Good day, and thank you for standing by. Welcome to the Curtiss-Wright Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Ryan, Senior Director, Investor Relations. Please go ahead..

Thank you, Laurie, and good morning, everyone. Welcome to Curtiss-Wright's Third 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 of 2020.

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, impairment of assets held for sale, foreign currency translation, acquisitions and divestitures, unless otherwise noted.

Now I'd like to turn the call over to Lynn to get things started.

Lynn?.

Thank you, Jim, and good morning, everyone. I'll begin with the key highlights of our third 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 third quarter highlights. We experienced a strong 12% increase in overall sales, of which 4% was organic.

Our A&D markets improved 15%, reflecting solid growth in commercial aerospace, naval defense and yet another quarter of strong performance from our PacStar acquisition. Having just completed its first year under Curtiss-Wright's ownership, I'm pleased to report that PacStar is executing very well, and its integration remains on track.

The business is well positioned for continued strong top line growth and is closely aligned with the Army's top modernization priorities. Turning to our commercial markets. We experienced strong year-over-year growth, which was led by both our industrial vehicle and process markets as these industries continue to sharply rebound.

Looking at our profitability, adjusted operating income improved 12% with adjusted operating margins strong at 17.5%, reflecting higher sales and operating income across all our segments 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 $4 million incremental investment in research and development as compared to the prior year. As a result, we are on track to invest $12 million in incremental R&D this year to support our future organic growth initiatives.

Adjusted diluted EPS was $1.88 in the third quarter, which was slightly above our expectations due to the strong operational performance and the benefits of our consistent share repurchase activity.

Free cash flow was similarly strong, up 76% compared with the prior year, with strong free cash flow conversion that exceeded 125% and keeps us on track to achieve our long-term objectives. Turning to our third quarter orders. We achieved 13% growth, and book-to-bill exceeded onetime sales, driven by increases within each of our three segments.

Digging a little deeper, we experienced solid growth of 7% in our A&D market orders as well as a robust growth of 25% in our commercial market, providing continued support to our strong backlog. Next, I wanted to address the global supply chain disruption on our business.

Overall, I am really proud of the team's strong execution in light of this challenging supply chain environment.

As we expected and as we indicated last quarter, our operations continued to be based with some supply chain disruptions caused by both delays in container shipments and shortages in electronic components, principally impacting sales within our A&I and Defense Electronics segment.

Thus far, these disruptions have been immaterial to our full year 2021 results, essentially limited to timing rather than lost revenues based upon the team's untiring efforts to mitigate these impacts to sales and to preserve our profitability.

We continue to aggressively manage the timing of product within our supply chain and remain encouraged by our strong backlog. As we move forward, this remains a watch item for us. And should we encounter further revenue pushout, we anticipate offsetting any delays through the strength of our combined portfolio.

I'd also like to address our press release from mid-September, where we announced the Board's support for a substantial increase in our share repurchase authorization from $150 million up to $550 million. We immediately and opportunistically began to repurchase $200 million of our stock in mid-September.

I'm pleased to report that we recently completed this program and bought back more than 1.5 million shares. We are on track to complete at least $250 million of share repurchases in 2021, and we remain well positioned for the continued return of capital to our shareholders going forward with $350 million of remaining authorization.

Finally, turning to our full year 2021 adjusted guidance. While we maintained our outlook for sales, operating income, margin and free cash flow, we tightened and raised the bottom end of our adjusted EPS guidance range.

We now expect to achieve between $7.20 and $7.35, essentially double-digit growth compared with the prior year based on our strong year-to-date performance and the benefit of our repurchase activity. We remain very much on track 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 third quarter performance and our outlook for 2021.

Chris?.

Thank you, Lynn, and good morning, everyone. I'll begin with the key drivers of our third quarter results where we again delivered another strong financial performance with higher sales and operating income in all three segments. Starting in the Aerospace & Industrial segment.

Sales increased 14% in the third quarter, led by strong increases in demand for our products and services in both commercial aerospace and general industrial markets.

Within the segment's commercial aerospace market, sales increased more than 20% year-over-year as we experienced improved OEM demand on Narrowbody aircraft as well as a solid increase in aftermarket sales.

