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 EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 1995
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 0-1222
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 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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 1, 1995, there were outstanding 4,468,763 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
July 1, 1995 and December 31, 1994 3
Consolidated Statements of Income for
Three Months Ended July 1, 1995 and
July 2, 1994 4
Consolidated Statements of Income for
Six Months Ended July 1, 1995 and
July 2, 1994 5
Consolidated Statements of Cash Flows
for Six Months Ended July 1, 1995 and
July 2, 1994 6
Notes to Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16-21
Part II. Other Information
Item 4. Submission of Matters to a Vote
of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
July 1, December 31,
1995 1994
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ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 41 $ 8,483
Accounts receivable (less allowance for
doubtful accounts of $175 and $182) 12,290 9,923
Inventories 13,051 10,334
Other receivables 119 476
Deferred income taxes (Note 5) 2,490 2,469
Other current assets 979 615
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Total Current Assets 28,970 32,300
Property and Equipment, Net 23,241 23,568
Deferred Income Taxes (Note 5) 7,924 8,310
Excess of Cost Over Net Assets Acquired
(Net of Accumulated Amortization
of $1,769 and $1,193) 18,856 14,693
Other Assets (Note 4) 1,162 981
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$80,153 $79,852
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt (Note 4) $ 4,386 $12,170
Accounts payable 4,034 3,725
Accrued liabilities 11,224 9,695
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Total Current Liabilities 19,644 25,590
Long-Term Debt (Note 4) 14,643 9,743
Convertible Subordinated Debentures (Note 4) 28,000 28,000
Other Long-Term Liabilities 506 736
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Total Liabilities 62,793 64,069
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Commitments and Contingencies (Note 6)
Shareholders' Equity:
Common stock - $.01 par value;
authorized 12,500,000 shares; issued and
outstanding 4,468,763 shares in 1995
and 4,464,154 in 1994 45 45
Additional paid-in capital 31,226 31,234
Accumulated deficit (13,911) (15,496)
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Total Shareholders' Equity 17,360 15,783
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$80,153 $79,852
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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
-----------------------------------------
July 1, 1995 July 2, 1994
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Net Sales $23,201 $14,814
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Operating Costs and Expenses:
Cost of goods sold 15,869 10,188
Selling, general and administrative
expenses 4,997 3,029
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Total Operating Costs and Expenses 20,866 13,217
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Operating Income 2,335 1,597
Interest (988) (622)
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Income from Operations Before Taxes 1,347 975
Income Tax Expense (Note 5) (377) (295)
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Net Income $ 970 $ 680
======= =======
Earnings Per Share:
Primary $ .20 $ .15
Fully Diluted .18 .14
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share
Primary 4,773 4,588
Fully Diluted 7,627 7,413
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
--------------------------------
July 1, 1995 July 2, 1994
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Net Sales $43,823 $30,046
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Operating Costs and Expenses:
Cost of goods sold 30,316 21,165
Selling, general and administrative
expenses 9,436 5,808
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Total Operating Costs and Expenses 39,752 26,973
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Operating Income 4,071 3,073
Interest (1,869) (1,266)
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Income From Operations Before Taxes 2,202 1,807
Income Tax Expense (Note 4) (617) (579)
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Net Income $ 1,585 $ 1,228
======= =======
Earnings Per Share:
Primary $ .34 $ .27
Fully diluted .31 .27
Weighted Average Number of Common and
Common Equivalent Shares Outstanding for
Computation of Earnings Per Share:
Primary 4,735 4,551
Fully diluted 7,626 7,413
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
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July 1, 1995 July 2, 1994
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Cash Flows from Operating Activities:
Net Income $1,585 $1,228
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 2,203 1,584
Deferred income tax provision 365 532
Changes in Assets and Liabilities, Net
of Effects from 3dbm Acquisition:
Accounts receivable (1,816) 1,453
Inventories (857) (364)
Other receivables 372 (21)
Other current assets (347) 223
Other assets 60 (136)
Accounts payable (1,371) 291
Accrued and other liabilities 761 591
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Net Cash Provided by
Operating Activities 955 5,381
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Cash Flows from Investing Activities:
Purchase of Property and Equipment (1,078) (561)
Acquisition of 3dbm (4,427) -
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Net Cash Used in Investing Activities (5,505) (561)
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Cash Flows from Financing Activities:
Proceeds from the Sale of Stock 19 9
Net Repayments of Long-Term Debt (3,884) (236)
Repurchase of Stock (27) (15)
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Net Cash Used in Financing Activities (3,892) (242)
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Net (Decrease) Increase in Cash and
Cash Equivalents (8,442) 4,578
Cash and Cash Equivalents at Beginning
of Period 8,483 534
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Cash and Cash Equivalents at End of Period $ 41 $5,112
====== ======
Supplemental Disclosures of Cash Flows
Information:
Interest Expense Paid $1,659 $1,232
Income Taxes Paid $ 125 $ 55
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 July 1, 1995 and July 2, 1994. 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, 1994.
