Curtiss-Wright Corporation

Good day and thank you for standing by. Welcome to the Curtis Wright First Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jim Ryan, Senior Director of Investor Relations. Please go ahead.

Thank you, Dawn, and good morning, everyone. Welcome to Curtis Wright's first quarter 2021 earnings conference call.

Joining me on the call today are President and Chief Executive Officer Lynn Banford and Vice President and Chief Financial Officer Chris Parker. Our call today is being webcast in the press release as well as a copy of today's financial presentation. It's available for download through the investor relations section of our company website at www.curtiswright.com. A replay of this webcast also can be found on the website. Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into CurtisRate's ongoing operating and financial performance. Also note, that both our adjusted results and full-year guidance exclude our bill-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. In addition, discussions about our first quarter results and full-year guidance reflect our new segment structure, which we announced earlier this year to provide greater clarity and transparency to our portfolios. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth exclude the effects of restructuring, foreign currency translation, acquisitions, and divestitures unless otherwise noted. Now I'd like to turn the call over to Lynn to get things started.

Lynn? Thank you, Jim, and good morning, everyone. I'll begin with the key highlights of the first quarter performance and an overview of our full year 2021 outlook. Then I'll turn the call over to Chris to provide a more detailed review of our financial results and an update to our full year guidance. Finally, I'll wrap up our prepared marks before we move to Q&A. Starting with the first quarter highlights, we're off to a great start with higher sales and improved profitability driven by strong operational performance that exceeded our expectations. The net sales increase of 2% was led by solid growth in our aerospace and defense markets, which improved 8%. Adjusted operating income improved 15%, while adjusted operating margin increased 160 basis points, reflecting strong margin improvement in the defense electronics and naval and power segments. Our results also reflected our swift actions taken last year in response to the pandemic, where we committed to controlling our costs to preserve profitability and free cash flow. Restructuring savings resulting from those efforts are reflected in our first quarter results and provide a strong base for our margin expansion over the course of the year. We also continue to fuel our innovation pipeline with a $4 million year-over-year increase in research and development investments to support our strategic growth initiatives. Adjusted diluted EPS was $1.51 in the first quarter, which increased 18% year over year. As a reminder, our prior year first quarter results were largely unaffected by the pandemic. Looking at our first quarter orders, overall book-to-bill was solid at approximately one-time sales in the first quarter, with 1.2 times in our commercial markets. This performance was led by a surge in demand for industrial vehicle products in both on and off-highway markets. Looking across the rest of our commercial markets, we have been encouraged by steady improvements since the third quarter of last year and remain optimistic for a continued solid rebound in the back half of this year. We also experienced solid new order growth in our A&D markets, principally led by higher demand for defense electronics and our recent acquisition of PacStar. Speaking of PACSTAR, the integration is on track, and I am encouraged by their strong performance to begin the year. As a reminder, PACSTAR is projected to deliver a high single-digit revenue growth and is aligned to one of the Department of Defense's top priorities in upgrading and modernizing the net-centric connected battlefield. Next, to our full year 21 guidance highlights. Where we raised are adjusted guidance for sales, operating income, margin, and diluted earnings per share. These increases are based upon higher demand in defense electronics and improved profitability in the naval and power segment. We now expect adjusted operating margin to range from 16.6% to 16.7%. We also increased diluted EPS by $0.10 to a new range of $7.10 to $7.30, with the top end of our range reflecting double-digit growth compared to 2020. Overall, we are encouraged by a solid start to the year, which supports our continued confidence to deliver strong results in 2021. Now, I would like to turn the call over to Chris to provide a more thorough review of our first quarter performance and our improved outlook for 2021. Chris?

