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Text: Joining me on the call today are President and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas.
These statements are based on management's current expectations and are not guarantees of future performance.
As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance.
Also note that both our adjusted results and full-year guidance exclude our build-to-print actuation product line that supported the 737 MAX program, as well as our German valves business, which was classified as held for sale in the fourth quarter.
I'll begin with the key highlights of our second quarter performance and an overview of our full-year 2021 outlook.
Starting with the second quarter highlights.
Overall, we experienced a strong 14% increase in sales.
Our aerospace and defense markets improved 11%, while sales to our commercial markets increased 21% year-over-year.
Diving deeper within our markets, we experienced double-digit sequential improvements in sales within our commercial aerospace, power and process and general industrial markets.
These markets were among the hardest hit by the pandemic last year and we are encouraged by their improving conditions.
Looking at our profitability.
Adjusted operating income improved 24%, while adjusted operating margins increased 120 basis points to 15.6%.
This performance reflects strong margin improvement in both the Aerospace and Industrial and the Naval and Power segments based upon higher sales, as well as the benefits of our operational excellence initiatives.
It's important to note that this strong performance was achieved while we continue to invest strategically with a $5 million incremental investment in research and development as compared to the prior year.
Based on our solid operational performance, adjusted diluted earnings per share was $1.56 in the second quarter, which was slightly above our expectations.
This reflects a strong 22% year-over-year growth rate, despite higher interest expense and a slightly higher tax rate, which were generally offset by the benefits of our consistent share repurchase activity.
Turning to our second quarter orders.
We achieved 11% growth and generated a strong 1.1 times book-to-bill overall, as orders exceeded one-time sales within each of our three segments.
Of note, our results reflect strong commercial market orders, which serves 50% year-over-year and included a record quarter of order activity for our industrial vehicle products covering both on and off-highway markets.
Within our aerospace and defense markets, book-to-bill was 1.15.
Next, to our full-year 2021 adjusted guidance where we raised our sales, operating income, margin and diluted earnings per share.
Our updated guidance reflects an improved outlook in our industrial markets, some additional planned R&D investments to support our top line growth and an increase to the full-year tax rate.
Chris will take you through the detail in the upcoming slides.
But in summary, we are well positioned to deliver strong results in 2021.
I'll begin with the key drivers of our second quarter results, where we again delivered another strong financial performance.
Starting in the Aerospace and Industrial segment.
Sales improved sharply year-over-year and this was led by a strong increase in demand of approximately 40% for industrial vehicle products to both on and off-highway markets.
The segment's sales growth also benefited from solid demand for surface treatment services to our industrial markets, which is driven by steady improvements in global economic activity.
Within the segment Commercial Aerospace market, we experienced improved demand for our Sensors products on narrow-body platforms.
However, as we expected, those gains were mainly offset by continued slowdowns on several wide-body platforms.
Looking ahead to the second half of 2021, we expect an improved performance within this market, led by increased production of narrow-body aircraft, including the 737 and A320.
Longer term, we see narrow-body aircraft returning to prior production levels by the 2023 timeframe, while wide-body aircraft may not fully recover until 2024 or even 2025.
Turning to the segment's profitability.
Adjusted operating income increased 138%, while adjusted operating margin increased 800 basis points to 15.7%, reflecting favorable absorption on higher sales and a dramatic recovery from last year's second quarter.
Also, our results reflect the benefits of our ongoing operational excellence initiatives in year-over-year restructuring savings.
And although we continue to experience minor influences from supply chain constraints in both container shipments and electronic components, this impact was immaterial to our overall results.
In the Defense Electronics segment, revenues increased 17% overall in the second quarter.
This was led by another strong performance from our PacStar acquisition, which is executing quite well and its integration remains on track.
Aside from PacStar, second quarter sales were lower on an organic basis due to timing on various C5 ISR programs in Aerospace Defense.
If you recall, we experienced an acceleration of organic sales into the first quarter for our higher-margin commercial off-the-shelf products as several customers took action to stabilize their supply chains due to concerns for potential shortage in electronic components.
Segment operating performance included $4 million in incremental R&D investments, unfavorable mix and about $2 million in unfavorable FX.
Absent these impacts, second quarter operating margins would have been nearly in line with the prior-year strong performance.
In the Naval and Power segment, we continue to experience solid revenue growth for our naval nuclear propulsion equipment, principally supporting the CVN-80 and 81 aircraft carrier programs.
