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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
------------------------------- ------------------
(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
--- ---
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 30, 1995,
there were outstanding 4,472,826 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
September 30, 1995 and December 31, 1994 3
Consolidated Statements of Income for
Three Months Ended September 30, 1995
and October 1, 1994 4
Consolidated Statements of Income for
Nine Months Ended September 30, 1995 and
October 1, 1994 5
Consolidated Statements of Cash Flows
for Nine Months Ended September 30, 1995
and October 1, 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 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)
September 30, December 31,
1995 1994
------------ -----------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 2,998 $ 8,483
Accounts receivable (less allowance for
doubtful accounts of $169 and $182) 14,175 9,923
Inventories 12,166 10,334
Other receivables 45 476
Deferred income taxes (Note 5) 2,490 2,469
Other current assets 961 615
---------- ----------
Total Current Assets 32,835 32,300
Property and Equipment, Net 23,129 23,568
Deferred Income Taxes (Note 5) 7,388 8,310
Excess of Cost Over Net Assets Acquired
(Net of Accumulated Amortization
of $2,056 and $1,193) 18,247 14,693
Other Assets (Note 4) 1,284 981
---------- ----------
$ 82,883 $ 79,852
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term debt (Note 4) $ 4,389 $ 12,170
Accounts payable 4,196 3,725
Accrued liabilities 12,940 9,695
---------- ----------
Total Current Liabilities 21,525 25,590
Long-Term Debt (Note 4) 13,756 9,743
Convertible Subordinated Debentures (Note 4) 28,000 28,000
Other Long-Term Liabilities 579 736
---------- ----------
Total Liabilities 63,860 64,069
---------- ----------
Commitments and Contingencies (Note 6)
Shareholders' Equity:
Common stock - $.01 par value;
authorized 12,500,000 shares; issued and
outstanding 4,472,826 shares in 1995
and 4,464,154 in 1994 45 45
Additional paid-in capital 31,236 31,234
Accumulated deficit (12,258) (15,496)
---------- ----------
Total Shareholders' Equity 19,023 15,783
---------- ----------
$ 82,883 $ 79,852
========== ==========
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
-------------------------------------
Sep. 30, 1995 Oct. 1, 1994
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Net Sales $ 24,080 $ 15,460
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Operating Costs and Expenses:
Cost of goods sold 15,939 11,076
Selling, general and administrative
expenses 4,920 3,151
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Total Operating Costs and Expenses 20,859 14,227
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Operating Income 3,221 1,233
Interest (984) (601)
------------- -----------
Income from Operations Before Taxes 2,237 632
Income Tax Expense (Note 5) (584) (174)
------------- -----------
Net Income $ 1,653 $ 458
============= ===========
Earnings Per Share:
Primary $ .34 $ .10
Fully Diluted .27 .10
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share
Primary 4,880 4,597
Fully Diluted 7,707 4,597
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
---------------------------------------
Sep. 30, 1995 Oct.1, 1994
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Net Sales $ 67,903 $ 45,506
----------- -----------
Operating Costs and Expenses:
Cost of goods sold 46,255 32,241
Selling, general and administrative
expenses 14,356 8,959
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Total Operating Costs and Expenses 60,611 41,200
----------- -----------
Operating Income 7,292 4,306
Interest (2,853) (1,867)
----------- -----------
Income From Operations Before Taxes 4,439 2,439
Income Tax Expense (Note 4) (1,201) (753)
----------- -----------
Net Income $ 3,238 $ 1,686
=========== ===========
Earnings Per Share:
Primary $ .68 $ .37
Fully diluted .57 .37
Weighted Average Number of Common and
Common Equivalent Shares Outstanding for
Computation of Earnings Per Share:
Primary 4,783 4,566
Fully diluted 7,704 4,566
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
-------------------------------------
Sep. 30, 1995 Oct. 1, 1994
------------- ------------
Cash Flows from Operating Activities:
Net Income $ 3,238 $ 1,686
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization 3,304 2,299
Deferred income tax provision 901 763
Changes in Assets and Liabilities, Net
of Effects from 3dbm Acquisition:
Accounts receivable (3,712) 757
Inventories 39 732
Other receivables 446 132
Other current assets (329) 264
Other assets (62) (259)
Accounts payable (355) (727)
Accrued and other liabilities 2,030 734
------------- -----------
Net Cash Provided by
Operating Activities 5,500 6,381
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Cash Flows from Investing Activities:
