Curtiss-Wright Corp (CW) 2021 Q2 法說會逐字稿

Thank you for standing by. And welcome to the Curtiss-Wright Second Quarter 2021 Financial Results Conference Call. (Operator Instructions). I would now like to introduce Senior Director, Investor Relations Jim Ryan.

Thank you, Andrew, and good morning, everyone. Welcome to Curtiss-Wright's Second Quarter 2021 Earnings Conference Call. Joining me on the call today are President and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas. Our call today is being webcast and the press release as well as a copy of today's financial presentation, is available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this webcast also can be found on the website. Please note, today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC.

As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance. Also note that both our adjusted results and full year guidance exclude our build-to-print actuation product line that supported the 737 MAX program, as well as our German valves business, which is classified as held for sale in the fourth quarter. GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth exclude the effects of restructuring, foreign currency translation, acquisitions and divestitures, unless otherwise noted.

Now I would like to turn the call over to Lynn to get things started. Lynn?

Thank you, Jim, and good morning, everyone. I'll begin with the key highlights of our second quarter performance and an overview of our full year 2021 outlook. Then I'll turn the call over to Chris to provide a more detailed review of our financial results and updates to our full year guidance. Finally, I'll wrap up our prepared remarks before we move to Q&A.

Starting with the second quarter highlights. Overall, we experienced a strong 14% increase in sales. Our aerospace and defense markets improved 11%, while sales to our commercial markets increased 21% year-over-year. Diving deeper within our markets, we experienced double-digit sequential improvements in sales within our commercial aerospace, power and process and general industrial markets. These markets were among the hardest hit by the pandemic last year, and we are encouraged by their improving conditions.

Looking at our profitability. Adjusted operating income improved 24%, while adjusted operating margins increased 120 basis points to 15.6%. This performance reflects strong margin improvement in both the aerospace and industrial and the Naval and Power segments based upon higher sales, as well as the benefits of our operational excellence initiatives. It's important to note that this strong performance was achieved while we continued to invest strategically with a $5 million incremental investment in research and development as compared to the prior year.

Based on our solid operational performance, adjusted diluted EPS was $1.56 in the second quarter, which was slightly above our expectations. This reflects a strong 22% year-over-year growth rate, despite higher interest expense and a slightly higher tax rate, which were generally offset by the benefits of our consistent share repurchase activity.

Turning to our second quarter orders. We achieved 11% growth and generated a strong 1.1x book-to-bill overall, as orders exceeded onetime sales within each of our 3 segments. Of note, our results reflect strong commercial market orders, which surged 50% year-over-year and included a record quarter of order activity for our industrial vehicle products covering both on- and off-highway markets. Within our aerospace and defense markets, book-to-bill was 1.15. This included $130 million in naval awards for aircraft carrier and submarine platforms, which we announced in an earlier press release, and we are also expecting a strong second half in orders.

Next, to our full year 2021 adjusted guidance, where we raised our sales, operating income, margin and diluted earnings per share. Our updated guidance reflects an improved outlook in our industrial markets, some additional planned R&D investments to support our top line growth and an increase to the full year tax rate. Chris will take you through the detail in the upcoming slides, but in summary, we are well positioned to deliver strong results in 2021.

Now I'd like to turn the call over to Chris to provide a more thorough review of our second quarter performance and our improved outlook for 2021. Chris?

Thank you, Lynn, and good morning, everyone. I'll begin with the key drivers of our second quarter results where we again delivered another strong financial performance. Starting in the Aerospace and Industrial segment, sales improved sharply year-over-year, and this was led by a strong increase in demand of approximately 40% for industrial vehicle products to both on- and off-highway markets.

This segment's sales growth also benefited from solid demand for surface treatment services to our industrial markets, which is driven by steady improvements in global economic activity. Within the segment's commercial aerospace market, we experienced an improved demand for our sensors products on narrowbody platforms. However, as we expected, those gains were mainly offset by continued slowdowns on several widebody platforms.

Looking ahead to the second half of 2021, we expect an improved performance within this market, led by increased production of narrowbody aircraft, including a 737 and A320. Longer term, we see narrowbody aircraft returning to prior production levels by the 2023 time frame, while widebody aircraft may not fully recover until 2024 or even 2025.

