Curtiss-Wright - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered double‑digit top-line growth and broad margin expansion: revenue $876.6M (+12% y/y), adjusted operating margin 18.3% (+130 bps), and adjusted EPS $3.23 (+21% y/y). Consensus was exceeded on revenue, EPS, and EBITDA (see Estimates Context)*
• Guidance raised across the board: sales growth to 9–10%, operating income +15–18%, operating margin 18.5–18.7%, EPS to $12.70–$13.00, and FCF to $520–$535M.
• Demand remained strong: new orders $1.0B (>1.1x book‑to‑bill), backlog $3.9B (+12% YTD), and FCF $117M (+17% y/y).
• Key catalysts: accelerating Flight Data Recorder retrofit programs with Honeywell, robust NATO and allied defense demand, strong naval programs (Columbia, Virginia), and commercial nuclear partnerships (e.g., Rolls‑Royce SMR).

What Went Well and What Went Wrong

• What Went Well
  • “We are successfully executing our Pivot to Growth strategy and building strong momentum to compound sustained profitable growth.” — Lynn M. Bamford, CEO.
  • Defense Electronics margins expanded to 26.8% on favorable absorption and operational excellence; segment sales +11% y/y.
  • Naval & Power sales +19% y/y with adjusted margin +210 bps to 16.5%, driven by Columbia-class timing and commercial nuclear strength.
• What Went Wrong
  • Higher R&D investments and tariff mitigation actions temper margin upside (company expects >$20M gross tariff exposure mitigated to ~$10M net in 2025).
  • Sequential timing headwinds in Ground Defense (CR and order timing cause Q3 revenue dip before strong Q4).
  • Capex increased across segments (Q2 capex $19.4M vs $11.1M y/y), modestly offsetting FCF growth.

Transcript

Speaker 2

Welcome to the Curtiss-Wright Second Quarter 2025 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. In the interest of time, we ask that you limit yourself to one primary question and one follow-up. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations.

Speaker 4

Thank you, Madison, and good morning, everyone. Welcome to Curtiss-Wright Second Quarter 2025 Earnings Conference call. Joining me on the call today are Chair and Chief Executive Officer Lynn Bamford and Vice President and Chief Financial Officer K. Christopher Farkas. A copy of today's financial presentation and the press release are available for download through the Investor Relations section of our website at curtisswright.com. A replay of this webcast will also be available on the website. Our discussion today includes certain projections and forward-looking statements that are based on management's current expectations and are not guarantees of future performance. We do talk about the risks and uncertainties associated with our forward-looking statements, including the impacts of tariffs and our public filings with the SEC.

As a reminder, the company's results and guidance 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. GAAP and non-GAAP reconciliations 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.

Speaker 0

Thank you, Jim, and good morning, everyone. As you will hear in our discussion today regarding our second quarter performance and the increases to our 2025 guidance, we are delivering on our pivot to growth strategy and, in turn, driving strong results for our shareholders. The team's continued deployment of our operational growth platform is benefiting Curtiss-Wright in many ways, from internal collaboration on R&D projects to securing positions on meaningful programs and projects across all our end markets, all while driving operation and commercial excellence initiatives throughout the book of business. As a result, we are well positioned to deliver strong financial performance in 2025 and maintain line of sight on the three-year objectives that we provided at last May's Investor Day.

As we look to the next five to ten years and beyond, we see numerous opportunities developing globally that we expect to provide tremendous upside to Curtiss-Wright's long-term growth. Later in our prepared remarks, I'll spend some time discussing our excitement and alignment with two of those areas of growth: defense and commercial nuclear. With that, I'll turn to the highlights of our second quarter 2025 results. Sales of $877 million represented an increase of 12% year over year, exceeding our expectations and highlighted by strong organic growth of 9%. The primary drivers behind this performance were higher sales in our naval and power segment and continued momentum in defense electronics. Operating income increased 20% year over year, exceeding our sales growth and driving 130 basis points of overall operating margin expansion. Diluted EPS increased 21% year over year, which slightly exceeded our expectations based on the higher A&D sales.

Free cash flow was $117 million, as higher cash earnings and improved working capital management drove a year-over-year improvement of 17%, reflecting nearly 100% cash conversion as we continued to support capital investments across all three segments. We also experienced strong demand in the second quarter, as new orders of $1 billion resulted in an overall book-to-bill in excess of 1.1 times. Starting with our A&D markets, while orders were down slightly year over year, mainly due to the timing of naval defense orders in the prior year, we experienced strong demand within our commercial aerospace market, supporting the anticipated ramp-up in OEM production, as well as modestly higher demand for our embedded computing equipment in defense electronics. As a result, book-to-bill across our A&D markets was 1.2 times.

With our commercial markets, we experienced strong demand in our commercial nuclear aftermarket, supporting the plant outages and restarts, in addition to the contribution from Ultra Energy. Overall, the second quarter growth in orders builds on our already strong backlog, which is now up 12% year to date, reaching a new record in excess of $3.8 billion. I would also like to highlight our second quarter announcements regarding capital allocation, where the board approved a $400 million increase in share repurchase authorization and a 14% increase in our quarterly dividend, which we've now grown for nine straight years. Both actions highlight our strong track record of financial performance and our dedication to returning capital to shareholders. Turning to our full-year guidance, based on our first half performance, the strength of our order book, and our confidence in our second half outlook, we once again raised our overall guidance.

We remain on track to deliver strong results while generating some of the strongest operational growth rates and margin expansion to date under the pivot to growth strategy. Overall, sales are now expected to increase 9 to 10%, and our revised guide represents 100 to 120 basis points of margin expansion in pursuit of a record operating margin in excess of 18.5%. At the bottom line, the strong increases in sales and earnings are now expected to drive diluted EPS growth of 16 to 19% as we continue to compound our earnings at a mid-teens pace over time. Lastly, we raised our free cash flow guidance and continue to expect strong free cash flow conversion exceeding 105%. In summary, Curtiss-Wright's strong year-to-date execution provides a stable foundation for our team to deliver another outstanding financial performance.