We also experienced higher sales for our industrial vehicle products, including both on- and off-highway, which continue to benefit from improved demand and strong order activity. Turning to the segment's profitability. Adjusted operating income increased 34% while adjusted operating margin increased 240 basis points to 15.7%.

Our results reflect favorable absorption on strong sales and the savings generated by our prior year restructuring actions. In the Defense Electronics segment, revenues increased 22% in the third quarter, principally reflecting the contribution from our PacStar acquisition.

Lower organic sales reflect the timing on various C5ISR programs in aerospace defense as we experienced a shift of about $10 million to $15 million in lower-margin system sales into the fourth quarter, which was mainly due to the global shortage and electronic components.

This segment's third quarter operating margin reflected favorable mix for our higher margin embedded computing revenues, which was more than offset by $4 million in incremental R&D investments and about $1 million in unfavorable FX.

And absent these two unfavorable impacts, this segment's third quarter 2021 operating margin would have been in line with the prior year's strong performance.

Next, in the Naval & Power segment, revenues increased 3% in the third quarter, led by higher sales of naval nuclear propulsion equipment and higher valve sales to process markets where we continue to experience strong demand.

This segment's adjusted operating income increased 4% while adjusted operating margin increased 20 basis points to 18.6%, reflecting favorable absorption on sales and approximately $2 million in restructuring savings.

It's also worth noting that we achieved higher profitability in this segment despite the wind down on the CAP1000 program in our commercial power market. To sum up the third quarter results, overall, both sales and adjusted operating income increased 12%.

And across Curtiss-Wright, we drove 10 basis points of year-over-year margin expansion while adding $4 million in incremental R&D investments, which represents a 70 basis point headwind on our overall profitability. 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 while our sales guidance remains unchanged, I wanted to briefly highlight some specific dynamics within a few markets.

Starting with naval defense, our guidance remains unchanged at flat to up 2%, and we continue to see strong order activity for our nuclear propulsion equipment on critical naval platforms. For example, as noted in our September press release, Curtiss-Wright was awarded contracts valued at approximately $100 million to provide pumps for the U.S.

Navy's Virginia-class submarine Columbia-class submarine and Ford-class aircraft carrier programs. These awards not only support our outlook for overall aerospace and defense market sales growth in 2021, but also provide long-term visibility and stability for our naval defense market revenues.

Next, a few comments about our commercial markets where overall sales growth remains unchanged at 6% to 8%. In the process market, we continue to see a solid rebound in MRO activity for our industrial valve businesses, principally to oil and gas customers.

In the general industrial market, based upon strong year-to-date growth in orders for industrial vehicle products, we are now on track to return to 2019 levels in this market by the end of 2021. This is one year ahead of what we communicated at our May Investor Day where we previously expected to reach those levels in 2022.

Continuing with our full year outlook, we are reaffirming our sales, operating income and operating margin guidance. We expect adjusted operating income growth of 9% to 12% and adjusted operating margin growth of 40 to 50 basis points to a range of 16.7% to 16.8%. Diving deeper, I'd like to share a few specific reminders about our segment guidance.

I'll begin in the Aerospace & Industrial segment where we're expecting operating income to grow 17% to 21% while operating margin is projected to increase 180 to 200 basis points, keeping us on track to exceed 2019 profitability levels this year.

Next, in the Defense Electronics segment, we're maintaining our outlook for solid growth in sales and operating income despite the challenges that we've encountered in the supply chain.

As we noted earlier, we experienced a $10 million to $15 million shift in revenue from the third into the fourth quarter based upon the timing and receipt of electronic components. We expect these delays to continue, and now expect to finish the year closer to the lower end of this segment's guidance range for sales.

It is, however, a very dynamic issue, and we're working aggressively to mitigate the impact on our business as we look to close out the year.

Regarding the segment's profitability, it's important to note that we are maintaining our outlook for operating income despite the revenue timing issues and our $8 million year-over-year increase in strategic investments in R&D.

Lastly, 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 despite the wind down of the CAP1000 program.

Continuing with our financial outlook, where we increased the bottom end of our full year 2021 adjusted diluted EPS guidance to a new range of $7.20 to $7.35, which reflects growth of 9% to 12%, in line with our growth in operating income.

Our updated guidance reflects both the lower share count stemming from our ongoing share repurchase activity as well as a slightly lower interest expense where we continue to maintain sufficient capacity under our revolver for continued share repurchase, acquisitions and operational investments.

