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 October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-8174
DUCOMMUN INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 95-0693330
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(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
111 West Ocean Boulevard, Suite 900, Long Beach, California 90802
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(Address of principal executive offices) (Zip Code)
(562) 624-0800
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of October 3, 1998, there
were outstanding 11,138,563 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 October 3, 1998 and
December 31, 1997 3
Consolidated Statements of Income for Three Months
Ended October 3, 1998 and September 27, 1997 4
Consolidated Statements of Income for Nine Months 5
Ended October 3, 1998 and September 27, 1997
Consolidated Statements of Cash Flows for Nine
Months Ended October 3, 1998 and September 27, 1997 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
October 3, December 31,
1998 1997
-------------- --------------
ASSETS
Current Asssets
Cash and cash equivalents $ 19,810 $ 2,156
Accounts receivable (less allowance for doubtful
accounts of $137 and $359) 17,718 19,189
Inventories 20,739 24,604
Deferred income taxes 4,527 4,612
Prepaid income taxes 227 2,877
Other current assets 3,002 2,053
-------- --------
Total Current Assets 66,023 55,491
Property and Equipment, Net 39,800 30,594
Deferred Income Taxes - 380
Excess of Cost Over Net Assets Acquired (Net of Accumulated
Amortization of $5,085 and $4,829) 19,291 16,907
Other Assets 694 869
-------- --------
$125,808 $104,241
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 4) $ 1,488 $ 919
Accounts payable 7,534 9,024
Accrued liabilties 19,079 15,366
-------- --------
Total Current Liabilities 28,101 25,309
Long-Term Debt (Note 4) 5,499 4,884
Deferred Income Taxes 1,672 -
Other Long-Term Liabilities 345 345
-------- --------
Total Liabilities 35,617 30,538
-------- --------
Commitments and Contingencies (Note 6)
Shareholders' Equity (Note 5):
Common stock -- $.01 per value; authorized 35,000,000 shares;
shares issued 11,321,325 in 1998 and 11,101,985 in 1997 113 74
Additional paid-in capital 60,236 59,497
Retained earnings 33,251 14,132
Less common stock held in treasury (3,409) -
-------- --------
Total Shareholders' Equity 90,191 73,703
-------- --------
$125,808 $104,241
======== ========
Share data have been adjusted for the 3-for-2 stock split in June 1998. 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
------------------------------------
October 3, 1998 September 27, 1997
--------------- ------------------
Net Sales $ 41,273 $ 40,482
Operating Costs and Expenses:
Cost of goods sold 27,785 27,721
Selling, general and administrative expenses 6,163 6,223
-------- --------
Total Operating Costs and Expenses 33,948 33,944
-------- --------
Operating Income 7,325 6,538
Gain on Sale of Subsidiary 9,249 --
Interest Expense (13) (137)
-------- --------
Income Before Taxes 16,561 6,401
Income Tax Expense (6,041) (2,686)
-------- --------
Net Income $ 10,520 $ 3,715
======== ========
Earnings Per Share:
Basic earnings per share $ .94 $ .34
Diluted earnings per share .90 .31
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share:
Basic earnings per share 11,218 11,030
Diluted earnings per share 11,707 11,836
Per-share data have been adjusted for the 3-for-2 stock split in June 1998. 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
-------------------------------------
October 3, 1998 September 27, 1997
--------------- ------------------
Net Sales $ 130,288 $ 115,171
--------- ---------
Operating Costs and Expenses:
Cost of goods sold 87,036 77,552
Selling, general and administrative expenses 21,144 19,804
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Total Operating Costs and Expenses 108,180 97,356
--------- ---------
Operating Income 22,108 17,815
Gain on Sale of Subsidiary 9,249 --
Interest Expense (221) (532)
--------- ---------
Income Before Taxes 31,136 17,283
Income Tax Expense (12,017) (7,258)
--------- ---------
Net Income $ 19,119 $ 10,025
========= =========
Earnings Per Share:
Basic earnings per share $ 1.70 $ .91
Diluted earnings per share 1.63 .84
Weighted Average Number of Common and
Common Equivalent Shares Outstanding
for Computation of Earnings Per Share:
Basic earnings per share 11,225 10,991
Diluted earnings per share 11,728 11,866
