<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 No. 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 90802-4632
- ------------------------------------------------------------ ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (562) 624-0800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------- ---------------------------
Common Stock, $.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
-----------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
<PAGE> 2
The aggregate market value of the voting stock held by nonaffiliates of the
registrant was approximately $115,000,000 as of January 31, 1999.
The number of shares of common stock outstanding on January 31, 1999 was
10,417,349.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference:
(a) Annual Report to Shareholders (the "1998 Annual Report") for the
year ended December 31, 1998, incorporated partially in Part I and Part II
hereof (see Exhibit 13), and
(b) Proxy Statement for the 1999 Annual Meeting of Shareholders (the
"1999 Proxy Statement"), incorporated partially in Part III hereof.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements in the Form 10-K and documents incorporated by
reference contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Any such forward-looking statements 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.
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
During 1998, Ducommun Incorporated ("Ducommun"), through its
subsidiaries (collectively, the "Company"), manufactured components and
assemblies principally for domestic and foreign commercial and military aircraft
and space programs. Domestic commercial aircraft programs include the Boeing
717, 737, 737NG, 747, 757, 767 and 777. Foreign commercial aircraft programs
include the Airbus Industrie A330, A340 and A340-600 aircraft, Bombardier
Business and Regional Jets and Dash 8. Major military aircraft programs include
the Boeing C-17, F-15 and F-18, Lockheed Martin F-16 and C-130, various
Sikorsky, Bell, Boeing and Augusta helicopter programs, and advanced development
programs. The Company is a subcontractor to Lockheed Martin on the Space Shuttle
external tank and a supplier of components for the Space Shuttle Orbitor, as
well as for Space Station Freedom. The Company manufactures components for
Atlas/Centaur, Delta and Titan expendable launch vehicles, Kistler K-1 reusable
launch vehicles, and various telecommunications satellites.
In June 1998, the Company acquired the capital stock of American
Electronics, Inc. ("AEI"). In June 1996, the Company acquired substantially all
of the assets and assumed certain liabilities of MechTronics of Arizona, Inc.
Aerochem, Inc.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier
of close tolerance chemical milling services for the aerospace and aircraft
industries. Chemical milling removes material in specific patterns to reduce
weight in areas where full material thickness is not required. This
sophisticated etching process enables Aerochem to produce lightweight,
high-strength designs that would be impractical to produce by conventional
means. Jet engine components, wing leading edges and fuselage skins are examples
of products that require chemical milling.
Aerochem offers production-scale chemical milling on aluminum, titanium,
steel, nickel-base and super alloys. Aerochem also specializes in very large and
complex parts up to 50 feet long. Management believes that Aerochem is the
largest independent supplier of chemical milling services in the United States.
Many of the parts chemically milled by Aerochem are formed and machined by
AHF-Ducommun Incorporated.
AHF-Ducommun Incorporated
AHF-Ducommun Incorporated ("AHF"), another Ducommun subsidiary, supplies
aircraft and aerospace prime contractors with engineering, manufacturing and
testing of complex components using stretch forming and thermal forming
processes and computer-controlled machining. Stretch forming is a process for
manufacturing large, complex structural shapes primarily from aluminum sheet
metal extrusions. AHF has some of the largest and most sophisticated stretch
forming presses in the United States. Thermal forming is a metal working process
conducted at high temperature for manufacturing close tolerance
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titanium components. AHF designs and manufactures the tooling required for the
production of parts in both forming processes. Certain components manufactured
by AHF are machined with precision milling equipment designed and constructed by
AHF. AHF also employs computer-aided design/manufacturing systems with three
5-axis gantry profile milling machines and three 5-axis numerically-controlled
routers to provide computer-controlled machining and inspection of complex parts
up to 100 feet long.
AHF has an integrated operation offering a broad range of capabilities.
From the design specifications of a customer, AHF is able to engineer,
manufacture, test and deliver the desired finished components. This process
depends on the skillful execution of several complex subtasks, including the
design and construction of special equipment. Management believes that the
ability of AHF to provide a full range of integrated capabilities represents a
competitive advantage.
Brice Manufacturing Company, Inc.
Brice Manufacturing Company, Inc. ("Brice"), a subsidiary of Ducommun,
is an after-market supplier of aircraft seating products to many of the world's
largest commercial airlines. Products supplied by Brice include plastic and
metal seat parts, overhauled and refurbished seats, components for installation
of in-flight entertainment equipment, and other cabin interior components for
commercial aircraft.
During 1998, Brice introduced an original equipment manufacture ("OEM")
16G aircraft seat. This new aircraft seat represents Brice's first major OEM
product.
Ducommun Technologies, Inc. (formerly Jay-El Products, Inc.)
Ducommun Technologies, Inc. ("DTI"), a subsidiary of Ducommun, develops,
designs and manufactures illuminated switches, switch assemblies and keyboard
panels used in many military aircraft, helicopter, commercial aircraft and
spacecraft programs, as well as ground support equipment and naval vessels. DTI
manufactures switches and panels where high reliability is a prerequisite.
Keyboard panels are lighted, feature push button switches, and are available
with sunlight readable displays. Some of the keyboard panels and illuminated
switches manufactured by DTI for military applications are night vision
goggle-compatible.
DTI also develops, designs and manufactures microwave switches, filters
and other components used principally on commercial and military aircraft and
telecommunications satellites. DTI has developed several new products that apply
its existing microwave technology to nonaerospace markets, including the
wireless telecommunications industry.
In June 1998, DTI acquired the capital stock of American Electronics,
Inc. ("AEI"). AEI is a leading manufacturer of high precision actuators, stepper
motors, fractional horsepower motors and resolvers principally for commercial
and military space applications.
4
<PAGE> 5
MechTronics of Arizona Corp.
In June 1996, the Company acquired substantially all of the assets and
assumed certain liabilities of MechTronics of Arizona, Inc., through a newly
formed subsidiary named MechTronics of Arizona Corp. ("MechTronics").
MechTronics is a leading manufacturer of mechanical and electromechanical
enclosure products for the defense electronics and commercial aviation markets.
MechTronics has a fully integrated manufacturing capability, including
engineering, fabrication, machining, assembly, electronic integration and
related processes. MechTronics' products include sophisticated radar enclosures,
aircraft avionics racks and shipboard communications and control enclosures.
3dbm, Inc.
In August 1998, the Company sold the capital stock of its wireless
communications subsidiary, 3dbm, Inc. ("3dbm"). The Company sold 3dbm because
the level of investment required to ensure the long-term viability of 3dbm in
the wireless system infrastructure business was more than the Company was
willing to commit.
Defense and Space Programs
A major portion of sales is derived from United States government
defense programs and space programs. Approximately 29 percent of 1998 sales were
related to defense programs and approximately 11 percent of 1998 sales were
related to space programs. These programs could be adversely affected by
reductions in defense spending and other government budgetary pressures which
would result in reductions, delays or stretch-outs of existing and future
programs. In addition, many of the Company's contracts covering defense and
space programs are subject to termination at the convenience of the customer (as
well as for default). In the event of termination for convenience, the customer
generally is required to pay the costs incurred by the Company and certain other
fees through the date of termination.
Commercial Programs
Approximately 60 percent of 1998 sales were related to commercial
aircraft programs, and nonaerospace commercial applications. The Company's
commercial sales depend substantially on aircraft manufacturer's production
rates, which in turn depend upon deliveries of new aircraft. Deliveries of new
aircraft by aircraft manufacturers are dependent on the financial capacity of
the airlines and leasing companies to purchase the aircraft. Sales of commercial
aircraft could be affected as a result of changes in new aircraft orders, or the
cancellation or deferral by airlines of purchases of ordered aircraft. The
Company's sales for commercial aircraft programs also could be affected by
changes in its customers' inventory levels and changes in its customers'
aircraft production build rates.
Major Customers
The Company had substantial sales to Boeing, Lockheed Martin and
Raytheon. During 1998, sales to Boeing were $48,334,000, or 28.3% of total
sales; sales to Lockheed Martin were $18,465,000, or 10.8% of total sales, and
sales to Raytheon were $12,596,000, or
5
<PAGE> 6
7.4% of total sales. Sales to Boeing, Lockheed Martin and Raytheon are
diversified over a number of different commercial, military and space programs.
Competition
The Company competes with various companies, some of which are
substantially larger and have greater financial, technical and personnel
resources. The Company's ability to compete depends on the quality of goods and
services, competitive pricing and the ability to solve specific customer
problems.
Backlog
At December 31, 1998, backlog believed to be firm was approximately
$138,200,000, compared to $155,700,000 at December 31, 1997. Approximately
$93,000,000 of total backlog is expected to be delivered during 1999.
Environmental Matters
Aerochem uses various acid and alkaline solutions in the chemical
milling process, resulting in potential environmental hazards. Despite existing
waste recovery systems and continuing capital expenditures for waste reduction
and management, at least for the immediate future, Aerochem will remain
dependent on the availability and cost of remote hazardous waste disposal sites
or other alternative methods of disposal.
The Aerochem facility located in El Mirage, California has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination. Based upon currently available information, the
Company has established a provision for the cost of such investigation and
corrective action. Aerochem expects to spend approximately $1 million for future
investigation and corrective action for groundwater contamination at its El
Mirage location. However, the Company's ultimate liability in connection with
the contamination 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 corrective action.
Ducommun's other subsidiaries are also subject to environmental laws and
regulations. However, the quantities of hazardous materials handled, hazardous
wastes generated and air emissions released by these subsidiaries are relatively
small.
The Company anticipates that capital expenditures will continue to be
required for the foreseeable future to upgrade and maintain its environmental
compliance efforts. The Company does not expect to spend a material amount on
capital expenditures for environmental compliance during 1999.
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
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<PAGE> 7
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.
Employees
At December 31, 1998, the Company employed 1,218 persons.
Business Segment Information
The Company operates principally in only one business segment.
Information About Foreign and Domestic Operations and Export Sales
In 1998, 1997 and 1996, foreign sales to manufacturers worldwide were
$29,007,000, 29,978,000 and $21,155,000, respectively.
