DUCOMMUN INC /DE/ - 10-Q Quarterly Report

Date: May 9, 2003

/s/ JAMES S. HEISER

Vice President and Chief Financial Officer

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of April 5, 2003, there were outstanding 9,873,551 shares of common stock.

The consolidated balance sheets, consolidated statements of income and consolidated statements of cash flows are unaudited as of and for the three months ended April 5, 2003 and March 30, 2002. The consolidated financial statements include the accounts of the Ducommun Incorporated and its subsidiaries (“Ducommun” or the “Company”), after eliminating inter-company balances and transactions. The financial information included in the quarterly report should be read in conjunction with the Company’s consolidated financial statements and the related notes thereto included in its annual report on Form 10-K for the year ended December 31, 2002.

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

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.

The Company maintains an allowance for doubtful accounts for estimated losses from the inability of customers to make required payments. The allowance for doubtful accounts is evaluated periodically based on the aging of accounts receivable, the financial condition of customers and their payment history, historical write-off experience and other assumptions.

Inventories are stated at the lower of cost or market, cost being determined on a first-in, first-out basis. The Company assesses the inventory carrying value and reduces it if necessary to its net realizable value based on customer orders on hand, and internal demand forecasts using management’s best estimates given information currently available. The Company’s customer demand is highly unpredictable, and can fluctuate significantly caused by factors beyond the control of the Company. The Company maintains an allowance for inventories for potentially excess and obsolete inventories and gross inventory levels that are carried at costs that are higher than their net realizable values. If market conditions are less favorable than those projected by management, such as an unanticipated decline in demand not meeting expectations, inventory write-downs may be required.

Property and equipment, including assets recorded under capital leases, are recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives and, in the case of leasehold improvements, over the shorter of the lives of the improvements or the lease term. The Company evaluates long-lived assets for recoverability, when significant changes in conditions occur, and recognizes impairment losses, if any, based upon the fair value of the assets.

The Company quantifies and records an estimate for warranty related costs based on the Company’s actual historical and projected return and failure rates and the current repair costs. Should the Company experience actual return and failure rates or repair costs that are higher than the estimated return and failure rates or repair costs used to calculate the provision, the Company’s operating results for the period or periods in which such returns or additional costs materialize will be adversely impacted. At

April 5, 2003 and December 31, 2002 the Company’s estimates for warranty liabilities were $1,679,000 and $1,697,000, respectively. During the period December 31, 2002 through April 5, 2003, there were no significant changes in the Company’s warranty liabilities.

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

In the normal course of business, the Company and its subsidiaries are defendants in certain litigation, claims and inquiries, including matters relating to environmental laws. In addition, the Company makes various commitments and incurs contingent liabilities. Management’s estimates regarding contingent liabilities could differ from actual results.

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.

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”), requires that certain items such as foreign currency translation adjustments, unrealized gains and losses on certain investments in debt and equity securities and minimum pension liability adjustments be presented as separate components of shareholders’ equity. SFAS No. 130 defines these as items of other comprehensive income and as such must be reported in a financial statement that is displayed with the same prominence as other financial statements. Accumulated other comprehensive income, as reflected in the Consolidated Statements of Shareholders’ Equity, was comprised of a minimum pension liability adjustment of $2,679,000, net of tax, at April 5, 2003 and December 31, 2002.

Certain amounts and disclosures included in the consolidated financial statements required management to make estimates and judgments that affect the amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In October 2002, the Company sold the capital stock of its airline seating manufacturing subsidiary, Brice Manufacturing Company, Inc. (“Brice”). The Company’s financial statements for the three months ended March 30, 2002 have been reclassified to reflect Brice as a discontinued operation. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of Brice have been condensed in the accompanying consolidated statements of income, consolidated balance sheets and consolidated statements of cash flows for 2002.

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding in each period. 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 period. For the three months ended April 5, 2003 and March 30, 2002, income available to common shareholders was $3,108,000 and $1,230,000, respectively. The weighted average number of common shares outstanding for the three months ended April 5, 2003 and March 30, 2002 were 9,873,000 and 9,703,000, and the diluted shares associated with stock options were 21,000 and 47,000, respectively.

Effective January 1, 2002, the Company adopted 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”). Pursuant to the impairment recognition provisions of SFAS No. 142, a pre-tax goodwill impairment loss of $3,633,000 ($2,325,000 after-tax) was recognized related to the Brice Manufacturing Company, Inc. (“Brice”) reporting unit during the first quarter of 2002.