Turning to the segment's profitability. Adjusted operating income increased 138%, while adjusted operating margin increased 800 basis points to 15.7%, reflecting favorable absorption on higher sales and a dramatic recovery from last year's second quarter. Also, our results reflect the benefits of our ongoing operational excellence initiatives and year-over-year restructuring savings. And although we continue to experience some minor influences from supply chain constraints in both container shipments and electronic components, this impact was immaterial to our overall results.

In the Defense Electronics segment, revenues increased 17% overall in the second quarter. This was led by another strong performance from our PacStar acquisition, which is executing quite well and its integration remains on track. Aside from PacStar, second quarter sales were lower on an organic basis due to timing on various C5ISR programs in aerospace defense.

If you recall, we experienced an acceleration of organic sales into the first quarter for our higher-margin Commercial Off-The-Shelf products, as several customers took action to stabilize their supply chains due to concerns for potential shortage in electronic components. Segment operating performance included $4 million in incremental R&D investments, unfavorable mix and about $2 million in unfavorable FX. Absent these impacts, second quarter operating margins would have been nearly in line with the prior year's strong performance.

In the Naval and Power segment, we continue to experience solid revenue growth for our naval nuclear propulsion equipment principally supporting the CVN-80 and 81 aircraft carrier programs. Elsewhere in the commercial power & process markets, we experienced higher nuclear aftermarket revenues, both in the U.S. and Canada as well as higher valve sales to process markets. This segment's adjusted operating income increased 13%, while adjusted operating margin increased 30 basis points to 17.2% due to favorable absorption on higher sales and the savings generated by our prior restructuring actions. To sum up the second quarter results, overall, adjusted operating income increased 24%, which drove margin expansion of 120 basis points year-over-year.

Turning to our full year 2021 guidance. I'll begin with our end market sales outlook, where we continue to expect total Curtiss-Wright sales growth of 7% to 9%, of which, 2% to 4% is organic. And as you can see, we've made a few changes highlighted in blue on the slide. Starting in naval defense, where our updated guidance ranges from flat to up 2%, driven by expectations for slightly higher CVN-81 aircraft carrier revenues and less of an offset in the timing of Virginia-class submarine revenues.

Our outlook for overall aerospace and defense market sales growth remains at 7% to 9%, which, as a reminder, positions Curtiss-Wright to once again for our defense revenues faster than the base DoD budget.

In our commercial markets, our overall sales growth is unchanged at 6% to 8%, though we updated the growth rates in each of our end markets. First, in power and process, we continue to see a solid rebound in MRO activity for our industrial valve businesses. However, we lowered our 2021 end market guidance due to the pushout of a large international oil and gas project into 2022. And as a result, we're now anticipating 1% to 3% growth in this market.

Next, in the general industrial market, based on the year-to-date performance and strong growth in orders for industrial vehicle products, we've raised our growth outlook to a new range of 15% to 17%. And I'd like to point out that at our recent Investor Day, we stated that we expect our industrial vehicle market to return to 2019 levels in 2022 and we have a strong order book to support that path.

Continuing with our full year outlook, I'll begin in the Aerospace & Industrial segment where improved sales and profitability reflect the continued strong recovery in our general industrial markets. We now expect the segment sales to grow 3% to 5%, and we've increased the segment's operating income guidance by $3 million to reflect the higher sales volumes. With these changes, we're now projecting segment operating income to grow 17% to 21%, while operating margin is projected to range from 15.1% to 15.3% of 180 to 200 basis points, keeping us on track to exceed 2019 profitability levels this year.

Next, in the defense electronics segment, while we remain on track to achieve our prior guidance, I wanted to highlight a few moving pieces since our last update. First, based upon technology pursuits in our pipeline, we now expect to make an additional $2 million of strategic investments in R&D for a total of $8 million year-over-year to fuel future organic growth.

Next, in terms of FX, we saw some weakening in the U.S. dollar during the second quarter, and this will create a small operating margin headwind on the full year for the businesses operating in Canada and the U.K. In addition, we've experienced some modest impacts on our supply chain over the past few months, principally related to the availability of small electronics, which we expected to minimally persist into the third quarter. And while this remains a watch item, particularly the impact on the timing of revenues, we're holding our full year segment guidance.

