Ducommun Inc

NYSE:DCO

Earnings Call Analysis

Ducommun’s Q2 2024 shows solid growth and improved profitability

Ducommun posted a strong Q2 2024 with a 5.2% increase in revenue to $197 million, driven by growth in both commercial aerospace and military sectors. The adjusted gross margin improved to 26.6%, up from 23.1% last year, due to favorable product mix and restructuring savings. Adjusted EBITDA reached $30 million, marking significant progress towards their Vision 2027 goals. Despite challenges with Boeing’s MAX, the company maintained its mid-single-digit revenue growth guidance for 2024. The GAAP diluted EPS increased from $0.17 to $0.52, while adjusted diluted EPS rose to $0.83. The company's backlog climbed to a record $1.068 billion.

Strong Revenue Growth and Solid Backlog

In the second quarter of 2024, Ducommun reported revenues of $197 million, a 5.2% increase from the prior year's $187.3 million. This growth was largely driven by strong performance in both commercial aerospace, which saw a 13% rise, and military and space sectors. Notably, the company recorded a backlog of $1.068 billion, marking an increase of $22 million sequentially and $58 million year-over-year. The defense backlog rose significantly, reaching a record $592 million, an increase of $98 million year-over-year, while commercial aerospace backlog stood at $451 million.

Margin Improvements and Operational Efficiency

Ducommun achieved a gross margin of 26% in Q2 2024, up from 21.4% in the same quarter last year. This was due to a favorable product mix and strategic pricing initiatives. The adjusted operating income margin reached a record 10.1%, significantly better than 8.1% in Q2 2023. Adjusted EBITDA also saw substantial improvement, reaching $30 million, or 15.2% of revenue. The company's long-term goal is to achieve 18% EBITDA margins by 2027.

Strategic Facility Consolidations

The company is moving forward with its restructuring initiatives, which involve closing its Monrovia, California, and Berryville, Arkansas facilities, transitioning operations to its Guaymas, Mexico plant. This strategic move is expected to yield $11 million to $13 million in annual savings once fully implemented. Notably, restructuring charges of $2.1 million were recorded in Q2, primarily from severance and related costs.

Outlook for Revenue and Margin Growth

Ducommun has maintained its revenue guidance for 2024 at mid-single digits, anticipating a flattish Q3 followed by growth in Q4. Specific to the commercial aerospace sector, the company is preparing for recovery in the build rates, particularly concerning Boeing's MAX aircraft, as they expect significant activity ramp-up by year-end. Additionally, Ducommun aims to sustain its margin trajectory in the second half of 2024, with expectations for continued improvements in 2025.

Cash Flow and Liquidity Position

For Q2 2024, Ducommun generated $1.8 million in cash flow from operating activities, an improvement over a usage of $9.7 million in the previous year. Their liquidity position is robust, totaling $205.4 million. With significant capital tied up in inventory and contract assets, the company expects to achieve stronger cash flow in Q4 of 2024, emphasizing a ramp-up in liquidity towards year-end.

Focus on Engineered Products and Market Opportunities

Ducommun's strategy includes increasing its revenue from engineered products to 25% or more by 2027. The emphasis on curated acquisitions and expanding capacities to capture market share from competitors signals a robust long-term growth trajectory. Recent contracts, including the fuselage skin projects for the 737 MAX, contribute to this strategy, with projected revenue exceeding $3.5 million through future shipments.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, everyone, and thank you for standing by. Welcome to the Second Quarter 2024 Ducommun Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

Now I will pass the call over to Ducommun's Senior Vice President and Chief Financial Officer, Suman Mookerji. Please go ahead.

[Suman Mookerji, executive]

Thank you, and welcome to Ducommun's 2024 Second Quarter Conference Call. With me today is Steve Oswald, Chairman, President and CEO.

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 conditions, results of operations and financial projections 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 delays in the launch and certification of new products; timing of orders from our customers; legal and regulatory risks; the cost of expansion and acquisitions; competition; economic and geopolitical developments, including supply chain issues and rising or high interest rates; the ability to attract and retain key personnel and avoid labor disruptions; the ability to adequately protect and enforce intellectual property rights; pandemics; disasters, natural or otherwise; and risk of cybersecurity attacks.