Note 2. Earnings per common share is 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. The computations of earnings per share are
as follows:
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
Computation of Earnings Per Common and Common Equivalent Share
(In thousands, except per share amounts)
For Quarter Ended
-----------------------------
July 1, July 2,
1995 1994
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Income for Computation of Primary Earnings
Per Share $ 970 $ 680
Interest, Net of Income Taxes, Relating
to 7 3/4% Convertible Subordinated
Debentures 390 368
Net Income for Computation of Primary
Earnings Per Share $ 970 $ 680
Net Income for Computation of Fully
Diluted Earnings Per Share $1,360 $1,048
Applicable Shares:
Weighted Average Common Shares Outstanding
for Computation of Primary Earnings Per
Share 4,468 4,464
Weighted Average Common Equivalent
Shares Arising From:
7 3/4% convertible subordinated
debentures 2,806 2,806
Stock options:
Primary 305 124
Fully diluted 353 143
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted
Earnings Per Share 7,627 7,413
Earnings Per Share:
Primary $ .20 $ .15
Fully diluted .18 .14
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
Computation of Earnings Per Common and Common Equivalent Share
(In thousands, except per share amounts)
For Six Months Ended
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July 1, July 2,
1995 1994
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Income for Computation of Primary
Earnings Per Share $1,585 $1,228
Interest, Net of Income Taxes, Relating
to 7 3/4% Convertible Subordinated
Debentures 779 740
Net Income for Computation of Primary
Earnings Per Share $1,585 $1,228
Net Income for Computation of Fully
Diluted Earnings Per Share $2,364 $1,968
Applicable Shares:
Weighted Average Common Shares
Outstanding for Computation of
Primary Earnings Per Share 4,467 4,463
Weighted Average Common Equivalent
Shares Arising From:
7 3/4% convertible subordinated
debentures 2,806 2,806
Stock options:
Primary 268 88
Fully diluted 353 144
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted Earnings
Per Share 7,626 7,413
Earnings Per Share:
Primary $ .34 $ .27
Fully diluted .31 .27
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Note 3. Acquisitions
In December 1994, Ducommun acquired the capital stock of Brice
Manufacturing Company, Inc. ("Brice") for $763,000 in cash and
$10,365,000 in notes and other contractual liabilities,
subject to adjustment based on a closing balance sheet. Under
the terms of the stock purchase agreement, Ducommun may be
required to make additional payments for each of the years
1995 to 1999, contingent upon Brice achieving certain levels
of financial performance. Any such payments are generally
capitalized as additional cost in excess of net assets
acquired. Brice is an after-market supplier of aircraft
seating products to many of the world's largest commercial
airlines. Products supplied by Brice include plastic and
metal seat parts, overhauled and refurbished seats, components
for installation of in-flight equipment, and other cabin
interior components for commercial aircraft.
In December 1994, Ducommun's subsidiary, Jay-El Products,
Inc., acquired substantially all of the assets and assumed
certain liabilities of Dynatech Microwave Technology, Inc.
("DMT"), for $7,500,000 in cash, subject to adjustment based
on a closing balance sheet. DMT is being integrated with
Jay-El Products. DMT manufactures switches and other
microwave components used on commercial and military aircraft.
DMT also has developed several new products that apply its
existing microwave technology to nonaerospace markets,
including the wireless communications field.
