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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, 2001   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. 1-8174

DUCOMMUN INCORPORATED

Registrant’s telephone number, including area code: (562) 624-0800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

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 (§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 nonaffiliates of the registrant was approximately $90,000,000 as of January 31, 2002.

The number of shares of common stock outstanding on January 31, 2002 was 9,696,900.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

     (a)  Proxy Statement for the 2002 Annual Meeting of Shareholders (the “2002 Proxy Statement”), incorporated partially in Part III hereof.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

     Certain statements in the Form 10-K and documents incorporated by reference contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any such forward-looking statements involve risks and uncertainties. The Company’s future financial results could differ materially from those anticipated due to the Company’s dependence on conditions in the airline industry, the level of new commercial aircraft orders, the production rates for Boeing commercial aircraft, the C-17 and Apache helicopter rotor blade programs, the level of defense spending, competitive pricing pressures, technology and product development risks and uncertainties, product performance, risks associated with acquisitions and dispositions of businesses by the Company, increasing consolidation of customers and suppliers in the aerospace industry, availability of raw materials and components from suppliers, cost and possible disruption of electricity availability in California, and other factors beyond the Company’s control.

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PART I

ITEM 1. BUSINESS

     During 2001, Ducommun Incorporated (“Ducommun”), through its subsidiaries (collectively, the “Company”), manufactures components and assemblies principally for domestic and foreign commercial and military aircraft and space programs. Domestic commercial aircraft programs include the Boeing 717, 737NG, 747, 757, 767 and 777. Foreign commercial aircraft programs include the Airbus Industrie A330, A340 and A340-600 aircraft, Bombardier business and regional jets, and the Embraer 145 and 170/190. Major military aircraft programs include the Boeing C-17 and F-18, Lockheed Martin F-16, various Sikorsky, Bell, Boeing and Augusta helicopter programs, and various aircraft and shipboard electronics upgrades programs. Space programs include the Space Shuttle external tank, and various commercial and military space launch and satellite programs.

     In August 2001, Ducommun, through a wholly owned subsidiary, acquired certain assets of the Fort Defiance, Arizona operation of Packard Hughes Interconnect Wiring Systems, a subsidiary of Delphi Automotive Systems Corp. (“Fort Defiance”). In June 2001, Ducommun acquired all of the units of Composite Structures, LLC (“Composite Structures”). In November 1999, Ducommun, through a wholly owned subsidiary, acquired the assets and assumed certain liabilities of Parsons Precision Products, Inc. (“Parsons”). In April 1999, Ducommun acquired the capital stock of Sheet Metal Specialties Company (“SMS”).

AeroStructural Products

Aerochem, Inc.

     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 Incorporated

     AHF-Ducommun Incorporated (“AHF”), another Ducommun subsidiary, supplies aircraft and aerospace prime contractors with 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

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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 five 5-axis numerically-controlled routers to provide computer-controlled machining and inspection of complex parts up to 100 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.

Parsons Precision Products, Inc.

     In November 1999, Ducommun, through a wholly owned subsidiary, acquired the assets and assumed certain liabilities of Parsons. Parsons is a leading manufacturer of complex titanium hot-formed subassemblies and components for commercial and military aerospace applications.

Composite Structures, LLC

     In June 2001, Ducommun acquired all of the units of Composite Structures. Composite Structures designs and manufactures metal, fiberglass and carbon composite aerostructures. Composite Structures produces helicopter main and tail rotor blades, and adhesive bonded assemblies, including spoilers and fuselage structural panels for aircraft, jet engine fan containment rings, and helicopters.

Electromechanical Products

Ducommun Technologies, Inc. (formerly Jay-El Products, Inc.)

     Ducommun Technologies, Inc. (“DTI”), a subsidiary of Ducommun, 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. DTI 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 DTI for military applications are night vision goggle-compatible.

     DTI also develops, designs and manufactures microwave switches, filters and other components used principally on commercial and military aircraft and satellites. In addition, DTI develops, designs and manufactures high precision actuators, stepper motors, fractional horsepower motors and resolvers principally for space applications.

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MechTronics of Arizona Corp.

     MechTronics of Arizona Corp. (“MechTronics”) is a leading manufacturer of mechanical and electromechanical enclosure products for the defense electronics and commercial aviation markets. MechTronics has a fully integrated manufacturing capability, including engineering, fabrication, machining, assembly, electronic integration and related processes. MechTronics’ products include sophisticated radar enclosures, gyroscopes and indicators, aircraft avionics racks and shipboard communications and control enclosures.

