Ducommun (DCO) Q3 2025 Earnings Call Transcript

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Date

Thursday, Nov. 6, 2025 at 1 p.m. ET

Call participants

• Chairman, President, and Chief Executive Officer — Steve Oswald
• Vice President, Chief Financial Officer, and Treasurer — Suman Mookerji

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Risks

• GAAP net loss of $64.4 million, or $4.30 per share, includes $99.7 million in litigation settlement and related costs from the Guaymas facility fire.
• Commercial aerospace revenue declined 10% due to ongoing destocking at Boeing (NYSE:BA) and Spirit AeroSystems (NYSE:SPR). Management expects this headwind to continue into 2026.
• Guidance indicates continued pressure in commercial aerospace while defense remains the growth driver. There is no expectation for catch-up to Boeing production rates in 2026 due to customer and internal inventory overhangs.

Takeaways

• Revenue -- $212.6 million, up 6%, a new quarterly record and the eighteenth consecutive quarter of revenue growth.
• Defense business -- Segment grew 13%, marking the third straight quarter of double-digit growth, with missiles up 21%, military fixed-wing up 17%, and rotary-wing platforms up 22%.
• Commercial aerospace -- Segment revenue down 10% due to destocking at Boeing and Spirit AeroSystems.
• Backlog and orders -- $338 million in Q3 bookings, resulting in a record $1.03 billion in remaining performance obligations (RPO) and a book-to-bill ratio of 1.6 times.
• Gross margin -- $56.5 million, or 26.6% of revenue, a record percentage and 40 basis points above the prior year’s GAAP margin; adjusted gross margin was 26.6% versus 26.5% last year.
• Adjusted EBITDA -- $34.4 million, 16.2% of revenue, expanding 30 basis points, the third consecutive quarter above $30 million.
• Litigation settlement -- $99.7 million charge recorded for the Guaymas fire litigation; company to pay $150 million with $56 million reimbursed by insurers and $1.35 million to settle ancillary subrogation claims.
• Adjusted EPS -- Adjusted EPS was $0.99 per diluted share, matching the prior year, while GAAP EPS registered a loss of $4.30 per share due to litigation costs.
• Segment results — Structural Systems -- Revenue of $89 million, operating margin excluding restructuring charges and other adjustments of 16%, with increases driven by military rotorcraft and ground vehicles, partially offset by declines in business jets.
• Segment results — Electronic Systems -- Revenue of $123.1 million and 17.5% adjusted operating margin in Q3 2025, driven by growth in missiles, fixed-wing aircraft, radar, and $5 million growth from industrial customers making last-time buys.
• Engineered products -- Comprised 23% of revenue year to date in Q3 2025, up from 15% in 2022, supported by organic growth and a strategic focus on increasing contribution above 25% by 2027.
• Restructuring -- $0.6 million net restructuring charge in Q3; on track for $11-$13 million in annual savings by 2026, with Monrovia facility being marketed and Berryville facility sold in Q2.
• Cash flow and liquidity -- $18.1 million in operating cash flow versus $13.9 million last year, with $250.7 million available liquidity and entire $200 million revolver undrawn at quarter end.
• Interest expense -- $2.9 million, down from $3.8 million, aided by a seven-year interest rate hedge locking in one-month SOFR at 170 bps for $150 million of debt.
• Leverage and settlement payment -- Plan to draw $95 million from the revolver for litigation payment in Q4, resulting in pro forma net leverage of about 2.3 times and $100 million plus remaining revolver capacity.
• Tariffs -- No material impact from tariffs, with 95% of revenue and most supply chain activity domestic. Management expects tariffs to remain immaterial going forward.
• Guidance reaffirmed -- Mid-single-digit revenue growth guidance for 2025 and expectation for low double-digit growth in Q4, with continued headwind from commercial aerospace destocking offset by robust defense demand.

Summary

Ducommun (NYSE:DCO) reported record quarterly revenue and gross margin percentage, driven by continued defense segment outperformance and backlog growth. Management executed a binding settlement on the Guaymas facility fire litigation, resulting in a significant GAAP net loss. Adjusted earnings remained stable as the company focused on operational efficiency and engineered product expansion. Restructuring initiatives and strategic pricing supported margin expansion, while liquidity and capital structure strengthened with no material impact from tariffs, setting conditions for future M&A activity.

• Management disclosed plans to shift further industrial production capacity to aerospace and defense as last-time industrial customer buys subside, enabling more efficient use of Appleton facility assets.
• Facility consolidation and relocation to lower-cost geographies are projected to accelerate margin improvement in 2026 as receiving plants ramp to full-rate production.
• Engineered products revenue growth was entirely organic over the past year, and additional contribution from M&A is anticipated as credit facility expansion discussions advance.
• Defense and radar platform alignment positions Ducommun with key U.S. and NATO defense priorities, including missile and SPY-6 radar programs referenced as funding catalysts in upcoming budgets.
• Adjusted free cash flow conversion to adjusted net income improved to 73% year to date, a substantial increase from both 2023 and 2024 levels. Management is targeting a 100% long-term conversion rate.
• Updated guidance confirms anticipated defense-driven low double-digit total growth in the next quarter, while commercial aerospace recovery timing depends on the pace of inventory destocking at OEMs and within the company.

