Curtiss-Wright Corporation (CW) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us today. My name is Peter Arment. I'm the senior aerospace defense analyst here are Baird. And we're very happy to have with us the management team from Curtiss-Wright. This is a fireside chat, so we'd encourage anyone to send in any questions via the web portal. And if there's time for it, we'll certainly try to get those in. From the company today, we have Lynn Bamford, who's the President and Chief Executive Officer. And we have Chris Farkas, Vice President and Chief Financial Officer; and Jim Ryan, who's the Senior Director of Investor Relations. And thank you very much, Lynn, Chris, Jim, for joining us. Very happy to have you back at the conference. And Jim, I'm going to pass it over to you, so we can get the forward-looking statement out of the way. Thank you.

Thanks, Peter, and good morning, everyone. Before we begin, I just want to provide a brief statement on our safe harbor, which is available on the investor slide deck on our website. Please note that today's discussion may include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995, and statements are based on management's current expectations and are not guarantees of future performance. We detailed those risks and uncertainties associated with the forward-looking statements in our public filings with the SEC. So with that, I'll turn it back over to you, Peter.

Thanks so much. Thanks, Jim. So good morning. And Lynn, Chris, so thanks for joining us. So basically, I want to start with your kind of more recent announcement that you around capital deployment because it's pretty significant. You recently expanded your share repurchase authorization. I think you completed a significant $200 million share repurchase program in October. And so I'm thinking back to your Investor Day, you had a considerable amount of time reviewing your M&A criteria, some of the key priorities. So maybe just the increase in the repurchase activity, does it indicate a change away from M&A? Or is it just simply your view of the current environment?

Thanks for that question, Peter. It's definitely something that we anticipated being asked as it's noteworthy. It is absolutely not indicative of a shift in priorities. Our priority remains with M&A which aligns with our pivot to growth. But as we also were very clear in the Investor Day and we talked about frequently publicly is that in the property that we purchase needs to be the right fit strategically and financially to help us grow both our cost and our bottom line and that we're not going to change the criteria -- the stringent criteria that we've made that have made our last 6 acquisitions successful. And I'd point out 5 of those 6 have been A&D focused, with TTC, DRG and so forth. I won't touch them all. We've been evaluating properties at a rapid pace this year and have already passed on double-digit numbers of properties this year. Multiples are high. And with that, the criteria of what makes a good, strategic and financial fit is -- it's a high bar, but we're not going to lower that bar because of trying to just put marks on the board. So with that, I feel confident that this is still something we can achieve as part of our long-term strategy. I'm not concerned about that at this point. There are properties out there. And our pipeline still remains full, so we feel optimistic about that. Turning to the share repurchase, it is -- we listed very clearly that below M&A., share repo was the second priority for use of our capital. And it's something Chris and I spend a lot of time looking at is making sure even with doing share repurchases that we did just recently, that we remain quite able to act for an acquisition of when we became available. And so we don't think we've taken anything off table by doing what we've done. And I'm going to turn it over to Chris to add some more color on the share repo.

Yes. Maybe what I'll do is I'll just kind of break that down into just 2 sections and I mean just briefly comment on the M&A. I mean we have a very strong balance sheet. We've got an essentially untapped $500 million revolver, the ability to lever up quickly. We finished September at 2.2x debt to EBITDA, well within investment grade, which we and our bankers feel is 3 or less. And if the right opportunity becomes available, we will absolutely seize it. I mean that is our top priority. Turning to share repurchases, we do remain committed to returning capital to shareholders, and we believe the share buyback is the most effective way to do this. Over the last 5 years, we repurchased approximately $130 million of stock per year. Last year during the pandemic, it was $200 million. And this year, it's going to be $250 million with that $200 million program that we just completed. We have $350 million of remaining authorization, and we like how we're positioned. The only other thing that I'd say is, just to remind people, at our May Investor Day, we did set targets that had a sales growth of 5% CAGR and an EPS growth of 10% CAGR. And you can kind of do the math and model that, but you're not going to get a 10% EPS CAGR around 5% top line growth. So we have and intend on returning capital to shareholders through share repurchases over the next few years. And we recognize it's our most expensive form of capital, and we like buying it back. It's a good sign.