Please refer to our annual report on Form 10-K, quarterly reports on Form 10-Q, and other reports filed from time-to-time with the SEC, as well as the press release issued today for a detailed discussion of the risks. Our forward-looking statements are subject to those risks. Statements made during this call are only as of the time made and we do not intend to update any statements made in this presentation, except if and as required by regulatory authorities.

This call also includes non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on this call. We filed our Q2 2024 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?

[Stephen Oswald, executive]

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 on the current situation of the company. Afterwards, Suman will review our financials in detail.

Let me first start off this quarterly call with Ducommun's Vision 2027 game plan for investors. 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 of 2022 and then presented to investors the following month in New York, where we got excellent feedback.

Since that time, Ducommun's management has been executing the Vision 2027 strategy by consolidating its facility or rooftop footprint, increasing the revenue percentage of engineered products and aftermarket content, continuing its targeted acquisition program, executing our offloading strategy with defense primes in high-growth segments of the defense budget, and by expanding content on key commercial aerospace platforms.

All of us here have a high level of conviction in the Vision 2027 strategy and financial goals and believe the many catalysts ahead present a unique value creation opportunity for shareholders. The Q2 2024 results are also a very good example of our strategy working.

Q2 was a record revenue and gross margin quarter, follows up the strong start we experienced in the first quarter. Revenues were $197 million, growing 5.2% over the prior year, and this is our fourth consecutive quarter with revenues exceeding $190 million. Strong growth in our commercial aircraft business across Boeing, Airbus and business jets helped drive revenue during the quarter.

We saw significant growth on the A220 program, where we make the skins for the entire fuselage, along with good growth in twin-aisle platforms as well. Business jet revenues were higher, driven by work we do for Gulfstream. We also saw an increase in our commercial revenue as we build buffer stock to support the Monrovia facility closure and transfer it to DCO's Guaymas, Mexico operation. Q2 was also supported by us building a higher production rate than SPR and BA to allow for efficiencies, workforce retention and level loading of our production.

Overall, commercial aerospace was up 13% from Q2 2023. We have now grown year-over-year revenue in our commercial aerospace business for 12 consecutive quarters, demonstrating the resilience of our business even in a challenging OEM environment with SPR and BA.

The other good news for DCO's commercial aerospace business is the fuselage skin project for the 737 MAX at Spirit, which we have been working on. We now anticipate having the FAI approved in September and shipping the first production set in October. 2025 revenue for the 4 skins should be over $3.5 million at 15 ship sets a month. Keep in mind this is less than 10% of the fuselage. So stay tuned for more news as we move forward and gain more program share.

Our defense business grew 3% year-over-year with strong demand for the F-15, Blackhawk and radar platform, as well as selective naval submarine programs. Growth was partially offset by declines in programs such as the JSF, F-18, which we have discussed in the past, and the F-16.

A pause in the TOW missile production contributed as well, but we now have a new PO from RTX, anticipate starting shipments again in July 2025 from Guaymas, Mexico. Defense business was $100 million in revenue for the third time in the last 4 quarters, and we remain optimistic about the growth ahead.

On offloading from RTX, our SPY-6 radar circuit card business grew over 100% from Q3 last year, tracking now for over $10 million in revenue in 2024 for just one CCA. We have the next card for the SPY-6 program in process and that will be in production next year.

Another record highlight in Q2 was gross margin of 26% for the quarter, up 460 bps year-over-year from 21.4% and 140 bps compared to the first quarter as we continue to realize benefits from our strategic value pricing initiatives, productivity improvements, favorable product mix, growing engineered product portfolio with aftermarket, and initial restructuring savings.

In addition, our Berryville, Arkansas facility is now down to less than 10 people to maintain capability on single platforms until the receiving plant is certified. Our Monrovia, California facility also significantly reduced headcount this month, with most production activities shut down, and the team is down to less than 20 employees. The Monrovia plant will be fully closed by the end of September. We will see the cost savings of these moves as the receiving plants ramp up production in 2025. So stay tuned.

For adjusted operating income margin in Q2, the team delivered 10.1%, a record performance and well ahead of the 8.1% number in Q2 2023. This is a great result, driven, again, by the continued growth in our engineered product businesses, favorable product mix, impact of our strategic pricing initiatives, and our restructuring savings beginning to kick in during the quarter.

