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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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 NO. 0-1222
DUCOMMUN INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-0693330
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
23301 South Wilmington Avenue, Carson, California 90745
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 513-7200
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock, $.01 par value American Stock Exchange
Pacific Stock Exchange
7-3/4% Convertible Subordinated
Debentures Due 2011 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $35 million as of January 31, 1996.
The number of shares of common stock outstanding on January 31, 1996 was
5,121,115.
Documents Incorporated by Reference: (a) Annual Report to Shareholders (the
"1995 Annual Report") for the year ended December 31, 1995, incorporated
partially in Part I and Part II hereof (see Exhibit 13.0), and (b) Proxy
Statement for the 1996 Annual Meeting of Shareholders (the "1996 Proxy
Statement"), incorporated partially in Part III hereof.
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PART I
ITEM 1. BUSINESS
During 1995, Ducommun Incorporated ("Ducommun"), through its subsidiaries
(collectively, the "Company"), manufactured components and assemblies
principally for domestic and foreign commercial and military aircraft and space
programs. Domestic commercial aircraft programs include the Boeing 737, 747,
757, 767 and 777 and the McDonnell Douglas MD-11 and MD-80/90. Foreign
commercial aircraft programs include the Airbus Industrie A330 and A340, de
Havilland Dash 8, and the Canadair Regional Jet. Major military aircraft
programs include the McDonnell Douglas C-17, F-15 and F-18, Lockheed Martin F-16
and C-130, Northrop Grumman F-18, various Sikorsky, Bell and Boeing helicopter
programs, and advanced development programs. The Company is a subcontractor to
Lockheed Martin on the Space Shuttle external tank and a supplier of components
for the Space Shuttle Orbitor. The Company manufactures components for
Atlas/Centaur, Delta and Titan expendable launch vehicles and various
telecommunications satellites. Through its 3dbm, Inc. ("3dbm") subsidiary, the
Company also sells products for the wireless communications industry.
In December 1994, the Company acquired all of the capital stock of Brice
Manufacturing Company, Inc. ("Brice") and acquired substantially all of the
assets and assumed certain liabilities of Dynatech Microwave Technology, Inc.
("DMT"). In January 1995, the Company acquired all of the capital stock of 3dbm.
Aerochem
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
close tolerance chemical milling services for the aerospace and aircraft
industries. Chemical milling removes material in specific patterns to reduce
weight in areas where full material thickness is not required. This
sophisticated etching process enables Aerochem to produce lightweight,
high-strength designs that would be impractical to produce by conventional
means. Jet engine components, wing leading edges and fuselage skins are examples
of products that require chemical milling.
Aerochem offers production-scale chemical milling on aluminum, titanium,
steel, nickel-base and super alloys. Aerochem also specializes in very large and
complex parts up to 50 feet long. Management believes that Aerochem is the
largest independent supplier of chemical milling services in the United States.
Many of the parts chemically milled by Aerochem are formed and machined by
AHF-Ducommun Incorporated.
AHF-Ducommun
AHF-Ducommun Incorporated ("AHF"), another Ducommun subsidiary, supplies
aircraft and aerospace prime contractors with
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engineering, manufacturing and testing of complex components using stretch
forming and thermal forming processes and computer-controlled machining.
Stretch forming is a process for manufacturing large complex structural shapes
primarily from aluminum sheet metal extrusions. AHF has some of the largest and
most sophisticated stretch forming presses in the United States. Thermal forming
is a metal working process conducted at high temperature for manufacturing close
tolerance titanium components. AHF designs and manufactures the tooling required
for the production of parts in both forming processes. Certain components
manufactured by AHF are machined with precision milling equipment designed and
constructed by AHF. AHF also employs computer-aided design/manufacturing systems
with three 5-axis gantry profile milling machines and a 5-axis
numerically-controlled router to provide computer-controlled machining and
inspection of complex parts up to 82 feet long.
AHF has an integrated operation offering a broad range of capabilities. From
the design specifications of a customer, AHF is able to engineer, manufacture,
test and deliver the desired finished components. This process depends on the
skillful execution of several complex subtasks, including the design and
construction of special equipment. Management believes that the ability of AHF
to provide a full range of integrated capabilities represents a competitive
advantage.
Jay-El Products
Ducommun's Jay-El Products, Inc. ("Jay-El Products") subsidiary develops,
designs and manufactures illuminated switches, switch assemblies and keyboard
panels used in many military aircraft, helicopter, commercial aircraft and
spacecraft programs, as well as ground support equipment and naval vessels.
Jay-El Products manufactures switches and panels where high reliability is a
prerequisite. Keyboard panels are lighted, feature push button switches and are
available with sunlight readable displays. Some of the keyboard panels and
illuminated switches manufactured by Jay-El Products for military applications
are night vision goggle-compatible.
As a result of the acquisition of DMT in December 1994, Jay-El Products
develops, designs and manufactures microwave switches, filters and other
components used principally on commercial and military aircraft. DMT also has
developed several new products that apply its existing microwave technology to
nonaerospace markets, including the wireless communications field.
Jay-El Products sells most of its products pursuant to fixed price
contracts, either directly or as a subcontractor under United States government
defense contracts.
Brice Manufacturing
In December 1994, Ducommun acquired the capital stock of Brice Manufacturing
Company, Inc. ("Brice"). Brice is an after-market
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supplier of aircraft seating products to many of the world's largest commercial
airlines. Products supplied by Brice include plastic and metal seat parts,
overhauled and refurbished seats, components for installation of in-flight
entertainment equipment, and other cabin interior components for commercial
aircraft. Management believes that Brice is the largest company in the United
States supplying airline seating and other cabin interior components exclusively
for the after-market.
3dbm
In January 1995, Ducommun acquired the capital stock of 3dbm. 3dbm develops,
designs and manufactures high-power expanders, repeaters, bi-directional
amplifiers, microcells and other wireless communication hardware used in
cellular telephone networks. 3dbm also designs and manufactures on a limited
basis microwave components and subsystems for both military and commercial
customers.
Defense and Space Programs
A major portion of sales is derived from United States government defense
programs and space programs. Approximately 36 percent of 1995 sales were related
to defense programs and approximately 9 percent of 1995 sales were related to
space programs. These programs could be adversely affected by reductions in
defense spending and other government budgetary pressures which would result in
reductions, delays or stretch-outs of existing and future programs. In addition,
the Company's contracts covering defense and space programs are subject to
termination at the convenience of the customer (as well as for default). In the
event of termination for convenience, the customer generally is required to pay
the costs incurred by the Company and certain other fees through the date of
termination.
Any substantial delay or suspension of production for the Space Shuttle
program would have a significant impact on the results of operations for the
Company.
Commercial Programs
Approximately 55 percent of 1995 sales were related to commercial aircraft
programs, and nonaerospace commercial applications. The Company's commercial
sales depend substantially on aircraft manufacturers' production rates, which in
turn depend upon deliveries of new aircraft. Deliveries of new aircraft by
aircraft manufacturers are dependent on the financial capacity of the airlines
and leasing companies to purchase the aircraft. Sales of commercial aircraft
could be affected as a result of changes in new aircraft orders, or the
cancellation or deferral by airlines of purchases of ordered aircraft.
Major Customers
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas, and Boeing. During 1995, sales to
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Lockheed Martin were $8,163,000, or 8.9% of total sales; sales to Northrop
Grumman were $9,623,000, or 10.5% of total sales; sales to McDonnell Douglas
were $9,516,000, or 10.4% of total sales, and sales to Boeing were $5,215,000 or
5.7% of total sales. Sales to Lockheed Martin are primarily for the Space
Shuttle program. Sales to Northrop Grumman, McDonnell Douglas and Boeing are
diversified over a number of different commercial and military programs.
Competition
The Company competes with various companies, some of which are substantially
larger and have greater financial, technical and personnel resources. The
Company's ability to compete depends on the quality of goods and services,
competitive pricing and the ability to solve specific customer problems.
Backlog
At December 31, 1995, backlog believed to be firm was approximately
$92,600,000, including $26,000,000 for space-related business, compared to
$84,800,000 at December 31, 1994. Approximately $40,000,000 of total backlog
is expected to be delivered during 1996.
Environmental Matters
Aerochem uses various acid and alkaline solutions in the chemical milling
process, resulting in potential environmental hazards. Despite existing waste
recovery systems and continuing capital expenditures for waste reduction and
management, at least for the immediate future, Aerochem will remain dependent on
the availability and cost of remote hazardous waste disposal sites or other
alternative methods of disposal.
The Aerochem facility located in El Mirage, California has been directed by
California environmental agencies to investigate and take corrective action for
groundwater contamination. Based upon currently available information, the
Company has established a provision for the cost of such investigation and
corrective action.
Aerochem has been notified by the United States Environmental Protection
Agency ("EPA") that Aerochem and other generators of hazardous waste disposed at
the Casmalia Resources Hazardous Waste Facility in California (the "Casmalia
Site"), an inactive hazardous waste treatment, storage and disposal facility,
may be responsible for certain costs associated with the cleanup and closure of
the Casmalia Site. Aerochem contributed less than 1/4 of 1% of the total waste
disposed at the Casmalia Site, and many other substantially larger companies and
governmental entities are involved at the Casmalia Site. The Company has
established a provision, based on currently available information, for
Aerochem's share of the estimated cost of cleanup and closure of the Casmalia
Site.
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Ducommun's other subsidiaries are also subject to environmental laws and
regulations. However, the quantities of hazardous materials handled, hazardous
wastes generated and air emissions released by these subsidiaries are relatively
small.
The Company anticipates that capital expenditures will continue to be
required for the foreseeable future to upgrade and maintain its environmental
compliance efforts. The Company does not expect to spend a material amount on
capital expenditures for environmental compliance during 1996.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including matters
relating to environmental laws. In addition, the Company makes various
commitments and incurs contingent liabilities. While it is not feasible to
predict the outcome of these matters, the Company does not presently expect that
any sum it may be required to pay in connection with these matters would have a
material adverse effect on its consolidated financial position or results of
operations.
Employees
At December 31, 1995, the Company employed 808 persons.
Business Segment Information
The Company operates in only one business segment.
Information About Foreign and Domestic Operations and Export Sales
In 1995, 1994 and 1993, foreign sales to manufacturers world-wide were
$23,497,000, $11,515,000 and $8,672,000, respectively.
The amounts of revenue, profitability and identifiable assets attributable
to foreign operations are not material when compared with the revenue,
profitability and identifiable assets attributed to Unites States domestic
operations during 1995, 1994 and 1993. Canada is the only country in which the
Company had sales of 5% or more of total sales, with sales of $4,518,000,
$5,944,000 and $3,445,000 in 1995, 1994 and 1993, respectively.
