FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 3, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-8174
DUCOMMUN INCORPORATED
(Exact name of registrant as specified in its charter)
| Delaware | 95-0693330 | |
| (State or other jurisdiction of incorporation or organization) |
I.R.S. Employer Identification No. |
111 W. Ocean Boulevard, Suite 900, Long Beach, California 90802
(Address of principal executive offices) (Zip Code)
(562) 624-0800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of July 3, 2004, there were outstanding 9,967,463 shares of common stock.
FORM 10-Q
INDEX
- 2 -
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
| July 3, 2004 |
December 31, 2003 |
|||||||
| Assets |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents |
$ | 266 | $ | 3,832 | ||||
| Accounts receivable (less allowance for doubtful accounts of $481 and $503) |
26,889 | 26,275 | ||||||
| Inventories |
46,999 | 40,003 | ||||||
| Deferred income taxes |
5,886 | 6,217 | ||||||
| Prepaid income taxes |
376 | 1,593 | ||||||
| Other current assets |
4,758 | 4,277 | ||||||
| Total Current Assets |
85,174 | 82,197 | ||||||
| Property and Equipment, Net |
56,984 | 56,929 | ||||||
| Goodwill (Net of Accumulated Amortization of $10,996 and $10,996) |
57,201 | 57,201 | ||||||
| Other Assets |
1,355 | 1,714 | ||||||
| $ | 200,714 | $ | 198,041 | |||||
| Liabilities and Shareholders’ Equity |
||||||||
| Current Liabilities: |
||||||||
| Current portion of long-term debt |
$ | 800 | $ | 2,185 | ||||
| Accounts payable |
14,216 | 14,200 | ||||||
| Accrued liabilities |
32,654 | 36,152 | ||||||
| Total Current Liabilities |
47,670 | 52,537 | ||||||
| Long-Term Debt, Less Current Portion |
600 | 400 | ||||||
| Deferred Income Taxes |
5,313 | 5,313 | ||||||
| Other Long-Term Liabilities |
2,041 | 2,041 | ||||||
| Total Liabilities |
55,624 | 60,291 | ||||||
| Commitments and Contingencies |
||||||||
| Shareholders’ Equity: |
||||||||
| Common stock — $.01 par value; authorized 35,000,000 shares; issued 9,967,463 shares in 2004 and 9,901,965 shares in 2003 |
100 | 99 | ||||||
| Additional paid-in capital |
39,195 | 38,394 | ||||||
| Retained earnings |
107,836 | 101,298 | ||||||
| Accumulated other comprehensive loss |
(2,041 | ) | (2,041 | ) | ||||
| Total Shareholders’ Equity |
145,090 | 137,750 | ||||||
| $ | 200,714 | $ | 198,041 | |||||
See accompanying notes to consolidated financial statements.
- 3 -
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| For Three Months Ended |
||||||||
| July 3, 2004 |
July 5, 2003 |
|||||||
| Net Sales |
$ | 57,383 | $ | 56,211 | ||||
| Operating Costs and Expenses: |
||||||||
| Cost of goods sold |
43,242 | 43,282 | ||||||
| Selling, general and administrative expenses |
7,993 | 7,105 | ||||||
| Total Operating Costs and Expenses |
51,235 | 50,387 | ||||||
| Operating Income |
6,148 | 5,824 | ||||||
| Interest Expense |
(76 | ) | (244 | ) | ||||
| Income Before Taxes |
6,072 | 5,580 | ||||||
| Income Tax Expense |
(1,765 | ) | (1,589 | ) | ||||
| Net Income |
$ | 4,307 | $ | 3,991 | ||||
| Earnings Per Share: |
||||||||
| Basic earnings per share: |
$ | 0.43 | $ | 0.40 | ||||
| Diluted earnings per share: |
$ | 0.42 | $ | 0.40 | ||||
| Weighted Average Number of Common Shares |
||||||||
| Outstanding: |
||||||||
| Basic |
9,966 | 9,874 | ||||||
| Diluted |
10,191 | 9,897 | ||||||
See accompanying notes to consolidated financial statements.
- 4 -
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
| For Six Months Ended |
||||||||
| July 3, 2004 |
July 5, 2003 |
|||||||
| Net Sales |
$ | 115,630 | $ | 111,252 | ||||
| Operating Costs and Expenses: |
||||||||
| Cost of goods sold |
91,075 | 86,310 | ||||||
| Selling, general and administrative expenses |
14,783 | 14,088 | ||||||
| Total Operating Costs and Expenses |
105,858 | 100,398 | ||||||
| Operating Income |
9,772 | 10,854 | ||||||
| Interest Expense |
(214 | ) | (565 | ) | ||||
| Income Before Taxes |
9,558 | 10,289 | ||||||
| Income Tax Expense |
(3,020 | ) | (3,190 | ) | ||||
| Net Income |
$ | 6,538 | $ | 7,099 | ||||
| Earnings Per Share: |
||||||||
| Basic earnings per share: |
$ | 0.66 | $ | 0.72 | ||||
| Diluted earnings per share: |
$ | 0.64 | $ | 0.72 | ||||
| Weighted Average Number of Common Shares Outstanding: |
||||||||
| Basic |
9,943 | 9,873 | ||||||
| Diluted |
10,205 | 9,895 | ||||||
See accompanying notes to consolidated financial statements.
