Q2 2022 Curtiss-Wright Corp Earnings Call

August 4, 2022

Welcome to the Curtiss Wright second quarter 2022 financial results Conference call. My name is Daryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press zero one on.

Your touchtone phone.

A reminder, this conference is being recorded I will now turn the call over to Jim Ryan Vice President Investor Relations. Jim. Please proceed.

Thank you Daryl and good morning, everyone welcome to Curtiss Wright's second quarter 2022 earnings Conference call. Joining me on the call today, our chair and Chief Executive Officer, Lynn Bamford, and Vice President and Chief Financial Officer, Chris Partners. Our call today is being webcast and the press release as well as a copy of today's financial presentation.

Available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright Dot 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 1095.

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 Curtiss Wright's ongoing operating and financial performance and.

Any references to organic growth on an adjusted basis and exclude foreign currency translation acquisitions and divestitures unless otherwise noted.

GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website now I would like to turn the call over to lend to get things started.

Thank you Jim and good morning, everyone I'll begin our remarks by covering the key highlights of our second quarter 2022 performance and some recent events that are influencing our business then I'll turn the call over to Chris to provide a more detailed review of our financial results and updates to our 2022 guidance finally, I'll wrap up.

Our prepared remarks before we move to Q&A.

Starting with our second quarter 2022 performance overall sales of $609 million was in line with our expectations for high single digit sequential growth.

Our results highlighted the strength of our combined portfolio driven by strong demand within our commercial aerospace nuclear aftermarket process and industrial end markets outside of those areas. Our performance was once again impacted by the timing of revenues in our defense markets, particularly for defense electronics due to the.

Ongoing global supply chain disruption.

Regarding our second quarter operational performance. The team has done a commendable job of mitigating the supply chain challenges and combating rising inflation and pricing pressures to ensure that we remain on a path to provide long term profitable growth, we demonstrated solid operating margin expansion in the second quarter mainly.

Driven by a better than anticipated mix enable empower and continued operational excellence.

On that performance adjusted diluted EPS increased 18% to $1 83 and exceeded our expectations.

New orders were strong up 13% year over year, reflecting increases in naval defense and commercial aerospace within our A&P markets and in nuclear and process within our commercial markets book to Bill was 127 times in the second quarter building upon our already strong backlog, which is now up nine.

Percent year to date.

This backlog provides additional comfort and visibility as we manage through the ongoing supply chain constraints, which are likely to continue into 2023.

Next I'd like to provide a few updates on some recent events first on the financing front. We have made recent news that provide this greater efficiency and flexibility in capital allocation in May we announced a new and expanded revolving credit facility and this past week, we priced $300 million in senior notes.

To reinforce our strong and healthy balance sheet.

These actions strengthen our ability to execute on our pivot to growth strategy Chris.

Chris will provide additional color later on in the call.

We're also excited to announce that on June 30, we completed the acquisition of Fat brand aerospace addressing systems business or.

Which is a leading supplier of fixed wing military aircraft arresting system in 2021, FAA generated approximately $70 million in sales and we are projecting that it will contribute approximately $40 million in the second half of 2022.

As a reminder, 25% of its sales are based in the U S with 75% and rest of world.

In addition, SaaS revenues are fairly evenly split between OEM and aftermarket business, providing a steady recurring stream of revenue for its strong global installed base of more than 5000 systems worldwide. We believe this is an exceptional strategic and financial fit and we expect this busy.

To align with our long term organic sales growth rate of 3% to 5% for the foreseeable future.

Further in addition to steady topline growth.

They support our corporate wide financial objective to achieve continued operating margin expansion and greater than 110% free cash flow conversion.

Next to our full year 2022, adjusted guidance, where we raised our sales operating income and diluted earnings per share were.

We are maintaining our outlook for organic growth of 3% to 5% driven by increases in the majority of our end markets and we now expect total sales growth of 4% to 6%, including the contribution from FAA.

As we'll discuss this morning, our updated guidance reflects higher sales and profitability within our Eni enable and power segments offset by a more conservative outlook within our defense electronic segment in the second half of the year.

I'd like to provide a couple of additional notes about timing of revenues in defense electronics as lead times and the availability of key electronic components continued to be delayed due to supply chain disruption. Additionally.

