Part I Business Ducommun provides engineering and manufacturing services for aerospace, defense, and industrial markets, with a $960.8 million backlog - Ducommun operates through two primary business segments: Electronic Systems and Structural Systems, serving the aerospace & defense (A&D) and Industrial markets2124 - Acquisitions are a key growth strategy, exemplified by the December 2021 purchase of Magnetic Seal LLC (MagSeal) for an initial price of $69.5 million to enhance its engineered product offerings2223 Net Revenues by End-Use Market (2022) | End-Use Market | Percentage of Total Net Revenues | | :-------------------- | :------------------------------- | | Military and Space | 59% | | Commercial Aerospace | 35% | | Industrial | 6% | Top Customers' Share of 2022 Net Revenues | Customer | Percentage of Net Revenues | | :---------------------------- | :------------------------- | | Raytheon Technologies Corp. | 22% |\ | Boeing Company | 7% |\ | Top 10 Customers (Combined) | 61% | - Backlog increased to $960.8 million at the end of 2022, up from $905.2 million in 2021, primarily driven by the commercial aerospace market, with remaining performance obligations at $853.0 million5456 - As of December 31, 2022, the company had 2,465 employees, with 435 subject to collective bargaining agreements65 Risk Factors The company faces significant risks from its capital structure, customer concentration, government spending, supply chain, and cybersecurity - Capital Structure Risk: The company's indebtedness of $248.4 million as of December 31, 2022, could limit financing options and affect financial condition, with the debt refinanced in July 20226869 - Customer Concentration Risk: A majority of revenues come from the aerospace and defense industry, with the top ten customers accounting for 61% of 2022 net revenues, posing a material impact risk from sales reductions to major customers8689 - Government Spending Risk: A significant portion of business depends on U.S. Government defense spending, which is subject to budgetary uncertainties and policy changes9294 - Supply Chain Risk: The company relies on third-party suppliers for raw materials and components, with some being single-source, which could cause disruptions or cost inefficiencies133 - Pandemic Risk: The COVID-19 pandemic continues to have a material adverse effect on the business, particularly disrupting the commercial aerospace industry and global supply chains134136 - Cybersecurity and Operational Risk: The business is vulnerable to cybersecurity attacks and system failures which could lead to data loss, business interruption, and reputational damage140 Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None145 Properties The company's headquarters are in Santa Ana, California, operating various owned and leased facilities suitable for current operations - The company's headquarters are located in Santa Ana, California, and it operates from various owned and leased facilities in the U.S. and abroad146 Legal Proceedings Information regarding the company's legal proceedings is detailed in Note 15 to the consolidated financial statements - For a description of legal proceedings, the report refers to Note 15 of the consolidated financial statements147 Mine Safety Disclosures This item is not applicable to the company - Not applicable148 Part II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Ducommun's common stock trades on the NYSE under DCO, with no dividends paid since Q1 2011 and no issuer equity purchases reported - The company's common stock is listed on the NYSE under the symbol DCO150 - No dividends have been paid since Q1 2011, and none are expected in the foreseeable future150 - There were no issuer purchases of equity securities reported151 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenues grew 10.4% to $712.5 million, driven by commercial aerospace recovery, though net income declined due to a prior-year one-time gain Overview and COVID-19 Impact The COVID-19 pandemic continued to negatively impact the business in 2022, particularly the commercial aerospace market, due to global economic factors - The COVID-19 pandemic and related economic factors (inflation, rising interest rates, supply chain issues) continued to negatively impact the business, especially the commercial aerospace end-use market154157 - The company utilized the option to defer employer payroll taxes under the CARES Act, with the final deferred amount paid by December 31, 2022156 Results of Operations For 2022, net revenues increased by 10.4% to $712.5 million, but gross profit margin declined, and net income significantly dropped due to the absence of a prior-year one-time gain Consolidated Results of Operations (2022 vs. 2021) | Financial Metric | 2022 (in thousands) | 2021 (in thousands) | Change | | :---------------------- | :------------------ | :------------------ | :---------- | | Net Revenues | $712,537 | $645,413 | +10.4% | | Gross Profit | $144,297 | $142,460 | +1.3% | | Operating Income | $39,788 | $48,881 | -18.6% | | Net Income | $28,789 | $135,536 | -78.8% | | Diluted EPS | $2.33 | $11.06 | -78.9% | - The increase in 2022 revenue was primarily due to a $91.8 million rise in the commercial aerospace market, partially offset by a $33.1 million decrease in the military and space market170 - Gross profit margin decreased to 20.3% in 2022 from 22.1% in 2021, mainly due to an unfavorable product mix172 - The decrease in 2022 net income was primarily due to the absence of the $132.5 million gain on sale-leaseback that occurred in 2021, coupled with $6.7 million in restructuring charges incurred in 2022184176174 Business Segment Performance In 2022, both Electronic Systems and Structural Systems segments saw revenue growth, but their operating income declined due to unfavorable product mix and restructuring charges Segment Performance (2022 vs. 2021) | Segment | Net Revenues 2022 (in millions) | Net Revenues 2021 (in millions) | Operating Income 2022 (in millions) | Operating Income 2021 (in millions) | | :------------------ | :------------------------------ | :------------------------------ | :---------------------------------- | :---------------------------------- | | Electronic Systems | $440.6 | $412.6 | $49.9 | $57.6 | | Structural Systems | $271.9 | $232.8 | $17.2 | $20.2 | - Electronic Systems' revenue increase was driven by a $33.2 million rise in commercial aerospace, while operating income decreased due to unfavorable product mix and restructuring charges189 - Structural Systems' revenue