The amounts of revenue, profitability and identifiable assets
attributable to foreign operations are not material when compared with the
revenue, profitability and identifiable assets attributed to United States
domestic operations during 1998, 1997 and 1996. Canada is the only foreign
country in which the Company had sales of 3.5% or more of total sales, with
sales of $6,173,000, $7,950,000 and $4,906,000 in 1998, 1997 and 1996,
respectively.
The Company is not subject to any foreign currency risks since all sales
are made in United States dollars.
ITEM 2. PROPERTIES
The Company occupies approximately 16 facilities with a total office and
manufacturing area of over 812,000 square feet, including both owned and leased
properties. At December 31, 1998, facilities which were in excess of 60,000
square feet each were occupied as follows:
<TABLE>
<CAPTION>
Square Expiration
Location Company Feet of Lease
----------------------- ------------------------ --------- -----------
<S> <C> <C> <C>
El Mirage, California Aerochem 74,300 Owned
Orange, California Aerochem 76,200 Owned
Carson, California AHF-Ducommun 65,000 1999
Carson, California AHF-Ducommun 108,000 Owned
Carson, California Ducommun Technologies 117,000 2002
Phoenix, Arizona MechTronics 90,900 2006
</TABLE>
The Company's facilities are, for the most part, fully utilized,
although excess capacity exists from time to time based on product mix and
demand. Management believes that these properties are in good condition and
suitable for their present use.
Although the Company maintains standard property casualty insurance
covering its properties, the Company does not carry any earthquake insurance
because of the cost of such
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insurance. Most of the Company's properties are located in Southern California,
an area subject to frequent and sometimes severe earthquake activity.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information under the caption "Quarterly Common Stock Price
Information" on page 18 of the 1998 Annual Report is incorporated herein by
reference. No dividends were paid during 1997 or 1998 (see Exhibit 13).
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" appearing on
page 18 of the 1998 Annual Report is incorporated herein by reference (see
Exhibit 13).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" appearing on pages 19 through
22 of the 1998 Annual Report is incorporated herein by reference (see Exhibit
13).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data under the captions
"Consolidated Statements of Income," "Consolidated Balance Sheets,"
"Consolidated Statements of Cash Flows," "Consolidated Statements of Changes in
Shareholders' Equity," and "Notes to Consolidated Financial Statements,"
together with the report thereon of PricewaterhouseCoopers LLP dated February
12, 1999, appearing on pages 23 through 37 of the 1998 Annual Report are
incorporated herein by reference (see Exhibit 13).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 9
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
The information under the caption "Election of Directors" in the 1999
Proxy Statement is incorporated herein by reference.
Executive Officers of the Registrant
The following table sets forth the names and ages of all executive
officers of the Company (including subsidiary presidents), all positions and
offices held with the Company and brief accounts of business experience during
the past five years. Executive officers do not serve for any specified terms,
but are typically elected annually by the Board of Directors of the Company or,
in the case of subsidiary presidents, by the Board of Directors of the
respective subsidiaries.
<TABLE>
<CAPTION>
Positions and Offices Other Business
Held With Company Experience
Name (Age) (Year Elected) (Past Five Years)
- ----------------------------- ----------------------------- ---------------------------
<S> <C> <C>
Norman A. Barkeley (69) Chairman Emeritus of the Chairman of the Board
Board (1999) (1989); Chief Executive
Officer (1988-1996) and
President (1988-1995)
Joseph C. Berenato (52) President (1996), Chief Executive Vice President
Executive Officer (1997) (1995), Chief Operating
and Chairman of the Board Officer (1995-1996), and
(1999) Chief Financial Officer
(1991-1996) of the Company
James S. Heiser (42) Vice President (1990), --
Chief Financial Officer
(1996), General Counsel
(1988), Secretary (1987),
and Treasurer (1995)
Kenneth R. Pearson (63) Vice President-Human --
Resources (1988)
Michael W. Williams (44) Vice President, Corporate VP Operations at H.R.
Development (1998) Textron; operations posit-
ions with Crane Valve
Group, ITT Corp. and
Parker Hannifin
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Positions and Offices Other Business
Held With Company Experience
Name (Age) (Year Elected) (Past Five Years)
- ----------------------------- ----------------------------- ---------------------------
<S> <C> <C>
Samuel D. Williams (50) Vice President (1991) and --
Controller (1988)
Robert A. Borlet (58) President of Ducommun --
Technologies, Inc. (1988)
Bruce J. Greenbaum (43) President of Brice --
Manufacturing Company, Inc.
(1994)
Robert B. Hahn (55) President of MechTronics of President of Aerochem,
Arizona Corp. (1997) Inc. (1987-1997)
Robert L. Hansen (45) President, AHF-Ducommun --
Incorporated (1989)
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Compensation of Executive Officers"
in the 1999 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the 1999 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors" contained in
the paragraph immediately following the table in the 1999 Proxy Statement is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Ducommun
Incorporated and subsidiaries, included in the 1998 Annual Report,
are incorporated by reference in Item 8 of this report. Page
numbers refer to the 1998 Annual Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Income - Years ended December 31, 23
1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997 24
Consolidated Statements of Cash Flows - Years ended December 31, 25
1998, 1997 and 1996
Consolidated Statements of Changes in Shareholders' Equity - Years 26
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 27-36
Report of Independent Accountants 37
</TABLE>
2. Financial Statement Schedule
The following schedule for the years ended December 31, 1998, 1997
and 1996 is filed herewith:
Schedule VIII - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not
applicable, not required, or the information has been otherwise
supplied in the financial statements or notes thereto.
(b) Reports on Form 8-K
During the last quarter of 1998, no reports on Form 8-K were filed.
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(c) Exhibits
3.1 Restated Certificate of Incorporation filed with the Delaware
Secretary of State on May 29, 1990. Incorporated by reference to
Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
3.2 Certificate of Amendment of Certificate of Incorporation
filed with the Delaware Secretary of State on May 27, 1998.
3.3 Bylaws as amended and restated on October 19, 1996.
Incorporated by reference to Exhibit 3.2 to Form 10-K for the year
ended December 31, 1996.
4.1 Fifth Amended and Restated Loan Agreement between Ducommun
Incorporated, as Borrower, and Bank of America National Trust and
Savings Association, as Bank, dated June 23, 1998. Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended June
28, 1998.
4.2 First Amendment to Fifth Amended and Restated Loan Agreement
between Ducommun Incorporated, as Borrower, and Bank of America
National Trust and Savings Association, as Bank, dated as of
October 1, 1998. Incorporated by reference to Exhibit 4.2 to Form
10-K for the year ended December 31, 1997.
4.3 Second Amendment to Fifth Amended and Restated Loan Agreement
dated August 10, 1998. Incorporated by reference to Exhibit 10.1 to
the Form 10-Q for the quarter ended October 3, 1998.
4.4 Third Amendment to Fifth Amended and Restated Loan Agreement
dated February 11, 1999.
4.5 Conversion Agreement dated July 22, 1992 between Ducommun and
the holders of the 9% Convertible Subordinated Notes due 1998.
Incorporated by reference to Exhibit 1 to Form 8-K dated July 29,
1992.
* 10.1 1981 Stock Incentive Plan as amended and restated March 21,
1990. Incorporated by reference to Exhibit 10.2 to Form 10-K for
the year ended December 31, 1989.
* 10.2 1990 Stock Option Plan. Incorporated by reference to Exhibit
10.4 to Form 10-K for the year ended December 31, 1990.
* 10.3 1994 Stock Incentive Plan, as amended May 7, 1998.
Incorporated by reference to Exhibit 10.3 to Form 10-K for the year
ended December 31, 1997.
* 10.4 Form of Nonqualified Stock Option Agreement for employees
under the 1994 Stock Incentive Plan, the 1990 Stock Option Plan and
the 1981 Stock Incentive Plan. Incorporated by reference to Exhibit
10.5 to Form 10-K for the year ended December 31, 1990.
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* 10.5 Form of Incentive Stock Option Agreement under the 1994
Stock Incentive Plan. Incorporated by reference to Exhibit 10.5 to
Form 10-K for the year ended December 31, 1996.
10.6 Form of Nonqualified Stock Option Agreement for nonemployee
directors under the 1994 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.6 to Form 10-K for the year ended December
31, 1997.
* 10.7 Form of Key Executive Severance Agreement entered with eight
current executive officers of Ducommun or its subsidiaries.
Incorporated by reference to Exhibit 10.7 to Form 10-K for the year
ended December 31, 1989. All of the Key Executive Severance
Agreements are identical except for the name of the executive
officer and the date of the Agreement:
<TABLE>
<CAPTION>
Executive Officer Date of Agreement
----------------- -----------------
<S> <C>
Joseph C. Berenato November 4, 1991
Robert A. Borlet July 27, 1988
Bruce J. Greenbaum December 6, 1995
Robert B. Hahn July 27, 1988
Robert L. Hansen May 5, 1993
James S. Heiser July 27, 1988
Kenneth R. Pearson July 27, 1988
Samuel D. Williams June 21, 1989
</TABLE>
* 10.8 Form of Indemnity Agreement entered with all directors and
officers of Ducommun. Incorporated by reference to Exhibit 10.8 to
Form 10-K for the year ended December 31, 1990. All of the
Indemnity Agreements are identical except for the name of the
director or officer and the date of the Agreement:
<TABLE>
<CAPTION>
Director/Officer Date of Agreement
---------------- -----------------
<S> <C>
Norman A. Barkeley July 29, 1987
Joseph C. Berenato November 4, 1991
James S. Heiser May 6, 1987
Kenneth R. Pearson July 27, 1988
Michael W. Williams February 26, 1999
Samuel D. Williams November 11, 1988
H. Frederick Christie October 23, 1985
Robert C. Ducommun December 31, 1985
Kevin S. Moore October 15, 1994
Thomas P. Mullaney April 8, 1987
Richard J. Pearson October 23, 1985
Arthur W. Schmutz December 31, 1985
</TABLE>
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* 10.9 Description of 1999 Executive Officer Bonus Arrangement.
* 10.10 Directors' Deferred Compensation and Retirement Plan, as
amended October 29, 1993. Incorporated by reference to Exhibit 10.9
to Form 10-K for the year ended December 31, 1993.