Purchase of Property and Equipment (1,792) (897)
Acquisition of 3dbm (4,427) -
------------- -----------
Net Cash Used in Investing Activities (6,219) (897)
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Cash Flows from Financing Activities:
Proceeds from the Sale of Stock 39 -
Net Repayments of Long-Term Debt (4,768) (358)
Repurchase of Stock (37) (6)
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Net Cash Used in Financing Activities (4,766) (364)
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Net (Decrease) Increase in Cash and
Cash Equivalents (5,485) 5,120
Cash and Cash Equivalents at Beginning
of Period 8,483 534
------------- -----------
Cash and Cash Equivalents at End of Period $ 2,998 $ 5,654
============= ===========
Supplemental Disclosures of Cash Flows
Information:
Interest Expense Paid $ 2,132 $ 2,420
Income Taxes Paid $ 150 $ 119
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 30,
1995 and October 1, 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
-------------------------------
Sep. 30, Oct. 1,
1995 1994
--------- --------
Income for Computation of Primary Earnings
Per Share $ 1,653 $ 458
Interest, Net of Income Taxes, Relating
to 7 3/4% Convertible Subordinated
Debentures 390 (A)
Net Income for Computation of Primary
Earnings Per Share $ 1,653 $ 458
Net Income for Computation of Fully
Diluted Earnings Per Share $ 2,043 $ 458
Applicable Shares:
Weighted Average Common Shares Outstanding
for Computation of Primary Earnings Per
Share 4,471 4,464
Weighted Average Common Equivalent
Shares Arising From:
7 3/4% convertible subordinated
debentures 2,806 (B)
Stock options:
Primary 409 133
Fully diluted 430 (B)
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted
Earnings Per Share 7,707 4,597
Earnings Per Share:
Primary $ .34 $ .10
Fully diluted .27 .10
(A) Excludes interest, net of income taxes, relating to 7 3/4% Convertible
Subordinated Debentures because their common stock equivalent shares are
antidilutive.
(B) Excludes common stock equivalents relating to 7 3/4% Convertible
Subordinated Debentures and Common Stock Options which are antidilutive.
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
Computation of Earnings Per Common and Common Equivalent Share
(In thousands, except per share amounts)
For Nine Months Ended
---------------------------
Sep. 30, Oct. 1,
1995 1994
-------- --------
Income for Computation of Primary
Earnings Per Share $ 3,238 $ 1,686
Interest, Net of Income Taxes, Relating
to 7 3/4% Convertible Subordinated
Debentures 1,169 (A)
Net Income for Computation of Primary
Earnings Per Share $ 3,238 $ 1,686
Net Income for Computation of Fully
Diluted Earnings Per Share $ 4,407 $ 1,686
Applicable Shares:
Weighted Average Common Shares
Outstanding for Computation of
Primary Earnings Per Share 4,468 4,463
Weighted Average Common Equivalent
Shares Arising From:
7 3/4% convertible subordinated
debentures 2,806 (B)
Stock options:
Primary 315 103
Fully diluted 430 (B)
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted Earnings
Per Share 7,704 4,566
Earnings Per Share:
Primary $ .68 $ .37
Fully diluted .57 .37
(A) Excludes interest, net of income taxes, relating to 7 3/4% Convertible
Subordinated Debentures because their common stock equivalent shares are
antidilutive.
(B) Excludes common stock equivalents relating to 7 3/4% Convertible
Subordinated Debentures and Common Stock Options which are antidilutive.
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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. 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. DMT has been 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 and other wireless telecommunications hardware
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 since the
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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 $16,148,000 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)
--------------------
Sep. 30, Dec. 31,
1995 1994
-------- --------
Bank credit agreement $ 12,250 $ 7,500
Term and real estate loans 3,681 4,048
Promissory notes related to
acquisitions 2,214 10,365
-------- --------
Total debt 18,145 21,913
Less current portion 4,389 12,170
-------- --------
Total long-term debt $ 13,756 $ 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 an $11,350,000
acquisition term loan at September 30, 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 September 30, 1995 was 8.75%. At
September 30, 1995, the Company had $4,258,000 of unused lines of
credit, after deducting $900,000 of loans outstanding for working
capital, $11,350,000 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 $479,000 and $519,000 at September 30, 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, $1,035,000; 1996,
$4,243,000; 1997, $6,257,000; 1998, $4,120,000; 1999, $209,000.
