DCO - NYSE

Good day, and thank you for standing by. Welcome to the Q4 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 your first speaker today, Suman Mookerji, Senior Vice President and Chief Financial Officer. Please go ahead.

Thank you, and welcome to Ducommun's 2025 Fourth 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, which 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 changes in production rates or delays in the launch and certification of new products; timing of orders from our customers, which are subject to cancellation, modification or rescheduling; 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 generally and as well as any potential losses arising from third-party subrogation claims 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; our ability to successfully implement restructuring, realignment and cost reduction initiatives that could adversely impact our ability to achieve our strategic objectives; international trade restrictions and our ability to obtain necessary U.S. government approvals for proposed sales to certain foreign customers; the impact of tariffs and elevated interest rates, risks associated with a prolonged partial or total U.S. government shutdown; 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 have filed our 2025 annual report on Form 10-K with the SEC. I would now like to turn the call over to Steve Oswald for a review of the operating results. Steve?

Okay. Thank you, Suman, and thanks, everyone, for joining us today for our fourth quarter conference call. Today, and as usual, I will give an update of the current situation of 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 exit our third year of execution and enter the fourth on very strong footing. 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 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 products 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 in high-growth segments, driving value-added pricing and expanding 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 market catalyst ahead presents a unique value creation opportunity for shareholders. The Q4 2025 results show again that strategy and initiatives are working with gross and adjusted EBITDA margins at record levels and tracking to meet and exceed our Vision 2027 goals with much more opportunities to come for DCO. I'm also very pleased to announce that our next investor conference will be held this September in New York on the 17th, and we will present the next 5-year vision for DCO as a follow-up to our current Vision 2027. I strongly believe Vision 2032 will be very compelling for shareholders, and I look forward to it. We will announce further details of the event in the spring. For Q4, I'm pleased to report that revenues reached a new quarterly record of $215.8 million or 9.4% over last year, beating our prior record of $212.6 million set last quarter and making this our 19th consecutive quarter with year-over-year growth in revenue. We achieved this with our fourth consecutive quarter of double-digit growth in DCO, military and space segment. Our commercial aerospace segment, which has been challenged all year due to destocking at BA and SPR, returned to growth in the quarter. I'm also happy to report that this quarter, the company's remaining performance obligation, RPOs grew to a new record level of $1.1 billion, increasing $75 million sequentially. The growth in RPO during the quarter was in our defense businesses and primarily in missiles, as you would expect. We closed on a number of opportunities and are well positioned for continuing revenue growth, and we expect the bookings momentum to continue in 2026. One of the highlights in the quarter was orders for the MIR program for DCO's Tulsa and Huntsville, Arkansas operations that totaled more than $80 million at good margins, a major win and one of the highest in DCO's history in terms of dollars and for just one program. Our book-to-bill overall was 1.3x in Q4, a great result for DCO after a very strong book-to-bill in Q3 as well. Gross margins also grew $13.4 million to 27.7% in Q4, a significant increase from 23.5% last year in Q4. While the quarter did benefit from a nontypical favorable product mix, which helped margins by approximately 100 basis points, the trend in gross margin still has been very positive throughout 2025 and positions us well to achieve our Vision 2027 margin targets. We continue to realize benefits from our growing Engineered Products portfolio with aftermarket, strategic value pricing initiatives, restructuring actions and productivity improvements. We have transitioned all programs from our closed facilities and are seeing meaningful cost savings in our P&L already with an expected run rate of $11 million to $13 million savings still on target by the end of 2026. For adjusted operating income margin in Q4, the team delivered an impressive 11.4%, well above the prior year of 8.2%. This was supported by growth in adjusted operating income margins in both the Structural Systems and Electronic Systems segment during the