DCO - NYSE

Good day, and thank you for standing by. Welcome to the Q2 2025 Ducommun Earnings Conference Call. [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 Second 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 and 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 that could cause actual results to differ 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 include, amongst others, the cyclicality of our end-use markets, the level of U.S. government defense spending, our customers may experience delays in 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 spending litigation matters generally as well as any losses arising from litigation related to the Guaymas performance center fire that may become material, the cost of expansion, consolidation and acquisitions, competition economic and geopolitical developments, including supply chain issues, international trade restrictions, the impact of tariffs and elevated 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 Q2 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. Thank you, Suman. Thanks, everyone, for joining us today for our second quarter conference call. Today, and as usual, I'll give an update of the current situation at the company. After which, 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 continue our third year of execution 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 common Board in November 2022, and then presented the following month in New York to investors where we got excellent feedback. Since that time, Ducommun's management has been executing the strategy by increasing the revenue percentage of engineered product and aftermarket content, which is at 23% this year, up from 15% in 2022, consolidating our rooftop footprint in contract manufacturing, continuing our focused acquisition program, executing the offloading strategy with defense primes and high-growth segments, driving value-added pricing, expanding content on our 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 market catalysts ahead present a unique value creation opportunity for shareholders. The Q2 2025 results show again the strategy initiatives are working, with both gross and adjusted EBITDA margins, for example, at record levels with more opportunities to come for DCO. For Q2, I'm happy to report revenues reached a new quarterly record of $202.3 million or 2.7% over prior year, beating our prior record of $201.4 million in Q3 of last year and also making this our 17th consecutive quarter with year-over-year growth in revenue. We achieved this despite headwinds in commercial aerospace build rates, destocking at BA and SPR, which was anticipated, and the continued strategic pruning of our noncore industrial businesses, the right thing to do. The revenue performance was driven by continued strength in our defense business, which grew 16% during the quarter and was our second consecutive quarter with double-digit growth. The growth in defense was driven by a very strong performance in our missile franchise, which grew by 39% during the quarter, along with DCO's radar business, much newer to DCO, up 46%. Now the outlook for our defense business continues to look great. In addition to the highlights I just mentioned, the Apache blades, Tomahawk cables, and the TOW missile case are scheduled to be back starting in the second half and into 2026 as we are nearing final approvals from RTX and BA. In addition, and previously discussed, 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 this strategic effort. I also thought it was the right time with the recent Wall Street Journal article on Missiles published on July 23 to highlight DCO's missile franchise and how well it's positioned to benefit from the replenishment of depleted worldwide inventories mentioned in the article, along with, in general, very robust U.S. and FMS order activity. For background, Ducommun is a supplier on over a dozen key missile platforms, including AMRAAM, MIR, PAC-3, SM2, SM3, SM6, Tomahawk and TOW amongst others. Our missile business is up 39% in the second quarter, and our missile backlog also increased 30% compared to the year ago. Excellent news. For greater context, DCO currently supports 18 missile programs with at least $750,000 of revenue in the last 12 months. Complementing our missile portfolios, our strong radar franchise, which is up and coming, covering marquee programs such as the SPY-6 radar, the LTAMDS radar, which is part of the Patriot missile defense system. The TPY-2 radar used on the THAAD missile defense system, and the G/ATOR radar used by the U.S. Marine Corps and various other radar platforms. This combination of both missile and radar platforms positioned us well in the current environment and also aligns us with key defense priorities outlined in the U.S. defense budget, including the Golden Dome as well as NATO priorities. We are in active negotiations with the defense right now for record levels of the SM3 as an example, and view our missile and radar franchises a bedrock for growth now and the next few years ahead. The strong growth in our defense business more than offset lower revenue in our commercial aerospace business, which declined 10% in the quarter. However, the outlook is promising for commercial aerospace as Boeing continues to perform at improved build rates and they get through