NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Description of Business
We are a leading global provider of innovative, value-added proprietary products and manufacturing solutions for high-performance products and high-cost-of failure applications used primarily in the aerospace and defense (“A&D”), industrial, medical, and other industries (collectively, “Industrial”). Our operations are organized into two primary businesses: Electronic Systems segment (“Electronic Systems”) and Structural Systems segment (“Structural Systems”), each of which is a reportable operating segment. Electronic Systems designs, engineers and manufactures high-reliability electronic and electromechanical products used in worldwide technology-driven markets including A&D and Industrial end-use markets. Electronic Systems’ product offerings primarily range from prototype development to complex assemblies. Structural Systems designs, engineers and manufactures large, complex contoured aerostructure components and assemblies and supplies composite and metal bonded structures and assemblies. Structural Systems’ products are primarily used on commercial aircraft, military fixed-wing aircraft, and military and commercial rotary-wing aircraft. All reportable operating segments follow the same accounting principles.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), and include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun,” the “Company,” “we,” “us” or “our”), after eliminating intercompany balances and transactions.
Our fiscal quarters typically end on the Saturday closest to the end of March, June and September for the first three fiscal quarters of each year, and on December 31 for our fourth fiscal quarter. As a result of using fiscal quarters for the first three quarters combined with leap years, our first and fourth fiscal quarters can range between 12 1/2 weeks to 13 1/2 weeks while the second and third fiscal quarters remain at a constant 13 weeks per fiscal quarter.
Changes in Accounting Policies
We adopted Accounting Standards Codification (“ASC”) 842, “Leases” (“ASC 842”), on January 1, 2019.
We applied ASC 842 using the additional transition method and therefore, recognized the cumulative effect of initially applying ASC 842 as an adjustment to the opening consolidated balance sheet at January 1, 2019. Therefore, the comparative information has not been adjusted and continues to be reported under the previous lease accounting standard, ASC 840, “Leases” (“ASC 840”).
Use of Estimates
Certain amounts and disclosures included in the consolidated financial statements required management to make estimates and judgments that affect the amount of assets, liabilities (including forward loss reserves), revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current year’s presentation.
Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | | |
| | (Dollars in thousands) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Interest paid | | $ | 10,135 | | | $ | 11,859 | | | $ | 16,474 | |
Taxes paid | | $ | 32,934 | | | $ | 3,810 | | | $ | 5,699 | |
Non-cash activities: | | | | | | |
Purchases of property and equipment not paid | | $ | 1,333 | | | $ | 2,477 | | | $ | 1,380 | |
Fair Value
Assets and liabilities that are measured, recorded or disclosed at fair value on a recurring basis are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine the fair value. Level 1, the highest level, refers to the values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant observable inputs. Level 3, the lowest level, includes fair values estimated using significant unobservable inputs.
We have money market funds and they are included as cash and cash equivalents. We also have forward interest rate swap agreements and had interest rate cap hedge agreements and the fair value of the forward interest rate swap agreements and interest rate cap hedge agreements were determined using pricing models that use observable market inputs as of the balance sheet date, a Level 2 measurement. The interest rate cap hedges matured during the second quarter of 2020 and as such, the premium was zero as of December 31, 2021.
There were no transfers between Level 1, Level 2, or Level 3 financial instruments in either 2021 or 2020.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. These assets are valued at cost, which approximates fair value, which we classify as Level 1. See Fair Value above.
Derivative Instruments
We recognize derivative instruments on our consolidated balance sheets at their fair value. On the date that we enter into a derivative contract, we designate the derivative instrument as a fair value hedge, a cash flow hedge, or a derivative instrument that will not be accounted for using hedge accounting methods. On November 29, 2021, we entered into forward interest rate swap agreements, all with an effective date of January 1, 2024 (“Forward Interest Rate Swaps”) to manage our exposure to interest rate movements on a portion of our debt. As such, we have made the following cash flow hedging relationship elections to qualify for hedge accounting treatment related to the Forward Interest Rate Swaps as our current term loans mature before the expiration of the Forward Interest Rate Swaps: 1) Probability of forecasted transactions, and 2) Assessment of effectiveness. See Note 8. As of December 31, 2021, all of our derivative instruments were designated as cash flow hedges.
We record changes in the fair value of a derivative instrument that is highly effective and that is designated and qualifies as a cash flow hedge in other comprehensive income (loss), net of tax until our earnings are affected by the variability of cash flows of the underlying hedged item. We report changes in the fair values of derivative instruments that are not designated or do not qualify for hedge accounting in current period earnings. We classify cash flows from derivative instruments in the consolidated statements of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument. Since the Forward Interest Rate Swaps are not effective until January 1, 2024, in both 2021 and 2020, we only recorded the changes in the fair value of the derivative instruments that were highly effective and that were designated and qualified as cash flow hedges in other long term liabilities and other comprehensive income (loss) of $1.7 million and zero, respectively.
When we determine that a derivative instrument is not highly effective as a hedge, we discontinue hedge accounting prospectively. In all situations in which we discontinue hedge accounting and the derivative instrument remains outstanding, we will carry the derivative instrument at its fair value on our consolidated balance sheets and recognize subsequent changes in its fair value in our current period earnings.
Allowance for Credit Losses
We maintain an allowance for credit losses for expected losses from the inability of customers to make required payments. The allowance for credit losses is evaluated periodically for expected credit losses based on the financial condition of customers and their payment history, the aging of accounts receivable, historical write-off experience and other assumptions, such as current assessment of economic conditions.
Inventories
Inventories are stated at the lower of cost or net realizable value with cost being determined using a moving average cost basis for raw materials and actual cost for work-in-process and finished goods. The majority of our inventory is charged to cost of sales as raw materials are placed into production and the related revenue is recognized. Inventoried costs include raw materials, outside processing, direct labor and allocated overhead, adjusted for any abnormal amounts of idle performance center expense, freight, handling costs, and wasted materials (spoilage) incurred. We assess the inventory carrying value and reduce it, if necessary, to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. The majority of our revenues are recognized over time, however, for revenue
contracts where revenue is recognized using the point in time method, inventory is not reduced until it is shipped or transfer of control to the customer has occurred. Our ending inventory consists of raw materials, work-in-process, and finished goods.
Property and Equipment and Depreciation
Property and equipment, including assets recorded under operating and finance leases, are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, or the lease term if shorter for leasehold improvements. Repairs and maintenance are charged to expense as incurred. We evaluate long-lived assets for recoverability considering undiscounted cash flows, when significant changes in conditions occur, and recognize impairment losses if any, based upon the fair value of the assets.
Business Combinations
When a business is acquired, we allocate the purchase price by recording the assets acquired and liabilities assumed at their estimated fair values as of the acquisition date, with the excess cost recorded as goodwill. A preliminary fair value is determined once a business is acquired, with the final determination of fair value be completed no later than one year from the date of acquisition.
To determine the estimated fair value of assets acquired and liabilities assumed requires significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenues, costs and cash flows, discount rates, and selection of comparable companies. We engage the assistance of valuation specialists in concluding on fair value measurements in determining the fair value of assets acquired and liabilities assumed in business combinations.
The fair value of the intangible assets is estimated using several valuation methodologies, including the income based or market based approaches, which represent Level 3 fair value measurements. Inputs to fair value analyses and other aspects of the allocation of the purchase price require judgment. The value for customer relationships is typically estimated based on a multi-period excess earnings approach. The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate, and (iv) the discount rate. The useful lives are estimated based on the underlying agreements or the future economic benefit expected to be received from the assets.
Acquisition related costs are not included as components of consideration transferred but instead, expensed as incurred and are included in selling, general and administrative expenses in our consolidated statements of income. See Note 2.
Goodwill
Goodwill is evaluated for impairment on an annual basis on the first day of the fourth fiscal quarter. If certain factors occur, including significant under performance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently, we may be required to perform an interim impairment test prior to the fourth quarter.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The qualitative approach for potential impairment analysis is performed to determine whether it is more likely than not that the fair value of a reporting unit was less than its carrying amount.
The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its carrying value, including goodwill. Fair value is estimated by management using a combination of the income approach (which is based on a discounted cash flow model) and the market approach. Management’s cash flow projections include significant judgments and assumptions, including the amount and timing of expected cash flows, long-term growth rates, and discount rates. The cash flows used in the discounted cash flow model are based on our best estimate of future revenues, gross margins, and adjusted after-tax earnings. If any of these assumptions are incorrect, it will impact the estimated fair value of a reporting unit. The market approach also requires significant management judgment in selecting comparable business acquisitions and the transaction values observed and its related control premiums.
In the fourth quarter of 2021, the carrying amount of goodwill at the date of the most recent annual impairment evaluation for Electronic Systems and Structural Systems was $117.4 million and $53.4 million, respectively.
We acquired 100% of the equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”) on December 16, 2021, for a purchase price of $69.5 million, net of cash acquired. We recorded preliminary goodwill of $32.9 million in our Structural Systems segment, which is also our reporting unit. See Note 2.
As of the date of our 2021 annual evaluation for goodwill impairment for the Structural Systems segment, which is also our reporting unit, we performed a step one goodwill impairment analysis as of the first day of the fourth quarter of 2021. The fair value of our Structural Systems segment exceeded its carrying value by 72% and thus, was not deemed impaired.
As of the date of our 2021 annual evaluation for goodwill impairment for the Electronic Systems segment, which is also our reporting unit, we performed a qualitative assessment as of the first day of the fourth quarter of 2021, which considered each of the following: 1) margin of passing most recent step one analysis, 2) earnings before interest, taxes, depreciation, and amortization, 3) long-term growth rate, 4) analyzing material adverse factors/changes between valuation dates, 5) general macroeconomic factors, and 6) industry and market conditions. Based upon our qualitative assessment, we concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount and thus, goodwill was not deemed impaired.
Other Intangible Assets
We amortize acquired other intangible assets with finite lives over the estimated economic lives of the assets, ranging from 2 to 19 years, generally using the straight-line method. The value of other intangibles acquired through business combinations has been estimated using present value techniques which involve estimates of future cash flows. We evaluate other intangible assets for recoverability considering undiscounted cash flows when significant changes in conditions occur, and recognize impairment losses, if any, based upon the estimated fair value of the assets.
Restructuring Charges
In May 2020, management approved and commenced a restructuring plan in the Structural Systems segment mainly to reduce headcount in response to the impact from the COVID-19 pandemic on commercial aerospace demand outlook. We recorded an aggregate total of $2.4 million for severance and benefit costs which were charged to restructuring charges during the year ended December 31, 2020.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, as reflected on the consolidated balance sheets under the equity section, was comprised of cumulative pension and retirement liability adjustments, net of tax, and change in net unrealized gains and losses on cash flow hedges, net of tax.
Revenue Recognition
Our customers typically engage us to manufacture products based on designs and specifications provided by the end-use customer. This requires the building of tooling and manufacturing first article inspection products (prototypes) before volume manufacturing. Contracts with our customers generally include a termination for convenience clause.
We have a significant number of contracts that are started and completed within the same year, as well as contracts derived from long-term agreements and programs that can span several years. We recognize revenue under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”), which utilizes a five-step model.
