Earnings Labs

Ducommun Incorporated (DCO)

Q4 2025 Earnings Call· Thu, Feb 26, 2026

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Transcript

Operator

Operator

Good day, and thank you for standing by. Welcome to the Q4 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 your first speaker today, Suman Mookerji, Senior Vice President and Chief Financial Officer. Please go ahead.

Suman Mookerji

Analyst · Citi

Thank you, and welcome to Ducommun's 2025 Fourth 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, which 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 changes in production rates or delays in the launch and certification of new products; timing of orders from our customers, which are subject to cancellation, modification or rescheduling; 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 and as well as any potential losses arising from third-party subrogation claims 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; our…

Stephen Oswald

Analyst · Citi

Okay. Thank you, Suman, and thanks, everyone, for joining us today for our fourth quarter conference call. Today, and as usual, I will give an update of the current situation of 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 exit our third year of execution and enter the fourth on very strong footing. Strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the Ducommun 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 products 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 in high-growth segments, driving value-added pricing and expanding content on 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 catalyst ahead presents a unique value creation opportunity for shareholders. The Q4 2025 results show again that strategy and initiatives are working with gross and adjusted EBITDA margins at record levels and tracking to meet and exceed our Vision 2027 goals with much more opportunities to come for DCO. I'm also very pleased to announce that our next investor conference will be held this September in New York on the 17th, and we will present the next 5-year vision for DCO as a follow-up to our…

Suman Mookerji

Analyst · Citi

Thank you, Steve. As a reminder, please see the company's 10-K and Q4 earnings release for a further description of information mentioned on today's call. As Steve discussed, our fourth quarter results reflect another record quarter of revenue with strong growth across most of our military end markets, including fixed wing aircraft, rotorcraft, missiles and radars. Gross margin and EBITDA margins both reached new record levels. And while favorable mix contributed about 100 basis points to our results, margins would have been very strong even without that benefit. We have completed our facility consolidation projects, and this will drive further synergies in 2026 as we ramp up production of the various product lines that were moved. These actions, along with our strategic pricing initiatives drove continued gross margin expansion in Q4 and keeps us on pace to achieve our Vision 2027 goal of 18% EBITDA margin. Now turning to our fourth quarter results. Revenue for the fourth quarter of 2025 was $215.8 million versus $197.3 million for the fourth quarter of 2024. The year-over-year increase of 9.4% reflects strong growth in military and space of 13%, driven by increases in fixed-wing aircraft, military rotorcraft, missiles and radars. Our commercial aerospace business returned to growth in the quarter with revenues up 1% year-over-year with growth in A320, 787 and Bell helicopters, offsetting lower sales on the 737 MAX. We posted total gross profit of $59.8 million or 27.7% of revenue for the quarter versus $46.4 million or 23.5% of revenue in the prior year period. We continue to provide adjusted gross margins as we had certain non-GAAP cost of revenue adjustment items in the prior year period relating to inventory step-up amortization from our acquisitions. On an adjusted basis, our gross margins were 27.7% in Q4 2025, up 370 basis points…

Stephen Oswald

Analyst · Citi

Okay. Thanks, Suman. In closing, look, 2025 was a great year and Q4 another success for DCO and its shareholders to continue to drive our Vision 2027 strategy. So I'm very pleased with that. We achieved another quarter of record revenue and gross margins and adjusted EBITDA margins were also at records of 27.7% and 17.5%, respectively. The company is also well positioned to meet and exceed our Vision 2027 target of 25% plus of engineered product revenues with full year 2025 at 23%. As everyone knows, driving this percentage as high as possible is our #1 strategic focus, and we're fully committed to realizing that as we go forward. Finally, with the continued strength in defense activity and commercial build rates heading higher, I'm also very optimistic about what lies ahead in 2026 and the next few years for our shareholders, employees and other stakeholders. Okay. So with that, let's go to questions. Thank you for listening.

Operator

Operator

[Operator Instructions] Our first question comes from John Godyn from Citi.

Unknown Analyst

Analyst · Citi

This is Bradley Eyster on for John Godyn. So I just wanted to follow up on the commentary about the inventory destocking that you guys previously highlighted. And I also want to look at it in conjunction with the movements we saw in inventory working capital in the fourth quarter. So I know you outlined headwinds in the first half and -- and we're expecting an improvement in the back half of this year. But with the working capital in the fourth quarter being pretty favorable, how should we think about the magnitude of the headwinds you previously called out for the first half '26? Is there any change here? Are you seeing an acceleration of inventory draw higher than expected? I'm just curious how to look at this one.

