UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________
FORM 10-Q
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x☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017March 28, 2020
OR
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¨☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-8174001-08174
_________________________________________________________ DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
_________________________________________________________ |
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Delaware | | 95-0693330 |
(State or other jurisdiction of incorporation or organization)
| | (I.R.S. Employer Identification No.)
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200 Sandpointe Avenue, Suite 700, Santa Ana, California | | 92707-5759 |
(Address of principal executive offices) | | (Zip code) |
Registrant’s telephone number, including area code: (657) 335-3665
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $.01 par value per share | | DCO | | New York Stock Exchange |
_________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨ | Accelerated filer | | x |
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Large accelerated filer | | ¨ | Accelerated filer | | x |
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Non-accelerated filer | | ¨ | Smaller reporting company | | ¨☐ |
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| | | Emerging growth company | | ¨☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐ No x
As of October 24, 2017,April 21, 2020, the registrant had 11,328,18511,648,725 shares of common stock outstanding.
DUCOMMUN INCORPORATED AND SUBSIDIARIES
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| Item 2. | | |
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| Item 3. | | |
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| Item 4. | | |
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| Item 1. | | |
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| Item 1.1A. | | |
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| Item 1A.4. | | |
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| Item 4. | | |
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| Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(InDollars in thousands, except share and per share data)
| | | | September 30, 2017 | | December 31, 2016 | | | March 28, 2020 | | December 31, 2019 |
Assets | | | | | Assets | | | | |
Current Assets | | | | | Current Assets | |
Cash and cash equivalents | | $ | 3,689 |
| | $ | 7,432 |
| Cash and cash equivalents | | $ | 65,599 | | | $ | 39,584 | |
Accounts receivable, net of allowance for doubtful accounts of $620 and $495 at September 30, 2017 and December 31, 2016, respectively | | 78,459 |
| | 76,239 |
| |
| Accounts receivable, net (allowance for credit losses of $1,418 and $1,321 at March 28, 2020 and December 31, 2019, respectively) | | Accounts receivable, net (allowance for credit losses of $1,418 and $1,321 at March 28, 2020 and December 31, 2019, respectively) | | 81,627 | | | 67,133 | |
Contract assets | | Contract assets | | 117,213 | | | 106,670 | |
Inventories | | 137,157 |
| | 119,896 |
| Inventories | | 119,751 | | | 112,482 | |
Production cost of contracts | | 11,389 |
| | 11,340 |
| Production cost of contracts | | 7,859 | | | 9,402 | |
| Other current assets | | 11,090 |
| | 11,034 |
| Other current assets | | 4,733 | | | 5,497 | |
| Total Current Assets | | 241,784 |
| | 225,941 |
| Total Current Assets | | 396,782 | | | 340,768 | |
Property and equipment, net of accumulated depreciation of $143,662 and $135,484 at September 30, 2017 and December 31, 2016, respectively | | 114,034 |
| | 101,590 |
| |
Property and Equipment, Net of Accumulated Depreciation of $158,711 and $162,920 at March 28, 2020 and December 31, 2019, respectively | | Property and Equipment, Net of Accumulated Depreciation of $158,711 and $162,920 at March 28, 2020 and December 31, 2019, respectively | | 114,732 | | | 115,216 | |
Operating Lease Right-of-Use Assets | | Operating Lease Right-of-Use Assets | | 18,519 | | | 19,105 | |
| Goodwill | | 117,435 |
| | 82,554 |
| Goodwill | | 170,890 | | | 170,917 | |
Intangibles, net | | 117,285 |
| | 101,573 |
| |
Non-current deferred income taxes | | 286 |
| | 286 |
| |
Other assets | | 3,025 |
| | 3,485 |
| |
Intangibles, Net | | Intangibles, Net | | 134,532 | | | 138,362 | |
Non-Current Deferred Income Taxes | | Non-Current Deferred Income Taxes | | 60 | | | 55 | |
Other Assets | | Other Assets | | 6,322 | | | 6,006 | |
Total Assets | | $ | 593,849 |
| | $ | 515,429 |
| Total Assets | | $ | 841,837 | | | $ | 790,429 | |
Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Current Liabilities | | | | | Current Liabilities | |
| Accounts payable | | Accounts payable | | $ | 76,970 | | | $ | 82,597 | |
Contract liabilities | | Contract liabilities | | 27,878 | | | 14,517 | |
Accrued and other liabilities | | Accrued and other liabilities | | 28,048 | | | 37,620 | |
Operating lease liabilities | | Operating lease liabilities | | 3,049 | | | 2,956 | |
| Current portion of long-term debt | | $ | — |
| | $ | 3 |
| Current portion of long-term debt | | 7,000 | | | 7,000 | |
Accounts payable | | 68,509 |
| | 57,024 |
| |
Accrued liabilities | | 29,799 |
| | 29,279 |
| |
| Total Current Liabilities | | 98,308 |
| | 86,306 |
| Total Current Liabilities | | 142,945 | | | 144,690 | |
Long-term debt, less current portion | | 222,394 |
| | 166,896 |
| |
Non-current deferred income taxes | | 31,253 |
| | 31,417 |
| |
Other long-term liabilities | | 17,245 |
| | 18,707 |
| |
Long-Term Debt, Less Current Portion | | Long-Term Debt, Less Current Portion | | 343,625 | | | 300,887 | |
Non-Current Operating Lease Liabilities | | Non-Current Operating Lease Liabilities | | 16,937 | | | 17,565 | |
| Non-Current Deferred Income Taxes | | Non-Current Deferred Income Taxes | | 18,147 | | | 16,766 | |
Other Long-Term Liabilities | | Other Long-Term Liabilities | | 17,756 | | | 17,721 | |
Total Liabilities | | 369,200 |
| | 303,326 |
| Total Liabilities | | 539,410 | | | 497,629 | |
Commitments and contingencies (Notes 12, 14) | |
| |
| |
Commitments and Contingencies (Notes 9, 11) | | Commitments and Contingencies (Notes 9, 11) | | | | |
Shareholders’ Equity | | | | | Shareholders’ Equity | |
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,324,917 and 11,193,813 issued at September 30, 2017 and December 31, 2016, respectively | | 113 |
| | 112 |
| |
Common stock - $0.01 par value; 35,000,000 shares authorized; 11,648,617 and 11,572,668 shares issued and outstanding at March 28, 2020 and December 31, 2019, respectively | | Common stock - $0.01 par value; 35,000,000 shares authorized; 11,648,617 and 11,572,668 shares issued and outstanding at March 28, 2020 and December 31, 2019, respectively | | 116 | | | 116 | |
Additional paid-in capital | | 78,624 |
| | 76,783 |
| Additional paid-in capital | | 89,820 | | | 88,399 | |
Retained earnings | | 151,880 |
| | 141,287 |
| Retained earnings | | 220,483 | | | 212,553 | |
Accumulated other comprehensive loss | | (5,968 | ) | | (6,079 | ) | Accumulated other comprehensive loss | | (7,992) | | | (8,268) | |
Total Shareholders’ Equity | | 224,649 |
| | 212,103 |
| Total Shareholders’ Equity | | 302,427 | | | 292,800 | |
Total Liabilities and Shareholders’ Equity | | $ | 593,849 |
| | $ | 515,429 |
| Total Liabilities and Shareholders’ Equity | | $ | 841,837 | | | $ | 790,429 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
(InDollars in thousands, except per share amounts)
| | | | Three Months Ended | | Nine Months Ended | | | Three Months Ended | |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | | March 28, 2020 | | March 30, 2019 | |
Net Revenues | | $ | 138,690 |
| | $ | 132,571 |
| | $ | 415,925 |
| | $ | 408,156 |
| Net Revenues | | $ | 173,475 | | | $ | 172,566 | | |
Cost of Sales | | 112,681 |
| | 107,348 |
| | 338,798 |
| | 329,749 |
| Cost of Sales | | 136,671 | | | 136,872 | | |
| Gross Profit | | 26,009 |
| | 25,223 |
| | 77,127 |
| | 78,407 |
| Gross Profit | | 36,804 | | | 35,694 | | |
Selling, General and Administrative Expenses | | 18,814 |
| | 17,171 |
| | 59,361 |
| | 58,796 |
| Selling, General and Administrative Expenses | | 23,178 | | | 22,846 | | |
| Operating Income | | 7,195 |
| | 8,052 |
| | 17,766 |
| | 19,611 |
| Operating Income | | 13,626 | | | 12,848 | | |
Interest Expense | | (2,088 | ) | | (1,945 | ) | | (5,588 | ) | | (6,279 | ) | Interest Expense | | (4,246) | | | (4,351) | | |
Gain on Divestitures | | — |
| | — |
| | — |
| | 18,815 |
| |
Other Income | | 488 |
| | 141 |
| | 488 |
| | 141 |
| |
| Income Before Taxes | | 5,595 |
| | 6,248 |
| | 12,666 |
| | 32,288 |
| Income Before Taxes | | 9,380 | | | 8,497 | | |
Income Tax Expense | | 940 |
| | 1,234 |
| | 2,073 |
| | 9,863 |
| Income Tax Expense | | 1,450 | | | 1,025 | | |
Net Income | | $ | 4,655 |
| | $ | 5,014 |
| | $ | 10,593 |
| | $ | 22,425 |
| Net Income | | $ | 7,930 | | | $ | 7,472 | | |
Earnings Per Share | | | | | | | | | Earnings Per Share | | | | | |
Basic earnings per share | | $ | 0.41 |
| | $ | 0.45 |
| | $ | 0.94 |
| | $ | 2.01 |
| Basic earnings per share | | $ | 0.68 | | | $ | 0.65 | | |
Diluted earnings per share | | $ | 0.41 |
| | $ | 0.44 |
| | $ | 0.92 |
| | $ | 1.99 |
| Diluted earnings per share | | $ | 0.67 | | | $ | 0.64 | | |
Weighted-Average Number of Common Shares Outstanding | | | | | | | | | Weighted-Average Number of Common Shares Outstanding | | |
Basic | | 11,241 |
| | 11,169 |
| | 11,276 |
| | 11,141 |
| Basic | | 11,610 | | | 11,434 | | |
Diluted | | 11,486 |
| | 11,310 |
| | 11,556 |
| | 11,261 |
| Diluted | | 11,855 | | | 11,755 | | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(InDollars in thousands)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net Income | | $ | 4,655 |
| | $ | 5,014 |
| | $ | 10,593 |
| | $ | 22,425 |
|
Other Comprehensive Income (Loss) | | | | | | | | |
Amortization of actuarial losses and prior service costs, net of tax benefit of $74 and $71 for the three months ended September 30, 2017 and October 1, 2016, respectively, and $225 and $212 for the nine months ended September 30, 2017 and October 1, 2016, respectively | | 128 |
| | 120 |
| | 382 |
| | 360 |
|
Change in unrealized gains and losses on cash flow hedges, net of tax of $17 and zero for the three months ended September 30, 2017 and October 1, 2016, respectively, and $161 and $326 for the nine months ended September 30, 2017 and October 1, 2016, respectively | | (28 | ) | | — |
| | (271 | ) | | (556 | ) |
Other Comprehensive Income (Loss) | | 100 |
| | 120 |
| | 111 |
| | (196 | ) |
Comprehensive Income | | $ | 4,755 |
| | $ | 5,134 |
| | $ | 10,704 |
| | $ | 22,229 |
|
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | March 28, 2020 | | March 30, 2019 | | | | |
Net Income | | $ | 7,930 | | | $ | 7,472 | | | | | |
Other Comprehensive Income, Net of Tax: | | | | | | | | |
Amortization of actuarial loss and prior service costs, net of tax of $59 and $51 for the three months ended March 28, 2020 and March 30, 2019, respectively | | 190 | | | 170 | | | | | |
| | | | | | | | |
Change in unrealized gains and losses on cash flow hedges, net of tax of $26 and $54 for the three months ended March 28, 2020 and March 30, 2019, respectively | | 86 | | | (84) | | | | | |
Other Comprehensive Income, Net of Tax | | 276 | | | 86 | | | | | |
Comprehensive Income | | $ | 8,206 | | | $ | 7,558 | | | | | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | March 28, 2020 | | March 30, 2019 | | | | |
Common Stock and Paid-in-Capital | | | | | | | | |
Balance, Beginning of Period | | $ | 88,515 | | | $ | 83,826 | | | | | |
Employee Stock Purchase Plan | | 1,112 | | | — | | | | | |
Stock Options Exercised | | 39 | | | 97 | | | | | |
Stock Awards Vested | | (1) | | | (1) | | | | | |
Stock Repurchased Related to the Exercise of Stock Options | | (2,008) | | | (1,901) | | | | | |
Stock-Based Compensation | | 2,279 | | | 1,464 | | | | | |
Balance, End of Period | | 89,936 | | | 83,485 | | | | | |
Retained Earnings | | | | | | | | |
Balance, Beginning of Period | | 212,553 | | | 180,356 | | | | | |
Net Income | | 7,930 | | | 7,472 | | | | | |
Adoption of ASC 842 Adjustment | | — | | | (264) | | | | | |
Balance, End of Period | | 220,483 | | | 187,564 | | | | | |
Accumulated Other Comprehensive Loss | | | | | | | | |
Balance, Beginning of Period | | (8,268) | | | (7,357) | | | | | |
Other Comprehensive Income, Net of Tax | | 276 | | | 86 | | | | | |
Balance, End of Period | | (7,992) | | | (7,271) | | | | | |
Total Stockholders’ Equity | | $ | 302,427 | | | $ | 263,778 | | | | | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(InDollars in thousands)
| | | | Nine Months Ended | | Three Months Ended | |
| | September 30, 2017 | | October 1, 2016 | | March 28, 2020 | | March 30, 2019 |
Cash Flows from Operating Activities | | | | | Cash Flows from Operating Activities | | | | |
Net Income | | $ | 10,593 |
| | $ | 22,425 |
| Net Income | | $ | 7,930 | | | $ | 7,472 | |
Adjustments to Reconcile Net Income to | | | | | Adjustments to Reconcile Net Income to | |
Net Cash Provided by Operating Activities: | | | | | Net Cash Provided by Operating Activities: | |
Depreciation and amortization | | 17,149 |
| | 17,420 |
| Depreciation and amortization | | 7,336 | | | 6,755 | |
Gain on divestitures | | — |
| | (18,815 | ) | |
Non-cash operating lease cost | | Non-cash operating lease cost | | 811 | | | 633 | |
| Stock-based compensation expense | | 4,264 |
| | 2,579 |
| Stock-based compensation expense | | 2,279 | | | 1,464 | |
Deferred income taxes | | (164 | ) | | (1,602 | ) | Deferred income taxes | | 1,495 | | | 217 | |
Provision for (recovery of) doubtful accounts | | 125 |
| | (26 | ) | |
| Allowance for credit losses | | Allowance for credit losses | | 97 | | | 104 | |
| Inventory reserves | | Inventory reserves | | 398 | | | 154 | |
| Other | | (2,217 | ) | | (4,923 | ) | Other | | 194 | | | (19) | |
Changes in Assets and Liabilities: | | | | | Changes in Assets and Liabilities: | |
Accounts receivable | | (1,427 | ) | | 5,777 |
| Accounts receivable | | (14,591) | | | 4,581 | |
Contract assets | | Contract assets | | (10,543) | | | (6,641) | |
Inventories | | (15,529 | ) | | (15,055 | ) | Inventories | | (7,667) | | | (3,023) | |
Production cost of contracts | | (599 | ) | | (1,437 | ) | Production cost of contracts | | 973 | | | 105 | |
Other assets | | 458 |
| | 7,095 |
| Other assets | | 871 | | | (468) | |
Accounts payable | | 13,801 |
| | 19,586 |
| Accounts payable | | (4,711) | | | (1,789) | |
Contract liabilities | | Contract liabilities | | 13,361 | | | (2,115) | |
Operating lease liabilities | | Operating lease liabilities | | (700) | | | (627) | |
Accrued and other liabilities | | 903 |
| | (5,453 | ) | Accrued and other liabilities | | (9,567) | | | (8,492) | |
Net Cash Provided by Operating Activities | | 27,357 |
| | 27,571 |
| |
Net Cash Used in Operating Activities | | Net Cash Used in Operating Activities | | (12,034) | | | (1,689) | |
Cash Flows from Investing Activities | | | | | Cash Flows from Investing Activities | | | | |
Purchases of property and equipment | | (24,599 | ) | | (12,712 | ) | Purchases of property and equipment | | (3,867) | | | (3,225) | |
Proceeds from sale of assets | | 3 |
| | — |
| |
Insurance recoveries related to property and equipment | | 288 |
| | — |
| |
Proceeds from divestitures | | — |
| | 55,272 |
| |
Payments for purchase of Lightning Diversion Systems, LLC, net of cash acquired | | (59,178 | ) | | — |
| |
Net Cash (Used in) Provided by Investing Activities | | (83,486 | ) | | 42,560 |
| |
| Post closing cash received from the acquisition of Nobles Worldwide, Inc., net | | Post closing cash received from the acquisition of Nobles Worldwide, Inc., net | | 190 | | | — | |
Net Cash Used in Investing Activities | | Net Cash Used in Investing Activities | | (3,677) | | | (3,225) | |
Cash Flows from Financing Activities | | | | | Cash Flows from Financing Activities | | | | |
| Borrowings from senior secured revolving credit facility | | 320,500 |
| | 29,700 |
| Borrowings from senior secured revolving credit facility | | 65,900 | | | 61,900 | |
Repayments of senior secured revolving credit facility | | (255,800 | ) | | (29,700 | ) | Repayments of senior secured revolving credit facility | | (15,900) | | | (58,700) | |
Repayments of senior unsecured notes and term loans | | (10,000 | ) | | (65,000 | ) | |
| Repayments of term loans | | Repayments of term loans | | (7,362) | | | (3,000) | |
Repayments of other debt | | (3 | ) | | (22 | ) | Repayments of other debt | | (54) | | | (17) | |
| Net cash paid upon issuance of common stock under stock plans | | (2,311 | ) | | (1,097 | ) | Net cash paid upon issuance of common stock under stock plans | | (858) | | | (1,805) | |
Net Cash Provided by (Used in) Financing Activities | | 52,386 |
| | (66,119 | ) | Net Cash Provided by (Used in) Financing Activities | | 41,726 | | | (1,622) | |
Net (Decrease) Increase in Cash and Cash Equivalents | | (3,743 | ) | | 4,012 |
| |
Net Increase (Decrease) in Cash and Cash Equivalents | | Net Increase (Decrease) in Cash and Cash Equivalents | | 26,015 | | | (6,536) | |
Cash and Cash Equivalents at Beginning of Period | | 7,432 |
| | 5,454 |
| Cash and Cash Equivalents at Beginning of Period | | 39,584 | | | 10,263 | |
Cash and Cash Equivalents at End of Period | | $ | 3,689 |
| | $ | 9,466 |
| Cash and Cash Equivalents at End of Period | | $ | 65,599 | | | $ | 3,727 | |
See accompanying notes to Condensed Consolidated Financial Statements.
