Good day, and thank you for standing by. Welcome to the Q2 2025 Ducommun Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ducommun's Senior Vice President, Chief Financial Officer, Mr. Suman Mookerji. Please go ahead.

Thank you, and welcome to Ducommun's 2025 Second Quarter Conference Call. With me today is Steve 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. 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. 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. 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. 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 end-use markets, the level of U.S. government defense spending, our customers may experience delays in 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 spending litigation matters generally as well as any losses arising from litigation related to the Guaymas performance center 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 risk of cybersecurity attacks. 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. 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. 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. 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 Steve Oswald for a review of the operating results. Steve?

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 of the current situation at the company. After which, Suman will review our financials in detail. 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. The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the common Board in November 2022, and then presented the following month in New York to investors where we got excellent feedback. Since that time, Ducommun's management has been executing the strategy by increasing the revenue percentage of engineered product and aftermarket content, which is at 23% this year, up from 15% in 2022, consolidating our rooftop footprint in contract manufacturing, continuing our focused acquisition program, executing the offloading strategy with defense primes and high-growth segments, driving value-added pricing, expanding content on our key commercial aerospace platforms. 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 and believe the market catalysts ahead present a unique value creation opportunity for shareholders. The Q2 2025 results show again the strategy initiatives are working, with both gross and adjusted EBITDA margins, for example, at record levels with more opportunities to come for DCO. For Q2, I'm happy to report revenues reached a new quarterly record of $202.3 million or 2.7% over prior year, beating our prior record of $201.4 million in Q3 of last year and also making this our 17th consecutive quarter with year-over-year growth in revenue. We achieved this despite headwinds in commercial aerospace…

Thank you, Steve. 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. As Steve 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. 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. As Steve 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. These actions, along with our strategic pricing initiatives drove continued gross margin expansion in Q2 and is keeping us on pace to achieve our VISION 2027 goals. 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. The year-over-year increase of 2.7% reflects strong growth in military and space of 16%, driven by increase in missiles, radar, military rotorcraft and a classifying program. 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. 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. 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. On an…

Okay. Thanks, Suman. Just to close before we get to questions here. 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 and have a good step-up forecasted in the second half of 2025. Adjusted EBITDA and gross margins were also at record levels of 16% and 26.6%, respectively, in the quarter. We're in great shape to meet and exceed our VISION 2027 target of 25% plus of engineered product revenues with 2025 Q2 coming in at 23%. Finally, with commercial bill rates heading higher, getting past destocking, along with stronger defense activity, especially in missiles, and we believe radar as well, very optimistic about what lies ahead in the second half and the next few years for our shareholders, for our employees and other stakeholders. So thank you for listening. Let's go to questions.

[Operator Instructions] Our first question comes from Noah Poponak from Goldman Sachs.

The forecast for low double-digit organic revenue growth in the fourth quarter, that would imply you expect the aerospace original equipment inventory destocking has ended by then. Do you have that visibility? And then I guess, 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?

No, great question. And 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, and Steve 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, and that's going to be a key driver. We're not expecting a huge ramp up in commercial aerospace here in the last 2 quarters. There will be some, but it's really also going to come from the defense portion of our business, which looks strong.

Yes. No, we're obviously going to see better in commercial aerospace. That's what we believe. We don't have a great line of sight into destocking. We've tried. We still think there's going to be some of that. 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 in defense. And remember, we have these products that have been offline 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.

Okay. That is interesting. And then Suman, can you spend another minute on the cash flow? That's one of the higher 2Q cash from ops numbers you've ever had. 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% of EBITDA conversion for the year or close to it?

So Noah, yes. We did have working capital as a headwind but as a lesser headwind than we did in Q2 of last year, and this is one of the stronger cash flows we've had in the company's history in Q2. We are looking at free cash flow conversion as well. And historically, we have -- if we look at 2024, it was 40% free cash flow as a percentage of adjusted net income. This year, year-to-date, we are at 55%, which is a noticeable improvement. I think taxes have also helped us with some of the changes in tax rules under the new act, and it's certainly helping us, but even in terms of just operating performance and higher profits, driving higher cash flows. We expect us to continue to improve that free cash flow conversion ratio to kind of our ultimate goal of getting to 100% free cash flow conversion over the next couple of years.