quarter. Adjusted EBITDA continues to improve towards our Vision 2027 goal of 18% in 2027 from 13% in 2022. DCO achieved 17.5% in the quarter or $37.9 million, up $10.6 million from Q4 2024. This includes about approximately 100 basis points of benefit from mix, which I mentioned earlier, but even without that represents tremendous progress in the past 3 years and a terrific job by the DCO team. GAAP EPS was $0.48 per diluted share in Q4 2025 versus $0.45 for Q4 2024. With the adjustments, diluted EPS was $1.05 a share in Q4 2025, $0.30 above adjusted diluted EPS of $0.75 in the prior year quarter. The higher GAAP and adjusted diluted EPS during the quarter was driven by improved operating income. Full year 2025 revenue grew 5% to a record $825 million. Our military and space business grew 14% in 2025, driven by strong performance across missiles, military rotorcraft, fixed wing platform and radar. Our commercial aerospace business declined as communicated early in 2025 by 7%, with destocking at BA and SPR headwind all year. Our noncore industrial businesses grew 3% year-over-year, providing nice volume and margin without interrupting our military and commercial aerospace focus. Full year 2025 adjusted EBITDA margins expanded 160 basis points to 16.4%, another year of record-breaking performance as we make steady progress towards our Vision 2027 target of 18% EBITDA margins. In 2025, we closed on over $915 million in bookings, a full year book-to-bill of 1.1, with continued positive news coming out of commercial aerospace and increased Department of War budgets, including the ramp-up in missile production, we have strong confidence in the momentum from both our primary end markets. We also announced in early Q4 that we entered into a binding settlement term sheet to resolve the Guaymas, Mexico fire litigation against us. The term sheet provided for, among other things, the final dismissal of the Guaymas fire litigation against Ducommun with prejudice and the release of claims against us in exchange for issuing a payment of $150 million, $56 million of that was funded by our insurance carriers. In addition, we also settled two ancillary subrogation claims of $1.35 million and $4 million, respectively. The Guaymas fire occurred in June of 2020. We recorded settlements to related costs of $7.6 million in Q4, and those charges are reflected in our GAAP earnings -- on our results. Except for the ancillary subrogation claim of $4 million, payment was made in November, and that is reflected in our Q4 cash flow used in operating activities. On the outlook for 2026, we expect to see continued strength in the defense business and a recovery in our commercial aerospace business during the second half once we get through destocking. We expect mid- to high single-digit revenue for the year of 2026, with growth ramping up throughout the year. Based on the current order book, we are expecting first half of 2026 to be in the low mid-single-digit range with growth ramping up in the second half of the year. In addition, tariffs have not been a material impact on results, and we expect that to continue, a good story for our investors. Now let me provide some additional color on our markets, products and programs. Beginning with our military and space sector, we saw revenues of $124 million compared to $109 million in Q4 2024. This represents a growth of 13%, was driven by strong performance in our military fixed wing and rotorcraft franchise as well as satellite-related business and continued growth in missile and radar. In addition, our facility consolidation and product line moves are now complete with Apache tail rotor blade now in production at its new location in Coxsackie, New York, the TOW missile case in production in Guaymas, Mexico and the Tomahawk in production at Joplin, Missouri. We have all heard the recent announcement from the Department of War to ramp up production capacity on key missile programs. Department of War has entered into long-term framework agreements with Raytheon, our largest customer, and Lockheed Martin to significantly increase production on key programs, including PAC-3, THAAD, AMRAAM, SM3, Tomahawk, amongst others. DCO is well positioned as an existing supplier with defense primes on all these programs and is in great shape with our capacity at our operations to fully benefit. These frameworks, agreements and DoD push to increase production should be another strong catalyst for growth in our military and space segment starting in 2027 and beyond. In 2025, DCO's missile business grew 20% compared to 2024, and we expect this trend to continue. During Q4, we booked in excess of $130 million in orders in our missile franchise with a book-to-bill exceeding 4x. We had significant wins on MIR, Tomahawk, AMRAAM, Standard Missiles and THAAD. With missile production expected to ramp up very meaningfully over the next few years, we expect this to be a big driver for growth. This is supported by demand to replenish stockpiles in the United States and also support FMS order activity. For context, Ducommun