1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 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 0-1222
DUCOMMUN INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-0693330
- ------------------------------- ------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
23301 South Wilmington Avenue, Carson, California 90745
- --------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 513-7200
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
---------------------------------------------------------------------------
(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 March 29, 1997, there
were outstanding 7,316,894 shares of common stock.
2
DUCOMMUN INCORPORATED
FORM 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at March 29, 1997 and
December 31, 1996 3
Consolidated Statements of Income for Three Months
Ended March 29, 1997 and March 30, 1996 4
Consolidated Statements of Cash Flows for Three
Months Ended March 29, 1997 and March 30, 1996 5
Notes to Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 29, December 31,
1997 1996
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 35 $ 571
Accounts receivable (less allowance for doubtful
accounts of $193 and $206) 16,857 14,722
Inventories 23,575 22,595
Deferred income taxes 4,057 4,597
Other current assets 1,707 1,850
-------- --------
Total Current Assets 46,231 44,335
Property and Equipment, Net 27,889 27,051
Deferred Income Taxes 4,782 5,594
Excess of Cost Over Net Assets Acquired (Net of Accumulated
Amortization of $3,869 and $3,548) 17,870 18,326
Other Assets 507 508
-------- --------
$ 97,279 $ 95,814
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 5) $ 1,158 $ 1,117
Accounts payable 9,351 8,343
Accrued liabilities 15,464 17,589
-------- --------
Total Current Liabilities 25,973 27,049
Long-Term Debt (Note 5) 9,049 9,173
Other Long-Term Liabilities 405 404
-------- --------
Total Liabilities 35,427 36,626
-------- --------
Commitments and Contingencies (Note 6)
Shareholders' Equity:
Common stock -- $.01 par value; authorized 12,500,000
shares; issued and outstanding 7,316,894 shares in 1997 and
7,301,428 in 1996 73 73
Additional paid-in capital 59,314 59,280
Retained earnings (accumulated deficit) 2,465 (165)
-------- --------
Total Shareholders' Equity 61,852 59,188
-------- --------
$ 97,279 $ 95,814
======== ========
See accompanying notes to consolidated financial statements.
-3-
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For Three Months Ended
--------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
Net Sales $35,305 $23,792
------- -------
Operating Costs and Expenses:
Cost of goods sold 24,201 15,588
Selling, general and administrative expenses 6,365 6,240
------- -------
Total Operating Costs and Expenses 30,566 21,828
------- -------
Operating Income 4,739 1,964
Interest Expense (201) (422)
------- -------
Income Before Taxes 4,538 1,542
Income Tax Expense (1,908) (432)
------- -------
Net Income $ 2,630 $ 1,110
======= =======
Earnings Per Share:
Primary $ .33 $ .19
Fully Diluted .33 .18
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share:
Primary 7,904 5,756
Fully Diluted 7,920 7,393
See accompanying notes to consolidated financial statements.
-4-
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DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For Three Months Ended
--------------------------------
March 29, 1997 March 30, 1996
-------------- --------------
Cash Flows from Operating Activities:
Net Income $ 2,630 $ 1,110
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 1,314 1,202
Deferred income tax provision 1,352 284
Changes in Assets and Liabilities, Net
Accounts receivable (2,135) 443
Inventories (980) (2,040)
Other assets 279 24
Accounts payable 1,008 2,249
Accrued and other liabilities (2,135) (588)
------- -------
Net Cash Provided by Operating Activities 1,333 2,684
------- -------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (1,820) (973)
------- -------
Net Cash Used in Investing Activities (1,820) (973)
------- -------
Cash Flows from Financing Activities:
Net Repayment of Long-Term Debt (83) (1,460)
Cash Premium for Conversion of Convertible Subordinated Debentures -- (556)
Other 34 (6)
------- -------
Net Cash Used in Financing Activities (49) (2,022)
------- -------
Net Decrease in Cash and Cash Equivalents (536) (311)
Cash and Cash Equivalents at Beginning of Period 571 371
------- -------
Cash and Cash Equivalents at End of Period $ 35 $ 60
======= =======
Supplemental Disclosures of Cash Flow Information:
Interest Expense Paid $ 263 $ 910
Income Taxes Paid $ 350 $ 400
Supplementary Information for Non-Cash Financing Activities:
During the first three months of 1996, the Company issued 844,282 new shares of
common stock upon conversion of $8,426,000 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 ended March 29, 1997 and March 30, 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.