The definition of a contract for us is typically defined as a customer purchase order as this is when we achieve an enforceable right to payment. The majority of our contracts are firm fixed-price contracts. The deliverables within a customer purchase order are analyzed to determine the number of performance obligations. In addition, at times, in order to achieve economies of scale and based on our customer’s forecasted demand, we may build in advance of receiving a purchase order from our customer. When that occurs, we would not recognize revenue until we have received the customer purchase order.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account under ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, control is transferred and the performance obligation is satisfied. The majority of our contracts have a single performance obligation as the promise to transfer the individual goods or services are highly interrelated or met the series guidance. For contracts with multiple performance obligations, we allocate the contract transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. The primary method used to estimate the standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service.
We manufacture most products to customer specifications and the product cannot be easily modified for another customer. As such, these products are deemed to have no alternative use once the manufacturing process begins. In the event the customer invokes a termination for convenience clause, we would be entitled to costs incurred to date plus a reasonable profit. Contract costs typically include labor, materials, overhead, and when applicable, subcontractor costs. For most of our products, we are building assets with no alternative use and have enforceable right to payment, and thus, we recognize revenue using the over time method.
The majority of our performance obligations are satisfied over time as work progresses. Typically, revenue is recognized over time using an input measure (i.e., costs incurred to date relative to total estimated costs at completion, also known as cost-to-cost plus reasonable profit) to measure progress. Our typical revenue contract is a firm fixed price contract, and the cost of raw materials could make up a significant amount of the total costs incurred. As such, we believe using the total costs incurred input method would be the most appropriate method. While the cost of raw materials could make up a significant amount of the total costs incurred, there is a direct relationship between our inputs and the transfer of control of goods or services to the customer.
Contract estimates are based on various assumptions to project the outcome of future events that can span multiple months or years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; and the performance of subcontractors.
As a significant change in one or more of these estimates could affect the progress completed (and related profitability) on our contracts, we review and update our contract-related estimates on a regular basis. We recognize such adjustments under the cumulative catch-up method. Under this method, the impact of the adjustment is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either operating costs and expenses or revenue.
Net cumulative catch-up adjustments on profit recorded were not material for both years ended December 31, 2021 and December 31, 2020.
Payments under long-term contracts may be received before or after revenue is recognized. When revenue is recognized before we bill our customer, a contract asset is created for the work performed but not yet billed. Similarly, when we receive payment before we ship our products to our customer and have met the shipping terms, a contract liability is created for the advance or progress payment. When a contract liability and a contract asset exist on the same contract, we report it on a net basis.
We record provisions for the total anticipated losses on contracts, considering total estimated costs to complete the contract compared to total anticipated revenues, in the period in which such losses are identified. The provisions for estimated losses on contracts require us to make certain estimates and assumptions, including those with respect to the future revenue under a contract and the future cost to complete the contract. Our estimate of the future cost to complete a contract may include assumptions as to changes in manufacturing efficiency, operating and material costs, and our ability to resolve claims and assertions with our customers. If any of these or other assumptions and estimates do not materialize in the future, we may be required to adjust the provisions for estimated losses on contracts. The provision for estimated losses on contracts is included as part of contract liabilities on the consolidated balance sheets. As of December 31, 2021 and 2020, provision for estimated losses on contracts were $2.8 million and $2.3 million, respectively.
Production cost of contracts includes non-recurring production costs, such as design and engineering costs, and tooling and other special-purpose machinery necessary to build parts as specified in a contract. Production costs of contracts are recorded to cost of sales using the over time revenue recognition model. We review the value of the production cost of contracts on a quarterly basis to ensure when added to the estimated cost to complete, the value is not greater than the estimated realizable value of the related contracts. As of December 31, 2021 and 2020, production costs of contracts were $8.0 million and $7.0 million, respectively.
Contract Assets and Contract Liabilities
Contract assets consist of our right to payment for work performed but not yet billed. Contract assets are transferred to accounts receivable when we bill our customers. We bill our customers when we ship the products and meet the shipping terms within the revenue contract. Contract liabilities consist of advance or progress payments received from our customers prior to the time transfer of control occurs plus the estimated losses on contracts. When a contract liability and a contract asset exist on the same contract, we report it on a net basis.
Contract assets and contract liabilities from revenue contracts with customers are as follows:
| | | | | | | | | | | | | | |
| | (Dollars in thousands) |
| | December 31, 2021 | | December 31, 2020 |
Contract assets | | $ | 176,405 | | | $ | 154,028 | |
Contract liabilities | | $ | 42,077 | | | $ | 28,264 | |
The increase in our contract assets as of December 31, 2021 compared to December 31, 2020 was primarily due to a net increase of products in work in process.
The increase in our contract liabilities as of December 31, 2021 compared to December 31, 2020 was primarily due to a net increase of advance or progress payments received from our customers in the current year. We recognized $20.9 million of the contract liabilities as of December 31, 2020 as revenues during the year ended December 31, 2021.
Performance obligations are defined as customer placed purchase orders (“POs”) with firm fixed price and firm delivery dates. Our remaining performance obligations as of December 31, 2021 totaled $814.1 million. We anticipate recognizing an estimated 70% of our remaining performance obligations as revenue during the next 12 months with the remaining performance obligations being recognized in 2023 and beyond.
Revenue by Category
In addition to the revenue categories disclosed above, the following table reflects our revenue disaggregated by major end-use market:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (Dollars in thousands) Years Ended December 31, | | % of Net Revenues |
| | Change | | 2021 | | 2020 | | 2021 | | 2020 |
Consolidated Ducommun | | | | | | | | | | |
Military and space | | $ | 30,989 | | | $ | 453,848 | | | $ | 422,859 | | | 70.3 | % | | 67.2 | % |
Commercial aerospace | | (12,411) | | | 155,731 | | | 168,142 | | | 24.1 | % | | 26.8 | % |
Industrial | | (2,106) | | | 35,834 | | | 37,940 | | | 5.6 | % | | 6.0 | % |
Total | | $ | 16,472 | | | $ | 645,413 | | | $ | 628,941 | | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
Electronic Systems | | | | | | | | | | |
Military and space | | $ | 19,235 | | | $ | 327,911 | | | $ | 308,676 | | | 79.5 | % | | 78.6 | % |
Commercial aerospace | | 2,886 | | | 48,903 | | | 46,017 | | | 11.8 | % | | 11.7 | % |
Industrial | | (2,106) | | | 35,834 | | | 37,940 | | | 8.7 | % | | 9.7 | % |
Total | | $ | 20,015 | | | $ | 412,648 | | | $ | 392,633 | | | 100.0 | % | | 100.0 | % |
| | | | | | | | | | |
Structural Systems | | | | | | | | | | |
Military and space | | $ | 11,754 | | | $ | 125,937 | | | $ | 114,183 | | | 54.1 | % | | 48.3 | % |
Commercial aerospace | | (15,297) | | | 106,828 | | | 122,125 | | | 45.9 | % | | 51.7 | % |
Total | | $ | (3,543) | | | $ | 232,765 | | | $ | 236,308 | | | 100.0 | % | | 100.0 | % |
Income Taxes
Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities. Deferred tax assets and liabilities are recognized, using enacted tax rates, for the expected future tax consequences of temporary differences between the book and tax bases of recorded assets and liabilities, operating losses, and tax credit carryforwards. Deferred tax assets are evaluated quarterly and are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Tax positions taken or expected to be taken in a tax return are recognized when it is more-likely-than-not, based on technical merits, to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement, including resolution of related appeals and/or litigation process, if any.
Litigation and Commitments
In the normal course of business, we are defendants in certain litigation, claims and inquiries, including matters relating to environmental laws. In addition, we make various commitments and incur contingent liabilities. Management’s estimates regarding contingent liabilities could differ from actual results.
Environmental Liabilities
Environmental liabilities are recorded when environmental assessments and/or remedial efforts are probable and costs can be reasonably estimated. Generally, the timing of these accruals coincides with the completion of a feasibility study or our commitment to a formal plan of action. Further, we review and update our environmental accruals as circumstances change and/or additional information is obtained that reasonably could be expected to have a meaningful effect on the outcome of a matter or the estimated cost thereof.
Accounting for Stock-Based Compensation
We measure and recognize compensation expense for share-based payment transactions to our employees and non-employees at their estimated fair value. The expense is measured at the grant date, based on the calculated fair value of the share-based award, and is recognized over the requisite service period (generally the vesting period of the equity award). The fair value of stock options are determined using the Black-Scholes-Merton (“Black-Scholes”) valuation model, which requires assumptions and judgments regarding stock price volatility, risk-free interest rates, and expected options terms. Management’s estimates could differ from actual results. The fair value of unvested stock awards is determined based on the closing price of the underlying common stock on the date of grant except for market condition awards for which the fair value was based on a Monte Carlo simulation model.
Government Grant
On November 15, 2021, we were awarded an Aviation Manufacturing Jobs Protection Program grant from the U.S. Department of Transportation of $4.0 million. As part of the award, we have to meet certain requirements over a six month performance period from November 15, 2021 to May 14, 2022. As of December 31, 2021, we have received $2.0 million with the remaining $2.0 million included as other current assets and expected to be received during 2022. We recorded $0.9 million and $0.1 million as a reduction of cost of sales and selling, general and administrative expenses, respectively, in 2021 with the remaining $3.0 million included as accrued and other liabilities.
Charitable Contributions
We contributed $0.3 million to the Ducommun Foundation during 2021.
Earnings Per Share
Basic earnings per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding in each period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding, plus potentially dilutive shares that could be issued if exercised or converted into common stock in each period.
The net income and weighted-average common shares outstanding used to compute earnings per share were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands, except per share data) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net income | | $ | 135,536 | | | $ | 29,174 | | | $ | 32,461 | |
Weighted-average number of common shares outstanding | | | | | | |
Basic weighted-average common shares outstanding | | 11,879 | | | 11,676 | | | 11,518 | |
Dilutive potential common shares | | 372 | | | 256 | | | 274 | |
Diluted weighted-average common shares outstanding | | 12,251 | | | 11,932 | | | 11,792 | |
Earnings per share | | | | | | |
Basic | | $ | 11.41 | | | $ | 2.50 | | | $ | 2.82 | |
Diluted | | $ | 11.06 | | | $ | 2.45 | | | $ | 2.75 | |
Potentially dilutive stock awards to purchase common stock, as shown below, were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive. However, these shares may be potentially dilutive common shares in the future.
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Stock options and stock units | | 3 | | | 254 | | | 127 | |
Recent Accounting Pronouncements
New Accounting Guidance Adopted in 2021
In November 2021, the FASB issued ASU 2021-10, “Government Assistance (Topic 832) - Disclosures by Business Entities about Government Assistance” (“ASU 2021-10”), which increases the transparency of government assistance including (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The new guidance is effective for fiscal years beginning after December 15, 2021, which will be our interim period
beginning January 1, 2022. Early adoption is permitted and thus, we have chosen to early adopt ASU 2021-10 beginning in 2021 and the adoption of this standard did not have a material impact on our consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, “Codification Improvements” (“ASU 2020-10”), which affect a wide variety of Topics in the Accounting Standards Codification (“Codification”). ASU 2020-10, among other things, contains amendments that improve the consistency of the Codification by including all disclosure guidance in the appropriate Disclosure Section (Section 50). Many of the amendments arose as the FASB provided an option to give certain information either on the face of the financial statements or in the notes to financial statements and that option only was included in the Other Presentation Matters Section (Section 45) of the Codification. Those amendments are not expected to change current practice. The new guidance is effective for fiscal years beginning after December 15, 2020, which was our interim period beginning January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which removes certain exceptions and provides guidance on various areas of tax accounting. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, which was our interim period beginning January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”), which will remove disclosures that no longer are considered cost-beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, which was our interim period beginning January 1, 2021. The adoption of this standard did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Standards
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”), which improves the accounting for acquired revenue contracts with customers in a business combination. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2023. Early adoption is permitted. We are evaluating the impact of this standard.
