Curtiss Wright Corp Q2 FY2025 Earnings Call

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, Chris 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 detail those risks and uncertainties associated with our forward-looking statements, including the impacts of tariffs in 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 to 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.

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 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 3-year objectives that we provided at last May's Investor Day. As we look to the next 5 to 10 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 2 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 earnings per share 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 continue to support capital investments across all 3 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 1.1x. 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 1.2x. With our commercial market, we experienced strong demand in our commercial nuclear aftermarket, supporting the planned 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 9 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.

Thank you, Lynn. I'll begin on Slide 4 by reviewing the key drivers of our second quarter 2025 performance by segment. Starting in Aerospace & 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 production on both narrow-body and wide-body platforms. Across the segments, 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. And turning to the segment 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 segments 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, commercial aerospace market, we experienced a modest increase in sales for our flight data recorder 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 mix, 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 5 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 the surge in third quarter orders as we approach the U.S. government September 30 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, the 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 U.K. submarines. Looking more broadly across all 3 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. In Power & 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 U.S., U.K. 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. And 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 6, 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 raised 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 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' 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%. Again, 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 then 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 segments, 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. So 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. And 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 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 7. Building upon our first half performance and expectations for continued strong growth, we have increased our full year adjusted diluted EPS guidance to a new range of $12.70 to $13 or up 16% to 19% and 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. And 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.

Thank you, Chris. And turning to Slide 8. 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 FY '26 DoD budget and reconciliation bill, including shipbuilding, 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 ensures that Curtiss-Wright will continue to play an important role supporting both current and next-generation pursuits. In addition, we strengthened 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 life cycle 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 to 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 COP 28 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 4 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 agreement 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 technologies supporting the entire life cycle 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 3-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 were 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 U.K. supply base. Rolls-Royce SMR was recently selected by great British Energy to provide the U.K.'s first 3 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 9, 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 3-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 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 4 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 to 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. And at this time, I would like to open up today's conference call for questions.

Our first question is coming from Scott Deuschle with Deutsche Bank.

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

Sure. Yes. So 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. 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 2, 3 supplier, and 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 orders that are made here in the third and fourth quarter but that our customers are also very concerned that they don't disrupt the flow and capacity of products that we've achieved over the past few years. So I think it's just particularly true when you think about the large growth rates that lie ahead on the major platforms over the next few years. So 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.

And then, 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. So just with that as context, can you speak a bit as to what kind of product applications these GPU cards are finding use cases for? And also what types of customers are using them today?

Yes. 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. So that's pretty good. It's definitely the mention of the tactical edge that really a lot of what's going on in modernization is about taking sensor data, processing it and acting, whether that's defensive moves or offensive moves to counter the data that's coming in from that sensor. And this is really opening up the ability to deploy those kinds of applications broadly across the battle space where quick decisions are essential. So that's like the high level. So that comes into defensive systems on ground vehicles that sends an incoming missile and something to counter that missile to a lot of other applications like that. But then also emerging data from 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. And so there's a lot throughout the tactical edge and back into the command and control is just a couple of examples.

And our next question is coming from Peter Arment with Baird.

Chris, Lynn, nice results. Chris, on the Defense Electronics margin performance, and it continues to be really robust when we think about, I guess, like 40% incrementals, like how do you think about the sustainability there? And is there opportunities for further expansion, just given how strong the performance already is?

Yes. 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. And one of the great things about moving product through your shops faster is some of the improved absorption that you get in that way. But there's also been a lot going on across that team this year in both commercial excellence and operational excellence. And just taking a look at certain parts of the business, they have further opportunities, bringing them up to best practices when it comes to, I'll call it, the operational excellence. But then there's even been some pricing successes in a few areas of that business. So it's really a good collection of effort through our operational growth platform to drive that improvement. And 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. I mean we still are going through that restructuring. We're still moving product across the various business units. And beyond that, we have a lot of focused disruption this year as the team readies itself for that full-scale ERP implementation that's currently going on. So that will kind of consume more management attention units as we get deeper into the year. So 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. But then 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 put that around. And we do have a strong IR&D ramp that's planned for that organization in the back half of the year. So 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.

