1 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 March 31, 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 - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-0693330 - ------------------------------- ------------------- (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No. 111 West Ocean Boulevard, Suite 900, Long Beach, California 90802 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (562) 624-0800 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (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 March 31, 2001, there were outstanding 9,637,593 shares of common stock. 2 DUCOMMUN INCORPORATED FORM 10-Q INDEX Page ---- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 3 Consolidated Statements of Income for Three Months Ended March 31, 2001 and April 1, 2000 4 Consolidated Statements of Cash Flows for Three Months Ended March 31, 2001 and April 1, 2000 5 Notes to Consolidated Financial Statements 6 - 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 11 Part II. Other Information Item 1. Legal Proceedings 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 -2- 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements DUCOMMUN INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) See accompanying notes to consolidated financial statements. -3-
March 31, December 31, 2001 2000 --------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 140 $ 100 Accounts receivable (less allowance for doubtful accounts of $1,123 and $1,161) 26,071 20,844 Inventories 32,111 32,240 Deferred income taxes 3,370 3,624 Prepaid income taxes 134 134 Other current assets 3,554 3,326 --------- --------- Total Current Assets 65,380 60,268 Property and Equipment, Net 50,186 49,579 Deferred Income Taxes 165 165 Excess of Cost Over Net Assets Acquired (Net of Accumulated Amortization of $11,074 and $10,355) 38,337 39,056 Other Assets 1,272 1,296 --------- --------- $ 155,340 $ 150,364 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 1,419 $ 1,409 Accounts payable 12,349 11,552 Accrued liabilities 16,553 15,904 --------- --------- Total Current Liabilities 30,321 28,865 Long-Term Debt, Less Current Portion 18,705 18,245 Deferred Income Taxes 2,409 2,409 Other Long-Term Liabilities 1,316 1,316 --------- --------- Total Liabilities 52,751 50,835 --------- --------- Commitments and Contingencies Shareholders' Equity: Common stock -- $.01 par value; authorized 35,000,000 shares; issued 9,747,493 shares in 2001 and 9,714,357 shares in 2000 97 97 Additional paid-in capital 36,708 36,673 Retained earnings 67,014 63,989 Less common stock held in treasury -- 109,900 shares in 2001 and 2000 (1,230) (1,230) --------- --------- Total Shareholders' Equity 102,589 99,529 --------- --------- $ 155,340 $ 150,364 ========= ========= 4 DUCOMMUN INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) See accompanying notes to consolidated financial statements. -4-
For Three Months Ended ------------------------- March 31, April 1, 2001 2000 -------- -------- Net Sales $ 48,461 $ 39,854 Operating Costs and Expenses: Cost of goods sold 36,007 27,683 Selling, general and administrative expenses 6,476 6,226 Goodwill amortization expense 719 719 -------- -------- Total Operating Costs and Expenses 43,202 34,628 -------- -------- Operating Income 5,259 5,226 Interest Expense (380) (500) -------- -------- Income Before Taxes 4,879 4,726 Income Tax Expense (1,854) (1,796) -------- -------- Net Income $ 3,025 $ 2,930 ======== ======== Earnings Per Share: Basic earnings per share $ .31 $ .30 Diluted earnings per share .31 .30 Weighted Average Number of Common Shares Outstanding: Basic 9,614 9,609 Diluted 9,718 9,719 5 DUCOMMUN INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) See accompanying notes to consolidated financial statements. -5-
For Three Months Ended ------------------------- March 31, April 1, 2001 2000 -------- -------- Cash Flows from Operating Activities: Net Income $ 3,025 $ 2,930 Adjustments to Reconcile Net Income to Cash Provided by Operating Activities: Depreciation and amortization 2,294 2,208 Deferred income tax provision 254 343 Income tax benefit related to the exercise of nonqualified stock options 70 579 Changes in Assets and Liabilities: Accounts receivable (5,227) 280 Inventories 129 (2,379) Prepaid income taxes -- 834 Other assets (204) 38 Accounts payable 797 470 Accrued and other liabilities 649 (481) ------- ------- Net Cash Provided by Operating Activities 1,787 4,822 ------- ------- Cash Flows from Investing Activities: Purchase of Property and Equipment (2,182) (1,130) ------- ------- Net Cash Used in Investing Activities (2,182) (1,130) ------- ------- Cash Flows from Financing Activities: Net Borrowings (Repayment) of Long-Term Debt 470 (2,881) Purchase of Common Stock for Treasury -- (174) Net (Payments) Related to Stock Options Exercised (35) (705) ------- ------- Net Cash Provided by (Used in) Financing Activities 435 (3,760) ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 40 (68) Cash and Cash Equivalents - Beginning of Period 100 138 ------- ------- Cash