is a supplier on over a dozen key missile platforms, including AMRAAM, MIR, PAC-3, SM2, SM3, SM6, Tomahawk, Naval Strike and TOW amongst others, which is excellent news for the company and our shareholders. Within our commercial aerospace operations, fourth quarter revenue increased 1% year-over-year to $82 million as we continue to work through Boeing and Spirit destocking on the MAX. In the quarter, we had growth in both 787 and A320 as well as in-flight entertainment compared to Q4 of 2024. The outlook is promising as Boeing increases their 737 MAX build rates from 38 to 42 and then to 47 later this year and with the new production line in Everett going live this summer. Completion of the Spirit acquisition has also helped with improving operations. We expect destocking for our products on the MAX, particularly those flowing through the legacy Spirit operations to persist through the first half of 2026 and gradually ebb in the back half of the year. The steady progress by Boeing ramping up production rates will certainly help with this. Additionally, Boeing is building momentum on 787 builds and making big investments in the South Carolina facility to increase capacity and ramp up production to 10 by the end of this year, with a further rate ramp in 2027 and beyond. DCO has 150,000 per shipset content on this platform, so this will help us as well. We're also monitoring the production at Airbus as they work through their engine issues, but overall, we remain very optimistic about DCO's commercial aerospace business in 2026 with much more growth ahead in 2027 and beyond as we get past destocking and industry supply issues. Our balance of defense and commercial aerospace businesses helped drive growth for the company in 2025. We very much like the mix and balance it provides. The outlook going forward is very positive for both end markets, and that is exciting news for the company and its shareholders. 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-K and Q4 earnings release for a further description of information mentioned on today's call. As Steve discussed, our fourth quarter results reflect another record quarter of revenue with strong growth across most of our military end markets, including fixed wing aircraft, rotorcraft, missiles and radars. Gross margin and EBITDA margins both reached new record levels. And while favorable mix contributed about 100 basis points to our results, margins would have been very strong even without that benefit. We have completed our facility consolidation projects, and this will drive further synergies in 2026 as we ramp up production of the various product lines that were moved. These actions, along with our strategic pricing initiatives drove continued gross margin expansion in Q4 and keeps us on pace to achieve our Vision 2027 goal of 18% EBITDA margin. Now turning to our fourth quarter results. Revenue for the fourth quarter of 2025 was $215.8 million versus $197.3 million for the fourth quarter of 2024. The year-over-year increase of 9.4% reflects strong growth in military and space of 13%, driven by increases in fixed-wing aircraft, military rotorcraft, missiles and radars. Our commercial aerospace business returned to growth in the quarter with revenues up 1% year-over-year with growth in A320, 787 and Bell helicopters, offsetting lower sales on the 737 MAX. We posted total gross profit of $59.8 million or 27.7% of revenue for the quarter versus $46.4 million or 23.5% of revenue in the prior year period. We continue to provide adjusted gross margins as we had certain non-GAAP cost of revenue adjustment items in the prior year period relating to inventory step-up amortization from our acquisitions. On an adjusted basis, our gross margins were 27.7% in Q4 2025, up 370 basis points from 24% in Q4 2024. I also want to add that we did not see any material impact from tariffs in the fourth 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 over 95% of revenue from our domestic facilities. Our revenues are also largely to domestic customers with U.S. revenues in excess of 85% in 2025. Revenues to China were 3% in 2025, 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 material from outside the United States, but even that is a very manageable spend with China being a low single-digit percentage. We expect to largely 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 fourth quarter of $14 million or 6.5% of revenue compared to operating income of $10.4 million or 5.3% of revenue in the prior year period. Adjusted operating income was $24.6 million or 11.4% of revenue this quarter compared to $16.1 million or 8.2% of revenue in the comparable period last year. The company reported net income for the fourth quarter of 2025 of $7.4 million or $0.48 per diluted share compared to $6.8 million or $0.45 per diluted share a year ago. On an adjusted basis, the company reported net income of $16.2 million or $1.05 per diluted share compared to adjusted net income of $11.4 million or $0.75 in Q4 2024. The GAAP net income and higher adjusted net income during the quarter