Note 5. Income Taxes
The provision for income tax expense consists of the following:
(In thousands)
----------------------
For Nine Months Ended
----------------------
Sep. 30, Oct. 1,
1995 1994
---------- ---------
Current tax expense:
Federal $ 75 $ (6)
State 225 (4)
---------- --------
300 (10)
---------- --------
Deferred tax expense:
Federal 846 858
State 55 (95)
---------- --------
901 763
---------- --------
Income Tax Expense $ 1,201 $ 753
========== ========
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Deferred tax assets (liabilities) consist of the following:
(In thousands)
---------------------
Sep. 30, Dec. 31,
1995 1994
-------- --------
Federal and state NOLs $ 13,940 $ 14,871
Credit carryforwards 1,180 1,113
Employment-related reserves 1,242 1,242
Inventory reserves 354 354
Other 988 1,025
-------- --------
17,704 18,605
Depreciation (2,676) (2,676)
-------- --------
Net deferred tax assets before
valuation allowance 15,028 15,929
Deferred tax assets valuation
allowance (5,150) (5,150)
-------- --------
$ 9,878 $ 10,779
======== ========
At September 30, 1995, the Company had federal tax NOLs totalling
$40 million which expire in the years 1999 through 2004. 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 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, growth in the
Company's cellular products business, general economic conditions,
interest rates, competitive pressures on sales and margins, price
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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 $18 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 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
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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 and other wireless telecommunications hardware 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
Third Quarter 1995 Compared to Third Quarter 1994
Net sales increased 56% to $24,080,000 in the third quarter of 1995. The
increase was due primarily to sales from businesses acquired in December 1994
and January 1995, and increased off-load work for aircraft structural
components from prime contractors and major subcontractors. During the third
quarter, a subsidiary of the Company also entered into a marketing agreement
with Kabool Limited in South Korea, and third quarter sales benefitted from the
initial delivery of wireless telecommunications products pursuant to this
agreement.
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1995 and 1994, sales to Lockheed Martin
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were approximately $2,215,000 and $2,329,000, respectively; sales to Northrop
Grumman were approximately $2,969,000 and $2,095,000, respectively; sales to
McDonnell Douglas were approximately $2,374,000 and $1,771,000, respectively;
and sales to Boeing were approximately $1,399,000 and $1,202,000,
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.
Gross profit, as a percentage of sales, was 33.8% for the third quarter of 1995
compared to 28.4% in 1994. This increase in gross profit as a percentage of
sales was primarily due to the economies of scale resulting from sales
increases and improvements in production efficiencies.
Selling, general and administrative expenses were 20.4% of sales in 1995 and
1994.
Interest expense increased to $984,000 in 1995 compared to $601,000 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 $584,000 and $174,000 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 $25,000 in the
third quarter of 1995. Cash expended to pay income taxes during the third
quarter of 1994 aggregated $64,000. 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 third quarter of 1995 was $1,653,000, or $0.27 per share,
compared to $458,000, or $0.10 per share, in 1994.
Nine Months of 1995 Compared to Nine Months of 1994
Net sales increased 49% to $67,903,000 for the nine months ended September 30,
1995. The increase was due primarily to sales from businesses acquired in
December 1994 and January 1995, and increased off-load work for aircraft
structural components from prime contractors and major subcontractors. The
Company sales also benefitted from the initial delivery of wireless tele-
communications products pursuant to a marketing agreement entered into during
the third quarter with Kabool Limited in Korea.
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The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1995 and 1994, sales to Lockheed Martin
were approximately $6,761,000 and $6,833,000, respectively; sales to Northrop
Grumman were approximately $7,582,000 and $5,727,000, respectively; sales to
McDonnell Douglas were approximately $7,521,000 and $5,487,000, respectively;
and sales to Boeing were approximately $4,166,000 and $4,309,000, 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.
At September 30, 1995, backlog believed to be firm was approximately
$88,600,000, including $25,800,000 for space-related business, compared to
$71,400,000 at October 1, 1994 and $84,800,000 at December 31, 1994.
Approximately $20,000,000 of the total backlog is expected to be delivered
during the fourth quarter of 1995.