Adjusted EBITDA was another great story in Q2, hitting $30 million for the first time, a big deal, while expanding a robust 130 basis points to 15.2% of revenue compared to 13.9% in Q2 2023. This all provides momentum along with the Q1 results as we work towards the 18% goal in our Vision 2027 plan.

The GAAP diluted EPS was $0.52 a share in Q2 2024 versus $0.17 a share for Q2 2023. And with adjustments, diluted EPS was an impressive $0.83 a share compared to diluted EPS of $0.54 in the prior year quarter. The higher gap in adjusted diluted EPS was driven by improved operating income as well as lower interest costs due to our hedging strategy during the quarter.

The company's consolidated backlog increased both sequentially and compared to the prior year quarter. Total company backlog ended Q2 at a new record of $1.068 billion, increasing over $22 million sequentially and almost $58 million year-over-year. Defense backlog increased $98 million compared to the prior year quarter to end at a record of $592 million.

The commercial aerospace backlog decreased $14 million year-over-year, primarily due to industry issues with single-aisle production rates and the MAX issues with Boeing and Spirit. However, our commercial aerospace backlog still grew on a sequential quarterly basis to $451 million.

As for the 2024 revenue guidance, despite continued uncertainty surrounding Boeing, Spirit and the FAA on the MAX, we are maintaining our guide of mid single-digits for the year, with Q3 flattish to last year followed by an uptick again in Q4. While we have seen a significant slowdown in the MAX build rates at the OEM level in Q2 and anticipate the same in Q3, we are positioned for the recovery as the build rates ramp back up.

If BA is at 38 by year-end for their most recent communications on the MAX, this will be a major lift for DCO. I will also add that despite the challenges in the MAX, we are comforted by continued strength on other programs at BA and Spirit, Airbus and Gulfstream.

Now let me provide some color on our markets, products and programs. Beginning with our military and space sector, we experienced revenues at $101 million compared to $97 million in Q2 2023. Growth was driven by the F-15 program along with military rotary aircraft, notably the Blackhawk program, as well as our radar franchise, again driven by the SPY-6 program. These were partially offset by weakness in F-35, F-18 and F-16 revenues.

The second quarter military and space revenue represented 51% of Ducommun's revenue in the period, down from 59% back in 2022 and 70% in 2021. We expect these trends -- we expected these trends and it reflects more balance with commercial aerospace, which we like. We also ended the second quarter with a backlog of $592 million, an increase of $98 million year-over-year, representing 55% of Ducommun's total backlog.

Within our commercial aerospace operations, second quarter revenue continued to see double-digit growth, increasing 13% year-over-year to $87 million, driven mainly by growth on the A220 platform, twin-aisle aircraft, business jets, as well as buffer build to support the closure of Monrovia facility.

As mentioned earlier, we believe a much better story is ahead for BA and MAX by the end of Q4 and into 2025. The backlog within our commercial aerospace business was $451 million at the end of the second quarter, increasing almost $9 million sequentially, and a solid number given the temporary weakness in the commercial aerospace market.

Now with that, I'll have Suman review our financial results in detail. Suman?

[Suman Mookerji, executive]

Thank you, Steve. As a reminder, please see the company's Q2 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 period of strong performance with growth in both our commercial aerospace and military end markets, as well as continued improvement in our margins.

We remain encouraged by the continued strength in domestic and global travel, which would support higher long-term demand for aircraft as we work through some of the industry issues impacting single-aisle production rates. In addition, we also made good progress on our facility consolidation efforts during the quarter, which will drive savings in 2025 and beyond. With all this, we feel like 2024 is showing good momentum that will continue to drive our performance towards our Vision 2027 goals.

Now turning to our second quarter results. Revenue for the second quarter of 2024 was $197 million versus $187.3 million for the second quarter of 2023. The year-over-year increase of 5.2% reflects growth in both commercial aerospace and military and space, highlighted by $9.9 million of growth across our commercial aerospace platforms and $3.2 million of growth in our military and space platforms.

We posted total gross profit of $51.2 million or 26% of revenue for the quarter versus $40.1 million or 21.4% of revenue in the prior year period. We continue to provide adjusted gross margins as we have certain non-GAAP cost of sales items in the current and prior period relating to inventory step-up, amortization on our recent acquisitions, restructuring charges, and the impact from the Guaymas fire on our operations.

