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

Thank you for joining us, and we're lucky to have Lynn Bamford and Chris Farkas from Curtiss-Wright joining us today. We're going to open it up with a quick read of the safe harbor, and then Lynn is going to give us a little quick overview of who is Curtiss-Wright, just as a reminder for anyone out there who's not as familiar with the company. And then we'll launch into a Q&A. [Operator Instructions] Otherwise, I will -- I have a whole list of questions to throw out there, and we will [ listen ] about that. So Jim, if you want to read the safe harbor, and then we'll turn it over to Lynn.

Thanks, Elizabeth. So let me provide a quick note on our safe harbor, which is available in the latest investor slide deck on our website. Please note today's discussion may include statements regarding our future plans, objectives, growth and expected performance including our outlook for the first quarter and fiscal year 2022, but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not statements of fact or guarantees of future performance. While we believe any forward-look statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties, details of those risks and uncertainties associated with the forward-looking statements in our public filings with the SEC. So with that, I'll turn it over to Lynn.

Thanks, Jim. So just as really a 50,000 level viewpoint, I'll talk about who Curtiss-Wright is. And I want to say thank you for the opportunity to be here today and talk about Curtiss-Wright with all the people that are on the phone call today. So we appreciate the opportunity. So at the top level, Curtiss-Wright is a global integrated business that provides highly engineered products, solutions and services mainly to the aerospace and defense markets, but we also serve commercial power, commercial aerospace and industrial markets. We really are proud that we have very strong positions, leadership positions in the majority of the products and services we offer, which gives us the ability to really build out on those capabilities. The other thing that's really a powerful underpinning of who Curtiss-Wright is, is there are inherent synergies and crossover technologies between the different segments that we report our results in. And I think we'll probably cover some of those today through the natural Q&A that will come. In 2022, we expect our revenues to be above $2.5 billion, with approximately 2/3 of those revenues now in the A&D end segments. The company has, for a long time, been focused on continuously expanding operating margins, and that has been something that we've been very successful about over recent years and continues to be a focus. In 2022, our operating margins will exceed 17%. We are very proud to have reached that 17% goal last year in 2021. And this is really important because it allows us to build upon our continued investments in R&D to fuel our innovation engine. We are always recognized for our strong free cash flow generation, which provides us steady opportunities to return value to our shareholders through repurchases -- share repurchases and dividends and capitalize on investments back into the business. Our long-term pivot to growth strategy, which we introduced at our May Investor Day, we're really enthusiastic about it, and we really believe it's the right direction for driving both top line growth, both organically and through acquisitions, and this will enable us to generate double-digit EPS growth, and we look to continue to do this while we maintain our free cash flow generation, extending our 8-year consecutive record of having greater than 100% free cash flow generation, which we're very proud of. So all in all said, we are -- feel really good about where we are as a company, our financials, our strategies to grow across our 3 segments and feel that we're really positioned to drive great long-term value for our shareholders.

Perfect. That's really helpful. Thank you for the overview. For investors that are less familiar with Curtiss-Wright, can you describe in a little more detail the pivot to growth strategy that you mentioned? And why this is important for the company's future and what makes it different?