Thank you, Lynn, and good morning, everyone. I'll begin today with a review of our first quarter sales and profitability, where we again delivered another strong operational performance. Starting in the aerospace and industrial segment, sales were lower year-over-year as anticipated based upon reduced demand on wide-body jets within the commercial aerospace market. However, on a positive note, we experienced an uplift in industrial vehicle product sales to both on and off-highway markets, driven by solid order growth, as Lynn mentioned earlier. This segment's operating performance, while bolstered by year-over-year restructuring savings, primarily reflects unfavorable absorption on lower sales and an immaterial impact due to supply chain constraints in both container shipments and electronic components. In the defense electronics segment, the strong 31% growth in revenues reflects the contribution from our PACSTAR acquisition and a 4% increase in organic growth, principally in aerospace defense for our commercial off-the-shelf RECOTS products. Segment operating performance was very strong as adjusted operating income increased 42%, while adjusted operating margin increased 170 basis points to 20.9%. Key drivers of this performance included higher organic sales volumes, favorable mix towards our COTS products, and the benefit of our cost containment efforts, which more than offset higher investments in research and development. Of note, this performance did include the acceleration of some revenues from the second quarter as several customers took action to stabilize their supply chains due to global concerns for potential shortage in electronic components. In the naval and power segment, we experienced solid revenue growth for our naval nuclear propulsion equipment and higher fleet services, which was mainly offset by lower aftermarket revenues to our commercial power and process markets. Adjusted operating income increased 21% while adjusted operating margin increased 300 basis points to 17.7% due to favorable sales mix within our naval defense markets and an increased benefit from our 2020 restructuring actions. To sum up the first quarter results, overall, adjusted operating income increased 15%, which drove margin expansion of 160 basis points year over year. Turning to our full year 2021 guidance, I'll begin with our end market sales outlook, where we've made a few changes highlighted in blue on the slide, reflecting a modest increase in total Curtis Wright sales. Our outlook for overall aerospace and defense market sales growth is now 7 to 9 percent based upon strong first quarter demand and higher orders for our defense electronics equipment. This positions Curtis 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 percent, and we are encouraged by the strong 1.2 times book to bill recorded in the first quarter. We now expect total Curtiss-Wright sales growth of 7 to 9 percent, of which 2 to 4 percent is organic. Continuing with our outlook by segment, I'll begin in aerospace and industrial, where our top-line guidance of 1 to 3 percent sales growth remains unchanged, and we continue to project solid growth in operating income and margin, mainly reflecting the benefits of our prior restructuring initiatives. As we look across the remainder of the year, we continue to monitor the impact on our industrial supply chain very closely. We believe that we can fully mitigate any such impact through various initiatives and expect it to be immaterial to our full-year performance. Next, in the defense electronics segment, based on the solid first quarter orders within our defense markets, we now expect the segment sales to grow 22% to 24%. driven by a combination of 4% to 6% organic growth and a strong contribution from PACSTAR. Segment operating income guidance increased $2 million on a $5 million increase in sales, and as a result, we're now projecting segment operating income to grow 10% to 13%, while operating margin is projected to range from 21.3% to 21.5%. Of note, segment profitability reflects a $6 million year-over-year increase in research and development, unfavorable mix due to a ramp-up in lower-margin system sales, and inorganic sales from PacStar, which will be dilutive to overall Curtis Wright margins in year one. In the enable and power segment, our top-line guidance of 1% to 3% sales growth remains unchanged. However, we increased adjusted operating income guidance to reflect an additional $2 million benefit from our prior year restructuring actions. Segment adjusted operating income is now projected to grow 2% to 5%, while adjusted operating margin is expected to increase 20 to 30 basis points to a range of 18.2% to 18.3%. So to summarize our outlook, we expect full year 2021 adjusted operating income to grow 9 to 11% overall on a 7 to 9% increase in sales. Operating margin is expected to improve 30 to 40 basis points to 16.6 to 16.7%, reflecting the strong profitability and savings generated by our restructuring initiatives. Continuing with our 2021 financial outlook, where we've increased our full-year adjusted diluted EPS guidance by 10 cents to a new range of $7.10 to $7.30, reflecting growth of 8% to 11%. Following our strong first quarter performance, we now expect second quarter diluted EPS to be similar to the first, followed by sequential quarterly improvement during the second half of 2021, with the fourth quarter being our strongest. Turning to our full-year free cash flow outlook, our guidance remains unchanged with a range of $330 to $360 million. During the first quarter, which reflected our typical outflow of cash, we experienced a solid 34% year-over-year improvement in adjusted free cash flow due to higher cash earnings and lower capital expenditures. Our solid first quarter performance provides us with confidence, and we remain on track to achieve our full-year free cash flow guidance and exceed our long-term conversion target of 110% again in 2021. Now I'd like to turn the call back over to Lynn for some closing remarks. Lynn?

Thank you, Chris. In summary, we expect to deliver strong results in 2021. We are well positioned to deliver a high single-digit growth rate in sales, and double-digit growth in operating income and diluted EPS in 2021 while continuing to expand our margins to reach 17% in 2022. We expect to accomplish these results while making an additional $10 million of strategic investment in R&D to fuel future organic growth. Our adjusted free cash flow remains strong as we expect to generate north of 110% free cash flow conversion. We also continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth. Our balance sheet remains very strong and we have sufficient capacity to spend up to $1.6 billion in strategic acquisitions. Of course, should acquisitions not transpire as expected, then we will consider additional share repurchase activity as we have done historically to ensure maximum return to our shareholders. Later this month, on the morning of May 26th, we will be conducting our Virtual Investor Day event. During the event, we will share Curtis Wright's new vision and pivot to growth strategy, driven by a renewed focus on top-line acceleration. We will provide an overview of our new operating growth plan, led by our continued focus on operational excellence, as well as a deeper dive into the segment, where we have tremendous potential to leverage technological leadership across the corporation. As we will demonstrate, we continue to build upon the company's strong foundation and decades of engineering expertise through ongoing innovation and collaboration. This, in turn, drives our continued strategic investment. We will conclude the day by delivering our new three-year targets, building upon our top quartile performance while driving solid growth and operating income, EPS, and free cash flow. We hope that you will join us in a few weeks as we reinforce Curtis Wright's strong culture of innovation, proven operational excellence, and dedication to delivering long-term value for our stakeholders. At this time, I would like to open up today's call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from the line of Mike Shermoli with Truist.

