Executive Summary / Key Takeaways

• Record Performance & Margin Expansion: Ducommun achieved record quarterly revenue of $202.3 million in Q2 2025, marking its 17th consecutive quarter of year-over-year growth. This was underpinned by record gross margins of 26.6% and Adjusted EBITDA margins of 16.0%, demonstrating strong execution of its VISION 2027 strategy.
• Defense Sector Strength: Robust growth in military and space, particularly in missile (up 39%) and radar (up 46%) programs, is a key revenue driver. Ducommun's broad portfolio across critical defense platforms positions it well for global military spending and FMS order activity.
• Engineered Products & Aftermarket Focus: The company is significantly ahead of its VISION 2027 target, with engineered products and aftermarket content reaching 23% of total revenue. This high-margin segment is crucial for future profitability and competitive differentiation.
• Commercial Aerospace Recovery & Strategic Content Wins: Despite near-term headwinds from Boeing (BA) and Spirit AeroSystems (SPR) destocking, a recovery is anticipated in H2 2025. New content wins on the 737 MAX and 787, coupled with facility restructuring, are expected to drive future growth and efficiency.
• Operational Optimization & Liquidity: Ongoing restructuring initiatives, including facility consolidations, are projected to yield $11 million to $13 million in annual savings, ramping up in late 2025 and 2026. Strong cash flow generation and a fully available $200 million revolving credit facility provide ample liquidity for strategic growth.

A Legacy Forged in Precision: Ducommun's Enduring Strategy

Ducommun Incorporated, founded in 1849, has a storied history of adapting and innovating within the industrial landscape. The company has evolved into a leading global provider of engineering and manufacturing services for high-performance products and high-cost-of-failure applications, primarily serving the aerospace and defense (A&D) industries. This long-standing presence underscores a deep institutional knowledge and resilience, which are foundational to its current strategic direction.

At the heart of Ducommun's investment thesis lies its "VISION 2027" game plan, a comprehensive strategy unanimously approved by its Board in November 2022. This plan is designed to transform the company by increasing its revenue mix from engineered products and aftermarket content, consolidating its manufacturing footprint, pursuing targeted acquisitions, and expanding its content on critical A&D platforms. This strategic pivot is not merely about growth; it is about enhancing profitability and strengthening Ducommun's competitive moat in a demanding industry.

Technological Edge: Engineering for High-Stakes Applications

Ducommun's core technological differentiation lies in its specialized engineering and manufacturing capabilities for high-reliability, complex components. The company excels in producing intricate electronic and electromechanical products, such as world-class cabling solutions, printed circuit board assemblies, electronic warfare systems, and radar enclosures. In its Structural Systems segment, Ducommun designs and manufactures large, complex contoured aerostructure components, including fuselage skins, rotor blades, and flight control surfaces. These are not off-the-shelf parts; they are custom-engineered solutions for applications where failure is not an option.

The tangible benefits of this technological expertise are evident in Ducommun's financial performance. Its engineered products, for instance, command "very good pricing power" and are "significantly accretive to our margins," as noted by management. While specific quantifiable performance metrics for its technology (e.g., "superior energy yield by X%") are not publicly detailed, the strategic intent is clear: to deliver superior integration and reliability that justifies premium pricing and fosters deep customer loyalty. This focus on value-added, high-engineering-content products directly contributes to the company's expanding gross and Adjusted EBITDA margins.

Ducommun's R&D initiatives are implicitly tied to its strategic goal of moving up the value chain. By becoming a supplier of "higher-level assemblies" with "higher engineering content and higher levels of complexity," the company is investing in the capabilities required to secure new, more profitable contract awards. This continuous push for advanced solutions reinforces its competitive position against rivals.

Competitive Landscape: Niche Strength in a Concentrated Market

The aerospace and defense supply chain is characterized by a few large prime contractors and a fragmented ecosystem of specialized suppliers. Ducommun operates within this environment, distinguishing itself through its deep engineering expertise and focus on high-cost-of-failure applications.

Compared to direct competitors like HEICO Corporation (HEI), which excels in aftermarket replacement parts and broader avionics, Ducommun's market positioning is more specialized for custom engineering and integration for prime contractors. While HEICO's gross profit margin (TTM 42%) and operating profit margin (TTM 22%) are notably higher than Ducommun's (TTM 25.71% and 7.55% respectively), reflecting HEICO's strong aftermarket focus, Ducommun leverages its engineering strengths to secure long-term contracts in specialized military programs. This allows Ducommun to counter HEICO's scale with tailored solutions, potentially improving its market share in specific military segments.

Against Triumph Group (TGI), which focuses on structural components and electronics for high-volume aircraft production, Ducommun's offerings provide qualitatively better performance in custom designs for rotary-wing aircraft and specialized defense projects. Triumph's gross profit margin (TTM 32%) and operating profit margin (TTM 11%) are also higher than Ducommun's, indicating TGI's efficiency in its large-scale manufacturing. However, Ducommun's integrated engineering approach offers a differentiator in innovation speed for niche applications, exploiting Triumph's potential weaknesses in operational agility for specialized projects.

Ducommun also faces Moog Inc. (MOG.A), a specialist in precision motion control systems. While direct financial comparisons are not available, Moog's reputation for technological innovation in high-performance controls suggests a strong R&D focus. Ducommun's dual-segment approach (electronic and structural) and full-system design strategy allow it to capture more diversified contracts, providing a broader offering than Moog's niche control systems. Ducommun's ability to handle complex assemblies for aircraft avionics and radar systems provides a unique value proposition.