Pursuant to the nonamortization provisions of SFAS No. 142, there was no goodwill amortization expense in 2003 and 2002, respectively.

In December 2002, the Company and its lenders amended the Company’s credit agreement. The amended credit agreement provides for a $75,000,000 unsecured revolving credit line gradually declining to $60,000,000 at maturity on September 30, 2005. Interest is payable monthly on the outstanding borrowings based on the bank’s prime rate plus a spread based on the leverage ratio of the Company calculated at the end of each fiscal quarter (4.50% at April 5, 2003). A Eurodollar pricing option is also available to the Company for terms of up to six months at the Eurodollar rate plus a spread based on the leverage ratio of the Company calculated at the end of each fiscal quarter (2.80% at April 5, 2003). At April 5, 2003, the Company had $58,625,000 of unused lines of credit, after deducting $15,800,000 of loans outstanding and $575,000 for an outstanding standby letter of credit. The credit agreement includes minimum interest coverage, maximum leverage, minimum EBITDA (earnings before interest, taxes, depreciation and amortization) and minimum net worth covenants, an unused commitment fee based on the leverage ratio (0.40% per annum at April 5, 2003), and limitations on future dispositions of property, repurchases of common stock, outside indebtedness, capital expenditures and acquisitions.

The carrying amount of long-term debt 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 maturities.

Aggregate maturities of long term debt during the next five years are as follows: 2003, $1,473,000; $2004, $3,649,000; 2005, $16,200,000; 2006, $0; 2007, $0.

At April 5, 2003 and March 30, 2002, no preferred shares were issued or outstanding.

The Company has three stock option or incentive plans. Stock awards may be made to directors, officers and key employees under the stock plans on terms determined by the Compensation Committee of the Board of Directors or, with respect to directors, on terms determined by the Board of Directors. Stock options have been and may be granted to directors, officers and key employees under the stock plans at prices not less than 100% of the market value on the date of grant, and expire not more than ten years from the date of grant. The option price and number of shares are subject to adjustment under certain dilutive circumstances. At April 5, 2003, 375,189 common shares were reserved for the exercise of outstanding options.

In December 2002, Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123” (“SFAS No. 148”), was issued. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in not only annual, but also interim financial statements about the effect the fair value method would have had on reported results.

In accordance with the provisions of SFAS No. 123, the Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans based on the fair value method. If the Company had elected to recognize compensation expense based upon the fair value at the grant date for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company’s net income and earnings per share would be reduced to the pro forma amounts indicated below:

These pro forma amounts may not be representative of future disclosures since the estimated fair value of stock options is amortized to expense over the vesting period, and additional options may be granted in future years.

The Company’s subsidiary, Aerochem, Inc. (“Aerochem”), is a major supplier of chemical milling services for the aerospace industry. Aerochem was directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its El Mirage, California facility (the “Site”). Aerochem continues to work with the environmental agencies, and 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 correction action.

The Company’s subsidiary, Composite Structures, LLC (“CSLLC”), is a major supplier of composite and metal bond aerostructures for the aerospace industry. CSLLC and several other companies have been ordered by a California environmental agency to investigate and clean up soil and groundwater contamination at CSLLC’s Monrovia, California facility. CSLLC has filed a petition for review of the order.

In the normal course of business, the Company 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, results of operations or cash flows.

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 Boeing, Raytheon and Lockheed Martin. During the first three months of 2003 and 2002, sales to Boeing were $29,143,000 and $27,133,000, respectively; sales to Raytheon were $7,111,000 and $6,937,000, respectively; and sales to Lockheed Martin were $3,117,000 and $2,684,000, respectively. At April 5, 2003, trade receivables from Boeing, Raytheon and Lockheed Martin were $12,990,000, $2,973,000 and $530,000, 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 supplies products and services to the aerospace industry. The Company’s subsidiaries are organized into two strategic businesses, each of which is a reportable operating segment. Ducommun AeroStructures (“DAS”) manufactures aerospace structural components and subassemblies. Ducommun Technologies (“DT”) manufactures aerospace electromechanical components and subsystems. The accounting policies of the segments are the same as those of the Company, as described in Note 1, Summary of Significant Accounting Policies.

Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information” (“SFAS No. 131”), establishes standards for reporting information about segments in financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Segment assets include assets directly identifiable with each segment. Corporate assets include assets not specifically identified with a business segment, including cash.