Ducommun Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). Our subsidiariesoperations are organized into two strategic2 primary businesses: Electronic Systems segment and Structural Systems segment, each of which is a reportable operating segment. Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including aerospace, defense, industrialA&D and medical and otherIndustrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex assemblies. Structural Systems designs, engineers and manufactures large, complex contoured aerospace structuralaerostructure 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. BothAll reportable operating segments follow the same accounting principles.
Basis of Presentation
The unaudited condensed 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. The December 31, 20162019 condensed consolidated balance sheet data was derived from audited financial statements, but does not contain all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”).
Our significant accounting policies were described in Part IV, Item 15(a)(1), “Note 1. Summary of Significant Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2016. We followed the same accounting policies for interim reporting.2019. The financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
In the opinion of management, all adjustments, consisting of recurring accruals, have been made that are necessary to fairly state our condensed consolidated financial position, statements of income, comprehensive income and cash flows in accordance with GAAP for the periods covered by this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2017March 28, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.2020.
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.
Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
Use of Estimates
Certain amounts and disclosures included in the unaudited condensed consolidated financial statements requiresrequire management to make estimates and judgments that affect the amounts 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 may differ from these estimates.estimates.Certain reclassifications have been made to prior period amounts to conform to the current year’s presentation.
Impact of the COVID-19 Pandemic
The commercial aerospace industry continues to be adversely affected by the impact from the continued grounding of the Boeing 737 MAX program combined with the outbreak of the COVID-19 pandemic which resulted in the announcements towards the end of our first quarter by two of our largest customers, The Boeing Company (“Boeing”) and Spirit Aerosystems Holdings, Inc. (“Spirit”), to temporarily shut down production at some of their facilities. While Boeing has resumed production at two of their manufacturing facilities subsequent to our quarter ended March 28, 2020, we expect there will be an impact to our condensed consolidated financial results for the second quarter of 2020. Given the uncertainties surrounding the duration and impact of these matters, we cannot reasonably estimate with certainty the related financial impact to our full year 2020 financial results; however, there could be a material adverse impact on our business, results of operations and financial condition for some portion, if not the remainder, of 2020.
Supplemental Cash Flow Information
| | | | | | | | | | | (In thousands) | |
| | (In thousands) Nine Months Ended | | Three Months Ended | |
| | September 30, 2017 | | October 1, 2016 | | March 28, 2020 | | March 30, 2019 |
Interest paid | | $ | 4,867 |
| | $ | 5,283 |
| Interest paid | | $ | 3,523 | | | $ | 3,984 | |
Taxes paid | | $ | 1,969 |
| | $ | 5,539 |
| Taxes paid | | $ | 33 | | | $ | 5 | |
Non-cash activities: | | | | | Non-cash activities: | |
Purchases of property and equipment not paid | | $ | 890 |
| | $ | 687 |
| Purchases of property and equipment not paid | | $ | 464 | | | $ | 2,124 | |
Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share areis computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding, plus any potentialpotentially dilutive shares that could be issued if exercised or converted into common stock in each period.
The net income and weighted-average number of common shares outstanding used to compute earnings per share were as follows:
| | | | | | | | | | | | (In thousands, except per share data) | |
| | (In thousands, except per share data) Three Months Ended | | (In thousands, except per share data) Nine Months Ended | | Three Months Ended | |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | | March 28, 2020 | | March 30, 2019 | |
Net income | | $ | 4,655 |
| | $ | 5,014 |
| | $ | 10,593 |
| | $ | 22,425 |
| Net income | | $ | 7,930 | | | $ | 7,472 | | |
Weighted-average number of common shares outstanding | | | | | | | | | Weighted-average number of common shares outstanding | | | | | |
Basic weighted-average common shares outstanding | | 11,241 |
| | 11,169 |
| | 11,276 |
| | 11,141 |
| Basic weighted-average common shares outstanding | | 11,610 | | | 11,434 | | |
Dilutive potential common shares | | 245 |
| | 141 |
| | 280 |
| | 120 |
| Dilutive potential common shares | | 245 | | | 321 | | |
Diluted weighted-average common shares outstanding | | 11,486 |
| | 11,310 |
| | 11,556 |
| | 11,261 |
| Diluted weighted-average common shares outstanding | | 11,855 | | | 11,755 | | |
Earnings per share | | | | | | | | | Earnings per share | | | | | |
Basic | | $ | 0.41 |
| | $ | 0.45 |
| | $ | 0.94 |
| | $ | 2.01 |
| Basic | | $ | 0.68 | | | $ | 0.65 | | |
Diluted | | $ | 0.41 |
| | $ | 0.44 |
| | $ | 0.92 |
| | $ | 1.99 |
| Diluted | | $ | 0.67 | | | $ | 0.64 | | |
Potentially dilutive stock options and stock unitsawards 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) Three Months Ended | | (In thousands) Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Stock options and stock units | | 166 |
| | 515 |
| | 142 |
| | 617 |
|
| | | | | | | | | | | | | | | | | | |
| | (In thousands) | | | | | | |
| | Three Months Ended | | | | | | |
| | March 28, 2020 | | March 30, 2019 | | | | |
Stock options and stock units | | 253 | | | 178 | | | | | |
Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using significant unobservable inputs.
Divestitures
On January 22, 2016, we entered into an agreement,We have money market funds and completedthey are included as cash and cash equivalents. We also have interest rate cap hedge agreements for which the sale on the same date, to sell our operation located in Pittsburgh, Pennsylvania for a preliminary sales price of $38.5 million in cash. We divested this facility as part of our overall strategy to streamline operations, which included consolidating our footprint. However, the salefair value of the Pittsburgh operation did not representinterest rate cap hedge agreements was determined using pricing models that use observable market inputs as of the balance sheet date, a strategic shift in our business and thus, was includedLevel 2 measurement. The interest rate cap hedge premium is 0 as of March 28, 2020.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in the ongoing operating results in the condensed consolidated income statements for all periods presented. Preliminary net assets sold were $24.0 million, net liabilities sold were $4.0 million, and direct transaction costs incurred were $0.2 million, resulting in a preliminary gain on divestiturethree months ended March 28, 2020.
$18.3 million. In the fourth quarter of 2016, we finalized the sale with a final sales price of $38.6 million in cash. The final 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 Huntsville, Alabama and Iuka, Mississippi (collectively, “Miltec”) operations for a preliminary sales price of $14.6 million, in cash, subject to post-closing adjustments. We divested this facility as part of our overall strategy to streamline operations, which included consolidating our footprint. However, the sale of the Miltec operation did not represent a strategic shift in our business and thus, was included in the ongoing operating results in the condensed consolidated income statements for all periods presented. We completed the sale on March 25, 2016. Preliminary net assets sold were $15.4 million, net liabilities sold were $2.6 million, and direct transaction costs incurred during the current period were $1.3 million, resulting in a preliminary gain on divestiture of $0.5 million. In the fourth quarter of 2016, we finalized the sale with a final sales price of $13.3 million in cash. The final 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.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value above.
Derivative Instruments
We recognize derivative instruments on our condensed consolidated balance sheets at their fair value. On the date that we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, 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 September 30, 2017,March 28, 2020, all of our derivative instruments were designated as cash flow hedges.
We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash flows of the underlying hedge. We record any hedge ineffectiveness and amounts excluded from effectiveness testing in current period earnings within interest expense. We report changes in the fair values of derivative instruments that are not designated or do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments in the condensed consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument. For the three months ended March 28, 2020, the impact of cash flow hedges in the respective periods were insignificant.
When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we will carry the derivative instrument at its fair value on our condensed consolidated balance sheets and recognize subsequent changes in its fair value in our current period earnings.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost being determined using a moving average cost basis for raw materials and actual cost for work-in-process and finished goods, with units being relieved andgoods. The majority of our inventory is charged to cost of sales on a first-in, first-out basis.as raw materials are placed into production and the related revenue is recognized. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) incurred. Costs under long-term contracts are accumulated into, and removed from, inventory on the same basis as other contracts. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. The majority of our revenues are recognized over time, however, for revenue contracts where revenue is recognized using the point in time method, inventory is not reduced until it is shipped or transfer of control to the customer has occurred. Our ending inventory consists of raw materials, work-in-process, and finished goods.
Production Cost of Contracts
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of goods soldsales using the units of delivery method.over time revenue recognition model. We review the value of the production cost of contracts on a quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable value of the related contracts.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected on the condensed consolidated balance sheets under the equity section, was comprised of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and losses on cash flow hedges, net of tax.
Provision for Estimated Losses on Contracts
We record provisions for the total anticipated losses on contracts, considering total estimated costs to complete the contract compared to total anticipated revenues, in the period in which such losses are identified. The provisions for estimated losses on contracts require us to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Our estimate of the future cost to complete a contract may include assumptions as to improvementschanges 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 additionaladjust the provisions for estimated losses on contracts. The provision for estimated losses on contracts is included as part of contract liabilities on the condensed consolidated balance sheets.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume manufacturing. Contracts with our customers generally include a termination for convenience clause.
We have a significant number of contracts that are started and completed within the same year, as well as contracts derived from long-term agreements and programs that can span several years. We recognize revenue when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services. We apply a five-step approach as defined in the new standard in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when the corresponding performance obligation is satisfied.
Orders for our products generally correspond to the production schedules of our customers and are supported with purchase orders with firm fixed price and firm delivery dates. Our customers have continuous control of the work in progress and finished goods throughout the manufacturing process, as these are built to customer specifications with no alternative use, and there is an enforceable right to payment for work performed to date. As a result, we recognize revenue over time based on the extent of progress towards completion of the performance obligation. Revenue recognized is based on the cost-to-cost method as it best depicts the transfer of control to our customer which takes place as we incur costs. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenues are recorded proportionally as costs are incurred.
From time to time, we recognize revenue at a point in time upon transfer of control of the products to the customer. Point in time recognition was determined as the customer does not simultaneously receive or consume the benefits provided by our performance and the asset being manufactured has alternative uses to us.
Each distinct promise to transfer products is considered an identified performance obligation for which revenue is recognized upon transfer of control of the products to our customer. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual good or service is not separately identifiable from other promises in the contract and is, therefore, not distinct.
As a significant change in one or more of these estimates could affect the profitability of our contracts, we review and update our contract-related estimates on a regular basis. We recognize adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, we recognize the total loss in the quarter it is identified. The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue. Net cumulative catch up adjustments on profit recorded were not material during the three months ended for both March 28, 2020 and March 30, 2019.
Contract Assets and Contract Liabilities
Payments under long-term contracts may be received before or after revenue is recognized. When revenue is recognized before we bill our customer, a contract asset is created for the work performed but not yet billed. Similarly, when we receive payment before we ship our products to our customer, a contract liability is created for the advance or progress payment.
Contract assets consist of our right to payment for work performed but not yet billed. Contract assets are transferred to accounts receivable when we bill our customers. We bill our customers when we ship the products and meet the shipping terms within the revenue contract. Contract liabilities consist of advance or progress payments received from our customers prior to the time transfer of control occurs plus the estimated losses on contracts.
Contract assets and contract liabilities from revenue contracts with customers are as follows:
| | | | | | | | | | | | | | |
| | (In thousands) | | |
| | March 28, 2020 | | December 31, 2019 |
Contract assets | | $ | 117,213 | | | $ | 106,670 | |
Contract liabilities | | $ | 27,878 | | | $ | 14,517 | |
Remaining performance obligations are defined as customer placed purchase orders (“POs”) with firm fixed price and firm delivery dates. Our remaining performance obligations as of March 28, 2020 totaled $726.8 million. We anticipate recognizing
an estimated 70% of our remaining performance obligations as revenue during the next 12 months with the remaining performance obligations being recognized in the remainder of 2021 and beyond.
Revenue by Category
In addition to the revenue categories disclosed above, the following table reflects our revenue disaggregated by major end-use market:
| | | | | | | | | | | | | | | | | | |
| | (In thousands) | | | | | | |
| | Three Months Ended | | | | | | |
| | March 28 2020 | | March 30, 2019 | | | | |
Consolidated Ducommun | | | | | | | | |
Military and space | | $ | 100,820 | | | $ | 76,661 | | | | | |
Commercial aerospace | | 62,525 | | | 85,496 | | | | | |
Industrial | | 10,130 | | | 10,409 | | | | | |
Total | | $ | 173,475 | | | $ | 172,566 | | | | | |
| | | | | | | | |
Electronic Systems | | | | | | | | |
Military and space | | $ | 73,238 | | | $ | 60,387 | | | | | |
Commercial aerospace | | 14,752 | | | 13,401 | | | | | |
Industrial | | 10,130 | | | 10,409 | | | | | |
Total | | $ | 98,120 | | | $ | 84,197 | | | | | |
| | | | | | | | |
Structural Systems | | | | | | | | |
Military and space | | $ | 27,582 | | | $ | 16,274 | | | | | |
Commercial aerospace | | 47,773 | | | 72,095 | | | | | |
Total | | $ | 75,355 | | | $ | 88,369 | | | | | |
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 20172020
In December 2016,March 2020, the FASB issued ASU 2016-19, “Technical Corrections and Improvements”2020-03, “Codification Improvements to Financial Instruments” (“2016-19”ASU 2020-03”), which cover a varietyprovides clarity to, or address various specific issues, including modifications 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.debt instruments. The new guidance was effective for us beginning January 1, 2017.upon issuance of this final accounting standards update. The adoption of this standard did not have a significantmaterial impact on our condensed consolidated financial statements.
In February 2020, the FASB issued ASU 2020-02, “Financial Statements - Credit losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Relating to Accounting Standards Update No. 2016-02, Leases (Topic 842)” (“ASU 2020-02”), which provides guidance on the measurement and requirements related to credit losses. The new guidance was effective upon issuance of this final accounting standards update. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Statements” (“ASU 2019-04”), which clarify, correct, and improve various aspects of the guidance in ASU 2016-01, ASU 2016-13, and ASU 2017-12. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which was our interim period beginning January 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
In March 2016,2019, the FASB issued ASU 2016-09, “Compensation - Stock Compensation2019-01, “Leases (Topic 718)842): Improvements to Employee Share-Based Payment Accounting”Codification Improvements” (“ASU 2016-09”2019-01”), which is intended to improveaddresses various lessor implementation issues and clarifies that lessees and lessors are exempt from certain interim disclosure requirements associated with the accounting for employee share-based payments.adoption of ASC 842. The new guidance wasis effective for usfiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which was our interim period beginning January 1, 2017.2020. The adoption of this standard did not have a significant dollarmaterial impact on our condensed consolidated financial statements.