On an adjusted basis, our gross margins were 26.6% in Q2 2024 versus 23.1% in Q2 2023. The improvement in gross margin was driven by our growing engineered products portfolio as well as favorable product mix in our manufacturing services businesses, strategic pricing initiatives, productivity improvements, and some initial restructuring savings.

We continue to make progress working through a difficult operating environment with supply chain and labor. Through our proactive efforts, including strategic buys on our inventory investments, we have been able to avoid any significant impact thus far on our business. During the second quarter of 2024, we reduced our inventory by $7.1 million from Q1 while still keeping our performance centers positioned to meet our 2024 delivery commitments and ready for a ramp-up in commercial aerospace build rates.

We grew our contract assets by $13 million versus Q1. This was partly due to buffer build of product to support the Monrovia facility closure, as well as some modest build ahead in our commercial aerospace structures business to level load production. We continue to look for opportunities to unwind our working capital investments to improve our cash flow.

Ducommun reported operating income for the second quarter of $13.9 million or 7.1% of revenue compared to $5 million or 2.7% of revenue in the prior year period. Adjusted operating income was $19.9 million or 10.1% of revenue this quarter compared to $15.2 million or 8.1% of revenue in the comparable period last year.

The company reported net income for the second quarter of 2024 of $7.7 million or $0.52 per diluted share compared to net income of $2.4 million or $0.17 per diluted share a year ago.

On an adjusted basis, the company has reported net income of $12.5 million or $0.83 per diluted share compared to net income of $7.3 million or $0.54 in Q2 2023. The higher net income and adjusted net income during the quarter were driven by higher operating income and adjusted operating income. Additionally, our interest rate hedge helped to reduce our year-over-year interest expense.

Now let me turn to our segment results. Our Structural Systems segment posted revenue of $95.6 million in the second quarter of 2024 versus $80.2 million last year. The year-over-year increase reflected $10.4 million of higher sales across our commercial aerospace applications, including the A220 and select twin-aisle platforms, in addition to regional business jets and buffer build to support the Monrovia facility closure.

In addition, we maintained commercial aerospace build rates for selected products to help level load production and maintain production efficiencies. The $5 million of higher revenue within the military and space markets was driven by strength in Blackhawk and other military programs.

Structural Systems' operating income for the quarter was $10.6 million or 11% of revenue compared to $5.4 million or 6.7% of revenue for the prior year quarter. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 15.4% in Q2 2024 versus 16% in Q2 2023. The slight decline was from higher costs due to the transition of production from Monrovia to Guaymas, partially offset by strategic pricing initiatives and operating leverage from higher revenues at other performance centers within the segment.

Our Electronic Systems segment posted revenue of $101.4 million in the second quarter of 2024 versus $107.1 million in the prior year period. The decline is attributable to lower revenues from in-flight entertainment electronics, F-18 and F-35 platforms, along with a reduction in our industrial business as we chose to selectively prune non-core business. The declines were partially offset by strength on select military platforms, including the F-15, SPY-6 radar and naval and submarine programs, along with business jets with Gulfstream and on the A220 platform with Airbus.

Electronic Systems' operating income for the second quarter was $16.8 million or 16.6% of revenue versus $9.5 million or 8.9% of revenue in the prior year period. Excluding restructuring charges and other adjustments in both years, the segment operating margin was 16.9% in Q2 2024 versus 11.4% in Q2 2023.

The year-over-year increase was primarily due to shifting mix with higher growth in revenues and profitability in our engineered product businesses, along with strategic value pricing initiatives as well as savings from the restructuring program. Restructuring savings were driven by the transition of product lines from our Berryville performance center to other facilities.

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 with excellent employee retention and engagement and are also working diligently with our customers, Boeing and RTX, to obtain the requisite approval. During Q2 2024, we recorded $2.1 million in restructuring charges. The majority of these charges were severance and related benefits, as we continue to wind down the 2 operations. We expect to incur an additional $3 million to $4 million in restructuring expenses, through the end of 2024 and early 2025 as we complete the program.