Industry glossary

• Backlog: Sum of orders forecasted to be delivered (shipped) within a defined time frame, often two years, may include firm orders and anticipated deliveries under long-term agreements.
• RPO (Remaining Performance Obligations): Total contracted but undelivered revenue, with no time constraint, representing future revenue yet to be recognized on the balance sheet under ASC 606.
• Book-to-bill ratio: Measure of current demand, calculated as the dollar value of new orders received in a period divided by the revenue billed in the same period; values above 1.0 indicate growing backlog.
• Engineered products: Customized or highly specified products with engineering content, differentiated from standard contract manufacturing, typically carry higher margins and strategic value.

Full Conference Call Transcript

Suman Mookerji: Thank you, and welcome to Ducommun's 2025 Third Quarter Conference Call. With me today is Steve Oswald, Chairman, President, and Chief Executive Officer. I am 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 US 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 financing and service existing debt, fund capital expenditures, and meet our working capital needs.

Legal and regulatory risks, including pending litigation matters, generally as well as any potential losses arising from third-party subrogation claims related to the Guam's 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, risks associated with the prolonged U.S. Federal government shutdown, the ability to attract and retain key personnel and avoid labor disruption, the ability to adequately protect and enforce intellectual property rights, pandemics, disasters, natural or otherwise, and risk of cybersecurity attack.

Please refer to our annual report on Form 10-Ks, 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. 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 have filed our Q3 2025 quarterly report on Form 10-Q with the SEC. I would now like to turn the call over to Steve Oswald for a review of the operating. Steve?

Steve Oswald: Thank you, Suman, and thanks, everyone, for joining us today for our third-quarter conference call. Today, as usual, I will give an update on the current financial situation of the company. Afterwards, 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 finalize our third year of execution in Q4 2025, the strategy and vision were developed coming out of the COVID pandemic over 2022. Unanimously approved by the common board in November 2022, then presented the following month in New York to investors where we got excellent feedback.

Since that time, the Commons 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 and high-growth segments, driving value-added pricing, 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 catalysts ahead present a unique value creation opportunity for Ducommun. The Q3 2025 results show again the strategy initiatives are working.

With both gross and adjusted EBITDA margins, for example, at record levels with much more opportunity to come. For Ducommun. I am also very pleased to announce that our next investor conference will be in 2026 in New York. We will present the next five-year vision for Ducommun, which I believe will be very compelling. I look forward to it. For Q3, I am pleased to report that revenues reached a new quarterly record of $212.6 million, or 6% over last year. Beating our prior record of $202.3 million just set last quarter. And marking this our eighteenth consecutive quarter of year-over-year growth in revenue.

We achieved this despite continued headwinds in our commercial aerospace business, which has been previously forecasted due to destocking at Boeing and Spirit. The company, however, continued to see double-digit growth in the defense business, grew 13% during the quarter. Making it our third double-digit quarter in a row. The growth in defense was driven by strong, very strong performance in our missile franchise, grew by 21% in the quarter, along with our military fixed-wing aircraft business of 17%. And rotary-wing aircraft platforms rising 22%. The outlook for our defense business continues to look great.

In addition to the highlights I just mentioned, the Apache tail rotor blade is now fully approved by Boeing and in production at our new location in Coxsackie, New York. The TOW missile case is also in production in Guaymas, Mexico, with just one last sign-up from RTX on the case harness remaining. This is all very good news with the Tomahawk, our last major program to move, set for full production in 2026. Separately, and as previously mentioned, our team continues to build scale at other defense customers outside of RTX, which has been a long-term goal. A great example is BAE Systems, at over $21 million, up 39% year to date versus 2024.

Ducommun also had an excellent bookings quarter. With $338 million of new orders in Q3, representing a book-to-bill of 1.6 times. This increased our remaining performance obligations to $1.03 billion as well. A new record for the company. We feel very confident now about our momentum in orders, and Q4 as well is looking strong. Across the board. I talked about our missile business earlier this year, and that continues to outperform. We are positioned very well strategically to benefit from the replenishment of depleted worldwide inventories along with very robust US and FMS order activity.

Ducommun is a supplier on over a dozen key missile platforms, including AMRAAM, MIR, PAC-3, SM-2, SM-3, SM-6, Tomahawk, Naval Strike Missile, and TOW, amongst others. Our missile business is up 21% in the third quarter and is now up 27% year to date in 2025. We see continued growth in our pipeline of opportunities going forward, which is excellent news. Complementing our missile portfolio is a strong radar franchise, which is up and coming at Ducommun.