Additionally, following the signing of the FY 'twenty to Dod budget late in the first quarter. We saw an immediate acceleration in defense orders that were delayed by the continuing resolution. This activity continued early in the second quarter, providing greater optimism for a stronger second half recovery.

The speed of defense Electronics orders. However has since returned to a more normal cadence as our customers manage their inventory levels in response to the ongoing challenges in the supply chain.

Together this is impacting the timing of about $25 million in defense electronic revenues that have now pushed out of 2022.

As we have experienced historically and despite the push out we expect a strong increase across all our A&D markets. During the second half of the year and the continued solid growth of commercial markets.

Our operating income guidance has been increased to a new range of 5% to 7% growth and we are driving solid operating margin expansion, while continuing to invest in the business. We also remain on track to achieve double digit growth in diluted EPS and generate strong free cash flow in summary, we are well.

Positioned to deliver strong results in 2022, now I would like to turn the call over to Chris to provide a more thorough review of our second quarter 2022 performance and our outlook for the remainder of the year Chris.

Thank you and good morning, everyone.

Begin with the key drivers of our second quarter 2022 results by segment.

Starting in aerospace and industrial where we delivered another strong performance with sales and operating income increased eight 7% respectively.

Within the segments commercial aerospace market sales grew more than 20%, reflecting strong demand on both narrow body and wide body platforms.

On a related note, we recently announced that we won a significant award on the future Airbus <unk> hundred 50, <unk> aircraft to provide custom electric actuation technology for the main deck cargo door and also secured demonstrator technology on the Airbus <unk> program.

We have been stating that we've been working with Airbus to strengthen our relationship and content and we're really pleased to share. These first of a kind wins for our actuation technology with Airbus.

Within the segments industrial markets, our results principally reflected increased sales of industrial vehicle products, most notably serving off highway and specialty vehicle platforms.

Turning to the segments operating performance our results reflected favorable absorption on strong sales as well as the benefits of our operational excellence initiatives, which more than offset any supply chain and inflationary pressures on margin.

It's also worth noting that the segment's results included an incremental $1 million in R&D investments, where we to otherwise demonstrated 40 basis points and year over year operating margin expansion.

Next in defense electronics, our performance again reflected the timing is defense revenues based upon the supply chain challenges impacting the industry.

As a result, we experienced lower embedded computing revenues in aerospace defense supporting various fighter jet and helicopter programs as well as reduced sales in tactical communications equipment in ground defense.

Within the segments commercial aerospace market.

Order.

What's reflected.

Instrumentation sales.

In the second half of the year.

So the statement.

Our second quarter results.

A&D revenues, which we expect.

It is based on increased volumes.

Yeah.

Next to enable and power segment, our results reflected lower enabled defense revenues, mainly due to the timing of production on the CDN 80 aircraft carrier and Virginia class submarine programs.

It was offset those impacts were offset by higher CDN 81 carrier and Columbia class submarine revenues as these two programs continue to ramp up.

And the power and process market, our results reflected double digit sales growth in both nuclear aftermarket and process, where we continue to experience very strong demand.

And these increases more than offset the wind down of production on the cap 1000 program.

Regarding the segments profitability, we delivered 270 basis points and year over year margin expansion, reflecting improved mix and the enabled defense and process markets as well as the benefits of our operational excellence initiatives.

To sum up the second quarter results overall Curtiss Wright operating margin was slightly above expectations at 16, 1% up 50 basis points year over year and up 340 basis points sequentially.

Next turning to our full year 2022 guidance I'll begin on slide five with our end market sales outlook.

As Len mentioned earlier, our overall guidance now reflects a $40 million contribution from the acquisition and we now expect total Curtiss Wright sales growth of 4% to 6%.

We continue to expect organic sales growth of 3% to 5% unchanged from our prior guide so we updated the growth rates in several of our end markets.

I'll begin in our A&D markets.

In Aerospace defense, we now expect sales growth of 9% to 11%, which principally reflects the contribution from the <unk> acquisition.

In addition, we now expect a more favorable outlook for our actuation sales within the Ani's segment, and a slightly lower but positive growth rate within the defense electronics segment.