Next, in the Naval & Power segment, our guidance remains unchanged, and we continue to expect 20 to 30 basis points of margin expansion on solid sales growth. So to summarize our full year outlook, we expect 2021 adjusted operating income to grow 9% to 12% overall on 7% to 9% increase in total sales. Operating margin is now expected to improve 40 to 50 basis points to 16.7% to 16.8%, reflecting strong profitability as well as the benefits of our prior year restructuring and ongoing company-wide operational excellence initiatives. Continuing with our 2021 financial outlook where we have again increased our full year adjusted diluted EPS guidance this time to a new range of $7.15 to $7.35, which reflects growth of 9% to 12%, in line with our growth in operating income. Note that our guidance also includes the impacts of higher R&D investments, a higher tax rate, which is now projected to be 24% based upon a recent change in U.K. tax law and a reduction in our share count, driven by ongoing share repurchase activity.

Over the final 6 months of 2021, we expect our third quarter diluted EPS to be in line with last year's third quarter and the fourth quarter to be our strongest quarter of the year. Turning to our full year free cash flow outlook. We've generated $31 million year-to-date. And as we've seen historically, we typically generate roughly 90% or greater of our free cash flow in the second half of the year, and we remain on track to achieve our full year guidance of $330 million to $360 million.

Now I'd like to turn the call back over to Lynn for some closing remarks. Lynn?

Thank you, Chris. I'd like to spend the next few minutes discussing some thoughts and observations since our recent May Investor Day. I'll start with the President's FY '22 defense budget request, which was issued shortly after our Investor Day event. The release reflected approximately 2% growth over the FY '21 enacted budget and was reasonably consistent with our expectations and plans. The budget revealed continued strong support for the most critical U.S. naval platforms, including the CVN-80 and 81 aircraft carriers and the Columbia class and Virginia class submarines. We believe the bipartisan support for the Navy's future provides us a strong base from which we can grow our nuclear and surface ship revenues and has room for potential upside, should they add a third Virginia submarine or another DDG Destroyer.

We also expect ongoing support for the funding of the DoD's top strategic priorities, including cyber, encryption, unmanned and autonomous vehicles, all of which were highlighted in the budget release. This bodes well for our defense electronics product offering, which support all of these areas. Another bright spot was Army modernization. Despite cuts to the overall Army budget funding to upgrade battlefield network is up 25% in the services FY '22 budget request to a total of $2.7 billion, which represents the single greatest increase among the Army's modernization priorities.

Further, it provides great confidence behind our decision to acquire PacStar as they are in a prime position to capitalize on the ongoing modernization of ground forces. Since then, we have also seen increasing signs of optimism as the budget makes its way through the congressional markup. The recent vote by the Senate Armed Service Committee to authorize an additional $25 billion to the Pentagon budget for FY '22 represents a 3% upside to the President's initial request and an overall increase of 5% above the current fiscal year. Though not final, this again, provides confidence in our long-term organic growth assumptions across our defense markets.

Next, I'd like to highlight some of the key takeaways from our recent Investor Day and say thank you to everyone who participated. Our pivot to growth strategy is led by a renewed focus on top line acceleration, which we expect to achieve through both organic and inorganic sales growth and our expectations to grow operating income faster than sales, which implies continued operating margin expansion. Additionally, we are targeting a minimum of double digit EPS growth over the 3-year period ending in 2023 and continued strong free cash flow generation. Based on our new long-term guidance assumptions, we're minimally expecting low single-digit organic sales growth in each of our end markets. We have good line of sight on achieving a 5% base sales growth CAGR, including PacStar by the end of 2023.

In addition to the organic growth embedded within these expectations, we are focused on maximizing our growth potential in our key end markets based on the contribution from our continued incremental investments in R&D, as well as the benefits of our new operational growth platform. We are reinvesting in our business at the highest level in Curtiss-Wright's recent history. And as you know, it's an area that I am very passionate about. As you saw in our updated guidance, we increased our 2021 R&D investment by another $2 million, reflecting a total of $12 million in incremental year-over-year spending.

These investments are targeted at critical technologies and the highest growth vectors in our end markets, such as MOSA in our Defense Electronics business. Additionally, the rollout of the new operational growth platform is providing greater management focus, attention and energy to drive all things critical to growth from reinvigorating innovation and collaboration to providing new opportunities in commercial excellence and strategic pricing.

