Q2 2025 Ducommun Inc Earnings Call
Speaker #2: Good day, and thank you for standing by. Welcome to the Q2 2025 Ducommun Earnings Conference Call. At this time, all participants are in listen-only mode.
Speaker #2: After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press *101 on our telephone.
Speaker #2: You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 101 again. Please be advised that today's conference is being recorded.
Speaker #2: I would now like to hand the conference over to Ducommun's Senior Vice President and Chief Financial Officer, Mr. Suman Mookerji. Please go ahead.
Speaker #3: Thank you and welcome to Ducommun's Q2 2025 conference call. With me today is Stephen Oswald, Chairman, President, and Chief Executive Officer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections, or performance that we may make during the prepared remarks or the Q&A session that follows.
Speaker #3: Certain statements today that are not historical facts—including any statements as to future market and regulatory conditions, results of operations, and financial projections, including those under our Vision 2027 game plan for investors—are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are therefore prospective.
Speaker #3: These forward-looking statements are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements.
Speaker #3: Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct.
Speaker #3: In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing Ducommun include, amongst others, the cyclicality of our use markets, the level of U.S. government defense spending, our customers may experience delays in the launch and certification of new products, timing of orders from our customers, our ability to obtain additional financing and service existing debt to fund capital expenditures and meet our working capital needs, legal and regulatory risks, including pending litigation matters generally, as well as any losses arising from litigation related to the requirements, performance, and fire that may become material, the cost of expansion, consolidation, and acquisitions, competition, economic and geopolitical developments, including supply chain issues, international trade restrictions, the impact of tariffs and elevated interest rates, the ability to attract and retain key personnel and avoid labor disruptions, the ability to adequately protect and enforce intellectual property rights, pandemics, disasters, natural or otherwise, and the risk of cybersecurity attacks.
Speaker #3: Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time to time with the SEC, as well as the press release issued today for a detailed discussion of the risks.
Speaker #3: Our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation except if and as required by regulatory authorities.
Speaker #3: This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call.
Speaker #3: We filed our Q2 2025 quarterly report on Form 10-Q with the SEC today. I would now like to turn the call over to Stephen Oswald for a review of the operating results.
Speaker #3: Stephen?
Speaker #4: Okay, thank you, Suman. Thanks, everyone, for joining us today for our second quarter conference call. Today, and as usual, I'll give an update on the current situation at the company, after which Suman will review our financials in detail.
Speaker #4: Let me start off again on this quarterly call with Ducommun's Vision 2027 game plan for investors. As we continue our third year of execution in 2025, our strategy and vision were developed coming out of the COVID pandemic.
Speaker #4: Over the summer and fall of 2022, unanimously approved by the board in November 2022, and then presented the following month in New York to investors, where we received excellent feedback.
Speaker #4: Since that time, Ducommun's management has been executing the strategy by increasing the revenue percentage of engineered products and aftermarket content, which is at 23% this year, up from 15% in 2022. This includes consolidating our rooftop footprint and contract manufacturing, continuing our focused acquisition program, executing the offloading strategy with defense primes and high-growth segments, driving value-added pricing, and expanding content on our key commercial aerospace platforms.
Speaker #4: All of us here, as well as my fellow board members, continue to have a high level of conviction in the Vision 2027 strategy and financial goals. We believe the market catalysts ahead present a unique value creation opportunity for shareholders.
Speaker #4: The Q2 2025 results show again that the strategy initiatives are working, with both growth and adjusted EBITDA margins, for example, at record levels, and more opportunities to come for DCO.
Speaker #4: For Q2, I'm happy to report revenues reached a new quarterly record of $202.3 million, or 2.7% over the prior year, beating our prior record of $201.4 million.
Speaker #4: In Q3 of last year, we achieved this despite headwinds in commercial aerospace build rates, de-stocking at BA and SPR, which was anticipated, and the continued strategic pruning of our non-core industrial businesses. This marks our 17th consecutive quarter with year-over-year growth in revenue, and it was the right thing to do.
Speaker #4: The revenue performance was driven by continued strength in our defense business, which grew 16% during the quarter and marked our second consecutive quarter with double-digit growth.
Speaker #4: The growth in defense was driven by very strong performance in our missile franchise, which grew by 39% during the quarter, along with DCO's radar business, much newer to DCO, up 46%.
Speaker #4: Now, the outlook for our defense business continues to look great. In addition to the highlights I just mentioned, the Apache blades, Tomahawk cables, and the TOW missile case are scheduled to be back starting in the second half and into 2026, as we are nearing final approvals from RTX and BA.
Speaker #4: In addition, as previously discussed, our team continues to build scale at other defense customers outside of RTX, which has been a long-term goal.
