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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-8174
DUCOMMUN INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 95-0693330
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(State or other jurisdiction I.R.S. Employer
incorporation or organization) Identification No.
111 West Ocean Boulevard, Suite 900, Long Beach, California 90802
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(Address of principal executive offices) (Zip Code)
(562) 624-0800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of June 30, 2001, there were
outstanding 9,679,998 shares of common stock.
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DUCOMMUN INCORPORATED
FORM 10-Q
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000 3
Consolidated Statements of Income for Three Months
Ended June 30, 2001 and July 1, 2000 4
Consolidated Statements of Income for Six Months
Ended June 30, 2001 and July 1, 2000 5
Consolidated Statements of Cash Flows for Six
Months Ended June 30, 2001 and July 1, 2000 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 16
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2001 2000
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 147 $ 100
Accounts receivable (less allowance for doubtful
accounts of $1,192 and $1,161) 35,126 20,844
Inventories 41,203 32,240
Deferred income taxes 3,666 3,624
Prepaid income taxes 134 134
Other current assets 5,810 3,326
--------- ---------
Total Current Assets 86,086 60,268
Property and Equipment, Net 55,151 49,579
Deferred Income Taxes 165 165
Excess of Cost Over Net Assets Acquired (Net of
Accumulated Amortization of $11,944 and $10,355) 73,654 39,056
Other Assets 2,732 1,296
--------- ---------
$ 217,788 $ 150,364
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 3,139 $ 1,409
Accounts payable 15,604 11,552
Accrued liabilities 17,255 15,904
--------- ---------
Total Current Liabilities 35,998 28,865
Long-Term Debt, Less Current Portion 71,831 18,245
Deferred Income Taxes 2,409 2,409
Other Long-Term Liabilities 1,316 1,316
--------- ---------
Total Liabilities 111,554 50,835
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Common stock -- $.01 par value; authorized
35,000,000 shares; issued 9,789,899 shares
in 2001 and 9,714,357 shares in 2000 98 97
Additional paid-in capital 37,087 36,673
Retained earnings 70,279 63,989
Less common stock held in treasury -- 109,900
shares in 2001 and 109,900 shares in 2000 (1,230) (1,230)
--------- ---------
Total Shareholders' Equity 106,234 99,529
--------- ---------
$ 217,788 $ 150,364
========= =========
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For Three Months Ended
----------------------
June 30, July 1,
2001 2000
-------- --------
Net Sales $ 50,463 $ 42,439
Operating Costs and Expenses:
Cost of goods sold 36,836 30,199
Selling, general and administrative expenses 6,966 5,783
Goodwill amortization expense 869 719
-------- --------
Total Operating Costs and Expenses 44,671 36,701
-------- --------
Operating Income 5,792 5,738
Interest Expense (526) (479)
-------- --------
Income Before Taxes 5,266 5,259
Income Tax Expense (2,001) (1,999)
-------- --------
Net Income $ 3,265 $ 3,260
======== ========
Earnings Per Share:
Basic $ .34 $ .34
Diluted .33 .33
Weighted Average Number of Common
Shares Outstanding:
Basic 9,667 9,655
Diluted 9,763 9,760
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For Six Months Ended
----------------------
June 30, July 1,
2001 2000
-------- --------
Net Sales $ 98,924 $ 82,293
Operating Costs and Expenses:
Cost of goods sold 72,843 57,882
Selling, general and administrative expenses 13,442 12,008
Goodwill amortization expense 1,588 1,439
-------- --------
Total Operating Costs and Expenses 87,873 71,329
-------- --------
Operating Income 11,051 10,964
Interest Expense (906) (979)
-------- --------
Income Before Taxes 10,145 9,985
Income Tax Expense (3,855) (3,795)
-------- --------
Net Income $ 6,290 $ 6,190
======== ========
Earnings Per Share:
Basic $ .65 $ .64
Diluted .65 .64
Weighted Average Number of Common
Shares Outstanding:
Basic 9,641 9,632
Diluted 9,730 9,728
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For Six Months Ended
---------------------
June 30, July 1,
2001 2000
-------- -------
Cash Flows from Operating Activities:
Net Income $ 6,290 $ 6,190
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 4,792 4,450
Deferred income tax provision (42) 455
Income tax benefit related to the exercise of
nonqualified stock options 140 678