This includes marquee programs such as the SPY-6 radar, which I mentioned earlier, the LATAM's radar, which is part of the Patriot missile defense system, the TPY-2 radar used on the THAAD missile defense system, the GATR radar used by the US Marine Corps, and various other radar platforms. This combination of both missile and radar platforms positions and aligns us with key defense priorities outlined in the US defense budget, including the Golden Dome, as well as NATO priorities. 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 received approval from the FAA to increase their build rates from 38 to 42 on the 737 MAX, as well as strong momentum in the 787 builds. This reinforces our optimism about the commercial business once we get through the destocking in 2026. We also like the balance of having both defense and commercial aerospace revenues contributing and offsetting at times. Gross margins also grew $3.8 million to 26.6% in Q3, on par with the record gross margin percentage achieved in 2025.

Up 40 basis points year over year from 26.2% as we continue to realize the benefits from our growing engineered products portfolio with aftermarket, strategic value pricing initiatives, restructuring actions, and productivity improvements. We also sold the Berryville, Arkansas facility in Q2, and are actively marketing the Monrovia, California facility, and we are seeing initial cost savings in our P&L with $11 to $13 million still on target in 2026. For adjusted operating income margins in Q3, the team delivered 10.6%, which was just above the prior year of 10.5%. Structural Systems segment margin grew nicely in the quarter with productivity improvements and a good mix of profitable business.

Adjusted EBITDA continues to improve on our march to our Vision 2027 goal of 18% in 2027 from 13% in 2022. Ducommun achieved 16.2% of revenue for the first time in Q3, up $2.5 million from Q3 2024 to $34.4 million. Tremendous progress in the past three years. It is our third consecutive quarter with adjusted EBITDA above $30 million, and it represents an expansion of 30 basis points above the prior year. And nine quarters to go to reach 18%. Subsequent to our three months ended 09/27/2025, in October, we entered into a binding settlement term sheet to resolve the Guaymas fire litigation against us.

The term sheet provides for, amongst other things, the final dismissal of the Guaymas fire litigation against us with prejudice and release of claims against us in exchange for us issuing a payment of $150 million, $56 million of which is expected to be funded by our insurance carriers. In addition, we also settled ancillary subrogation claims for $1.35 million. The Guaymas facility fire occurred in June 2020. We recorded settlements and related costs of $99.7 million in Q3, and those charges are reflected in our GAAP earnings results. GAAP EPS was a loss of $4.30 a share in Q3 2025 versus income of 67¢ per diluted share for Q3 2024.

With the adjustments, diluted EPS was 99¢ a share in Q3 2025 and in line with the adjusted diluted EPS of $0.99 in the prior year quarter. The lower GAAP EPS was due to litigation settlements and related costs net. I am happy to report that this quarter, the company's RPO grew to a new record level of $1.03 billion, increasing $125 million sequentially. Growth in RPO during the quarter was both across commercial aerospace and defense businesses. We closed on a number of opportunities that restocked our RPO and are well-positioned for continuing revenue growth. Our book-to-bill again was 1.6 times, a great number for Ducommun, and excellent momentum ahead in the pipeline for Q4.

On the outlook for the fourth quarter, we expect to see continued momentum in the defense business partially offset by the impact of destocking in commercial aerospace. We are reaffirming our guidance of mid-single-digit revenue growth for the full year 2025 and reiterating our expectation for low double-digit growth in Q4. In addition, tariffs have not had a material impact on our results, and we expect that to continue, which is a great story for our investors. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we saw revenues of $126 million compared to $111 million in Q3 2020.

Growth was driven by a fifth straight quarter of strong year-over-year improvements in missile programs such as the Naval Strike Missile, Ram, AMRAAM, as well as solid growth in military rotorcraft. On the SPY-6 radar and on military ground vehicles. Within our commercial aerospace operation, the third quarter declined 10.10% year over year to $77 million, driven mainly by lower rates on regional and business jets and, of course, Boeing platforms. As I mentioned earlier, we believe that finally, much better stories are ahead for Boeing and MAX now that inventory production is ramping up and they are working through their overstock. Inventory.

Revenue in our industrial businesses increased $5 million during Q3 with customers making last-time buys and replenishing depleted stock. While not core to our portfolio, there are a few cuts that we continue to serve with no interruption to our core aerospace and defense business. With that, I will have Suman review our financials in detail. Suman?

Suman Mookerji: Thank you, Steve. As a reminder, please see the company's 10-Q and Q3 earnings release for a further description of information mentioned on today's call. As Steve discussed, our third-quarter results reflected another record quarter of revenue with strong growth across all our military end markets, including missiles, fixed-wing aircraft, rotorcraft, ground vehicles, and radars. Gross margins maintained at record levels established in the first half, and we saw another quarter of record EBITDA. We are nearly at the end of our facility consolidation project, which will drive further synergies into 2026 as we ramp up production of the various product lines that were moved.