Speaker #4: Northrop Grumman is an example of this strategic effort. I also thought it was the right time, given the recent Wall Street Journal article on missiles published on July 23, to highlight DCO's missile franchise and how well it's positioned to benefit from the replenishment of depleted worldwide inventories mentioned in the article, along with, in general, very robust U.S. and FMS order activity.
Speaker #4: For background, Ducommun is a supplier in over a dozen key missile platforms, including AMRAAM, MIR, PAC-3, SM-2, SM-3, SM-6, Tomahawk, and TOW, amongst others.
Speaker #4: Our missile business is up 39% in the second quarter, and our missile backlog also increased 30% compared to a year ago. Excellent news. For greater context, DCO currently supports 18 missile programs with at least $750,000 of revenue in the last 12 months.
Speaker #4: Complementing our missile portfolios is a strong radar franchise that is up and coming, covering marquee programs such as the SPY-6 radar, the LATAMS radar, which is part of the Patriot missile defense system, the TPY-2 radar used on the THAAD missile defense system, and the Gator radar used by the U.S. Marine Corps, along with various other radar platforms.
Speaker #4: This combination of both missile and radar platforms positioned us well in the current environment and also aligns us with key defense priorities outlined in the U.S. defense budget, including the Golden Dome as well as NATO priorities.
Speaker #4: We are in active negotiations with the defense prime right now for record levels of the SM-3, as an example. We view our missile and radar franchises as a bedrock for growth now and in the years ahead.
Speaker #4: The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter. However, the outlook is promising for commercial aerospace as Boeing continues to perform and improve build rates, and they get through the de-stocking along with SPR. I also want to add that everything we see out of Boeing commercial in the last three or four months has been very encouraging.
Speaker #4: Both the 737 and 787 are main platforms. We're optimistic that build rates will be growing to 38 to 42 on the 737 MAX soon, as outlined by Boeing on recent calls.
Speaker #4: Gross margin also grew by $2.5 million to 26.6% in Q2, matching the record gross margin percentage achieved in Q1, and up 60 basis points year-over-year from 26%. We continue to realize benefits from our growing engineered product portfolio with aftermarket, strategic value pricing initiatives, restructuring actions, and productivity improvements.
Speaker #4: We have ceased manufacturing operations in both our Monrovia, California, and Barryville, Arkansas, operations. We expect to see those savings be higher as the receiving plants ramp up later this year and more fully in 2026.
Speaker #4: For adjusted operating income margins in Q2, the team delivered 9.9%, which is just below the prior year's 10.1%. The Electronic Systems segment margin grew nicely in the quarter, with a good mix of profitable business and improvements in productivity.
Speaker #4: Adjusted EBITDA hit another record in Q2, achieving 16% of revenue for the first time, up $2.4 million to $32.4 million. Fantastic. This is our third quarter with adjusted EBITDA above $30 million, and it represents an expansion of 80 basis points above the prior year and continues the strong momentum we saw in 2024.
Speaker #4: As we work towards the 18% goal in our Vision 2027 plan, we have two and a half years to go. GAAP diluted EPS was $0.82 a share in Q2 2025, versus $0.52 a share for Q2 2024.
Speaker #4: And with adjustments, diluted EPS was $0.88 a share compared to adjusted diluted EPS of $0.83 in the prior year quarter.
Speaker #4: The higher GAAP and adjusted diluted EPS during the quarter were driven by improved operating income, as well as lower interest costs due to lower interest rates and a reduced outstanding debt balance.
Speaker #4: The company's consolidated backlog continues to be strong at $1.02 billion, but did decrease by $50 million year-over-year due to the timing of awards. We are enacting negotiations with customers on a number of meaningful opportunities, and based on our current pipeline, we expect a significant uptick in orders in the second half.
Speaker #4: The defense backlog was flat compared to the prior year quarter and is at $593 million, but it is expected to ramp up in the back half of the year.
Speaker #4: The commercial aerospace backlog decreased by $47 million compared to the prior year quarter. This decline is due to lower OEM production rates and de-stocking, which we fully expect to come back.
Speaker #4: In December 2022, we set a target of generating 25% of our revenues from engineered products, which was 9% in 2017 and 15% in 2022.
Speaker #4: In 2024, we noted that our engineered product business drove 23% of our total revenue, up from 19% in 2023, positioning us well ahead of the curve in achieving our Vision 2027 goal. We're certainly pushing for a lot more.
Speaker #4: We achieved this both through focused investment, driving organic growth in those current businesses, as well as the BLR acquisition. In Q2 2025, we have maintained this 23% mix and continue to work on both organic and inorganic opportunities to drive this higher.