     In April 1999, Ducommun acquired the capital stock of SMS, a manufacturer of subassemblies for commercial and military aerospace applications, which has been merged into MechTronics. In August 2001, MechTronics acquired certain assets of Fort Defiance, a supplier wiring harnesses and cable assemblies for use in commercial and military aerospace applications and other military application.

Seating Products

Brice Manufacturing Company, Inc.

     Brice Manufacturing Company, Inc. (“Brice”), a subsidiary of Ducommun, is an original equipment manufacturer (“OEM”) of commercial aircraft seats and an after-market supplier of aircraft seating products to many of the world’s largest commercial airlines. Brices’s OEM products include a proprietary line of coach, business and convertible commercial aircraft seats. After-market 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.

Defense and Space Programs

     A major portion of sales is derived from United States government defense programs and space programs. Approximately 41 percent of 2001 sales were related to defense programs and approximately 5 percent of 2001 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, many of 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.

Commercial Programs

     Approximately 54 percent of 2001 sales were related to commercial aircraft programs, and nonaerospace commercial applications. The Company’s commercial sales depend substantially on aircraft manufacturer’s production rates, which in turn depend upon deliveries of new aircraft. Deliveries of new aircraft by aircraft manufacturers are dependent on the

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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. The Company’s sales for commercial aircraft programs also could be affected by changes in its customers’ inventory levels and changes in its customers’ aircraft production build rates.

Major Customers

     The Company had substantial sales to Boeing, Raytheon and Lockheed Martin. During 2001, sales to Boeing were $106,106,000, or 47% of total sales; sales to Raytheon were $16,571,000, or 7% of total sales; and sales to Lockheed Martin were $9,556,000, or 4% of total sales. Sales to Boeing, Raytheon and Lockheed Martin are diversified over a number of different commercial, military and space 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, 2001, backlog believed to be firm was approximately $308,400,000, compared to $238,600,000 at December 31, 2000. Approximately $135,000,000 of total backlog is expected to be delivered during 2002.

Environmental Matters and Legal

     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 expects to spend approximately $1 million for future investigation and corrective action for groundwater contamination at its El Mirage location. However, the Company’s ultimate liability in connection with the contamination will depend upon a number of factors, including changes in existing laws and regulations, and the design and cost of the construction, operation and maintenance of the corrective action.

     The Company anticipates that capital expenditures will continue to be required for the foreseeable future to upgrade and maintain its environmental compliance efforts. The

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Company does not expect to spend a material amount on capital expenditures for environmental compliance during 2002.

     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, 2001 the Company employed 1,555 persons.

Business Segment Information

     The Company operates principally in only one business segment.

Information About Foreign and Domestic Operations and Export Sales

     In 2001, 2000 and 1999, foreign sales to manufacturers worldwide were $28,006,000, $26,267,000 and $28,313,000, 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 United States domestic operations during 2001, 2000 and 1999. The Company had no sales to a foreign country greater than 5% of total sales in 2001, 2000 and 1999.

     The Company is not subject to any foreign currency risks since all sales are made in United States dollars.

ITEM 2. PROPERTIES

     The Company occupies approximately 21 facilities with a total office and manufacturing area of over 1,403,000 square feet, including both owned and leased properties. At December 31, 2001, facilities which were in excess of 60,000 square feet each were occupied as follows:

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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. Most of the Company’s properties are located in Southern California, an area subject to frequent and sometimes severe earthquake activity.

ITEM 3. LEGAL PROCEEDINGS

     None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

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PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The common stock of the Company (DCO) is listed on the New York Stock Exchange. On December 31, 2001, the Company had approximately 524 holders of record of common stock. No dividends were paid during 2001 or 2000. The following table sets forth the high and low closing sales prices per share for the Company’s common stock as reported on the New York Stock Exchange for the fiscal periods indicated.

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ITEM 6. SELECTED FINANCIAL DATA

Share-related data have been adjusted for the 3-for-2 stock split in June 1998.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Ducommun designs, engineers and manufactures aerostructures components and electromechanical components and assemblies primarily for the aerospace industry. In addition, the Company manufactures commercial aircraft seats and is an after-market supplier of aircraft seating products to commercial airlines. The Company manufactures components and assemblies principally for domestic and foreign commercial and military aircraft and space programs. Domestic commercial aircraft programs include the Boeing 717, 737NG, 747, 757, 767 and 777. Foreign commercial aircraft programs include the Airbus Industrie A330, A340 and A340-600 aircraft, Bombardier business and regional jets, and the Embraer 145 and 170/190. Major military programs include the Boeing C-17 and F-18 and Lockheed Martin F-16, various Sikorsky, Bell, Boeing and Augusta helicopter programs, and various aircraft and shipboard upgrade programs. Space programs include the space shuttle external fuel tank, and various commercial and military space launch and satellite programs.