Per-share data have been adjusted for the 3-for-2 stock split in June 1998. 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
-------------------------------------
October 3, 1998 September 27, 1997
--------------- ------------------
Cash Flows from Operating Activities:
Net Income $ 19,119 $ 10,025
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 4,352 3,993
Gain on sale of subsidiary (9,249) --
Deferred income tax provision 1,663 3,906
Other 42 --
Changes in Assets and Liabilities, Net of Effects
From Acquisition and Divestiture:
Accounts receivable 164 (5,144)
Inventories 3,069 (3,361)
Prepaid income taxes 2,650 --
Other assets (952) 94
Accounts payable (975) 1,158
Accrued and other liabilities 2,297 (1,016)
-------- --------
Net Cash Provided by Operating Activities 22,180 9,655
-------- --------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (9,329) (5,701)
Acquisition (8,165) --
Proceeds from Sale of Subsidiary 17,250 --
Cash Payments Related to Sale of Subsidiary (1,143) --
Other 208 --
-------- --------
Net Cash Used in Investing Activities (1,179) (5,701)
-------- --------
Cash Flows from Financing Activities:
Net Repayment of Long-Term Debt (716) (4,122)
Repurchase of Common Stock (3,409) --
Other 778 (83)
-------- --------
Net Cash (Used in) Provided by Financing Activities (3,347) (4,205)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents 17,654 (251)
Cash and Cash Equivalents at Beginning of Period 2,156 571
-------- --------
Cash and Cash Equivalents at End of Period $ 19,810 $ 320
======== ========
Supplemental Disclosures of Cash Flows Information:
Interest Expense Paid $ 338 $ 601
Income Taxes Paid $ 4,270 $ 3,721
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 October 3, 1998 and September 27,
1997. 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, 1997.
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 Share
The Company effected a three-for-two stock split of the Company's common
stock in the form of a stock dividend, which was paid on June 10, 1998
to shareholders of record as of May 20, 1998, and is reflected in all
references to the number of common shares and per-share amounts in this
report.
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding in each period. Diluted earnings per share is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding plus any potential dilution that
could occur if stock options were exercised or converted into common
stock in each period. For the three months ended October 3, 1998 and
September 27, 1997, income available to common stockholders was
$10,520,000 and $3,715,000, respectively. The weighted average number of
common shares outstanding for the three months ended October 3, 1998 and
September 27, 1997 were 11,218,000 and 11,030,000 and the dilutive
shares associated with stock options were 489,000 and 806,000,
respectively. For the nine months ended October 3, 1998 and September
27, 1997, income available to common stockholders was $19,119,000 and
$10,025,000, respectively. The weighted average number of common shares
outstanding for the nine months ended October 3, 1998 and September 27,
1997 were 11,225,000 and 10,991,000 and the dilutive shares associated
with stock options were 503,000 and 875,000, respectively.
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Note 4. Long-term debt is summarized as follows:
(In Thousands)
----------------------------------
October 3, 1998 December 31, 1997
--------------- -----------------
Term and real estate loans $4,745 $5,181
Promissory notes related to acquisitions 2,242 622
------ ------
Total debt 6,987 5,803
Less current portion 1,488 919
------ ------
Long-term debt, less current portion $5,499 $4,884
------ ------
The Company's bank credit agreement provides for a $40,000,000 unsecured
revolving credit line with an expiration date of July 1, 2001. Interest
is payable monthly on the outstanding borrowings based on the bank's
prime rate (8.25% per annum at October 3, 1998) minus 0.25%. A
Eurodollar pricing option is also available to the Company for terms of
up to six months at the Eurodollar rate plus a spread based on the
leverage ratio of the Company calculated at the end of each fiscal
quarter (1.00% at October 3, 1998). At October 3, 1998, the Company had
$40,000,000 of unused lines of credit available. The credit agreement
includes fixed charge coverage and maximum leverage ratios, and
limitations on future dividend payments and outside indebtedness.