In January 1995, Ducommun acquired the capital stock of 3dbm,
Inc. for $4,780,000 in cash (of which $353,000 has been
withheld with respect to certain assets and potential
liabilities of 3dbm) and $1,000,000 in notes. Under the terms
of the stock purchase agreement, Ducommun may be required to
make additional payments for each of the years 1995 to 1997,
contingent upon 3dbm achieving certain levels of financial
performance. 3dbm supplies microcell systems used in cellular
telephone networks, low-power television transmitters, and
microwave components and subsystems to both military and
commercial customers.
The acquisitions of Brice, DMT and 3dbm described above were
accounted for under the purchase method of accounting and,
accordingly, the operating results for Brice, DMT and 3dbm
have been included in the Consolidated Statements of Income
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since the dates of the respective acquisitions. The cost of
the acquisitions has been preliminarily allocated on the basis of the
estimated fair value of assets acquired and the liabilities assumed.
This resulted in approximately $16,469,000 of cost in excess of net
assets acquired. Such excess (which will increase for any future
contingent payments) is being amortized on a straight line basis over
fifteen years.
Note 4. Long-term debt and convertible subordinated debentures are summarized
as follows:
(In thousands)
------------------------------
Jul. 1, Dec. 31,
1995 1994
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Bank credit agreement $12,800 $ 7,500
Term and real estate loans 3,803 4,048
Promissory notes related to
acquisitions 2,426 10,365
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Total debt 19,029 21,913
Less current portion 4,386 12,170
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Total long-term debt $14,643 $ 9,743
======= =======
7 3/4% Convertible subordinated
debentures due 2011 $28,000 $28,000
======= =======
In July 1995, the Company and its bank amended the Company's
credit agreement. The amended credit agreement provides for a
$5,500,000 working capital line of credit and a $11,900,000
acquisition term loan at July 1, 1995. The working capital
line of credit has an expiration date of July 15, 1997 and the
acquisition term loan has a December 31, 1998 expiration date.
Interest is payable monthly on the outstanding borrowings
based on the bank's prime rate plus 0.25% for the working
capital line of credit and the bank's prime rate plus 0.75%
for the acquisition term loan. A Eurodollar pricing option is
also available to the Company for terms of up to six months at
the Eurodollar rate plus 2.0% for the working capital line of
credit and the Eurodollar rate plus 2.5% for the acquisition
term loan. The bank's prime rate at July 1, 1995 was 9.0%.
At July 1, 1995, the Company had $4,258,000 of unused lines of
credit, after deducting $12,800,000 of loans outstanding for
the acquisitions and $342,000 for an outstanding standby
letter of credit which supports the estimated post-closure
maintenance cost for a former surface impoundment.
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Borrowings under the credit agreement are secured by most of
the assets of the Company and its subsidiaries. The credit
agreement includes minimum effective tangible net worth and
earnings covenants, debt to effective tangible net worth,
fixed charge coverage and quick ratios, and limitations on
capital expenditures, future dividend payments and outside
indebtedness.
Interest is paid semiannually on the 7.75% convertible
subordinated debentures which are convertible into 2,805,611
shares of common stock at a conversion price of $9.98 per
share, and are subject to a mandatory redemption of $2,000,000
per year from 1996 to 2010. The Company currently holds
sufficient debentures to satisfy the redemption requirement
through the year 2001.
Debt issuance costs related to the issuance of convertible
debt are being amortized over the term of the debt.
Unamortized debt issuance costs of $492,000 and $519,000 at
July 1, 1995 and December 31, 1994, respectively, are included
in Other Assets.
Aggregate maturities of long-term debt, together with sinking
fund payments required, are as follows: 1995, $1,920,000;
1996, $4,243,000; 1997, $6,257,000; 1998, $4,720,000; 1999,
$509,000.
