DCO - NYSE

Good day and thank you for standing by. Welcome to the Q1 2025 Ducommun Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Ducommun’s, Senior Vice President, Chief Financial Officer, Mr. Suman Mookerji, please go ahead.

Thank you, and welcome to Ducommun’s 2025 first quarter conference call. With me today is Steve Oswald, Chairman, President and Chief Executive Officer. I'm going to discuss certain limitations to any forward-looking statements regarding future events, projections, or performance that we may make during the prepared remarks or the Q&A session that follows. Certain statements today that are not historical facts including any statements as to future market as regulatory conditions, results of operations, and financial projections including those under our Vision 2027 game plan for investors are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are therefore prospective. These forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to defer materially from the future results expressed or implied by such forward-looking statements. Although, we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing Ducommun and include amongst others. The cyclicality of our end use markets, the level of U.S. government defense spending. Our customers may experience delays in the launch and certification of new products, timing of orders from our customers, our ability to obtain additional financing and service, existing debt to fund capital expenditures, and meet our working capital needs. Legal and regulatory risks, including pending litigation matters, the cost of expansion, consolidation and acquisitions, competition, economic and geopolitical developments including supply chain issues, international trade restrictions, the impact of tariffs and rising or high interest rates, the ability to attract and retain key personnel and avoid labor disruptions the ability to adequately protect and enforce intellectual property rights pandemics, disasters, natural or otherwise and risk of cybersecurity attacks. Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q and other reports filed from time to time with the SEC as well as the press release issued today for a detailed discussion of the risks. Our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities. This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our Q1 2025 quarterly report on Form 10-Q with the SEC today. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve?