Note 5. Shareholders' Equity
In May 1998 the shareholders of Ducommun Incorporated authorized the
amendment of its Certificate of Incorporation to increase the Company's
authorized common stock from 12,500,000 shares to 35,000,000 shares. The
Company effected a three-for-two stock split of the Company's common
stock in the form of a stock dividend, which was paid on June 10, 1998
to shareholders of record as of May 20, 1998, and is reflected in all
references to the number of common shares and per-share amounts in this
report. Average shares outstanding for the quarter ended October 3, 1998
and September 27, 1997, after adjusting for the stock split, were
11,218,000 and 11,030,000, respectively and for the nine months ended
October 3, 1998 and September 27, 1997 were 11,225,000 and 10,991,000,
respectively.
In July 1998 the Board of Directors authorized the repurchase of up to
$15,000,000 of its common stock. To date, $3,409,000 has been used to
acquire 182,762 shares in the open market.
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Common shares issued and outstanding are summarized in the table below.
(In Thousands) October 3, 1998 September 27, 1997
-------------- --------------- ------------------
Issued 11,321,325 11,101,985
In Treasury (182,762) -
---------- ----------
Outstanding 11,138,563 11,101,985
---------- ----------
Note 6. Commitments and Contingencies
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier
of chemical milling services for the aerospace industry. Aerochem has
been directed by California environmental agencies to investigate and
take corrective action for groundwater contamination at its El Mirage,
California facility (the "Site"). Aerochem expects to spend
approximately $1 million for future investigation and corrective action
at the Site, and the Company has established a provision for such costs.
However, the Company's ultimate liability in connection with the Site
will depend upon a number of factors, including changes in existing laws
and regulations, and the design and cost of the construction, operation
and maintenance of the correction action.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including
matters relating to environmental laws. In addition, the Company makes
various commitments and incurs contingent liabilities. While it is not
feasible to predict the outcome of these matters, the Company does not
presently expect that any sum it may be required to pay in connection
with these matters would have a material adverse effect on its
consolidated financial position or results of operations.
Note 7. Acquisition and Divestiture
In June 1998, the Company acquired the capital stock of American
Electronics, Inc. ("AEI") for $8,165,000 in cash and $1,900,000 in other
liabilities. AEI is a leading manufacturer of high-precision actuators,
stepper motors, fractional horsepower motors and resolvers principally
for commercial and military space applications. Calendar 1997 sales of
AEI exceeded $7.1 million, of which approximately 60% were related to
space programs. The acquisition of AEI was accounted for under the
purchase method of accounting, and based on preliminary allocation of
the purchase price, the Company recorded goodwill of $5,813,000. The
consolidated statements of income include the operating results for AEI
since the date of the acquisition.
The acquisition was funded from internally generated cash, debt payable
to sellers and borrowings under the Company's credit agreement with its
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bank. The acquisition is expected to strengthen the Company's position
in the aerospace industry, add complementary lines of business and
improve utilization of existing manufacturing facilities and overhead
structure.
In August 1998, the Company sold the capital stock of its wireless
communications subsidiary, 3dbm, Inc., for $17,250,000 in cash. The
transaction resulted in an after-tax gain of $6,206,000, or $0.53 per
diluted share, which was recorded in the third quarter 1998 results.
Exclusive of the gain recognized, this transaction did not have a
significant impact on the Company's results of operations or financial
position.
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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.