Yes, Peter. I would add that the other side of that story is our alignment with the direction of the DoD budget and military sales. We have strong incremental growth in the team, which enhances our ability to drive top-line growth. This includes our partnerships with NVIDIA, Honeywell flight data recorders, and our alignment on golden Dome and doors that are opening for us. Additionally, our solid position across Europe and NATO allies, where the build-out is just beginning, is expected to bring us good margins. We need to keep the top line growing, and we have clear visibility on that.

Yes, Lynn, I wanted to follow up regarding the flight data recorders. Do you expect the retrofitting to occur at a consistent pace, or do you anticipate any factors that could accelerate that process?

I think it will accelerate. We're just starting to see people reconciling their need to do this. We've been collaborating with Boeing, which has been the basis of our outlook. However, I would say that the bulk of the increase we announced last quarter comes from gaining clearer visibility with our partner, Honeywell, on how the fleets will undertake these retrofits. It's still early days, but the mandate covers a significant portion of regional jets, which is a major focus for us, and there are many more regional jets than there are even 737s. This presents a substantial area for growth. We have been quite transparent about our efforts to qualify on Airbus, which we expect to achieve in the first half of 2026. Many developments are on the horizon that will drive growth in this sector. As we evaluate our capacity planning across nuclear, this is another area where we're ensuring we thoroughly analyze our capacity for upcoming demands.

And our next question is coming from Myles Walton with Wolfe Research.

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, excess cash. And just curious on the overall capital deployment and M&A pipeline.

Thank you for that. At the end of Q1, we mentioned that we were considering a few options, but we have decided not to pursue them because they did not align with our strategic and financial goals. While we emphasize that capital deployment is a priority, we will not compromise our standards. The pipeline is active, and we anticipate more opportunities in the latter half of this year, but we've dismissed those earlier options. Our teams are proactively searching for privately held companies that would partner exclusively with Curtiss-Wright, and we are also engaged with the financial community. We intend to return capital to shareholders, having discussed plans to increase our dividend and broaden share buyback authorization from our Board. I'll ask Chris to elaborate on our strategy regarding share buybacks, which is our second priority for capital.

Yes. 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. But we're certainly not intending to sit on our hands, and we're excited about what we can do with that money.

Okay. Cool. And then maybe on the Defense Electronics, third quarter decline and then reacceleration in the fourth quarter. How much of that is visible based on the backlog? How much of that is conversations with customers? And maybe if you can give us the book-to-bill that you had in Defense Electronics in the second quarter?

Sure. Yes. Maybe what I'll do is I'll just start with the book-to-bill that we have within Defense Electronics in the second quarter overall, which was about 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. But it's been kind of an unusual year. We are used to starting off as we have several times over the past 4 or 5 years under a CR. And then we had that resolved or what we felt was effectively resolved in the first quarter. But 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 kind of redeploy funding to what they consider to be the highest priorities. And we think we're very well aligned with those priorities. But it has created some uncertainty and delay in the way that those decisions are being made and the orders are being placed and the most sensitive business for us as we've mentioned in the past, given the direct connectivity to the government customer is in tactical communications. So 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 kind of evaluate the pipeline, the status of where we are within our order book, and we do see a very strong pipeline in front of us. But there will be some timing issues here. We think some of those will be resolved here prior to the end of the government's fiscal year-end. And given the ship-and-bill nature of that business, we'll probably see those sales increase here in the fourth quarter. That's our current expectation. So 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, but Q4 is going to be a strong finish to the year from a sales perspective.

And our next question comes from Louie DiPalma with William Blair.

Chris and Jim, good great quarter. You mentioned Golden Dome as a potential opportunity. But 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. So what are you seeing in the pipeline with that program? And just in general, where are you seeing the most demand for your encryption, tactical communications and edge computing products?

We have been involved with that program for several years and definitely see ourselves moving forward with it. There are several new initiatives underway for next-generation fighter jets, next-generation rotor wings, and the CCA program. I'm optimistic about our involvement across these different platforms. A winner has already been chosen in some cases, while others are still competing with two finalists. The XM30 program, for instance, may not get as much attention, but we have a strong presence with both competitors vying for the final selection. Our tactical communications, which include advanced encryption technologies, are integrating well into these programs. I believe Golden Dome will significantly benefit Curtiss-Wright through our computing NAND and electromechanical actuation equipment, along with radars on many major systems that will work together rather than as separate units. This aligns well with our products.

Great. And did you estimate earlier in the call that the AP1000 reactor opportunity in North America is over $1 billion?

