Curtiss-Wright Corporation

Thank you for standing by. Welcome to the Curtis Wright Third 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. And 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, Investor Relations. Please go ahead.

Thank you, Lori, and good morning, everyone. Welcome to Curtis Wright's third 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 Barker. 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 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-gap view that excludes certain costs in order to provide greater transparency and to certify ongoing operating and financial performance. Also note that both our adjusted results and full year guidance include our build-to-print actuation product line that supported the 737 MAX program, as well as our German valve business, which was classified as held for sale in the fourth quarter of 2020. 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, impairment of assets held for sale, foreign currency translation, acquisitions, and divestitures, unless otherwise known. 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 third 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 third quarter highlights, we experienced a strong 12% increase in overall sales, of which 4% was organic. Our A&D markets improved 15%, reflecting solid growth in commercial aerospace, naval defense, and yet another quarter of strong performance from our PACSAR acquisition. Having just completed its first year under Curtis Wright's ownership, I'm pleased to report that PACSTAR is executing very well and its integration remains on track. The business is well positioned for continued strong top-line growth and is closely aligned with the Army's top modernization priorities. Turning to our commercial markets, we experienced strong year-over-year growth, which was led by both our industrial vehicle and process markets, as these industries continue to sharply rebound. Looking at our profitability, adjusted operating income improved 12% with adjusted operating margin strong at 17.5%, reflecting higher sales and operating income across all our segments, as well as the benefits of our operational excellence initiative. It's important to note that this strong performance was achieved while we continued to invest strategically with a $4 million incremental investment in research and development in as compared to the prior year. As a result, we are on track to invest $12 million in incremental RMD this year to support our future organic growth initiative. Adjusted diluted EPS was $1.88 in the third quarter, which was slightly above our expectations due to the strong operational performance and the benefits of our consistent share repurchase activity. Free cash flow was similarly strong, up 76% compared with the prior year, with strong free cash flow conversions that exceeded 125% and keeps us on track to achieve our long-term objectives. Turning to our third quarter orders, we achieved 13% growth and booked a bill exceeded one-time sales, driven by increases within each of our three segments. Digging a little deeper, we experienced solid growth of 7% in our A&D market orders, as well as a robust growth of 25% in our commercial market, providing continued support to our strong backlog. Next, I wanted to address the global supply chain disruption on our business. Overall, I am really proud of the team's strong execution in light of this challenging supply chain environment. As we expected and as we indicated last quarter, our operations continue to be faced with some supply chain disruptions caused by both delays in container shipments and shortages in electronic components, principally impacting sales within our ANI and defense electronic segments. Thus far, these disruptions have been immaterial to our full year 2021 results, essentially limited to timing rather than lost revenues, based upon the team's untiring efforts to mitigate these impacts to sales and to preserve our profitability. We continue to aggressively manage the timing of products within our supply chain and remain encouraged by our strong backlog. As we move forward, this remains a watch item for us, and should we encounter further revenue push-outs, we anticipate offsetting any delays through the strength of our combined portfolio. I'd also like to address our press release from mid-September, where we announced the Board's support for a substantial increase in our share repurchase authorization from $150 million up to $550 million. We immediately and opportunistically began to repurchase $200 million of our stock in mid-September. I'm pleased to report that we recently completed this program and bought back more than 1.5 million shares. We are on track to complete at least $250 million of share repurchases in 2021, and we remain well positioned for the continued return of capital to our shareholders going forward with $350 million of remaining authorization. Finally, turning to our full year 2021 adjusted guidance. While we maintained our outlook for sales, operating income, margin, and free cash flow, we tightened and raised the bottom end of our adjusted EPS guidance range. We now expect to achieve between $7.20 and $7.35, essentially double-digit growth compared with the prior year, based on our strong year-to-date performance and the benefit of our repurchase activity. We remain very much on track 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 third quarter performance and our outlook for 2021. Chris?