Yes, that's a great question and one very important to me as a newer CEO. We announced our Pivot to Growth strategy at the beginning of 2021. and we've already taken a number of steps to execute on this new strategy. At the beginning of last year, we rolled out our new segment structure to simplify how we represent our business transparently to our investors. And I think that's been very important. We worked very hard on deepening and expanding our customer relationships last year, and this continued journey of the Pivot to One Curtiss-Wright. We had started that One Curtiss-Wright journey really back in the early 20 -- around 2013. And it was really focused on back-office type of integration and things that would help us expand our margins. With this pivot to growth -- we've taken that One Curtiss-Wright journey, and it's more -- become more of a market-facing and a customer-facing activities that's really critical to us unleashing some growth potential that we had within the company that we had not unlocked previously. Our Pivot to Growth strategy built out on our operational growth platform that even though we'd say we're focused on growing, we've not at all taken our eye off of driving the operational improvements that we have always been focused on. And those are really critical because they afford us the opportunity to continue to invest in R&D that we really believe we're sitting at great positions with technologies and markets that are really at growth pivot points in where they are and having those R&D dollars, making sure we're driving them to the highest return opportunities is really important and something that myself and the leadership team is really focused on making sure we're doing those things to fund the highest return R&D opportunities across the organization. We see growth opportunities in each of our segments. There's unique things going on in them. And one of the things that's also been a focus for me is making sure we're really targeting those crossover technologies where we have technologies in one end market, maybe a defense market that can be pulled through, but probably more frequently technology in some of our commercial markets that we can read through to defense markets. But there's examples of both. I mean the Honeywell -- our partnership with Honeywell we announced a couple of years ago for the flight data recorder was really technology developed in the defense space for deployment on defense helicopters, et cetera, that has now gone to the commercial space. And I look at our footprint that we built out in electrification of vehicles, we're reading that across into the defense space. So this is a really exciting thing that's really motivated the employees within Curtiss-Wright and has really got the employees widely embracing this pivot to growth strategy that we're excited about. Acquisitions do remain an important part of that pivot to growth. I think we're very open and talked about that during our Investor Day. And one thing I always do want to emphasize is that even though we've put this focus on growth and put forward some targets, minimally 5% over the 3-year period but potentially up to 10%, that doesn't mean we're going to change the way we scrutinize and evaluate acquisitions and become less rigorous in the approach we take to that. And I've mentioned in some of the individual meetings in 2021, we looked at double-digit numbers of properties that we chose not to move forward. And these were properties that were in our end markets that could have been viable candidates, but we felt for various reasons. Sometimes the way they invested in their technology, sometimes things that were going on relative to their financials that we just didn't feel they were good fits for us and are willing to pass on those. We think the South Bend acquisition that we did add here in January of this year, is a fantastic fit. And I think the dynamics of how it came to be part of Curtiss-Wright really reflect the nimbleness of the team within Curtiss-Wright to move quickly and act on an acquisition when it is that right strategic and it is that right financial fit. So we feel really good about our current pipeline and believe that we will continue to make the balance of M&A and organic growth how we go about delivering on the pivot to growth that we feel confident will drive this 5% CAGR in top line growth, 10% CAGR if we find larger acquisitions and drive our EPS and our free cash flow that we had put forward at Investor Day.

Great. And circling back on the [ M&A ] there. With recent volatility in the market, do you feel like that, that's maybe present more opportunities that weren't available even 6 months ago for various reasons? Or any sort of change that presented itself as of the recent volatility potentially?

Well, I think we may see some more carve-outs from some of the bigger defense primes as they look to drive their portfolios. But I would say, we had a pretty steady flow of books in 2021, and that's continued in 2022. But I'd also like to comment that if you look at how we've sourced quite a few of our past 7 acquisitions, it hasn't been through an auction process. They've been companies that we've worked with, built relationships with and have gotten to know the owners, and they could see that their company's long-term future inside of Curtiss-Wright would be great, and we've been able to work in a proprietary manner to have those companies join Curtiss-Wright. So that we continue to make as a priority across the management team to be looking for properties like that. I think for all of the properties we've bought since 2016, we paid in the 10 to 12x multiple range. So we're very -- that's part of the discipline. I was just mentioning, we're not going -- I wouldn't say there's not no possibility we'd never pay above that. There is for something that would be -- have truly some technology that was really a game changer. So I don't really like to take anything off the table from a size or a multiple. But I think we have a very good processes for evaluating it and do still see the pipeline is very healthy.

Okay, great. As we dig a little further back into the aerospace and defense markets, which has been sort of the focus of the company now, right? Can you talk about the sense -- not that we have a fiscal '22 budget, and it looks like numbers thrown around for fiscal '23, which we think are probably on the light end of where things actually end up, where do you see opportunities in growth for this year? And how might -- what's happening in Eastern Europe and the fallout there impact your business?

