Ducommun’s Defense Pivot Fuels Progress Toward 25% Engineered Product Revenue by 2027

Ducommun Incorporated (NYSE: DCMI) is steadily advancing toward its VISION 2027 goals, with Q1 2025 results underscoring its strategic pivot to high-margin engineered products and defense markets. Despite headwinds in commercial aerospace, the company achieved record margins and maintained momentum toward its target of deriving 25% of revenue from engineered products by 2027—a goal now within striking distance after hitting 23% in 2024.

Q1 2025: Defense Growth Offsets Commercial Challenges

Ducommun’s first-quarter results highlighted a stark divide between its defense and commercial segments:
- Defense & Space Revenue: Surged 15% year-over-year to 55% of total revenue, driven by missile programs (e.g., Next Generation Jammer, AMRAAM), electronic warfare systems, and military radar.
- Commercial Aerospace: Declined 10%, the first drop in 15 quarters, due to Boeing’s 737 MAX production cuts and customer destocking.

Total revenue reached $194.1 million, marking the 16th consecutive quarter of year-over-year growth, albeit at a modest 2% pace. While commercial struggles weighed on top-line growth, operational excellence shone through:
- Gross Margin: Hit a record 26.6%, up 200 basis points, fueled by defense’s higher-margin work.
- Adjusted EBITDA: Rose 13% to $30.9 million (15.9% of revenue), a key milestone toward the 18% VISION 2027 target.

Engineered Products: The Path to 25% by 2027

Ducommun’s engineered products—custom components for defense and aerospace—are its growth engine. In 2024, they contributed 23% of revenue, up from 17% in 2020, with Q1 2025 showing 100% of revenue derived from its two core engineered segments (Electronic Systems and Structural Systems). The company aims to boost this to 25% by 2027, a target now within reach due to:
1. Defense Prime Off-Loading: Growing demand from defense contractors like Lockheed Martin and Raytheon, which outsource complex subsystems to Ducommun.
2. M&A Pipeline: Plans to acquire niche engineered product firms in 2025 will accelerate revenue diversification.
3. Margin Expansion: The 26.6% gross margin in Q1 2025 reflects the profitability of engineered products, with management confident in reaching 18% EBITDA margins by 2027.

Challenges Ahead: Navigating Commercial Volatility

While defense momentum is strong, commercial aerospace remains a wildcard. Boeing’s 737 MAX production, currently at 38 units/month, is expected to rebound in H2 2025, easing destocking pressures. However, risks persist:
- Customer Concentration: Boeing accounts for ~20% of commercial aerospace revenue, making Ducommun vulnerable to production fluctuations.
- Structural Costs: Restructuring non-core businesses will incur $4–6 million in annual costs through late 2025, though these are offset by margin gains.

Backlog Strength and Defense Dominance

Ducommun’s $1.05 billion backlog (up $50 million year-over-year) reflects long-term defense commitments, with 59% ($619 million) tied to military programs. CEO Stephen Oswald emphasized that defense programs are “a key lever for margin expansion,” with the A220 (a “great performer”) and electronic warfare systems driving sustained demand.

Conclusion: A Strong Foundation for 2027

Ducommun’s Q1 2025 performance validates its strategy to shift toward engineered products and defense markets. With 23% of revenue already from engineered products, record margins, and a robust defense backlog, the 25% target by 2027 appears achievable. Key data points reinforce this:
- Adjusted EBITDA margins at 15.9% are 2.1x the rate of growth needed to reach 18% by 2027.
- Defense revenue mix at 55% is within striking distance of the 55-60% VISION 2027 goal.
- Free cash flow improved to $0.8 million in Q1, setting the stage for better capital returns as commercial aerospace rebounds.

Investors should monitor Boeing’s production rates and M&A execution, but the structural tailwinds in defense and Ducommun’s operational discipline suggest the company is on track to meet its 2027 milestones. For now, the stock’s 12-month forward P/E of ~14x reflects optimism—a prudent bet on a company leveraging defense’s growth to outperform cyclical aerospace volatility.