Turning to ground defense, our tactical communications equipment remains a high priority for the U S Army to support its modernization efforts. However, the business is sensitive to both ongoing supply chain delays in funding delays caused by the continuing resolution and our update updated guidance reflects a push in sales out of 2022.

As a result, and despite a strong second half forecast, we now project our ground defense market to be slightly down on the year before recovering in 2023.

Wrapping up our A&D sales our guidance remains unchanged in both naval defense and commercial aerospace, though it's worth noting that both of these end markets continue to experience very strong order activity, which bodes well for our performance in 2022 and long term outlook.

Outside of our A&D markets, we raised our growth outlook for the power and process market to a new range of 4% to 6% based on our strong year to date performance and increased demand for both our nuclear aftermarket and industrial valve products.

As a result, we've raised our growth outlook for our overall commercial markets to a new range of 5% to 7%.

Continuing with our outlook by segment on slide six I'll begin in aerospace and industrial where we continue to project strong growth in both commercial aerospace and general industrial market sales.

Our updated topline guidance now reflects growth of 6% to 8% due to improved demand within our aerospace defense market supporting the F 35 fighter jet and higher electromechanical actuation sales in ground defense.

The segment's operating performance continues to reflect strong growth in operating income and margin driven by improved sales and the benefits of our operational excellence initiatives.

Next in the defense Electronics segment, we have revised our current year sales growth expectations to reflect the supply chain challenges impacting our aerospace and ground defense markets.

Despite a growing backlog, we now expect overall segment sales to be flat year over year.

And as a result, we lowered our guidance for operating income to reflect reduced sales volumes. However, we raised our margin assumption slightly for lower R&D spending.

Regarding the R&D spending it's important to note that we shifted $2 million to development contracts as we were able to secure an increase in customer funded programs.

We view this reimbursement is a positive development and it's important to note that this segment continues to receive the highest levels of annual investment to ensure that we remain aligned to the dod's top priorities, including cyber encryption and hypersonic to name just a few.

Lastly, in the enabling power segment, we now expect strong sales growth of 7% to 8% of which 3% to 4% is organic.

This increase was driven by an improved order book underlying our power and process markets and the contribution from the <unk> acquisition.

Full year segment operating income is now projected to grow 6% to 8% while segment operating margin remains a strong 18% to 18, 2%.

I would note that while let's say increases our operating income guidance. It will be dilutive to overall Curtiss Wright margin in year, one and particularly during the first six months of integration as is typical for a new acquisition.

So to summarize our outlook, we expect total Curtiss Wright operating income to now grow 5% to 7% overall on a 4% to 6% increase in sales.

We continue to expect operating margin to improve 10 to 30 basis points, ranging from 17, 1% to 17, 3%, including a $6 million increase in R&D investments the cap 1000, wind-down headwinds and first year margin dilution on the USAA acquisition.

Continuing with our financial outlook on slide seven we raised our full year 2022, adjusted diluted EPS guidance by a nickel to a new range of $8 10, $8 30, which represents 10% to 13% growth year over year.

Our updated EPS guidance reflects both higher organic operating income and some accretion from FAA, partially offset by a $4 million increase in interest expense due to higher rates use of our revolver for the USAA transaction, and some new financing, which I'll address shortly.

Overall im pleased to say that our updated 2022 outlook aligns with our May 2021, Investor day projections for continued profitable growth as we expected to deliver operating income growth in excess of sales growth, while also generating double digit EPS growth.

To aid in your quarterly modeling and based on the timing of defense sales, including SAA. We now expect third quarter sales to grow by mid to high single digits sequentially compared with the second quarter 2022, adjusted results and diluted EPS to grow by high single digit sequentially, followed by a very strong fourth quarter performance.

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Turning to our full year free cash flow outlook, our guidance remains unchanged with a range of $345 million to $365 million, including a contribution from SA.

Thus far in 2022, the timing of revenues advanced payments on naval contracts and higher inventory levels have resulted in lower than expected first half free cash flow performance.

Looking forward to our expectations for a strong second half I wanted to provide some color on a few underlying drivers.

First we are expecting a strong second half ramp in revenues and this leads to both higher billings and collections and a substantial liquidation of inventory levels upon product shipment as we've seen historically.