In August 2020, the FASB issued ASU 2020-06, “Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies reporting or provides clarification on various topics, including clarification that an entity should use the weighted-average share count from each quarter when calculating the year-to-date weighted-average share count. The new guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, which will be our interim period beginning January 1, 2022. Early adoption is permitted. We are evaluating the impact of this standard.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional guidance for a limited time for contracts that reference London Interbank Offered Rate (“LIBOR”), to ease the potential burden in accounting for, or recognizing the effects, of reference rate reform on financial reporting as a result of the cessation of LIBOR. The new guidance is effective at any time after March 12, 2020 but no later than December 31, 2022. We have made the following elections related to our current cash flow hedging relationships as our current term loans mature before the expiration of the Forward Interest Rate Swaps: 1) Probability of forecasted transactions, and 2) Assessment of effectiveness. See Note 8.
Note 2. Business Combinations
On December 16, 2021, we acquired 100.0% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”), a privately-held leading provider of high-impact, military-proven magnetic seals for critical systems in aerospace and defense applications, offering sealing solutions that are engineered to perform in high-speed, high-vibration, and other challenging environments. MagSeal is located in Warren, Rhode Island. The acquisition of MagSeal will continue to advance our strategy to diversify and offer more customized, value-driven engineered products with aftermarket opportunities.
The purchase price for MagSeal was $69.5 million, net of cash acquired, all payable in cash. We paid a gross aggregate of $71.3 million in cash upon the closing of the transaction. We allocated the preliminary gross purchase price of $71.3 million to the assets acquired and liabilities assumed at their estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets was recorded as goodwill.
The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities assumed at the date of acquisition (in thousands):
| | | | | | | | |
| | Estimated Fair Value |
Cash | | $ | 1,821 | |
Accounts receivable | | 2,093 | |
Inventories | | 4,586 | |
Other current assets | | 98 | |
Property and equipment | | 482 | |
Operating lease right-of-use assets | | 1,533 | |
Intangible assets | | 30,100 | |
Goodwill | | 32,864 | |
| | |
Total assets acquired | | 73,577 | |
Current liabilities | | (869) | |
| | |
Other non-current liabilities | | (1,408) | |
Total liabilities assumed | | (2,277) | |
Total purchase price allocation | | $ | 71,300 | |
| | | | | | | | | | | | | | |
| | Useful Life (In years) | | Estimated Fair Value (In thousands) |
Intangible assets: | | | | |
Customer relationships | | 19 | | $ | 24,800 | |
Backlog | | 2 | | 600 | |
Trade name | | Indefinite | | 4,700 | |
| | | | $ | 30,100 | |
The intangible assets acquired of $30.1 million were determined based on the estimated fair values using valuation techniques consistent with the income approach to measure fair value, which represented Level 3 fair value measurements. The useful lives were estimated based on the underlying agreements or the future economic benefit expected to be received from the assets. The value for customer relationships and backlog were estimated based on a multi-period excess earnings approach, while the value for trade name was assessed using the relief from royalty methodology. Inputs to the income approach models and other aspects of the allocation of the purchase price require judgment. The more significant inputs used in the customer relationships intangible asset valuation include (i) future revenue growth rates, (ii) projected gross margins, (iii) the customer attrition rate, and (iv) the discount rate.
The goodwill of $32.9 million arising from the acquisition is attributable to the benefits we expect to derive from expected synergies from the transaction, including complementary products that will enhance our overall product portfolio, opportunities within new markets, and an acquired assembled workforce. All the goodwill was assigned to the Structural Systems segment. The MagSeal acquisition, for tax purposes, is deemed an asset acquisition and thus, is deductible for income tax purposes.
Acquisition related transaction costs were not included as components of consideration transferred but have been expensed as incurred. Total acquisition-related transaction costs incurred by us were $0.9 million during 2021 and charged to selling, general and administrative expenses.
MagSeal’s results of operations have been included in our consolidated statements of income since the date of acquisition as part of the Structural Systems segment and were immaterial since the date of acquisition. Pro forma results of operations of the MagSeal acquisition have not been presented as the effect of the MagSeal acquisition was not material to our financial results for both 2021 and 2020.
Note 3. Inventories
Inventories consisted of the following:
| | | | | | | | | | | | | | |
| | (In thousands) December 31, |
| | 2021 | | 2020 |
Raw materials and supplies | | $ | 125,334 | | | $ | 107,983 | |
Work in process | | 20,609 | | | 15,895 | |
Finished goods | | 4,995 | | | 5,345 | |
Total | | $ | 150,938 | | | $ | 129,223 | |
Note 4. Property and Equipment, Net
Property and equipment, net consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) December 31, | | Range of Estimated |
| | 2021 | | 2020 | | Useful Lives |
Land | | $ | 10,494 | | | $ | 15,733 | | | |
Buildings and improvements | | 49,699 | | | 60,664 | | | 5 - 40 Years |
Machinery and equipment | | 180,761 | | | 174,251 | | | 2 - 20 Years |
Furniture and equipment | | 19,017 | | | 18,490 | | | 2 - 10 Years |
Construction in progress | | 10,580 | | | 10,594 | | | |
| | 270,551 | | | 279,732 | | | |
Less accumulated depreciation | | 168,132 | | | 169,742 | | | |
Total | | $ | 102,419 | | | $ | 109,990 | | | |
Depreciation expense was $14.1 million, $13.8 million, and $13.5 million, for the years ended December 31, 2021, 2020 and 2019, respectively.
Note 5. Leases
Sale-Leaseback Transaction
On December 16, 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena performance center located in Carson, California (“Sale-Leaseback Agreement”). The building and related land was sold for $143.1 million and we have no continuing involvement. The carrying value of the building and related land was $9.4 million and we recognized a gain of $132.5 million. As part of the Sale-Leaseback Agreement, we entered into an initial five year lease for the usage of the just sold building and related land, with three options to renew in five year increments. The lease was classified as an operating lease and the future minimum base monthly lease payments during the initial five year period in aggregate total $19.6 million.
All Leases
We elected to utilize the following practical expedients that are permitted under ASC 842:
•As an accounting policy election by class of underlying asset, elected not to separate nonlease components from lease components and instead to account for each separate lease component and the nonlease components associated with that lease component as a single lease component; and
•As an accounting policy election not to apply the recognition requirements in ASC 842 to short term leases (a lease at commencement date has a lease term of 12 months or less and does not contain a purchase option that the lessee is reasonably certain to exercise).
We have operating and finance leases for manufacturing facilities, corporate offices, and various equipment. Our leases have remaining lease terms of 1 to 10 years, some of which include options to extend the leases for up to 15 years, and some of which include options to terminate the leases within 1 year.
The components of lease expense consisted of the following:
| | | | | | | | | | | | | |
| (In thousands) | | |
| Years Ended | | |
| December 31, 2021 | | December 31, 2020 | | |
Operating leases expense | $ | 4,283 | | | 4,028 | | | |
| | | | | |
Finance leases expense: | | | | | |
Amortization of right-of-use assets | $ | 356 | | | 281 | | | |
Interest on lease liabilities | 62 | | | 56 | | | |
Total finance lease expense | $ | 418 | | | $ | 337 | | | |
Short term and variable lease expenses for the year ended December 31, 2021 were not material.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| (In thousands) |
| Years Ended |
| December 31, 2021 | | December 31, 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 5,150 | | | $ | 4,191 | |
Operating cash flows from finance leases | $ | 61 | | | $ | 56 | |
Financing cash flows from finance leases | $ | 363 | | | $ | 288 | |
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 23,317 | | | $ | 165 | |
Finance leases | $ | 401 | | | $ | 1,241 | |
The weighted average remaining lease terms were as follows:
| | | | | | | | | | | |
| (In years) |
| December 31, 2021 | | December 31, 2020 |
Operating leases | 5 | | 6 |
Finance leases | 6 | | 7 |
When a lease is identified, we recognize a right-of-use asset and a corresponding lease liability based on the present value of the lease payments over the lease term discounted using our incremental borrowing rate, unless an implicit rate is readily determinable. As the discount rate in our leases is usually not readily available, we use our own incremental borrowing rate as the discount rate. Our incremental borrowing rate is based on the interest rate on our term loan, which is a secured rate. The interest rate on our term loan is based on London Interbank Offered Rate (“LIBOR”) plus an applicable margin.
The weighted average discount rates were as follows:
| | | | | | | | | | | |
| Years Ended |
| December 31, 2021 | | December 31, 2020 |
Operating leases | 3.1% | | 6.5% |
Finance leases | 3.6% | | 4.3% |
Maturity of operating and finance lease liabilities are as follows:
| | | | | | | | | | | | | | |
| | (In thousands) |
| | Operating Leases | | Finance Leases |
2021 | | $ | 7,037 | | | $ | 375 | |
2022 | | 7,201 | | | 339 | |
2023 | | 7,037 | | | 272 | |
2024 | | 6,975 | | | 213 | |
2025 | | 6,345 | | | 159 | |
Thereafter | | 2,536 | | | 433 | |
Total lease payments | | 37,131 | | | 1,791 | |
Less imputed interest | | 2,924 | | | 187 | |
Total | | $ | 34,207 | | | $ | 1,604 | |
Operating lease payments include $3.8 million related to options to extend lease terms that are reasonably certain of being exercised. As of December 31, 2021, there are $4.9 million of legally binding minimum lease payments for leases signed but not yet commenced. These operating leases will commence during 2022 with lease terms of 7 years.
Finance lease payments related to options to extend lease terms that are reasonably certain of being exercised are not significant. As of December 31, 2021, there are no legally binding minimum lease payments for leases signed but not yet commenced.
Note 6. Goodwill and Other Intangible Assets
Goodwill
The carrying amounts of goodwill, by operating segment, for the years ended December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) |
| | Electronic Systems | | Structural Systems | | Consolidated Ducommun |
Gross goodwill | | $ | 199,157 | | | $ | 53,395 | | | $ | 252,552 | |
Accumulated goodwill impairment | | (81,722) | | | — | | | (81,722) | |
| | | | | | |
Balance at December 31, 2020 | | 117,435 | | | 53,395 | | | 170,830 | |
| | | | | | |
| | | | | | |
Goodwill from acquisition during period | | — | | | 32,864 | | | 32,864 | |
Balance at December 31, 2021 | | $ | 117,435 | | | $ | 86,259 | | | $ | 203,694 | |
We perform our annual goodwill impairment test as of the first day of the fourth quarter. If certain factors occur, including significant under performance of our business relative to expected operating results, significant adverse economic and industry trends, significant decline in our market capitalization for an extended period of time relative to net book value, a decision to divest individual businesses within a reporting unit, or a decision to group individual businesses differently, we may be required to perform an interim impairment test prior to the fourth quarter.