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

Ducommun designs, engineers and manufactures aerostructure and electromechanical components and subassemblies principally for the aerospace industry. 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, F-15 and F-18 and Lockheed Martin F-16, various Sikorsky, Bell, Boeing and Augusta helicopter programs, and various aircraft and shipboard electronics upgrade programs. Space programs include the space shuttle external fuel tank, and various commercial and military space launch and satellite programs.

less favorable than those projected by management, such as an unanticipated decline in demand not meeting expectations, inventory write-downs may be required.

Property and 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, when significant changes in conditions occur, and recognizes impairment losses, if any, based upon the fair value of the assets.

The Company’s business acquisitions have typically resulted in goodwill, which affects the amount of possible impairment expense that the Company will incur. The determination of the value of goodwill requires management to make estimates and assumptions that affect the Company’s consolidated financial statements. In assessing the recoverability of the Company’s goodwill, management must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets. On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) and was required to analyze its goodwill for impairment during the first quarter 2002. Upon adoption of SFAS No. 142, in the first quarter of 2002, the Company recorded a non-cash, pre-tax charge of $3,633,000 ($2,325,000 net of tax) for goodwill impairment of its Brice operating unit. The Company performs goodwill impairment tests on an annual basis and between annual tests in certain circumstances whenever events may dictate an impairment exists. In response to changes in industry and market conditions, the Company may be required to strategically realign its resources and consider restructuring, disposing or otherwise exiting businesses which could result in an impairment of goodwill.

The Company quantifies and records an estimate for warranty related costs based on the Company’s actual historical and projected return and failure rates and the current repair costs. Should the Company experience actual return and failure rates, or repair costs that are higher than the estimates used to calculate the provision, the Company’s operating results for the period or periods in which such returns or additional costs materialize will be adversely impacted. At April 5, 2003 and December 31, 2002 the Company’s estimates for warranty liabilities were $1,679,000 and $1,697,000, respectively.

During the period December 31, 2002 through April 5, 2003, there were no significant changes in the Company’s warranty liabilities.

In October 2002, Ducommun sold the capital stock of its airline seating manufacturing subsidiary, Brice. Brice has been classified as a discontinued operation in the accompanying financial statements for the three months ended March 31, 2002.

Net sales in the first quarter of 2003 were $55,041,000 compared to $54,632,000 for the first quarter of 2002. The Company’s mix of business in the first quarter of 2003 was approximately 65% military, 31% commercial, and 4% space, compared to 52% military, 43% commercial, and 5% space in the first quarter of 2002.

The Company had substantial sales to Boeing, Raytheon and Lockheed Martin. During the first quarters of 2003 and 2002, sales to Boeing were $29,143,000 and $27,133,000, respectively; sales to Raytheon were $7,111,000 and $6,937,000, respectively; and sales to Lockheed Martin were $3,117,000 and $2,684,000, respectively. At April 5, 2003, trade receivables from Boeing, Raytheon and Lockheed Martin were $12,990,000, $2,973,000 and $530,000, 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 the first quarter of 2003, commercial sales for Boeing aircraft and various regional and business aircraft were significantly lower, principally because of the dramatic decline in commercial jet aircraft deliveries. Sales related to commercial business were approximately $17,153,000, or 31% of total sales in the first quarter of 2003, compared to sales of $23,374,000, or 43% of total sales in the first

quarter of 2002. The Boeing 737/737NG program accounted for approximately $6,315,000 and $8,679,000 in sales in the first quarters of 2003 and 2002, respectively.

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 sea-based vehicles. The Company’s defense business is widely diversified among military manufacturers and programs. Sales related to military programs were approximately $35,514,000, or 65% of total sales in the first quarter of 2003, compared to sales of $28,465,000, or 52% of sales in the first quarter of 2002. Military sales increased, particularly for the Apache helicopter program and various military electronics upgrade programs. In the first quarters of 2003 and 2002, the C-17 program accounted for sales of approximately $9,802,000 and $9,592,000, respectively, and the Apache helicopter program accounted for sales of approximately $7,609,000 and $4,275,000, respectively.

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. Sales related to space programs were approximately $2,374,000, or 4% of total sales in the first quarter 2003, compared to sales of $2,793,00, or 5% of total sales in the first quarter of 2002.

At April 5, 2003, backlog believed to be firm was approximately $293,823,000, compared to $289,857,000 at December 31, 2002. The backlog increase from December 31, 2002 was primarily due to higher bookings for the Apache helicopter program, partially offset by lower bookings for commercial programs. Approximately $117,000,000 of the total backlog is expected to be delivered during 2003.