* 10.11 Ducommun Incorporated Executive Retirement Plan dated
May 5, 1993. Incorporated by reference to Exhibit 10.2 to Form 10-Q
for the quarter ended July 3, 1993.
* 10.12 Ducommun Incorporated Executive Compensation Deferral Plan
dated May 5, 1993. Incorporated by reference to Exhibit 10.3 to
Form 10-Q for the quarter ended July 3, 1993.
* 10.13 Ducommun Incorporated Executive Compensation Deferral Plan
No. 2 dated October 15, 1994. Incorporated by reference to Exhibit
10.12 to Form 10-K for the year ended December 31, 1994.
11 Reconciliation of the Numerators and Denominators of the
Basic and Diluted Earnings Per Share Computations
13 1998 Annual Report to Shareholders (not deemed to be filed
except as previously incorporated by reference).
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
- -------------------
* Indicates an executive compensation plan or arrangement.
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and 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
Date: February 26, 1999 By: /s/ Joseph C. Berenato
-----------------------------------------
Joseph C. Berenato
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: February 26, 1999 By: /s/ Joseph C. Berenato
-----------------------------------------
Joseph C. Berenato
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Date: February 26, 1999 By: /s/ James S. Heiser
-----------------------------------------
James S. Heiser
Vice President, Chief Financial Officer,
General Counsel, Secretary and Treasurer
(Principal Financial Officer)
Date: February 26, 1999 By: /s/ Samuel D. Williams
-----------------------------------------
Samuel D. Williams
Vice President, Controller and Assistant
Treasurer
(Principal Accounting Officer)
</TABLE>
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DIRECTORS
<TABLE>
<S> <C>
By: /s/ Norman A. Barkeley Date February 26, 1999
------------------------------ --------------------------
Norman A. Barkeley
By: /s/ Joseph C. Berenato Date February 26, 1999
------------------------------ --------------------------
Joseph C. Berenato
By: /s/ H. Frederick Christie Date February 26, 1999
------------------------------ --------------------------
H. Frederick Christie
By: /s/ Robert C. Ducommun Date February 26, 1999
------------------------------ --------------------------
Robert C. Ducommun
By: /s/ Kevin S. Moore Date February 26, 1999
------------------------------ --------------------------
Kevin S. Moore
By: /s/ Thomas P. Mullaney Date February 26, 1999
------------------------------ --------------------------
Thomas P. Mullaney
By: /s/ Richard J. Pearson Date February 26, 1999
------------------------------ --------------------------
Richard J. Pearson
By: /s/ Arthur W. Schmutz Date February 26, 1999
------------------------------ --------------------------
Arthur W. Schmutz
</TABLE>
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Ducommun Incorporated
Our audits of the consolidated financial statements referred to in our report
dated February 12, 1999 appearing on page 37 of the 1998 Annual Report to
Shareholders of Ducommun Incorporated (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
February 12, 1999
17
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DUCOMMUN INCORPORATED
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
SCHEDULE VIII
Column A Column B Column C Column D Column E
- ------------------------ ------------- ----------------------------- -------------- -----------
Additions
-----------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
Description of Period Expenses Accounts Deductions Period
- ------------------------ ------------- ----------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Allowance for $ 194,000(a)
Doubtful Accounts $ 359,000 $ 7,000 $ - 47,000(b) $ 125,000
FOR THE YEAR ENDED DECEMBER 31, 1997
Allowance for
Doubtful Accounts $ 206,000 $ 290,000 $ - $ 137,000(b) $ 359,000
FOR THE YEAR ENDED DECEMBER 31, 1996
Allowance for
Doubtful Accounts $ 366,000 $ 28,000 $ - $ 188,000(b) $ 206,000
Deferred Tax Assets $ 665,000(c)
Valuation Allowance $2,433,000 $ - $ - 1,768,000(d) $ -
</TABLE>
(a) Collections on previously written off accounts.
(b) Write-offs on uncollectible accounts.
(c) Change in valuation allowance due to reevaluation of realizability of
future income tax benefit occasioned by the acquisition of MechTronics.
(d) Change in valuation allowance due to reevaluation of realizability of
future income tax benefit.
18
<PAGE> 19
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation filed with the Delaware
Secretary of State on May 29, 1990. Incorporated by reference to
Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
3.2 Certificate of Amendment of Certificate of Incorporation filed with
the Delaware Secretary of State on May 27, 1998.
3.3 Bylaws as amended and restated on October 19, 1996. Incorporated by
reference to Exhibit 3.2 to Form 10-K for the year ended December 31,
1996.
4.1 Fifth Amended and Restated Loan Agreement between Ducommun
Incorporated, as Borrower, and Bank of America National Trust and
Savings Association, as Bank, dated June 23, 1998. Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended June 28,
1998.
4.2 First Amendment to Fifth Amended and Restated Loan Agreement between
Ducommun Incorporated, as Borrower, and Bank of America National Trust
and Savings Association, as Bank, dated as of October 1, 1998.
Incorporated by reference to Exhibit 4.2 to Form 10-K for the year
ended December 31, 1997.
4.3 Second Amendment to Fifth Amended and Restated Loan Agreement dated
August 10, 1998. Incorporated by reference to Exhibit 10.1 to the Form
10-Q for the quarter ended October 3, 1998.
4.4 Third Amendment to Fifth Amended and Restated Loan Agreement dated
February 11, 1999.
4.5 Conversion Agreement dated July 22, 1992 between Ducommun and the
holders of the 9% Convertible Subordinated Notes due 1998.
Incorporated by reference to Exhibit 1 to Form 8-K dated July 29,
1992.
*10.1 1981 Stock Incentive Plan as amended and restated March 21, 1990.
Incorporated by reference to Exhibit 10.2 to Form 10-K for the year
ended December 31, 1989.
*10.2 1990 Stock Option Plan. Incorporated by reference to Exhibit 10.4 to
Form 10-K for the year ended December 31, 1990.
*10.3 1994 Stock Incentive Plan, as amended May 7, 1998. Incorporated by
reference to Exhibit 10.3 to Form 10-K for the year ended December 31,
1997.
*10.4 Form of Nonqualified Stock Option Agreement for employees under the
1994 Stock Incentive Plan, the 1990 Stock Option Plan and the 1981
Stock Incentive Plan. Incorporated by reference to Exhibit 10.5 to
Form 10-K for the year ended December 31, 1990.
<PAGE> 20
*10.5 Form of Incentive Stock Option Agreement under the 1994 Stock
Incentive Plan. Incorporated by reference to Exhibit 10.5 to Form 10-K
for the year ended December 31, 1996.
10.6 Form of Nonqualified Stock Option Agreement for nonemployee directors
under the 1994 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.6 to Form 10-K for the year ended December 31, 1997.
*10.7 Form of Key Executive Severance Agreement entered with eight current
executive officers of Ducommun or its subsidiaries. Incorporated by
reference to Exhibit 10.7 to Form 10-K for the year ended December 31,
1989. All of the Key Executive Severance Agreements are identical
except for the name of the executive officer and the date of the
Agreement:
<TABLE>
<CAPTION>
Executive Officer Date of Agreement
----------------- -----------------
<S> <C>
Joseph C. Berenato November 4, 1991
Robert A. Borlet July 27, 1988
Bruce J. Greenbaum December 6, 1995
Robert B. Hahn July 27, 1988
Robert L. Hansen May 5, 1993
James S. Heiser July 27, 1988
Kenneth R. Pearson July 27, 1988
Samuel D. Williams June 21, 1989
</TABLE>
*10.8 Form of Indemnity Agreement entered with all directors and officers of
Ducommun. Incorporated by reference to Exhibit 10.8 to Form 10-K for
the year ended December 31, 1990. All of the Indemnity Agreements are
identical except for the name of the director or officer and the date
of the Agreement:
<TABLE>
<CAPTION>
Director/Officer Date of Agreement
---------------- -----------------
<S> <C>
Norman A. Barkeley July 29, 1987
Joseph C. Berenato November 4, 1991
James S. Heiser May 6, 1987
Kenneth R. Pearson July 27, 1988
Michael W. Williams February 26, 1999
Samuel D. Williams November 11, 1988
H. Frederick Christie October 23, 1985
Robert C. Ducommun December 31, 1985
Kevin S. Moore October 15, 1994
Thomas P. Mullaney April 8, 1987
Richard J. Pearson October 23, 1985
Arthur W. Schmutz December 31, 1985
</TABLE>
<PAGE> 21
*10.9 Description of 1999 Executive Officer Bonus Arrangement.
*10.10 Directors' Deferred Compensation and Retirement Plan, as amended
October 29, 1993. Incorporated by reference to Exhibit 10.9 to Form
10-K for the year ended December 31, 1993.
*10.11 Ducommun Incorporated Executive Retirement Plan dated May 5, 1993.
Incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter
ended July 3, 1993.
*10.12 Ducommun Incorporated Executive Compensation Deferral Plan dated May
5, 1993. Incorporated by reference to Exhibit 10.3 to Form 10-Q for
the quarter ended July 3, 1993.
*10.13 Ducommun Incorporated Executive Compensation Deferral Plan No. 2 dated
October 15, 1994. Incorporated by reference to Exhibit 10.12 to Form
10-K for the year ended December 31, 1994.
11 Reconciliation of the Numerators and Denominators of the Basic and
Diluted Earnings Per Share Computations
13 1998 Annual Report to Shareholders (not deemed to be filed except as
previously incorporated by reference).
21 Subsidiaries of Registrant
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
- -------------------
* Indicates an executive compensation plan or arrangement.
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
DUCOMMUN INCORPORATED
Ducommun Incorporated, a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation (hereinafter called the "corporation") is
Ducommun Incorporated.
2. The Certificate of Incorporation of the corporation is hereby amended
by striking out Article FOURTH thereof, and by substituting in lieu of said
Article the following new Article:
FOURTH: The Corporation shall be authorized to issue two classes
of shares of stock to be designated, respectively, "Preferred Stock" and
"Common Stock"; the total number of shares which the corporation shall
have authority to issue is 40,000,000; the total number of shares of
Preferred Stock shall be 5,000,000, and each such share shall have a par
value of $.01; the total number of shares of Common Stock shall be
35,000,000, and each such share shall have a par value of $.01.