Speaker #4: We have made tremendous progress to date, and I'm proud of our team and strategic plan. As for the second half of 2025, we are positioned to benefit from the expected Boeing recovery in the second half, along with continued momentum in defense.
Speaker #4: For revenue guidance, after a somewhat flattish first half, we're expecting mid-single-digit growth in Q3, with low double-digit growth in Q4. In addition, we believe tariffs will have limited and no material impact on our 2025 revenues.
Speaker #4: A good story for our investors. Also, I want to reiterate as well that Ducommun is a U.S. manufacturer, with U.S. employees and 95% of our revenues produced in the U.S.
Speaker #4: Our only other facility is based in Glamis, Mexico, and that production is less than 5% of our revenue, and thankfully covered under the USMCA.
Speaker #4: Exempting us from tariffs. The other good news is Ducommun's revenue from China is almost entirely related to one program for an Airbus supplier, which is owned by the government. This constitutes less than 2% of our revenue, and we have not seen any impact at this point on tariffs for our revenue.
Speaker #4: On the supplier side, we do procure some parts from Europe and Asia, but it is manageable, and so far, the impact has been seen to be pretty de minimis.
Speaker #4: We will continue to monitor it as the situation evolves, but at this point, we certainly don't see it as being something that's a material impact to the company.
Speaker #4: Now, let me provide some color on our markets, products, and programs. Beginning with our military and space sector, we saw revenues of $117 million, compared to $101 million in Q2 2024.
Speaker #4: Growth was driven by significant activity in missile programs such as TOW and AMRAAM, as well as solid growth in military rotorcraft on the Gator radar and on a classified program.
Speaker #4: We also entered the second quarter with a backlog of $593 million, flat to prior year, representing 58% of Ducommun's total backlog. Within our commercial aerospace operations, second quarter revenue declined 10% year-over-year to $78 million, driven mainly by lower rates on Boeing platforms, commercial helicopters, and in-flight entertainment.
Speaker #4: As I mentioned earlier, we believe that finally a much better story is ahead for BA and MAX, now that production is ramping again and they're working through their overstocked inventory.
Speaker #4: The backlog within our commercial aerospace business was $404 million at the end of the second quarter, decreasing $47 million compared to the prior year, driven by lower rates on Boeing platforms.
Speaker #4: We expect this to recover as production rates ramp up in late 2025 and 2026. Revenue in our industrial business declined by 23% to $8 million during Q2, as we continually strategically pruned our non-core business from the portfolio.
Speaker #4: This will benefit the company in the longer term as we transition that capacity to our core aerospace and defense platforms. With that, I'd like Suman to review our Q2 results in detail.
Speaker #4: Suman?
Speaker #3: Thank you, Stephen. As a reminder, please see the company's 10-Q and Q2 earnings release for a further description of information mentioned on today's call.
Speaker #3: As Stephen discussed, our second quarter results reflected another record quarter of revenue, with strong growth in our military end markets, especially in missiles and radar systems.
Speaker #3: We also saw record gross margins and record EBITDA margins during the quarter. We are nearing the end of our facility consolidation projects, which will drive further synergies in late 2025 and into 2026 as we close out the recertification of the various product lines at the receiving facilities.
Speaker #3: As Stephen highlighted earlier, we also made great progress in continuing to build up our engineered product portfolio, with those revenues now contributing 23% to our mix.
Speaker #3: These actions, along with our strategic pricing initiatives, drove continued gross margin expansion in Q2 and are keeping us on pace to achieve our Vision 2027 goals.
Speaker #3: Now, turning to our second quarter results. Revenue for the second quarter of 2025 was $202.3 million, versus $197 million for the second quarter of 2024.
Speaker #3: The year-over-year increase of 2.7% reflects strong growth in military and space of 16%, driven by an increase in missiles, radar, military rotorcraft, and a classified program.
Speaker #3: This was partially offset by weakness in our commercial aerospace business, mainly driven by lower revenues on Boeing platforms and on select commercial rotorcraft platforms as we complete our facility consolidation exercise.
Speaker #3: We posted total gross profit of $53.7 million, or 26.6% of revenue for the quarter, versus $51.2 million, or 26% of revenue in the prior-year period.
Speaker #3: We continue to provide adjusted gross margin as we had certain non-GAAP cost of revenue items in the prior year period relating to inventory step-up amortization on our acquisitions and restructuring charges.
Speaker #3: On an adjusted basis, our gross margins were 26.6% in Q2 2025 and in Q2 2024. We also continue to make progress on our supply chain and the working capital in our business.