And lastly, based on strong year-to-date free cash flow generation of $128 million, we remain on track to achieve our full year free cash flow guidance of $330 million to $360 million. And now I'd like to turn the call back over to Lynn for some closing remarks.

Lynn?.

Thank you, Chris. I'd like to recap some of the key takeaways of our 2021 guidance where despite some caution as it pertains to the ongoing supply chain issues, we are well positioned to drive strong results for this year.

Led by high single-digit revenue growth, including the contribution from last year's PacStar acquisition, we expect to generate 9% to 12% growth in both operating income and diluted EPS this year. Our 2021 operating margin guidance of 16.7% to 16.8% reflects our solid execution and ongoing focus on operational excellence.

We expect to achieve those results while investing an additional $12 million or 40 basis points in strategic R&D to facilitate future organic growth. In addition, our adjusted free cash flow remains strong, and we are on track to achieve our ninth consecutive year of greater than 100% free cash flow conversion.

We also continue to maintain a strong and healthy balance sheet and remain committed to deploying disciplined and balanced capital allocation to support our pivot to growth. We are focused on investing our capital for the best possible return to drive long-term shareholder value.

And in the case of our recent share repurchase announcement, we took advantage of opportunities to ramp up our activities in this area. Meanwhile, acquisitions have been and will continue to remain the highest priority for Curtiss-Wright.

With a full pipeline of opportunities, I remain ever confident that we will effectively deploy our capital to strategically and profitably grow our business for the long term.

In summary, Curtiss-Wright is performing well, and we remain on track to deliver strong profitable growth in 2021, driven by our diversification and the strength of our combined portfolio. Our defense backlog remains strong, particularly in naval defense.

And our commercial orders have been very resilient, reflecting book-to-bill of 1.1x sales year-to-date. We continue to demonstrate the highest levels of agility in response to the dynamic changes taking place in our end markets.

Altogether, this affords us the opportunity to remain on track to achieve our long-term guidance communicated at our May Investor Day. At this time, I would like to open up today's conference call for questions..

[Operator Instructions] Our first question is from Peter Arment of Baird..

Lynn and Chris, everyone, nice results..

Thank you..

Lynn, maybe you could just talk a little bit about the supply chain risk. I mean you guys have done a very good job, I think, of mitigating it. Is it just your dual sourcing or some of the DPAS ratings that you've talked about in the past? Maybe talk about some of the bigger levers and then how you're kind of working that going forward..

Yes. It's clearly a topic that's top of mind. And thank you, Peter, for the question. It is very real, and it continues to be a headwind towards us that we're working to overcome. You saw that we stated we had some revenues pushed from Q3 into Q4, around $10 million to $15 million in our Defense Electronics segment due to the supply chain pressures.

So it's an area that we have a lot of people focused on and are doing everything we can. We're fighting the -- that's probably the biggest and most notable area where we're feeling it, but also in the container shipment. We're fighting the freight costs and transit times.

And we're also beginning to fight some deallocation in the chips area where we've been promised certain levels. And when the shipments arrive, we've received less chips than we have. And so that's sort of a -- as you can imagine, that's a very dynamic area. But we absolutely are doing the things you mentioned.

We are working dual sourcing wherever it's capable. We're actually looking even in some of our areas. We have some recent activity where we're looking to change our processor chips and move to different processor chips and things in that -- along those lines, so there's less pressure on the supply chain.

So the teams are really being creative, and I'm proud of them for that. The DPAS ratings is another important area. And we're really working the executive relationships to try and make sure it's visible the impact of us receiving products on both our national security or mobility products, really critical things to people around the world.

And so the team is doing a great job. I said that in my prepared remarks. But it's really impressive to see the creativity that the teams are applying to try and overdo this. And hopefully, we'll see an end of this sometime in the next calendar year and get back to more normal.

And I guess the only other comment I would make is we're chasing Q4, still working issues associated with it, but planning well further out into '22 and really managing our supply chain needs well into '22 and even somewhat beyond in a manner that we would not have historically done.

So we're adjusting our practices to really do the best we can to stay on top of it..