     The Company recognizes revenue when persuasive evidence of an arrangement exists, the price is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. The Company records provisions for estimated losses on contracts in the period in which such losses are identified.

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Acquisitions

     In August 2001, the Company, through a wholly owned subsidiary, acquired certain assets of the Fort Defiance, Arizona operation of Packard Hughes Interconnect Wiring Systems, a subsidiary of Delphi Automotive Systems Corp. (“Fort Defiance”) for $4,590,000 in cash. Fort Defiance supplies wiring harnesses and cable assemblies for use in commercial and military aerospace applications and other military applications. In June 2001, the Company acquired all of the units of Composite Structures, LLC (“Composite Structures”), for $47,966,000 in cash and $5,354,000 in nonnegotiable promissory notes. Composite Structures designs and manufactures metal, fiberglass and carbon composite aerostructures. Composite Structures produces helicopter main and tail rotor blades, and adhesive bonded assemblies, including spoilers and fuselage structural panels for aircraft, jet engine fan containment rings, and helicopters. In November 1999, the Company, through a wholly owned subsidiary, acquired the assets and assumed certain liabilities of Parsons Precision Products, Inc. (“Parsons”) for $22,073,000 in cash. Parsons is a leading manufacturer of complex titanium hot-formed subassemblies and components for commercial and military aerospace applications. In April 1999, the Company acquired the capital stock of Sheet Metal Specialties Company (“SMS”) for $10,096,000 in cash, net of cash acquired and payments of other liabilities of SMS, and a $1,500,000 note. SMS is a manufacturer of subassemblies for commercial and military aerospace applications. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the operating results for these acquisitions 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 the assets acquired and liabilities assumed. These acquisitions accounted for approximately $48,788,000 and $24,831,000 of the excess of cost over net assets acquired at December 31, 2001 and December 31, 2000, respectively. The acquisitions were funded from internally generated cash, notes and other accounts payable to sellers, and borrowings under the Company’s credit agreement (see Financial Condition for additional information). These acquisitions strengthened the Company’s position in the aerospace industry and added complementary lines of business.

     The cost of acquired businesses in excess of the fair market value of their underlying net assets is currently being 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.

Results of Operations

2001 Compared to 2000

     Net sales increased 36% to $224,905,000 in 2001. The increase resulted primarily from an increase in the Company’s sales from the Fort Defiance and Composite Structures acquisitions, as well as higher military sales for the C-17, F-15 and F-18 programs and higher commercial sales for the Boeing 777 and Regional Jet programs. Sales to the C-17 program increased approximately $10,094,000 in 2001. The acquisitions of Fort Defiance and Composite Structures increased sales by approximately $43,351,000 in 2001. Excluding the

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Fort Defiance and Composite Structures acquisitions, sales increased 10% in 2001 compared to 2000. The Company’s mix of business was approximately 54% commercial, 41% military and 5% space in 2001. Foreign sales decreased to 13% of sales in 2001 from 16% in 2000. The Company did not have sales to any foreign country greater than 5% of total sales in 2001 or 2000.

     The Company had substantial sales to Boeing, Raytheon and Lockheed Martin. During 2001 and 2000, sales to Boeing were $106,106,000 and $61,109,000, respectively; sales to Raytheon were $16,571,000 and $14,242,000, respectively; and sales to Lockheed Martin were $9,556,000 and $12,685,000, respectively. At December 31, 2001, trade receivables from Boeing, Raytheon and Lockheed Martin were $13,815,000, $2,414,000 and $740,000, respectively. The sales and receivables relating to Boeing, Raytheon and Lockheed Martin are diversified over a number of different commercial, space and military programs.

     The Company’s commercial business is represented on virtually all of today’s major commercial aircraft. During 2001, commercial sales for Boeing aircraft were significantly higher, principally because of the acquisitions of Fort Defiance and Composite Structures. Sales related to commercial business were approximately $120,922,000, or 54% of total sales in 2001.

     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. Sales related to military programs were approximately $92,563,000, or 41% of total sales in 2001. The C-17 program accounted for approximately $37,012,000 in sales in 2001.

     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 and satellite programs. During 2001, sales related to space programs were lower due to timing differences in production scheduling for the Space Shuttle program. Sales related to space programs were approximately $11,420,000, or 5% of total sales in 2001.

