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What changed in DUCOMMUN INC /DE/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of DUCOMMUN INC /DE/'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+268 added−262 removedSource: 10-K (2024-02-22) vs 10-K (2023-02-16)

Top changes in DUCOMMUN INC /DE/'s 2023 10-K

268 paragraphs added · 262 removed · 210 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeThe combination of these factors has, in turn, created a significant challenge for some of our customers and the entire commercial aerospace manufacturing and services sector. As the number of infections from COVID-19 continues to decline and/or stabilize in various parts of the world, it should result in the steady increase in consumer confidence on the safety of air travel.
Biggest changeWhile there continues to be uncertainty, Boeing is continuing to work with airlines and government officials on delivery timing and expect to deliver most of the aircraft in inventory by the end of 2024. The combination of these factors has, in turn, created a significant challenge for some of our customers and the entire commercial aerospace manufacturing and services sector.
Components, assemblies, and lightning diversion products are provided principally for domestic and foreign commercial and military fixed-wing aircraft, military and commercial rotary-wing aircraft and space programs. Further, we provide select industrial high-reliability applications for the industrial, medical, and other end-use markets. We build custom, high-performance electronics and 4 Table of Contents electromechanical systems.
Components, assemblies, and 4 Table of Contents lightning diversion products are provided principally for domestic and foreign commercial and military fixed-wing aircraft, military and commercial rotary-wing aircraft and space programs. Further, we provide select industrial high-reliability applications for the industrial, medical, and other end-use markets. We build custom, high-performance electronics and electromechanical systems.
Our applications include structural components, structural assemblies, bonded (metal and composite) components, precision profile extrusions and extruded assemblies, ammunition handling systems, and magnetic seals. In the structural components products, Structural Systems provides design services, engineers, and manufacturing of large complex contoured aluminum, titanium and Inconel aerostructure components for the aerospace industry.
Our applications include structural components, structural assemblies, bonded (metal and composite) components, precision profile extrusions and extruded assemblies, ammunition handling systems, magnetic seals, and aerodynamic systems. In the structural components products, Structural Systems provides design services, engineers, and manufacturing of large complex contoured aluminum, titanium and Inconel aerostructure components for the aerospace industry.
Structural assembly products include winglets, engine components, and fuselage structural panels for aircraft. Metal and composite bonded structures and assemblies products include aircraft wing spoilers, large fuselage skins, rotor blades on rotary-wing aircraft and components, flight control surfaces, engine components, ammunition handling systems, and magnetic seals.
Structural assembly products include winglets, engine components, and fuselage structural panels for aircraft. Metal and composite bonded structures and assemblies products include aircraft wing spoilers, large fuselage skins, rotor blades on rotary-wing aircraft and components, flight control surfaces, engine components, ammunition handling systems, magnetic seals, and aerodynamic systems.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in Adelanto (a.k.a., El Mirage) and Monrovia, California. Based on currently available information, we have accrued $1.5 million at December 31, 2022 for our estimated liabilities related to these sites.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its facilities located in Adelanto (a.k.a., El Mirage) and Monrovia, California. Based on currently available information, we have accrued $1.5 million at December 31, 2023 for our estimated liabilities related to these sites.
In 2022, we continued to invest in infrastructure to improve internal safety protocols related to key processes and refined our health and safety software tools to track and engage our performance centers to further reduce our lost time and total recordable incident rates. Diversity and Inclusion Diversity and inclusion has been and will continue to be important to our success.
In 2023, we continued to invest in infrastructure to improve internal safety protocols related to key processes and refined our health and safety software tools to track and engage our performance centers to further reduce our lost time and total recordable incident rates. Diversity and Inclusion Diversity and inclusion has been and will continue to be important to our success.
Net revenues related to military and space, commercial aerospace, and Industrial end-use markets in 2022 and 2021 were as follows: Many of our contracts are firm fixed price contracts subject to termination at the convenience of the customer (as well as for default).
Net revenues related to military and space, commercial aerospace, and Industrial end-use markets in 2023 and 2022 were as follows: Many of our contracts are firm fixed price contracts subject to termination at the convenience of the customer (as well as for default).
We anticipate that capital expenditures will continue to be required for the foreseeable future to upgrade and maintain our environmental compliance efforts, however, we currently do not expect such expenditures to be material in 2023 and the near term.
We anticipate that capital expenditures will continue to be required for the foreseeable future to upgrade and maintain our environmental compliance efforts, however, we currently do not expect such expenditures to be material in 2024 and the near term.
We implemented the use of employee health and safety key performance indicators (“KPIs”) that are regularly communicated to our employees by senior management to improve safety outcomes.
We implemented the use of employee health and safety key performance indicators (“KPIs”) that were regularly communicated to our employees by senior management to improve safety outcomes.
AEROSPACE AND DEFENSE END-USE MARKETS OVERVIEW Our largest end-use markets are the aerospace and defense markets and our revenues from these markets represented 94% of our total net revenues in 2022.
AEROSPACE AND DEFENSE END-USE MARKETS OVERVIEW Our largest end-use markets are the aerospace and defense markets and our revenues from these markets represented 94% of our total net revenues in 2023.
The majority of the long-term agreements (“LTAs”) we enter into do not meet the definition of a contract under Accounting Standards Codification 606 (“ASC 606”) and thus, the backlog amount is greater than the remaining performance obligations amount as defined under ASC 606.
The majority of the long-term agreements (“LTAs”) we enter into do not meet the definition of a contract under Accounting Standards Codification 606 (“ASC 606”) and thus, the backlog amount may or may not be greater than the remaining performance obligations amount as defined under ASC 606.
These raw materials are generally available from a number of suppliers and are generally in adequate supply. However, from time to time, and exacerbated by the COVID-19 pandemic, we have experienced increases in lead times and limited availability of various items including aluminum, titanium and certain other raw materials and/or components.
These raw materials are generally available from a number of suppliers and are generally in adequate supply. However, from time to time, and due to the lingering effects from the COVID-19 pandemic, we have experienced increases in lead times and limited availability of various items including aluminum, titanium and certain other raw materials and/or components.
Revenues from the Industrial end-use markets were 6% of our total net revenues during 2022.
Revenues from the Industrial end-use markets were 6% of our total net revenues during 2023.
Net revenues by major customer for 2022 and 2021 were as follows: 7 Table of Contents Net revenues from our customers, except the U.S. Government, are diversified over a number of different military and space, commercial aerospace, industrial, medical and other products.
Net revenues by major customer for 2023 and 2022 were as follows: Net revenues from our customers, except the U.S. Government, are diversified over a number of different military and space, commercial aerospace, industrial, medical and other products.
To this end, we continue to focus on protecting the health and safety of our employees and maintaining a safe work environment by following the COVID-19 safety guidelines provided by state and local governments and the Centers for Disease Control and Prevention at all of our facilities.
To this end, we continue to focus on protecting the health and safety of our employees and maintaining a safe work environment, including during the COVID-19 pandemic where we followed the COVID-19 safety guidelines provided by state and local governments and the Centers for Disease Control and Prevention at all of our facilities.
As part of our continuing improvement in this area, we implemented diversity and inclusion initiatives in 2019 to help accelerate the process of developing a diverse talent pool. To that end, we are seeing an increase in the number of women and individuals from underrepresented communities being promoted into leadership roles.
As part of our continuing improvement in this area, we implemented diversity and inclusion initiatives in 2019 to help accelerate the process of developing diverse, and qualified talent and applicant pools. To that end, we are seeing an increase in the number of women and individuals from underrepresented communities being promoted on merit into leadership roles.
We strive to provide opportunities for qualified members of underrepresented communities and women for advancement within our company and award scholarships to the children and grandchildren of our 9 Table of Contents employees so that they may develop the skills that will support their entry into the workforce.
We strive to provide equal opportunities for qualified members of underrepresented communities and women for advancement within our company and award merit-based scholarships to the children and grandchildren of our employees so that they may develop the skills that will support their entry into the workforce.
However, the industry remains vulnerable to various developments including fuel price spikes, credit market fluctuations, acts of terrorism, natural disasters, conflicts, epidemics, pandemics, supply chain shortages, rising interest rates, and increased global environmental regulations.
However, the industry remains vulnerable to various developments including fuel price spikes, credit market fluctuations, acts of terrorism, natural disasters, conflicts, epidemics, pandemics, and increased global environmental regulations.
Workforce Demographics As of December 31, 2022, we had a highly skilled workforce of 2,465 employees, of which 435 are subject to collective bargaining agreements expiring in April 2025 and June 2024.
Workforce Demographics As of December 31, 2023, we had a highly skilled workforce of 2,265 employees, of which 368 are subject to collective bargaining agreements expiring in April 2025 and June 2024.
Boeing’s commercial market outlook forecast projects a three and eight tenths percent growth rate for passenger and cargo traffic over a 20 year period. Based on long-term global economic growth projections of two and six tenths percent average annual gross domestic product (“GDP”) growth, Boeing projects demand for 41,170 new airplanes over the next 20 years.
Boeing’s commercial market outlook forecast projects a three and a half percent growth rate in the global fleet over a 20 year period. Based on long-term global economic growth projections of two and six tenths percent average annual gross domestic product (“GDP”) growth, Boeing projects demand for 42,595 new airplanes over the next 20 years.
Revenues from the commercial aerospace end-use market represented 35% of our total net revenues for 2022.
Revenues from the commercial aerospace end-use market represented 41% of our total net revenues for 2023.
Employee Safety and Health The safety of our workforce remains our highest priority as evidenced by our initial and continuing response to the COVID-19 pandemic.
Employee Safety and Health The safety of our workforce remains our highest priority as evidenced by our response to the COVID-19 pandemic over the last four years.
Due to the continuing COVID-19 pandemic, while both major large aircraft manufacturers, Boeing and Airbus SE (“Airbus”), have announced improved build rates, it will take longer to reach pre- 6 Table of Contents COVID-19 pandemic levels.
Due to the effects from the lingering COVID-19 pandemic or regulatory compliance requirements, while both major large aircraft manufacturers, Boeing and Airbus SE (“Airbus”), have announced improved build rates, it will take longer to reach pre-COVID-19 pandemic levels.
Electronic Systems’ product offerings primarily range from prototype development to complex assemblies as discussed in more detail below. Structural Systems designs, engineers and manufactures various sizes of complex contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft.
Structural Systems designs, engineers and manufactures various sizes of complex contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft and military and commercial rotary-wing aircraft.
As a result, we have significant revenues from certain customers. Boeing and Raytheon Technologies Corporation (“Raytheon”) were our largest customers, with Boeing generating 7% and Raytheon generating 22% of our 2022 net revenues. Revenues from our top 10 customers, including Boeing and Raytheon, were 61% of total net revenues during 2022.
As a result, we have significant revenues from certain customers. Boeing and RTX Corporation (f/k/a Raytheon Technologies Corporation) (“RTX”) were our largest customers, with Boeing generating 8.2% and RTX generating 16.8% of our 2023 net revenues. Revenues from our top 7 Table of Contents 10 customers, including Boeing and RTX, were 59% of total net revenues during 2023.
We believe our business in these markets in the long-term, is stable and we are well positioned in these markets even though the residual effects of the COVID-19 pandemic and the related inflationary forces, rising interest rates, and supply chain issues has had and will continue to have an impact on our business.
We believe our business in these markets in the long-term, is stable and we are well positioned in these markets even though the residual effects of the COVID-19 pandemic and the resulting inflation, rising or high interest rates, and supply chain issues has had and will continue to have an impact on our business. 6 Table of Contents SALES AND MARKETING Our commercial revenues are substantially dependent on airframe manufacturers’ production rates of new aircraft.
The residual effects of the COVID-19 pandemic, geopolitical events including the war in Ukraine, inflationary forces, rising interest rates, and supply chain issues have and continue to contribute to a general slowdown in the global economy, and having an adverse impact on demand for civil air travel.
The residual effects of the COVID-19 pandemic and the resulting inflation, rising or high interest rates, supply chain issues, geopolitical developments, and other events have contributed and/or continues to contribute to a general slowdown in the global economy and most significantly, the adverse impact on demand for civil air travel.
The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including our company.
Information included on our website is not incorporated by reference in this Form 10-K. The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including our company.
We believe a diverse hiring process at the intern level will result in inclusive hiring going forward and help us develop a diverse leadership team as our interns continue in their careers. Talent Acquisition, Retention, and Development We attract, develop, and retain employee talent by offering competitive compensation packages and fostering a culture of care about their well-being.
We believe that broadening the diversity of our pool of potential qualified applicants at the intern level will support our efforts at a diverse workforce reflective of the population and help us continue to develop a more diverse leadership team as our interns continue in their careers. 9 Table of Contents Talent Acquisition, Retention, and Development We attract, develop, and retain employee talent by offering competitive compensation packages and fostering a culture of care about their well-being.
Our Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, if any, are available free of charge on our website as soon as reasonably practicable after they are filed with or furnished to the SEC. Information included on our website is not incorporated by reference in this Form 10-K.
