Earnings Call Transcript - DCO Q4 2025

Operator, Operator

Good day, and thank you for being here. Welcome to the Q4 2025 Ducommun Earnings Conference Call. Please note that today's conference is being recorded. I will now turn the call over to Suman Mookerji, Senior Vice President and Chief Financial Officer. Please proceed.

Suman Mookerji, CFO

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?

Stephen Oswald, CEO

Thank you, Suman, and thanks to everyone for joining us today for our fourth quarter conference call. As usual, I will start with an update on the company's current situation, followed by Suman's detailed review of our financials. Let me begin by discussing Ducommun's Vision 2027 strategy for investors as we move from our third to our fourth year of execution on strong ground. This strategy was developed after the COVID pandemic and approved by the Ducommun Board in November 2022, followed by a presentation to investors in New York in December, where we received great feedback. Since then, the management team has been implementing this strategy by increasing the revenue share of engineered products and aftermarket content, reaching 23% this year from 15% in 2022. We have consolidated our manufacturing footprint, advanced our acquisition program, and executed our offloading strategy with defense primes in high-growth areas, enhancing pricing strategies and increasing content on key commercial aerospace platforms. The entire team, along with my fellow Board members, remains highly confident in the Vision 2027 strategy and our financial objectives, believing that upcoming market catalysts provide substantial value creation opportunities for our shareholders. The Q4 2025 results reaffirm that our strategy is working, with gross and adjusted EBITDA margins at record levels, positioning us to meet and surpass our Vision 2027 goals, with more opportunities on the horizon for DCO. Additionally, I am thrilled to announce that our next investor conference is scheduled for September 17th in New York, where we will present our next five-year vision as a follow-up to Vision 2027. I believe Vision 2032 will be very appealing for shareholders, and I eagerly anticipate sharing more details in the spring. In Q4, I'm pleased to report that revenues hit a new quarterly record of $215.8 million, representing a 9.4% increase from last year, surpassing our previous high of $212.6 million set last quarter. This marks our 19th consecutive quarter of year-over-year revenue growth. We achieved this alongside our fourth consecutive quarter of double-digit growth in the DCO military and space segment. Although our commercial aerospace segment faced challenges throughout the year due to inventory reductions at Boeing and Spirit, it returned to growth in the quarter. I am also happy to report that our remaining performance obligations reached a new high of $1.1 billion, up $75 million sequentially, primarily driven by our defense businesses, especially in missiles. We closed on several opportunities and feel well-positioned for ongoing revenue growth, with expectations for this momentum to carry into 2026. Notable highlights for the quarter include orders for the MIR program at our Tulsa and Huntsville operations, totaling over $80 million at attractive margins—one of the most significant wins in DCO's history for a single program. Our overall book-to-bill ratio was 1.3x in Q4, a strong performance following a positive book-to-bill in Q3 as well. Gross margins increased by $13.4 million to 27.7% in Q4, significantly up from 23.5% in Q4 last year. While the quarter benefited from an atypical favorable product mix which added about 100 basis points to margins, the overall trend has been very encouraging throughout 2025, placing us in a strong position to achieve our Vision 2027 margin targets. We continue to reap the benefits from our growing Engineered Products portfolio, productivity improvements, and strategic pricing initiatives. All programs from closed facilities have transitioned smoothly, yielding significant cost savings in our financials, with an expected annual savings run rate of $11 million to $13 million still on target by the end of 2026. For adjusted operating income margin in Q4, the team achieved an impressive 11.4%, up from 8.2% in the previous year, bolstered by growth in adjusted operating income margins in both Structural Systems and Electronic Systems segments. Adjusted EBITDA continues to move toward our Vision 2027 goal of 18% from 13% in 2022, achieving 17.5% in the quarter or $37.9 million, up $10.6 million from Q4 2024. This includes roughly 100 basis points of benefit from the favorable mix previously mentioned, but even excluding that, it reflects tremendous progress over the past three years thanks to the DCO team's efforts. GAAP EPS was $0.48 per diluted share in Q4 2025 compared to $0.45 for Q4 2024. With adjustments, diluted EPS was $1.05 a share in Q4 2025, $0.30 higher than $0.75 from the same quarter last year, driven by improved operating income. Full-year 2025 revenue rose 5% to a record $825 million. Our military and space division grew by 14% in 2025, thanks to strong performance in missiles, military rotorcraft, fixed-wing platforms, and radar. Our commercial aerospace division saw a 7% decline for the year due to ongoing inventory reductions at Boeing and Spirit. Nonetheless, our noncore industrial divisions grew by 3% year-over-year, providing volume and margin without hindering our military and commercial aerospace