Thank you, Lynn, and good morning, everyone. I'll begin with the key drivers of our third quarter results, where we again delivered another strong financial performance with higher sales and operating income in all three segments. Starting in the aerospace and industrial segment, sales increased 14% in the third quarter, led by strong increases in demand, for our products and services in both commercial aerospace and general industrial markets. Within the segment's commercial aerospace market, sales increased more than 20% year over year as we experienced improved OEM demand on narrowbody aircraft, as well as a solid increase in aftermarket sales. We also experienced higher sales for our industrial vehicle products, including both on and off highway, which continue to benefit from improved demand and strong order activity. Turning to the segment's profitability, adjusted operating income increased 34%, while adjusted operating margin increased 240 basis points to 15.7%. Our results reflect favorable absorption on strong sales and the savings generated by our prior year restructuring actions. In the defense electronics segment, revenues increased 22% in the third quarter, principally reflecting the contribution from our PACSTAR acquisition. Lower organic sales reflected timing on various C5ISR programs in aerospace defense as we experienced a shift of about $10 to $15 million in lower margin system sales into the fourth quarter, which was mainly due to the global shortage in electronic components. This segment's third quarter operating margin reflected favorable mix for our higher margin embedded computing revenues, which was more than offset by $4 million in incremental R&D investments and about $1 million in unfavorable FX. In absent these two unfavorable impacts, this segment's third quarter 2021 operating margin would have been in line with the prior year's strong performance. Next, in the naval and power segment, revenues increased 3% in the third quarter, led by higher sales of naval nuclear propulsion equipment and higher valve sales to process markets where we continue to experience strong demand. This segment's adjusted operating income increased 4%, while adjusted operating margin increased 20 basis points to 18.6%, reflecting favorable absorption on sales and approximately $2 million in restructuring savings. It's also worth noting that we achieved higher profitability in this segment, despite the wind-down on the CAP 1000 program in our commercial power market. To sum up the third quarter results, overall both sales and adjusted operating income increased 12%, And across Curtis Wright, we drove 10 basis points of year-over-year margin expansion while adding $4 million in incremental R&D investments, which represents a 70 basis point headwind on our overall profitability. 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 organics. And while our sales guidance remains unchanged, I wanted to briefly highlight some specific dynamics within a few markets. Starting in naval defense, our guidance remains unchanged at flat top 2%, and we continue to see strong order activity for our nuclear propulsion equipment on critical naval platforms. For example, as noted in our September press release, Curtis Wright was awarded contracts valued at approximately $100 million to provide pumps for the U.S. Navy's Virginia-class submarine, Columbia-class submarine, and Ford-class aircraft carrier programs. These awards not only support our outlook for overall aerospace and defense market sales growth in 2021, but also provide long-term visibility and stability for our naval defense market revenues. Next, a few comments about our commercial markets, where overall sales growth remains unchanged at 6% to 8%. In the process market, we continue to see a solid rebound in MRO activity for our industrial valve businesses, principally, oil and gas customers. In the general industrial market, based upon strong year-to-date growth in orders for industrial vehicle products, we are now on track to return to 2019 levels in this market by the end of 2021. This is one year ahead of what we communicated at our May Investor Day where we previously expected to reach those levels in 2022. Continuing with our full-year outlook, we are reaffirming our sales, operating income, and operating margin guidance. We expect adjusted operating income growth of 9% to 12% and adjusted operating margin growth of 40% to 50% basis points to a range of 16.7% to 16.8%. Diving deeper, I'd like to share a few specific reminders of auto segment guidance. I'll begin in the aerospace and industrial segment, where we're expecting operating income to grow 17% to 21%, while operating margin is projected to increase 180 to 200 basis points, keeping us on track to exceed 2019 profitability levels this year. Next, in the defense electronics segment, we're maintaining our outlook for solid growth in sales and operating income despite the challenges that we've encountered in the supply chain. As we noted earlier, we experienced a $10 to $15 million shift in revenue from the third into the fourth quarter based upon the timing and receipt of electronic components. We expect these delays to continue and now expect to finish the year closer to the lower end of this segment's guidance range for sales. It is, however, a very dynamic issue, and we're working aggressively to mitigate the impact on our business as we look to close out the year. Regarding this segment's profitability, it's important to note that we are maintaining our outlook for operating income despite the revenue timing issues and our $8 million year-over-year increase in strategic investments in RMD. Lastly, 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 despite the wind down on the Cap 1000 program. Continuing with our financial outlook, where we increased the bottom end of our full year 2021 adjusted diluted EPS guidance to a new range of $7.20 to $7.35, which reflects growth of 9% to 12% in line with our growth in operating income. Our updated guidance reflects both a lower share count, stemming from our ongoing share repurchase activity, as well as a slightly lower interest expense where we continue to maintain sufficient capacity under our revolver for continued share repurchase, acquisitions, and operational investments. And lastly, Based on strong year-to-date free cash flow generation of $128 million, we remain on track to achieve our full-year free cash flow guidance of $330 to $360 million. And now I'd like to turn the call back over to Lynn for some closing remarks. Lynn?

