Ducommun Incorporated (DCO)

Executive Summary / Key Takeaways

• VISION 2027 Transformation Drives Margin Inflection: Ducommun's strategic pivot from commoditized manufacturing to higher-margin engineered products has expanded adjusted EBITDA margins from 13% in 2022 to 14.8% in 2024, with Q3 2025 hitting a record 16.2%. This 320 basis point improvement demonstrates that facility consolidation, pricing power, and product mix shifts are delivering tangible financial results, not just strategic aspirations.

• Defense Business Provides Growth Resilience Amid Commercial Headwinds: While commercial aerospace faces Boeing (BA) and Spirit AeroSystems (SPR) destocking, DCO's defense segment grew 13% in Q3 2025, marking three consecutive quarters of double-digit growth. This diversification insulates the company from commercial cyclicality and positions it to capture accelerated upside when destocking resolves in 2026, creating a compelling risk-adjusted growth profile.

• Guaymas Litigation Resolution Removes Major Overhang: The $150 million settlement of the 2020 fire litigation, with $56 million covered by insurance, crystallizes a five-year uncertainty. The net $95 million cash outflow in Q4 2025 will temporarily increase pro forma net leverage to 2.3x, but eliminates a binary risk that had been weighing on valuation and management attention.

• Facility Consolidation Delivers Structural Cost Savings: The shutdown of Monrovia and Berryville facilities, with work transferred to lower-cost Guaymas and U.S. performance centers, is generating $11-13 million in annual savings. These synergies are ramping through 2026 as receiving facilities move up the learning curve, providing a visible path to the VISION 2027 target of 18% adjusted EBITDA margins.

• Competitive Positioning Emphasizes Engineering Moats Over Scale: DCO's integrated electronic and structural systems, defense certifications, and 175-year engineering heritage create switching costs that smaller peers like CPI Aerostructures cannot match. While larger competitors like Spirit AeroSystems and Moog have scale advantages, DCO's defense focus and engineered products mix (23% of revenue) support superior margins and more stable cash flows.

Setting the Scene: The Aerospace Supplier Transformation Story

Ducommun Incorporated, founded in 1849 and headquartered in Costa Mesa, California, operates at the intersection of aerospace and defense manufacturing, but its current identity bears little resemblance to its historical commodity parts business. The company generates revenue through two segments: Electronic Systems, which designs high-reliability electronic and electromechanical products, and Structural Systems, which manufactures complex aerostructure components and assemblies. This dual capability creates a unique position in the supply chain, enabling DCO to offer integrated solutions that pure-play competitors cannot replicate.

The aerospace and defense supply chain has undergone profound consolidation over the past two decades, with prime contractors increasingly offloading engineering and manufacturing risk to specialized suppliers. This structural shift favors companies that can deliver engineered solutions rather than machined parts. DCO's VISION 2027 strategy, formalized in November 2022, explicitly targets this opportunity by increasing engineered products and aftermarket content to over 25% of revenue, consolidating manufacturing footprint, and expanding content on key commercial platforms like the Boeing 737 MAX and Airbus A220.

Industry dynamics currently present a tale of two markets. Defense spending is surging as the U.S. and NATO allies replenish depleted inventories and modernize platforms, with missile and radar franchises experiencing robust order activity. Conversely, commercial aerospace faces near-term headwinds from Boeing's quality control issues, FAA production rate restrictions on the 737 MAX, and destocking at Spirit AeroSystems. This bifurcation creates both risk and opportunity: companies overexposed to commercial face margin pressure, while those with defense diversification can maintain growth trajectories and capture commercial upside when the cycle turns.

DCO sits in the middle tier of the supply chain, competing with specialized players like Astronics (ATRO) in electronics and CPI Aerostructures (CVU) in structures, while also facing larger diversified suppliers like Spirit AeroSystems (SPR) and Moog (MOG.A). Unlike these peers, DCO's balanced segment mix—roughly 60% Electronic Systems and 40% Structural Systems—provides natural hedging against end-market volatility. This positioning enables more predictable cash generation and reduces customer concentration risk, with no single defense program exceeding 10% of revenue.

Technology, Products, and Strategic Differentiation

DCO's competitive moat rests on integrated engineering capabilities that bridge electronic and structural domains. The Electronic Systems segment designs high-reliability products ranging from prototype development to complex assemblies for missile guidance, radar systems, and aircraft platforms. The Structural Systems segment manufactures large, contoured aerostructure components, composite structures, and metal-bonded assemblies. This integration allows DCO to deliver complete solutions—such as electronic harnesses integrated into structural panels—that reduce assembly time and improve reliability for customers.

The company's engineered products portfolio, which reached 23% of revenue in Q3 2025 up from 15% in 2022, represents the highest-margin and most defensible portion of the business. These products include aftermarket content, proprietary designs, and mission-critical components with long qualification cycles. Once DCO qualifies a part on a platform like the F-35 or THAAD missile defense system, switching suppliers requires requalification that can take years and cost millions. This creates pricing power and recurring revenue streams that commodity manufacturers cannot access.