the destocking along with SPR. I also want to add that everything we see out of Boeing Commercial in the last 3 or 4 months has been very encouraging, both on the 737 and 787, our main platforms. We're optimistic that bill rates will be growing from 38 to 42 on the 737 MAX soon as outlined by Boeing on recent calls. Gross margin also grew $2.5 million to 26.6% in Q2, matching the record gross margin percentage achieved in Q1, up 60 basis points year-over-year from 26% as we continue to realize benefits from our growing engineered product portfolio with aftermarket, strategic value pricing initiatives, restructuring actions and productivity improvements. We have ceased manufacturing operations in both our Monrovia, California and Berryville, Arkansas operations. We expect to see those savings be higher as the receiving plants ramp up later this year and more fully in 2026. For adjusted operating income margins in Q2, the team delivered 9.9%, which is just below the prior year of 10.1%. Electronic Systems segment margin grew nicely in the quarter, with a good mix of profitable business and improvements in productivity. Adjusted EBITDA hit another record in Q2, achieving 16% of revenue for the first time, up $2.4 million to $32.4 million. Fantastic. This is our third quarter with adjusted EBITDA above $30 million and represents an expansion of 80 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, 2.5 years to go. GAAP diluted EPS was $0.82 a share in Q2 2025 versus $0.52 a share for Q2 2024. And with adjustments, diluted EPS was a strong $0.88 a share compared to adjusted diluted EPS of $0.83 in the prior year quarter. The higher GAAP and 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 $1.02 billion, but did decrease $50 million year-over-year due to timing of awards. We are in active negotiations with the customers on a number of meaningful opportunities, and based on our current pipeline, we expect a significant uptick in orders in the second half. The defense backlog was flat compared to the prior year quarter and is at $593 million, but expected to ramp up in the back half of the year. The commercial aerospace backlog decreased by $47 million compared to the prior year quarter due to lower OEM production rates and destocking, which we fully expect to come back. In December 2022, we set a target of generating 25% of our revenues 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 we're certainly pushing for a lot more. We achieved this both through focused investment, driving organic growth in those current business as well as the BLR acquisition. In Q2 2025, we have maintained this 23% mix and continue to work on both organic and inorganic opportunities to drive this higher. We have made tremendous progress to date and I'm proud of our team and strategic plan. As for the second half of 2025, we are positioned to benefit from the expected Boeing recovery in the second half, along with continued momentum in defense. For revenue guidance, after somewhat flattish first half, we're expecting mid-single-digit growth in Q3 with low double-digit growth in Q4. In addition, we believe tariffs will have limited and no material impact on our 2025 revenues, a good story for our investors. Also, 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 Ducommun's revenue into China is almost entirely one program for an Airbus supplier, who is owned by the government, constitute less than 2% of our revenue, and we have not seen any impact at this point on tariffs for our revenue. On the supplier side, we do procure some parts from Europe and Asia, but it is manageable. And so far, the impact has been seen to be pretty de minimis. We will continue to monitor it as the situation evolves. But at this point, we certainly don't see it as being something as a material impact to the company. Now let me provide some color on our markets, products and programs. Beginning with our military and space sector, we saw revenues of $117 million compared to $101 million in Q2 2024. Growth was driven by significant activity in missile programs such as TOW and AMRAAM, as well as solid growth in military rotorcraft on the G/ATOR radar and on a classified program. We also ended the second quarter with a backlog of $593 million, flat to prior year, representing 58% of Ducommun's total backlog. Within our commercial aerospace operations, second quarter revenue declined 10% year-over-year to $78 million, driven mainly by lower rates on Boeing platforms, commercial helicopters and in-flight entertainment. As I mentioned earlier, we believe that finally, a much better story is ahead for BA and MAX now that production is ramping up again, and they're working through their overstocked inventory. The backlog within our commercial aerospace business was $404 million at the end of the second quarter, decreasing $47 million compared to prior year driven by lower rates on Boeing platforms. We expect this to recover as production rates ramp up in late 2025 and 2026. Revenue in our industrial business declined by 23% to $8 million during Q2 as we continually strategically prune our noncore business on the portfolio. This will benefit the company in the longer term as we transition that capacity to our core aerospace and defense platforms. With that, I'll let Suman to review our financial results in detail. Suman?