ACQUISITION AND DIVESTITURE
- ---------------------------
In June 1998, the Company acquired the capital stock of American Electronics,
Inc. ("AEI") for $8,165,000 in cash and $1,900,000 in notes and other
liabilities. AEI is a leading manufacturer of high-precision actuators, stepper
motors, fractional horsepower motors and resolvers principally for commercial
and military space applications. Calendar 1997 sales of AEI exceeded $7.1
million, of which approximately 60% were related to space programs. The
acquisition of AEI was accounted for under the purchase method of accounting,
and based on preliminary allocation of the purchase price, the Company recorded
goodwill of $5,813,000. The consolidated statements of income include the
operating results for AEI since the date of the acquisition.
The acquisition was funded from internally generated cash, debt payable to
sellers and borrowings under the Company's credit agreement with its bank. The
acquisition is expected to strengthen the Company's position in the aerospace
industry and add complementary lines of business.
In August 1998, the Company sold the capital stock of its wireless
communications subsidiary, 3dbm, Inc. ("3dbm"), for $17,250,000 in cash. The
transaction resulted in an after-tax gain of $6,206,000, or $0.53 per diluted
share, which was recorded in the third quarter 1998 results. The proceeds from
this transaction will be used for general corporate purposes including
acquisitions and common stock repurchases.
RESULTS OF OPERATIONS
- ---------------------
Third Quarter of 1998 Compared to Third Quarter of 1997
- -------------------------------------------------------
Net sales increased 2% to $41,273,000 in the third quarter of 1998. The increase
resulted primarily from a broad-based increase in sales in most of the Company's
product lines due to increased outsourcing from the primes and first tier
subcontractors as well as new contract awards, partially offset by lower
aftermarket sales. The net effect on sales of the acquisition of AEI and the
divestiture of 3dbm in the third quarter of 1998 compared to the third quarter
of 1997 was not material.
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The Company had substantial sales to Boeing and Lockheed Martin. During the
third quarter of 1998 and 1997, sales to Boeing were approximately $11,514,000
and $13,653,000, respectively; and sales to Lockheed Martin were approximately
$4,421,000 and $4,643,000, respectively. The sales relating to Boeing and
Lockheed Martin are diversified over a number of different commercial, space and
military programs.
Gross profit, as a percentage of sales, was 32.7% for the third quarter of 1998
compared to 31.5% for the third quarter of 1997. This increase was primarily the
result of changes in sales mix and lower production costs.
Selling, general and administrative expenses, as a percentage of sales, were
14.9% for the third quarter of 1998 compared to 15.4% in 1997. The decrease in
these expenses as a percentage of sales was primarily the result of lower
variable costs.
Interest expense decreased approximately 91% to $13,000 in the third quarter of
1998 compared to $137,000 for 1997. The decrease in interest expense was
primarily due to higher interest income from invested cash in 1998 compared to
1997, which was offset against interest expense.
Income tax expense increased to $6,041,000 in the third quarter of 1998 compared
to $2,686,000 for 1997. The increase in income tax expense was primarily due to
$3,043,000 of income taxes related to the sale of 3dbm, Inc. Cash paid for
income taxes was $2,105,000 in the third quarter of 1998, compared to $1,211,000
in 1997.
Net income for the third quarter of 1998 was $10,520,000, or $0.90 diluted
earnings per share, compared to $3,715,000, or $0.31 diluted earnings per share,
in 1997. Net income for the third quarter of 1998 included an after-tax gain of
$6,206,000, or $0.53 per diluted share, for the sale of the capital stock of
3dbm, Inc.
Nine Months of 1998 Compared to Nine Months of 1997
- ---------------------------------------------------
Net sales increased 13% to $130,288,000 in the first nine months of 1998. The
increase resulted primarily from a broad-based increase in sales in most of the
Company's product lines due to increased outsourcing from the primes and first
tier subcontractors as well as new contract awards, partially offset by lower
aftermarket sales. The net effect on sales of the acquisition of AEI and the
divestiture of 3dbm in the first nine months of 1998 compared to the nine months
of 1997 was not material.
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The Company had substantial sales to Boeing and Lockheed Martin. During the
first nine months of 1998 and 1997, sales to Boeing were approximately
$37,148,000 and $30,072,000, respectively; and sales to Lockheed Martin were
approximately $14,833,000 and $13,201,000, respectively. The sales relating to
Boeing and Lockheed Martin are diversified over a number of different
commercial, space and military programs.