And just as a follow-up, another risk area that a lot of people are asking about is regarding impacts of a continuing resolution. It's obviously been -- continuing resolution has gone on for quite a number of years, and you had to manage that.

But maybe you could just remind us how that impacts you and just maybe high-level thoughts about how you think about your defense portfolio growing next year?.

Sure. Thank you, Peter. So it's disappointing to see us repeating this pattern, honestly, staying in the continuing resolution. It's not healthy for the country. It's not healthy for our national defenses. It obviously blocks the start of any new programs, and the world is a dynamic place, and that's not how we should be managing our country.

We're insulated to some degree to a continuing resolution as we're not selling so much directly to the government but into the primes, and they're trying to keep things moving along. So we can absorb some amount of continuing resolution and not feel the impact immediately. But obviously, all things work through the supply chain system.

And so eventually, it does impact us. We're -- we know that we are aligned with top priorities in the defense budget. We're pleased with that. They have positive funding in what was proposed by the President's budget. We have the markups that went through the House, and the Senate provided good upside for Curtiss-Wright.

So I believe they're going to get it passed, and it's just a matter of time. And so that will be good for us. I mean I think we feel really good that the bipartisan support for the Navy continues to be strong, the belief in shipbuilding.

I mean we really feel like we have aligned ourselves along the top priorities with -- that does have bipartisan support. So ultimately, as it passes, I think we'll be in good shape..

And our next question is from Michael Ciarmoli of Truist Securities..

Nice results. Maybe can we just stay on defense. I guess organic growth down two quarters in a row and I guess some of that organic pressure due to the slide outs.

But maybe can you speak to the performance of some of the acquisitions? I mean are they seeing some of the same challenges? And I guess you were touching on the continuing resolution that's going to create some pressure here, but most of your customers have tempered their growth expectations next year.

Should we kind of calibrate ourselves for a little bit more of a challenged defense environment here over the next couple of quarters?.

I think we still feel good about the guidance we put forward in Investor Day. It is -- there's a bit of uncertainty out there. I think most of the tempering has really been around supply chain and delays. That's what we are seeing so far is we're not seeing -- where we've seen some challenges, it's really delays of revenue, not business going away.

I mean obviously, Lockheed Martin has changed their F-35 outlook, and we have content on the F-35. So that's something that might be a mild headwind for us going forward. But it's a pretty minor portion of our overall revenues, 2% to 3%. So that's one area that we've seen something put out that we have to go again.

But I think we have a lot more tailwinds than we have headwinds with our naval positions, the Defense Electronics positions, our investments in MOSA and how we're capturing new business around there that -- and really, the PacStar acquisition continues just to have great feedback from their end customer and great support within the budget.

So other than the F-35, that's really the only notable program headwind that we see the others are pretty good. So we feel good about the guidance we look forward. And just to comment on the acquisition. Sorry, just real quick. I mean we're pleased with the performance of our acquisitions.

And they obviously are subject to the overall defense budgets, but they're all doing well. And we just reported out a couple of months ago to the Board on the performance of our acquisitions, and it was pretty much a green light across the board..

Got it. Got it. And then just totally shifting gears to power. You kind of called out the CAP1000 in your prepared remarks. Anything -- just trying to get a sense of what we should be thinking. Obviously, you guys don't have anything modeled in on a go-forward basis.

There's been chatter out there and reports about Ukraine being interested in the AP1000, other countries.

What else are you seeing, hearing, preparing for? And just -- how should we think about if no orders come through any of the capacity you have in your facilities there outside of Pittsburgh? Can they easily get repurposed if we don't see too much AP1000 activity?.

We're definitely -- it's a dynamic issue, and we're working it. But we believe we are managing the capacity and the load to be able to go through this period where we don't -- as we wind down the AP1000 program, that we're very much balancing towards that without the anticipation of an order coming as we wind that down.

If one would come, we very much have plans set up to be able to ensure that we're capable of scaling up with that. I mean it doesn't -- the labor load comes a bit after the order. You start with the material orders and such.

And so we have time to adjust our workforce and believe that the workforce up in that area that there are people, and that we will be able to achieve it. I mean it's -- I have to say, it's an exciting time. It's not -- as you stated, it's not in our anticipation.

