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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 June 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 August 4, 1997 there were 15,520,052 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 JUNE 30, 1997
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1997 and December 31, 1996...................... 3
Consolidated Statements of Income for the
three months ended June 30, 1997
and 1996, and the six months ended
June 30, 1997 and 1996................................... 4
Consolidated Statements of Cash Flows for
the six months ended June 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
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Item 1. Legal Proceedings..............................................14
Item 2. Changes in Securities..........................................14
Item 3. Defaults Upon Senior Securities................................14
Item 4. Submission of Matters to a Vote of Security Holders............14
Item 5. Other Information..............................................15
Item 6. Exhibits and Reports on Form 8-K...............................15
Signatures..............................................................16
Exhibit Index...........................................................17
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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>
JUNE 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $11,946 $19,676
Accounts receivable.............................. 6,080 2,460
Inventories...................................... 11,789 7,809
Deferred tax assets.............................. 2,301 2,301
Prepaid expenses and other current assets........ 626 468
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Total current assets........................... 32,742 32,714
PROPERTY AND EQUIPMENT............................. 19,787 14,883
TRADEMARKS AND PATENTS............................. 14,921 15,139
GOODWILL........................................... 48,339 49,053
DEFERRED FINANCING FEES............................ 127 146
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TOTAL ASSETS....................................... $115,916 $111,935
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $5,361 $2,062
Accrued expenses................................. 2,128 2,277
Income taxes payable............................. 1,021 101
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Total current liabilities...................... 8,510 4,440
LONG-TERM LIABILITIES:
Long-term debt................................... 20,000 20,000
Deferred tax liabilities......................... 7,769 7,906
Deferred rent liabilities........................ 688 763
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Total liabilities.............................. 36,967 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 15,597,152 and
16,011,152 shares.............................. 156 160
Additional paid-in capital....................... 43,350 45,532
Retained earnings................................ 35,443 33,134
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Total stockholders' equity..................... 78,949 78,826
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $115,916 $111,935
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</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
-------- ------- -------- -------
<S> <C> <C> <C> <C>
NET SALES..................................... $17,008 $15,259 $31,609 $27,178
COST OF SALES................................. 11,310 9,776 21,094 17,584
------- ------- ------- -------
Gross profit............................... 5,698 5,483 10,515 9,594
------- ------- ------- -------
------- ------- ------- -------
SELLING, GENERAL AND ADMINISTRATIVE........... 2,708 2,536 5,351 4,702
AMORTIZATION OF GOODWILL...................... 357 353 714 702
------- ------- ------- -------
Operating income........................... 2,633 2,594 4,450 4,190
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------- ------- ------- -------
OTHER:
Interest expense........................... 316 316 632 632
Other (income), net........................ (128) (152) (284) (322)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES.................... 2,445 2,430 4,102 3,880
PROVISION FOR INCOME TAXES.................... 1,069 1,069 1,793 1,707
------- ------- ------- -------
NET INCOME.................................... $1,376 $1,361 $2,309 $2,173
------- ------- ------- -------
------- ------- ------- -------
NET INCOME PER COMMON SHARE................... $0.09 $0.08 $0.15 $0.13
------- ------- ------- -------
------- ------- ------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING........... 15,759 16,596 15,879 16,600
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 2,309 $ 2,173
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 2,831 2,254
Changes in assets and liabilities:
Accounts receivable.......................... (3,620) (1,392)
Inventories.................................. (3,980) (85)
Prepaid expenses and other current assets.... (158) 240
Accounts payable............................. 3,299 (1,528)
Accrued expenses............................. (149) (477)
Income taxes payable/receivable.............. 920 1,147
Deferred tax liabilities..................... (137) (128)
Deferred rent liabilities.................... (75) (57)
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Net cash provided by operating activities.. 1,240 2,147
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................ (6,803) (2,357)
Other............................................. 19 (117)
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Net cash used for investing activities..... (6,784) (2,474)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock......................... (2,186) -
------- -------
Net cash used for financing activities..... (2,186) -
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------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS........... (7,730) (327)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...... 19,676 19,345
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CASH AND CASH EQUIVALENTS, END OF PERIOD............ $11,946 $19,018
------- -------
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 613 $ 613
Income taxes $ 1,009 $ 1,135
</TABLE>
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ALDILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. BASIS OF PRESENTATION
The consolidated balance sheet as of June 30, 1997 and the consolidated
statements of income for the three month and six month periods ended June 30,
1997 and 1996, and the consolidated statements of cash flows for the six month
periods ended June 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 six month periods ended June 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):
June 30, December 31,
1997 1996
-------- -----------
Raw materials $5,500 $3,868
Work in process 3,210 2,298
Finished goods 3,079 1,643
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Inventories $11,789 $7,809
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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
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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
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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 Company's total net sales. Sales to Callaway as a
percentage of the Company's net sales has decreased again in 1997. Sales to
Callaway comprised 35% of net sales in the first half 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. In addition, sales to Taylor Made Golf comprised 21% of net
sales in the first half of 1997 and therefore the Company's results of
operations are to a lesser extent also dependent on sales to Taylor Made Golf.
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RESULTS OF OPERATIONS
SECOND QUARTER 1997 COMPARED TO SECOND QUARTER 1996
NET SALES. Net sales increased $1.7 million, or 11.5%, to $17.0 million
for the second quarter ended June 30, 1997 (the "1997 Period") from $15.3
million for the second quarter ended June 30, 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 14% in the 1997 Period as
compared to the 1996 Period.
