1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1997
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 of I.R.S. Employer
incorporation or organization) Identification No.
23301 South Wilmington Avenue, Carson, California 90745
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(Address of principal executive offices) (Zip Code)
(310) 513-7200
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(Registrant's telephone number, including area code)
N/A
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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 September 27, 1997, there
were outstanding 7,401,323 shares of common stock.
2
DUCOMMUN INCORPORATED
FORM 10-Q
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 27, 1997 and
December 31, 1996 3
Consolidated Statements of Income for Three Months
Ended September 27, 1997 and September 28, 1996 4
Consolidated Statements of Income for Nine Months
Ended September 27, 1997 and September 28, 1996 5
Consolidated Statements of Cash Flows for Nine
Months Ended September 27, 1997 and September 28, 1996 6
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Part II. Other Information
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 amounts)
September 27, December 31,
1997 1996
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 320 $ 571
Accounts receivable (less allowance for doubtful
accounts of $178 and $206) 19,866 14,722
Inventories 25,956 22,595
Deferred income taxes 4,057 4,597
Other current assets 1,730 1,850
-------- --------
Total Current Assets 51,929 44,335
Property and Equipment, Net 29,698 27,051
Deferred Income Taxes 2,228 5,594
Excess of Cost Over Net Assets Acquired (Net of Accumulated
Amortization of $4,511 and $3,548) 17,229 18,326
Other Assets 692 508
-------- --------
$101,776 $ 95,814
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 5) $ 1,018 $ 1,117
Accounts payable 9,501 8,343
Accrued liabilities 16,621 17,589
-------- --------
Total Current Liabilities 27,140 27,049
Long-Term Debt (Note 5) 5,150 9,173
Other Long-Term Liabilities 356 404
-------- --------
Total Liabilities 32,646 36,626
-------- --------
Commitments and Contingencies (Note 6)
Shareholders' Equity:
Common stock -- $.01 par value; authorized 12,500,000 shares;
issued and outstanding 7,401,323 shares in 1997 and
7,301,428 shares in 1996 74 73
Additional paid-in capital 59,196 59,280
Retained earnings (accumulated deficit) 9,860 (165)
-------- --------
Total Shareholders' Equity 69,130 59,188
-------- --------
$101,776 $ 95,814
======== ========
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
-------------------------------
September 27, September 28,
1997 1996
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Net Sales $ 40,482 $ 29,778
-------- --------
Operating Costs and Expenses:
Cost of goods sold 27,721 20,245
Selling, general and administrative expenses 6,223 5,483
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Total Operating Costs and Expenses 33,944 25,728
-------- --------
Operating Income 6,538 4,050
Interest Expense (137) (235)
-------- --------
Income Before Taxes 6,401 3,815
Income Tax Expense (2,686) (1,068)
-------- --------
Net Income $ 3,715 $ 2,747
======== ========
Earnings Per Share:
Primary $ .47 $ .35
Fully Diluted .47 .35
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share:
Primary 7,891 7,823
Fully Diluted 7,906 7,845
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 Nine Months Ended
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September 27, September 28,
1997 1996
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Net Sales $ 115,171 $ 82,439
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Operating Costs and Expenses:
Cost of goods sold 77,552 55,283
Selling, general and administrative expenses 19,804 17,526
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Total Operating Costs and Expenses 97,356 72,809
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Operating Income 17,815 9,630
Interest Expense (532) (932)
--------- ---------
Income Before Taxes 17,283 8,698
Income Tax Expense (7,258) (2,435)
--------- ---------
Net Income $ 10,025 $ 6,263
========= =========
Earnings Per Share:
Primary $ 1.27 $ .92
Fully Diluted 1.26 .83
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share:
Primary 7,911 6,837
Fully Diluted 7,931 7,858
See accompanying notes to consolidated financial statements.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For Nine Months Ended
-------------------------------
September 27, September 28,
1997 1996
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Cash Flows from Operating Activities:
Net Income $ 10,025 $ 6,263
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 3,993 3,318
Deferred income tax provision 3,906 1,429
Changes in Assets and Liabilities, Net
Accounts receivable (5,144) 1,085
Inventories (3,361) (2,938)
Other assets 94 (274)
Accounts payable 1,158 1,917
Accrued and other liabilities (1,016) 1,148
-------- --------
Net Cash Provided by Operating Activities 9,655 11,948