We may use either a qualitative or quantitative approach when testing a reporting unit’s goodwill for impairment. The qualitative approach for potential impairment analysis to determine whether it is more likely than not that the fair value of a reporting unit was less than its carrying amount.
The quantitative approach for potential impairment analysis is performed by comparing the fair value of a reporting unit to its carrying value, including goodwill. Fair value is estimated by management using a combination of the income approach (which is based on a discounted cash flow model) and market approach. Management’s cash flow projections include significant judgments and assumptions, including the amount and timing of expected cash flows, long-term growth rates, and discount rates. The cash flows used in the discounted cash flow model are based on our best estimate of future revenues, gross margins, and adjusted after-tax earnings. If any of these assumptions are incorrect, it will impact the estimated fair value of a reporting unit. The market approach also requires significant management judgment in selecting comparable business acquisitions and the transaction values observed and its related control premiums.
Our most recent step one goodwill impairment test for our Electronic Systems reporting unit was as of the first day of the fourth quarter of 2019 where the fair value of our Electronic Systems reporting unit exceeded its carrying value by 44%. No material adverse factors/changes have occurred since the fourth quarter of 2019 and thus, for our annual goodwill impairment test of our Electronic Systems reporting unit as of the first day of the fourth quarter of 2021, we used a qualitative assessment and
determined it was not more likely than not that the fair value of a reporting unit was less than its carrying amount. As our commercial aerospace end-use market business continues to be negatively impacted by the COVID-19 pandemic, we performed a step one goodwill impairment test for our Structural Systems reporting unit as of the first day of the fourth quarter of 2021, where the fair value of our Structural Systems reporting unit exceeded its carrying value by 72%. Thus, the respective goodwill amounts were not deemed impaired.
On December 16, 2021, we acquired 100% of the outstanding equity of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”) for a purchase price of $69.5 million, net of cash acquired. We preliminarily allocated the gross purchase price of $71.3 million to the assets acquired and the liabilities assumed at their estimated fair values. The excess of the purchase price over the aggregate fair values was recorded as goodwill within the Structural Systems reporting unit. See Note 2.
Other intangible assets are related to acquisitions, including MagSeal, and recorded at fair value at the time of the acquisition. Other intangible assets with finite lives are generally amortized on the straight-line method over periods ranging from 2 to 19 years. Intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | (In thousands) |
| | | December 31, 2021 | | December 31, 2020 |
| Wtd. Avg Life (Yrs) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Finite-lived assets | | | | | | | | | | | | | |
Customer relationships | 17 | | $ | 246,300 | | | $ | 114,169 | | | $ | 132,131 | | | $ | 221,500 | | | $ | 101,535 | | | $ | 119,965 | |
Trade names and trademarks | 14 | | 5,500 | | | 1,263 | | | 4,237 | | | 5,500 | | | 857 | | | 4,643 | |
Contract renewal | 14 | | 1,845 | | | 1,845 | | | — | | | 1,845 | | | 1,845 | | | — | |
Technology | 15 | | 400 | | | 291 | | | 109 | | | 400 | | | 264 | | | 136 | |
Backlog | 2 | | 600 | | | 13 | | | 587 | | | — | | | — | | | — | |
Total finite-lived assets | | | 254,645 | | | 117,581 | | | 137,064 | | | 229,245 | | | 104,501 | | | 124,744 | |
| | | | | | | | | | | | | |
Indefinite-lived assets | | | | | | | | | | | | | |
Trade names and trademarks | | | 4,700 | | | — | | | 4,700 | | | — | | | — | | | — | |
Total | | | $ | 259,345 | | | $ | 117,581 | | | $ | 141,764 | | | $ | 229,245 | | | $ | 104,501 | | | $ | 124,744 | |
The carrying amount of other intangible assets by operating segment as of December 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In thousands) |
| | December 31, 2021 | | December 31, 2020 |
| | Gross | | Accumulated Amortization | | Net Carrying Value | | Gross | | Accumulated Amortization | | Net Carrying Value |
Other intangible assets | | | | | | | | | | | | |
Electronic Systems | | $ | 164,545 | | | $ | 90,191 | | | $ | 74,354 | | | $ | 164,545 | | | $ | 80,903 | | | $ | 83,642 | |
Structural Systems | | 94,800 | | | 27,390 | | | 67,410 | | | 64,700 | | | 23,598 | | | 41,102 | |
Total | | $ | 259,345 | | | $ | 117,581 | | | $ | 141,764 | | | $ | 229,245 | | | $ | 104,501 | | | $ | 124,744 | |
Amortization expense of other intangible assets was $13.1 million, $13.2 million and $11.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. Future amortization expense by operating segment is expected to be as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) |
| | Electronic Systems | | Structural Systems | | Consolidated Ducommun |
2022 | | $ | 9,288 | | | $ | 5,276 | | | $ | 14,564 | |
2023 | | 9,288 | | | 5,196 | | | 14,484 | |
2024 | | 9,288 | | | 4,673 | | | 13,961 | |
2025 | | 9,288 | | | 4,673 | | | 13,961 | |
2026 | | 9,288 | | | 4,649 | | | 13,937 | |
Thereafter | | 27,914 | | | 38,243 | | | 66,157 | |
| | $ | 74,354 | | | $ | 62,710 | | | $ | 137,064 | |
Note 7. Accrued and Other Liabilities
The components of accrued and other liabilities consisted of the following:
| | | | | | | | | | | | | | |
| | (In thousands) December 31, |
| | 2021 | | 2020 |
Accrued compensation | | $ | 24,391 | | | $ | 28,432 | |
Accrued income tax and sales tax | | 926 | | | 80 | |
Other | | 15,974 | | | 12,014 | |
Total | | $ | 41,291 | | | $ | 40,526 | |
Note 8. Long-Term Debt
Long-term debt and the current period interest rates were as follows:
| | | | | | | | | | | | | | |
| | (In thousands) December 31, |
| | 2021 | | 2020 |
Term loans | | $ | 287,712 | | | $ | 295,638 | |
Revolving credit facility | | — | | | 25,000 | |
| | | | |
| | | | |
Total debt | | 287,712 | | | 320,638 | |
Less current portion | | 7,000 | | | 7,000 | |
Total long-term debt, less current portion | | 280,712 | | | 313,638 | |
Less debt issuance costs - term loans | | 1,328 | | | 1,716 | |
Total long-term debt, net of debt issuance costs - term loans | | $ | 279,384 | | | $ | 311,922 | |
Debt issuance costs - revolving credit facility (1) | | $ | 1,136 | | | $ | 1,515 | |
| | | | |
Weighted-average interest rate | | 3.27 | % | | 3.59 | % |
(1) Included as part of other assets.
Future long-term debt payments at December 31, 2021 were as follows:
| | | | | |
| (In thousands) |
2022 | $ | 7,000 | |
2023 | 7,000 | |
2024 | 112,000 | |
2025 | 161,712 | |
2026 | — | |
Thereafter | — | |
Total | $ | 287,712 | |
In December 2019, we completed the refinancing of a portion of our existing debt by entering into a new revolving credit facility (“2019 Revolving Credit Facility”) to replace the then existing revolving credit facility that was entered into in November 2018 (“2018 Revolving Credit Facility”) and entered into a new term loan (“2019 Term Loan”). The 2019 Revolving Credit Facility is a $100.0 million senior secured revolving credit facility that matures on December 20, 2024 replacing the $100.0 million 2018 Revolving Credit Facility that would have matured on November 21, 2023. The 2019 Term Loan is a $140.0 million senior secured term loan that matures on December 20, 2024. We also have an existing $240.0 million senior secured term loan that was entered into in November 2018 that matures on November 21, 2025 (“2018 Term Loan”). The original amounts available under the 2019 Revolving Credit Facility, 2019 Term Loan, and 2018 Term Loan (collectively, the “Credit Facilities”) in aggregate, totaled $480.0 million.
The 2019 Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as the London Interbank Offered Rate [“LIBOR”]) plus an applicable margin ranging from 1.50% to 2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable monthly or quarterly. In addition, the 2019 Term Loan requires installment payments of 1.25% of the original outstanding principal balance of the 2019 Term Loan amount on a quarterly basis, on the last day of the calendar quarter. During 2021, we made the required quarterly payments, in aggregate totaling $7.0 million.
The 2019 Revolving Credit Facility bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR) plus an applicable margin ranging from 1.50% to 2.50% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 0.50% to 1.50% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable quarterly. The undrawn portion of the commitment of the 2019 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. However, the 2019 Revolving Credit Facility does not require any principal installment payments.
The 2018 Term Loan bears interest, at our option, at a rate equal to either (i) the Eurodollar Rate (defined as LIBOR plus an applicable margin ranging from 3.75% to 4.00% per year or (ii) the Base Rate (defined as the highest of [a] Federal Funds Rate plus 0.50%, [b] Bank of America’s prime rate, and [c] the Eurodollar Rate plus 1.00%) plus an applicable margin ranging from 3.75% to 4.00% per year, in each case based upon the consolidated total net adjusted leverage ratio, typically payable monthly or quarterly. In addition, the 2018 Term Loan required installment payments of 0.25% of the outstanding principal balance of the 2018 Term Loan amount on a quarterly basis.
Further, under the Credit Facilities, if we exceed the annual excess cash flow threshold, we are required to make an annual additional principal payment based on the consolidated adjusted leverage ratio. The annual mandatory excess cash flow payment is based on (i) 50% of the excess cash flow amount if the adjusted leverage ratio is greater than 3.25 to 1.0, (ii) 25% of the excess cash flow amount if the adjusted leverage ratio is less than or equal to 3.25 to 1.0 but greater than 2.50 to 1.0, and (iii) zero percent of the excess cash flow amount if the consolidated adjusted leverage ratio is less than or equal to 2.50 to 1.0. During the first quarter of 2021, we made the required 2020 annual excess cash flow payment of $0.9 million. As of December 31, 2021, we were in compliance with all covenants required under the Credit Facilities.
We drew down $50.0 million on the 2019 Revolving Credit Facility during the first quarter of 2020 to hold as cash on hand, $25.0 million of which was repaid during the fourth quarter of 2020. The remaining $25.0 million was repaid during 2021.
In conjunction with entering into the 2019 Revolving Credit Facility and the 2019 Term Loan, we drew down the entire $140.0 million on the 2019 Term Loan and used those proceeds to pay off and close the 2018 Revolving Credit Facility of $58.5 million, paid down a portion of the 2018 Term Loan of $56.0 million, paid the accrued interest associated with the amounts being paid down on the 2018 Revolving Credit Facility and 2018 Term Loan, paid the fees related to this transaction, and the
remainder used for general corporate expenses. The $56.0 million pay down on the 2018 Term Loan paid all the required quarterly installment payments on the 2018 Term Loan until maturity.