Second we expect a significant amount of cash advances tied to the recent second quarter surge in naval orders.

And third we're expecting a large cash payment upon the final delivery of our cap 1000 reactor coolant pumps to China, which we expect in the fourth quarter.

This milestone would mark the completion of our contract production and the substantive conclusion of the seven year program with China.

Beyond this the management team is very focused on free cash flow generation, we're accelerating the frequency of collection calls and information flow and working capital and are aggressively working to mitigate any exposures on the full year.

We remain on track and expect to exceed our long term adjusted free cash flow conversion target of 110% again in 2022.

Next I'll expand on our recent financing actions that Lynn highlighted at the start of the call.

And although we have more than sufficient liquidity and our leverage ratios remain in line with a strong investment grade rating given the current interest rate environment. We've taken several steps to get ahead of further potential rate hikes.

In May of 2022, we amended and Upsized our revolver, we entered into a new five year agreement with a syndicate of financial institutions, increasing the size of our revolving credit facility by $250 million up to $750 million, while also expanding the accordion feature to $250 million both at very attractive.

Rates.

In July we took the opportunity to further strengthen our balance sheet by taking advantage of the current pricing in the private placement market.

On July 29th we circled $300 million.

Of note offering at competitive rates, consisting of $200 million and $4, 49% 10 year notes and $100 million and $4 six 4% 12 year notes.

We opted for a delayed draw feature for up to three months to provide us with some additional short term flexibility.

We intend to use the proceeds from these new notes in our Upsized revolving credit facility to support our balanced capital allocation strategy and internal growth initiatives and also as a reminder, we have $200 million in notes coming due in the first quarter of 2023.

Overall, we remain very pleased with the flexibility and conservative nature of our capital structure, which provides further confidence in our ability to drive strong financial performance and long term value for our shareholders.

Now I would like to turn the call back over to Linda to continue with our prepared remarks Glenn.

Thank you, Chris I'd like to take a few minutes to provide some perspective on what's driving the confidence in our second half projections and how we're positioned to deliver solid operational performance in 2022 and beyond the.

The Curtiss Wright team has continued to do an exceptional job in managing the business through challenging market conditions, while remaining focused on executing our pivot to growth strategy to maximize revenue and operating income growth.

In spite of recession fears and an uncertain macro backdrop, our guidance changes illustrate the agility of the business and our ability to react to market uncertainty capitalizing on the full market breadth of our portfolio the supply chain challenges, which are delaying defense market sales and our most profitable.

<unk> are being entirely offset by the strength in our commercial market recovery. This.

This sales rebalancing along with the benefits of our ongoing operational excellence programs continue to keep us on track to achieve our initial 2022 guidance in Investor day commitment prior to including any contributions from FAA.

This builds on our long track record of resiliency for Curtiss Wright and I would like to provide two examples that support our optimism.

Most recently during the pandemic year in 2020 and also looking further back into 2015, we were faced with macro market conditions that drove significant and rapid decline in sales with our companywide focus on operational excellence in both cases, we effectively mitigated the negative impact to total coverage.

Right operating margins.

The situation today is slightly different given the supply chain constraints and some related order delays as customers enact a sharper focus on their inventories, but we feel strongly about our ability to remain agile through these disruptions and we will continue to drive solid execution and returns for our shareholders.

Certified also maintains a healthy and balanced capital allocation strategy and our strong balance sheet to support our top and bottom line growth. The recently added FAA business is a prime example of our ability to add critical acquisitions in adjacent markets to drive our future growth.

So we continue to prioritize acquisitions as a strategic accelerator under our pivot to growth strategy. They will be supplemented by continued share repurchase and operational investments.

Looking beyond this year, the long term prospects for Curtiss Wright and the markets. We serve remain very healthy we expect to enter 2023 with a strong backlog across the portfolio. Several of our key markets are positioned for an influx of funding.

We expect they will continue to benefit from strong defense budget, both domestic and international as well as secular trends in modernization electrification and the drive to carbon free energy and more broadly and energy independence across the globe.

In closing I remain confident in our outlook to deliver strong profitable growth in 2022, and our ability to meet our investor day targets led by end market strength, the drive to improve profitability and our strong free cash flow generation, we remain committed to delivering long term value for our shareholders at this.