Changes in Assets and Liabilities, Net
Accounts receivable (5,766) (2,798)
Inventories (734) (4,135)
Prepaid income taxes -- 1,188
Other assets (1,601) (29)
Accounts payable 77 1,199
Accrued and other liabilities (1,428) 467
-------- -------
Net Cash Provided by Operating Activities 1,728 7,665
-------- -------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (3,688) (4,398)
Acquisition of business (48,230) --
-------- -------
Net Cash Used in Investing Activities (51,918) (4,398)
-------- -------
Cash Flows from Financing Activities:
Net Borrowings (Repayment) of Long-Term Debt 49,962 (2,604)
Purchase of Common Stock for Treasury -- (174)
Net Receipts (Payments) Related to Stock
Options Exercised 275 (511)
-------- -------
Net Cash Provided by (Used in) Financing Activities 50,237 (3,289)
-------- -------
Net Increase (Decrease) in Cash and Cash Equivalents 47 (22)
Cash and Cash Equivalents - Beginning of Period 100 138
-------- -------
Cash and Cash Equivalents - End of Period $ 147 $ 116
======== =======
Supplemental Disclosures of Cash Flows Information:
Interest Expense Paid $ 952 $ 1,061
Income Taxes Paid $ 4,609 $ 1,471
Supplemental information for Non-Cash Investing
and Financing Activities:
See Note 7 for non-cash investing activities
related to the acquisition of businesses
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The consolidated balance sheets, consolidated statements of income
and consolidated statements of cash flows are unaudited as of and for
the three months and six months ended June 30, 2001 and July 1, 2000.
The financial information included in the quarterly report should be
read in conjunction with the Company's consolidated financial statements
and the related notes thereto included in its annual report to
shareholders for the year ended December 31, 2000.
Note 2. Certain amounts and disclosures included in the consolidated financial
statements required management to make estimates which could differ from
actual results.
Note 3. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding in each period.
Diluted earnings per share is computed by dividing net income by the
weighted average number of common shares outstanding plus any potential
dilution that could occur if stock options were exercised and converted
into common stock in each period. The weighted average number of common
shares outstanding for the three months ended June 30, 2001 and July 1,
2000 was 9,667,000 and 9,655,000, and the potentially dilutive shares
associated with stock options were 96,000 and 105,000, respectively. The
weighted average number of common shares outstanding for the six months
ended June 30, 2001 and July 1, 2000 was 9,641,000 and 9,632,000, and
the potentially dilutive shares associated with stock options were
89,000 and 96,000, respectively.
Note 4. Long-term debt is summarized as follows:
(In Thousands)
-----------------------
June 30, December 31,
2001 2000
------- -----------
Bank credit agreement $65,400 $14,300
Term and real estate loans 3,416 3,679
Notes and other liabilities for acquisitions 6,154 1,675
------- -------
Total debt 74,970 19,654
Less current portion 3,139 1,409
------- -------
Total long-term debt $71,831 $18,245
======= =======
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The Company's credit agreement provides for a $100,000,000 unsecured
revolving credit line declining to $60,000,000 at maturity on September
30, 2005. Interest is payable monthly on the outstanding borrowings
based on the bank's prime rate (6.75% at June 30, 2001) plus a spread
based on a leverage ratio of the Company calculated at the end of each
fiscal quarter (0.25% at June 30, 2001). A Eurodollar pricing option is
also available to the Company for terms of up to six months at the
Eurodollar rate plus a spread based on a leverage ratio of the Company
calculated at the end of each fiscal quarter (1.50%) at June 30, 2001.
The weighted average interest rate on borrowings outstanding was 5.68%
and 7.89% at June 30, 2001 and December 31, 2000, respectively. At June
30, 2001, the Company had $34,600,000 of unused lines of credit, after
deducting $65,400,000 of loans outstanding. The agreement includes
minimum interest coverage, maximum leverage, minimum EBITDA and minimum
net worth covenants, an unused commitment fee based on the leverage
ratio (0.30% per annum at June 30, 2001), and limitations on future
dispositions of property, repurchases of common stock, outside
indebtedness, capital expenditures and acquisitions.