Now I would like to turn the call over to Chris to provide a more in-depth review of our financials.

Speaker 1

Thank you, Lynn. I'll begin on slide four by reviewing the key drivers of our second quarter 2025 performance by segment. Starting in aerospace and industrial, overall sales increased 3% and were essentially in line with our expectations. Beginning with the segment's commercial aerospace market, we experienced solid OEM sales growth, supporting increased wide-body platforms. Across the segment's defense markets, we experienced modest increases in actuation equipment sales within our aerospace defense market, supporting various fighter jet programs and also in ground defense for the Enduring Shield platform. In the general industrial market, sales were essentially flat overall, despite the ongoing macro challenges facing global industrial vehicle markets. Turning to the segment's second quarter profitability, operating income and margin grew 5% and 40 basis points respectively.

These results were driven by favorable absorption on higher sales, restructuring savings, and a tailwind from FX, which were partially offset by increased investments in customer-funded development programs. Next, in the defense electronics segment, overall sales increased 11% and were slightly ahead of our expectations. Within the segment's aerospace defense market, this performance was driven by increased sales of our embedded computing equipment on both European fighter jets and domestic UAV programs. In the ground defense market, our results reflected increased tactical communications revenues, as well as continued support for U.S. Army vehicle modernization and replenishment. Elsewhere in the segment's commercial aerospace market, we experienced a modest increase in sales for our flight data recorders, supporting Boeing aircraft under the new 25-hour safety mandate, and this activity is expected to accelerate going forward.

Regarding the segment's operating performance, we delivered strong operating margin of 26.8%, up 110 basis points, mainly reflecting absorption on higher revenues, as well as the benefits of our ongoing operational excellence initiatives. Turning to the naval and power segment, sales growth of 19% exceeded our expectations, once again driven by higher naval defense revenues, most notably on the Columbia-class submarine, based upon the timing and acceleration of material receipts as our production continues to ramp on the U.S. Navy's top acquisition priority. In the power and process market, our results reflected another solid contribution from the Ultra Energy acquisition, which benefited both our commercial nuclear and process markets.

On an organic basis, we experienced strong low-teens revenue growth in commercial nuclear, supporting the ramp-up in development across several SMR designs, including the X Energy and TerraPower advanced reactors, as well as increased aftermarket revenues based upon the strong spring outage season for U.S. operating reactors. Regarding the segment's operating performance, favorable absorption on higher organic revenues and favorable MEX, particularly in commercial nuclear, were partially offset by increased investment in research and development. To sum up Curtiss-Wright's second quarter results, overall we generated a strong operating margin of 18.3%, driving 130 basis points in operating margin expansion on the strong top-line performance. Turning to our full-year 2025 guidance, I'll begin on slide five with our end market sales outlook, where total sales are now expected to grow 9 to 10%, driven by improved expectations for organic growth in both our aerospace and naval defense markets.

Starting in aerospace defense, a strong first half performance, particularly for our embedded computing equipment on C5-ISR programs, provides us with confidence to raise our full-year sales guidance to a new range of 7 to 9%. Additionally, we continue to expect higher sales of aircraft arresting systems equipment, principally supporting international customers, and we remain on track to demonstrate strong growth in the second half of the year. Within ground defense, our outlook of 6 to 8% sales growth remains unchanged and continues to reflect higher full-year sales of tactical communications equipment, as well as electromechanical actuation equipment on ground-based missile defense systems. Of note, we now anticipate sales in this market to decline sequentially in Q3, based upon the timing of year-to-date orders resulting from the full-year continuing resolution. However, we expect a surge in third quarter orders as we approach the U.S.

government's September 30th fiscal year end, which in turn will drive strong fourth quarter revenues in this market. In naval defense, we now expect full-year sales to grow 7 to 9%, mainly driven by the better-than-expected first half performance. Of note, sales on the Columbia-class submarine program, which ramped up considerably to begin the year based upon the timing of material receipts, are expected to decline and stabilize in production over the remainder of the year. Beyond that, we continue to expect higher aftermarket revenues supporting overhauls and retrofits on prior generation carriers, in addition to the contribution from Ultra Energy on UK submarines. Looking more broadly across all three defense markets, our improved outlook reflects approximately 20% growth in direct foreign military sales in 2025, based on accelerating demand from NATO and allied countries.

Turning to commercial aerospace, our outlook for 13 to 15% sales growth is unchanged, and we remain on track to deliver strong second half growth based on the planned ramp-up in OEM production and the timing of avionics and instrumentation equipment within our defense electronics segment. Wrapping up our aerospace and defense outlook, we now project total sales in these markets to increase 8 to 10%. Moving to our commercial markets and power and process, we maintained our outlook for 16 to 18% sales growth, which continues to reflect a combination of mid to high single-digit organic revenue growth, as well as the contribution from Ultra Energy.

Within our commercial nuclear market, continued strength in our order book provides us with increased confidence regarding our full-year outlook for higher aftermarket sales, supporting the maintenance of the U.S., UK, and South Korea reactors, as well as a ramp-up in development revenues across several SMR and advanced reactor designs. Next, within the process market, we continue to expect solid organic growth, mainly reflecting higher subsea pump development revenues. Lastly, in the general industrial market, we maintain a cautious outlook and continue to expect flat sales in 2025, despite the macro challenges facing global industrial vehicle markets and our expectations for modest sales increases in industrial automation and surface treatment services. Wrapping up our total commercial markets, we continue to target full-year sales growth of 9 to 11%.