     At December 31, 2001, backlog believed to be firm was approximately $308,400,000, compared to $238,600,000 at December 31, 2000. The backlog increase from December 31, 2000 was due primarily to backlog related to the Fort Defiance and Composite Structures acquisitions. Approximately $135,000,000 of the total backlog is expected to be delivered during 2002.

     Gross profit, as a percentage of sales, decreased to 25.8% in 2001 from 28.9% in 2000. This decrease was primarily the result of changes in sales mix, pricing pressures from customers, higher production costs, including higher energy costs, operating inefficiencies at Ducommun AeroStructures, and lower gross profit margins, as a percentage of sales, from the Fort Defiance and Composite Structures acquisitions.

     Selling, general and administrative expenses, as a percentage of sales, were 12.9% in 2001, compared to 13.8% in 2000. Selling, general and administrative expenses in 2001

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included an approximately $808,000 charge for the settlement of a lawsuit brought by Com Dev Consulting Ltd. in 2001. Selling, general and administrative expenses in 2000 included an approximately $715,000 increase in the allowance for doubtful accounts resulting from the bankruptcy of two of the Company’s airline customers during the fourth quarter of 2000.

     In early January 2001, the Company embarked on steps to integrate the marketing, engineering and manufacturing capabilities of its AHF-Ducommun, Aerochem and Parsons subsidiaries to offer a full range of structural components and subassemblies to the Company’s customers. In October 2001, this integration effort was expanded to include Composite Structures.

     Goodwill amortization expense, as a percentage of sales, was 1.7% in 2001 and 2000. Interest expense increased 32% to $2,369,000 in 2001 primarily due to higher debt levels in 2001 compared to 2000, partially offset by lower interest rates in 2001.

     Income taxes are accounted for using 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. Income tax expense increased to $8,222,000 in 2001, compared to $7,797,000 in 2000. The increase in income tax expense was primarily due to the increase in income before taxes, partially offset by a lower effective income tax rate, 36.0% for 2001 compared to 38.0% for 2000. The decrease in the tax rate was primarily due to utilization of research and development tax credits. Cash expended to pay income taxes increased to $8,454,000 in 2001, compared to $5,084,000 in 2000.

     Net income for 2001 was $14,603,000, or $1.50 diluted earnings per share, compared to $12,720,000, or $1.30 diluted earnings per share, in 2000. Net income for 2001 increased 15% compared to 2000. Net income for 2001 included an after-tax charge of $517,000, or $0.05 per diluted share, for the Com Dev lawsuit settlement, partially offset by a tax benefit of $450,000, $0.04 per diluted share, for research and development credits used to lower the Company’s effective tax rate. Net income for 2001, excluding the charge for the Com Dev lawsuit settlement and the tax benefit noted above was $14,654,000, or $1.51 diluted earning per share.

2000 Compared to 1999

     Net sales increased 13% to $165,711,000 in 2000. The increase resulted primarily from an increase in the Company’s sales from the SMS and Parsons acquisitions, as well as sales from a new contract at AHF-Ducommun for C-17 fuselage panels. Sales to the C-17 program increased approximately $11,300,000 in 2000. The acquisitions of SMS and Parsons increased sales by approximately $13,000,000 in 2000. Excluding the SMS and Parsons acquisitions, sales increased 5% in 2000 compared to 1999. The Company’s mix of business was approximately 53% commercial, 38% military and 9% space in 2000. Foreign sales decreased to 16% of sales from 19% in 1999. The Company did not have sales to any foreign country greater than 5% of total sales in 2000 or 1999.

     The Company had substantial sales to Boeing, Lockheed Martin and Raytheon. During 2000 and 1999, sales to Boeing were $61,109,000 and $40,310,000, respectively; sales

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to Lockheed Martin were $12,685,000 and $15,470,000, respectively; and sales to Raytheon were $14,242,000 and $10,138,000, respectively. At December 31, 2000, trade receivables from Boeing, Lockheed Martin and Raytheon were $6,318,000, $1,390,000 and $1,826,000, respectively. The sales and receivables relating to Boeing, Lockheed Martin and Raytheon are diversified over a number of different commercial, space and military programs.

     The Company’s commercial business is represented on virtually all of today’s major commercial aircraft. During 2000, commercial sales for Boeing aircraft were slightly higher, principally because of the acquisitions of Parsons and SMS. Sales related to commercial business were approximately $88,515,000, or 53% of total sales in 2000.