initiatives. Adjusted EBITDA margins for the full year 2025 widened by 160 basis points to 16.4%, reflecting another year of record performance as we steadily work towards our Vision 2027 target of 18% EBITDA margins. In 2025, we secured over $915 million in bookings, achieving a full-year book-to-bill ratio of 1.1. With positive developments in commercial aerospace and increased defense budgets, especially a ramp-up in missile production, we are confident in the momentum across both primary end markets. Additionally, in early Q4, we announced a binding settlement regarding the Guaymas, Mexico fire litigation, which resolved the claims against us in exchange for a $150 million payment, with $56 million funded by our insurance providers. We also settled two related claims for $1.35 million and $4 million, respectively. The Guaymas fire occurred in June 2020, and we recorded $7.6 million in related settlements during Q4, which is reflected in our GAAP earnings. Apart from the $4 million ancillary claim paid in November, this is accounted for in our Q4 cash flow from operating activities. Looking ahead to 2026, we anticipate continued strength in the defense sector and a recovery in our commercial aerospace business during the latter half of the year after the destocking phase. We expect mid- to high single-digit revenue growth for 2026, with growth accelerating throughout the year. Based on our current order book, we project the first half of 2026 to show low to mid-single-digit growth, ramping up in the second half of the year. Furthermore, tariffs have not significantly impacted our results, and we expect this trend to persist, which is positive for our investors. Now, let me provide some additional insights into our markets, products, and programs. In our military and space sector, revenues reached $124 million compared to $109 million in Q4 2024, reflecting a 13% growth driven by strong performance in our military fixed-wing and rotorcraft divisions, as well as satellite-related businesses and continued missile and radar growth. Our facility consolidation and product line relocations are complete, with Apache tail rotor blades now being produced in Coxsackie, New York, the TOW missile case in Guaymas, Mexico, and Tomahawk missiles in Joplin, Missouri. We have noted the recent announcements from the Department of Defense regarding increased production capacities for key missile programs. The Department of Defense has established long-term framework agreements with Raytheon, our largest customer, and Lockheed Martin to significantly boost production on major programs, including PAC-3, THAAD, AMRAAM, SM3, and Tomahawk. DCO is well-positioned as an existing supplier to defense primes for all these programs and is ready to fully capitalize on the increased capacity at our facilities. These frameworks and DoD initiatives should serve as strong catalysts for growth in our military and space sector starting in 2027 and beyond. In 2025, DCO's missile business grew by 20% compared to 2024, a trend we expect to continue. During Q4, we secured over $130 million in orders within our missile sector, achieving a book-to-bill ratio exceeding 4x, with notable successes in MIR, Tomahawk, AMRAAM, and THAAD. With the anticipated significant ramp-up in missile production over the coming years, we expect this to be a key growth driver, supported by the need to replenish stockpiles in the United States and bolster FMS order activity. Ducommun supplies components for over a dozen essential missile platforms, including AMRAAM, MIR, PAC-3, SM2, SM3, SM6, Tomahawk, Naval Strike, and TOW, which is excellent news for our company and shareholders. In our commercial aerospace sector, Q4 revenue grew by 1% year-over-year to $82 million as we navigate through Boeing and Spirit destocking related to the MAX program. However, we experienced growth in both the 787 and A320 platforms as well as in-flight entertainment services compared to Q4 of 2024. The future looks promising, with Boeing set to increase their 737 MAX production rates from 38 to 42 and ultimately to 47 later this year, alongside the new production line in Everett going live this summer. Completing the Spirit acquisition has also aided in improving operations. We anticipate that destocking of our MAX products, especially those associated with legacy Spirit operations, will continue through the first half of 2026, tapering off in the latter half of the year. The steady progress Boeing is making with ramping up production rates will certainly assist in this matter. Additionally, Boeing is gaining momentum on the 787 builds, investing heavily in their South Carolina facility to enhance capacity and aim for a target of 10 units by year-end, with further increases planned for 2027 and beyond. DCO has substantial content on this platform, which will benefit us as well. We are also keeping an eye on production at Airbus as they address their engine issues, but overall, we remain very optimistic about DCO's commercial aerospace sector in 2026, with anticipated growth continuing into 2027 and beyond as we move past destocking and industry supply challenges. The balanced mix between our defense and commercial aerospace sectors contributed significantly to the company's growth in 2025. We are pleased with this mix and the balance it provides. The outlook for both end markets remains very positive, which is exciting news for the company and its shareholders. With that, I'll turn it over to Suman to review our financial results in detail.