Okay. Thanks, Suman, and thanks, everyone, for joining us today for our first quarter conference call. Today, and as usual, I will give an update of the current situation of the company. Afterwards, Suman will review our financials in detail. Let me start off again on this quarterly call with Ducommun's Vision 2027 game plan for investors as we start our third year in 2025. The strategy and vision were developed coming out of the COVID pandemic over the summer and fall of 2022, unanimously approved by the Ducommun Board in November 2022, then presented to investors the following month in New York, where we got excellent feedback. Since that time, Ducommun's management has been executing the Vision 2027 strategy. This includes increasing the revenue percentage of engineered product and aftermarket content, which finished at 23% for 2024, up from 19% in 2023 consolidating our rooftop footprint and contract manufacturing continuing the targeted acquisition program, executing our offloading strategy with defense primes and high growth segments of the defense budget, driving value added pricing and expanded content on key commercial aerospace platforms. All of us here, as well as my fellow Board members, continue to have a high level of conviction in the Vision 2027 strategy and financial goals and believe the many catalysts ahead present unique value creation opportunity for shareholders. The Q1 2025 results are another example of our strategy and initiatives working. Just look at the margin expansion performance and much more to come this year and in 2026. Despite the challenges discussed on our prior earnings call, I'm happy to report Q1 sales of $194.1 million which was 1.7% over prior year, making this quarter our 16th consecutive quarter with year-over-year growth in revenue. Team achieved this despite the headwinds in commercial aerospace bill rates, destocking at BA and SPR and the continued strategic pruning of our non-core industrial business. It was also our seventh consecutive quarter above $190 million in revenue. Strong growth in our missile and electronic warfare, along with military helicopter programs, drove our military and space revenue to 15% growth over prior year. This includes not just order increases, but also major programs I've been speaking about coming online, such as the offload of the next-generation jammer from RTX and AMRAAM. Our defense business looks great with Apache blades coming back online in Q2, Tomahawk cables along with the tall missile case in Q3. We can't wait. I also want to point out that three of our top five customers in Q1 were defense primes and that is consistent with all of 2024 as well. Our team continues to build scale at other defense customers outside of RTX, which is and has been a long-term goal. Northrop Grumman is a great example of the strategic effort. The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter and was anticipated. This is the first commercial aerospace decline in the past 15 quarters for DCO. We had tough comparison Q1, as both Boeing and Spirit drove higher demand during this period last year. We have seen steady improvement in demand with both these customers over the course of Q1 2025 coming out of the Boeing strike and Q4 of last year, and the outlook is promising. I also want to add that everything we're seeing out of Boeing commercial last few months has been very encouraging, both on the 737 and 787, our main platforms. We're optimistic that bill rates will be at 38 soon on the 737. Gross margin, also grew $4.7 million to 26.6% in Q1. A new quarterly record of 200 basis point year-over-year from 24.6%. As we continue to realize year-over-year benefits from our growing engineered products portfolio with aftermarket, strategic value pricing initiatives, restructuring actions and productivity improvements. We have cease manufacturing operations of both on Monrovia, California and Berryville, Arkansas facilities and are already seeing cost savings from this action. We expect to see these savings be higher as the receiving plants ramp up production later this year and fully in 2026, stay tuned. For adjusted operating income margins in Q1, the team delivered 9.9%, which was a 90 basis point improvement compared to prior year of 9%. We continued to be pleased with the growth in our engineered products portfolio and our structured business this quarter, which fully recovered from a one-time expense in Q4 2024. We did tell investors last quarter, it was one time and kept our word. Adjusted EBITDA continues to grow compared to last year at 15.9%. A record for us is the percentage of sales up $3.5 million and almost $31 million, fantastic progress. This is our second quarter with adjusted EBITDA above $30 million, and it represents an expansion of 150 basis points above prior year and continues the strong