It's an important question, especially with the current situations in our world. I just feel -- for those who maybe don't know Curtiss-Wright so well, we have strong positions across ground, naval and aerospace platforms, mostly in the U.S. but a worldwide footprint. We are well positioned with long-term visibility on many key platforms here in the U.S. that always have bipartisan support. About half of our defense business is in the naval and it's Navy space and it's dominated by the CVN-80, 81 Virginia-class and Columbia-class, but it's not exclusively that. We do aircraft handling equipment that sells globally. Obviously, Safran will build out that aircraft handling capability. And again, their business is about 25% U.S., 75% outside the U.S., so it really gives us a nice launch pad to continue to drive more and more balance of overseas or non-U.S. business for the U.S. In general, we are pleased. The budget was actually signed or the appropriations bill was actually signed this week. We really like what we see in it. A lot of our strategies continue to be very well aligned with what is funded in the budget. In our Defense Electronics segment, one of the most important things that you -- anybody who has listened to us has heard us talk about for the past year is the move to the -- excuse me, to the MOSA open standards -- open systems approach. And we've been really focusing our R&D dollars in that space and continue to see a complete directive from our -- from the U.S. DoD to adopt the MOSA standard. So we feel very good about what's going on with the growth factors for where we've invested in our R&Ds and where that portion of our business is going. And that business is more -- is largely the aerospace in the ground. A lot of the ground business comes from the PacStar acquisition we made late in 2022, and we're very pleased to see that in the Army's top 6 priorities, the 2 places that are important to us soldier lethality and the net centric modernization are in those top 6 priorities. And we expect them to continue to benefit from strong budgetary support and bipartisan support across all of those spaces. Being in the continuing resolution, I think we talked at our earnings call that continuing resolutions happen frequently. This one was longer than normal. And so it will likely have some impact on our business. One thing that's -- we've talked about is -- we do a lot of money that's funded through the RDT&E. And when you're in a continuing resolution, the RDT&E money is basically frozen to the dollars and the programs that were funded last year. We think we do roughly about $30 million of business through like new program starts and with 180 days continuous resolution. We think that may have provided some headwind into the defense electronics space this year, maybe 1% to 2%, but we're still seeing. We'll see how quickly they can move out now that they have an appropriations bill and get back to spending it. But the good thing in that defense electronics space, the C5ISR and the cyber capabilities that very much aligned with where we are, we're in a great place with all of that. Turning to Ukraine, the impacts are really kind of twofold. We have -- one of the places, we have a strong position, again, for people who would have followed us over the years is in ground vehicle programs throughout Europe. We're very active with the major primes in Europe that build ground vehicles and are well positioned with them. And so I think, surely, the importance of ground vehicles is quite sadly come to the forefront over the past several weeks. And as NATO countries commit to increasing their spending, Germany has stated it will go above the 3% all in Germany have committed to buying at 35 that I think all of those capabilities, whether it's directly to the primes in Europe or back through foreign military sales out of U.S. companies, that, that situation will drive incremental business to Curtiss-Wright. Whether any of that in this year, I would kind of doubt but it's very early days. So obviously, it's really early to try and predict how that's going to move forward. But the other impact of the situation going on currently in Ukraine is something that we've been working on for some time, and that's really working with Westinghouse, working with some of the new SMR start small modular reactor starts to allow countries in Eastern Europe and elsewhere in the world, but to gain energy independence, and this march has been going on. Westinghouse signed a number of memorandums of understanding over in Eastern European to be a supplier into Eastern Europe. You may have seen we settled all past issues with Westinghouse in the first quarter of this year. So our partnership with them is in great shape to move forward and be able to participate in the build-out of a nuclear footprint in Eastern Europe, which I would think the sense of urgency was there prior to a month ago and some specific examples of that. And surely, that has just gotten more urgent with everything going on and we have commitment from Westinghouse to be their provider for the first multiunit program. We think that will be Poland. And again, there was a real sense of urgency prior, and I feel like that will only be increased. It's sad to say, but I think people want their energy independence. And there's other opportunities outside of Eastern European. There's still India and various other places around the world. So -- but that's really -- the impact is really twofold with the situation in Ukraine.

How soon could you see revenue on that program and where, I guess, outside -- you said India, but where outside of Eastern Europe, do you see opportunities as you think about sort of the totality of the opportunity?