Elsewhere, in the commercial Power and Process markets, we experienced higher nuclear aftermarket revenues both in the U.S. and Canada, as well as higher valve sales to process markets.
The segment's adjusted operating income increased 13%, while adjusted operating margin increased 30 basis points to 17.2% due to favorable absorption on higher sales and the savings generated by our prior restructuring actions.
To sum up the second-quarter results, overall, adjusted operating income increased 24%, which drove margin expansion of 120 basis points year-over-year.
Turning to our full-year 2021 guidance.
I'll begin with our end-market sales outlook, where we continue to expect total Curtiss-Wright sales growth of 7% to 9%, of which 2% to 4% is organic.
And as you can see, we've made a few changes highlighted in blue on the slide.
Starting in Naval Defense, where our updated guidance ranges from flat to up 2%, driven by expectations for slightly higher CVN-81 aircraft carrier revenues and less of an offset in the timing of Virginia-class submarine revenues.
Our outlook for overall aerospace and defense market sales growth remains at 7% to 9%, which, as a reminder, positions Curtiss-Wright to once again grow our defense revenues faster than the base DoD budget.
In our commercial markets, our overall sales growth is unchanged at 6% to 8%, though we updated the growth rates in each of our end markets.
First, in Power and Process, we continue to see a solid rebound in MRO activity for our industrial valves businesses.
However, we lowered our 2021 end market guidance due to the push out of a large international oil and gas project into 2022.
And as a result, we are now anticipating 1% to 3% growth in this market.
Next, in the general industrial market, based on the year-to-date performance and strong growth in orders for industrial vehicle products, we've raised our growth outlook to a new range of 15% to 17%.
And I would like to point out that at our recent Investor Day, we stated that we expect our industrial vehicle market to return to 2019 levels in 2022 and we have a strong order book to support that path.
Continuing with our full-year outlook.
I'll begin in the Aerospace and Industrial segment, where improved sales and profitability reflect the continued strong recovery in our general industrial markets.
We now expect the segment sales to grow 3% to 5%, and we've increased this segment's operating income guidance by $3 million to reflect the higher sales volumes.
With these changes, we're now projecting segment operating income to grow 17% to 21%, while operating margin is projected to range from 15.1% to 15.3% of 180 to 200 basis points, keeping us on track to exceed 2019 profitability levels this year.
Next, in the Defense Electronics segment.
While we remain on track to achieve our prior guidance, I wanted to highlight a few moving pieces since our last update.
First, based upon technology pursuits in our pipeline, we now expect to make an additional $2 million of strategic investments in R&D for a total of $8 million year-over-year to fuel future organic growth.
Next, in terms of FX, we saw some weakening in the U.S. dollar during the second quarter, and this will create a small operating margin headwind on the full year for the businesses operating in Canada and the UK.
In addition, we've experienced some modest impacts on our supply chain over the past few months, principally related to the availability of small electronics, which we expected to minimally persist into the third quarter.
And while this remains a watch item, particularly the impact on the timing of revenues, we're holding our full-year segment guidance.
Next, in the Naval and Power segment, our guidance remains unchanged and we continue to expect 20 to 30 basis points of margin expansion on solid sales growth.
So, to summarize our full-year outlook, we expect 2021 adjusted operating income to grow 9% to 12% overall on 7% to 9% increase in total sales.
Operating margin is now expected to improve 40 to 50 basis points to 16.7% to 16.8%, reflecting strong profitability, as well as the benefits of our prior-year restructuring and ongoing companywide operational excellence initiatives.
Continuing with our 2021 financial outlook, where we have again increased our full-year adjusted diluted earnings per share guidance, at this time to a new range of $7.15 to $7.35, which reflects growth of 9% to 12%, in line with our growth in operating income.
Note that our guidance also includes the impacts of higher R&D investments, a higher tax rate, which is now projected to be 24% based upon a recent change in UK tax law and a reduction in our share count, driven by ongoing share repurchase activity.
Over the final six months of 2021, we expect our third quarter diluted earnings per share to be in line with last year's third quarter and the fourth quarter to be our strongest quarter of the year.
Turning to our full-year free cash flow outlook, we've generated $31 million year to date.
And as we've seen historically, we typically generate roughly 90% or greater of our free cash flow in the second half of the year and we remain on track to achieve our full-year guidance of $330 million to $360 million.
I'd like to spend the next few minutes discussing some thoughts and observations since our recent May Investor Day.