     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. Sales related to military programs were approximately $62,569,000, or 38% of total sales in 2000. The C-17 program accounted for approximately $19,594,000 in sales in 2000.

     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 and satellite programs. During 2000, sales related to space programs were lower due to timing differences in production scheduling for the Space Shuttle program. Sales related to space programs were approximately $14,627,000, or 9% of total sales in 2000.

     At December 31, 2000, backlog believed to be firm was approximately $238,600,000, compared to $213,100,000 at December 31, 1999. The backlog increase from December 31, 1999 was due primarily to a contract with Boeing for production of fuselage skin panels for the C-17 aircraft. The contract was valued at $49,000,000 at the time of the award. There is also an option contract with Boeing for the production of C-17 fuselage skin panels for the period 2003-2007. The option contract, if fully exercised by Boeing, is valued at $62 million. Taken together, the $111 million contract is the largest contract award in the Company’s history. The Company also experienced backlog growth at December 31, 2000 of approximately $10,800,000 for the F-18 program.

     Gross profit, as a percentage of sales, decreased to 28.9% in 2000 from 31.7% in 1999. This decrease was primarily the result of changes in sales mix, pricing pressures from customers and production costs for new programs.

     Selling, general and administrative expenses, as a percentage of sales, were 13.8% in 2000, compared to 14.9% in 1999. Selling, general and administrative expenses in 2000 included an approximately $715,000 increase in the allowance for doubtful accounts resulting from the bankruptcy of two of the Company’s airline customers during the fourth quarter of 2000.

     Goodwill amortization expense, as a percentage of sales, was 1.7% in 2000, compared to 1.4% in 1999. This increase was primarily the result of a full year of goodwill amortization expense in 2000 related to the SMS and Parsons acquisitions made in 1999. Interest expense

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increased 193% to $1,788,000 in 2000 primarily due to higher debt levels and interest rates in 2000 compared to 1999.

     Income tax expense decreased to $7,797,000 in 2000, compared to $8,448,000 in 1999. The decrease in income tax expense was primarily due to the decrease in income before taxes and an effective income tax rate of 38.0% for 2000 compared to 38.6% for 1999. The decrease in the tax rate was primarily due to certain tax credits that became available to the Company. Cash expended to pay income taxes decreased to $5,084,000 in 2000, compared to $8,170,000 in 1999.

     Net income for 2000 was $12,720,000, or $1.30 diluted earnings per share, compared to $13,444,000, or $1.28 diluted earnings per share, in 1999. Diluted earnings per share rose $0.02 per diluted share on a year to year basis, despite a decline in net income, due to a reduction of approximately 757,000 in average diluted shares outstanding in 2000 compared to 1999.

Financial Condition

Liquidity and Capital Resources

     Cash flow from operating activities for 2001 was $33,315,000, compared to $20,687,000 in 2000. The increase in cash flow from operating activities resulted principally from increases in income before depreciation and amortization, accounts payable and accrued and other liabilities. During 2001, the Company spent $6,013,000 on capital expenditures.

     In August 2001, the Company, through a wholly owned subsidiary, acquired certain assets of Fort Defiance for $4,590,000 in cash. In June 2001, the Company acquired all of the units of Composite Structures for $47,966,000 in cash and $5,354,000 in nonnegotiable promissory notes. In November 1999, the Company, through a wholly-owned subsidiary, acquired the assets and assumed certain liabilities of Parsons for $22,073,000 in cash. In April 1999, the Company acquired the capital stock of SMS for $10,096,000 in cash, net of cash acquired and payments of other liabilities of SMS, and a $1,500,000 note. The acquisitions were funded from internally generated cash, notes and other accounts payable to sellers, and borrowings under the Company’s credit agreement. These acquisitions strengthened the Company’s position in the aerospace industry and added complementary lines of business.

     The Company’s bank credit agreement provides for a $100,000,000 unsecured revolving credit line declining to $60,000,000 at maturity on September 30, 2005. At December 31, 2001, the Company had $56,575,000 of unused lines of credit, after deducting $43,000,000 of loans outstanding and $425,000 for an outstanding standby letter of credit.

     The Company continues to depend on operating cash flow and the availability of its bank credit agreement 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 2002.

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     Aggregate maturities of long-term debt during the next five years are as follows: 2002, $3,160,000; 2003, $1,944,000; 2004, $3,794,000; 2005, $43,400,000, 2006, $0.

     The Company expects to spend less than $6,000,000 for capital expenditures in 2002. The Company believes that the ongoing subcontractor consolidation makes acquisitions an increasingly important component of the Company’s future growth. Accordingly, the Company plans to continue to seek attractive acquisition opportunities and to make substantial capital expenditures for manufacturing equipment and facilities to support long-term contracts for both commercial and military aircraft and space programs.

