Old Firm Putting On a New Face : Ducommun Gears Up With a Leaner Look

Just three years ago, Ducommun was a fast-growing electronics and aerospace company with an expansion strategy calling for $1 billion in annual sales by the firm’s 141st birthday in 1990.

But Ducommun’s ambitious plans were dashed by a sudden downturn in the electronics industry, the space shuttle disaster, recurring management turmoil and $39 million in red ink.

Last week, the Cypress-based company said it will sell to rival Arrow Electronics Inc. of Melville, N.Y., three electronics businesses accounting for about 80% of Ducommun’s 1986 sales of $455 million.

The sale will shrink Ducommun, which ranks as the nation’s fourth-largest distributor of electronics products, to less than a quarter of its present size.

In the process, the company that claims to be the oldest continuing enterprise in California will be transformed into a firm focusing almost exclusively on aerospace.

Presiding over the company’s radical restructuring is Ducommun Chairman Wallace W. Booth, 64, who has headed the firm since 1978. The company had been led by four generations of Ducommun family members before Booth’s appointment as chief executive.

Some past and present Ducommun executives and financial analysts attribute the company’s problems in recent years to Booth, who is variously described as autocratic, detached from day-to-day operations and lacking in electronics industry expertise.

“He doesn’t know a thing about the electronics industry,” said one Ducommun executive, who asked to remain anonymous. “He’s an excruciatingly bright financial man, but he wouldn’t know a semiconductor if it bit him on the foot.”

Added a former company executive: “He was completely a fish out of water, and he had no clue about where to go next” in the electronics industry. “And, quite frankly, the same is probably true about aerospace.”

Booth, who turns 65 on Wednesday but said he has no immediate plans to retire, dismissed the criticism as sour grapes from disgruntled employees.

In the deal announced last Monday, Arrow said it will purchase Ducommun’s Kierulff Electronics, Ducommun Data Systems and MTI Systems businesses. All three units are involved in the distribution of electronic and computer components.

Under the terms of the agreement, Ducommun shareholders will receive Arrow stock valued at about $40 million, and Arrow will assume $90 million in Ducommun debt. Stockholders will retain their existing Ducommun shares, which will represent ownership of the company’s remaining operations.

Ducommun, which moved its headquarters from Los Angeles to Orange County last year, will retain three aerospace businesses: AHF-Ducommun, Aerochem and Jay-El Products. It also will keep a fourth operation, Tri-Tec Engineering, which makes cables and other products for the electronics industry.

The restructuring will reduce Ducommun’s total employee count from about 2,500 to half that. Of the company’s 500 Orange County employees, about 350 work at the three businesses to be purchased by Arrow.

After the sale, Ducommun’s Southern California operations will consist of three facilities in Gardena and a plant in Orange.

The sale marks the latest in a series of changes at the tradition-rich firm.

The company was founded by Swiss immigrant Charles L. Ducommun, who in 1849 opened a Los Angeles hardware store catering to the gold rush trade. According to the company’s version of events, Ducommun walked from Arkansas to California to seek gold and ply his trade as a watchmaker.

By the early 1900s, the company had entered the metals-distribution business. Ducommun grew rapidly after World War II, and in the 1960s, the company expanded into electronics by purchasing a small Los Angeles firm called Kierulff Electronics.

Due to a decline in demand, Ducommun sold its metals businesses in 1981 and used the proceeds to acquire several aerospace companies.

Like several of its competitors, Ducommun in the early 1980s had been gearing up for an anticipated expansion in the electronics-distribution business. But the industry entered a sudden slump in mid-1984, and Kierulff, by far Ducommun’s largest unit, was crippled by a downturn in its semiconductor-distribution operations.

Ducommun lost money for two consecutive years, reporting deficits of $19.2 million in 1986 and $19.7 million the year before. The company’s stock took a beating, falling from more than $40 per share in early 1984 to as little as $11.75 earlier this year.

The losses from electronics operations were concentrated in the Kierulff and Ducommun Data Systems businesses, with MTI Systems generating significant growth and earnings both years.

Ducommun has returned to profitability in 1987, but its first-half earnings of $7.2 million were attributable primarily to a one-time gain from the sale of two divisions, Metermaster and Airdrome Parts.

Since 1985, Kierulff has lost two major distribution accounts, Motorola and Advanced Micro Devices. Although the circumstances are not entirely clear, Booth acknowledged that management turmoil at Ducommun probably contributed to the loss of the Advanced Micro franchise.

Analysts estimate that the Motorola and Advanced Micro franchises alone accounted for nearly 10% of Ducommun’s total sales. Some of the lost revenue has been replaced by new franchises, including National Semiconductor Corp.