Hey, good morning, guys. Thanks for taking the questions. Nice results. Thanks, Mike. Good morning. Morning. Lynn or Chris, I mean, you mentioned supply chain various times throughout the prepared remarks. Can you just maybe give a little bit more color, you know, where specifically you're seeing the tightness? You know, is it up at the printed circuit board, semiconductor level? And, you know, you mentioned, you know, some good pickup in on-road, off-road vehicles. Is there any concern on that side of the market regarding supply chain constraints and then even dovetailing in there, maybe just what you're seeing on raw material and input prices as well as it relates to the whole supply chain.

So I'll start off and then I'll let Chris add some color to it. I think there's a couple – you know, we are seeing some impact from supply chain. It's nothing – tightness and delays, nothing that's going to date. We don't feel will impact us materially, but it's really something we're definitely focused on and keeping a close eye on. You know, the areas where we're seeing some impact is a little bit of margin impact with increased freight costs. We're seeing some delays due to container shipments, specifically around the Los Angeles port. Again, these are all things we're managing. We work closely with our customers to make sure they understand where we're seeing delays and find mitigation approaches for them. But I'd say the one that's top of our list for paying attention to is electronic components. These obviously come into play for both our A&I segments, specifically for the vehicle programs, and then obviously defense electronics. And we're really doing a lot of different things to mitigate the risks in this area. We have longstanding relationships with our supply chains that we take advantage of. We dual source where we can. And then in some areas where we can use government priorities to expedite our electronics, we for sure take advantage of all those types of situations. So at this point, we feel we have the situation underhand, but, you know, things can change. Those are the main areas where we're seeing delays, and we think we're managing them.

Yeah, and I would... I would only go on to add that, you know, a little bit of cost erosion, you know, Mike, as you look at the, you know, aerospace and industrial group, but that's a pretty flexible and agile group and it, uh, you know, reacting to shifts in, in, uh, material costs and, you know, whether it's passing it on to the customer or kind of tightening the belt to kind of offset that. I think we've got that under control and in our guidance for the year. And then on the defense side, it's really more about, you know, customers reacting, trying to pull in a little bit out of Q2 into Q1 to get ahead on this. But I think, uh, there it's more timing than anything, but Lynn said it well.

Got it. Perfect. And then just one more bigger picture on the overall defense budget. Obviously we've only seen, you know, the skinny version of the top line right now, but as you guys sort of size up the portfolio, any, any things, you know, kind of bubble into the surface area of risk, joint strike fighter, any of your other platforms. And then we are also hearing that, you know, kind of, if it is related to infrastructure investment, you know, investing in the shipyards. And that seems to be a key priority of the Navy, which might have some positives for dress Iran. But any comments on the overall trajectory of defense spending or programs?

I would say overall, you know, we feel pretty confident and remain pretty optimistic for our outlook and what we've, you know, the news coming through on what's expected when the President's budget is put forward we think is going to very much support where we have our business. I mean, I think it's pretty publicly spoken about that, you know, China is the pacing threat, which clearly ties right to shipbuilding, which is the largest portion of our defense business. And lots of data points that we're picking up that there is clear bipartisan support for the shipbuilding industry. So we don't see any disruption there. And again, I know I've mentioned it before, but the input we get from our customer base is a continuous challenge that we can ramp up. So we see that as a good sign. And some support for making some capital investments to be prepared for that ramp-up. So all good news in that space. And, again, you know, I mean, if there's trimming of budgets, you know, all programs are subject to that. And so it's not as if we think there's no risk at all across the business. But we do know that, you know, places where we're heavily – you know, we have larger amounts of revenue are the top priorities. And, you know, specifically when I think of PacStar, you know, being our largest acquisition and wanting to make sure it performs the expectations, it continues. You know, it had a great start to the year. Our outlook is optimistic, and it remains a high, high priority within the DOD. So, I don't want to be naive and say there's no risk. Clearly, we have an eye to it, but we really feel solid about where we have our programs. And I guess the one last comment I'd make is we've really taken a strategy in our defense electronics to really have state-of-the-art products that are kind of program agnostic. And this press And, you know, adoption of the MOSA standard just continues. And we put out that press release on the F-22 adoption just as an example to really try and be more transparent about where we're winning business and why we're optimistic.

Got it. Helpful. Thanks, guys. I'll jump back in the queue.

Thanks, Mike. Your next question comes from the line of Peter Armand with Baird.

Hey, good morning. Lynn, Chris, Jim, nice quarter. Thank you. So commercial markets booked a bill, 1.2. Maybe if you could just give us a little more color on what you're seeing there and, you know, if you view it to be kind of sustainable or this is just an initial snapback in order activity.

So I'd say, you know, our most... clear point of optimism. And it's a fair question because, you know, as we've seen the orders pick up in the strong first quarter, you know, whether it was just advanced buying or something that's, you know, going to continue as a trend. And so that's definitely a question we've had for ourselves. We really do believe it is the beginning of a trend. And, you know, the uptick in the industrial on and off highway vehicles is just so encouraging. And, you You know, it's the orders that have been placed and the dialogues we're having with our customers that really lead us to believe that that's going to continue on. You know, in the commercial aerospace areas, you know, our actuation and sensors are really getting signals that we're going to see a solid rebound in the second half of the year. And if there's any one area that we're still a little bit in a wait-and-see, it's around our surface tech business, that they are, you know, they're kind of, they don't, you know, being the short cycle, you don't see the pickup as significant. far in advance there. And so we're optimistic we're going to start seeing a little bit more there in the second half. It has picked up some, but it isn't quite as strong as we're seeing in the others. And, Chris, I don't know if you'd want to add any color to that.