was driven by the higher adjusted operating income after excluding litigation settlement and related costs. Now let me turn to our segment results. Our Structural Systems segment posted revenue of $96 million in the fourth quarter of 2025 versus $90 million last year. The year-over-year change reflected $5 million of higher revenue in our military and space business, driven by military rotorcraft and fixed wing aircraft platforms. Our commercial aerospace business grew 1% with growth on Airbus platforms and 787 offsetting weakness on the 737 MAX. Structural Systems operating income for the quarter was $14.6 million or 15.2% of revenue compared to $3.2 million or 3.6% of revenue for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 17.8% in Q4 2025 versus 9.2% in Q4 2024. The increase in year-over-year margin was driven by savings from plant consolidation and favorable sales mix. Our Electronic Systems segment posted revenue of $120 million in the fourth quarter of 2025 versus $107 million in the prior year period. The year-over-year change reflected $9.4 million in higher revenues in military and space applications, driven by strong growth in fixed-wing aircraft, rotorcraft, missiles and radar. Our industrial business increased $3 million during Q4. Commercial aerospace in the quarter was flat to prior year with in-flight entertainment and other commercial aerospace offsetting lower revenues on the 737 MAX. Electronic Systems operating income for the fourth quarter was $22 million or 18.4% of revenue versus $19 million or 17.7% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 18.6% in Q4 2025 versus 17.7% in Q4 2024. The year-over-year increase was driven by higher manufacturing volume and favorable sales mix. Next, I would like to provide an update on our restructuring program. As a reminder and as discussed previously, we commenced a restructuring initiative back in 2022. These actions were taken to better position the company for stronger performance in the short and long term. This included 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. I'm happy to report that we have closed out the restructuring program as of Q4 and have moved all transitioning programs into production at the receiving facilities. Production is now ongoing on rotor blades for the Apache helicopter at our Coxsackie, New York facility, 737 MAX spoilers and TOW missile cases in Guaymas, Mexico and Tomahawk components in our Joplin, Missouri facility. During Q4 2025, we recorded $0.6 million net in restructuring charges. We do not expect additional restructuring expenses in 2026 related to this program. As previously communicated, we expect to generate $11 million to $13 million in annual savings from our actions and have already seen meaningful realization of savings in 2024 and 2025. We expect the synergies to further ramp in 2026 as the receiving facilities move up the learning curve and move to full rate production. Turning to liquidity and capital resources. In Q4 2025, we used $74.7 million in cash from operating activities as we paid out the litigation settlement-related items. Excluding the $101.2 million in payments related to litigation settlement, non-GAAP adjusted cash provided by operating activities was $26.5 million during the quarter compared to $18.4 million in Q4 of last year. The improvement was due to higher adjusted operating income and lower cash taxes, partially offset by higher operating working capital. For the full year 2025, we used $33.4 million in cash flow from operating activities as we paid litigation settlement-related items of $103.2 million. Excluding these onetime litigation settlement-related payments, non-GAAP adjusted net cash provided by operating activities was $69.8 million, which is more than 2x the number from 2024 of $34.2 million. This strong improvement in operating cash flow is great news for the company. Also, in Q4, the company amended its credit agreement, which now includes a $200 million term loan and a $450 million revolver. This new $650 million facility lowers our cost of capital and gives us incremental capacity to execute on our acquisition strategy. As of the end of the fourth quarter, we had available liquidity of $390 million, comprising of the unutilized portion of our revolver and cash on hand. Interest expense in Q4 2025 was $3.5 million compared to $3.6 million in Q4 of 2024. The year-over-year improvement in interest cost was primarily due to lower interest rate costs, offset by a higher debt balance. In November 2021, we put in place an interest rate hedge that went into effect for a 7-year period starting January '24 and pegs the 1-month term SOFR at 170 basis points for $150 million of our debt. The hedge is still in place and will continue to drive significant interest cost savings in 2026 and beyond. To conclude the financial overview, I would like to say that the fourth quarter results demonstrate that our Vision 2027 strategy is working and that we are positioned well for 2026 and beyond. I'll now turn it back over to Steve for his closing remarks. Steve?