Moving on to our full-year 2025 outlook by segment, on slide six, I'll begin in aerospace and industrial, where we are increasing our revenue guidance to a new range of 4 to 5%. This is principally driven by our overall strong outlook in commercial aerospace, along with improved expectations across a number of our defense markets. Regarding the segment's profitability, we now expect operating income growth of 6 to 9% and operating margin expansion of 30 to 60 basis points to a new range of 17.3 to 17.6%, as we raise the low end of the guidance range due to expectations for a lesser net tariff impact, as well as a more favorable absorption on higher sales.

For your modeling purposes, we expect third quarter sales and operating income to improve sequentially over the segment's second quarter results, benefiting from higher sales volumes, various pricing and operational excellence initiatives, and a more favorable mix of business. Next, in defense electronics, we continue to expect sales to grow 9 to 11% overall, reflecting the strength of this business's record backlog, its forward pipeline, and solid growth projections across all A&D markets. Regarding the segment's profitability, our continued efforts to drive margin improvement through commercial excellence and improved manufacturing throughput are now expected to promote further margin expansion. As a result, we now expect operating income growth of 18 to 20% and operating margin expansion of 190 to 210 basis points to a new all-time high range of 26.8 to 27%.

For your modeling purposes and based on the timing of revenues in the ground defense market, we now anticipate the segment's third quarter results to reflect similar margins to Q2, but on lower sales. We expect a strong finish to the year. In naval and power, we now expect sales to grow 12 to 13%, reflecting the increased naval defense market outlook following the strong first half performance and overall solid growth across the segment's defense and commercial markets. Regarding the segment's profitability, we now project operating income to grow 15 to 18% on the higher sales. For your modeling purposes, we expect the segment's third quarter sales and operating income to be in line with our second quarter results, while the fourth quarter should reflect a shift in mix towards more profitable end market sales.

To summarize our 2025 outlook, overall, we now anticipate total Curtiss-Wright operating income growth of 15 to 18% and operating margin to range from 18.5 to 18.7%, up 100 to 120 basis points. We expect to generate these strong returns while maintaining greater than $20 million in incremental investments in total research and development across the portfolio. For your modeling purposes, at the overall Curtiss-Wright Corporation level, we expect total sales to be fairly evenly distributed between the third and fourth quarters, while the fourth quarter reflects a benefit of favorable mix on more profitable end market sales, resulting in a strong operating margin to conclude the year. Continuing with our financial outlook on slide seven, building upon our first half performance and expectations for continued strong growth, we've increased our full-year adjusted diluted EPS guidance to a new range of $12.70 to $13.00, we're up 16% to 19%.

Based on the timing of sales, as previously discussed, we expect our third quarter 2025 EPS to be relatively on par sequentially with our second quarter 2025 results, followed by a strong finish to the year. Lastly, turning to free cash flow, our full-year guidance now reflects an increase of $20 million to $25 million based upon both higher cash earnings and an approximate $15 million cash benefit from the administration's recent changes in tax legislation. As a reminder, our outlook for capital expenditures continues to reflect an increase of nearly $20 million year over year associated with ongoing growth investments. Overall, our free cash flow outlook now ranges from $520 million to $535 million, up 8% to 11%, which implies an improved free cash flow conversion rate of approximately 108%. Now I'd like to turn the call back over to Lynn.

Speaker 0

Thank you, Chris. Turning to slide eight, I would like to spend the next few minutes discussing Curtiss-Wright's potential for near, medium, and long-term growth in defense and commercial nuclear, driven by the tremendous global demand that continues to build across these markets. Starting in defense, where we are well positioned to capitalize on the continued acceleration in global defense spending. In the U.S., we are aligned to the strategic priorities outlined within the combined FY26 U.S. Department of Defense budget and reconciliation bill, including ship building, the Golden Dome program, aircraft modernization, and next-generation air superiority, to name a few. Our proven capabilities as an industry-leading supplier of embedded computing technology and MOSA-based solutions, as well as our long-standing presence on the highest priority U.S. naval platforms, ensure that Curtiss-Wright will continue to play an important role supporting both current and next-generation pursuits.

In addition, we strengthen our alignment with strategic military priorities by consistently investing in R&D while ensuring that we are fully equipped to support our customers throughout the entire program lifecycle across all of our defense markets. As a result, our strong position and success as a critical supplier has enabled us to deliver consistent growth in our defense markets and a demonstrated ability to win in any budget environment. Outside of the U.S., the acceleration of NATO and allied funding and the need for advanced technologies to counter emerging threats has provided a meaningful accelerant to Curtiss-Wright's overall defense market growth rate. As Chris noted earlier, we now expect growth in direct foreign military sales to increase 20% this year, exceeding the mid-teens pace that we have delivered over the past few years, as militaries across the globe continue to improve their operational readiness.

In addition, the recently announced expectations for NATO countries to expand the previous defense spending target of 2% of GDP to potentially 5% should provide continued growth opportunities for Curtiss-Wright. Lastly, as a high-value partner to our military customers, we remain focused on leveraging the most exciting and cutting-edge technologies in the high-tech commercial markets and bringing these capabilities to the tactical edge. The adoption and influence of modern advancements such as AI and machine learning and autonomous systems, when tailored to defense applications, should come to open new doors for Curtiss-Wright to support these increased technological demands and provide additional opportunities for revenue growth and margin expansion. Overall, our alignment to the numerous critical pursuits driving global defense spending will provide continued opportunities for growth across all Curtiss-Wright's defense businesses well into the next decade.

Next, turning to the right-hand side of the slide, nuclear power continues to undergo a strategic shift with several critical imperatives that are converging, driving nuclear power to a major inflection point: the need for reliable energy, energy independence, and decarbonization. In 2023, we observed the COP28 commitments by 22 nations to triple global energy capacity by 2050, which reflected the broad and growing consensus that nuclear power must be part of a global solution. In more recent news, we've witnessed the U.S.

administration's focus on reinvigorating the commercial nuclear industrial base by signing four critical executive orders that are expected to quadruple the country's current nuclear output to 400 gigawatts by 2050, to reform modernization regulations to promote faster and more cost-effective practical licensing for new and existing reactors, to accelerate the deployment of advanced reactor technologies, including peaceful nuclear cooperation or 123 agreements as a matter of national security, and to promote the construction of 10 new large reactors in the U.S. by 2030. Curtiss-Wright remains in a prime position to leverage its deep commercial nuclear experience to serve this global resurgence in demand with technology supporting the entire lifecycle from new build to the aftermarket. Next, I would like to highlight Curtiss-Wright's tremendous long-term opportunity to support the construction of Westinghouse's AP1000 reactors, where we are aligned as a supplier of reactor coolant pumps and other critical technologies.