I think you said it well. I'd only go on to say, you know, when you're looking at the commercial, you know, book to bill 1.2 times, so it's not only the vehicle orders. Yeah, but we have seen a steady sequential ramp in the process markets. Now, they're not back to where they were in the prior year, but things are looking good from that perspective. And then, you know, as you look at nuclear within power and process and the nuclear aftermarket, they had a very good quarter here in the first quarter of 21 as well. You know, not quite as great as where they were in Q1 of 20, but just, you know, continued sequential improvement, and they're on a strong ramp. And then when you do shift over to A and D and you look at commercial aerospace just to reinforce what Lynn was saying about our long order cycle and short order cycle businesses. And we have been getting a lot of feedback from customers asking about rate readiness and expecting volumes to ramp in the second half. So while we're looking at surface tech with some caution, given its short order cycle nature, I think it speaks favorably to support our full year guide and beyond.

Chris, you mentioned in the power, there were some reduced valves to the energy market, kind of a little bit of a headwind. Do you just need CapEx spending to pick up there in order to see that recover as well?

Yeah, I think it's a little bit of capex spending, you know, but I also think it's really just timing and climbing back to pre-pandemic levels. If things are starting to open up here, we're starting to see improvements and we're headed in a good direction here. I think it's really timing. We are expecting to see improvements here in the back half of the year and the orders signals that we're getting in power and process support that.

And that's just the last question on M&A. Lynn, just You mentioned kind of the significant capacity you have for M&A, but I think you guys have been very, very much focused on kind of adding in niche companies, niche technologies, and it sounds like that's still the focus. But where are you comfortable in terms of if it was the right fit taking leverage up to?

So I highlight that we have $1.6 billion of capacity because for a very specific strategic company, that, you know, really added to our capabilities and build out on what we have to offer, I think we would go there and potentially beyond would be possible. So you are right that we have historically added, you know, sub-$100 million companies. I think we showed our willingness to go beyond that with Pastar, and I would feel comfortable continuing on in that direction. direction. And with that, I'll turn it over to Chris to talk a little bit more about the leverage.

Yeah, you know, I think from where we are from a debt to EBITDA standpoint at about two and a half times, I mean, we are within investment grade. We view investment grade to be in that 3x, you know, or below level. And, you know, something transformational came along and we, you know, felt it would be a good opportunity for us and our stakeholders and shareholders to get up to a three and a half to four times for the right property, we would do that. And I think we quickly used the cash to delete the lever back down to investment grade. But, you know, we found our sweet spot right now. And I think, you know, we have great capacity.

Appreciate all the color. Nice results. Thanks.

Thank you. Thank you. Your next question comes from the line of Miles Walton with UBS.

Hey, good morning. I was hoping that maybe you can You can touch on the performance in the quarter, obviously, better than you all had expected, but maybe 20 cents on the APS, and you raised the full year by 10. Am I right to think that the comments about some of the pre-buy, I guess, from 2Q into 1Q explains why the full beat versus the expectation maybe doesn't drop to the full year?

Yeah, that is it, Myles. I think as you look at what we did here on the full year guidance and increasing The sales by $5 million in the defense electronics segment and $2 million of OI. We really had a much stronger pull from Q2 into Q1, so that's really half of what I would say you're seeing above consensus. But the rest is just strength in orders and what we're seeing for that business for the remainder of the year. We're also, you know, we had some better restructuring savings in the naval and power segment, and that will translate to the full year. I think that was roughly $2 million as well. So you're right on.

Yep.

Okay.

And maybe on PACSTAR, it sounds like it's performing well. I think it was supposed to be dilutive to the segment margins, at least out of the gates. Is that the case? How dilutive? Or maybe just color on what the underlying business was even better on the margin side by how much?

So thanks for that. We are very encouraged at how things have performed with PacStar and Q1, the integration into the company, them leveraging. We definitely did talk about them being diluted in year one, and I'll let Chris add some color to that, but we're well on the path towards leveraging our supply chain and channels to really help them drive their operating margins. And Really, the pull for their products is quite outstanding, and we're very encouraged by what we see as an outlook for them.

And I'm not going to provide a lot of color on the dilution to PacStar's margins, but I will say that... I'll try. To Lynn's point, I mean, they are off to a good start, and we are very encouraged by how well the integration into... Our defense electronics segment is going. They will be dilutive to our full-year margins, Curtis Wright overall margins this year. But we're going to bring them to 17% over time. So they're going to be a contributor, and we like how things are going so far. Okay. Thanks so much. Thanks, Miles.

Yep. Thank you, Miles. Thank you. And there are no further questions at this time. I will now turn. I'm sorry. I will now turn the call back over to the President and Chief Executive Officer, Lynn Bamford.

So, everyone, thank you for joining us today. We look forward to speaking with you again at our upcoming Investor Day event. Have a great day.

