Ducommun Incorporated (DCO) Earnings

Management highlights

- Financial Performance Overview * Q1 2026 marked the fourth consecutive quarter with total revenue over $200 million * Gross margin reached 26.9%, and adjusted operating margin hit 16.4% (up from 16.4% in Q1 2025, with year-over-year margin expansion driven by higher manufacturing volume and favorable product mix) * Operating cash flow grew significantly to $11.2 million in Q1 2026, up from $0.8 million in Q1 2025, driven by higher net income and contract liabilities * Available liquidity totaled $384 million at the end of Q1 2026, consisting of cash on hand and the unutilized portion of the company's revolving credit facility - Capital Structure Update * The company amended its credit agreement in Q4 2025, establishing a new $650 million facility that includes a $200 million term loan and $450 million revolving credit facility * The new facility lowers the company's cost of capital and provides incremental capacity to support an active acquisition strategy * A 7-year interest rate hedge initiated in 2021, effective January 2024, remains in place, pegging rates at 170 basis points for $150 million of debt and delivering ongoing interest cost savings - Strategic Progress * Management confirms the company's Vision 2027 strategy is delivering results, and the business is well positioned for 2026 and beyond * Increasing the share of engineered product revenue is the company's top strategic priority, with full management commitment to this goal * A new long-term strategic plan, Vision 2032, will be unveiled at the upcoming Investor Day in September 2026 - Operational Updates * The company completed the transfer of Apache rotor blade production from California to New York, with ramping expected to be complete by June 2026 (Q2 2026) * The company is supplying prototypes to Bell for the Black Hawk replacement program, positioning it for future growth in the military rotorcraft segment * A former top executive from Northrop Grumman Mission Systems has joined the company's board of directors, bringing industry expertise and insight to support growth with key defense customers

Guidance

- Overall margin guidance: Management expects adjusted operating margins to strengthen over the remainder of 2026, with a full-year target of 18% - Commercial original equipment (OE) inventory outlook: The current Boeing 737 MAX inventory overhang is expected to be resolved by the end of 2026, with meaningful volume growth expected after destocking is complete; Airbus production is expected to remain steady - Missile growth outlook: Significant missile revenue upside is expected starting in late 2026 to early 2027, with orders ramping in late 2026 and revenue growth accelerating through 2027 and 2028; the company expects production for key programs like Tomahawk to increase by 8X or more from current levels - Radar and military rotorcraft outlook: Current weakness in these segments is due to temporary order timing issues, not demand declines; medium-to-long term growth is expected for radar (driven by missile defense demand), and military rotorcraft demand is expected to remain stable with potential share growth from the Black Hawk replacement program - Investor Day: A full Investor Day will be held in September 2026, with additional detailed breakdowns of defense segment growth opportunities, updates on Vision 2027, and the unveiling of the new Vision 2032 strategic plan

Segment performance

Segment-specific financial results with absolute revenue figures are not provided in the transcript. The only segment-level data shared is related to revenue contribution mix: engineered products accounted for 23% of total revenue over the 12 months ending Q1 2026, up from 15% in 2022. Missiles represent approximately 20% of total defense revenue, and missiles, radars, and electronic warfare combined make up 19% of the company's total revenue. The share of engineered products has grown 8 percentage points since 2022, with most of this growth coming from organic expansion rather than acquisitions.

Risks & headwinds

- Commercial OE inventory risk: The ongoing Boeing 737 MAX fuselage inventory overhang is suppressing near-term volumes, and the exact timeline for destocking remains uncertain, with potential for unexpected delays - Missile growth timing risk: Large defense primes like RTX move slower than desired, so the ramp-up of missile production and orders may be delayed relative to current expectations - Workforce expansion risk: While the company has excess physical facility capacity and available production hours to support missile ramping, hiring and training sufficient qualified personnel will be a key near-term challenge - Acquisition execution risk: The company has not completed an acquisition since acquiring BLR Aerospace, has failed to close multiple targeted opportunities over the past 18 months, and there is no guarantee a deal will close in the near term despite active pursuit - Quarterly volatility risk: Order timing push-outs from defense customers can create quarterly volatility in revenue and margins for radar and rotorcraft segments, even if long-term demand remains on track

Analyst Q&A

• Q: How long will the current commercial OE inventory overhang last, and when can we expect a snap-back in volume? What is the long-term growth outlook for the missile business? /

  A: The 737 MAX inventory overhang driven by Spirit AeroSystems/Wichisa will be resolved by the end of 2026, after which meaningful volume growth is expected. Airbus production is currently steady. For missiles, the company is positioned as a key incumbent supplier to RTX (its largest defense customer) on nearly all RTX missile platforms. Management expects significant growth starting in late 2026 to early 2027, with orders ramping late 2026 and revenue growing through 2027 and 2028. Key programs like Tomahawk are expected to grow at least 8X from current levels.

• Q: When will missile orders appear in backlog, why have there been no acquisitions in over three years, and what is the current organic growth performance of your engineered product businesses? /

  A: The company is in active discussions for missile contracts and will provide updates on orders in the August earnings call. The engineered product segment has grown strongly organically, increasing its total revenue contribution from 15% in 2022 to 23% in Q1 2026 even with limited acquisition growth. Management is actively pursuing acquisition opportunities, has been close on multiple deals in the last 18 months, but remains disciplined on valuation to protect shareholder value, and expects to close a deal within the next several months.

• Q: Will the company need to add new production capacity to support the coming missile ramp, and what is behind the current weakness in military radars and rotorcraft? /

  A: The company already has excess unused facility footprint and available production hours (no full second shift currently) so it does not need additional capacity expansion; the only challenge is hiring and training qualified new personnel, which has not yet been completed. Current weakness in radars and rotorcraft is purely due to temporary order timing shifts, including customer specification changes and quarterly push-outs. The long-term demand outlook is strong for both: radar demand is growing driven by missile defense, and the company is positioned well for share growth in rotorcraft via the Black Hawk replacement program. The Apache rotor blade production transfer will be complete by June 2026, alleviating near-term pressure.

• Q: Q1 2026 margins were stronger than typical seasonal trends, what is the expected margin cadence for the rest of the year? /

  A: Q1 2026 margins benefited from approximately 20 basis points of favorable product mix, which was less than the mix benefit seen in the second half of 2025. Management expects margins to maintain and strengthen sequentially over the rest of 2026, on track to hit the full-year target of 18%.