momentum we saw in 2024 as we work towards the 18% goal in our vision 2027 plan. GAAP diluted EPS was $0.69 a share in Q1 2025 versus $0.46 a share for Q1 2024 and with the adjustments diluted EPS was a strong $0.83 a share compared to adjusted diluted EPS of $0.70 a share in the prior year quarter. The higher GAAP in adjusted diluted EPS during the quarter was driven by improved operating income, as well as lower interest costs due to lower interest rates along with a lower outstanding debt balance. The company's consolidated backlog continues to be strong at $1.05 billion, increasing $8 million year-over-year. The defense backlog increased over $50 million compared to the prior year quarter. No surprise there, and is now at $620 million. The commercial aerospace backlog decreased by $31 million compared to the prior year quarter due to lower OEM production rates, but fully expected to come back. In December, 2022, we set a target of generating 25% plus our revenue from engineered products, which was 9% in 2017 and 15% in 2022. In 2024. We reported that our engineered product business drove 23% of our total revenue up from 19% in 2023. Positioning us well ahead of the curve in achieving our Vision 2027 goal, and certainly pushing for a lot more. We achieved this both through focused investment driving organic growth in our current businesses as well as the BLR acquisition. In Q1 2025, we have maintained this mix at 23% and continue to work on both organic and inorganic opportunities to drive this higher. We made tremendous progress to date, and I'm proud of our team and strategic plans. As for 2025 revenue, we are positioned to benefit from the expected Boeing recovery in the second half along with defense, which includes three programs mentioned earlier coming back online in Q2 and Q3. We are reaffirming our guide of mid-single-digit revenue growth for the year, with Q2 being flattish to last year due to commercial aerospace including destocking, but anticipate good strength in the second half of 2025. In addition, we also believe tariffs will have a limited, if any, impact on our 2025 revenues, a good story for our investors. I want to reiterate as well that Ducommun is a U.S. manufacturer with U.S. employees and 95% of our revenue is produced in the U.S. Our only other facility is based in Guaymas, Mexico and that production is less than 5% of our revenue and thankfully covered under the USMCA, exempting us from tariffs. The other good news is the common sales into China is almost entirely one program for an Airbus supplier who is owned by the government, constitute less than 3% of our revenues, and we have not seen any impact at this point on tariffs for ourselves. On the supplier side, we do procure some parts from Europe and Asia, but it is manageable and so far the impact has been pretty de-minimis. We will continue to monitor as the situation evolves, but at this point, we certainly don't see it as being something material to the company. To sum it up, to comment in a lot of ways is the new trade policy, with mostly U.S. manufacturing operations and U.S. employees. Now let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we saw revenues of $114 million compared to $99 million in Q1 2024. Growth was driven by missile programs such as the TOW and AMRAAM, electronic warfare and radar programs including the NGJ, Aegis Combat System, [Gaither] and on the F-16 and Blackhawk for fixed and rotary wing platforms. These are partially offset by weakness on the F-35, Patriot and the V-22. We also ended the first quarter with a backlog of $620 million, an increase of $51 million year-over-year, representing 59% of Ducommun’s total backlog. Within our commercial aerospace operations, first quarter revenue took a step backwards, declining 10% year-over-year in the quarter to $72 million driven mainly by lower rates on the 737 MAX, commercial helicopters and in-flight entertainment, partially offset by growth on the A320 and 787. As I mentioned earlier, we believe that finally a much better story is ahead for PA and the MAX. Now the production is ramping up again after the strike. We have seen demand pick up at both Boeing and Spirit over the last few months. The backlog within our commercial aerospace business was $411 million at the end of the first quarter, decreasing $31 million compared to prior year driven by Boeing strike late last year and its impact on production rates. We expect this to recover as production rates ramp-up in 2025. Revenue in our Industrial business declined to $9 billion during Q1 as we continue to strategically improve non-core business from the portfolio. This will benefit the company in the long-term as we transition that capacity to our core aerospace and defense platforms. With that, I’ll have Suman review our financial results in detail. Suman?