Upon the completion of our restructuring program, we expect to generate $11 million to $13 million in annual savings from our actions, and are already beginning to see some realization of savings from these actions this year. We anticipate selling the land and building at both Monrovia, California and Berryville, Arkansas.

Turning next to liquidity and capital resources. Year-to-date Q2 2024, we generated $1.8 million in cash flow from operating activities, which was an improvement compared to year-to-date Q2 2023, which had a usage of $9.7 million. The improvement was due to higher net income of $7 million as well as improvements, compared to prior year in accrued and other liabilities.

As of the end of the second quarter, we had available liquidity of $205.4 million, comprising of the unutilized portion of our revolver and cash on hand. Our existing credit facility was put in place in July 2022 at an opportune time in the credit markets, allowing us to reduce our spread, increase the size of our revolver, and allowing us the flexibility to execute on our acquisition strategy.

Interest expense was $4 million compared to $5.7 million in Q2 of 2023. The year-over-year improvement in interest costs despite a higher debt balance was due to the interest rate hedge going into effect.

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 resulted in interest savings of $1.4 million in Q2 2024 and will continue to drive significant interest cost savings in 2024 and beyond.

To conclude the financial review for Q2 2024, I would like to say that the second quarter results continued our momentum from Q1, and positions us well for the rest of 2024.

I'll now turn it back over to Steve for his closing remarks. Steve?

[Stephen Oswald, executive]

Okay. Thanks, Suman. And just in closing, Q2 was an excellent quarter and a record in some cases with many highlights for the company and our shareholders. You start to realize some of the gains we all expect for the Vision 2027, especially around margin expansion. Our first half positioned us well to deliver a strong performance in 2022, despite some of the current constraints. The progress on gross and EBITDA margin expansion has been excellent. We're not surprised and feel right on schedule.

In addition, on 2 key tenets of our 2027 game plan, we're tracking well against the goals of 18% EBITDA margins and 25%, or more of engineered product and aftermarket revenues. With commercial aerospace build ramps still ahead of us and the benefits from our facility consolidation expected to kick in starting in 2025, I'm excited about what lies ahead for us at Ducommun and our shareholders in the years ahead. Stay tuned.

Okay. With that, let's please go to questions.

[Operator]

And it comes from the line of Jason Gursky with Citi.

[Jason Gursky, analyst]

Steve, maybe start with you and talk a little bit about the pipeline of new opportunities and maybe, just kind of give us a flavor of how things have evolved year-to-date, starting at the beginning of the year where you are today and what you see in the pipeline. I'm just curious if anything kind of new and interesting has popped up for you here over the last 6, 7 months. And when you look out over the next couple of years, what you think the pipeline conversion might look like and book-to-bills, just kind of general demand flavor as well?

[Stephen Oswald, executive]

Good to be with you. So first, let me just tackle commercial aerospace. There's -- I talked about the skins and that's, though, not a huge number. Starting next year, about $3 million or $4 million. I mean, we're only doing less than 10% of the fuselage for the MAX. We do 100% of the fuselage for the A220. So we can do it right. We have the capacity, we have the machine.

So that's something in the pipeline we're very, very excited about. We're also, and just to kind of disclose it today, we're also working on opportunities more on the commercial aerospace side and specifically, around share shift from some of our competitors. And we'll get into it today. But we have some nice things happening there. We're going to pick up. I can disclose this.

We're going to pick up also on the 787, a good amount of business starting in January 2025. And the 787 gets to 5 or 10. That's real money for DCO. So on that side, it's good. We just met with Airbus at the Air Show. We're in a very good position with Airbus there. They're going on the way up, and we're going to go on the way up with them. So I think on the commercial side, it's all looking very positive, and there'll be more news coming.

On the defense side, we certainly work on sort of the hypersonic and the other sort of things that we probably can't discuss on the call too much. But I'll just give you one example. This offloading program has been great for us. We're really getting heavy into radar. We make one card so far on the SPY-6. And year-to-date, it's been over $5 million for one card. So, we're going to bring on another card next year.

So we've got some very nice things happening in defense, not only organically, but obviously with share shift as well. And we just met with Raytheon at the Air Show and had a great meeting. And the Tomahawks are going to go to Guaymas, which is going to be a great boost for us, from where we are now in Berryville. That's a major program. We've had that since the 80s.

