Ducommun Incorporated 2026 Q2 Earnings Call

Please go ahead. Thank you, and welcome to Ducommun's 2026 second quarter conference call.

With me today is Stephen G. 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 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 projects, 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 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 government's performance under 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 activities that could adversely affect 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. 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 2026 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, Sumon.

Thanks, everyone, for joining us today for our second quarter conference call. Today, as usual, I'll give an update of the current situation at the company, after which Sumon will review our financials in detail. Let me start off again on this quarterly call with Ducommun's Vision 2027 game plan for our investors, as we continue to make great progress in our fourth year of the plan, heading into the final year of the Vision starting this January. The strategy and Vision were developed 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 had excellent feedback.

Since that time, Ducommun's management has been executing the strategy by increasing the revenue percentage of engineered product content, which is at 23% over the past year and 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 catalysts ahead present a unique value creation opportunity for our shareholders. The Q2 2026 results show again that the strategy initiatives are working.

With gross and adjusted EBITDA margins continuing to stay on track to meet and exceed our Vision 2027 goals, along with revenues and the level of engineered products and aftermarket at the company. For Q2, I'm very happy to report that revenues reached the new quarterly record of $224 million, 12% growth over last year, our fifth consecutive quarter of over $200 million in revenue, and our 21st consecutive quarter with year-over-year revenue growth. We had strong growth across all our end markets, with commercial aerospace in particular showing continued strength this year with 16% year-over-year growth, a very positive sign. We saw production and deliveries continue to ramp, driven by higher OEM production rates and a gradual easing of the destocking impact. In addition, we benefited from new aftermarket content that drove incremental retrofit revenues on the 737 MAX.

We still expect some destocking to remain as a headwind through the end of this year. The situation is improving. Military and space revenues grew 7% with continued strength in our missile portfolio and fixed-wing aircraft, partially offset by temporary weakness in our radar, space and naval revenues. During the quarter, we also pulled ahead some production activity and associated revenues from the second half to level load production at our plants ahead of higher delivery commitments in the second half of this year. Another major highlight in Q2 was the company's remaining performance obligations continued growth, reaching a record $1.16 billion, which is over $250 million higher than prior year, and $85 million higher than just last quarter. This represents a book-to-bill ratio of 1.4 times in the quarter and 1.3 times over the last 12 months.

We added more than a quarter's worth of revenue to our backlog in the last year, which is fantastic. Our defense business RPO grew $197 million year-over-year, and commercial aerospace grew $54 million. We closed on $310 million of bookings in Q2, and have closed on $1.1 billion in the past 12 months. It still does not include our share of potential orders from defense primes under the seven-year missile framework agreements, which are still being negotiated by RTX and the government. Also happy to see it is now completed as of last month for the PAC-3 and THAAD at Lockheed and L3Harris.

We continue to have discussions with the defense primes to support them on these major agreements. Are well positioned as the incumbent supplier of many of the programs, which is great news for DCO and shareholders. Production on many of these missile programs, such as the Tomahawk, PAC-3, and Standard Missile 3 and 6 are expected to grow several fold. This will be a big driver of growth for the DCO defense business over the next few years. Our performance centers are prepared for this increase in production, with most capacity already in place, and we will hit the ground running once the orders begin to flow. Gross margin grew by $9.9 million in the second quarter to 28%, a 160-basis point improvement from 26.4% last year in Q2.