Gross profit, as a percentage of sales, decreased to 21.8% in the first quarter of 2003 from 23.6% in the first quarter of 2002. This decrease was primarily the result of pricing pressures on both new contracts and renewals of existing contracts, increases in manufacturing costs and lower commercial build rates.

Selling, general and administrative expenses, as a percentage of sales, were 12.7% in the first quarter of 2003, compared to 11.8% in the first quarter of 2002. Selling, general and administrative expenses in 2003 included severance costs of $279,000.

Interest expense decreased to $321,000 in the first quarter of 2003 compared to $515,000 for the first quarter of 2002. The decrease in interest expense was primarily due to lower debt levels and lower interest rates in 2003 compared to 2002.

Income tax expense decreased to $1,601,000 in the first quarter of 2003, compared to $2,130,000 in the first quarter of 2002. The decrease in income tax expense was primarily due to the decrease in income from continuing operations before taxes and a lower effective income tax rate of 34.0% for the first

quarter of 2003 compared to 36.0% for the first quarter of 2002. Cash expended to pay income taxes decreased to $16,000 in the first quarter of 2003, compared to $1,648,000 in the first quarter of 2002.

Net income for the first quarter of 2003 was $3,108,000, or $0.31 diluted earnings per share, compared to $1,230,000, or $0.13 diluted earnings per share in the first quarter of 2002. Net income for the first quarter of 2002 included a non-cash after-tax charge of $2,325,000, or $0.24 per diluted share for goodwill impairment at Brice in accordance with SFAS No. 142 and a loss from discontinued operation of $230,000, or $0.02 per diluted share, for Brice. Net income for the first quarter of 2002, excluding the charge for goodwill impairment and loss from discontinued operation was $3,785,000, or $0.39 per diluted share.

Net cash provided by operating activities for the first quarters of 2003 and 2002 was $5,986,000 and $1,191,000, respectively. Net cash provided by operating activities for the first quarter of 2003 included $3,108,000 of net income, $1,886,000 of depreciation, an increase of $1,280,000 in trade payables due to timing of payments to suppliers to optimize discounts and payment periods, an increase of $1,026,000 in customer deposits, mainly related to customer prepayments and progress billings, an increase in $664,000 in accrued state franchise and sales taxes, an increase of $859,000 in accrued compensation, which includes bonus and severance costs and an increase of $1,658,000 in all other accrued expenses, partially offset by a $3,262,000 increase in accounts receivable due to the timing of billing activities to customers and a $1,002,000 increase in inventory for increases in work in process for future shipments to customers.

Net cash used in investing activities for the first quarter of 2003 consisted primarily of $1,434,000 of capital expenditures.

Net cash used in financing activities in the first quarter of 2003 of $4,404,000 included $4,527,000 of net repayments by the Company of principal on outstanding borrowings, partially offset by $123,000 of net cash received from the exercise of common stock options.

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 2003. In December 2002, the Company and its lenders amended the Company’s credit agreement. The amended credit agreement provides for a $75,000,000 unsecured revolving credit line gradually declining to $60,000,000 at maturity on September 30, 2005. Interest is payable monthly on the outstanding borrowings based on the bank’s prime rate plus a spread based on the leverage ratio of the Company calculated at the end of each fiscal

quarter (4.50% at April 5, 2003). A Eurodollar pricing option is also available to the Company for terms of up to six months at the Eurodollar rate plus a spread based on the leverage ratio of the Company calculated at the end of each fiscal quarter (2.80% at April 5, 2003). At April 5, 2003, the Company had $58,625,000 of unused lines of credit, after deducting $15,800,000 of loans outstanding and $575,000 for an outstanding standby letter of credit. The credit agreement includes minimum interest coverage, maximum leverage, minimum EBITDA (earnings before interest, taxes, depreciation and amortization) and minimum net worth covenants, an unused commitment fee based on the leverage ratio (0.40% per annum at April 5, 2003), and limitations on future dispositions of property, repurchases of common stock, outside indebtedness, capital expenditures and acquisitions.

Aggregate maturities of long term debt during the next five years are as follows: 2003, $1,473,000; $2004, $3,649,000; 2005, $16,200,000; 2006, $0; 2007, $0.