So from a timing standpoint, the most specific example and where we anticipate will be the first example is Poland had declared they'd like to have the first AP1000 plant on the grid in 2023 that if you back that up to first concrete dates in 2028, it would imply they'd start ordering equipment in 2024. We have said 3 to 5 years, not 2 to 4 years, just simply to be a bit conservative from the standpoint of how these things progress. And again, new sense of urgency, but also -- the world has changed a lot in the past month. So that is the timing that we think is the most likely. Interestingly, the other thing going on that could be right side-by-side with that is Poland has also declared that they would like to build or interested in investigating, building an SMR on an old coal site and have signed a memorandum of understanding with NuScale, which is one of the leading SMR providers and a company that we have significant content to. So that's another area that I think just the build-out of the nuclear power grid across Eastern Europe is going to come in multiple ways over the next coming years. Outside of Eastern European clearly, India, as I mentioned, there's been talks with Saudi Arabia and still not to diminish the situation in China. The China has put forward fairly aggressive goals for carbon reduction. And we still generally believe that if -- for them to meet that, they are going to need to leverage the global supply chain. Our AP1000 plants have done fantastic in China. We have a good working relationship with the energy providers in China. Obviously, it would be good if the geopolitical situation became a bit more friendly. But they value the AP1000 technology is the safest nuclear reactor capability around the globe available in the world. So I still think there's a chance there.

Okay. And can you remind us what was the size and the cadence of your last AP1000 order?

Why don't you take that, Chris?

Sure. Yes. We received our last order on the AP1000 directly from China in late 2015. It was about a $450 million order for 16 reactor coolant pumps. Now we recognize that revenue on an over time basis. So it's a 5- to 7-year mill curve depending on the customer schedule, but very, very profitable business. We've said the AP1000 program has 23%-plus, plus profitability. And we are nearing the end of the order. Revenue did peak back in 2019 at $110 million. And since then, we've been ramping down, again aligned to the customer's construction schedule. This year in '22, we've got about $30 million of revenue remaining. And that's $20 million down from 2021. That's a 1% headwind to our organic growth for this year, which at the consolidated level is 3% to 5%. And it also represents a significant margin challenge, which we've offset through operational excellence programs here. So we will complete the majority of the production work this year, ship our final pumps. And -- lastly, I guess while we're talking about the AP1000, the only thing I'd like to remind everyone is that our current guidance in our Investor Day targets through 2023, do not include a new AP1000 order. We've said that this will be upside to our profitable growth when the next order is received.

If we turn to commercial aerospace, can you give us some color on your outlook for this portion of your business? And then talk about how you're thinking about the OE versus the aftermarket pieces of it?

Sure. Maybe I'll start with the second part of the question and then kind of move to the first. Just to give people who aren't really familiar with Curtiss-Wright an overview of our commercial aero market, it's about 10% of total Curtiss-Wright revenues. And we sell actuation sensors, flight controls and surface tech services predominantly into that market. We're about 80% OEM and about 20% aftermarket. As you look at that and slice it down between narrow-body, widebody, we're about 60% narrow-body 40% wide-body, of course, Boeing and Airbus are our biggest customers, but we also sell into business share, regional jet and helicopter markets. Like most companies in commercial aerospace, the pandemic was -- hit everyone very, very hard. But since the lows of 2020 and specifically Q2, we have seen orders improve steadily and sequentially. In the fourth quarter of 2021, our orders were very strong. They were actually up 90% year-over-year. And for the full year of '21, we were up 39%. So as we approach fiscal year 2022, we're projecting this to be our strongest end market with growth at 9% to 11%. We expect that aftermarket growth rates are going to slightly outpace the OEM growth rates but both very solid, and we're producing in line largely with Boeing and Airbus estimates. We're encouraged by some of the more recent announcements that we've seen on the 737 MAX, where they are moving to potentially ramp up to 47 per month by the end of 2023. And while Airbus, I think, has been a little bit more cautious lately in their projections, I think they're still projecting to be up 15% to 20% by 2023. So like most, we're encouraged by what we're seeing, narrow-body will recover faster than wide body, but we think we will be back to 2019 levels in 2024.