Thank you, Steve. As a reminder, please see the company's 10-Q and Q1 earnings release for a further description of information mentioned on today's call. As Steve discussed, our first quarter results reflected in another period of solid performance with strong growth in our military and markets. We also continue to make good progress on our facility consolidation projects, which are nearing completion and will drive further synergies in late 2025 and into 2026, as we close out the recertification of the various product lines as the receiving facilities over the next few months. As Steve highlighted earlier, we also made great progress in continuing to build up our engineered product portfolio with those revenues now contributing 23% to our mix. These actions along with our strategic pricing initiatives for continued margin expansion in Q1 and is keeping us on pace to achieve our Vision 2027 goals. Now, turning to our first quarter, results, revenue for the first quarter of 2025 was $194.1 million versus $190.8 million for the first quarter of 2024. The year-over-year increase of 1.7% reflects strong growth in military and space of 15%, driven by increases in electronic warfare, missiles, and radar systems. This was partially offset by weakness in our commercial aerospace business, mainly driven by lower revenues on the 737 MAX. We posted total gross profit of $51.6 million or 26.6% of revenue for the quarter versus $46.9 million or 24.6% of revenue in the prior year period. We continue to provide adjusted gross margins as we had certain non-GAAP cost of sales items in the prior year period relating to inventory step-up amortization on our acquisitions and restructuring charges. On an adjusted basis, our gross margins were 26.6% in Q1 2025 versus 25% in Q1 2024. The improvement in gross margins was driven by our growing engineered products portfolio, strategic pricing initiatives, productivity improvements, and restructuring savings across both our structural systems and electronic system segments. We also continue to make progress on supply chain and labor. Through our proactive efforts, including strategic buys and our inventory investments, we have been able to avoid any significant impacts thus far on our business. Going forward, we will continue to work to improve the working capital terms in the business and improve our cash flow. I also want to add that we did not see any measurable impact from tariffs in the first quarter, and as Steve mentioned, do not anticipate any significant impact to our P&L. We are a U.S. manufacturing business with U.S. employees and generate 95% of revenues from our domestic facilities. The other 5% comes from Mexico and all that revenue is tariff free through the USMCA. Our sales are also largely to domestic customers with U.S. sales being in excess of 85% in 2024. Sales to China, or less than 3%, mostly to one customer for Airbus, and there has been no impact to those volumes or orders at this time due to the tariffs. Our supply chain is also largely domestic with less than 5% of our direct suppliers being foreign. Some of our domestic suppliers do source materials from outside the United States, but even that is a very manageable spend with China being a low single-digit percentage. We expect to mitigate the impact of tariffs on our material spend through military duty-free exemptions, alternative sourcing of materials from domestic suppliers, or by passing on the impact to our customers. Ducommun reported operating income for the first quarter of $16.6 million, or 8.5% of revenue compared to $12.6 million or 6.6% of revenue in the prior year period. Adjusted operating income was $19.2 million or 9.9% of revenue this quarter compared to $17.1 million or 9% of revenue in the comparable period last year. The company reported net income for the first quarter of 2025 of $10.5 million or $0.69 per diluted share compared to net income of $6.8 million or $0.46 per diluted share a year ago. On an adjusted basis, the company reported net income of $12.6 million or $0.83 per diluted share compared to adjusted net income of $10.4 million or $0.70 in Q1 2024. The higher net income and adjusted net income during the quarter was driven by the higher operating income and adjusted operating income. Now let me turn to our segment results. Our Structural Systems segment posted revenue of $84.4 million in the first quarter of 2025 versus $83.3 million last year. The year-over-year increase reflected $2.3 million of higher sales across our military and space applications, including Blackhawk and TOW. Commercial aerospace was down just 2%, driven primarily by a decline in 737 MAX and commercial helicopters. Structural Systems operating income for the quarter was $10.4 million or 12.3% of revenue compared to $2.9 million or 3.4% of revenue for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 14.9% in Q1 2025 versus 7.8% in Q1 2024. In Q4 2024, we had noted unfavorable program mix and onetime costs impacting the profitability of the segment. We had highlighted these as temporary with an expected recovery in Q1 2025. Our performance here in Q1 2025 validates those comments as we saw a strong recovery in the margins of the Structural Systems segment. Our Electronic Systems segment posted revenue of $109.7 million in the first quarter of 2025 versus $107.5 million in the prior year period. Higher revenues from TOW and AMRAAM missiles, as well as from electronic warfare and radar programs, were partially offset by lower revenues from F-35, in-flight entertainment electronics along with the reduction in our industrial business as we chose to selectively prune non-core work. We have been pruning our industrial business now for multiple quarters, maintaining only select customers that are accretive to our business. Electronics Systems operating income for the first quarter was $18.1 million or 16.5% of revenue versus $19 million or 17.6% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 16.9% in Q1 2025 versus 18.4% in Q1 2024. The year-over-year decrease was primarily due to lower manufacturing volume and higher manufacturing costs, partially offset by favorable product mix in the quarter. Next, I would like to provide an update on our ongoing restructuring program. As a reminder and as discussed previously, we commenced a restructuring initiative back in 2022. These actions are being taken to better position the company for stronger performance in the short and long-term. This includes the shutdown of our facilities in Monrovia, California and Berryville, Arkansas and the transfer of that work to our low cost operation in Guaymas, Mexico and to other existing performance centers in the United States. We continue to make progress on these transitions and are working diligently with our customers, Boeing and RTX to obtain the requisite approvals which are expected to be completed by the end of Q3. Later this month, we expect to start full production of rotor blades for the Apache helicopter at our Coxsackie, New York facility, which will complete the transition of that program from our Monrovia, California facility. We are also working through the transition of 737 MAX spoilers, Tomahawk harnesses, and the dual missile case, which are all expected to go into production in Guaymas in the second half of this year. During Q1 2025, we recorded $0.4 million in net restructuring charges. We expect to incur an additional $0.5 million to $1 million in restructuring expenses as we complete the program. As previously communicated, we expect to generate $11 million to $13 million in annual savings from our actions and have already seen some realization of savings in 2024 and the first quarter of this year. We expect the synergies to ramp up in late 2025 and into 2026 as the product recertification is complete and the receiving facilities move up the learning curve and ramp-up production. We anticipate selling the land and building at both Monrovia, California and Berryville, Arkansas. During the quarter, we reclassified the Berryville land, buildings, and building improvements to assets held for sale and are making progress towards the sale of that property in Q2. Turning now to liquidity and capital resources. In Q1 2025, we generated $0.8 million in cash flow from operating activities, which was an improvement compared to use of $1.6 million in Q1 2024. The improvement was due to net income growth of $3.7 million offset by investments in working capital. As of the end of the first quarter, we had available liquidity of $221.7 million comprising of the unutilized portion of our revolver and cash on hand. Our existing credit facility was put in place in July 2022 at an opportune time in the credit markets, allowing us to reduce our spread, increase the size of our revolver and allowing us the flexibility to execute on our acquisition strategy. Interest expense in Q1 2025 was $3.3 million compared to $3.9 million in Q1 of 2024. The year-over-year improvement in interest cost was primarily due to lower interest rate along with a lower debt balance. In November, 2021, we put in place an interest rate hedge that went into effect for a seven-year period starting January 2024, and pegs the one-month terms of for at 170 basis points for $150 million of our debt. The hedge will continue to drive significant interest savings in 2025 and beyond. To conclude the financial review for Q1 2025, I would like to say that the first quarter results at a strong start to the year building on the momentum from 2024 positions as well for the rest of 2025 and beyond. I'll now turn it back over to Steve for his closing remarks, Steve.