Speaker #3: Through our proactive efforts, including strategic buys in our inventory investments, we have been able to avoid any significant operational impacts on our business. We continue to work to improve the working capital turns in the business and improve our cash flow.
Speaker #3: I also want to add that we did not see any material impact from tariffs in the second quarter. As Stephen mentioned, we do not anticipate any significant impact to our P&L at this time.
Speaker #3: We are a U.S. manufacturing business with U.S. employees and generate 95% of revenues from our domestic facilities. Our revenues are also largely from domestic customers, with U.S. revenues being in excess of 85% in 2024.
Speaker #3: Revenues to China were less than 3%, mostly from one customer for Airbus, and there has been no impact on those volumes or orders at this time due to the tariffs.
Speaker #3: Our supply chain is also largely domestic, with less than 5% of our direct suppliers being foreign. Some of our domestic suppliers do source materials from outside the United States, but even that is a manageable spend, with China being a low single-digit percentage.
Speaker #3: We expect to mitigate the impact of tariffs on our material spend through military duty-free exemptions, alternate sourcing of materials from domestic suppliers, or by passing on the impact to our customers.
Speaker #3: Ducommun reported operating income for the second quarter of $17.2 million, or 8.5% of revenue, compared to $13.9 million, or 7.1% of revenue in the prior year period.
Speaker #3: Adjusted operating income was $20 million, or 9.9% of revenue this quarter, compared to $19.9 million, or 10.1% of revenue in the comparable period last year.
Speaker #3: The company reported net income for the second quarter of 2025 of $12.6 million, or 82 cents per diluted share, compared to net income of $7.7 million, or 52 cents per diluted share a year ago.
Speaker #3: On an adjusted basis, the company reported net income of $13.4 million, or $0.88 diluted share, compared to adjusted net income of $12.5 million, or $0.83 in Q2 2024.
Speaker #3: The higher net income and adjusted net income during the quarter was driven by the higher operating income and adjusted operating income, as well as lower interest expense.
Speaker #3: Now, let me turn to our segment results. Our Structural Systems segment posted revenue of $92 million in the second quarter of 2025, versus $95.6 million last year.
Speaker #3: The year-over-year change reflected $6.2 million in lower revenues across our commercial aerospace business, mainly driven by lower revenues on Boeing platforms, as well as lower revenue on select commercial rotorcraft platforms, as we complete the transition of certain product lines under our facility consolidation initiative.
Speaker #3: The decline in commercial aerospace was partially offset by $2.7 million in higher revenues across our military and space applications, driven by strength in military rotorcraft platforms and selected missile programs.
Speaker #3: Structural Systems' operating income for the quarter was $9.5 million, or 10.4% of revenue, compared to $10.6 million, or 11% of revenue for the prior year quarter.
Speaker #3: Excluding restructuring charges and other adjustments in both years, the segment operating margin was 13% in Q2 2025, versus 15.4% in Q2 2024. The decline in margin was driven by an unfavorable sales mix in the quarter.
Speaker #3: Our electronic systems segment posted revenue of $110.2 million in the second quarter of 2025, versus $101.4 million in the prior year period. The year-over-year change reflected $13.8 million in higher revenues in military and space applications, driven by strong growth in missiles and radar systems, military fixed-wing aircraft, and unclassified programs.
Speaker #3: The strong growth in defense was partially offset by lower revenues from commercial aerospace and a reduction in our industrial business, as we chose to selectively prune non-core work.
Speaker #3: We have been pruning our industrial business now for multiple quarters, maintaining only select customers that are accretive to our business. Electronic Systems operating income for the second quarter was $21 million, or 19% of revenue, versus $16.8 million, or 16.6% of revenue in the prior year period.
Speaker #3: Excluding restructuring charges and other adjustments in both years, the segment operating margin was $19.4% in Q2 2025, versus $16.9% in Q2 2024. The year-over-year increase was driven by a favorable product mix, and better leverage of fixed costs from higher revenue.
Speaker #3: Next, I would like to provide an update on our ongoing restructuring program. As a reminder, and as discussed previously, we commenced a restructuring initiative back in 2022.
Speaker #3: These actions are being taken to better position the company for stronger performance in the short and long term. This includes the shutdown of our facilities in Monrovia, California, and Barryville, ansas, and the transfer of that work to our low-cost operation in Glamis, Mexico, and to other existing performance centers in the United States.
Speaker #3: We continue to make progress on these transitions and are working diligently with our customers, Boeing and RTX, to obtain the requisite approvals, which are expected to be completed by the end of Q3.
Speaker #3: This quarter, we expected to start this quarter, we expect to start full production of rotor blades for the Apache helicopter at Arcoxaki, New York facility, which will complete the transition of that program from California.
