Ducommun Incorporated

and thank you for standing by. Welcome to the Q2 2025 Duke Common earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to Duke Commons Senior Vice President, Chief Financial Officer, Mr. Suman Mukherjee. Please go ahead.

Thank you, and welcome to Duke Commons 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 risk 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 Duke Common include, amongst others, the cyclicality of our induced 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. Afterwards, Suman will review our financials in detail. Let me start off again on this quarterly call with the Commons 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, the Commons 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, and 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 I 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 $2.01.4 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 build rates, destocking at BA and SPR, which was anticipated, and the continued strategic pruning of our non-core industrial businesses, the right thing to do. The revenue performance was driven by continued strength in our defense business, which grew 16% during the quarter and was our second consecutive quarter with double-digit growth. The growth in defense was driven by very strong performance in our missile franchise, which grew by 39% during the quarter, along with DCO's radar business, much newer to DCO, up 46%. Now, the outlook for our defense business continues to look great. In addition to the highlights I just mentioned, the Apache blades, Tomahawk cables, and the tow missile case are scheduled to be back starting in the second half and into 2026 as we are nearing final approvals from RTX and BA. In addition, and previously discussed, our team continues to build scale at other defense customers outside of RTX, which is and has been a long-term goal. Northrop Grumman is a great example of this strategic effort. I also thought it was the right time with the recent Wall Street Journal article on missiles published on July 23rd to highlight DCO's missile franchise and how well it is positioned to benefit from the replenishment of depleted worldwide inventories mentioned in the article, along with, in general, very robust U.S. and FMS order activity. For background, Decommon is a supplier on over a dozen key missile platforms, including Amaran, Mir, Pac-3, SM-2, SM-3, SM-6, Tomahawk, and TOW, amongst others. Our missile business is up 39% in the second quarter, and our missile backlog also increased 30% compared to the year ago. Excellent news. For greater context, DCO currently supports 18 missile programs with at least $750,000 of revenue in the last 12 months. Complementing our missile portfolios, our strong radar franchise, which is up and coming, covering marquee programs such as the SPY-6 radar, the LATAMS radar, which is part of the Patriot missile defense system, the TPY-2 radar used on the THAAD missile defense system, and the Gator radar used by the U.S. Marine Corps and various other radar platforms. This combination of both missile and radar platforms positioned us well in the current environment and also aligns us with key defense priorities outlined in the U.S. defense budget, including the Golden Dome as well as NATO priorities. We are in active negotiations with the defense prime right now for record levels of the SM-3 as an example, and Bureau of Missile and Radar franchises a bedrock for growth now and the next few years ahead. The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter. However, the outlook is promising for commercial aerospace as Boeing continues to perform at improved build rates and they get through the G-stocking along with SPR. I also want to add that everything we see out of Boeing Commercial the last three or four months has been very encouraging, both on the 737 and 787, our main platforms. We're optimistic that bill rates will be growing from 38 to 42 on the 737 MAX soon, as outlined by Boeing on recent calls. Gross margin also grew 2.5 million to 26.6% in Q2, matching the record gross margin percentage achieved in Q1, up 60 basis points year-over-year from 26% as we continue to realize benefits from our growing engineered product portfolio with aftermarket, strategic value pricing initiatives, restructuring actions, and productivity improvements. We have ceased manufacturing operations in both our Monrovia, California, and Berryville, Arkansas operations. We expect to see those savings be higher as the receiving plants ramp up later this year and more fully in 2026. For adjusted operating income margins in Q2, the team delivered 9.9%, which is just below the prior year of 10.1%. The electronic system segment margin grew nicely in the quarter, with a good mix of profitable business and improvements in productivity. Adjusted EBITDA hit another record in Q2, achieving 16% of revenue for