ITEM 2. PROPERTIES
The Company occupies approximately 20 facilities with a total area of over
748,000 square feet, including both owned and leased properties. At December 31,
1995, facilities which were in excess of 60,000 square feet each were occupied
as follows:
Square Expiration
Location Company Feet of Lease
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El Mirage, California Aerochem 74,300 Owned
Orange, California Aerochem 76,200 Owned
Carson, California AHF-Ducommun 130,400 1996-01
Carson, California AHF-Ducommun 108,000 Owned
Carson, California Jay-El Products 117,000 1997
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The Company's facilities are, for the most part, fully utilized, although
excess capacity exists from time to time based on product mix and demand.
Management believes that these properties are in good condition and suitable
for their present use.
Although the Company maintains standard property casualty insurance covering
its properties, the Company does not carry any earthquake insurance because of
the cost of such insurance. All of the Company's properties are located in
Southern California, an area subject to frequent and sometimes severe earthquake
activity.
3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS
The information under the caption "Quarterly Common Stock Price Information"
on page 9 of the 1995 Annual Report is incorporated herein by reference. No
dividends were paid during 1994 or 1995 (see Exhibit 13.0).
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" appearing on
page 9 of the 1995 Annual Report is incorporated herein by reference (see
Exhibit 13.0).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing on pages 10 through 13
of the 1995 Annual Report is incorporated herein by reference (see Exhibit
13.0).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data under the captions
"Consolidated Statements of Income," "Consolidated Balance Sheets,"
"Consolidated Statements of Cash Flows,"
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"Consolidated Statements of Changes in Shareholders' Equity," and "Notes to
Consolidated Financial Statements," together with the report thereon of Price
Waterhouse LLP dated February 20, 1996, appearing on pages 14 through 25 of the
1995 Annual Report are incorporated herein by reference (see Exhibit 13.0).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
The information under the caption "Election of Directors" in the 1996 Proxy
Statement is incorporated herein by reference.
Executive Officers of the Registrant
The following table sets forth the names and ages of all executive officers
of the Company (including subsidiary Presidents), all positions and offices held
with the Company, their terms of office and brief accounts of business
experience during the past five years:
Positions & Offices Other Business
Held with Company Experience
Name (Age) (Year Elected) (Past Five Years)
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Norman A. Chairman of the Board -
Barkeley (66) (1989) and Chief
Executive Officer (1988)
Joseph C. President (1996), Executive Vice President (1995)
Berenato (49) Chief Operating Officer of the Company; previously
(1995), and Chief Senior Vice President/Managing Director of
Financial Officer (1991) Manufacturers Hanover Trust Company (Los Angeles)
(1980-1991)
James S. Heiser Vice President (1990), -
(39) General Counsel (1988),
Secretary (1987), and
Treasurer (1995)
Kenneth R. Vice President-Human -
Pearson (60) Resources (1988)
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Positions & Offices Other Business
Held with Company Experience
Name (Age) (Year Elected) (Past Five Years)
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Samuel D. Vice President (1991), -
Williams (47) Controller (1988), and
Assistant Treasurer (1990)
Robert A. Borlet President of Jay-El -
(55) Products, Inc. (1988)
Robert B. Hahn President of Aerochem, Inc. -
(52) (1987)
Robert L. Hansen President of AHF- -
(42) Ducommun Incorporated
(1989)
Paul L. Graham President of 3dbm, Inc. President of Dynatech
(51) (1995) Microwave Technology, Inc. (1992-1994); previously,
general and senior management at TRW, Titan Sesco,
Vector General, Hughes and Raytheon
Bruce J.
Greenbaum (40) President of Brice President and/or
Manufacturing Company, General Manager of
Inc. (1994) Brice during five years prior to acquisition by Ducommun
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Compensation of Executive Officers" in
the 1996 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" in the 1996 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Election of Directors" contained in the
paragraph immediately following the table in the 1996 Proxy Statement is
incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Ducommun
Incorporated and subsidiaries, included in the 1995 Annual Report,
are incorporated by reference in Item 8 of this report. Page numbers
refer to the 1995 Annual Report:
Page
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Consolidated Statements of Income - Years 14
ended December 31, 1995, 1994 and 1993
Consolidated Balance Sheets - December 31, 1995 15
and 1994
Consolidated Statements of Cash Flows - Years 16
ended December 31, 1995, 1994 and 1993
Consolidated Statements of Changes in 17
Shareholders' Equity - Years ended
December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements 18-24
Report of Independent Accountants 25
2. Financial Statement Schedule
The following schedule for the years ended December 31, 1995, 1994
and 1993 is filed herewith:
Schedule VIII - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because they are not
applicable, not required, or the information has been otherwise
supplied in the financial statements or notes thereto.
(b) Reports on Form 8-K
During the last quarter of 1995, no reports on Form 8-K were filed.
(c) Exhibits
3.1 Restated Certificate of Incorporation filed with the Delaware
Secretary of State on May 29, 1990. Incorporated by reference to
Exhibit 3.1 to Form 10-K for the year ended December 31, 1990.
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3.2 Bylaws as amended and restated on October 21, 1992. Incorporated
by reference to Exhibit 3.2 to Form 10-K for the year ended December
31, 1992.
4.1 Third Amended and Restated Loan Agreement dated January 20, 1995
between Ducommun and Bank of America NT&SA. Incorporated by reference
to Exhibit 4.1 to Form 10-K for the year ended December 31, 1994.
4.2 Amended and Restated Security Agreement dated January 20, 1995
between Ducommun and Bank of America NT&SA. Incorporated by reference
to Exhibit 4.2 to Form 10-K for the year ended December 31, 1994.
4.3 Amended and Restated Security Agreement dated January 20, 1995
between the subsidiaries of Ducommun and Bank of America NT&SA.
Incorporated by reference to Exhibit 4.3 to Form 10-K for the year
ended December 31, 1994.
4.4 First Amendment to Third Amended and Restated Loan Agreement
dated as of June 30, 1995. Incorporated by reference to Exhibit 4 to
Form 10-Q for the quarter ended September 30, 1995.
4.5 Second Amendment to Third Amended and Restated Loan Agreement
dated as of November 3, 1995.
4.6 Form of Indenture and Debentures for 7 3/4% Convertible
Subordinated Debentures due 2011 (the "Debentures"). Incorporated by
reference to Exhibit 4.1 to Form S-2 Registration Statement (File No.
33-4313).
4.7 Officer's Certificate dated March 14, 1988 addressed to Bankers
Trust Company reducing the conversion price for the Debentures.
Incorporated by reference to Exhibit 4.12 to Form 10-K for the year
ended December 31, 1989.
4.8 Conversion Agreement dated July 22, 1992 between Ducommun and
the holders of the 9% Convertible Subordinated Notes due 1998.
Incorporated by reference to Exhibit 1 to Form 8-K dated July 29,
1992.
4.9 Loan and Security Agreement dated December 1, 1992 between
AHF-Ducommun Incorporated ("AHF"), a subsidiary of Ducommun, and the
CIT Group/Equipment Financing, Inc., as amended. The Company will
furnish a copy of such agreement to the Securities and Exchange
Commission upon request.
4.10 Standing Loan Agreement dated December 17, 1993 between AHF and
Bank of America NT&SA. The Company will furnish a copy of such
agreement to the Securities and Exchange Commission upon request.
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* 10.1 1981 Stock Incentive Plan as amended and restated March 21,
1990. Incorporated by reference to Exhibit 10.2 to Form 10-K for the
year ended December 31, 1989.
* 10.2 1990 Stock Option Plan. Incorporated by reference to Exhibit
10.4 to Form 10-K for the year ended December 31, 1990.
* 10.3 Form of Stock Option Agreement under the 1990 Stock Option Plan
and the 1981 Stock Incentive Plan. Incorporated by reference to
Exhibit 10.5 to Form 10-K for the year ended December 31, 1990.
* 10.4 1994 Stock Incentive Plan. Incorporated by reference to Exhibit
10.4 to Form 10-K for the year ended December 31, 1994.
* 10.5 Form of Key Executive Severance Agreement entered with nine
current executive officers of Ducommun or its subsidiaries.
Incorporated by reference to Exhibit 10.7 to Form 10-K for the year
ended December 31, 1989.
* 10.6 Form of Indemnity Agreement entered with all directors and
officers of Ducommun. Incorporated by reference to Exhibit 10.8 to
Form 10-K for the year ended December 31, 1990.
* 10.7 Description of 1996 Executive Officer Bonus Arrangement.
* 10.8 Directors' Deferred Compensation and Retirement Plan, as
amended October 29, 1993. Incorporated by reference to Exhibit 10.9
to Form 10-K for the year ended December 31, 1993.
* 10.9 Amended and Restated Employment Agreement dated as of May 5,
1993 between Ducommun and Norman A. Barkeley. Incorporated by
reference to Exhibit 10.1 to Form 10-Q for the quarter ended July 3,
1993.
* 10.10 Ducommun Incorporated Executive Retirement Plan dated May 5,
1993. Incorporated by reference to Exhibit 10.2 to Form 10-Q for the
quarter ended July 3, 1993.
* 10.11 Ducommun Incorporated Executive Compensation Deferral Plan
dated May 5, 1993. Incorporated by reference to Exhibit 10.3 to Form
10-Q for the quarter ended July 3, 1993.
* 10.12 Ducommun Incorporated Executive Compensation Deferral Plan No.
2 dated October 15, 1994. Incorporated by reference to Exhibit 10.12
to Form 10-K for the year ended December 31, 1994.
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10.13 Stock Purchase and Sale Agreement among Ducommun Incorporated
and each of the shareholders of J. Nelson Hoffman Manufacturing,
Inc., d/b/a Brice Manufacturing Company, dated December 6, 1994.
Incorporated by reference to Exhibit 1 to Form 8-K dated December 20,
1994.
10.14 Asset Purchase Agreement by and among Jay-El Products, Inc., as
buyer, and Dynatech Microwave Technology, Inc., as seller, and
Ducommun Incorporated and Dynatech Corporation, dated December 30,
1994. Incorporated by reference to Exhibit 1 to Form 8-K dated
January 13, 1995.
11.1 Computation of Income (Loss) Per Common and Common Equivalent
Share.
13.0 1995 Annual Report to Shareholders (not deemed to be filed
except as previously incorporated by reference).
21.0 Subsidiaries of registrant.
23.1 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.