In March 2016,August 2018, the FASB issued ASU 2016-05, “Derivatives and Hedging2018-13, “Fair Value Measurement (Topic 815)820): EffectDisclosure Framework - Changes to
the Disclosure Requirements for Fair Value Measurement” (“ASU 2016-05”2018-13”), which clarifies that a change inshould improve the counter party to a derivative instrument designated as a hedging instrument does not require dedesignationeffectiveness of that hedging relationship, provided that all other hedge accounting criteria are met.fair value measurement disclosures by removing certain requirements, modifying certain requirements, and adding certain new requirements. The new guidance was effective for usfiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which was our interim period beginning January 1, 2017.2020. Early adoption was permitted. The adoption of this standard did not have a significantmaterial impact on our condensed consolidated financial statements.
In July 2015,June 2016, the FASB issued ASU 2015-11, “Inventory2016-13, “Financial Instruments - Credit Losses (Topic 330)”326): Measurement of Credit Losses on Financial Instruments” (“ASU 2015-11”2016-13”), which is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 requires inventory within the scopemeasurement of ASU 2015-11 to be measuredall expected credit losses for financial assets held at the lowerreporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of cost or net realizable value. Subsequent measurementthe loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is unchangedappropriate for inventory measured using last-in, first-out (“LIFO”) ortheir circumstances. ASU 2016-13 requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the retail inventory value.credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. The new guidance was effective for usfiscal years beginning after December 15, 2019, including interim periods within those fiscal years, which was our interim period beginning January 1, 2017.2020. The adoption of this standard did not have a significantmaterial impact on our condensed consolidated financial statements.
Recently Issued Accounting Standards
In August 2017,March 2020, the FASB issued ASU 2017-12, “Derivatives and Hedging2020-04, “Reference Rate Reform (Topic 815): Targeted Improvements to Accounting for Hedging”848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2017-12”2020-04”), which intendsprovides optional guidance for a limited time for contracts that reference London Interbank Offered Rate (“LIBOR”), to improve and simplify accounting rules around hedge accounting. ASU 2017-12 refines and expands hedgeease the potential burden in accounting for, bothor recognizing the effects, of reference rate reform on financial (i.e., interest rate) and commodity risks. In addition, it creates more transparency around how economic results are presented, both on the facereporting as a result of the financial statements and in the footnotes.cessation of LIBOR. The new guidance is effective for annual periods beginningat any time after March 12, 2020 but no later than December 15, 2018, including interim periods within those annual periods, which will be our interim period beginning January 1, 2019. Early adoption is permitted, including adoption in any interim period after the issuance of ASU 2017-12. We are evaluating the impact of this standard.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which provides clarity on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. Early adoption is permitted, including adoption in any interim period. The amendments should be applied prospectively to an award modified on or after the adoption date. We are evaluating the impact of this standard.
In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs” (“ASU 2017-07”), which require an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The new guidance is effective for annual periods beginning after
December 15, 2017, including interim periods within those annual periods, which will be our interim period beginning January 1, 2018. We are evaluating the impact of this standard.
In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill, the amendments eliminate Step Two from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed 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, 2018.31, 2022. We are evaluating the impact of this standard.
In December 2016,2019, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes” (“ASU 2016-20”2019-12”), which cover a varietyremoves certain exceptions and provides guidance on various areas 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 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 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.accounting. The new guidance is effective for fiscal years beginning after December 15, 2018,2020, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2019.2021. Early adoption is permitted. We are evaluating the impact of this standard and currently anticipate it will impact our condensed consolidated financial statements.standard.
In May 2014,August 2018, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 606)”715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2014-09”2018-14”), which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customerswill remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, 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 deferred 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 onlyadd disclosure requirements identified as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.relevant. The new guidance is effective for usfiscal years beginning after December 15, 2020, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2018 and provides us additional time to evaluate2021. Early adoption is permitted. We are evaluating the impact that ASU 2014-09 will have on our condensed consolidated financial statements. We are in the process of completing the implementation phase of the project. We have noted that under ASU 2014-09, the percentage of completion, unit of delivery method of recognizing revenue is no longer a viable method for us and production costs will generally not be deferred. Instead, revenue will be recognized as the customer obtains control of the goods and services promised in the contract (i.e., performance obligations). Given the nature of our products and terms and conditions in the majority of our contracts, our customer obtains control as we perform work under the contract. As such, most of our revenues will be recognized sooner as a result of changing to an over time method (i.e., cost-to-cost plus a reasonable profit) from a point-in-time method, which is our current method for recognizing revenue. This will result in eliminating the majority of our work-in-process and finished goods inventory and a significant increase in unbilled accounts receivables (i.e., contract assets). This change will also impact our information technology systems, systems of internal controls over financial reporting, and certain accounting policies, requiring the usage of more judgement in determining our revenue recognition. Further, we have selected a software solution and are in the process of implementing the software solution to comply with this new accounting standard. Finally, we will adopt the new accounting standard using the modified retrospective method, under which the cumulative effect of initially applying the new guidance is recognized as an adjustment to certain captions on the balance sheet, including the opening balance of retained earnings in the first quarter of 2018.
Note 2. Business CombinationCombinations
On September 11, 2017,In October 2019, we acquired 100.0% of the outstanding equity interests of Lightning Diversion Systems, LLCNobles Parent Inc., the parent company of Nobles Worldwide, Inc. (“LDS”Nobles”), a privately-held worldwideglobal leader in lightning protectionthe design and manufacturing of high performance ammunition handling systems serving the aerospacefor a wide range of military platforms including fixed-wing aircraft, rotary-wing aircraft, ground vehicles, and defense industries,shipboard systems. Nobles is located in Huntington Beach, California.St. Croix Falls, Wisconsin. The acquisition of LDS is part ofNobles advances our strategy to enhance revenue growth by focusing on advanced proprietary technology on various aerospacediversify and defense platforms.offer more customized, value-driven engineered products with aftermarket opportunities.
The original purchase price for LDSNobles was $60.0$77.0 million, net of cash acquired, all payable in cash. UponWe paid a gross total aggregate of $77.3 million in cash upon the closing of the transaction. Subsequent to the closing of the transaction, during the three months ended March 28, 2020, we paid $61.4received $0.2 million withback from the remaining $0.6seller which lowered the purchase price to $76.8 million, paid in October 2017, subsequent to our quarter ended September 30, 2017.net of cash acquired. We preliminarily allocated the gross purchase price of $62.0$77.1 million to the assets acquired and liabilities assumed at estimated fair values. The excess of the purchase price over the aggregate fair values isof the net assets was recorded as goodwill. The allocation is subject to revision as the estimates of fair value of currentthe assets non-current assets, identifiable intangible assets,acquired and current liabilities assumed are based on preliminary information and are subject to refinement. We are in the process of reviewing third party valuationsvaluation of certain assets.the assets and liabilities. In addition, the purchase price is subject to finalization of the working capital amount.
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
|
| | | | |
| | Estimated Fair Value |
Cash | | $ | 2,223 |
|
Accounts receivable | | 918 |
|
Inventories | | 1,732 |
|
Other current assets | | 54 |
|
Property and equipment | | 138 |
|
Intangible assets | | 22,400 |
|
Goodwill | | 34,881 |
|
Total assets acquired | | 62,346 |
|
Current liabilities | | (325 | ) |
Total liabilities assumed | | (325 | ) |
Total preliminary purchase price allocation | | $ | 62,021 |
|
| | | | | | | | |
| | Estimated Fair Value |
Cash | | $ | 658 | |
Accounts receivable | | 1,880 | |
Inventories | | 2,866 | |
Other current assets | | 288 | |
Property and equipment | | 2,319 | |
Intangible assets | | 37,200 | |
Goodwill | | 34,833 | |
Other non-current assets | | 675 | |
Total assets acquired | | 80,719 | |
Current liabilities | | (2,187) | |
Net non-current deferred tax liability | | (742) | |
Other non-current liabilities | | (675) | |
Total liabilities assumed | | (3,604) | |
Total purchase price allocation | | $ | 77,115 | |
| | | | Useful Life (In years) | | Estimated Fair Value (In thousands) | | Useful Life (In years) | | Estimated Fair Value (In thousands) |
Intangible assets: | | | | | Intangible assets: | | | | |
Customer relationships | | 15 | | $ | 21,100 |
| Customer relationships | | 15-16 | | $ | 34,200 | |
Trade name | | 15 | | 1,300 |
| |
Trade names and trademarks | | Trade names and trademarks | | 15 | | 3,000 | |
| |
| | $ | 22,400 |
| | | | $ | 37,200 | |
The intangible assets acquired of $22.4$37.2 million were preliminarily determined based on the estimated fair values using valuation techniques consistent with the income approach to measure fair value. The useful lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the assets. The fair values of the identifiable intangible assets were estimated using several valuation methodologies, which represented Level 3 fair value measurements. The value for customer relationships was estimated based on a multi-period excess earnings approach, while the value for the trade namenames and trademarks was assessed using the relief from royalty methodology. Further, we analyzed the technology acquired and concluded no fair value should be assigned to it.
The goodwill of $34.9$34.8 million arising from the acquisition is preliminarily attributable to the benefits we expect to derive from expected synergies from the transaction, including complementary products that will enhance our overall product portfolio, opportunities within new markets, and an acquired assembled workforce. All the goodwill was assigned to the ElectronicStructural Systems segment. Since the LDSThe Nobles acquisition, for tax purposes, wasis also deemed an asseta stock acquisition and thus, the goodwill recognized is not deductible for income tax purposes.purposes except for $6.7 million of pre-acquisition goodwill that is tax deductible.
Acquisition related transaction costs arewere not included as components of consideration transferred but have been expensed as incurred. Total acquisition-related transaction costs incurred by us were $0.3$0.8 million in both the three months and nine months ended September 30, 2017during 2019 and charged to selling, general and administrative expenses.
LDS’Nobles’ results of operations have been included in our condensed consolidated statements of income since the date of acquisition as part of the ElectronicStructural Systems segment. Pro forma results of operations of the LDSNobles acquisition during the three and nine months ended September 30, 2017 have not been presented as the effect of the LDSNobles acquisition was not material to our financial results.
Note 3. 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, which were charged to selling, general and administrative expenses. We do not expect to record additional expenses related to these restructuring plans.
As of September 30, 2017, we have accrued $0.4 million for loss on early exit from a 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 was 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, which were charged to selling, general and administrative expenses. We do not expect to record additional expenses related to this restructuring plan.
As of September 30, 2017, we have accrued $0.1 million for loss on early exit from a lease in the Electronic Systems segment.
Our restructuring activities in the nine months ended September 30, 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | Nine Months Ended September 30, 2017 | | September 30, 2017 |
| | Balance | | Charges | | Cash Payments | | Change in Estimates | | Balance |
Lease termination | | $ | 654 |
| | $ | — |
| | $ | (235 | ) | | $ | 64 |
| | $ | 483 |
|
Ending balance | | $ | 654 |
| | $ | — |
| | $ | (235 | ) | | $ | 64 |
| | $ | 483 |
|
Summary of 2017 Restructuring Plan
Subsequent to our quarter ended September 30, 2017, in November 2017, management approved and commenced a restructuring plan that is expected to increase operating efficiencies. We currently estimate this initiative will result in $22.0 million to $25.0 million in total pre-tax restructuring charges through 2018, with an estimate of $10.5 million to be recorded during the fourth quarter of 2017. Of these charges, we estimate $9.0 million to $10.0 million are expected to be cash payments for employee separation and other consolidation related expenses with the remaining $13.0 million to $15.0 million expected to be non-cash charges for write-down of inventory and impairment of long-lived assets. On an annualized basis, beginning in 2019, we estimate these restructuring actions will result in total savings of $14.0 million.
Note 4. 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 September 30, 2017 | | As of December 31, 2016 |
| | Fair Value Measurements Using | | | | Fair Value Measurements Using | | |
| | Level 1 | | Level 2 | | Level 3 | | Total Balance | | Level 1 | | Level 2 | | Level 3 | | Total Balance |
Assets | | | | | | | | | | | | | | | | |
Money market funds(1) | | $ | 96 |
| | $ | — |
| | $ | — |
| | $ | 96 |
| | $ | 3,751 |
| | $ | — |
| | $ | — |
| | $ | 3,751 |
|
Interest rate cap hedges(2) | | — |
| | 122 |
| | — |
| | 122 |
| | — |
| | 553 |
| | — |
| | 553 |
|
Total Assets | | $ | 96 |
| | $ | 122 |
| | $ | — |
| | $ | 218 |
| | $ | 3,751 |
| | $ | 553 |
| | $ | — |
| | $ | 4,304 |
|
(1) Included as cash and cash equivalents.
(2) Interest rate cap hedge premium included as other current assets and other assets.
The fair value of the interest rate cap hedge agreements was 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 the three months ended September 30, 2017.
Note 5. Financial Instruments
Derivative Instruments and Hedging Activities
We periodically enter into cash flow derivative transactions, such as interest rate cap agreements, to hedge exposure to various risks related to interest rates. We assess the effectiveness of the interest rate cap hedges at inception of the hedge. We recognize all derivatives at their fair value. For cash flow designated hedges, the effective portion of the changes in fair value of the derivative contract are recorded in accumulated other comprehensive income (loss), net of taxes, and are recognized in net earnings at the time earnings are affected by the hedged transaction. Adjustments to record changes in fair values of the derivative contracts that are attributable to the ineffective portion of the hedges, if any, are recognized in earnings. We present derivative instruments in our condensed 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. During the three months ended September 30, 2017, the interest rate cap hedges continued to be highly effective and zero, net of tax, was recognized in other comprehensive income. No amount was recorded in the condensed consolidated income statements during the three months ended September 30, 2017. See Note 9.
The recorded fair value of the derivative financial instruments on the condensed consolidated balance sheets were as follows:
|
| | | | | | | | | | | | | | | | |
| | (In thousands) September 30, 2017 | | (In thousands) December 31, 2016 |
| | 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 | | $ | — |
| | $ | 122 |
| | $ | — |
| | $ | 553 |
|
Total Derivatives | | $ | — |
| | $ | 122 |
| | $ | — |
| | $ | 553 |
|
Note 6. Inventories
Inventories consisted of the following:
| | | | | | | | | | | | | | |
| | (In thousands) | | |
| | March 28, 2020 | | December 31, 2019 |
Raw materials and supplies | | $ | 106,347 | | | $ | 98,151 | |
Work in process | | 10,026 | | | 10,887 | |
Finished goods | | 3,378 | | | 3,444 | |
| | | | |
| | | | |
Total | | $ | 119,751 | | | $ | 112,482 | |
|
| | | | | | | | |
| | (In thousands) |
| | September 30, 2017 | | December 31, 2016 |
Raw materials and supplies | | $ | 70,787 |
| | $ | 64,650 |
|
Work in process | | 66,689 |
| | 56,806 |
|
Finished goods | | 12,275 |
| | 9,180 |
|
| | 149,751 |
| | 130,636 |
|
Less progress payments | | 12,594 |
| | 10,740 |
|
Total | | $ | 137,157 |
| | $ | 119,896 |
|
Note 4. LeasesWe net progress paymentselected to utilize the following practical expedients that are permitted under ASC 842:
•As an accounting policy election by class of underlying asset, chose not to separate nonlease components from customerslease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component; and
•As an accounting policy election chose not to apply the recognition requirements in ASC 842 to short term leases (a lease at commencement date has a lease term of 12 months or less and does not contain a purchase option that the lessee is reasonably certain to exercise).
We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have remaining lease terms of 1 year to 11 years, some of which include options to extend the leases for up to 5 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense were as follows:
| | | | | | | | | | | |
| (In thousands) | | |
| Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Operating leases expense | $ | 1,008 | | | 963 | |
| | | |
Finance leases expense: | | | |
Amortization of right-of-use assets | $ | 60 | | | $ | 45 | |
Interest on lease liabilities | 10 | | | 9 | |
Total finance lease expense | $ | 70 | | | $ | 54 | |
Short term lease expense for the three months ended March 28, 2020 was not material.
Supplemental cash flow information related to inventory purchases against inventoriesleases were as follows:
| | | | | | | | | | | |
| (In thousands) | | |
| Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 1,029 | | | $ | 923 | |
Operating cash flows from finance leases | $ | 10 | | | $ | 9 | |
Financing cash flows from finance leases | $ | 54 | | | $ | 17 | |
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 165 | | | $ | — | |
Finance leases | $ | 372 | | | $ | 457 | |
The weighted average remaining lease terms were as follows:
| | | | | | | | | | | |
| (In years) | | |
| Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Operating leases | 5 | | 7 |
Finance leases | 7 | | 4 |
When a lease is identified, we recognize a right-of-use asset and a corresponding lease liability based on the condensed consolidated balance sheets.present value of the lease payments over the lease term discounted using our incremental borrowing rate, unless an implicit rate is readily determinable. As the discount rate in our leases is usually not readily available, we use our own incremental borrowing rate as the discount rate. Our incremental borrowing rate is based on the interest rate on our term loan, which is a secured rate. The interest rate on our term loan is based on London Interbank Offered Rate (“LIBOR”) plus an applicable margin.