Thank you, Steve. As a reminder, please see the company's 10-Q and Q2 earnings release for a further description of information mentioned on today's call. As Steve discussed, our second quarter results reflected another record quarter of revenue with strong growth in our military end markets, especially in missiles and radar systems. We also saw record gross margins and record EBITDA margins during the quarter. We are nearing the end of our facility consolidation projects, which will drive further synergies in late 2025 and into 2026 as we close out the recertification of the various product lines at the receiving facilities. 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 drove continued gross margin expansion in Q2 and is keeping us on pace to achieve our VISION 2027 goals. Now turning to our second quarter results. Revenue for the second quarter of 2025 was $202.3 million versus $197 million for the second quarter of 2024. The year-over-year increase of 2.7% reflects strong growth in military and space of 16%, driven by increase in missiles, radar, military rotorcraft and a classifying program. This was partially offset by weakness in our commercial aerospace business, mainly driven by lower revenues on Boeing platforms and on select commercial rotorcraft platforms as we complete our facility consolidation exercise. We posted total gross profit of $53.7 million or 26.6% of revenue for the quarter versus $51.2 million or 26% of revenue in the prior year period. We continue to provide adjusted gross margin as we had certain non-GAAP cost of revenue 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 Q2 2025 and in Q2 2024. We also continue to make progress on our supply chain and the working capital in our business. Through our proactive efforts, including strategic buys and our inventory investments, we have been able to avoid any significant operational impact on our business. We continue to work to improve the working capital turns in the business and improve our cash flow. I also want to add that we did not see any material impact from tariffs in the second quarter. And as Steve mentioned, we do not anticipate any significant impact to our P&L at this time. We are a U.S. manufacturing business with U.S. employees and generate 95% of revenues from our domestic facilities. Our revenues are also largely to domestic customers with U.S. revenues being in excess of 85% in 2024. Revenues to China were less than 3%, mostly 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, alternate sourcing of materials from domestic suppliers or by passing on the impact to our customers. Ducommun reported operating income for the second quarter of $17.2 million or 8.5% of revenue compared to $13.9 million or 7.1% of revenue in the prior year period. Adjusted operating income was $20 million or 9.9% of revenue this quarter compared to $19.9 million or 10.1% of revenue in the comparable period last year. The company reported net income for the second quarter of 2025 of $12.6 million or $0.82 per diluted share compared to net income of $7.7 million or $0.52 per diluted share a year ago. On an adjusted basis, the company reported net income of $13.4 million or $0.88 per diluted share compared to adjusted net income of $12.5 million or $0.83 in Q2 2024. The higher net income and adjusted net income during the quarter was driven by the higher operating income and adjusted operating income and lower interest expense. Now let me turn to our segment results. Our Structural Systems segment posted revenue of $92 million in the second quarter of 2025 versus $95.6 million last year. The year-over-year change reflected $6.2 million in lower revenues across our commercial aerospace business, mainly driven by lower revenues in Boeing platforms as well as lower revenue and select commercial rotorcraft platforms as we complete the transition of certain product lines under our facility consolidation initiative. The decline in commercial aerospace was partially offset by $2.7 million of higher revenues across our military and space applications, driven by strength in military rotorcraft platforms and selected missile programs. Structural Systems operating income for the quarter was $9.5 million or 10.4% of revenue compared to $10.6 million or 11% of revenue for the prior year quarter. Excluding restructuring charges and other adjustments in both years, segment operating margin was 13% in Q2 2025 versus 15.4% in Q2 2024. The decline in margin was driven by an unfavorable sales mix in the quarter. Our Electronic Systems segment posted revenue of $110.2 million in the second quarter of 2025 versus $101.4 million in the prior year period. The year-over-year change reflected $13.8 million in higher revenues in military and space applications, driven by strong growth in missiles and radar systems, military fixed-wing aircraft and on a classified program. The strong growth in defense was partially offset by lower revenues from commercial aerospace and a reduction in our industrial business as we chose to selectively prune noncore work. We have been pruning our industrial business now for multiple quarters, maintaining only select customers that are accretive to our business. Electronic Systems operating income for the second quarter was $21 million or 19% of revenue versus $16.8 million or 16.6% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, segment operating margin was 19.4% in Q2 2025 versus 16.9% in Q2 2024. The year-over-year increase was driven by a favorable product mix and better leverage of fixed costs from higher revenue. 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 their requisite approvals, which are expected to be completed by the end of Q3. This quarter, we expect it to start -- this quarter, 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 California. We are also working through the transition of 737 MAX spoilers, Tomahawk harnesses and the TOW missile cases, which are all expected to go into production in Guaymas in the second half of this year. During Q2 2025, we recorded $0.6 million net in 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 half 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 in Monrovia. And during the second quarter, we closed on the sale of the Berryville facility. Turning to liquidity and capital resources. In Q2 2025, we generated $22.4 million in cash flow from operating activities, which was an improvement compared to $3.5 million in Q2 2024. The improvement was due to net income growth of $4.8 million as well as better working capital management. As of the end of the second quarter, we had available liquidity of $236.9 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 market, allowing us to reduce our spread, increase the size of our revolver and allowing us the flexibility to execute on our acquisition strategy. Our strong cash generation allowed us to pay down the remaining balance on our revolver during Q2 2025, and the entire $200 million revolver capacity is now available to us. Interest expense in Q2 2025 was $3 million compared to $4 million in Q2 2024. The year-over-year improvement in interest cost was primarily due to lower interest rates, along with a lower debt balance. In November 2021, we put in place an interest rate hedge that went into effect for a 7-year period starting January 2024 and pegs the 1-month term SOFR at 170 basis points for $150 million of our debt. The hedge will continue to drive significant interest cost savings in 2025 and beyond. To conclude the financial review for Q2 2025, I would like to say that the second quarter results complete a strong first half, building on the momentum from 2024 and positions us 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. Just to close before we get to questions here. Q2 was an excellent continuation of our strategy working despite the anticipated headwind from commercial aerospace. As we've talked about, we achieved another quarter of record revenue and have a good step-up forecasted in the second half of 2025. Adjusted EBITDA and gross margins were also at record levels of 16% and 26.6%, respectively, in the quarter. We're in great shape to meet and exceed our VISION 2027 target of 25% plus of engineered product revenues with 2025 Q2 coming in at 23%. Finally, with commercial bill rates heading higher, getting past destocking, along with stronger defense activity, especially in missiles, and we believe radar as well, very optimistic about what lies ahead in the second half and the next few years for our shareholders, for our employees and other stakeholders. So thank you for listening. Let's go to questions.