At October 3, 1998, backlog believed to be firm was approximately $146,800,000
compared to $166,100,000 at September 27, 1997 and $155,700,000 at December 31,
1997. Approximately $40,000,000 of the total backlog is expected to be delivered
during 1998.
Gross profit, as a percentage of sales, was 33.2% for the first nine months of
1998 compared to 32.7% in 1997. This increase was primarily the result of
changes in sales mix, lower production costs and the economies of scale
resulting from sales increases.
Selling, general and administrative expenses, as a percentage of sales, were
16.2% for the first nine months of 1998 compared to 17.2% in 1997. The decrease
in these expenses as a percentage of sales was primarily the results of higher
sales volume partially offset by an increase in related variable period costs.
Interest expense decreased approximately 58% to $221,000 in the first nine
months of 1998 compared to $532,000 for 1997. The decrease in interest expense
was primarily due to higher interest income from invested cash in 1998 compared
to 1997, which was offset against interest expense.
Income tax expense increased to $12,017,000 in the first nine months of 1998
compared to $7,258,000 for 1997. The increase in income tax expense was
primarily due to the increase in income before taxes and $3,043,000 of income
taxes related to the sale of 3dbm, Inc. Cash paid for income taxes was
$4,270,000 in the first nine months of 1998, compared to $3,721,000 in 1997.
Net income for the first nine months of 1998 was $19,119,000, or $1.63 diluted
earnings per share, compared to $10,025,000, or $0.84 diluted earnings per
share, in 1997. Net income for the first nine months of 1998 included an
after-tax gain of $6,206,000, or $0.53 per diluted share, for the sale of the
capital stock of 3dbm, Inc.
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FINANCIAL CONDITION
- -------------------
Liquidity and Capital Resources
- -------------------------------
Cash flow from operating activities for the nine months ended October 3, 1998
was $22,180,000, compared to $9,655,000 for the nine months ended September 27,
1997. The increase in cash flow from operating activities resulted principally
from an increase in income before the gain on sale of 3dbm subsidiary, a
decrease in inventory, a reduction during 1998 in prepaid income taxes and an
increase in accrued tax liabilities related to the sale of 3dbm. 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 1998. The Company's bank credit agreement provides
for a $40,000,000 unsecured revolving credit line with an expiration date of
July 1, 2001. At October 3, 1998, the Company had $40,000,000 of unused lines of
credit available. See Note 4 to the Notes to Consolidated Financial Statements.
In June 1998, the Company acquired the capital stock of American Electronics,
Inc. ("AEI") for $8,165,000 in cash and $1,900,000 in other liabilities. AEI is
a leading manufacturer of high-precision actuators, stepper motors, fractional
horsepower motors and resolvers principally for commercial and military space
applications. Calendar 1997 sales of AEI exceeded $7.1 million, of which
approximately 60% were related to space programs. The acquisition of AEI was
accounted for under the purchase method of accounting, and based on preliminary
allocation of the purchase price, the Company recorded goodwill of $5,813,000.
The consolidated statements of income include the operating results for AEI
since the date of the acquisition.
The acquisition was funded from internally generated cash, notes payable to
sellers and borrowings under the Company's credit agreement with its bank. The
acquisition is expected to strengthen the Company's position in the aerospace
industry and add complementary lines of business.
In August 1998, the Company sold the capital stock of its wireless
communications subsidiary, 3dbm, Inc., for $17,250,000 in cash. The transaction
resulted in an after-tax gain of $6,206,000, or $0.53 per diluted share, which
was recorded in the third quarter 1998 results. The proceeds from this
transaction will be used for general corporate purposes including acquisitions
and common stock repurchases.