As we discussed at last year's Investor Day, we see the potential to generate more than $1.5 billion of growth in Europe alone, likely beginning with awards to support the AP1000 plants in Bulgaria and Poland, with an order still anticipated to come in 2026. Of note, we conservatively excluded this benefit from our three-year Investor Day targets. The AP1000 optionality, sitting on top of our strong core, continues to grow. Elsewhere, the recent Pennsylvania Energy and Innovation Summit, hosted by Senator McCormick and attended by President Trump, top administration officials, and Westinghouse executives, was certainly an encouraging sign for this industry. It signaled a strong U.S. commitment to new large reactor construction that follows the vision set forth in the administration's executive orders. Given their advanced technology and strong government backing, Westinghouse has expressed their plans to begin construction of 10 new large reactors in the U.S.

by 2030, which would provide an incremental opportunity of greater than $1 billion for Curtiss-Wright. Next, the growth of small modular and advanced reactors is expected to be transformative to the nuclear industry. We continue to grow our presence across the leading reactor designers, with our expected content ranging from $20 million to more than $120 million, and with the potential for further upside as we continue to secure additional content. Last Friday, we are excited to announce our newest partnership with Rolls-Royce SMR to support their global SMR fleet. This was a tremendous first step in our relationship, which leverages Curtiss-Wright's expertise as a leading provider of reactor protection systems, resulting from our acquisition of Ultra Energy, while also meeting their desire for localization of the UK supply base.

Rolls-Royce SMR was recently selected by Great British Energy to provide the UK's first three SMRs, and we look forward to supporting these and other commitments across Europe. Overall, while SMRs only represent a small portion of Curtiss-Wright's commercial nuclear revenues today, current design and development will begin to transition into prototypes over the next few years, driving accelerated growth in this market. Lastly, as demand for commercial nuclear power continues to accelerate, Curtiss-Wright is well positioned to strengthen its leadership position in all these areas to win significant new business today and well into the next decade. This continued momentum provides us with increased confidence in our ability to generate more than $1.5 billion in annual commercial nuclear revenues by the middle of next decade and nearly quadruple our current base of approximately $400 million.

Turning to slide nine, where I'll wrap up today's prepared remarks, the team's consistent execution, along with our strong and growing backlog, provides confidence in our expectations to generate record financial performance across all major metrics in 2025. As a result, we remain on track to achieve or exceed our three-year objectives provided at last May's Investor Day. In addition, our efficient balance sheet supports our disciplined capital allocation strategy, which includes acquisitions and operational investments and ensures consistent returns to our shareholders. We have also focused on our ability to consistently generate strong returns on our investments, including R&D systems and infrastructure, to support our future growth. Based on our success, we have expanded our return on invested capital by more than 400 basis points over the past four years, while staying steadily above the rising cost of capital.

Adding to that, we anticipate more than 100 basis points of growth in ROIC this year, while integrating our most recent nuclear acquisition. This serves as yet another proof point that our pivot to growth strategy is working. In summary, there are a number of exciting things taking place across Curtiss-Wright that build on our strong core of A&D and commercial businesses and that position us to capture the fastest underlying growth vectors in our markets. We are driving strong financial performance, compounding earnings at a mid-teens pace, and delivering strong and consistent free cash flow generation for our shareholders. Thank you. At this time, I would like to open up today's conference call for questions.

Speaker 2

The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. We ask that you pick up your handset when posing your questions to provide optimal sound quality. Again, we ask that you please limit yourself to one question and one follow-up, and then queue again with additional. Thank you. Our first question is coming from Scott Deusel with Deutsche Bank. Please go ahead.

Hey, good morning. Chris, quite a few commercial aerospace companies saw this quarter their growth decelerate and some destocking headwinds, and their commercial OEM revenue in many cases declined. Curtiss-Wright seems to be seeing the opposite trend with growth accelerating. Can you speak a bit more as to what's driving that growth acceleration in commercial aerospace?

Speaker 1

Sure. Yeah. I think first it's important to note that we took a fairly conservative position on commercial aero coming into the year. There's certainly been more than a fair share of challenges in the industry over the past 18 months or so. I think it was important that we recognize that. Destocking is really not an easy answer for us. I mean, given the breadth of our portfolio and our position as a tier two-three supplier, I think as you look out across our customers and upward to Boeing and Airbus, it's a fairly mixed bag, depending on the platform, the engines, the airframes. We're seeing some positive signals, some negative signals.

Overall, we do expect that there will be some adjustments to SIOP that are made here in the third and fourth quarter, but our customers are also very concerned that they don't disrupt the flow and capacity of product that we've achieved over the past few years. I think this is particularly true when you think about the large growth rates that lie ahead on the major platforms over the next few years. We think this will become a little bit clearer in the second half of the year. If anything, we think it may temporarily abate some of the strong growth that lies ahead for commercial aero manufacturers, but we feel really well positioned with our guidance.

Okay. Lynn, if I go to the defense solutions website, I can find quite a few accelerated computing solutions that Curtiss-Wright now has in the market, including these GPU chips that have NVIDIA Blackwell chips on them. Just for that as context, can you speak a bit as to what kind of product applications these GPU cards you're finding use cases for and also what types of customers are using them today?