Yes. We provided that information as a reference, but we are cautious. As a supplier to Westinghouse, we are working towards becoming their partner on that program. However, we prefer not to speculate on the specifics of the content and how everything will develop. We need to focus on being a reliable supplier for them, and that is our current stance. Nonetheless, it is a significant opportunity for us.

And our next question comes from Peter Skibitski with Alembic Global.

Chris, I think your DCS sales or your direct FMS sales were about 9% of your total revenue last year. Just wondering, is that levered more so to one segment than another? And I was wondering which of the 3 segments do you expect to grow DCs the fastest this year?

I'll provide a broad overview, though we haven't detailed how our performance breaks down by segment. Our product families indicate where we stand. We have a longstanding presence in defense electronics equipment, which is sold directly to defense markets in NATO and allied countries. This is a key area for us. Our turret drive stabilization capabilities and mission packages within defense electronics are well-positioned for significant growth. Recently, Germany announced a $25 billion investment in military vehicles, including the Boxer tank, which we launched a few months ago. Our partnership with Rheinmetall has resulted in our selection for stabilization and other equipment for these tanks, with plans to manufacture between 2,500 and 3,500 units. We also provide equipment for European-built rotorcraft and fighter jets, showing broad coverage in Europe. Our arresting system equipment, part of the Naval and Power segment, has seen global adoption. When we acquired this team from Safran, we noted that 75% of their sales were outside the U.S., giving us a solid international presence that continues to expand. Additionally, our aircraft landing equipment team specializes in equipment that helps helicopters safely land on ships in higher sea conditions. These areas represent significant parts of our business. I appreciate your mention of the 9% figure; we expect our direct foreign military sales to reach up to 10% of Curtiss-Wright's total revenues this year, driven by these growth areas.

And our next question comes from Nathan Jones with Stifel.

I have a couple of questions. Your team has achieved significant success in growth investments over the past few years, and the Pivot to Growth strategy has clearly been effective. You also have several positive factors contributing to revenue in the coming years. I understand you're investing an additional $20 million in R&D this year. Are there opportunities to further accelerate internal investments in the areas that are emerging as growth opportunities over the next few years?

Yes, we will continue to prioritize investments in certain areas, and while we're not fully there yet, we anticipate significant expansion to meet nuclear capacity needs. We maintain transparency with our partners about their ramp-up and product needs, which will guide some additional investments. This goes beyond capacity planning to include developing the right products for various suppliers. We engage with major players in the industry and are open to investments as opportunities become clearer. One key area is the ramp-up of flight data recorders, which will require investment, although it may not involve major capital like some nuclear equipment. We can also invest in R&D across our businesses, particularly in our subsea segment, which has been growing impressively after over five years of investment. We're preparing to deliver our first pump to Shell. While these examples stand out, they are not exhaustive. Generally, we believe investing around 2% of our capital back into the company is appropriate, and this may increase slightly in the coming years, driven by revenue visibility linked to these investments.

High return capital, I don't think you get any pushback on investing in that. Here's a high-level question. Over the last several years, you guys have talked about being aligned to the DoD budget and expect to outgrow the DoD budget each year. It's like a 13% increase in the DoD budget for fiscal '26. Why shouldn't we expect you to outgrow that budget for your U.S. military business?

I want to emphasize that we take pride in our achievements over the past few years, during which we have experienced good growth amid varying budgets. This year, we have an increase in our budget due to the combined base budget and the continuing resolution. Although we are not ready to discuss our expectations for 2026 just yet, we are well-positioned regarding our spending priorities. This includes investments in shipbuilding, funding for the industrial base, communications equipment, and tactical aircraft, where we have established a strong presence, particularly with projects like the F-47, MB-75, and F-15. We are also making improvements to the existing fleet. I believe we are focusing on the right areas, and this aligns with our ongoing growth in foreign military sales, which is crucial for our overall defense expansion. We will wait until we have more clarity on the 2026 budget, as we have yet to see a published FYDP. These factors will influence our revenue projections, and we will provide guidance as we approach the end of this year.

And our next question comes from Michael Ciarmoli with Truist Securities.

I think I was under Chris, just an update on the Columbia, I think you said the profile stabilizes, then it's down. Can you just give us a general update maybe where you are on that? What ships that you're working on? And does that pick back up in '26?