And the 60-40 wide-body, narrow-body wide-body, that's in normal times. Correct?

Yes. That's been on the MAX. I mean there is obviously a little bit of uncertainty here with the 787 program, but we don't really view that as materially significant to our results. And as soon as that FAA certification goes through, I think that will be an opportunity for us.

Okay. And how are you thinking about the supply chain and its impact on your business across all the different industries? So you see industrial aerospace and the pinch points there. And are you starting to see things get less worse? Or how -- what's the state of affairs?

Well, I'd say you are right to say that there are supply chain impacts across our businesses broadly, and they come from freight issues to raw materials, but the one that's really the most significant that we're working our way through across the organization is really tied to the chip shortages. And that's really -- that affects obviously the defense electronics space, but there's also some impact into that, into the [ ANI ] space. I'd say I'm really pleased with what the team has been doing, really started doing really in Q2 of last year of different approaches to handle the supply chain issues. But that is the one that's right now the most impacting to our business. And currently, we're thinking that overall, for Curtiss-Wright, our traditional half 1, half 2 revenues that we're expecting there to be roughly a 2% shift of revenues from the half 1 to half 2 really driven by supply chain things. I definitely would want to emphasize we don't feel like we're losing any business over the supply chain issues. It's really just the timing of the revenues. And we work very closely with our customers to really understand what their priorities are and making sure we're getting them what they need so they can maintain their shipments. And I would say, are really being very successful in that with a lot of hard work going on with the teams inside the different business units. Some of the things that we've been doing to handle the situation is looking for gold sources where possible. I'd say that's really more prevalent on the [ ANI ] side than the defense electronics, where there's more specialized components and configuration management by the end customers, but we're doing it where we can. We're definitely making sure we leverage our long-standing relationships with suppliers to work for the good of the entire corporation. I mean, that's always something we had done, but I'd say we've done it more intensely over this period. And in the defense side, we're definitely leveraging the DPAS ratings to assure we're at the front of the line ahead of commercial customers to get components and do that both pragmatically from a legal responsibility but also really getting to the executives and our suppliers to make sure they understand the real-world impact that if we are not supplied to what it means we don't deliver to the war fighter. And that is -- it's certainly come into focus for everyone as of late. So it's -- the teams are doing things, but it is a real impact. And there's pricing. I think maybe for those who would have listened to Investor Day, there is inflation tied to this. It's not just supply chain. Prices are going up, and we're working really hard to understand that, stay on top of it, adjust our prices as needed. Working closely with our customers, so they understand that we're trying to pass on costs that we're receiving and being pretty transparent with customers in that. But it's led us to have some closer relationships with our class customers and greater insight into where they see their forecast by them really wanting us to be successful in being able to keep up with supply to them. So it's an ongoing situation. And to the part of your question, is it getting less bad? I honestly wouldn't say that we see that yet. I think there is some optimism in the back half of this year, we might start to see some relief. But I would say we haven't seen it yet. It just sort of continues on. It's not worse. It's just sort of status quo.

Okay. And what about on the labor front? Are you seeing issues there as well in terms of hiring and the available workforce?

So that -- it's definitely a tight labor force environment. I mean I think that's -- everyone realizes that. I think the thing working in Curtiss-Wright's favor is we tend to have a long-term stable workforce throughout all levels and all types of employees we have across the organization. I think we pride ourselves in being a pretty good place to work and treat our employees well with respect. And many of our employees are really proud of the products and services we provide into critical industries around here in the U.S. and around the globe. So we tend to have a pretty stable workforce. We have a pretty long list of open positions right now. And our time to fill is definitely extended out from where we would traditionally be. But we are staying a step ahead of it, I would say, at this juncture in time.

Okay. Maybe just turn to capital allocation. And we had a question from the audience. So little tie into this as well. If we could just -- if you could talk to us about your approach to capital allocation or how you think about M&A versus share repurchases? And then specifically with the question from the audience was if you could please discuss your recent Safran acquisition and what makes it compelling.