The weighted average discount rates were as follows:
| | | | | | | | | | | |
| Three Months Ended | | |
| March 28, 2020 | | March 30, 2019 |
Operating leases | 6.5 | % | | 6.5 | % |
Finance leases | 5.3 | % | | 6.5 | % |
Maturity of operating and finance lease liabilities are as follows:
| | | | | | | | | | | | | | |
| | (In thousands) | | |
| | Operating Leases | | Finance Leases |
2020 (Excluding the three months ended March 28, 2020) | | $ | 3,173 | | | $ | 223 | |
2021 | | 4,177 | | | 284 | |
2022 | | 3,786 | | | 147 | |
2023 | | 3,454 | | | 108 | |
2024 | | 3,032 | | | 82 | |
Thereafter | | 7,071 | | | 207 | |
Total lease payments | | 24,693 | | | 1,051 | |
Less imputed interest | | 4,707 | | | 81 | |
Total | | $ | 19,986 | | | $ | 970 | |
Operating lease payments include $11.6 million related to options to extend lease terms that are reasonably certain of being exercised. As of March 28, 2020, there are 0 legally binding minimum lease payments for leases signed but not yet commenced.
Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are not significant. As of March 28, 2020, it excludes $1.0 million of legally binding minimum lease payments for leases signed but not yet commenced. These finance leases will commence during 2020 with a lease term of 10 years.
Note 7.5. Goodwill
We perform our annual goodwill impairment test duringas of the first day of the fourth quarter. If certain factors occur, we may have to perform an impairment test prior to the fourth quarter including significant under performance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an
extended period of time relative to net book value, a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently.differently, we may perform an impairment test prior to the fourth quarter.
As a result of the outbreak of the COVID-19 pandemic during the three months ended March 28, 2020, which impacts our business in the United States and the rest of the world, we assessed our goodwill for potential impairment indicators. The most recent goodwill impairment test for our Electronic Systems reporting unit was the annual goodwill impairment test as of the first day of the fourth quarter of 2019 where the fair value of our Electronic Systems reporting unit exceeded its carrying value by 44% and thus, goodwill was not deemed impaired at that time. For the first quarter of 2020, we performed a qualitative assessment including consideration of 1) margin of passing most recent Step 1 analysis, 2) earnings before interest, taxes, depreciation, and amortization, 3) long-term growth rate, 4) analyzing material adverse factors/changes between valuation
dates, 5) general macroeconomic factors, and 6) industry and market conditions. We determined it was not more likely than not that the fair value of a reporting unit is less than its carrying amount and thus, goodwill was not deemed impaired.
The most recent Step 1 goodwill impairment test for our Structural Systems reporting unit was April 2019, where the fair value of our Structural Systems reporting unit exceeded its carrying value by 85%. As such, for our annual goodwill impairment test as of the first day of the fourth quarter of 2019, we used a qualitative assessment and determined it was not more likely than not that the fair value of a reporting unit is less than its carrying amount and thus, goodwill was not deemed impaired at that time. For the first quarter of 2020, we performed a qualitative assessment including consideration of 1) margin of passing most recent step 1 analysis, 2) earnings before interest, taxes, depreciation, and amortization, 3) long-term growth rate, 4) analyzing material adverse factors/changes between valuation dates, 5) general macroeconomic factors, and 6) industry and market conditions. We determined it was not more likely than not that the fair value of a reporting unit is less than its carrying amount and thus, goodwill was not deemed impaired.
We acquired Nobles Worldwide, Inc. (“Nobles”) in October 2019 and recorded goodwill of $34.8 million in our Structural Systems segment. See Note 2.
The carrying amounts of our goodwill all in our Electronic Systems segment, were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Electronic Systems | | Structural Systems | | Consolidated Ducommun |
Gross goodwill | | $ | 199,157 | | | $ | 53,482 | | | $ | 252,639 | |
Accumulated goodwill impairment | | (81,722) | | | — | | | (81,722) | |
Balance at December 31, 2019 | | 117,435 | | | 53,482 | | | 170,917 | |
Purchase price allocation refinements | | — | | | (27) | | | (27) | |
Balance at March 28, 2020 | | $ | 117,435 | | | $ | 53,455 | | | $ | 170,890 | |
|
| | | | |
| | (In thousands) |
Gross goodwill | | $ | 164,276 |
|
Accumulated goodwill impairment | | (81,722 | ) |
Balance at December 31, 2016 | | 82,554 |
|
Goodwill from acquisition during the period | | 34,881 |
|
Balance at September 30, 2017 | | $ | 117,435 |
|
Note 8.6. Accrued and Other Liabilities
The components of accrued and other liabilities were as follows:
| | | | | | | | | | | | | | |
| | (In thousands) | | |
| | March 28, 2020 | | December 31, 2019 |
Accrued compensation | | $ | 20,201 | | | $ | 31,342 | |
Accrued income tax and sales tax | | 585 | | | 163 | |
| | | | |
| | | | |
| | | | |
Other | | 7,262 | | | 6,115 | |
Total | | $ | 28,048 | | | $ | 37,620 | |
|
| | | | | | | | |
| | (In thousands) |
| | September 30, 2017 | | December 31, 2016 |
Accrued compensation | | $ | 17,259 |
| | $ | 15,455 |
|
Accrued income tax and sales tax | | 1,161 |
| | 332 |
|
Customer deposits | | 3,798 |
| | 3,204 |
|
Provision for forward loss reserves | | 2,025 |
| | 4,780 |
|
Other | | 5,556 |
| | 5,508 |
|
Total | | $ | 29,799 |
| | $ | 29,279 |
|
Note 9.7. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
| | | | | | | | | | | | | | |
| | (In thousands) | | |
| | March 28, 2020 | | December 31, 2019 |
Term loans | | $ | 302,638 | | | $ | 310,000 | |
Revolving credit facility | | 50,000 | | | — | |
| | | | |
| | | | |
| | | | |
Total debt | | 352,638 | | | 310,000 | |
Less current portion | | 7,000 | | | 7,000 | |
Total long-term debt, less current portion | | 345,638 | | | 303,000 | |
Less debt issuance costs - term loans | | 2,013 | | | 2,113 | |
Total long-term debt, net of debt issuance costs - term loans | | $ | 343,625 | | | $ | 300,887 | |
Debt issuance costs - revolving credit facility (1) | | $ | 1,799 | | | $ | 1,894 | |
Weighted-average interest rate | | 4.49 | % | | 6.87 | % |
(1) Included as part of other assets.
|
| | | | | | | | |
| | (In thousands) |
| | September 30, 2017 | | December 31, 2016 |
Term loan | | $ | 160,000 |
| | $ | 170,000 |
|
Revolving credit facility | | 64,700 |
| | — |
|
Other debt (fixed 5.41%) | | — |
| | 3 |
|
Total debt | | 224,700 |
| | 170,003 |
|
Less current portion | | — |
| | 3 |
|
Total long-term debt | | 224,700 |
| | 170,000 |
|
Less debt issuance costs | | 2,306 |
| | 3,104 |
|
Total long-term debt, net of debt issuance costs | | $ | 222,394 |
| | $ | 166,896 |
|
Weighted-average interest rate | | 3.43 | % | | 3.25 | % |
OurOn December 20, 2019, we completed the refinancing of a portion of our existing debt by entering into a new revolving credit facility consists of(“New Revolving Credit Facility”) to replace the existing revolving credit facility that was entered into in November 2018 (“2018 Revolving Credit Facility”) and entering into a $275.0 million senior securednew term loan which matures on June 26, 2020 (“New Term Loan”), and. The New Revolving Credit Facility is a $200.0$100.0 million senior secured revolving credit facility (“that matures on December 20, 2024 replacing the $100.0 million 2018 Revolving Credit Facility”), whichFacility that would have matured on November 21, 2023. The New Term Loan is a $140.0 million senior secured term loan that matures on June 26, 2020December 20, 2024. We also have an existing $240.0 million senior secured term loan that was entered into in November 2018 that matures on November 21, 2025 (“2018 Term Loan”). The original amounts available under the New Revolving Credit Facility, New Term Loan, and 2018 Term Loan (collectively, the “Credit Facilities”). in aggregate, totaled $480.0 million.
The New Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as the London Interbank Offered Rate [“LIBOR”] plus an applicable margin ranging from 1.50% to 2.50% per year) or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. In addition, the New Term Loan requires installment payments of 1.25% of the original outstanding principal balance of the New Term Loan amount on a quarterly basis.
The New Revolving Credit Facilities bearFacility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from 1.50% to 2.75%2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.75%1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio.ratio, typically payable quarterly. The undrawn portionsportion of the commitmentscommitment of the New Revolving Credit Facilities areFacility is subject to a commitment fee ranging from 0.175% to 0.300%0.275%, based upon the consolidated total net adjusted leverage ratio.
The 2018 Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR plus an applicable margin ranging from 3.75% to 4.00% per year) or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 3.75% to 4.00% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. In addition, the 2018 Term Loan requires installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount on a quarterly basis.
Further, under the Credit Facilities, if we aremeet the annual excess cash flow threshold, we will be required to make excess flow payments. The annual mandatory prepayments of amounts outstanding under the Term Loan. The mandatory prepaymentsexcess cash flow payments will be made quarterly,based on (i) 50% of the excess cash flow amount if the adjusted leverage ratio is greater than 3.25 to 1.0, (ii) 25% of the excess cash flow amount if the adjusted leverage ratio is less than or equal to 5.0% per year3.25 to 1.0 but greater than 2.50 to 1.0, and (iii) zero percent of the original aggregate principalexcess cash flow amount duringif the first two
years and increaseadjusted leverage ratio is less than or equal to 7.5% per year during2.50 to 1.0. During the third year, and increase to 10.0% per year duringthree months ended March 28, 2020, we made 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.required 2019 annual excess cash flow payment of $7.4 million. As of September 30, 2017,March 28, 2020, we were in compliance with all covenants required under the Credit Facilities.
We have been making periodic voluntary principal prepayments on our credit facilities, however, during the three months ended March 28, 2020, as a result of drawing down $50.0 million on the New Revolving Credit Facility to hold as cash, we made no net aggregate voluntary prepayments.
In addition,conjunction with entering into the New Revolving Credit Facility and the New Term Loan, we incurred $4.8drew down the entire $140.0 million on the New Term Loan and used those proceeds to pay off and close the 2018 Revolving Credit Facility of $58.5 million, pay down a portion of the 2018 Term Loan of $56.0 million, pay the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit Facility and 2018 Term Loan, pay the fees related to this transaction, and the remainder will be used for general corporate expenses. The New Revolving Credit Facility does not require any principal installment payments, however, the undrawn portion is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. The New Term Loan requires installment payments of 1.25% of the initial principal balance outstanding on a quarterly basis. The $56.0 million pay down paid all the required quarterly principal installment payments on the 2018 Term Loan until it matures.
The New Term Loan and 2018 Term Loan were considered a modification of debt issuance costs relatedand thus, no gain or loss was recorded. Instead, the new fees paid to the Credit Facilities and those costslenders of $0.6 million were capitalized and are being amortized over the five year life of the Credit Facilities.
On July 14, 2017, we entered into a technical amendmentNew Term Loan. The remaining debt issuance costs related to the Credit Facilities (“First Amendment”) which provides more flexibility to close certain qualified acquisitions permitted under the Credit Facilities.
We made voluntary principal prepayments of zero and $10.0 million under the2018 Term Loan duringof $1.5 million will continue to be amortized over its remaining life.
The New Revolving Credit Facility that replaced the three2018 Revolving Credit Facility was considered an extinguishment of debt except for the portion related to the creditors that were part of both the New Revolving Credit Facility and nine months ended September 30, 2017, respectively.the 2018 Revolving Credit Facility and in which case, it was considered a modification of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the 2018 Revolving Credit Facility that was considered an extinguishment of debt of $0.5 million. In addition, the new fees paid to the lenders of $0.5 million as part of the New Revolving Credit Facility were
capitalized and are being amortized over its remaining life. Further, the remaining debt issuance costs related to the 2018 Revolving Credit Facility of $1.1 million will also be amortized its remaining life.
In October 2019, we acquired LDS100.0% of the outstanding equity interests of Nobles for aan original purchase price of $60.0$77.0 million, net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid $61.4a gross total aggregate of $77.3 million in cash upon the closing of the transaction by drawing down on the Revolving Credit Facility. The remaining $0.6 million was paid in October 2017 in cash, also by drawing down on the2018 Revolving Credit Facility. See Note 2 for further information.2.
As of September 30, 2017,March 28, 2020, we had $134.5$49.8 million of unused borrowing capacity under the Revolving Credit Facility, after deducting $64.7 million for draw down on the Revolving Credit Facility and $0.8$0.2 million for standby letters of credit.
The Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our domestic subsidiaries, other than one subsidiary2 subsidiaries that were considered minor (“Subsidiary Guarantors”) that was considered minor.. The Subsidiary Guarantors jointly and severally guarantee the Credit Facilities. The Parent Company has no independent assets or operations and the Subsidiary Guarantors jointly and severally guarantee, on a senior unsecured basis, the Credit Facilities. Therefore,therefore, no condensed consolidating financial information for the Parent Company and its subsidiaries are presented.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with a portion of these interest rate cap hedges maturing on a quarterly basis, and a final quarterly maturity datesdate of June 2020, and in aggregate, totaling $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the interest rate cap hedges. See Note 51 for further discussion.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 condensed consolidated balance sheets with no impact to the condensed consolidated income statements or condensed consolidated cash flow statements.
Note 10. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At September 30, 2017 and December 31, 2016, no preferred shares were issued or outstanding.
Note 11.8. Employee Benefit Plans
The components of net periodic pension expense were as follows:
| | | | (In thousands) | | (In thousands) | | (In thousands) | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | March 28, 2020 | | March 30, 2019 | |
Service cost | | $ | 133 |
| | $ | 133 |
| | $ | 398 |
| | $ | 399 |
| Service cost | | $ | 155 | | | $ | 126 | | |
Interest cost | | 332 |
| | 341 |
| | 997 |
| | 1,025 |
| Interest cost | | 302 | | | 347 | | |
Expected return on plan assets | | (382 | ) | | (370 | ) | | (1,147 | ) | | (1,111 | ) | Expected return on plan assets | | (440) | | | (411) | | |
Amortization of actuarial losses | | 202 |
| | 191 |
| | 607 |
| | 572 |
| Amortization of actuarial losses | | 249 | | | 221 | | |
Net periodic pension cost | | $ | 285 |
| | $ | 295 |
| | $ | 855 |
| | $ | 885 |
| Net periodic pension cost | | $ | 266 | | | $ | 283 | | |
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for the three and nine months ended September 30, 2017March 28, 2020 were as follows:
|
| | | | | | | | |
| | (In thousands) |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | September 30, 2017 |
Amortization of actuarial losses - total before tax (1) | | $ | (202 | ) | | $ | (607 | ) |
Tax benefit | | 74 |
| | 225 |
|
Net of tax | | $ | (128 | ) | | $ | (382 | ) |
| | | | | | | | | | |
(1) | The amortization expense is included in the computation | (In thousands) | | |
| | Three Months Ended | | |
| | March 28, 2020 | | |
Amortization of periodic pension cost and is a decrease to net income upon reclassification from accumulated other comprehensive loss.actuarial losses - total before tax (1) | | $ | 249 | | | |
Tax benefit | | (59) | | | |
Net of tax | | $ | 190 | | | |
(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.
Note 12.9. 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 our use of the facility or theunder our 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 vary and, in many cases, are indefinite but subject to statutes 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 valueamount of our indemnification obligations as insignificant based on this history and insurance coverage and therefore, have therefore, not recorded any liability for these guarantees and indemnities
on the accompanying condensed consolidated balance sheets. Further, when considered with our insurance coverage, although recorded through different captions on our condensed consolidated balance sheets, the potential impact is further mitigated.
Note 13.10. Income Taxes
The provision for income taxes is determined using an estimated annual effective tax rate, which is generally less than the U.S. federal statutory rate, primarily due to research and development (“R&D”) tax credits and deductions available for domestic production activities.credits. Our effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as expected utilization of R&D tax credits, valuation allowances against deferred tax assets, the recognition or derecognition of tax benefits related to uncertain tax positions, and changes in or the interpretation of tax laws in jurisdictions where we conduct business. Also, excess tax benefits and tax deficiencies related to our equity compensation recognized in the income statement could result in fluctuations in our effective tax rate period-over-period depending on the volatility of our stock price and how many awards vest in the period. We recognize deferred tax assets and liabilities, using enacted tax rates, for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers.