Thank you, Chris. I'd like to recap some of the key takeaways of our 2021 guidance, where despite some caution as it pertains to the ongoing supply chain issues, we are well positioned to drive strong results for this year. Led by high single-digit revenue growth, including the contribution from last year's PACSTAR acquisition, we expect to generate 9% to 12% growth in both operating income and diluted EPS this year. Our 2021 operating margin guidance of 16.7% to 16.8% reflects our solid execution and ongoing focus on operational excellence. We expect to achieve those results while investing an additional $12 million or 40 basis points in strategic R&D to facilitate future organic growth. In addition, our adjusted free cash flow remains strong, and we are on track to achieve our ninth consecutive year of greater than 100% free cash flow conversion. We also continue to maintain a strong and healthy balance sheet, and remain committed to deploying disciplined and balanced capital allocations to support our pivot to growth. We are focused on investing our capital for the best possible return to drive long-term shareholder value. And in the case of our recent share repurchase announcement, we took advantage of opportunities to ramp up our activities in this area. Meanwhile, acquisitions have been and will continue to remain the highest priority for Curtis Wright. With a full pipeline of opportunities, I remain ever confident that we will effectively deploy our capital to strategically and profitably grow our business for the long term. In summary, Curtis Raids is performing well, and we remain on track to deliver strong, profitable growth in 2021, driven by our diversification and the strength of our combined portfolio. Our defense backlog remains strong. particularly in naval defense, and our commercial orders have been very resilient, reflecting book-to-bill of 1.1 times sales year-to-date. We continue to demonstrate the highest levels of agility in response to the dynamic changes taking place in our end markets. Altogether, this affords us the opportunity to remain on track to achieve our long-term guidance communicated at our May Investor Day. At this time, I would like to open up Dave's conference call for questions.

And as a reminder, to ask a question, you will need to press star 1 on your telephone. And our first question is from Peter Arment of Baird. Your line is open.

Yes. Good morning, Lynn, Chris, everyone. Nice results. Thank you. Lynn, maybe you could just talk a little bit about the supply chain risks. I mean, you guys have done a very good job, I think, of mitigating. Is it just, you know, your dual sourcing or some of the DPAS ratings that you've talked about in the past? Maybe talk about some of the bigger levers and then how you're kind of working that going forward. Thanks.