Suman Mookerji, CFO

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 were 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.

Stephen Oswald, CEO

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, Operator

Our first question comes from John Godyn from Citi.

Unknown Analyst, Analyst

This is Bradley Eyster speaking on behalf of John Godyn. I wanted to follow up on the discussion about the inventory destocking that you mentioned earlier. I also want to examine this alongside the changes in inventory working capital in the fourth quarter. While you pointed out challenges in the first half and indicated that we should expect improvements in the second half of this year, I’m curious about the favorable working capital situation in the fourth quarter. How should we assess the extent of the challenges you previously mentioned for the first half of 2026? Has there been any shift in this regard? Are you observing a quicker inventory draw than anticipated? I'm interested in your perspective on this matter.

Suman Mookerji, CFO

I believe our expectations align with earlier comments regarding destocking. We anticipate ongoing destocking, which has two components: one at our customers and the other within our facility. The destocking in our facility will assist in decreasing the working capital tied up in the business. We expect some of this to occur as we previously mentioned for Q1 and Q2 and for the remainder of the year. From an external perspective, we expect to see more destocking happening in the first half, tapering off as we progress into the second half of 2026 as we observe inventory levels decreasing, primarily at Spirit, or the legacy Spirit operations in Boeing Wichita, and also, to a certain extent, at Boeing Direct.

Unknown Analyst, Analyst

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.

Stephen Oswald, CEO

Yes, I’d like to add something. First, we regard our missile capabilities as a core part of Ducommun's legacy, as we cover all major missile programs. The positive aspect is that we are familiar with production for these systems, and they are currently being manufactured. Additionally, we have substantial capacity, and where we may be limited, we're investing in it. However, it's important to note that we are not the original equipment manufacturer, so we rely on them for orders, which they acquire from either the State Department through Foreign Military Sales or the Department of War. We anticipate a significant increase in activity around 2027. We are in communication with companies like Raytheon and Lockheed, and we are pleased with the agreements in progress. However, there will be some delays as these processes take time, so please stay tuned.

Operator, Operator

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

Michael Crawford, Analyst

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?

Stephen Oswald, CEO

I believe we have at least 30% capacity in our factories right now for this missile increase, and I'm being conservative with that estimate.

Suman Mookerji, CFO

The additional incremental capital expenditure required to expand that capacity is not significant. It is something we can accommodate within our regular capital expenditure budget and implement quickly. Increases in defense electronics capacity for the products we manufacture do not require significant capital expenditure or take a lot of time to establish. Therefore, we are actively assessing all other capacity across each of our factories in light of potential new business and making investments where necessary to adjust capacity. However, as mentioned, in the near term over the next 12 months, given the at least 30% existing open capacity, we have no issues meeting demand.

Stephen Oswald, CEO

Yes. Let me give you an example. We have a factory in Joplin, Missouri where the Tomahawk is going to be located. Joplin generates about $100 million a year in revenue. They produce world-class cabling and various other products, primarily for defense, but also some for commercial use. We're placing the Tomahawk in an existing building that was previously underutilized. That's why we believe we can achieve over 30% in capacity. We project that we could reach $200 million in revenue in the next three to four years at this facility, which is very exciting for us as it represents a significant opportunity for DCO.

Michael Crawford, Analyst

Great, that's really helpful. I have one more question. You mentioned that you're collaborating with primes on hypersonics and counter-hypersonic programs. Is that primarily focused on the structural aspects rather than the electronics? What is your role in that?

Suman Mookerji, CFO

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

Stephen Oswald, CEO

Yes, a lot of cables, Mike.

Operator, Operator

Our next question comes from Ken Herbert from RBC.

Kenneth Herbert, Analyst

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?

Stephen Oswald, CEO

You want to take that?

Suman Mookerji, CFO

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.

Stephen Oswald, CEO

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.

Kenneth Herbert, Analyst

Okay. That's helpful. The 2027 targets appear to be increasingly attainable. When do you think you'll be ready to provide an update on those numbers, particularly regarding the business's margin potential?