As Steve highlighted earlier, we also made great progress in continuing to build up our engineered products portfolio, with those revenues contributing 23% to our mix this year. These actions, along with our strategic pricing initiatives, drove continued gross margin expansion in Q3 and are keeping us on pace to achieve our Vision 2027 goals. Now turning to our third-quarter results. Revenue for 2025 was $212.6 million versus $201.4 million for 2024. The year-over-year increase of 6% reflects strong growth in military and space of 13%, driven by increases in missiles, fixed-wing aircraft, military rotorcraft, ground vehicles, and radars.

This was partially offset by weakness in our commercial aerospace business, mainly driven by lower revenues across large commercial, including both Boeing and Airbus platforms and on business jets. We posted total gross profit of $56.5 million or 26.6% of revenue for the quarter versus $52.7 million or 26.2% of revenue in the prior year period. We continue to provide adjusted gross margins as we had certain non-GAAP cost of revenue adjust items in the prior year period relating to inventory step-up amortization on our acquisition. On an adjusted basis, our gross margins were 26.6% in Q3 2025 and 26.5% in Q3 2024.

I also want to add that we did not see any measurable impact from tariffs in the third quarter. And as Steve mentioned, we do not anticipate any significant impact on our P&L at this time. 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 to domestic customers, with US revenues in excess of 85% year to date. Q3. Revenues to China were up 3% year to date, mostly one customer for Airbus, and there has been no impact on those volumes or orders at this time due to the tariffs.

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 very manageable spend. With China being a low single-digit percentage. We expect to largely 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. Ducommun reported an operating loss for the third quarter of $80.1 million compared to operating income of $15.3 million or 7.6% of revenue in the prior year period.

Adjusted operating income was $22.4 million or 10.6% of revenue this quarter compared to $21.1 million or 10.5% of revenue in the comparable period last year. The net operating loss was experienced due to the litigation settlement and related costs of $99.7 million. The company reported a net loss for 2025 of $64.4 million or $4.30 per share. Compared to net income of $10.1 million or 67¢ per diluted share a year ago. On an adjusted basis, the company reported net income of $15.2 million or $0.99 per diluted share compared to adjusted net income of $14.8 million or $0.99 in Q3 2024.

The GAAP net loss was primarily due to the litigation settlement and related costs, and the higher adjusted net income during the quarter was driven by higher adjusted operating income after excluding the litigation settlement and related costs. Now let me turn to our segment results. Our Structural Systems segment posted revenue of $89 million in 2025 versus $86 million last year. The year-over-year change reflects $6 million of higher revenue in our military and space business driven by military rotorcraft and ground vehicles offset by $2.5 million in lower revenues across our commercial aerospace business, mainly driven by lower revenues on the business jet platform.

We have completed the transition of certain commercial rotorcraft product lines under our facility consolidation initiative, and we are starting to see growth in those platforms. Structural Systems operating income for the quarter was $11.9 million or 13.3% of revenue. Compared to $8.3 million or 9.6% of revenue for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 16% in Q3 2025 versus 14.7% in Q3 2024. The increase in year-over-year margin was driven by savings from plant consolidation. Our Electronic Systems segment posted revenue of $123.1 million in 2025 versus $115.4 million in the prior year period.

The year-over-year change reflected $8.2 million in higher revenues in military and space applications driven by strong growth in missiles, fixed-wing aircraft, and radar systems. Our industrial business increased $5 million during Q3 with certain customers making last-time buys. Growth in these segments was partially offset by lower revenues from commercial aerospace. Electronic Systems operating income for the third quarter was $21.1 million or 17.1% of revenue, versus $18.9 million or 16.4% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 17.5% in Q3 2025, versus 16.8% in Q3 2024. The year-over-year increase was driven by higher manufacturing volumes.

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. 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 Berryville, Arkansas, and the transfer of that work to our low-cost operation in Guaymas, Mexico, and to other existing performance centers in The United States. We continue to make progress on these transitions, and the receiving facilities have started ramping up production here in Q4.

Last month, we started full production of rotor blades for the Apache helicopter at our Coxsackie, New York facility, which completes the transition of that program from California. We also completed the transition for 737 MAX spoilers and TOW missile cases, both of which are now in production in Guaymas. During Q3 2025, we recorded $600,000 net in restructuring charges. We expect to incur an additional $5 million in restructuring expenses as we complete the program by the end of Q4. As previously communicated, we expect to generate $11 million to $13 million in annual savings from our actions and have already seen some realization of savings in 2024 and in the current year.