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* Indicates an executive compensation plan or arrangement.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DUCOMMUN INCORPORATED
Date March 13, 1996 By /s/ Norman A. Barkeley
-------------- ----------------------
Norman A. Barkeley
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date March 13, 1996 By /s/ Joseph C. Berenato
-------------- ----------------------
Joseph C. Berenato
President, Chief Operating
Officer and Chief Financial
Officer
(Principal Financial Officer)
Date March 13, 1996 By /s/ Samuel D. Williams
-------------- ----------------------
Samuel D. Williams
Vice President, Controller
and Assistant Treasurer
(Principal Accounting Officer)
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DIRECTORS
By /s/ Norman A. Barkeley Date March 13, 1996
-------------------------- ------------------
Norman A. Barkeley
By /s/ H. Frederick Christie Date March 13, 1996
-------------------------- ------------------
H. Frederick Christie
By /s/ Robert C. Ducommun Date March 13, 1996
-------------------------- ------------------
Robert C. Ducommun
By /s/ Kevin S. Moore Date March 13, 1996
-------------------------- ------------------
Kevin S. Moore
By /s/ Thomas P. Mullaney Date March 13, 1996
-------------------------- ------------------
Thomas P. Mullaney
By /s/ Richard J. Pearson Date March 13, 1996
-------------------------- ------------------
Richard J. Pearson
By /s/ Arthur W. Schmutz Date March 13, 1996
-------------------------- ------------------
Arthur W. Schmutz
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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Ducommun Incorporated
Our audits of the consolidated financial statements referred to in our report
dated February 20, 1996 appearing on page 25 of the 1995 Annual Report to
Shareholders of Ducommun Incorporated (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the Financial Statement Schedule listed in Item 14(a)
of this Form 10-K. In our opinion, this Financial Statement Schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
Price Waterhouse LLP
Los Angeles, California
February 20, 1996
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DUCOMMUN INCORPORATED
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE VIII
Column A Column B Column C Column D Column E
- ------------------------ ------------ -------------------------- -------------- ----------
Additions
---------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------ ---------- ---------- ---------- -------------- ----------
FOR THE YEAR ENDED DECEMBER 31, 1995
Allowance for
Doubtful Accounts $ 182,000 $ 216,000 $ 13,000(a) $ 45,000(c) $ 366,000
Deferred Tax Assets
Valuation Allowance $5,150,000 $ - $ - $2,717,000(e) $2,433,000
FOR THE YEAR ENDED DECEMBER 31, 1994
Allowance for
Doubtful Accounts $ 314,000 $ - $ 11,000(a) $ 143,000(c) $ 182,000
Deferred Tax Assets
Valuation Allowance $9,962,000 $ - $ - $4,812,000(d) $5,150,000
FOR THE YEAR ENDED DECEMBER 31, 1993
Allowance for
Doubtful Accounts $ 371,000 $ 20,000 $ 15,000(a) $ 92,000(c) $ 314,000
Deferred Tax Assets
Valuation Allowance $ - $ - $9,962,000(b) $ - $9,962,000
(a) Collections on previously written off accounts.
(b) Per adoption of Statement of Financial Accounting Standards No. 109.
(c) Write-offs on uncollectible accounts.
(d) Change in valuation allowance due to re-evaluation of realizability of
future income tax benefit occasioned by the acquisitions of Brice and
DMT.
(e) Change in valuation allowance due to re-evaluation of realizability of
future income tax benefit occasioned by the acquisition of 3dbm.
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INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
3.1 Restated Certificate of Incorporation filed with
the Delaware Secretary of State on May 29, 1990.
Incorporated by reference to Exhibit 3.1 to Form
10-K for the year ended December 31, 1990.
3.2 Bylaws as amended and restated on October 21, 1992.
Incorporated by reference to Exhibit 3.2 to Form 10-K
for the year ended December 31, 1992.
4.1 Third Amended and Restated Loan Agreement dated
January 20, 1995 between Ducommun and Bank of America
NT&SA. Incorporated by reference to Exhibit 4.1 to Form
10-K for the year ended December 31, 1994.
4.2 Amended and Restated Security Agreement dated January
20, 1995 between Ducommun and Bank of America NT&SA.
Incorporated by reference to Exhibit 4.2 to Form 10-K
for the year ended December 31, 1994.
4.3 Amended and Restated Security Agreement dated January
20, 1995 between the subsidiaries of Ducommun and Bank
of America NT&SA. Incorporated by reference to Exhibit
4.3 to Form 10-K for the year ended December 31, 1994.
4.4 First Amendment to Third Amended and Restated Loan
Agreement dated as of June 30, 1995. Incorporated by
reference to Exhibit 4 to Form 10-Q for the quarter
ended September 30, 1995.
4.5 Second Amendment to Third Amended and Restated Loan
Agreement dated as of November 3, 1995.
4.6 Form of Indenture and Debentures for 7 3/4% Convertible
Subordinated Debentures due 2011 (the "Debentures").
Incorporated by reference to Exhibit 4.1 to Form S-2
Registration Statement (File No. 33-4313).
4.7 Officer's Certificate dated March 14, 1988 addressed
to Bankers Trust Company reducing the conversion price
for the Debentures. Incorporated by reference to Exhibit
4.12 to Form 10-K for the year ended December 31, 1989.
4.8 Conversion Agreement dated July 22, 1992 between Ducommun
and the holders of the 9% Convertible Subordinated Notes
due 1998. Incorporated by reference to Exhibit 1 to
Form 8-K dated July 29, 1992.
4.9 Loan and Security Agreement dated December 1, 1992
between AHF-Ducommun Incorporated ("AHF"), a subsidiary
of Ducommun, and the CIT Group/Equipment Financing, Inc.,
as amended. The Company will furnish a copy of such
agreement to the Securities and Exchange Commission upon
request.
4.10 Standing Loan Agreement dated December 17, 1993 between
AHF and Bank of America NT&SA. The Company will furnish
a copy of such agreement to the Securities and Exchange
Commission upon request.
20
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
10.1* 1981 Stock Incentive Plan as amended and restated
March 21, 1990. Incorporated by reference to Exhibit
10.2 to Form 10-K for the year ended December 31, 1989.
10.2* 1990 Stock Option Plan. Incorporated by reference
to Exhibit 10.4 to Form 10-K for the year ended
December 31, 1990.
10.3* Form of Stock Option Agreement under the 1990 Stock
Option Plan and the 1981 Stock Incentive Plan.
Incorporated by reference to Exhibit 10.5 to Form 10-K
for the year ended December 31, 1990.
10.4* 1994 Stock Incentive Plan. Incorporated by reference
to Exhibit 10.4 to Form 10-K for the year ended
December 31, 1994.
10.5* Form of Key Executive Severance Agreement entered
with nine current executive officers of Ducommun or
its subsidiaries. Incorporated by reference to Exhibit
10.7 to Form 10-K for the year ended December 31, 1989.
10.6* Form of Indemnity Agreement entered with all directors
and officers of Ducommun. Incorporated by reference to
Exhibit 10.8 to Form 10-K for the year ended
December 31, 1990.
10.7* Description of 1996 Executive Officer Bonus Arrangement.
10.8* Directors' Deferred Compensation and Retirement Plan,
as amended October 29, 1993. Incorporated by reference
to Exhibit 10.9 to Form 10-K for the year ended
December 31, 1993.
10.9* Amended and Restated Employment Agreement dated as
of May 5, 1993 between Ducommun and Norman A. Barkeley.
Incorporated by reference to Exhibit 10.1 to Form 10-Q
for the quarter ended July 3, 1993.
10.10* Ducommun Incorporated Executive Retirement Plan dated
May 5, 1993. Incorporated by reference to Exhibit 10.2
to Form 10-Q for the quarter ended July 3, 1993.
10.11* Ducommun Incorporated Executive Compensation Deferral
Plan dated May 5, 1993. Incorporated by reference to
Exhibit 10.3 to Form 10-Q for the quarter ended
July 3, 1993.
10.12* Ducommun Incorporated Executive Compensation Deferral
Plan No. 2 dated October 15, 1994. Incorporated by
reference to Exhibit 10.12 to Form 10-K for the year
ended December 31, 1994.
10.13 Stock Purchase and Sale Agreement among Ducommun
Incorporated and each of the shareholders of J.
Nelson Hoffman Manufacturing, Inc., d/b/a Brice
Manufacturing Company, dated December 6, 1994.
Incorporated by reference to Exhibit 1 to Form 8-K
dated December 20, 1994.
10.14 Asset Purchase Agreement by and among Jay-El Products,
Inc., as buyer, and Dynatech Microwave Technology, Inc.,
as seller, and Ducommun Incorporated and Dynatech
Corporation, dated December 30, 1994. Incorporated by
reference to Exhibit 1 to Form 8-K dated January 13, 1995.
11.1 Computation of Income (Loss) Per Common and Common
Equivalent Share.
13.0 1995 Annual Report to Shareholders (not deemed to
be filed except as previously incorporated by
reference).
21.0 Subsidiaries of registrant.
23.1 Consent of Price Waterhouse LLP.
27.0 Financial Data Schedule.
- --------------
* Indicates an executive compensation plan or arrangement.
1
SECOND AMENDMENT TO THIRD AMENDED
AND RESTATED LOAN AGREEMENT
This Second Amendment to Third Amended and Restated Loan Agreement (the
"Amendment") dated as of November 3, 1995, is between Bank of America National
Trust and Savings Association (the "Bank") and Ducommun Incorporated (the
"Borrower").
RECITALS
A. The Bank and the Borrower entered into that certain Third Amended
and Restated Loan Agreement dated as of January 20, 1995, as amended June 30,
1995 (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. Definitions. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. Amendments. The Agreement is hereby amended as follows:
2.1 Paragraph 7.8(b) of the Agreement shall be amended to read in full
as follows:
"(b) Additional debts incurred with respect to
purchase money or capitalized lease obligations for capital
expenditures after 9/30/95 not to exceed in outstandings an
aggregate principal amount of Three Million Dollars
($3,000,000) at any one time."
2.2 Paragraph 7.9(i) of the Agreement shall be amended to read in full
as follows:
"(i) Purchase money Liens securing obligations
incurred in connection with purchases or capitalized leases
permitted by paragraph 7.8(b), provided that such Liens shall
be limited to the item or items being so purchased or leased."
2.3 The following shall be added to Paragraph 7.11 of the Agreement as
new Paragraph 7.11(d):
Exhibit 4.5
1
2
"(d) Conversion or exchange of any portion of the
Subordinated Debt to common stock of the Borrower, and the
payment to the holders of such Subordinated Debt of a premium
not exceeding $0.15 for each dollar of such Subordinated Debt,
provided that the aggregate payment for all such premiums in
any twelve-month period may not exceed One Million Dollars
($1,000,000). Prior to each premium payment, the Borrower
shall provide to the Bank a certificate executed by an officer
of the Borrower who is authorized to do so, indicating the
amount of premium to be paid per dollar of Subordinated Debt
that is being converted or exchanged and the aggregate amount
of the premium payment, and certifying that, giving effect to
the payment of that premium, no defaults exists under this
Agreement."
