Curtiss-Wright Corporation

Thank you for standing by, and welcome to the Curtis Wright Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker 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. If you require any further assistance, please press star 0. I would now like to introduce Senior Director, Investor Relations, Jim Wright.

Thank you, Andrew, and good morning, everyone. Welcome to Curtis Wright's second quarter 2021 earnings conference call. Joining me on the call today are President and Chief Executive Officer Lynn Bamford and Vice President and Chief Financial Officer Chris Parks. Our call today is being webcast, and the press release, as well as a copy of today's financial presentation, is 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 and 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 at the SEC. As a reminder, the company's results include an adjusted, non-gap view that excludes certain costs in order to provide greater transparency into Curtis Wright'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. Gap to non-gap 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 would 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 our second 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 updates to our full year guidance. Finally, I'll wrap up our prepared remarks before we move to Q&A. 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 continued 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 EPS 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 surged 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. This included $130 million in naval awards for aircraft carrier and submarine platforms, which we announced in an earlier press release, and we are also expecting a strong second half in orders. 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. Now I'd like to turn the call over to Chris to provide a more thorough review of our second quarter performance and our improved outlook for 2021. Chris?

Thank you, Lennon. Good morning, everyone. 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. This 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 this segment's 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 narrowbody aircraft returning to prior production levels by the 2023 timeframe, while widebody aircraft may not fully recover until 2024 or even 2025. Turning to this 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 and year-over-year restructuring savings. And although we continue to experience some minor influences from supply chain constraints in both container shipments and electronic components, this impact is 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 C5ISR 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 a potential shortage in electronic components. Segment operating performance included $4 million in incremental R&D investments, unfavorable NICs, and about $2 million in unfavorable FX. Absent these impacts, second quarter operating margins would have been nearly in line with the prior year's 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 experience higher nuclear aftermarket revenues both in the U.S. and Canada, as well as higher valve sales to process markets. This 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 Curtis 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 enabled 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 percent, which, as a reminder, positions Curtiss-Wright to once again grow our defense revenues faster than the base DOT budget. In our commercial markets, our overall sales growth is unchanged at 6 to 8 percent, 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 valve 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're 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'd 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 the 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%, up 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 U.K., 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 restructuring and ongoing company-wide operational excellence initiatives. Continuing with our 2021 financial outlook, where we have again increased our full-year adjusted diluted EPS guidance, 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 EPS 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 to $360 million. Now I'd like to turn the call back over to Lynn for some closing remarks. Lynn?

Thank you, Chris. 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 FY22 Defense Budget Request, which was issued shortly after our Investor Day event. The release reflected approximately 2% growth over the FY21 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 CBN 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 networks is up 25% in the service's FY22 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 FY22 reflects 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. Next, I'd like to highlight some of the key takeaways from our recent Investor Day and say thank you to everyone who participated. 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 EPS 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 Curtis Wright's recent history. And as you know, it's an area that I am 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 factors 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 efficiency. 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 vigor that this team has demonstrated since 2013. Lastly, I wanted to reiterate that our target for a minimum EPS 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 target as we find critical strategic acquisitions to bring into Curtis 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 EPS 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. At this time, I would like to open up today's conference call for questions.

Thank you. 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. Our first question comes from the line of Nathan Jones with Stiefel. Good morning, everyone.

Good morning, Nathan.

Good morning, Nathan.

I'd like to start off with a question on the COTS commentary you had of customers potentially stocking up in one queue that led to maybe a bit of a decline in the second quarter. You'll typically see a seasonal ramp into the second half. Still anticipating seeing that seasonal ramp. And how do you think about inventory in the channel or inventory at customers? Do you think that they're You know, they're still ahead of where they would normally be, in line, behind, just any color you can give us on that?