     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 (the “Site”). Aerochem expects to spend approximately $1 million for future investigation and corrective action at the Site, and the Company has established a provision for such costs. However, the Company’s ultimate liability in connection with the Site will depend upon a number of factors, including changes in existing laws and regulations, and the design and cost of the construction, operation and maintenance of the corrective action.

     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 or cash flows.

Future Accounting Requirements

     In June 2001, Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS No. 141”) and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) were issued. The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized in earnings when incurred. SFAS No. 141 was effective for the Company as of July 27, 2001. SFAS No. 142 is effective for the Company on January 1, 2002 for existing goodwill and intangible assets. Although the Company has not completed its assessment of these new accounting standards, it expects that the provisions of SFAS No. 142 relating to the accounting for goodwill will have a significant impact on its consolidated net income in 2002 when compared to consolidated net income for years prior to 2002. The accompanying Consolidated Financial Statements for the year ended December 31, 2001 include goodwill amortization of $3.8 million for the year ended December 31, 2001 and an unamortized goodwill balance of $59,165,000 at December 31, 2001. In addition, in connection with the impairment provisions of the new rules, the Company is currently evaluating the amount of goodwill at each of its reporting units to determine if any impairment exists. By mid-2002, the Company expects to complete the required impairment tests of goodwill. Because of the extensive effort needed to comply with

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these new rules, it is not practicable to reasonably estimate the impact, if any, of such tests on the Company’s financial statements.

     In June 2001, Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) was issued. SFAS No. 143 sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. Subsequently, the recorded liability will be accreted to its present value and the capitalized costs will be depreciated. The Company is required to adopt SFAS No. 143 on December 31, 2002. The Company is currently assessing, but has not yet determined, the impact of SFAS No. 143 on its financial position and results of operations.

     In August 2001, Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) was issued. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill, which is specifically addressed by SFAS No. 142. SFAS No. 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not recoverable from its undiscounted cash flows, with the recognized impairment being the difference between the carrying amount and fair value of the asset. With respect to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires that the asset be considered held and used until it is actually disposed of but requires that its depreciable life be revised in accordance with APB Opinion No. 20, “Accounting Changes.” SFAS No. 144 also requires that an impairment loss be recognized at the date a long-lived asset is exchanged for a similar productive asset. The Company will be required to adopt SFAS No. 144 on January 1, 2003. The Company is currently assessing, but has not yet determined, the impact of SFAS No. 144 on its financial position and results of operations.

Forward Looking Statement and Risk Factors

     Any forward-looking statements made in this Form 10-K involve risks and uncertainties. The Company’s future financial results could differ materially from those anticipated due to the Company’s dependence on conditions in the airline industry, the level of new commercial aircraft orders, production rates for Boeing commercial aircraft, the C—17 and Apache helicopter rotor blade programs, the level of defense spending, competitive pricing pressures, technology and product development risks and uncertainties, product performance, risks associated with acquisitions and dispositions of businesses by the Company, increasing consolidation of customers and suppliers in the aerospace industry, availability of raw materials and components from suppliers, cost and possible disruption of electricity availability in California, and other factors beyond the Company’s control.

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ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Not applicable.

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,” “Consolidated Statements of Changes in Shareholders’ Equity,” and “Notes to Consolidated Financial Statements,” together with the report thereon of PricewaterhouseCoopers, LLP dated February 12, 2002, appearing on pages 22 through 41 are incorporated herein by reference.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     Not applicable.

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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 2002 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, all positions and offices held with the Company and brief accounts of business experience during the past five years. Executive officers do not serve for any specified terms, but are typically elected annually by the Board of Directors of the Company or, in the case of subsidiary presidents, by the Board of Directors of the respective subsidiaries.