Time, I would like to open up today's conference call for questions.

If anyone has a question you can press zero one on your Touchtone phone. Once again, if you have a question is zero one on your Touchtone phone.

And our first question comes from Peter Arment go ahead Peter.

Yes, good morning Lynn Christian.

Lynn.

The modest push out in defense electronics.

Tied to the supply chain you also mentioned kind of the lingering aspect of the CR I was just wondering your updated thoughts on we get at sea or in the fall, which everyone expects that would have any impact.

On your outlook, how you factored that in.

So I think yes general Ken.

Sensus is in spite of really then moving the house and Senate markups through at a nice reasonable pace. Most people are predicting there will be a CR I think most of the.

The discussions ive listened into anticipated being in the nature of a three months CR, which historically this year with almost 180 days. The average CR is in the low 50 days is what has happened over the past decade or so.

<unk>.

I think that.

I think the strong book to Bill will have this year.

In that segment.

Let us enter that year with strong backlogs that will give us the ability to buffett.

Really up to like a three months CR and continue to drive the organic growth that we've experienced in the past in that segment and so.

It's hard to say that if it goes well beyond the three months and is something like it was this year.

We are definitely.

<unk> seen recovery in bookings, but.

It is that is part of the $25 million push out during the year combined for sure with the uncertainty in the supply chain.

Okay, and then you mentioned bookings so youre bookings were really strong, particularly in the commercial markets are they are all your commercial markets back above.

The pandemic levels and have you seen any rate of change just as the recession comment begins to take hold.

Hello, Chris speak to that.

Not all of our markets Peter are back up to the 2019 levels.

This year, but what I will say is just starting off as a reminder, when we were at that May 2021, Investor day, we thought that the industrial vehicle market would recover in 2022 and that actually recovered to pre pandemic levels last year, we had that record backlog nearly doubled.

<unk>.

This year, we're seeing some very very strong signs within both our nuclear aftermarket and our process markets and we're very very close to having the process markets recover back to 2019 levels. This year I think our guidance range and what we provided there puts us right in the right in the area.

<unk>.

Getting back to 2019.

A little bit further off on nuclear aftermarket, but I would say that's probably the next closest to the full recovery to pre pandemic levels and then <unk>.

<unk> aerospace is still fairly.

Beneath those 2019 levels, we've said that that market will fully recover.

Somewhere in that 23% to 25 timeframe 24 is split the difference but.

But we feel very comfortable about that I mean, the order book that we had.

In the quarter for commercial aerospace was very strong I mean, our orders were up 47% year over year in Q2, and we are now up 30% year to date year over year. So we feel very confident.

And the continued ramp and trajectory of that.

That very fast growing market for us this year and you can see from some of the guidance changes that we've made to power and process better.

That are more than offsetting the wind down of the cap 1000 programs that those markets are benefiting from the recovery as well so.

Overall very pleased with the order book and what we saw here in Q2 and Q1.

I appreciate the detail so I'll jump back in queue. Thanks, guys.

Thanks Peter.

And our next question comes from Kristine Leeway go ahead Christine.

Hey, good morning, everyone.

Good morning.

Glenn across the defense industry.

We've seen tightness in the supply chain, particularly in defense electronics. When you look at your core competencies and the problem areas in the supply chain are there areas. It makes sense for you to vertically integrate to either support your internal needs or be a trusted provider for the industry going forward.

So.

Interesting question and something that we have definitely debated internally.

I don't know if I would call it completely bertolli vertically integrated that I don't see us becoming a component supplier.

Got that in the past.

You'll continue to stay open to <unk>.

Decisions as the markets evolve and supply chains evolve, but at this point, we think we're finding ways to manage through it and.

Would not see it now there are ways. We are very focused on addressing the security needs from the Dod and enhancing our ability to provide trusted electronics to our customers.

A significant area of investment for us and an area. We are very focused on and have been on for several years, that's not really a new thing, but we don't see that as becoming vertically integrated there is a lot of different partnerships, we formed and ways that we develop our products to allow us to provide that trusted electronics capability without becoming a component supply.

Specifically.

Thanks for the color and maybe switching gears to nuclear can you characterize the strong demand you're seeing in the nuclear aftermarket business I mean, considering the disruptions in energy supply globally, how quickly our customers acting to extend the life of existing plants can you provide any color on the <unk>.