Yeah, sure. I'll take that one. I mean, in Q1, we definitely saw some defense customers accelerate orders, you know, looking to try to get ahead of the electronics component shortage. You know, so as you look at this organic headwind that we had year over year in Q2, about $8 million, that was really just work that had been accelerated into Q1. I mean, we continue to experience some minor delays in electronic components. It's a fairly dynamic situation out there in the market, given what most companies went through last year and the steep ramp that most companies are fortunate enough to face this year. But it's really impacting mainly the timing of revenues, air defense revenues, higher margin C5ISR products within our defense electronics segment. Now, as you look at the second half of the year, We expect that there will be some pressure based upon the timing and receipt of those components, and most of that pressure will be put on Q3. But as you've seen historically coming out of the defense electronics business, we typically have a very big Q4 ramp, and we're expecting that again this year. So we're currently working our way through the issues and feel like we're doing a good job in overcoming those pressures.

And then I guess I'll go to Lynn's favorite area, R&D. Increase the R&D expense in second quarter, increase your target for the full year. Can you talk about the opportunities that you have there, whether you think that there are opportunities to continue to increase that R&D investment as we go forward, whether we should think about more as plateauing at this level, any guidance you can give us on that?

So thank you for that. And it is as you stated, an area I do like to talk about. So with that, we've put up some additional R&D in our defense electronics group as we just continue to see really outstanding opportunities to expand our product line, both in broadening our product line around the MOSA initiative as it just continues to gain traction across a broad range of customers in the defense industry but then also some specific technologies around encryption and the denied GPS, cyber, and really some additional investments with our PACSTAR team around the battlefield modernization. So the opportunities just continue to grow. We are really positioned at a great time right now and really feel that the time is right to invest. The other area where we are also increasing investment is in ANI, and that's really around... the electrification and electronification, Internet of Things, around electric vehicles, hybrid vehicles, and our push in that area that we've really positioned ourselves to be a leader, a technology leader in this space and a go-to for a lot of the major vehicle manufacturers. And we're really making sure we're very systematically knowing who's building vehicles in this space and are working with them to have you know, often, you know, tailored variants of specific products to, you know, fit specifically into their vehicles. And that takes some investment on our part. And we feel it's the right thing to do. And again, you know, we're frequently asked about, you know, do we think that R&D will go up again in 22 or not? And, you know, we're not giving specific guidance in that. And I really do think it's important for people to understand that we really are case by case, looking at how we allocate our capital and whether R&D is the best investment in it, other investments, or it's time to return that in margin. And we'll make balanced decisions in that area based on the opportunities that are before us. But we're not afraid to spend some R&D to secure long-term growth where we see opportunities that we can see are going to pay dividends for years to come. And we make R&D investments that pay dividends honestly, within the same calendar year, the next calendar year, and sometimes it's three to four years out. And so, again, you have to not just balance the returns, but also make sure you're fueling your immediate term, near term, and longer term growth. And so those are the tradeoffs. We're maturing our processes around how we look broadly at those investments across the organization and make the best strategic investments.

Great. Thanks for taking my questions.

Thank you very much.

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

Thanks. Good morning. Maybe, Ben, you talked about the M&A pipeline being very full at the moment and maybe optimism about reaching the upper end of the sales target. Can you sort of reengage on that and talk about what kinds of properties, sizes, scales, pricing – sort of any other characteristics you'd like to flesh out, as well as do you think you'd close one before the end of the year that's material?

