Ducommun Incorporated

Good day and thank you for standing by. Welcome to the Q3 2026 DoCommon Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Dukkhamen's Senior Vice President and Chief Financial Officer, Suman Mookerji. Please go ahead.

Thank you and welcome to Dukkhamen's 2026 Third 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 the company's progress and value creation opportunity for shareholders under our Vision 2027 game plan for investors, beliefs about the company's ability to attain the goals stated in our Vision 2032 strategic plan, potential destocking headwinds and their impact on the company's business for the remainder of 2026, expectations related to the U.S. Department of War's long-term framework agreements for key missile programs, with defense primes, our share of potential orders from those primes, the increase in production on many of those missile programs and their impact on the growth of our defense business, estimated synergies to be realized under the company's facility consolidation project, and the outlook for the company's revenue and commercial aerospace and defense businesses for the full year 2026 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 Dukkhamen 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 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 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 ability to successfully implement restructuring, realignment and cost reduction initiatives that could adversely impact our ability to achieve our strategic objectives International Trade Restrictions, and our ability to obtain necessary U.S. government approvals for proposed sales to certain foreign customers, the impact of tariffs and elevated interest rates, risks associated with a prolonged partial or total U.S. federal government shutdown, 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-A, quarterly report 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. The 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 Q3 2026 quarterly report on Form 10Q 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 third quarter conference call. Today, as usual, I will give an update of the current situation at the company. Afterwards, Suman will review our financials in detail. To start, I want to thank everyone that attended the launch of our Vision 2032 strategy in September, either in person, in New York, or virtually. It was over 1,300 days since our last Investor Day in 2022, and we were excited to share our game plan for continued growth. The highlights were new revenue and margin expansion targets, along with plans for a significant increase in percentage of engineered products for the DCO P&L. The feedback we have received since then from all shareholders has been very positive, so again, thank you. As in previous calls, I will reiterate the Commons Vision 2027 strategy as we continue to make great progress heading into our fifth and final year starting this January. The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the Commons 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 content which was 24% in Q3, a record, 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 key commercial aerospace platforms. All of us here are thrilled about Vision 2027 and many accomplishments to date. The Q3 2026 results show again that the strategy initiatives are working. with, again, record gross margins. I'm happy to report our adjusted even of margins and engineered product revenue mix are very close to our final Vision 2027 targets a year early. Wonderful news. Our Vision 2032 strategy continues that momentum. We'll take DCO to the next level. We're doubling down on engineered products to build that to at least 40% of revenue, both organically by increasing our acquisition activity. We expect to grow total revenue to the range of $1.6 to $1.7 billion and expand adjusted to even margins to 23% of revenue. We've got the right team in place, and the plans to execute these targets are already in motion. For Q3, we achieved a new record of $227 million in revenue, 6% growth over last year, and our sixth consecutive quarter of over $200 million in revenue, and now 22 consecutive quarters of year-over-year revenue growth. In Q3, commercial aerospace performed extraordinarily well, growing 28% over last year, with narrow-body platforms of both Boeing and Airbus growing significantly as we're working through the final stages of destocking, and that is coming to an end in December. We're also benefiting on the commercial side from a major new program for VA, supplying proprietary switches we talked about last quarter. This is an engineered product designed by DCO engineers and is driving retrofit and new bill revenue at significant margins for us, and DCOs receive bookings in excess of $30 million are first for us at this level. Military and space revenues came in at 7% lower this quarter versus prior year due to the timing of orders and production on certain programs, including some pull forward into the first half of the year that we discussed previously. We closed on $263 million in military and space bookings in Q3, an all-time record, which represents a book-to-bill of 2.2, and takes our military and space revenue performance obligation to an all-time high of $868 million. This record level of order activity sets us up well for strong growth in our military and space business. Missiles continues to outperform other areas of our defense portfolio, with another quarter of double-digit growth as well as continued strength in fixed-wing aircraft, which is offset by temporary softness in our rotary wing, ground vehicle, and radar platforms. Overall for DCO, we closed on $354 million of new bookings during the quarter to book the bill of $1.6 million. This increases our remaining performance obligations for the company to a record $1.3 billion, $255 million higher than prior year, and $127 million higher than Q2. All outstanding. Our defense business RPO grew $275 million year-over-year, highlighted by a $90 million order on the SPY-6 Navy radar from RTX. This is the offload of CCAs from the Andover, Massachusetts facility that I've talked about over the past few years. that is now really paying off in a big way, but it did take time. $54 million in bookings as well for the Mesa Airborne Surveillance for Northrop Grumman that supports the Boeing E-7 Wedgetail, and that number is for five planes. I am thrilled with the current state of our radar business, which is now becoming a franchise like the DCO missile business. To put this segment in perspective and context, in 2024, we booked $65 million for five radar programs, In 2025, only $11 million for three programs, and year-to-date in 2026, we've booked over $150 million for seven programs, and that is just in the first nine months. Such wonderful news. Overall, in 2026, we have booked $535 million of defense orders through Q3 of this year, and I want to point out that this does not include any orders under the seven-year missile framework agreements for RTX and Lockheed. For clarity, Framework agreements announced have resulted in contract awards but not orders to defense primes, and will eventually