We record a valuation allowance against our deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized. When we establish or reduce our valuation allowances against our deferred tax assets, the provision for income taxes will increase or decrease, respectively, in the period when that determination is made.
We recorded income tax expense of $0.9$1.5 million (effective tax rate of 16.8%) for the three months ended September 30, 2017March 28, 2020 compared to $1.2$1.0 million (effective tax rate of 19.8%) for the three months ended October 1, 2016.March 30, 2019. The decreaseincrease in the effectiveincome tax rateexpense for the three months ended September 30, 2017first quarter of 2020 compared to the three months ended October 1, 2016first quarter of 2019 was primarily due to tax benefits recognized from additional U.S. Federal research and development tax credits. FASB ASU 2016-09 became effective beginning January 1, 2017 and required all the tax effects related to share-based payments be recorded through thehigher pre-tax income statement. This could result in fluctuations in our effective tax rate from period to period, depending on the number of awards exercised and/or vested in the quarter as well as the volatility of our stock price. During the current year three month period, we recognized tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.1 million, which decreased our effective tax rate by 0.6%.
We recorded income tax expense of $2.1 million (effective tax rate of 16.4%) for the nine months ended September 30, 2017 compared to $9.9 million (effective tax ratefirst quarter of 30.5%) for the nine months ended October 1, 2016. The decrease in the effective tax rate for the nine months ended September 30, 20172020 compared to the nine months ended October 1, 2016 was primarily duefirst quarter of 2019. On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provides tax relief to individuals and businesses affected by the preliminary gain on divestiturescoronavirus pandemic. We considered the provisions of the CARES Act and determined they do not have a material impact to our Pittsburgh and Miltec operations of $18.8 million, which resulted in a higher state tax liability, compared to the current year nine month period. In addition, during the current year nine month period, we
recognized tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.6 million, which decreased the effective tax rate by 4.8%, and we recognized additional tax benefits from U.S. Federal research and development tax credits.income taxes.
Our total amount of unrecognized tax benefits was $3.7$5.8 million and $3.0$5.7 million as of September 30, 2017March 28, 2020 and December 31, 2016,2019, respectively. If recognized, $2.4$4.1 million would affect the effective tax rate. We do not reasonablyAs a result of statute of limitations set to expire in the fourth quarter of 2020, we expect significant increases or decreases to our unrecognized tax benefits of approximately $2.0 million in the next twelve months.
In 2016, the Internal Revenue Service (“IRS”) commenced an audit of our 2014 and 2015 tax years. Although the outcome of tax examinations cannot be predicted with certainty, we believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.
Note 14.11. Contingencies
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in El Mirage and Monrovia, California. Based on currently available information, Ducommun has established an accrual for its estimated liability for such investigation and corrective action of $1.5 million at both September 30, 2017March 28, 2020 and December 31, 2016,2019, which is reflected in other long-term liabilities on its condensed consolidated balance sheets.
Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. Structural Systems and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, Ducommun preliminarily estimates that the range of its future liabilities in connection with the landfill located in West Covina, California is between $0.4 million and $3.1 million. Ducommun has established an accrual for its estimated liability in connection with the West Covina landfill of $0.4 million at September 30, 2017,March 28, 2020, which is reflected in other long-term liabilities on its condensed 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.liabilities in the ordinary course of business. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it may be required to pay in connection with these matters would have a material adverse effect on its condensed consolidated financial position, results of operations or cash flows.
Note 15.12. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two2 strategic businesses, StructuralElectronic Systems and ElectronicStructural Systems, each of which is a reportable operating segment.
Financial information by reportable operating segment was as follows:
| | | | | | | | | | | | | | | | | | |
| | (In thousands) Three Months Ended | | | | | | |
| | March 28, 2020 | | March 30, 2019 | | | | |
Net Revenues | | | | | | | | |
Electronic Systems | | $ | 98,120 | | | $ | 84,197 | | | | | |
Structural Systems | | 75,355 | | | 88,369 | | | | | |
Total Net Revenues | | $ | 173,475 | | | $ | 172,566 | | | | | |
Segment Operating Income | | | | | | | | |
Electronic Systems | | $ | 15,122 | | | $ | 9,181 | | | | | |
Structural Systems | | 5,390 | | | 10,549 | | | | | |
| | 20,512 | | | 19,730 | | | | | |
Corporate General and Administrative Expenses (1) | | (6,886) | | | (6,882) | | | | | |
Operating Income | | $ | 13,626 | | | $ | 12,848 | | | | | |
Depreciation and Amortization Expenses | | | | | | | | |
Electronic Systems | | $ | 3,575 | | | $ | 3,502 | | | | | |
Structural Systems | | 3,689 | | | 3,000 | | | | | |
Corporate Administration | | 72 | | | 253 | | | | | |
Total Depreciation and Amortization Expenses | | $ | 7,336 | | | $ | 6,755 | | | | | |
Capital Expenditures | | | | | | | | |
Electronic Systems | | $ | 815 | | | $ | 836 | | | | | |
Structural Systems | | 2,137 | | | 3,689 | | | | | |
Corporate Administration | | — | | | — | | | | | |
Total Capital Expenditures | | $ | 2,952 | | | $ | 4,525 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | (In thousands) Three Months Ended | | (In thousands) Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net Revenues | | | | | | | | |
Structural Systems | | $ | 59,685 |
| | $ | 60,931 |
| | $ | 176,372 |
| | $ | 185,642 |
|
Electronic Systems | | 79,005 |
| | 71,640 |
| | 239,553 |
| | 222,514 |
|
Total Net Revenues | | $ | 138,690 |
| | $ | 132,571 |
| | $ | 415,925 |
| | $ | 408,156 |
|
Segment Operating Income | | | | | | | | |
Structural Systems | | $ | 3,466 |
| | $ | 5,893 |
| | $ | 8,147 |
| | $ | 13,347 |
|
Electronic Systems | | 8,234 |
| | 6,600 |
| | 24,158 |
| | 19,769 |
|
| | 11,700 |
| | 12,493 |
| | 32,305 |
| | 33,116 |
|
Corporate General and Administrative Expenses (1) | | (4,505 | ) | | (4,441 | ) | | (14,539 | ) | | (13,505 | ) |
Operating Income | | $ | 7,195 |
| | $ | 8,052 |
| | $ | 17,766 |
| | $ | 19,611 |
|
Depreciation and Amortization Expenses | | | | | | | | |
Structural Systems | | $ | 2,220 |
| | $ | 2,851 |
| | $ | 6,879 |
| | $ | 6,683 |
|
Electronic Systems | | 3,345 |
| | 3,232 |
| | 10,207 |
| | 10,661 |
|
Corporate Administration | | 54 |
| | 6 |
| | 63 |
| | 76 |
|
Total Depreciation and Amortization Expenses | | $ | 5,619 |
| | $ | 6,089 |
| | $ | 17,149 |
| | $ | 17,420 |
|
Capital Expenditures | | | | | | | | |
Structural Systems | | $ | 4,449 |
| | $ | 3,555 |
| | $ | 17,217 |
| | $ | 10,149 |
|
Electronic Systems | | 1,793 |
| | 947 |
| | 4,256 |
| �� | 1,701 |
|
Corporate Administration | | 127 |
| | — |
| | 775 |
| | — |
|
Total Capital Expenditures | | $ | 6,369 |
| | $ | 4,502 |
| | $ | 22,248 |
| | $ | 11,850 |
|
(1)Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments. | |
(1) | Includes costs not allocated to either the Structural Systems or Electronic Systems operating segments. |
Segment assets include assets directly identifiable to or allocated to each segment. Our segment assets are as follows:
| | | | | | | | | | | | | | |
| | (In thousands) | | |
| | March 28, 2020 | | December 31, 2019 |
Total Assets | | | | |
Electronic Systems | | $ | 431,562 | | | $ | 411,981 | |
Structural Systems | | 335,942 | | | 328,718 | |
Corporate Administration (1) | | 74,333 | | | 49,730 | |
Total Assets | | $ | 841,837 | | | $ | 790,429 | |
Goodwill and Intangibles | | | | |
Electronic Systems | | $ | 208,097 | | | $ | 210,453 | |
Structural Systems | | 97,325 | | | 98,826 | |
Total Goodwill and Intangibles | | $ | 305,422 | | | $ | 309,279 | |
(1)Includes assets not specifically identified to or allocated to either the Electronic Systems or Structural Systems operating segments, including cash and cash equivalents.
|
| | | | | | | | |
| | (In thousands) |
| | September 30, 2017 | | December 31, 2016 |
Total Assets | | | | |
Structural Systems | | $ | 207,413 |
| | $ | 175,580 |
|
Electronic Systems | | 376,569 |
| | 325,780 |
|
Corporate Administration (1) | | 9,867 |
| | 14,069 |
|
Total Assets | | $ | 593,849 |
| | $ | 515,429 |
|
Goodwill and Intangibles | | | | |
Structural Systems | | $ | 3,063 |
| | $ | 3,745 |
|
Electronic Systems | | 231,657 |
| | 180,382 |
|
Total Goodwill and Intangibles | | $ | 234,720 |
| | $ | 184,127 |
|
| |
(1) | Includes assets not specifically identified to or allocated to either the Structural Systems or Electronic Systems operating segments, including cash and cash equivalents. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Ducommun Incorporated (“Ducommun,” “the Company,” “we,” “us” or “our”) is a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical and other industries (collectively, “Industrial”). We differentiate ourselves as a full-service solution-based provider, offering a wide range of value-added products and services in our primary businesses of electronics, structures and integrated solutions. We operate through two primary business segments: Electronic Systems and Structural Systems, each of which is a reportable segment.
ThirdCOVID-19 Coronavirus Pandemic Impact on Our Business
The outbreak of the COVID-19 coronavirus has been declared a pandemic by the World Health Organization during our first quarter 2017of 2020 but did not have a significant impact to our overall business during the three months ended March 28, 2020. However, during the latter part of our first quarter and subsequent to our quarter end, the COVID-19 pandemic has grown, causing non-essential businesses to shut down and many people to observe the shelter-in-place directive from our government. The COVID-19 pandemic is beginning to contribute to a general slowdown in the global economy and if it continues for an extended period of time, it could adversely impact the businesses of our customers and suppliers, as well as our results of operations and financial condition for some portion, if not the remainder, of 2020. See Risk Factors included in Part II, Item 1A of this Form 10-Q.
First quarter 2020 highlights:
•Revenues of $138.7$173.5 million
•Net income of $4.7$7.9 million, or $0.41$0.67 per diluted share
•Adjusted EBITDA of $14.5$23.2 million
Backlog of $655.3 million
Completed the acquisition of Lightning Diversion Systems, LLC
Non-GAAP Financial Measures
Adjusted earnings before interest, taxes, depreciation, amortization, and restructuring chargesstock-based compensation expense (“Adjusted EBITDA”) was $14.5$23.2 million and $14.9$21.1 million for the three months ended SeptemberMarch 28, 2020 and March 30, 2017 and October 1, 2016,2019, respectively.
When viewed with our financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and accompanying reconciliations, we believe Adjusted EBITDA provides additional useful information to clarify and enhance the understanding of the factors and trends affecting our past performance and future prospects. We define these measures, explain how they are calculated and provide reconciliations of these measures to the most comparable GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this Quarterly Report on Form 10-Q (“Form 10-Q”), are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP. They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net cash provided by operating activities as measures of our liquidity. The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items.
We use Adjusted EBITDA non-GAAP operating performance measures internally as complementary financial measures to evaluate the performance and trends of our businesses. We present Adjusted EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our operating commitments.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as substitutesa substitute for analysis of our results as reported under GAAP. Some of these limitations include:
•They do not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments;
•They do not reflect changes in, or cash requirements for, our working capital needs;
•They do not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt;
•Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;
•They are not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows;
•They do not reflect the impact on earnings of charges resulting from matters unrelated to our ongoing operations; and
•Other companies in our industry may calculate Adjusted EBITDA differently from us, limiting their usefulness as comparative measures.
Because of these limitations, Adjusted EBITDA and the related financial ratios should not be considered as measures of discretionary cash available to us to invest in the growth of our business or as a measure of cash that will be available to us to meet our obligations. You should compensate for these limitations by relying primarily on our GAAP results and using Adjusted EBITDA only as supplemental information. See our Condensed Consolidated Financial Statements contained in this Form 10-Q.
However, in spite of the above limitations, we believe that Adjusted EBITDA is useful to an investor in evaluating our results of operations because these measures:
•Are widely used by investors to measure a company’s operating performance without regard to items excluded from the calculation of such terms, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired, among other factors;
•Help investors to evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating performance; and
•Are used by our management team for various other purposes in presentations to our Board of Directors as a basis for strategic planning and forecasting.
The following financial items have been added back to or subtracted from our net income when calculating Adjusted EBITDA:
•Interest expense may be useful to investors for determining current cash flow;
•Income tax expense may be useful to investors because it represents the taxes which may be payable for the period and the change in deferred taxes during the period, and may reduce cash flow available for use in our business;
•Depreciation may be useful to investors because it generally represents the wear and tear on our property and equipment used in our operations;
•Amortization expense may be useful to investors because it represents the estimated attrition of our acquired customer base and the diminishing value of product rights; and
•Stock-based compensation may be useful to our investors for determining current cash flow;
Gain on divestitures may be useful to our investors in evaluating our on-going operating performance; and
Restructuring charges may be useful to our investors in evaluating our core operating performance.flow.