This concludes today's conference call. Thank you for participating.

You may now disconnect. Thank you. Thank you. Thank you.

Thank you. Thank you. Thank you.

Good day and thank you for standing by. Welcome to the Curtis Wright first quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Jim Ryan, Senior Director of Investor Relations. Please go ahead.

Thank you, Dawn, and good morning, everyone. Welcome to Curtis Wright's first quarter 2021 earnings conference call.

Joining me on the call today are President and Chief Executive Officer Lynn Banford and Vice President and Chief Financial Officer Chris Parker. Our call today is being webcast in the press release as well as a copy of today's financial presentation. It's available for download through the investor relations section of our company website at www.curtiswright.com. A replay of this webcast also can be found on the website. Please note, today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into CurtisRate's ongoing operating and financial performance. Also note, that both our adjusted results and full-year guidance exclude our bill-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. In addition, discussions about our first quarter results and full-year guidance reflect our new segment structure, which we announced earlier this year to provide greater clarity and transparency to our portfolios. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth exclude the effects of restructuring, foreign currency translation, acquisitions, and divestitures unless otherwise noted. Now I'd like to turn the call over to Lynn to get things started. Lynn?

Thank you, Jim, and good morning, everyone. I'll begin with the key highlights of the first quarter performance and an overview of our full year 2021 outlook. Then I'll turn the call over to Chris to provide a more detailed review of our financial results and an update to our full year guidance. Finally, I'll wrap up our prepared marks before we move to Q&A. Starting with the first quarter highlights, we're off to a great start with higher sales and improved profitability driven by strong operational performance that exceeded our expectations. The net sales increase of 2% was led by solid growth in our aerospace and defense markets, which improved 8%. Adjusted operating income improved 15%, while adjusted operating margin increased 160 basis points, reflecting strong margin improvement in the defense electronics and naval and power segments. Our results also reflected our swift actions taken last year in response to the pandemic, where we committed to controlling our costs to preserve profitability and free cash flow. Restructuring savings resulting from those efforts are reflected in our first quarter results and provide a strong base for our margin expansion over the course of the year. We also continue to fuel our innovation pipeline with a $4 million year-over-year increase in research and development investments to support our strategic growth initiatives. Adjusted diluted EPS was $1.51 in the first quarter, which increased 18% year over year. As a reminder, our prior year first quarter results were largely unaffected by the pandemic. Looking at our first quarter orders, overall book-to-bill was solid at approximately one-time sales in the first quarter, with 1.2 times in our commercial markets. This performance was led by a surge in demand for industrial vehicle products in both on and off-highway markets. Looking across the rest of our commercial markets, we have been encouraged by steady improvements since the third quarter of last year and remain optimistic for a continued solid rebound in the back half of this year. We also experienced solid new order growth in our A&D markets, principally led by higher demand for defense electronics and our recent acquisition of PacStar. Speaking of PACSTAR, the integration is on track and I am encouraged by their strong performance to begin the year. As a reminder, PACSTAR is projected to deliver a high single-digit revenue growth and is aligned to one of the Department of Defense's top priorities in upgrading and modernizing the net-centric connected battlefield. Next to our full year 21 guidance highlights. Where we raised are adjusted guidance for sales, operating income, margin, and diluted earnings per share. These increases are based upon higher demand in defense electronics and improved profitability in the naval and power segment. We now expect adjusted operating margin to range from 16.6% to 16.7%. We also increased diluted EPS by $0.10 to a new range of $7.10 to $7.30, with the top end of our range reflecting double-digit growth compared to 2020. Overall, we are encouraged by a solid start to the year, which supports our continued confidence to deliver strong results in 2021. Now I would like to turn the call over to Chris to provide a more thorough review of our first quarter performance and our improved outlook for 2021. Chris?