[Operator Instructions] Our first question comes from Noah Poponak from Goldman Sachs.

The forecast for low double-digit organic revenue growth in the fourth quarter, that would imply you expect the aerospace original equipment inventory destocking has ended by then. Do you have that visibility? And then I guess, as we move into 2026, can we use that exit rate as a guidepost, at least on the aerospace side, especially given how easy the comparisons will be?

No, great question. And what we're seeing is certainly some ramp-up activity in commercial aerospace as we go into Q3 and Q4. But even in our defense business, and Steve highlighted some of the great things that we're seeing in our missiles and radar business, we are expecting a higher level of activity on the defense side of our business, and that's going to be a key driver. We're not expecting a huge ramp up in commercial aerospace here in the last 2 quarters. There will be some, but it's really also going to come from the defense portion of our business, which looks strong.

Yes. No, we're obviously going to see better in commercial aerospace. That's what we believe. We don't have a great line of sight into destocking. We've tried. We still think there's going to be some of that. So we feel the double digit -- low double digit in Q4 is going to be better on commercial, but it's going to be strong in defense. And remember, we have these products that have been offline like the Apache rotor blade, which is coming online this quarter, and that's going to help us in Q4. So we've got some upside there, too.

Okay. That is interesting. And then Suman, can you spend another minute on the cash flow? That's one of the higher 2Q cash from ops numbers you've ever had. But you still -- I think you still actually had working capital as a headwind. What's driving the improvement? And can you get to that 50% of EBITDA conversion for the year or close to it?

So Noah, yes. We did have working capital as a headwind but as a lesser headwind than we did in Q2 of last year, and this is one of the stronger cash flows we've had in the company's history in Q2. We are looking at free cash flow conversion as well. And historically, we have -- if we look at 2024, it was 40% free cash flow as a percentage of adjusted net income. This year, year-to-date, we are at 55%, which is a noticeable improvement. I think taxes have also helped us with some of the changes in tax rules under the new act, and it's certainly helping us, but even in terms of just operating performance and higher profits, driving higher cash flows. We expect us to continue to improve that free cash flow conversion ratio to kind of our ultimate goal of getting to 100% free cash flow conversion over the next couple of years.

And Noah, just to get back to your earlier question, I don't want to leave it because I know this destocking thing is important for everybody on the call, is that, again, we've asked for things, both from BA and Spirit. We do the best we can with it. We're still going to have some destocking through the rest of the year on certain things. We think that or we hope that probably first quarter, second quarter next year will be clear. I'm just not sure, I really couldn't tell you, honestly, it would be the end of this year. I wish it was, but just not sure at this point.

Our next question comes from Ken Herbert from RBC Capital Markets.