DCO's defense certifications and ITAR compliance provide another layer of differentiation. The company's U.S.-based manufacturing footprint (95% of revenue from domestic facilities) and USMCA -covered Mexico operations insulate it from tariffs and supply chain disruptions that have plagued competitors with more global exposure. This setup translates to more predictable cost structures and lower geopolitical risk, supporting margin stability even during trade tensions.

The facility consolidation strategy—shutting down high-cost operations in Monrovia, California and Berryville, Arkansas while transferring work to Guaymas, Mexico and other U.S. centers—addresses a critical cost disadvantage. The Berryville facility sale in Q2 2025 for $2 million exceeded expectations, while the Monrovia shutdown is nearing completion. This eliminates fixed cost drag and positions DCO to compete more effectively on price while maintaining margins. The $11-13 million in annual savings represents 140-170 basis points of EBITDA margin improvement, a material driver of the VISION 2027 target.

Financial Performance & Segment Dynamics

DCO's financial results provide clear evidence that the VISION 2027 strategy is working. Full-year 2024 revenue grew 3.9% to a record $786 million, marking 15 consecutive quarters of year-over-year growth. More importantly, the composition shifted dramatically: commercial aerospace grew 8%, military and space grew 4%, while non-core industrial businesses were pruned by 24%. This selective pruning demonstrates management's discipline in reallocating capacity from low-margin commoditized work to higher-value aerospace and defense platforms.

Adjusted EBITDA margins expanded 140 basis points to 14.8% in 2024, with Q3 2025 reaching a record 16.2% of revenue. This expansion occurred despite commercial aerospace headwinds, proving that structural improvements are more than offsetting cyclical pressures. The free cash flow to adjusted net income conversion improved to 73% year-to-date in Q3 2025, up from 40% in 2024 and 33% in 2023. This shows the business is generating cash, not just accounting earnings, providing capital for growth investments and debt reduction.

The Electronic Systems segment delivered Q3 2025 revenue of $123.1 million, up 6.6% year-over-year, with segment operating margins of 17.1%. Growth was driven by $8.2 million higher revenues in military and space end-use markets, particularly missile and fixed-wing aircraft platforms, plus $5.1 million in industrial markets from restocking and last-time buys. This performance demonstrates the segment's ability to grow despite a $5.6 million decline in commercial aerospace, highlighting the diversification benefit. The 17.1% operating margin, up 70 basis points year-over-year, reflects higher manufacturing volume and favorable product mix toward engineered products.

The Structural Systems segment posted Q3 2025 revenue of $89.5 million, up 4.0% year-over-year, with segment operating margins surging 370 basis points to 13.3%. This margin expansion is particularly significant because it occurred while the segment absorbed $2.5 million lower commercial aerospace revenues due to business jet destocking. The improvement was driven by lower other manufacturing costs and reduced restructuring charges as the Monrovia wind-down nears completion. This validates management's claim that Q4 2024 margin pressure was temporary, and that facility consolidation is delivering sustainable cost savings.

Balance sheet strength provides strategic flexibility. Total debt decreased to $228.1 million as of September 27, 2025, down from $243.2 million at year-end 2024, while the weighted-average interest rate fell to 6.11% from 7.25%.

Available liquidity stands at $250.7 million, comprising cash and undrawn revolver capacity. The interest rate hedge put in place in November 2021, which became effective in January 2024, pegs $150 million of debt at 170 basis points for seven years, driving significant interest cost savings. This reduces financial risk and provides dry powder for acquisitions, supporting the VISION 2027 growth agenda.

Outlook, Management Guidance, and Execution Risk

Management has reaffirmed guidance for mid-single-digit revenue growth in 2025, with low double-digit growth expected in Q4. This outlook embeds a clear assumption: defense momentum will more than offset commercial aerospace destocking through year-end. The defense business grew 13% in Q3, driven by 21% growth in missiles, 17% in military fixed-wing aircraft, and 22% in rotary-wing platforms. This shows the company is capturing share in high-growth defense segments while managing commercial headwinds.

For 2026, management expects commercial aerospace destocking to continue impacting results, particularly in the first half, and does not anticipate catching up to Boeing production rates quickly. This conservative stance sets realistic expectations and highlights that the commercial recovery will be gradual rather than immediate. However, the long-term outlook is promising, with Boeing receiving FAA approval to increase 737 MAX production from 38 to 42 airplanes per month and strong momentum in 787 builds. When destocking resolves, DCO's expanded content on these platforms should drive accelerated growth.

The engineered products mix reaching 23% of revenue in Q3 2025 positions DCO well ahead of its VISION 2027 target of 25% plus. Management has stated that "driving this percentage as high as possible is our #1 strategic focus." Each percentage point shift toward engineered products carries 500-800 basis points of incremental margin, providing a visible path to the 18% adjusted EBITDA margin target. The BLR Aerospace acquisition, completed in April 2023, contributed to this mix improvement and demonstrates management's ability to execute targeted M&A.