Reconciliations of net income to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net revenues were as follows:
| | | (In thousands) Three Months Ended | | (In thousands) Nine Months Ended | | (Dollars in thousands) Three Months Ended | |
| September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | March 28, 2020 | | March 30, 2019 | |
Net income | $ | 4,655 |
| | $ | 5,014 |
| | $ | 10,593 |
| | $ | 22,425 |
| Net income | $ | 7,930 | | | $ | 7,472 | | |
Interest expense | 2,088 |
| | 1,945 |
| | 5,588 |
| | 6,279 |
| Interest expense | 4,246 | | | 4,351 | | |
Income tax expense | 940 |
| | 1,234 |
| | 2,073 |
| | 9,863 |
| Income tax expense | 1,450 | | | 1,025 | | |
Depreciation | 3,243 |
| | 3,249 |
| | 9,910 |
| | 10,002 |
| Depreciation | 3,436 | | | 3,484 | | |
Amortization | 2,376 |
| | 2,840 |
| | 7,239 |
| | 7,418 |
| Amortization | 3,900 | | | 3,271 | | |
Stock-based compensation expense | 1,100 |
| | 594 |
| | 4,264 |
| | 2,579 |
| Stock-based compensation expense | 2,279 | | | 1,464 | | |
Gain on divestitures | — |
| | — |
| | — |
| | (18,815 | ) | |
Restructuring charges | 64 |
| | — |
| | 64 |
| | — |
| |
| Adjusted EBITDA | $ | 14,466 |
| | $ | 14,876 |
| | $ | 39,731 |
| | $ | 39,751 |
| Adjusted EBITDA | $ | 23,241 | | | $ | 21,067 | | |
% of net revenues | 10.4 | % | | 11.2 | % | | 9.6 | % | | 9.7 | % | % of net revenues | 13.4 | % | | 12.2 | % | |
Results of Operations
ThirdFirst Quarter of 20172020 Compared to ThirdFirst Quarter of 20162019
The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share:
| | | | (in thousands, except per share data) Three Months Ended | | (in thousands, except per share data) Nine Months Ended | | (Dollars in thousands, except per share data) Three Months Ended | |
| | September 30, 2017 | | % of Net Revenues | | October 1, 2016 | | % of Net Revenues | | September 30, 2017 | | % of Net Revenues | | October 1, 2016 | | % of Net Revenues | | March 28, 2020 | | % of Net Revenues | | March 30, 2019 | | % of Net Revenues | |
Net Revenues | | $ | 138,690 |
| | 100.0 | % | | $ | 132,571 |
| | 100.0 | % | | $ | 415,925 |
| | 100.0 | % | | $ | 408,156 |
| | 100.0 | % | Net Revenues | | $ | 173,475 | | | 100.0 | % | | $ | 172,566 | | | 100.0 | % | |
Cost of Sales | | 112,681 |
| | 81.2 | % | | 107,348 |
| | 81.0 | % | | 338,798 |
| | 81.5 | % | | 329,749 |
| | 80.8 | % | Cost of Sales | | 136,671 | | | 78.8 | % | | 136,872 | | | 79.3 | % | |
| Gross Profit | | 26,009 |
| | 18.8 | % | | 25,223 |
| | 19.0 | % | | 77,127 |
| | 18.5 | % | | 78,407 |
| | 19.2 | % | Gross Profit | | 36,804 | | | 21.2 | % | | 35,694 | | | 20.7 | % | |
Selling, General and Administrative Expenses | | 18,814 |
| | 13.6 | % | | 17,171 |
| | 12.9 | % | | 59,361 |
| | 14.3 | % | | 58,796 |
| | 14.4 | % | Selling, General and Administrative Expenses | | 23,178 | | | 13.4 | % | | 22,846 | | | 13.2 | % | |
| Operating Income | | 7,195 |
| | 5.2 | % | | 8,052 |
| | 6.1 | % | | 17,766 |
| | 4.2 | % | | 19,611 |
| | 4.8 | % | Operating Income | | 13,626 | | | 7.8 | % | | 12,848 | | | 7.5 | % | |
Interest Expense | | (2,088 | ) | | (1.5 | )% | | (1,945 | ) | | (1.5 | )% | | (5,588 | ) | | (1.3 | )% | | (6,279 | ) | | (1.5 | )% | Interest Expense | | (4,246) | | | (2.4) | % | | (4,351) | | | (2.5) | % | |
Other Income | | 488 |
| | 0.4 | % | | 141 |
| | 0.1 | % | | 488 |
| | 0.1 | % | | 141 |
| | — | % | |
Gain on Divestitures | | — |
| | — | % | | — |
| | — | % | | — |
| | — | % | | 18,815 |
| | 4.6 | % | |
| Income Before Taxes | | 5,595 |
| | 4.1 | % | | 6,248 |
| | 4.7 | % | | 12,666 |
| | 3.0 | % | | 32,288 |
| | 7.9 | % | Income Before Taxes | | 9,380 | | | 5.4 | % | | 8,497 | | | 5.0 | % | |
Income Tax Expense | | 940 |
| | nm |
| | 1,234 |
| | nm |
| | 2,073 |
| | nm |
| | 9,863 |
| | nm |
| Income Tax Expense | | 1,450 | | | nm | | | 1,025 | | | nm | | |
Net Income | | $ | 4,655 |
| | 3.4 | % | | $ | 5,014 |
| | 3.8 | % | | $ | 10,593 |
| | 2.5 | % | | $ | 22,425 |
| | 5.5 | % | Net Income | | $ | 7,930 | | | 4.6 | % | | $ | 7,472 | | | 4.3 | % | |
| | | | | | | | | | | | | | | | | | | | | | |
Effective Tax Rate | | 16.8 | % | | nm |
| | 19.8 | % | | nm |
| | 16.4 | % | | nm |
| | 30.5 | % | | nm |
| Effective Tax Rate | | 15.5 | % | | nm | | | 12.1 | % | | nm | | |
Diluted Earnings Per Share | | $ | 0.41 |
| | nm |
| | $ | 0.44 |
| | nm |
| | $ | 0.92 |
| | nm |
| | $ | 1.99 |
| | nm |
| Diluted Earnings Per Share | | $ | 0.67 | | | nm | | $ | 0.64 | | | nm | |
nm = not meaningful
Net Revenues by End-Use Market and Operating Segment
Net revenues by end-use market and operating segment during the first fiscal three months ended March 28, 2020 and nine months of 2017 and 2016,March 30, 2019, respectively, were as follows:
| | | | Three Months Ended | | Nine Months Ended | | Three Months Ended | |
| | | | (In thousands) | | % of Net Revenues | | | | (In thousands) | | % of Net Revenues | | | (Dollars in thousands) | | | % of Net Revenues | |
| | Change | | September 30 2017 | | October 1, 2016 | | September 30 2017 | | October 1, 2016 | | Change | | September 30 2017 | | October 1, 2016 | | September 30 2017 | | October 1, 2016 | | Change | | March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 | |
Consolidated Ducommun | | | | | | | | | | | | | | | | | | Consolidated Ducommun | | | | | | | | | | | |
Military and space | | | | | | | | | | | | | | | | | | Military and space | | $ | 24,159 | | | $ | 100,820 | | | $ | 76,661 | | | 58.1 | % | | 44.4 | % | |
Defense electronics | | $ | 7,740 |
| | $ | 50,259 |
| | $ | 42,519 |
| | 36.3 | % | | 32.1 | % | | $ | 27,514 |
| | $ | 153,728 |
| | $ | 126,214 |
| | 37.0% | | 30.9% | |
Defense structures | | 318 |
| | 12,534 |
| | 12,216 |
| | 9.0 | % | | 9.2 | % | | 4,434 |
| | 42,041 |
| | 37,607 |
| | 10.1% | | 9.2% | |
Commercial aerospace | | Commercial aerospace | | (22,971) | | | 62,525 | | | 85,496 | | | 36.0 | % | | 49.6 | % | |
Industrial | | Industrial | | (279) | | | 10,130 | | | 10,409 | | | 5.9 | % | | 6.0 | % | |
Total | | Total | | $ | 909 | | | $ | 173,475 | | | $ | 172,566 | | | 100.0 | % | | 100.0 | % | |
| Electronic Systems | | Electronic Systems | | |
Military and space | | Military and space | | $ | 12,851 | | | $ | 73,238 | | | $ | 60,387 | | | 74.7 | % | | 71.7 | % | |
Commercial aerospace | | (2,842 | ) | | 60,923 |
| | 63,765 |
| | 43.9 | % | | 48.1 | % | | (16,820 | ) | | 176,643 |
| | 193,463 |
| | 42.5% | | 47.4% | Commercial aerospace | | 1,351 | | | 14,752 | | | 13,401 | | | 15.0 | % | | 15.9 | % | |
Industrial | | 903 |
| | 14,974 |
| | 14,071 |
| | 10.8 | % | | 10.6 | % | | (7,359 | ) | | 43,513 |
| | 50,872 |
| | 10.4% | | 12.5% | Industrial | | (279) | | | 10,130 | | | 10,409 | | | 10.3 | % | | 12.4 | % | |
Total | | $ | 6,119 |
| | $ | 138,690 |
| | $ | 132,571 |
| | 100.0 | % | | 100.0 | % | | $ | 7,769 |
| | $ | 415,925 |
| | $ | 408,156 |
| | 100.0% | | 100.0% | Total | | $ | 13,923 | | | $ | 98,120 | | | $ | 84,197 | | | 100.0 | % | | 100.0 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Structural Systems | | | | | | | | | | | | | | | | | | Structural Systems | | |
Military and space (defense structures) | | $ | 318 |
| | $ | 12,534 |
| | $ | 12,216 |
| | 21.0 | % | | 20.0 | % | | $ | 4,434 |
| | $ | 42,041 |
| | $ | 37,607 |
| | 23.8% | | 20.3% | |
Military and space | | Military and space | | $ | 11,308 | | | $ | 27,582 | | | $ | 16,274 | | | 36.6 | % | | 18.4 | % | |
Commercial aerospace | | (1,564 | ) | | 47,151 |
| | 48,715 |
| | 79.0 | % | | 80.0 | % | | (13,704 | ) | | 134,331 |
| | 148,035 |
| | 76.2% | | 79.7% | Commercial aerospace | | (24,322) | | | 47,773 | | | 72,095 | | | 63.4 | % | | 81.6 | % | |
Total | | $ | (1,246 | ) | | $ | 59,685 |
| | $ | 60,931 |
| | 100.0 | % | | 100.0 | % | | $ | (9,270 | ) | | $ | 176,372 |
| | $ | 185,642 |
| | 100.0% | | 100.0% | Total | | $ | (13,014) | | | $ | 75,355 | | | $ | 88,369 | | | 100.0 | % | | 100.0 | % | |
| | | | | | | | | | | | | | | | | | |
Electronic Systems | | | | | | | | | | | | | | | | | | |
Military and space (defense electronics) | | $ | 7,740 |
| | $ | 50,259 |
| | $ | 42,519 |
| | 63.6 | % | | 59.4 | % | | $ | 27,514 |
| | $ | 153,728 |
| | $ | 126,214 |
| | 64.1% | | 56.7% | |
Commercial aerospace | | (1,278 | ) | | 13,772 |
| | 15,050 |
| | 17.4 | % | | 21.0 | % | | (3,116 | ) | | 42,312 |
| | 45,428 |
| | 17.7% | | 20.4% | |
Industrial | | 903 |
| | 14,974 |
| | 14,071 |
| | 19.0 | % | | 19.6 | % | | (7,359 | ) | | 43,513 |
| | 50,872 |
| | 18.2% | | 22.9% | |
Total | | $ | 7,365 |
| | $ | 79,005 |
| | $ | 71,640 |
| | 100.0 | % | | 100.0 | % | | $ | 17,039 |
| | $ | 239,553 |
| | $ | 222,514 |
| | 100.0% | | 100.0% | |
Net revenues for the three months ended September 30, 2017March 28, 2020 were $138.7$173.5 million, compared to $132.6$172.6 million for the three months ended October 1, 2016.March 30, 2019. The year-over-year increase was primarily due to the following:
•$8.124.2 million higher revenues in our military and space end-use markets mainly due to increased demand, which favorably impacted ourhigher build rates on military fixed-wing aircraft platforms, various missile platforms, and helicopterother military and space platforms; and
$0.9 million higher revenues in our industrial end-use markets; partially offset by
•$2.823.0 million lower revenues in our commercial aerospace end-use markets mainly due to the winding down of a regional jet program and continued softness in demand within the business jet market.
Net revenues for the nine months ended September 30, 2017 were $415.9 million, compared to $408.2 million for the nine months ended October 1, 2016. The year-over-year increase was primarily due to the following:
$31.9 million higher revenues in our military and space end-use markets mainly due to increased demand, which favorably impacted our helicopter and fixed-wing platforms, partially offset by the divestiture of our Miltec operation in March 2016. The net increase was partially offset by
$16.8 million lower revenues in our commercial aerospace end-use markets mainly due to the winding down of a regional jet program and continued softness in demand within the business jet market; and
$7.4 million lower revenues in our industrial end-use markets mainly due to exiting certain Industrial customers and the divestiture of our Pittsburgh operation in January 2016.
build rates on large aircraft platforms.
Net Revenues by Major Customers
A significant portion of our net revenues are from our top ten customers as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | March 28, 2020 | | March 30, 2019 | | | | |
Boeing Company | | 8.4 | % | | 19.9 | % | | | | |
| | | | | | | | |
Northrop Grumman Corporation | | 5.6 | % | | 4.3 | % | | | | |
Raytheon Company (1) | | 11.2 | % | | 10.5 | % | | | | |
Spirit Aerosystems Holdings, Inc. | | 5.6 | % | | 11.9 | % | | | | |
United Technologies Corporation (1) | | 7.2 | % | | 4.7 | % | | | | |
Total top ten customers (2) | | 54.3 | % | | 67.1 | % | | | | |
(1)Subsequent to our quarter ended March 28, 2020, United Technologies Corporation completed its acquisition of Raytheon Company on April 3, 2020, and renamed the combined company, Raytheon Technologies Corporation.
(2)Includes The Boeing Company (“Boeing”), Northrop Grumman Corporation (“Northrop”), Raytheon Company (“Raytheon”), Spirit Aerosystems Holdings, Inc. (“Spirit”), and United Technologies Corporation (“United Technologies”). The significant decrease in total aggregate revenues generated from our top ten customers was primarily due to the decrease by Boeing and Spirit, mainly due to the impact from the continued grounding of the Boeing 737 MAX program combined with the outbreak of the COVID-19 pandemic during our first quarter of 2020, which resulted in the March 23, 2020 and March 24, 2020 announcements by Boeing and Spirit, respectively, to temporarily shut down production at some of their facilities. However, subsequent to our quarter end, Boeing resumed production at two of their manufacturing facilities.
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Boeing Company | | 17.1 | % | | 18.1 | % | | 16.6 | % | | 17.8 | % |
Lockheed Martin Corporation | | 5.7 | % | | 6.6 | % | | 5.7 | % | | 5.7 | % |
Raytheon Company | | 14.3 | % | | 8.6 | % | | 14.1 | % | | 7.3 | % |
Spirit Aerosystems Holdings, Inc. | | 8.0 | % | | 8.3 | % | | 7.6 | % | | 8.2 | % |
United Technologies Corporation | | 4.5 | % | | 5.3 | % | | 5.0 | % | | 4.9 | % |
Total top ten customers (1) | | 64.3 | % | | 61.0 | % | | 62.8 | % | | 57.3 | % |
| |
(1) | Includes the Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Raytheon Company (“Raytheon”), Spirit Aerosystems Holdings, Inc. (“Spirit”), and United Technologies Corporation (“United Technologies”). |
Boeing, Lockheed Martin,Northrop, Raytheon, Spirit, and United Technologies represented the following percentages of total accounts receivable:
| | | | September 30, 2017 | | December 31, 2016 | | | March 28, 2020 | | December 31, 2019 |
Boeing | | 15.4 | % | | 7.8 | % | Boeing | | 4.7 | % | | 5.9 | % |
Lockheed Martin | | 4.8 | % | | 2.9 | % | |
| Northrop | | Northrop | | 5.7 | % | | 6.0 | % |
Raytheon | | 6.2 | % | | 10.9 | % | Raytheon | | 5.2 | % | | 3.3 | % |
Spirit | | 10.9 | % | | 9.0 | % | Spirit | | 1.6 | % | | 2.0 | % |
United Technologies | | 3.0 | % | | 7.8 | % | United Technologies | | 5.7 | % | | 3.4 | % |
The net revenues and accounts receivable from Boeing, Lockheed Martin,Northrop, Raytheon, Spirit, and United Technologies are diversified over a number of commercial, military and space programs and were generated by both operating segments.
Gross Profit
Gross profit consists of net revenues less cost of sales. Cost of sales includes the cost of production of finished products and other expenses related to inventory management, manufacturing quality, and order fulfillment. Gross profit margin as a percentage of net revenues decreasedincreased year-over-year in the three months ended September 30, 2017March 28, 2020 to 18.8%21.2%, compared to the three months ended October 1, 2016March 30, 2019 of 19.0% primarily20.7% due to unfavorable product mix, partially offset by lower manufacturing costs as a result of ongoing cost reduction initiatives.
Gross profit margin as a percentage of net revenues decreased year-over-year in the nine months ended September 30, 2017 to 18.5% compared to the nine months ended October 1, 2016 of 19.2% primarily due to unfavorable product mix, partially offset by lower manufacturing costs as a result of ongoing cost reduction initiativescompensation and higher manufacturing volume.benefit costs.
Selling, General and Administrative (“SG&A”) Expenses
SG&A expenses increased $1.6$0.3 million year-over-year in the three months ended September 30, 2017March 28, 2020 compared to the three months ended October 1, 2016 primarilyMarch 30, 2019 due to higher compensation and benefit costsother corporate expenses of $1.5 million.
SG&A expenses increased $0.6 million year-over-year in the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016 primarily due to higher compensation and benefit costs of $2.0 million, partially offset by a decrease due to the divestitureslower professional services fees of our Pittsburgh and Miltec operations and closure of certain facilities of $1.3$0.4 million.
Interest Expense
Interest expense increased year-over-yeardecreased in the three months ended September 30, 2017March 28, 2020 compared to the three months ended October 1, 2016 primarilyMarch 30, 2019 due to lower interest rates, partially offset by a higher utilizationoutstanding balance on the Credit Facilities driven by the acquisition of Nobles Worldwide, Inc. (“Nobles”) in October 2019, and higher net draw down on the Revolving Credit Facility, balance in the current three month period, including the acquisition of Lightning Diversion Systems, LLC (“LDS”), partially offset by a lower Term Loan balance$50.0 million as a result of voluntary principal prepaymentscash on our credit facilities.
Interest expense decreased year-over-year in the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016 primarily due to a lower outstanding Term Loan balance as a result of voluntary principal prepayments on our credit facilities, partially offset by higher utilization of the Revolving Credit Facility in the current nine month period, including the acquisition of LDS.
Gain on Divestitures
There was no gain on divestitures during the three and nine months ended September 30, 2017. The gain on divestitures for the three and nine months ended October 1, 2016 consisted of the divestitures during the first quarter of 2016 of our Pittsburgh operation with a pretax gain of $18.3 million and our Miltec operation with a preliminary pretax gain of $0.5 million. (see Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q).hand.
Income Tax Expense
We recorded income tax expense of $0.9$1.5 million (effective tax rate of 16.8%) for the three months ended September 30, 2017March 28, 2020 compared to $1.2$1.0 million (effective tax rate of 19.8%) for the three months ended October 1, 2016.March 30, 2019. The decreaseincrease in the effectiveincome tax rateexpense for the three months ended September 30, 2017first quarter of 2020 compared to the three months ended October 1, 2016first quarter of 2019 was primarily due to tax benefits recognized from additional U.S. Federal research and development tax credits. FASB ASU 2016-09 “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” became effective beginning January 1, 2017 and required all of the tax effects related to share-based payments to be recorded through thehigher pre-tax income statement. This could result in fluctuations in our effective tax rate from period to period, depending on the number of awards exercised and/or vested in the quarter as well as the volatility of our stock price. During the current year three month period, we recognized tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.1 million, which decreased the effective tax rate by 0.6%.