Note 5. Shareholders' Equity
Since 1998, the Company's Board of Directors has authorized the
repurchase of up to $30,000,000 of its common stock. During 1998, 1999
and 2000, the Company repurchased in the open market 1,918,962 shares of
its common stock for a total of $25,296,000, and cancelled 1,809,062
shares of treasury stock. The Company did not repurchase any of its
common stock during the six months ended June 30, 2001.
Note 6. Commitments and Contingencies
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier
of chemical milling services for the aerospace industry. Aerochem has
been directed by California environmental agencies to investigate and
take corrective action for groundwater contamination at its El Mirage,
California facility (the "Site"). Aerochem expects to spend
approximately $1 million for future investigation and corrective action
at the Site, and the Company has established a provision for such costs.
However, the Company's ultimate liability in connection with the Site
will depend upon a number of factors, including changes in existing laws
and regulations, and the design and cost of the construction, operation
and maintenance of the correction action.
Com Dev Consulting Ltd. ("Com Dev") filed a lawsuit against the Company
and certain of its officers relating to the sale by the Company of the
capital stock of its wireless communications subsidiary, 3dbm, Inc., to
Com Dev in August 1998. During the quarter ended June 30, 2001, the
Company entered a settlement agreement with Com Dev to settle the
lawsuit, and reached an agreement with its insurer regarding
reimbursement of defense costs and contribution to the settlement. The
Company has recorded the financial impact, in excess of reserves, of the
settlement with Com Dev within selling, general and administrative
expenses in the quarter and
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six months ended June 30, 2001. Net income for the second quarter of
2001 included an after-tax charge of $288,000, or $0.03 per diluted
share, for the Com Dev lawsuit. Net income for the first half of 2001
included an after-tax charge of $501,000, or $0.05 per diluted share,
for the Com Dev lawsuit. Net income for the first six months ended June
30, 2001, excluding the charge for the Com Dev lawsuit, was $6,791,000,
or $0.70 per diluted share.
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, the Company makes
various commitments and incurs contingent liabilities. While it is not
feasible to predict the outcome of these matters, the Company 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 7. Acquisitions
On June 6, 2001 (the "Closing Date"), Ducommun Incorporated ("Ducommun"
or the "Company"), acquired, directly and indirectly, all of the units
(the "Units") of Composite Structures, LLC ("Composite Structures"),
pursuant to a Unit and Stock Purchase Agreement by and among Ducommun,
as buyer, and Composite Structures, LLC, its Members and Optionholders,
CSD Holdings Corporation and the Shareholders of CSD Holdings
Corporation, collectively, as sellers.
Composite Structures designs and manufactures metal, fiberglass and
carbon composite aerostructures. The Company produces helicopter main
and tail rotor blades, and adhesive bonded assemblies, including
spoilers and fuselage structural panels for aircraft, jet engine fan
containment rings, and helicopters. The purchase price for Composite
Structures, including indebtedness assumed, was approximately
$53,584,000, which amount is subject to adjustment based upon Composite
Structures tangible net book value as of the Closing Date. The purchase
price was approximately $48,230,000 in cash and $5,354,000 in
nonnegotiable promissory notes. The source of funds for the acquisition
of Composite Structures was Ducommun's working capital and borrowings
under Ducommun's revolving credit agreement (Note 4). The acquisition
was accounted for under the purchase method of accounting. The purchase
price was allocated to the identifiable assets acquired and liabilities
assumed based upon the fair value on the acquisition date. The net
tangible assets consist primarily of accounts receivable, property and
equipment and other liabilities. The excess amount of the purchase price
over the fair market value of identifiable assets acquired is accounted
for as goodwill and is being amortized on a straight-line basis over 15
years. The acquisition accounted for approximately $36,187,000 of the
excess of cost over net assets acquired at June 30, 2001. The
consolidated statements of income include the operating results for
Composite Structures since the date of the acquisition.