<unk> of this cycle, perhaps like the steepness and duration of demand.

So we've definitely seen the uptick and truthfully I think we are at the very beginning of what is going to be a long demand cycle in the commercial nuclear aftermarket that.

Here in the U S. We're really just beginning to see any revenues from the 68 year life extensions. It's getting started in Canada, South Korea will be next behind and Theres a lot of chatter across Europe .

Extending life of a nuclear power plants, and bringing power plants back online, Japan has talked about changing their stance towards nuclear power.

I think most notably even Germany has started to talk about its stance on nuclear power, which has been the strongest anti nuclear power.

Kind of determination by our government and so with that I really believe we're at the beginning of that cycle. We're very focused on making sure. We have a global reach for providing our products into these life extensions around the globe and are well positioned to have <unk>.

Sales and distribution channels in the end markets that will be driving this and that is setting aside all of the exciting work in the nuclear arena around Newbuild that we believe has a strong future both in the Gen. Three plus AP 1000 reactor and the continue.

<unk> support and.

Acceleration of the Gen four reactors and some continued ongoing funding from our governments. The two recent bills the chips app and the <unk>.

Inflation reduction act, even the chips Act actually has funding in it.

For advanced nuclear development and then also the inflation reduction Act has.

<unk> funding that will be directed towards extending the life of reactors and newbuild. So theres just a lot of momentum behind it here in the U S and I think we're seeing that globally and I think we're just at the beginning of what is a really exciting period for that group.

Thanks again for the color. Thanks Lynn.

Thank you.

And our next question comes from Michael Scherer, Mali go ahead Michael.

Hey, good morning, guys. Thanks for taking my question.

Just to stay on what Christian was just asking in that nuclear aftermarket.

Lynn you mentioned that global reach making sure you're positioned.

Is there anything you need to do to kind of expand your presence in Europe do you need to invest more I mean, you could look at M&A opportunities in the nuclear aftermarket because you mentioned kind of U S. Canada Korea, but any anything that has to be done to kind of sharp your position in Europe .

Hello.

We have a reach globally into France into the places where there is.

Stated intent to drive the activity.

But that doesn't mean that we're not looking to broaden that and that is something that a very active part of the discussions with the team right now and again, whether that direct staffing our partnership.

It's definitely an area, we're exploring on strengthening that reach.

Globally, but we're comfortable that we're well positioned to be making our capabilities known in those markets and working with them.

If I think down the road for our nuclear business.

Is what we're.

Feeling optimistic is going to happen around the new reactor build I mean, I think that's it.

If we win the business that we're optimistic we're going to win.

That's going to drive a need for engineering staffing in.

Possibly some capital expansion, but all kind of within our normal business cycles and things that would be.

Really fantastic for the business, but I think thats still a bit.

Get out as those developments get going but.

It's an area that we feel confident enough in the growth that we're seeing that as needed we will make the investments needed to make sure. We're there to maximize our ability to grow in those markets.

Got it just on what you just mentioned on the OEM side.

Any update you can give us kind of the status of pending sort of AP 1000 orders or even the <unk>.

Emerging FMR market do you have a thought as to kind of which potential orders might at first.

Well, we're already engaged and working with a variety of the new FM, our developers and a little bit of that has been public I hope that we'll be able to make.

Some additional announcements here in the back half of this year about where our engagement is but you know as we've said we're very closely watching.

The new developers that are most likely to.

Find wins and if you read nuclear news.

It's ex energy Terrapower.

<unk> just to name a couple and im not picking winners or losers work working very broadly across.

Those players to make sure we're positioned to have content with all of them and so I think that work is ramping up as we speak and they begin their their work and we continue.

Not to change, but to feel optimistic about our timing of an AP 1000 order that again that timing was.

Ironically put forward.

Dave that Ukraine War began and obviously world politics has changed in the sense of urgency for energy independence has changed and I think we.

<unk> continued to see a really steady rate of activity of all the things that need to happen prior to us getting orders across a lot of those eastern European countries. So I think both of those are progressing to provide.

Great future for Curtis right in the middle of this decade.