3. Representations and Warranties. When the Borrower signs this
Agreement, the Borrower represents and warrants to the Bank that: (a) there is
no event which is, or with notice or lapse of time or both would be, a default
under the Agreement, (b) the representations and warranties in the Agreement are
true as of the date of this Amendment as if made on the date of this Amendment,
(c) this Amendment is within the Borrower's powers, has been duly authorized,
and does not conflict with any of the Borrower's organizational papers, and (d)
this Agreement does not conflict with any law, agreement, or obligation by which
the Borrower is bound.
4. Effect of Amendment. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of
this Amendment.
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By:________________________________
J. Thomas Fagan
Vice President
(signatures continue)
2
3
DUCOMMUN INCORPORATED
By:________________________________
Joseph C. Berenato
Executive Vice President, Chief
Operating Officer and Chief
Financial Officer
By:__________________________
James S. Heiser
Vice President and
Secretary
3
1
DUCOMMUN INCORPORATED
DESCRIPTION OF
1996 EXECUTIVE OFFICER BONUS ARRANGEMENT
The Ducommun Incorporated 1996 Executive Officer Bonus Arrangement (the
"Arrangement") is designed to reward achievement of annual operating plan
objectives in order to build profitability and provide competitive compensation
levels. The Arrangement contains a formula-based incentive plan driven by sales,
net income, cash flow and return on asset performance in excess of established
thresholds. The participants in the Arrangement are the five Ducommun corporate
officers and the five subsidiary presidents.
The Arrangement provides for bonus awards ranging from 0 to 100% of annual
base salary depending on position. The targeted bonus award under the
Arrangement is half of the maximum bonus eligibility for each individual. Bonus
awards are based on a combination of total corporate performance and on
individual performance of executive officers. The subsidiary presidents are also
measured based upon the financial performance of their operating units. All
awards are subject to the approval of the Compensation Committee of the Board of
Directors.
Exhibit 10.7
1
DUCOMMUN INCORPORATED AND SUBSIDIARIES
Computation of Earnings Per Common and Common Equivalent Share
(In thousands, except per share amounts)
For the Year Ended
-----------------------------------------------
Dec. 31, Dec. 31, Dec. 31,
1995 1994 1993
---------- ---------- ----------
Income Before Change in Accounting Principle
for Taxes for Computation of Primary
Earnings Per Share $ 5,046 $ 2,204 $ 2,228
Interest, Net of Income Taxes, Relating to
7-3/4% Convertible Subordinated Debentures 1,354 (A) 1,299
Income From Operations Before Change in
Accounting Principle for Taxes for
Computation of Fully Diluted Earnings
Per Share 6,400 2,204 3,527
Cumulative Effect of Change in Accounting
Principle for Taxes - - 8,000
Net Income for Computation of Primary
Earnings Per Share 5,046 2,204 10,228
Net Income for Computation of Fully Diluted
Earnings Per Share 6,400 2,204 11,527
Applicable Shares
Weighted Average Common Shares Outstanding
for Computation of Primary Earnings
Per Share 4,500 4,463 4,457
Weighted Average Common Equivalent
Shares Arising From:
7-3/4% convertible subordinated debentures 2,431 (B) 2,806
Stock options:
Primary 342 112 71
Fully Diluted 427 (B) 72
Weighted Average Common and Common Equivalent
Shares Outstanding for Computation of Fully
Diluted Earnings Per Share 7,358 4,575 7,335
Earnings Per Share
Income Before Change in Accounting Principle
Primary $1.04 $0.48 $0.49
Fully Diluted 0.87 0.48 0.48
Cumulative Effect of Change in Accounting
Principle
Primary $ - $ - $1.77
Fully Diluted - - 1.09
Net Income
Primary $1.04 $0.48 $2.26
Fully Diluted 0.87 0.48 1.57
(A) Excludes interest, net of income taxes, relating to 7-3/4% convertible
subordinated debentures because their common stock equivalents shares are
antidilutive.
(B) Excludes common stock equivalents relating to 7-3/4% convertible
subordinated debentures and common stock options which are antidilutive
for 1994.
Exhibit 11.1
1
DUCOMMUN INCORPORATED
ANNUAL REPORT
The following portions of Ducommun Incorporated and Subsidiaries 1995 Annual
Report are incorporated by reference in Items 5, 6, 7 and 8 of this report.
Page
----
Quarterly Common Stock Price Information 9
Selected Financial Data 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-13
Consolidated Statements of Income 14
Consolidated Balance Sheets 15
Consolidated Statements of Cash Flows 16
Consolidated Statements of Changes in Shareholders' 17
Equity
Notes to Consolidated Financial Statements 18-24
Report of Independent Accountants 25
Exhibit 13.0
2
Ducommun Incorporated
SELECTED
FINANCIAL DATA
(in thousands, except per share amounts)
Year ended December 31, 1995 (A) 1994 (A) 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
Net Sales $ 91,217 $ 61,738 $ 64,541 $ 67,445 $ 74,380
-------------------------------------------------------------
Gross Profit as a Percentage of Sales 33.0% 28.8% 26.8% 26.0% 27.1%
-------------------------------------------------------------
Income:
Income from Continuing Operations Before
Taxes, Extraordinary Item and Cumulative
Effect of Accounting Change $ 6,941 $ 3,177 $ 3,427 $ 2,611 $ 3,036
Income Tax Expense (1,895) (973) (1,199) (187) (486)
Discontinued Operations, Net of Income Taxes -- -- -- -- (480)
Extraordinary Item, Net of Income Taxes -- -- -- 636 300
Cumulative Effect of Accounting Change -- -- 8,000 (B) -- --
-------------------------------------------------------------
Net Income $ 5,046 $ 2,204 $ 10,228 $ 3,060 $ 2,370
=============================================================
Earnings Per Share:
Continuing Operations $ .87 $ .48 $ .48 $ .66 $ .72
Discontinued Operations, Net of Income Taxes -- -- -- -- (.14)
Extraordinary Item, Net of Income Taxes -- -- -- .09 .09
Cumulative Effect of Accounting Change -- -- 1.09 -- --
-------------------------------------------------------------
Net Income Per Share $ .87 $ .48 $ 1.57 $ .75 $ .67
=============================================================
Working Capital $ 11,247 $ 6,710 $ 11,744 $ 9,873 $ 7,203
Total Assets 80,974 79,852 55,290 49,694 52,018
Convertible Subordinated Notes and Debentures 24,263 28,000 28,000 28,000 38,000
Long-Term Debt Including Current Portion 12,845 21,913 4,529 6,600 2,400
Total Shareholders' Equity 24,588 15,783 13,585 3,347 (4,204)
Cash Dividends Per Share -- -- -- -- --
(A) - See Note 2 to the consolidated financial statements for discussion of
acquisitions.
(B) - See Note 11 to the consolidated financial statements for description of
change in accounting for income taxes.
QUARTERLY COMMON STOCK PRICE INFORMATION
1995 1994 1993
---------------------- ----------------------- -----------------------
High Low High Low High Low
- ----------------------------------------------------------------------------------------------------------------------
First Quarter $6.25 $4.69 $4.25 $2.75 $4.56 $3.56
Second Quarter 7.75 5.75 5.38 3.88 4.13 3.50
Third Quarter 10.25 7.19 4.75 4.13 4.25 3.13
Fourth Quarter 10.50 8.88 5.00 4.19 3.69 2.75
The common stock of the Company (DCO) is listed on the American Stock
Exchange and the Pacific Stock Exchange. On December 31, 1995, the Company had
approximately 756 holders of record of common stock.
9
3
Ducommun Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ACQUISITIONS
In January 1995, the Company acquired the stock of 3dbm, Inc. ("3dbm") for
approximately $5.2 million. 3dbm is a supplier of high power expanders,
microcells and other wireless communications hardware used in cellular telephone
networks, and microwave components and subsystems to both military and
commercial customers. In December 1994, the Company acquired the stock of Brice
Manufacturing Company, Inc. ("Brice"), and acquired the assets and assumed
certain liabilities of Dynatech Microwave Technology, Inc. ("DMT") for
approximately $11 million and $7.5 million, respectively. Brice is an
after-market supplier of aircraft seating products supplied to many of the
world's largest commercial airlines. DMT is a manufacturer of switches and other
microwave components used on commercial and military aircraft and in other
nonaerospace commercial applications.
The acquisitions were funded from internally generated cash, notes payable to
sellers and borrowings under the Company's credit agreement with its bank (see
Financial Condition for additional information). These acquisitions strengthened
the Company's position in the aerospace industry, added complementary lines of
business and improved utilization of existing manufacturing facilities and
overhead structure.
RESULTS OF OPERATIONS
1995 Compared to 1994 -- Net sales increased 48% to $91,217,000 in 1995. The
increase was due primarily to sales from businesses acquired in December 1994
and January 1995, and increased offload work for aircraft structural components
from prime contractors and major subcontractors. The Company's mix of business
was approximately 55% commercial, 36% military and 9% space in 1995. Foreign
sales increased to 26% of total sales in 1995 from 19% in 1994. The increase in
foreign sales was primarily the result of higher sales to foreign customers from
the acquired businesses. Canada is the only foreign country in which the Company
had sales of 5% or more of total sales in 1995 and 1994.
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1995 and 1994, sales to Lockheed Martin
were $8,163,000 and $9,454,000, respectively; sales to Northrop Grumman were
$9,623,000 and $7,696,000, respectively; sales to McDonnell Douglas were
$9,516,000 and $7,540,000, respectively; and sales to Boeing were $5,215,000 and
$5,685,000, respectively. At December 31, 1995, trade receivables from Lockheed
Martin, Northrop Grumman, McDonnell Douglas and Boeing were $1,562,000,
$1,210,000, $768,000 and $629,000, respectively. The sales and receivables
relating to Lockheed Martin are primarily for the Space Shuttle program. The
sales and receivables relating to Northrop Grumman, McDonnell Douglas and Boeing
are diversified over a number of different commercial and military programs.
The Company's commercial business is represented on virtually all of today's
major commercial aircraft. During 1995, the Company experienced an increase in
commercial sales primarily as a result of increased offload work for aircraft
structural components from prime contractors and major subcontractors, and sales
from acquisitions made in 1994 and 1995.
