<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
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
- --------------------------------------------------------------------------------
(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.
111 West Ocean Boulevard, Suite 900, Long Beach, California 90802
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(562) 624-0800
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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 April 3, 1999, there were
outstanding 10,384,299 shares of common stock.
<PAGE> 2
DUCOMMUN INCORPORATED
FORM 10-Q
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance sheets at April 3, 1999 and
December 31, 1998 3
Consolidated Statements of Income for Three Months
Ended April 3, 1999 and April 4, 1998 4
Consolidated Statements of Cash Flows for Three
Months Ended April 3, 1999 and April 4, 1998 5
Notes to Consolidated Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 12
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
April 3, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current Asssets:
Cash and cash equivalents $ 9,668 $ 9,066
Accounts receivable (less allowance for doubtful
accounts of $95 and $125) 18,112 19,680
Inventories 21,969 19,495
Deferred income taxes 4,728 4,449
Prepaid income taxes 1,259 1,283
Other current assets 2,453 2,437
--------- ---------
Total Current Assets 58,189 56,410
Property and Equipment, Net 42,544 41,145
Excess of Cost Over Net Assets Acquired (Net of Accumulated -- --
Amortization of $5,835 and $5,468) 18,606 18,974
Other Assets 675 675
--------- ---------
$ 120,014 $ 117,204
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 4) $ 1,469 $ 1,434
Accounts payable 8,939 7,445
Accrued liabilties 15,318 16,738
--------- ---------
Total Current Liabilities 25,726 25,617
Long-Term Debt (Note 4) 5,229 5,350
Deferred Income Taxes 1,714 1,714
Other Long-Term Liabilities 870 818
--------- ---------
Total Liabilities 33,539 33,499
--------- ---------
Commitments and Contingencies (Note 6)
Shareholders' Equity:
Common stock -- $.01 par value; authorized
35,000,000 shares; issued 11,357,061
shares in 1999 and 11,345,255 in 1998 114 113
Additional paid-in capital 60,461 60,419
Retained earnings 41,030 37,825
Less common stock held in treasury -- 972,762
shares in 1999 and 931,762 shares in 1998 (15,130) (14,652)
--------- ---------
Total Shareholders' Equity 86,475 83,705
--------- ---------
$ 120,014 $ 117,204
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For Three Months Ended
------------------------
April 3, April 4,
1999 1998
-------- ----------
<S> <C> <C>
Net Sales $ 34,537 $ 43,261
Operating Costs and Expenses:
Cost of goods sold 23,774 29,477
Selling, general and administrative expenses 5,395 7,698
-------- --------
Total Operating Costs and Expenses 29,169 37,175
-------- --------
Operating Income 5,368 6,086
Interest Expense (25) (83)
-------- --------
Income Before Taxes 5,343 6,003
Income Tax Expense (2,138) (2,461)
-------- --------
Net Income $ 3,205 $ 3,542
======== ========
Earnings Per Share:
Basic earnings per share $ .31 $ .32
Diluted earnings per share .30 .30
Weighted Average Number of Common Shares
for Computation of Earnings Per Share:
Basic earnings per share 10,409 11,194
Diluted earnings per share 10,758 11,828
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For Three Months Ended
----------------------
April 3, April 4,
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 3,205 $ 3,542
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization 1,534 1,407
Deferred income tax provision (279) 146
Other 54 55
Changes in Assets and Liabilities, Net
Accounts receivable 1,568 591
Inventories (2,474) 811
Prepaid income taxes 24 2,000
Other assets (16) (957)
Accounts payable 1,494 42
Accrued and other liabilities (1,368) (1,119)
------- -------
Net Cash Provided by Operating Activities 3,742 6,518
------- -------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (2,619) (5,024)
------- -------
Net Cash Used in Investing Activities (2,619) (5,024)
------- -------
Cash Flows from Financing Activities:
Net Repayment of Long-Term Debt (86) (254)
Purchase of Common Stock for Treasury (478) --
Other 43 22
------- -------
Net Cash Used in Financing Activities (521) (232)
------- -------
Net Increase in Cash and Cash Equivalents 602 1,262
Cash and Cash Equivalents, Beginning of Period 9,066 2,156
------- -------
Cash and Cash Equivalents, End of Period $ 9,668 $ 3,418
======= =======
Supplemental Disclosures of Cash Flows Information:
Interest Expense Paid $ 93 $ 104
Income Taxes Paid $ 139 $ 54
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
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 April 3, 1999 and April 4, 1998. 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, 1998.