Gross profit, as a percentage of sales, increased to 31.9% in 1995 from 29.2%
in 1994. This increase was primarily the result of changes in sales mix,
economies of scale resulting from sales increases and improvements in
production efficiencies, 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 21.1% of sales in
1995, compared to 19.7% of sales for 1994. The increase in these expenses as a
percentage of sales was primarily the result of higher sales volume, goodwill
amortization and period costs related to acquisitions.
Interest expense increased to $2,853,000 in 1995 compared to $1,867,000 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 $1,201,000 and $753,000 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
$150,000 during the nine months ended September 30, 1995, compared to $119,000
during the nine months ended October 1, 1994. For further discussion relating
to the adoption of SFAS 109 by the Company, see Note 5 to the consolidated
financial statements.
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19
Net income for the nine months ended September 30, 1995 was $3,238,000, or
$0.57 per share, compared to $1,686,000, or $0.37 per share, in 1994.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flow from operating activities for the nine months ended September 30,
1995 was $5,500,000 compared to $6,381,000 in the comparable period of 1994.
This reduction was primarily due to higher receivables related to the Brice and
DMT acquisitions. During the nine months ended September 30, 1995 the Company
had net bank borrowings of $4,750,000, of which $4,427,000 were used to
purchase 3dbm in January 1995. The Company also repaid $11,168,000 of
principal on its outstanding debt, including $8,976,000 relating to Brice as
discussed below.
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 $5,500,000 working capital line of
credit and an $11,350,000 acquisition term loan at September 30, 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 September 30,
1995 was 8.75%. At September 30, 1995, the Company had $4,258,000 of unused
lines of credit, after deducting $900,000 of loans outstanding for working
capital, $11,350,000 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.
-19-
20
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
$8,976,000 of these notes through September 30, 1995. Of the remaining
$1,389,000 of notes and contractual liabilities, $750,000 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.
Ducommun is exploring the possibility of calling or making a conversion offer
for a portion of its currently outstanding 7.75% convertible subordinated
debentures, which are convertible into common stock at $9.98 per share. The
timing and amount of debentures involved in such a transaction will depend upon
a variety of factors, including the market price of Ducommun's common stock and
general economic conditions.
Aggregate maturities of long-term debt, together with sinking fund payments
required, are as follows: 1995, $1,035,000; 1996, $4,243,000; 1997,
$6,257,000; 1998, $4,120,000; 1999, $209,000.
The Company spent $1,792,000 on capital expenditures during the nine months
ended September 30, 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
-20-
21
Company has established a provision for the additional groundwater
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.
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 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number Description
4 First Amendment to Third Amended and Restated Loan Agreement
dated as of June 30, 1995.
27 Financial Data Schedule
b) Reports on Form 8-K
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: October 24, 1995
- 23 -
1
FIRST AMENDMENT TO THIRD AMENDED
AND RESTATED LOAN AGREEMENT
This First Amendment to Third Amended and Restated Loan
Agreement (the "Amendment") dated as of June 30, 1995, is between Bank of
America National Trust and Savings Association (the "Bank") and Ducommun
Incorporated (the "Borrower").
RECITALS
A. The Bank and the Borrower entered into that certain Third
Amended and Restated Loan Agreement dated as of January 20, 1995 (the
"Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in
this Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 In Schedule 1 of the Agreement, the definition
of "Expiration Date" is amended by deleting the date "July 15, 1996"
therefrom, and inserting the date "July 15, 1997" in its stead.
2.2 In Subparagraph 1.12(e) of the Agreement, the
period at the end of item (ix) of the definition of "Excess Cash Flow"
is deleted and the following substituted therefor:
", (x) minus any voluntary Commitment
reduction for that fiscal period."
2.3 In Subparagraph 1.12(e) of the Agreement,
item (i) of the definition of Cash Flow is amended and restated in its
entirety to read as follows:
"(i) Minus any increase (and plus any
decrease) in Working Capital over that fiscal period
(excluding $1,800,000 of the Working Capital
Advances),"
2.4 In Subparagraph 1.12(e) of the Agreement, item
(iii) of the definition of "EBITDA" is amended and restated in its
entirety to read as follows:
"(iii) provisions for taxes accrued in that
fiscal period,"
2.5 The following Subparagraph (h) is added to
Paragraph 1.12 of the Agreement:
"(h) Interim permanent prepayments of
Acquisition Advances outstanding under the Commitment
are permitted at the Borrower's option and will be
applied; (i) first to the next scheduled principal
payment within the calendar quarter, and (ii) then
-1-
2
to scheduled principal payments in the inverse order
of their maturity and the Commitment shall
concurrently be reduced by the amount of any such
prepayments."