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The following table presents unaudited pro forma consolidated operating
results for the three months ended June 30, 2001 and July 1, 2000 and
the six months ended June 30, 2001 and July 1, 2000 as if the Composite
Structures acquisition had occurred as of the beginning of the periods
presented.
(In thousands, except per share amounts) Three Months Ended Three Months Ended Six Months Ended Six Months Ended
June 30, 2001 July 1, 2000 June 30, 2001 July 1, 2000
------------------ ------------------ ---------------- ----------------
Net sales $61,858 $58,555 $125,719 $112,158
Net earnings 2,738 3,751 5,926 6,312
Basic earnings per share 0.28 0.39 0.61 0.66
Diluted earnings per share 0.28 0.38 0.61 0.65
The unaudited pro forma consolidated operating results of the Company
are not necessarily indicative of the operating results that would have
been achieved had the Composite acquisition been consummated at the
beginning of the periods presented, and should not be construed as
representative of future operating results.
Note 8. Future Accounting Requirements
In July 2001, the Financial Accounting Standards Board issued FASB
Statement No. 142 (FAS 142), "Goodwill and Other Intangible Assets." FAS
142 changes the accounting for goodwill from an amortization method to
an impairment-only approach. Upon adoption of FAS 142, goodwill will be
tested at the reporting unit annually and whenever events or
circumstances occur indicating that goodwill might be impaired.
Amortization of goodwill, including goodwill recorded in past business
combinations, will cease. The adoption date for the Company will be
January 1, 2002. The Company has not yet determined what the impact of
FAS 142 will be on the Company's results of operations and financial
position.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL STATEMENT PRESENTATION
The interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of the Company,
necessary for a fair presentation of the results for the interim periods
presented.
ACQUISITIONS
On June 6, 2001 (the "Closing Date"), Ducommun Incorporated ("Ducommun" or the
"Company"), acquired, directly and indirectly, all of the units (the "Units") of
Composite Structures, LLC ("Composite Structures"), pursuant to a Unit and Stock
Purchase Agreement by and among Ducommun, as buyer, and Composite Structures,
LLC, its Members and Optionholders, CSD Holdings Corporation and the
Shareholders of CSD Holdings Corporation, collectively, as sellers.
Composite Structures designs and manufactures metal, fiberglass and carbon
composite aerostructures. The Company produces helicopter main and tail rotor
blades, and adhesive bonded assemblies, including spoilers and fuselage
structural panels for aircraft, jet engine fan containment rings, and
helicopters. The purchase price for Composite Structures, including indebtedness
assumed, was approximately $53,584,000, which amount is subject to adjustment
based upon Composite Structures tangible net book value as of the Closing Date.
The purchase price was approximately $48,230,000 in cash and $5,354,000 in
nonnegotiable promissory notes. The source of funds for the acquisition of
Composite Structures was Ducommun's working capital and borrowings under
Ducommun's revolving credit agreement Note 4). The acquisition was accounted for
under the purchase method of accounting. The purchase price was allocated to the
identifiable assets acquired and liabilities assumed based upon the fair value
on the acquisition date. The net tangible assets consist primarily of accounts
receivable, property and equipment and other liabilities. The excess amount of
the purchase price over the fair market value of identifiable assets acquired is
accounted for as goodwill and is being and is being amortized on a straight-line
basis over 15 years. The amount and allocation of the purchase price is subject
to revision, which is not expected to be material, based on the final
determination of the tangible net book value of Composite on the closing date
and the fair value of certain acquired assets and liabilities. The acquisition
accounted for approximately $36,187,000 of the excess of cost over net assets
acquired at June 30, 2001. The consolidated statements of income include the
operating results for Composite Structures since the date of the acquisition.
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RESULTS OF OPERATIONS
Second Quarter of 2001 Compared to Second Quarter of 2000
Net sales increased 19% to $50,463,000 in the second quarter of 2001. The
increase of approximately $8,024,000 in sales resulted primarily from an
increase in the Company's sales from the Composite Structures acquisition, which
accounted for 13% of the sales increase, as well as higher sales for the Boeing
737 and 777 programs, various Regional Jet programs and higher military sales to
the C-17 program. Excluding the acquisition, sales increased 6% in the second
quarter of 2001 compared to the second quarter of 2000.