As a result, we will have continued opportunities for cost reduction, which could free up money to cover short-term acquisition dilution, be distributed to R&D investments or result in margin expansion. These will be focused and conscious investment decisions. Further, I believe it's critical to point out that we will continue to drive our strong processes and dedication to operational excellence with the same level of commitment and vigor that this team has demonstrated since 2013.

Lastly, I wanted to reiterate that our target for a minimum EPS CAGR of 10% over the 3-year period is likely to incorporate annual share repurchase activity above our current base level of $50 million annually. We remain committed to effectively allocating capital to drive the greatest long-term returns to our shareholders. Therefore, the year-to-year allocation to share repurchases will vary depending on the size and timing of future acquisitions that we bring in to Curtiss-Wright.

Finally, with more management attention on M&A and a very full pipeline of opportunities, I feel very optimistic that we will have the opportunity to exceed 5% and approach the 10% sales target as we find critical strategic acquisitions to bring in to Curtiss-Wright.

In summary, we are well positioned to deliver strong results this year. We expect to generate a high single-digit growth rate in sales and 9% to 12% growth in both operating income and diluted EPS this year. Our 2021 operating margin guidance now stands at 16.7% to 16.8%, including our incremental investments in R&D, and we remain on track to continue to expand our margins to reach 17% in 2022.

Our adjusted free cash flow remains strong, and we continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth, while ensuring that we are investing our capital for the best possible returns to drive long-term shareholder value.

At this time, I would like to open up today's conference call for questions.

(Operator Instructions) Our first question comes from the line of Nathan Jones with Stifel.

I'd like to start off with a question on the cost commentary you had of customers potentially stocking up in 1Q that led to maybe a bit of a decline in the second quarter. You typically see a seasonal ramp into the second half, still anticipating seeing that seasonal ramp? And how do you think about inventory in -- the channel inventory (inaudible)? Do you think that they're still ahead of where they would normally be in line, behind, just any color you can give us on that?

Yes, sure. I'll take that one. I mean in Q1, we definitely saw some defense customers accelerated orders, looking to try to get ahead of the electronics component shortage. So as you look at this organic headwind that we had year-over-year in Q2 of about $8 million, that was really just work that had been accelerated into Q1. I mean we continue to experience some minor delays in electronic components. It's a fairly dynamic situation out there in the market, given what most companies went through last year and the steep ramp that most companies are fortunate enough to face this year.

But it's really impacting mainly the timing of revenues, Air Defense revenues, higher-margin C5ISR products within our Defense Electronics segment. Now as you look at the second half of the year, we expect that there will be some pressure based upon the timing and receipt of those components, and most of that pressure will be put on Q3. But as you've seen historically coming out of the Defense Electronics business, we typically have a very big Q4 ramp, and we're expecting that again this year. So we're currently working our way through the issues and feel like we're doing a good job in overcoming those pressures.

And then I guess I'll go to Lynn's favorite area R&D. You increased the R&D expense in the second quarter, increased your target for the full year. Can you talk about the opportunities that you have there, where do you think that there are opportunities to continue to increase that R&D investment as we go forward, whether we should think about more as plateauing at this level? Any guidance you can give us on that?

So thank you for that. And it is, as you stated, an area I do like to talk about. So with that, we've put up some additional R&D in our Defense Electronics Group as we just continue to see really outstanding opportunities to expand our product line, both in broadening our product line around the MOSA initiative as it just continues to gain traction across a broad range of customers in the defense industry, but then also some specific technologies around encryption and the denied GPS, cyber and really some additional investments in -- with our PacStar team around the battlefield modernization. So the opportunities just continue to grow. We are really positioned at a great time right now and really feel that the time is right to invest.

The other area where we are also increasing investment is in A&I, and that's really around the electrification and electronification, Internet of Things, around electric vehicles, hybrid vehicles and our push in that area that we've really positioned ourselves to be a leader -- a technology leader in this space and are a go-to for a lot of the major vehicle manufacturers, and we're really making sure we're very systematically knowing who's building vehicles in this space and are working with them to have often tailored variants of specific products to fit specifically into their vehicles, and that takes some investment in our part, and we feel it's the right thing to do.