the first time, up $2.4 million to $32.4 million. Fantastic. This is our third quarter with adjusted EBITDA above $30 million, and it represents an expansion of 80 basis points above prior year and continues the strong momentum we saw in 2024, as we work towards the 18% goal in our Vision 2027 plan. Two and a half years to go. Gap diluted EPS was 82 cents a share in Q2 2025 versus 52 cents a share for Q2 2024. And with adjustments, diluted EPS was a strong 88 cents a share compared to adjusted diluted EPS of 83 cents in the prior year quarter. The higher gap and adjusted diluted EPS during the quarter was driven by improved operating income, as well as lower interest costs due to lower interest rates, along with a lower outstanding debt balance. The company's consolidated backlog continues to be strong at $1.02 billion, but did decrease $50 million year-over-year due to timing of awards. We are in active negotiations with customers on a number of meaningful opportunities that And based on our current pipeline, we expect a significant uptick in orders in the second half. The defense backlog was flat compared to the prior year quarter and is at $593 million, but expected to ramp up in the back half of the year. The commercial aerospace backlog decreased by $47 million compared to the prior year quarter due to lower OEM production rates and destocking, which we fully expect to come back. In December 2022, we set a target of generating 25% of our revenues from engineered products, which was 9% in 2017 and 15% in 2022. In 2024, we reported that our engineered product business drove 23% of our total revenue, up from 19% in 2023, positioning us well ahead of the curve in achieving our vision 2027 goal of certainly pushing, and we're certainly pushing for a lot more. We achieved this both through focused investment driving organic growth in those current businesses as well as the BLR acquisition. In Q2 2025, we have maintained this 23% mix and continue to work on both organic and inorganic opportunities to drive this higher. We have made tremendous progress to date and I'm proud of our team and strategic plan. As for the second half of 2025, we are positioned to benefit from the expected Boeing recovery in the second half, along with continued momentum in defense. For revenue guidance, after somewhat flattish first half, we're expecting mid-single-digit growth in Q3, with low double-digit growth in Q4. In addition, we believe tariffs will have limited and no material impact on our 2025 revenues, a good story for our investors. Also, I want to reiterate as well that Dukaman is a U.S. manufacturer the U.S. employees, and 95% of our revenue is produced in the U.S. Our only other facility is based in Guaymas, Mexico, and that production is less than 5% of our revenue, and thankfully covered under the USMCA, exempting us from tariffs. The other good news is the Commons revenue into China is almost entirely one program for an Airbus supplier, who is owned by the government, constitute less than 2% of our revenue. We have not seen any impact at this point on tariffs for our revenue. On the supplier side, we do procure some parts from Europe and Asia, but it is manageable, and so far the impact has been seen to be pretty de minimis. We will continue to monitor it as the situation evolves, but at this point, we certainly don't see it as being something that's a material impact to the company. Now let me provide some color on our markets, products, and programs. Beginning with our military and space sector, we saw revenues of $117 million compared to 101 million in Q2 2024. Growth was driven by significant activity in missile programs such as TOW and AMRAAM, as well as solid growth in military rotorcraft on the Gator radar and on a classified program. We also ended the second quarter with a backlog of 593 million, flat the prior year, representing 58% of the Commons total backlog. Within our commercial aerospace operations, second quarter revenue declined 10% year-over-year, $78 million, driven mainly by lower rates on Boeing platforms, commercial helicopters, and in-flight entertainment. As I mentioned earlier, we believe that finally a much better story is ahead for BA and MAX. Now the production is ramping up again, and they're working through their overstocked inventory. The backlog within our commercial aerospace business was $404 million at the end of the second quarter, Decrease in 47 million compared to prior year driven by lower rates on Boeing platforms. We expect this to recover as production rates ramp up in late 2025 and 2026. Revenue in our industrial business declined by 23% to 8 million during Q2 as we continually strategically prune our non-core business from the portfolio. This will benefit the company in the longer term as we transition that capacity to our core aerospace and defense platforms. With that, I'll let Suman review our financial results in detail.