-------- --------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (5,701) (4,390)
Acquisition of MechTronics -- (8,000)
-------- --------
Net Cash Used in Investing Activities (5,701) (12,390)
-------- --------
Cash Flows from Financing Activities:
Net Borrowings (Repayments) of Long-Term Debt (4,122) 736
Cash Premium for Conversion of Convertible Subordinated
Debentures -- (609)
Other (83) (17)
-------- --------
Net Cash (Used in) Provided by Financing Activities (4,205) 110
-------- --------
Net Decrease in Cash and Cash Equivalents (251) (332)
Cash and Cash Equivalents at Beginning of Period 571 371
-------- --------
Cash and Cash Equivalents at End of Period $ 320 $ 39
======== ========
Supplemental Disclosures of Cash Flows Information:
Interest Expense Paid $ 601 $ 1,272
Income Taxes Paid $ 3,721 $ 1,327
Supplementary Information for Non-Cash Financing Activities:
During the first nine months of 1996, the Company
issued 2,417,205 new shares of common stock upon
conversion of $24,263,000 of its outstanding 7.75%
convertible subordinated debentures
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 nine months ended September 27, 1997 and September 28,
1996. 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, 1996.
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 common share computations are based on the weighted
average number of common and common equivalent shares outstanding in
each period. Common equivalent shares represent the number of shares
which would be issued assuming the exercise of dilutive stock options,
reduced by the number of shares which would be purchased with the
proceeds from the exercise of such options.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
(In thousands, except per share amounts)
For Three Months Ended
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September 27, September 28,
1997 1996
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Net Income for Computation of
Primary Earnings Per Share $3,715 $2,747
Net Income for Computation of
Fully Diluted Earnings Per Share 3,715 2,747
Applicable Shares:
Weighted Average Common Shares
Outstanding for Computation of
Primary Earnings Per Share 7,353 7,295
Weighted Average Common Equivalent
Shares Arising From Stock options:
Primary 538 528
Fully diluted 553 550
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted
Earnings Per Share 7,906 7,845
Earnings Per Share:
Primary $ .47 $ .35
Fully diluted .47 .35
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES
(In thousands, except per share amounts)
For Nine Months Ended
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September 27, September 28,
1997 1996
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Income for Computation of Primary
Earnings Per Share $10,025 $ 6,263
Interest, Net of Income Taxes,
Relating to 7.75% Convertible
Subordinated Debentures -- 222
Net Income for Computation of
Primary Earnings Per Share 10,025 6,263
Net Income for Computation of
Fully Diluted Earnings Per Share 10,025 6,485
Applicable Shares:
Weighted Average Common Shares
Outstanding for Computation of
Primary Earnings Per Share 7,327 6,350
Weighted Average Common Equivalent
Shares Arising From:
7.75% convertible subordinated debentures -- 958
Stock options:
Primary 584 487
Fully diluted 604 550
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted
Earnings Per Share 7,931 7,858
Earnings Per Share:
Primary $ 1.27 $ .92
Fully diluted 1.26 .83
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS 128"). SFAS 128 establishes new standards for computing
and presenting earnings per share ("EPS"), and supersedes APB Opinion
No. 15, "Earnings Per Share." SFAS 128 replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures, and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 becomes effective for the Company for the year
ending December 31, 1997. Pro forma EPS for the third quarter of 1997
and 1996, and the first nine months of 1997 and 1996, assuming the
application of SFAS 128 are as follows:
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For Three Months Ended
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September 27, September 28,
1997 1996
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Basic earnings per share $.51 $.38
Diluted earnings per share .47 .35
For Nine Months Ended
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September 27, September 28,
1997 1996
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Basic earnings per share $1.37 $.99
Diluted earnings per share 1.27 .83
Note 4. Acquisition
In June 1996, the Company acquired substantially all of the assets of
MechTronics of Arizona, Inc. ("MechTronics") for $8,000,000 in cash and
a $750,000 note. The Company may be required to make additional
payments through 1999, based on the future financial performance of
MechTronics. MechTronics is a leading manufacturer of mechanical and
electromechanical enclosure products for the defense electronics,
commercial aviation and communications markets. The acquisition of
MechTronics was accounted for under the purchase method of accounting.