2.6 In Paragraph 7.2 of the Agreement,
Subparagraph (f) is amended and restated in its entirety to read as
follows:
"(f) Updated projections for the Borrower and
its Subsidiaries (prepared on a consolidated and
consolidating basis) as follows: (i) within 60 days
prior to the end of each Fiscal Year on an annual
basis for the subsequent Fiscal Years through
December 31, 1998, and (ii) within 30 days after the
end of each Fiscal Year the annual operating plan for
the current Fiscal Year, on a monthly basis; such
projections required by (i) and (ii) above to be in
form and detail satisfactory to the Bank, and each
one to be submitted together with the certification
of the Borrower's chief financial officer stating
that the projections are based on facts known to the
Borrower and on assumptions that are reasonable and
consistent with such facts, that no material (in
amount and likelihood) fact or assumption has been
omitted as a basis for such projections which, in the
Borrower's reasonable business judgment, should be
included, and that such projections are reasonably
based on such facts and assumptions."
2.7 In Paragraph 7.3 of the Agreement, Subparagraphs
(a) and (b) are amended and restated in their entirety to read as
follows:
"(a) Twenty Four Million Dollars
($24,000,000); plus
(b) 90% of the net income after income taxes
(without subtracting losses) earned in each Fiscal
Quarter commencing March 31, 1995; minus
(c) any earnout payments to former Brice and
3DBM stockholders in connection with the Brice
acquisition or the 3DBM acquisition, if such earnout
payments are capitalized."
2.8 In Paragraph 7.4 of the Agreement, the ratios
required for the periods are amended and restated in their entirety to
read as follows:
Period Ratio
------ -----
the date hereof through
December 30, 1995 1.65:1.00
December 31, 1995 through
December 30, 1996 1.40:1.00
December 31, 1996 through
December 30, 1997 1.10:1.00
December 31, 1997 through
December 31, 1998 .90:1.00
-2-
3
2.9 In Paragraph 7.5 of the Agreement, the lead in
paragraph is amended and restated in full to read as follows:
"7.5 Quick Ratio. To maintain, on a
consolidated basis as of the end of each month, a
ratio of selected current assets to selected current
liabilities of at least 0.55:1.00 commencing June 30,
1995 and at all times, calculated in accordance with
GAAP consistently applied."
2.10 In Paragraph 7.6 of the Agreement, the ratios
required for the periods are amended and restated in their entirety as
follows:
Period Ratio
------ -----
the date hereof through
June 29, 1995 1.10:1.00
June 30, 1995 through
December 30, 1995 1.08:1.00
December 31, 1995 through
March 30, 1997 1.15:1.00
March 31, 1997 through
March 30, 1998 1.20:1.00
March 31, 1998
and at all times 1.25:1.00
2.11 The following is added to Subparagraph 7.6(a)
of the Agreement:
"minus (x) earnout payments in connection
with the Brice acquisition or the 3DBM Acquisition,
if such earnout payments are capitalized;"
3. Representations and Warranties. When the Borrower signs
this Amendment, the Borrower represents and warrants to the Bank that: (a)
there is no event which is, or with notice or lapse of time or both would be, a
default under the Agreement, (b) the representations and warranties in the
Agreement are true as of the date of this Amendment as if made on the date of
this Amendment, (c) this Amendment is within the Borrower's powers, has been
duly authorized, and does not conflict with any of the Borrower's
organizational papers, and (d) this Amendment does not conflict with any law,
agreement, or obligation by which the Borrower is bound.
4. Effect of Amendment. Except as provided in this
Amendment, all of the terms and conditions of the Agreement shall remain in
full force and effect.
This Amendment is executed as of the date stated at the
beginning of this Amendment.
-3-
4
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:________________________________
J. Thomas Fagan
Vice President
DUCOMMUN INCORPORATED
By:________________________________
Joseph C. Berenato
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
By:________________________________
James S. Heiser
Vice President and
Secretary
-4-
5
1,000
9-MOS
DEC-31-1995
JAN-01-1995
SEP-30-1995
2,998
0
14,344
169
12,166
32,835
53,144
30,015
82,883
21,525
42,335
45
0
0
18,978
82,883
67,903
67,903
46,255
46,255
14,356
0
2,853
4,439
1,201
3,238
0
0
0
3,238
0.68
0.57