Okay, thanks Suman. In closing, Q1 was an excellent start to the year despite the anticipated headwind from commercial aerospace. As mentioned, several times we achieved another record for gross margin percentage at 26.6% and just keep in mind, a few years ago we had a run rate of roughly 20% for an entire year, and that was back in 2022, so we've come a long way in two years and could not be happy about that. Adjusted EBITDA percentage was great and a record as well at 15.9% of sales. We're also very well-positioned to meet and exceed our Vision 2027 target of 25% plus of engineered product revenues with 2021 -- 2025 Q1 coming in at 23% and we're getting this as high as it is our no one strategic focus. Finally, with commercial bill rates heading higher in the second half, getting past destocking, along with stronger defense activity, I'm very optimistic about what lies ahead in the next few years for DCO, its shareholders and other stakeholders. Okay, let's go to questions please. Thank you.

[Operator Instructions] Our first question comes from the line of Mike Crawford with B. Riley Securities.

Thank you. Starting with commercial aerospace, I mean, we know something about Boeing is increasing their monthly build rates, but, how would you characterize any delay and when your ship set rates to Boeing and Spirit would increase if Boeing does get production up to 38 a month?

We are seeing rates from Boeing in the low-20s. We're seeing rates from Spirit ramp up to the mid to high-20s as we went through Q1 and into April. We know publicly that Boeing is likely producing at around in the low-30s at the moment. So there is some destocking impact that we are seeing, but the rates have continued to progress and go up over the last four months this year. And so we are very optimistic that there will continue to be despite the destocking continued growth in the demand for us on both those platforms. And the expectation is that Boeing is able to get to their rate of 38 by the end of this year.

Yeah. Mike, this is Steve. I'm very confident where they are. They had a great April as you can see from the announcements they made. March to April was really impressive. I think their efficiency and everything they're doing within fusion sound has gotten a lot better. I think 38 is in the cards probably maybe by September, October. So we're going to see a lift.

Okay. Thank you. And then just turning to rotary wing, you had some weakness, but you also had some selected rotary wing platforms with higher rates. I take it as Apache or Apache blades are coming on in Q2. So what was performing higher in Q1 and how much of this would you attribute to BLR Aerospace?

So, we did, as you rightly pointed on the defense side of our business, see well, the weakness that you pointed out, we saw on the commercial side. We have some transitions ongoing with production moving from Monrovia to Coxsackie, and so some demand with the Bell helicopter. Some issues with materials on Sikorsky platforms, which drove temporary softness in the quarter on commercial helicopter. But we are going to see the Apache production here ramp-up, which should be really a positive in Q2 and beyond on the rotorcraft side for us.

Yes. Plus, Mike, we're on the Apache engine with MagSeal. So that's also they're going great with the engine business there. So that's a part of that lift. But we might have this and that with blades right now. But now we're just starting to get ramped up. We cut the blades, looked at everything is looking great. We get everybody trained out in New York. So we're hoping, obviously, these are high energy parts, you got to be careful, but we're hoping in May, we're going to start really ramping up and we got the orders. We just got to get the production in place.

Okay. I'll just end with that the DSO increase in Q1, is that anything structural or contractual that changed? Or should we look for those DSOs to come back down?

It's a good point. So we need to have just some seasonality in the sales in Q1. We had a slightly bigger March, we had some items that went out towards the end of the quarter that drove it, there isn't any structural change. It was just the seasonality a onetime kind of thing during the quarter.

Our next question comes from the line of Ken Herbert with RBC Capital Markets.

Good morning, Steve and Suman. I wanted to ask first on the M&A pipeline. You obviously have a placeholder for M&A contribution as we think about Vision '27, it's been quiet recently on the deal front. Are you still tracking towards the placeholder you've got in place for '27 from M&A? And maybe can you give any more detail on how the pipeline looks now and due diligence efforts and maybe expectations for M&A this year?

So we -- Ken, thank you for the question, and good morning to you as well. We continue to track multiple opportunities in our pipeline. And we've got to be disciplined and make sure we execute on the right one. We see enough in the pipeline for us to feel probably confident in being able to get a deal done this year. And I think that's what --

I would say the deal volume is good. We -- and I know just -- we just looked at something fairly hard and did a lot of hours in on it and turned out it just wasn't for us. So we're involved with diligence as you asked, and we're looking forward to getting one sooner than later, Ken.