The Company leases certain facilities and equipment for periods ranging from 1 to 9 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 the first quarters of 2003 and 2002 was $799,000 and $831,000, respectively. Future minimum rental payments under operating leases having initial or remaining noncancelable terms in excess of one year at April 5, 2003 are as follows:

The Company expects to spend less than $8,000,000 for capital expenditures in 2003. 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, is a major supplier of chemical milling services for the aerospace industry. Aerochem was directed by California environmental agencies to investigate and take corrective action for groundwater contamination at its El Mirage, California facility (the “Site”). Aerochem continues to work with the environmental agencies, and 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.

In December 2002, Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS No. 123” (“SFAS No. 148”), was issued. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in not only annual, but also interim financial statements about the effect the fair value method would have had on reported results. The transition and annual disclosure requirements of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The Company has adopted interim disclosure requirements of SFAS No. 148.

The Company’s business, financial condition, results of operations and cash flows may be affected by known and unknown risks, uncertainties and other factors. Any of these risks, uncertainties

and other factors could cause the Company’s future financial results to differ materially from recent financial results or from currently anticipated future financial results. In addition to those noted elsewhere in this report, the Company is subject to the following risks and uncertainties:

The aerospace markets in which the Company sells its products are cyclical and have experienced periodic declines. The market for the Company’s products sold for new commercial aircraft production is currently experiencing a decline, the depth and duration of which is unknown. The Company’s sales are, therefore, unpredictable and tend to fluctuate based on a number of factors, including economic conditions and developments affecting the aerospace industry and the customers served. For example, the tragic events of September 11, 2001 and the continued downturn in commercial aircraft production have negatively impacted the Company’s operations. If the current economic downturn were to continue for an extended period or if conditions in the commercial aircraft market were to worsen, the negative impact on the Company’s business, financial condition and operating results could be further exacerbated.

The Company estimates that, in the first quarter of 2003, approximately 18% of its sales were for Boeing commercial aircraft and approximately 13% of its sales were for other commercial aircraft and miscellaneous nonaerospace commercial applications. The production rate for new commercial aircraft is expected to decline at least through 2004, and the timing of any rebound in new commercial aircraft production is unknown. These reductions in commercial aircraft production are expected to affect adversely the Company’s result of operations and cash flows.

The Company estimates that, in the first quarter of 2003, approximately 69% of its sales were derived from military and space markets. These military and space markets are largely dependent upon government spending, particularly by the United States government. Changes in the levels of spending for military and space could improve or reduce the Company’s prospects in its military and space markets. The tragedy involving the Space Shuttle Columbia may further affect government spending for space programs, which could adversely affect the Company.

The Company Is Dependent on Boeing Commercial Aircraft, the C-17 Aircraft and Apache Helicopter Programs

The Company estimates that, in the first quarter of 2003, approximately 18% of its sales were for Boeing commercial aircraft, 18% of its sales were for the C-17 aircraft, and 14% of its sales were for the

Apache helicopter. The Company’s sales for Boeing commercial aircraft and the C-17 aircraft are principally for new aircraft production; and the Company’s sales for the Apache helicopter program are principally for replacement rotor blades. Any significant change in production rates for these programs would have a material effect on the Company’s results of operations and cash flows. In addition, there is no guarantee that the Company’s current significant customers will continue to buy products from the Company at current levels. The loss of a key customer could have a material adverse effect on the Company. For example, the Company manufactures the spoilers for the Boeing 737NG aircraft (the “737 Spoilers”), which contributed approximately $2,860,000 to sales in the first quarter of 2003. The Company has been informed that a competitor has been awarded a contract to produce the 737 Spoilers, although the timing and amount of any transition of work to the competitor is presently unknown.

Terrorist Attacks, Such As Those That Occurred on September 11, 2001, Have Adversely Impacted the Company’s Operations and May Do So Again in the Future

The terrorist attacks that occurred on September 11, 2001 have had a negative impact on commercial air travel and, consequently, on the manufacture of commercial aircraft and the demand for the Company’s commercial aircraft products. There can be no assurance that the current world political and military tensions, or the United States military actions, will not lead to further acts of terrorism and civil disturbances in the United States or elsewhere. These attacks may strike directly at the physical facilities of the Company, its suppliers or its customers. Such attacks could have an adverse impact on the Company’s domestic and international sales, supply chain, production capabilities, insurance premiums or ability to purchase insurance, thereby adversely affecting the Company’s financial position, results of operations and cash flows. In addition, the consequences of terrorist attacks and armed conflicts are unpredictable, and their long-term effects upon the Company are uncertain.