It's a very comprehensive answer. I think there's certainly been a lot of focus on your path on the M&A, but the step-up in share repurchase was certainly significant. Maybe just switching over to defense or maybe on the budgets. You've got basically defense is about 50% of your business today. We've seen the initial kind of numbers around the fiscal '22 defense budget. Hopefully, we'll see that signed into law. We've had several markups in Congress. And we're still entering -- we're still under continuing resolution. How do we think about your Defense portfolio as the opportunities for growth as we go into the next year under -- with that environment?

Thanks, Peter. I'll maybe start -- step back and start with some background for some people on the call that they'd not be quite as familiar with Curtiss-Wright. I know you are, Peter. But over the past 20 years, Curtiss-Wright has demonstrated an ability to grow faster than the base DoD budget. And so that's really a fundamental principle that underpins our Defense business and something we're very proud of. We're on track to do that again in 2021. We will -- we anticipate growing approximately 2% versus the budget that's declining 2%. And so that really speaks to our combined portfolio. It spans to the defense budget and our consistent ability to invest in -- be part of programs that are the highest priority within the defense budget. We are well positioned on many key platforms that have bipartisan support. We were really pleased with what we saw come out in the President's budget several months ago and then even more with the markups that have gone through, as you said, both houses. We very much hope that the budget will be signed into the process into law. I'm here in the first week in December, but we will see. And we look forward to seeing the FYDP coming forward early next year, which we think will have many good things in it. Even stepping back for a second to some of the markups that went through the House and Senate, strong support for areas where we have business, some more for the naval platforms, potentially a third Virginia-class sub, an additional DDG 51 and some additional support for the line items where our recent acquisition of PacStar received funding. I mean the initial budget was fantastic. It had a 25% increase in the budget where they receive a lot of their funding. And there's even additional monies being made available through the markups; and so it's something we spend a lot of time on with making sure we understand the priorities of the DoD and which technology is critical for. And obviously, that's a lot of where our defense electronics is and making sure we're bringing products that match those defense priorities. So all in all, we're very encouraged. The support for shipbuilding, as said, it's very bipartisan, so we think we're well positioned to continue that track record of outgrowing the defense budgets.

That's great. And just one, just a follow-up on that. Do you see much on that from just when you think about legacy portfolios, legacy kind of programs? When you think about Curtiss-Wright, I don't really think of you having a lot of legacy, where you're seeing if there was cuts to legacy, that there would be pressure there. Maybe just from a high level, when you think about your Defense portfolio, how should we -- how do we think of that?

One of the things that I think -- specifically our Defense Electronics program, that we have done that, I think, really positions us outstandingly is we do have products that we have been providing into existing platforms for a decade plus. We have great programs that allow us to continue to extend the life of those products. So again, we try to do a lot of things that when there are pressures on the defense budget, that we position ourselves to have successful strategies to grow in both tight markets and in growing markets. And so where there's not money to do tech refreshes and upgrades, we work very hard to be able to extend the life of our products to existing programs; as well as when there is money available to do tech refreshes, that we've got state-of-the-art technology there. So we're we really try and work to be, honestly, an outstanding supplier into the primes to work with them to maintain the platforms that are critical to our military under a variety of defense budgets, increases and challenges.

I appreciate that. I just wanted to -- because we do think of you as outperforming the defense budget, so I just was curious on the overall portfolio. So the -- and recently, obviously, the infrastructure bill passed. You've touched a lot of different end markets. Any implications there, how that might benefit Curtiss-Wright?

Yes. I mean hopefully, that will be signed into law. Next week is, I think, the current expectation. I don't -- we don't have any specific insight on how it's going to impact us. But I think there's some broad-brush areas that certainly will be good for Curtiss-Wright. Obviously, there's a lot of money that's going to be spent on doing construction work between bridges and roads. And for our off-highway vehicle, we believe that there will be a clear connection between the work we do there and an increase in construction. So we're -- I think there's definitely some room for optimism. Obviously, there's money still and emphasis to press for low-emission vehicles. We do a lot of work with large-bus type of vehicles for on-highway, and so we believe that there would be some tailwinds for us there. And then there's money in there for the energy infrastructure. And whether that's maintaining the nuclear footprint that we have today, we think that, that will see some tailwinds there. And our aftermarket work supports some nonnuclear plants also with our process improvements and things, so we think we'll see some tailwinds just broadly across the energy sector as we support securing the grid and making it more resilient.