-6-
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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
------------------------
March 29, March 30,
1997 1996
--------- ---------
Income for Computation of Primary
Earnings Per Share $ 2,630 $ 1,110
Interest, Net of Income Taxes,
Relating to 7.75% Convertible
Subordinated Debentures -- 218
Net Income for Computation of
Primary Earnings Per Share 2,630 1,110
Net Income for Computation of
Fully Diluted Earnings Per Share 2,630 1,328
Applicable Shares:
Weighted Average Common Shares
Outstanding for Computation of
Primary Earnings Per Share 7,307 5,306
Weighted Average Common Equivalent
Shares Arising From:
7.75% convertible subordinated debentures -- 1,587
Stock options:
Primary 597 450
Fully diluted 613 500
Weighted Average Common and Common
Equivalent Shares Outstanding for
Computation of Fully Diluted
Earnings Per Share 7,920 7,393
Earnings Per Share:
Primary $ .33 $ .19
Fully diluted .33 .18
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 results for the first
quarter of 1997 and 1996, assuming the application of SFAS 128 are as
follows:
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For Three Months Ended
------------------------
March 29, March 30,
1997 1996
--------- ---------
Basic earnings per share $ 0.36 $ 0.21
Diluted earnings per share 0.33 0.18
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)
-------------------------
March 29, December 31,
1997 1996
--------- ------------
Bank credit agreement $ 3,500 $ 4,000
Term and real estate loans 5,804 5,294
Promissory notes related to acquisitions 903 996
------- --------
Total debt 10,207 10,290
Less current portion 1,158 1,117
------- --------
Total long-term debt $ 9,049 $ 9,173
======= ========
In April 1997, the Company and its bank signed a commitment letter to
amend the Company's credit agreement. The amended credit agreement
will provide for a $40,000,000 senior unsecured revolving credit line
with an expiration date of July 1, 1999. The amended credit agreement
will replace the Company's existing credit agreement which provides
for a $21,000,000 senior unsecured revolving credit line. Interest is
payable monthly on the outstanding borrowings based on the bank's
prime rate (8.50% at March 29, 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
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calculated at the end of each fiscal quarter. At March 29, 1997, the
Company had $17,158,000 of unused lines of credit, after deducting
$3,500,000 of loans outstanding and $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. Based upon currently available
information, the Company has established a provision for the cost of
such investigation and corrective 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.
-9-
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL STATEMENT PRESENTATION
The interim financial statements reflect all adjustments, consisting only of
normal recurring adjustments, which are, in the opinion of the Company,
necessary for a fair presentation of the results for the interim periods
presented.
RESULTS OF OPERATIONS
First Quarter 1997 Compared to First Quarter 1996
Net sales increased 48% to $35,305,000 in the first 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, as
well as sales from MechTronics which was acquired in June 1996.
The Company had substantial sales to Lockheed Martin, Boeing, McDonnell Douglas
and Northrop Grumman. During the first quarter of 1997 and 1996, sales to
Lockheed Martin were approximately $4,134,000 and $2,463,000, respectively;
sales to Boeing were approximately $4,758,000 and $2,425,000, respectively;
sales to McDonnell Douglas were approximately $3,340,000 and $2,700,000,
respectively; and sales to Northrop Grumman were approximately $1,485,000 and
$1,878,000, respectively. The sales to Lockheed Martin are primarily related
to the Space Shuttle program. The sales relating to Boeing, McDonnell Douglas
and Northrop Grumman are diversified over a number of different commercial and
military programs.
At March 29, 1997, backlog believed to be firm was approximately $148,000,000,
including $21,498,000 for space-related business, compared to $92,500,000 at
March 30, 1996 and $134,500,000 at December 31, 1996. Approximately
$77,000,000 of the total backlog is expected to be delivered during 1997.
Gross profit, as a percentage of sales, was 31.5% for the first quarter of 1997
compared to 34.5% in 1996. This decrease was primarily the result of changes
in sales mix, as well as higher production cost at MechTronics, which was
acquired in June 1996.
Selling, general and administrative expenses, as a percentage of sales, were
18.0% for the first quarter of 1997 compared to 26.2% 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.
-10-
11
Interest expense decreased to $201,000 in the first quarter of 1997 compared to
$422,000 for 1996. The decrease in interest expense was primarily due to the
conversion of $15,837,000 of convertible subordinated debentures that were
outstanding at March 30, 1996.
Income tax expense increased to $1,908,000 in the first quarter of 1997
compared to $432,000 for 1996. The increase in income tax expense was
primarily due to the increase in income before taxes. 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
$350,000 in the first quarter of 1997, compared to $400,000 in 1996.
Net income for the first quarter of 1997 was $2,630,000, or $0.33 per share,
compared to $1,110,000, or $0.18 per share, in 1996.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flow from operating activities for the three months ended March 29, 1997
was $1,333,000. 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.
In April 1997, the Company and its bank signed a commitment letter to amend the
Company's credit agreement. The amended credit agreement will provide for a
$40,000,000 senior unsecured revolving credit line with an expiration date of
July 1, 1999. The amended credit agreement will replace the Company's existing
credit agreement which provides for a $21,000,000 senior unsecured revolving
credit line. Interest is payable monthly on the outstanding borrowings based
on the bank's prime rate (8.50% at March 29, 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. At March 29, 1997, the Company
had $17,158,000 of unused lines of credit, after deducting $3,500,000 of loans
outstanding and $342,000 for an outstanding standby letter of credit which
supports the estimated post-closure maintenance cost for 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 Company spent $1,820,000 on capital expenditures during the first three
months of 1997 and expects to spend less than $11,000,000 for capital
expenditures in 1997. The Company plans to make substantial capital
expenditures in 1997 for numerically controlled routers and laser
scriber-related
-11-
12
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. Based upon currently available information, the Company has
established a provision for the cost of such investigation and corrective
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 results for the first quarter of 1997 and 1996, assuming the application
of SFAS 128 are as follows:
For Three Months Ended
------------------------
March 29, March 30,
1997 1996
--------- ---------
Basic earnings per share $ 0.36 $ 0.21
Diluted earnings per share 0.33 0.18
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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.
-13-
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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: April 22, 1997
-15-
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1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-29-1997
35
0
17,050
193
23,575
46,231
60,067
32,178
97,279
25,973
0
0
0
73
61,779
97,279
35,305
35,305
24,201
24,201
6,365
0
201
4,538
1,908
2,630
0
0
0
2,630
0.33
0.33