Yes, absolutely. As you mentioned, Mike, the Columbia has been the primary contributor in the first half of the year, and we saw a significant increase in material receipts. While we've indicated that production will decrease and stabilize in the latter half of the year, this is mainly a transition from material to labor and doesn't reflect any issues with the ship itself. We are committed to maintaining a steady pace of one ship per year as requested by our customers. Currently, we're focusing on a ship, which has reached its peak in previous years. This year, we are working on a sub-2 ship and are progressing towards reaching peak production for sub-1. Overall, we are on track to achieve that one-per-year pace. More importantly, when we look at our entire naval business, there's strong support for shipbuilding, and we have a robust backlog. There is a promising growth trajectory ahead for Naval Defense at Curtiss-Wright.

And our next question comes from Justin Lang with Morgan Stanley.

I'm on for Kristine today. Just sticking with the large reactor opportunity in the U.S. with Westinghouse, obviously, I appreciate it's early stages. But should we think about the economics around domestic efforts looking similar to maybe in Eastern Europe? Or are there any material differences to note at the outset?

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

Okay. Great. And then I think you called out higher embedded computing revenue in the quarter in part related to domestic UAV programs. So when I think back to the '24 Investor Day, there was some discussion of runway with unmanned systems, building off your role in Triton. So I was just hoping you could elaborate a little bit on the drone market. opportunities ahead of you, just given some of the momentum we've seen in that particular area?

Yes. I mean, Curtiss-Wright has a long history of participating in the drone market back to Global Hawk and EuroHawk going back well over a decade ago. And so one of the things that's exciting to me is, I mean, everybody sees the images in the news and I 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. And there is a level at a smaller level that would not be an area of Curtiss-Wright 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, but there is a lot in between there. And our product portfolio includes quite a range of size, weight, and power compute options that could find applicability across a very large portion of platforms in this. And so there's a lot of things we're engaged in, not all of them are public knowledge yet, but it's definitely an area where were very active. And then the flip of that is the build-out of counter-UAS technology is definitely a focus knowing that the quantities of the smaller, cheaper drones that can be levered in the war space. And so that is also an area, not the UAVs themselves, but defenses against them is a very area where we have very relevant technology. And that's asked earlier about some of the applications for the NVIDIA products. That's also a good use case for it. And so a lot of things. And then there's all unmanned, there's unmanned ground vessels and unmanned water vehicles. And we're exploring where our product fit is across all of those.

And our next question comes from Tony Bancroft with Gabelli Funds.

Congratulations on all your successes. You mentioned earlier about M&A. I would like to delve deeper into that. You have a large group of impressive businesses that you've either acquired or expanded, including submarine technologies, arresting gear, tactical communication equipment, and planes. Could you provide some broad priorities on your future M&A strategies? I understand the beginning of this year didn't go as planned, but moving forward, how do you align or prioritize these different businesses? Is there something new we might not be considering?

I wanted to be transparent about some points we've mentioned in Q1, but I want to clarify that we still have items in the pipeline. M&A will certainly be a part of our future. We have expressed our interest in acquiring in Defense Electronics, where we have a strong track record and a global reach. We can enhance the sales capabilities of acquired businesses through our team's extensive reach. This allows us to expand the range of products we offer and leverage our expertise in ruggedization. We see significant acquisition opportunities in this area. Additionally, major naval and aircraft safety systems align with our product strategy focused on safety-critical applications, and ESCO is an excellent example of this. They play a vital role in ensuring the safe landing of aircraft on land and at sea. Last year, we successfully acquired two companies in the commercial nuclear sector, and we remain active there, even though options are limited. While we haven't been very active in commercial aerospace, it's important to note that it's not entirely off the table. We aim to focus on growing businesses where we can differentiate through technology. A few years back, we divested a business that lacked intellectual property and posed margin challenges, leading us to be more cautious in our growth strategy. Currently, due to challenges in industrial markets, commercial aerospace isn't our top priority. However, if opportunities arise that feature select technologies offering a competitive advantage, we would consider them. Our acquisition strategy benefits from our diversification across various markets, allowing us to be selective in our pursuits. Unlike businesses concentrated in a narrow market, we won't feel pressured to settle for what's available; that's not how Curtiss-Wright operates.

And 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.

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

This concludes today's Curtiss-Wright earnings conference call. Please disconnect your line at this time, and have a wonderful day.