Note 5. Income Taxes
The provision for income tax expense consists of the following:
(In thousands)
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For Six Months Ended
--------------------
Jul. 1, Jul. 2,
1995 1994
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Current tax expense:
Federal $ 52 $ 47
State 200 -
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252 47
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Deferred tax expense:
Federal 346 599
State 19 (67)
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365 532
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Income Tax Expense $617 $579
==== ====
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Deferred tax assets (liabilities) consist of the following:
(In thousands)
-------------------
Jul. 1, Dec. 31,
1995 1994
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Federal and state NOLs $14,330 $14,871
Credit carryforwards 1,180 1,113
Employment-related reserves 1,242 1,242
Inventory reserves 354 354
Other 1,134 1,025
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18,240 18,605
Depreciation (2,676) (2,676)
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Net deferred tax assets before
valuation allowance 15,564 15,929
Deferred tax assets valuation
allowance (5,150) (5,150)
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$10,414 $10,779
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At July 1, 1995, the Company had federal tax NOLs totalling
$42 million which expire in the years 1999 through 2004. The
Company had California tax NOLs totalling $3 million which
expire in the years 1995 through 1996. SFAS 109 requires that
the tax benefit of such NOLs be recorded, measured by enacted
tax rates, as an asset to the extent management assesses the
utilization of such NOLs to be "more likely than not."
Management has determined that the income of the Company will,
more likely than not, be sufficient to realize the recorded
net deferred tax asset prior to the ultimate expiration of the
NOLs. Realization of the future tax benefits of NOLs is
dependent on the Company's ability to generate sufficient
taxable income within the carryforward period. In assessing
the likelihood of utilization of existing NOLs, management
considered the historical results of operations of its
operating subsidiaries, including recently acquired
operations, and the current economic environment in which the
Company operates. Management does not expect and did not
consider any material changes in trends or the relationship
between reported pretax income and federal and state taxable
income or material asset sales or similar non-routine
transactions in assessing the likelihood of realization of the
recorded net deferred tax asset.
Future levels of pretax income are dependent upon the extent
of defense spending and other government budgetary pressures,
the level of new aircraft orders by commercial airlines,
production rate requirements for the Space Shuttle program,
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growth in the Company's cellular products business, general
economic conditions, interest rates, competitive pressures on sales
and margins, price levels and other factors beyond the Company's
control. No assurance can be given that sufficient taxable income
will be generated for the realization of the recorded deferred tax
asset net of the valuation allowance.
The Company's ability to utilize $19 million of its NOLs is
subject to limitation. This limitation resulted from the
changes in the conversion price of the Company's convertible
debt securities following the distribution in 1988 of Arrow
Electronics, Inc. stock to the Company's shareholders.
Management considered this limitation when recording the
Company's deferred tax asset. Furthermore, the ability of the
Company to utilize its NOLs would be subject to additional
significant limitation in the event of a "change of ownership"
as defined in the Internal Revenue Code. A "change of
ownership" could be caused by purchases or sales of the
Company's securities owned by persons or groups now or in the
future having ownership of 5% or more of the Company's
outstanding common stock or issuance by the Company of common
stock (including shares that are issuable on conversion of the
debentures).
Note 6. Contingencies
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major
supplier of close tolerance chemical milling services for the
aerospace and aircraft industries. At Aerochem's facility
located in El Mirage, California, there have been indications
that nitrates, fluorides, metals and other contaminants may
have entered the groundwater in the vicinity of a percolation
pond used by the former owner of the facility. In early 1993,
perchloroethylene and trichloroethylene also were detected in
the groundwater underlying the El Mirage facility and an
adjacent parcel of property. Aerochem has been directed by
the California Environmental Protection Agency and the
Lahontan Region Water Quality Control Board to perform
additional groundwater investigational work at the El Mirage
facility to characterize the vertical and horizontal extent of
groundwater contamination, and to conduct a pilot scale
project for possible groundwater remediation. Aerochem is in
the process of implementing a work plan to characterize the
extent of groundwater contamination in accordance with the
agencies' directives. Based upon currently available
information, the Company has established a provision for the
additional groundwater and investigational work and pilot
scale groundwater remediation project directed by the
agencies. Depending on the results of the groundwater
investigational work and pilot scale groundwater remediation
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project, Aerochem may be required to perform soil and/or groundwater
remediation work at its El Mirage facility. The Company presently is
not able to estimate the cost of such remediation work.
Aerochem has been notified by the United States Environmental
Protection Agency ("EPA") that Aerochem and other generators
of hazardous waste disposed at the Casmalia Resources
Hazardous Waste Facility (the "Casmalia Site"), an inactive
hazardous waste treatment, storage and disposal facility, may
be responsible for certain costs associated with the cleanup
and closure of the Casmalia Site. Aerochem, together with
certain other generators, is presently engaged in negotiations
with the EPA. Aerochem believes that any liability it may
incur in connection with the Casmalia Site will not be
material, because Aerochem contributed less than 1/4% of the
total waste disposed at the Casmalia Site and many other
substantially larger companies and governmental entities are
involved at the Casmalia Site. The Company has established a
provision, based on currently available information, for
Aerochem's share of the estimated cost of cleanup and closure
of the Casmalia Site.