We recorded income tax expense of $2.1 million (effective tax rate of 16.4%) for the nine months ended September 30, 2017 compared to $9.9 million (effective tax ratefirst quarter of 30.5%) for the nine months ended October 1, 2016. The decrease in the effective tax rate for the nine months ended September 30, 20172020 compared to the nine months ended October 1, 2016 was primarily duefirst quarter of 2019. On March 27, 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provides tax relief to individuals and businesses affected by the preliminary gain on divestiturescoronavirus pandemic. We considered the provisions of the CARES Act and determined they do not have a material impact to our Pittsburgh and Miltec operations of $18.8 million, which resulted in a higher state tax liability, compared to the current nine month period. In addition, during the current nine month period, we recognized tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.6 million, which decreased the effective tax rate by 4.8%, and we recognized additional tax benefits from U.S. Federal research and development tax credits.income taxes.
Our total amount of unrecognized tax benefits was $3.7$5.8 million and $3.0$5.7 million as of September 30, 2017March 28, 2020 and December 31, 2016,2019, respectively. If recognized, $2.4$4.1 million would affect the effective tax rate. We do not reasonablyAs a result of statute of limitations set to expire in the fourth quarter of 2020, we expect significant increases or decreases to our unrecognized tax benefits of $2.0 million in the next twelve months.
In 2016, the Internal Revenue Service (“IRS”) commenced an audit of our 2014 and 2015 tax years. Although the outcome of tax examinations cannot be predicted with certainty, we believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.
Net Income and Earnings per Share
Net income and earnings per share for the three months ended September 30, 2017March 28, 2020 were $4.7$7.9 million, or $0.41$0.67 per diluted share, compared to $5.0$7.5 million, or $0.44$0.64 per diluted share, for the three months ended October 1, 2016.March 30, 2019. The decreaseincrease in net income for the three months ended September 30, 2017March 28, 2020 compared to the three months ended October 1, 2016March 30, 2019 was primarily due to the following:
$1.6 million higher SG&A expense; partially offset by
$0.3$1.1 million of higher gross profit as a result of higher revenues and lower income tax expense.compensation and benefit costs.
Net income and earnings per share for the nine months ended September 30, 2017 were $10.6 million, or $0.92 per diluted share, compared to $22.4 million, or $1.99 per diluted share, for the nine months ended October 1, 2016. The decrease in net income for the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016 was primarily due to the following:
The prior year included a preliminary pre-tax gain on divestitures$7.8 million lower income tax expense.
Business Segment Performance
We report our financial performance based upon the two reportable operating segments: StructuralElectronic Systems and ElectronicStructural Systems. The results of operations differ between our reportable operating segments due to differences in competitors, customers, extent of proprietary deliverables and performance. The following table summarizes our business segment performance for the three and nine months ended SeptemberMarch 28, 2020 and March 30, 2017 and October 1, 2016:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | | | | | | | | | | | |
| | % | | (Dollars in thousands) | | | | % of Net Revenues | | | | | | | | | | | | |
| | Change | | March 28, 2020 | | March 30, 2019 | | March 28, 2020 | | March 30, 2019 | | | | | | | | | | |
Net Revenues | | | | | | | | | | | | | | | | | | | | |
Electronic Systems | | 16.5 | % | | $ | 98,120 | | | $ | 84,197 | | | 56.6 | % | | 48.8 | % | | | | | | | | | | |
Structural Systems | | (14.7) | % | | 75,355 | | | 88,369 | | | 43.4 | % | | 51.2 | % | | | | | | | | | | |
Total Net Revenues | | 0.5 | % | | $ | 173,475 | | | $ | 172,566 | | | 100.0 | % | | 100.0 | % | | | | | | | | | | |
Segment Operating Income | | | | | | | | | | | | | | | | | | | | |
Electronic Systems | | | | $ | 15,122 | | | $ | 9,181 | | | 15.4 | % | | 10.9 | % | | | | | | | | | | |
Structural Systems | | | | 5,390 | | | 10,549 | | | 7.2 | % | | 11.9 | % | | | | | | | | | | |
| | | | 20,512 | | | 19,730 | | | | | | | | | | | | | | | |
Corporate General and Administrative Expenses (1) | | | | (6,886) | | | (6,882) | | | (4.0) | % | | (4.0) | % | | | | | | | | | | |
Total Operating Income | | | | $ | 13,626 | | | $ | 12,848 | | | 7.8 | % | | 7.5 | % | | | | | | | | | | |
Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | |
Electronic Systems | | | | | | | | | | | | | | | | | | | | |
Operating Income | | | | $ | 15,122 | | | $ | 9,181 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization | | | | 3,575 | | | 3,502 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | 18,697 | | | 12,683 | | | 19.1 | % | | 15.1 | % | | | | | | | | | | |
Structural Systems | | | | | | | | | | | | | | | | | | | | |
Operating Income | | | | 5,390 | | | 10,549 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization | | | | 3,689 | | | 3,000 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | 9,079 | | | 13,549 | | | 12.0 | % | | 15.3 | % | | | | | | | | | | |
Corporate General and Administrative Expenses (1) | | | | | | | | | | | | | | | | | | | | |
Operating Loss | | | | (6,886) | | | (6,882) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Depreciation and Amortization | | | | 72 | | | 253 | | | | | | | | | | | | | | | |
Stock-Based Compensation Expense | | | | 2,279 | | | 1,464 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | (4,535) | | | (5,165) | | | | | | | | | | | | | | | |
Adjusted EBITDA | | | | $ | 23,241 | | | $ | 21,067 | | | 13.4 | % | | 12.2 | % | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Capital Expenditures | | | | | | | | | | | | | | | | | | | | |
Electronic Systems | | | | $ | 815 | | | $ | 836 | | | | | | | | | | | | | | | |
Structural Systems | | | | 2,137 | | | 3,689 | | | | | | | | | | | | | | | |
Corporate Administration | | | | — | | | — | | | | | | | | | | | | | | | |
Total Capital Expenditures | | | | $ | 2,952 | | | $ | 4,525 | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | % | | (In thousands) | | % of Net Revenues | | % | | (In thousands) | | % of Net Revenues |
| | Change | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 | | Change | | September 30, 2017 | | October 1, 2016 | | September 30, 2017 | | October 1, 2016 |
Net Revenues | | | | | | | | | | | | | | | | | | | | |
Structural Systems | | (2.0 | )% | | $ | 59,685 |
| | $ | 60,931 |
| | 43.0 | % | | 46.0 | % | | (5.0 | )% | | $ | 176,372 |
| | $ | 185,642 |
| | 42.4 | % | | 45.5 | % |
Electronic Systems | | 10.3 | % | | 79,005 |
| | 71,640 |
| | 57.0 | % | | 54.0 | % | | 7.7 | % | | 239,553 |
| | 222,514 |
| | 57.6 | % | | 54.5 | % |
Total Net Revenues | | 4.6 | % | | $ | 138,690 |
| | $ | 132,571 |
| | 100.0 | % | | 100.0 | % | | 1.9 | % | | $ | 415,925 |
| | $ | 408,156 |
| | 100.0 | % | | 100.0 | % |
Segment Operating Income | | | | | | | | | | | | | | | | | | | | |
Structural Systems | | | | $ | 3,466 |
| | $ | 5,893 |
| | 5.8 | % | | 9.7 | % | | | | $ | 8,147 |
| | $ | 13,347 |
| | 4.6 | % | | 7.2 | % |
Electronic Systems | | | | 8,234 |
| | 6,600 |
| | 10.4 | % | | 9.2 | % | | | | 24,158 |
| | 19,769 |
| | 10.1 | % | | 8.9 | % |
| | | | 11,700 |
| | 12,493 |
| | | | | | | | 32,305 |
| | 33,116 |
| | | | |
Corporate General and Administrative Expenses (1) | | | | (4,505 | ) | | (4,441 | ) | | (3.2 | )% | | (3.3 | )% | | | | (14,539 | ) | | (13,505 | ) | | (3.5 | )% | | (3.3 | )% |
Total Operating Income | | | | $ | 7,195 |
| | $ | 8,052 |
| | 5.2 | % | | 6.1 | % | | | | $ | 17,766 |
| | $ | 19,611 |
| | 4.3 | % | | 4.8 | % |
Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | |
Structural Systems | | | | | | | | | | | | | | | | | | | | |
Operating Income | | | | $ | 3,466 |
| | $ | 5,893 |
| | | | | | | | $ | 8,147 |
| | $ | 13,347 |
| | | | |
Other Income | | | | 200 |
| | 141 |
| | | | | | | | 200 |
| | 141 |
| | | | |
Depreciation and Amortization | | | | 2,220 |
| | 2,851 |
| | | | | | | | 6,879 |
| | 6,683 |
| | | | |
Restructuring Charges | | | | 64 |
| | — |
| | | | | | | | 64 |
| | — |
| | | | |
| | | | 5,950 |
| | 8,885 |
| | 10.0 | % | | 14.6 | % | | | | 15,290 |
| | 20,171 |
| | 8.7 | % | | 10.9 | % |
Electronic Systems | | | | | | | | | | | | | | | | | | | | |
Operating Income | | | | 8,234 |
| | 6,600 |
| | | | | | | | 24,158 |
| | 19,769 |
| | | | |
Other Income | | | | 288 |
| | — |
| | | | | | | | 288 |
| | — |
| | | | |
Depreciation and Amortization | | | | 3,345 |
| | 3,232 |
| | | | | | | | 10,207 |
| | 10,661 |
| | | | |
| | | | 11,867 |
| | 9,832 |
| | 15.0 | % | | 13.7 | % | | | | 34,653 |
| | 30,430 |
| | 14.5 | % | | 13.7 | % |
Corporate General and Administrative Expenses (1) | | | | | | | | | | | | | | | | | | | | |
Operating Loss | | | | (4,505 | ) | | (4,441 | ) | | | | | | | | (14,539 | ) | | (13,505 | ) | | | | |
Depreciation and Amortization | | | | 54 |
| | 6 |
| | | | | | | | 63 |
| | 76 |
| | | | |
Stock-Based Compensation Expense | | | | 1,100 |
| | 594 |
| | | | | | | | 4,264 |
| | 2,579 |
| | | | |
| | | | (3,351 | ) | | (3,841 | ) | | | | | | | | (10,212 | ) | | (10,850 | ) | | | | |
Adjusted EBITDA | | | | $ | 14,466 |
| | $ | 14,876 |
| | 10.4 | % | | 11.2 | % | | | | $ | 39,731 |
| | $ | 39,751 |
| | 9.6 | % | | 9.7 | % |
Capital Expenditures | | | | | | | | | | | | | | | | | | | | |
Structural Systems | | | | $ | 4,449 |
| | $ | 3,555 |
| | | | | | | | $ | 17,217 |
| | $ | 10,149 |
| | | | |
Electronic Systems | | | | 1,793 |
| | 947 |
| | | | | | | | 4,256 |
| | 1,701 |
| | | | |
Corporate Administration | | | | 127 |
| | — |
| | | | | | | | 775 |
| | — |
| | | | |
Total Capital Expenditures | | | | $ | 6,369 |
| | $ | 4,502 |
| | | | | | | | $ | 22,248 |
| | $ | 11,850 |
| | | | |
| |
(1) | Includes costs not allocated to either the Structural(1)Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.Electronic Systems Electronic Systems operating segments. |
Structural Systems
Structural Systems’ net revenues in the three months ended September 30, 2017March 28, 2020 compared to the three months ended October 1, 2016 decreased $1.2March 30, 2019 increased $13.9 million primarily due to the following:
•$1.6 million lower revenues in our commercial aerospace end-use markets mainly due to the winding down of a regional jet program and continued softness in demand within the business jet market; partially offset by
$0.312.9 million higher revenues in our military and space end-use markets mainly due to higher build rates on military fixed-wing aircraft platforms and various missile platforms, partially offset by lower build rates on other military and space platforms; and
•$1.4 million higher revenues in our commercial aerospace end-use markets due to higher build rates on other commercial aerospace platforms.
Electronic Systems segment operating income in the three months ended March 28, 2020 compared to the three months ended March 30, 2019 increased demand, which favorably impacted our helicopter platforms.$5.9 million due to favorable manufacturing volume and favorable product mix.
Structural Systems’Systems
Structural Systems net revenues in the ninethree months ended September 30, 2017March 28, 2020 compared to the ninethree months ended October 1, 2016March 30, 2019 decreased $9.3$13.0 million primarily due to the following:
•$13.724.3 million lower revenues in our commercial aerospace end-use markets mainly due to the winding down of a regional jet program and continued softness in demand within the business jet market;lower build rates on large aircraft platforms; partially offset by
•$4.411.3 million higher revenues in our military and space end-use markets mainly due to increased demand, which favorably impacted our helicopterhigher build rates on other military and space platforms and military fixed-wing aircraft platforms.
The Structural Systems segment operating income in the three and nine months ended September 30, 2017 compared to the three and nine months ended October 1, 2016 decreased $2.4 million and $5.2 million, respectively, primarily due to the impact of new program development on large airframe platforms and lower manufacturing volume.
Electronic Systems
Electronic Systems’ net revenues in the three months ended September 30, 2017March 28, 2020 compared to the three months ended October 1, 2016 increased $7.4March 30, 2019 decreased $5.2 million primarily due to the following:
$7.7 million higher revenues in our militaryunfavorable manufacturing volume and space end-use markets mainly due to increased demand, which favorably impacted our fixed-wing, missile, and helicopter platforms; and
$0.9 million higher revenues in our Industrial end-use markets; partially offset by
$1.3 million lower revenues in our commercial aerospace end-use markets mainly due to continued softness in demand in the business jet market.
Electronic Systems’ net revenues in the nine months ended September 30, 2017 compared to the nine months ended October 1, 2016 increased $17.0 million primarily due to the following:
$27.5 million higher revenues in our military and space end-use markets mainly due to increased demand, which favorably impacted our fixed-wing, helicopter, and missile platforms,unfavorable product mix, partially offset by the divestiture of our Miltec operation in March 2016. The net increase was partially offset by
$7.4 million lower revenues in our Industrial end-use markets mainly due to exiting certain Industrial customerscompensation and the divestiture of our Pittsburgh operation in January 2016; and
$3.1 million lower revenues in our commercial aerospace end-use markets mainly due to continued softness in demand in the business jet market.
Electronic Systems’ segment operating income in the three and nine months ended September 30, 2017 compared to the three and nine months ended October 1, 2016 increased $1.6 million and $4.4 million, respectively, primarily due to higher manufacturing volume and lower manufacturing costs as a result of ongoing cost reduction initiatives, partially offset by unfavorable product mix.benefit costs.
Corporate General and Administrative (“CG&A”) Expenses
CG&A expenses increased $0.1 millionwas essentially flat in the three months ended September 30, 2017March 28, 2020 compared to the three months ended October 1, 2016.
CG&A expenses increased $1.0 million in the nine months ended SeptemberMarch 30, 2017 compared to the nine months ended October 1, 2016 primarily due to higher compensation and benefit costs of $2.5 million, partially offset by lower professional services fees of $1.3 million.2019.