Okay. That's helpful. And are you seeing more in Aerospace or Defense or combined or anything maybe we should just keep in mind?

I would say the businesses that we look at tend to be kind of niche engineered product businesses, which often will span across some defense platforms as well as Commercial Aerospace. So it is a mix of both. It isn't necessarily skewed one way or the other.

Yes, I would say that's right, Ken. I'd say we usually have sort of a mix. It's usually never 100% one way or the other. So that's so we're seeing and what we've seen.

Okay. And just finally, you seem to be running ahead of your '27 targets in terms of contribution from the Engineered Products. And if you do another deal this year, I'm assuming it would be very focused on the Engineered Products. How should we think about the -- maybe the margin contribution from these Engineered Products? You talked obviously a lot about the sales contribution. Can you maybe help us understand how impactful this could be as you grow that mix to the EBITDA? I mean I can imagine it's been a big component of obviously just the margin improvement on the gross margins and EBITDA. But any help you can give in framing that as we think moving forward on the Engineered Products would be nice.

Great question, Ken. And these are significantly accretive to our margins, right? These are engineered proprietary product businesses with access to the aftermarket and in line with some of the other aftermarket peers that you cover, like margins are in line with those. So they tend to be accretive, they tend to provide also significant margin runway for us to execute on post-acquisition. And so we believe that this is going to continue to be as we do additional acquisitions, a key driver of margin expansion for us into 2027.

Yes. Ken, I'll also add, we have as far as the value we provide for these products, I mean we have very good pricing power. So that's the other thing, which is important for investors to know.

Our next question comes from the line of Michael Ciarmoli with Truist Securities.

Really nice margins here. Maybe Steve or Suman, just to kind of level set us and unpack maybe the revenue guidance for the rest of the year, mid-single-digit growth. Defense obviously had a really strong quarter here but the comps do get a bit tougher and you're obviously going to have some of this recovery in commercial aero. But maybe how are you thinking about the growth rates between commercial aero and defense for the remainder of the year?

Yes, just let me jump in the first. I think first thing, Mike, just to note, in this is a real benefit for shareholders that we have this mix of defense and commercial, right? We've had a lot of peer groups that or peers that have more commercial and they're struggling a bit. But as you can see, our defense business, we've been talking about really came to the fore as they say in Q1. So first of all, we're really pleased with our balance. As far as what I can see, obviously, we're flattish in Q2, but we feel very good about destocking and commercial rates going up, not only on the 37, but on the 87, right because we have very good content mix there. So very positive on the back half. And I think maybe defense going forward, maybe not 15, but certainly a very respectable growth number. Suman anything to add?

The only thing I'd add there, Steve, is that there is -- we're going to see the ramp-up in the programs that have been transitioning, right? So we have the TOW missile cases, spoilers and the Tomahawk program. So across commercial and defense, we're going to get some lift in the back half from those programs coming back online.

That is going to be great for everyone.

Okay. Got it, got it. What about the A220? I know Airbus' commentary around both the 220 and 350 have been a little bit squishy just given the Spirit facilities. Do you expect that to be a material contributor to the A220 this year?

Look, yes, so a couple of things. First, that A220 program is great for us, as we talked about, we make the fuselage skins, we're a suppliers to China. We haven't seen any headwind yet, so we feel very good about that. So that's going to continue. We feel as far as where we sit here today, it's going to again be good business this year leading to next year. I understand about the Spirit issue and the engine issue, and I'm hoping sooner or later, they're going to work through that. But we're running rates higher than what they're shipping, that's for sure. And we're happy about that. The other thing is on the A350, we're really -- we're not a player on the A350. So I know the struggle and it won't impact us.

Got it, got it. And last one for me. I think you called out the in-flight entertainment side of commercial as being weak. I just wondering if you could potentially size that business? What are the thoughts there just given that's may be viewed as more discretionary spending from the airlines. Does that continue to be a headwind for the remainder of the year? Or was that just kind of short term here temporary?

That -- it's not a huge portion of our business. It's a low single-digit percentage of our total business. I think we'll continue to see some softness there through the rest of this year. That we expect will be offset by other things in the portfolio.