Shares of Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is hereby authorized to fix the
voting powers, if any, designations, preferences and the relative,
participating, optional or other rights, if any, and the qualifications,
limitations or restrictions thereof, of any unissued series of Preferred
Stock; and to fix the number of shares constituting such series, and to
increase or decrease the number of shares of any such series (but not
below the number of shares thereof then outstanding).
3. The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, Ducommun Incorporated has caused this Certificate to
be signed by James S. Heiser, its Secretary, this 20th day of May, 1998.
By: /s/ James S. Heiser
------------------------------
James S. Heiser
Secretary
<PAGE> 1
EXHIBIT 4.4
THIRD AMENDMENT TO FIFTH
AMENDED AND RESTATED LOAN AGREEMENT
This Third Amendment (the "Amendment") dated as of February 11, 1999, 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 amended by a First
Amendment dated as of October 1, 1997 and a Second Amendment dated as of August
10, 1998 ("Second Amendment") (as 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 added to Paragraph 1.1
of the agreement, in the appropriate alphabetical sequence, to read as
follows:
"Letter of Credit" means any standby letter of
credit issued by the Bank pursuant to Paragraph 2.2 of this
Agreement, either as originally issued or as the same may from
time to time be supplemented, modified, amended, renewed or
extended.
"Letter of Credit Obligations" means at any time
the sum of (a) the Outstanding Letters of Credit, plus (b) the
amount of all unreimbursed drawings under all Letters of Credit.
"Outstanding Letters of Credit" means, as of any
date of determination, the aggregate face amount of all Letters
of Credit outstanding on such date minus the aggregate amount, if
any, paid in cash by Bank under such Letters of Credit that has
been reimbursed by Borrower."
(b) In the definition of "Cash Flow", the phrase
commencing with the word "minus" on line 8 thereof is amended to read as
follows:
". . . minus cash income taxes paid during that
fiscal year, excluding cash income taxes not
exceeding $1,500,000 associated with the capital
gains realized from Borrower's sale of the 3dbm
subsidiary during fiscal year 1998, . . ."
-1-
<PAGE> 2
(c) The definition of "Line of Credit" is amended to read
as follows:
"Line of Credit" means the credit facility for
Loans and Letters of Credit described in Article 2 of this
Agreement."
(d) In the definition of "Loan Documents", the phrase "the
Letters of Credit" is added immediately following the phrase "the
Guaranty".
(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 minus the Letter of
Credit Obligations."
(f) The definition of "Term of this Agreement" is amended
to read as follows:
"Term of this Agreement" means the period
commencing on the Restatement Date and ending on the last date
upon which no Loan or other Obligation of Borrower to Bank
remains unpaid, no Letter of Credit remains outstanding, and Bank
has no further commitment hereunder to make the Line of Credit
available to Borrower."
(g) In the definition of "Total Funded Debt", commencing
at line 11 thereof, the phrase beginning with the words "Contingent
Obligations" is amended to read as follows:
". . . Contingent Obligations under any guaranties
of the obligations of any Person other than
Borrower's Subsidiaries or Affiliates, Outstanding
Letters of Credit (minus Cash and Cash Equivalents
of Borrower and its Subsidiaries), . . ."
(h) The definition of "Total Outstandings" is amended to
read as follows:
"Total Outstandings" means, as of any date of
determination, the sum of (a) all outstanding Loans and (b) the
Letter of Credit Obligations."
2.2 Paragraph 2.2 of the Agreement is amended in its entirety to read as
follows:
"2.2 Letters of Credit. Subject to the terms and
conditions hereof, at any time and from time to time from the
Restatement Date through the Banking Day immediately preceding the
Termination Date, Bank shall issue such Letters of Credit as Borrower
may request, provided that, upon giving effect to such Letter of Credit,
(i) Total Outstandings shall not exceed the Line Commitment, and (ii)
the Letter of Credit Obligations shall not exceed $1,000,000 for standby
Letters of Credit. Unless Bank otherwise consents in writing, the term
of any standby Letter of Credit shall not exceed 24 months, and shall in
no event in any case extend more than 12 months beyond the
-2-
<PAGE> 3
Termination Date. No Letter of Credit shall be issued except to the
extent reasonably necessary in the ordinary course of the business of
Borrower or its Subsidiaries, and no Letter of Credit shall be issued in
any event to support any workers' compensation obligation of Borrower or
its Subsidiaries. Unless otherwise agreed to by Bank, the face amount of
any Letter of Credit shall not be less than $25,000.
Borrower agrees:
(a) if there is a default under this Agreement, to
immediately prepay and make Bank whole for any outstanding Letters of
Credit.
(b) the issuance of any Letter of Credit and any amendment
to a Letter of Credit is subject to Bank's written approval and must be
in form and content satisfactory to Bank and in favor of a beneficiary
acceptable to Bank.
(c) to sign Bank's form Application and Agreement for
Standby Letter of Credit with respect to each Letter of Credit.
(d) to allow Bank to automatically charge its checking
account for applicable fees, discounts, and other charges.
(e) to pay Bank a non-refundable fee equal to 1.50% per
annum of the outstanding undrawn amount of each standby Letter of
Credit, payable annually in advance, calculated on the basis of the face
amount outstanding on the day the fee is calculated.
(f) to pay to Bank the amount of any payment made or to be
made by Bank under any Letter of Credit, upon Bank's demand; and, if
Borrower fails to make any such payment, Bank may, but is not required
to, without notice to or the consent of Borrower, make a Loan in an
aggregate amount equal to the amount paid by Bank on the relevant Letter
of Credit, whether or not the same would cause Total Outstandings to
exceed the Line Commitment (without waiving the obligation of Borrower
to reduce Total Outstandings to an amount less than or equal to the Line
Commitment) and, for this purpose, the conditions precedent set forth in
Article 8 and the amount limitations set forth in Paragraph 2.1 shall
not apply. The proceeds of such Loan shall be paid to Bank to reimburse
it for the payment made by it under the Letter of Credit.
(g) Subject to the next sentence, a Letter of Credit may
be requested pursuant to this Paragraph 2.2 for the account of Borrower
or for the account of any Subsidiary of Borrower. To the extent that a
Subsidiary of Borrower is the account party under any Letter of Credit,
Borrower hereby guarantees the payment and performance of such
Subsidiary with respect to any Obligation of such Subsidiary relating to
such Letter of Credit, and agrees to deliver to Bank, duly executed and
in form and content acceptable to Bank, a duly executed continuing
guaranty further evidencing the foregoing guaranty, together with a
resolution or other evidence of the corporate authority of Borrower to
execute, perform and deliver such continuing guaranty."
2.3 In Paragraph 4.13 of the Agreement, the phrase ", or in
connection with the issuance of any Letter of Credit," is added in the third
line of said paragraph immediately following the word "Loan".
-3-
<PAGE> 4
2.4 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) for working capital purposes
of Borrower and its Subsidiaries, (ii) to issue Letters of Credit, (iii)
for other lawful corporate purposes in the ordinary course of business,
and (iv) to finance Permitted Acquisitions."
2.5 Paragraph 6.3 of the Agreement is amended by deleting the
period at the end of the paragraph and adding the following:
"; provided further, however, that the amount of the
following transactions shall not be included in calculating the amount
of redemptions or repurchases of shares permitted under clause (c) of
this Paragraph 6.3: common stock repurchases that (i) occurred prior to
January 1, 1999 or (ii) are financed exclusively from balance sheet cash
derived from sources other than Loans under this Agreement."
2.6 All references to Letters of Credit in Paragraph 9.2 of the
Agreement, previously deleted pursuant to Paragraph 2.9 of the Second Amendment,
are hereby fully reinstated.
2.7 All references to Letters of Credit in Paragraph 10.8 of the
Agreement, previously deleted pursuant to Paragraph 2.10 of the Second
Amendment, are hereby fully reinstated.
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 $5,000.00.
4.2 An Instrument of Joinder, duly executed by Ducommun
Technologies, Inc., together with corporate resolutions authorizing such
guaranty by joinder, certified by their respective Secretary or
Assistant Secretary.
4.3 Evidence that the execution, delivery and performance of this
Amendment by the Borrower has been duly authorized.
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.
-4-
<PAGE> 5
(Signature page follows)
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-
<PAGE> 1
EXHIBIT 10.9
DUCOMMUN INCORPORATED
DESCRIPTION OF
1999 EXECUTIVE OFFICER BONUS ARRANGEMENT
The Ducommun Incorporated 1999 Executive Officer Bonus Arrangement (the
"Arrangement") is designed to reward achievement of annual operating plan
objectives in order to build profitability and provide competitive compensation
levels. The Arrangement contains a formula-based incentive plan driven by sales,
net income, cash flow and return on asset performance in excess of established
thresholds. The participants in the Arrangement are the five Ducommun corporate
officers and five subsidiary presidents.
The Arrangement provides for bonus awards ranging from 0 to 100% of
annual base salary depending on position. The targeted bonus award under the
Arrangement is half of the maximum bonus eligibility for each individual. Bonus
awards are based on a combination of total corporate performance and on
individual performance of executive officers. The subsidiary presidents are also
measured based upon the financial performance of their operating units. All
awards are subject to the approval of the Compensation Committee of the Board of
Directors.
<PAGE> 1
EXHIBIT 11
DUCOMMUN INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF THE NUMERATORS AND DENOMINATORS OF
THE BASIC AND DILUTED EARNINGS PER SHARE COMPUTATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income Available to Common Stockholders $23,693,000 11,149,000 $ 2.13
======
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 469,000
----------- -----------
DILUTED EPS
Income Available to Common Stockholders
+ Assumed Conversions $23,693,000 $11,618,000 $ 2.04
=========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income Available to Common Stockholders $14,297,000 11,037,000 $ 1.30
======
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 829,000
----------- -----------
DILUTED EPS
Income Available to Common Stockholders
+ Assumed Conversions $14,297,000 $11,866,000 $ 1.20
=========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
BASIC EPS
Income Available to Common Stockholders $10,285,000 9,892,000 $ 1.04
======
EFFECT OF DILUTIVE SECURITIES
Stock Options -- 771,000
7 3/4% Convertible Subordinated Debentures 222,000 1,067,000
----------- -----------
DILUTED EPS
Income Available to Common Stockholders
+ Assumed Conversions $10,507,000 $11,730,000 $ 0.90
=========== =========== ======
</TABLE>
Note: Share-related data have been adjusted for the 3-for-2 stock split in
June 1998.