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 result 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.
Acquisitions
In December 1994, the Company acquired the stock of Brice Manufacturing
Company, Inc. ("Brice"), and acquired the assets and assumed certain
liabilities of Dynatech Microwave Technology, Inc. ("DMT") for approximately
$11 million and $7.5 million, respectively. In January 1995, the Company
acquired the stock of 3dbm, Inc. ("3dbm") for approximately $5.8 million.
Brice is an after-market supplier of aircraft seating products supplied to many
of the world's largest commercial airlines. DMT is a manufacturer of switches
and other microwave components used on commercial and military aircraft and in
other nonaerospace commercial applications. 3dbm is a supplier of microcell
systems used in cellular telephone networks, low-power television transmitters
and microwave components and subsystems to both military and commercial
customers.
These acquisitions were funded from internally generated cash, notes payable to
sellers and borrowings under the Company's credit agreement with its bank (see
Financial Condition for additional information). These acquisitions strengthen
the Company's position in the aerospace industry, add complementary lines of
business and improve utilization of existing manufacturing facilities and
overhead structure.
RESULTS OF OPERATIONS AND EFFECTS OF INFLATION
Second Quarter 1995 Compared to Second Quarter 1994
Net sales increased 57% to $23,201,000 in the second quarter of 1995. The
increase was due primarily to sales from businesses acquired in December 1994
and January 1995.
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1995 and 1994, sales to Lockheed Martin
were approximately $2,298,000 and $2,336,000, respectively; sales to Northrop
Grumman were approximately $1,401,000 and $711,000, respectively; sales to
McDonnell Douglas were approximately $2,841,000 and $2,071,000, respectively;
and sales to Boeing were approximately $1,542,000 and $1,157,000, respectively.
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The sales to Lockheed Martin are primarily related to the Space Shuttle
program. The sales relating to Northrop Grumman, McDonnell Douglas and Boeing
are diversified over a number of different commercial and military programs.
Gross profit, as a percentage of sales, was 31.6% for the second quarter of
1995 compared to 31.2% in 1994.
Selling, general and administrative expenses increased to 21.5% of sales in
1995, compared to 20.4% of sales for 1994. The increase in these expenses as a
percentage of sales was primarily the result of higher sales volume and
goodwill amortization and period costs related to acquisitions.
Interest expense increased to $988,000 in 1995 compared to $622,000 in 1994
primarily due to higher debt levels caused by acquisition financing.
As a result of adopting Statement of Financial Accounting Standards No. 109 --
"Accounting for Income Taxes" ("SFAS 109") in 1993, the Company was not able to
utilize the benefit of its net operating loss carryforwards to compute income
tax expense for financial reporting purposes. This resulted in income tax
expense of $377,000 and $295,000 in 1995 and 1994, respectively, for financial
reporting purposes. From a cash flow perspective, however, the Company
continues to use its federal and state tax net operating loss carryforwards to
offset taxable income. Cash expended to pay income taxes was $50,000 in the
second quarter of 1995. There was no cash expended to pay income taxes during
the second quarter of 1994. For further discussion relating to the adoption of
SFAS 109 by the Company, see Note 5 to the consolidated financial statements.
Net income for the second quarter of 1995 was $970,000, or $0.18 per share,
compared to $680,000, or $0.14 per share, in 1994.
First Half of 1995 Compared to First Half of 1994
Net sales increased 46% to $43,823,000 in the first half of 1995. The increase
was due primarily to sales from businesses acquired in December 1994 and
January 1995.
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1995 and 1994, sales to Lockheed Martin
were approximately $4,546,000 and $4,504,000, respectively; sales to Northrop
Grumman were approximately $4,613,000 and $3,632,000, respectively; sales to
McDonnell Douglas were approximately $5,147,000 and $3,716,000, respectively;
and sales to Boeing were approximately $2,767,000 and $3,107,000, respectively.