Sure. So I think, honestly, anticipations on some tax law changes coming in 22 has upped people's motivation that things they were considering selling both PEs and private companies to try and get deals done this year. So for a lot of the active properties in the pipeline, the push is to do a deal this year. Now, again, whether we actually do a deal will depend on as we move through diligence on some properties that we're active with right now. But again, we're not going to do a deal as we always say. You'd be disappointed if I didn't reiterate it that we won't do a deal for deal's sake. It's going to have to be the right strategic and financial fit. But there's targets out there that are in that range. I would say the largest number of the properties we're seeing are across our defense markets right now. That is the majority of the pipeline. It's not exclusively that, but it does seem to be the most active area right now, which is an area that's a high priority for us, so that works well. I mean, we're not saying that we would only buy properties in defense and industries, but it is an area especially where we see them being complementary to our current product offering and something additional we can bring to our current customer base, whether that's you know, a naval platform or one of the people building electronic subsystems. And so that's very much the prices are kind of in line with what we've seen historically, I would say. It hasn't, I mean, I know there's some talk and there's some examples of prices being more, you know, the multiples being more extreme. I think we're finding quality products where the multiples are reasonable and and in line with what would make them a good strategic fit within Curtis Wright. And so that's something that we do have a lot of management attention on, a lot of processes. We have quite a few active properties right now that we're working through to see which ones we think would be the best strategic fit for Curtis Wright. So I think there's a reasonable chance we would add something to our portfolio in the calendar year. And we are seeing properties in the range of you know, PACSTAR types of revenues that are coming available. So it's really a great, healthy pipeline right now.

Okay.

That's great color.

Thank you. And then maybe on just the press release you put out the other day on the X-Energy selection for reactivity and controlled shutdown system, you know, I'm not as familiar with, you know, what you might be doing there on the nuclear side that could maybe reignite some of the fade in the revenue on the new build OEMs. Maybe is there something there to point to that would cause me to be more optimistic about the future of OEM commercial nuclear?

So thank you. Thank you for reading our press release first and asking about it. So I'll open with that. But there is, you know, one of the areas that also got a lot of support in the Department of Energy's budget is that was put forward as part of the FY22 overall budget was an increase of spending of a significant amount from the Department of Energy to support the funding of new small modular reactors and new advanced reactors. And this program, X-Energy, is one of the two companies that has been funded by the DOE for development of future reactors. And so we are very active in engaging with everybody that's out there, both from the private sector and receiving public funding, to participate in their reactor development because there's a lot of companies. I mean, there's probably 20 companies out there right now, roughly, that are working on new reactor developments. And surely not all of those will go to commercial production, so it's definitely one of those situations where you've got to cover the field So you're partnered with the ones that are going to go. And I think things continue to progress nicely for NuScale, which really got started several years ago, and we have the most significant content on that that we've talked about. It's earlier days for some of these others where we're still winning content. I think on our investor day, we talked about the ranges of revenue we might get on various types of reactors, you know, from tens to many tens, about millions of dollars per reactor. And so I just think the overall sentiment is, you know, the press for carbon-free energy becomes ever more. I think more and more it's being recognized, and we're hearing it from the government and the Biden administration, recognizing that nuclear needs to be a part of that, and I think that's being recognized worldwide. There's a lot of activity, licenses being processed over in Eastern Europe. As those countries say, we're not going to get there without nuclear, and so this isn't going to light on fire in 2021 or 2022, but it's going to be a strong area for us this decade for sure.

Okay, great. And one clarification or detailed modeling question, Chris, on the other income, it was, you know, virtually breakeven in the quarter, I guess, $400,000, and I think you're still guiding $16 to $17 million for the year. Was there anything specific that drove the lighter other income in the quarter?

No, I mean, I think, you know, as you look at really what's happening kind of year over year, you know, it's really just, you know, we are seeing other income drop, and it's mainly associated with the pensions. You know, we did, as you know, process some payments to former executives that had recently retired during the quarter, and there's some pension true-up that comes along with that, but that's really the full extent of it. Okay. Thanks.

Thank you. And our next question comes from the line of Michael Ciamoli with Truist Securities. Hey, guys.

Good morning. Thanks for taking the questions. I guess, Lynn or Chris, can you talk about the order flow and maybe parse it out by segment if you have the book to bill? I think you said Naval was very strong, but maybe curious about the broader defense portfolio and maybe even outside of industrial, which you called out. Any more color you can give on the bookings environments?