Military components manufactured by the Company are employed in many of the
country's front-line fighters, bombers, helicopters and support aircraft, as
well as many land and sea-based vehicles. The Company believes that the defense
business has stabilized. The Company's defense business is widely diversified
among military manufacturers and programs and, with the exception of the C-17
program which accounted for approximately $4,904,000 in sales in 1995, the
cancellation of any individual program is not expected to have a significant
impact on the Company's operations.
In the space sector, the Company produces components for the expendable fuel
tanks which help boost the Space Shuttle vehicle into orbit. Components are also
produced for a variety of unmanned launch vehicles.
10
4
Sales related to space programs in 1995 decreased 20% to $8,457,000. The
Company's customer is currently upgrading the design of the expendable fuel tank
and, due to the timing of the introduction of new super lightweight expendable
fuel tanks, 1995 sales were lower than 1994. Any substantial delay or suspension
of production for the Space Shuttle program would have a significant impact on
the results of operations for the Company.
At December 31, 1995, backlog believed to be firm was approximately
$92,600,000, including $26,000,000 for space-related business, compared to
$84,800,000 at December 31, 1994. Approximately $40,000,000 of the total backlog
is expected to be delivered during 1996.
Gross profit, as a percentage of sales, increased to 33.0% in 1995 from 28.8%
in 1994. This increase was primarily the result of changes in sales mix,
economies of scale resulting from sales increases and improvements in production
efficiencies. The increase was partially offset by production inefficiencies
resulting from the relocation of the DMT business in the first quarter of 1995,
higher production costs at 3dbm, changes in customer production schedules and
the start of new production programs.
Selling, general and administrative expenses increased to $19,572,000, or
21.5% of sales in 1995, compared to 19.7% of sales for 1994. The increase in
these expenses as a percentage of sales was primarily the result of goodwill
amortization and period costs related to acquisitions and $507,000 of debt
conversion expense related to the conversion of $6,252,000 of convertible
subordinated debentures.
Interest expense increased 44.7% to $3,570,000 in 1995 primarily due to
higher debt levels caused by acquisition financing.
As a result of adopting Statement of Financial Accounting Standards No. 109
- -- "Accounting for Income Taxes" ("SFAS 109") in 1993, the Company was not able
to utilize the benefit of its net operating loss carryforwards to compute income
tax expense for financial reporting purposes. This resulted in income tax
expense of $1,895,000 and $973,000 in 1995 and 1994, respectively, for financial
reporting purposes. The increase in income tax expense was primarily due to the
increase in income before taxes. This increase was partially offset by the
decrease in the valuation allowance due to the Company's reevaluation of the
realizability of tax benefits from future operations. From a cash flow
perspective, however, the Company continued to use its federal net operating
loss carryforwards to offset taxable income. Cash expended to pay income taxes
was $555,000 in 1995, compared to $123,000 in 1994. For further discussion
relating to the adoption of SFAS 109 by the Company, see Note 11 to the
consolidated financial statements.
Net income for 1995 was $5,046,000, or $0.87 per share, compared to
$2,204,000, or $0.48 per share, in 1994.
1994 Compared to 1993 -- Net sales decreased 4.3% to $61,738,000 in 1994. The
decrease was due primarily to a reduction in the Company's commercial sales for
both narrow-body and wide-body aircraft. This decrease was partially offset by
an increase in sales to certain military and space programs. The Company's mix
of business was approximately 40% commercial, 43% military and 17% space in
1994. Foreign sales increased to 19% of total sales in 1994 from 13% in 1993.
The increase in foreign sales was primarily the result of higher sales to
customers in Canada, which increased to 10% of total sales in 1994 from 5% of
total sales in 1993. Canada is the only foreign country in which the Company had
sales of 5% or more of total sales in 1994 and 1993.
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1994 and 1993, sales to Lockheed Martin
were $9,454,000 and $7,839,000, respectively; sales to Northrop Grumman were
$7,696,000 and $4,473,000, respectively; sales to McDonnell Douglas
11
5
Ducommun Incorporated
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
were $7,540,000 and $4,928,000, respectively; and sales to Boeing were $5,685,00
and $7,949,000, respectively. At December 31, 1994, trade receivables from
Lockheed Martin, Northrop Grumman, McDonnell Douglas and Boeing were $852,000,
$746,000, $1,809,000 and $769,000, respectively. The sales and receivables
relating to Lockheed Martin are primarily for the Space Shuttle program. The
sales and receivables relating to Northrop Grumman, McDonnell Douglas and Boeing
are diversified over a number of different commercial and military programs.
The Company's commercial business is represented on virtually all of today's
major commercial aircraft. During 1994, the Company experienced a decrease in
commercial sales primarily as a result of a reduction in customer commercial
aircraft production rates.
Military components manufactured by the Company are employed in many of the
country's front-line fighters, bombers, helicopters and support aircraft, as
well as many land and sea-based vehicles. The Company's defense business is
widely diversified among military manufacturers and programs. The C-17 program
accounted for approximately $5,131,000 in sales for 1994.
In the space sector, the Company produces components for the expendable fuel
tanks which help boost the Space Shuttle vehicle into orbit. Components are also
produced for a variety of unmanned launch vehicles. Sales related to space
programs in 1994 increased 16% to $10,560,000. This increase was due primarily
to an increase in production tooling and equipment sales.
At December 31, 1994, backlog believed to be firm was approximately
$84,800,000, including $26,000,000 for space-related business, compared to
$74,500,000 at December 31, 1993.
Gross profit, as a percentage of sales, increased to 28.8% in 1994 from 26.8%
in 1993. This increase was primarily the result of changes in sales mix and
lower fixed production costs, partially offset by production inefficiencies
resulting from changes in customer production schedules and the start of new
production programs.
Selling, general and administrative expenses increased to $12,141,000, or
19.7% of sales in 1994, compared to 17.2% of sales for 1993. The increase in
these expenses as a percentage of sales was primarily the result of
approximately $449,000 of acquisition-related period costs, lower sales volume
and an increase in provision for environmental costs.
Interest expense decreased 9.4% to $2,467,000 in 1994 primarily due to
reduced debt levels.
Net income for 1994, after deducting $449,000 of pre-tax acquisition costs,
was $2,204,000, or $0.48 per share, compared to $10,228,000, or $1.57 per share,
in 1993. Net income for 1993 included the cumulative effect of a change in
accounting principle for income taxes of $8,000,000, or $1.09 per share,
relating to the adoption of SFAS 109.
FINANCIAL CONDITION
Liquidity and Capital Resources -- Cash flow from operating activities for 1995
was $8,086,000, of which $2,501,000 was used to purchase property and equipment,
and $4,427,000 was used in the acquisition of 3dbm in January 1995. At December
31, 1995 the Company had bank borrowings of $8,100,000. During 1995, the Company
repaid $9,068,000 of principal on its outstanding bank, promissory notes, term
and commercial real estate loans.
The Company continues to depend on operating cash flow and the availability
of its bank line of credit to provide short-term liquidity. Cash from operations
and bank borrowing capacity are expected to provide sufficient liquidity to meet
the Company's obligations during 1996.
12
6
During the fourth quarter of 1995, the Company entered into agreements to
convert $6,252,000 principal amount of its 7.75% convertible subordinated
debentures, of which $3,737,000 were converted in 1995 and the balance in 1996.
The Company paid cash of $258,000 in 1995 and $146,000 in 1996 for these
conversions. The conversions will reduce future interest expense by
approximately $500,000 annually.
The convertible subordinated debentures are presently callable by the
Company, and beginning March 31, 1996 will be callable at par. The Company is
exploring the possibility of calling or converting all or part of its remaining
outstanding convertible subordinated debentures. The timing and amount of
debentures involved in such transactions will depend upon a variety of factors,
including the market price of the Company's common stock and general economic
conditions.
Aggregate maturities of long-term debt, together with sinking fund payments
required, during the next five years are as follows: 1996, $3,910,000; 1997,
$5,024,000; 1998, $1,421,000; 1999, $209,000; 2000, $85,000.
The Company spent $2,501,000 on capital expenditures during 1995 and expects
to spend less than $5,000,000 for capital expenditures in 1996.
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
chemical milling services for the aerospace industry. Aerochem has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination at its El Mirage, California facility. Based upon
currently available information, the Company has established a provision for the
cost of such investigation and corrective action.
Aerochem has been notified by the United States Environmental Protection
Agency ("EPA") that Aerochem and other generators of hazardous waste disposed at
the Casmalia Resources Hazardous Waste Facility in California (the "Casmalia
Site"), an inactive hazardous waste treatment, storage and disposal facility,
may be responsible for certain costs associated with the cleanup and closure of
the Casmalia Site. Aerochem contributed less than 1/4 of 1% of the total waste
disposed at the Casmalia Site and many other substantially larger companies and
governmental entities are involved at the Casmalia Site. The Company has
established a provision, based on currently available information, for
Aerochem's share of the estimated cost of cleanup and closure of the Casmalia
Site.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including matters
relating to environmental laws. In addition, the Company makes various
commitments and incurs contingent liabilities. While it is not feasible to
predict the outcome of these matters, the Company does not presently expect that
any sum it may be required to pay in connection with these matters would have a
material adverse effect on its consolidated financial position or results of
operations.
FUTURE ACCOUNTING REQUIREMENTS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 -- "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 will become effective for the Company in
1996. The adoption of SFAS 123 is not expected to have a material effect on the
Company's financial position or results of operations.
13
7
Ducommun Incorporated
CONSOLIDATED STATEMENTS
OF INCOME
(in thousands, except per share amounts)
Year ended December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------
Net Sales $ 91,217 $ 61,738 $ 64,541
Operating Costs and Expenses:
Cost of goods sold 61,134 43,953 47,270
Selling, general and administrative expenses 19,572 12,141 11,121
--------------------------------
Total Operating Costs and Expenses 80,706 56,094 58,391
--------------------------------
Operating Income 10,511 5,644 6,150
Interest Expense (3,570) (2,467) (2,723)
--------------------------------
Income Before Taxes and Cumulative Effect of
Change in Accounting Principle for Taxes 6,941 3,177 3,427
Income Tax Expense (Note 11) (1,895) (973) (1,199)
Income Before Cumulative Effect of Change in
Accounting Principle for Taxes 5,046 2,204 2,228
Cumlative Effect of Change in Accounting
Principle for Taxes (Note 11) -- -- 8,000
--------------------------------
Net Income $ 5,046 $ 2,204 $ 10,228
================================
Earnings Per Share:
Primary Earnings Per Share:
Income Before Cumulative Effect of Change in
Accounting Principle for Taxes $ 1.04 $ .48 $ .49
Cumulative Effect of Change in Accounting
Principle for Taxes -- -- 1.77
--------------------------------
Primary Earnings Per Share $ 1.04 $ .48 $ 2.26
================================
Fully Diluted Earnings Per Share:
Income Before Cumulative Effect of Change in
Accounting Principle for Taxes $ .87 $ .48 $ .48
Cumulative Effect of Change in Accounting
Principle for Taxes -- -- 1.09
--------------------------------
Fully Diluted Earnings Per Share $ .87 $ .48 $ 1.57
================================
See accompanying notes to consolidated financial statements.