The aerospace industry is highly competitive and competitive pressures may adversely affect the Company. The Company competes worldwide with a number of United States and international companies that are larger than it in terms of resources and market share. The Company is experiencing competitive pricing pressures, particularly in its Ducommun AeroStructures business. These competitive pricing pressures have had, and are expected to continue to have, a material adverse effect on the Company’s business, financial condition and operating results. For example, Ducommun AeroStructures has agreed with several customers to reduce its prices by between 2% and 12% during 2003 from the prices in effect at December 31, 2002. Although the exact amounts of these price reductions vary by contract, the price reductions cover contracts under which the Company had aggregate sales of approximately $33,560,000 in 2002.

The Company sells its products under firm, fixed-price contracts providing for a fixed price for the products regardless of the production costs incurred by the Company. As a result, manufacturing

inefficiencies, start-up costs and other factors may result in cost overruns and losses on contracts. The cost of producing products also may be adversely affected by increases in the cost of labor, materials, outside processing, overhead and other factors. In many cases, the Company makes multi-year firm, fixed-price commitments to its customers, without assurance that the Company’s anticipated production costs will be achieved.

The Company’s Products and Processes Are Subject to Risks from Changes in Technology

The Company’s products and processes are subject to risks of obsolescence as a result of changes in technology. To address this risk, the Company invests in product design and development, and for capital expenditures. There can be no guarantee that the Company’s product design and development efforts will be successful, or that the amounts of money required to be invested for product design and development and capital expenditures will not increase materially in the future.

The Company Faces Risks Associated with Acquisitions and Dispositions of Businesses

A key element of the Company’s long-term strategy has been growth through acquisitions. The Company is continuously reviewing and actively pursuing acquisitions, including acquisitions outside of its current aerospace markets. Acquisitions may require the Company to incur additional indebtedness, resulting in increased leverage, or to issue additional equity, resulting in dilution to existing stockholders. This additional financing for acquisitions and capital expenditures may not be available on terms acceptable or favorable to the Company. Acquired businesses may not achieve anticipated results, and could result in a material adverse effect on the Company’s financial condition, results of operations and cash flows. The Company also periodically reviews its existing businesses to determine if they are consistent with the Company’s strategy. The Company has sold, and may sell in the future, business units and product lines, which may result in either a gain or loss on disposition.

The Company’s acquisition strategy exposes it to risks, including the risk that the Company may not be able to successfully integrate acquired businesses. The Company’s ability to grow by acquisition is dependent upon, among other factors, the availability of suitable acquisition candidates. Growth by acquisition involves risks that could have a material adverse affect on the Company’s business, financial condition and operating results, including difficulties in integrating the operations and personnel of acquired companies, the potential amortization of acquired intangible assets, the potential impairment of goodwill and the potential loss of key employees of acquired companies. The Company may not be able to consummate acquisitions on satisfactory terms or, if any acquisitions are consummated, to satisfactorily integrate these acquired businesses.

In assessing the recoverability of the Company’s goodwill at December 31, 2002, management was required to make certain critical estimates and assumptions. These estimates and assumptions, with

respect to the Company’s Ducommun AeroStructures (“DAS”) reporting unit, included that, during the next several years DAS will make improvements in manufacturing efficiency, achieve reductions in operating costs, and obtain increases in sales and backlog. If any of these or other estimates and assumptions are not realized in the future, the Company may be required to record an impairment charge for the goodwill of DAS. The goodwill of DAS was $36,785,000 at April 5, 2003.

Significant Consolidation in the Aerospace Industry Could Adversely Affect the Company’s Business and Financial Results

The aerospace industry is experiencing significant consolidation, including among the Company’s customers, competitors and suppliers. Consolidation among the Company’s customers may result in delays in the award of new contracts and losses of existing business. Consolidation among the Company’s competitors may result in larger competitors with greater resources and market share, which could adversely affect the Company’s ability to compete successfully. Consolidation among the Company’s suppliers may result in fewer sources of supply and increased cost to the Company.

The Company’s Manufacturing Operations May Be Adversely Affected by the Availability of Raw Materials and Components from Suppliers

In some cases, the Company’s customers supply raw materials and components to the Company. In other cases, the Company’s customers designate specific suppliers from which the Company is directed to purchase raw materials and components. As a result, the Company may have limited control over the selection of suppliers and the timing of receipt and cost of raw materials and components from suppliers. The failure of customers and suppliers to deliver on a timely basis raw materials and components to the Company may adversely affect the Company’s results of operations and cash flows.