turn into purchase orders that get slowed down at the supply chain. While the timing of such orders is hard to predict, our current expectation is for that to happen starting in late Q1 and Q2 of next year, but we'll be getting OEM commitments to start ordering material in Q4. In addition, we've been adding staff and floor space as we speak. Production on many of these missile programs, such as the PAC-3, AMRAAM, Standard Missile 3, Standard Missile 6, and Tomahawk are expected to grow several fold, and this will be a big driver of growth for DCO and the industry over the next several years. Gross margins grew by $7 million in the quarter to 28.9%, a 140 basis point improvement, another record from 27.5% last year in Q3. The benefits of our Vision 2027 strategy continue to flow through the P&L with expansion from DCO's engineered product portfolio, which again includes the new major BA application I mentioned earlier, and we have now reached 24% of revenue. This along with strategic value-added pricing, restructuring actions, and productivity improvements are all reading through to the P&L. Our cost-saving expectations of $13 million annually from our facility consolidation program have also been realized at this time. For adjusted operating income margin in Q3, the team delivered 12.3% 40 basis points below the prior year of 12.7%. This is mainly due to timing of stock-based compensation expense during the year. Adjusted EBITDA continues to improve towards our Vision 2027 goal of 18% in 2027 from 13% in 2022. DCO achieved 17.5% in the quarter, or 39.7 million, up 2.4 million from Q3 2025. This puts us in great shape to achieve our 2027 target. GAAP EPS was $0.89 per diluted share in Q3 2026 versus a loss of $4.06 per share for Q3 2025 from the litigation settlement. With adjustments, diluted EPS was $1.21 a share in Q3 versus $1.22 in prior year quarter. Higher operating income drove the higher GAAP EPS during the quarter, while adjusted net income was essentially flat prior year. As I've touched on earlier, we've had some significant orders in the quarter with over 354 million of bookings and a book-to-bill of 1.6. Over the last 12 quarters, we've closed on over 1.1 billion of bookings, a trailing 12-month book-to-bill of 1.3. With increased defense spending and positive momentum in commercial aerospace, we have strong tailwinds in both our primary and markets. It is the best I have seen since joining Duke Common in 2017. On the outlook for the fourth quarter, I expect to see continued growth, especially in our commercial aerospace business. In September, during our investor day, we narrowed our revenue guidance for 2026 to a range of $880 million to $890 million. We're continuing to track to that and further refine that range to $885 million to $890 million. This is also in line with our original guidance for February of this year, amid the single high-digit revenue growth for the full year 2026. Now let me provide some color on our markets, products, and programs. Beginning with our commercial aerospace operations, third quarter revenue increased 28% year-over-year to $97 million, with strong growth in production and deliveries on single aisle platforms for both Airbus and Boeing. In particular, on the 737 MAX platform, we benefited from the shipments of the proprietary switches, and overall, Our aerospace business grew across all platform groups, single aisle, wide body, commercial rotorcraft, business jets, and engines. Now that Boeing received FAA certification of the 737 MAX 10 in October, the company has cleared another hurdle in their recovery. The new production line is also up and running, and the company is working to stabilize at 47 MAXs a month on the way to 52 in the second half of next year. While this is slower than the prior expectations, it still represents great progress for our second largest customer. and with internal and external destocking largely coming to an end, we are set up very well for good growth going into 2027 and beyond. I will also add that the 787 build rate increases will be good for the common. We have limited exposure as well as 777 production delays and don't expect those to affect revenue in Q4 and in 2027. Airbus has an aggressive Q4 goal for shipments and DSO is fully supporting the production needs with capacity available to meet the demand. The other item I want to cover in commercial aerospace is our seven-year LTA expiration for Airbus at the end of 2026. I'm happy to report we have now finalized a new two-year agreement to continue supplying superplastic-formed and hot-formed titanium products for the A320 family. And in addition, we received a purchase order today from Airbus. Such great news. This content is for both Pratt engines and CFM engines and will be in effect starting in January. We will now see significant double-digit price increases for both Pratt and CFM to sell components, which shows our strategy of high-value and niche contract manufacturing, which has been developed over the decades, is a winner and very effective. Ducomet, for those who do not know, is the worldwide market share leader in titanium, SPS, and hot form outside of the OEM Toulouse operation and one of the very few companies in that space. This is a big deal for our P&L shareholder value and will make a difference in DCO Structure's gross margin of profitability in 2027 and 2028, starting in January. In our military and space sector, we saw revenues of $119 million compared to $128 million in Q3 2025. This represents a 7% decline as related to timing as we built more military space in the first half to level low production for the year. Our missile franchise continues to form well, up 25% year-over-year in Q3, as well as double-digit growth in fixed wind platforms. This was offset by temporary declines in radar, ground vehicles, and rotorcraft due to timing of orders and production schedules. As I've noted earlier, we had robust bookings in our defense business with a book-to-bill of 2.2, and with the RPO record levels positioning us for growth in the future. Our missile franchise continues to perform a double-digit growth rate at Tacoma, and Tacoma expects orders for the seven-year agreements to come in starting in late Q1 and Q2 of 2027. DCO is a key supplier on the PAC-3, SM-3, SM-6, Tomahawk, THAAD, and Amran, and we continue to work with Defense Primes on multiple opportunities. DCO is also in great shape with capacity at our operations to fully support the required ramp-up with minimal capital. Overall, our missiles, radar, and electronic warfare franchise grew 12% during the quarter on a year-to-date basis, represents 39% of our military and space segment, and more than 21% now of our total company revenues. This is a great platform that I expect to drive growth for us for multiple years going forward. In summary, the outlook for the next few years continues to be exciting for the company and our shareholders. We like the balance of defense and commercial aerospace, and like I said earlier, This is the best position I've seen the company in for future growth since I joined Dukaman in 2017. With that, I'll have Suman review our financial results in detail. Suman?