The Company had substantial sales to Boeing, Lockheed Martin and Raytheon.
During the second quarters of 2001 and 2000, sales to Boeing were approximately
$22,445,000 and $14,727,000, respectively; sales to Lockheed Martin were
approximately $1,749,000 and $3,003,000, respectively; and sales to Raytheon
were approximately $2,292,000 and $5,036,000, respectively. The sales relating
to Boeing, Lockheed Martin and Raytheon are diversified over a number of
different commercial, space and military programs.
Gross profit, as a percentage of sales, was 27.0% for the second quarter of 2001
compared to 28.8% in 2000. This decrease was primarily the result of changes in
sales mix, pricing pressures from customers, higher production costs, including
higher energy costs, operating inefficiencies at Ducommun AeroStructures and
lower gross profit margins on sales from the Composite Structures acquisition.
Selling, general and administrative expenses, as a percentage of sales, were
13.8% for the second quarter of 2001 compared to 13.6% in 2000. Expenses for the
second quarter of 2001 included approximately $465,000 of cost related to the
Com Dev lawsuit.
Goodwill amortization expense for the second quarter of 2001 was $869,000
compared to $719,000 in 2000. The increase was primarily the result of a partial
month of goodwill amortization expense related to the Composite Structures
acquisition made in June 2001.
Interest expense increased to $526,000 in the second quarter of 2001 compared to
$479,000 for 2000. The increase in interest expense was primarily due to higher
average debt levels partially offset by lower interest rates in 2001 compared to
2000.
Income tax expense increased to $2,001,000 in the second quarter of 2001
compared to $1,999,000 for 2000. The increase in income tax expense was due to
the increase in income before taxes. Cash paid for income taxes was $3,490,000
in the second quarter of 2001, compared to $1,433,000 in 2000. Net income for
the second quarter of 2001 was $3,265,000, or $0.33 diluted earnings per share,
compared to $3,260,000, or $0.33 diluted earnings per share, in 2000. Net income
for the second quarter of 2001 included an after-tax charge of $288,000, or
$0.03 per diluted share, for the Com Dev lawsuit. Net income for the second
quarter of 2001, excluding the charge for the Com Dev lawsuit, was $3,553,000,
or $0.36 per diluted share.
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Six Months of 2001 Compared to Six Months of 2000
Net sales increased 20% to $98,924,000 in the first six months of 2001. The
increase of approximately $16,631,000 in sales resulted primarily from an
increase in sales for the Boeing 737 and 777 programs, various Regional Jet
programs, higher military sales to the C-17 program and sales from the Composite
Structures acquisition, which accounted for 7% of the sales increase. Excluding
the acquisition, sales increased 13% in the first six months of 2001 compared to
the first six months of 2000.
The Company had substantial sales to Boeing, Lockheed Martin and Raytheon.
During the first six months of 2001 and 2000, sales to Boeing were approximately
$40,259,000 and $29,273,000, respectively; sales to Lockheed Martin were
approximately $5,592,000 and $6,472,000, respectively; and sales to Raytheon
were approximately $6,535,000 and $8,033,000, respectively. The sales relating
to Boeing, Lockheed Martin and Raytheon are diversified over a number of
different commercial, space and military programs.
At June 30, 2001, backlog believed to be firm was approximately $322,400,000
compared to $238,600,000 at December 31, 2000 and $229,700,000 at July 1, 2000.
Backlog at June 30, 2001 included $102,500,000 of backlog from the Composite
Structures acquisition. Approximately $94,000,000 of backlog is expected to be
delivered during the remainder of 2001.
Gross profit, as a percentage of sales, was 26.4% for the first six months of
2001 compared to 29.7% in 2000. This decrease was primarily the result of
changes in sales mix, pricing pressures from customers, higher production costs,
including higher energy costs, operating inefficiencies at Ducommun
AeroStructures and lower gross profit margins on sales from the Composite
Structures acquisition.