The consolidated statements of income include the operating results for
MechTronics since the date of the acquisition.
Note 5. Long-term debt is summarized as follows:
(In thousands)
----------------------------
September 27, December 31,
1997 1996
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Bank credit agreement $ -- $ 4,000
Term and real estate loans 5,390 5,294
Promissory notes related to acquisitions 778 996
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Total debt 6,168 10,290
Less current portion 1,018 1,117
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Total long-term debt $ 5,150 $ 9,173
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The Company's bank credit agreement provides for a $40,000,000
unsecured revolving credit line with an expiration date of July 1,
1999. Interest is payable monthly on the outstanding borrowings based
on the bank's prime rate (8.50% at September 27, 1997) minus 0.25%. 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 (1.00% at September 27, 1997). At September 27, 1997, the
Company had $39,658,000 of unused lines of credit, after deducting
$342,000 for an outstanding standby letter of credit which supports
the estimated post-closure maintenance cost of a former surface
impoundment. The credit agreement includes fixed charge coverage and
maximum leverage ratios, and limitations on future dividend payments
and outside indebtedness.
The carrying amount of long-term debt approximates fair value based
on the terms of the related debt and estimates using interest rates
currently available to the Company for debt with similar terms and
remaining maturities.
Note 6. 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.
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.
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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.
RESULTS OF OPERATIONS
Third Quarter of 1997 Compared to Third Quarter of 1996
- -------------------------------------------------------
Net sales increased 36% to $40,482,000 in the third quarter of 1997. The
increase resulted from a broad-based increase in sales in most of the Company's
product lines due to improved industry conditions and new contract awards.
The Company had substantial sales to Boeing, Lockheed Martin and Northrop
Grumman. During the third quarter of 1997 and 1996, sales to Boeing were
approximately $13,653,000 and $6,470,000, respectively; sales to Lockheed Martin
were approximately $4,643,000 and $3,164,000, respectively; and sales to
Northrop Grumman were approximately $1,969,000 and $1,873,000, respectively. The
sales relating to Lockheed Martin, Boeing and Northrop Grumman are diversified
over a number of different commercial, military and space programs.
Gross profit, as a percentage of sales, was 31.5% for the third quarter of 1997
compared to 32.0% in 1996. This decrease was primarily the result of changes in
sales mix and higher production costs. The decrease was partially offset by
economies of scale resulting from sales increases.
Selling, general and administrative expenses, as a percentage of sales, were
15.4% for the third quarter of 1997 compared to 18.4% in 1996. The decrease in
these expenses as a percentage of sales was primarily the result of higher sales
volume partially offset by an increase in related period costs.
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Interest expense decreased to $137,000 in the third quarter of 1997 compared to
$235,000 for 1996. The decrease in interest expense was primarily due to lower
debt levels.
Income tax expense increased to $2,686,000 in the third quarter of 1997 compared
to $1,068,000 for 1996. The increase in income tax expense was primarily due to
the increase in income before taxes and an effective tax rate of 42% in 1997
compared to 28% in 1996. From a cash flow perspective, however, the Company
continues to use its federal net operating loss carryforwards to offset taxable
income. Cash paid for income taxes was $1,211,000 in the third quarter of 1997,
compared to $360,000 in 1996.
Net income for the third quarter of 1997 was $3,715,000, or $0.47 per share,
compared to $2,747,000, or $0.35 per share, in 1996.
Nine Months of 1997 Compared to Nine Months of 1996
- ---------------------------------------------------
Net sales increased 40% to $115,171,000 in the first nine months of 1997. The
increase resulted from a broad-based increase in sales in most of the Company's
product lines due to improved industry conditions and new contract awards, as
well as sales of $15,363,000 in the first nine months of 1997 compared to
$4,783,000 in the first nine months of 1996 from the MechTronics acquisition
completed in June 1996.