Speaker 0

Yeah, it's definitely an exciting new area, and I love the fact that you went to the defense solutions website and looked at some of our products. That's pretty good. It's definitely, you know, the mention of the tactical edge that, you know, really a lot of what's going on in modernization is about taking sensor data, processing it, and asking, you know, whether that's defensive moves or offensive moves to counter the data that's coming in that sensor. This is really opening up the ability to deploy those kinds of applications broadly across the battle space where quick decisions are essential. That's like the high, you know, definitely a high level. That comes in to defensive systems on ground vehicles that sense an incoming missile and shoot something to counter that missile to a lot of other applications like that.

Also, merging data from many, many sensors on a more holistic approach across the battlefield to be able to provide a greater picture of the entire battlefield to command and control type of applications for making planning steps. There's a lot throughout the tactical edge and back into the command and control are just a couple of examples.

Thank you.

Thank you.

Thanks, Scott.

Speaker 2

Thank you. Our next question is coming from Peter Arment with Baird. Please go ahead.

Yeah. Hey, good morning, Lynn, Chris, Jim, nice results. Hey, Chris, on the defense electronics margin performance, you know, it continues to be really, really robust. You know, when we think about, you know, I guess it's like 40% incremental. It's like, how do you think about the sustainability there? Is there opportunities for further expansion just given how strong the performance already is? Thanks.

Speaker 1

Yeah, the team is doing an absolutely great job this year, Peter. We've talked a little bit about the restructuring for growth that's been going on within the defense electronics segment this year and particularly focus on throughput. One of the great things about moving product through your shops faster is some of the improved absorption that you get in that way. There's also been a lot going on across that team this year in both commercial excellence and operational excellence. Just taking a look at certain parts of the business that have further opportunities, bringing them up to best practices when it comes to, I'll call it, the operational excellence. There's even been some pricing successes in a few areas of that business. It's really a good collection of effort through our operational growth platform to drive that improvement.

Yes, I do think that there's further opportunity that lies ahead for that team, but we're certainly balancing it against a couple of things here as we move deeper into the year. We still are going through that restructuring. We're still moving product across the various business units. Beyond that, we have a lot of, I'll call it, focus disruption this year as the team readies itself for that full-scale ERP implementation that's currently going on. That'll kind of consume more management attention units as we get deeper into the year. Those are some of the things that we're just kind of being a little bit more cautious for as we look at the margins. Also, as you kind of look at the strong start to the year, it's important to note that we did have some favorable mix in C5-ISR programs in the first half.

We had some FX uplift. We expect the dollar is going to weaken as we get a little bit further into the year, and that's going to flip that around. We do have a strong IR&D ramp that's planned for that organization in the back half of the year. Really pleased with the continued raises and the margin performance, the record-breaking margin performance for that segment. We're optimistic as we go forward, but we're continuing to be cautious in a few areas.

Speaker 0

Yeah, Peter, I only have a couple of things.

Speaker 1

Yeah, everything's good. No, that's okay. The other side of that story is our alignment with where the U.S. Department of Defense budget's going and the direct foreign military sales is, we have such strong incrementals in the team that our ability to assure we're doing things to accelerate top-line growth. That's everything from the NVIDIA partnerships we just talked about to the Honeywell Flight Data Recorders to our alignment on Golden Dome and doors that's going to open to us. Our position, our good and strong position that we've had for years across Europe and the NATO allies of the build-out that's really just beginning there, is broadly very good margin business to us. We've got to keep the top line going too, and we've got a good line of sight on that.

Yeah, Lynn, just as a quick follow-up to the voice, the flight data recorders, do you see the retrofitting being kind of at its steady cadence with the mandate between now and 2030, or is there an accelerant around that? Thanks.

Speaker 0

I think it will accelerate. I mean, we're getting going with people reconciling they have to do this. We've been working with production with Boeing for that, you know, been what's been the underpinning of what was part of our guide. I would say the majority of the raise we did last quarter is us getting clearer line of sight with our partner Honeywell on how the fleets are going to go about doing these retrofits. It's early days, but the mandate really goes across a good portion of the regional jets, and that's a big area of focus for us. There are a lot more regional jets than there are even 737. A big, big area of growth there. We've been pretty open that we're working to be qualified on Airbus, and that's anticipated in the first half of 2026.

A lot of things are coming that are going to make that area growth. It's one of our, as we talk about deep diving our capacity planning across nuclear, it's another area we're really making sure we're fully analyzing our capacity planning for what's coming.

Thanks, Lynn.

Thank you, Peter.

Speaker 2

Thank you. Our next question is coming from Miles Walton with Wolfe Research. Please go ahead.

Great. Thanks. Good morning. Lynn, I was hoping you could touch on the M&A pipeline, perhaps what you're seeing there. I know Ultra was the last deal in that space, but obviously you're going to end the year here probably with a pretty unlevered balance sheet to excess cash. Just curious on the overall capital deployment and M&A pipeline.

Speaker 0

Okay. Thank you for that. I think when you probably took note that when we talked on this topic at the end of Q1, we indicated that we had a couple of things we were looking at, and we are not going to act on those things that we were in the process of looking at in Q1, that they really just didn't meet our strategic and financial requirements. As much as we clearly state this is our top intended use for our capital, it is not with compromising our standards. The pipeline is not empty, so I'm not implying that. I think there was a little bit more line of sight for something coming in the back half of this year, and those we've dismissed. With that, the teams are active. We're outlooking.

We're always prioritizing companies that are privately held that we can convince to go exclusively with Curtiss-Wright, but we're very active in the financial community also. We will return capital to shareholders. We talked about raising our dividend and increased share buyback authorization from our board. Maybe I'd ask Chris to speak a little bit to our thinking around the share buyback as our second priority for our capital.

Speaker 1

Yeah, we certainly believe that share buyback is the most effective way to return capital to shareholders. The board increased our authorization by $400 million in May. We now have $534 million in authorization. We still believe that there's a lot in the windshield ahead for us, and we're excited to meet with the board again here in September and have some discussions about the best way to deploy that cash. We're certainly not intending to sit on our hands, and we're excited about what we can do with that money.

