<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number 0-21872
ALDILA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3645590
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
15822 BERNARDO CENTER DRIVE, SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices)
(619) 592-0404
(Registrant's Telephone No.)
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
--- ---
As of November 7, 1997 there were 15,428,871 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
1
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ALDILA, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1997
Page
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
three months ended September 30, 1997
and 1996, and the nine months ended
September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997
and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
2
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $7,753 $19,676
Accounts receivable 4,207 2,460
Inventories 12,472 7,809
Deferred tax assets 2,301 2,301
Prepaid expenses and other current assets 624 468
-------- --------
Total current assets 27,357 32,714
PROPERTY AND EQUIPMENT 22,749 14,883
TRADEMARKS AND PATENTS 14,813 15,139
GOODWILL 47,982 49,053
DEFERRED FINANCING FEES 117 146
-------- --------
TOTAL ASSETS $113,018 $111,935
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,295 $2,062
Accrued expenses 1,475 2,277
Income taxes payable 105 101
-------- --------
Total current liabilities 5,875 4,440
LONG-TERM LIABILITIES:
Long-term debt 20,000 20,000
Deferred tax liabilities 7,701 7,906
Deferred rent liabilities 650 763
-------- --------
-------- --------
Total liabilities 34,226 33,109
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; authorized 5,000,000
shares; no shares issued
Common stock, $.01 par value; authorized 30,000,000
shares; issued and outstanding 15,418,871 and
16,011,152 shares 154 160
Additional paid-in capital 42,404 45,532
Retained earnings 36,234 33,134
-------- --------
Total stockholders' equity 78,792 78,826
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,018 $111,935
-------- --------
-------- --------
</TABLE>
3
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME -- UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $12,772 $16,735 $44,381 $43,913
COST OF SALES 8,838 10,434 29,932 28,018
------- ------- ------- -------
Gross profit 3,934 6,301 14,449 15,895
------- ------- ------- -------
SELLING, GENERAL AND ADMINISTRATIVE 2,025 2,489 7,376 7,191
AMORTIZATION OF GOODWILL 357 357 1,071 1,059
------- ------- ------- -------
Operating income 1,552 3,455 6,002 7,645
------- ------- ------- -------
OTHER:
Interest expense 162 317 794 949
Other (income), net (93) (200) (377) (522)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,483 3,338 5,585 7,218
PROVISION FOR INCOME TAXES 692 1,469 2,485 3,176
------- ------- ------- -------
NET INCOME $791 $1,869 $3,100 $4,042
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER COMMON SHARE $0.05 $0.11 $0.20 $0.24
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING 15,667 16,437 15,806 16,544
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,100 $ 4,042
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,137 3,544
Changes in assets and liabilities:
Accounts receivable (1,747) (393)
Inventories (4,663) (666)
Prepaid expenses and other current assets (156) 239
Accounts payable 2,233 (886)
Accrued expenses (802) (536)
Income taxes payable/receivable 4 1,462
Deferred tax liabilities (205) (193)
Deferred rent liabilities (113) (85)
-------- --------
Net cash provided by operating activities 1,788 6,528
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,606) (3,016)
Other 29 (118)
-------- --------
Net cash used for investing activities (10,577) (3,134)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 24
Repurchases of common stock (3,165) (1,528)
Tax benefit from exercise of stock options 7
-------- --------
Net cash used for financing activities (3,134) (1,528)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,923) 1,866
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,676 19,345
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,753 $ 21,211
-------- --------
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,226 $ 1,226
Income taxes $ 2,679 $ 2,352
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ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
1. BASIS OF PRESENTATION
The consolidated balance sheet as of September 30, 1997 and the
consolidated statements of income for the three month and nine month periods
ended September 30, 1997 and 1996, and the consolidated statements of cash
flows for the nine month periods ended September 30, 1997 and 1996 are
unaudited and reflect all adjustments of a normal recurring nature which are,
in the opinion of management, necessary for a fair presentation of the
financial position and results of operations for the interim periods. The
consolidated balance sheet as of December 31, 1996 was derived from the
Company's audited financial statements. Operating results for the three and
nine month periods ended September 30, 1997 are not necessarily indicative of
results to be expected for the fiscal year ending December 31, 1997. These
consolidated financial statements should be read in conjunction with the
Company's December 31, 1996 consolidated financial statements and notes
thereto.