AVAILABLE INFORMATION General information about us can be obtained from our website address at www.ducommun.com . Our Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, if any, are available free of charge on our website as soon as reasonably practicable after they are filed with or furnished to the SEC.
We have supplemented our organic growth by identifying, acquiring and integrating acquisition opportunities that result in broader, more sophisticated product and service offerings while diversifying and expanding our customer base and markets.
We have supplemented our organic growth by identifying, acquiring and integrating acquisition opportunities that result in broader, more sophisticated product and service offerings while diversifying and expanding our customer base and markets. For example, on April 25, 2023, we acquired 100% of the outstanding equity interests of BLR Aerospace L.L.C.
Revenue based on remaining performance obligations is subject to delivery delays or program cancellations, which are beyond our control. Remaining performance obligations were $853.0 million at December 31, 2022.
Revenue based on remaining performance obligations is subject to delivery delays or program cancellations, which are beyond our control. Remaining performance obligations were $963.5 8 Table of Contents million at December 31, 2023. We anticipate recognizing an estimated 70% or $674.0 million of our remaining performance obligations during 2024.
Airline financial performance, which also plays a role in the demand for new capacity, has been adversely impacted by the COVID-19 pandemic and aforementioned issues. According to the International Air Transport Association (“IATA”), net losses for the airline industry were $42 billion in 2021 and $138 billion in 2020.
Airline financial performance, which also plays a role in the demand for new capacity, has been adversely impacted by the COVID-19 pandemic and aforementioned issues. According to the International Air Transport Association (“IATA”), it is estimating industry-wide profits of $23.3 billion for 2023, an increase from its forecast of $4.6 billion a year ago.
However, the Monrovia, California performance center that employs 130 of our collective bargaining employees that are covered by an agreement expiring in June 2024 will be ceasing production and the facility will close by the middle of 2023.
However, the Monrovia, California performance center that employs 97 of our collective bargaining employees that are covered by an agreement expiring in June 2024 will be ceasing production and the facility will close by the middle of 2024. See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further discussion.
See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further discussion. Historically, we have been successful in negotiating renewals to expiring agreements without material disruption of operating activities, and believe our relations with our employees are good.
Historically, we have been successful in negotiating renewals to expiring agreements without material disruption of operating activities, and believe our relations with our employees are good. See Risk Factors contained within Part I, Item 1A of this Form 10-K for additional information regarding certain risks related to our employees.
Thus, revenues from commercial aircraft could be affected as a result of changes in new aircraft orders, or the cancellation or deferral by airlines of purchases of ordered aircraft. Further, our revenues from commercial aircraft programs could be affected by changes in our customers’ inventory levels and changes in our customers’ aircraft production build rates.
Further, our revenues from commercial aircraft programs could be affected by changes in our customers’ inventory levels and changes in our customers’ aircraft production build rates as a result of changing demand by their end customer or in order to comply with regulatory requirements.
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 is affected by timing differences in the placement of customer orders, and tends to be concentrated in several programs to a greater extent, than our net revenues. As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues.
We anticipate recognizing an estimated 70% or $597.0 million of our remaining performance obligations during 2023. 8 Table of Contents We define backlog as potential revenue that is based on customer placed POs and LTAs with firm fixed price and expected delivery dates of 24 months or less.
We define backlog as potential revenue that is based on customer placed POs and LTAs with firm fixed price and expected delivery dates of 24 months or less. Backlog is subject to delivery delays or program cancellations, which are beyond our control.
SALES AND MARKETING Our commercial revenues are substantially dependent on airframe manufacturers’ production rates of new aircraft. Deliveries of new aircraft by airframe manufacturers are dependent on the demand and financial capacity of its customers, primarily airlines and leasing companies, to purchase the aircraft.
Deliveries of new aircraft by airframe manufacturers are dependent on the demand and financial capacity of its customers, primarily airlines and leasing companies, to purchase the aircraft. Thus, revenues from commercial aircraft could be affected as a result of changes in new aircraft orders, or the cancellation or deferral by airlines of purchases of ordered aircraft.
Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transport and disposal of hazardous and non-hazardous materials, pollutants and contaminants.
ENVIRONMENTAL MATTERS Our business, operations and facilities are subject to numerous stringent federal, state and local environmental laws and regulations issued by government agencies, including the Environmental Protection Agency (“EPA”). Among other matters, these regulatory authorities impose requirements that regulate the emission, discharge, generation, management, transport and disposal of hazardous and non-hazardous materials, pollutants and contaminants.
The acquisition of MagSeal continued to advance our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities, and was included in our Structural Systems segment. PRODUCTS AND SERVICES Business Segment Information We operate through two primary strategic businesses, Electronic Systems and Structural Systems, each of which is a reportable segment.
We utilized the 2022 Revolving Credit Facility (as defined below) to complete the acquisition. The acquisition of BLR adds to our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities, and was included in our Structural Systems segment.
The results of operations among our operating segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance. Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and Industrial end-use markets.
PRODUCTS AND SERVICES Business Segment Information We operate through two primary strategic businesses, Electronic Systems and Structural Systems, each of which is a reportable segment. The results of operations among our operating segments vary due to differences in competitors, customers, extent of proprietary deliverables and performance.
In The Boeing Company’s (“Boeing”) 2022 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), they indicated that domestic travel continues to recover from the lingering effects of the COVID-19 pandemic and will recover before international travel. The pace of the commercial market recovery remains impacted by government restrictions related to COVID-19, especially China.
In The Boeing Company’s (“Boeing”) 2023 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”), they indicated that in 2023, global air traffic largely recovered to 2019 levels with domestic travel continuing to be the most robust and the single-aisle market following closely.
The increase in backlog was primarily in the commercial aerospace end-use markets, partially offset by a decrease in the military and space end-use markets. ENVIRONMENTAL MATTERS Our business, operations and facilities are subject to numerous stringent federal, state and local environmental laws and regulations issued by government agencies, including the Environmental Protection Agency (“EPA”).
Backlog was $993.6 million at December 31, 2023, compared to $960.8 million at December 31, 2022. The increase in backlog was primarily in the military and space end-use markets, partially offset by a decrease in the commercial aerospace end-use markets and the industrial end-use markets.
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For example, in December 2021, we acquired 100% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”), a privately-held leading provider of high-impact, military-proven magnetic seals for critical systems in aerospace and defense applications, offering sealing solutions that are engineered to perform in high-speed, high-vibration, and other challenging environments for an original purchase price of $69.5 million, net of cash acquired.
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(“BLR”), a privately-held leading provider of aerodynamic systems that enhance the productivity, performance, and safety of rotary and fixed-wing aircraft on commercial and military platforms. The initial purchase price was $115.0 million, net of cash acquired. We paid a gross aggregate of $117.0 million in cash upon the closing of the transaction.
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A portion of the purchase price was funded by drawing down on our revolving credit facility. This draw down on our revolving credit facility was paid off by the end of 2021.
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Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and Industrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex assemblies as discussed in more detail below.
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IATA also forecasts $6.9 billion of losses for the industry globally for 2022, with $9.9 billion of profits in North America driven by 5 Table of Contents robust domestic market being more than offset by losses in other regions. However, for 2023, IATA is forecasting $4.6 billion in profits for the industry globally.
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Further, one of our largest customers, The Boeing Company (“Boeing”), was notified by the Federal Aviation Administration (“FAA”) in early January 2024 it has initiated an investigation into Boeing’s quality control system.
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While the outlook continues to improve, we continue to face a challenging environment in the near to medium-term as airlines are facing increased fuel and other costs, and the global economy is experiencing high inflation. The current environment is also affecting the financial viability of some airlines.
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This was followed by the FAA announcing actions to increase its oversight of Boeing as well as not approving production rate increases or additional production lines for the 737 MAX until it is 5 Table of Contents satisfied that Boeing is in full compliance with required quality control procedures.
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Revenues from the military and space end-use market in 2022 represented 59% of our total net revenues during 2022. The FY 2023 National Defense Authorization Act (“NDAA”), enacted by the U.S. President in December 2022, is the annual policy bill that establishes, continues, or modifies federal programs, and provides the prerequisites for Congress to appropriate budget authority for defense programs.
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For 2024, IATA is forecasting $25.7 billion in profits for the industry globally. Thus, the overall outlook continues to stabilize as we face uncertainties in the environment in the near-to medium-term as airlines are facing persistently high and volatile cost of fuel and tight labor conditions.
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The FY 2023 NDAA authorized $30 billion more than the U.S. President originally requested in the FY 2023 budget request. However, there continues to be uncertainty with respect to future program-level appropriations for the U.S. Department of Defense (“U.S. DoD”) and other government agencies for fiscal year 2024 and beyond.
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The global economy is expecting an easing of inflation and interest rates, with regional economic and geopolitical difficulties adding uncertainty to the outlook and the financial viability of some airlines and regions.
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As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues. Backlog was $960.8 million at December 31, 2022, compared to $905.2 million at December 31, 2021.
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International travel has mostly recovered and the wide-body market continues to be paced by the international travel recovery. The transition in the international commercial market from recovery to normal market conditions is progressing slowly as China international travel remains below 2019 levels. Overall, Boeing is experiencing strong demand from its airline customers globally.
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See Risk Factors contained within Part I, Item 1A of this Form 10-K for additional information regarding certain risks related to our employees. AVAILABLE INFORMATION General information about us can be obtained from our website address at www.ducommun.com .
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Revenues from the military and space end-use market in 2023 represented 53% of our total net revenues during 2023. The U.S. government is currently operating under a continuing resolution (“CR”) to keep the government funded while the Congress works to enact full year fiscal year 2024 (“FY24”) appropriation bills.
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Under the Fiscal Responsibility Act of 2023, which imposes limits on discretionary spending for defense and non-defense programs in exchange for the lifting of the debt ceiling in June 2023, if Congress fails to enact all appropriation bills by April 30, 2024, then the budget caps will be reduced and corresponding automatic reductions to agency budget accounts will be enforced through sequestration.
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For example, California recently passed two wide-reaching bills that will impose significant and mandatory climate-related reporting requirements for large public and private companies doing business in the state. The bills will ultimately require annual disclosure of audited Scope 1, 2, and 3 greenhouse gas (“GHG”) emissions and biennial disclosure related to certain climate risks beginning in January 2026.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

66 edited+32 added−14 removed107 unchanged
Biggest changeWe cannot ensure that we would be able to refinance our debt or enter into alternative financing plans in adequate amounts on commercially reasonable terms, terms acceptable to us or at all, or that such plans guarantee that we would be able to meet our debt obligations. 10 Table of Contents Our level of debt could: • limit our ability to obtain additional financing to fund capital expenditures, investments or acquisitions or other general corporate requirements; • require a portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions or other general corporate purposes; • increase our vulnerability to adverse changes in general economic, industry and competitive conditions; • place us at a disadvantage compared to other, less leveraged competitors; • expose us to the risk of increased borrowing costs and higher interest rates as all of our current borrowings under our 2022 Credit Facilities bear interest at variable rates (our interest rate swaps, with an aggregate total notional amount of $150.0 million and seven year tenor, will not take effect until January 1, 2024), which could further adversely impact our cash flows; • limit our flexibility to plan for and react to changes in our business and the industry in which we compete; • restrict us from making strategic acquisitions; • expose us to risk of unfavorable changes in the global credit markets; and • make it more difficult for us to satisfy our obligations with respect to the 2022 Credit Facilities and our other debt.
Biggest changeOur level of debt could: • limit our ability to obtain additional financing to fund capital expenditures, investments or acquisitions or other general corporate requirements; • require a portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions or other general corporate purposes; • increase our vulnerability to adverse changes in general economic, industry and competitive conditions; • place us at a disadvantage compared to other, less leveraged competitors; • expose us to the risk of increased borrowing costs and rising or high interest rates as a portion of our current borrowings under our 2022 Credit Facilities bear interest at variable rates (our interest rate swaps, with an aggregate total notional amount of $150.0 million and seven year tenor, became effective on January 1, 2024), which could further adversely impact our cash flows; • limit our flexibility to plan for and react to changes in our business and the industry in which we compete; • restrict us from making strategic acquisitions; • expose us to risk of unfavorable changes in the global credit markets; and • make it more difficult for us to satisfy our obligations with respect to the 2022 Credit Facilities and our other debt.
The terms of the 2022 Term Loan require us to make installment payments of 0.625% of the initial outstanding principal balance on a quarterly basis during years one and two, 1.250% during years three and four, and 1.875% during year five, on the last business day of each calendar quarter.
The terms of the 2022 Term Loan require us to make installment payments of 0.625% of the initial outstanding principal balance on a quarterly basis during years one and two, 1.250% during years three and four, and 1.875% during year five, on the last business day of each calendar quarter.