And Noah, just to get back to your earlier question, I don't want to leave it because I know this destocking thing is important for everybody on the call, is that, again, we've asked for things, both from BA and Spirit. We do the best we can with it. We're still going to have some destocking through the rest of the year on certain things. We think that or we hope that probably first quarter, second quarter next year will be clear. I'm just not sure, I really couldn't tell you, honestly, it would be the end of this year. I wish it was, but just not sure at this point.

Our next question comes from Ken Herbert from RBC Capital Markets.

Steve and Suman, nice results. I just wanted to ask, 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 mix tailwind in the second half of the year. What does the guidance imply for sort of exit rate from that portfolio this year into 2026 as maybe as a percent of the revenues?

It will 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 in at the tail end and will not have a significant impact on the mix for the year. So I would expect it to be fairly consistent this year with the expectation that it continues to ramp up in '26.

Yes, I think that's about right. I think it's going to bounce around 23%, Ken, but fairly close. And then obviously, we're looking to ramp that up in 2026.

Yes. So on that point, Steve, or Suman, obviously, it's been quite a while since you've announced an acquisition. A lot of your peers are talking about maybe a greater focus on acquisitions in the aerospace and defense sector. Are you -- can you comment on what you're seeing in the pipeline, confidence of something maybe in the back half of the year? And are you seeing more competition that may have pushed some opportunities out of reach? Any more detail on the M&A outlook would be helpful.

We are continuing to see a number of opportunities, but there is increased level of competition. You're absolutely right. But we think we can be competitive enough to win assets. So we'll continue to keep our heads down and working on our pipeline and continue to work through the various opportunities we are seeing right now.

Yes, I think just to jump in here, it was -- I think I like our pipeline right now for the second half. I think there's a few things out there that are interesting. I'll say this from my old boss, we're picky eaters as they say, as far as we do look at things and we're active. And we're just thoughtful, and I know that's what you want us to be as far as purchasing something. So we passed in the past and -- but we have a couple of things that look promising in the second half.

That's great. And if I could, just finally, any update on Monrovia and potential sale of that property and how we might think of that as ideally real estate values maybe firm up a little bit and you get a little better visibility there. It sounds like you were obviously successful in Berryville.

Yes. Well, let me just mention Berryville. I'm going to give credit to Suman and the entire team as well as Jerry Redondo. We were able to get $2 million for that operation. And our expectations were quite a bit lower, so we're hoping that will continue. We did market Monrovia last year, but the bid we have, we felt that wasn't shareholder friendly and so we pulled back. So that's our next property. We're happy to have Berryville 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, and we'll keep you posted.

Our next question comes from Mike Crawford from B. Riley Securities.

I'd like to get back to the engineered and aftermarket products mix of your business. I mean, 23% now, it's near $200 million run rate. I know you're targeting with this VISION 2027 $1 billion in revenue and 25%, that's $250 million, but would that be enough for that to be a stand-alone business? Or would it need more scale? And then I guess, ancillary to that is how difficult or not would it be to separate that from the rest of Ducommun's business?

Yes. Great question. Suman, do you want to take that first?

Yes. That business is -- there are a lot of synergies between that business and our existing business, let me say. There are unique attributes about the business, of engineered product businesses, which make them attractive, which is why we want to grow that as a mix of our overall revenues. That being said, they are also -- and they are 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 products businesses sell to as do our -- the rest of our contract manufacturing business. So we're not necessarily viewing that as being a stand- alone business on its own, but certainly wanted to be a larger portion of our portfolio.

Yes. I will tell you this, Mike, it's a good question. Certainly, scale in that area is our #1 focus. So as far as having something stand alone in the future, I would just say, stay tuned. We'll have to see.

Okay. Great. And just one follow-up question, a little different category. But I know you've made some inroads into space and unmanned systems markets. I think you started with the Predator maybe a few years ago, but it's not -- it hasn't been a huge part of your mix. You've had success, obviously, with Viasat and IFC, but any updates there?

