Ducommun Inc’s Q1 2025 Earnings: Margins Soar Amid Strategic Shifts

Ducommun Inc (NYSE: DCO) has delivered a mixed but ultimately promising Q1 2025 earnings report, showcasing robust margin expansion and strategic progress despite headwinds in its Commercial Aerospace division. The results underscore the company’s focus on defense growth, operational efficiency, and long-term Vision 2027 goals. Let’s dissect the numbers and implications.

Financial Highlights: Margins Hit Record Levels

Ducommun’s Q1 revenue rose 1.7% year-over-year to $194.1 million, extending its streak of 16 consecutive quarters of revenue growth. More impressively, gross margin surged to 26.6%, a 200-basis-point increase from Q1 2024, fueled by higher engineered products sales, pricing discipline, and operational improvements. Adjusted EBITDA hit 15.9% of sales, another record, while adjusted EPS rose to $0.83, up 18.6% year-over-year.

Despite these positives, the stock has underperformed the broader market year-to-date, suggesting investors may be pricing in near-term Commercial Aerospace risks.

Segment Analysis: Defense Rises, Aerospace Stumbles

• Commercial Aerospace: Revenue fell 10% to $72 million, the first quarterly decline in 15 quarters. Boeing’s 737 MAX production rates remain in the “low 30s” monthly, with destocking by Boeing and Spirit AeroSystems dragging performance. In-flight entertainment demand also weakened, though management expects recovery as Boeing ramps to 38/month by year-end.
• Military & Space: Revenue jumped 15% to $114 million, driven by missile programs (TOW, AMRAAM), electronic warfare systems (NGJ, Aegis), and radar systems. Weakness in F-35 and V-22 programs was offset by gains elsewhere.
• Industrial: Revenue dropped to $9 million as the company exited non-core operations, a move to focus resources on aerospace/defense.

Strategic Wins: Vision 2027 Progress and Cost Cuts

Ducommun’s Vision 2027 goals—25%+ of revenue from engineered products by 2027 and 18% EBITDA margins—are accelerating:
- Engineered products now account for 23% of revenue, up from 19% in 2023 and 15% in 2022.
- Facility consolidation in California and Arkansas will shift production to low-cost sites in Mexico and New York, saving $11–$13 million annually by 2026.
- Tariff mitigation remains minimal: 95% of revenue is U.S.-based, with only 5% from Mexico (USMCA-compliant) and <3% from China.

Risks and Challenges

• Commercial Aerospace Cyclicality: Boeing’s slow ramp-up and Airbus’s A220 program (where production exceeds shipments) create uncertainty.
• Restructuring Costs: Ongoing facility closures could add $0.5–$1 million in expenses, though long-term savings are significant.
• Defense Execution: Delays in Apache blades (Q2 restart), Tomahawk cables (Q3), and TOW missile cases (late 2025) could delay cash flow.

Outlook: H2 2025 Could Be the Turning Point

Management forecasts mid-single-digit revenue growth for 2025, with Q2 expected to be “flattish” due to destocking but a stronger second half as Boeing production accelerates. Free cash flow aims to improve to 100% of adjusted net income over the next few years, a critical metric for sustaining growth.

Investment Takeaways

Ducommun’s Q1 results are a mixed bag but ultimately positive. The margin gains and defense momentum suggest the company is on track to meet its Vision 2027 targets. While Commercial Aerospace headwinds and restructuring costs pose near-term risks, the long-term thesis rests on:
1. Defense dominance: Military programs are growing faster than the sector average, and U.S. defense spending trends remain strong.
2. Cost discipline: Facility closures and operational improvements will amplify margins as savings materialize.
3. Acquisition pipeline: Management’s focus on niche engineered products could unlock accretive growth.

The defense backlog’s $50 million year-over-year jump versus Commercial Aerospace’s $31 million drop highlights the strategic pivot. If Boeing’s production rates rebound as promised, Ducommun could see a significant H2 bounce.

Conclusion: A Buy for the Long Game

Ducommun’s Q1 results are a testament to its ability to navigate cyclical challenges while advancing its strategic goals. With margins at record levels, a $620 million defense backlog, and $11–$13 million in annual savings coming online, the company is positioned to thrive in the second half of 2025 and beyond.

While near-term volatility from Boeing’s slow ramp-up and restructuring costs is inevitable, the long-term vision—25%+ engineered products and 18% EBITDA margins—is within reach. For investors willing to look past short-term headwinds, Ducommun’s stock could reward patience with margin expansion, free cash flow growth, and a robust pipeline of defense programs.

Final Note: Monitor DCO’s Q2 results for signs of stabilization in Commercial Aerospace and further margin gains. If the stock remains undervalued relative to its peers and growth trajectory, it’s a compelling opportunity.