On July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of all the forward interest rate swaps (“Amended Forward Interest Rate Swaps”) we entered into in November 2021 that were based on U.S. dollar-one month London Interbank Offered Rate (“LIBOR”) to be based on one month Term Secured Overnight Financing Rate (“SOFR”) as borrowings can only be based on SOFR.
In July 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of all the forward interest rate swaps (“Amended Forward Interest Rate Swaps”) we entered into in November 2021 that were based on U.S. dollar-one month London Interbank Offered Rate (“LIBOR”) to be based on one month Term Secured Overnight Financing Rate (“SOFR”) as borrowings can only be based on SOFR.
Accordingly, we can give no assurance that we will be successful in obtaining, in a timely manner or at all, the approvals, licenses or authorizations we need to sell our products outside the United States, which may result in the cancellation of orders and significant penalties to our customers if we do not make deliveries and fulfill our contractual commitments.
Accordingly, we can give no assurance that we will be successful in obtaining, in a timely manner or at all, the approvals, licenses or authorizations we need to sell or manufacture our products outside the United States, which may result in the cancellation of orders and significant penalties to our customers if we do not make deliveries and fulfill our contractual commitments.
Should we not have ready access to capital markets, we may have to undertake alternative financing plans, such as selling assets; reducing or delaying scheduled expansions and/or capital investments; or seeking various other forms of capital. Our ability to complete reasonable alternative financing plans may be affected by circumstances and economic events outside of our control.
Should we not have ready access to capital markets, we may have to undertake alternative financing plans, such as selling assets; reducing or delaying scheduled expansions, acquisitions and/or capital investments; or seeking various other forms of capital. Our ability to complete reasonable alternative financing plans may be affected by circumstances and economic events outside of our control.
Government are subject to numerous laws and regulations, which affect how we do business with our customers and may impose added costs to our business. As a result, our contracts and operations are subject to numerous, extensive, complex, costly and evolving laws, regulations and restrictions, principally by the U.S. Government or their agencies.
Government are subject to numerous laws, regulations and certifications, which affect how we do business with our customers and may impose added costs to our business. As a result, our contracts and operations are subject to numerous extensive, complex, costly and evolving laws, regulations and restrictions, principally by the U.S. Government or their agencies.
At December 31, 2022, we were in compliance with the leverage covenant under the 2022 Credit Facilities. However, there is no assurance that we will continue to be in compliance with the leverage covenant in future periods.
At December 31, 2023, we were in compliance with the leverage covenant under the 2022 Credit Facilities. However, there is no assurance that we will continue to be in compliance with the leverage covenant in future periods.
Acquisitions entail certain risks, including: 14 Table of Contents • difficulty in integrating the operations and personnel of the acquired company within our existing operations or in maintaining uniform standards; • loss of key employees or customers of the acquired company; • the failure to achieve anticipated synergies; • unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller; and • management and other personnel having their time and resources diverted to evaluate, negotiate and integrate acquisitions.
Acquisitions entail certain risks, including: • difficulty in integrating the operations and personnel of the acquired company within our existing operations or in maintaining uniform standards; • loss of key employees or customers of the acquired company; • the failure to achieve anticipated synergies; • unrecorded liabilities of acquired companies that we fail to discover during our due diligence investigations or that are not subject to indemnification or reimbursement by the seller; and • management and other personnel having their time and resources diverted to evaluate, negotiate and integrate acquisitions.
See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further discussion. 11 Table of Contents While we expect to meet all of our financial obligations, we cannot ensure that our business will generate sufficient cash flow from operations in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.
See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further discussion. 11 Table of Contents While we expect to meet all of our financial obligations, we cannot ensure that our business will generate sufficient cash flow from operations in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.
We may not have the ability to renew facilities leases on terms favorable to us and relocation of operations presents risks due to business interruption. Certain of our manufacturing facilities and offices are leased and have lease terms that expire between 2023 and 2032.
We may not have the ability to renew facilities leases on terms favorable to us and relocation of operations presents risks due to business interruption. Certain of our manufacturing facilities and offices are leased and have lease terms that expire between 2024 and 2032.
Many of our suppliers are small companies with limited financial resources and manufacturing capabilities. We do not currently have the ability to manufacture these components ourselves. These and other factors, including the impact from the COVID-19 pandemic, import tariffs, the loss of a critical supplier or raw materials and/or component shortages, could cause disruptions or cost inefficiencies in our operations.
Many of our suppliers are small companies with limited financial resources and manufacturing capabilities. We do not currently have the ability to manufacture these components ourselves. These and other factors, including the impact from import tariffs, the loss of a critical supplier or raw materials and/or component shortages, could cause disruptions or cost inefficiencies in our operations.
We currently generate the majority of our revenues from customers in the aerospace and defense industry. Our business depends, in part, on the level of new military and commercial aircraft orders. As a result, we have significant sales to certain customers. Sales to The Boeing Company (“Boeing”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc.
We currently generate the majority of our revenues from customers in the aerospace and defense industry. Our business depends, in part, on the level of new military and commercial aircraft orders. As a result, we have significant sales to certain 12 Table of Contents customers. Sales to The Boeing Company (“Boeing”), Spirit AeroSystems Holdings, Inc. (“Spirit”), and Viasat, Inc.
Risks associated with operating and conducting our business outside the United States could adversely impact us. We have manufacturing facilities that we lease in Thailand and Mexico and also derive a portion of our net revenues from direct foreign sales. Further, our customers may derive portions of their revenues from non-U.S. customers.
Risks associated with operating and conducting our business outside the United States could adversely impact us. We have a manufacturing facility that we lease in Mexico and also derive a portion of our net revenues from direct foreign sales. Further, our customers may derive portions of their revenues from non-U.S. customers.
Even if such expenditures are made, there can be no assurance that we will be able to comply. We have been directed to investigate and take corrective action for groundwater contamination at certain sites and our ultimate liability for such matters will depend upon a number of factors.
Even if such expenditures are made, there can be no assurance that we will be able to comply. We have been directed to investigate and take corrective action for groundwater 17 Table of Contents contamination at certain sites and our ultimate liability for such matters will depend upon a number of factors.
The loss of members of our senior management group, or key engineering and technical personnel, could negatively impact our ability to grow and remain competitive in the future and could have a material adverse effect on our financial results. Labor disruptions by our employees could adversely affect our business. As of December 31, 2022, we employed 2,465 people.
The loss of members of our senior management group, or key engineering and technical personnel, could negatively impact our ability to grow and remain competitive in the future and could have a material adverse effect on our financial results. Labor disruptions by our employees could adversely affect our business. As of December 31, 2023, we employed 2,265 people.
If we are unable to successfully compete for new business, our net revenues growth and operating margins may decline. Several of our major customers have completed extensive cost containment efforts and we expect continued pricing pressures in 2023 and beyond. Competitive pricing pressures may have an adverse effect on our financial condition and operating results.
If we are unable to successfully compete for new business, our net revenues growth and operating margins may decline. Some of our major customers have completed extensive cost containment efforts and we expect continued pricing pressures in 2024 and beyond. Competitive pricing pressures may have an adverse effect on our financial condition and operating results.
In addition, the undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. At December 31, 2022, we had a total of $248.4 million of outstanding long-term debt under the 2022 Credit Facilities.
In addition, the undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. At December 31, 2023, we had a total of $266.0 million of outstanding long-term debt under the 2022 Credit Facilities.
In addition, shifts in government spending priorities have caused and may continue to cause additional uncertainty in the placement of orders. Our revenues from our top ten customers, which represented 61% of our total 2022 net revenues, were diversified over a number of different aerospace and defense products.
In addition, shifts in government spending priorities have caused and may continue to cause additional uncertainty in the placement of orders. Our revenues from our top ten customers, which represented 59% of our total 2023 net revenues, were diversified over a number of different aerospace and defense products.
However, the residual effects of the COVID-19 pandemic along with inflationary forces and supply chain issues continues to dampen civil air travel demand in various segments and markets, and if traveler demand does not return in the near future, it may make it difficult to continue to offset a significant portion of this risk.
However, the residual effects of the COVID-19 pandemic along with inflationary forces, supply chain issues, and rising or high interest rates continues to dampen civil air travel demand in various segments and markets, and if traveler demand does not return in the near future, it may make it difficult to continue to offset a significant portion of this risk.
The risk factors below should be considered together with the information included elsewhere in this Annual Report on Form 10-K (“Form 10-K”) as well as other required filings by us with the SEC. CAPITAL STRUCTURE RISKS Our indebtedness could limit our financing options, adversely affect our financial condition, and prevent us from fulfilling our debt obligations.
The risk factors below should be considered together with the information included elsewhere in this Form 10-K as well as other required filings by us with the SEC. CAPITAL STRUCTURE RISKS Our indebtedness could limit our financing options, adversely affect our financial condition, and prevent us from fulfilling our debt obligations.
(“Viasat”) 12 Table of Contents comprise a significant portion of our commercial aerospace end-use market. A significant portion of our net sales in our military and space end-use markets are made under subcontracts with original equipment manufacturers (“OEMs”), under their prime contracts with the U. S. Government.
(“Viasat”) comprise a significant portion of our commercial aerospace end-use market in 2023. A significant portion of our net sales in our military and space end-use markets are made under subcontracts with original equipment manufacturers (“OEMs”), under their prime contracts with the U. S. Government.
The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving credit facility that matures on July 14, 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the new credit facilities (“2022 Credit Facilities”).
The 2022 Revolving Credit Facility is a $200.0 million senior secured revolving credit facility that matures in July 2027. The 2022 Term Loan and 2022 Revolving Credit Facility, collectively are the new credit facilities (“2022 Credit Facilities”).
Two of our performance centers are parties to collective bargaining agreements, covering 130 full time hourly employees in one of those performance centers and 305 full time hourly employees in the other performance center, which will expire in June 2024 and April 2025, respectively.
Two of our performance centers are parties to collective bargaining agreements, covering 97 full time hourly employees in one of those performance centers and 271 full time hourly employees in the other performance center, which will expire in June 2024 and April 2025, respectively.
See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further discussion.
See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further discussion.
On July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior secured loan that matures on July 14, 2027.
In July 2022, we completed a refinancing of our then existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility (“2022 Revolving Credit Facility”). The 2022 Term Loan is a $250.0 million senior secured loan that matures in July 2027.
Any litigation, other legal proceedings or indemnity claims could result in an unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle on similarly 17 Table of Contents unfavorable terms, any of which could adversely affect our business, financial condition, and results of operations.
Any litigation, other legal proceedings or indemnity claims could result in an unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines that may exceed our insurance coverage limits, or we may decide to settle on similarly unfavorable terms, any of which could adversely affect our business, financial condition, and results of operations.
Changes in our operations in response to the COVID-19 pandemic or employee illnesses resulting from the pandemic, has resulted in and may continue to result in inefficiencies or delays, including in sales and product development efforts and our manufacturing and supply chain, and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession 19 Table of Contents planning, employees working remotely, or teleconferencing technologies.
Changes in our operations in response to the COVID-19 pandemic and other health threats or employee illnesses resulting from such diseases, has resulted in and may continue to result in inefficiencies or delays, including in sales and product development efforts and our manufacturing and supply chain, and additional costs related to business continuity initiatives, that cannot be fully mitigated through succession planning, employees working remotely, or teleconferencing technologies.
The future success of our business depends in large part upon our and our customers’ ability to maintain and enhance technological capabilities, develop and market manufacturing services that meet changing customer needs and successfully anticipate or respond to technological advances in manufacturing processes on a cost-effective and timely basis, while meeting evolving industry and regulatory standards.
The future success of our business depends in large part upon our and our customers’ ability to maintain and enhance technological capabilities, develop and market manufacturing services that meet changing customer needs and successfully anticipate or respond to technological advances in manufacturing processes such as the incorporation of artificial intelligence and other disruptive technologies on a cost-effective and timely basis, while meeting evolving industry and regulatory standards.
Our sales are, therefore, unpredictable and may tend to fluctuate based on a number of factors, including global economic conditions, geopolitical developments and conditions, pandemics, supply chain shortages, rising interest rates and other developments affecting our end-use markets and the customers served.
Our sales are, therefore, unpredictable and may tend to fluctuate based on a number of factors, including global economic conditions, U.S. defense budgetary spending, geopolitical developments and conditions, pandemics, supply chain shortages, rising or high interest rates and other developments affecting our end-use markets and the customers served.
Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results of operations and financial condition.
Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results of operations and financial condition. We may be unable to adequately protect or enforce our intellectual property rights.
We had significant sales to General Dynamics Corporation (“GD”), Northrop Grumman Corporation (“Northrop”), and Raytheon Technologies Corporation (“Raytheon”) in 2022 in our defense technologies end-use market. Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, or other difficulties in their business.
We had significant sales to General Dynamics Corporation (“GD”), Northrop Grumman Corporation (“Northrop”), and RTX Corporation (f/k/a Raytheon Technologies Corporation) (“RTX”) in 2023 in our defense technologies end-use market. Our customers may experience delays in the launch and certification of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products, or other difficulties in their business.