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

And we have no more questions in the queue I'll turn it back to chair and Executive Officer Lynn Bamford.

Well. Thank you everybody, who was able to join US today and we look forward to speaking with you again during our third quarter 2022 earnings conference call and have a great day.

Okay. Thank you thank.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

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Paul.

As a reminder, this conference is being recorded I will now turn the call over to Jim Ryan Vice President Investor Relations. Jim. Please proceed.

Thank you Daryl and good morning, everyone welcome to Curtiss Wright's second quarter 2022 earnings Conference call. Joining me on the call today are chairman and Chief Executive Officer, Lynn Bamford, and Vice President and Chief Financial Officer, Chris Partners. Our call today is being webcast and the press release as well as the copy of todays financial presentation.

<unk> is available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright Dot 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 1095.

Statements are based on management's current expectations and are not guarantees of future performance.

Detail those risks and uncertainties associated with forward looking statements in our public filings with the SEC.

Any references to organic growth on an adjusted basis and exclude foreign currency translation acquisitions and divestitures unless otherwise noted.

GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website now I would like to turn the call over to lend to get things started.

Thank you Jim and good morning, everyone I'll begin our remarks by covering the key highlights of our second quarter 2022 performance and some recent events that are influencing our business.

Then I will turn the call over to Chris to provide a more detailed review of our financial results and updates to our 2022 guidance finally, I'll wrap up our prepared remarks before we move to Q&A starts.

Starting with our second quarter 2022 performance overall sales of $609 million was in line with our expectations for high single digit sequential growth.

Our results highlighted the strength of our combined portfolio driven by strong demand within our commercial aerospace nuclear aftermarket process and industrial end market outside of those areas. Our performance was once again impacted by the timing of revenues in our defense markets, particularly for defense electronics due to the <unk>.

Ongoing global supply chain disruption.

Mainly driven by a better than anticipated mix enable empower and continued operational excellence based.

Based on that performance adjusted diluted EPS increased 18% to $1 83 and exceeded our expectations.

New orders were strong up 13% year over year, reflecting increases enabled defense and commercial aerospace within our A&D market and in nuclear and process within our commercial markets book to Bill with 127 times in the second quarter building upon our already strong backlog, which is now up nine.

Percent year to date.

This backlog provides additional comfort and visibility as we manage through the ongoing supply chain constraints, which are likely to continue into 2023.

Next I'd like to provide a few updates on some recent events first on the financing front. We have made recent moves that provide this greater efficiency and flexibility in capital allocation in May we announced a new and expanded revolving credit facility and this past week, we priced $300 million in senior notes.

To reinforce our strong and healthy balance sheet.

These actions strengthen our ability to execute on our pivot to growth strategy, Chris will provide additional color later on in the call.

We're also excited to announce that on June 30, we completed the acquisition of SaaS brand aerospace arresting systems business or.

Which is a leading supplier of fixed wing military aircrafts arresting system in.

In 2021, FAA generated approximately $70 million in sales and we are projecting that it will contribute approximately $40 million in the second half of 2022.

As a reminder, 25% of its sales are based in the U S with 75% and rest of world.

To align with our long term organic sales growth rate of 3% to 5% for the foreseeable future.

Further in addition to steady topline growth.

They support our corporate wide financial objective to achieve continued operating margin expansion and greater than 110% free cash flow conversion.

Next to our full year 2022, adjusted guidance, where we raised our sales operating income and diluted earnings per share we.

The speed of defense Electronics orders. However has since returned to a more normal cadence as our customers manage their inventory levels in response to the ongoing challenges in the supply chain.

Together this is impacting the timing of about $25 million in defense electronic revenues that have now pushed out of 2022.

And good morning, everyone I'll begin with the key drivers of our second quarter 2022 results by segment.

Starting in aerospace and industrial where we delivered another strong performance with sales and operating income increased 8% and 7% respectively.

Within the segments commercial aerospace market sales grew more than 20%, reflecting strong demand on both narrow body and wide body platforms.

Within the segments industrial markets, our results principally reflected increased sales of industrial vehicle products, most notably serving off highway and specialty vehicle platforms.

It's also worth noting that the segment's results included an incremental $1 million in R&D investments for you to otherwise demonstrated 40 basis points and year over year operating margin expansion.