The Company spent $9,329,000 on capital expenditures during the first nine
months of 1998 and expects to spend approximately $13,000,000 in the aggregate
for capital expenditures in 1998. The Company plans to make these capital
expenditures in 1998 primarily for manufacturing equipment and facilities to
support long-term aerospace structure contracts for both commercial and military
aircraft and space programs. These expenditures are expected to place the
Company in a favorable competitive position
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among aerospace subcontractors, and to allow the Company to take advantage of
the offload requirements from its customers.
In May 1998 the shareholders of the Company authorized the amendment of its
Certificate of Incorporation to increase the Company's authorized common stock
from 12,500,000 shares to 35,000,000 shares. The Company effected a
three-for-two stock split of the Company's common stock in the form of a stock
dividend, which was paid on June 10, 1998 to shareholders of record as of May
20, 1998.
In July 1998 the Company's Board of Directors authorized the repurchase of up to
$15 million of its common stock. Repurchases will be made from time to time on
the open market at prevailing prices. The shares initially will be held as
treasury stock. To date, $3,409,000 has been used to acquire 182,762 shares in
the open market.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
chemical milling services for the aerospace industry. Aerochem has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination at its El Mirage, California facility (the
"Site"). Aerochem expects to spend approximately $1 million for future
investigation and corrective action at the Site, and the Company has established
a provision for such costs. However, the Company's ultimate liability in
connection with the Site will depend upon a number of factors, including changes
in existing laws and regulations, and the design and cost of the construction,
operation and maintenance of the correction action.
In the normal course of business, Ducommun and its subsidiaries are defendants
in certain other litigation, claims and inquiries, including matters relating to
environmental laws. In addition, the Company makes various commitments and
incurs contingent liabilities. While it is not feasible to predict the outcome
of these matters, the Company does not presently expect that any sum it may be
required to pay in connection with these matters would have a material adverse
effect on its consolidated financial position or results of operations.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
- -------------------------------------------
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,
product performance, risks associated with acquisitions and dispositions of
businesses by the Company, increasing consolidation of customers and suppliers
in the aerospace industry, and other factors beyond the Company's control.
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FUTURE ACCOUNTING REQUIREMENTS
- ------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS 130"), and
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
About Pension and Other Postretirement Benefits" ("SFAS 132"). SFAS 130, 131 and
132 will become effective for the Company in 1998. The adoption of SFAS 130, 131
and 132 is not expected to have a material effect on the Company's financial
statements.
YEAR 2000
- ---------
The Company has commenced, for its systems, a year 2000 date conversion project
to address necessary code changes, testing, and implementation. Project
completion is planned for the beginning of 1999 at a cost that is not expected
to be material to the Company. The Company expects its year 2000 date conversion
project to be completed on a timely basis. The Company is also evaluating both
its products and its machinery and equipment against Year 2000 concerns. As a
result of these ongoing evaluations, the Company is not currently aware of any
significant exposure to contingencies related to the Year 2000 issue for its
information systems software, its products or its machinery and equipment and
believes that its business will not be substantially affected by the advent of
the Year 2000. The Company believes that by mid 1999, all evaluation and testing
of internal software applications, operating systems, products and machinery and
equipment will be completed with no material effect on the Company's operations
and will not require any material expenditures or other material diversion of
resources. The Company is currently working with third parties with which it has
material relationships to attempt to determine their preparedness with respect
to Year 2000 issues and to analyze the risk to the Company in the event any such
third parties experience significant business interruptions as a result of Year
2000 noncompliance. The Company expects to complete this review and analysis and
to determine the need for contingency planning in this regard by mid 1999.
However, there can be no assurance that the systems of the Company or of other
companies on which the Company's systems rely will be timely converted or that
any such failure to convert by another company would not have an adverse effect
on the Company. Maintenance or modification costs will be expensed as incurred,
while the cost of new software will be capitalized and amortized over the
software's useful life.
-16-
17
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Inapplicable.