The 2019 Term Loan and 2018 Term Loan were considered a modification of debt and thus, no gain or loss was recorded. Instead, the new fees paid to the lenders of $0.6 million were capitalized and are being amortized over the life of the 2019 Term Loan. The remaining debt issuance costs related to the 2018 Term Loan of $1.5 million as of the modification date will continue to be amortized over its remaining life.
The 2019 Revolving Credit Facility that replaced the 2018 Revolving Credit Facility was considered an extinguishment of debt except for the portion related to the creditors that were part of both the 2019 Revolving Credit Facility and the 2018 Revolving Credit Facility and in which case, it was considered a modification of debt. As a result, we expensed the portion of the unamortized debt issuance costs related to the 2018 Revolving Credit Facility that was considered an extinguishment of debt of $0.5 million. In addition, the new fees paid to the lenders of $0.5 million as part of the 2019 Revolving Credit Facility were capitalized and are being amortized over its remaining life. Further, the remaining debt issuance costs related to the 2018 Revolving Credit Facility of $1.1 million will also be amortized over its remaining life.
On December 16, 2021, we acquired 100.0% of the outstanding equity interests of Magnetic Seal LLC (f/k/a Magnetic Seal Corporation, “MagSeal”) for a purchase price of $69.5 million, net of cash acquired, all payable in cash. Upon the closing of the transaction, we paid a gross total aggregate of $71.3 million in cash, $65.0 million of which was from drawing down on the 2019 Revolving Credit Facility. This draw down on the 2019 Revolving Credit Facility was paid off by December 31, 2021. See Note 2.
Also on December 16, 2021, we entered into a sale-leaseback transaction for the building and related land for our Gardena performance center located in Carson, California, for a sale price of $143.1 million. A portion of the net proceeds were used to pay down on the $65.0 million that was drawn on the 2019 Revolving Credit Facility for the MagSeal acquisition. See Note 5.
As of December 31, 2021, we had $99.8 million of unused borrowing capacity under the 2019 Revolving Credit Facility, after deducting $0.2 million for standby letters of credit.
The Credit Facilities were entered into by us (“Parent Company”) and guaranteed by all of our domestic subsidiaries, other than two subsidiaries that were considered minor (“Subsidiary Guarantors”). The Subsidiary Guarantors jointly and severally guarantee the Credit Facilities. The Parent Company has no independent assets or operations and therefore, no consolidating financial information for the Parent Company and its subsidiaries are presented.
On November 29, 2021, we entered into derivative contracts, U.S. dollar-one month LIBOR forward interest rate swaps designated as cash flow hedges, all with an effective date of January 1, 2024, for an aggregate total notional amount of $150.0 million, weighted average fixed rate of 1.8%, and all terminating on January 1, 2031 (“Forward Interest Rate Swaps”). The Forward Interest Rate Swaps mature on a monthly basis, with fixed amount payer payment dates on the first day of each calendar month, commencing on February 1, 2024 through January 1, 2031. The Forward Interest Rate Swaps were deemed to be highly effective upon entering into the derivative contracts and thus, hedge accounting treatment was utilized. Since the Forward Interest Rate Swaps are not effective until January 1, 2024, we only recorded the changes in the fair value of the Forward Interest Rate Swaps and recorded in other long term liabilities and in other comprehensive income (loss) of $1.7 million as of December 31, 2021. See Note 1 for further information.
In October 2015, we entered into interest rate cap hedges designated as cash flow hedges with a portion of these interest rate cap hedges maturing on a quarterly basis, and a final quarterly maturity date of June 2020, in aggregate, totaling $135.0 million of our debt. We paid a total of $1.0 million in connection with entering into the interest rate cap hedges. The interest rate cap hedges matured during our second quarter of 2020 and as such, all remaining amounts related to the interest rate cap hedges were fully amortized and unrealized gains and losses recorded in accumulated other comprehensive income were also realized at that time. See Note 1 for further information.
Note 9. Shareholders’ Equity
We are authorized to issue five million shares of preferred stock. At December 31, 2021 and 2020, no preferred shares were issued or outstanding.
Note 10. Stock-Based Compensation
Stock Incentive Compensation Plans
We currently have two active stock incentive plans: i) the 2020 Stock Incentive Plan (the “2020 Plan”), which expires on May 6, 2030, and ii) the 2018 Employee Stock Purchase Plan (“ESPP”). The 2013 Stock Incentive Plan, as Amended (the “2013
Plan”) was closed to further issuances of stock awards on May 6, 2020 and any remaining shares available were folded into the 2020 Plan as part of the approval of the 2020 Plan by shareholders at the 2020 Annual Meeting of Shareholders on May 6, 2020. The 2020 Plan permit awards of stock options, restricted stock units, performance stock units and other stock-based awards to our officers, key employees and non-employee directors on terms determined by the Compensation Committee of the Board of Directors (the “Compensation Committee”). The aggregate number of shares available for issuance under the 2020 Plan is 651,162 plus any outstanding awards issued under the 2013 Plan that are subsequently forfeited, terminated, expire or otherwise lapse without being exercised. As of December 31, 2021, shares available for future grant under the 2020 Plan are 113,579. Prior to the adoption of the 2020 Plan, we granted stock-based awards to purchase shares of our common stock under certain predecessor plans. No further awards can be granted under these predecessor plans.
Employee Stock Purchase Plan
The ESPP was adopted by the Board of Directors and approved by the shareholders in 2018, including 750,000 shares that can be awarded. The first offering period closed on July 31, 2019. Under the ESPP, our employees who elect to participate have the right to purchase common stock at a 15% discount from the lower of the market value of the common stock at the beginning or the end of each six month offering period and the discount will be treated as compensation to those employees. Employees purchase common stock using payroll deductions, which may not exceed 10% of their eligible compensation and other limitations. The Compensation Committee administers the ESPP. As of December 31, 2021, there are 609,670 shares available for future award grants.
Stock Options
In the years ended December 31, 2021, 2020, and 2019, we granted stock options to our officers and key employees of zero, 8,000, and 189,170, respectively, with weighted-average grant date fair values of zero, $16.48, and $15.95, respectively. Stock options have been granted with an exercise price equal to the fair market value of our stock on the date of grant and expire not more than ten years from the date of grant. The stock options typically vest over a period of three or four years from the date of grant. The option price and number of shares are subject to adjustment under certain dilutive circumstances. If an employee terminates employment, the non-vested portion of the stock options will not vest and all rights to the non-vested portion will terminate completely.
Stock option activity for the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | Number of Stock Options | | Weighted- Average Exercise Price Per Share | | Weighted-Average Remaining Contractual Life (Years) | | Aggregate Intrinsic Value (in thousands) |
Outstanding at January 1, 2021 | | 380,143 | | | $ | 35.46 | | | | | |
Granted | | — | | | $ | — | | | | | |
Exercised | | (48,769) | | | $ | 35.53 | | | | | |
Expired | | (3,634) | | | $ | 36.49 | | | | | |
Forfeited | | (9,961) | | | $ | 39.72 | | | | | |
Outstanding at December 31, 2021 | | 317,779 | | | $ | 35.30 | | | 5.7 | | $ | 3,460 | |
Exerciseable at December 31, 2021 | | 258,174 | | | $ | 33.75 | | | 5.3 | | $ | 3,211 | |
Changes in nonvested stock options for the year ended December 31, 2021 were as follows:
| | | | | | | | | | | | | | |
| | Number of Stock Options | | Weighted- Average Grant Date Fair Value |
Nonvested at January 1, 2021 | | 191,677 | | | $ | 14.73 | |
Granted | | — | | | $ | — | |
Vested | | (122,111) | | | $ | 14.10 | |
Forfeited | | (9,961) | | | $ | 15.32 | |
Nonvested at December 31, 2021 | | 59,605 | | | $ | 15.93 | |
The aggregate intrinsic value of stock options represents the amount by which the market price of our common stock exceeds the exercise price of the stock option. The aggregate intrinsic value of stock options exercised for the years ended December 31, 2021, 2020 and 2019 was $1.0 million, $0.9 million, and $1.8 million, respectively. Cash received from stock options exercised
for the years ended December 31, 2021, 2020 and 2019 was $1.7 million, $1.6 million, and $2.0 million, respectively, with related tax benefits of $0.4 million, $0.4 million, and $0.5 million, respectively. The total amount of stock options vested and expected to vest in the future is 317,779 shares with a weighted-average exercise price of $35.30 and an aggregate intrinsic value of $3.5 million. These stock options have a weighted-average remaining contractual term of 5.7 years.
The share-based compensation cost expensed for stock options for the years ended December 31, 2021, 2020, and 2019 (before tax benefits) was $1.2 million, $1.8 million, and $1.6 million, respectively, and is included in selling, general and administrative expenses on the consolidated income statements. At December 31, 2021, total unrecognized compensation cost (before tax benefits) related to stock options of $0.4 million is expected to be recognized over a weighted-average period of 0.5 years. The total fair value of stock options vested during the years ended December 31, 2021, 2020, and 2019 was $1.7 million, $2.0 million, and $1.3 million, respectively.
We apply fair value accounting for stock-based compensation based on the grant date fair value estimated using a Black-Scholes-Merton (“Black-Scholes”) valuation model. The assumptions used to compute the fair value of stock option grants under the Stock Incentive Plans for years ended December 31, 2021, 2020, and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Risk-free interest rate | | N/A | | 1.59 | % | | 1.92 | % |
Expected volatility | | N/A | | 37.75 | % | | 40.44 | % |
Expected dividends | | N/A | | — | | | — | |
Expected term (in months) | | N/A | | 66 | | 60 |
We recognize compensation expense, net of an estimated forfeiture rate, on a straight-line basis over the requisite service period of the award. We have award populations with option vesting terms of three and four years. We estimate the forfeiture rate based on our historic experience, attempting to determine any discernible activity patterns. The expected life computation is based on historic exercise patterns and post-vesting termination behavior. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The expected volatility is derived from historical volatility of our common stock. We suspended payments of dividends after the first quarter of 2011.
Restricted Stock Units
We granted restricted stock units (“RSUs”) to certain officers, key employees and non-employee directors of 118,995, 118,835, and 62,520 RSUs during the years ended December 31, 2021, 2020, and 2019, respectively, with weighted-average grant date fair values (equal to the fair market value of our stock on the date of grant) of $55.92, $27.62, and $41.04 per share, respectively. RSUs represent a right to receive a share of stock at future vesting dates with no cash payment required from the holder. The RSUs typically have a three year vesting term of 33%, 33% and 34% on the first, second and third anniversaries of the date of grant, respectively. If an employee terminates employment, their non-vested portion of the RSUs will not vest and all rights to the non-vested portion will terminate.
Restricted stock unit activity for the year ended December 31, 2021 was as follows:
| | | | | | | | | | | | | | |
| | Number of Restricted Stock Units | | Weighted- Average Grant Date Fair Value |
Outstanding at January 1, 2021 | | 165,907 | | | $ | 30.70 | |
Granted | | 118,995 | | | $ | 55.92 | |
Vested | | (74,958) | | | $ | 31.61 | |
Forfeited | | (7,662) | | | $ | 40.08 | |
Outstanding at December 31, 2021 | | 202,282 | | | $ | 44.85 | |
The share-based compensation cost expensed for RSUs for the years ended December 31, 2021, 2020, and 2019 (before tax benefits) was $4.1 million, $2.6 million, and $2.4 million respectively, and is included in selling, general and administrative expenses on the consolidated income statements. At December 31, 2021, total unrecognized compensation cost (before tax benefits) related to RSUs of $5.6 million is expected to be recognized over a weighted average period of 1.7 years. The total fair value of RSUs vested for the years ended December 31, 2021, 2020, and 2019 was $4.2 million, $2.3 million, and $2.4 million, respectively. The tax benefit realized from vested RSUs for the years ended December 31, 2021, 2020, and 2019 was $1.0 million, $0.5 million, and $0.6 million, respectively.