But hearing things going on between Ukraine -- I mean there was an announcement yesterday about NuScale and Bulgaria signing an agreement. Obviously, NuScale is the one of the next-generation reactors where we talked about our content on. So that's great to hear about potential build-out of it elsewhere.

And just I think even with the COP26 Summit, just the realization a lot of the reports that came out of that, nuclear will be part of the carbon-free solution. And so after some years of not much support, sentiment is definitely shifting. And I think the dollars will flow in this decade. Whether it's '22 or '23 or '24, I mean, I don't know.

But it's closer than I think we felt it would be for a lot of years..

And our next question is from Nathan Jones of Stifel..

Start with a question on the share repurchase executed a couple of hundred million here in the second half of 2021.

Is the plan to go back to more just offsetting dilution? Or do you have designs on utilizing some more of that authorization here in the short term?.

So it is -- I think what we've said most consistently is we are really committed to deploying our capital to provide value to our shareholders and having not put an acquisition on the Board. So far, we had capital available and decided to move forward.

We have $350 million of open authorization, and we'll make decisions with it as acquisitions come into clearer light. I mean that is undoubtedly our highest priority. But we're going to make our capital work to provide value to our shareholders. So with that, maybe I'll let Chris make a few comments on kind of the landscape..

Yes. I would only add, Lynn, we have a very strong balance sheet, and we're excited about what we can do with that to support our capital allocation strategy. And we think that the share buyback is the most effective way to return capital to shareholders. Over the last five years, it's been $130 million.

Last year during the pandemic, it was $200 million. And we also did the PacStar acquisition. And this year, we're on track to $250 million. I think we like where we're positioned. I think that we feel we have opportunity. And the only other thing I might add is that at the recent Investor Day when we set those minimum financial targets out there.

You'll notice that we said 5% minimum sales CAGR, and that we said that there would be a 10% EPS CAGR. So absent any further acquisitions, you can kind of quickly do the math and see that you need to return capital to shareholders through share repurchase to hit that 10% EPS CAGR. So we're excited about it.

We feel that it's a great time to buy Curtiss-Wright stock given the position of our multiple and where we are relative to our peers and our pivot to growth strategy. So we remain committed..

Does the repurchase say anything about the actionability of the M&A pipeline in the short term? Or are they kind of separate issues?.

No, it really does not signal anything about where we sit with M&A that Chris and I work very closely to model scenarios and our ability to drive acquisitions. And we still very much have a lot of dry powder and are able to move on acquisitions as they become available.

We planned for that to be in coincidence with the purchase buyback that we have done so far..

And then just one follow-up on a comment you made about the budget markups being positive for Curtiss-Wright.

Can you give us a little more detail on what some of those budget markups were that you believe are a positive for Curtiss-Wright?.

Sure. I think the two that are the most notable is a potential for a third Virginia-class. And another DDG-51 are both part of the markups.

And then additional support within the Army for network modernization, which already had really great support in the primary budget that was put forth by the President, but even some further potential increases from it..

[Operator Instructions] We have a question from Myles Walton of UBS..

You've got Lou Raffetto on for Myles.

So as we think about the $12 million of incremental R&D spending this year, how -- I guess how do we think about that going into 2022? Do we stay at this elevated level? Or do we step back, somewhere in between?.

Yes, that's a question we're asked a lot, and we really have not given guidance of R&D spend going for the forward years. And there's a couple of reasons for that. One is of our total engineering spend, about half is IRAD and about half is customer funded.

So we're always kind of ebbing and tying as we go through the balance of where we see -- putting our engineers to work on customer-funded programs, having the best return for Curtiss-Wright versus our ideas to spend on IRAD. And so it's a trade-off in that -- between those.

And we really look to make those investments really based on the best use of our spend to drive long-term growth.

And so not putting a fixed amount and saying, we'll just let ourselves spend up to that, but really betting each problem as the return on investment to the organization, some short term, some long term, some incremental investments to extend product families, some swings for the fence as the saying goes and really make those decisions as the projects come available.

So I'm a big believer in spending R&D. I think it's important. And so I look for us to continue, being willing to spend R&D and taking those steps to grow the Company long term. So I would say it's likely, but we're not putting forth any specific levels..

And I would only add that we are committed to achieve 17% operating margin this next year. So that is a big focus of ours. But we are also working our operational excellence initiatives across the organization to continue to free up money for investments. So we'll be able to provide more color on that in February..