I'll start with the President's FY '22 defense budget request, which was issued shortly after our Investor Day event.
The release reflected approximately 2% growth over the FY '21 enacted budget and was reasonably consistent with our expectations and plans.
The budget revealed continued strong support for the most critical U.S. naval platforms, including the CVN-80 and 81 aircraft carriers and the Columbia-class and Virginia-class submarines.
We believe the bipartisan support for the Navy's future provides us a strong base, from which we can grow our nuclear and surface ship revenues and has room for potential upside should they add a third Virginia submarine or another DDG destroyer.
We also expect ongoing support for the funding of the DoD's top strategic priorities, including cyber, encryption, unmanned and autonomous vehicles, all of which were highlighted in the budget release.
This bodes well for our defense electronics product offering, which support all of these areas.
Another bright spot was army modernization.
Despite cuts to the overall army budget, funding to upgrade Battlefield network is up 25% in the services FY '22 budget request to a total of $2.7 billion, which represents the single greatest increase among the Army's modernization priorities.
Further, it provides great confidence behind our decision to acquire PacStar, as they are in a prime position to capitalize on the ongoing modernization of ground forces.
Since then, we have also seen increasing signs of optimism as the budget makes its way through the Congressional markup.
The recent vote by the Senate Armed Service Committee to authorize an additional $25 billion to the Pentagon's budget for FY '22 represents a 3% upside to the President's initial request and an overall increase of 5% above the current fiscal year.
Though not final, this again provides confidence in our long-term organic growth assumptions across our defense markets.
Our pivot-to-growth strategy is led by a renewed focus on top line acceleration, which we expect to achieve through both organic and inorganic sales growth and our expectations to grow operating income faster than sales, which implies continued operating margin expansion.
Additionally, we are targeting a minimum of double-digit earnings per share growth over the three-year period ending in 2023 and continued free -- strong free cash flow generation.
Based on our new long-term guidance assumptions, we're minimally expecting low single-digit organic sales growth in each of our end markets.
We have good line of sight on achieving a 5% base sales growth CAGR, including PacStar, by the end of 2023.
In addition to the organic growth embedded within these expectations, we are focused on maximizing our growth potential in our key end markets based on the contribution from our continued incremental investments in R&D, as well as the benefits of our new operational growth platform.
We are reinvesting in our business at the highest level in Curtiss-Wright's recent history.
And as you know, it's an area that I'm very passionate about.
As you saw in our updated guidance, we increased our 2021 R&D investment by another $2 million, reflecting a total of $12 million in incremental year-over-year spending.
These investments are targeted at critical technologies and the highest growth vectors in our end markets such as MOSA in our defense electronics business.
Additionally, the rollout of the new operational growth platform is providing greater management focus, attention and energy to drive all things critical to growth from reinvigorating innovation and collaboration, to providing new opportunities in commercial excellence and strategic pricing.
As a result, we will have continued opportunities for cost reduction, which could free up money to cover short-term acquisition dilution, be distributed to R&D investments or result in margin expansion.
These will be focused and conscious investment decisions.
Further, I believe it's critical to point out that we will continue to drive our strong processes and dedication to operational excellence, with the same level of commitment and bigger that this team has demonstrated since 2013.
Lastly, I wanted to reiterate that our target for a minimum earnings per share CAGR of 10% over the three-year period is likely to incorporate annual share repurchase activity above our current base level of $50 million annually.
We remain committed to effectively allocating capital to drive the greatest long-term returns to our shareholders.
Therefore, the year-to-year allocation to share repurchases will vary, depending on the size and timing of future acquisitions that we bring into Curtiss-Wright.
Finally, with more management attention on M&A and a very full pipeline of opportunities, I feel very optimistic that we will have the opportunity to exceed 5% and approach the 10% sales targets as we find critical strategic acquisitions to bring into Curtiss-Wright.
In summary, we are well positioned to deliver strong results this year.
We expect to generate a high single-digit growth rate in sales and 9% to 12% growth in both operating income and diluted earnings per share this year.
Our 2021 operating margin guidance now stands at 16.7% to 16.8%, including our incremental investments in R&D.
And we remain on track to continue to expand our margins to reach 17% in 2022.
Our adjusted free cash flow remains strong and we continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth, while ensuring that we are investing our capital for the best possible returns to drive long-term shareholder value.

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curtiss-wright raises full-year 2021 financial guidance.
q2 adjusted earnings per share $1.56.

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