Environmental Liabilities Could Adversely Affect the Company’s Financial Results

The Company is subject to various environmental laws and regulations. The Company is investigating and taking corrective action for groundwater contamination at its Aerochem subsidiary’s El Mirage, California site. The Company has been ordered to investigate and clean up soil and groundwater contamination at its CSLLC subsidiary’s Monrovia, California site. The Company is also a potentially responsible party at certain sites at which it previously disposed of hazardous wastes. There can be no assurance that future developments, lawsuits and administrative actions, and liabilities relating to environmental matters will not have a material adverse effect on the Company’s results of operations or cash flows.

Product Liability Claims in Excess of Insurance Could Adversely Affect the Company’s Financial Results and Financial Condition

The Company faces potential liability for personal injury or death as a result of the failure of products designed or manufactured by the Company. Although the Company maintains product liability

insurance, any material product liability not covered by insurance could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

Damage or Destruction of the Company’s Facilities Caused by Earthquake or Other Causes Could Adversely Affect the Company’s Financial Results and Financial Condition

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. Even if covered by insurance, any significant damage or destruction of the Company’s facilities could result in the inability to meet customer delivery schedules and may result in the loss of customers and significant additional costs to the Company. As a result, any significant damage or destruction of the Company’s properties could have a material adverse effect on the Company’s business, financial condition or results of operations.

As of a date within 90 days prior to the date of this report (the “Evaluation Date”) the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the Evaluation Date.

No significant changes were made in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date.

Pursuant to the requirements of the Securities 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 (Registrant)

By:		/s/ JAMES S. HEISER
		James S. Heiser Vice President, Chief Financial Officer And General Counsel (Duly Authorized Officer of the Registrant)


By:		/s/ SAMUEL D. WILLIAMS
		Samuel D. Williams Vice President and Controller (Chief Accounting Officer of the Registrant)

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods represented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Delaware		95-0693330
(State or other jurisdiction of		I.R.S. Employer
incorporation or organization)		Identification No.

			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Consolidated Balance Sheets at April 5, 2003 and December 31, 2002	3

		Consolidated Statements of Income for Three Months Ended April 5, 2003 and March 30, 2002	4

		Consolidated Statements of Cash Flows for Three Months Ended April 5, 2003 and March 30, 2002	5

		Notes to Consolidated Financial Statements	6 - 16

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17 - 28

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	29

	Item 4.	Controls and Procedures	29

Part II.	Other Information

	Item 6.	Exhibits and Reports on Form 8-K	30

Signatures			31

Certifications			32 - 33

	April 5, 2003			December 31, 2002
ASSETS
Current Assets:
Cash and cash equivalents	$	322		$	174
Accounts receivable (less allowance for doubtful accounts of $455 and $534)		27,230			23,968
Inventories		42,338			41,336
Deferred income taxes		7,404			6,711
Prepaid income taxes		63			140
Other current assets		4,355			4,400

Total Current Assets		81,712			76,729
Property, Plant and Equipment, Net		61,487			61,936
Deferred Income Taxes		889			1,049
Goodwill (Net of Accumulated Amortization of $10,996 and $10,996)		55,532			55,532
Other Assets		2,191			2,364

	$	201,811		$	197,610

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt	$	3,338		$	1,501
Accounts payable		17,483			16,203
Accrued liabilities		28,131			25,039

Total Current Liabilities		48,952			42,743
Long-Term Debt, Less Current Portion		17,985			24,349
Deferred Income Taxes		3,122			3,122
Other Long-Term Liabilities		8,069			6,954

Total Liabilities		78,128			77,168

Commitments and Contingencies
Shareholders’ Equity:
Common stock—$.01 par value; authorized 35,000,000 shares; issued 9,873,551 shares in 2003 and 9,863,985 shares in 2002		99			99
Additional paid-in capital		38,058			37,925
Retained earnings		88,205			85,097
Accumulated other comprehensive loss		(2,679	)		(2,679	)

Total Shareholders’ Equity		123,683			120,442

	$	201,811		$	197,610

	For Three Months Ended
	April 5, 2003			March 30, 2002
Net Sales	$	55,041		$	54,632
Operating Costs and Expenses:
Cost of goods sold		43,028			41,743
Selling, general and administrative expenses		6,983			6,459

Total Operating Costs and Expenses		50,011			48,202

Operating Income from Continuing Operations		5,030			6,430
Interest Expense		(321	)		(515	)

Income from Continuing Operations Before Taxes		4,709			5,915
Income Tax Expense		(1,601	)		(2,130	)