and Cash Equivalents - End of Period $ 140 $ 70 ======= ======= Supplemental Disclosures of Cash Flow Information: Interest Expense Paid $ 370 $ 403 Income Taxes Paid $ 1,119 $ 38 6 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 ended March 31, 2001 and April 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 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 plus income associated with dilutive securities by the weighted average number of common shares outstanding plus any potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock in each period. For the three months ended March 31, 2001 and April 1, 2000, income available to common shareholders was $3,025,000 and $2,930,000, respectively. The weighted average number of common shares outstanding for the three months ended March 31, 2001 and April 1, 2000 were 9,614,000 and 9,609,000, respectively, and the dilutive shares associated with stock options were 104,000 and 110,000, respectively. Note 4. Long-term debt is summarized as follows: (In thousands) ----------------------- March 31, December 31, 2001 2000 --------- ------------ Bank credit agreement $14,900 $14,300 Term and real estate loans 3,549 3,679 Notes and other liabilities for acquisitions 1,675 1,675 ------- ------- Total debt 20,124 19,654 Less current portion 1,419 1,409 ------- ------- Total long-term debt $18,705 $18,245 ======= ======= In September 2000, the Company signed a new $100,000,000 revolving credit facility with a group of banks. The 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 -6- 7 outstanding borrowings based on the bank's prime rate plus a spread based on the leverage ratio of the Company calculated at the end of each fiscal quarter (8.00% at March 31, 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 the leverage ratio of the Company calculated at the end of each fiscal quarter (6.80% at March 31, 2001). At March 31, 2001, the Company had $85,100,000 of unused lines of credit, after deducting $14,900,000 of loans outstanding. The credit agreement includes minimum interest coverage, maximum leverage, minimum EBITDA and minimum net worth covenants, an unused commitment fee based on the leverage ratio (0.25% per annum at March 31, 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 three months ended March 31, 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") has filed a complaint 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. ("3dbm") to Com Dev in August 1998. The complaint seeks recovery of damages in excess of $10,000,000, restitution of the $17,250,000 purchase price paid for 3dbm and recovery of punitive damages, costs and attorneys' fees. The Company intends to vigorously defend the matter. While it is not feasible to predict the outcome of this matter, the Company presently believes that the final resolution of the matter will not have a material adverse effect on its consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this matter be unfavorable, the Company may be required to pay damages and other expenses, which could have a material adverse effect on its consolidated financial position and results of operations. 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 or results of operations. -7- 8 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. RESULTS OF OPERATIONS First Quarter of 2001 Compared to First Quarter of 2000 Net sales increased 22% to $48,461,000 in the first quarter of 2001. The increase of approximately $9,000,000 in sales resulted primarily from an increase in the Company's commercial sales to the Boeing 777 and Regional Jet programs and higher military sales to the C-17 program. The Company had substantial sales to Boeing, Lockheed Martin and Raytheon. During the first quarters of 2001 and 2000, sales to Boeing were approximately $17,814,000 and $14,546,000, respectively; sales to Lockheed Martin were approximately $3,843,000 and $3,469,000, respectively; and sales to Raytheon were approximately $4,243,000 and $2,997,000, respectively. The sales relating to Boeing, Lockheed Martin and Raytheon are diversified over a number of different commercial, space and military programs. At March 31, 2001, backlog believed to be firm was approximately $243,000,000 compared to $238,600,000 at December 31, 2000 and $205,400,000 at April 1, 2000. Approximately $88,000,000 of backlog is expected to be delivered during the remainder of 2001. Gross profit, as a percentage of sales, was 25.7% for the first quarter of 2001 compared to 30.5% in 2000. This decrease was primarily the result of changes in sales mix, pricing pressures from customers and higher production costs. Selling, general and administrative expenses, as a percentage of sales, were 13.4% for the first quarter of 2001 compared to 15.6% in 2000. This decrease as a percentage of sales was primarily the result of higher sales volume partially offset by an increase in related period costs. Interest expense decreased to $380,000 in the first quarter of 2001 compared to $500,000 for 2000. The decrease in interest expense was primarily due to lower debt