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 are 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 April 3, 1999 and April
4, 1998, income available to common stockholders was $3,205,000 and
$3,542,000, respectively. The weighted average number of common shares
outstanding for the three months ended April 3, 1999 and April 4, 1998
were 10,409,000 and 11,194,000 and the dilutive shares associated with
stock options were 349,000 and 634,000, respectively.
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<PAGE> 7
Note 4. Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
(In Thousands)
------------------------
April 3, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Bank credit agreement $ 120 $ --
Term and real estate loans 4,523 4,635
Notes and other liabilities for
acquisitions 2,055 2,149
------ ------
Total debt 6,698 6,784
Less current portion 1,469 1,434
------ ------
Total long-term debt $5,229 $5,350
====== ======
</TABLE>
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 (7.75% per annum at April 3, 1999) 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
April 3, 1999). At April 3, 1999, the Company had $39,880,000 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. Shares outstanding at April 3, 1999 and April 4, 1998, after
adjusting for the stock split, were 10,384,000 and 11,205,000,
respectively.
In July 1998 the Board of Directors authorized the repurchase of up to
$15,000,000 of its common stock. In January 1999 the Board of Directors
authorized the repurchase of up to an additional $15,000,000 of its
common stock. As of April 3, 1999, the Company had repurchased 972,762
shares of common stock in the open market for a total of approximately
$15,130,000, or an average price of $15.55 per share.
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<PAGE> 8
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
In April 1999, the Company acquired the capital stock of Sheet Metal
Specialties Company doing business as SMS Technologies Company ("SMS"),
a privately held company based in Chatsworth, California, for $9,629,000
in cash and a $1,500,000 note. SMS is a manufacturer of complex
assemblies and sub-assemblies for commercial and military aerospace
applications. Sales for the twelve-month period ended March 31, 1999
exceeded $9,800,000. The acquisition of SMS will be accounted for under
the purchase method of accounting. The acquisition was funded from
internally generated cash, the note payable to the seller and borrowings
under the Company's credit agreement with its bank.
-8-
<PAGE> 9
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
In April 1999, the Company acquired the capital stock of Sheet Metal Specialties
doing business as SMS Technologies Company ("SMS"), a privately held company
based in Chatsworth, California, for $9,629,000 in cash and a $1,500,000 note.
SMS is a manufacturer of complex assemblies and sub-assemblies for commercial
and military aerospace applications. Sales for the twelve-month period ended
March 31, 1999 exceeded $9,800,000. The acquisition of SMS will be accounted for
under the purchase method of accounting. The acquisition was funded from
internally generated cash, the note payable to the seller and borrowings under
the Company's credit agreement with its bank.
RESULTS OF OPERATIONS
First Quarter of 1999 Compared to First Quarter of 1998
Net sales decreased 20% to $34,537,000 in the first quarter of 1999. The
decrease was due primarily to a reduction in the Company's sales of commercial
and military aftermarket products in its aircraft seating and electromechanical
switch businesses, and lower sales for Boeing 747 and space programs. Sales in
the first quarter of 1999 also were adversely affected by a lack of availability
of certain types of titanium due to a strike at a major titanium supplier. The
Company expects these factors to continue to adversely impact sales at least
through the second and third quarters of 1999. In addition, the Company expects
to add sales through acquisitions such as its recent acquisition of SMS.
The Company had substantial sales to Boeing, Lockheed Martin and Raytheon.
During the first quarters of 1999 and 1998, sales to Boeing were approximately
$10,509,000 and $11,396,000, respectively; sales to Lockheed Martin were
approximately $3,385,000 and $4,736,000, respectively; and sales to Raytheon
were approximately $1,812,000 and $3,111,000, respectively. The sales relating
to Lockheed Martin, Boeing and Raytheon are diversified over a number of
different commercial, military and space programs.
At April 3, 1999, backlog believed to be firm was approximately $133,700,000
compared to $138,200,000 at December 31, 1998. Approximately $64,000,000 of
backlog is expected to be delivered during 1999.
-9-
<PAGE> 10
Gross profit, as a percentage of sales, was 31.2% for the first quarter of 1999
compared to 31.9% in 1998. This decrease was primarily the result of changes in
sales mix and production costs spread over lower sales.
Selling, general and administrative expenses, as a percentage of sales, were
15.6% for the first quarter of 1999 compared to 17.8% in 1998. The decrease in
these expenses as a percentage of sales was primarily the result of a reduction
of personnel related costs.
Interest expense decreased to $25,000 in the first quarter of 1999 compared to
$83,000 for 1998. The decrease in interest expense was primarily due to lower
debt levels.