Speaker #3: We are also working through the transition of 737 MAX spoilers, Tomahawk harnesses, and the TOW missile cases, which are all expected to go into production in Glamis in the second half of this year.
Speaker #3: During Q2 2025, we recorded $0.6 million net in restructuring charges. We expect to incur an additional $0.5 to $1 million in restructuring expenses as we complete the program.
Speaker #3: As previously communicated, we expect to generate $11 to $13 million in annual savings from our actions and have already seen some realization of savings in 2024 and the first half of this year.
Speaker #3: We expect the synergies to ramp up in late 2025 and into 2026 as the product recertification is complete and the receiving facilities move up the learning curve and ramp up production.
Speaker #3: We anticipate selling the land and building in Monrovia, and during the second quarter, we closed on the sale of the Barryville facility. Turning to liquidity and capital resources.
Speaker #3: In Q2 2025, we generated $22.4 million in cash flow from operating activities, which was an improvement compared to $3.5 million in Q2 2024. The improvement was due to net income growth of $4.8 million, as well as better working capital management.
Speaker #3: As of the end of the second quarter, we had available liquidity of $236.9 million, comprising the unutilized portion of our revolver and cash on hand.
Speaker #3: Our existing credit facility was put in place in July 2022, at an opportune time in the credit markets. This allowed us to reduce our spread, increase the size of our revolver, and provided us with the flexibility to execute on our acquisition strategy.
Speaker #3: Our strong cash generation allowed us to pay down the remaining balance on our revolver during Q2 2025, and the entire $200 million revolver capacity is now available to us.
Speaker #3: Interest expense in Q2 2025 was $3 million, compared to $4 million in Q2 2024. The year-over-year improvement in interest cost was primarily due to lower interest rates, along with a lower debt balance.
Speaker #3: In November 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting in January 2024, and begs the one-month term so far at 170 basis points for $150 million of our debt.
Speaker #3: The hedge will continue to drive significant interest cost savings in 2025 and beyond. To conclude the financial review for Q2 2025, I would like to say that the second quarter results complete a strong first half, building on the momentum from 2024, and position us well for the rest of 2025 and beyond.
Speaker #3: I'll now turn it back over to Stephen for his closing remarks. Stephen?
Speaker #4: Okay, thanks, Suman. Just to close before we get to the questions here, you know, Q2 was an excellent continuation of our strategy working. Despite the anticipated headwind from commercial aerospace, as we've talked about, we achieved another quarter of record revenue.
Speaker #4: And we have a good step-up forecasted in the second half of 2025. Adjusted EBITDA and gross margins were also at levels of 16% and 26.6%, respectively.
Speaker #4: In the quarter, we're in great shape. To meet and exceed our Vision 2027 target of over 25% of engineered product revenues, Q2 2025 came in at 23%.
Speaker #4: Finally, with commercial build rates heading higher, and getting past de-stocking, along with stronger defense activity—especially in missiles and we believe radar as well—we are very optimistic about what lies ahead in the second half.
Speaker #4: In the next few years, for our shareholders, for our employees, and other stakeholders. So thank you for listening. Let's go to questions.
Speaker #2: Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you need to press *11 on your telephone and wait for your name to be announced.
Speaker #2: To withdraw your question, please press star 11 again. Please stand by while I compile the Q&A roster. Our first question comes from Noah Papanek.
Speaker #2: From Goldman Sachs, please go head.
Speaker #5: Hey, everyone.
Speaker #4: Hi, Noah. Thanks for joining us.
Speaker #5: Yeah, thanks, Stephen. The forecast for low double-digit organic revenue growth in the fourth quarter would imply you expect the aerospace original equipment inventory de-stocking has ended by then.
Speaker #5: Do you have that visibility? And then I guess, you know, as we move into 2026, can we use that exit rate as a guidepost, at least on the aerospace side, especially given how easy the comparisons will be?
Speaker #4: No, great question. What we're seeing is certainly some ramp-up activity in commercial aerospace as we go into Q3 and Q4. But even in our defense business, Stephen highlighted some of the great things that we're seeing in our missiles and radar business. We are expecting a higher level of activity on the defense side of our business.
Speaker #4: And that's going to be a key driver. We're not expecting, you know, a huge ramp-up in commercial aerospace here in these last two quarters.
Speaker #4: There'll be some, but it's really also going to come from the defense portion of our business, which looks strong. Yeah. No, we're obviously going to see better performance in commercial aerospace.
Speaker #4: That's what we believe. We don't have a great line of sight into de-stocking. We've tried, but we still think there's going to be some of that.