2. INVENTORIES
Inventories consist of the following (in thousands):
September December
30, 31,
1997 1996
--------- --------
Raw materials $ 5,966 $ 3,868
Work in process 3,814 2,298
Finished goods 2,692 1,643
------- -------
Inventories $12,472 $ 7,809
------- -------
------- -------
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<PAGE>
3. EARNINGS PER SHARE
In February of 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings
Per Share (EPS)." This statement requires the presentation of earnings per
share to reflect both "Basic EPS" as well as "Diluted EPS" on the face of the
income statement. In general, Basic EPS excludes dilution created by stock
equivalents and is a function of the weighted average number of common shares
outstanding for the period. Diluted EPS does reflect the potential dilution
created by stock equivalents as if such equivalents are converted into common
stock and is calculated in substantially the same manner as Fully Diluted EPS
illustrated in Accounting Principles Board Opinion No. 15, "Earnings Per
Share." The Company will be required to adopt the new method of reporting
earnings per share in the fourth quarter of 1997. The Company does not
expect the adoption of this standard to have a material impact on the
presentation of earnings per share as currently reported.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview -- Business Conditions
Aldila, Inc. (the "Company") is principally in the business of designing,
manufacturing and marketing graphite (carbon fiber based composite) golf club
shafts, with approximately 85% of its net sales resulting from sales to golf
club manufacturers for inclusion in their clubs. As a result, the Company's
operating results are substantially dependent not only on demand by its
customers for the Company's shafts but also on demand by consumers for clubs
including graphite shafts such as the Company's.
In the first quarter of 1998, the Company expects to begin production of
carbon fiber at its new facility currently under construction in Evanston,
Wyoming. The Company will use the output of this facility to satisfy a
significant portion of its internal demand for carbon fiber in the manufacturing
of golf club shafts. It also anticipates that it will produce at this new
facility carbon fiber in excess of what it will be able to use in the
manufacturing of golf club shafts. The Company intends to sell such excess, in
some cases in the form of graphite prepreg manufactured using its existing
facility in San Diego, California, to other manufacturers of carbon fiber-based
products. The Company is also exploring entering into the manufacturing of new
carbon fiber-based products in order to take advantage of this excess carbon
fiber capacity and may make acquisitions of other companies in order to acquire
such product lines. The Company expects that the additional vertical
integration offered by its new facility will assist it from the outset in
maintaining its position as a low cost manufacturer of graphite golf club shafts
at all price points. Management of the Company believes that the ability to
manufacture carbon fiber will also ultimately enable the Company to diversify
its sales and reduce its dependence on the overall golf club market, while
continuing to leverage the Company's existing composite materials expertise,
which should provide opportunities for growth that are not currently present in
the golf shaft business. As a result of the fact that this new facility will
necessarily need to undergo a "shakedown" period and will not be operating at
full capacity at the beginning, however, the full benefit of this facility to
the Company will not begin to be realized until at least 1999.
-8-
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Historically, graphite shafts have principally been offered by
manufacturers of higher priced, premium golf clubs, and the Company's sales have
been predominantly of premium graphite shafts. In addition, until recently, the
United States market for graphite shafts was dominated by a relatively small
number of United States-based shaft manufacturers. Both of these aspects of the
graphite shaft market have been changing. As a high percentage of premium clubs
are sold with graphite shafts, as compared to a smaller percentage of value
priced clubs, the Company anticipates that growth in graphite shaft usage in the
future will be greater in the value priced segment of the market than in the
premium segment. Management of the Company expects sales of shafts for the
value priced club market to increase significantly over the next several years,
although management also anticipates that sales of premium shafts will continue
to represent a majority of the Company's sales measured in dollars for the
foreseeable future. Over the last several years, the number of shaft
manufacturers of graphite golf shafts serving the United States premium club
market has increased, including affiliates of foreign manufacturers that had
previously not had significant sales in the United States. These two overall
trends in the graphite shaft marketplace have had the effect, and are expected
by management to continue to have the effect for at least the next several
years, of decreasing the average selling price of the Company's shafts.
Although the Company's gross profit margin is being adversely affected by the
reduction in average selling price and continuing increases in raw material
costs, these adverse effects on gross margin are being mitigated to some extent
by efforts being taken by the Company to control costs, including manufacturing
its own graphite prepreg and, starting in 1998, its own carbon fiber, increased
automation and increasing the percentage of its shafts being manufactured in
countries with lower labor and overhead costs.