We expect the synergies to ramp up in 2026 as the receiving facilities move up the learning curve and ramp up to full-rate production. We are actively marketing the land and building in Monrovia after having closed on the sale of the Berryville facility in Q2. Turning next to liquidity and capital resources. In Q3 2025, we generated $18.1 million in cash flow from operating activities, which was an improvement compared to $13.9 million in Q3 2024. The improvement was due to higher adjusted operating income, lower interest costs, and lower cash taxes, partially offset by higher operating working capital.

As of the end of the third quarter, we had available liquidity of $250.7 million, comprised of the unutilized portion of our revolver and cash on hand. Our existing credit facility was put in place in July 2022 at an opportune time in the credit market, allowing us to reduce our spread, increase the size of our revolver, and allowing us flexibility to execute on our acquisition strategy. 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 available to us at this time. We expect to draw down $95 million during Q4 to make payment under the legal settlement agreement.

After the drawdown, we expect pro forma net leverage to be approximately 2.3 times. This leaves sufficient leverage headroom and also in excess of $100 million available to us on the revolver along with cash on hand. This provides sufficient liquidity to fund our operations and execute on our acquisition agenda. Separately, we are working with our banking group to expand and extend our credit facility to support the next leg of growth at Ducommun. Interest expenses in Q3 2025 were $2.9 million compared to $3.8 million in 2024. The year-over-year improvement in interest cost was primarily due to lower interest rates along with a lower debt balance.

In November 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting January 2024. And takes the one-month term SOFR at 170 basis points for $150 million of our debt. The hedge will continue to drive significant interest cost savings for the rest of 2025 and beyond. To conclude the financial overview for Q3 2025, I would like to say that the third-quarter results continue the strong results we have achieved this year. Building on the momentum from 2024 and positioning us well for the rest of the year and beyond. I will now turn it back over to Steve for his closing remarks.

Steve Oswald: Okay. Thanks, Suman. Appreciate it. Okay. Just in closing, Q3 was another success, I believe, for Ducommun and its shareholders. To continue driving our strategy while effectively managing the headwind from commercial aerospace. We achieved another quarter of record revenue. Adjusted EBITDA margins and adjusted gross margins are also at record levels, 16.2% and 26.6%, respectively. The company is also well-positioned to meet and exceed our Vision 2027 target of 25% plus of engineered product revenues, year to date, 2025 Q3 at 23%. As everyone knows, driving this percentage as high as possible is our number one strategic focus and drive here at the company.

Finally, with the continued strength in defense activity, the commercial bill rates setting higher, I am very optimistic about what lies ahead in Q4. And the next few years for our shareholders, employees, and other stakeholders. I thank you for listening, and let's go to questions.

Operator: Thank you. At this time, we will conduct the question and answer session. And as a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Ken Herbert of RBC Capital Markets. Your line is now open.

Ken Herbert: Yeah. Hey. Good morning, Steve and Suman.

Steve Oswald: Good morning, Ken.

Ken Herbert: Hey, Steve. I first wanted to ask, really strong bookings in the quarter within commercial aerospace. Can you provide any more sort of detail in terms of what you saw there and specifically level set us maybe at what your ship rate is currently on the MAX and maybe how much of a headwind we should think about that in 2026?

Steve Oswald: Yeah. Let me just thanks, Ken. Good to hear from you. And I can jump in as well. Let me first talk about the, you know, the build rates. So you know, the MAX build rate is really people always talk about Boeing and the build rates, and that's true for us. But we have a lot of business at Spirit. So it's really I think we probably have more on the MAX at Spirit than we do at Boeing. Obviously, we do spoilers direct, and we do some other things direct. We do a lot of stuff for the fuselage at Spirit. You know, that's still down.

I mean, it's still running, I would say, probably 26, 28, you know, a month. Right? That's not fair. In terms of us shipping our physical product, we're seeing, you know, mid-twenties to high-twenties, let's say. And, you know, I would say our well, we want to maintain level load in our factories. Our production, depending on the parts, and our view of inventory in the system. Our part production may range between 30 to 40 aircraft per month. So there are times for certain parts where we are continuing to build ahead to balance production in our facilities. We did see growth in bookings across Boeing and Airbus.

We got some good additional order inflow for work we do on the nacelles for Airbus, not directly to Airbus, but on Airbus platforms. So it was good to see the booking pick up. And remaining performance obligations pick up for commercial aero. I mean, it certainly did for defense as well. It was good to see that tick up for commercial aerospace as well this quarter.

Ken Herbert: Great. Thanks, Steve. And if I could, you're the guide, you know, mid-single-digit growth for the full year to your comment implies low double-digit growth in the fourth quarter. What are the puts and takes on that mid-single-digit? I mean, where could we maybe see upside in the fourth quarter? Where are you still sort of seeing some pressure perhaps as you think about closing out the year?