Speaker #4: So we feel the double-digit, low double-digit in Q4 is going to be better on commercial, but it's going to be strong defense. And remember, you know, we have these products that have been offline.
Speaker #4: Like the Apache rotor blade, which is coming online this quarter, and that's going to help us in Q4. So we've got some upside there too.
Speaker #5: Okay. That is interesting. And then, Suman, can you spend another minute on the cash flow? That's one of the higher two-quarter cash from operations numbers you've ever had.
Speaker #5: But you still, I think you still actually had working capital as a headwind. What's driving the improvement? And can you get to that 50% EBITDA conversion for the year, or close to it?
Speaker #4: So, no. Yes. We definitely have working capital as a headwind, but it's a lesser headwind than we did in Q2 of last year. This is one of the stronger cash flows we've had in the company's history in Q2.
Speaker #4: We are looking at free cash flow conversion as well. Historically, we looked at 2024; it was 40%. Free cash flow is a percentage of adjusted net income.
Speaker #4: This year, year-to-date, we're at 55%, which is a noticeable improvement. I think taxes have also helped us with some of the changes in tax rules.
Speaker #4: Under the new act, it's certainly helping us. But even in terms of just operating performance and higher profits driving higher cash flows, we expect to continue improving that free cash flow conversion ratio to reach our ultimate goal of getting to 100% free cash flow conversion over the next couple of years.
Speaker #5: Yeah.
Speaker #4: And Noah, just to get back to your earlier question, I don't want to leave it because I know de-stocking is important for everybody. On the call is that, again, we've asked for things both from BA and Spirit.
Speaker #4: You know, we do the best we can with it. We're still going to have some de-stocking through the rest of the year on certain things.
Speaker #4: We think that, you know, we hope that, you know, probably the first quarter or second quarter next year will be clear. I'm just not sure.
Speaker #4: I really couldn't tell you, honestly. It'd be the end of this year. I wish it was, but I'm just not sure at this point.
Speaker #5: Okay. Appreciate the detail. Thank you.
Speaker #4: Okay, thanks. I appreciate you joining.
Speaker #2: Thank you. Our next question comes from Kian Herbert from RBC Capital Markets. Please go ahead.
Speaker #5: Yeah. Hi. Thanks. Stephen Suman. Nice results.
Speaker #4: Thank ou.
Speaker #5: I just wanted to ask you, you're still at sort of, I think it's 23% of the revenues from the engineered products portfolio. It sounds like that's not maybe a significant mixed tailwind in the second half of the year.
Speaker #5: What is the what is the guidance imply for sort of exit rate from that portfolio this year into 2026 as a maybe as a percent of the revenues?
Speaker #4: It'll kind of depend on the acquisitions and what we close. I mean, I would expect us to kind of stay at a fairly steady rate here through the end of this year because even any acquisition will kind of come into the tail end and may not have a significant impact on the mix for the year.
Speaker #4: So I would expect it to be fairly consistent this year, with the expectation that it continues to ramp up in '26.
Speaker #5: Yeah, I think that's about right. I think it's going to bounce around $23, Kian. But fairly close, and then obviously we're looking to ramp that up.
Speaker #4: In 2026.
Speaker #5: Yeah. So on that point, Stephen or Suman, obviously you know it's been quite a while since you've announced an acquisition. A lot of your peers are talking, you know, maybe a greater focus on acquisitions, you know, in the aerospace and defense sector.
Speaker #5: Can you comment on what you're seeing in the pipeline? Confidence in something, maybe in the back half of the year, and are you seeing more competition that may have pushed some opportunities out of reach?
Speaker #5: Any more any more detail on on the M&A outlook would be would be helpful. Thank ou.
Speaker #4: We're continuing to see a lot of opportunities, but there is an increased level of competition. You're absolutely right. But we think we can be competitive enough to win assets.
Speaker #4: So we'll continue to keep our heads down and work on our pipeline, and continue to work through the various opportunities we're seeing right now.
Speaker #5: Yeah. I think just if I jump in here, it was, I think I like our pipeline right now for the second half. I think there are a few things out there that are interesting.
Speaker #5: You know, I'll say this from my old bosses: we’re picky eaters, as they say. As far as you know, we do look at things and we're active, and you know we're just, you know, we're thoughtful. And I know that's what you want us to be as far as purchasing some of this.
Speaker #5: So we've passed in the past, and we have a couple of things that look promising in the half. That's great. And if I could just finally ask, any update on Monrovia and the potential sale of that property? How might we think of that ideally, you know, as real estate values maybe firm up a little bit, and you get a little better visibility there?
Speaker #5: Sounds like you were obviously successful on Barryville.