Right now, obviously, we built all the buffer to move it, so -- but we have some wonderful margin expansion happening there as well as we go to Guaymas and the TOW. So the TOW is also coming back. We talked about that already in my remarks coming back mid-year. We already have the PO for that in Guaymas.

So both on the commercial and defense side, looking good to very good. And then also, obviously, if the build rates, which I think are going to go up eventually, that's going to be some nice tailwind as well.

[Jason Gursky, analyst]

Okay, great. And just a quick follow-up. Suman, you mentioned maybe some additional liquidity or capacity. And I think you mentioned M&A on the same sentence. So, I'm just kind of curious to get an update just on the pipeline of potential M&A. And have you further opened the aperture on potentially doing something larger, where we'd be bringing in more revenue than what you had targeted for Vision 2027?

[Suman Mookerji, executive]

So, we continue to look at a number of opportunities. I would say that in terms of us being able to meet and exceed the target we set forth in Vision 2027, which is a $75 million placeholder for revenue from acquisitions, we feel very good about being able to meet and exceed that. So I would agree. Are we looking to do something bigger than, or something more transformational at this time?

No, we're looking to continue our strategy of doing these tuck-in acquisitions of niche product lines in kind of a more manageable size range and be prudent with our leverage at this time. So, we aren't looking to change the aperture on size of deals, but we feel good about being able to exceed the Vision 2027 target for acquisition revenue.

[Operator]

Our next question comes from the line of Mike Crawford with B. Riley Securities.

[Michael Crawford, analyst]

So, Suman, you benefit from absorption as you built some buffered stock. Now, can you just walk us through how margins are affected by the ramp-up at Guaymas and as you work through this buffer that you've built up and get into a more normalized cadence?

[Suman Mookerji, executive]

Right. So, great question, Mike. And we did have a significant improvement in our structures segment margins on a sequential quarter basis. And to the point you just made, it was driven to a large extent by Monrovia having better absorptions. Actually it's Monrovia had significantly lower revenues in Q1 versus the Q4 of last year and Q1 of last -- of 2023.

So, we saw a very low revenue base, kind of trying to handle higher fixed cost base in Q1, which led to -- and higher one-time costs related to the transition in Monrovia in Q1. We had lower costs. We had double the revenue in Monrovia, as we built up buffer stock and looked to close out operations. We had doubled the revenue in Q2 versus Q1 in that Monrovia facility.

That helped with absorption, again, to the point you made, right. And we also had some slightly better mix. So, we feel like the improvement that we're seeing in that structures segment margin in Q2, which is in line with where structures margins have been historically, is sustainable if that's kind of where you are getting to.

[Michael Crawford, analyst]

Okay. And just, excuse me, related, you're getting near the end of this, I guess, second restructuring program since you guys joined the company, and put it on its current trajectory. But I know there's $11 million to $13 million cost savings target, but I imagine a chunk of that has already been realized.

[Suman Mookerji, executive]

That is correct. So I would say, that from our Berryville and Joplin facility, we are right now tracking at a run rate of, I would say, $2 million to $3 million of savings annually. So an annual run rate of $2 million to $3 million, I would say, is where we are right now from the shutdown of Berryville. Of course, that will ramp-up later in 2025, when we actually start production of some of those product lines in Guaymas, Mexico. So that hasn't started yet.

[Stephen Oswald, executive]

Yes, I wouldn't say a good chunk, Mike. I would say it's, I think 2 to 3 is fair. Okay. There's a lot more coming.

[Operator]

[Operator Instructions] Our next question is from Michael Ciarmoli with Truist Securities.

[Michael Ciarmoli, analyst]

Good results. Yes, Steve or Suman, the buffer stock, I think coupling that with maybe, I think you said you're building ahead right now. How should we sort of calibrate ourselves just on the revenue? I think you said 3Q would be down a little bit, but do we have to go through and unwind period here, as we look out over the second half of the year, even into early '25? Just depend -- I mean, I don't think we have a crystal ball with Boeing's rates or Airbus's for sure, but how should we think about maybe the impact of the build ahead and buffer on revenues?