<PAGE> 1
EXHIBIT 13
DUCOMMUN INCORPORATED
ANNUAL REPORT
The following portions of Ducommun Incorporated and Subsidiaries 1998 Annual
Report are incorporated by reference in Items 5, 6, 7, and 8 of this report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Selected Financial Data 18
Quarterly Common Stock Price Information 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-22
Consolidated Statements of Income 23
Consolidated Balance Sheets 24
Consolidated Statements of Cash Flows 25
Consolidated Statements of Changes in
Shareholders' Equity 26
Notes to Consolidated Financial Statements 27-36
Report of Independent Accountants 37
</TABLE>
<PAGE> 2
EXHIBIT 13
SELECTED FINANCIAL DATA
DUCOMMUN INCORPORATED
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net Sales $ 170,772 $ 157,287 $ 118,357 $ 91,217 $ 61,738
--------- --------- --------- --------- ---------
Gross Profit as a Percentage of Sales 33.3% 32.0% 32.6% 33.0% 28.8%
--------- --------- --------- --------- ---------
Operating Income 29,795 25,288 15,478 10,511 5,644
--------- --------- --------- --------- ---------
Operating Income as a Percentage of Sales 17.4% 16.1% 13.1% 11.5% 9.1%
--------- --------- --------- --------- ---------
Gain on Sale of Subsidiary 9,249 -- -- -- --
--------- --------- --------- --------- ---------
Income Before Taxes 38,919 24,653 14,325 6,941 3,177
Income Tax Expense (15,226) (10,356) (4,040) (1,895) (973)
--------- --------- --------- --------- ---------
Net Income $ 23,693 $ 14,297 $ 10,285 $ 5,046 $ 2,204
========= ========= ========= ========= =========
Earnings Per Share:
Income Before Gain on Sale of
Subsidiary $ 1.51 $ 1.20 $ .90 $ .59 $ .32
Gain on Sale of Subsidiary .53 -- -- -- --
--------- --------- --------- --------- ---------
Diluted Earnings Per Share $ 2.04 $ 1.20 $ .90 $ .59 $ .32
========= ========= ========= ========= =========
Working Capital $ 30,793 $ 30,182 $ 17,286 $ 11,247 $ 6,710
Total Assets 117,204 104,241 95,814 80,974 79,852
Convertible Subordinated Debentures -- -- -- 24,263 28,000
Long-Term Debt Including Current Portion 6,784 5,803 10,290 12,845 21,913
Total Shareholders' Equity 83,705 73,703 59,188 24,588 15,783
Cash Dividends Per Share -- -- -- -- --
</TABLE>
QUARTERLY COMMON STOCK PRICE INFORMATION
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
High Low High Low High Low
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 23.33 $ 19.42 $ 16.83 $ 13.67 $ 9.42 $ 6.33
Second Quarter 23.50 18.94 19.59 15.75 9.92 8.59
Third Quarter 20.75 17.19 26.46 18.58 12.25 8.25
Fourth Quarter 18.75 13.13 25.79 19.17 16.25 11.09
</TABLE>
The common stock of the Company (DCO) is listed on the New York Stock
Exchange. On December 31, 1998, the Company had approximately 647 holders of
record of common stock.
Per share amounts have been adjusted for the 3-for-2 stock split in June 1998.
18
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ACQUISITIONS
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. The acquisition of AEI was accounted for under the purchase method
of accounting, and based on the preliminary allocation of the purchase price,
the Company recorded goodwill of $5,628,000. The consolidated statements of
income include the operating results for AEI since the date of the 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. MechTronics is a leading manufacturer of mechanical and
electromechanical enclosure products for the defense electronics, commercial
aviation and communications markets.
The acquisitions were funded from internally generated cash, notes and
other accounts payable to sellers and borrowings under the Company's credit
agreement with its bank (see Financial Condition for additional information).
These acquisitions strengthened the Company's position in the aerospace industry
and added complementary lines of business.
DISPOSITIONS
In August 1998, the Company sold the capital stock of its wireless
communications subsidiary, 3dbm, Inc. The subsidiary was sold for $17,250,000 in
cash, resulting in a pretax gain of $9,249,000 on the sale and an after-tax gain
of $6,206,000, or $.53 per diluted share, which was recorded in the third
quarter of 1998. The Company sold 3dbm, Inc. because the level of investment
required to ensure the long term viability of 3dbm, Inc. in the wireless systems
infrastructure business was more than the Company was willing to commit.
RESULTS OF OPERATIONS
1998 Compared to 1997 - Net sales increased 9% to $170,772,000 in 1998. The
increase resulted primarily from a broad-based increase in sales in most of the
Company's product lines due to outsourcing from prime contractors and first tier
subcontractors as well as new contract awards, partially offset by lower
commercial and military aftermarket sales. The net effect on sales of the
acquisition of AEI and the divestiture of 3dbm in 1998 compared to 1997 was a
decrease in sales of approximately $111,000 in 1998. The Company's mix of
business was approximately 60% commercial, 29% military and 11% space in 1998.
Foreign sales decreased to 17% of sales from 19% in 1997. Canada is the only
foreign country in which the Company had sales of 3.5 percent or more of total
sales, with sales of $6,173,000 in 1998 and $7,950,000 in 1997.
The Company had substantial sales to Boeing, Lockheed Martin and
Raytheon. During 1998 and 1997, sales to Boeing were $48,334,000 and
$36,375,000, respectively; sales to Lockheed Martin were $18,465,000 and
$17,455,000, respectively; and sales to Raytheon were $12,596,000 and
$9,101,000, respectively. At December 31, 1998, trade receivables from Boeing,
Lockheed Martin and Raytheon were $4,352,000, $1,891,000 and $1,752,000,
respectively. The sales and receivables relating to Boeing, Lockheed Martin and
Raytheon are diversified over a number of different commercial, space and
military programs.
The Company's commercial business is represented on virtually all of
today's major commercial aircraft. During 1998, commercial sales increased
primarily as a result of increased commercial aircraft build rates and new
contract awards. Sales related to commercial business were approximately
$102,432,000, or 60% of total sales in 1998.
Military components manufactured by the Company are employed in many of
the country's front-line fighters, bombers, helicopters and support aircraft, as
well as many land and sea-based vehicles. The Company's defense business is
widely diversified among military manufacturers and programs. Sales related to
military programs were approximately $50,231,000, or 29% of total sales in 1998.
The C-17 program accounted for approximately $9,846,000 in sales in 1998.
In the space sector, the Company produces components for the expendable
fuel tanks which help boost the Space Shuttle vehicle into orbit. Components are
also produced for a variety of unmanned launch vehicles and satellite programs.
Sales related to space programs were approximately $18,109,000, or 11% of total
sales in 1998.
At December 31, 1998, backlog believed to be firm was approximately
$138,200,000, compared to $155,700,000 at December 31, 1997. The backlog
decrease from December 31, 1997 was due to product shipments in 1998 at a faster
rate than new business was awarded to replace it. However, the Company
experienced backlog growth principally in the Boeing 737, 777 and C-17 aircraft.
Approximately $93,000,000 of the total backlog is expected to be delivered
during 1999.
19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gross profit, as a percentage of sales, increased to 33.3% in 1998 from 32.0% in
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,
was 15.8% in 1998, compared to 15.9% in 1997.
Interest expense decreased 80% to $125,000 in 1998 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 $15,226,000 in 1998, compared to
$10,356,000 in 1997. The increase in income tax expense was primarily due to
$3,043,000 of income taxes related to the gain on the sale of 3dbm, Inc. and the
increase in income before taxes. Cash expended to pay income taxes increased to
$9,464,000 in 1998, compared to $4,932,000 in 1997, primarily as a result of
taxes paid on the gain on the sale of 3dbm, Inc.
Net income for 1998 was $23,693,000, or $2.04 diluted earnings per
share, compared to $14,297,000, or $1.20 diluted earnings per share, in 1997.
Net income for 1998 included an after-tax gain of $6,206,000, or $0.53 per
diluted share, on the sale of the capital stock of 3dbm, Inc.
1997 Compared to 1996 - Net sales increased 33% to $157,287,000 in 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 of $22,003,000 in 1997, compared to $8,414,000 in 1996 from the
MechTronics acquisition completed in June 1996. The Company's mix of business
was approximately 59% commercial, 31% military and 10% space in 1997. Foreign
sales increased to 19% of total sales in 1997 from 18% in 1996. Canada is the
only foreign country in which the Company had sales of 4% or more of total
sales, with sales of $7,950,000 in 1997 and $4,906,000 in 1996.
The Company had substantial sales to Boeing, Lockheed Martin and
Northrop Grumman. During 1997 and 1996, sales to Boeing were $36,375,000 and
$21,907,000, respectively; sales to Lockheed Martin were $17,455,000 and
$13,037,000, respectively; and sales to Northrop Grumman were $6,568,000 and
$7,843,000, respectively. At December 31, 1997, trade receivables from Boeing,
Lockheed Martin and Northrop Grumman were $4,079,000, $1,659,000 and $551,000,
respectively. The sales and receivables relating to Boeing, Lockheed Martin and
Northrop Grumman are diversified over a number of different commercial, space
and military programs.
During 1997, commercial sales increased primarily as a result of
commercial aircraft build rates, new contract awards and increased airline seat
refurbishment projects, as well as sales from the MechTronics acquisition.
During 1997, military sales increased primarily as a result of new contract
awards, as well as sales from the MechTronics acquisition. Sales related to
space programs were approximately $14,821,000, or 10% of total sales in 1997.
At December 31, 1997, backlog believed to be firm was approximately
$155,700,000, compared to $134,500,000 at December 31, 1996. Backlog growth has
been concentrated principally in the Boeing 737, 777 and C-17 aircraft.
Gross profit, as a percentage of sales, decreased to 32.0% in 1997 from
32.6% in 1996. This decrease was primarily the result of change in sales mix.
The decrease was partially offset by economies of scale resulting from sales
increases.