Okay. Cool. Maybe on the defense electronics third quarter decline and reacceleration in the fourth quarter, how much of that is visible based on the backlog? How much of that is conversations with customers? If you can give us the book to bill that you had in defense electronics in the second quarter.

Sure. Maybe what I'll do is I'll just start with the book to bill that we had within defense electronics in the second quarter overall, which was about a 0.9 book to bill. I will say that our orders were up 5% year over year, and our backlog has increased 3% year over year. It's been kind of an unusual year. We are used to starting off, as we have several times over the past four or five years, under a CR. We had that resolved or what we felt was effectively resolved in the first quarter. The CR has a little bit more nuance to it. It was a 1% increase over the prior year funding levels, but it also provided the government with opportunities to redeploy funding to what they considered to be the highest priorities. We think we're very well aligned with those priorities.

It has created some uncertainty and delay in the way that those decisions are being made and the orders are being placed. The most benefit of the business for us, as we've mentioned in the past, given the direct connectivity to the government customer, is in tactical communications. We've seen a little bit more delay in that order book here in the second quarter. Lynn and the rest of the management team have frequent discussions to evaluate the pipeline, the status of where we are within our order book. We do see a very strong pipeline in front of us. There will be some timing issues here. We think some of those will be resolved prior to the end of the government's fiscal year end. Given the ship and bill nature of that business, we'll probably see those sales increase in the fourth quarter. That's our current expectation.

We do have a strong backlog across this business. We're very, very confident in our overall sales guidance for the year, but it's going to put a little bit more pressure on Q3. We will maintain our profit margins. Q4 is going to be a strong finish to the year from a sales perspective.

All right, thanks for the call.

You're welcome.

Speaker 2

Thank you. Our next question comes from Louis Dupont Diploma with BMO Capital Markets. Please go ahead.

Lynn, Chris, and Jim, good morning and great quarter. You mentioned Golden Dome as a potential opportunity. Speaking of large programs, do you expect to play a role with the Army's next-generation command and control program with your edge products as there's been over $3 billion in funding? We know that Palantir and Anduril received an initial prototype contract, but there likely will be many vendors involved in that one, similar to Golden Dome. What are you seeing in the pipeline with that program? In general, where are you seeing the most demand for your encryption, tactical communications, and edge computing products?

Speaker 0

Yeah. We have been involved with that in that area with that program for several years and definitely see ourselves ramping with it. You said Golden Dome, but stepping back broadly, there's a handful of new starts going on across next-generation fighter jets, next-generation rotor wings, the CCA program. I feel very good about our penetration across those various platforms to be prepared. Some, a winner has been selected. Some are still in competition with two winners. That's even the XM30 program, another example that doesn't seem to make it to the headlines quite as much. We have solid content across the two players that are competing for final down select on that. Our tactical communications with some really advanced encryption technologies is being very well integrated into the rollout of those programs.

I think Golden Dome is going to be a great driver for Curtiss-Wright, between the computing and our electromechanical actuation equipment, along with the radars across a lot of the major systems that will be integrated to make Golden Dome working in unison and not as isolated systems. That's a very good alignment with our product.

Speaker 1

Did you estimate earlier in the call that the AP1000 reactor opportunity in North America is over $1 billion?

Speaker 0

Yes, we just put that out as a reference, and it will be, but again, we're cautious. We are a supplier to Westinghouse Electric Company. We're working to, we fully anticipate we'll be their partner on that program. We don't like to get ahead of ourselves of saying exactly what content and how things will shake out, but we need to work hard to be a good supplier to them. That's the position we're in. Yes, it's a very significant opportunity for us.

Speaker 1

Excellent. Thanks, Lynn, Chris, and Jim.

Speaker 0

Thank you.

Thank you, Lynn.

Speaker 2

Thank you. Our next question comes from Peter Skibitsky with Olympic Global. Please go ahead.

Hey, good morning, guys. Nice quarter. Hey, Chris, I think your DCS sales or your direct FMS sales were about 9% of your total revenue last year. I'm just wondering, is that levered more so to one segment than another? I was wondering, which of the three segments do you expect to grow DCS sales the fastest this year?

Speaker 0

Maybe I'll just talk about it broadly. I don't think we've given much color on how it breaks out across the segments, but if you hear the product families, it kind of tells you where it is. We've had a long position with defense electronics equipment of various types being sold directly into the defense markets across NATO and allied countries. That's probably the top area I would call out. Our current drive stabilization capabilities and mission packages, which is part of defense electronics, is definitely poised for some amazing growth. There was an announcement out of Germany a couple of weeks ago about spending $25 billion on military vehicles. One of the vehicles they called out was the Boxer armored fighting vehicle platform, which we had just announced a few months ago, our partnership with Rheinmetall selecting us for the stabilization equipment and some other equipment on those vehicles.

They're going to build somewhere between 2,500 to 3,500 vehicles. That's a good place. We do a lot of equipment on European-built rotorcraft. It's just really a broad coverage, European-built fighter jets, so just broad coverage there. Our aircraft arresting systems equipment, which is in the naval and power segment, is definitely well adopted around the globe. When we bought those, we bought the team as a carve-out from Safran. We were very open that 75% of their sales were outside of the U.S. That's a great place where we have a great international footprint, and it's continuing to grow. The other area I would call out is our aircraft landing equipment from our team that does a lot of specialized equipment that's integrated onto the deck of ships to allow helicopters to land in higher sea safely for the airmen. There's a couple of the areas.

It's a very good portion of our business. We are saying that now, I appreciate you referencing the 9%, that this year we anticipate our direct foreign military sales will be up to 10% of Curtiss-Wright Corporation's overall revenues, relating to these areas of growth.

Great. Thanks so much for the call.

Thank you.