Next in defense electronics, our performance again reflected the timing of defense revenues based upon the supply chain challenges impacting the industry.

Within the segments commercial aerospace market.

Order.

What's reflected.

Instrumentation sales.

In the second half of the year.

Our second.

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A&D revenues, which we expect.

It is based on increased volumes.

Next to enable and power segment, our results reflected lower enabled defense revenues, mainly due to the timing of production on the CV and 80 aircraft carrier and Virginia class submarine programs.

Those offset those impacts were offset by higher CDN 81 carrier and Columbia class submarine revenues as these two programs continue to ramp up.

And the power and process market, our results reflected double digit sales growth in both nuclear aftermarket and process, where we continue to experience very strong demand.

And these increases more than offset the wind down of production on the cap 1000 program.

To sum up the second quarter results overall Curtiss Wright operating margin was slightly above expectations at 16, 1% up 50 basis points year over year and up 340 basis points sequentially.

Next turning to our full year 2022 guidance I'll begin on slide five with our end market sales outlook.

As Len mentioned earlier, our overall guidance now reflects a $40 million contribution from the acquisition and we now expect total Curtiss Wright sales growth of 4% to 6%.

We continue to expect organic sales growth of 3% to 5% unchanged from our prior guide so we updated the growth rates in several of our end markets.

I'll begin in our A&D markets.

In Aerospace defense, we now expect sales growth of 9% to 11%, which principally reflects the contributions from the <unk> acquisition.

In addition, we now expect a more favorable outlook for our actuation sales within the Ani's segment, and a slightly lower but positive growth rate within the defense electronics segment.

As a result, and despite a strong second half forecast, we now project our ground defense market to be slightly down on the year before recovering in 2023.

Outside of our A&D markets.

Our growth outlook for the power and process market to a new range of 4% to 6% based on our strong year to date performance and increased demand for both our nuclear aftermarket and industrial valve products.

As a result, we've raised our growth outlook for our overall commercial markets to a new range of 5% to 7%.

Continuing with our outlook by segment on slide six I'll begin in aerospace and industrial where we continue to project strong growth in both commercial aerospace and general industrial market sales.

The segment's operating performance continues to reflect strong growth in operating income and margin driven by improved sales and the benefits of our operational excellence initiatives.

Next in the defense Electronics segment, we have revised our current year sales growth expectations to reflect the supply chain challenges impacting our aerospace and ground defense markets.

Despite a growing backlog, we now expect overall sales to be flat year over year.

And as a result, we lowered our guidance for operating income to reflect reduced sales volumes. However, we raised our margin assumption slightly for lower <unk> spending.

Regarding the R&D spending it's important to note that we shifted $2 million to development contracts as we were able to secure an increase in customer funded programs.

Lastly, in the naval and power segment, we now expect strong sales growth of 7% to 8% of which 3% to 4% is organic.

This increase was driven by an improved order book underlying our power and process markets and the contribution from the acquisition.

Full year segment operating income is now projected to grow 6% to 8% while segment operating margin remains a strong 18% to 18, 2%.

I would note that while lesser increases our operating income guidance it will be dilutive to overall Curtiss Wright margin in year, one and particularly during the first six months of integration as is typical for a new acquisition.

So to summarize our outlook, we expect total Curtiss Wright operating income to now grow 5% to 7% overall on a 4% to 6% increase in sales.

We continue to expect operating margin to improve 10 to 30 basis points, ranging from 17, 1% to 17, 3%, including a $6 million increase in R&D investments to cap 1000, wind-down headwinds and first year margin solution on the ESI acquisition.

Overall I'm pleased to say that our updated 2022 outlook aligns with our May 2021, Investor day projections for continued profitable growth as we expected to deliver operating income growth in excess of sales growth, while also generating double digit EPS growth.

To aid in your quarterly modeling and based on the timing of defense sales, including SAA. We now expect third quarter sales to grow by mid to high single digits sequentially compared with the second quarter 2022, adjusted results and diluted EPS to grow by high single digits sequentially, followed by a very strong fourth quarter performed.

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Turning to our full year free cash flow outlook, our guidance remains unchanged with a range of $345 million to $365 million, including a contribution from SAA.