Curtiss Wright Corp (CW) Q2 2021 Earnings Call Transcript

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Curtiss Wright Corp (CW 0.62%)
Q2 2021 Earnings Call
Aug 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you for standing by, and welcome to the Curtiss-Wright Second Quarter 2021 Financial Results Conference Call. [Operator Instructions] After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to introduce Senior Director, Investor Relations, Jim Ryan.

Jim Ryan -- Senior Director, Investor Relations

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 was 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?

Lynn M. Bamford -- President and Chief Executive Officer

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 continue 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 1.1 times book-to-bill overall, as orders exceeded one-time sales within each of our three segments. Of note, our results reflect strong commercial market orders, which serves 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 Award 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?

K. Christopher Farkas -- Vice President and Chief Financial Officer

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. The 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 Commercial Aerospace market, we experienced improved demand for our Sensors products on narrow-body platforms. However, as we expected, those gains were mainly offset by continued slowdowns on several wide-body platforms.

Looking ahead to the second half of 2021, we expect an improved performance within this market, led by increased production of narrow-body aircraft, including the 737 and A320. Longer term, we see narrow-body aircraft returning to prior production levels by the 2023 timeframe, while wide-body 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 in year-over-year restructuring savings. And although we continue to experience 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 C5 ISR 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 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 and Process markets, we experienced higher nuclear aftermarket revenues both in the U.S. and Canada, as well as higher valve sales to process markets. The 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 grow 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 valves businesses. However, we lowered our 2021 end market guidance due to the push out of a large international oil and gas project into 2022. And as a result, we are 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 would 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 and 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 this 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 UK. 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 and 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 companywide operational excellence initiatives. Continuing with our 2021 financial outlook, where we have again increased our full-year adjusted diluted EPS guidance, at 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 UK tax law and a reduction in our share count, driven by ongoing share repurchase activity. Over the final six 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?

Lynn M. Bamford -- President and Chief Executive Officer

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's 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 three-year period ending in 2023 and continued free -- 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'm 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 bigger that this team has demonstrated since 2013. Lastly, I wanted to reiterate that our target for a minimum EPS CAGR of 10% over the three-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 into 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 targets as we find critical strategic acquisitions to bring into 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Nathan Jones with Stifel.

Nathan Jones -- Stifel -- Analyst

Good morning, everyone.

K. Christopher Farkas -- Vice President and Chief Financial Officer

Hey, good morning, Nathan.

Lynn M. Bamford -- President and Chief Executive Officer

Good morning, Nathan.

Nathan Jones -- Stifel -- Analyst

I'd like to start off with the 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 and the channel inventory at customers? 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?

K. Christopher Farkas -- Vice President and Chief Financial Officer

Yeah, sure. I'll take that one. I mean, in Q1, we definitely saw some defense customers accelerate 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 on electronic components. So, 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, aero defense revenues, higher-margin C5 ISR 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 of 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.

Nathan Jones -- Stifel -- Analyst

And then, I guess, going back to Lynn's favorite area, R&D. You increased the R&D expense in 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?

Lynn M. Bamford -- President and Chief Executive Officer

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, I -- we're frequently asked about, do we think that R&D will go up again in '22 or not. And you were not giving specific guidance in 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. But 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 three to four years out. And so, again, you have to not just balance the returns, but also make sure you're fueling [Technical Issues] immediate term, near term and longer-term growth. And so, those are the trade-offs for maturing our processes around how we look broadly at those investments across the organization and make the best strategic investment.

Nathan Jones -- Stifel -- Analyst

Great, thanks for taking my questions.

Lynn M. Bamford -- President and Chief Executive Officer

Thank you very much.

K. Christopher Farkas -- Vice President and Chief Financial Officer

Thank you.

Operator

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

Myles Walton -- UBS -- Analyst

Thanks, good morning.

Lynn M. Bamford -- President and Chief Executive Officer

Good morning.

Myles Walton -- UBS -- Analyst

Maybe, Lynn, you talked about the M&A pipeline being very full at the moment and maybe optimism about reaching the upper end of the sales target. Can you sort of reengage on that and talk about what kinds of properties, sizes, scales, pricing and 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 that's material?

Lynn M. Bamford -- President and Chief Executive Officer

Sure. So, I think, honestly, anticipations on some tax law changes coming in '22 has upped people's motivation that things that we're considering telling 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 properties that were 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 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 industries. But it is an area especially where we see them being complementary to our current product offering and 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 there is 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.

Myles Walton -- UBS -- Analyst

Okay, that's great color. Thank you. And then maybe on just the press release you put out the other day on the X-energy selection for activity and controlled 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 OEM commercial nuclear?

Lynn M. Bamford -- President and Chief Executive Officer

So, thank you. Thank you for reading our press release, first. And [Speech Overlap]. So, 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's 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. In this program, X-energy is one of the two 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 those situations where you've 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, but we're still winning content. I think on 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 been recognized and we're hearing that from the government in the Biden administration, recognizing that nuclear needs to be a part of that. And I think that's been recognized worldwide. There is 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.

Myles Walton -- UBS -- Analyst

Okay, great. And one clarification or a 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 light or other income in the quarter?