Speaker 2

Thank you. Our next question comes from Nathan Jones with Seafold. Please go ahead.

Speaker 1

Morning, everyone.

Speaker 0

Good morning, Nathan. Just a couple of questions. You guys have had really great success investing for growth over the last few years. Pivot to growth definitely has clearly been a success. You do have plenty of good tailwinds to revenue over the next few years. I know you said you're investing an incremental $20 million in R&D this year. Do you see opportunities to further accelerate some of the internal investments targeting some of these areas that have come to the front in terms of growth over the next few years? Yeah, I think there will be areas that we will continue to invest in ourselves that are a priority for us. We're not quite to those yet, but we will definitely have some significant expansion to do to ramp to the nuclear capacity, which is great.

We are very transparent with the partners we have in this space as to how they see their ramp going and therefore their need of our product. We're modeling that out, but that's definitely going to drive some incremental investments. That's not just in capacity planning. There will be some investments in building out some products to have the right products to supply into some of these suppliers. We talk with the various major players in this space where we're quite willing to make investments as the opportunity base becomes more clear. That's one area that's top of mind. I mentioned the flight data recorder ramp that we see coming. That's going to require some investment.

There's no major capital with it that is as significant as really across some of the nuclear equipment, but there's a lot of areas that we can continue to invest in R&D across our businesses. There's an ever-growing capability. If I take our subsea area that we've been investing in really for over five years, at this point, it's just taking off. We're getting ready to deliver the first pump to Shell. We've been down in Brazil. There's a lot of incremental opportunities and there'll be investments required to be able to ramp in that area. I'm not saying it's limited to those. Those are sort of the ones that come to top of mind.

We are very much looking, you know, when we think of our capital investments, you know, we've typically always said that around 2% seems to be the right level for us to invest in capital back into the company. That may tick up a little above 2% in the back of this decade, but it'll be a great situation for everyone that we need to do those investments because we'll have line of sight on the revenues that they're going to be tied to.

Speaker 1

I reach on capital. I don't think you'll get any pushback on that, investing in that. Here's a high-level question. Over the last several years, you guys have talked about being aligned to the U.S. Department of Defense budget and expect to outgrow the U.S. Department of Defense budget each year. There's like a 13% increase in the U.S. Department of Defense budget for fiscal 2026. Why shouldn't we expect you to outgrow that budget for your U.S. military business?

Speaker 0

I know that you've always taken note of our making that point, and we're very proud of what we've done over the past years and had good growth in down budgets and up budgets. This is definitely an up budget with the combination of the base budget and the continuing or in the reconciliation. Thank you very much, Chris. I don't think we're going to quite get ahead and talk about what we anticipate coming in 2026 yet. We are very well aligned to where those monies are being spent and whether that's the shipbuilding and funding for the industrial base, which we are very aggressively pursuing, to the communication equipment, to tactical aircraft where we have very strong historical footings. Whether that is the F-47 or the MB-75 or the F-15, we really are in good position across all those as doing retrofit on the existing fleet.

I know we're aligned to the right places, and that's added to our continued accelerant of the direct foreign military sales contributing to our overall defense growth. I definitely think it's in the possibilities. We'll wait till we get a little further through the end of this year that we see we really do need to get some more color on the 2026 budget, and there hasn't been an FYDP published yet. Some of those things will play into our ability to characterize where our revenues will come. You'll hear that guidance in due time as we round out this year.

Speaker 1

Thanks for taking my questions.

Speaker 0

Thank you, Nathan.

Speaker 2

Thank you. Our next question comes from Michael Tirmulli with True Securities. Please go ahead.

Hey, good morning, guys. Nice results. Thanks for taking the question. Lynn, can you, I think our vendor, Chris, just an update on the Columbia-class submarine? I think you said the profile stabilizes, you know, then it's down. Can you just give us a general update, maybe where you are on that, what ship set you're working on, and, you know, does that pick back up in 2026?

Speaker 1

Yeah, sure. I mean, as you saw, Mike, the strength of the Columbia-class submarine was the number one driver here in the first half of the year. It ramped up significantly. It front-loaded with material receipts. We talked about in the script that the production is going to lower and stabilize in the back half, but that's really just kind of a shift from material to labor. It's not necessarily indicative of what's happening with the ship. We continue to increase the cadence to meet that desired one per year case that the customer has called out for. As you kind of look at where we are from a ship perspective, we certainly had been working on one. As you look at one, that peaked out in prior years. This year we're working on sub two. We'll probably reach the peak there and sub the production on sub one.

We're moving towards that. Again, we're ramping up to a desired nice one per year pace. I think, more importantly, as you take a look across our total naval business, and we talked about a strong support for shipbuilding, etc., we've got a very strong backlog in that business. Overall, a great growth trajectory lies ahead for naval defense at Curtiss-Wright Corporation.

Got it. That's helpful. Lynn, this might just be semantics or mincing words, but I think you said you fully expect to be a partner for Westinghouse. Is there a chance you wouldn't be supplying the reactor coolant pumps? Thinking about the reactor coolant pump opportunity, when do you really start kind of priming that supply chain? I know you're thinking of getting that order in 2026, but is that supply chain ready to go?

Speaker 0

Yeah. It probably is more semantics because I just don't like to speak to it in a presumptive manner when we're working the details out with them. We're absolutely working with them to plan these, not just the overseas reactors, but the 10 new reactors that are to be built here in the U.S. I think if you listen to some of the things that they're saying publicly, one of the real strengths that they believe they have in winning business is not changing the design. Having a consistent design that has a very good proven track record that they can move into a sequential ramp by repeated production is very much publicly part of their strategy. Obviously, we're the only one to deliver the reactor coolant pumps to them. That is obviously indicative of good business signs for Curtiss-Wright.

We just hold back and are cautious in saying anything is a given.

Got it. Got it. Just a quick follow-up. I mean, if they do actually start construction by 2030, what's kind of your lead time on that?