Our goodwill and other intangible assets as of December 31, 2022 were $330.6 million, or 32% of total assets. If our goodwill and/or other assets are impaired, it could have an adverse effect on our results of operations and financial condition.
Our goodwill and other intangible assets as of December 31, 2023 were $410.9 million, or 37% of total assets. If our goodwill and/or other assets are impaired, it could have an adverse effect on our results of operations and financial condition.
If any audit or review were to uncover inaccurate costs or improper activities, we could be subject to penalties and sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from conducting future business with the U.S. Government. Any such outcome could have a material adverse effect on our financial results.
If any audit or review were to uncover inaccurate costs or improper activities, we could be subject to penalties and sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from conducting future business with the U.S. Government.
Even if covered by insurance, any significant damage or destruction of our facilities due to storms, earthquakes, fires or other natural disasters could result in our inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to us.
Our California performance centers generated $185.9 million in net revenues during 2023. Even if covered by insurance, any significant damage or destruction of our facilities due to storms, earthquakes, fires or other natural disasters could result in our inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to us.
Our larger competitors may 15 Table of Contents be able to compete more effectively for very large-scale contracts than we can by providing different or greater capabilities or benefits such as technical qualifications, past performance on large-scale contracts, geographic presence, price and availability of key professional personnel.
Many of our customers have the in-house capability to fulfill their manufacturing requirements. Our larger competitors may be able to compete more effectively for very large-scale contracts than we can by providing different or greater capabilities or benefits such as technical qualifications, past performance on large-scale contracts, geographic presence, price and availability of key professional personnel.
Cybersecurity threats are evolving and include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products, our employees, customers or suppliers, or other acts that could lead to disruptions in our business.
Cybersecurity threats are evolving and include, but are not limited to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products, our employees, customers or suppliers, or other acts that could lead to disruptions in our business, which risk may be heightened by the increased prevalence and use of artificial intelligence.
A violation of specific laws and regulations, by us, our employees, or others working on our behalf, such as a supplier or a venture partner, could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or services and civil or criminal investigations or proceedings. 16 Table of Contents In some instances, these laws and regulations impose terms or rights that are different from those typically found in commercial transactions.
A violation of specific laws and regulations, by us, our employees, or others working on our behalf, such as a supplier or a venture partner, could harm our reputation and result in the imposition of fines and penalties, the termination of our contracts, suspension or debarment from bidding on or being awarded contracts, loss of our ability to export products or services and civil or criminal investigations or proceedings.
As a result, we are subject to the risks of conducting and operating our business internationally, including: • political instability; • economic and geopolitical developments and conditions; • pandemics and disasters, natural or otherwise; • compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S. companies conducting business abroad, including, but not limited to, the Foreign Corrupt Practices Act; • imposition of taxes, export controls, tariffs, embargoes and other trade restrictions; • difficulties repatriating funds or restrictions on cash transfers; and • potential for new tariffs imposed on imports by the U.S. administration.
As a result, we are subject to the risks of conducting and operating our business internationally, including: • political instability; • economic and geopolitical developments and conditions; • pandemics and disasters, natural or otherwise; • compliance with a variety of international laws, as well as U.S. laws affecting the activities of U.S. companies conducting business abroad, including, but not limited to, the Foreign Corrupt Practices Act; • imposition of taxes, export control approvals or licenses, tariffs, embargoes and other trade restrictions; • difficulties repatriating funds or restrictions on cash transfers; and • potential for new tariffs imposed on imports by the U.S. administration. 15 Table of Contents While the impact of these factors is difficult to predict, we believe any one or more of these factors could have a material adverse effect on our financial results.
The total long-term debt was primarily the result of our acquisitions, including Lightning Diversion Systems, LLC (“LDS”) in September 2017, Certified Thermoplastics Co., LLC (“CTP”) in April 2018, and Nobles Worldwide, Inc. (“Nobles”) in October 2019. Our ability to obtain additional financing or complete a debt refinancing in the future may be limited.
The total long-term debt was primarily the result of our acquisitions, including Lightning Diversion Systems, LLC (“LDS”) in September 2017, Certified Thermoplastics Co., LLC (“CTP”) in April 2018, Nobles Worldwide, Inc. (“Nobles”) in October 2019, and BLR Aerospace, L.L.C.
Additionally, our competitors that have greater direct purchasing power, may have product cost advantages which could have a material adverse effect on our financial results. GENERAL RISKS The COVID-19 pandemic has had, and continues to have, a material adverse effect on our business, results of operations, and financial condition.
Additionally, our competitors that have greater direct purchasing power, may have product cost advantages which could have a material adverse effect on our financial results. GENERAL RISKS Pandemics and other disease outbreaks such as COVID-19 and similar health threats that may arise in the future may have a material adverse effect on our business, results of operations, and financial condition.
At December 31, 2022, the outstanding balance on the 2022 Credit Facilities was $248.4 million with an average interest rate of 4.36%. Should interest rates increase significantly, our debt service cost will increase as all of our current debt borrowings under the 2022 Credit Facilities bear interest at variable rates.
At December 31, 2023, the outstanding balance on the 2022 Credit Facilities was $266.0 million with an average interest rate of 7.53%. Should interest rates increase significantly, our debt service cost on the variable portion of our debt will increase.
Consolidation among our suppliers may result in fewer sources of supply and increased cost to us. Our growth strategy includes evaluating selected acquisitions, which entails certain risks to our business and financial performance. We have historically achieved a portion of our growth through acquisitions and expect to evaluate selected future acquisitions as part of our strategy for growth.
Consolidation among our suppliers may result in fewer sources of supply and increased cost to us. 14 Table of Contents Our growth strategy includes evaluating selected acquisitions, which entails certain risks to our business and financial performance.
We have operations located in regions of the U.S. that may be exposed to damaging storms, earthquakes, fires and other natural disasters. Although we maintain standard property casualty insurance covering our properties and may be able to recover costs associated with certain natural disasters through insurance, we do not carry any earthquake insurance because of the cost of such insurance.
Although we maintain standard property casualty insurance covering our properties and may be able to recover costs associated with certain natural disasters through insurance, we do not carry any earthquake insurance because of the cost of such insurance. Many of our properties are located in Southern California, an area subject to earthquake activity.
Any acquisition of another business entails risks and it is possible that we may not realize the expected benefits from an acquisition or that an acquisition could adversely affect our existing operations.
We have historically achieved a portion of our growth through acquisitions and expect to evaluate selected future acquisitions as part of our strategy for growth. Any acquisition of another business entails risks and it is possible that we may not realize the expected benefits from an acquisition or that an acquisition could adversely affect our existing operations.
This is due to the numerous uncertainties that have risen from the pandemic, including the severity of the disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, long-term impact from COVID-19 infection or vaccines, and the related unintended or unanticipated consequences.
The long-term impact to our business remains unknown due to the numerous uncertainties that have risen from such health threats, including the severity of the disease, the duration of the outbreak, the likelihood of resurgences of the outbreak, including the emergence and spread of variants, actions that may be taken by governmental authorities in response to the disease, the timing, distribution, efficacy and public acceptance of vaccines, long-term impact from diseases or vaccines, and related unintended or unanticipated consequences. 20 Table of Contents Our ability to continue to manufacture products is highly dependent on our ability to maintain the safety and health of our performance center employees.
See Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. We may be subject to litigation, other legal proceedings and indemnity claims, and, if any of these are resolved adversely against us, it could have a material adverse effect on our business, financial condition, and results of operations.
We may be subject to litigation, other legal proceedings and indemnity claims, and, if any of these are resolved adversely against us in amounts that exceed the limits of our insurance coverage, it could have a material adverse effect on our business, financial condition, and results of operations.
Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate as a result of changed conditions, and fraud. Due to these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud.
We are required to provide a report from management to our shareholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate as a result of changed conditions, and fraud.
Government approvals and related export licenses for proposed sales to certain foreign customers. We must comply with numerous laws and regulations relating to the export of some of our products before we are permitted to sell those products outside the United States.
We must comply with numerous laws and regulations relating to the export of some of our products before we are permitted to sell or manufacture those products outside the United States. Compliance often entails the submission and timely receipt of the necessary export approvals, licenses, or authorizations from the U.S. Government.
For example, the U.S. Government may terminate any of our customers’ government contracts and subcontracts either at its convenience or for default based on our performance.
In some instances, these laws and regulations impose terms or rights that are different from those typically found in commercial transactions. For example, the U.S. Government may terminate any of our customers’ government contracts and subcontracts either at its convenience or for default based on our performance.
In addition, the undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio. In December 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena performance center located in Carson, California (“Sale-Leaseback Agreement”).
In addition, the undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio.
Although we have not experienced any material labor-related work stoppage and consider our relations with our employees to be good, labor stoppages may occur in the future.
See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. Although we have not experienced any material labor-related work stoppage and consider our relations with our employees to be good, labor stoppages may occur in the future.
However, the Monrovia, California performance center that employs 130 of our collective bargaining employees that are covered by an agreement that expires in June 2024 will be ceasing production and the facility will close by the middle of 2023. See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
However, the Monrovia, California performance center that employs 97 of our collective bargaining employees that are covered by an agreement that expires in June 2024 will be ceasing production and the facility is currently expected to close by the middle of 2024.
Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business.
We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business.
Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur 20 Table of Contents remediation costs, subject us to claims and damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business.
Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. In addition, such cybersecurity attacks may result in a significant ransom demand.
The building and related land was sold for $143.1 million and we recognized a gain of $132.5 million. See Note 6 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further discussion.
See Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
In late 2020, Boeing began receiving regulatory approval for its 737 MAX to return to service from some of the major civil aviation regulators around the world and thus, we have been seeing an increase in our production rates. However, they are still below pre-COVID-19 pandemic levels.
Boeing was one of our largest customers in 2023, and the 737 MAX was one of our highest commercial end use market revenue platforms. While Boeing has received approval from all the major civil aviation regulators around the world for its 737 MAX to return to service, our production rates are still below pre-COVID-19 pandemic levels.
In the ordinary course of our business, there are transactions and calculations where the ultimate tax determination is uncertain.
Unanticipated changes in our tax provision or exposure to additional income tax liabilities could affect our profitability. Significant judgment is required in determining our provision for income taxes. In the ordinary course of our business, there are transactions and calculations where the ultimate tax determination is uncertain.
The final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. 18 Table of Contents Our ability to accurately report our financial results or prevent fraud may be adversely affected if our internal control over financial reporting is not effective.
Our ability to accurately report our financial results or prevent fraud may be adversely affected if our internal control over financial reporting is not effective. The accuracy of our financial reporting is dependent on the effectiveness of our internal controls.
Thus far, the ability of our employees to work has not been significantly impacted by individuals contracting or being exposed to COVID-19.
While we continue to follow guidelines and requirements of governmental authorities and taking preventive and protective measures to prioritize the safety and well-being of our employees, these measures are not always successful. Thus far, the ability of our employees to work has not been significantly impacted by individuals contracting or being exposed to COVID-19 or its variants.
We are subject to a number of procurement laws and regulations. Our business and our reputation could be adversely affected if we fail to comply with these laws. We must comply with and are affected by laws and regulations relating to the award, administration and performance of U.S. Government contracts.
Any such outcome could have a material adverse effect on our financial results. 16 Table of Contents We are subject to a number of procurement laws and regulations. Our business and our reputation could be adversely affected if we fail to comply with these laws.
We compete worldwide with a number of domestic and international companies that have substantially greater manufacturing, purchasing, marketing and financial resources than we do. Many of our customers have the in-house capability to fulfill their manufacturing requirements.
Customer pricing pressures could reduce the demand and/or price for our products and services. The markets we serve are highly competitive and price sensitive. We compete worldwide with a number of domestic and international companies that have substantially greater manufacturing, purchasing, marketing and financial resources than we do.
In November 2021, we entered into U.S. dollar-one month LIBOR forward interest rate swaps, all with an effective date of January 1, 2024, for an aggregate total notional amount of $150.0 million, weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”).
The Amended Forward Interest Rate Swaps, with an aggregate total notional amount of $150.0 million and all with a seven year tenor, became effective on January 1, 2024. The weighted average fixed rate of the Amended Forward Interest Rate Swaps was 1.7%.
See “Goodwill and Other Intangible Assets” in Note 7 of our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. Unanticipated changes in our tax provision or exposure to additional income tax liabilities could affect our profitability. Significant judgment is required in determining our provision for income taxes.
See “Goodwill and Other Intangible Assets” in Note 7 of our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. 18 Table of Contents We expect to face increased costs and resources to comply with the new SEC cybersecurity rule.
The COVID-19 pandemic has caused, and continues to cause, a significant adverse impact on our employees, operations, businesses of our customers, suppliers and distribution partners, and volatility in the financial markets.
While the commercial aerospace industry continues to recover from the effects of the COVID-19 pandemic, new variants of that disease, along with other similar public health threats may have or may continue to have an adverse impact on our employees, operations, businesses of our customers, suppliers and distribution partners, and volatility in the financial markets.