K. Christopher Farkas -- Vice President and Chief Financial Officer

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 and payments to former executives that had recently retired during the quarter and there is some pension true-up that comes along with that, but that's really the full extent of it.

Myles Walton -- UBS -- Analyst

Okay, thanks.

K. Christopher Farkas -- Vice President and Chief Financial Officer

Sure.

Operator

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

Michael Ciarmoli -- Truist -- Analyst

Hey, guys, good morning. Thanks for taking the questions.

K. Christopher Farkas -- Vice President and Chief Financial Officer

Good morning.

Michael Ciarmoli -- Truist -- Analyst

I guess, 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 may be 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?

K. Christopher Farkas -- Vice President and Chief Financial Officer

Yeah, sure. I mean, overall, for the second quarter, we were one times -- 1.1 times book to bill and we were stronger than one times across each of our segments. So, all three segments. We were also above one time in A&D and commercial. Now if you dive a little bit deeper into A&D, we're a little bit stronger on the defense side and just shy of one on the commercial aero side. But overall, a very strong quarter and we saw our orders of $67 million or 11% year-over-year. And our backlog is up; now A&D flat, commercial up 12%. But I think you should 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. You know, that's a little bit lumpy. This year in Q2, we issued a press release and we've 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, on that GI recoveries on nuclear aftermarket. But overall, very strong quarter for orders, great nook-to-bill and we're pleased with our positioning on the full year.

Michael Ciarmoli -- Truist -- Analyst

How was the defense ex-Navy? You're kind of specific defense [Speech Overlap]

Lynn M. Bamford -- President and Chief Executive Officer

Yeah. So, defense ex-Navy. I mean, we did benefit from PacStar -- the PacStar acquisition. So, orders in that field ranged slightly above what their sales were for the quarter. We did see a little bit of pressure in C5 ISR 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 electronic -- for defense electronics. So, I think we've got a good trajectory ahead of us and we're expecting a good second half.

Michael Ciarmoli -- Truist -- Analyst

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 where do you stand with F-35?

K. Christopher Farkas -- Vice President and Chief Financial Officer

No. I mean, we're not really seeing anything in terms of program delays or 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 and our 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.

Michael Ciarmoli -- Truist -- Analyst

Got it, got it. I mean, just like one last one on -- 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, but the widebodies, presumably just 87 [Phonetic] has the real outsized exposure and A350?

K. Christopher Farkas -- Vice President and Chief Financial Officer

Yeah. I mean, just to throw a few numbers out there, I mean, on the Boeing 737 MAX, we still have 75 K per shipset. So -- and even though we walked away from that build-to-print business last year, we are still benefiting from and they -- 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 narrow-body.

And in the 787 program, we do 500 K per shipset. Yes, there has 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 narrow-body that's going to more than offset that as we get deeper into the year.

Michael Ciarmoli -- Truist -- Analyst

Got it. Thanks for the color, guys.

Lynn M. Bamford -- President and Chief Executive Officer

Yeah. Thanks, Mike.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Peter Arment with Baird.

Peter Arment -- Baird -- Analyst

Yeah. Good morning, Lynn and Christian. And 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, we are 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.

K. Christopher Farkas -- Vice President and Chief Financial Officer

Yeah, we'll get a sequence ramp here in aerospace defense revenues Q2 to Q3 this year. So, I -- and 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, 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.

Peter Arment -- Baird -- Analyst

Okay, and then just on incrementals. I mean, obviously, very strong in Aero Industrial, as you would expect, just kind of snapping back in; a little softer defense electronics. How should we think about that, as that just progresses through the year? Similar?

K. Christopher Farkas -- Vice President and Chief Financial Officer

Yeah. I mean, we did 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've got a slight benefit here in Q2 in 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 free 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 a 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.

Peter Arment -- Baird -- Analyst

I appreciate that. And then just one -- just as a follow back up on Defense Electronics in general. Sometimes, in the -- 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. Thanks.

Lynn M. Bamford -- President and Chief Executive Officer

Well, 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 three branches of the defense industry. And I think 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 our product positioning with that and the push toward outsourcing, toward 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. And 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 toward outsourcing gives us opportunities for growth.

And then I look at things like PacStar being positioned, where they're positioned and it's the beginning of this really 10-year journey to modernize the battlefield, the 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 the -- across the army and some of the other services, too, quite frankly, that there is similar technologies in the aerospace area that we're -- being able to read that technology across to delivering that same capabilities. So, there's a lot of reasons that we do feel very strongly about our ability to continue to outpace the defense budgets.

Peter Arment -- Baird -- Analyst

Thanks so much. Appreciate all the details, Lynn.

Lynn M. Bamford -- President and Chief Executive Officer

Thank you.

K. Christopher Farkas -- Vice President and Chief Financial Officer

Thank you.

Peter Arment -- Baird -- Analyst

Thank you. 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.

Lynn M. Bamford -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Jim Ryan -- Senior Director, Investor Relations

Lynn M. Bamford -- President and Chief Executive Officer

K. Christopher Farkas -- Vice President and Chief Financial Officer

Nathan Jones -- Stifel -- Analyst

Myles Walton -- UBS -- Analyst

Michael Ciarmoli -- Truist -- Analyst

Peter Arment -- Baird -- Analyst

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