Backlog
We define backlog as customer placed purchase orders (“POs”) and long-term agreements (“LTAs”) with firm fixed price and expected delivery dates of 24 months or less. The majority of the LTAs do not meet the definition of a contract under ASC 606 and thus, the backlog amount disclosed below is greater than the remaining performance obligations amount disclosed in Note 1 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q. Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our net revenues. Backlog in industrial markets tends to be of a shorter duration and is generally fulfilled within a 3-monththree month period. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues. $427.0
The decrease in backlog was primarily in the commercial aerospace end-use markets, mainly due to the COVID-19 pandemic, partially offset by an increase in the military and space end-use markets. $587.0 million of total backlog is expected to be delivered over the next 12 months. The following table summarizes our backlog as of September 30, 2017March 28, 2020 and December 31, 2016:2019:
| | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) | | | | |
| | Change | | March 28, 2020 | | December 31, 2019 |
Consolidated Ducommun | | | | | | |
Military and space | | $ | 23,158 | | | $ | 474,451 | | | $ | 451,293 | |
Commercial aerospace | | (54,335) | | | 376,307 | | | 430,642 | |
Industrial | | (2,618) | | | 25,668 | | | 28,286 | |
Total | | $ | (33,795) | | | $ | 876,426 | | | $ | 910,221 | |
Electronic Systems | | | | | | |
Military and space | | $ | 15,972 | | | $ | 326,999 | | | $ | 311,027 | |
Commercial aerospace | | 1,213 | | | 76,932 | | | 75,719 | |
Industrial | | (2,618) | | | 25,668 | | | 28,286 | |
Total | | $ | 14,567 | | | $ | 429,599 | | | $ | 415,032 | |
Structural Systems | | | | | | |
Military and space | | $ | 7,186 | | | $ | 147,452 | | | $ | 140,266 | |
Commercial aerospace | | (55,548) | | | 299,375 | | | 354,923 | |
Total | | $ | (48,362) | | | $ | 446,827 | | | $ | 495,189 | |
|
| | | | | | | | | | | | |
| | (In thousands) |
| | Change | | September 30, 2017 | | December 31, 2016 |
Consolidated Ducommun | | | | | | |
Military and space | | | | | | |
Defense electronics | | $ | (7,745 | ) | | $ | 189,831 |
| | $ | 197,576 |
|
Defense structures | | 7,727 |
| | 66,605 |
| | 58,878 |
|
Commercial aerospace | | 44,019 |
| | 367,408 |
| | 323,389 |
|
Industrial | | 4,355 |
| | 31,485 |
| | 27,130 |
|
Total | | $ | 48,356 |
| | $ | 655,329 |
| | $ | 606,973 |
|
Structural Systems | | | | | | |
Military and space (defense structures) | | $ | 7,727 |
| | $ | 66,605 |
| | $ | 58,878 |
|
Commercial aerospace | | 31,253 |
| | 316,492 |
| | 285,239 |
|
Total | | $ | 38,980 |
| | $ | 383,097 |
| | $ | 344,117 |
|
Electronic Systems | | | | | | |
Military and space (defense electronics) | | $ | (7,745 | ) | | $ | 189,831 |
| | $ | 197,576 |
|
Commercial aerospace | | 12,766 |
| | 50,916 |
| | 38,150 |
|
Industrial | | 4,355 |
| | 31,485 |
| | 27,130 |
|
Total | | $ | 9,376 |
| | $ | 272,232 |
| | $ | 262,856 |
|
Liquidity and Capital Resources
Available Liquidity
Total debt, the weighted-average interest rate, cash and cash equivalents and available credit facilities were as follows:
| | | | | | | | | | | | | | |
| | (Dollars in millions) | | |
| | March 28, | | December 31, |
| | 2020 | | 2019 |
Total debt, including long-term portion | | $ | 352.6 | | | $ | 310.0 | |
Weighted-average interest rate on debt | | 4.49 | % | | 6.87 | % |
Term Loans interest rate | | 4.69 | % | | 6.28 | % |
| | | | |
Cash and cash equivalents | | $ | 65.6 | | | $ | 39.6 | |
Unused Revolving Credit Facility | | $ | 49.8 | | | $ | 99.8 | |
|
| | | | | | | | |
| | (In millions) |
| | September 30, | | December 31, |
| | 2017 | | 2016 |
Total debt, including long-term portion | | $ | 224.7 |
| | $ | 170.0 |
|
Weighted-average interest rate on debt | | 3.43 | % | | 3.25 | % |
Term Loan interest rate | | 3.44 | % | | 3.31 | % |
Cash and cash equivalents | | $ | 3.7 |
| | $ | 7.4 |
|
Unused Revolving Credit Facility | | $ | 134.5 |
| | $ | 199.0 |
|
OurOn December 20, 2019, we completed the refinancing of a portion of our existing debt by entering into a new revolving credit facility consists of(“New Revolving Credit Facility”) to replace the existing revolving credit facility that was entered into in November 2018 (“2018 Revolving Credit Facility”) and entering into a $275.0 million senior securednew term loan which matures on June 26, 2020 (“New Term Loan”), and. The New Revolving Credit Facility is a $200.0$100.0 million senior secured revolving credit facility (“that matures on December 20, 2024 replacing the $100.0 million 2018 Revolving Credit Facility”), whichFacility that would have matured on November 21, 2023. The New Term Loan is a $140.0 million senior secured term loan that matures on June 26, 2020December 20, 2024. We also have an existing $240.0 million senior secured term loan that was entered into in November 2018 that matures on November 21, 2025 (“2018 Term Loan”). The original amounts available under the New Revolving Credit Facility, New Term Loan, and 2018 Term Loan (collectively, the “Credit Facilities”). in aggregate, totaled $480.0 million. We are required to make mandatory prepaymentsinstallment payments of amounts1.25% of the original outstanding underprincipal balance of the New Term Loan.Loan amount on a quarterly basis. In addition, if we meet the annual excess cash flow threshold, we will be required to make excess flow payments on an annual basis. Further, the undrawn portion of the commitment of the New Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. As of September 30, 2017,As of March 28, 2020, we were in compliance with all covenants required under the Credit Facilities. See Note 97 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. On July 14, 2017,
In November 2018, we entered intocompleted credit facilities to replace the then existing credit facilities. The November 2018 credit facilities consisted of the 2018 Term Loan and the 2018 Revolving Credit Facility (collectively, the “2018 Credit Facilities”). We are required to make installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount on a technical amendmentquarterly basis. In addition, if we meet the annual excess cash flow threshold, we will be required to the Credit Facilities (“First Amendment”) which provides more flexibilitymake excess flow payments on an annual basis. See Note 7 to close certain qualified acquisitions permittedour condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for further information. We made an aggregate total of $7.4 million of voluntary and mandatory principal prepayments under the Credit Facilities.Term Loans during the three months ended March 28, 2020.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with maturity dates of June 2020, and in aggregate, totaling $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the interest rate cap hedges.
On September 11, 2017,In October 2019, we acquired LDSNobles Parent Inc., the parent company of Nobles Worldwide, Inc. (“Nobles”) for aan original purchase price of $60.0$77.0 million, net of cash acquired, all payable in cash. UponWe paid a gross total aggregate of $77.3 million in cash upon the closing of the transaction we paid $61.4 million in cash by drawing down on the Revolving Credit Facility. The remaining $0.6 million was paid in October 2017 in cash, also by drawing down on the2018 Revolving Credit Facility. See Note 2 for further information.to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q.
We expect to spend a total of $26.0$12.0 million to $30.0$14.0 million for capital expenditures in 20172020 financed by cash generated from operations, principally to support the expansion of our Parsons, Kansas facility and new contract awards atin Electronic Systems and Structural Systems
and Electronic Systems. As part of our strategic plan to become a Tier 2 supplier of higher-level assemblies and win new contract awards, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies. However, some portion of the expected capital expenditures in 2020 could be delayed as a result of the COVID-19 pandemic.
We believe the ongoing aerospace and defense subcontractor consolidation makes acquisitions an increasingly important component of our future growth. We will continue to make prudent acquisitions and capital expenditures for manufacturing equipment and facilities to support long-term contracts for commercial and military aircraft and defense programs.
We continue to depend on operating cash flow and the availability of our Credit Facilities to provide short-term liquidity. Cash generated from operations and bank borrowing capacity isare expected to provide sufficient liquidity to meet our obligations during the next twelve months.
Cash Flow Summary
Net cash provided byused in operating activities for the ninethree months ended September 30, 2017 decreased to $27.4March 28, 2020 was $12.0 million, compared to $27.6$1.7 million for the ninethree months ended October 1, 2016.March 30, 2019. The lowerhigher net cash generatedused during the first ninethree months of 20172020 was primarily due to lower net income,higher accounts receivable and higher inventories, partially offset by higher accounts payable mainly due to the timing of payments.net income.
Net cash used in investing activities of $83.5was $3.7 million for the ninethree months ended September 30, 2017March 28, 2020 compared to net cash provided by of $42.6$3.2 million in the ninethree months ended October 1, 2016 primarily due toMarch 30, 2019. The higher net cash used during the payments for the purchasefirst three months of LDS, net of cash acquired of $59.2 million in the current year nine month period2020 compared to the prior year nine month period which included proceeds from the divestiture of our Pittsburgh and Miltec operations of approximately $55.3 million andwas due to higher purchases of property and equipment mainly to support the expansion of our Parsons, Kansas facility.equipment.
Net cash provided by financing activities was $41.7 million for the ninethree months ended SeptemberMarch 28, 2020 compared to net cash used of $1.6 million for the three months ended March 30, 20172019. The higher net cash provided by during the first three months of $52.4 million2020 was primarilymainly due to higher net borrowings fromdraw down on the New Revolving Credit Facility, that was used for the purchase of LDS, partially offset by higher repayments on the Credit Facilities.
of term loans.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of operating and finance leases not recorded as a result of the practical expedients utilized, right of offset of industrial revenue bonds and associated failed sale-leasebacks on property and equipment, and indemnities.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States requires estimation and judgment that affect the reported amounts of net revenues, expenses, assets and liabilities. For a description of our critical accounting policies, please refer to “Critical Accounting Policies” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 20162019 Annual Report on Form 10-K. There have been no material changes in any of our critical accounting policies during the three and nine months ended September 30, 2017.March 28, 2020.
Recent Accounting Pronouncements
See “Part I, Item 1. Ducommun Incorporated and Subsidiaries—Notes to Condensed Consolidated Financial Statements—Note 1. Summary of Significant Accounting Policies—Recent Accounting Pronouncements” for further information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our main market risk exposure relates to changes in U.S. and U.K. interest rates on our outstanding long-term debt. At September 30, 2017,March 28, 2020, we had total borrowings of $224.7$352.6 million under our Credit Facilities.
The New Term Loan and Revolving Credit Facility that bearbears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR)the London Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 1.50% to 2.75%2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.75%1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio.
The New Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from 1.50% to 2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio.
A hypothetical 10% increase or decrease in the interest rate would have an immaterial impact on our financial condition and results of operations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s chief executive officer (“CEO”) and chief financial officer (“CFO”) have conducted an evaluation of the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of September 30, 2017. The Company had previously reported a material weakness in internal control over
financial reporting related to not maintaining effective controls related to the quarterly, and annual accounting and disclosures for income taxes. This material weakness was described in Item 9A in the Management’s Report on Internal Control Over Financial Reporting in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. As a result of the material weakness in the Company’s internal control over financial reporting, which was not remediated as of September 30, 2017, the CEO and CFO concluded the Company’sthat such disclosure controls and procedures were not effective as of September 30, 2017.the end of the period covered by this report.
Management’s Remediation Activities
We are committed to remediating the control deficiencies that constitute the material weakness described above. Our Chief Financial Officer is responsible for remediating the control deficiency that gave rise to the material weakness.
While significant progress has been made to enhance our internal control over financial reporting relating to the material weakness, additional time will be required to assess and ensure the sustainability of these processes and procedures. We expect the remedial actions described above will have had sufficient time to function during 2017 to allow management to conclude that the material weakness has been satisfactorily remediated and that the existing controls are operating effectively. However, we cannot make any assurances that such actions will be completed during 2017. Until the controls described above have had sufficient time for management to conclude that they are operating effectively, the material weakness described above will continue to exist.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controlscontrol over financial reporting during the three months ended September 30, 2017March 28, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 1411 to our condensed consolidated financial statements included in Part I, Item 1 of this Form 10-Q for a description of our legal proceedings.
Item 1A. Risk Factors
See Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20162019 for a discussion of our risk factors. ThereOther than the risk factor below, there have been no material changes in the ninethree months ended September 30, 2017March 28, 2020 to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The outbreak of the COVID-19 coronavirus could have a material adverse effect on our business, results of operations and financial condition.
In recent weeks, the COVID-19 coronavirus pandemic has caused significant volatility in financial markets, including the market price of our stock, and the commercial aerospace industry, which has raised the prospect of an extended global recession. Public health problems resulting from COVID-19 and precautionary measures instituted by governments and businesses to mitigate its spread, including travel restrictions and quarantines, is beginning to contribute to a general slowdown in the global economy and if it continues for an extended period of time, it could adversely impact the businesses of our customers, suppliers and distribution partners, and disrupt our operations. Changes in our operations in response to the COVID-19 pandemic or employee illnesses resulting from the pandemic, may result in inefficiencies or delays, including in sales and product development efforts and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning, employees working remotely, or teleconferencing technologies. In addition, a prolonged economic downturn could result in reduced or delayed demand for our products. While the full extent and impact of the COVID-19 pandemic cannot be reasonably estimated with certainty at this time, it could have a material adverse impact on our business, results of operations and financial condition for some portion, if not the remainder, of 2020.
Item 4. Mine Safety Disclosures
Not applicable.
Item 6. Exhibits
2.4 Stock Purchase Agreement dated January 22, 2016, by and among Ducommun Incorporated, Ducommun LaBarge Technologies, Inc., as Seller, LaBarge Electronics, Inc., and Intervala, LLC, as Buyer. Incorporated by reference to Exhibit 2.1 to Form 8-K dated January 25, 2016. | |
3.1 | Restated Certificate of Incorporation filed with the Delaware Secretary of State on May 29, 1990. Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1990. |
3.1 Restated Certificate of Incorporation filed with the Delaware Secretary of State on May 29, 1990. Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
10.1 Incremental Term Loan Lender Joinder Agreement and Additional Credit Extension Amendment, dated as of December 20, 2019, by and among Ducommun Incorporated, as Borrower, the subsidiaries of the Borrower party thereto, as Guarantors, Bank of America, N.A., as Administrative Agent, Swingline Lender and an L.C. Issuer, and the lender party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 20, 2019. 10.2 Credit Agreement, dated as of June 26, 2015,November 21, 2018, among Ducommun Incorporated, certain of its subsidiaries, Bank of America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.1 to Form 8-K dated Junefiled on November 26, 2015.2018. 10.2 First Amendment to Credit Agreement, dated as of July 14, 2017, among Ducommun Incorporated, certain of its subsidiaries, Bank of America, N.A., as administrative agent, swingline lender and issuing bank, and other lenders party thereto. Incorporated by reference to Exhibit 10.2 to Form 10-Q for the period ended July 1, 2017.
*10.17 Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical except for the name of the director or officer and the date of the Agreement:
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*10.13 | Form of Indemnity Agreement entered with all directors and officers of Ducommun. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended December 31, 1990. All of the Indemnity Agreements are identical except for the name of the director or officer and the date of the Agreement: |
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| | | | | | | | | |
| Director/Officer | | Date of Agreement | |
| Richard A. Baldridge | | March 19, 2013 | |
| Gregory S. Churchill | | March 19, 2013 | |
| Shirley G. Drazba | | October 18, 2018 | |
| Robert C. Ducommun | | December 31, 1985 | |
| Dean M. Flatt | | November 5, 2009 | |
| Douglas L. Groves | | February 12, 2013 | |
| Jay L. Haberland | | February 2, 2009 | |
| Stephen G. Oswald | | January 23, 2017 | |
| Amy M. Paul | | January 23, 2017 | |
| Robert D. Paulson | | March 25, 2003 | |
| Anthony J. Reardon | | January 8, 2008 | |
| Jerry L. Redondo | | October 1, 2015 | |
| Rosalie F. Rogers | | July 24, 2008 | |
| Rajiv A. Tata | | January 24, 2020 | |
| Christopher D. Wampler | | January 1, 2016 | |
|
| | | | | | | | | | | | | |
| Person | | Date of Agreement | |
| DouglasJerry L. GrovesRedondo | | January 23, 2017 | |
| Amy M. PaulRosalie F. Rogers | | January 23, 2017 | |
| Anthony J. ReardonRajiv A. Tata | | January 24, 2020 | |
| Christopher D. Wampler | | January 23, 2017 | |
| Jerry L. Redondo | | January 23, 2017 | |
| Rosalie F. Rogers | | January 23, 2017 | |
| Christopher D. Wampler | | January 23, 2017 | |
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE XBRL Taxonomy Extension Presentation Linkbase
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* Indicates an executive compensation plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
Date: April 30, 2020 | By: | | /s/ Stephen G. Oswald |
| | | Stephen G. Oswald |
| | | Chairman, President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
Date: April 30, 2020 | By: | | /s/ Christopher D. Wampler |
| | | Christopher D. Wampler |
| | | Vice President, Interim Chief Financial Officer and Treasurer, and Controller and Chief Accounting Officer |
| | | (Principal Financial and Principal Accounting Officer) |
| | | |
| | | |
Date: November 1, 2017 | By: | | /s/ Stephen G. Oswald |
| | | Stephen G. Oswald |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | |
Date: November 1, 2017 | By: | | /s/ Douglas L. Groves |
| | | Douglas L. Groves |
| | | Vice President, Chief Financial Officer and Treasurer |
| | | (Principal Financial Officer) |
| | |
Date: November 1, 2017 | By: | | /s/ Christopher D. Wampler |
| | | Christopher D. Wampler |
| | | Vice President, Controller and Chief Accounting Officer |
| | | (Principal Accounting Officer) |