In an interview at his office last week, Booth characterized the pending sale of Ducommun’s electronics businesses as “a logical reaction to a classic industrial problem of overexpansion and overcapacity.”

He acknowledged that Ducommun, like a number of other distributors, failed to foresee that industry sales would not continue to increase indefinitely.

“We really geared up for continuing growth,” he said. “Everybody else had the same problem.”

Booth said the sale “is clearly the best thing we can do for our shareholders.”

Wall Street seemed to agree. Ducommun stock immediately jumped more than $1.50 per share after Monday’s announcement of the sale. It closed Friday at $19, up $2.625 for the week, in heavy trading on the American Stock Exchange. Arrow shares closed at $11.25, up $1.50 for the week, on the New York Stock Exchange.

Compounding its problems in the electronics industry, Ducommun’s aerospace group was dealt a severe blow when the space shuttle Challenger exploded in January, 1986. The company’s Aerochem and AHF-Ducommun units are space shuttle subcontractors and depended on the shuttle program for a quarter of their sales at the time of the accident.

Ducommun, which manufactures parts for the shuttle’s liquid rocket booster, expects the shuttle program to be revived and sales to resume in early 1988.

Analysts and Ducommun executives said that frequent management shake-ups seriously hampered the company’s ability to cope with the electronics slump, the shuttle disaster and other external problems.

Two Ducommun presidents have been forced out since 1984. The Kierulff business has been supervised by four executives in four years. A number of other managers also left the company for varying reasons.

“Some were fired, and some quit,” said a former Ducommun executive. “They’ve had a huge number of people who left the company, and they’ve had a lot of supplier problems . . . . Relationships had deteriorated over the years.”

A current company manager said: “The industry was in a terrible slump, and only the best-run companies were eking out a profit. Ducommun was the worst of the bunch.”

Booth dismissed suggestions that internal turmoil was an important factor in Ducommun’s difficulties. “I don’t think it played a role,” he said. “It received more publicity than it probably deserved.”

Last March, Booth fired Ducommun President W. Donald Bell after the company reported an embarrassing $11 million in inventory write-downs and $5 million in other write-offs and extraordinary charges. Analysts and company executives said the charges were evidence of a lack of adequate management oversight.

Bell, who plans to start his own electronics-distribution firm soon, said he believes that he was treated unfairly by Booth.

“The company blamed the inventory loss on me . . . ,” Bell said in an interview last week. “But it should not have been tagged on my tail more than anyone else’s.”

Asked about Bell’s characterization of himself as the fall guy for the inventory fiasco, Booth declined to comment directly.

“Don Bell is a fine guy and a nice person,” said Booth, who has on a shelf in his office a photograph of Booth and Bell taken at the latter’s wedding.

The firing was “a painful experience,” Booth said. “But it was clear for the success of Kierulff that it took a different set of talents and skills. I had to make a change.”

Bell’s dismissal marked the second time that Booth has ejected a hand-picked successor. In 1986, Ducommun President David G. Schmidt was released from his duties.

Booth said the firings were necessary, and he discounted criticism of his management style.

“I don’t think I’m autocratic, and I don’t think most of my immediate subordinates in the organization would say I am,” Booth said. “One article made me sound like an Armand Hammer, which I think is not the case.”

Hammer is the 89-year-old chairman of Occidental Petroleum, who has fired several potential successors through the years.

“I think I have a collegial atmosphere where I invite people to participate in the management and candidly share their views,” Booth said. “I hope I run an open shop. I explain what I do to them so they understand where we’re going and why we’re going there.”

Management difficulties aside, analysts generally agree that Ducommun’s decision to sell its electronics businesses was necessary to help shore up the firm’s sagging finances by reducing Ducommun’s heavy debt burden and divesting unprofitable operations.

Jay Vleeschhouwer, an analyst with L.H. Friend & Co. in Los Angeles, said the sale will help the company reduce its heavy debt and should help improve profits. “Their revenues will be much smaller, but the operating margins are substantially higher” in aerospace than in electronics distribution, Vleeschhouwer said.

Robert C. Ducommun, the 36-year-old great-grandson of the company’s founder, said the decision to sell the three electronics businesses was a difficult one for the family. He is one of three family members who sit on the company’s board. Ducommun descendants own about 15% of the company’s stock.

“The perspective of the family is that we have this behind us--or we hope we do,” said Ducommun. “We want to build a company that once again is deserving of the respect and stature that it had in the past.”

DUCOMMUN AT A GLANCE Stock Price High and low for each year

Year High Low 1980 $27.080 $13.330 1981 27.375 18.000 1982 33.000 18.500 1983 47.500 28.250 1984 43.875 26.000 1985 34.875 23.125 1986 35.500 14.500