And we view it probably more of an out-year story, I guess, before it starts to finally trickle down, I would expect, for you.

Yes. I wouldn't think 2022 would feel much of it. I mean we'll see how quickly they get on towards doing these things. If there's planning for -- if people are planning out large construction projects, there's a chance that orders could start flowing in '22 just given everything going on across the supply chains in general, that people understand lead time is out, and I think people are getting on placing orders early. But again, we'll see how it plays out once the bill is actually signed into law and how that starts flowing. So it's definitely something we're keeping a close eye on.

At your Investor Day, just thinking about your growth targets, you issued some top line targets. I think it was a minimum of, like you mentioned earlier, 5% CAGR as you reach 2023 and the potential to reach 10% sales CAGR including basically acquisitions. So when you think beyond your 2023 targets, can you discuss kind of the longer-term opportunities that can help shape how we think of Curtiss-Wright?

I definitely appreciate that question because we really do manage this company, invest our R&D for the long term, for the back half of this decade and the decade beyond that and where we're going to find growth to make Curtiss-Wright an ever-growing and stable, profitable company. And just to touch on a few areas where we're going to be profitable over decades to come, we're doing a lot of work around green aviation and electric aircraft, which, again, that's not a near-term thing. But we have a press release that we've been selected by Eviation, which is the world's first all-electric aircraft, is just one example to show wins we're finding in the States. There's a lot going on that we can't press release because either we don't want to put out press releases or the customer doesn't want us to. But we look for representative things that we can talk about publicly that show the progress we're making in these end markets. And so that's an area that we see a lot of future potential in. We're very active with the next-generation single-aisle programs. And that's something that's securing our positions on those next aircraft. It's something that we're very active with both Boeing and Airbus on. If we move to the general industrial portion of our A&I segment, again, being very focused on green technologies, the electrification of industrial vehicles and then also what we call electronification but with human interface in those electric vehicles, just having a really broad suite of products that we can gain continued content on those products as just many parts of our world moves to have a lower emission footprint, things that we can do there to be aligned with that growth sector. When I think of the aerospace and defense, we're very active really looking at next-generation aircraft, future vertical lift, making sure we're securing our content on those platforms that will go into production later this decade. But the time to secure our future is now on those platforms, and we work very hard looking over the horizon about what we do to secure our business from there. We're investing in the product areas, the electronics, the capability that are going to really, again, are critical to the DoD and whether that's having the MOSA open standards, offering of products. Things that are tied to hypersonics, Cyber and security are areas that we're very focused on making sure we're providing leading-edge technologies into the defense department. So we're very pleased with our position in the Navy. We're well positioned on the platforms that are very well supported by a bipartisan. I'm very pleased to say that by a bipartisan support, whether it's the aircraft carriers, various submarines, the destroyers, those platforms just provide a great path. And I think one of the things I think is important to note is, something we talked about in the Investor Day, that we've increased our content across those major platforms 25% since 2015. So you can look at where -- we're very public about what our content is on those platforms, but we continue to look and be a type of supplier that the Navy wants to put more work with us as time goes by because we're an outstanding supplier into our Navy, and we're very proud of that. Then the other half of our Naval & Power segment is the nuclear world. And there's just a lot of reasons to be optimistic about all things commercial nuclear that is more outstanding than has been for, say, the past decade. And that's I think the recognition that the current nuclear fleet needs to be part of green solution. Though new builds need to be part of the green targets that many of the countries have put forward, the focus has always been on China for us given the large order we had several years still with China. But as you look across Eastern Europe, many of those -- many of the Eastern European countries know that they need to have new-build nuclear plants to be part of achieving their carbon-free goals. And I think that's really probably the nearest-term opportunity for new builds, and some of those are very much already publicly declared. They're going to build Westinghouse AP1000 plants. And so that's a great thing for us. I think here in the United States, I think the government has -- the DOE has recognized that they don't want to see further nuclear plants shut and are willing to put some money forward to help the existing plants stay on the grid. And we saw the first step of that in Illinois, where there were 4 plants that were slated for shutdown, and DOE has stepped in and reversed that direction. And so with that, that it kind of stabilizes the base business where we do our aftermarket work. And then with that, those plants are moving for the -- towards their subsequent license renewals to go from 60 years to 80 years. And so that's -- those are very good times for business for us. So I just go across the various portions of our Naval & Power. And I guess the last one not to pass over is the process portion of that is we see our work that we've done in the subsea pumping area. We're moving through qualification with a couple of the large producers, and that's another growth area for us. So we feel like there's a lot of things in our end markets going on right now that was just part of why our pivot to growth and giving ourselves the freedom to invest in ourselves and once we get to 17% of margin next year but beyond that to really be able to make strategic decisions to bring the right products to market in these end markets that really have good growth factors right now.