Selling, general and administrative expenses, as a percentage of sales,
decreased to 15.9%, compared to 19.6% in 1996. The decrease was primarily the
result of higher sales volume partially offset by an increase in related period
costs.
Interest expense decreased approximately 45% to $635,000 in 1997
primarily due to the conversion of $24,263,000 of convertible subordinated
debentures that were outstanding during the first half of 1996 and lower debt
levels.
Income tax expense increased to $10,356,000 in 1997, compared to
$4,040,000 for 1996. The increase in income tax expense was primarily due to the
increase in income before taxes and an effective tax rate of 42% in 1997,
compared to 28% in 1996. From a cash flow perspective, however, the Company
continued to use its federal net operating loss carryforwards to offset taxable
income. Cash expended to pay income taxes was $4,932,000 in 1997, compared to
$1,759,000 in 1996. At December 31, 1997, the Company had federal tax NOLs
totaling approximately $528,000.
Net income for 1997 was $14,297,000, or $1.20 diluted earnings per
share, compared to $10,285,000, or $.90 diluted earnings per share, in 1996.
20
<PAGE> 5
DUCOMMUN INCORPORATED
FINANCIAL CONDITION
Liquidity and Capital Resources - Cash flow from operating activities for 1998
was $25,172,000, compared to $13,483,000 in 1997. The increase in cash flow from
operating activities resulted principally from an increase in income before the
gain on the sale of 3dbm, Inc., a decrease in inventories and a reduction in
prepaid income taxes. During 1998, the Company spent $11,827,000 on capital
expenditures, $8,165,000 to purchase AEI, $14,652,000 to repurchase shares of
the Company's common stock and repaid $919,000 of principal on its outstanding
bank borrowings, promissory notes, term and commercial real estate loans.
In June 1998, the Company acquired the capital stock of 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.
The acquisition was funded from internally generated cash, notes and other
accounts 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 $.53 per diluted share. The
proceeds from this transaction will be used for general corporate purposes,
including acquisitions and common stock repurchases. The Company sold 3dbm, Inc.
because the level of investment required to ensure the long-term viability of
3dbm, Inc. in the wireless systems infrastructure business was more than the
Company was willing to commit.
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 December 31,
1998, the Company had $40,000,000 of unused lines of credit available.
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.
Aggregate maturities of long-term debt during the next five years are as
follows: 1999, $1,434,000; 2000, $996,000; 2001, $909,000; 2002, $875,000; 2003,
$560,000.
The Company expects to spend less than $15,000,000 for capital
expenditures in 1999. The Company plans to continue to seek attractive
acquisition opportunities and to make substantial capital expenditures 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 among aerospace subcontractors, and to allow the Company to take
advantage of the off-load requirements from its customers.
The Company declared a three-for-two stock split of the Company's common
stock in the form of a stock dividend, which was effected 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 $15,000,000 of its common stock. Repurchases were made from time to
time on the open market at prevailing prices. As of December 31, 1998, the
Company had repurchased 931,762 shares of its common stock in the open market
for a total of approximately $14,652,000, or an average price of $15.73 per
share. In January 1999, the Company's Board of Directors extended the Company's
stock repurchase program and authorized the repurchase of up to an additional
$15,000,000 of its common stock.
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 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.
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND 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.
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 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 STATEMENT AND RISK FACTORS
Any forward-looking statements made in this Annual 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.
22
<PAGE> 7
CONSOLIDATED STATEMENTS OF INCOME DUCOMMUN INCORPORATED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
--------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net Sales $ 170,772 $ 157,287 $ 118,357
Operating Costs and Expenses:
Cost of goods sold 113,929 106,967 79,732
Selling, general and administrative expenses 27,048 25,032 23,147
--------- --------- ---------
Total Operating Costs and Expenses 140,977 131,999 102,879
--------- --------- ---------
Operating Income 29,795 25,288 15,478
Interest Expense (125) (635) (1,153)
Gain on Sale of Subsidiary 9,249 -- --
--------- --------- ---------
Income Before Taxes 38,919 24,653 14,325
Income Tax Expense (15,226) (10,356) (4,040)
--------- --------- ---------
Net Income $ 23,693 $ 14,297 $ 10,285
========= ========= =========
Earnings Per Share:
Basic earnings per share $ 2.13 $ 1.30 $ 1.04
Diluted earnings per share 2.04 1.20 .90
</TABLE>
Per share amounts have been adjusted for the 3-for-2 stock split in June 1998.
See accompanying notes to consolidated financial statements.
23
<PAGE> 8
CONSOLIDATED BALANCE SHEETS DUCOMMUN INCORPORATED
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- --------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,066 $ 2,156
Accounts receivable (less allowance for doubtful
accounts of $125 and $359) 19,680 19,189
Inventories (Note 3) 19,495 24,604
Deferred income taxes (Note 11) 4,449 4,612
Prepaid income taxes 1,283 2,877
Other current assets 2,437 2,053
--------- ---------
Total Current Assets 56,410 55,491
Property and Equipment, Net (Note 4) 41,145 30,594
Excess of Cost Over Net Assets Acquired (Net of Accumulated
Amortization of $5,468 and $4,832) 18,974 16,907
Other Assets 675 1,249
--------- ---------
$ 117,204 $ 104,241
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 6) $ 1,434 $ 919
Accounts payable 7,445 9,024
Accrued liabilities (Note 5) 16,738 15,366
--------- ---------
Total Current Liabilities 25,617 25,309
Long-Term Debt, Less Current Portion (Note 6) 5,350 4,884
Deferred Income Taxes (Note 11) 1,714 --
Other Long-Term Liabilities 818 345
--------- ---------
Total Liabilities 33,499 30,538
========= =========
Commitments and Contingencies (Notes 2, 10 and 12)
Shareholders' Equity (Note 7):
Common stock -- $.01 par value; authorized 35,000,000
shares; issued 11,345,255 shares
in 1998 and 7,454,198 in 1997 113 74
Additional paid-in capital 60,419 59,497
Retained earnings 37,825 14,132
Less common stock held in treasury -- 931,762 shares (14,652) --
--------- ---------
Total Shareholders' Equity 83,705 73,703
--------- ---------
$ 117,204 $ 104,241
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS DUCOMMUN INCORPORATED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 23,693 $ 14,297 $ 10,285
Adjustments to Reconcile Net Income to Cash Provided
by Operating Activities:
Depreciation and amortization 5,868 5,340 4,473
Deferred income tax provision 1,783 5,200 2,014
Gain on sale of subsidiary (9,249) -- --
Change in Assets and Liabilities, Net of Effects
From Acquisitions and Disposition:
Accounts receivable (1,798) (4,467) 1,826
Inventories 4,313 (2,009) (4,105)
Prepaid income taxes 1,594 (2,877) --
Other assets (613) (429) (636)
Accounts payable (1,064) 681 2,310
Accrued and other liabilities 645 (2,253) 1,880
-------- -------- --------
Net Cash Provided by Operating Activities 25,172 13,483 18,047
-------- -------- --------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (11,827) (7,629) (6,691)
Acquisition of Businesses (8,165) -- (8,000)
Proceeds from Sale of Subsidiary 17,250 -- --
Cash Payments Related to Sale of Subsidiary (1,143) -- --
Proceeds from Sale of Assets 233 -- --
-------- -------- --------
Net Cash Used in Investing Activities (3,652) (7,629) (14,691)
-------- -------- --------
Cash Flows from Financing Activities:
Net Repayment of Long-Term Debt (919) (4,487) (2,555)
Purchase of Common Stock for Treasury (14,652) -- --
Other 961 218 (601)
-------- -------- --------
Net Cash Used in Financing Activities (14,610) (4,269) (3,156)
-------- -------- --------
Net Increase in Cash and Cash Equivalents 6,910 1,585 200
Cash and Cash Equivalents, Beginning of Year 2,156 571 371
-------- -------- --------
Cash and Cash Equivalents, End of Year $ 9,066 $ 2,156 $ 571
======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Interest Expense Paid $ 401 $ 720 $ 1,553
Income Taxes Paid $ 9,464 $ 4,932 $ 1,759
</TABLE>
Supplemental Information for Noncash Investing and Financing Activities:
See Note 2 for non-cash investing activities related to the acquisition of
businesses.
During 1996, the Company issued 2,417,205 new shares of common stock upon
conversion of $24,263,000 of its outstanding 7.75% convertible subordinated
debentures.
See accompanying notes to consolidated financial statements.
25
<PAGE> 10
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DUCOMMUN INCORPORATED
<TABLE>
<CAPTION>
Additional Retained Total
Shares Common Paid-In Earnings Treasury Shareholders'
Outstanding Stock Capital (Deficit) Stock Equity
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 4,852,281 $ 49 $34,989 $(10,450) $ -- $ 24,588
Stock options exercised 43,200 -- 156 -- -- 156
Stock repurchased related to the
exercise of stock options (11,258) -- (147) -- -- (147)
Common stock issued upon conversion
of outstanding 7.75% convertible
subordinated debentures 2,417,205 24 24,100 -- -- 24,124
Income tax benefit related to the
exercise of nonqualified stock options -- -- 182 -- -- 182
Net Income -- -- -- 10,285 -- 10,285
--------- ------- ------- -------- -------- ----------
Balance at December 31, 1996 7,301,428 73 59,280 (165) -- 59,188
Stock options exercised 269,117 3 1,030 -- -- 1,033
Stock repurchased related to the
exercise of stock options (116,347) (2) (4,134) -- -- (4,136)
Income tax benefit related to the
exercise of nonqualified stock options -- -- 3,321 -- -- 3,321
Net Income -- -- -- 14,297 -- 14,297
--------- ------- ------- -------- -------- ----------
Balance at December 31, 1997 7,454,198 74 59,497 14,132 -- 73,703
Stock options exercised 198,550 2 981 -- -- 983
Stock repurchased related to the
exercise of stock options (55,562) -- (1,397) -- -- (1,397)
Income tax benefit related to the
exercise of nonqualified stock options -- -- 1,375 -- -- 1,375
Adjustment for stock split 3,748,069 37 (37) -- -- --
Common stock held in treasury (931,762) -- -- -- (14,652) (14,652)
Net Income -- -- -- 23,693 -- 23,693
--------- ------- ------- -------- -------- ----------
Balance at December 31, 1998 10,413,493 $ 113 $60,419 $ 37,825 $(14,652) $ 83,705
========== ======= ======= ======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of the
Company and its subsidiaries, after eliminating significant intercompany
balances and transactions.