Income from Continuing Operations		3,108			3,785
Loss From Discontinued Operation, Net of Tax		—			(230	)
Cumulative Effect of Accounting Change, Net of Tax		—			(2,325	)

Net Income	$	3,108		$	1,230

Earnings Per Share:
Basic earnings per share:
Income from continuing operations	$	0.31		$	0.39
Loss from discontinued operation, net of tax		—			(0.02	)
Cumulative effect of accounting change, net of tax		—			(0.24	)

Basic earnings per share	$	0.31		$	0.13

Diluted earnings per share:
Income from continuing operations	$	0.31		$	0.39
Loss from discontinued operation, net of tax		—			(0.02	)
Cumulative effect of accounting change, net of tax		—			(0.24	)

Diluted earnings per share	$	0.31		$	0.13

Weighted Average Number of Common Shares
Outstanding:
Basic		9,873			9,703
Diluted		9,894			9,750
Data above have been reclassified to reflect Brice Manufacturing Company, Inc., as a discontinued operation for the three months ended March 30, 2002.

	For Three Months Ended
	April 5, 2003			March 30, 2002
Cash Flows from Operating Activities:
Net Income	$	3,108		$	1,230
Adjustments to Reconcile Net Income to
Cash Provided by Operating Activities:
Depreciation and amortization		1,886			2,047
Deferred income tax benefit		(533	)		(1,461	)
Income tax benefit related to the exercise of nonqualified stock options		7			402
Provision for doubtful accounts		—			45
Cumulative effect of accounting change, net of tax		—			2,325
Changes in Assets and Liabilities:
Accounts receivable		(3,262	)		(2,212	)
Inventories		(1,002	)		(2,143	)
Other assets		295			388
Accounts payable		1,280			(120	)
Accrued and other liabilities		4,207			(154	)

Net Cash Provided by Operating Activities from Continuing Operations		5,986			347
Net Cash Provided by Operating Activities from Discontinued Operation		—			844

Net Cash Provided by Operating Activities		5,986			1,191

Cash Flows from Investing Activities:
Purchase of Property and Equipment		(1,434	)		(852	)

Net Cash Used in Investing Activities		(1,434	)		(852	)

Cash Flows from Financing Activities:
Net Repayment of Long-Term Debt		(4,527	)		(2,440	)
Net Cash Effect of Exercise of Stock Options		123			156

Net Cash Used in Financing Activities		(4,404	)		(2,284	)

Net Increase (Decrease) in Cash and Cash Equivalents		148			(1,945	)
Cash and Cash Equivalents—Beginning of Period		174			2,414

Cash and Cash Equivalents—End of Period	$	322		$	469

Supplemental Disclosures of Cash Flow Information:
Interest Paid	$	208		$	425
Income Taxes Paid	$	16		$	1,648
Supplemental information for Non-Cash Investing and Financing Activities:
See Note 2 for non-cash investing activities related to the disposition of business.

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

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

	(In thousands) For Three Months Ended March 30, 2002
Net Sales	$	1,605
Cost of Sales		1,411

Gross Profit		194
Selling, General & Administrative Expenses		554

Operating Loss		(360	)
Income Tax Benefit		130

Net Loss From Operation	$	(230	)

	(In thousands)
	April 5, 2003		December 31, 2002
Bank credit agreement	$	15,800	$	20,300
Term and real estate loans		1,954		1,981
Notes and other liabilities for acquisitions		3,569		3,569

Total debt		21,323		25,850
Less current portion		3,338		1,501

Total long-term debt	$	17,985	$	24,349

	(In thousands) Three Months Ended
	April 5, 2003			March 30, 2002
Net Income:
As reported	$	3,108		$	1,230
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(99	)		(90	)

Pro forma		3,009			1,140

Earnings per common share:
As reported:
Basic	$	.31		$	.13
Diluted		.31			.13
Pro forma:
Basic	$	.30		$	.12
Diluted		.30			.12

	(In thousands)
	April 5, 2003		December 31, 2002
Total Assets
DAS	$	139,095	$	135,374
DT		46,547		46,961
Corporate Administration		16,169		15,275

Total Assets	$	201,811	$	197,610

Goodwill
DAS	$	36,785	$	36,785
DT		18,747		18,747

Total Goodwill	$	55,532	$	55,532

	(In thousands) Lease Commitments
2003	$	1,648
2004		1,683
2005		1,203
2006		562
2007		529
Thereafter		2,098

Total	$	7,723

/s/ JOSEPH C. BERENATO
President and Chief Executive Officer