In recent years, the Company's results of operations have been materially
affected on several occasions by dramatic year-to-year changes in its sales to
an individual golf club manufacturer customer. Such changes can result either
from decisions by the customer to increase or decrease shaft purchases from an
alternative supplier or from the traditional volatility in consumer demand for
specific clubs. The Company believes that this volatility is likely to continue
in the future, particularly as club manufacturers seek to gain competitive
advantages through an increased rate of technological innovation in club design.
The Company's results will benefit whenever it has an opportunity to supply the
latest "hot" club and will be adversely
-9-
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affected whenever sales of clubs containing Aldila shafts drop dramatically.
In particular, in recent years, a significant portion of the Company's sales
has tended to be concentrated in one or two customers, thereby making the
Company's results of operations dependent to a large extent on continued
sales to those customers. In the first nine months of 1997, sales to
Callaway Golf Company and Taylor Made Golf represented 34% and 22%,
respectively, of the Company's total net sales. The Company expects Callaway
and Taylor Made to continue to be collectively the Company's principal
customers at least through 1998. The Company believes that while it will
often not be possible to predict, with any certainty, shifts in demand for
particular clubs, the Company's broad range of club manufacturer customers
should reduce in some cases the extent of the impact on the Company's
financial results.
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<PAGE>
RESULTS OF OPERATIONS
THIRD QUARTER 1997 COMPARED TO THIRD QUARTER 1996
NET SALES. Net sales decreased $4.0 million, or 23.7%, to $12.8
million for the third quarter ended September 30, 1997 (the "1997 Period")
from $16.7 million for the third quarter ended September 30, 1996 (the "1996
Period"). The decrease in net sales was attributable to decreased unit sales
to the Company's club manufacturer customers coupled with lower average
selling prices to these customers. Unit sales decreased 11% in the 1997
Period as compared to the 1996 Period and the average selling price of shafts
sold decreased 15%.
In the 1997 Period, the Company's net sales were negatively impacted by
the timing of its customers new product introductions and buying patterns in
comparison to the net sales reported in the 1996 Period. See --"Management's
Discussion and Analysis of Financial Condition and results of Operations
- --Seasonality."
GROSS PROFIT. Gross profit decreased $2.4 million, or 37.6%, to $3.9
million for the 1997 Period from $6.3 million for the 1996 Period,
principally as a result of the decrease in net sales. The Company's gross
profit margin decreased to 30.8% in the 1997 Period compared to 37.7% in the
1996 Period as a result of lower average selling prices for shafts sold
combined with higher raw material costs.
OPERATING INCOME. Operating income decreased $1.9 million, or 55%, to
$1.6 million for the 1997 Period from $3.5 million for the 1996 Period and
decreased as a percentage of net sales to 12.2% in the 1997 Period compared
to 20.6% in the 1996 Period, primarily related to the lower gross profit
margin.
NINE MONTH PERIOD IN 1997 COMPARED TO NINE MONTH PERIOD IN 1996
NET SALES. Net sales increased $0.5 million, or 1.0%, to $44.4 million
for the nine month period ended September 30, 1997 from $43.9 million for the
nine month period ended September 30, 1996. The increase in net sales was
attributable to increased unit sales to the Company's club manufacturer
customers. Unit sales increased 10% in the nine month period ended September
30, 1997 as compared to the nine month period ended September 30, 1996, which
was offset by an 8% decrease in the average selling price of shafts sold.
-11-
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GROSS PROFIT. Gross profit decreased $1.5 million or 9.1%, to $14.4
million for the nine month period ended September 30, 1997 from $15.9 million
for the nine month period ended September 30, 1996 partially as a result of
lower average selling prices for shafts sold. The Company's gross profit
margin decreased to 32.6% for the nine month period ended September 30, 1997
from 36.2% for the nine month period ended September 30, 1996 as a result of
lower average selling prices for shafts sold combined with higher raw
material costs.
OPERATING INCOME. Operating income decreased $1.6 million, or 21.5%, to
$6.0 million for the nine month period ended September 30, 1997 from $7.6
million for the nine month period ended September 30, 1996 and decreased as a
percentage of net sales to 13.5% from 17.4%, respectively, primarily related
to the lower gross profit margin.