Accordingly, long-term uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. Government discretionary spending levels will continue to be subject to pressure. 13 Table of Contents Exports of certain of our products are subject to various export control regulations and authorizations, and we may not be successful in obtaining the necessary U.S.
Further, there continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government agencies for fiscal year 2025 and beyond. Accordingly, long-term uncertainty remains with respect to overall levels of defense spending and it is likely that U.S. Government discretionary spending levels will continue to be subject to pressure.
Also in December 2021, we acquired 100% of the outstanding equity interests of MagSeal for an original purchase price of $69.5 million, net of cash acquired, all payable in cash. A portion of the proceeds from the sale-leaseback transaction was subsequently utilized to pay down the amount drawn on the 2019 Revolving Credit Facility to close the MagSeal acquisition.
On April 25, 2023, we acquired 100% of the outstanding equity interests of BLR for an initial purchase price of $115.0 million, net of cash acquired, all payable in cash. We paid a gross aggregate of $117.0 million in cash upon the closing of the transaction. We utilized the 2022 Revolving Credit Facility to complete the acquisition.
Removed
The weighted average fixed rate of the Amended Forward Interest Rate Swaps was 1.7%.
Added
(“BLR”) on April 25, 2023. 10 Table of Contents Our ability to obtain additional financing or complete a debt refinancing in the future may be limited.
Removed
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges, with a portion of these interest rate cap hedges maturing on a quarterly basis, with notional value in aggregate, totaling $135.0 million. However, all of these interest rate cap hedges matured in June 2020.
Added
We cannot ensure that we would be able to refinance our debt or enter into alternative financing plans in adequate amounts on commercially reasonable terms, terms acceptable to us or at all, or that such plans guarantee that we would be able to meet our debt obligations.
Removed
Boeing was one of our largest customers in 2022, and the 737 MAX was one of our highest commercial end use market revenue platforms.
Added
Further, as noted earlier, in early January 2024, the FAA initiated an investigation into Boeing’s quality control system.
Removed
While the FY 2023 NDAA authorized $30 billion more than the U.S. President originally requested in the FY 2023 budget request, there continues to be uncertainty with respect to future program-level appropriations for the U.S. DoD and other government agencies for fiscal year 2024 and beyond.
Added
This was followed by the FAA announcing actions to increase its oversight of Boeing as well as not approving production rate increases or additional production lines for the 737 MAX until it is satisfied that Boeing is in full compliance with required quality control procedures.
Removed
Compliance often entails the submission and timely receipt of the necessary export approvals, licenses, or authorizations from the U.S. Government.
Added
For instance, the U.S. government is currently operating under a continuing resolution (“CR”) to keep the government funded while the Congress works to enact full year fiscal year 2024 (“FY24”) appropriation bills.
Removed
While the impact of these factors is difficult to predict, we believe any one or more of these factors could have a material adverse effect on our financial results. Customer pricing pressures could reduce the demand and/or price for our products and services. The markets we serve are highly competitive and price sensitive.
Added
Under the Fiscal Responsibility Act of 2023, which imposes limits on discretionary spending for defense and non-defense programs in exchange for the lifting of the debt ceiling in June 2023, if Congress fails to enact all appropriation bills by April 30, 2024, then the budget caps will be reduced and corresponding automatic reductions to agency budget accounts will be enforced through sequestration which could have a 13 Table of Contents material effect on our results of operations, financial position, and/or cash flows.
Removed
The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from management to our shareholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls.
Added
Exports of certain of our products and our production facility in Guaymas, Mexico are subject to various export control regulations and authorizations, and we may not be successful in obtaining the necessary U.S. Government approvals and related export licenses for proposed sales to certain foreign customers.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeITEM 2. PROPERTIES Our headquarters are located in Santa Ana, California. As of December 31, 2022, we owned or leased facilities and land for corporate functions and manufacturing at locations throughout the United States and various places outside the United States. We believe our existing facilities are suitable and adequate for our present purposes.
Biggest changeITEM 2. PROPERTIES Our headquarters are located in Santa Ana, California. As of December 31, 2023, we owned or leased facilities and land for corporate functions and manufacturing at locations throughout the United States and a manufacturing location outside the United States. We believe our existing facilities are suitable and adequate for our present purposes.
Removed
Each of our reportable segments uses each of these facilities.
Added
Each of our reportable segments uses each of these facilities. ITEM 3. LEGAL PROCEEDINGS See Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for a description of our legal proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. 23 Table of Contents PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changePerformance Graph The following graph compares the yearly percentage change in our cumulative total shareholder return with the cumulative total return of the Russell 2000 Index and the median of our 2023 Proxy Statement peers (“Median of Peers”) over a five year period, assuming the reinvestment of any dividends.
Biggest changeIssuer Purchases of Equity Securities None. Performance Graph The following graph compares the yearly percentage change in our cumulative total shareholder return with the cumulative total return of the Russell 2000 Index and the median of our 2024 Proxy Statement peers (“Median of Peers”) over a five year period, assuming the reinvestment of any dividends.
We have not paid any dividends since the first quarter of 2011 and we do not expect to pay dividends for the foreseeable future. See “Part III, Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS” for information relating to shares to be issued under equity compensation plans. Issuer Purchases of Equity Securities None.
We have not paid any dividends since the first quarter of 2011 and we do not expect to pay dividends for the foreseeable future. See “Part III, Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS” for information relating to shares to be issued under equity compensation plans. Unregistered Sales of Equity Securities None.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange under the symbol DCO. As of December 31, 2022, we had 142 holders of record of our common stock.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange under the symbol DCO. As of December 31, 2023, we had 134 holders of record of our common stock.
The graph is not necessarily indicative of future price performance: ITEM 6. [Reserved] 22 Table of Contents
The graph is not necessarily indicative of future price performance: ITEM 6. [Reserved] 24 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeThe following table summarizes our business segment performance for 2022 and 2021: 29 Table of Contents 30 Table of Contents % (Dollars in thousands) Years Ended December 31, % of Net Revenues % of Net Revenues Change 2022 2021 2022 2021 Net Revenues Electronic Systems 6.8 % $ 440,638 $ 412,648 61.8 % 63.9 % Structural Systems 16.8 % 271,899 232,765 38.2 % 36.1 % Total Net Revenues 10.4 % $ 712,537 $ 645,413 100.0 % 100.0 % Segment Operating Income Electronic Systems $ 49,876 $ 57,629 11.3 % 14.0 % Structural Systems 17,225 20,234 6.3 % 8.7 % 67,101 77,863 Corporate General and Administrative Expenses (1) (27,313) (28,982) (3.8) % (4.5) % Total Operating Income $ 39,788 $ 48,881 5.6 % 7.6 % Adjusted EBITDA Electronic Systems Operating Income $ 49,876 $ 57,629 Other Income — 196 Depreciation and Amortization 13,974 13,823 Restructuring Charges 3,786 — Success Bonus Related to Completion of Sale-Leaseback Transaction (2) — 970 67,636 72,618 15.3 % 17.6 % Structural Systems Operating Income 17,225 20,234 Other Income — 72 Depreciation and Amortization 17,212 14,331 Restructuring Charges 2,900 — Inventory Purchase Accounting Adjustments 1,381 106 Guaymas Fire Related Expenses 4,466 2,486 Success Bonus Related to Completion of Sale-Leaseback Transaction (2) — 475 43,184 37,704 15.9 % 16.2 % Corporate General and Administrative Expenses (1) Operating Loss (27,313) (28,982) Depreciation and Amortization 235 235 Stock-Based Compensation Expense 10,744 11,212 Other Debt Refinancing Costs 224 — Success Bonus Related to Completion of Sale-Leaseback Transaction (2) — 6 (16,110) (17,529) Adjusted EBITDA $ 94,710 $ 92,793 13.3 % 14.4 % Capital Expenditures Electronic Systems $ 10,717 $ 7,471 Structural Systems 8,834 8,463 Corporate Administration — — Total Capital Expenditures $ 19,551 $ 15,934 (1) Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments.
Biggest changeThe following table summarizes our business segment performance for 2023 and 2022: % (Dollars in thousands) Years Ended December 31, % of Net Revenues % of Net Revenues Change 2023 2022 2023 2022 Net Revenues Electronic Systems (2.4) % $ 430,136 $ 440,638 56.8 % 61.8 % Structural Systems 20.2 % 326,856 271,899 43.2 % 38.2 % Total Net Revenues 6.2 % $ 756,992 $ 712,537 100.0 % 100.0 % Segment Operating Income Electronic Systems $ 42,086 $ 49,876 9.8 % 11.3 % Structural Systems 23,460 17,225 7.2 % 6.3 % 65,546 67,101 Corporate General and Administrative Expenses (1) (36,629) (27,313) (4.8) % (3.8) % Total Operating Income $ 28,917 $ 39,788 3.8 % 5.6 % Adjusted EBITDA Electronic Systems Operating Income $ 42,086 $ 49,876 Other Income 222 — Depreciation and Amortization 14,276 13,974 Stock-Based Compensation Expense 462 186 Restructuring Charges 6,412 3,786 63,458 67,822 14.8 % 15.4 % Structural Systems Operating Income 23,460 17,225 Depreciation and Amortization 18,060 17,212 Stock-Based Compensation Expense 387 163 Restructuring Charges 8,334 2,900 Inventory Purchase Accounting Adjustments 5,531 1,381 Guaymas Fire Related Expenses 3,896 4,466 Other Fire Related Expenses 477 — 60,145 43,347 18.4 % 15.9 % Corporate General and Administrative Expenses (1) Operating Loss (36,629) (27,313) Depreciation and Amortization 235 235 Stock-Based Compensation Expense 14,196 10,395 Restructuring Charges 109 — Other Debt Refinancing Costs — 224 (22,089) (16,459) Adjusted EBITDA $ 101,514 $ 94,710 13.4 % 13.3 % Capital Expenditures Electronic Systems $ 6,007 $ 10,717 Structural Systems 13,127 8,834 Corporate Administration — — Total Capital Expenditures $ 19,134 $ 19,551 (1) Includes costs not allocated to either the Electronic Systems or Structural Systems operating segments. 31 Table of Contents Electronic Systems Electronic Systems’ net revenues in 2023 compared to 2022 decreased $10.5 million primarily due to the following: • $20.7 million lower revenues in our military and space end-use markets due to lower build rates on military fixed-wing aircraft platforms and various missile platforms, partially offset by higher build rates on other military and space platforms; partially offset by • $10.6 million higher revenues in our commercial aerospace end-use markets due to higher build rates on other commercial aerospace platforms, partially offset by lower build rates on regional and business aircraft platforms.
We define Adjusted EBITDA, explain how it is calculated, and provide a reconciliation to the most comparable GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this Form 10-K, are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP.
We define this measure, explain how it is calculated and provide a reconciliation of this measure to the most comparable GAAP measure in the table below. Adjusted EBITDA and the related financial ratios, as presented in this Form 10-K, are supplemental measures of our performance that are not required by, or presented in accordance with, GAAP.
They are not a measurement of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to net cash provided by operating activities as measures of our liquidity.
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 a measurement of our liquidity.
In conjunction with the closing of the 2022 Credit Facilities, we utilized the entire $250.0 million of proceeds from the 2022 Term Loan plus our existing cash on hand to pay off our entire debt balance outstanding of $254.2 million under prior credit facilities.
In conjunction with the closing of the 2022 Credit Facilities, we utilized the entire $250.0 million of proceeds from the 2022 Term Loan plus our existing cash on hand to pay off our entire debt balance outstanding of $254.2 million under our prior credit facilities.
We also present Adjusted EBITDA and the related financial ratios, as applicable, because we believe that measures such as these provide useful information with respect to our ability to meet our operating commitments.
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.
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; 24 Table of Contents • Stock-based compensation expense may be useful to our investors for determining current cash flow; • Restructuring charges may be useful to our investors in evaluating our core operating performance; • Guaymas fire related expenses may be useful to our investors in evaluating our core operating performance; • Insurance recoveries related to business interruption may be useful to our investors in evaluating our core operating performance; • Purchase accounting inventory step-ups may be useful to our investors as they do not necessarily reflect the current or on-going cash charges related to our core operating performance; • Loss on extinguishment of debt may be useful to our investors for determining current cash flow; • Other debt refinancing costs may be useful to our investors in evaluating our core operating performance; • Gain on sale-leaseback may be useful to our investors in evaluating our core operating performance; and • Success bonus related to completion of sale-leaseback transaction may be useful to our investors in evaluating our core operating performance.