Okay. Great. And just a couple of other quick follow-ups. Is there any update on the assets held for sale for the one business. I guess, they've been out there now for about a year.

Does that indicate any lack of interest or anything like that we need to be mindful of?.

No. I think we're moving along in that process pretty well. And yes, I'm not going to go into the specifics on the sale and exactly where we are. But I think we've -- I think we're well positioned to move on from that property in the near term..

Okay. Great. And then just last one. Page or Slide 11 in the deck, I think it's third quarter lays out the end market sales growth and has 4% organic growth for A&D and then 5% organic growth for commercial markets, but I thought organic growth was only up 1% for the quarter.

So what am I missing?.

Well, I think as you take a look at our sales growth, Q3 year-over-year, the biggest contributor to the growth was obviously within Aerospace & Industrial. And the strength of that market was really driven by what we're seeing in industrial vehicles and then also commercial aerospace for the quarter.

The second biggest, I would say, organic mover was within Naval & Power. And that was really based upon the strength in what we saw year-over-year naval defense, particularly the Virginia-class submarine. Looking at Defense Electronics, while we were up substantially year-over-year, the majority of that contribution was from PacStar.

We were slightly down organically, roughly $5 million year-over-year. But that was really related to the timing of the pushout into the fourth quarter due to the availability of electronic components..

All right.

So the 4% organic growth isn't really organic growth then for the aerospace defense market as sort of indicated on that slide?.

No, I think at the full year, we're still holding all of our assumptions in our guidance range.

I think as we look at that, we would say that while we're anticipating that we're going to be at 4% to 6% on the full year, it's probably going to be a little bit more towards the lower end of the range given some of the timing issues that we've indicated within Defense Electronics. But -- and we expect to be within all those ranges..

Okay. I guess I thought that was specific to the third quarter, but not a problem..

And we have a question from Peter Arment of Baird..

Yes. Just a quick question, Lynn. In the power and process area, you talked about strong growth in valves to the process market.

What kind of visibility do you have there? And maybe just remind us what you're seeing there in general, how -- what the outlook -- how sustainable it is?.

Okay. Yes. Thank you. It's an area of the business we don't usually get as many questions about. So it's nice to have talk about it. So we definitely continue to see growth opportunities for our severe service applications. And the forecast is that the process markets will grow mid- to high-single digits with full recovery in 2023.

So our visibility, it's a fairly short-term business. So we really look to market trends to anticipate where we're going. And we've tracked well with where the market outlook is. So we feel good about tracking that with full recovery in 2023.

We've definitely seen favorable trends in 2021 as the industry increases MRO work, which is the largest portion of our sales and is generally tied to GDP. We did have one CapEx project back in the last quarter push into 2022, so there are some mixed bags. But we do see full recovery from the pandemic..

And we have a question from Michael Ciarmoli of Truist Securities..

Just another end market I wanted to ask about.

Within industrial, what are the trends you're seeing in the surface treatment side of the business? And maybe any color on where that is in relation to prepandemic, and kind of what you're seeing with your various customers in different geographies there?.

Yes. So just touching specifically upon the surface technologies business, Mike, which is really more of a short-cycle business. We've talked about that in the past as being, we'll say, the bellwether. Certainly, in times of economic recession, it will be the first to drop.

But in periods of improvement, it will be one of the last months to recover because those orders have to come in on the long-cycle businesses soon. We've had -- since the lows of Q2 of this last year, we've seen a steady improvement within that business quarter-over-quarter. The orders continue to support that outlook for steady sequential growth.

Initially, I would say that most of that recovery was based upon what we're seeing on the industrial side of the business, the industrial vehicles, automation and services. And the growth rates there have been pretty good. But we started off this year a little bit down in commercial aerospace, mainly due to widebody. But we are seeing that pick up.

Even within that business, commercial aerospace orders continue to grow. It's not at the same rate as our long-cycle businesses, but it does provide us with optimism that we are on the right trajectory in the short cycles..

And there are no further questions at this time. I will now turn the call over back to Lynn Bamford, President and Chief Executive Officer, for closing remarks..

Thank you. Thank you all for joining us today. We look forward to speaking with you again during our fourth quarter earnings conference call, and have a great day..

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