14
8
Ducommun Incorporated
CONSOLIDATED BALANCE
SHEETS
(in thousands, except share amounts)
December 31, 1995 1994
- -----------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 371 $ 8,483
Accounts receivable (less allowance for doubtful
accounts of $366 and $182) 13,828 9,923
Inventories (Note 3) 13,362 10,334
Deferred income taxes (Note 11) 5,090 2,469
Other current assets 1,151 1,091
--------------------
Total Current Assets 33,802 32,300
Property and Equipment, Net (Note 4) 23,011 23,568
Deferred Income Taxes (Note 11) 6,451 8,310
Excess of Cost Over Net Assets Acquired
(Net of Accumulated Amortization of $2,323 and $1,193) 16,697 14,693
Other Assets (Note 6) 1,013 981
--------------------
$ 80,974 $ 79,852
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt (Note 6) $ 3,910 $ 12,170
Accounts payable 4,917 3,725
Accrued liabilities (Note 5) 13,728 9,695
--------------------
Total Current Liabilities 22,555 25,590
Long-Term Debt (Note 6) 8,935 9,743
Convertible Subordinated Debentures (Note 6) 24,263 28,000
Other Long-Term Liabilities 633 736
--------------------
Total Liabilities 56,386 64,069
--------------------
Commitments and Contingencies (Notes 2, 10 and 12)
Shareholders' Equity (Note7):
Common stock -- $.01 par value; authorized 12,500,000
shares; issued and outstanding 4,852,281 shares
in 1995 and 4,464,154 in 1994 49 45
Additional paid-in capital 34,989 31,234
Accumulated deficit (10,450) (15,496)
--------------------
Total Shareholders' Equity 24,588 15,783
--------------------
$ 80,974 $ 79,852
====================
See accompanying notes to consolidated financial statements.
15
9
Ducommun Incorporated
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 5,046 $ 2,204 $ 10,228
Adjustments to Reconcile Net Income to Cash Provided
by Operating Activities:
Depreciation and amortization 4,382 3,117 3,310
Cumulative effect of change in accounting principle for taxes -- -- (8,000)
Deferred income tax provision 934 712 1,047
Other 44 51 450
Changes in Assets and Liabilities, Net of Effects
from Acquisitions:
Accounts receivable (3,413) 1,475 1,156
Inventories (1,651) 1,280 643
Other current assets (2,649) 526 21
Other assets 2,068 234 (51)
Accounts payable (166) (701) (2,342)
Accrued and other liabilities 3,491 1,517 (229)
--------------------------------
Net Cash Provided by Operating Activities 8,086 10,415 6,233
--------------------------------
Cash Flows from Investing Activities:
Purchase of Property and Equipment (2,501) (1,219) (3,830)
Acquisition of Businesses (4,427) (8,263) --
Other 34 3 4
--------------------------------
Net Cash Used in Investing Activities (6,894) (9,479) (3,826)
--------------------------------
Cash Flows from Financing Activities:
Net Borrowing (Repayment) of Long-Term Debt (9,068) 7,019 (2,071)
Cash Premium for Conversion of Convertible Subordinated Debentures (258) -- --
Other 22 (6) 10
--------------------------------
Net Cash Provided by (Used in) Financing Activities (9,304) 7,013 (2,061)
--------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (8,112) 7,949 346
Cash and Cash Equivalents at Beginning of Year 8,483 534 188
--------------------------------
Cash and Cash Equivalents at End of Year $ 371 $ 8,483 $ 534
================================
Supplemental Disclosures of Cash Flow Information:
Interest Expense Paid $ 3,719 $ 2,508 $ 2,771
Income Taxes Paid $ 555 $ 123 $ 64
Supplementary Information for Non-Cash Financing Activities:
During November and December 1995, the Company issued 374,446 new shares of
common stock upon conversion of $3,737,000 of its outstanding 7.75% convertible
subordinated debentures.
See accompanying notes to consolidated financial statements.
16
10
Ducommun Incorporated
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
Total
Shares Common Additional Accumulated Shareholders'
(in thousands, except for shares outstanding) Outstanding Stock Paid-In Capital Deficit Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1993 4,453,258 $ 45 $ 31,230 $ (27,928) $ 3,347
Stock options exercised 14,350 -- 28 -- 28
Stock repurchased (5,000) -- (18) -- (18)
Net Income -- -- -- 10,228 10,228
-----------------------------------------------------------------------------------
Balance at December 31, 1993 4,462,608 $ 45 $ 31,240 $ (17,700) $ 13,585
Stock options exercised 5,000 -- 9 -- 9
Stock repurchased (3,454) -- (15) -- (15)
Net Income -- -- -- 2,204 2,204
-----------------------------------------------------------------------------------
Balance at December 31, 1994 4,464,154 $ 45 $ 31,234 $ (15,496) $ 15,783
Stock options exercised 20,125 -- 68 -- 68
Stock repurchased (6,444) -- (46) -- (46)
Conversion of convertible
subordinated debentures 374,446 4 3,733 -- 3,737
Net Income -- -- -- 5,046 5,046
-----------------------------------------------------------------------------------
Balance at December 31, 1995 4,852,281 $ 49 $ 34,989 $ (10,450) $ 24,588
===================================================================================
See accompanying notes to consolidated financial statements.
17
11
Ducommun Incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts of the
Company and its subsidiaries, after eliminating significant intercompany
balances and transactions.
Cash Equivalents: Cash equivalents consist of highly liquid instruments
purchased with maturities of three months or less.
Revenue Recognition: Revenue, including sales under fixed price contracts, is
recognized upon shipment of products or when title passes based on the terms of
the sale. The effects of revisions in contract value or estimated costs of
completion are recognized over the remaining terms of the agreement. Provisions
for estimated losses on contracts are recorded in the period identified.
Inventory Valuation: Inventories are stated at the lower of cost or market. Cost
is determined based upon the first-in, first-out method. Costs on fixed price
contracts in progress included in inventory represent accumulated recoverable
costs less the portion of such costs allocated to delivered units and applicable
progress payments received.
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 ranging
from 2 to 40 years and, in the case of leasehold improvements, over the shorter
of the lives of the improvements or the lease term.
Income Taxes: In January 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 -- "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactments of changes in tax laws or rates.
Excess of Costs Over Net Assets Acquired: The cost of acquired businesses in
excess of the fair market value of their underlying net assets is amortized on
the straight line basis over periods ranging from 15 to 40 years. The Company
assesses the recoverability of cost in excess of net assets of acquired
businesses by determining whether the amortization of this intangible asset over
its remaining life can be recovered through future operating cash flows.
Environmental Costs: Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable, and costs
can be reasonably estimated. Generally, the timing of these accruals coincides
with the completion of a feasibility study or the Company's commitment to a
formal plan of action.
Earnings Per Share: Earnings per common share is based on the weighted average
number of common and common equivalent shares outstanding in each year. Common
equivalent shares represent the number of shares which would be issued assuming
the exercise of dilutive stock options, reduced by the number of shares which
would be purchased with the proceeds from the exercise of such options. For 1995
and 1993, shares associated with convertible securities have been included in
the weighted average number of shares outstanding. For 1994, shares associated
with convertible securities have not been included in the weighted average
number of shares outstanding since their inclusion would have had an
antidilutive effect.
Use of Estimates: Certain amounts and disclosures included in the consolidated
financial statements required management to make estimates which could differ
from actual results.
NOTE 2. ACQUISITIONS
In January 1995, Ducommun acquired the capital stock of 3dbm, Inc. for
$4,780,000 in cash (of which $353,000 was withheld with respect to certain
assets and potential liabilities of 3dbm) and $400,000 in notes. Under the terms
of the stock purchase agreement, the Company may be required to make additional
payments through 1997, contingent upon 3dbm achieving certain levels of
financial performance. Any such payments are generally capitalized as additional
cost in excess of net assets acquired. 3dbm supplies high-power expanders,
microcells and other wireless communications hardware used in cellular telephone
networks, and microwave components and subsystems to both military and
commercial customers. Pro forma results for 1995 and 1994, assuming the
acquisition of 3dbm at the beginning of the respective periods, would not have
been materially different from the Company's historical results for the periods
presented.
18
12
Ducommun Incorporated
In December 1994, Ducommun acquired the capital stock of Brice Manufacturing
Company, Inc. ("Brice") for $763,000 in cash and $10,365,000 in notes and other
contractual liabilities. Under the terms of the stock purchase agreement, the
Company may be required to make additional payments through 1999, contingent
upon Brice achieving certain levels of financial performance. Any such payments
are generally capitalized as additional cost in excess of net assets acquired.
Brice is an after-market supplier of aircraft seating products to many of the
world's largest commercial airlines. Products supplied by Brice include plastic
and metal seat parts, overhauled and refurbished seats, components for
installation of in-flight equipment, and other cabin interior components for
commercial aircraft.
In December 1994, Ducommun's subsidiary, Jay-El Products, Inc. ("Jay-El
Products"), acquired substantially all of the assets of Dynatech Microwave
Technology, Inc. ("DMT"), for $7,500,000 in cash. DMT was integrated with Jay-El
Products in the first quarter of 1995. DMT manufactures switches and other
microwave components used on commercial and military aircraft. DMT also has
developed several new products that apply its existing microwave technology to
nonaerospace markets, including the wireless communications field.
The following table presents unaudited pro forma consolidated operating
results for the Company for the years ended December 31, 1994 and December 31,
1993, respectively, as if the Brice and DMT acquisitions had occurred as of the
beginning of the periods presented.
(in thousands) 1994 1993
- ------------------------------------------------------
Net sales $80,582 $82,459
Earnings before
accounting change 3,132 2,643
Net earnings 3,132 10,643
Per share:
Earnings before
accounting change 0.62 0.54
Net earnings 0.62 1.63
The unaudited pro forma consolidated operating results for the Company
are not necessarily indicative of the operating results that would have been
achieved had the acquisitions been consummated at the beginning of the periods
presented, and should not be construed as representative of future operating
results.