Suman Mookerji: I would say that continues to be pressure with destocking on the commercial aerospace side. So we expect that to continue to be a headwind that we will work through. Medium to longer-term outlook continues to get more and more positive and brighter. But the immediate impact here in Q4, I think we'll continue to see some pressure there. On the defense side, we continue to see strong activity. We expect that to be the bright spot in Q4 as well. Both with order intake and revenues.

Steve Oswald: I think we try to be as balanced as possible. I mean, one of the real bright spots is the 787, even though they're gonna do a lot more down and they have a lot of plans for that, is that, you know, they're gonna get to eight or ten, which I'm sure they'll get through fairly quickly, you know, that's real money for Ducommun. So we're really enthusiastic about that program as well.

Ken Herbert: Great. Thanks, Steve. Suman, I'll pass it back there.

Steve Oswald: Okay. Thanks, Ken. Appreciate it.

Operator: Thank you. Our next question comes from the line of Mike Crawford of B. Riley Securities. Your line is now open.

Mike Crawford: Yes. Thank you, B. Riley. So what's that $100 million difference in the RPO and the backlog between that $1.03 billion and the $1.116 billion?

Suman Mookerji: You mean what is the where did the delta? Oh, yeah. So it came evenly between both commercial aerospace as well as defense. So we saw order intake on both fronts and driving the growth in RPO. As you said, on the commercial side, we saw growth with Airbus, but also with the onboarding platforms. In order intake. On the defense side, we continue to see strong intake of orders on missile platforms. That continue to support our growth there.

Steve Oswald: I think he was asking also the 100 the difference between backlog and RPO.

Suman Mookerji: Oh, the difference between backlog and RPO. I'm sorry. Can I get that what you want?

Mike Crawford: Yes.

Suman Mookerji: Yeah. Okay. The difference in backlog so RPO is the is the GAAP term. Right? So that's the remaining performance obligations that is revenue yet to be recognized. Backlog is more linked to shipments. So that's kind of the primary difference. Backlog, we also constrained to a two-year window. We include forecasts under LTAs. Within backlog. I would refer you to our 10-K and filings where we have kind of given a full and more precise definition of the backlog. But those are the key items that are within backlog, whereas RPO is unconstrained, there isn't any time period constraint.

It's the total remaining, you know, orders that are unfulfilled or for which we have not recognized revenue as yet in our financial statement.

Mike Crawford: Okay. Yeah. That makes sense. And then for engineered product, the year-to-date mix was 23%. I think that's the same as it was in the first half. So just want to make sure that was the mix in the third quarter itself. And then if you had any thoughts on whether that is growing faster than the rest of the business in Q4 and or next year.

Steve Oswald: Yeah. So first, yeah. So, look, we're really happy, you know, from where we came from a couple of years ago, 23% is a good number. Hard to do. Right? Because you do have we do have a big contract manufacturing business. Right? So you're fighting the percentages. So we're pleased with 23%. We did have we've had a good first nine months. I see that, you know, going forward now. I also mentioned that the upticks last year have been all organic. Which, you know, has been terrific. Right?

So we're using shareholder money and buying these companies in the last, you know, four, five, six years actually had doing a fairly good job, I think, for the organic growth. So see that continuing. Obviously, we also have our other leg of our strategy, which is our acquisitions, and you know, and that's all gonna be engineered products and aftermarket. And that's, you know, Suman is obviously leading that along with myself and the rest of the team. So we feel good about it. You know, we've got nine quarters to go, Mike. So, you know, we're confident we're gonna beat that number. Twenty-five.

Mike Crawford: Yeah. Okay. Thanks. And then last one for me is so from last time buys, industrial was up in the third quarter, but I imagine that starts to come down and then it is down, you know, next year, maybe thereafter. And so what do you do with that manufacturing space? Is it what's what is it port over to? Alright.

Suman Mookerji: Well, that moves primarily to aerospace and defense. And that the objective behind pruning our industrial business where we are not getting sufficient return. And we did see, as we noted, slightly higher revenues this quarter. I think it goes back to the run rate we have been seeing in Q1 and Q2 of this year. And it kind of again, here in Q4, you know, will be flattish to slightly down potentially, you know, in the future as we don't make the required margin. Not gonna continue that business.

Steve Oswald: Yeah. And my goal, all that business is cards. So all that business is circuit cards or CCAs. So as that goes down, that goes directly over to Raytheon cards and, you know, other cards that we're making for customers. It's primarily out of Appleton. Right? This is the Appleton facility. So it's a nice mix where we're just gonna we still have the same SMT machines. We have the same people. It's just that, you know, so it's not like it's in three different locations, so it's gonna be it's gonna be easy for us.

Mike Crawford: Okay. Excellent. Thank you so much.

Steve Oswald: Yeah. Bye. Great to hear from you.

Operator: Thank you. Our next question comes from the line of Sam Struhsaker of Truist Securities. Your line is now open.