And again, we're frequently asked about do we think that R&D will go up again in '22 or not, and we're not giving specific guidance on that. And I really do think it's important for people to understand that we really are case-by-case looking at how we allocate our capital and whether R&D is the best investment in it, other investments or it's time to return that in margin, and we'll make balanced decisions in that area based on the opportunities that are before us.

We're not afraid to spend some R&D to secure long-term growth where we see opportunities that we can see are going to pay dividends for years to come. And we make R&D investments that pay dividends honestly within the same calendar year, the next calendar year and sometimes it's 3 to 4 years out. And so again, you have to not just balance the returns but also make sure you're (inaudible) immediate term, near-term and longer-term growth. And so those are the trade-offs we're maturing our processes around how we look broadly at those investments across the organization and make the best strategic investments.

Your next question comes from the line of Myles Walton with UBS.

Maybe Lynn, you talked about the M&A pipeline being very full at the moment and maybe optimism about reaching upper end of the sales target. Can you sort of reengage on that and talk about what kinds of property sizes, scales, pricing, sort of any other characteristics you'd like to flesh out? As well as do you think you'd close one before the end of the year if that's material?

Sure. So I think, honestly, anticipations on some tax law changes coming in '22 has upped people's motivation, the things they were considering selling both PEs and private companies to try and get deals done this year. So for a lot of the active properties in the pipeline, the push is to do a deal this year. Now again, whether we actually do a deal will depend on as we move through diligence on some properties that we're active with right now. And -- but again, we're not going to do a deal as we always say, you'd be disappointed, if I didn't reiterate it that we won't do a deal for deal's sake, it's going to have to be the right strategic and financial fit. But there's targets out there that are in that range.

I would say the largest number of the properties we're seeing are across our defense markets right now, that is majority of the pipeline. It's not exclusively that -- but that is -- it does seem to be the most active area right now, which is an area that's a high priority for us. So that works well. I mean we're not saying that we would only buy properties in defense and industries, but it is an area, especially where we see them being complementary to our current product offering and is something additional we can bring to our current customer base, whether that's enable platform or one of the people building electronic subsystems.

And so that's very much. The prices are kind of in line with what we've seen historically, I would say. It hasn't -- I mean I know there's some talk and there's some examples of prices being more -- the multiples being more extreme. I think we're finding quality products where the multiples are reasonable and in line with what would make them a good strategic fit within Curtiss-Wright. And so that's something that we do have a lot of management attention on a lot of processes. We have quite a few active properties right now that we're working through to see which ones we think would be the best strategic fit for Curtiss-Wright. So I think it's -- there's a reasonable chance we would add something to our portfolio in the calendar year. And we are seeing properties in the range of PacStar types of revenues that are coming available. So it's really a great, healthy pipeline right now.

Okay. That's great color. And then maybe on just the press release you put out the other day on the X-energy selection for reactivity control, shutdown system. I'm not as familiar with what you might be doing there on the nuclear side that could maybe reignite some of the [fade in] the revenue on the new build OEMs. Maybe -- is there something there to point to that would cause me to be more optimistic about the future of OEM commercial nuclear?

So thank you for reading our press release first, and I'll just -- I'll open with that. But there is -- I don't -- one of the areas that also got a lot of support in the Department of Energy budget that was put forward as part of the FY '22 overall budget was an increase of spending of a significant amount on -- from the Department of Energy to support the funding of new small modular reactors and new advanced reactors.

And this program, X-energy is one of the 2 companies that has been funded by the DOE for development of future reactors. And so we are very active in engaging with everybody that's out there, both from the private sector and receiving public funding to participate in their reactor development because there's a lot of companies, I mean there's probably 20 companies out there right now roughly that are working on new reactor developments. And surely, not all of those will go to commercial production. So it's definitely one of the situations where you got to cover the field. So you're partnered with the ones that are going to go.

And I think things continue to progress nicely for NuScale, where we have the most -- which really got started several years ago and we have the most significant content on that, that we've talked about. It's earlier days for some of these others where we're still winning content. I think in our Investor Day, we talked about the ranges of revenue we might get on various types of reactors from tens to many tens, about millions of dollars per reactor. And so I just think the overall sentiment is the press for carbon-free energy becomes ever more that I think more and more it's being recognized, and we're hearing that from the government and the Biden administration, recognizing that nuclear needs to be a part of that. And I think that's being recognized worldwide. There's a lot of activity, licenses being processed over in Eastern Europe, as those countries say, we're not going to get there without nuclear. And so this isn't going to light on fire in 2021 or 2022 but it's going to be a strong area for us this decade, for sure.