Suman Mookerji

Analyst · Citi

I think we're -- our expectations are in line with previous comments on destocking. We expect there to be continued destocking, and there are two elements of destocking, right, destocking at our customer and destocking in our facility. Destocking in our facility does help reduce working capital tied up in the business. So we expect some of that to happen, as previously discussed in Q1 and Q2 and for the rest of the year. I think from an external destocking perspective, we see more of that happening in the first half and then ebbing as we get into the second half of 2026 as we see inventory getting burned down, mainly at Spirit -- the legacy Spirit or Boeing Wichita and also, to some extent, at Boeing Direct.

Unknown Analyst

Analyst · Citi

Got it. I also want to switch gears to the defense side. So with all the primes talking about increasing their investment in capacity. I was curious if you guys can talk a bit more about your potential medium-term opportunities here, like once this capacity begins to take effect, do you benefit proportionally of this capacity increase? Are there opportunities for you to grow faster than the market? Any color I could probably here would be appreciated.

Stephen Oswald

Analyst · Citi

Yes. Let me just jump in here. Well, first of all, I mean, this -- we really call it, at least for missiles that we call it a franchise within Ducommun because this has been one of our legacies is -- I mentioned in the script before the questions that we go across all the major missile programs. The good news is that these are all things we know how to make. These are things that are already in production. And the other thing that I mentioned is that we have a significant amount of capacity for most and where we might have a little less that we're putting CapEx into that. So that's all very positive. Now on the other side, we're not the OEM. So we have to work with the OEM and wait for the orders. But they need to get the orders from either the State Department through FMS or the Department of War. So we really see this major sort of move in 2027. We are in contact and Raytheon is having meetings and Lockheed as well. And so we couldn't be happier with all the agreements that are happening. It's just going to -- it's going to be a little bit of a lag just because these things take a little bit of time, unfortunately. Stay tuned.

Operator

Operator

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

Michael Crawford

Analyst · B. Riley Securities

Maybe just to dig down into that a little bit more. I mean you've optimized your footprint, you're done with the restructuring. And could you characterize like how much room you have to grow in your new footprint without, let's say, growth CapEx?

Stephen Oswald

Analyst · B. Riley Securities

I think we -- I mean, this would be a high-level number maybe, but it's at least we have 30% -- I mean I'm being conservative. We probably have 30% of room in our factories right now for this missile increase. So I'd say we're...

Suman Mookerji

Analyst · B. Riley Securities

And the CapEx -- additional incremental CapEx required to expand that capacity is not significant. It is something that we can accommodate within our regular CapEx budget and can implement quickly. Defense electronics capacity increases for the products we make do not entail significant CapEx or take a lot of time to put in place. So we are actively evaluating all other capacity across each of our factories in the context of all this potential new business and making investments where needed to adjust capacity. But as Steve said, here in the near term over the next 12 months, given the at least 30% existing open capacity, there is no issue in meeting demand.

Stephen Oswald

Analyst · B. Riley Securities

Yes. Mike, let me give you an example. We have a factory in Joplin, Missouri that that's where the Tomahawk is going to go. Joplin runs about $100 million a year in revenue. They do world-class cabling and other things and -- mostly defense, but some commercial, too. And we're putting the Tomahawk in a building that's already standing there that wasn't utilized. And so that's why we have that 30-plus percent. And we think that we could do $200 million in revenue in the next 3 or 4 years there with what we have. So that's very exciting to us for just one plant that's a big mover for DCO.

Michael Crawford

Analyst · B. Riley Securities

Great. No, that's super helpful. And then just maybe one separate question for me. And just on -- you do call out that you're partnering with primes on hypersonics and counter-hypersonic programs. Is that more on the structural side as opposed to the electronics? Or what are you doing there?

Suman Mookerji

Analyst · B. Riley Securities

More on the electronics side with interconnects, ruggedized interconnects that we have presence on hypersonics.

Stephen Oswald

Analyst · B. Riley Securities

Yes, a lot of cables, Mike.

Operator

Operator

Our next question comes from Ken Herbert from RBC.

Kenneth Herbert

Analyst · RBC

Steve and Suman, nice quarter. The exit rate on margins is pretty strong. How do we think about the puts and takes on margins in '26 and sort of what's implied in terms of margin expansion on the, call it, mid- to high single-digit top line outlook?

Stephen Oswald

Analyst · RBC

You want to take that?

Suman Mookerji

Analyst · RBC

Sure. Ken, excellent point and question. I would look at the exit rate not based off of Q4's EBITDA of 17.5%, but versus look at the blended EBITDA margin over the year and view that as an exit rate. As we noted, there was about 100 basis points of favorability driven by unusually or atypical product and business revenue mix in the quarter, which helped margins, but we are seeing ourselves exiting closer to the 16.5% on EBITDA as the baseline for 2026, with improvement opportunities, especially as we go into the back half as revenue scale as well as the production ramps up on the product lines that have been moved in 2025.