The acquisitions of 3dbm, Brice and DMT described above were accounted for
under the purchase method of accounting and, accordingly, the operating results
for 3dbm, Brice and DMT have been included in the Consolidated Statements of
Income since the dates of the respective acquisitions. The cost of the
acquisitions was allocated on the basis of the estimated fair value of assets
acquired and liabilities assumed. These acquisitions accounted for approximately
$14,864,000 and $11,730,000 of the Excess of Cost Over Net Assets Acquired at
December 31, 1995 and December 31, 1994, respectively. Such excess (which will
increase for any future contingent payments) is being amortized on a straight
line basis over fifteen years.
NOTE 3. INVENTORIES
Inventories consist of the following:
(in thousands) December 31, 1995 1994
- ------------------------------------------------------
Raw materials and supplies $ 3,377 $ 3,573
Work in process 9,353 6,400
Finished goods 647 437
-----------------------
13,377 10,410
Less progress payments 15 76
-----------------------
Total $ 13,362 $ 10,334
=======================
Work in process inventories include amounts under long-term fixed price
contracts aggregating $5,631,000 and $4,712,000 at December 31, 1995 and 1994,
respectively.
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
(in thousands) December 31, 1995 1994
- ------------------------------------------------------
Land $ 4,869 $ 4,869
Buildings and improvements 11,196 10,811
Machinery and equipment 32,186 30,900
Furniture and equipment 3,913 2,987
Construction in progress 1,047 192
-----------------------
53,211 49,759
Less accumulated depreci-
ation and amortization 30,200 26,191
-----------------------
Total $ 23,011 $ 23,568
=======================
Depreciation expense was $3,252,000, $2,961,000 and $3,206,000 for the years
ended December 31, 1995, 1994 and 1993, respectively.
19
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
(in thousands) December 31, 1995 1994
- ------------------------------------------------------------
Accrued compensation $ 5,225 $ 4,144
Accrued interest 569 585
Provision for environmental costs 1,742 1,735
Accrued state franchise and sales tax 339 369
Other 5,853 2,862
---------------------
Total $13,728 $ 9,695
=====================
NOTE 6. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED DEBENTURES
Long-term debt and convertible subordinated debentures are summarized as
follows:
(in thousands) December 31, 1995 1994
- ---------------------------------------------------------
Bank credit agreement $ 8,100 $ 7,500
Term and real estate loans 3,559 4,048
Promissory notes related to
acquisitions 1,186 10,365
---------------------
Total debt 12,845 21,913
Less current portion 3,910 12,170
---------------------
Total long-term debt $ 8,935 $ 9,743
=====================
7.75% Convertible subordinated
debentures due 2011 $24,263 $28,000
=====================
In July 1995, the Company and its bank amended the Company's credit
agreement. The amended credit agreement provides for a $5,500,000 working
capital line of credit and an $8,100,000 acquisition term loan at December 31,
1995. The working capital line of credit has an expiration date of July 15,
1997, and the acquisition term loan has a December 31, 1998 expiration date.
Interest is payable monthly on the outstanding borrowings based on the bank's
prime rate (8.75% at December 31, 1995) plus 0.25% for the working capital line
of credit and the bank's prime rate plus 0.75% for the acquisition term loan. A
Eurodollar pricing option is also available to the Company for terms of up to
six months at the Eurodollar rate plus 2.0% for the working capital line of
credit and the Eurodollar rate plus 2.5% for the acquisition term loan. At
December 31, 1995, the Company had $5,158,000 of unused lines of credit, after
deducting $8,100,000 of loans outstanding for the acquisitions and $342,000 for
an outstanding standby letter of credit which supports the estimated
post-closure maintenance cost for a former surface impoundment.
Borrowings under the credit agreement are secured by most of the assets of
the Company and its subsidiaries. The credit agreement includes minimum
effective tangible net worth and earnings requirements, debt to effective
tangible net worth, fixed charge coverage and quick ratios, and limitations on
capital expenditures, future dividend payments and outside indebtedness.
During the fourth quarter of 1995, the Company entered into agreements to
convert $6,252,000 principal amount of its 7.75% convertible subordinated
debentures, of which $3,737,000 were converted in 1995 and the balance in 1996.
The Company paid cash of $257,860 in 1995 and $145,800 in 1996 for the
conversions. The conversions will reduce future interest expense by
approximately $500,000 annually.
Interest is paid semiannually on the 7.75% convertible subordinated
debentures which, as of December 31, 1995, were convertible into 2,431,162
shares of common stock at a conversion price of $9.98 per share, and are subject
to a mandatory redemption of $2,000,000 per year from 1996 to 2010. The Company
currently holds sufficient debentures to satisfy the redemption requirement
through the year 2003. The convertible subordinated debentures are presently
callable by the Company, and beginning March 31, 1996 will be callable at par.
The weighted average interest rate on borrowings outstanding was 7.98% and
7.91% at December 31, 1995 and 1994, respectively.
The carrying amount of long-term debt and convertible subordinated debentures
approximates fair value based on the terms of the related debt, recent
transactions and estimates using interest rates currently available to the
Company for debt with similar terms and remaining maturites.
Debt issuance costs related to the issuance of convertible debt are being
amortized over the term of the debt. Unamortized debt issuance costs of $403,000
and $519,000 at December 31, 1995 and December 31, 1994, respectively, are
included in Other Assets.
Aggregate maturities of long-term debt, together with sinking fund payments
required, during the next five years are as follows: 1996, $3,910,000; 1997,
$5,024,000; 1998, $1,421,000; 1999, $209,000; 2000, $85,000.
NOTE 7. SHAREHOLDERS' EQUITY
At December 31, 1995 and 1994, no preferred shares were issued or outstanding.
The Company has reserved 2,431,162 shares of common stock for issuance upon the
conversion of the 7.75% convertible subordinated debentures.
20
14
Ducommun Incorporated
NOTE 8. STOCK OPTIONS
The Company has two stock incentive plans and a stock option plan. Stock awards
may be made to officers and key employees under one of the stock incentive plans
on terms determined by the Compensation Committee of the Board of Directors. No
stock awards have been made under this plan. Options have been and may be
granted to officers and key employees under the other stock incentive plan and
the stock option plan at prices not less than 100% of the market value on the
date of grant. The option price and number of shares are subject to adjustment
under certain dilutive circumstances. The exercise schedules and terms of
options are determined by the Compensation Committee of the Board of Directors
at the date of grant. Options expire not more than ten years from the date of
grant. At December 31, 1995, options for 579,287 shares of common stock were
exercisable.
At December 31, 1995, 235,001 common shares were available for future stock
grants under the plans, and 717,525 common shares were reserved for the
exercise of options. Option activity during the three years ended December 31,
1995 was as follows:
Exercise Price
Number of Shares Per Share
- -----------------------------------------------------
Outstanding at
January 1, 1993 656,500 $1.88 -- $26.63
Granted 86,075 3.50
Exercised (14,350) 1.88
Forfeited (24,925) 1.88 -- 4.63
--------
Outstanding at
December 31, 1993 703,300 $1.88 -- $26.63
Granted 35,000 4.88
Exercised (5,000) 1.88
Forfeited (21,225) 1.88 -- 4.63
--------
Outstanding at
December 31, 1994 712,075 $1.88 -- $26.63
Granted 49,200 6.00 -- 10.13
Exercised (20,125) 1.88 -- 4.88
Forfeited (23,625) 3.88 -- 26.63
--------
Outstanding at
December 31, 1995 717,525 $1.88 -- $10.13
========
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 -- "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 will become effective for the Company in
1996. The adoption of SFAS 123 is not expected to have a material effect on the
Company's consolidated financial position or results of operations.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company has an unfunded supplemental retirement plan that was suspended in
1986, but which continues to cover certain former executives. The accumulated
benefit obligations under the plan at December 31, 1995 and 1994 were $721,000
and $741,000, respectively, which are included in accrued liabilities.
The Company also provides certain health care benefits for retired employees.
Employees become eligible for these benefits if they meet minimum age and
service requirements, are eligible for retirement benefits and agree to
contribute a portion of the cost. As of December 31, 1995, there were 159
current and retired employees eligible for such benefits. Eligibility for
additional employees to become covered by retiree health benefits was terminated
in 1988.
The Company accrues postretirement health care benefits over the period in
which active employees become eligible for such benefits. The components of
periodic expenses for these postretirement benefits are as follows:
(in thousands) Year ended December 31, 1995 1994
- ---------------------------------------------------------
Service cost $ 1 $ 1
Interest cost 64 73
Amortization of net transition
obligation 84 84
Net amortization and deferral 21 28
------------------
Net periodic postretirement
benefit cost $170 $186
==================
The actuarial liabilities for these postretirement benefits are as follows:
(in thousands) December 31, 1995 1994
- ----------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $666 $815
Fully eligible active plan
participants 129 112
Other active plan participants 10 20
------------------
Total 805 947
Unrecognized net transition
obligation (824) (908)
Unrecognized prior service cost (28) (56)
Unrecognized net gain 220 135
------------------
Accrued postretirement benefit cost $173 $118
==================
The accumulated postretirement benefit obligations at December 31, 1995 and
1994 were determined using an assumed discount rate of 7.25% and 8.5%,
respectively. For measurement purposes, an 11% annual rate of increase
21
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
in the per capita cost of covered health care benefits was assumed for 1996; the
rate was assumed to decrease gradually to 6.5% in the year 2003 and remain at
that level thereafter over the projected payout period of the benefits.
A 1% increase in the assumed annual health care cost trend rate would
increase the present value of the accumulated postretirement benefit obligation
at December 31, 1995 by $2,800, and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year then
ended by $300.
During 1993, the Company's Board of Directors approved a retirement benefit
and compensation program for the Company's Chief Executive Officer in
consideration of a freeze in salary, reduced bonus eligibility and
discontinuance of future stock option awards. The components of periodic
expenses for this postretirement benefit are as follows:
(in thousands) December 31, 1995 1994
- -----------------------------------------------------
Service cost $155 $148
Interest cost 34 20
Amortization of prior
service cost 25 25
------------------
Net periodic cost $214 $193
==================
The actuarial liabilities for this postretirement benefit are as follows:
(in thousands) December 31, 1995 1994
- -----------------------------------------------------
Accumulated benefit obligation:
Vested active plan participant $605 $398
Unrecognized prior service cost (25) (50)
Unrecognized net gain (loss) (4) 14
------------------
Accrued cost $576 $362
==================
The accrued cost under this plan is included in accrued liabilities.