LIQUIDITY AND CAPITAL RESOURCES
Since November 1993, the only indebtedness of the Company has been $20.0
million in 6.13% senior notes due 2001. The Company has not used borrowings
to finance its operations or provide working capital for over five years but
may require additional short-term financing for the Company's working capital
needs
Cash (including cash equivalents) provided from operating activities for
the nine month period in 1997 was $1.8 million compared to $6.5 million
provided from operating activities for the nine month period in 1996. This
decrease resulted principally from the increase in inventory for the nine
month period ended September 30, 1997 compared to the nine month period ended
September 30, 1996 and the decrease in net income for the same periods. The
Company used $10.6 million for capital expenditures during the nine month
period ended September 30, 1997. The Company currently anticipates
committing to additional capital expenditures of approximately $7.0 million
in the fourth quarter of 1997 primarily related to development and
construction of a new facility for the manufacture of carbon fiber.
Management estimates that the design, construction and start-up of the
planned 50,000 square foot facility will be completed in 1998 and have a
total capital cost of approximately $16.0 million. The Company has used
existing cash and cash provided by operating activities to fund the project
to date.
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The Company may from time to time consider the acquisition of businesses
complementary to its business. The Company could require additional debt
financing if it were to engage in a material acquisition in the future.
On October 26, 1995 the Board of Directors of the Company authorized the
repurchase of up to 2.5 million shares of the Company's common stock. The
Company intends to repurchase shares from time to time in the market at then
prevailing prices, depending on market and general economic conditions. The
Company repurchased 600,000 shares in the first nine months of 1997 at an
average price of $5.28 per share.
SEASONALITY
Because the Company's customers have historically built inventory in
anticipation of purchases by golfers in the spring and summer, the principal
selling season for golf equipment, the Company's operating results have been
affected by seasonal demand for golf clubs, which has generally resulted in
higher sales in the second and third quarter. The success of certain
customers' products, in particular, Callaway and Taylor Made Golf, patterns
of product introduction, and customer acceptance thereof, coupled with a
generally increasing overall demand for graphite shafts, has tended to
mitigate the impact of seasonality in previous years; however, these factors
had a negative impact on the Company's sales in the third quarter of 1997.
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"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
With the exception of historical information (information relating to
the Company's financial condition and results of operations at historical
dates or for historical periods), the matters discussed in this Management's
Discussion and Analysis of Financial Condition and Results of Operations are
forward-looking statements that necessarily are based on certain assumptions
and are subject to certain risks and uncertainties. These forward-looking
statements are based on management's expectations as of the date hereof, and
the Company does not undertake any responsibility to update any of these
statements in the future. Actual future performance and results could differ
from that contained in or suggested by these forward-looking statements as a
result of the factors set forth in this Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Business Risks
described in the Company's Report on Form 10-K for the year ended December
31, 1996 and elsewhere in the Company's filings with the Securities and
Exchange Commission.
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PART II -- OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 27.1:
Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant
during the quarter ended September 30, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: ALDILA, INC.
November 7, 1997 /s/ ROBERT J. CIERZAN
---------------------
Robert J. Cierzan
Vice President, Finance
Signing both in his capacity as
Vice President and as Chief
Accounting Officer of the Registrant
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EXHIBIT INDEX
EXHIBIT NO.
- -----------
27.1 Financial Data Schedule
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<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 7,753
<SECURITIES> 0
<RECEIVABLES> 4,207
<ALLOWANCES> 0
<INVENTORY> 12,472
<CURRENT-ASSETS> 27,357
<PP&E> 22,749
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,018
<CURRENT-LIABILITIES> 5,875
<BONDS> 20,000
0
0
<COMMON> 154
<OTHER-SE> 78,638
<TOTAL-LIABILITY-AND-EQUITY> 113,018
<SALES> 44,381
<TOTAL-REVENUES> 44,381
<CGS> 29,932
<TOTAL-COSTS> 37,308
<OTHER-EXPENSES> 1,071<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 794
<INCOME-PRETAX> 5,585
<INCOME-TAX> 2,485
<INCOME-CONTINUING> 3,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,100
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
<FN>
<F1>GOODWILL AMORTIZATION
</FN>
</TABLE>