[Suman Mookerji, executive]

Hi, Mike. Great question. So we -- during Q2, we had about, I would say, between the buffer build and the build ahead, somewhere between $5 million to $6 million in revenue that you could say was pulled ahead from Q3 and Q4. And so, that's kind of how I would think about how Q3 comes out in line with what Steve said a little earlier, Q3 being flattish on a year-over-year basis and then seeing improvement in Q4. So that kind of, all in all, we come out at that mid-single-digit guidance for the full year.

[Stephen Oswald, executive]

Yes. Mike, I think that's the right way to think about it. I think overall, it's light. The impact is light.

[Michael Ciarmoli, analyst]

Okay.

[Stephen Oswald, executive]

So, it's not anything I'm very concerned about, but just for everyone on the call, I mean, we're little -- Parsons is a big manufacturer for both Spirit and for BA. And we just don't want to have to layoff 40 people and then four months later, hire them again.

[Michael Ciarmoli, analyst]

Right. Yes, of course.

[Stephen Oswald, executive]

There's a little -- there's some retention -- employee retention in there that I think investors, I think, hopefully, will agree it's smart.

[Michael Ciarmoli, analyst]

And then just on the aerospace, I mean, I know we can kind of see it in our models. You've got the slide out there. Highest quarterly revenue rate since 3Q '19. Is there any way to measure that on a same-store sales basis? I mean, you've obviously had some acquisitions in there. You've picked up some new programs like the A220. But just knowing that MAX had been one of the biggest programs, just trying to get a sense as to -- if I were looking at that on same-store sales versus that 3Q, how much runway do you still have, because, I mean, we're still well below prior peak production rates here?

[Stephen Oswald, executive]

Yes. I think we have a lot. I think when you go back that long, I mean, if you think about us now, there's a lot more defense business than we had back then. So, that's one thing to think about and also and which is extremely important, we have a good deal of more engineered product and aftermarket. So -- and that could also fall into commercial, right, Mike. But...

[Michael Ciarmoli, analyst]

Yes. Okay.

[Stephen Oswald, executive]

We were much more -- we were certainly different back then. And so, you're right that we have the -- I think, the right kind of base. I think we have good balance and I think that we're very anxious. I know it's Kelley's first day, so we're going to cheer for him and we certainly feel like things are going to get better. We're going to ride the ramp-up, and I think that's going to be great for our revenue.

One more thing I'll add there, Mike, as you think about modeling our commercial aerospace revenues relative to where we were in 2019, a little over half of our revenues come from -- our commercial aerospace revenues come specifically from Boeing and Airbus platforms. So, you couldn't apply build rates directly to our entire commercial aerospace revenues. There are other elements, including business jets, commercial helicopters and other in-flight entertainment stuff and things that we do. So if you were looking really at build rates across Boeing and Airbus platforms, a little more than half is...

[Michael Ciarmoli, analyst]

Got it. Okay.

[Suman Mookerji, executive]

Of course, yes that will grow higher. That will grow higher. Right now, it's that much.

[Michael Ciarmoli, analyst]

Okay. And it's just the last one. Any thoughts, Suman, on free cash generation? I know you kind of mentioned that inventory being down sequentially, but just, yes, I know you've got the guidance out there on the top line, talked a little bit about the margins and where we should be, but how should we think about cash generation second half of the year here and into '25?

[Suman Mookerji, executive]

Yes, that's an important focus area for us, Mike, at the company. And Q2, as you noted, was impacted by buildup in contract assets, as we did some of these buffer builds. We did some amount of build ahead on the commercial aerospace platforms. We do expect that Q4 will be really strong for us in terms of cash flow to end up the year on a much more positive note. And that is a priority for us. I mean, I would expect Q3 to be marginally better, but not significantly, but with a real ramp-up in cash flow towards the end of the year.

[Michael Ciarmoli, analyst]

Okay. That's perfect. I'll come back.

[Suman Mookerji, executive]

As we have this pattern as well in our business.

[Operator]

Our next question is from the line of Noah Poponak with Goldman Sachs.

[Noah Poponak, analyst]

Suman, maybe just picking up there, how should we think about where free cash to net income conversion or EBITDA conversion go over the medium term, if you kind of think about more normal times where you're not having to build ahead and you don't have so much uncertainty at the customers, and things are kind of coming along a little bit more visibly?