Yes. No, that's excellent. I mean the pendulum has finally swung back a little bit to nuclear, which is obviously very important. And it sounds like you've got a ton of seed planting going on to keep the growth going beyond your targets. So that's really helpful. One area that's getting a lot of talk about is supply chain. Maybe you could give us how you're characterizing the supply in chain pressures, what's your impact that you're seeing on your business. I know there are certain segments that are impacted more than others. Maybe, Chris, you can talk about that or how you want to quantify the impact today and what you're thinking about being up for next year.

Maybe Chris and I can tag team this question a bit. So I mean it's -- the supply chain pressures are very real, and it's a topic of constant conversation between myself and the divisions across Curtiss-Wright. And I'd say the place where it is the most acute is tied to the chip shortages, which has impact obviously to our Defense Electronics space but also into the A&I with industrial vehicles, that there's impact there. I think I'll start off by saying and I'd say the team is doing a great job being creative and deepening our relationships with our customers and our suppliers to really try and best plan to avoid this. So far, we're not thinking it's impacting any lost sales. It's mostly the timing of revenues. I mean we were very open and talked about revenue shifting from Q2 into out of Q2 and into Q3, then Q3 to Q4 based on some of the timing of the supplies, $10 million to $15 million. And we were pleased that we can predict what that was and delivered, I think, a strong Q3 in line with what we had forecasted. But it's ongoing and something we talked about on our earnings call that for those of you who have heard it, sorry for the repeat, but is we're starting to see some deallocation, where we have committed shipments from our suppliers, and we get 75% or 50% of what the commitments were that they were going to ship. So that's obviously continuing to create -- chaos is too strong of a word, but issues where the team is just continuously replanning the work we put on our lines and such. And so it is an issue in Q4. The thing I feel really good about is it's where Curtiss-Wright, as a diversified company with revenues and products coming from a variety of areas, that we're looking to balance the year and achieve our overall targets by leveraging our diversified portfolio. So -- and at this point, we don't think we've lost any business. And we're working really hard with our customers to make sure that we get the products to them that they need, that we help them hit their financial year. So it's an interesting time. I would say with that, Chris, do you want to add anything?

I think you hit the high points. It's really all about timing at this point. Nothing is going away from the business. And yes, maybe there's just a little -- a tale of 2 segments perhaps in the way that we look at the supply chain issues. I think if you look at the Aerospace & Industrial segment for Curtiss-Wright, it's really more about timing delays and shipments coming in through Los Angeles and some of the things that are happening over there with containers and/or pricing. We've seen a little bit of a headwind there, nothing material, maybe $4 million in that segment on the year. But we've been really effective in offsetting that through pricing with our customers and are maintaining a strong guide in margin expansion for that segment this year. And then on the Defense Electronics side of things, it's really more about the electronics and timing. And we haven't seen quite the cost impact there. I think the team is doing a really great job in ensuring the products are coming in timely without a lot of additional costs. But anything that we do see in that regard we will offset through pricing and/or our operational excellence initiatives. So things are going reasonably well. It's a dynamic issue, and we're working on it.

That's helpful. I mean I know it's certainly getting a lot of exposure, as it should, just because everyone is dealing with it. So switching quickly just to margins, you have a 17% kind of margin target in '22. How do we think about kind of either expanding those or holding those levels when you think about either growth or M&A? What's the best way to think about the framework for the 17% margin?