Okay. Great. And one clarification or detailed modeling question. Chris, on the other income, it was virtually breakeven in the quarter, I guess, $400,000, and I think you're still guiding $16 million to $17 million for the year. Was there anything specific that drove the lighter other income in the quarter?

No. I mean, I think as you look at really what's happening kind of year-over-year, it's really just -- we are seeing other income drop, and it's mainly associated with the pension. We did, as you know, process payments to former executives that had recently retired during the quarter, and there's some pension true-up that comes along with that. But that's really the full extent of it.

Your next question comes from the line of Michael Ciarmoli with Truist Securities.

Lynn or Chris, can you talk about the order flow and maybe parse it out by segment, if you have the book-to-bill? I think you said naval was very strong, but maybe curious about the broader defense portfolio and maybe even outside of industrial, which you called out. Any more color you can give on the bookings environment?

Yes, sure. I mean overall for the second quarter, we were 1.1x book-to-bill, and we were stronger than 1x across each of our segments, so all 3 segments. We were also above 1x in A&D and commercial. Now if you dive a little bit deeper into A&D, we were a little bit stronger on the defense side and just shy of 1 on the commercial aero side. But overall, a very strong quarter. We saw our orders up $67 million or 11% year-over-year, and our backlog is up, (inaudible) A&D flat, commercial up 12%. But I think if you take a look at the orders and what happened this year versus last year, it's important to note that we had a very strong Q2 last year, $230 million in naval orders that we received. That's a little bit lumpy. This year, in Q2, we issued a press release, and we got about $130 million in orders, and we are expecting another big Q3. So it will level out year-over-year. It will be another strong year for us in orders.

As you take a look at commercial and what happened there, I mean, we were up $77 million or 50% year-over-year, and the vast majority of that related to on- and off-highway vehicle products and that GI recovery some nuclear aftermarket. But overall, a very strong quarter for orders, great book-to-bill, and we're pleased with our positioning on the full year.

How was the defense ex-Navy, your kind of specific defense...

Yes. Yes, so Defense ex-Navy, I mean, we did benefit from PacStar, the PacStar acquisition. So orders in that field range slightly above what their sales were for the quarter. We did see a little bit of pressure in C5ISR and aero defense, but that was really mainly due to that acceleration that we saw in the first quarter. So I think our outlook, as we look across the back half of the year is that we're expecting a sequential improvement in both naval orders and defense aero orders for Defense Electronics. So I think we've got a good trajectory ahead of us, and we're expecting a good second half.

Okay. And are you seeing any impact? I mean we've seen some suppliers call out the F-35. I know you've got some content there. Is it timing risk there? You obviously called out the pull forward. But is that program kind of sliding to the right? Or what are you seeing with F-35?

No. I mean we're not really seeing anything in terms of program delays, anything out there. I mean, as you know, we have a fairly agnostic approach to the development of our products, and we've got a very, very wide range of platforms that we support across the defense industry in Defense Electronics business. We're not seeing anything there that's unusual. We did mention here that we are working through some issues relative to the timing of availability in small electronic components, but we feel like those are mostly timing-related issues and the team is doing a great job in working its way through that.

Got it. Got it. And maybe just one last one. You were talking commercial aerospace with narrow-bodies. Can you just maybe level set us? You got out of the MAX. So on narrow-bodies, I mean, do you still have a good portion of any legacy content on the MAX right now? Is it -- are we just more focused on the neo at this point? And outside of, I mean, obviously, the widebodies, presumably just 87 has the real outsized exposure and A350?

Yes. I mean just to throw a few numbers out there. I mean, on the Boeing 737 MAX, we still have $75,000 per shipset. So -- and even though we walked away from that build-to-print business last year, we are still benefiting from -- and what we expect to see as a ramp here in the back half of the year. We're producing in line with Boeing. So -- and therefore their [plans] are to ramp to 31 per month by early 2022. So we'll definitely see some pick up here in the back half of the year on narrowbody.