Stephen Oswald

Analyst · RBC

Yes. I think that's fair, Ken. I think that's probably right. I mean we had a little bit of extra benefit in Q4. Of course, we'll take it, but I think the other number is a better one to use.

Kenneth Herbert

Analyst · RBC

Okay. That's helpful. And increasingly, the 2027 targets look increasingly attainable. What -- maybe not today, but when do you think you'd be prepared to provide an update to those numbers, especially on the margin potential of the business?

Stephen Oswald

Analyst · RBC

Yes, that's a good question. Thank you for bringing that up. That will be in September. So when we announce our -- we have our investor meeting, the first part of it will be an update on the Vision 2027, and then we'll roll into the Vision 2032 and our plans for the company and investors.

Kenneth Herbert

Analyst · RBC

Perfect. And just one final question. Can you level set us on what missiles and munitions represent within the defense portfolio? Because it sounds like the growth opportunity in that business is clearly going to be much better than company average growth.

Suman Mookerji

Analyst · RBC

Absolutely, Ken. So missiles are about 1/4 of our defense business. And as you noted, the opportunity is significant for us going forward there.

Stephen Oswald

Analyst · RBC

Yes, Ken, that MIR order was a big deal for us. We don't see $80 million orders very often here. We love them, but we don't see them very often. So we were -- it's a long time coming, but that's a nice shot in the arm for the company.

Operator

Operator

Our next question comes from Tony Bancroft from Gabelli Funds.

George Bancroft

Analyst · Gabelli Funds

Great call, great quarter. Well done. Just you talked about a little bit before, but more in broader strokes, with this announcement of a potential $1.5 trillion budget, even if it goes over a longer period of time, it's still materially much larger than I think most people would even expect. How do you look at that as far as keeping up with the growth, assuming directionally that's where it's going? I know you said you have capacity, but I mean, quadrupling these numbers we've seen, are you able to do it? And then I guess, at some point, there is going to be a run rate and normalization? And how do you guys look at overcapacity? That might even be an issue right now for quite a while, but do you think about that? How do you look at that? And then maybe on top of that, a $1.5 trillion budget has got to be a lot of new opportunities. Would you guys be looking at adjacencies or even other areas to involve yourself in?

Stephen Oswald

Analyst · Gabelli Funds

Yes. Thank you, Tony. Good to be with you. I think obviously, overall, it's a great opportunity for DCO. We're -- the nice thing is our relationships with defense primes are very strong. I mentioned RTX is our largest customer. So we're critical to their success, which is what we want, right? So we're -- and we're sole sourcing a lot of things. And so that's positive. If you can see, we've done a lot of good work with Northrop Grumman in the past. I've talked about that when I first came on and through the years about getting relationships with other primes other than just having this huge number of Raytheon. And we've done that and Lockheed as well and working on other things. So we think it's -- we read the headline and took our breath away a little bit, but we feel really good about it. And on the capacity side, again, we have really good footprints in the Midwest for these electronic systems. We have, again, I think, at least 30% in our back pocket. And that's just with, as Suman mentioned, regular CapEx feeding every year for the company. So nothing extraordinary you're going to hear from us, I'm sure, in the next few years. And lastly, we're continuing to work on building relationship with new warfare and building relationships with -- we already have a relationship with GA and other companies to take advantage of the CCA warfare program as well as others, hypersonics. So our defense business is strong. It's only going to get stronger. It's only going to get bigger.

Operator

Operator

[Operator Instructions] Our next question comes from Sam Struhsaker from Truist Securities.

Samuel Struhsaker

Analyst · Truist Securities

I guess, first and foremost, I'm a little bit curious just on the destocking on the MAX. I'm curious, is there any way you could maybe break out, I guess, kind of how much of what remains is internal versus external?

Suman Mookerji

Analyst · Truist Securities

Yes. It is more external than internal. I wouldn't say that -- we haven't really broken that out publicly. But I would say that yes, it is more external versus internal on the MAX. And for context, let's also keep in mind that the large commercial platforms are about -- including both Boeing and Airbus are about 50% of our commercial aerospace revenues. So the impact of destocking as well as the recovery needs to be weighted in our commercial aerospace forecast accordingly.

Stephen Oswald

Analyst · Truist Securities

Yes. And I also say this, we had 1% growth in Q4, which obviously is nice. But part of that, we had a big revenue bump up in in-flight entertainment versus Q4 2024. So that was one of the big reasons we got to the positive side in Q4. So yes, we don't break it out. We're -- the best news is that as we go forward here, we got all confidence that Kelly and Boeing are going to do their thing. And we're going to -- this is -- there's better days ahead, let's put it that way, okay, because the pull, the demand side is going to help a big time on this.