Thank you, Lynn, and good morning, everyone. I'll begin today with a review of our first quarter sales and profitability, where we again delivered another strong operational performance. Starting in the aerospace and industrial segment, sales were lower year over year as anticipated based upon reduced demand on wide-body jets within the commercial aerospace market. However, on a positive note, we experienced an uplift in industrial vehicle product sales to both on and off-highway markets, driven by solid order growth, as Lynn mentioned earlier. This segment's operating performance, while bolstered by year-over-year restructuring savings, primarily reflects unfavorable absorption on lower sales and an immaterial impact due to supply chain constraints in both container shipments and electronic components. In the defense electronics segment, the strong 31% growth in revenues reflects the contribution from our PACSTAR acquisition and a 4% increase in organic growth, principally in aerospace defense for our commercial off-the-shelf RECOTS products. Segment operating performance was very strong as adjusted operating income increased 42%, while adjusted operating margin increased 170 basis points to 20.9%. Key drivers of this performance included higher organic sales volumes, favorable mix towards our COTS products, and the benefit of our cost containment efforts, which more than offset higher investments in research and development. Of note, this performance did include the acceleration of some revenues from the second quarter as several customers took action to stabilize their supply chains due to global concerns for potential shortage in electronic components. In the naval and power segment, we experienced solid revenue growth for our naval nuclear propulsion equipment and higher fleet services, which was mainly offset by lower aftermarket revenues to our commercial power and process markets. Adjusted operating income increased 21% while adjusted operating margin increased 300 basis points to 17.7% due to favorable sales mix within our naval defense markets and an increased benefit from our 2020 restructuring actions. To sum up the first quarter results, overall, adjusted operating income increased 15%, which drove margin expansion of 160 basis points year over year. Turning to our full year 2021 guidance, I'll begin with our end market sales outlook, where we've made a few changes highlighted in blue on the slide, reflecting a modest increase in total Curtis Wright sales. Our outlook for overall aerospace and defense market sales growth is now 7 to 9 percent based upon strong first quarter demand and higher orders for our defense electronics equipment. This positions Curtis 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 percent, and we are encouraged by the strong 1.2 times book-to-bill recorded in the first quarter. We now expect total Curtiss-Wright sales growth of 7 to 9 percent, of which 2 to 4 percent is organic. Continuing with our outlook by segment, I'll begin in aerospace and industrial, where our top-line guidance of 1 to 3 percent sales growth remains unchanged, and we continue to project solid growth in operating income and margin, mainly reflecting the benefits of our prior restructuring initiatives. As we look across the remainder of the year, we continue to monitor the impact on our industrial supply chain very closely. We believe that we can fully mitigate any such impact through various initiatives and expect it to be immaterial to our full-year performance. Next, in the defense electronics segment, based on the solid first quarter orders within our defense markets, we now expect the segment sales to grow 22% to 24%. driven by a combination of 4% to 6% organic growth and a strong contribution from PACSTAR. Segment operating income guidance increased $2 million on a $5 million increase in sales, and as a result, we're now projecting segment operating income to grow 10% to 13%, while operating margin is projected to range from 21.3% to 21.5%. Of note, segment profitability reflects a $6 million year-over-year increase in research and development, unfavorable mix due to a ramp-up in lower-margin system sales, and inorganic sales from PacStar, which will be dilutive to overall Curtis Wright margins in year one. In the enable and power segment, our top-line guidance of 1% to 3% sales growth remains unchanged. However, we increased adjusted operating income guidance to reflect an additional $2 million benefit from our prior year restructuring actions. Segment adjusted operating income is now projected to grow 2% to 5%, while adjusted operating margin is expected to increase 20 to 30 basis points to a range of 18.2% to 18.3%. So to summarize our outlook, we expect full year 2021 adjusted operating income to grow 9 to 11% overall on a 7 to 9% increase in sales. Operating margin is expected to improve 30 to 40 basis points to 16.6 to 16.7%, reflecting the strong profitability and savings generated by our restructuring initiatives. Continuing with our 2021 financial outlook, where we've increased our full-year adjusted diluted EPS guidance by 10 cents to a new range of $7.10 to $7.30, reflecting growth of 8% to 11%. Following our strong first quarter performance, we now expect second quarter diluted EPS to be similar to the first, followed by sequential quarterly improvement during the second half of 2021, with the fourth quarter being our strongest. Turning to our full-year free cash flow outlook, our guidance remains unchanged with a range of $330 to $360 million. During the first quarter, which reflected our typical outflow of cash, we experienced a solid 34% year-over-year improvement in adjusted free cash flow due to higher cash earnings and lower capital expenditures. Our solid first quarter performance provides us with confidence, and we remain on track to achieve our full-year free cash flow guidance and exceed our long-term conversion target of 110% again in 2021. Now I'd like to turn the call back over to Lynn for some closing remarks. Lynn?

Thank you, Chris. In summary, we expect to deliver strong results in 2021. We are well positioned to deliver a high single-digit growth rate in sales, and double-digit growth in operating income and diluted EPS in 2021 while continuing to expand our margins to reach 17% in 2022. We expect to accomplish these results while making an additional $10 million of strategic investment in R&D to fuel future organic growth. Our adjusted free cash flow remains strong as we expect to generate north of 110% free cash flow conversions. We also continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth. Our balance sheet remains very strong and we have sufficient capacity to spend up to $1.6 billion in strategic acquisitions. Of course, should acquisitions not transpire as expected, then we will consider additional share repurchase activity as we have done historically to ensure maximum return to our shareholders. Later this month, on the morning of May 26, we will be conducting our Virtual Investor Day event. During the event, we will share Curtis Wright's new vision and pivot to growth strategy, driven by a renewed focus on top-line acceleration. We will provide an overview of our new operating growth plan, led by our continued focus on operational excellence, as well as a deeper dive into the segment, where we have tremendous potential to leverage technological leadership across the corporation. As we will demonstrate, we continue to build upon the company's strong foundation and decades of engineering expertise through ongoing innovation and collaboration. This, in turn, drives our continued strategic investment. We will conclude the day by delivering our new three-year targets, building upon our top quartile performance while driving solid growth in operating income, EPS, and free cash flow. We hope that you will join us in a few weeks as we reinforce Curtis Wright's strong culture of innovation, proven operational excellence, and dedication to delivering long-term value for our stakeholders. At this time, I would like to open up today's call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from the line of Mike Shermoli with Truist.