Okay. Thanks, Suman. In closing, look, 2025 was a great year and Q4 another success for DCO and its shareholders to continue to drive our Vision 2027 strategy. So I'm very pleased with that. We achieved another quarter of record revenue and gross margins and adjusted EBITDA margins were also at records of 27.7% and 17.5%, respectively. The company is also well positioned to meet and exceed our Vision 2027 target of 25% plus of engineered product revenues with full year 2025 at 23%. As everyone knows, driving this percentage as high as possible is our #1 strategic focus, and we're fully committed to realizing that as we go forward. Finally, with the continued strength in defense activity and commercial build rates heading higher, I'm also very optimistic about what lies ahead in 2026 and the next few years for our shareholders, employees and other stakeholders. Okay. So with that, let's go to questions. Thank you for listening.

[Operator Instructions] Our first question comes from John Godyn from Citi.

This is Bradley Eyster on for John Godyn. So I just wanted to follow up on the commentary about the inventory destocking that you guys previously highlighted. And I also want to look at it in conjunction with the movements we saw in inventory working capital in the fourth quarter. So I know you outlined headwinds in the first half and -- and we're expecting an improvement in the back half of this year. But with the working capital in the fourth quarter being pretty favorable, how should we think about the magnitude of the headwinds you previously called out for the first half '26? Is there any change here? Are you seeing an acceleration of inventory draw higher than expected? I'm just curious how to look at this one.

I think we're -- our expectations are in line with previous comments on destocking. We expect there to be continued destocking, and there are two elements of destocking, right, destocking at our customer and destocking in our facility. Destocking in our facility does help reduce working capital tied up in the business. So we expect some of that to happen, as previously discussed in Q1 and Q2 and for the rest of the year. I think from an external destocking perspective, we see more of that happening in the first half and then ebbing as we get into the second half of 2026 as we see inventory getting burned down, mainly at Spirit -- the legacy Spirit or Boeing Wichita and also, to some extent, at Boeing Direct.

Got it. I also want to switch gears to the defense side. So with all the primes talking about increasing their investment in capacity. I was curious if you guys can talk a bit more about your potential medium-term opportunities here, like once this capacity begins to take effect, do you benefit proportionally of this capacity increase? Are there opportunities for you to grow faster than the market? Any color I could probably here would be appreciated.

Yes. Let me just jump in here. Well, first of all, I mean, this -- we really call it, at least for missiles that we call it a franchise within Ducommun because this has been one of our legacies is -- I mentioned in the script before the questions that we go across all the major missile programs. The good news is that these are all things we know how to make. These are things that are already in production. And the other thing that I mentioned is that we have a significant amount of capacity for most and where we might have a little less that we're putting CapEx into that. So that's all very positive. Now on the other side, we're not the OEM. So we have to work with the OEM and wait for the orders. But they need to get the orders from either the State Department through FMS or the Department of War. So we really see this major sort of move in 2027. We are in contact and Raytheon is having meetings and Lockheed as well. And so we couldn't be happier with all the agreements that are happening. It's just going to -- it's going to be a little bit of a lag just because these things take a little bit of time, unfortunately. Stay tuned.

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

Maybe just to dig down into that a little bit more. I mean you've optimized your footprint, you're done with the restructuring. And could you characterize like how much room you have to grow in your new footprint without, let's say, growth CapEx?

I think we -- I mean, this would be a high-level number maybe, but it's at least we have 30% -- I mean I'm being conservative. We probably have 30% of room in our factories right now for this missile increase. So I'd say we're...

And the CapEx -- additional incremental CapEx required to expand that capacity is not significant. It is something that we can accommodate within our regular CapEx budget and can implement quickly. Defense electronics capacity increases for the products we make do not entail significant CapEx or take a lot of time to put in place. So we are actively evaluating all other capacity across each of our factories in the context of all this potential new business and making investments where needed to adjust capacity. But as Steve said, here in the near term over the next 12 months, given the at least 30% existing open capacity, there is no issue in meeting demand.

Yes. Mike, let me give you an example. We have a factory in Joplin, Missouri that that's where the Tomahawk is going to go. Joplin runs about $100 million a year in revenue. They do world-class cabling and other things and -- mostly defense, but some commercial, too. And we're putting the Tomahawk in a building that's already standing there that wasn't utilized. And so that's why we have that 30-plus percent. And we think that we could do $200 million in revenue in the next 3 or 4 years there with what we have. So that's very exciting to us for just one plant that's a big mover for DCO.

Great. No, that's super helpful. And then just maybe one separate question for me. And just on -- you do call out that you're partnering with primes on hypersonics and counter-hypersonic programs. Is that more on the structural side as opposed to the electronics? Or what are you doing there?

More on the electronics side with interconnects, ruggedized interconnects that we have presence on hypersonics.

Yes, a lot of cables, Mike.

Our next question comes from Ken Herbert from RBC.

Steve and Suman, nice quarter. The exit rate on margins is pretty strong. How do we think about the puts and takes on margins in '26 and sort of what's implied in terms of margin expansion on the, call it, mid- to high single-digit top line outlook?

You want to take that?