-17-
18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Second Amendment To Fifth Amended And Restated Loan
Agreement
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
-18-
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DUCOMMUN INCORPORATED
---------------------
(Registrant)
By: /s/ James S. Heiser
-------------------------------
James S. Heiser
Vice President, Chief Financial
Officer and General Counsel
(Duly Authorized Officer
of the Registrant)
By: /s/ Samuel D. Williams
-------------------------------
Samuel D. Williams
Vice President and Controller
(Chief Accounting Officer of
the Registrant)
Date: October 28, 1998
-19-
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EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.1 Second Amendment To Fifth Amended And Restated Loan Agreement
27 Financial Data Schedule
1
EXHIBIT 10.1
SECOND AMENDMENT TO FIFTH
AMENDED AND RESTATED LOAN AGREEMENT
This Second Amendment (the "Amendment") dated as of August 10, 1998, is
between Bank of America National Trust and Savings Association (the "Bank") and
Ducommun Incorporated, a Delaware corporation (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Fifth Amended and
Restated Loan Agreement dated as of June 23, 1997, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further 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 Paragraph 1.1 of the Agreement is hereby amended as follows:
(a) The following defined terms are deleted in their
entirety: "Letter of Credit," "Letter of Credit Obligations," and
"Outstanding Letters of Credit."
(b) In the definition of "Consideration", the figure
"$10,000,000" is substituted for the figure "$5,000,000".
(c) The definition of "Line of Credit" is amended to read as
follows:
"`Line of Credit' means the credit facility for Loans
described in Article 2 of this Agreement."
(d) In the definition of "Loan Documents," the phrase "the
Letters of Credit," is hereby deleted.
(e) The definition of "Maximum Amount" is amended to read
as follows:
"`Maximum Amount' means, as of any date of determination
thereof, the Line Commitment."
(f) The definition of "Permitted Acquisition" is amended
as follows:
(i) The first line of the definition is amended to read:
"`Permitted Acquisition' means, subject to Paragraph
6.3(c) hereof, any Acquisition by Borrower:..."
-1-
2
(ii) Subparagraph (vi) is amended to read as follows:
"(vi) of a Target which, if the Total Purchase Price
for the Acquisition is greater than $15,000,000,
obtains at least 75% of its revenue from one or more
lines of business that are the same as or very
similar to one or more lines of business in which
Borrower or one of its Subsidiaries is engaged. If
the Total Purchase Price for the Acquisition of such
Target is less than or equal to $15,000,000, such
percentage is reduced to 50%."
(iii) In subparagraph (vii), the figure of "$35,000,000"
is substituted for the figure of "$25,000,000."
(iv) In subparagraph (viii), the first three lines are
amended to read:
"(viii) with respect to which, if the Total Purchase
Price for such Acquisition is not less than
$15,000,000:..."
(v) In clause (B) of subparagraph (viii), the phrase
"Total Purchase Price" is substituted for the word
"Consideration."
(g) In the definition of "Term of this Agreement," the
phrase "no Letter of Credit remains outstanding," is deleted.
(h) The definition of "Termination Date" is amended to read:
"`Termination Date' means July 1, 2001."
(i) In the definition of "Total Consideration," clause (a)
is amended to read:
"...(a) the aggregate amount of the Consideration for
all Acquisitions (excluding American Electronics, Inc.)
that have occurred during the Term of this
Agreement,..."
(j) In the definition of "Total Funded Debt" the phrase
"Outstanding Letters of Credit" is deleted.
(k) The definition of "Total Outstandings" is amended to
read:
"'Total Outstandings' means, as of any date of
determination, all outstanding Loans."
(l) The definition of "Total Purchase Price" is added to
read as follows:
"`Total Purchase Price' means Total Consideration
without excluding the then current value of Borrower's
-2-
3
capital stock up to $10,000,000 that constitutes all or
any part of the Consideration for such Acquisition."
2.2 Paragraph 2.2 of the Agreement is deleted in its entirety
and the following is substituted therefore:
"2.2 Intentionally Omitted."
2.3 In Paragraph 4.13 of the Agreement, the phrase "or in
connection with the issuance of any Letter of Credit, " is deleted.