Performance Stock Units
We granted performance stock awards (“PSUs”) to certain key employees of 182,886, 159,136, and 58,178 PSUs during the years ended December 31, 2021, 2020, and 2019, respectively, with weighted-average grant date fair values of $49.76, $29.65, and $43.80 per share, respectively. PSU awards are subject to the attainment of performance goals established by the Compensation Committee, the periods during which performance is to be measured, and all other limitations and conditions applicable to the awarded shares. Performance goals are based on a pre-established objective formula that specifies the manner of determining the number of PSUs that will be granted if performance goals are attained. If an employee terminates employment, their non-vested portion of the PSUs will not vest and all rights to the non-vested portion will terminate.
Performance stock activity for the year ended December 31, 2021 was as follows:
| | | | | | | | | | | | | | |
| | Number of Performance Stock Units | | Weighted- Average Grant Date Fair Value |
Outstanding at January 1, 2021 | | 288,954 | | | $ | 31.95 | |
Granted | | 182,886 | | | $ | 49.76 | |
| | | | |
Vested | | (172,277) | | | $ | 33.76 | |
Forfeited | | — | | | $ | — | |
Outstanding at December 31, 2021 | | 299,563 | | | $ | 41.16 | |
The share-based compensation cost expensed for PSUs for the years ended December 31, 2021, 2020, and 2019 (before tax benefits) was $5.9 million, $4.9 million and $3.2 million, respectively, and is included in selling, general and administrative expenses on the consolidated income statements. At December 31, 2021, total unrecognized compensation cost (before tax benefits) related to PSUs of $7.0 million is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of PSUs vested during the years ended December 31, 2021, 2020, and 2019, was $9.6 million, $3.7 million, and $3.8 million, respectively. The tax benefit realized from PSUs for the years ended December 31, 2021, 2020, and 2019 were $2.3 million, $0.9 million, and $0.9 million, respectively.
Note 11. Employee Benefit Plans
Supplemental Retirement Plans
We have three unfunded supplemental retirement plans. The first plan was suspended in 1986, but continues to cover certain former executives. The second plan was suspended in 1997, but continues to cover certain current and retired directors. The third plan covers certain current and retired employees and further employee contributions to this plan were suspended on August 5, 2011. The liability for the third plan and interest thereon is included in accrued employee compensation and long-term liabilities were both zero at December 31, 2021, and zero and $0.1 million, respectively, at December 31, 2020. The accumulated benefit obligations of the first two plans at December 31, 2021 and December 31, 2020 were both $0.3 million, and are included in accrued liabilities.
Defined Contribution 401(k) Plans
We sponsor a 401(k) defined contribution plan for all our employees. The plan allows the employees to make annual voluntary contributions not to exceed the lesser of an amount equal to 25% of their compensation or limits established by the Internal Revenue Code. Under this plan, we generally provide a match equal to 50% of the employee’s contributions up to the first 6% of compensation, except for union employees who are not eligible to receive the match. Our provision for matching and profit sharing contributions for the three years ended December 31, 2021, 2020, and 2019 was $2.8 million, $2.6 million, and $2.7 million, respectively.
Other Plans
We have a defined benefit pension plan covering certain hourly employees of a subsidiary (the “Pension Plan”). Pension Plan benefits are generally determined on the basis of the retiree’s age and length of service. Assets of the Pension Plan are composed primarily of fixed income and equity securities. We also have a retirement plan covering certain current and retired employees (the “LaBarge Retirement Plan”). As part of the acquisition of CTP, we acquired their defined benefit pension plan (the “CTP Pension Plan”), which covered certain current and retired employees that were fully funded by CTP as of the acquisition date in April 2018. The CTP Pension Plan was suspended as of the acquisition date but continued to cover certain current and former CTP employees. The CTP Pension Plan gross assets, liabilities, and current year expense were immaterial
for disclosure purposes. The CTP Pension Plan was subsequently liquidated in November 2019 with no loss recorded as a pension plan escrow fund was established as part of the acquisition to cover any losses until it was liquidated.
The components of net periodic pension cost for the Pension Plan and LaBarge Retirement Plan in aggregate are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Service cost | | $ | 676 | | | $ | 622 | | | $ | 503 | |
Interest cost | | 1,010 | | | 1,209 | | | 1,388 | |
Expected return on plan assets | | (1,895) | | | (1,761) | | | (1,644) | |
Amortization of actuarial losses | | 1,285 | | | 993 | | | 885 | |
Net periodic pension cost | | $ | 1,076 | | | $ | 1,063 | | | $ | 1,132 | |
The components of the reclassifications of net actuarial losses from accumulated other comprehensive loss to net income for 2021 were as follows:
| | | | | | | | |
| | (In thousands) Year Ended December 31, |
| | 2021 |
Amortization of actuarial loss - total before tax (1) | | $ | 1,285 | |
Tax benefit | | (309) | |
Net of tax | | $ | 976 | |
(1)The amortization expense is included in the computation of periodic pension cost and is a decrease to net income upon reclassification from accumulated other comprehensive loss.
The estimated net actuarial loss for both plans that will be amortized from accumulated other comprehensive loss into net periodic cost during 2022 is $1.3 million.
The obligations, fair value of plan assets, and funded status of both plans are as follows:
| | | | | | | | | | | | | | |
| | (In thousands) December 31, |
| | 2021 | | 2020 |
Change in benefit obligation(1) | | | | |
Beginning benefit obligation (January 1) | | $ | 42,804 | | | $ | 39,085 | |
Service cost | | 676 | | | 622 | |
Interest cost | | 1,010 | | | 1,209 | |
Actuarial (gain) loss | | (2,537) | | | 3,491 | |
Benefits paid | | (2,148) | | | (1,603) | |
Ending benefit obligation (December 31) | | $ | 39,805 | | | $ | 42,804 | |
Change in plan assets | | | | |
Beginning fair value of plan assets (January 1) | | $ | 30,632 | | | $ | 28,443 | |
Return on assets | | 3,122 | | | 2,300 | |
Employer contribution | | 2,095 | | | 1,492 | |
Benefits paid | | (2,151) | | | (1,603) | |
Ending fair value of plan assets (December 31) | | $ | 33,698 | | | $ | 30,632 | |
Funded status (underfunded) | | $ | (6,107) | | | $ | (12,172) | |
Amounts recognized in the consolidated balance sheet | | | | |
Current liabilities | | $ | 427 | | | $ | 605 | |
Non-current liabilities | | $ | 5,680 | | | $ | 11,567 | |
Unrecognized loss included in accumulated other comprehensive loss | | | | |
Beginning unrecognized loss, before tax (January 1) | | $ | 12,620 | | | $ | 10,660 | |
Amortization | | (1,282) | | | (993) | |
Liability (gain) loss | | (2,537) | | | 3,491 | |
Asset (gain) loss | | (1,228) | | | (538) | |
Ending unrecognized loss, before tax (December 31) | | 7,573 | | | 12,620 | |
Tax impact | | (1,827) | | | (3,003) | |
Unrecognized loss included in accumulated other comprehensive loss, net of tax | | $ | 5,746 | | | $ | 9,617 | |
| | | | |
| | | | |
(1)Projected benefit obligation equals the accumulated benefit obligation for the plans.
On December 31, 2021, our annual measurement date, the accumulated benefit obligation exceeded the fair value of the plans assets by $6.1 million. Such excess is referred to as an unfunded accumulated benefit obligation. We recorded unrecognized loss included in accumulated other comprehensive loss, net of tax at December 31, 2021 and 2020 of $5.7 million and $9.6 million, respectively, which decreased shareholders’ equity. This charge to shareholders’ equity represents a net loss not yet recognized as pension expense. This charge did not affect reported earnings, and would be decreased or be eliminated if either interest rates increase or market performance and plan returns improve which will cause the Pension Plan to return to fully funded status.
Our Pension Plan asset allocations at December 31, 2021 and 2020, by asset category, were as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Equity securities | | 69% | | 67% |
Cash and equivalents | | 1% | | —% |
Debt securities | | 30% | | 33% |
Total(1) | | 100% | | 100% |
(1)Our overall investment strategy is to achieve an asset allocation within the following ranges to achieve an appropriate rate of return relative to risk.
| | | | | |
Cash | 0-10% |
Fixed income securities | 15-75% |
Equities | 30-80% |
Pension Plan assets consist primarily of listed stocks and bonds and do not include any of the Company’s securities. The return on assets assumption reflects the average rate of return expected on funds invested or to be invested to provide for the benefits included in the projected benefit obligation. We select the return on asset assumption by considering our current and target asset allocation. We consider information from various external investment managers, forward-looking information regarding expected returns by asset class and our own judgment when determining the expected returns.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Year Ended December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | | $ | 414 | | | $ | — | | | $ | — | | | $ | 414 | |
Fixed income securities | | 3,648 | | | — | | | — | | | 3,648 | |
Equities(1) | | 7,446 | | | — | | | — | | | 7,446 | |
Other investments | | 1,199 | | | — | | | — | | | 1,199 | |
Total plan assets at fair value | | $ | 12,707 | | | $ | — | | | $ | — | | | 12,707 | |
Pooled funds | | | | | | | | 20,991 | |
Total fair value of plan assets | | | | | | | | $ | 33,698 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Year Ended December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash equivalents | | $ | 136 | | | $ | — | | | $ | — | | | $ | 136 | |
Fixed income securities | | 2,983 | | | — | | | — | | | 2,983 | |
Equities(1) | | 3,331 | | | — | | | — | | | 3,331 | |
Other investments | | 1,097 | | | — | | | — | | | 1,097 | |
Total plan assets at fair value | | $ | 7,547 | | | $ | — | | | $ | — | | | 7,547 | |
Pooled funds | | | | | | | | 23,085 | |
Total fair value of plan assets | | | | | | | | $ | 30,632 | |
(1)Represents mutual funds and commingled accounts which invest primarily in equities, but may also hold fixed income securities, cash and other investments. Commingled funds with publicly quoted prices and actively traded are classified as Level 1 investments.
Pooled funds are measured using the net asset value (“NAV”) as a practical expedient for fair value as permissible under the accounting standard for fair value measurements and have not been categorized in the fair value hierarchy in accordance with ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” Pooled fund NAVs are provided by the trustee and are determined by reference to the fair value of the underlying securities of the trust, less its liabilities, which are valued primarily through the use of directly or indirectly observable inputs. Depending on the pooled fund, underlying securities may include marketable equity securities or fixed income securities.