The Company had substantial sales to Boeing, Lockheed Martin and Northrop
Grumman. During the first nine months of 1997 and 1996, sales to Boeing were
approximately $30,072,000 and $19,664,000, respectively; sales to Lockheed
Martin were approximately $13,201,000 and $7,964,000, respectively; and sales to
Northrop Grumman were approximately $5,318,000 and $6,241,000, respectively. The
sales relating to Lockheed Martin, Boeing and Northrop Grumman are diversified
over a number of different commercial, military and space programs.
At September 27, 1997, backlog believed to be firm was approximately
$166,100,000 compared to $129,800,000 at September 28, 1996 and $134,500,000 at
December 31, 1996. Approximately $39,000,000 of the total backlog is expected to
be delivered during the fourth quarter of 1997.
Gross profit, as a percentage of sales, was 32.7% for the first nine months of
1997 compared to 32.9% in 1996. This decrease was primarily the result of
changes in sales mix and higher production costs. The decrease was partially
offset by economies of scale resulting from sales increases.
Selling, general and administrative expenses, as a percentage of sales, were
17.2% for the first nine months of 1997 compared 21.3% in 1996. The decrease in
these expenses as a percentage of sales was primarily the result of higher sales
volume partially offset by an increase in related period costs.
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Interest expense decreased to $532,000 in the first nine months of 1997 compared
to $932,000 for 1996. The decrease in interest expense was primarily due to the
conversion of $24,263,000 of convertible subordinated debentures during the
first half of 1996 and lower debt levels.
Income tax expense increased to $7,258,000 in the first nine months of 1997
compared to $2,435,000 for 1996. The increase in income tax expense was
primarily due to the increase in income before taxes and an effective tax rate
of 42% in 1997 compared to 28% in 1996. From a cash flow perspective, however,
the Company continues to use its federal net operating loss carryforwards to
offset taxable income. Cash paid for income taxes was $3,721,000 in the first
nine months of 1997, compared to $1,327,000 in 1996.
Net income for the nine months of 1997 was $10,025,000, or $1.26 per share,
compared to $6,263,000, or $0.83 per share, in 1996.
FINANCIAL CONDITION
Liquidity and Capital Resources
- -------------------------------
Cash flow from operating activities for the first nine months ended September
27, 1997 was $9,655,000. 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 1997.
The Company's bank credit agreement provides for a $40,000,000 unsecured
revolving credit line with an expiration date of July 1, 1999. At September 27,
1997, the Company had $39,658,000 of unused lines of credit available.
See Note 5 to the Notes to Consolidated Financial Statements.
The Company spent $5,701,000 on capital expenditures during the first nine
months of 1997 and expects to spend approximately $8,000,000 for capital
expenditures in 1997. The Company plans to make substantial capital expenditures
in 1997 primarily for plant, machinery and equipment to support long-term
aerospace structure contracts for both commercial and military aircraft. These
expenditures are expected to place the Company in a favorable competitive
position among aerospace subcontractors, and to allow the Company to take
advantage of the offload requirements from its customers.
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").
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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.
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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 establishes new standards for computing and presenting earnings per share
("EPS"), and supersedes APB Opinion No. 15, "Earnings Per Share." SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. SFAS 128
becomes effective for the Company for the year ending December 31, 1997. Pro
forma EPS for the third quarter of 1997 and 1996, and the first nine months
months of 1997 and 1996, assuming the application of SFAS 128 are as follows:
For Three Months Ended
--------------------------------
September 27, September 28,
1997 1996
------------- -------------
Basic earnings per share $.51 $.38
Diluted earnings per share .47 .35
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For Nine Months Ended
--------------------------------
September 27, September 28,
1997 1996
------------- -------------
Basic earnings per share $1.37 $.99
Diluted earnings per share 1.27 .83
Any forward looking statements made in this Form 10-Q Report 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 the Space Shuttle program, the level of defense spending, competitive
pricing pressures, technology and product development risks and uncertainties,
and other factors beyond the Company's control.
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Inapplicable.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) The following exhibits are filed with this report
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
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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
(Chief Accounting Officer of the
Registrant)
Date: October 20, 1997
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