Yeah, it's clearly a topic that's top of mind, and thank you, Peter, for the question. It is very real, and it continues to be a headwind towards us that we're working to overcome. You saw that we stated we had some revenues pushed from Q3 into Q4, around $10 to $15 million in our defense electronics segment due to, you know, the supply chain pressures. So it's an area that we have a lot of people focused on and are doing everything we can. You know, we're fighting the, you know, that's probably the biggest and most notable area where we're feeling it, but also in the container shipments. You know, we're fighting... the freight costs in transit times, and we're also beginning to fight some deallocation in the chips area where, you know, we've been promised certain levels, and when the shipments arrive, we've received less chips than we have. And so that's sort of a, you know, as you can imagine, that's a very dynamic area. But we absolutely are doing the things you mentioned. We are working dual sourcing wherever it's, you know, capable. We're actually looking even in some of our areas. We have some recent activity where we're looking – to change out processor chips and move to different processor chips and things, and that along those lines, there's less pressure on the supply chain. So the teams are really being creative, and I'm proud of them for that. You know, the DPAS ratings is another important area, and we're really, you know, working the executive relationships to try and, you know, make sure it's visible, the impact of us receiving products on both our national security or mobility products, you know, really critical things to, people around the world. And so the team's doing a great job. I said that in my prepared remarks, but it's really impressive to see the creativity that the teams are applying to try and overdo this. And hopefully we'll see an end of this sometime in the next calendar year and get back to more normal. And I guess the only other comment I would make is we're chasing Q4. you know, still working issues associated with it, but, you know, planning well further out into 22 and really managing our supply chain needs well into 22 and even somewhat beyond in a manner that we would not have historically done. So we're adjusting our practices to really do the best we can to stay on top of it.

And just as a follow-up, another risk area that, you know, a lot of people have been asking about is regarding, you know, impacts of a continuing resolution measure. you know, it's obviously been a continuing resolution that's gone on for quite a number of years and you've had to manage that. But, you know, maybe you could just remind us how that impacts you and just maybe high-level thoughts about how you think about your defense portfolio growing next year. Thanks again.

Sure. Thank you, Peter. So it's disappointing to see us repeating this pattern, honestly, staying in the continuing resolution. It's not healthy for the country. It's not healthy for our national defenses. It obviously blocks the start of any new programs, and the world's a dynamic place, and that's not how we should be managing our country. You know, we're insulated to some degree to a continuing resolution as, you know, we're not selling so much directly to the government but into the primes, and they're trying to keep things moving along. So, you know, we can absorb some amount of continuing resolution and not feel the impact immediately, but, obviously all things work through the supply chain system, and so eventually it does impact us. We know that we are aligned with top priorities in the defense budget. We're pleased with that. They have positive funding in what was proposed by the president's budget. We have the markups that went through the House and the Senate provided good upside for Kurdish rights, so I believe they're going to get it passed, and it's you know, just a matter of time. And so that will, you know, be good for us. I mean, I think we feel really good that the bipartisan support for the Navy continues to be strong, the belief in shipbuilding. I mean, we really feel like we have aligned ourselves along the top priorities that, you know, does have bipartisan support. So ultimately, as it passes, I think we'll be in good shape.

And our next question is from Michael Charmoli of TruList Securities. Your line is open.

Hey, good morning, guys. Nice results, and thanks for taking the question here. Can we just stay on defense? I guess, you know, organic growth down, you know, two quarters in a row, and I guess, you know, some of that organic pressure due to the slide outs, but Maybe can you speak to, you know, the performance of, you know, some of the acquisitions? I mean, are they seeing some of the same challenges? And I guess, you know, you were touching on the continuing resolution. That's going to create some pressure here. But, you know, most of your customers have tempered their growth expectations next year. Should we kind of calibrate ourselves for a little bit more of a challenged, you know, defense environment here over the next couple quarters?