Steve and Suman, nice results. I just wanted to ask, you're still at sort of I think it's 23% of the revenues from the engineered products portfolio. It sounds like that's not maybe a significant mix tailwind in the second half of the year. What does the guidance imply for sort of exit rate from that portfolio this year into 2026 as maybe as a percent of the revenues?

It will kind of depend on the acquisitions and what we close. I mean, I would expect us to kind of stay at a fairly steady rate here through the end of this year because even any acquisition will kind of come in at the tail end and will not have a significant impact on the mix for the year. So I would expect it to be fairly consistent this year with the expectation that it continues to ramp up in '26.

Yes, I think that's about right. I think it's going to bounce around 23%, Ken, but fairly close. And then obviously, we're looking to ramp that up in 2026.

Yes. So on that point, Steve, or Suman, obviously, it's been quite a while since you've announced an acquisition. A lot of your peers are talking about maybe a greater focus on acquisitions in the aerospace and defense sector. Are you -- can you comment on what you're seeing in the pipeline, confidence of something maybe in the back half of the year? And are you seeing more competition that may have pushed some opportunities out of reach? Any more detail on the M&A outlook would be helpful.

We are continuing to see a number of opportunities, but there is increased level of competition. You're absolutely right. But we think we can be competitive enough to win assets. So we'll continue to keep our heads down and working on our pipeline and continue to work through the various opportunities we are seeing right now.

Yes, I think just to jump in here, it was -- I think I like our pipeline right now for the second half. I think there's a few things out there that are interesting. I'll say this from my old boss, we're picky eaters as they say, as far as we do look at things and we're active. And we're just thoughtful, and I know that's what you want us to be as far as purchasing something. So we passed in the past and -- but we have a couple of things that look promising in the second half.

That's great. And if I could, just finally, any update on Monrovia and potential sale of that property and how we might think of that as ideally real estate values maybe firm up a little bit and you get a little better visibility there. It sounds like you were obviously successful in Berryville.

Yes. Well, let me just mention Berryville. I'm going to give credit to Suman and the entire team as well as Jerry Redondo. We were able to get $2 million for that operation. And our expectations were quite a bit lower, so we're hoping that will continue. We did market Monrovia last year, but the bid we have, we felt that wasn't shareholder friendly and so we pulled back. So that's our next property. We're happy to have Berryville closed and sold. Hopefully, some good things will be happening in the commercial market in the second half. But we are going to market it again, and we'll keep you posted.

Our next question comes from Mike Crawford from B. Riley Securities.

I'd like to get back to the engineered and aftermarket products mix of your business. I mean, 23% now, it's near $200 million run rate. I know you're targeting with this VISION 2027 $1 billion in revenue and 25%, that's $250 million, but would that be enough for that to be a stand-alone business? Or would it need more scale? And then I guess, ancillary to that is how difficult or not would it be to separate that from the rest of Ducommun's business?

Yes. Great question. Suman, do you want to take that first?

Yes. That business is -- there are a lot of synergies between that business and our existing business, let me say. There are unique attributes about the business, of engineered product businesses, which make them attractive, which is why we want to grow that as a mix of our overall revenues. That being said, they are also -- and they are managed fairly independently, but there are also synergies with the broader organization. Aerospace and defense is a small industry with the same set of customers that our engineered products businesses sell to as do our -- the rest of our contract manufacturing business. So we're not necessarily viewing that as being a stand- alone business on its own, but certainly wanted to be a larger portion of our portfolio.

Yes. I will tell you this, Mike, it's a good question. Certainly, scale in that area is our #1 focus. So as far as having something stand alone in the future, I would just say, stay tuned. We'll have to see.

Okay. Great. And just one follow-up question, a little different category. But I know you've made some inroads into space and unmanned systems markets. I think you started with the Predator maybe a few years ago, but it's not -- it hasn't been a huge part of your mix. You've had success, obviously, with Viasat and IFC, but any updates there?

It's a bit of a tricky business for us just because there's a high level of expense, as you know, for developing these types of products. We are supporting space in Joplin. We make cables, cabling, which is world-class for space applications. We do other things in our engineered products businesses. So we're probably, as far as space goes, we're opportunistic, and that's what I would say. We're much more strategically aligned on defense and on commercial aerospace. But if there's a space application, which we can do, and it won't cost us a fortune and we'll have a good return, then we're happy to do it.

Our next question comes from Sam Struhsaker from Truist Securities.

