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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 March 31, 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
incorporation or organization) Identification Number)
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
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As of May 6, 1997 there were 15,711,152 shares of the Registrant's common
stock, par value $0.01 per share, outstanding.
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ALDILA, INC.
TABLE OF CONTENTS
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED MARCH 31, 1997
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Income for the
three months ended March 31, 1997
and 1996 4
Consolidated Statements of Cash Flows for
the three months ended March 31, 1997
and 1996 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II OTHER INFORMATION
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Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $14,019 $19,676
Accounts receivable 7,069 2,460
Inventories 9,030 7,809
Deferred tax assets 2,301 2,301
Prepaid expenses and other current assets 474 468
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Total current assets 32,893 32,714
PROPERTY AND EQUIPMENT 17,159 14,883
TRADEMARKS AND PATENTS 15,030 15,139
GOODWILL 48,696 49,053
DEFERRED FINANCING FEES 136 146
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TOTAL ASSETS $113,914 $111,935
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $4,506 $2,062
Accrued expenses 1,791 2,277
Income taxes payable 891 101
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Total current liabilities 7,188 4,440
LONG-TERM LIABILITIES:
Long-term debt 20,000 20,000
Deferred tax liabilities 7,838 7,906
Deferred rent liabilities 725 763
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Total liabilities 35,751 33,109
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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 15,711,152 and 16,011,152 shares 157 160
Additional paid-in capital 43,939 45,532
Retained earnings 34,067 33,134
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Total stockholders' equity 78,163 78,826
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $113,914 $111,935
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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NET SALES $14,601 $11,919
COST OF SALES 9,784 7,808
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Gross profit 4,817 4,111
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SELLING, GENERAL AND ADMINISTRATIVE 2,643 2,166
AMORTIZATION OF GOODWILL 357 349
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Operating income 1,817 1,596
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OTHER:
Interest expense 316 316
Other (income), net (156) (170)
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INCOME BEFORE INCOME TAXES 1,657 1,450
PROVISION FOR INCOME TAXES 724 638
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NET INCOME $ 933 $ 812
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NET INCOME PER COMMON SHARE $0.06 $0.05
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WEIGHTED AVERAGE SHARES OUTSTANDING 15,999 16,608
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 933 $ 812
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,390 1,067
Changes in assets and liabilities:
Accounts receivable (4,609) (1,351)
Inventories (1,222) (347)
Prepaid expenses and other current assets (6) 377
Accounts payable 2,444 (1,173)
Accrued expenses (486) (899)
Income taxes payable 790 1,150
Deferred tax liabilities (68) (65)
Deferred rent liabilities (38) (28)
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Net cash used by operating activities (872) (457)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,190) (582)
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Net cash used for investing activities (3,190) (582)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock (1,595) 0
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Net cash used for financing activities (1,595) 0
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NET DECREASE IN CASH AND CASH EQUIVALENTS (5,657) (1,039)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,676 19,345
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CASH AND CASH EQUIVALENTS, END OF PERIOD $14,019 $18,306
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 613 $ 613
Income taxes $ 2 $ 3
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ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PRESENTATION
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The consolidated balance sheet as of March 31, 1997 and the consolidated
statements of income and of cash flows for the three month periods ended
March 31, 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 month period ended March 31, 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
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Inventories consist of the following (in thousands):
March 31, December 31,
1997 1996
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Raw materials $5,453 $3,868
Work in process 1,834 2,298
Finished goods 1,743 1,643
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Inventories $9,030 $7,809
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3. EARNINGS PER SHARE
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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
earnings per share computation.
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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 90% 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.
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 already 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,
depending on the availability in the marketplace of graphite shafts at lower
price points. 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 should be
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 affected whenever sales of clubs containing Aldila shafts
drop dramatically. The Company also believes that while it will often not be
possible to predict, with any certainty, such shifts in advance, 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.
In recent years, the Company has benefited from strong sales of its
shafts to Callaway Golf Company ("Callaway") resulting from the popularity of
Callaway's clubs. During 1996 and 1995, sales to Callaway comprised 43% and
50%, respectively, of the
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Company's total net sales. Sales to Callaway as a percentage of the
Company's net sales is expected to decrease again in 1997. Sales to Callaway
comprised 36% of net sales in the first quarter of 1997. However, the
Company's results of operations continue to be dependent on sales to
Callaway, and as a result, further significant decreases in sales to Callaway
could have a significant adverse impact on the Company's sales or earnings.
