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. [Operator Instructions] 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 Second Quarter 2022 Earnings Conference Call. Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas. 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.curtisswright.com. A replay of this webcast also can be found on the website. Please note, today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance. Any references to organic growth are 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'd like to turn the call over to Lynn to get things started. Lynn?

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 in Naval & Power and continued operational excellence. 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 in Naval Defense and commercial aerospace within our A&D markets and in Nuclear and Process within our commercial markets. Book-to-bill was 1.27x in the second quarter, building upon our already strong backlog, which is now up 9% 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…

Thank you, Lynn, and good morning, everyone. I'll begin with the key drivers of our second quarter 2022 results by segment. Starting in Aerospace & Industrial, where we delivered another strong performance as sales and operating income increased 8% and 7%, respectively. Within the segment's commercial aerospace market, sales grew more than 20%, reflecting strong demand on both narrowbody and widebody platforms. On a related note, we recently announced that we won a significant award on the future Airbus A350 F aircraft to provide custom electric actuation technology for the main deck cargo door and also secured demonstrator technology on the Airbus UpNext program. We've 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 segment's industrial markets, our results principally reflected increased sales of industrial vehicle products, most notably serving off-highway and specialty vehicle platforms. Turning to the segment's 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'd otherwise demonstrated 40 basis points in 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. As a result, we experienced lower-embedded computing revenues in Aerospace Defense supporting various fighter jet and helicopter programs as well as reduced sales of tactical communications equipment in Ground Defense. Within the segment's commercial aerospace market, due to the timing of orders, results reflected forward instrumentation sales normalized in the second half of the year. To the…

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 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 in our most profitable segment are being entirely offset by the strength in our commercial market recovery. 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 and Investor Day commitment prior to including any contribution from SAA. This builds on a long track record of resiliency for Curtiss-Wright, and I would like to provide 2 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 company-wide focus on operational excellence, in both cases, we effectively mitigated the negative impact to total Curtiss-Wright 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 will continue to drive solid execution and return for our shareholders. Curtiss-Wright also maintains a healthy and balanced…

[Operator Instructions] And our first question comes from Peter Arment.

On the modest push-out in Defense Electronics tied to supply chain, you also mentioned kind of the lingering aspect of the CR. I just wondered if your updated thoughts on if we get a CR in the fall, which everyone expects, if that would have any impact on your outlook and how you factored that in?

So I think, yes, general consensus is in spite of really then moving the House and Senate mark up through the -- at a nice reasonable pace, most people are predicting there will be a CR. I think most of the discussions I've listened into anticipated being in the nature of a 3-month CR, which historically, this year it was almost 180 days. The average CR is in the low-50s days, is what has happened over the past decade or so. I think that the strong book-to-bill we'll have this year in that segment will let us enter that year with strong backlogs that will give us the ability to buffet really up to like a 3-month 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 it goes well beyond the 3 months and is something like it was this year. But we are -- we've definitely seen recovery in bookings, but it is that -- it's 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. Your bookings were really strong, particularly in our commercial markets. Are they -- are all your commercial markets back above pre-pandemic levels? And have you seen any rate of change just when the recession kind of begins to take hold?

Chris can speak to that.

Yes. And 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. 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 area of getting back to 2019. We're 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 commercial aerospace is still fairly beneath those 2019 levels. We've said that, that market will fully recover somewhere in that '23 to '25 time frame, '24, split the difference. 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 in the continued ramp and trajectory of 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 & Process that are more than offsetting the wind down of the CAP1000 program 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.

And our next question comes from Kristine Liwag.

Lynn, 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 that make sense for you to vertically integrate to either support your internal needs or be a trusted provider for the industry going forward?

So that's an interesting question and something that we have definitely debated internally. I don't know if I would call it completely vertically integrated that I don't see us becoming a component supplier. We've discussed that in the past and continue to stay open to 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. It's a significant area of investment for us and an area we are very focused on and have been on in for several years. That's not really a new thing. But we don't see that as becoming vertically integrated. There's a lot of different partnerships we've formed and ways that we develop our products that allow us to provide that trusted electronics capability without becoming a component supplier specifically.

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 are customers acting to extend the life of existing plants? Can you provide any color on the shape of the 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 60 to 80-year life extensions. It's getting started in Canada. South Korea will be next behind, and there's a lot of chatter across Europe of extending life -- 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 antinuclear power -- kind of determination by a 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 sales and distribution channels in the end markets that will be driving this. And that is setting aside all the exciting work in the nuclear arena around newbuild that we believe has a strong future, both in the Gen 3 plus AP1000 reactors and the continued support and acceleration of the Gen 4 reactors and some continued ongoing funding from our government, the 2 recent bills, the CHIPS Act and the Inflation Reduction Act. Even the CHIPS Act actually has funding in it for advanced nuclear development and then also the Inflation Reduction Act has strong funding that would be directed towards extending the life of reactors and newbuilds. So there's 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's a really exciting period for that group.

Our next question comes from Michael Ciarmoli.

Just to stay on what Kristine was just asking. In that Nuclear Aftermarket, I mean, 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, do you look at M&A opportunities in the Nuclear Aftermarket? Because you mentioned kind of U.S., Canada, Korea. But anything that has to be done to kind of shore up your position in Europe?

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's a very active part of the discussions with the team right now. And again, whether that's direct staffing or partnerships, that'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. Truthfully, when we -- if I think down the road for our nuclear business, as what we're feeling optimistic is going to happen around the new reactor build, I mean, I think that's -- if we win the business that we're optimistic we're going to win, that's going to drive a need for engineering, staffing and 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 that's still a bit 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 that, what you just mentioned on the OEM side. Any update you can give us on kind of the status of pending sort of AP1000 orders or even the emerging SMR market? Do you have a thought as to kind of which potential orders might hit first?

Well, we're already engaged in working with a variety of the new SMR 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 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 X Energy, TerraPower, GE Hitachi, just to name a couple, and I'm not picking winners or losers. We're 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 work. And we continue not to change, but I feel optimistic about our timing of an AP1000 order that -- again, that timing was ironically put forward the day the Ukraine war began. And obviously, world politics has changed in the sense of urgency for energy independence has changed. And I think we just continue 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 Curtiss-Wright in the middle of this decade.

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.

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