Sam Struhsaker: Hi, guys. On for Mike Ciarmoli today. Appreciate you taking the questions. It looks like margins have kind of been nice, steadily improving and expanding here. I was just curious if you could get some, you know, thoughts from you guys on sort of where you're thinking about kind of cadence of opportunities to continue to expand those margins might fall both for 2025 and throughout 2026. Thanks.

Suman Mookerji: Yeah. No. That's a good question. And, you know, we do expect margins to be stable here for the rest of 2025, and then and as we look into 2026, again, we provide specific guidance on margin. But what I would say is that big opportunity for us is to drive the savings from our facility consolidation effort. So all the product lines that, you know, Steve mentioned earlier that we have transitioned from high-cost locations to lower-cost locations are going to ramp up and we get up the learning curve on production with these products. They're going to drive strong savings for us. In 2026. So that's gonna be a key driver.

In addition to the things we do all day every day. Right? We want to get paid for the value we provide and drive strategic pricing. We want to find opportunities to continue to drive cost efficiencies. And we want to continue our transition to more engineered products, which improves revenue mix and drives higher margins. Those will continue. But the big nuggets there in 2026 is facility consolidation.

Steve Oswald: Yeah. I think that the overall, Sam, that's sort of the recipe. You know? We're gonna continue to enjoy, you know, we have very good demand in aftermarket and commercial aerospace. We'll continue to enjoy that. Obviously, you know, we're gonna continue to where we provide value, raise prices. Each and every year in that area. Well as engineered products. So we have a lot of strength there and just more of the same. So we feel good about next year on margins.

Sam Struhsaker: That's great. Thanks. And if I could just sneak in one other. I'm curious. You guys obviously called out M&A as, you know, a point of interest in the past, but just kind of curious about your thoughts on capacity there following this recent litigation expense, and maybe if there's any change in timeline there. Thanks. That's all.

Steve Oswald: Cool. Thank you, Sam.

Suman Mookerji: Yeah. So we do continue to have availability on our revolver, and we will. Post the drawdown related to the litigation settlement. Our net leverage, as I said earlier, is expected to be low twos. After making that payment. And we continue to generate cash. We'll continue to pay down debt and lower that leverage, and that opens up capacity for us going forward. We are in discussions with our banks to increase the size of our facilities and extend the tenure of our current facility. So that we have more flexibility going forward on being able to execute on acquisitions. So M&A continues to be a focus area for us.

And we have and we'll continue to ensure we have sufficient liquidity to be able to execute on that plan.

Sam Struhsaker: Great. Thanks.

Operator: Thank you. Our next question comes from the line of Tony Bancroft of Gamco Investors. Your line is now open.

Tony Bancroft: Hey, gents. Great job. As always. Just you talked about Golden Dome. I know it's pretty far out. It's a bogey pretty far out there, but, you know, a lot of your customers, a high percentage of your customers are gonna be big, probably, participants in this program. And have you heard anything initially, maybe what they're telling you so you can begin the planning phase or, you know, what parts of your business do you think you're gonna be most exposed to it? Thanks.

Steve Oswald: Yeah. Well, look. It's certainly something, you know, we're excited about because we are very, to your point, very well positioned. You know, obviously, the missile franchise that we have, depending on what they use, what they deploy, I mean, you know, we're pretty much on every missile or pretty close to every missile. But just on the RTX side. So, you know, we feel great about that. The other positive thing for investors, and I talked about this, you know, it just it's happened for reasons like offloading from RTX for the SPY-6. And other things. And we really we're really starting to build a radar franchise that, you know, is gaining more and more traction.

That's gonna be the other thing. Right? I mean, you know, we not only make radar for, you know, ground-based installations. I mean, you know, something that's exciting that, you know, we're thankful that's gonna go forward is the E-7 Wedgetail, which we do a lot with for Northrop. It's a folks that don't know, it's a Boeing plane outfitted. You know, for sort of the brain of warfare. And so that's on its way. As well. So not that it's not Golden Dome, but it's all about, you know, us being well-positioned in missiles and radar. You know, have we heard a ton about it yet from our customers? No.

But, you know, we are on everything that we believe is gonna be utilized. Pretty much. So we'll have more on that in the future, Tony.

Tony Bancroft: Great. Thanks so much, Steve. Great job.

Steve Oswald: Okay. Great. Good to hear from you. Thank you.

Operator: As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. Our next question comes from the line of Noah Poponak of Goldman Sachs. Your line is now open.

Noah Poponak: Hey, guys.

Steve Oswald: Hi, Noah.

Noah Poponak: Thanks for the time. You know, I guess if I look at the total company organic revenue growth through the year, low single digit, in the first half. You're gonna exit the year low double digit. And the defense business has had good growth through the year. Aerospace is down. With the destocking. I guess, you know, as we go into 2026, can '26 look like the exit rate you're gonna have here in the fourth quarter? Because, you know, the defense drivers I mean, that'll be a tougher compare, but the defense drivers sound pretty durable. And then on the aerospace side, you're gonna, you know, at some point, you're gonna link up with Boeing.