Samuel Struhsaker

Analyst · Truist Securities

Got it. Absolutely. And I mean, I guess, kind of in turning to maybe the better days ahead, so to speak, are you guys saying that you're totally prepared once the destocking is out to switch production to whatever the rate increases are at Boeing and Airbus? Is it kind of move up throughout the year?

Stephen Oswald

Analyst · Truist Securities

Yes, you kind of came in or come out, but I think what you asked is that are we ready for the build rate increases for both Airbus and BA?

Samuel Struhsaker

Analyst · Truist Securities

Yes.

Stephen Oswald

Analyst · Truist Securities

Yes, 100%. We can't wait. We're waiting for the year.

Samuel Struhsaker

Analyst · Truist Securities

Awesome. And then if I could just sneak in one last one. All the production lines that just recently got moved in and out are now up and running with their new facilities. So they're not necessarily all quite at full run rate. But I was curious if you could put any kind of details around the cadence of those all getting to full run rate and if there will be any kind of margin benefit that you might associate with that once they are running at full rate.

Suman Mookerji

Analyst · Truist Securities

So I think we expect that to get to full rate by the second half of this year. We had projected $11 million to $13 million in total synergies as of Q4 of 2025, I would say approximately half of that is in the P&L on a run rate basis with another $6 million to $7 million to go, and that will come into the P&L over the course of this year, getting to run rate by the end of this year.

Stephen Oswald

Analyst · Truist Securities

Yes. The last one is the Tomahawk. We made 18 cables for it. And there's a lot has to happen on that missile. And that's the one we are still working on a few things. That will be second half for sure.

Operator

Operator

Our next question comes from Connor Dessert from Goldman Sachs.

Connor Dessert

Analyst · Goldman Sachs

You've got Connor Dessert on for Noah Poponak today. I appreciate the commentary that you guys had about upsizing the credit facility so that you could execute more on the acquisition strategy. I was curious if you guys could give us an update on what the M&A market is looking like from your perspective today. We've heard some other A&D suppliers comment that activity has picked up, and there are a lot more potential deals out there with more willing sellers. So I was curious if you guys are seeing a similar level of activity for the assets that are in your target range and how competitive some of the bidding processes are for those assets?

Suman Mookerji

Analyst · Goldman Sachs

Yes, we are seeing increased activity. We are very much involved in any and all processes that involve assets with engineered products within our size range. It is competitive. There are -- and valuations are not cheap, but we'll remain disciplined. We continue to evaluate multiple opportunities. And we think that there are opportunities where we can create value at the current multiples at which these assets are trading.

Stephen Oswald

Analyst · Goldman Sachs

Yes. We're seeing good things. More to come on that.

Connor Dessert

Analyst · Goldman Sachs

Okay. That's helpful. And then just kind of a follow-up on that. As I look out through '26 and '27, I think Vision 2027, you guys have had a $75 million revenue contribution placeholder from M&A. It starts to look a little more possible that at least the bottom end of that range could be reached just organically from here. Is that kind of the right way to think about it given some of the pickup in momentum, especially in some of the defense areas of the business? Or in your guys' view, does that Vision 2027 still rely on that $75 million placeholder from M&A?

Suman Mookerji

Analyst · Goldman Sachs

Yes. I would say, yes, it does getting to that -- within that range will definitely require the M&A piece, mainly driven by commercial aerospace recovery pace that we have seen versus what everyone would have naturally expected back in December of 2022 when we put that plan together. The production outlook at that point in time versus reality today is very different. Defense has been great, and we'll continue to see strong growth. We should continue to remain bullish but some of that will happen in 2027 and beyond in terms of production ramp-up on some of these missile platforms. So the longer-term outlook for the company and defense is very strong, but it's -- not all of it is going to come into 2026 and 2027.

Stephen Oswald

Analyst · Goldman Sachs

But we're going to -- we're working on the $75 million. I mean, we purchased BLR in 2023. So that's part of the $75 million, which is helping, but we've got more work to do on the $75 million, and we're hard at it there, Connor.

Operator

Operator

I am showing no further questions at this time. I would now like to hand it over to Steve Oswald for closing remarks.

Stephen Oswald

Analyst · Citi

Great. Thank you. And again, thanks for joining us. I very much appreciate your time this morning. Also all the excellent questions. We always appreciate the dialogue after our script -- reading our scripts. So I thought that was great. We are excited about the year. We're also looking forward, as I mentioned earlier, to our September meeting in New York, and we hope that everybody can either make it personally in-person or online. We think it will be an exciting, exciting day for not only to update on the Vision 2027 progress, which we're happy about, but also talk about our big future together. So with that, I'll leave it, and have a great and a safe day. Thank you.

Operator

Operator

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