		Positions and Offices		Other Business
		Held With Company		Experience
Name (Age)		(Year Elected)		(Past Five Years)
Joseph C. Berenato (55)		President (1996), Chief Executive Officer (1997) and Chairman of the Board (1999)		—
Robert A. Borlet (61)		Vice President, Manufacturing Operations (1999)		President of Ducommun Technologies, Inc. (1988 - -1999)
James S. Heiser (45)		Vice President (1990), Chief Financial Officer (1996), General Counsel (1988), Secretary (1987), and Treasurer (1995)		—
Kenneth R. Pearson (66)		Vice President-Human Resources (1988)		—
Michael W. Williams (47)		Vice President, Corporate Development (1998)		Vice President of Operations at H.R. Textron, Inc. (1996 — 1998)

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		Positions and Offices		Other Business
		Held With Company		Experience
Name (Age)		(Year Elected)		(Past Five Years)
Samuel D. Williams (53)		Vice President (1991) and Controller (1988)		—
Paul L. Graham (57)		President of Ducommun Technologies, Inc. (1999)		President of 3dbm, Inc. (1995-1998); President of Com Dev Wireless Systems (1998-1999)
Robert B. Hahn (59)		President of MechTronics of Arizona Corp. (1997)		President of Aerochem, Inc. (1987-1997)
Richard A. Klisz (45)		President of Brice Manufacturing Company, Inc. (2000)		Vice President, Sales and Marketing of Aerochem, Inc. (1994-2000)
Bradley W. Spahr (55)		President of Ducommun AeroStructures (a group of companies consisting of Aerochem, Inc., AHF-Ducommun Incorporated, Parsons Precision Products, Inc. and Composite Structures, LLC) (2001)		President of Composite Structures, LLC (1997-2001), President of H.R. Textron, Inc.(1994-1996)

ITEM 11. EXECUTIVE COMPENSATION

     The information under the caption “Compensation of Executive Officers” in the 2002 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 2002 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 2002 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, are incorporated by reference in Item 8 of this report.
				Page
		Report of Independent Accountants		22
		Consolidated Statements of Income — Years ended December 31, 2001, 2000 and 1999		23
		Consolidated Balance Sheets — December 31, 2001 and 2000		24
		Consolidated Statements of Cash Flows — Years ended December 31, 2001, 2000 and 1999		25
		Consolidated Statements of Changes in Shareholders’ Equity — Years Ended December 31, 2001, 2000 and 1999		26
		Notes to Consolidated Financial Statements		27-41
		2.      Financial Statement Schedule
		The following schedule for the years ended December 31, 2001, 2000 and 1999 is filed herewith:
		Report of Independent Accountants on Financial Statement Schedule		42
		Schedule VIII — Valuation and Qualifying Accounts and Reserves		43
		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.
		3.      Exhibits
		See Item 14(c) for a list of exhibits		44-46

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Report of Independent Accountants

     To the Board of Directors and Shareholders of Ducommun Incorporated:

In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 21 present fairly, in all material respects, the financial position of Ducommun Incorporated and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion.

PricewaterhouseCoopers LLP
 
Los Angeles, California
February 14, 2002

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Consolidated Statement of Income

See accompanying notes to consolidated financial statements.

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Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

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Consolidated Statement of Cash Flows

Supplemental information for Non-Cash Investing and Financing Activities:

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity

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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 intercompany balances and transactions.

Cash Equivalents

     Cash equivalents consist of highly liquid instruments purchases with original maturities of three months or less. The cost of these investments approximate fair value.

Revenue Recognition

     Revenue, including sales under fixed price contracts, is recognized when persuasive evidence of an arrangement exists, pricing is fixed or determinable, collection is reasonably assured and delivery of products has occurred or services have been rendered. 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. The Company periodically evaluates long-lived assets for recoverability and recognizes impairment losses, if any, based upon the fair value of the assets.

Income Taxes

     Income taxes are accounted for using 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.

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Excess of Costs Over Net Assets Acquired

     The cost of acquired businesses in excess of the fair market value of their underlying net assets has been 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 Liabilities

     Environmental 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

     Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in each year. Diluted earnings per share is computed by dividing income available to common shareholders plus income associated with dilutive securities by the weighted average number of common shares outstanding plus any potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock in each year. In 2001, 2000 and 1999, income available to common shareholders was $14,603,000, $12,720,000 and $13,444,000, respectively. In 2001, 2000 and 1999, the weighted average number of common shares outstanding was 9,662,000, 9,650,000 and 10,209,000, respectively, and the dilutive shares associated with stock options were 64,000, 111,000 and 309,000, respectively.