Sure. Ken, excellent point and question. I would look at the exit rate not based off of Q4's EBITDA of 17.5%, but versus look at the blended EBITDA margin over the year and view that as an exit rate. As we noted, there was about 100 basis points of favorability driven by unusually or atypical product and business revenue mix in the quarter, which helped margins, but we are seeing ourselves exiting closer to the 16.5% on EBITDA as the baseline for 2026, with improvement opportunities, especially as we go into the back half as revenue scale as well as the production ramps up on the product lines that have been moved in 2025.

Yes. I think that's fair, Ken. I think that's probably right. I mean we had a little bit of extra benefit in Q4. Of course, we'll take it, but I think the other number is a better one to use.

Okay. That's helpful. And increasingly, the 2027 targets look increasingly attainable. What -- maybe not today, but when do you think you'd be prepared to provide an update to those numbers, especially on the margin potential of the business?

Yes, that's a good question. Thank you for bringing that up. That will be in September. So when we announce our -- we have our investor meeting, the first part of it will be an update on the Vision 2027, and then we'll roll into the Vision 2032 and our plans for the company and investors.

Perfect. And just one final question. Can you level set us on what missiles and munitions represent within the defense portfolio? Because it sounds like the growth opportunity in that business is clearly going to be much better than company average growth.

Absolutely, Ken. So missiles are about 1/4 of our defense business. And as you noted, the opportunity is significant for us going forward there.

Yes, Ken, that MIR order was a big deal for us. We don't see $80 million orders very often here. We love them, but we don't see them very often. So we were -- it's a long time coming, but that's a nice shot in the arm for the company.

Our next question comes from Tony Bancroft from Gabelli Funds.

Great call, great quarter. Well done. Just you talked about a little bit before, but more in broader strokes, with this announcement of a potential $1.5 trillion budget, even if it goes over a longer period of time, it's still materially much larger than I think most people would even expect. How do you look at that as far as keeping up with the growth, assuming directionally that's where it's going? I know you said you have capacity, but I mean, quadrupling these numbers we've seen, are you able to do it? And then I guess, at some point, there is going to be a run rate and normalization? And how do you guys look at overcapacity? That might even be an issue right now for quite a while, but do you think about that? How do you look at that? And then maybe on top of that, a $1.5 trillion budget has got to be a lot of new opportunities. Would you guys be looking at adjacencies or even other areas to involve yourself in?

Yes. Thank you, Tony. Good to be with you. I think obviously, overall, it's a great opportunity for DCO. We're -- the nice thing is our relationships with defense primes are very strong. I mentioned RTX is our largest customer. So we're critical to their success, which is what we want, right? So we're -- and we're sole sourcing a lot of things. And so that's positive. If you can see, we've done a lot of good work with Northrop Grumman in the past. I've talked about that when I first came on and through the years about getting relationships with other primes other than just having this huge number of Raytheon. And we've done that and Lockheed as well and working on other things. So we think it's -- we read the headline and took our breath away a little bit, but we feel really good about it. And on the capacity side, again, we have really good footprints in the Midwest for these electronic systems. We have, again, I think, at least 30% in our back pocket. And that's just with, as Suman mentioned, regular CapEx feeding every year for the company. So nothing extraordinary you're going to hear from us, I'm sure, in the next few years. And lastly, we're continuing to work on building relationship with new warfare and building relationships with -- we already have a relationship with GA and other companies to take advantage of the CCA warfare program as well as others, hypersonics. So our defense business is strong. It's only going to get stronger. It's only going to get bigger.

[Operator Instructions] Our next question comes from Sam Struhsaker from Truist Securities.

I guess, first and foremost, I'm a little bit curious just on the destocking on the MAX. I'm curious, is there any way you could maybe break out, I guess, kind of how much of what remains is internal versus external?

Yes. It is more external than internal. I wouldn't say that -- we haven't really broken that out publicly. But I would say that yes, it is more external versus internal on the MAX. And for context, let's also keep in mind that the large commercial platforms are about -- including both Boeing and Airbus are about 50% of our commercial aerospace revenues. So the impact of destocking as well as the recovery needs to be weighted in our commercial aerospace forecast accordingly.