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; • Stock-based compensation expense may be useful to our investors for determining current cash flow; • Restructuring charges may be useful to our investors in evaluating our core operating performance; • Guaymas fire related expenses may be useful to our investors in evaluating our core operating performance; • Other fire related expenses may be useful to our investors in evaluating our core operating performance; • Insurance recoveries related to loss on operating assets (property and equipment, inventories, and other assets) may be useful to our investors in evaluating our core operating performance; 26 Table of Contents • Insurance recoveries related to business interruption may be useful to our investors in evaluating our core operating performance; • Purchase accounting inventory step-ups may be useful to our investors as they do not necessarily reflect the current or on-going cash charges related to our core operating performance; • Loss on extinguishment of debt may be useful to our investors for determining current cash flow; • Other debt refinancing costs may be useful to our investors in evaluating our core operating performance; • Gain on sale-leaseback may be useful to our investors in evaluating our core operating performance; and • Success bonus related to completion of sale-leaseback transaction may be useful to our investors in evaluating our core operating performance.
The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each calendar month, commencing on February 1, 2024 through January 1, 2031. See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each calendar month, commencing on February 1, 2024 through January 1, 2031. See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
A preliminary fair value is determined once a business is acquired, with the final determination of fair value be completed no later than one year from the date of acquisition.
A preliminary fair value is determined once a business is acquired, with the final determination of fair value to be completed no later than one year from the date of acquisition.
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) which aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. We considered the provisions in the IRA and determined they have no or minimal impact to our overall income taxes.
In August 2022, the U.S. enacted the Inflation Reduction Act of 2022 (“IRA”) which aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing in domestic energy production while promoting clean energy. We considered the provisions in the IRA and determined they have no or minimal impact to our overall income taxes.
The fair value of stock options are determined using the Black-Scholes-Merton (“Black-Scholes”) valuation model, which requires assumptions and judgments regarding stock price volatility, risk-free interest rates, and expected options terms. Management’s estimates could differ from actual results.
The fair value of stock options is determined using the Black-Scholes-Merton (“Black-Scholes”) valuation model, which requires assumptions and judgments regarding stock price volatility, risk-free interest rates, and expected options terms. Management’s estimates could differ from actual results.
(3) 2022 and 2021 included inventory purchase accounting adjustments of inventory that was stepped up as part of our purchase price allocation from our acquisition of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”) in December 2021 and is a part of our Structural Systems operating segment.
(4) 2022 and 2021 included inventory purchase accounting adjustments of inventory that was stepped up as part of our purchase price allocation from our acquisition of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”) in December 2021 and is a part of our Structural Systems operating segment.
Some of these limitations include: • It does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments; • It does not reflect changes in, or cash requirements for, our working capital needs; • It does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; • It is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; • It does not reflect the impact on earnings or charges resulting from matters unrelated to our ongoing operations; and • Other companies in our industry may calculate Adjusted EBITDA differently from us, limiting their usefulness as comparative measures.
Some of these limitations include: • It does not reflect our cash expenditures, future requirements for capital expenditures or contractual commitments; • It does not reflect changes in, or cash requirements for, our working capital needs; • It does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on our debt; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements; • It is not adjusted for all non-cash income or expense items that are reflected in our statements of cash flows; • It does not reflect the impact on earnings or charges resulting from matters unrelated to our ongoing operations; and • Other companies in our industry may calculate Adjusted EBITDA differently from us, limiting its usefulness as a comparative measure.
The majority of the LTAs do not meet the definition of a contract under ASC 606 and thus, the backlog amount disclosed below is greater than the remaining performance obligations amount disclosed in Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
The majority of the LTAs do not meet the definition of a contract under ASC 606 and thus, the backlog amount disclosed below is greater than the remaining performance obligations amount disclosed in Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
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 23 Table of Contents information that clarifies and enhances the understanding of the factors and trends affecting our past performance and future prospects.
When viewed with our financial results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and accompanying reconciliations, we believe Adjusted EBITDA provides additional useful information that clarifies and enhances the understanding of the factors and trends affecting our past performance and future prospects.
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.
The majority of our revenues are recognized over time, however, for revenue contracts where revenue is recognized 37 Table of Contents 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.
The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items. We use Adjusted EBITDA as a non-GAAP operating performance measure internally as a complementary financial measure to evaluate the performance and trends of our businesses.
The presentation of these measures should not be interpreted to mean that our future results will be unaffected by unusual or nonrecurring items. 25 Table of Contents We use Adjusted EBITDA as a non-GAAP operating performance measure internally as a complementary financial measure to evaluate the performance and trends of our businesses.
Acquisition related costs are not included as components of consideration transferred but instead, expensed as incurred and are included in selling, general and administrative expenses in our consolidated statements of income. See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K.
Acquisition related costs are not included as components of consideration transferred but instead, expensed as incurred and are included in selling, general and administrative expenses in our consolidated statements of income. See Note 2 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K.
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer orders and tends to be concentrated in several programs to a greater extent than our net revenues.
Backlog is subject to delivery delays or program cancellations, which are beyond our control. Backlog is affected by timing differences in the placement of customer 32 Table of Contents orders and tends to be concentrated in several programs to a greater extent than our net revenues.
We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 2018 and by state taxing authorities for tax years after 2017.
We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 2019 and by state taxing authorities for tax years after 2018.
The Amended Forward Interest Rate Swaps weighted average fixed rate is 1.7%, as a result of the difference between U.S. dollar-one month LIBOR and one month Term SOFR. See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
The Amended Forward Interest Rate Swaps weighted average fixed rate was 1.7% as a result of the difference between U.S. dollar-one month LIBOR and one month Term SOFR. See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
(“Spirit”), and Viasat, Inc. (“Viasat”). The revenues from Boeing, GD, Lockheed Martin, Northrop, Raytheon, Spirit, and Viasat are diversified over a number of commercial, military and space programs and some of which were generated by both operating segments. Gross Profit Gross profit consists of net revenues less cost of sales.
(“Spirit”), and Viasat, Inc. (“Viasat”). The revenues from Boeing, GD, Northrop, RTX, Spirit, and Viasat are diversified over a number of commercial, military and space programs and some of which were generated by both operating segments. Gross Profit Gross profit consists of net revenues less cost of sales.
COVID-19 Pandemic Impact on Our Business The COVID-19 pandemic has had a significant impact on our overall business during the year ended December 31, 2022.
COVID-19 Pandemic Impact on Our Business The COVID-19 pandemic had a significant impact on our overall business during the prior year ended December 31, 2022.
See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for the net impact of these adjustments to our consolidated financial statements for 2022 and 2021. Payments under long-term contracts may be received before or after revenue is recognized.
See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for the net impact of these adjustments to our consolidated financial statements for 2023 and 2022. Payments under long-term contracts may be received before or after revenue is recognized.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as substitutes for analysis of our results as reported under GAAP.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
On July 14, 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of the Forward Interest Rate Swaps (“Amended Forward Interest Rate Swaps”).
In July 2022, as a result of completing a refinancing of our existing debt, we were required to complete an amendment of the Forward Interest Rate Swaps (“Amended Forward Interest Rate Swaps”).
Recent Accounting Pronouncements See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for a description of recent accounting pronouncements.
Recent Accounting Pronouncements See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for a description of recent accounting pronouncements.
See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information.
See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
Of these charges, we estimate $9.0 million to $12.0 million to be cash payments for employee separation and other facility consolidation related expenses, and $3.0 million to $4.0 million to be non-cash charges for impairment of long-lived assets. On an annualized basis, we anticipate these restructuring actions will result in total cost savings of $11.0 million to $13.0 million.
Of these charges, we estimate $4.5 million to $6.0 million to be cash payments for employee separation and other facility consolidation related expenses, and $0.5 million to $1.0 million to be non-cash charges for impairment of long-lived assets. On an annualized basis, we anticipate these restructuring actions will result in total cost savings of $11.0 million to $13.0 million.
At the same leverage ratio, the interest rate spread in the 2022 Credit Facilities is lower than the interest rate spread under our prior credit facilities. Interest payments are typically paid on a quarterly basis, on the last business day each quarter.
At the same leverage ratio, the interest rate spread in the 2022 Credit Facilities is lower than the interest rate spread under our prior credit facilities. Interest payments are typically paid on a monthly or quarterly basis, depending on the interest rate selected, on the last business day each month or quarter.
When revenue is recognized before we bill our customer, a contract asset is created for the work performed but not yet billed. Similarly, when we receive payment before we ship our products to our customer, a contract liability is created for the advance or progress payment.
When revenue is recognized before we bill our customer, a contract asset is created for the work performed but not yet billed. Similarly, when we receive payment before we ship our products to our customer and have met the shipping terms, a contract liability is created for the advance or progress payment.
As a result of the COVID-19 pandemic, precautionary measures were instituted by governments and businesses to mitigate its spread, including the imposition of travel restrictions, quarantines, shelter in place directives, and shutting down of non-essential businesses. The safety of our employees remains our highest priority.
As a result of the COVID-19 pandemic, precautionary measures were instituted by governments and businesses to mitigate its spread, including the imposition of travel restrictions, quarantines, shelter in place directives, and shutting down of non-essential businesses.
See Note 13 and Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional information.
See Note 15 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for additional information.
As of December 31, 2022, we recorded an increase to income taxes payable of $10.6 million and a decrease to net deferred tax liabilities of a similar amount. We are monitoring legislation for any further changes to Section 174 and the potential impact to our financial statements in 2023.
For the year ended December 31, 2023, we recorded an increase to income taxes payable of $9.7 million and a decrease to net deferred tax liabilities of a similar amount. We are monitoring legislation for any further changes to Section 174 and the potential impact to our financial statements in 2024.
Recap for the year ended December 31, 2022: • Net revenues of $712.5 million • Net income of $28.8 million, or $2.33 per diluted share • Adjusted EBITDA of $94.7 million Non-GAAP Financial Measures Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, Guaymas fire related expenses, insurance recoveries related to business interruption, inventory purchase accounting adjustments, loss on extinguishment of debt, other debt refinancing costs, gain on sale-leaseback, and success bonus related to the completion of sale-leaseback transaction (“Adjusted EBITDA”) was $94.7 million and $92.8 million for years ended December 31, 2022 and December 31, 2021, respectively.
Recap for the year ended December 31, 2023: • Net revenues of $757.0 million • Net income of $15.9 million, or $1.14 per diluted share • Adjusted EBITDA of $101.5 million Non-GAAP Financial Measures Adjusted earnings before interest, taxes, depreciation, amortization, stock-based compensation expense, restructuring charges, Guaymas fire related expenses, other fire related expenses, insurance recoveries related to loss on operating assets, insurance recoveries related to business interruption, inventory purchase accounting adjustments, loss on extinguishment of debt, other debt refinancing costs, gain on sale-leaseback, and success bonus related to the completion of sale-leaseback transaction (“Adjusted EBITDA”) was $101.5 million and $94.7 million for the years ended December 31, 2023 and December 31, 2022, respectively.
The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate, and (iv) the discount rate. The useful lives are estimated based on the underlying agreements or the future economic benefit expected to be received from the assets.
The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenues, (ii) the projected earnings before interest, taxes, and amortization (“EBITA”) margins, (iii) the customer attrition rates, and (iv) the discount rate. The useful lives are estimated based on the underlying agreements or the future economic benefit expected to be received from the assets.
Electronic Systems segment operating income in 2022 compared to 2021 decreased $7.8 million primarily due to unfavorable product mix and restructuring charges, partially offset by favorable manufacturing volume and lower compensation and benefits costs.
Electronic Systems segment operating income in 2023 compared to 2022 decreased $7.8 million primarily due to unfavorable product mix and higher restructuring charges, partially offset by favorable manufacturing volume.
(2) 2022 included $0.5 million of restructuring charges that were recorded as cost of sales.
(2) 2023 and 2022 included $0.3 million and $0.5 million, respectively, of restructuring charges that were recorded as cost of sales.
While both major large aircraft manufacturers, The Boeing Company (“Boeing”) and Airbus SE, have announced increases in build rates for 2023, the ramp up is slower than expected and below pre-pandemic levels.
For 2024, while both major large aircraft manufacturers, Boeing and Airbus SE, have announced either similar or increases in build rates compared to 2023, the ramp up is slower than expected and below pre-pandemic levels.
Further, the undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio, typically paid on a quarterly basis, on the last business day each quarter. However, the 2022 Revolving Credit Facility does not require any principal installment payments.
Further, the undrawn portion of the commitment of the 2022 Revolving Credit Facility is subject to a commitment 33 Table of Contents fee ranging from 0.175% to 0.275%, based upon the consolidated total net adjusted leverage ratio, typically paid on a quarterly basis, on the last business day each quarter.
Reconciliations of net income to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net revenues were as follows: (Dollars in thousands) Years Ended December 31, 2022 2021 2020 Net income $ 28,789 $ 135,536 $ 29,174 Interest expense 11,571 11,187 13,653 Income tax expense 4,533 34,948 2,807 Depreciation 14,535 14,051 13,824 Amortization 16,886 14,338 15,026 Stock-based compensation expense (1) 10,744 11,212 9,299 Restructuring charges (2) 6,686 — 2,424 Guaymas fire related expenses 4,466 2,486 1,704 Insurance recoveries related to business interruption (5,400) — — Inventory purchase accounting adjustments (3) 1,381 106 — Loss on extinguishment of debt 295 — — Other debt refinancing costs 224 — — Gain on sale-leaseback — (132,522) — Success bonus related to completion of sale-leaseback transaction (4) — 1,451 — Adjusted EBITDA $ 94,710 $ 92,793 $ 87,911 % of net revenues 13.3 % 14.4 % 14.0 % (1) 2022 included $1.2 million of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash.