Selling, general and administrative expenses, as a percentage of sales, were
13.6% for the first six months of 2001 compared to 14.6% in 2000. Expenses for
the first six months of 2001 included approximately $808,000 of cost related to
the Com Dev lawsuit.
Goodwill amortization expense for the first six months of 2001 was $1,588,000
compared to $1,439,000 in 2000. The increase was primarily the result of a
partial month of goodwill amortization expense related to the Composite
Structures acquisition made in June 2001
Interest expense decreased to $906,000 in the first six months of 2001 compared
to $979,000 for 2000. The decrease in interest expense was primarily due to
lower interest rates partially offset by higher debt levels in 2001 compared to
2000.
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Income tax expense increased to $3,855,000 in the first six months of 2001
compared to $3,795,000 for 2000. The increase in income tax expense was due to
the increase in income before taxes. Cash paid for income taxes was $4,609,000
in the first six months of 2001, compared to $1,471,000 in 2000. Net income for
the first six months of 2001 was $6,290,000, or $0.65 diluted earnings per
share, compared to $6,190,000, or $0.64 diluted earnings per share, in 2000. Net
income for the first half of 2001 included an after-tax charge of $501,000, or
$0.05 per diluted share, for the Com Dev lawsuit. Net income for the first half
of 2001, excluding the charge for the Com Dev lawsuit, was $6,791,000, or $0.70
per diluted share.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flows from operating activities for the six months ended June 30, 2001 was
$1,728,000, compared to $7,665,000 for the six months ended July 1, 2000. The
decrease in cash flow from operating activities resulted principally from an
increase in accounts receivable and other assets and a decrease in accrued and
other liabilities. During the first six months of 2001, the Company had net
borrowings of $49,962,000, of which $48,230,000 was utilized for the acquisition
of Composite Structures. The Company continues to depend on operating cash flow
and the availability of its bank line of credit to provide short-term liquidity.
Cash from operations and bank borrowing capacity are expected to provide
sufficient liquidity to meet the Company's obligations during 2001. The
Company's bank credit agreement provides for a $100,000,000 unsecured revolving
credit line declining to $60,000,000 at maturity on September 30, 2005. At June
30, 2001, the Company had $34,600,000 of unused lines of credit. See Note 4 to
the Notes to Consolidated Financial Statements.
The Company spent $3,688,000 on capital expenditures during the first six months
of 2001 and expects to spend less than $7,000,000 in the aggregate for capital
expenditures in 2001. The Company plans to continue to make substantial capital
expenditures for manufacturing equipment and facilities to support long-term
contracts for both commercial and military aircraft and Space programs.
Since 1998, the Company's Board of Directors has authorized the repurchase of up
to $30,000,000 of its common stock. During 1998, 1999 and 2000, the Company
repurchased in the open market 1,918,962 shares of its common stock for a total
of $25,296,000. No repurchases were made during the first six months of 2001,
however, repurchases will be made from time to time on the open market at
prevailing prices.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
chemical milling services for the aerospace industry. Aerochem has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination at its El Mirage, California facility (the
"Site"). Aerochem expects to spend approximately $1 million for future
investigation and corrective action at the Site, and the Company has established
a provision for such costs. However, the Company's ultimate liability in
connection with the Site will depend upon a number of factors, including changes
in existing laws and regulations, and the design and cost of the construction,
operation and maintenance of the correction action.
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Com Dev Consulting Ltd. ("Com Dev") filed a lawsuit against the Company and
certain of its officers relating to the sale by the Company of the capital stock
of its wireless communications subsidiary, 3dbm, Inc., to Com Dev in August
1998. During the quarter ended June 30, 2001, the Company entered a settlement
agreement with Com Dev to settle the lawsuit, and reached an agreement with its
insurer regarding reimbursement of defense costs and contribution to the
settlement. The Company has recorded the financial impact, in excess of
reserves, of the settlement with Com Dev within selling, general and
administrative expenses in the quarter ended June 30, 2001. Net income for the
second quarter of 2001 included an after-tax charge of $288,000, or $0.03 per
diluted share, for the Com Dev lawsuit. Net income for the second quarter of
2001, excluding the charge for the Com Dev lawsuit, was $3,553,000, or $0.36 per
diluted share. Net income for the first six months of 2001 included an after-tax
charge of $501,000, or $0.05 per diluted share, for the Com Dev lawsuit. Net
income for the six months of 2001, excluding the charge for the Com Dev lawsuit,
was $6,791,000, or $0.70 per diluted share.
