DUCOMMUN INC /DE/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period form 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.


23301 Wilmington Avenue, Carson, California		90745-6209
(Address of principal executive offices)		(Zip Code)

(310) 513-7280

(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 October 2, 2004, there were outstanding 10,029,857 shares of common stock.

DUCOMMUN INCORPORATED

FORM 10-Q

INDEX


			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets at October 2, 2004 and December 31, 2003	3

		Consolidated Statements of Income for Three Months Ended October 2, 2004 and October 4, 2003	4

		Consolidated Statements of Income for Nine Months Ended October 2, 2004 and October 4, 2003	5

		Consolidated Statements of Cash Flows for Nine Months Ended October 2, 2004 and October 4, 2003	6

		Notes to Consolidated Financial Statements	7 - 21

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22 - 36

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

	Item 4.	Controls and Procedures	37

Part II.	Other Information

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38

	Item 6.	Exhibits	39

Signatures			40

Exhibits

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PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	October 2, 2004			December 31, 2003
Assets
Current Assets:
Cash and cash equivalents	$	380		$	3,832
Accounts receivable (less allowance for doubtful accounts of $319 and $503)		26,293			26,275
Inventories		51,860			40,003
Deferred income taxes		6,084			6,217
Prepaid income taxes		1,213			1,593
Other current assets		4,780			4,277

Total Current Assets		90,610			82,197
Property and Equipment, Net		55,959			56,929
Goodwill (Net of Accumulated Amortization of $10,996 and $10,996)		57,201			57,201
Other Assets		2,591			1,714

	$	206,361		$	198,041

Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of long-term debt	$	1,900		$	2,185
Accounts payable		16,510			14,200
Accrued liabilities		31,191			36,152

Total Current Liabilities		49,601			52,537
Long-Term Debt, Less Current Portion		—			400
Deferred Income Taxes		6,215			5,313
Other Long-Term Liabilities		2,041			2,041

Total Liabilities		57,857			60,291

Commitments and Contingencies
Shareholders’ Equity:
Common stock — $.01 par value; authorized 35,000,000 shares; issued 10,029,857 shares in 2004 and 9,901,965 shares in 2003		100			99
Additional paid-in capital		39,857			38,394
Retained earnings		110,588			101,298
Accumulated other comprehensive loss		(2,041	)		(2,041	)

Total Shareholders’ Equity		148,504			137,750

	$	206,361		$	198,041

See accompanying notes to consolidated financial statements.

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)


	For Three Months Ended
	October 2, 2004			October 4, 2003
Net Sales	$	51,835		$	56,404
Operating Costs and Expenses:
Cost of goods sold		42,599			43,820
Selling, general and administrative expenses		6,046			6,709

Total Operating Costs and Expenses		48,645			50,529

Operating Income		3,190			5,875
Interest Expense		(27	)		(142	)

Income Before Taxes		3,163			5,733
Income Tax Expense		(411	)		(1,777	)

Net Income	$	2,752		$	3,956

Earnings Per Share:
Basic earnings per share:	$	0.28		$	0.40
Diluted earnings per share:	$	0.27		$	0.40
Weighted Average Number of Common Shares
Outstanding:
Basic		9,990			9,874
Diluted		10,173			9,988

See accompanying notes to consolidated financial statements.

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)


	For Nine Months Ended
	October 2, 2004			October 4, 2003
Net Sales	$	167,465		$	167,656
Operating Costs and Expenses:
Cost of goods sold		133,674			130,130
Selling, general and administrative expenses		20,829			20,797

Total Operating Costs and Expenses		154,503			150,927

Operating Income		12,962			16,729
Interest Expense		(241	)		(707	)

Income Before Taxes		12,721			16,022
Income Tax Expense		(3,431	)		(4,967	)

Net Income	$	9,290		$	11,055

Earnings Per Share:
Basic earnings per share:	$	0.93		$	1.12
Diluted earnings per share:	$	0.91		$	1.11
Weighted Average Number of Common Shares
Outstanding:
Basic		9,959			9,873
Diluted		10,164			9,926

See accompanying notes to consolidated financial statements.

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For Nine Months Ended
	October 2, 2004			October 4, 2003
Cash Flows from Operating Activities:
Net Income	$	9,290		$	11,055
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and amortization		5,581			5,670
Deferred income tax provision		1,035			(919	)
Income tax benefit related to the exercise of nonqualified stock options		510			8
Provision for (recovery of) doubtful accounts		(184	)		36
Loss (Gain) on sale of assets		186			(6	)
Net (recovery of) provision for warranty reserves		(24	)		76
Net provision for (recovery of) contract cost overruns		577			(420	)
Changes in Assets and Liabilities:
Accounts receivable		166			(8,720	)
Inventories		(11,857	)		(4,786	)
Other assets		(1,000	)		563
Accounts payable		2,310			(376	)
Accrued and other liabilities		(5,514	)		7,710

Net Cash Provided by Operating Activities		1,076			9,891

Cash Flows from Investing Activities:
Purchase of Property and Equipment		(4,825	)		(4,042	)
Acquisition of Business		—			(2,322	)
Proceeds from Sale of Assets		28			6

Net Cash Used in Investing Activities		(4,797	)		(6,358	)

Cash Flows from Financing Activities:
Net Repayment of Long-Term Debt		(685	)		(3,571	)
Net Cash Effect of Exercise Related to Stock Options		954			125

Net Cash Provided by (Used in) Financing Activities		269			(3,446	)

Net (Decrease) Increase in Cash and Cash Equivalents		(3,452	)		87
Cash and Cash Equivalents - Beginning of Period		3,832			174

Cash and Cash Equivalents - End of Period	$	380		$	261

Supplemental Disclosures of Cash Flow Information:
Interest Paid	$	191		$	708
Income Taxes Paid	$	2,172		$	3,172

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.

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DUCOMMUN INCORPORATED AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Consolidation

The consolidated balance sheets and consolidated statements of income are unaudited as of and for the three months and nine months ended October 2, 2004 and October 4, 2003 and the consolidated statements of cash flows for the nine months ended October 2, 2004 and October 4, 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 indic

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