Cash Equivalents: Cash equivalents consist of highly
liquid instruments purchased with maturities of three months or less.
Revenue Recognition: Revenue, including sales under fixed price contracts, is
recognized upon shipment of products or when title passes based on the terms of
sale. The effects of revisions in contract value or estimated costs of
completion are recognized over the remaining terms of the agreement. Provisions
for estimated losses on contracts are recorded in the period identified.
Inventory Valuation: Inventories are stated at the lower of cost or market. Cost
is determined based upon the first-in, first-out method. Costs on fixed price
contracts in progress included in inventory represent accumulated recoverable
costs less the portion of such costs allocated to delivered units and applicable
progress payments received.
Property and Depreciation: Property and equipment, including assets recorded
under capital leases, are recorded at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives ranging
from 2 to 40 years and, in the case of leasehold improvements, over the shorter
of the lives of the improvements or the lease term.
Income Taxes: Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's financial statements or tax returns.
Excess of Costs Over Net Assets Acquired: The cost of acquired businesses in
excess of the fair market value of their underlying net assets is amortized on
the straight-line basis over periods ranging from 15 to 40 years. The Company
assesses the recoverability of cost in excess of net assets of acquired
businesses by determining whether the amortization of this intangible asset over
its remaining life can be recovered through future operating cash flows.
Environmental Liabilities: Environmental liabilities are recorded when
environmental assessments and/or remedial efforts are probable, and costs can be
reasonably estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Company's commitment to a formal plan
of action.
Earnings Per Share: Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding in each year. Diluted earnings per share is computed by dividing
income available to common stockholders plus income associated with dilutive
securities by the weighted average number of common shares outstanding plus any
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock in each year. In
1998, 1997 and 1996, income available to common stockholders was $23,693,000,
$14,297,000 and $10,285,000, respectively, and income associated with dilutive
securities was $0, $0 and $222,000, respectively. In 1998, 1997 and 1996, the
weighted average number of common shares outstanding was 11,149,000, 11,037,000
and 9,892,000, the dilutive shares associated with stock options were 469,000,
829,000 and 771,000, and the dilutive shares associated with the outstanding
7.75% convertible subordinated debentures were 0, 0 and 1,067,000, respectively.
Stock-Based Compensation: Compensation cost attributable to stock option and
similar plans is recognized based on the difference, if any, between the closing
market price of the stock on the date of grant over the exercise price of the
option. The Company has not issued any stock options with an exercise price less
than the closing market price of the stock on the date of grant.
Comprehensive Income: In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income"("SFAS 130"). SFAS 130 was effective for the Company during
1998. This statement divides comprehensive income into net income and other
comprehensive income. The Company has no items of other comprehensive income in
any period presented and is consequently not required to report comprehensive
income.
Use of Estimates: Certain amounts and disclosures included in the consolidated
financial statements required management to make estimates which could differ
from actual results.
27
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. ACQUISITIONS AND DISPOSITION
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. 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 the business of MechTronics.
MechTronics is a leading manufacturer of mechanical and electromechanical
enclosure products for the defense electronics, commercial aviation and
communications markets.
The acquisitions of AEI and MechTronics were accounted for under the
purchase method of accounting and, accordingly, the operating results for AEI
and MechTronics have been included in the consolidated statements of income
since the dates of the respective acquisitions. The cost of the acquisitions was
allocated on the basis of the estimated fair value of assets acquired and
liabilities assumed. These acquisitions accounted for approximately $7,705,000,
$1,827,000 and $1,827,000 of the excess of cost over net assets acquired at
December 31, 1998, December 31, 1997 and December 31, 1996. Such excess (which
will increase for any future contingent payments) is being amortized on a
straight-line basis over fifteen years.
The following table presents unaudited pro forma consolidated operating
results for the Company for the year ended December 31, 1996, as if the
MechTronics acquisition had occurred as of the beginning of the periods
presented. Pro forma results for 1998, assuming the acquisition of AEI at the
beginning of the period, would not have been materially different from the
Company's historical results for the period presented.
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------
(In thousands, except per share amounts) (Unaudited)
<S> <C>
Net sales $ 125,762
Net earnings 10,166
Basic earnings per share 1.03
Diluted earnings per share .89
</TABLE>
The unaudited pro forma consolidated operating results of the Company
are not necessarily indicative of the operating results that would have been
achieved had the MechTronics acquisition been consummated at the beginning of
the period presented, and should not be construed as representative of future
operating results.
In August 1998, the Company sold the capital stock of its wireless
communications subsidiary, 3dbm, Inc. The subsidiary was sold for $17,250,000 in
cash, resulting in a pretax gain of $9,249,000 on the sale and an after-tax gain
of $6,206,000, or $.53 per diluted share, which was recorded in the third
quarter of 1998.
28
<PAGE> 13
DUCOMMUN INCORPORATED
NOTE 3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------
(In thousands)
<S> <C> <C>
Raw materials and supplies $ 7,081 $ 7,717
Work in process 12,630 17,058
Finished goods 820 1,041
------- -------
20,531 25,816
Less progress payments 1,036 1,212
------- -------
Total $19,495 $24,604
======= =======
</TABLE>
Work in process inventories include amounts under long-term fixed price
contracts aggregating $7,171,000 and $10,500,000 at December 31, 1998 and 1997,
respectively.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Range of
Estimated
DECEMBER 31, 1998 1997 Useful Lives
- ---------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Land $ 9,560 $ 4,235
Buildings and improvements 14,733 13,127 5 - 40 Years
Machinery and equipment 43,130 38,368 2 - 20 Years
Furniture and equipment 6,256 4,995 2 - 10 Years
Construction in progress 2,931 2,696
------- -------
76,610 63,421
Less accumulated depreciation and amortization 35,465 32,827
------- -------
Total $41,145 $30,594
======= =======
</TABLE>
Depreciation expense was $4,423,000, $4,056,000 and $3,410,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- -------------------------------------------------------------
(In thousands)
<S> <C> <C>
Accrued compensation $ 8,357 $ 8,228
Provision for environmental costs 2,135 1,663
Customer deposits 534 1,181
Accrued state franchise and sales tax 462 288
Other 5,250 4,006
------- -------
Total $16,738 $15,366
======= =======
</TABLE>
29
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Bank credit agreement $ -- $ --
Term and real estate loans 4,635 5,181
Notes and other liabilities for acquisitions 2,149 622
------ ------
Total debt 6,784 5,803
Less current portion 1,434 919
------ ------
Total long-term debt $5,350 $4,884
====== ======
</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% at December 31, 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 December 31, 1998). At December 31, 1998, the
Company had $40,000,000 of unused lines of credit available. The credit
agreement includes fixed charge coverage and maximum leverage ratios, unused
commitment fee, and limitations on future dividend payments and outside
indebtedness.
The weighted average interest rate on borrowings outstanding was 6.73%
and 7.24% at December 31, 1998 and 1997, respectively.
The carrying amount of long-term debt approximates fair value based on
the terms of the related debt, recent transactions and estimates using interest
rates currently available to the Company for debt with similar terms and
remaining maturities.
Aggregate maturities of long-term debt during the next five years are as
follows: 1999, $1,434,000; 2000, $996,000; 2001, $909,000; 2002, $875,000; 2003,
$560,000.
NOTE 7. SHAREHOLDERS' EQUITY
At December 31, 1998 and 1997, no preferred shares were issued or outstanding.
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, and is reflected in all references to
the number of common shares and per share amounts in this report. Average shares
outstanding for 1998, 1997 and 1996, after adjusting for the stock split, were
11,149,000, 11,037,000 and 9,892,000, respectively.
In July 1998, the Board of Directors authorized the repurchase of up to
$15,000,000 of its common stock. As of December 31, 1998, the Company had
repurchased 931,762 shares of common stock in the open market for a total of
approximately $14,652,000, or an average price of $15.73 per share.
30
<PAGE> 15
DUCOMMUN INCORPORATED
NOTE 8. STOCK OPTIONS
The Company has three stock option or incentive plans. Stock awards may be made
to directors, officers and key employees under the stock plans on terms
determined by the Compensation Committee of the Board of Directors or, with
respect to directors, on terms determined by the Board of Directors. Stock
options have been and may be granted to directors, officers and key employees
under the stock plans at prices not less than 100% of the market value on the
date of grant, and expire not more than ten years from the date of grant. The
option price and number of shares are subject to adjustment under certain
dilutive circumstances. At December 31, 1998, options for 533,713 shares of
common stock were exercisable.
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with
the provisions of SFAS 123, the Company applies APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans and does not recognize compensation expense for its stock-based
compensation plans based on the fair value method prescribed by SFAS 123. If the
Company had elected to recognize compensation expense based upon the fair value
at the grant date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net income and earnings per share would be
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net Income:
As reported $ 23,693 $ 14,297 $ 10,285
Pro forma 23,150 14,032 10,101
Earnings per common share:
As reported:
Basic $ 2.13 $ 1.30 $ 1.04
Diluted 2.04 1.20 .90
Pro forma:
Basic $ 2.08 $ 1.27 $ 1.02
Diluted 1.99 1.18 .88
</TABLE>
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over the
vesting period, and additional options may be granted in future years. The fair
value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996, respectively: dividend yields of zero
percent; expected monthly volatility of 29.17, 30.62 and 31.75 percent;
risk-free interest rates of 5.53, 6.38 and 6.33 percent; and expected option
life of four years for 1998, 1997 and 1996. The weighted average fair value of
options granted during 1998, 1997 and 1996, for which the exercise price equals
the market price on the grant date, was $10.02, $4.99 and $3.23, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded
31
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
At December 31, 1998, 372,702 common shares were available for future
grants and 880,525 common shares were reserved for the exercise of options.