Speaker #4: Yeah. Well, let me just mention Barryville, and we'll give credit to Suman and the entire team, as well as Jerry Redondo. You know we were able to get $2 million for that operation.
Speaker #4: And you know our expectations were quite a bit lower, so we're hoping that will continue. We did market Monrovia last year, but the bid we had, we felt that wasn't shareholder-friendly.
Speaker #4: And so we figured we'd pull back. So that's our next property. We're happy to have Barryville closed and sold. Hopefully, some good things will be happening in the commercial market in the second half, but we are going to market it again.
Speaker #4: And we'll keep you posted.
Speaker #5: Great. Thanks, Stephen.
Speaker #4: All right. Thanks, Kian.
Speaker #2: Thank you. Our next question comes from Mike Crawford from B. Riley's Security. Please go ahead.
Speaker #6: Thanks. I'd like to get back to the engineered and aftermarket products mix of your business. I mean, 23% now. It's near a $200 million run rate.
Speaker #6: I mean, now you're targeting this Vision 27 and $1 billion in revenue and 25%. That's $250 million, but would that be enough for that to be a standalone business, or would it need more scale?
Speaker #6: And then, I guess the ancillary to that is how typical or not would it be to separate that from the rest of Ducommun's business?
Speaker #4: Yeah. Great question. Suman, do you want to take that first?
Speaker #3: Yes. I mean, the business is there. There are...
Speaker #4: There are a lot of synergies between that business and our existing business, let me say. There are unique attributes about the business, which may be engineered product businesses, which make them attractive, which is why we want to grow that as a mix of our overall revenues.
Speaker #4: That being said, you know they are also managed fairly independently. But there are also synergies with the broader organization. Aerospace and defense is a small industry with the same set of customers that our engineered product businesses sell to.
Speaker #4: As do the rest of our contract manufacturing business. So you know we're not necessarily viewing that as being a standalone business on its own.
Speaker #4: But certainly, we wanted to be a larger portion of our portfolio. Yeah. We'll tell you this, Mike: that's a good question. Certainly, scale in that area.
Speaker #4: There's our number one focus. So, as far as you know having something standalone in the future, I would just say stay tuned. We'll have to see.
Speaker #6: Okay, great. Thank you. And just one follow-up question, a little different category, but I know you've made some inroads into the space and unmanned systems markets.
Speaker #6: I think you started with the Predator maybe a few years ago, but it hasn't been a huge part of your mix. You know, if I succeed, obviously I would advise that in C.
Speaker #6: But any updates there? You know.
Speaker #4: It's a bit of a tricky business for us just because there's a high level of expense, as you know, for developing these types of products.
Speaker #4: We are, you know, supporting space, you know, in Joplin. We make, you know, cables and cabling, which is world-class for space applications. You know, we do other things.
Speaker #4: In our engineered products businesses, we're probably as far as space goes; we're opportunistic. And that's what I would say. We're much more strategically aligned on defense.
Speaker #4: And on commercial aerospace. But if there's a space application, which we can do, and it won't cost us a fortune, and we'll have a good return, then we're happy to do.
Speaker #6: Okay. Great. Thanks, Stephen.
Speaker #4: Thanks, Mike.
Speaker #2: Thank you. Our next question comes from Sam Stritziker from Truist Securities. Please go ahead.
Speaker #7: Hey, guys. I'm ExxonMobil today. Thanks for taking the question. I guess circling back to the de-stocking trends for a moment, it looks like commercial aero might have actually been up sequentially this quarter, if I have it right.
Speaker #7: So I was just curious. Obviously, I know you guys said there's been a ton of visibility into the back half of the year, but just sort of what kind of cadence you guys have seen so far?
Speaker #7: Did you see—kind of—do you think de-stocking has sort of picked up, or where are you seeing that as of now?
Speaker #4: I would say you know de-stocking impacts continues. There was you ow we want to make sure our factories are operating at optimal capacity as well.
Speaker #4: So you know we've had some build ahead in commercial aerospace as well in our factories, right? So that's kind of another form of de-stocking, I guess you could say.
Speaker #4: So, as we do some build ahead, you will see some sequential improvement in commercial aerospace. But as far as de-stocking impacts from Boeing and Spirit, I think that persists.
Speaker #4: As much as it did in Q1.
Speaker #7: Yeah. Yeah. See, Spirit, you know Boeing obviously is driving the train here, but Spirit is a major part of our MAX business. I mean, we do a lot for Spirit.
Speaker #7: And when you know Boeing had shut down and had these strikes and other things, you know Spirit, and rightfully so, didn't want to lay off 1,000 people.