Future Accounting Requirements

     In June 2001, SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets” were issued. The statements eliminate the pooling-of-interests method of accounting for business combinations and require that goodwill and certain intangible assets not be amortized. Instead, these assets will be reviewed for impairment annually with any related losses recognized in earnings when incurred. SFAS No. 141 was effective for the Company as of July 27, 2001. SFAS No. 142 is effective for the Company on January 1, 2002 for existing goodwill and intangible assets. Although the Company has not completed its assessment of these new accounting standards, it expects that the provisions of SFAS No. 142 relating to the accounting for goodwill will have a significant impact on its consolidated net income in 2002 when compared to consolidated net income for years prior to 2002. The accompanying Consolidated Financial Statements for the year ended December 31, 2001 include goodwill amortization of $3.8 million for the year ended December 31, 2001 and an unamortized goodwill balance of $59,165,000 at December 31, 2001. In addition, in connection with the impairment provisions of the new rules, the Company is currently evaluating the amount of goodwill at each of its reporting units to determine if any impairment exists. By mid-2002, the Company expects to complete the required impairment tests of goodwill. Because of the extensive effort needed to comply with these new rules, it is not practicable to reasonably estimate the impact, if any, of such tests on the Company’s financial statements.

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     In June 2001, SFAS No. 143, “Accounting for Asset Retirement Obligations” was issued. SFAS No. 143 sets forth the financial accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset. Subsequently, the recorded liability will be accreted to its present value and the capitalized costs will be depreciated. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company is currently assessing, but has not yet determined, the impact of SFAS No. 143 on its financial position and results of operations.

     In August 2001, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” was issued. SFAS No. 144 modifies and expands the financial accounting and reporting for the impairment or disposal of long-lived assets other than goodwill, which is specifically addressed by SFAS No. 142. SFAS No. 144 maintains the requirement that an impairment loss be recognized for a long-lived asset to be held and used if its carrying value is not recoverable from its undiscounted cash flows, with the recognized impairment being the difference between the carrying amount and fair value of the asset. With respect to long-lived assets to be disposed of other than by sale, SFAS No. 144 requires that the asset be considered held and used until it is actually disposed of but requires that its depreciable life be revised in accordance with APB Opinion No. 20, “Accounting Changes.” SFAS No. 144 also requires that an impairment loss be recognized at the date a long-lived asset is exchanged for a similar productive asset. The Company will be required to adopt SFAS No. 144 on January 1, 2003. The Company is currently assessing, but has not yet determined, the impact of SFAS No. 144 on its financial position and results of operations.

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 August 2001, the Company, through a wholly owned subsidiary, acquired certain assets of the Fort Defiance, Arizona operation of Packard Hughes Interconnect Wiring Systems, a subsidiary of Delphi Automotive Systems Corp. (“Fort Defiance”) for $4,590,000 in cash. Fort Defiance supplies wiring harnesses and cable assemblies for use in commercial and military aerospace applications and other military applications. In June 2001, the Company acquired all of the units of Composite Structures, LLC (“Composite Structures”), for $47,966,000 in cash and $5,354,000 in nonnegotiable promissory notes. Composite Structures designs and manufactures metal, fiberglass and carbon composite aerostructures. Composite Structures produces helicopter main and tail rotor blades, and adhesive bonded assemblies, including spoilers and fuselage structural panels for aircraft, jet engine fan containment rings, and helicopters. In November 1999, the Company, through a wholly owned subsidiary, acquired the assets and assumed certain liabilities of Parsons Precision Products, Inc. (“Parsons”) for $22,073,000 in cash. Parsons is a leading manufacturer of complex titanium hot-formed subassemblies and components for commercial and military

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aerospace applications. In April 1999, the Company acquired the capital stock of Sheet Metal Specialties Company (“SMS”) for $10,096,000 in cash, net of cash acquired and payments of other liabilities of SMS, and a $1,500,000 note. SMS is a manufacturer of subassemblies for commercial and military aerospace applications.

     The acquisitions of Fort Defiance, Composite Structures, Parsons and SMS were accounted for under the purchase method of accounting and, accordingly, the operating results for Fort Defiance, Composite Structures, Parsons and SMS 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 $48,788,000 and $24,831,000 of the excess of cost over net assets acquired at December 31, 2001 and December 31, 2000, respectively, which is being amortized on a straight-line basis over 15 to 20 years.

     The following table presents unaudited pro forma consolidated operating results for the Company for the years ended December 31, 2001 and December 31, 2000, as if the Fort Defiance and Composite Structures acquisitions had occurred as of the beginning of the periods presented.

     The unaudited pro forma consolidated operating results of the Company are not necessarily indicative of the operating results that would have been achieved had the Fort Defiance and Composite Structures acquisitions been consummated at the beginning of the periods presented, and should not be construed as representative of future operating results.

Note 3. Inventories

     Inventories consist of the following:

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     Work in process inventories include amounts under long-term fixed price contracts aggregating $21,773,000 and $13,979,000 at December 31, 2001 and 2000, respectively.

Note 4. Property and Equipment

     Property and equipment consist of the following: