Business Context and Reporting Period
Company: Ducommun Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Industry: Aerospace and Defense Manufacturing
Ducommun designs, engineers, and manufactures aerostructures, electromechanical components, and commercial aircraft seats. The company serves domestic and foreign commercial, military, and space programs. Key customers include Boeing (47% of 2001 sales), Raytheon (7%), and Lockheed Martin (4%). The company operates primarily in one business segment with significant exposure to the U.S. defense budget and commercial aircraft production rates.
Key Financial Metrics (Year Ended Dec 31, 2001)
| Metric | 2001 | 2000 |
|---|---|---|
| Net Sales | $224,905,000 | $165,711,000 |
| Gross Profit Margin | 25.8% | 28.9% |
| Operating Income | $25,194,000 | $22,305,000 |
| Net Income | $14,603,000 | $12,720,000 |
| Diluted EPS | $1.50 | $1.30 |
| Cash Flow from Operations | $33,315,000 | $20,687,000 |
| Total Assets | $216,075,000 | $148,474,000 |
| Long-Term Debt (incl. current) | $52,298,000 | $19,654,000 |
| Working Capital | $41,542,000 | $31,403,000 |
| Backlog (Firm) | $308,400,000 | $238,600,000 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 36% to $224.9 million, driven primarily by the acquisitions of Fort Defiance and Composite Structures (adding ~$43.4 million in sales) and higher military sales for C-17, F-15, and F-18 programs.
- Margin Compression: Gross profit margin declined from 28.9% to 25.8% due to sales mix changes, customer pricing pressures, higher energy costs, and lower margins from recent acquisitions.
- Debt Increase: Long-term debt rose significantly from $19.7 million to $52.3 million to fund acquisitions and operations. Interest expense increased 32% to $2.4 million.
- Profitability: Despite margin pressure, Net Income grew 15% to $14.6 million, aided by a lower effective tax rate (36.0% vs 38.0%) due to R&D credits.
- Customer Concentration: Sales to Boeing increased from $61.1 million (2000) to $106.1 million (2001), raising its share of total sales from ~37% to 47%.
Guidance, Outlook, Risks, and Unusual Items
- Acquisitions: In 2001, the company acquired Fort Defiance ($4.6M cash) and Composite Structures ($48.0M cash + notes). These were funded by internal cash and borrowings.
- Accounting Changes: The company is adopting SFAS No. 142 (Goodwill) effective Jan 1, 2002. This will eliminate goodwill amortization (currently $3.8M/year) but requires annual impairment testing. Management expects a significant impact on 2002 net income compared to prior years.
- Environmental Contingency: Aerochem faces groundwater contamination issues at its El Mirage, CA facility. A provision has been established, with expected future investigation/corrective costs of approximately $1 million. Ultimate liability is uncertain.
- Litigation: A $808,000 charge was recorded in 2001 for the settlement of a lawsuit with Com Dev Consulting Ltd.
- Risks: Key risks include dependence on the airline industry, defense spending levels, Boeing production rates, and potential disruption of electricity availability in California. The company does not carry earthquake insurance for its Southern California facilities.
- Liquidity: The company maintains a $100M revolving credit line (declining to $60M by 2005). As of Dec 31, 2001, $56.6M was unused. Management expects operating cash flow and credit facilities to meet 2002 obligations.
Investor Verification Checklist
- Goodwill Impairment: Verify the outcome of the SFAS 142 impairment tests expected by mid-2002, as this could materially alter future earnings.
- Boeing Dependency: Assess the risk of revenue concentration given Boeing represents 47% of sales.
- Environmental Liability: Monitor the El Mirage site remediation costs to ensure they do not exceed the $1 million estimate.
- Debt Service: Review the ability to service the increased debt load ($52.3M) given the decline in gross margins.
- Backlog Conversion: Track the conversion of the $308.4M backlog into revenue, noting that ~$135M is expected in 2002.