The assumptions used to determine the benefit obligations and expense for our two plans are presented in the tables below. The expected long-term return on assets, noted below, represents an estimate of long-term returns on investment portfolios consisting of a mixture of fixed income and equity securities. The estimated cash flows from the plans for all future years are determined based on the plans’ population at the measurement date. We used the expected benefit payouts from the plans for each year into the future and discounted them back to the present using the Wells Fargo yield curve rate for that duration.
The weighted-average assumptions used to determine the net periodic benefit costs under the two plans were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Discount rate used to determine pension expense | | | | | | |
Pension Plan | | 2.50% | | 3.22% | | 4.23% |
LaBarge Retirement Plan | | 1.85% | | 2.85% | | 4.00% |
The weighted-average assumptions used to determine the benefit obligations under the two plans were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
Discount rate used to determine value of obligations | | | | | | |
Pension Plan | | 2.85% | | 2.50% | | 3.22% |
LaBarge Retirement Plan | | 2.35% | | 1.85% | | 2.85% |
Long-term rate of return - Pension Plan only | | 6.25% | | 6.25% | | 7.00% |
The following benefit payments under both plans, which reflect expected future service, as appropriate, are expected to be paid:
| | | | | | | | | | | | | | |
| | (In thousands) |
| | Pension Plan | | LaBarge Retirement Plan |
2022 | | $ | 1,389 | | | $ | 427 | |
2023 | | $ | 1,457 | | | $ | 410 | |
2024 | | $ | 1,580 | | | $ | 391 | |
2025 | | $ | 1,668 | | | $ | 372 | |
2026 | | $ | 1,757 | | | $ | 354 | |
2027 - 2031 | | $ | 9,480 | | | $ | 1,504 | |
Our funding policy is to contribute cash to our plans so that the minimum contribution requirements established by government funding and taxing authorities are met. We expect to make contributions of $0.7 million to the plans in 2022.
Note 12. Indemnifications
We have made guarantees and indemnities under which we may be required to make payments to a guaranteed or indemnified party, in relation to certain transactions, including revenue transactions in the ordinary course of business. In connection with certain performance center leases, we have indemnified our lessors for certain claims arising from the performance center or the lease. We indemnify our directors and officers to the maximum extent permitted under the laws of the State of Delaware.
However, we have a directors and officers insurance policy that may reduce our exposure in certain circumstances and may enable us to recover a portion of future amounts that may be payable, if any. The duration of the guarantees and indemnities varies and, in many cases is indefinite but subject to statute of limitations. The majority of guarantees and indemnities do not provide any limitations of the maximum potential future payments we could be obligated to make. Historically, payments related to these guarantees and indemnities have been immaterial. We estimate the fair value of our indemnification obligations as insignificant based on this history and insurance coverage and have, therefore, not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets.
Note 13. Income Taxes
Our pre-tax income attributable to foreign operations was not material. The provision for income tax expense consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Current tax expense | | | | | | |
Federal | | $ | 31,171 | | | $ | 2,525 | | | $ | 5,802 | |
State | | 2,829 | | | (459) | | | 1,067 | |
| | 34,000 | | | 2,066 | | | 6,869 | |
Deferred tax expense (benefit) | | | | | | |
Federal | | 107 | | | 1,294 | | | (650) | |
State | | 841 | | | (553) | | | (917) | |
| | 948 | | | 741 | | | (1,567) | |
Income tax expense | | $ | 34,948 | | | $ | 2,807 | | | $ | 5,302 | |
We recognized net income tax benefits from deductions of share-based payments in excess of compensation cost recognized for financial reporting purposes of $0.9 million, $0.4 million, and $0.8 million for the years ended December 31, 2021, 2020, and 2019, respectively.
Deferred tax (liabilities) assets were comprised of the following:
| | | | | | | | | | | | | | |
| | (In thousands) December 31, |
| | 2021 | | 2020 |
Deferred tax assets: | | | | |
Accrued expenses | | $ | 620 | | | $ | 558 | |
Allowance for doubtful accounts | | 269 | | | 371 | |
Contract overrun reserves | | 680 | | | 546 | |
Deferred compensation | | 272 | | | 113 | |
Deferred revenue | | 1,570 | | | 18 | |
Employment-related accruals | | 4,028 | | | 5,912 | |
Environmental reserves | | 499 | | | 493 | |
Federal tax credit carryforwards | | 133 | | | 133 | |
Inventory reserves | | 2,957 | | | 2,684 | |
Operating lease liabilities | | 8,145 | | | 4,186 | |
Pension obligation | | 1,550 | | | 2,915 | |
Federal and state net operating loss carryforwards | | 4,243 | | | 5,125 | |
State tax credit carryforwards | | 7,123 | | | 9,271 | |
Stock-based compensation | | 2,584 | | | 2,179 | |
| | | | |
Other | | 2,503 | | | 1,526 | |
Total gross deferred tax assets | | 37,176 | | | 36,030 | |
Valuation allowance | | (7,718) | | | (9,330) | |
Total gross deferred tax assets, net of valuation allowance | | 29,458 | | | 26,700 | |
Deferred tax liabilities: | | | | |
| | | | |
Depreciation | | (11,986) | | | (11,255) | |
Goodwill | | (6,557) | | | (5,493) | |
Intangibles | | (20,337) | | | (22,298) | |
Operating lease right-of-use assets | | (7,931) | | | (3,879) | |
Prepaid insurance | | (534) | | | (385) | |
| | | | |
Other | | (840) | | | (349) | |
Total gross deferred tax liabilities | | (48,185) | | | (43,659) | |
Net deferred tax liabilities | | $ | (18,727) | | | $ | (16,959) | |
We have federal and state tax net operating losses of $15.1 million and $18.2 million, respectively, as of December 31, 2021. The federal net operating losses acquired from the acquisition of Nobles are subject to an annual limitation under Internal Revenue Code Section 382; however, we expect to fully realize them under ASC Subtopic 740-10 before they begin to expire in 2033. The state net operating loss carryforwards include $10.7 million that is not expected to be realized due to various limitations and has been reduced by a valuation allowance. If not realized, the state net operating loss carryforwards, depending on the tax jurisdiction, will begin to expire between 2027 and 2038.
We have federal and state tax credit carryforwards of $0.1 million and $10.9 million, respectively, as of December 31, 2021. A valuation allowance of $9.0 million has been provided on state tax credit carryforwards that are not expected to be realized under ASC Subtopic 740-10. If not realized, the federal tax carryforwards will begin to expire in 2032 and state tax credit carryforwards, depending on the tax jurisdiction, will begin to expire between 2022 and 2036.
We believe it is more likely than not that we will generate sufficient taxable income to realize the benefit of the remaining deferred tax assets.
The principal reasons for the variation between the statutory and effective tax rates were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Statutory federal income tax rate | | 21.0% | | 21.0% | | 21.0% |
State income taxes (net of federal benefit) | | 3.1 | | 4.6 | | 3.6 |
Foreign derived intangible income deduction | | — | | (0.4) | | (1.2) |
| | | | | | |
Stock-based compensation expense | | (0.5) | | (1.4) | | (2.1) |
Research and development tax credits (1) | | (3.0) | | (13.8) | | (7.8) |
Other tax credits | | — | | (0.3) | | — |
| | | | | | |
Changes in valuation allowance | | (1.0) | | (0.4) | | (1.6) |
Non-deductible book expenses | | 0.7 | | 3.6 | | 3.9 |
Changes in deferred tax assets | | — | | (0.2) | | (2.2) |
| | | | | | |
| | | | | | |
Changes in tax reserves | | 0.2 | | (4.6) | | 1.2 |
Other | | — | | 0.7 | | (0.8) |
Effective income tax rate | | 20.5% | | 8.8% | | 14.0% |
(1)For 2020, (3.4)% is additional research and development tax credits related to 2019.
Our total amount of unrecognized tax benefits was $4.4 million, $4.1 million, and $5.7 million at December 31, 2021, 2020, and 2019, 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, 2021, 2020, and 2019 were not significant. If recognized, $2.6 million would affect the effective income tax rate. As a result of statute of limitations set to expire in 2022, we expect decreases to our unrecognized tax benefits of approximately $0.7 million in the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Balance at January 1, | | $ | 4,069 | | | $ | 5,663 | | | $ | 5,283 | |
Additions for tax positions related to the current year | | 562 | | | 418 | | | 408 | |
Additions for tax positions related to prior years | | 180 | | | 157 | | | — | |
Reductions for tax positions related to prior years | | — | | | — | | | (28) | |
Reductions for lapse of statute of limitations | | (376) | | | (2,169) | | | — | |
Balance at December 31, | | $ | 4,435 | | | $ | 4,069 | | | $ | 5,663 | |
We file U.S. Federal and state income tax returns. We are subject to examination by the Internal Revenue Service (“IRS”) for tax years after 2017 and by state taxing authorities for tax years after 2016. While we are no longer subject to examination prior to those periods, carryforwards generated prior to those periods may still be adjusted upon examination by the IRS or state taxing authorities if they either have been or will be used in a subsequent period. We believe we have adequately accrued for tax deficiencies or reductions in tax benefits, if any, that could result from the examination and all open audit years.
In March 2020, the U.S. enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that provided tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the CARES Act and determined they do not have a material impact on our overall income taxes. We utilized the option to defer payment of the employer portion of payroll taxes (Social Security) that would otherwise be required to be made during the period beginning March 27, 2020 to December 31, 2020. As such, as of December 31, 2020, we deferred payment of income tax deductions related to payroll taxes of $6.1 million and recorded the related deferred tax asset of $1.4 million, which was included as part of the net deferred income taxes on the consolidated balance sheet. We were required to and made the payments for 50% of the deferred payroll taxes by December 31, 2021. As of December 31, 2021, the remaining unpaid deferred income tax deductions related to payroll taxes is $3.1 million and the related deferred tax asset of $0.7 million is included as part of the net deferred income taxes on the consolidated balance sheet.
In December 2020, the U.S. enacted the Consolidated Appropriations Act, 2021 (“Appropriations Act”) that provided additional tax relief to individuals and businesses affected by the coronavirus pandemic. We considered the provisions of the Appropriations Act and determined they do not have a material impact to our overall income taxes.
On March 11, 2021, the U.S. enacted the American Rescue Plan Act of 2021 (“Rescue Plan”). The amendment to Section 162(m) expanding the definition of covered employee to also include the next five highest compensated employees in the limitation will apply to us effective January 1, 2027. We do not expect any tax impacts to be material. We considered other provisions in the Rescue Plan and determined they have no or minimal impact to our overall income taxes.
The Tax Cuts and Jobs Act of 2017 (“TCJA”), which was signed into U.S. law in December 2017, eliminated the option to immediately deduct research and development expenditures in the year incurred under Section 174 effective January 1, 2022. The amended provision under Section 174 requires us to capitalize and amortize these expenditures over five years. Although there is proposed legislation to temporarily reinstate the current deduction of the expenditures after 2021 through 2025, we must consider the changes under the TCJA. If the provision is not deferred, modified, or repealed, with retroactive effect to January 1, 2022, it may result in a material impact on cash from operating activities and the balance of our deferred taxes. The actual impact will depend on if and when this provision is deferred, modified, or repealed by Congress, including if retroactively to January 1, 2022, and the amount of research and development expenditures incurred in 2022. We are monitoring legislation for any further changes to Section 174 and the impact to the financial statements in 2022.