The sales to Lockheed Martin are primarily related to the Space Shuttle
program. The sales relating to Northrop Grumman, McDonnell Douglas and Boeing
are diversified over a number of different commercial and military programs.
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At July 1, 1995, backlog believed to be firm was approximately $93,100,000,
including $27,140,000 for space-related business, compared to $74,100,000 at
July 2, 1994 and $84,800,000 at December 31, 1994. Approximately $34,000,000
of the total backlog is expected to be delivered during 1995.
Gross profit, as a percentage of sales, increased to 30.8% in 1995 from 29.6%
in 1994. This increase was primarily the result of changes in sales mix
partially offset by production inefficiencies resulting from the relocation of
the DMT business in the first quarter of 1995, higher production costs at 3dbm,
changes in customer production schedules and the start of new production
programs.
Selling, general and administrative expenses increased to 21.5% of sales in
1995, compared to 19.3% of sales for 1994. The increase in these expenses as a
percentage of sales was primarily the result of higher sales volume and
goodwill amortization and period costs related to acquisitions.
Interest expenses increased to $1,869,000 in 1995 compared to $1,266,000 in
1994 primarily due to higher debt levels caused by acquisition financing.
As a result of adopting Statement of Financial Accounting Standards No. 109 --
"Accounting for Income Taxes" ("SFAS 109") in 1993, the Company was not able to
utilize the benefit of its net operating loss carryforwards to compute income
tax expense for financial reporting purposes. This resulted in income tax
expense of $617,000 and $579,000 in 1995 and 1994, respectively, for financial
reporting purposes. From a cash flow perspective, however, the Company
continues to use its federal and state tax net operating loss carryforwards to
offset taxable income. Cash expended to pay income taxes was $125,000 in the
first half of 1995, compared to $55,000 in the first half of 1994. For further
discussion relating to the adoption of SFAS 109 by the Company, see Note 5 to
the consolidated financial statements.
Net income for the first half of 1995 was $1,585,000, or $0.31 per share,
compared to $1,228,000, or $0.27 per share, in 1994.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flow from operating activities for the first half of 1995 was $955,000
compared to $5,381,000 in the comparable period of 1994. This reduction was
due to higher receivables and inventories primarily related to the recent
acquisitions and reductions in accounts payable. During the first half of 1995
the Company had net bank borrowings of $5,300,000, of which $4,427,000 were
used to purchase 3dbm in January 1995. During the first half of 1995, the
Company also repaid $9,184,000 of principal on its outstanding debt.
- 18 -
19
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 borrowings capacity are expected to provide sufficient liquidity to
meet the Company's obligations during 1995.
In July 1995, the Company and its bank amended the Company's credit agreement.
The amended credit agreement provides for a $5,500,000 working capital line of
credit and a $11,900,000 acquisition term loan at July 1, 1995. The working
capital line of credit has an expiration date of July 15, 1997 and the
acquisition term loan has a December 31, 1998 expiration date. Interest is
payable monthly on the outstanding borrowings based on the bank's prime rate
plus 0.25% for the working capital line of credit and the bank's prime rate
plus 0.75% for the acquisition term loan. A Eurodollar pricing option is also
available to the Company for terms of up to six months at the Eurodollar rate
plus 2.0% for the working capital line of credit and the Eurodollar rate plus
2.5% for the acquisition term loan. The bank's prime rate at July 1, 1995 was
9.0%. At July 1, 1995, the Company had $4,258,000 of unused lines of credit,
after deducting $12,800,000 of loans outstanding for the acquisitions and
$342,000 for an outstanding standby letter of credit which supports the
estimated post-closure maintenance cost for a former surface impoundment.
Borrowings under the credit agreement are secured by most of the assets of the
Company and its subsidiaries. The credit agreement includes minimum effective
tangible net worth and earnings covenants, debt to effective tangible net
worth, fixed charge coverage and quick ratios, and limitations on capital
expenditures, future dividend payments and outside indebtedness.
On December 6, 1994, the Company incurred $10,365,000 in notes and other
contractual liabilities to the former shareholders of Brice. The Company paid
$8,772,000 of these notes through July 1, 1995. Of the remaining $1,593,000 of
notes and contractual liabilities, $900,000 is subject to interest. Quarterly
interest is payable at 7.75% per annum. Principal is payable in installments
which commenced on March 6, 1995 with final payment due in December 1999.