growth was fueled by a $58.6 million increase in commercial aerospace from higher large aircraft build rates, with operating income declining due to unfavorable mix and restructuring190 Backlog Total backlog increased by $55.6 million to $960.8 million at year-end 2022, driven by commercial aerospace growth, with $655.0 million expected to be delivered in the next 12 months Backlog by End-Use Market (in thousands) | End-Use Market | Dec 31, 2022 | Dec 31, 2021 | Change | | :-------------------- | :----------- | :----------- | :---------- | | Military and space | $457,354 | $520,278 | ($62,924) | | Commercial aerospace | $450,092 | $333,107 | $116,985 | | Industrial | $53,374 | $51,802 | $1,572 | | Total | $960,820 | $905,187 | $55,633 | Liquidity and Capital Resources As of December 31, 2022, the company had $46.2 million in cash and $199.8 million available credit, with total debt at $248.4 million after a July 2022 refinancing Liquidity Position (as of Dec 31) | Metric | 2022 (in millions) | 2021 (in millions) | | :---------------------------- | :----------------- | :----------------- | | Total Debt | $248.4 | $287.7 | | Cash and cash equivalents | $46.2 | $76.3 | | Unused Revolving Credit Facility | $199.8 | $99.8 | - In July 2022, the company completed a major debt refinancing, establishing a new $250.0 million term loan and a $200.0 million revolving credit facility, both maturing in 2027197401 - A restructuring plan commenced in April 2022 is expected to result in total pre-tax charges of $12.0 million to $16.0 million through 2023, aiming for annualized cost savings of $11.0 million to $13.0 million201 - Cash flow from operating activities was $32.7 million in 2022, a significant improvement from a $0.6 million use of cash in 2021211 Critical Accounting Policies and Estimates The company's critical accounting policies involve significant judgment, particularly for revenue recognition over time and annual goodwill impairment testing, with no impairment recorded in 2022 - Revenue is primarily recognized over time using a cost-to-cost input method, as most products are built to customer specifications with no alternative use and an enforceable right to payment222223 - Goodwill is tested for impairment annually on the first day of the fourth quarter, with a quantitative test for the Structural Systems reporting unit and a qualitative assessment for the Electronic Systems unit in 2022, resulting in no impairment for either234238239 - Inventories are stated at the lower of cost or net realizable value, with cost determined on a moving average or actual cost basis242 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is from interest rate changes on its $248.4 million variable-rate debt, with a hypothetical 10% change not expected to be material - The main market risk is from interest rate changes on the $248.4 million of outstanding variable-rate debt under the 2022 Credit Facilities246 - The interest rate on the debt is based on Term SOFR plus a margin ranging from 1.375% to 2.375%, depending on the consolidated total net adjusted leverage ratio247 Financial Statements and Supplementary Data This section incorporates by reference the company's audited consolidated financial statements and supplementary data from Part IV, Item 15 - The financial statements and supplementary data are incorporated by reference from Part IV, Item 15(a) 1 and 2 of the report250 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None251 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2022253 - Based on the COSO framework, management concluded that the company maintained effective internal control over financial reporting as of December 31, 2022256 - No material changes were made to the internal control over financial reporting during the fourth quarter of 2022258 Other Information The company reports no other information for this item - None259 Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable260 Part III Directors, Executive Officers and Corporate Governance This section incorporates by reference information from the 2023 Proxy Statement regarding directors, executive officers, and corporate governance - Information regarding directors, executive officers, corporate governance, and the audit committee is incorporated by reference from the 2023 Proxy Statement263264265 Executive Compensation This section incorporates by reference information from the 2023 Proxy Statement concerning executive and director compensation - Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement269 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference security ownership information from the 2023 Proxy Statement, detailing securities authorized for issuance under equity compensation plans - Information regarding security ownership is incorporated by reference from the 2023 Proxy Statement270 Equity Compensation Plan Information | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Remaining for Future Issuance (c) | | :------------------------------------------ | :---------------------------------------- | :---------------------------------- | :------------------------------------------- | | Equity Compensation Plans approved by security holders | 702,425 | $36.89 | 338,061 | | Employee stock purchase plan approved by security holders | — | — | 549,977 | | Total | 702,425 | | 888,038 | Certain Relationships and Related Transactions, and Director Independence This section incorporates by reference information from the 2023 Proxy Statement regarding related party transactions and director independence - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement273 Principal Accountant Fees and Services This section incorporates by reference information from the 2023 Proxy Statement concerning fees paid to and services provided by the principal accountant - Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement274 Part IV Exhibits and Financial Statement Schedules This section contains the company's consolidated financial statements and auditor's report, which includes a critical audit matter regarding goodwill impairment assessment - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting281 - A critical audit matter was identified concerning the goodwill impairment assessment of the Structural Systems reporting unit, due to the significant management judgment involved in estimating its fair value, particularly the gross margin assumptions288289 Form 10-K Summary This item is not applicable to the company - Not applicable496
Ducommun(DCO) - 2022 Q4 - Annual Report