Hey, good morning, guys. Thanks for taking the questions. Nice results. Thanks, Mike. Good morning. Morning. Lynn or Chris, you mentioned supply chain various times throughout the prepared remarks. Can you just maybe give a little bit more color where specifically you're seeing the tightness? Is it up at the printed circuit board, semiconductor level? You mentioned some good pickup in on-road, off-road vehicles. Is there any concern on that side of the market regarding supply chain constraints and then even dovetailing in there, maybe just what you're seeing on raw material and input prices as well as it relates to the whole supply chain.

So I'll start off and then I'll let Chris add some color to it. I think there's a couple – you know, we are seeing some impact from supply chain. It's nothing – tightness and delays, nothing that's going to date. We don't feel will impact us materially, but it's really something we're definitely focused on and keeping a close eye on. You know, the areas where we're seeing some impact is a little bit of margin impact with increased freight costs. We're seeing some delays due to container shipments, specifically around the Los Angeles port. Again, these are all things we're managing. We work closely with our customers to make sure they understand where we're seeing delays and find mitigation approaches for them. But I'd say the one that's top of our list for paying attention to is electronic components. These obviously come into play for both our A&I segments, specifically for the vehicle programs, and then obviously defense electronics. We're really doing a lot of different things to mitigate the risks in this area. We have longstanding relationships with our supply chains that we take advantage of. We dual source where we can. And then in some areas where we can use government priorities to expedite our electronics, we for sure take advantage of all those types of situations. So at this point, we feel we have the situation underhand, but, you know, things can change. Those are the main areas where we're seeing delays, and we think we're managing them.

Yeah, and I would... I would only go on to add that, you know, a little bit of cost erosion, you know, Mike, if you look at the, you know, aerospace and industrial group, but that's a pretty flexible and agile group and it, uh, you know, reacting to shifts in, in, uh, material costs and, you know, whether it's passing it on to the customer or kind of tightening the belt to kind of offset that. I think we've got that under control and in our guidance for the year. And then on the defense side, it's really more about, you know, customers reacting, trying to pull in a little bit out of Q2 into Q1 to get ahead on this. But I think, uh, There it's more timing than anything, but Lynn said it well.

Got it. Perfect. And then just one more bigger picture on the overall defense budget. Obviously we've only seen, you know, the skinny version of the top line right now, but as you guys sort of size up the portfolio, any, any things, you know, kind of bubble into the surface area of risk, joint strike fighter, any of your other platforms. And then we are also hearing that, you know, kind of, if it is related to infrastructure investment, you know, investing in the shipyards. And that seems to be a key priority of the Navy, which might have some positives for dress Iran. But any comments on the overall trajectory of defense spending or programs?

I would say overall, you know, we feel pretty confident and remain pretty optimistic for our outlook and what we've, you know, the news coming through on what's expected when the president's budget is put forward we think is going to very much support where we have our business. I mean, I think it's pretty publicly spoken about that, you know, China is the pacing threat, which clearly ties right to shipbuilding, which is the largest portion of our defense business. And lots of data points that we're picking up that there is clear bipartisan support for the shipbuilding industry. So that is, we don't see any disruption there. And again, I know I've mentioned it before, but the input we get from our customer base is a continuous challenge that we can ramp up. So we see that as a good sign. And some support for making some capital investments to be prepared for that ramp-up. So all good news in that space. And, again, you know, I mean, if there's trimming of budgets, you know, all programs are subject to that. And so it's not as if we think there's no risk at all across the business. But we do know that, you know, places where we're heavily – you know, we have larger amounts of revenue are the top priorities. And, you know, specifically when I think of PacStar, you know, being our largest acquisition and wanting to make sure it performs the expectations, it continues. You know, it had a great start to the year. Our outlook is optimistic, and it remains a high, high priority within the DOD. So, I don't want to be naive and say there's no risk. Clearly, we have an eye to it, but we really feel solid about where we have our programs. And I guess the one last comment I'd make is we've really taken a strategy in our defense electronics to really have state-of-the-art products that are kind of program agnostic. And this press and, you know, adoption of the MOSA standard just continues. And we put out the press release on the F-22 adoption just as an example to really try and be more transparent about where we're winning business and why we're optimistic.

Got it. Helpful. Thanks, guys. I'll jump back in the queue.

Thanks, Mike. Your next question comes from the line of Peter Armand with Baird.

Hey, good morning, Lynn, Chris, Jim. Nice quarter. Thank you. So commercial markets booked a bill, 1.2. Maybe if you could just give us a little more color on what you're seeing there and if you view it to be kind of sustainable or this is just an initial snapback in order activity.

I'd say our most clear point of optimism, and it's a fair question because as we've seen the orders pick up in the strong first quarter, whether it was just advanced buying or something that's going to continue as a trend. That's definitely a question we've had for ourselves. We really do believe it is the beginning of a trend. you know, the uptick in the industrial on and off highway vehicles is just so encouraging. And, you know, we're here, you know, it's the orders that have been placed and the dialogues we're having with our customers that really lead us to believe that that's going to continue on. You know, in the commercial aerospace areas, you know, our actuation and sensors are really getting signals that we're going to see a solid rebound in the second half of the year. And if there's any one area that we're still A little bit in a wait and see, it's around our surface tech business that they are, you know, they're kind of, they don't, you know, being the short cycle, you don't see the pickup as far in advance there. And so we're optimistic we're going to start seeing a little bit more there in the second half. It has picked up some, but it isn't quite as strong as we're seeing in the others. And, Chris, I don't know if you'd want to add any color to that.