Note 14. Commitments and Contingencies
In December 2020, a representative action under California’s Private Attorneys General Act was filed against us in the Superior Court for the State of California, County of San Bernardino. We received service of process of this complaint on January 28, 2021. The complaint alleges violations of California’s wage and hour laws relating to our current and former employees and seeks attorney’s fees and penalties. We vigorously refuted and defended these claims, and reached a tentative settlement of $0.8 million during the fourth quarter 2021, which is subject to court approval. Thus, we recorded accrued liabilities of $0.8 million as of December 31, 2021.
Structural Systems has been directed by California environmental agencies to investigate and take corrective action for groundwater contamination at our facilities located in El Mirage and Monrovia, California. Based on currently available information, we have established an accrual for its estimated liability for such investigation and corrective action of $1.5 million as of both December 31, 2021 and December 31, 2020, which is reflected in other long-term liabilities on our consolidated balance sheets.
Structural Systems also faces liability as a potentially responsible party for hazardous waste disposed at landfills located in Casmalia and West Covina, California. Structural Systems and other companies and government entities have entered into consent decrees with respect to these landfills with the United States Environmental Protection Agency and/or California environmental agencies under which certain investigation, remediation and maintenance activities are being performed. Based on currently available information, we preliminarily estimate that the range of our future liabilities in connection with the landfill located in West Covina, California is between $0.4 million and $3.1 million. We have established an accrual for the estimated liability in connection with the West Covina landfill of $0.4 million as of both December 31, 2021 and December 31, 2020, which is reflected in other long-term liabilities on our consolidated balance sheets. Our ultimate liability in connection with these matters will depend upon a number of factors, including changes in existing laws and regulations, the design and cost of construction, operation and maintenance activities, and the allocation of liability among potentially responsible parties.
In June 2020, a fire severely damaged our performance center in Guaymas, Mexico, which is part of our Structural Systems segment. There were no injuries, however, property and equipment, inventories, and tooling in this leased facility were damaged. Our Guaymas performance center is comprised of two buildings with an aggregate total of 62,000 square feet. The loss of production from the Guaymas performance center is being absorbed by our other existing performance centers. A neighboring, non-related manufacturing facility, also suffered fire damage during the same time as the fire that severely damaged our Guaymas performance center. The cause of the fire is still undetermined and as such, there is no amount of loss that is probable and reasonably estimable at this time.
Our insurance covers damage to the facility, equipment, unfinished inventory, and other assets at replacement cost, finished goods inventory at selling price, as well as business interruption, third party property damage, and recovery related expenses caused by the fire, less our per claim deductible. The anticipated insurance recoveries related to losses and incremental costs incurred are recognized when receipt is probable. The anticipated insurance recoveries in excess of net book value of the damaged operating assets and business interruption will not be recorded until all contingencies related to our claim have been resolved. During the year ended December 31, 2020, $0.8 million of revenue and $0.5 million of related cost of sales were reversed for revenue previously recognized using the over time method as the revenue recognition process for these items were deemed to be interrupted as a result of these inventory items being damaged. Also during the year ended December 31, 2020, we wrote off property and equipment and tooling with an aggregate total net book value of $7.1 million and inventory on hand of $3.4 million that were damaged by the fire. The related anticipated insurance recoveries were also presented within the same financial statement line item in the consolidated statements of income resulting in no net impact, with the anticipated insurance recoveries receivable included as part of other current assets on the consolidated balance sheets. As of December 31, 2021,
$13.5 million of general insurance recoveries have been received to date. The timing of and the remaining amounts of insurance recoveries, including for business interruption, are not known at this time.
In the normal course of business, Ducommun and its subsidiaries are defendants in certain other litigation, claims and inquiries, including matters relating to environmental laws. In addition, Ducommun makes various commitments and incurs contingent liabilities in the ordinary course of business. While it is not feasible to predict the outcome of these matters, Ducommun does not presently expect that any sum it may be required to pay in connection with these matters would have a material adverse effect on its consolidated financial position, results of operations or cash flows.
Note 15. Major Customers and Concentrations of Credit Risk
We provide proprietary products and services to the Department of Defense and various United States Government agencies, and most of the aerospace and aircraft manufacturers who receive contracts directly from the U.S. Government as an original equipment manufacturer (“Primes”). In addition, we also service technology-driven markets in the industrial, medical and other end-use markets. As a result, we have significant net revenues from certain customers. Accounts receivable were diversified over a number of different commercial, military and space programs and were made by both operating segments. Net revenues from our top ten customers, including The Boeing Company (“Boeing”), Lockheed Martin Corporation (“Lockheed Martin”), Northrop Grumman Corporation (“Northrop”), Raytheon Technologies Corporation (“Raytheon”), and Spirit AeroSystems Holdings, Inc. (“Spirit”), represented the following percentages of total net revenues:
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Boeing | | 7.8 | % | | 10.5 | % | | 16.6 | % |
Lockheed Martin | | 4.4 | % | | 5.0 | % | | 4.0 | % |
Northrop | | 7.1 | % | | 9.1 | % | | 4.0 | % |
Raytheon | | 24.4 | % | | 20.9 | % | | 15.6 | % |
Spirit | | 3.8 | % | | 3.3 | % | | 12.2 | % |
Top ten customers (1) | | 61.1 | % | | 61.1 | % | | 65.4 | % |
(1) Includes Boeing, Lockheed Martin, Northrop, Raytheon, and Spirit.
Boeing, Lockheed Martin, Northrop, Raytheon, and Spirit represented the following percentages of total accounts receivable:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 |
Boeing | | 3.5 | % | | 4.8 | % |
Lockheed Martin | | 0.4 | % | | 2.4 | % |
Northrop | | 10.9 | % | | 12.3 | % |
Raytheon | | 17.8 | % | | 15.0 | % |
Spirit | | 0.7 | % | | 1.1 | % |
In 2021, 2020 and 2019, net revenues from foreign customers based on the location of the customer were $43.6 million, $58.5 million and $81.6 million, respectively. No net revenues from a foreign country were greater than 3.0% of total net revenues in 2021, 2020, and 2019. We have manufacturing facilities in Thailand and Mexico. Our net revenues, profitability and identifiable long-lived assets attributable to foreign revenues activity were not material compared to our net revenues, profitability and identifiable long-lived assets attributable to our domestic operations during 2021, 2020, and 2019. We are not subject to any significant foreign currency risks as all our sales are made in United States dollars.
Note 16. Business Segment Information
We supply products and services primarily to the aerospace and defense industries. Our subsidiaries are organized into two strategic businesses, Electronic Systems and Structural Systems, each of which is an operating segment as well as a reportable segment.
Financial information by reportable segment was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | (In thousands) Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
Net Revenues | | | | | | |
Electronic Systems | | $ | 412,648 | | | $ | 392,633 | | | $ | 360,373 | |
Structural Systems | | 232,765 | | | 236,308 | | | 360,715 | |
Total Net Revenues | | $ | 645,413 | | | $ | 628,941 | | | $ | 721,088 | |
Segment Operating Income (Loss) (1)(2) | | | | | | |
Electronic Systems | | $ | 57,629 | | | $ | 51,894 | | | $ | 38,613 | |
Structural Systems | | 20,234 | | | 19,584 | | | 46,836 | |
| | 77,863 | | | 71,478 | | | 85,449 | |
Corporate General and Administrative Expenses (3) | | (28,982) | | | (25,972) | | | (29,216) | |
Operating Income | | $ | 48,881 | | | $ | 45,506 | | | $ | 56,233 | |
Depreciation and Amortization Expenses | | | | | | |
Electronic Systems | | $ | 13,823 | | | $ | 14,038 | | | $ | 14,170 | |
Structural Systems | | 14,331 | | | 14,559 | | | 13,663 | |
Corporate Administration | | 235 | | | 253 | | | 472 | |
Total Depreciation and Amortization Expenses | | $ | 28,389 | | | $ | 28,850 | | | $ | 28,305 | |
Capital Expenditures | | | | | | |
Electronic Systems | | $ | 7,471 | | | $ | 5,037 | | | $ | 5,508 | |
Structural Systems | | 8,463 | | | 8,570 | | | 13,338 | |
Corporate Administration | | — | | | — | | | — | |
Total Capital Expenditures | | $ | 15,934 | | | $ | 13,607 | | | $ | 18,846 | |
(1)The results for 2021 include MagSeal’s results of operations which have been included in our consolidated statements of income since the date of acquisition as part of the Structural Systems segment. See Note 2.
(2)The results for 2019 includes Nobles’ results of operations which have been included in our consolidated statements of income since the date of acquisition as part of the Structural Systems segment.
(3)Includes cost not allocated to either the Electronic Systems or Structural Systems operating segments.
Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash. The following table summarizes our segment assets for 2021 and 2020:
| | | | | | | | | | | | | | |
| | (In thousands) December 31, |
| | 2021 | | 2020 |
Total Assets | | | | |
Electronic Systems | | $ | 490,814 | | | $ | 448,606 | |
Structural Systems | | 408,118 | | | 325,604 | |
Corporate Administration | | 79,803 | | | 63,137 | |
Total Assets | | $ | 978,735 | | | $ | 837,347 | |
Goodwill and Intangibles | | | | |
Electronic Systems | | $ | 191,789 | | | $ | 201,077 | |
Structural Systems | | 153,669 | | | 94,497 | |
Total Goodwill and Intangibles | | $ | 345,458 | | | $ | 295,574 | |
On December 16, 2021, we acquired 100.0% of the outstanding equity interests of MagSeal for a purchase price of $69.5 million, net of cash acquired. We allocated the preliminary gross purchase price of $71.3 million to the assets acquired and liabilities assumed at their estimated fair values. The excess of the purchase price over the aggregate fair values of the net assets was recorded as goodwill. See Note 2.
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2021, 2020, AND 2019
(Dollars in thousands)
SCHEDULE II
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
Description | | Balance at Beginning of Period | | Charged to (Reduction of) Costs and Expenses | | | | Deductions/(Recoveries) | | Other(1) | | Balance at End of Period |
2021 | | | | | | | | | | | | |
Allowance for Credit Losses | | $ | 1,552 | | | $ | 227 | | | | | $ | 681 | | | | | $ | 1,098 | |
Valuation Allowance on Deferred Tax Assets | | $ | 9,330 | | | $ | (1,612) | | | | | $ | — | | | $ | — | | | $ | 7,718 | |
2020 | | | | | | | | | | | | |
Allowance for Credit Losses | | $ | 1,321 | | | $ | 231 | | | | | $ | — | | | $ | — | | | $ | 1,552 | |
Valuation Allowance on Deferred Tax Assets | | $ | 9,375 | | | $ | (111) | | | | | $ | — | | | $ | 66 | | | $ | 9,330 | |
2019 | | | | | | | | | | | | |
Allowance for Credit Losses | | $ | 1,135 | | | $ | 219 | | | | | $ | 33 | | | $ | — | | | $ | 1,321 | |
Valuation Allowance on Deferred Tax Assets | | $ | 9,083 | | | $ | (593) | | | | | $ | — | | | $ | 885 | | | $ | 9,375 | |
(1) Includes opening balances of Nobles Worldwide, Inc. acquired in October 2019.