Overall, as we discussed at Investor Day and our new pivot-to-growth strategy, our focus is really on maximizing revenue and operating income growth for the shareholders. We intend to fully leverage the company's main operating structure. We accomplished great things over the last 7 years. And many of those things that we've learned and best practices that we've built into the culture of Curtiss-Wright are sustained and continue as we move forward. So we'll have that continued focus on operational excellence, a continued focus on maintaining top-quartile performance. And -- but it is important, as we think about margin expansion going forward, to recognize that we're not going to sacrifice profitable growth for top-decile margin. We've been stating this for years, yes, we're focused on ensuring steady, sustained investments that bring the highest returns back into the business. And for example, this year, while we're still guiding to 40 to 50 basis points of operating margin expansion this year, we have increased our incremental R&D investments by $12 million. And without that, we'd be at 17%. So we see an opportunity right now in the market to invest in many of the areas that Lynn has talked about so far, and we're going to take advantage of that. Now in addition to that increase in research and development to stimulate organic growth in our pivot-to-growth strategy, we are focused on M&A. We've been through a lot of properties. We won't sacrifice our stringent financial and strategic criteria for the sake of growth. But as we find those right properties, there might be higher amortization in the organization going forward. But we're not going to allow our acquisition strategy to deteriorate our financial metrics. And PacStar is a great example. So this is our single largest acquisition in history that we were able to bring into the company just last year. They have strong top line growth. It had a 17% operating margin. And out of the gate, they're doing very, very well. We're very pleased with the integration. So going forward, we have opportunities for continued cost reductions, strategic pricing improvements. And we talked a little bit about our operational growth platform at Investor Day. We're very proud of the things that we're doing there. We're focused on achieving that 17% operating margin in 2022. We haven't provided a specific target beyond that. But all these things that we're doing will contribute towards freeing up money for incremental investment. We're providing that expansion going forward. So our main focus is really just making sure that operating income growth exceeds revenue growth, and that does imply continued margin expansion.

That's helpful. And we only have a couple of minutes left, so maybe -- you did mention the operational growth platform, so maybe I'll go right there. Talk -- maybe, Lynn, if you could just talk a little bit about how that's going to help accelerate your pivot to your growth strategy. Maybe where are you in the process of rolling out this new platform? What kind of benefits do you see both in the short and long run?

It's definitely something we put a lot of work into this year. I'd say if not every one but one of our Curtiss-Wright employees know that we have an operational growth platform and what it is and that it is part of our future going forward. So I mean we've made great progress. We've done like a pilot program and assessed to about -- almost 50 sites across the organization. We actually, just a couple of weeks ago, had a meeting with people from across the organization to talk about what we learned from that initial assessment. And I'd like to step back and rethink the platform as we initially formulated it and make some tweaks to it, and we're in the process of doing that. And so I think we'll have a final implementation of it by the end of this year and then start formal assessments of all of the teams next year. But more broadly, stepping back, the things that it's really opening the door for is leadership oversight from me specifically of areas of the business that are more critical to growth. Not -- again, not stepping away from the focus on maintaining operational excellence and continuously looking to take cost but adding to that areas of looking at innovation and collaboration across the organization, making sure those -- where there's opportunities, there's funding made available for those and that they're brought forward, funded and celebrated as we have some early successes in that area from some things that we're doing. Execution of the strategic plans, key opportunities for growth, having executive oversight and involvement in those key growth opportunities, so to me, it's somewhat both of a continuation of the operational excellence of the past and then bringing more leadership oversight over growth opportunities. The one part of it that's also -- kind of touched on this before, but the commercial excellence piece and really understanding our pricing strategies, given the environment we're in today, is something that we've moved forward on the priority schedule than maybe we would have thought we would. But it's something we put a lot of emphasis on Q4 is to really understand where we are with our pricing and where we see inflation pressures and to make sure we're addressing those. So I think that's part of the journey of One Curtiss-Wright, that as we become a more integrated company that has leadership oversight over more aspects of the business, that it's just giving a great platform to expand that over to the things that are going to help us grow over the long term.

It's a terrific way to end. Obviously, it sounds like it's going to give you a lot more insight into your businesses.

Yes.

So I want to thank you, Lynn and Chris, Jim, for joining us today here. Really enjoyed our discussion. And hopefully, we get to do this in person next year in Chicago. So thanks again for supporting the conference.

Thank you.

Thank you. Look forward to it.

Bye.

Thanks.