I think you said it well. I'd only go on to say when you're looking at the commercial book to bill at 1.2 times, so it's not only the vehicle orders, but we have seen a steady sequential ramp in the process markets. Now, they're not back to where they were in the prior year, but things are looking good from that perspective. And then as you look at nuclear within power and process and the nuclear aftermarket, they had a very good quarter here in the first quarter of 21 as well. Not quite as great as where they were in Q1 of 20, but just continued sequential improvement, and they're on a strong ramp. And then when you do shift over to A&D and you look at commercial aerospace, just to reinforce what Lynn was saying about our long-order cycle and short-order cycle businesses, I mean, we have been getting a lot of feedback from customers asking about rate readiness and expecting volumes to ramp in the second half. So while we're looking at surface tech with some caution, given its short order cycle nature, I think it speaks favorably to support our full year guide and beyond.

Chris, you mentioned in the power, there was some reduced valves to the energy market, kind of a little bit of a headwind. Do you just need CapEx spending to pick up there in order to see that recover as well?

I think it's a little bit of cap-back spending, but I also think it's really just timing and climbing back to pre-pandemic levels. Things are starting to open up here. We're starting to see improvements, and we're headed in a good direction here. I think it's really timing. We are expecting to see improvements here in the back half of the year, and the orders signals that we're getting in power and process support that.

That's just the last question on M&A. Lynn, just You mentioned kind of the significant capacity you have for M&A, but I think you guys have been very, very much focused on kind of adding in niche companies, niche technologies, and it sounds like that's still the focus. But where are you comfortable in terms of if it was the right fit taking leverage up to?

So I highlight that we have $1.6 billion of capacity because for a very specific strategic company, that, you know, really added to our capabilities and build out on what we have to offer, I think we would go there and potentially beyond would be possible. So you are right that we have historically added, you know, sub-$100 million companies. I think we showed our willingness to go beyond that with Pastar, and I would feel comfortable continuing on in that direction. direction. And with that, I'll turn it over to Chris to talk a little bit more about the leverage.

Yeah, you know, I think from where we are from a debt to EBITDA standpoint at about two and a half times, I mean, we are within investment grade. We do investment grade to be in that 3x, you know, or below level. And, you know, something transformational came along and we, you know, felt it would be a good opportunity for us and our stakeholders and shareholders to get up to a three and a half to four times For the right property, we would do that, and I think we'd quickly use the cash to delever back down to investment grade. But we found our sweet spot right now, and I think we have great capacity.

Appreciate all the color. Nice results. Thanks.

Thank you.

Thank you. Your next question comes from the line of Miles Walton with UBS.

Hey, good morning. I was hoping that maybe you can... You can touch on the performance in the quarter, obviously, better than you all had expected, but maybe 20 cents on the APS, and you raised the full year by 10. Am I right to think that the comments about some of the pre-buy, I guess, from 2Q into 1Q explains why the full beat versus the expectation maybe doesn't drop to the full year?

Yeah, that is it, Myles. I think as you look at what we did here on the full year guidance and increasing The sales by $5 million in the defense electronics segment and $2 million of OI. We really had a much stronger pull from Q2 into Q1, so that's really half of what I would say you're seeing above consensus. But the rest is just strength in orders and what we're seeing for that business for the remainder of the year. We're also, you know, we had some better restructuring savings in the naval and power segment, and that will translate to the full year. I think that was roughly $2 million as well. So you're right on.

Yep.

Okay.

And maybe on PACSTAR, it sounds like it's performing well. I think it was supposed to be dilutive to the segment margins, at least out of the gates. Is that the case? How dilutive? Or maybe just color on what the underlying business was even better on the margin side by how much?

So thanks for that. We are very encouraged at how things have performed with PacStar and Q1, the integration into the company, them leveraging. We definitely did talk about them being diluted in year one, and I'll let Chris add some color to that, but we're well on the path towards leveraging our supply chain and channels to really help them drive their operating margins. And Really, the pull for their products is quite outstanding, and we're very encouraged by what we see as an outlook for them.

And I'm not going to provide a lot of color on the dilution to PACSTAR's margins, but I will say that... I'll try. To Lynn's point, I mean, they are off to a good start, and we are very encouraged by how well the integration into our defense electronics segment is going. They will be diluted to our full-year margins, Curtis Wright overall margins this year, but we're going to bring them to 17% over time. So they're going to be a contributor, and we like how things are going so far. Okay. Thanks so much.

Thanks, Miles. Yep. Thank you, Miles.

Thank you. And there are no further questions at this time. I will now turn I'm sorry. I will now turn the call back over to the President and Chief Executive Officer, Lynn Bamford.

So, everyone, thank you for joining us today. We look forward to speaking with you again at our upcoming Investor Day event. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.