I think we still feel good about the guidance we put forward in Investor Day. You know, it is – there's a bit of uncertainty out there. I think most of the tempering has really been around supply chain and delays. That's what we are seeing so far is we're not seeing – it's really delays of revenue, not business going away. I mean, obviously, Lockheed Martin has changed their F-35 outlook, and, you know, we have content on the F-35. So that's something that might be a mild headwind for us going forward, but it's a pretty minor portion of our overall revenues, 2% to 3%. So that's one area that, you know, we've seen something put out that, you know, we have to go again. But I think we have a lot more tailwinds than we have headwinds with you know, our naval positions, the defense electronics positions, our investments in MOSA, and how we're, you know, capturing new business around there. And, you know, really the PACCAR acquisition continues just to have, you know, great feedback from their end customer and great support within the budget. So, you know, other than the F-35, that's really the only, you know, notable program headwind that we see. The others are pretty good. So... We feel good about the guidance that's been forward. And just to comment on the acquisition. Sorry, just real quick. I mean, we're pleased with the performance of our acquisitions. And, you know, they obviously are subject to the overall defense budget, but they're all doing well. And, you know, we just reported out a couple months ago to the board on the performance of our acquisitions, and it was pretty much a green light across the board. So... Got it. Got it.

And then just totally shifting gears to power, you kind of called out the CAP-1000 in your prepared remarks. Anything, just trying to get a sense of what we should be thinking. Obviously, you guys don't have anything modeled in on a go-forward basis. There's been, you know, chatter out there and reports about Ukraine being interested in the AP-1000, other countries, you know. What else are you seeing, hearing, preparing for? And, you know, just how should we think about if no orders come through, you know, any of the capacity you have in your facilities there outside of Pittsburgh? Can they easily get repurposed if, you know, we don't see too much AP1000 activity?

We're definitely, you know, it's a dynamic issue and we're working it, but we believe we are managing the capacity and the load to be able to, you know, go through this period where we, you know, as we wind down the AP1000 program, that we're very much balancing towards that without the anticipation of an order coming as we wind that down. If one would come, we very much have plans set up to be able to assure that we're capable of scaling up with that. I mean, it doesn't The labor load comes a bit after the order. You start with the material orders and such, and so we have time to adjust our workforce and believe that, you know, the workforce up in that area, that there are people and that we will be able to achieve it. I mean, it's – I have to say it's been, you know, it's exciting times. You know, it's not – as you stated, it's not in our anticipation, but, you know, hearing things going on between – Ukraine, I mean, there was an announcement yesterday about NuScale and Bulgaria signing an agreement. Obviously, NuScale's, you know, the one of the next generation reactors where we've talked about our content on. So that's great to hear about, you know, the potential build-outs of it elsewhere. And just, you know, I think, you know, even with the COP26 summit, you know, just the realization from a lot of the reports that came out of this that, you know, nuclear will be part of the carbon-free solution. And so You know, after some years of not much support, sentiment is definitely shifting, and I think the dollars will flow, you know, in this decade. You know, whether it's 22 or 23 or 24, I mean, I don't know, but I, you know, it's closer than I think we felt it would be for a lot of years, so. Okay.

Okay, perfect. Great. Thanks. I'll jump back in, too.

And our next question is from Nathan Jones of Stiefel. Your line is open.

Good morning, everyone. Good morning, Nathan. Let's start with a question on the share repurchase. Executed a couple hundred million here in the second half of 2021. Is the plan to go back to more just offsetting dilution, or do you have designs on utilizing some more of that authorization here in the short term?

So, you know, it is, you know, I think what we've said most consistently is we are really committed to deploying our capital to provide value to our shareholders. And having not put an acquisition on the board so far, we had capital available and decided to move forward. We have $350 million of open authorization, and we'll make decisions with it as acquisitions come into clearer light. I mean, that is undoubtedly our highest priority here. but we're going to make our capital work to provide value to our shareholders. So with that, maybe I'll let Chris make a few comments on kind of the landscape.