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, the Company makes various commitments and
incurs contingent liabilities. While it is not feasible to predict the outcome
of these matters, the Company 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.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 will become effective for the
Company in 2001. The adoption of SFAS 133 is not expected to have a material
effect on the Company's financial position, results of operations or cash flow.
In July 2001, the Financial Accounting Standards Board issued FASB Statement No.
142 (FAS 142), "Goodwill and Other Intangible Assets." FAS 142 changes the
accounting for goodwill from an amortization method to an impairment-only
approach. Upon adoption of FAS 142, goodwill will be tested at the reporting
unit annually and whenever events or circumstances occur indicating that
goodwill might be impaired. Amortization of goodwill, including goodwill
recorded in past business combinations, will cease. The adoption date for the
Company will be January 1, 2002. The Company has not yet determined what the
impact of FAS 142 will be on the Company's results of operations and financial
position.
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FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Any forward-looking statements made in this Form 10-Q involve risks and
uncertainties. The Company's future financial results could differ materially
from those anticipated due to the Company's dependence on conditions in the
airline industry, the level of new commercial aircraft orders, the production
rate for Boeing commercial aircraft, the C-17 and the Space Shuttle programs,
the level of defense spending, competitive pricing pressures, technology and
product development risks and uncertainties, product performance, risks
associated with acquisitions and dispositions of businesses by the Company,
increasing consolidation of customers and suppliers in the aerospace industry,
availability of raw materials and components from suppliers and other factors
beyond the Company's control.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Com Dev Consulting Ltd. filed a lawsuit, against the Company and certain
officers of the Company in connection with the sale of the capital stock
of 3dbm by the Company to Com Dev in August 1998. During the quarter
ended June 30, 2001, the Company entered into a settlement agreement
with Com Dev to settle the lawsuit, which included a general release of
the Company and its directors, officers and affiliates, and a dismissal
of the lawsuit with prejudice. See Note 6 to the Notes to Consolidated
Financial Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
The 2001 annual meeting of shareholders of the Company was held on May
2, 2001. At the meeting, Norman A. Barkeley, H. Frederick Christie and
Kevin S. Moore were elected as directors of the Company to serve for
three-year terms expiring at the annual meeting of shareholders in 2004.
In the election of directors, the shareholder vote was as follows:
Norman A. Barkeley, For - 8,611,608, Abstain - 636,017; H. Frederick
Christie, For - 8,686,464, Abstain - 561,161; Kevin S. Moore, For -
8,633,298, Abstain - 614,327. The directors whose terms of office
continued after the annual meeting are: Joseph C. Berenato, Eugene P.
Conese, Jr., Ralph D. Crosby, Jr., Robert C. Ducommun and Thomas P.
Mullaney. At the meeting, the 2001 Stock Incentive Plan was approved,
providing for the issuance of up to 475,000 shares of common stock of
the Company. In the approval of the stock incentive plan, the
shareholder vote was as follows: For - 5,874,683, Against - 2,318,222,
Abstain - 1,054,720.
Item 6. Exhibits and Reports on Form 8-K.
(a) No exhibits are filed with this report.
(b) A report on Form 8-K dated June 6, 2001 was filed during the quarter
for which this report is filed with respect to the acquisition of
Composite Structures, LLC, reported under Item 2 thereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Ducommun Incorporated
---------------------
(Registrant)
By: /s/ James S. Heiser
---------------------------------
James S. Heiser
Vice President, Chief
Financial Officer and
General Counsel
(Duly Authorized Officer of
the Registrant)
By: /s/ Samuel D. Williams
---------------------------------
Samuel D. Williams
Vice President and Controller
(Duly Authorized Officer of
the Registrant)
Date: July 30, 2001
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