Reconciliations of net income to Adjusted EBITDA and the presentation of Adjusted EBITDA as a percentage of net revenues were as follows: (Dollars in thousands) Years Ended December 31, 2023 2022 2021 Net income $ 15,928 $ 28,789 $ 135,536 Interest expense 20,773 11,571 11,187 Income tax expense 451 4,533 34,948 Depreciation 15,473 14,535 14,051 Amortization 17,098 16,886 14,338 Stock-based compensation expense (1) 15,045 10,744 11,212 Restructuring charges (2) 14,855 6,686 — Guaymas fire related expenses 3,896 4,466 2,486 Other fire related expenses 477 — — Insurance recoveries related to loss on operating assets (5,724) — — Insurance recoveries related to business interruption (2,289) (5,400) — Inventory purchase accounting adjustments (3)(4) 5,531 1,381 106 Loss on extinguishment of debt — 295 — Other debt refinancing costs — 224 — Gain on sale-leaseback — — (132,522) Success bonus related to completion of sale-leaseback transaction (5) — — 1,451 Adjusted EBITDA $ 101,514 $ 94,710 $ 92,793 % of net revenues 13.4 % 13.3 % 14.4 % (1) 2023 and 2022 included $2.7 million and $1.2 million, respectively, of stock-based compensation expense for awards with both performance and market conditions that will be settled in cash.
Contract costs typically include labor, materials, overhead, and when applicable, subcontractor costs. For most of our products, we are building assets with no alternative use and have enforceable right to payment, and thus, we recognize revenue using the over time method. The majority of our performance obligations are satisfied over time as work progresses.
For most of our products, we are building assets with no alternative use and have enforceable right to payment, and thus, we recognize revenue using the over time method. The majority of our performance obligations are satisfied over time as work progresses.
Net Revenues by Major Customers A significant portion of our net revenues are from our top ten customers as follows: Years Ended December 31, 2022 2021 Boeing Company 6.7 % 7.8 % General Dynamics Corporation 5.7 % 3.0 % Lockheed Martin Corporation 3.5 % 4.4 % Northrop Grumman Corporation 5.7 % 7.1 % Raytheon Technologies Corporation 21.6 % 24.4 % Spirit AeroSystems Holdings, Inc. 5.7 % 3.8 % Viasat, Inc. 5.4 % 2.6 % Top ten customers (1) 61.4 % 61.1 % (1) Includes The Boeing Company (“Boeing”), General Dynamics Corporation (“GD”), Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”), Spirit AeroSystems Holdings, Inc.
Net Revenues by Major Customers A significant portion of our net revenues are from our top ten customers as follows: Years Ended December 31, 2023 2022 Boeing Company 8.2 % 6.7 % General Dynamics Corporation 3.8 % 5.7 % Northrop Grumman Corporation 5.5 % 5.7 % RTX Corporation 16.8 % 21.6 % Spirit AeroSystems Holdings, Inc. 6.4 % 5.7 % Viasat, Inc. 5.5 % 5.4 % Top ten customers (1) 58.7 % 61.4 % (1) Includes The Boeing Company (“Boeing”), General Dynamics Corporation (“GD”), Northrop Grumman Corporation (“Northrop”), RTX Corporation (f/k/a Raytheon Technologies Corporation) (“RTX”), Spirit AeroSystems Holdings, Inc.
Cost of sales includes the cost of production of finished products and other expenses related to inventory management, manufacturing quality, and order fulfillment. Gross profit margin decreased to 20.3% in 2022 compared to 22.1% in 2021 primarily due to unfavorable product mix, partially offset by favorable manufacturing volume and lower compensation and benefits costs.
Cost of sales includes the cost of production of finished products and other expenses related to inventory management, manufacturing quality, and order fulfillment. Gross profit margin increased to 21.6% in 2023 compared to 20.3% in 2022 primarily due to favorable manufacturing volume, partially offset by unfavorable product mix and higher other manufacturing costs.
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) December 31, 2022 2021 Total debt, including long-term portion $ 248.4 $ 287.7 Weighted-average interest rate on debt 4.36 % 3.27 % Term Loans interest rate 4.24 % 3.22 % Cash and cash equivalents $ 46.2 $ 76.3 Unused Revolving Credit Facility $ 199.8 $ 99.8 On July 14, 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility (“2022 Revolving Credit Facility”).
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) December 31, 2023 2022 Total debt, including short-term portion $ 266.0 $ 248.4 Weighted-average interest rate on debt 7.53 % 4.36 % Term Loans interest rate 6.93 % 4.24 % Cash and cash equivalents $ 42.9 $ 46.2 Unused Revolving Credit Facility $ 176.0 $ 199.8 In July 2022, we completed a refinancing of all our existing debt by entering into a new term loan (“2022 Term Loan”) and a new revolving credit facility (“2022 Revolving Credit Facility”).
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.
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.
See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for additional accounting policies. Revenue Recognition Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use 35 Table of Contents customer.
See Note 1 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for additional accounting policies. Revenue Recognition Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume manufacturing.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The qualitative approach for potential impairment analysis is performed to determine whether it is more likely than not that the fair value of a reporting unit was less than its carrying amount.
The qualitative approach for potential impairment analysis is performed to determine whether it is more likely than not that the fair value of a reporting unit was less than its carrying amount. The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its carrying value, including goodwill.
If any of these or other assumptions and estimates do not materialize in the future, we may be required to adjust the provisions for estimated losses on contracts.
If any of these or other assumptions and estimates do not materialize in the future, we may be required to adjust the provisions for estimated losses on contracts. The provision for estimated losses on contracts is included as part of contract liabilities on the consolidated balance sheets.
Inputs to fair value analyses and other aspects of the allocation of the purchase price require judgment. The value for customer relationships is typically estimated based on a multi-period excess earnings approach.
Inputs to fair value analyses and other aspects of the allocation of the purchase price require judgment. The values for technology and trade name are typically estimated using the relief from royalty methodology, while the value for customer relationships is typically estimated based on a multi-period excess earnings approach.
The Structural Systems operating income in 2022 compared to 2021 decreased $3.0 million primarily due to unfavorable product mix and restructuring charges, partially offset by favorable manufacturing volume and lower compensation and benefits costs. In June 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural Systems segment.
The Structural Systems operating income in 2023 compared to 2022 increased $6.2 million primarily due to favorable manufacturing volume and favorable product mix, partially offset by higher restructuring charges, higher inventory purchase accounting adjustments, and unfavorable other manufacturing costs. In June 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural Systems segment.
The decrease in net income in 2022 compared to 2021 was primarily due to a lack of gain on sale-leaseback of $132.5 million, higher restructuring charges of $6.7 million ($0.5 million was recorded as cost of sales), and higher SG&A expenses of $4.8 million, partially offset by lower income tax expense of $30.4 million and higher other income, net of $5.1 million. 28 Table of Contents Business Segment Performance We report our financial performance based upon the two reportable operating segments: Electronic Systems and Structural Systems.
The decrease in net income in 2023 compared to 2022 was primarily due to higher SG&A expenses of $21.4 million, higher interest expense of $9.2 million, higher restructuring charges of $8.2 million (the portion recorded in cost of sales decreased $0.2 million), partially offset by higher gross profit of $18.9 million, lower income tax expense of $4.1 million, and higher other income, net of $2.8 million. 30 Table of Contents Business Segment Performance We report our financial performance based upon the two reportable operating segments: Electronic Systems and Structural Systems.
Production costs of contracts are recorded to cost of sales using the over time revenue recognition model. We review the value of the production cost of contracts on a quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable value of the related contracts.
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.
The COVID-19 pandemic and the resulting inflation, rising interest rates, supply chain issues, and other events including the war in Ukraine have and continues to contribute to a general slowdown in the global economy and most significantly, the commercial aerospace end-use market.
The residual effects of the COVID-19 pandemic and the resulting inflation, rising or high interest rates, supply chain issues, geopolitical developments, and other events have contributed and/or continue to contribute to a general slowdown in the global economy and most significantly, the commercial aerospace end-use market.
If recognized, $2.5 million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2023, we expect decreases to our unrecognized tax benefits of approximately $0.6 million in the next twelve months. We file U.S. Federal and state income tax returns.
As a result of statute of limitations set to expire in 2024, we expect decreases to our unrecognized tax benefits of $0.8 million in the next twelve months. We file U.S. Federal and state income tax returns.
We expect to spend a total of $17.0 million to $19.0 million for capital expenditures in 2023, financed by cash generated from operations, principally to support new contract awards in Electronic Systems and Structural Systems.
We expect to spend a total of $23.0 million to $25.0 million for capital expenditures in 2024, financed by cash generated from operations, principally to support both growth in existing programs as well as new contract awards in Electronic Systems and Structural Systems.
As part of our strategic plan to become a supplier of higher-level assemblies and win new contract awards, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies.
As part of our strategic plan to become a supplier of higher-level assemblies and win new contract awards, additional up-front investment in tooling will be required for newer programs which have higher engineering content and higher levels of complexity in assemblies. We believe the ongoing aerospace and defense subcontractor consolidation makes acquisitions an increasingly important component of our future growth.
The primary method used to estimate the standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.
The primary method used to estimate the standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. 35 Table of Contents We manufacture most products to customer specifications and the product cannot be easily modified to satisfy another customer’s order.
While the full extent and impact of the COVID-19 pandemic cannot be reasonably estimated with certainty at this time, COVID-19 has had a significant impact on our business, the businesses of our customers and suppliers, as well as our results of operations and financial condition, and may have a material adverse impact on our business, results of operations and financial condition for 2023 and beyond.
While the full extent and impact of the COVID-19 pandemic cannot be reasonably estimated with certainty, in the prior year, the COVID-19 pandemic had a significant impact on our business, the businesses of our customers and suppliers, as well as our results of operations and financial condition, and such lingering effects along with compliance with regulatory compliance, could have a material adverse impact on our business, results of operations and financial condition for 2024 and beyond.
On August 9, 2022, the U.S. enacted the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (“CHIPS Act”) which provides new funding to boost domestic research and manufacturing of semiconductors in the United States. We are evaluating the provisions in the CHIPS Act. Any impact to our overall income taxes would be for 2023 and thereafter.
In August 2022, the U.S. enacted the Creating Helpful Incentives to Produce Semiconductors Act of 2022 (“CHIPS Act”) which provides new funding to boost domestic research and manufacturing of semiconductors in the United States. We considered the provisions in the CHIPS Act and determined they have no or minimal impact to our overall income taxes.
Our unrecognized tax benefits were $4.9 million and $4.4 million in 2022 and 2021, respectively. We record interest and penalty charges, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of December 31, 2022 and 2021 were not significant.
We record interest and penalty charges, if any, related to uncertain tax positions as a component of tax expense and unrecognized tax benefits. The amounts accrued for interest and penalty charges as of December 31, 2023 and 2022 were not significant. If recognized, $2.6 million would affect the effective income tax rate.
The year-over-year increase was primarily due to the following: • $91.8 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms, other commercial aerospace platforms, and regional and business aircraft platforms; partially offset by • $33.1 million lower revenues in our military and space end-use markets due to lower build rates on military rotary-wing aircraft platforms and military fixed-wing aircraft platforms.
The year-over-year increase was primarily due to the following: • $61.8 million higher revenues in our commercial aerospace end-use markets due to higher build rates on large aircraft platforms and other commercial aerospace platforms; partially offset by 28 Table of Contents • $16.9 million lower revenues in our military and space end-use markets due to lower build rates on various missile platforms and military fixed-wing aircraft platforms, partially offset by higher build rates on military rotary-wing aircraft platforms, a portion of which was related to BLR, and other military and space platforms.
Net Income and Earnings per Diluted Share Net income and earnings per diluted share for 2022 were $28.8 million, or $2.33 per diluted share, compared to net income and earnings per diluted share for 2021 of $135.5 million, or $11.06 per diluted share.
Net Income and Earnings per Diluted Share Net income and earnings per diluted share for 2023 were $15.9 million, or $1.14 per diluted share, compared to net income and earnings per diluted share for 2022 of $28.8 million, or $2.33 per diluted share.
See Note 6 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information on our sale-leaseback transaction. 27 Table of Contents Income Tax Expense We recorded an income tax expense of $4.5 million (an effective tax rate of 13.6%) in 2022, compared to $34.9 million (an effective tax rate of 20.5%) in 2021.
Se e Note 2 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. Income Tax Expense We recorded an income tax expense of $0.5 million (an effective tax rate of 2.8%) in 2023, compared to $4.5 million (an effective tax rate of 13.6%) in 2022.