levels and interest rates in 2001 compared to 2000. Income tax expense increased to $1,854,000 in the first quarter of 2001 compared to $1,796,000 for 2000. The increase in income tax expense was primarily due to the increase in income before taxes. Cash paid for income taxes was $1,119,000 in the first quarter of 2001, compared to $38,000 in 2000. Taxes prepaid by the Company during 1999 resulted in lower cash paid for income taxes during the first quarter of 2000. Net income for the first quarter of 2001 was $3,025,000, or $0.31 diluted earnings per share, compared to $2,930,000, or $0.30 diluted earnings per share, in 2000. -8- 9 FINANCIAL CONDITION Liquidity and Capital Resources Cash flow from operating activities for the three months ended March 31, 2001 was $1,787,000, compared to $4,822,000 for the three months ended April 1, 2000. The decrease in cash flow from operating activities resulted principally from an increase in accounts receivable, partially offset by an increase in accounts payable and accrued and other liabilities. During the first three months of 2001, the Company had net borrowings of $470,000, and spent $2,182,000 on capital expenditures. 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 March 31, 2001, the Company had $85,100,000 of unused lines of credit, after deducting $14,900,000 of loans outstanding. See Note 4 to the Notes to Consolidated Financial Statements. The Company spent $2,182,000 on capital expenditures during the first three months of 2001 and expects to spend less than $10,000,000 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 of common stock were made by the Company during the first quarter of 2001, however, repurchases may 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. -9- 10 Com Dev Consulting Ltd. ("Com Dev") has filed a complaint 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. ("3dbm") to Com Dev in August 1998. The complaint seeks recovery of damages in excess of $10,000,000, restitution of the $17,250,000 purchase price paid for 3dbm and recovery of punitive damages, costs and attorneys' fees. The Company intends to vigorously defend the matter. While it is not feasible to predict the outcome of this matter, the Company presently believes that the final resolution of the matter will not have a material adverse effect on its consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this matter be unfavorable, the Company may be required to pay damages and other expenses, which could have a material adverse effect on its consolidated financial position and results of operations. 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 or results of operations. 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 as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities" - an amendment of FASB Statement No. 133, became effective for the Company in the first quarter 2001. The adoption of SFAS 133 did not have a material effect on the Company's financial position, results of operations or cash flow. 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, the outcome of the lawsuit brought by Com Dev, and other factors beyond the Company's control. -10- 11 Item 3. Quantitative and Qualitative Disclosure about Market Risk Not applicable. -11- 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings. In October 1999, Com Dev Consulting Ltd. ("Com Dev") filed a complaint in the United States District Court against the Company and certain of its officers relating to the sale of the capital stock of 3dbm, Inc. ("3dbm") by the Company to Com Dev in August 1998. On February 3, 2000, the United States District Court dismissed the complaint without prejudice. On April 7, 2000, Com Dev filed another complaint in California Superior Court against the Company and certain of its officers relating to the sale of the capital stock of 3dbm by the Company to Com Dev. The complaint seeks recovery of damages in excess of $10,000,000, restitution of the $17,250,000 purchase price paid for 3dbm, and recovery of punitive damages, costs and attorneys' fees. A jury trial of the lawsuit is currently scheduled to begin on April 23, 2001. The Company intends to vigorously defend the matter. While it is not feasible to predict the outcome of this matter, the Company presently believes that the final resolution of the matter will not have a material adverse effect on its consolidated financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of this matter be unfavorable, the Company may be required to pay damages and other expenses, which could have a material adverse effect on its consolidated financial position and results of operations. During the first quarter of 2001, the trial of the lawsuit by Com Dev was continued, and a new trial date has not been set. Item 6. Exhibits and Reports on Form 8-K. (a) No exhibits are filed with this report. (b) No reports on Form 8-K were filed during the quarter for which this report is filed. -12- 13 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 (Chief Accounting Officer of the Registrant) Date: April 25, 2001 -13-