Yeah, I would only add, Lynn, that, you know, we have a very strong balance sheet, and we're excited about what we can do with that to support our capital allocation strategy. And we think that share buyback is the most effective way to return capital to shareholders. And, you know, over the last five years, it's been $130 million. Last year during the pandemic, it was $200 million. And we also, you know, did the PacStar acquisition. And this year, we're on track to $250 million. I think we like where we're positioned. I think that we feel we have opportunity. And, you know, the only other thing I might add is that the recent investor day, when we set those minimum financial targets out there, you'll notice that we set 5% minimum sales character. and that we said that there would be a 10% EPS kegger. So absent any further acquisitions, you can kind of quickly do the math and see that you need to return capital to shareholders through share or purchase to hit that 10% EPS kegger. So, you know, we're excited about it. We feel that, you know, it's a great time to buy Curtis Wright stock given, you know, the position of our multiple and where we are relative to our peers and our pivot to growth strategy. So we remain committed.

Does the repurchase say anything about the actionability of the M&A pipeline in the short term, or are they kind of separate issues?

No, it really does not signal anything about, you know, where we sit with M&A. Chris and I work very closely to model scenarios and our ability to, you know, drive acquisitions, and we still very much have a lot of dry powder projects. and are able to move on acquisitions as they become available. We've planned for that to be in coincidence with the purchase buyback that we have done so far.

And then just one follow-up on a comment you made about the budget markups being positive for Curtis Wright. Could you give us a little more detail on what some of those budget markups were that you believe are positive for Curtis Wright?

Sure. I think the two that are the most notable is a potential for a third Virginia class and another DDG 51 are both a part of the markups. And then additional support within the Army for network modernization, which already had really great support in the primary budget that was put forward by the President, but even some further potential increases from it.

Thanks for the call. I'll talk to Dr.

Thank you.

And again, if you have any question, please press star one. And we have a question from Miles Walton of UBS. Your line is open.

Hey, good morning. You've got Lou Fedawan for Miles. Hello. Hey, so as we think about the $12 million of incremental R&D spending this year, I guess how do we think about that going into 2022? Do we stay at this elevated level or do we step back? somewhere in between?

Yeah, that's a question we're asked a lot, and we really have not given guidance of R&D spend going for the forward years, and there's a couple reasons for that. One is of our total engineering spend, about half is IRAD and about half is customer funded. So we're always kind of ebbing and tying as we go through the balance of where we see, you know, putting our engineers to work on customer-funded programs, having the best return for Curtis Wright versus our ideas to spend on IRAD. And so it's a tradeoff in that, you know, between those. And we really look to make those investments really based on the best use of our spend to, you know, to drive long-term growth. And so not, you know, putting a fixed amount and saying we'll just let ourselves spend up to that, but really vetting each problem as the return on investment to the organization, some short-term, some long-term, some, you know, incremental investments to extend product families, some swings for the fence, as the saying goes, and really make those decisions as the projects come available. So, you know, I'm a big believer in spending R&D. I think it's important. And so, you know, I look for us to continue, you know, being willing to spend R&D and, you know, taking those steps to grow the company long term. So I would say, you know, it's likely, but, you know, we're not putting forth any, you know, specific levels.

And I would only add that we are, you know, committed to achieve 17% operating margin this next year. So that is a big focus of ours. But we are also working our operational excellence initiatives across the organization to continue to free up monies for investments. So we'll be able to provide more color on that in February. Okay, great.

Thank you. And just a couple other quick follow-ups. Is there any update on the asset sell for sale for the one business, I guess, that's been out there now for about a year? Does that indicate any lack of interest or anything like that we need to be mindful of?

No, I think we're moving along in that process pretty well. And, yeah, I'm not going to go into the specifics on the sale and exactly where we are, but I think we're well positioned to move on from that property in the near term. Okay, great. Thank you.

And then just last one. Page or slide 11 in the deck, I think it's the third quarter, it lays out the end market sales growth. It has 4% organic growth for A&D. And then 5% organic growth for commercial markets. But I thought organic growth was only up 1% for the quarter. So what am I missing?