[Suman Mookerji, executive]

Yes. Excellent question. Thanks, Noah. In the long run, we do want to get our free cash flow closer to the net income number. We're not going to get there here in the next few quarters or next year as we continue to have significant amount of inventory and contract assets in the balance sheet. And supply chain pressures while these are still significant, we continue to have close to 2 years of lead time on inventory.

We have fluctuations in build rates, which often means we're stuck with raw material inventory. We've ordered 2 years in advance sitting on our balance sheet. So as those supply chain pressures ease, there is more predictability in production rates. We will be able to continue to wind down our strategic inventory that we have been holding for the past few years. And it will get us, over the next couple of years, closer to that target of getting our free cash flow in line with our net income.

[Stephen Oswald, executive]

And Noah, this is Steve. I also think that some of this restructuring is going to help. I mean, there's other things, bigger rocks on the market and troubled companies and strategic buying and everything, but it also is going to help us on the manufacturing services side to have a smaller footprint and I think better management over our inventory and our processes.

[Noah Poponak, analyst]

Okay. That's helpful. I appreciate that. On the margins -- the segment margins, I guess, would it be possible to just speak to how you expect each segment's margin in the second half to kind of directionally compare to the first half? Just electronic systems has had this pretty sizable increase year-over-year. Structurally, you talked about the difference between 1Q and 2Q, but that's a pretty big difference. How do each of those shape up? Second half, first half.

[Suman Mookerji, executive]

Yes, I'll take that. So we don't -- but we don't give guidance at the segment level for margins. I can give you some comments, which are directionally help you. So if you look at the -- our electronics margins, they have jumped in Q1 of this year, and they've kind of stayed in the ballpark here in Q2. And that was driven by a shift in the mix within our electronic systems portfolio towards more engineered product revenue and growth in the profitability, as well as those engineered product revenues on a year-over-year basis.

That was a significant driver for the Electronics segment margins. And we, I would say, would expect margins to stay in the ballpark of where you're seeing them here in Q2 for the rest of the year, right? There is always a range of, I would say, 50 basis points to 75 basis points within which they may fluctuate based on product mix in a particular quarter. But they're in that ballpark.

On the structures side, you saw margins this quarter get back to historical levels. We had an unusual situation with Monrovia, which had unusually low revenue and other one-time costs as we were shutting down the facility in Q1, which subdued the overall structure segment margins. That got back to normal here in Q2, helped the structures business improve. We also had some better mix in there, which helped, in Q2 get the structures margins up.

Now with Monrovia costs being further cut down in Q3, and as Steve mentioned, we have less than 20 people now in that facility, we do believe that we will have similar levels of structures margins for the second half. And, of course, margins will continue to improve in 2025 as the restructuring savings start to kick-in and other initiatives take hold.

So long-term trajectory margins improve. Second half, I would say, margins are expected to stay in the same ballpark. Q2 margins, I would say, probably have about 75 basis points of favorable mix in them just overall at the DCO level, and -- but that's typical for us. And we expect to stay in that range, yes.

[Stephen Oswald, executive]

We're going to hold serve for the most part.

[Noah Poponak, analyst]

Last 1 I had was just your defense revenue had a bit of a, I guess, transition with F-18 and the timing of missile, I think, was how you described it. And it looks like maybe you've now lapped the former and then have had some orders on the ladder. Should we expect your defense revenues to kind of be stable going forward here, or can the growth rate accelerate?

[Suman Mookerji, executive]

We probably flattish here in the rest of 2024, as we continue to face tough compares on the F-18 in particular, as well as the TOW missile program. But with TOW coming back in 2025, as well as other programs such as the SPY-6 ramping up in 2025, we should have better times in defense starting next year. Yes.

[Stephen Oswald, executive]

We'll be better next year, for sure.

[Operator]

And there appears to be no further questions. I will turn the call back to Stephen Oswald for closing remarks.

[Stephen Oswald, executive]

Okay. Thank you very much and just wanted to thank everyone for joining us. Obviously, we're very enthusiastic about our numbers, about our performance as we close the second quarter. We feel great about where we are, and we look forward to continuing to build a performance story, as we move to our Vision 2027 financial goals. So again, we appreciate all the support, and wish you a good day. Thank you.

[Operator]

And thank you all for participating in today's conference. You may now disconnect.