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. We are supporting space in Joplin. We make cables, cabling, which is world-class for space applications. We do other things in our engineered products businesses. So 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 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 it.

Our next question comes from Sam Struhsaker from Truist Securities.

On for Mike Ciarmoli today. I guess circling back to the destocking trends for a moment. It looks like commercial aero might have actually been up sequentially this quarter, if I have it right. So I was just curious, obviously, I know you guys said there's 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? Did you see kind of -- do you think destocking has sort of picked up? Or where are you guys seeing that as of now?

I would say destocking impact continues. There was -- we want to make sure our factories are operating at optimal capacity as well. So we've had some build ahead in commercial aerospace as well in our factories, right? So that's kind of another form of destocking, I guess, you could say. So as we do some build ahead, you will see some sequential improvement in commercial aerospace. But as far as destocking impact from Boeing and Spirit, I think that persists as much as it did in Q1.

Yes, yes. See Spirit -- Boeing, obviously, is driving the train here, but Spirit is a major part of our MAX business. We do a lot for Spirit. And when Boeing had shut down and the strike and other things, Spirit, rightfully so, didn't want to lay off 1,000 people, so they just kept making fuselages, and there's a lot of fuselages still on the back. And they're burning those down. So I think all good things ahead, but it's still an issue for the industry and for us at some levels, but it's coming down. That's the best part about it. Progress is being made and that's what we want.

Understood. Makes sense. And then I guess if I could just sneak in another one. Really nice margins in Electronic Systems this quarter. It looks like it might be a high watermark. Should we think of that as maybe a new floor? Or how sustainable are you guys thinking that might be?

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. In the electronics business, it was more concentrated, that product mix favorability. On the flip side, on the structure side, it was unfavorable, which kind of net offsets to the 50 basis points I mentioned earlier. 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 net favorability across the DCO portfolio of about 50 basis points.

Got it. Okay. And then sorry, just one last one. You guys mentioned, I think, last quarter that Apache was going to maybe kick in this quarter. 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, we'll see that next quarter. I was just a little bit unclear.

On Q2, Apache was still a headwind. This year as Coxsackie completes recertification on Apache, and there's been great progress here even through the early part of Q3 here and getting that process completed, we're going to see a ramp-up with Apache.

Yes, 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, and Boeing was -- and the military, everybody was at Coxsackie in the last 2 days and things could not have gone better. So it looks like sometime in August, later this month, we'll be fully approved to start manufacturing and then we'll start shipping in September. So that's late breaking, but I want to share it with everybody.

[Operator Instructions] Our next question comes from Tony Bancroft from GAMCO Investors.

Well done on the quarter, gentlemen. Maybe backing up the 30,000 feet back to the previous question with what you might do potentially spinning off or -- I'm not sure what the direction of that question was, but the aftermarket business could be self-sufficient. You've done a great job growing this company. You're almost $1.5 billion size company. What's sort of the next leg over? I know you have the targets in the next 2 years, but how do you envision this company, maybe bigger picture, broader strokes over the next maybe 5 years?

Yes. Great question. Headline is go, go, go. I think pretty much, we've got our VISION 2027 to [ 25 ]. We're going to -- we'll be out at some point with our vision probably 2030. We'll have to -- just I don't want to get too ahead of ourselves. But our goal is to continue to build this portfolio with higher percentages of engineered product and aftermarket as well as, as you know, Tony, we're continuing to take cost out and value price all our contract manufacturing, which is a niche business, right? It's a nice business. So you're going to see more and more of that. And I think it's a 10-year play, more, more, more. That's how I see it.

I'm showing no further questions at this time. I will now turn it back over to Steve Oswald for final remarks.

Okay. Thank you. I appreciate everyone calling in this morning and listening. Obviously, my remarks are my remarks. I feel very good about where we are. I think that there's a lot of tailwind. We are in great shape, as I mentioned earlier, on this missile franchise in the next couple of years. Our radar business is doing terrific. And I'm getting closer and closer to Boeing and their BCA team and spending some time with them. And everything I can see, it's thumbs up 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. Look forward to connecting soon.

Thank you for participating in today's conference. This does conclude the program. You may now disconnect.