NOTE 10. LEASES
The Company leases certain facilities and equipment for periods ranging from 1
to 6 years. The leases generally are renewable and provide for the payment of
property taxes, insurance and other costs relative to the property. Rental
expense in 1995, 1994 and 1993, was $3,550,000, $2,910,000, and $2,750,000,
respectively. Future minimum rental payments under operating leases having
initial or remaining non-cancelable terms in excess of one year and related
income from a non-cancelable sublease at December 31, 1995 are as follows:
Lease Sublease Net
(in thousands) Commitments Commitments Commitments
- ---------------------------------------------------------
1996 $3,274 $207 $3,067
1997 2,506 80 2,426
1998 1,189 -- 1,189
1999 869 -- 869
2000 200 -- 200
Thereafter 38 -- 38
---------------------------------
Total $8,076 $287 $7,789
=================================
NOTE 11. INCOME TAXES
The provision for income tax expense consists of the following:
(in thousands)
Year ended December 31, 1995 1994 1993
- -----------------------------------------------------
Current tax expense:
Federal $ 210 $ 10 $ 118
State 751 251 34
-----------------------------
961 261 152
-----------------------------
Deferred tax expense:
Federal 845 1,079 1,128
State 89 (367) (81)
-----------------------------
934 712 1,047
-----------------------------
Income Tax Expense $1,895 $ 973 $1,199
=============================
Effective January 1, 1993, the Company adopted SFAS 109. The adjustments to
the January 1, 1993 balance sheet to adopt SFAS 109 netted to $8 million. This
amount is reflected in net income for 1993 as the cumulative effect of a change
in accounting principle. It primarily represents the impact of recognizing a
deferred tax asset for the benefit of tax net operating loss carryforwards
("NOLs") that could not be recorded under SFAS 96.
Deferred tax assets (liabilities) are comprised of the following:
(in thousands) December 31, 1995 1994
- ----------------------------------------------------
Federal NOLs $11,538 $14,871
Credit carryforwards 1,197 1,113
Employment-related reserves 1,691 1,242
Inventory reserves 748 354
Other 1,352 1,025
--------------------
16,526 18,605
Depreciation (2,552) (2,676)
--------------------
Net deferred tax assets before
valuation allowance 13,974 15,929
Deferred tax assets valuation
allowance (2,433) (5,150)
--------------------
Net deferred tax asset $11,541 $10,779
====================
The decrease in the valuation allowance is due to the Company's reevaluation
of the realizability of income
22
16
Ducommun Incorporated
tax benefits from future operations including acquisitions consummated in 1995
and 1994. As a result, the carrying value of the net deferred tax benefit was
increased by $2,717,000, of which $1,155,000 was allocated to goodwill arising
from the acquisition of 3dbm and $1,562,000 was recognized as a current period
tax benefit. In 1994, the carrying value of the net deferred tax asset was
increased by $4,700,000 which was allocated to reduce goodwill arising from the
acquisition of Brice and DMT.
The principal reasons for the variation from the customary relationship
between income taxes and income from continuing operations before income taxes
are as follows:
Year ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------
Statutory federal
income tax rate 35.0% 35.0% 34.0%
State income taxes (net
of federal benefit) 6.2 6.2 6.2
Goodwill amortization 4.5 1.1 1.0
Benefit of net operating
loss carryforwards
and carrybacks (24.4) (12.0) (5.5)
Alternative minimum tax 3.0 3.7 --
Debt Conversion 2.9 -- --
Other .1 (3.4) (.7)
---------------------------------
Effective Income
Tax Rate 27.3% 30.6% 35.0%
=================================
At December 31, 1995, the Company had federal tax NOLs totalling $34 million
which expire in the years 1999 through 2004. SFAS 109 requires that the tax
benefit of such NOLs be recorded, measured by enacted tax rates, as an asset to
the extent management assesses the utilization of such NOLs to be "more likely
than not." Management has determined that the income of the Company will, more
likely than not, be sufficient to realize the recorded deferred tax asset prior
to the ultimate expiration of the NOLs. Realization of the future tax benefits
of NOLs is dependent on the Company's ability to generate sufficient taxable
income within the carryforward period. In assessing the likelihood of
utilization of existing NOLs, management considered the historical results of
operations of its operating subsidiaries, including acquired operations, and
the current economic environment in which the Company operates. Management does
not expect and did not consider any material future changes in trends or the
relationship between reported pretax income and federal and state taxable
income or material asset sales or similar non-routine transactions in assessing
the likelihood of realization of the recorded deferred tax asset.
Future levels of pretax income are dependent upon the extent of defense
spending and other government budgetary pressures, the level of new aircraft
orders by commercial airlines, production rate requirements for the Space
Shuttle program, general economic conditions, interest rates, competitive
pressures on sales and margins, price levels and other factors beyond the
Company's control.
The ability of the Company to utilize its NOLs could be subject to
significant limitation in the event of a "change of ownership" as defined in the
Internal Revenue Code. A "change of ownership" could be caused by purchases or
sales of the Company's securities owned by persons or groups now or in the
future having ownership of 5% or more of the Company's outstanding common stock
or issuance by the Company of common stock (including shares that are issuable
on conversion of the debentures).
NOTE 12. CONTINGENCIES
Ducommun's subsidiary, Aerochem, Inc. ("Aerochem"), is a major supplier of
chemical milling services for the aerospace industry. Aerochem has been directed
by California environmental agencies to investigate and take corrective action
for groundwater contamination at its El Mirage, California facility. Based upon
currently available information, the Company has established a provision for the
cost of such investigation and corrective action.
Aerochem has been notified by the United States Environmental Protection
Agency ("EPA") that Aerochem and other generators of hazardous waste disposed at
the Casmalia Resources Hazardous Waste Facility in California (the "Casmalia
Site"), an inactive hazardous waste treatment, storage and disposal facility,
may be responsible for certain costs associated with the cleanup and closure of
the Casmalia Site. Aerochem contributed less than 1/4 of 1% of the total waste
disposed at the Casmalia Site and many other substantially larger companies and
governmental entities are involved at the Casmalia Site. The Company has
established a provision, based on currently available information, for
Aerochem's share of the estimated cost of cleanup and closure of the Casmalia
Site.
In the normal course of business, Ducommun and its subsidiaries are
defendants in certain other litigation, claims and inquiries, including matters
relating to environmental laws. In addition, the Company makes various
commitments and incurs contingent liabilities. While it is not feasible to
predict the outcome of these matters, the Company does not presently expect that
any sum it may be required to pay in connection with these matters would have a
material adverse effect on its consolidated financial position or results of
operations.
23
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Continued
NOTE 13. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK
The Company provides proprietary products and services to most of the prime
aerospace and aircraft manufacturers. As a result, the Company's sales and trade
receivables are concentrated principally in the aerospace industry.
The Company had substantial sales to Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing. During 1995, 1994 and 1993, sales to Lockheed
Martin were $8,163,000, $9,454,000 and $7,839,000, respectively; sales to
Northrop Grumman were $9,623,000, $7,696,000 and $4,473,000, respectively; sales
to McDonnell Douglas were $9,516,000, $7,540,000 and $4,928,000, respectively;
and sales to Boeing were $5,215,000, $5,685,000, and $7,949,000, respectively.
At December 31, 1995, trade receivables from Lockheed Martin, Northrop Grumman,
McDonnell Douglas and Boeing were $1,562,000, $1,210,000, $768,000 and $629,000,
respectively. The sales and receivables relating to Lockheed Martin are
primarily for the Space Shuttle program. The sales and receivables relating to
Northrop Grumman, McDonnell Douglas and Boeing are diversified over a number of
different commercial and military programs.
In 1995, 1994 and 1993, foreign sales to manufacturers worldwide were
$23,497,000, $11,515,000 and $8,672,000, respectively. Canada is the only
country in which the Company had sales of 5% or more of total sales, with
$4,518,000, $5,944,000 and $3,445,000 in 1995, 1994 and 1993, respectively.
NOTE 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except
per share amounts) 1995 1994
-------------------------------------------- -------------------------------------------
Three months ended Dec. 31 Sep. 30 July 1 April 1 Dec. 31 Oct. 1 July 2 April 2
- ------------------------------------------------------------------------------------------------------------------
Sales and Earnings:
Net Sales $ 23,314 $ 24,080 $ 23,201 $ 20,622 $ 16,232 $ 15,460 $ 14,814 $ 15,232
-------------------------------------------- --------------------------------------------
Gross Profit 8,434 8,142 7,332 6,175 4,520 4,384 4,626 4,255
-------------------------------------------- --------------------------------------------
Income Before Taxes 2,502 2,237 1,347 855 738 632 975 832
Income Tax Expense (694) (584) (377) (240) (220) (174) (295) (284)
-------------------------------------------- --------------------------------------------
Net Income $ 1,808 $ 1,653 $ 970 $ 615 $ 518 $ 458 $ 680 $ 548
============================================ ============================================
Earnings Per Share:
Primary $ .36 $ .34 $ .20 $ .13 $ .11 $ .10 $ .15 $ .12
Fully Diluted $ .29 $ .27 $ .18 $ .13 $ .11 $ .10 $ .14 $ .12
24
18
Ducommun Incorporated
REPORT OF INDEPENDENT ACCOUNTANTS [LOGO]
To the Board of Directors and Shareholders of Ducommun Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of changes in shareholders'
equity present fairly, in all material respects, the financial position of
Ducommun Incorporated and its subsidiaries at December 31,1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31,1995, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993.
/s/ Price Waterhouse LLP
Los Angeles, California
February 20, 1996
25
1
SUBSIDIARIES OF REGISTRANT
As of December 31, 1995, the active subsidiaries of Ducommun were:
Aerochem, Inc., a California corporation
AHF-Ducommun Incorporated, a California corporation
Brice Manufacturing Company, Inc., a California corporation
Jay-El Products, Inc., a California corporation
3dbm, Inc., a California corporation
Exhibit 21.0
1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-36415, 33-9383, 2-83732, 2-77309 and 2-64222) of
Ducommun Incorporated of our report dated February 20, 1996 appearing on page 25
of the Annual Report to Shareholders which is incorporated in this Annual Report
on Form 10-K. We also consent to the incorporation by reference of our report on
the Financial Statement Schedules, which appears on page 17 of this Form 10-K.
Price Waterhouse LLP
Los Angeles, California
March 13, 1996
Exhibit 23.1
5
1,000
YEAR
DEC-31-1995
JAN-01-1995
DEC-31-1995
371
0
14,194
366
13,362
33,802
53,211
30,200
80,974
22,555
33,831
0
0
49
24,539
80,974
91,217
91,217
61,134
61,134
19,572
0
3,570
6,941
1,895
5,046
0
0
0
5,046
1.04
.87