Ducommun's strategic response to this competitive landscape involves building scale with other defense primes beyond its largest customer, RTX Corporation (RTX). Northrop Grumman (NOC), for example, has become Ducommun's second-largest customer, demonstrating success in diversifying its customer base and leveraging its capabilities in airborne surveillance electronics and power packs. Furthermore, Ducommun is "getting quoted heavily by Airbus (EADSY)" due to other suppliers' performance issues, indicating opportunities to gain market share through superior operational execution. The company's predominantly U.S. manufacturing footprint (95% of revenue from U.S. operations) and USMCA coverage for its Mexico facility also provide a competitive advantage against global trade policy volatility and tariffs, positioning it as a "new trade policy" leader.

Financial Momentum and Strategic Execution

Ducommun's recent financial performance underscores the effectiveness of its VISION 2027 strategy. In Q2 2025, the company reported record net revenues of $202.3 million, marking its 17th consecutive quarter of year-over-year growth. This growth was primarily fueled by a robust 16% increase in its defense business, with missile programs surging 39% and radar business growing 46%. This strong defense momentum more than offset a 10% decline in commercial aerospace revenue, which was impacted by lower Boeing platform rates and destocking.

Profitability metrics also reached new highs, with gross margin hitting a record 26.6% in Q2 2025, up 60 basis points year-over-year. Adjusted EBITDA reached an all-time high of $32.4 million, or 16.0% of net revenues, an 80 basis point expansion from the prior year. These improvements are direct results of the company's focus on its engineered product portfolio, strategic value pricing initiatives, and ongoing restructuring efforts. The Engineered Products and Aftermarket segment now contributes 23% of total revenue, significantly advancing towards the 25%+ VISION 2027 target.

From a liquidity perspective, Ducommun is in a strong position. Net cash provided by operating activities for the first six months of 2025 was $23.2 million, a substantial improvement from $1.8 million in the prior year period. This was driven by higher net income and improved working capital management, with year-to-date free cash flow conversion at 55%. The company's proactive interest rate hedge, effective January 2024, pegs $150 million of its debt at a 1-month Term SOFR of 170 basis points, generating significant interest cost savings. With a fully available $200 million revolving credit facility and $199.8 million in unused borrowing capacity as of June 28, 2025, Ducommun possesses ample financial flexibility to fund its strategic initiatives, including targeted acquisitions and capital expenditures for new programs.

Outlook and Growth Catalysts

Ducommun's management projects mid-single-digit revenue growth for the full year 2025, with a flattish first half transitioning to mid-single-digit growth in Q3 and low double-digit growth in Q4. This outlook is predicated on several key assumptions and catalysts:

• Commercial Aerospace Recovery: Management anticipates a recovery in Boeing's production rates, with the 737 MAX expected to ramp up from 38 to 42 units soon. While destocking at Boeing and Spirit AeroSystems is expected to persist through 2025, it is projected to clear by Q1 or Q2 2026. New content wins, such as the 737 MAX fuselage skins (expected to generate over $3 million in 2025 revenue) and a significant 787 share shift, will further bolster this recovery.
• Sustained Defense Momentum: The defense business is expected to maintain strong growth, driven by the replenishment of global missile inventories and robust U.S. and FMS order activity. Key programs like Apache blades, Tomahawk cables, and TOW missile cases are scheduled to return to full production in the second half of 2025 and into 2026, following successful facility transitions and customer certifications.
• Restructuring Benefits: The ongoing restructuring plan, which includes the closure of Monrovia, California, and Berryville, Arkansas facilities and the transfer of work to lower-cost operations like Guaymas, Mexico, is nearing completion. These actions are expected to generate $11 million to $13 million in annual savings, with synergies ramping up in late 2025 and more fully in 2026.
• Favorable Tax Legislation: The recently enacted One Big Beautiful Bill Act (OBBBA) in July 2025, which reinstates immediate expensing of U.S. R&D expenditures and provides a supplementary $156 billion to the DoD, is expected to decrease Ducommun's cash tax liability for 2025 and support defense spending.

Risks and Considerations

Despite a compelling growth trajectory, investors should be mindful of several risks. The commercial aerospace segment remains sensitive to Boeing's production challenges and quality control issues, which could impact Ducommun's revenue and profitability if build rates do not recover as anticipated. The ongoing destocking at Boeing and Spirit AeroSystems presents a near-term headwind, with full clarity not expected until early 2026.

Legal and regulatory risks, particularly the Guaymas fire litigation, pose an unquantifiable but potentially material financial exposure if Ducommun is deemed responsible for damages exceeding its insurance coverage. While tariffs are currently deemed to have a "limited and no material impact" due to Ducommun's U.S.-centric operations, escalating global trade tensions could introduce unforeseen supply chain disruptions or cost pressures. Furthermore, the cyclicality of end-use markets and the level of U.S. government defense spending remain inherent risks, though Ducommun's diversified defense portfolio aims to mitigate this.

Conclusion

Ducommun Incorporated is executing a clear and compelling VISION 2027 strategy, transforming itself into a more profitable, technologically differentiated aerospace and defense supplier. The company's record financial performance in Q2 2025, driven by robust defense growth and a strategic shift towards high-margin engineered products, underscores the effectiveness of its initiatives. While commercial aerospace faces temporary headwinds, the anticipated recovery, coupled with significant content wins and the realization of restructuring synergies, positions Ducommun for accelerated growth in the second half of 2025 and beyond.

Ducommun's competitive advantages, rooted in its specialized engineering expertise and strong relationships with prime contractors, enable it to thrive in niche, high-value segments. The company's proactive approach to operational efficiency, liquidity management, and strategic diversification across defense customers and programs further strengthens its long-term investment appeal. For discerning investors, Ducommun represents a resilient and strategically focused player poised for continued value creation, leveraging its technological leadership and operational discipline to capitalize on enduring demand in the A&D sectors.