And the 787 program, we do $500,000 per shipset. As there's been some temporary delays in what I would say in that program, but it's not material to our overall business. We expect that they're going to pick that back up here in the second half of the year. And on the full year, we're expecting commercial aero to be relatively flat. Some headwinds here at the beginning of the year relative to widebody, but we expect a ramp up in narrowbody that's going to more than offset that as we get deeper into the year.

(Operator Instructions) Our next question comes from the line of Peter Arment with Baird.

Chris, maybe just a clarification on -- so your Defense Electronics growth was down 6% in the quarter, and I guess it's down 1% year-to-date, you kind of called out the cadence a little bit, but just for modeling purposes, so are we expecting kind of a softer Q3 a little bit or just relative to what you just experienced and then a much stronger fourth quarter, just a little color there would be helpful?

Yes. We'll get a sequential ramp here in Aerospace Defense revenues Q2 to Q3 this year. So I should say, I'm sorry, Defense Electronics revenues in Q2 to Q3. But we will certainly have our strongest quarter in Q4, and it is typically our strongest quarter. So yes, we will see continued improvement here in the back half of the year. Q4 will be our strongest. I think in our script here, we talked a little bit about the soft guide on Q3. And as you look at flat EPS year-over-year, Q3 to Q3, I think most of that is associated with what we're facing here in this temporary timing issue in Defense Electronics.

Okay. And then just on incrementals. I mean, obviously, very strong in aero industrial, as you would expect, just kind of snapping back and a little softer in Defense Electronics. How should we think about that as that just progresses through the year? Similar?

Yes. I mean we do 25% to 30% incremental margins. I think that's a fair way to look at it as you go throughout the year. I mean, certainly, we're starting to get some good traction here on our operational excellence initiatives, as we've seen some good things out of the gate. We got a slight benefit here in Q2 and a few places associated with that, but that will continue on deeper into the full year.

I think we're expecting to see some of the minor supply chain issues that we faced earlier this year. I mean we talked a little bit about some very, I'll call it, immaterial impacts to freight and expediting costs to kind of get around some of that, and we'll see some pickup in the back half of the year as we get ahead of that. And just great overall absorption. I mean, particularly when you look at that aerospace and industrial group last year in Q2, if you recall, we actually had to shut down a couple of Mexico facilities for a few months there. So when you look at that 800 basis points of expansion year-over-year, I mean it's really just the strong ramp in revenues and what we're seeing, and we expect good things out of that segment for the rest of the year. We just increased our guidance to reflect the strong industrial vehicle order outlook and there'll be a lot of good sales volume and absorption coming through there.

I appreciate that. And then just as a follow back up on Defense Electronics in general, sometimes as budgets kind of flatten out or get a little softer, we hear about maybe potentially OEMs maybe not doing as much outsourcing or not going down that path. Maybe you could just kind of highlight that how you think your business is positioned versus either your peers or just how that will operate in that environment?

So I think something we talked a lot about during the Investor Day was this Tri-Service memo back in 2019 with the push for the MOSA and the SOSA outsourcing across all 3 branches of the defense industry. And I'd tell you, we've been really working to put some press releases out to highlight where we have invested. We started back in 2019 on the product offering to support that. And we think that, that -- our product positioning with that and the push towards outsourcing towards MOSA puts us in a great position that we will continue to grow better than the defense budget during the foreseeable future that we've made the right investments.

We spend our R&D very carefully, very strategically with a very keen eye to a return on investment and looking at the programs that will be available to us with investing in the right products. And so we believe that push towards outsourcing gives us opportunities for growth. And then I look at things like PacStar are being positioned where they're positioned, and it's the beginning of this really 10-year journey to modernize the battlefield, investments we've made in encryption. It's early days with the denied GPS product offering, but that is an area that continues to be a focus for -- across the Army and some of the other services, too, quite frankly that there's similar technologies in the aerospace area that we're being able to read that technology across to delivering that same capability. So there's a lot of reasons that we do feel very strongly about our ability to continue to outpace the defense budget.

I'm showing no further questions. So with that, I'll turn the call back over to President and Chief Executive Officer, Lynn Bamford, for any closing remarks.

I will simply say thank you for joining us today, and we look forward to speaking with you again during our third quarter earnings conference call, and have a great day.

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