Income tax expense decreased to $2,138,000 in the first quarter of 1999 compared
to $2,461,000 for 1998. The decrease in income tax expense was primarily due to
the decrease in income before taxes. Cash paid for income taxes was $139,000 in
the first quarter of 1999, compared to $54,000 in 1998. Net income for the first
quarter of 1999 was $3,205,000, or $0.30 per share, compared to $3,542,000, or
$0.30 per diluted share, in 1998.
FINANCIAL CONDITION
Liquidity and Capital Resources
Cash flow from operating activities for the three months ended April 3, 1999 was
$3,742,000, compared to $6,518,000 for the three months ended April 4, 1998. The
decrease in cash flow from operating activities resulted principally from an
increase in inventory and lower reductions in prepaid taxes, partially offset by
a reduction in accounts receivables and increased liabilities. During the first
three months of 1999, the Company spent $2,619,000 on capital expenditures,
$478,000 to repurchase shares of the Company's common stock and $86,000 to repay
principal on its outstanding bank borrowings, promissory notes, and term and
commercial real estate loans. 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 1999. 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 April 3, 1999, the
Company had $39,880,000 of unused lines of credit available. See Note 4 to the
Notes to Consolidated Financial Statements.
The Company spent $2,619,000 on capital expenditures during the first three
months of 1999 and expects to spend approximately $8,000,000 in the aggregate
for capital expenditures in 1999. 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.
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<PAGE> 11
In July 1998 the Board of Directors authorized the repurchase of up to
$15,000,000 of its common stock. In January 1999 the Board of Directors
authorized the repurchase of up to an additional $15,000,000 of its common
stock. As of April 3, 1999, the Company had repurchased 972,762 shares of common
stock in the open market for a total of approximately $15,130,000, or an average
price of $15.55 per share. Repurchases will be made from time to time on the
open market at prevailing prices.
In April 1999, the Company acquired the capital stock of Sheet Metal Specialties
Company doing business as SMS Technologies Company ("SMS"), a privately held
company based in Chatsworth, California, for $9,629,000 in cash and a $1,500,000
note. SMS is a manufacturer of complex assemblies and sub-assemblies for
commercial and military aerospace applications. Sales for the twelve-month
period ended March 31, 1999 exceeded $9,800,000. The acquisition of SMS will be
accounted for under the purchase method of accounting. The acquisition was
funded from internally generated cash, the note payable to the seller and
borrowings under the Company's credit agreement with its bank.
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.
FUTURE ACCOUNTING REQUIREMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 will become effective for the
Company in 2000. The adoption of SFAS 133 is not expected to have a material
effect on the Company's financial position, results of operations or cash flow.
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<PAGE> 12
YEAR 2000
The Company has commenced, for its systems, a year 2000 date conversion project
to address necessary code changes, testing, and implementation. Critical systems
have been inventoried and assessed for Year 2000 compliance and the Company is
in the process of testing and planning for contingencies. Project completion is
planned for mid-1999 at a cost that is not expected to exceed $200,000. 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 as a result of its information
systems software, products, or machinery and equipment. The Company anticipates
that by mid-1999, all planned evaluation and testing of material internal
software applications, operating systems, products and machinery and equipment
will be completed without any material expenditures or other material diversions
of resources. The Company is currently working with third parties with which it
has a material relationship 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 business or systems rely, will be Year
2000 compliant in a timely manner or that any such failure to be Year 2000
compliant would not have an adverse effect on the Company's business or systems.
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.
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, availability of raw materials and components from
suppliers, and other factors beyond the Company's control.
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<PAGE> 13
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Inapplicable.
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<PAGE> 14
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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<PAGE> 15
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 27, 1999
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<PAGE> 16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> APR-03-1999
<CASH> 9,668
<SECURITIES> 0
<RECEIVABLES> 18,207
<ALLOWANCES> 95
<INVENTORY> 21,969
<CURRENT-ASSETS> 58,189
<PP&E> 79,071
<DEPRECIATION> 36,527
<TOTAL-ASSETS> 120,014
<CURRENT-LIABILITIES> 25,726
<BONDS> 0
0
0
<COMMON> 114
<OTHER-SE> 86,361
<TOTAL-LIABILITY-AND-EQUITY> 120,014
<SALES> 34,537
<TOTAL-REVENUES> 34,537
<CGS> 23,774
<TOTAL-COSTS> 23,774
<OTHER-EXPENSES> 5,395
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 5,343
<INCOME-TAX> 2,138
<INCOME-CONTINUING> 3,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,205
<EPS-PRIMARY> .31
<EPS-DILUTED> .30
</TABLE>