Execution risks center on facility consolidation timing and defense program performance. The company estimates remaining restructuring charges of just $0.5 million in 2025, with synergies ramping in 2026 as receiving facilities move up the learning curve. This suggests the heavy lifting is complete, and margin benefits will accelerate. However, any delays in qualifying transferred product lines or cost overruns at receiving facilities could pressure margins and delay savings realization.

Risks and Asymmetries

The Guaymas fire litigation settlement, while resolving uncertainty, creates near-term financial pressure. The $95 million net cash outflow in Q4 2025 will be funded through revolver drawdown, increasing pro forma net leverage to approximately 2.3x. This temporarily reduces financial flexibility and increases interest expense, though management is working with its banking group to expand and extend the credit facility. The settlement eliminates the tail risk of a larger judgment but consumes capital that could otherwise fund growth investments.

Commercial aerospace concentration remains a material risk. DCO derives significant revenue from Boeing platforms, particularly the 737 MAX, and Spirit AeroSystems destocking has created a headwind that management expects to persist into 2026. If Boeing's production issues worsen or FAA restrictions tighten further, DCO's commercial revenue could decline more than anticipated. This could offset defense growth and pressure overall margins, particularly in the Structural Systems segment where commercial content is higher.

Defense program concentration, while diversified, still presents risk. No single program exceeds 10% of defense revenue, but the missile franchise's 21% growth and radar franchise's expansion on platforms like SPY-6, LTAMDS, and G/ATOR create dependency on specific budget priorities. If defense spending shifts away from these platforms or if program schedules slip, DCO's growth trajectory could slow. The current valuation embeds expectations of continued defense outperformance.

The competitive landscape is intensifying, particularly for engineered product acquisitions. Management acknowledges "increased level of competition" in the lower mid-market, with larger players like Moog and Spirit AeroSystems also pursuing consolidation. This could drive up acquisition multiples and make it harder for DCO to find attractively priced targets, potentially slowing the engineered products mix shift. However, DCO's disciplined approach—being "picky eaters" and passing on overpriced deals—should protect returns on capital.

Tariffs and trade policy pose asymmetric risk. While DCO's U.S.-based manufacturing and USMCA coverage have limited impact to date, any escalation of tariffs on Mexican operations or broad-based trade restrictions could increase costs. The company's less than 3% revenue exposure to China provides some insulation, but not immunity. This could compress margins just as the company is demonstrating pricing power and cost control.

Valuation Context

Trading at $89.44 per share, Ducommun carries a market capitalization of $1.34 billion and an enterprise value of $1.55 billion. The stock trades at 1.66 times trailing twelve-month sales and 15.26 times EBITDA, positioning it at a discount to electronic-focused peer Astronics (2.19x sales, 29.75x EBITDA) but at a premium to struggling Spirit AeroSystems (0.73x sales). This reflects the market's recognition of DCO's margin expansion and defense resilience, while acknowledging its smaller scale relative to diversified peers.

On cash flow metrics, DCO trades at 29.92 times free cash flow and 22.39 times operating cash flow, with a free cash flow yield of approximately 3.3%. This compares favorably to Astronics' 36.05x free cash flow multiple, suggesting DCO's cash generation is more highly valued. The company's debt-to-equity ratio of 0.42 and net leverage of 2.3x pro forma for the Guaymas settlement sit in the middle of the peer range, with Moog at 0.08x and Spirit at negative equity due to losses.

The valuation embeds expectations for continued margin expansion toward the VISION 2027 target of 18% EBITDA margins. If DCO achieves this target on its current revenue base, EBITDA would approach $140 million, implying a forward EV/EBITDA multiple of approximately 11x. This suggests the stock is pricing in successful execution but not perfection, leaving room for upside if defense growth accelerates or commercial recovery comes sooner than expected.

Relative to historical performance, DCO's current multiples are consistent with periods of margin expansion and defense outperformance. The key difference today is the engineered products mix, which at 23% is approaching the 25% target that management views as critical for sustainable competitive advantage. This indicates the valuation is supported by structural improvements rather than cyclical peaks.

Conclusion

Ducommun's investment thesis centers on a successful transformation from commoditized manufacturer to engineered products specialist, with defense-led growth providing resilience while commercial aerospace works through destocking. The VISION 2027 strategy is delivering tangible results: adjusted EBITDA margins have expanded 320 basis points since 2022, engineered products mix has grown from 15% to 23%, and free cash flow conversion has improved dramatically. The Guaymas litigation settlement, while creating near-term financial pressure, eliminates a major overhang and allows management to focus fully on execution.

The company's competitive moats—integrated electronic and structural capabilities, defense certifications, and 175-year engineering heritage—position it to capture share in high-growth missile and radar franchises while maintaining pricing power. Facility consolidation is delivering $11-13 million in annual savings, providing a clear path to the 18% EBITDA margin target. The key variables that will determine success are the pace of defense order intake, the timing of commercial aerospace recovery, and management's ability to execute targeted acquisitions that accelerate the engineered products mix shift. If DCO continues on its current trajectory, the stock's valuation appears reasonable for a company demonstrating both margin expansion and defensive growth characteristics in a cyclical industry.