Yeah, I don't know. That's something we have to work with Westinghouse Electric Company on. We've given our lead time. We do still think that Poland, somewhere in Eastern Europe, most likely Poland, will be the first orders that we will get. We've been pretty consistent in saying sometime in 2026, and we still see that. Obviously, they've got to be ordering pumps sooner than later if they're going to be in construction in 2030. We're definitely working on our capacity plan as indicative of when we see these orders coming.

Got it. Perfect. Thanks, guys. Appreciate it.

Speaker 2

Thank you. Our next question comes from Justin Lenk with Morgan Stanley. Please go ahead.

Yeah, hi. I'm on for Christine today. Thanks for taking the questions. Just sticking with the large reactor opportunity in the U.S. with Westinghouse, obviously appreciate it's early stages, but should we think about the economics around domestic efforts looking similar to maybe some of the near-term opportunities ahead of you in Eastern Europe, or are there any material differences to note at the outset?

Speaker 0

I think they'll be similar. Again, the details are not fully worked out, but yes, I mean, we will provide product to Westinghouse Electric Company at a negotiated contractual rate. I think that will be relatively, if not exactly, consistent.

Okay, great. You called out higher embedded computing revenue in the quarter in part related to domestic UAV programs. I think back to the 2024 investor day, there's some discussion of runway with unmanned systems building off your role on Triton. I was just hoping you could elaborate a little bit on the drone market opportunity ahead of you, just given some of the momentum we've seen in that specific area. Thanks.

Yeah, I mean, Curtiss-Wright Corporation's got a long history of participating in the drone market back to Global Hawk and EuroHawk, going back well over a decade ago. One of the things that's exciting to me is, I mean, everybody sees the images in the news and understand that the size of what a Global Hawk was and what people promote now is what the size of many of the UAVs are. There is a level at a smaller level that would not be an area Curtiss-Wright Corporation would play, little things you see people holding in their hands and such like that. That's not an area that I see any fit for Curtiss-Wright Corporation in, but there is a lot in between there.

Our product portfolio includes quite a range of size, weight, and power compute options that can find applicability across a very large portion of platforms in this. There are a lot of things we're engaged in. Not all of them are public knowledge yet, but it's definitely an area where we're very active. The flip of that is the build-out of counter UAS technology is definitely a focus, knowing that the quantities of these smaller, cheaper drones that can be levered in the war space. That is also an area, not the UAVs themselves, but the defenses against them is a very area where we have very relevant technology. That's, you know, asked earlier about some of the applications for the NVIDIA products. That's also a good use case for it. A lot of things. All unmanned is there's unmanned ground vehicles and unmanned water vehicles.

We're exploring where our product fit is across all of those.

Perfect. Thanks.

Thank you.

Speaker 2

Thank you. Our next question comes from Tony Bancroft with Gabelli Funds. Please go ahead.

Good morning, team. Congratulations on all your successes. You mentioned earlier about, you talked a little bit about M&A. Maybe just to get a little more into that, you have a large group of great businesses that you've either acquired or grown from submarines to arresting gear, tactical communication equipment, planes. Could you maybe just give us a broad stroke priority on if you were to continue doing M&A? I know it sounds like the beginning of this year didn't work out, but going forward, how do you sort of align those or how do you prioritize those different businesses? Is there something new that we're not thinking about?

Speaker 0

Yeah. I definitely wanted to be open about pulling some things out that we had alluded to in Q1, but that does not mean there's not items in the pipeline. I do want to just be cautious to make sure I don't send some tone. M&A is absolutely going to be part of our future going forward. We have been pretty open over the past couple of years. Defense electronics is definitely a place that we look to acquire. We have such a great track record and our global reach of that team really that some of these more bolt-on types of acquisitions, we can bring so much power to how they can sell their products based on the reach of our team that it usually can be a great fit.

That's an area where we can push out the walls on the types of products we do and bring that expertise of ruggedization to help broaden the product offering. There's a lot of properties in that space. That's probably the highest area where we see potential acquisitions. We definitely continue to look there. Major naval and aircraft safety systems definitely also fit our mandate of where we drive our product strategies to safety-critical types of applications. ESCO is a great example of that. They are absolutely critical for the safe landing of aircraft on both ground and sea. That is an area we'll look. I feel really lucky that last year we were able to have two acquisitions in the commercial nuclear space. That is an area we look and we're still active. There's not a lot of properties that would come available there.

There is a potential in that space too. I'd say those are broadly our priorities.

Speaker 2

Commercial aerospace, it's not an area we've been very active. It's not that it's impossible or, you know, off the table. We're very purposeful. You probably remember many years ago, five-ish years ago, we shed business that we did not own the intellectual property on and was the continual margin challenge. We're very careful that we want to grow our businesses in places that really have differentiated technology. That's one of our strategic fits. Who knows, maybe someday we'll find something there. Probably right now in the industrial markets with some of the challenges in those markets, it wouldn't be a top priority. Again, select technology that really would give us a differentiator that we could tuck into that team, it would not be off the table. I think it's one of the powers for our acquisition strategy that we have as a company because we are diversified.

We can look at a broad range of books in different end markets and be very selective. Where if you're very narrow in the end market for your business, you might feel more push. You have to take what becomes available in that market. Curtiss-Wright Corporation is just never going to do that.

Speaker 4

That's a great overview. Thank you, Lynn. Great job.

Speaker 2

Thank you.

Speaker 0

Thank you. I'm showing no further questions at this time. I will turn the floor back to Lynn Bamford, Chair and Chief Executive Officer, for additional or closing remarks.

Speaker 2

Thank you, everybody, for joining us. We look forward to either seeing you out on the road or at our next earnings call. Thank you.

Speaker 4

Thank you.

Speaker 0

Thank you. This concludes today's Curtiss-Wright Earnings Conference call. Please disconnect your line at this time and have a wonderful day.