Interest Expense Interest expense increased in 2022 compared to 2021 primarily due to higher interest rates, partially offset by a lower outstanding debt balance. See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information on our long-term debt.
See Note 3 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information. Interest Expense Interest expense increased in 2023 compared to 2022 primarily due to higher interest rates and a higher outstanding debt balance, mainly due to the acquisition of BLR on April 25, 2023.
Structural Systems Structural Systems’ net revenues in 2022 compared to 2021 increased $39.1 million primarily due to the following: • $58.6 million higher revenues in commercial aerospace end-use markets due to higher build rates on large aircraft platforms, other commercial aerospace platforms, and regional and business aircraft platforms; partially offset by • $19.4 million lower revenues in military and space end-use markets due to lower build rates on various missile platforms.
Structural Systems Structural Systems’ net revenues in 2023 compared to 2022 increased $55.0 million primarily due to the following: • $51.1 million higher revenues in commercial aerospace end-use markets due to higher build rates on large aircraft platforms, other commercial aerospace platforms, regional and business aircraft platforms, and commercial rotary-wing aircraft platforms; and • $3.8 million higher revenues in military and space end-use markets due to higher build rates on military rotary-wing platforms, a portion of which was related to BLR, and other military and space platforms, partially offset by lower build rates on various missile platforms and military fixed-wing aircraft platforms.
We manufacture most products to customer specifications and the product cannot be easily modified to satisfy another customer’s order. As such, these products are deemed to have no alternative use once the manufacturing process begins. In the event the customer invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit.
As such, these products are deemed to have no alternative use once the manufacturing process begins. In the event the customer invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. Contract costs typically include labor, materials, overhead, and when applicable, subcontractor costs.
Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report on Form 10-K filed with the SEC on February 23, 2022, which is incorporated by reference herein.
Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2022 Form 10-K filed with the SEC on February 16, 2023.
As a result of these factors, trends in our overall level of backlog may not be indicative of trends in our future net revenues. 32 Table of Contents The increase in backlog was primarily in the commercial aerospace end-use markets; partially offset by a decrease in the military and space end-use markets. $655.0 million of total backlog is expected to be delivered over the next 12 months.
The increase in backlog was primarily in the military and space end-use markets; partially offset by a decrease in the commercial aerospace end-use markets and industrial end-use markets. $656.0 million of total backlog is expected to be delivered over the next 12 months.
Accounting for Stock-Based Compensation We measure and recognize compensation expense for share-based payment transactions to our employees and non-employees at their estimated fair value. The expense is measured at the grant date, based on the calculated fair value of the share-based award, and is recognized over the requisite service period (generally the vesting period of the equity award).
The expense is measured at the grant date, based on the calculated fair value of the share-based award, and is recognized over the requisite service period (generally the vesting period of the equity award).
(4) 2021 included $1.3 million of success bonus related to the completion of the sale-leaseback transaction that was recorded as part of cost of sales. 25 Table of Contents RESULTS OF OPERATIONS 2022 Compared to 2021 The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share: (Dollars in thousands, except per share data) Years Ended December 31, 2022 % of Net Revenues 2021 % of Net Revenues Net Revenues $ 712,537 100.0 % $ 645,413 100.0 % Cost of Sales 568,240 79.7 % 502,953 77.9 % Gross Profit 144,297 20.3 % 142,460 22.1 % Selling, General and Administrative Expenses 98,351 13.8 % 93,579 14.5 % Restructuring Charges 6,158 0.9 % — — % Operating Income 39,788 5.6 % 48,881 7.6 % Interest Expense (11,571) (1.6) % (11,187) (1.7) % Loss on Extinguishment of Debt (295) — % — — % Gain on Sale-Leaseback — — % 132,522 20.5 % Other Income, Net 5,400 0.7 % 268 — % Income Before Taxes 33,322 4.7 % 170,484 26.4 % Income Tax Expense 4,533 nm 34,948 nm Net Income $ 28,789 4.0 % $ 135,536 21.0 % Effective Tax Rate 13.6 % nm 20.5 % nm Diluted Earnings Per Share $ 2.33 nm $ 11.06 nm nm = not meaningful Net Revenues by End-Use Market and Operating Segment Net revenues by end-use market and operating segment during 2022 and 2021, respectively, were as follows: (Dollars in thousands) Years Ended December 31, % of Net Revenues Change 2022 2021 2022 2021 Consolidated Ducommun Military and space $ (33,147) $ 420,701 $ 453,848 59.1 % 70.3 % Commercial aerospace 91,778 247,509 155,731 34.7 % 24.1 % Industrial 8,493 44,327 35,834 6.2 % 5.6 % Total $ 67,124 $ 712,537 $ 645,413 100.0 % 100.0 % Electronic Systems Military and space $ (13,730) $ 314,181 $ 327,911 71.3 % 79.5 % Commercial aerospace 33,227 82,130 48,903 18.6 % 11.8 % Industrial 8,493 44,327 35,834 10.1 % 8.7 % Total $ 27,990 $ 440,638 $ 412,648 100.0 % 100.0 % Structural Systems Military and space $ (19,417) $ 106,520 $ 125,937 39.2 % 54.1 % Commercial aerospace 58,551 165,379 106,828 60.8 % 45.9 % Total $ 39,134 $ 271,899 $ 232,765 100.0 % 100.0 % 26 Table of Contents Net revenues for 2022 were $712.5 million compared to $645.4 million for 2021.
(5) 2021 included $1.3 million of success bonus related to the completion of the sale-leaseback transaction that was recorded as part of cost of sales. 27 Table of Contents RESULTS OF OPERATIONS 2023 Compared to 2022 The following table sets forth net revenues, selected financial data, the effective tax rate and diluted earnings per share: (Dollars in thousands, except per share data) Years Ended December 31, 2023 % of Net Revenues 2022 % of Net Revenues Net Revenues $ 756,992 100.0 % $ 712,537 100.0 % Cost of Sales 593,805 78.4 % 568,240 79.7 % Gross Profit 163,187 21.6 % 144,297 20.3 % Selling, General and Administrative Expenses 119,728 15.8 % 98,351 13.8 % Restructuring Charges 14,542 1.9 % 6,158 0.9 % Operating Income 28,917 3.9 % 39,788 5.6 % Interest Expense (20,773) (2.7) % (11,571) (1.6) % Loss on Extinguishment of Debt — — % (295) — % Other Income, Net 8,235 1.1 % 5,400 0.8 % Income Before Taxes 16,379 2.3 % 33,322 4.8 % Income Tax Expense 451 nm 4,533 nm Net Income $ 15,928 2.1 % $ 28,789 4.0 % Effective Tax Rate 2.8 % nm 13.6 % nm Diluted Earnings Per Share $ 1.14 nm $ 2.33 nm nm = not meaningful Net Revenues by End-Use Market and Operating Segment Net revenues by end-use market and operating segment during 2023 and 2022, respectively, were as follows: (Dollars in thousands) Years Ended December 31, % of Net Revenues Change 2023 2022 2023 2022 Consolidated Ducommun Military and space $ (16,882) $ 403,819 $ 420,701 53.3 % 59.1 % Commercial aerospace 61,782 309,291 247,509 40.9 % 34.7 % Industrial (445) 43,882 44,327 5.8 % 6.2 % Total $ 44,455 $ 756,992 $ 712,537 100.0 % 100.0 % Electronic Systems Military and space $ (20,696) $ 293,485 $ 314,181 68.2 % 71.3 % Commercial aerospace 10,639 92,769 82,130 21.6 % 18.6 % Industrial (445) 43,882 44,327 10.2 % 10.1 % Total $ (10,502) $ 430,136 $ 440,638 100.0 % 100.0 % Structural Systems Military and space $ 3,814 $ 110,334 $ 106,520 33.8 % 39.2 % Commercial aerospace 51,143 216,522 165,379 66.2 % 60.8 % Total $ 54,957 $ 326,856 $ 271,899 100.0 % 100.0 % Net revenues for 2023 were $757.0 million compared to $712.5 million for 2022.
Cash generated from operations and bank borrowing capacity is expected to provide sufficient liquidity to meet our obligations during the next twelve months from the date of issuance of these financial statements.
Cash generated from operations and bank borrowing capacity is expected to provide sufficient liquidity to meet our obligations during the next twelve months from the date of issuance of these financial statements. 34 Table of Contents Cash Flow Summary 2023 Compared to 2022 Net cash provided by operating activities during 2023 was $31.1 million, compared to $32.7 million during 2022.
As of December 31, 2022, 33 Table of Contents we were in compliance with all covenants required under the 2022 Credit Facilities. See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information. During 2022, we paid down our existing debt an aggregate total of $34.2 million.
However, the 2022 Revolving Credit Facility does not require any principal installment payments. As of December 31, 2023, we were in compliance with all covenants required under the 2022 Credit Facilities. See Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
The higher cash used in investing activities during 2022 was primarily due to the lack of proceeds from sale-leaseback, partially offset by the lack of payments for acquisition. Net cash used in financing activities during 2022 was $43.5 million compared to $37.3 million during 2021.
Net cash used in investing activities during 2023 was $133.5 million compared to $19.2 million during 2022. The higher net cash used in investing activities during 2023 was primarily due to payments for the acquisition of BLR. Net cash provided by financing activities during 2023 was $99.0 million compared to net cash used of $43.5 million during 2022.
Corporate General and Administrative (“CG&A”) Expenses CG&A expenses in 2022 compared to 2021 decreased $1.7 million primarily due to lower professional services fees of $1.5 million and lower compensation and benefits costs of $0.8 million.
Corporate General and Administrative (“CG&A”) Expenses CG&A expenses in 2023 compared to 2022 increased $9.3 million primarily due to higher stock-based compensation expense of $3.9 million, higher compensation and benefits costs of $3.4 million, and higher professional services fees of $1.5 million, mainly due to the BLR acquisition.
The lower pre-tax income in 2022 caused the research and development tax credits to have a higher income tax benefit impact on the effective tax rate. The higher income tax benefit on the effective tax rate was partially offset by higher income tax expense related to non-deductible book compensation expenses.
The decrease in the effective tax rate for 2023 compared to 2022 was primarily due to lower pre-tax income for 2023 compared to 2022, which caused the research and development tax credits to have a higher income tax benefit impact on the effective tax rate.
We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years. In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provided tax relief to individuals and businesses affected by the coronavirus pandemic.
We 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.
See Note 1 and Note 9 to our consolidated financial statements included in Part IV, Item 15(a) of this Annual Report on Form 10-K for further information. In December 2021, we acquired MagSeal for an original purchase price of $69.5 million, net of cash acquired, all payable in cash.
See Note 2, Note 9, and Note 10 to our consolidated financial statements included in Part IV, Item 15(a) of this Form 10-K for further information.
The provision for estimated losses on contracts is included as part of contract liabilities on the consolidated balance sheets. 36 Table of Contents 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 cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of sales using the over time revenue recognition model.
The higher cash provided by operating activities during 2022 was primarily due to higher accounts payable and accrued liabilities, partially offset by lower net income, higher accounts receivable, higher inventories, and higher contract assets. Net cash used in investing activities during 2022 was $19.2 million compared to net cash provided by investing activities of $57.8 million during 2021.
The lower net cash provided by operating activities during 2023 was primarily due to lower accounts payable mainly due to timing of payments, higher inventories mainly due to longer lead times and to support revenue growth, and lower net income, partially offset by lower contract assets and higher contract liabilities.
The value of other intangibles acquired through business combinations has been estimated using present value techniques which involve estimates of future cash flows. We evaluate other intangible assets for recoverability considering undiscounted cash flows, when significant changes in conditions occur, and recognize impairment losses, if any, based upon the estimated fair value of the assets.
We evaluate other intangible assets for recoverability considering undiscounted cash flows when significant changes in conditions occur, and recognize impairment losses, if any, based upon the estimated fair value of the assets. Accounting for Stock-Based Compensation We measure and recognize compensation expense for share-based payment transactions to our employees and non-employees at their estimated fair value.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeThe 2022 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) Term SOFR plus an applicable margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is less than zero percent, it will be 38 Table of Contents deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in each case based upon the consolidated total net adjusted leverage ratio.
Biggest changeThe 2022 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) Term SOFR plus an applicable margin ranging from 1.375% to 2.375% per year or (ii) Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] Term SOFR plus 1.00%, and if the Base Rate is less than zero percent, it will be deemed zero percent) plus an applicable margin ranging from 0.375% to 1.375% per year, in each case based upon the consolidated total net adjusted leverage ratio.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our main market risk exposure relates to changes in interest rates on our outstanding long-term debt. At December 31, 2022, we had borrowings of $248.4 million under our 2022 Credit Facilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our main market risk exposure relates to changes in interest rates on our outstanding long-term debt. At December 31, 2023, we had borrowings of $266.0 million under our 2022 Credit Facilities.

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