Well, I think, you know, as you take a look at our sales growth, you know, Q3 year over year, you know, the biggest contributor to the growth was obviously within aerospace and industrial markets. You know, and the strength of that market was really driven by what we're seeing in industrial vehicles and then also commercial airspace for the quarter. The second, you know, biggest, I would say, organic mover was within Naval Empower, and that was really based upon, you know, the strength and what we saw year-over-year in Naval Defense, particularly the Virginia-class submarine. Looking at defense electronics, while, you know, we were up substantially year-over-year, you know, the majority of that contribution was from TACSTAR. We were slightly down organically, you know, roughly $5 million year over year, but that was really related to the timing of the pushout into the fourth quarter, you know, due to the availability of electronic components.

All right, so the 4% organic growth isn't really organic growth then for the aerospace defense market, as sort of indicated on that slide.

No, I think, you know, I think on the full year, we're still holding all of our assumptions in our guidance range. I think as we look at that, we would say that, you know, while we were at, you know, while we're anticipating that we're going to be at four to six on the full year, it's, you know, probably going to be a little bit more towards the lower end of the range, you know, given some of the, you know, the timing issues that we've indicated within defense electronics. But, you know, we expect to be within all those ranges.

Okay. I guess I just, I thought that was specific to the third quarter, but not a problem. Thank you.

And we have a question from Peter Arment of Baird. Your line is open.

Just a quick question, Lynn. In the power and process area, you talked about, you know, strong growth in valves, you know, to the process market. What kind of visibility do you have there? And maybe just remind us, you know, what you're seeing there in general, what the outlook, how sustainable it is.

Thanks. Okay. Yeah, thank you. It's an area of the business we don't, You usually get as many questions about, so it's nice to have, you know, talk about it. So we definitely continue to see growth opportunities, you know, for our severe service applications. And, you know, the forecast is that the process markets will go mid to high single digits with full recovery in 2023. So, you know, our visibility, it's a fairly short-term business. So, you know, we really look to market trends to, you know, anticipate where we're going. And, you know, we've tracked well with where the market outlook is, so we feel good about, you know, tracking that, you know, with full recovery in 2023. We've definitely seen favorable trends in 2021 as the industry increases MRO work, which is the largest portion of our sales, and is generally tied to GDP growth. You know, we did have one CapEx project, you know, back in the last quarter push into 2022. So, you know, there are some mixed bags, but we do see full recovery from the pandemic.

Appreciate the call. Thanks, Lynn. Thank you, Peter.

And we have a question from Michael Charmoli of Truist Securities. Your line is open.

Hey, thanks, guys, for taking the follow-up. Just another end market I wanted to ask about. Within industrial markets, You know, what are the trends you're seeing in the surface treatment side of the business, you know, and maybe any color on where that is in relation to pre-pandemic and, you know, kind of what you're seeing, you know, with your various customers in different geographies there?

Yeah, so just touching specifically upon, you know, the surface technologies business, Mike, which is really more of a short cycle business. You know, we've talked about that in the past as being the, We'll say the bellwether, certainly in times of economic recession, it will be the first to drop, but in periods of improvement, it will be one of the last ones to recover because those orders have to come in on the long cycle businesses soon. Since the lows of Q2 this last year, we've seen a steady improvement within that business quarter over quarter. The orders continue to support that outlook for steady sequential growth. Initially, I would say that most of that recovery was based upon what we're seeing on the industrial side of the business, the industrial vehicles, automation and services, And the growth rate there has been pretty good. But, you know, we started off this year a little bit down in commercial aerospace, you know, mainly due to wide body. But we are seeing that pick up. And, you know, even within that business, you know, commercial aerospace orders continue to grow. It's not at the same rate as our long cycle businesses, but it does provide us with optimism that we are on the right trajectory in the short cycles. Got it. Got it. Helpful. Thanks, guys.

Thanks, Blake.

And there are no further questions at this time. I will now turn the call over back to Lynn Bamford, President and Chief Executive Officer, for closing remarks.

Thank you. Thank you all for joining us today. We look forward to speaking with you again during our fourth quarter earnings conference call, and have a great day.

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