Which will be, you know, pretty good growth off pretty easy compares. Can '26 grow double digits total top line?

Suman Mookerji: So we, you know, we will provide guidance on 2026 early in the year. We don't typically provide the guidance now. But I would say that, you know, commercial aerospace destocking, we expect will continue to have an impact in 2026. I don't think we see ourselves catching up to Boeing production rates in at least 2026, given the amount of inventory held by them and also inventory at our end, right, there's gonna be stocking both of the customer and at our end. We need to work through.

So I do agree with you that I think we have we're at a trough, but how quickly we move off the trough, we'll have to see based on how quickly destocking gets done here over the next couple of quarters. On the defense side, we do continue to see good order intake and growth in our RPO. So the outlook continues to be positive for defense growth.

Steve Oswald: Yeah. And, Noah, we'll, you know, just our cadence. We'll I think our call is probably in February. Alright? So we will have a full view of our numbers. But I think you bring up a great point about yeah, there are lower compares, which are gonna be good for us. Right? And, eventually, we are gonna sync up. The thing that I always a little bit worried about is Spirit's always a little wildcard. It's still not closed. You know, with the purchase. And, you know, the fuselages, and I don't know how many are back in the backyard these days. And that's more than half of our MAX business. Right?

So but, you know, we're very positive, but maybe in the first six months, it'll be still a little rocky for commercial aero. On the Boeing side.

Noah Poponak: Okay. I guess, how is 4Q growing low double digits if you're seeing that rockiness or the inventory destock for the next six to nine months?

Suman Mookerji: Continued strength in our defense business. Noah. That's a key driver.

Steve Oswald: And a little compared to what? One ninety-seven? One ninety-seven. One ninety-seven in Q4 last year. We're up two zero one. So a little bit in Q3. Yeah. Little bit less on the on the on the compare there.

Noah Poponak: Right. The compares can move around on you. Okay. Can you just approximately how much of your revenue at this point on an annual basis is the MAX?

Suman Mookerji: So it's if you look at large commercial aerospace, it's about 50 if you look at Boeing and Airbus, it's about 50% of our total commercial aerospace business. And Boeing is more than half of our large commercial. So it's a meaningful portion of our commercial aerospace business. I mean, maybe, you know, still less than 20%. Of our commercial aerospace business today. But expected to ramp up.

Steve Oswald: Yeah. Okay. It's just yeah. It's a good we're looking at the numbers here. We have our little cheat sheets here. You know what I mean? Noah, I had, you know, last year versus this year, you know, year to date, you know, for the MAX, you know, it's down double digit. So it's, you know, it's a good part of our business, but it has hurt us.

Noah Poponak: Okay. Yeah. And then, Suman, on the cash flow statement, you've had improvement in the working capital turns year to date after that's built up on you over the last few years. Putting the payment aside, do you expect 4Q to be up year over year, or maybe where do you expect the conversion from your adjusted EBITDA to come in for the year on free cash?

Suman Mookerji: So we talk about free cash flow to adjusted net income, Noah, and we are at 73% year to date. Which is a significant improvement from where we were last year with that same conversion was around 40%. And 33% back in 2023. So significant improvement in free cash flow to adjusted net income. Conversion for the company, you know, we don't provide specific guidance on cash flow generation, but we expect Q4 to be a continued strong quarter for cash flow generation kind of in line with what we have seen in the past couple of quarters. And our goal is 100%.

Steve Oswald: Our goal is 100%.

Noah Poponak: Right? Which we're working on. Okay. And what is the cash payment you will make? How much is the cash payment you'll make regarding the litigation in the fourth quarter?

Suman Mookerji: So the cash payment that we will make is net payment to us, net of insurance recoveries, is just over $95 million.

Noah Poponak: Sorry. Sorry. It's in or out? 95

Suman Mookerji: Is payment outflow of $95 million?

Noah Poponak: Okay. Got it. Okay. Thank you.

Steve Oswald: Noah, thanks for calling.

Operator: Thank you. It appears there are no further questions at this time. I would like to turn the call back over to Steve Oswald for closing remarks.

Steve Oswald: Okay. Thank you very much. Thanks to everyone for joining us again for the call. Just to wrap things up here, you know, we feel as we head into the end of the year, we feel great about, you know, 2025 and, you know, our margins. What we're doing with defense. I mean, you know, are we disappointed with the destocking and the continued sort of rocky road a little bit commercial aerospace? The answer is yes. But, you know, we know that's our best future ahead of us. And we're well-positioned in capital, well-positioned with the customer. And look forward to a strong close to 2025. And an excellent 2026. So, again, all the best.

Thank you for joining us, have a great rest of the day.

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

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