2.4 The Agreement is hereby amended to add a new Paragraph 4.18
to read as follows:
"4.18 Year 2000 Compliance. The Borrower has developed and
budgeted for a comprehensive program to address the "Year 2000
Problem" (that is the inability of computers, as well as
embedded microchips in non-computing devices, to properly
perform date-sensitive functions with respect to certain dates
prior to and after December 31, 1999). The Borrower has
implemented that program substantially in accordance with its
timetable and budget and reasonably anticipates that it will
have substantially addressed the year 2000 problem as to all
computers, as well as embedded microchips in non-computing
devices, that are material to the Borrower's business properties
or operations. The Borrower has developed comprehensive
contingency plans to achieve uninterrupted and unimpaired
business operation in the event of failure of its own equipment
due to a year 2000 problem, as well as general failure of/or
interruption in its communications or delivery infrastructure,
however, the Borrower cannot provide assurance that the systems
of other companies on which the Borrower's systems rely also
will be timely converted or that such failure to convert by
another company would not have an adverse affect on the
Borrower's system."
2.5 Paragraph 5.9 of the Agreement is amended in its entirety to
read as follows:
"5.9 Use of Proceeds. Use the proceeds of the Line of Credit
for the following purposes only: (i) working capital purposes of
Borrower and its Subsidiaries, (ii) other lawful corporate
purposes in the ordinary course of business, and (iii) to
finance Permitted Acquisitions."
2.6 Paragraph 6.3 of the Agreement is amended by deleting the
period at the end of said paragraph and adding the following:
"and (c) the Borrower may redeem or repurchase shares of its
common stock, in addition to the amount permitted in clause
(b) herein, in an aggregate amount not exceeding
$15,000,000; provided that all amounts paid by the Borrower
to redeem or repurchase stock under this Paragraph 6.3(c),
shall reduce by like amount, the amount of Permitted
Acquisitions allowed under this Agreement."
-3-
4
2.7 A new clause (p) is added to Paragraph 6.6 of the Agreement
to read as follows:
"(p) Indebtedness incurred in connection with the
Acquisition of American Electronics, Inc."
2.8 In Paragraph 6.11 of the Agreement, the table appearing
therein is amended to read as follows:
"Period Maximum Ratio
------- -------------
Second Fiscal Quarter, 1.25:1:00
1997, through Fourth Fiscal
Quarter, 1999
First Fiscal Quarter, 2000 1.30:1.0
and each Fiscal Quarter
thereafter"
2.9 In Paragraph 9.2 of the Agreement, all references to Letters
of Credit are hereby deleted.
2.10 In Paragraph 10.8 of the Agreement, all references to
Letters of Credit are hereby deleted.
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. Conditions. This Amendment will be effective when the Bank receives
the following items, in form and content acceptable to the Bank:
4.1 An amendment fee in the amount of $10,000.
4.2 An Instrument of Joinder, duly executed by American
Electronics, Inc., together with a corporate resolution authorizing such
guaranty by joinder, certified by its Secretary or Assistant Secretary.
5. 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.
(signatures to follow)
-4-
5
This Amendment is executed as of the date stated at the beginning of
this Amendment.
Bank of America National Trust
and Savings Association
By: /s/ J. Thomas Fagan
-------------------------------
J. Thomas Fagan
Vice President
Ducommun Incorporated
By: /s/ K. R. Pearson
-------------------------------
Kenneth R. Pearson
Vice President - Human
Resources and Assistant
Secretary
By: /s/ J. S. Heiser
-------------------------------
James S. Heiser
Vice President, Treasurer,
Secretary, And Chief
Financial Officer
-5-
5
1,000
9-MOS
DEC-31-1998
JAN-01-1998
OCT-03-1998
19,810
0
17,855
137
20,739
66,023
78,545
38,745
124,136
28,101
0
0
0
113
90,078
124,136
130,288
130,288
87,036
87,036
21,144
9,249
221
31,136
12,017
19,119
0
0
0
19,119
1.70
1.63