Speaker #7: So, they just kept making fuselages. And there's a lot of fuselages still on the back. And you know they're burning those down. So, I think all good things ahead.
Speaker #7: But it is still an issue for the industry and for us, at some level. However, it's coming down; that's the best part about it.
Speaker #7: It is progress that is being made. And that's what we want. Got it. Understood. Makes sense. And then, I guess if I could just sneak in another one.
Speaker #4: Yes, sir.
Speaker #7: A really
Speaker #7: Nice, really nice margins in electronic systems this quarter. Looks like it might be a high watermark. How should we think of that as maybe a new floor?
Speaker #7: Or how sustainable are you guys thinking that might be?
Speaker #4: I would say that if you look across the company, we probably had 50 basis points of favorability in margin due to favorable product mix.
Speaker #4: In the electronics business, it was more concentrated. The product mix was favorable. On the flip side, on the structure side, it was unfavorable. We've kind of net offset to the 50 basis points I mentioned earlier.
Speaker #4: So, I wouldn't say that the higher gross margins in the electronics are the new baseline. They're certainly a move in the right direction. But there was a net favorability across the DCO portfolio of about 50 basis points.
Speaker #7: Got it. Okay. And then, sorry, just one last one. You guys mentioned that I inked last quarter that Apache was going to kick in this quarter.
Speaker #7: And just to clarify, I guess, was the uptick in rotorcraft a benefit from that Apache, or is that still has not yet kicked in?
Speaker #7: We'll see that next quarter. I was just a little bit unclear on the exact numbers.
Speaker #4: In Q2, Apache was still a headwind. In Q2, Apache was still a headwind. Yeah. Yeah.
Speaker #7: Okay.
Speaker #4: Sure. As you know, Kentucky completes recertification on Apache, and there's been great progress here, even through the early part of Q3, in getting that process completed. We're going to see a ramp-up with Apache.
Speaker #7: Yeah, it's a good question. We're all about sharing good news. On this call, I got an update this morning from our New York team.
Speaker #7: And Boeing was and the military everybody was at Kosaki the last two days. And things could not be could not have gone ter. So it looks like you know sometime in August, later this later this month, we'll be fully approved.
Speaker #7: To start manufacturing, and then we'll begin shipping in September. So that's late-breaking, but I wanted to share it with everybody. Great. Thanks, guys.
Speaker #4: Thanks, Kian.
Speaker #2: Thank you. As a reminder, to ask a question, you would need to press *11 on your telephone and wait for your name to be announced.
Speaker #2: One moment for our next question. Our next question comes from Tony Bancroft from Gemco Investors. Please go ahead.
Speaker #8: Well done on the quarter. Gentlemen, you know maybe backing up the $30,000 feet back to the previous question with you know what you might do with potentially spinning off or I'm not sure what direction of that question was, but you ow the aftermarket business could be you know could be you know self-sufficient.
Speaker #8: What you know is you've done a great job growing this company. You know you're almost a billion and a half, you know, size company.
Speaker #8: What’s sort of the next leg over? I know you have the targets for the next two years, but how do you envision this company maybe bigger picture, broader strokes over the next, you know, maybe five years?
Speaker #4: Yeah. Great question. The headline is go, go, go. I mean, pretty much, you know we've got our Vision 2027 to 2025. We're going to, you know, we'll be out at some point with our Vision probably 2030.
Speaker #4: We'll have to, you know, just get someone to get ahead of ourselves. But, you know, our goal is to continue to build this portfolio with higher and higher percentages of engineered product and aftermarket.
Speaker #4: As well as, as you know, Tony, we're continuing to take costs out and value price all our contract manufacturing, which is a niche business, right?
Speaker #4: It's a nice business. So, you know you're going to see more and more of that. And, you know, I think it's a 10-year play.
Speaker #4: More and more and more.
Speaker #8: Thank you.
Speaker #4: Yeah, that's how I see it. Tony, thanks for joining us.
Speaker #2: I'm showing no further questions at this time. I will now turn it back over to Stephen Oswald for final remarks.
Speaker #4: Okay. Thank you. I appreciate everyone calling in this morning and listening. You know, obviously, my remarks are my remarks. I feel very good about where we are.
Speaker #4: I think that there's a lot of tailwind. We're where we are, in great shape, as I mentioned earlier on this missile franchise. You know, in the next couple of years, our radar business is doing terrific.
Speaker #4: And you know I'm getting closer and closer to Boeing and their BCA team, and you know, spending some time with them. Everything I can see, it's thumbs up.
Speaker #4: And they're going to continue, I think, to do great things on the 37 and the 87. So I want to leave you with that. Thank you again.
Speaker #4: Look forward to connecting soon.