Yeah, sure. I mean, overall for the second quarter, we were 1.1 times book to bill, and we were stronger than 1 times across each of our segments, so all three segments. We were also above 1 time in A&D and commercial. Now, if you dive a little bit deeper into A&D, we were a little bit stronger on the defense side and just shy of 1 on the commercial era side, but overall a very strong quarter overall. We saw our orders up 67 million or 11% year over year, and our backlog is up now A&D flat, commercial up 12%. But I think as you take a look at the orders and what happened this year versus last year, it's important to note that we had a very strong Q2 last year, $230 million in NAVAL orders that we received. You know that's a little bit lumpy. This year in Q2, we issued a press release, and we got about $130 million in orders this and we are expecting another big Q3. So it'll level out year over year. It'll be another strong year for us in orders. You know, as you take a look at commercial and what happened there, I mean, we were up $77 million or 50% year over year, and the vast majority of that related to on- and off-highway vehicle products, you know, and that GI recovery, some nuclear aftermarket. But overall, you know, very strong quarter for orders, great book to bill, and we're pleased with... our positioning on the full year.

How was the Defense X Navy, your kind of specific defense?

Yeah, so Defense X Navy, I mean, we did benefit from PACSTAR, the PACSTAR acquisition. So orders in that field ranged slightly above what their sales were for the quarter. We did see a little bit of pressure in C5ISR and aero defense, but that was really mainly due to that acceleration that we saw in the first quarter. I think our outlook, as we look across the back half of the year, is that we're expecting a sequential improvement in both naval orders and defense aero orders for defense electronics. I think we've got a good trajectory ahead of us, and we're expecting a good second half.

Okay, and are you seeing any impact? I mean, we've seen some suppliers call out the F-35. I know you've got some content there. You know, is it, you know, timing risk there? You know, you obviously called out the pull forward, but, you know, is that program kind of sliding to the right, or what are you seeing with F-35?

No, I mean, we're not really seeing anything in terms of program delays, anything out there. I mean, as you know, we you know, have a fairly agnostic approach to the development of our products, and we've got a very, very wide range of platforms that we support across the defense industry and our defense electronics business. We're not seeing anything there that's unusual. You know, we did mention here that, you know, we are working through, you know, some issues relative to the timing of availability and small electronic components, but we feel like, you know, those are mostly timing-related issues, and And the team's doing a great job in working its way through that.

Got it. Got it. And maybe just one last one on E&E. You were talking commercial aerospace with narrowbodies. Can you just maybe level set us? You know, you got out of the MAX. So on narrowbodies, I mean, do you still have a good portion of any legacy content on the MAX right now? Are we just more focused on the NEO at this point and, you know, Outside of, I mean, obviously, the wide bodies, presumably just 8.7 has the real outsized exposure and 8.350?

Yeah, I mean, just to throw a few numbers out there, I mean, on the Boeing 737 MAX, we still have 75K per ship set. So even though we walked away from that build to print business last year, you know, we are still benefiting from And what we expect to see is a ramp here in the back half of the year. We're producing in line with Boeing, and their plans are to ramp to 31 per month by early 2022. So we'll definitely see some pickup here in the back half of the year on narrowbody. On the 787 program, we do 500K per ship set. Yes, there's been some temporary delays in what I would say in that program, but it's not material to our overall business. We expect that they're going to pick that back up here in the second half of the year. On the full year, we're expecting commercial air to be relatively flat. Some headwinds here at the beginning of the year relative to wide body, but we expect a ramp up in narrow body that's going to more than offset that as we get deeper into the year. Got it. Thanks for the call, guys.

Yep. Thanks, Mike.

Thank you. And as a reminder, to ask a question, you will need to press star 1 on your telephone. Our next question comes from the line of Peter Armit with Baird.