Based in part, however, on Callaway's statements to the Company that it will
continue to be Callaway's primary supplier of graphite golf club shafts, the
Company expects that Callaway will continue to be the Company's largest
customer for the foreseeable future. The Company continues to serve a broad
range of golf club manufacturers, and, in part as a result of the success in
the marketplace of clubs manufactured by several of these other customers,
sales to other customers in addition to Callaway are likely to represent
significant percentages of the Company's net sales over the next several
years.
RESULTS OF OPERATIONS
FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
NET SALES. Net sales increased $2.7 million, or 22.5%, to $14.6
million for the first quarter ended March 31, 1997 (the "1997 Period") from
$11.9 million for the first quarter ended in 1996 (the "1996 Period"). The
increase in net sales was attributable to increased unit sales to the
Company's club manufacturer customers. Unit sales increased 31% in the 1997
Period as compared to the 1996 Period, which was offset by a 7% decrease in
the average selling price of shafts sold, both as a result of a change in
product mix and heightened competitive pressures.
GROSS PROFIT. Gross profit increased $0.7 million, or 17.2%, to
$4.8 million for the 1997 Period from $4.1 million for the 1996 Period
principally as a result of the increase in net sales. The Company's gross
profit margin decreased to 33.0% in the 1997 Period compared to 34.5% in the
1996 Period as a result of the factors noted above.
The Company's gross profit margin was also negatively impacted by
increases in raw material costs.
OPERATING INCOME. Operating income increased $0.2 million, or
13.8%, to $1.8 million for the 1997 Period from $1.6 million for the 1996
Period, but decreased as a percentage of net sales to 12.4% in the 1997
Period compared to 13.4% in the 1996 Period, primarily related to the lower
gross profit margin. Selling, general and administrative expense remained
relatively constant as a percentage of net sales at 18.1% for the 1997 Period
as compared to 18.2% for the 1996 Period.
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 and does not anticipate doing so for the foreseeable future. The
Company's belief that it will not otherwise need to finance its operations
with borrowings is based on assumptions that it will continue to be
profitable, with positive cash provided by operating activities, and that
changes in the pace of technological development in shaft design and
manufacturing processes will not result in substantially higher levels of
spending on capital expenditures and research and development than the
Company has recently incurred.
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Cash (including cash equivalents) used by operating activities for
the 1997 Period was $0.9 million compared to $0.5 million in the 1996 Period.
This increase resulted principally from the increase in accounts receivable
in the 1997 Period over the 1996 Period partially offset by an increase in
accounts payable. The Company used $3.2 million for capital expenditures
during the 1997 Period. The Company currently anticipates committing to
capital expenditures of approximately $18.5 million in 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 require
approximately 15 months, and a capital expenditure of approximately $16.0
million. The Company plans to use existing cash and cash provided by
operating activities to fund the project.
The Company may from time to time consider the acquisition of
businesses complementary to the Company's business. The Company anticipates
that its cash requirements for maintaining its current level of operations
and those planned for the foreseeable future can be satisfied by cash
provided through operating activities. The Company could require additional
debt financing, however, it if 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 300,000 shares in the 1997 period at an average price
of $5.32 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, 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 recent
years.
"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) Not applicable.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during
the quarter ended March 31, 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.
May 6, 1997 /s/ ROBERT J. CIERZAN
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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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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,019
<SECURITIES> 0
<RECEIVABLES> 7,069
<ALLOWANCES> 0
<INVENTORY> 9,030
<CURRENT-ASSETS> 32,893
<PP&E> 17,159
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,914
<CURRENT-LIABILITIES> 7,188
<BONDS> 20,000
0
0
<COMMON> 157
<OTHER-SE> 78,006
<TOTAL-LIABILITY-AND-EQUITY> 113,914
<SALES> 14,601
<TOTAL-REVENUES> 14,601
<CGS> 9,784
<TOTAL-COSTS> 12,427
<OTHER-EXPENSES> 357<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316
<INCOME-PRETAX> 1,657
<INCOME-TAX> 724
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<NET-INCOME> 933
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<F1>GOODWILL AMORTIZATION
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