Yes. And I also say this, we had 1% growth in Q4, which obviously is nice. But part of that, we had a big revenue bump up in in-flight entertainment versus Q4 2024. So that was one of the big reasons we got to the positive side in Q4. So yes, we don't break it out. We're -- the best news is that as we go forward here, we got all confidence that Kelly and Boeing are going to do their thing. And we're going to -- this is -- there's better days ahead, let's put it that way, okay, because the pull, the demand side is going to help a big time on this.

Got it. Absolutely. And I mean, I guess, kind of in turning to maybe the better days ahead, so to speak, are you guys saying that you're totally prepared once the destocking is out to switch production to whatever the rate increases are at Boeing and Airbus? Is it kind of move up throughout the year?

Yes, you kind of came in or come out, but I think what you asked is that are we ready for the build rate increases for both Airbus and BA?

Yes.

Yes, 100%. We can't wait. We're waiting for the year.

Awesome. And then if I could just sneak in one last one. All the production lines that just recently got moved in and out are now up and running with their new facilities. So they're not necessarily all quite at full run rate. But I was curious if you could put any kind of details around the cadence of those all getting to full run rate and if there will be any kind of margin benefit that you might associate with that once they are running at full rate.

So I think we expect that to get to full rate by the second half of this year. We had projected $11 million to $13 million in total synergies as of Q4 of 2025, I would say approximately half of that is in the P&L on a run rate basis with another $6 million to $7 million to go, and that will come into the P&L over the course of this year, getting to run rate by the end of this year.

Yes. The last one is the Tomahawk. We made 18 cables for it. And there's a lot has to happen on that missile. And that's the one we are still working on a few things. That will be second half for sure.

Our next question comes from Connor Dessert from Goldman Sachs.

You've got Connor Dessert on for Noah Poponak today. I appreciate the commentary that you guys had about upsizing the credit facility so that you could execute more on the acquisition strategy. I was curious if you guys could give us an update on what the M&A market is looking like from your perspective today. We've heard some other A&D suppliers comment that activity has picked up, and there are a lot more potential deals out there with more willing sellers. So I was curious if you guys are seeing a similar level of activity for the assets that are in your target range and how competitive some of the bidding processes are for those assets?

Yes, we are seeing increased activity. We are very much involved in any and all processes that involve assets with engineered products within our size range. It is competitive. There are -- and valuations are not cheap, but we'll remain disciplined. We continue to evaluate multiple opportunities. And we think that there are opportunities where we can create value at the current multiples at which these assets are trading.

Yes. We're seeing good things. More to come on that.

Okay. That's helpful. And then just kind of a follow-up on that. As I look out through '26 and '27, I think Vision 2027, you guys have had a $75 million revenue contribution placeholder from M&A. It starts to look a little more possible that at least the bottom end of that range could be reached just organically from here. Is that kind of the right way to think about it given some of the pickup in momentum, especially in some of the defense areas of the business? Or in your guys' view, does that Vision 2027 still rely on that $75 million placeholder from M&A?

Yes. I would say, yes, it does getting to that -- within that range will definitely require the M&A piece, mainly driven by commercial aerospace recovery pace that we have seen versus what everyone would have naturally expected back in December of 2022 when we put that plan together. The production outlook at that point in time versus reality today is very different. Defense has been great, and we'll continue to see strong growth. We should continue to remain bullish but some of that will happen in 2027 and beyond in terms of production ramp-up on some of these missile platforms. So the longer-term outlook for the company and defense is very strong, but it's -- not all of it is going to come into 2026 and 2027.

But we're going to -- we're working on the $75 million. I mean, we purchased BLR in 2023. So that's part of the $75 million, which is helping, but we've got more work to do on the $75 million, and we're hard at it there, Connor.

I am showing no further questions at this time. I would now like to hand it over to Steve Oswald for closing remarks.

Great. Thank you. And again, thanks for joining us. I very much appreciate your time this morning. Also all the excellent questions. We always appreciate the dialogue after our script -- reading our scripts. So I thought that was great. We are excited about the year. We're also looking forward, as I mentioned earlier, to our September meeting in New York, and we hope that everybody can either make it personally in-person or online. We think it will be an exciting, exciting day for not only to update on the Vision 2027 progress, which we're happy about, but also talk about our big future together. So with that, I'll leave it, and have a great and a safe day. Thank you.