- 5 -
DUCOMMUN INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| For Six Months Ended |
||||||||
| July 3, 2004 |
July 5, 2003 |
|||||||
| Cash Flows from Operating Activities: |
||||||||
| Net Income |
$ | 6,538 | $ | 7,099 | ||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: |
||||||||
| Depreciation and amortization |
3,738 | 3,768 | ||||||
| Deferred income tax provision |
331 | 89 | ||||||
| Income tax benefit related to the exercise of nonqualified stock options |
286 | 7 | ||||||
| Recovery of doubtful accounts |
(22 | ) | (1 | ) | ||||
| Loss on sale of assets |
33 | — | ||||||
| Net (recovery of) provision for warranty reserves |
(13 | ) | 12 | |||||
| Net provision for (recovery of) contract cost overruns |
869 | (407 | ) | |||||
| Changes in Assets and Liabilities: |
||||||||
| Accounts receivable |
(592 | ) | (2,586 | ) | ||||
| Inventories |
(6,996 | ) | (2,102 | ) | ||||
| Other assets |
1,095 | 371 | ||||||
| Accounts payable |
16 | (947 | ) | |||||
| Accrued and other liabilities |
(4,354 | ) | 3,466 | |||||
| Net Cash Provided by Operating Activities |
929 | 8,769 | ||||||
| Cash Flows from Investing Activities: |
||||||||
| Purchase of Property and Equipment |
(3,833 | ) | (2,908 | ) | ||||
| Proceeds from Sale of Assets |
6 | — | ||||||
| Net Cash Used in Investing Activities |
(3,827 | ) | (2,908 | ) | ||||
| Cash Flows from Financing Activities: |
||||||||
| Net Borrowings (Repayment) of Long-Term Debt |
(1,185 | ) | (5,941 | ) | ||||
| Net Cash Effect of Exercise Related to Stock Options |
517 | 126 | ||||||
| Net Cash Used in Financing Activities |
(668 | ) | (5,815 | ) | ||||
| Net (Decrease) Increase in Cash and Cash Equivalents |
(3,566 | ) | 46 | |||||
| Cash and Cash Equivalents - Beginning of Period |
3,832 | 174 | ||||||
| Cash and Cash Equivalents - End of Period |
$ | 266 | $ | 220 | ||||
| Supplemental Disclosures of Cash Flow Information: |
||||||||
| Interest Paid |
$ | 150 | $ | 572 | ||||
| Income Taxes Paid |
$ | 2,118 | $ | 2,439 | ||||
| Supplemental information for Non-Cash Investing and Financing Activities: |
||||||||
| See Note 2 for non-cash investing activities related to the acquisition of business. |
||||||||
See accompanying notes to consolidated financial statements.
- 6 -
DUCOMMUN INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Consolidation
The consolidated balance sheets, consolidated statements of income and consolidated statements of cash flows are unaudited as of and for the three months and six months ended July 3, 2004 and July 5, 2003 and the consolidated financial statements of cash flows for the six months ended July 3, 2004 and July 5, 2003 are unaudited. The consolidated financial statements include the accounts of Ducommun Incorporated and its subsidiaries (“Ducommun” or the “Company”), after eliminating inter-company balances and transactions. The interim financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of the Company, necessary for a fair presentation of the results for the interim periods presented. The financial information included in the quarterly report should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in its annual report on Form 10-K for the year ended December 31, 2003.
Cash Equivalents
Cash equivalents consist of highly liquid instruments purchased with original maturities of three months or less. The cost of these investments approximates fair value.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. The Company records provisions for estimated losses on contracts in the period in which such losses are identified.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts for estimated losses from the inability of customers to make required payments. The allowance for doubtful accounts is evaluated periodically based on the aging of accounts receivable, the financial condition of customers and their payment history, historical write-off experience and other assumptions.
- 7 -
Inventory Valuation
Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. The Company assesses the inventory carrying value and reduces it if necessary to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. The Company’s customer demand is highly unpredictable, and can fluctuate significantly caused by factors beyond the control of the Company. The Company maintains an allowance for inventories for potentially excess and obsolete inventories and gross inventory levels that are carried at costs that are higher than their market values. If market conditions are less favorable than those projected by management, such as an unanticipated decline in demand not meeting expectations, inventory write-downs may be required.
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 and, in the case of leasehold improvements, over the shorter of the lives of the improvements or the lease term. The Company evaluates long-lived assets for recoverability, when significant changes in conditions occur, and recognizes impairment losses, if any, based upon the fair value of the assets.
Goodwill
The Company's business acquisitions have typically resulted in goodwill, which affects the amount of possible impairment expense that the Company will incur. The determination of the value of goodwill requires management to make estimates and assumptions that affect the Company's consolidated financial statements. The Company performs a goodwill impairment test annually in its fourth quarter and between annual tests, in certain circumstances, whenever events may indicate an impairment may have occurred. In assessing the recoverability of the Company's goodwill, management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets.
Warranty Liability
The Company quantifies and records an estimate for warranty related costs based on the Company's actual historical and projected return and failure rates and the current repair costs. Should the Company experience actual return and failure rates, or repair costs that are higher than the estimates used to calculate the provision, the Company's operating results for the period or periods in which such returns or additional costs materialize will be adversely impacted.
- 8 -
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards, No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Litigation and Commitments
In the normal course of business, the Company and its subsidiaries are defendants in certain litigation, claims and inquiries, including matters relating to environmental laws. In addition, the Company makes various commitments and incurs contingent