Mike, the other than I think the compares get a little bit easier. We had a really good Q1 2024 with in-flight. I mean it's one customer. So -- and obviously, we didn't have a great rest of the year where things kind of tamped down a bit. So I think going forward, we'll probably moderate around that on a -- basis.

Our next question comes from the line of Jason Gursky with Citi.

Steve I wonder if you could just spend a few minutes talking about the potential for new work scopes for you all. And maybe start with the commercial side. Obviously, Spirit AeroSystems is going through a thing here. And I'm just wondering if there won't be some more opportunities there for you as those assets land in different hands. So is there opportunity here either Boeing or Airbus as a result of what's going on at Spirit AeroSystems for you guys? That would be the first part. Yes. And then the second part would be on the defense. I'm just kind of curious if you are beginning to see any signs of increased outsourcing initiatives by any of the big cap defense companies?

Certainly, it's funny to ask that we have our Senior VP out of Spirit actually today meeting with them in Wichita. So we have a very close relationship with Spirit, they're obviously a top customer of ours. And we do see more opportunity especially as things ramp up, okay? So for instance, we just got going on the 737 MAX skins. And early on, right? So we do 4 or 5 skins and we do 15 a month. That's the deal we have, right? So it's not paid by the drink. And we feel very good about increasing business there, we understand there's delivery challenges were pretty much 100% on time. We're pretty close to both Airbus and Spirit and Boeing so our operations are very strong. So we think there is growth there. We're continuing to work with them. I think the skins is sort of in the lead as well as maybe some other things as well as Airbus, we're getting quoted heavily by Airbus, frankly, because some of the other suppliers are not getting the job done, whether that changes hands, we'll have to see. But we see a lot of growth activity as far as quoting at this point. So I think that's, I think, a good story. I think -- if you look at our just percentage of what we have on the programs in general and our operation performance, it's all very positive. You want to add on the second part?

On the defense side, I think we are continuing to see numerous opportunities to bid for work, RTX is a big customer for us, our biggest customer and we are actively bidding both a lot of new work with them. So I think stay tuned for additional wins for us then on the defense side as well.

Yes. The only thing I'd say as well, Jason, is that look, seriously, like the card businesses, CCAs, those type of things are very difficult applications. I mean we're really good, right? So we picked up a lot from RTX that needed to make these cards in Massachusetts. And now that's coming our way in Tulsa, and we have other things we're working on with Northrop. So that's not changing. And I've been bullish on defense. I've been telling investors, look, these things take time and they do because when you're moving something from an internal operation, at RTX to Tulsa. They're not going to give you everything at first. You got to get 50%, you got to get testing machines. So all this is going to come together for us, I believe, in this year and next year. So I was very happy with the 15%. I'll say that in defense this quarter.

Our next question comes from the line of Tony Bancroft with Gamco Investors, Inc.

Congratulation, well done. Based on the $1 trillion PBR, you sort of talked about this a little bit, but -- and then on top of that, a sort of a two-pronged attack here and then the increase in European defense spending. Maybe you could talk a little bit more in detail about how you see yourselves seeing position for that growth trajectory and maybe a little further out, there have been questions of being able to continue that growth. How do you see this maybe playing out over the next few years? And what programs that you're on that are going to have the best exposure to the growth?

Yes. Tony, I'll jump in and then you can. So, I think first and I think just in general, our whole portfolio around electronic warfare, missiles, radar. Obviously, things are going to be happening with the Golden Dome and some other things we're still trying to figure out. So we really feel very good and strong about being a part of this $1 trillion budget being able to support all these customers. I mentioned in my remarks that we've -- in the past, right or only, we were a big Raytheon house, as they would say. And now we're moving in much more to Northrop. We're moving into BAE systems. We're moving into some of these other companies on purpose, right? To kind of build out this customer base. And we got a lot of things to provide. Cabling, we're great at that, we're great at cards. So we think that we're in the right position. And as I mentioned earlier, not only the budget, but also customers like RTX are offloading, right? They're offloading and driving margins. They might be 3 or 4 years into a program with 7-year fixed pricing, and they have nowhere to go. So they're going to move stuff out and they're going to try to drive margins that way as a company. So it's all looking good, Tony.

A nice job positioning yourself. Good job, Steve. Thanks.

Thanks very much. Good to hear from you.

[Operator Instructions] Our next question comes from the line of Noah Poponak with Goldman Sachs.