On for Mike Ciarmoli today. I guess circling back to the destocking trends for a moment. It looks like commercial aero might have actually been up sequentially this quarter, if I have it right. So I was just curious, obviously, I know you guys said there's a ton of visibility into the back half of the year, but just sort of what kind of cadence you guys have seen so far? Did you see kind of -- do you think destocking has sort of picked up? Or where are you guys seeing that as of now?

I would say destocking impact continues. There was -- we want to make sure our factories are operating at optimal capacity as well. So we've had some build ahead in commercial aerospace as well in our factories, right? So that's kind of another form of destocking, I guess, you could say. So as we do some build ahead, you will see some sequential improvement in commercial aerospace. But as far as destocking impact from Boeing and Spirit, I think that persists as much as it did in Q1.

Yes, yes. See Spirit -- Boeing, obviously, is driving the train here, but Spirit is a major part of our MAX business. We do a lot for Spirit. And when Boeing had shut down and the strike and other things, Spirit, rightfully so, didn't want to lay off 1,000 people, so they just kept making fuselages, and there's a lot of fuselages still on the back. And they're burning those down. So I think all good things ahead, but it's still an issue for the industry and for us at some levels, but it's coming down. That's the best part about it. Progress is being made and that's what we want.

Understood. Makes sense. And then I guess if I could just sneak in another one. Really nice margins in Electronic Systems this quarter. It looks like it might be a high watermark. Should we think of that as maybe a new floor? Or how sustainable are you guys thinking that might be?

I would say that if you look across the company, we probably had 50 basis points of favorability in margin due to favorable product mix. In the electronics business, it was more concentrated, that product mix favorability. On the flip side, on the structure side, it was unfavorable, which kind of net offsets to the 50 basis points I mentioned earlier. So I wouldn't say that the higher gross margins in the electronics are the new baseline. They're certainly a move in the right direction, but there was net favorability across the DCO portfolio of about 50 basis points.

Got it. Okay. And then sorry, just one last one. You guys mentioned, I think, last quarter that Apache was going to maybe kick in this quarter. And just to clarify, I guess, was the uptick in rotorcraft a benefit from that Apache? Or is that still -- has not yet kicked in, we'll see that next quarter. I was just a little bit unclear.

On Q2, Apache was still a headwind. This year as Coxsackie completes recertification on Apache, and there's been great progress here even through the early part of Q3 here and getting that process completed, we're going to see a ramp-up with Apache.

Yes, it's a good question. We're all about sharing good news on this call. I got an update this morning from our New York team, and Boeing was -- and the military, everybody was at Coxsackie in the last 2 days and things could not have gone better. So it looks like sometime in August, later this month, we'll be fully approved to start manufacturing and then we'll start shipping in September. So that's late breaking, but I want to share it with everybody.

[Operator Instructions] Our next question comes from Tony Bancroft from GAMCO Investors.

Well done on the quarter, gentlemen. Maybe backing up the 30,000 feet back to the previous question with what you might do potentially spinning off or -- I'm not sure what the direction of that question was, but the aftermarket business could be self-sufficient. You've done a great job growing this company. You're almost $1.5 billion size company. What's sort of the next leg over? I know you have the targets in the next 2 years, but how do you envision this company, maybe bigger picture, broader strokes over the next maybe 5 years?

Yes. Great question. Headline is go, go, go. I think pretty much, we've got our VISION 2027 to [ 25 ]. We're going to -- we'll be out at some point with our vision probably 2030. We'll have to -- just I don't want to get too ahead of ourselves. But our goal is to continue to build this portfolio with higher percentages of engineered product and aftermarket as well as, as you know, Tony, we're continuing to take cost out and value price all our contract manufacturing, which is a niche business, right? It's a nice business. So you're going to see more and more of that. And I think it's a 10-year play, more, more, more. That's how I see it.

I'm showing no further questions at this time. I will now turn it back over to Steve Oswald for final remarks.

Okay. Thank you. I appreciate everyone calling in this morning and listening. Obviously, my remarks are my remarks. I feel very good about where we are. I think that there's a lot of tailwind. We are in great shape, as I mentioned earlier, on this missile franchise in the next couple of years. Our radar business is doing terrific. And I'm getting closer and closer to Boeing and their BCA team and spending some time with them. And everything I can see, it's thumbs up and they're going to continue, I think, to do great things on the 37 and the 87. So I want to leave you with that. Thank you again. Look forward to connecting soon.