Interest is paid semiannually on the 7.75% convertible subordinated debentures
which are convertible into 2,805,611 shares of common stock at a conversion
price of $9.98 per share, and are subject to a mandatory redemption of
$2,000,000 per year from 1996 to 2010. The Company currently holds sufficient
debentures to satisfy the redemption requirements through the year 2001.
Aggregate maturities of long-term debt, together with sinking fund payments
required, are as follows: 1995, $1,920,000; 1996, $4,243,000; 1997,
$6,257,000; 1998, $4,720,000; 1999, $509,000.
- 19 -
20
The Company spent $1,078,000 on capital expenditures during the second quarter
of 1995 and expects to spend less than $3,000,000 for capital expenditures in
1995.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
close tolerance chemical milling services for the aerospace and aircraft
industries. At Aerochem's facility located in El Mirage, California, there
have been indications that nitrates, fluorides, metals and other contaminants
may have entered the groundwater in the vicinity of a percolation pond used by
the former owner of the facility. In early 1993, perchloroethylene and
trichloroethylene also were detected in the groundwater underlying the El
Mirage facility and an adjacent parcel of property. Aerochem has been directed
by the California Environmental Protection Agency and the Lahontan Region Water
Quality Control Board to perform additional groundwater investigational work at
the El Mirage facility to characterize the vertical and horizontal extent of
groundwater contamination and to conduct a pilot scale project for possible
groundwater remediation. Aerochem is in the process of implementing a work
plan to characterize the extent of groundwater contamination in accordance with
the agencies' directives. Based upon currently available information, the
Company has established a provision for the additional groundwater and
investigational work and pilot scale groundwater remediation project directed
by the agencies. Depending on the results of the groundwater investigational
work and pilot scale groundwater remediation project, Aerochem may be required
to perform soil and/or groundwater remediation work at its El Mirage facility.
The Company presently is not able to estimate the cost of such remediation
work.
Aerochem has been notified by the United States Environmental Protection Agency
("EPA") that Aerochem and other generators of hazardous waste disposed in the
Casmalia Resources Hazardous Waste facility (the "Casmalia Site"), an inactive
hazardous waste treatment, storage and disposal facility, may be responsible
for certain costs associated with the cleanup and closure of the Casmalia Site.
Aerochem, together with certain other generators, is presently engaged in
negotiations with the EPA. Aerochem believes that any liability it may incur
in connection with the Casmalia Site will not be material, because Aerochem
contributed less than 1/4% of the total waste disposed at the Casmalia Site and
many other substantially larger companies and governmental entities are
involved at the Casmalia Site. The Company has established a provision, based
on currently available information, for Aerochem's share of the estimated cost
of cleanup and closure of the Casmalia Site.
- 20 -
21
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 result of operations.
- 21 -
22
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 1995 annual meeting of the Company was held on May 3,
1995. 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 in 1998. In the election of directors, the
shareholder vote was as follows: Norman A. Barkeley, For - 4,063,885, Abstain
- - 9,140; H. Frederick Christie, For - 4,064,134, Abstain - 8,891; Kevin S.
Moore, For - 4,064,134, Abstain - 8,891. The directors whose terms of office
continued after the annual meeting are: Robert C. Ducommun, Thomas P.
Mullaney, Richard J. Pearson and Arthur W. Schmutz.
Item 6. Exhibits and Reports on Form 8-K.
A Financial Data Schedule is filed as Exhibit 27 with this
report. No reports on Form 8-K were filed during the quarter for which this
report is filed.
- 22 -
23
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/ Joseph C. Berenato
--------------------------------
Joseph C. Berenato
Executive Vice President,
Chief Operating Officer and
Chief Financial Officer
(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: July 28, 1995
- 23 -
5
1,000
6-MOS
DEC-31-1995
JAN-01-1995
JUL-01-1995
41
0
12,465
175
13,051
28,970
52,499
29,258
80,153
19,644
43,149
45
0
0
17,315
80,153
43,823
43,823
30,316
30,316
9,436
0
1,869
2,202
617
1,585
0
0
0
1,585
0.34
0.31