Just kind of thinking through the pace of growth through the rest of the year. I think you had last quarter talked about 1Q being flat, 2Q a little better, the 1Q actual is a little better. Still feel the same about 2Q? Or is that looking better? And I guess, the defense growth rates quite high in the quarter as others have noted, the compares get a little tougher there through the rest of the year, but not that much tougher. And Aero was just down a ton in the first quarter and Boeing was on strike and had things turned off. And or I guess, was coming out of the strike. So I don't know, maybe I'm splitting hairs on the mid-single for the full year, but it's a little tough to get there, I guess, if things break the right way, maybe it's just early in the year and there's a bit of dynamic macro being conservative. But how do you see the growth rate playing out through the year? And what's the upside of where things going to land?

Great question. On the commercial aerospace side, I would say that -- so if you look at Boeing and Airbus, they're about 50% of our total commercial aerospace business. So we do expect that to ramp up in the second half of the year, but I wouldn't apply that growth rate on our entire commercial aerospace revenue, right? So 50%, the other 50% includes business jets and rotorcraft and other things. But there will be growth there, there will be continued strength in the defense business, as Steve mentioned earlier, may not be at the 15% mark, but we do expect based on the programs that -- and the visibility we have to the rest of the year, there's going to be continued strength there. And then we have also the ramp-up on the programs that have moved from one facility to another and are currently kind of in hibernation but expected to ramp-up in the second half of the year. They include TOW missile case, they include the spoilers and the 737 MAX as well as the Tomahawk harnesses, along with the Apache blade. So those are all expected to give us some lift in the second half. So we see good growth in commercial aerospace, good growth in defense to kind of get us to that mid-single digit number for the full year.

Yes. No, I'd also say, look, we're -- okay, is it a little conservative right now? Yes, we want to really see how the second quarter goes with BA and Spirit. Obviously, that's a big part of our growth story. So we'll probably have a firmer number we will in the next call, but that's kind of where we see it right now.

Okay, that makes sense. Where do you expect your mix of revenue from Engineered Systems to be as you're exiting the year?

It will kind of depend on the acquisition. I think if we do get an acquisition, it's likely to exceed or get very close to kind of the 25% we have said. I don't know it depends on the timing also of the acquisition and how much your revenues have contributed. But we expect it to be in that 23% to 24% like you see and with an acquisition ramping up to beyond 25% in the next 12 months.

Yes, I think that's right. I think we're going to -- we're obviously job one right now is another acquisition, right? So we're -- everybody is working hard on that. So once we do that, we think we'll be over that. And then come next year, we'll have new thoughts about the next 5 years, right? So we're holding right now with the Vision 2027 and we're happy where we are.

Okay. Should we expect the first quarter segment operating margin to be the low watermark for the year and you work higher sequentially off of it? Or is there seasonality or expense timing or mix that could drive a lower quarter at some point in the year?

So I would say there is some goodness in the Q1 margin, so at 15.9% EBITDA margin were also. And if you linearly space out our Vision 2027 goal, we would kind of have to be at 16% by the end of the year. So we kind of are there already in Q1. But it does have 50 to 75 basis points of, I would say, mixed goodness in it. So we'll continue to see, I think, good margins for the rest of the year, but I wouldn't say this is a low watermark. But with that 50 to 75 basis point range, I think we're -- is how I would say.

Around 16 should be good, right? For the year.

Yes, to the end at the end of the year.

Makes sense. And then just last one, Suman, what are you expecting for full year 2025 free cash conversion, whether from your adjusted net income or EBITDA?

So we did have -- we had 40% free cash flow conversion last year. In 2024, we had a little over 30% free cash flow conversion in 2023. We expect 2025 to be continuing that path of improvement. I wouldn't guide to a specific number for the year. We don't typically provide free cash flow guidance. Our end goal here over the next few years is to get back to 100% free flow as a percentage of adjusted net income. But that will happen over the next couple of years as we unwind our working capital investment.

That will be better this year.

But it will be better this year than it was.

Continuing this reduction.

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Steve Oswald for closing remarks.

Okay, just wrapping up here. Thank you again for joining us for the call. Again, just to reiterate, we feel great about our start this year. We appreciate the thoughtful questions, the support from our shareholders. I feel very optimistic about this year and next year, and we look forward to reconnecting after Q2. Have a very good day and safe. Thank you.