Stephen Oswald, CEO

Yes, that's a good question. Thank you for mentioning that. That will be in September. When we announce our investor meeting, the first part will include an update on the Vision 2027, followed by an overview of Vision 2032 and our plans for the company and investors.

Kenneth Herbert, Analyst

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.

Suman Mookerji, CFO

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.

Stephen Oswald, CEO

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. It’s been a long time coming, but that's a nice boost for the company.

Operator, Operator

Our next question comes from Tony Bancroft from Gabelli Funds.

George Bancroft, Analyst

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?

Stephen Oswald, CEO

Thank you, Tony. It's great to be here. Overall, it's an excellent opportunity for DCO. Our relationships with defense primes are very strong, particularly with RTX, our largest customer. We're essential to their success, which is important to us. We're also sole sourcing many components, which is a positive sign. We've done a lot of good work with Northrop Grumman in the past and have been developing relationships with other primes beyond Raytheon, including Lockheed. We're optimistic, even though some recent headlines were surprising. On the capacity side, we have a solid presence in the Midwest for electronic systems, and we believe we have at least 30% capacity available, supported by our regular capital expenditures. There won't be anything extraordinary coming from us in the next few years. Additionally, we're focused on building relationships in new warfare technologies and are already collaborating with GA and others to leverage the CCA warfare program and hypersonics. Our defense business is strong, and we expect it to continue growing.

Operator, Operator

Our next question comes from Sam Struhsaker from Truist Securities.

Samuel Struhsaker, Analyst

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?

Suman Mookerji, CFO

Yes, it is more influenced by external factors than internal ones. While we haven't disclosed specific details publicly, I can confirm that the situation regarding the MAX is primarily external. Additionally, it's important to note that large commercial platforms, including both Boeing and Airbus, account for about 50% of our commercial aerospace revenues. Therefore, the effects of destocking and the necessity for recovery should be factored into our commercial aerospace forecast.

Stephen Oswald, CEO

We experienced 1% growth in Q4, which is positive. A significant part of that came from a major revenue increase in in-flight entertainment compared to Q4 2024. This was a key contributor to our positive performance in Q4. While we don't detail it, the encouraging news is that we have full confidence in Kelly and Boeing moving forward. Better days are on the horizon because the demand side will significantly support us.

Samuel Struhsaker, Analyst

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?

Stephen Oswald, CEO

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?

Samuel Struhsaker, Analyst

Yes.

Stephen Oswald, CEO

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

Suman Mookerji, CFO

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.

Stephen Oswald, CEO

Yes. The last one is the Tomahawk. We made 18 cables for it. And there's a lot that 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.

Operator, Operator

Our next question comes from Connor Dessert from Goldman Sachs.

Connor Dessert, Analyst

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?

Suman Mookerji, CFO

Yes, we are observing increased activity. We are actively engaged in all processes involving assets with engineered products within our size range. The competition is strong, and valuations are high, but we will maintain our discipline. We are assessing multiple opportunities and believe there are ways to create value at the current multiples for these assets.

Stephen Oswald, CEO

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

Connor Dessert, Analyst

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?

Suman Mookerji, CFO

Yes, reaching that range will definitely require mergers and acquisitions, primarily influenced by the pace of recovery in commercial aerospace that we have observed compared to what was expected back in December 2022 when we developed that plan. The production outlook from that time is significantly different from today's reality. The defense sector has performed well, and we anticipate continued strong growth. While we should remain optimistic, some of that growth will materialize in 2027 and beyond regarding the production ramp-up of certain missile platforms. Thus, the long-term outlook for the company and the defense sector is very solid, but not all of it will be realized in 2026 and 2027.

Stephen Oswald, CEO

We are currently focused on the $75 million. The acquisition of BLR in 2023 contributes to that amount and is beneficial, but we still have more work to do on the $75 million, and we are actively engaged in that effort, Connor.

Operator, Operator

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

Stephen Oswald, CEO

Thank you for joining us today. I appreciate your time this morning and the excellent questions. We always value the conversation that follows our scripted remarks. We are enthusiastic about the upcoming year and looking forward to our September meeting in New York. We hope everyone can attend either in person or online. It promises to be an exciting day as we provide updates on our Vision 2027 progress and discuss our future together. With that, I wish you a great and safe day. Thank you.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.