DCO Q3 Deep Dive: Defense Growth Outpaces Commercial Headwinds, Litigation Settlement Weighs on Margins

Aerospace and defense company Ducommun (NYSE:DCO) met Wall Streets revenue expectations in Q3 CY2025, with sales up 5.5% year on year to $212.6 million. Its non-GAAP profit of $0.99 per share was 3.9% above analysts’ consensus estimates.

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StockStory’s Take

Ducommun’s third quarter results met Wall Street’s revenue expectations but prompted a negative market reaction, with investors focused on the company’s sharply lower operating margin due to a substantial litigation settlement. Management attributed the quarter’s top-line growth to continued strength in the defense segment, particularly missiles and radar programs, which offset declines in commercial aerospace. CEO Stephen Oswald acknowledged ongoing commercial aerospace destocking as a key headwind, explaining, “We achieved this despite continued headwinds in our commercial aerospace business, which has been previously forecasted due to destocking at BA and SPR.” Adjusted margins improved, but the one-time legal charge dominated GAAP profitability.

Looking forward, management’s guidance is shaped by expectations of robust defense demand and a gradual recovery in commercial aerospace, though the latter remains constrained by inventory corrections at key customers. The company’s strategy remains focused on expanding its engineered products portfolio and capturing new defense contracts. Oswald said, “We are positioned very well strategically to benefit from the replenishment of depleted worldwide inventories along with robust U.S. and FMS order activity.” Management also highlighted anticipated cost savings from facility consolidations and ongoing margin improvement as key drivers for the remainder of the year and into 2026.

Key Insights from Management’s Remarks

Management attributed the quarter’s results to strength in defense programs, margin expansion from engineered products, and facility consolidation, while also noting the significant impact from the Guaymas Fire litigation settlement.

• Defense segment momentum: Ducommun’s missile and radar business saw double-digit growth, with the missile franchise up 21% in the quarter, driven by increased orders across key U.S. and international defense programs. Management cited this momentum as a major offset to commercial aerospace weakness.
• Engineered products expansion: The revenue mix from engineered products rose to 23%, up from 15% in 2022, as the company continued to prioritize higher-margin, value-added offerings. Management emphasized this shift as central to its long-term strategy for sustainable profit growth.
• Facility consolidation progress: Ongoing restructuring efforts, including the closure of the Berryville, Arkansas plant and the transition of production to lower-cost sites, contributed to improved segment margins. Management expects annual savings from these actions to reach $11–$13 million by 2026.
• Litigation impact on GAAP results: The $99.7 million charge for the Guaymas Fire litigation settlement led to a significant operating loss on a GAAP basis, despite otherwise strong operational performance. CFO Suman Mookerji explained that insurance recoveries will partially offset this cash outflow in the fourth quarter.
• Bookings and backlog strength: The company reported record new orders of $338 million, resulting in a book-to-bill ratio of 1.6x and a record backlog. This broad-based order intake across both defense and commercial markets supports revenue visibility into 2026.

Drivers of Future Performance

Ducommun’s outlook is anchored by sustained defense demand, facility cost savings, and a gradual recovery in commercial aerospace, though inventory headwinds are expected to persist.

• Defense demand remains robust: Management expects continued strong order flow from missile and radar programs, noting alignment with U.S. and allied defense priorities. This segment is projected to offset commercial aerospace softness, with the company positioned on over a dozen missile platforms and expanding radar offerings.
• Commercial aerospace recovery gradual: Destocking at major customers is likely to constrain growth into 2026, with management cautioning that synchronization with Boeing’s production rates may not occur until the second half of next year. However, recent FAA approval for increased 737 MAX build rates and momentum in the 787 program are viewed as medium-term positives.
• Margin upside from restructuring: Facility consolidation and an increasing mix of higher-margin engineered products are expected to support margin expansion in 2026. Management highlighted ongoing cost efficiencies, strategic pricing, and the transition of production lines to lower-cost operations as key levers for profitability improvement.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace of defense order growth, particularly from missile and radar programs; (2) signs of stabilization or improvement in commercial aerospace demand as destocking runs its course; and (3) realization of cost savings and margin expansion from facility consolidation efforts. Progress in shifting more revenue to engineered products and updates on the M&A pipeline will also be key indicators of strategic execution.

Ducommun currently trades at $92.28, in line with $92.12 just before the earnings. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free for active Edge members).

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