Option activity during the three years ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
Weighted Average
Number Exercise Price of
Of Shares Options Outstanding
- ------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1996 1,076,288 $ 2.663
Granted 271,500 9.396
Exercised (64,800) 2.423
Forfeited (4,500) 5.917
---------
Outstanding at December 31, 1996 1,278,488 4.093
Granted 97,500 14.600
Exercised (403,676) 2.559
Forfeited (51,525) 8.823
---------
Outstanding at December 31, 1997 920,787 5.614
Granted 206,450 21.283
Exercised (232,088) 4.237
Forfeited (14,624) 17.177
---------
Outstanding at December 31, 1998 880,525 $ 9.479
=========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable stock options:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Number of Remaining Average Average
Range of Outstanding Contractual Exercise Number Exercise
Exercise Prices Options Life Price Exercisable Price
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.250 - $ 2.999 254,375 2.34 $ 2.470 254,375 $ 2.470
$ 3.000 - $ 4.999 148,350 2.64 3.118 148,163 3.116
$ 5.000 - $ 7.999 15,000 1.92 6.750 11,250 6.750
$ 8.000 - $11.999 163,350 2.33 9.083 81,675 9.083
$12.000 - $17.999 100,500 3.04 14.289 38,250 14.698
$18.000 - $23.210 198,950 4.12 21.284 --
------- -------
Total 880,525 2.86 $ 9.479 533,713 $ 4.628
======= =======
</TABLE>
32
<PAGE> 17
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has an unfunded supplemental retirement plan that was suspended in
1986, but which continues to cover certain former executives. The accumulated
benefit obligations under the plan at December 31, 1998 and December 31, 1997
were $638,000 and $658,000, respectively, which are included in accrued
liabilities.
The Company provides certain health care benefits for retired employees.
Employees become eligible for these benefits if they meet minimum age and
service requirements, are eligible for retirement benefits and agree to
contribute a portion of the cost. As of December 31, 1998, there were 139
current and retired employees eligible for such benefits. Eligibility for
additional employees to become covered by retiree health benefits was terminated
in 1988. The Company accrues postretirement health care benefits over the period
in which active employees become eligible for such benefits. The accrued
postretirement benefit cost under these plans is included in accrued
liabilities.
The components of net periodic postretirement benefits cost for these
plans are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
- ---------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Service cost $ 1 $ 1
Interest cost 92 103
Amortization of net transition obligation 84 84
Amortization of actuarial gain (22) (22)
----- -----
Net periodic postretirement benefit cost $ 155 $ 166
===== =====
</TABLE>
The actuarial liabilities for these postretirement benefits are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ---------------------------------------------------------------
(In thousands)
<S> <C> <C>
Beginning obligation (January 1) $ 1,481 $ 1,485
Service cost 1 1
Interest cost 92 103
Actuarial gain (103) (68)
Benefits paid (73) (83)
------- -------
Benefit obligation (December 31) 1,398 1,438
Unrecognized net transition obligation (571) (655)
Unrecognized prior service cost -- --
Unrecognized net gain 402 363
------- -------
Accrued benefit cost $ 1,229 $ 1,146
======= =======
</TABLE>
The accumulated postretirement benefit obligations at December 31, 1998
and 1997 were determined using an assumed discount rate of 6.75% and 7.00%,
respectively. For measurement purposes, an 8.5% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1999; the rate
was assumed to decrease gradually to 4.75% in the year 2009 and remain at that
level thereafter over the projected payout period of the benefits.
A 1% increase in the assumed annual health care cost trend rate would
increase the present value of the accumulated postretirement benefit obligation
at December 31, 1998 by $500, and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year then ended
by $0.
33
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL SERVICES
NOTE 10. LEASES
The Company leases certain facilities and equipment for periods ranging from 1
to 8 years. The leases generally are renewable and provide for the payment of
property taxes, insurance and other costs relative to the property. Rental
expense in 1998, 1997 and 1996, was $3,483,000, $4,156,000 and $3,890,000,
respectively. Future minimum rental payments under operating leases having
initial or remaining noncancelable terms in excess of one year at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Lease
Commitments
- ------------------------------------------------------
(In thousands)
<C> <C>
1999 $2,848
2000 2,339
2001 1,730
2002 1,191
2003 655
Thereafter 1,219
------
Total $9,982
======
</TABLE>
NOTE 11. INCOME TAXES
The provision for income tax expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $11,355 $ 3,390 $ 735
State 2,088 1,766 1,291
------- ------- ------
13,443 5,156 2,026
------- ------- ------
Deferred tax expense:
Federal 1,747 5,171 2,230
State 36 29 (216)
------- ------- ------
1,783 5,200 2,014
------- ------- ------
Income Tax Expense $15,226 $10,356 $4,040
======= ======= ======
</TABLE>
34
<PAGE> 19
DUCOMMUN INCORPORATED
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------
(In thousands)
<S> <C> <C>
Federal NOLs $ -- $ 185
Credit carryforwards -- 1,803
Employment-related reserves 2,077 2,170
Environmental reserves 751 565
Inventory reserves 1,289 1,582
Other 1,351 1,248
------- -------
5,468 7,553
Depreciation (2,733) (2,561)
------- -------
Net deferred tax assets $ 2,735 $ 4,992
======= =======
</TABLE>
The principal reasons for the variation from the customary relationship
between income taxes and income from continuing operations before income taxes
are as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes (net of federal benefit) 4.1 5.3 5.6
Goodwill amortization .5 1.2 2.1
Benefit of net operating loss carryforwards and carrybacks -- -- (12.3)
Debt conversion -- -- 1.4
Other (.5) .5 (3.6)
---- ---- ----
Effective Income Tax Rate 39.1% 42.0% 28.2%
==== ==== ====
</TABLE>
During 1998, the Company utilized its remaining federal tax net
operating loss carryforwards and its federal tax credit carryforwards.
NOTE 12. 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 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.
35
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company provides proprietary products and services to most of the prime
aerospace and aircraft manufacturers. As a result, the Company's sales and trade
receivables are concentrated principally in the aerospace industry.
The Company had substantial sales to Boeing, Lockheed Martin and
Raytheon. During 1998, 1997 and 1996, sales to Boeing were $48,334,000,
$36,375,000 and $21,907,000, respectively; sales to Lockheed Martin were
$18,465,000, $17,455,000 and $13,037,000, respectively; and sales to Raytheon
were $12,596,000, $9,101,000 and $3,514,000, respectively. At December 31, 1998,
trade receivables from Boeing, Lockheed Martin and Raytheon were $4,352,000,
$1,891,000 and $1,752,000, respectively. The sales and receivables relating to
Boeing, Lockheed Martin and Raytheon are diversified over a number of different
commercial, space and military programs.
In 1998, 1997 and 1996, foreign sales to manufacturers worldwide were
$29,007,000, $29,978,000 and $21,155,000, respectively. Canada is the only
country in which the Company had sales of 3.5% or more of total sales, with
sales of $6,173,000, $7,950,000 and $4,906,000 in 1998, 1997 and 1996,
respectively. The amounts of revenue, profitability and identifiable assets
attributed to foreign operations are not material when compared with revenue,
profitability and identifiable assets attributed to United States domestic
operations during 1998, 1997 and 1996.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- -------------------------------------------------
Three months ended Dec 31 Oct 3 Jul 4 Apr 4 Dec 31 Sep 27 Jun 28 Mar 29
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and Earnings
Net Sales $ 40,484 $ 41,273 $ 45,754 $ 43,261 $ 42,116 $ 40,482 $ 39,384 $ 35,305
-------- -------- -------- -------- -------- -------- -------- --------
Gross Profit 13,591 13,488 15,980 13,784 12,701 12,761 13,754 11,104
-------- -------- -------- -------- -------- -------- -------- --------
Gain on Sale of
Subsidiary -- 9,249 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income Before Taxes 7,783 16,561 8,572 6,003 7,370 6,401 6,344 4,538
Income Tax Expense (3,209) (6,041) (3,515) (2,461) (3,098) (2,686) (2,664) (1,908)
-------- -------- -------- -------- -------- -------- -------- --------
Net Income $ 4,574 $ 10,520 $ 5,057 $ 3,542 $ 4,272 $ 3,715 $ 3,680 $ 2,630
======== ======== ======== ======== ======== ======== ======== ========
Earnings Per Share:
Basic $ .42 $ .94 $ .45 $ .32 $ .38 $ .34 $ .34 $ .24
Diluted $.40 $ .90 $ .43 $ .30 $ .36 $ .31 $ .31 $ .22
</TABLE>
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"). The unaudited quarterly data presented
above for the first three quarters of 1997 have been restated to comply with the
provisions of SFAS 128.
Per share amounts have been adjusted for the 3-for-2 stock split in June 1998.
36
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Ducommun Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Ducommun Incorporated and its subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Los Angeles, California
February 12, 1999
37
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
As of December 31, 1998, the active subsidiaries of the Company were:
Aerochem, Inc., a California corporation
AHF-Ducommun Incorporated, a California corporation
American Electronics, Inc., a California corporation
Brice Manufacturing Company, Inc., a California corporation
Ducommun Technologies, Inc., a California corporation
MechTronics of Arizona Corp., an Arizona corporation
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-31777, 33-82164, 33-36415, 33-9383, 2-83732,
2-77309 and 2-64222) of Ducommun Incorporated of our report dated February 12,
1999 appearing on page 37 of the Annual Report to Shareholders which is
incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 17 of this Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,066
<SECURITIES> 0
<RECEIVABLES> 19,805
<ALLOWANCES> 125
<INVENTORY> 19,495
<CURRENT-ASSETS> 56,410
<PP&E> 76,610
<DEPRECIATION> 35,465
<TOTAL-ASSETS> 117,204
<CURRENT-LIABILITIES> 25,617
<BONDS> 0
0
0
<COMMON> 113
<OTHER-SE> 83,592
<TOTAL-LIABILITY-AND-EQUITY> 117,204
<SALES> 170,772
<TOTAL-REVENUES> 170,772
<CGS> 113,929
<TOTAL-COSTS> 113,929
<OTHER-EXPENSES> 27,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 125
<INCOME-PRETAX> 38,919
<INCOME-TAX> 15,226
<INCOME-CONTINUING> 23,693
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,693
<EPS-PRIMARY> 2.13<F1>
<EPS-DILUTED> 2.04
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