GROSS PROFIT. Gross profit increased $0.2 million, or 3.9%, to $5.7
million for the 1997 Period from $5.5 million for the 1996 Period principally as
a result of the increase in net sales. The Company's gross profit margin
decreased to 33.5% in the 1997 Period compared to 35.9% 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 was $2.6 million for the 1997 Period
and for the 1996 Period and decreased as a percentage of net sales to 15.5% in
the 1997 Period compared to 17.0% in the 1996 Period, primarily related to the
lower gross profit margin.
SIX MONTH PERIOD IN 1997 COMPARED TO SIX MONTH PERIOD IN 1996
NET SALES. Net sales increased $4.4 million, or 16.3%, to $31.6 million
for the six month period ended June 30, 1997 from $27.2 million for the six
month period ended June 30, 1996. The increase in net sales was attributable to
increased unit sales to the Company's club manufacturer customers. Unit sales
increased 21% in the six month period ended June 30, 1997 as compared to the six
month period ended June 30, 1996, which was offset by a 4% decrease in the
average selling price of shafts sold.
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GROSS PROFIT. Gross profit increased $0.9 million, or 9.6%, to $10.5
million for the six month period ended June 30, 1997 from $9.6 million for the
six month period ended June 30, 1996 partially as a result of the increase in
the Company's net sales. The Company's gross profit margin decreased to 33.3%
for the six month period ended June 30, 1997 from 35.3% for the six month period
ended June 30, 1996 as a result of lower average selling prices for shafts sold
combined with higher raw material costs.
OPERATING INCOME. Operating income increased $0.3 million, or 6.2%, to
$4.5 million for the six month period ended June 30, 1997 from $4.2 million for
the six month period ended June 30, 1996 and decreased as a percentage of net
sales to 14.1% from 15.4%, respectively, primarily related to the lower gross
profit margin.
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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.
Cash (including cash equivalents) provided from operating activities for
the six month period in 1997 was $1.2 million compared to $2.1 million provided
from operating activities for the six month period in 1996. This decrease
resulted principally from the increase in inventory for the six month period
ended June 30, 1997 compared to the six month period ended June 30, 1996. The
Company used $6.8 million for capital expenditures during the six month period
ended June 30, 1997. The Company currently anticipates committing to additional
capital expenditures of approximately $11.7 million for the remainder 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 require capital expenditures of approximately $16.0 million. The
Company has used and will continue 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, 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
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on market and general economic conditions. The Company repurchased 414,000
shares in the first six 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, 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
The Company held its Annual Meeting of Stockholders on May 6,
1997. At the Annual Meeting, three items were submitted to a
vote of the stockholders of the Company and were approved:
1) The nine current directors of the company (listed below) were
nominated and elected to serve until the next annual meeting of
stockholders. Votes cast for each director as well as votes
withheld are as follows:
WITHHELD
NAME FOR AUTHORITY
---- --- ---------
Gary T. Barbera 14,361,094 768,059
Peter E. Bennett 14,360,294 768,859
Marvin M. Giles,III 14,361,949 767,659
Vincent T. Gorguze 14,334,488 794,665
John J. Henry 14,334,694 794,459
Donald C. Klosterman 14,343,594 785,559
Wm. Brian Little 14,360,494 768,659
Peter R. Mathewson 14,361,694 767,459
Chapin Nolen 14,360,194 768,959
2) The stockholders approved an amendment to the 1994 Stock
Incentive Plan. The 1994 Stock Incentive Plan provides for the
granting of options, stock appreciation rights, restricted stock
and performance shares to salaried employees and directors of the
Company and its
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subsidiaries and to consultants and advisors. 4,476,045 votes
were cast for approval of the amendments; 1,978,165 votes were
cast against approval of the amendments; there were 1,126,994
abstentions and 7,547,949 broker non-votes.
3) The stockholders also ratified the appointment of Deloitte &
Touche LLP as the Company's independent accountants for the
fiscal year ending December 31, 1997. 14,954,814 votes were cast
for ratification of Deloitte & Touche LLP; 110,400 votes were
cast against; and there were 63,939 abstentions and 0 broker
non-votes.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 25.1:
Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant
during the quarter ended June 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.
August 4, 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.
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25.1 Financial Data Schedule
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 11,946
<SECURITIES> 0
<RECEIVABLES> 6,080
<ALLOWANCES> 0
<INVENTORY> 11,789
<CURRENT-ASSETS> 32,742
<PP&E> 19,787
<DEPRECIATION> 0
<TOTAL-ASSETS> 115,916
<CURRENT-LIABILITIES> 8,510
<BONDS> 20,000
0
0
<COMMON> 156
<OTHER-SE> 78,793
<TOTAL-LIABILITY-AND-EQUITY> 115,916
<SALES> 31,609
<TOTAL-REVENUES> 31,609
<CGS> 21,094
<TOTAL-COSTS> 26,445
<OTHER-EXPENSES> 714<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 632
<INCOME-PRETAX> 4,102
<INCOME-TAX> 1,793
<INCOME-CONTINUING> 2,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,309
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<FN>
<F1>GOODWILL AMORTIZATION
</FN>
</TABLE>