Yeah, good morning, Lynn, Chris, Jim. Chris, maybe just a clarification on you. So your defense electronics growth was down, you know, 6% in the quarter, and I guess it's down 1% here today. You kind of called out. the cadence a little bit, but just for modeling purposes. So are we expecting kind of a softer Q3 a little bit or just relative to what you just experienced and then a much stronger fourth quarter? Just a little color there would be helpful.

Yeah, we'll get a sequential ramp here in aerospace defense revenues Q2 to Q3 this year. So I should say, I'm sorry, defense electronics revenues in Q2 to Q3. But we will certainly have our strongest quarter in Q4, and it is typically our strongest quarter. So, yeah, we will see continued improvement here in the back half of the year. Q4 will be our strongest. I think, you know, in our script here, we talked a little bit about the soft guide on Q3, and as you look at, you know, flat EPS year over year, Q3 to Q3. Yeah, I think most of that is associated with what we're facing here in this temporary timing issue in defense electronics.

Okay, and then just on incrementals, I mean, obviously very strong in aero-industrial, as you would expect, just kind of snapping back, and a little softer in defense electronics. How should we think about that as that just progresses through the year? Similar? Similar.

Yeah, I mean, you know, we do 25 to, you know, 30% incremental margins. I think that's a fair way to look at it as you go throughout the year. I mean, certainly, you know, we're starting to get some good traction here on, you know, our operational excellence initiatives, you know, as we've seen some good things out of the gate. We got a slight benefit here in Q2 and a few places associated with that, but that'll continue on deeper into the full year. I think we're expecting to see some of the minor supply chain issues that we faced earlier this year. I mean, we talked a little bit about some very, you know, I'll call it immaterial impacts to, you know, freight and expediting costs to kind of get around some of that. And we'll see some pickup in the back half of the year as we get ahead of that. And, you know, just great overall absorption. I mean, you know, particularly when you look at that aerospace and industrial group from last year in Q2, if you recall, we actually had to shut down a couple of Mexico facilities for a few months there. So, when you look at that 800 basis points of expansion year over year, I mean, it's really just a strong ramp in revenues and what we're seeing. And, you know, we expect good things out of that segment for the rest of the year. We just increased our guidance. to reflect the strong industrial vehicle order outlook, and there will be a lot of good sales volume and absorption coming through there.

I appreciate that. And then just as a follow-up on defense electronics in general, sometimes as budgets kind of flatten out or get a little softer, we hear about maybe potentially OEMs maybe not doing as much outsourcing or not going down that path. Maybe you could just kind of highlight that, how you think your business is positioned versus either your peers or just how that will operate in that environment. Thanks.

So I think something we talked a lot about during the investor day was this tri-service memo back in 2019 with the push for the MOSA and the SOSA outsourcing across all three branches of the defense industry. And I think we've been really working to put some press releases out to highlight where we have invested. We started back in 2019 on a product offering to support that. And We think that our product positioning with that and the push towards outsourcing, towards MOSA, puts us in a great position that we will continue to grow better than the defense budget during the foreseeable future, that we've made the right investments and we spend our R&D very carefully, very strategically, with a very keen eye to a return on investment and looking at the programs that will be available to us with investing in the right products. And so we believe that push towards outsourcing gives us opportunities for growth. And then I look at things like Paxar being positioned where they're positioned, and it's the beginning of this really 10-year journey to modernize the battlefield, the investments we've made in encryption. It's early days with the denied GPS product offering, but that is an area that continues to be a focus across the Army and some of the other services too, quite frankly, that there's similar technologies in the aerospace area that we're being able to read that technology across to delivering that same capability. So there's a lot of reasons that we do feel very strongly about our ability to continue to outpace the defense budgets.

Thanks so much. Appreciate all the details, Lynn.

Thank you. Thank you.

Thank you. I'm sure no further questions. So with that, I'll turn the call back over to President and Chief Executive Officer Lynn Bamford for any closing remarks.

I will simply say thank you for joining us today, and we look forward to speaking with you again during our third quarter earnings conference call, and have a great day.

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