Okay. Yes. Thank you for that. So I think we've used the term disciplined and balanced approach to our capital allocation. I think I inherited from Dave, the prior CEO. And I believe it was a pretty doggone good strategy. So if isn't broke don't fix it as the old saying goes. So we really do maintain that. But without a doubt, we're very upfront to say M&A is our priority for use of capital and we're working hard. And what that means, it doesn't mean you lower your standards for what you'll buy. It means you work harder to fill your pipeline with products so you can ultimately find high-quality properties that you want to put your capital towards. And I think that's just an important differentiation that people make sure they understand from our perspective, what making it a priority means. And we've talked a lot about -- we went through Investor Day, both the strategic side of being a good use and the financial side, and we definitely look at both of those. Safran does make our [Audio Gap] So I think that really shows where it is a priority. But I also definitely -- we're looking for the best way to create shareholder value to use our capital in the manner to best create shareholder value. And we've had a long history of share buyback, an average of $150 million a year since -- over the past 6 years. But over the past 2 years, we bought back $550 million of stock and $350 million were last year alone, which was the highest year we've ever done. So we definitely see -- when we say balance, we do mean balance. So we want to put money towards both -- and investments back into the business that we're not shy about investing in the businesses where we're frequently being asked by our Naval and our commercial aerospace customers, whether we're ready for ramp rate increases and to make sure we're positioning ourselves to demonstrate that we are a supplier that is ready to deliver on those ramp rates. So it really is a balanced approach looking to create shareholder value. I guess -- sorry, and talking specifically about Safran, we're super excited about it. We're hoping the acquisition will close late in Q2, early Q3. We don't see any hurdles to that. We have -- one of the targets we put forward at Investor Day was major safety systems. And we have -- part of our portfolio is helicopter landing equipment or safety systems, and now this adds fixed wing safety systems for landing aircraft. So it's a very natural extension of our product offering. As I mentioned, their footprint is interestingly 75% outside of the U.S. So it gives us a great platform to really build on extending our non-U.S. customer base and taking the other quality products we have out into that space. And so they are clearly a market leader. So in our quest when we talked in the opening about -- we're proud to be a market leader in the markets we play in. These guys are undoubtedly the market leader in their business. And we believe that we have clean line of sight that they will be accretive to the financial targets we set, and they have strategies to grow. And I believe that is part of Curtiss-Wright and some engineering collaborations, some sales resource collaboration, we're going to be able to help them grow faster than they would have been able to, without being part of Curtiss-Wright. And so those are all the kinds of criteria that you look at and you say, yes, this business belongs inside of Curtiss-Wright.

Okay. I think we have time for maybe one last question, and maybe we'll just keep talking about capital allocation. But today, given where we are, would you be more interested in sort of more transformative M&A or more bolt-ons?

So I think you have to be open to both because transformative M&A is something that you can't really predict the timing to. I think we have a pretty good track record of saying with hard work, we can incrementally find bolt-on acquisitions and really make those successful. And I think we've done that. Again, there might be gaps in time or they might come quickly together. But that is something that we absolutely are consistently looking for those bolt-on acquisitions. But as asked on Investor Day, whether we would be open to a more transformative acquisition, we are open to a more transformative acquisition. I mean it would have to really pass some very tough scrutiny on being a strong, strong strategic fit that the companies would really create value by being together and have either be at financial targets we want or clean line of sight that as a combination we could rapidly get that company to be at the financial targets we want. So it is something we are open to. We make sure that as we deal with financial agencies in the world, they understand that not to self-limit properties that they would show to Curtiss-Wright. And again, also always looking out in companies that are still private that we can build relationships that might ultimately still make that choice to have their company join Curtiss-Wright and be part of the Curtiss-Wright team. If we did something transformative, I could see that we would leverage the debt up close to 4% or even around the 4% mark. But if we did do that, we would obviously look to quickly bring that leverage back down under 3% for sure, by utilizing the free cash flow.

Well, thank you. I think that brings us to our allotted time. So thank you both for participating today. And we really appreciate it.

Well, thank you, Elizabeth.

Thank you, Elizabeth. It's nice seeing you.

Thank you.