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

Okay. Now we're very honored to have Curtiss-Wright here with us today. And with us here today, we have Ms. Liz -- Lynn Bamford, CEO of Curtiss-Wright and Mr. Chris Farkas, CFO. Curtiss-Wright designs, manufactures and overhauls precision components and engineered products and services primarily in the aerospace and defense, general industrial and power generation markets worldwide. Curtiss-Wright has 38 million shares outstanding. The stock trades at $475 for $18 billion market cap, and $630 million of net debt for an $18.5 billion total enterprise value. We are delighted to have Lynn and Chris here with us today to discuss the growing role in -- growing role in the aerospace and defense industry, and we'll sit down and have a nice chat. Thank you for being here. So great to have you here, and congratulations on all your success. You guys have just been ripping through the roof here with your performance.

Maybe let's start broadly by giving -- just giving maybe a more broad overview of what you do and maybe sort of go down your business lines a little bit?

Okay. Well, welcome, everybody, and it's my pleasure to be here, and thank you for the invitation. Today's comments may contain forward-looking statements, which have risks and uncertainties, which are outlined on our website. I'm obligated to say that. So -- but I don't know there's probably very different levels of awareness that who Curtiss-Wright is in this room. And so one thing I would encourage you to do, if you aren't very familiar with the company is, if you go to our website, we had an Investor Day about 15 months ago in May of last year, where we really give a pretty thorough overview of our end markets and our strategies in those end markets and 3-year forward-looking guidance. So it's a great place just to introduce yourself to the company and then maybe possibly check out our Q2 earnings call where we had some pretty strong results and raised guidance across the board. So just two good reference points to introduce yourself. But Curtiss-Wright has been continuously traded on the New York Stock Exchange for 96 years. The Wright in the name comes from Orville and Wilbur Wright, which most people don't realize. So it's just kind of an interesting and it's a great legacy to have as a business that people are very proud of that history. But from what matters today is, I think we are an engineering-centric company. We're just over 9,000 employees, of which about 1/4 of them are engineers. And so we are an engineering and manufacturing company that designs niche products for safety-critical applications that often operate and must not fail applications. And so we like hard problems that take lots of engineering smarts and then manufacture complex things that are of the highest quality. And that's kind of what binds us together is the capabilities and the engineering knowledge and approaches to be able to design those kinds of products. One of the things that we do as we design those products that is a powerful part of who we are is many times, we can take core technologies and take it across the various end markets. Tony introduced the end markets. And as you can see, and when you go through the material, we are at a variety of different end markets. So -- but we make that work for us by leveraging technology across those end markets. So we launched our Pivot to Growth strategy just over 4 years ago that the company had spent the prior decade, which Chris and I were both part of it, really driving financial performance in the company and really getting to some top quartile -- quartile numbers, but the thing that we had not been able to achieve was growth of the top line. And so as I became CEO, 4.5 years ago, that became the focus of what really was needed to continuation of operating margin expansion and things like that. But to really like that growth engine and our pivot to growth strategy, as you mentioned, has really been delivering results. But I think one of the really important things that I'm sure we'll cover in some of the specific questions is what -- we're at such an early stage in so many of our end markets and things that we have been working on over these past 4 years that are just coming to bear fruits, not even maybe yet. Some of them are coming in '26 and '27 and '28. And so our future is great, and there's a lot before us.

Lynn, that's a great overview. You and Chris have just done a great job and your team has done a great job. Maybe you could talk about a little more about the defense business with this $1 trillion budget coming into 2026, fiscal year '26, potentially the reconciliation bill funding where you've got a lot of plus up. It seems like you're well aligned with that -- with those budgets. Any areas where you expect to benefit more from than we'd expect in the areas of maybe concern where there's lower levels of funding that could impact you negatively?

Thank you for that. The Curtiss-Wright is 2/3 in aerospace and defense company and the majority of that is defense. So if you say our largest end markets, it is defense. And so we're really pleased with what we're seeing out of the budget that's moving itself through the process and having that $1 trillion amount of spend is pretty amazing. And we are very well aligned to what's in the budget. Shipbuilding is our biggest single end market. We're on all the major platforms. And there's very strong support for shipbuilding, getting to the 2 plus 1 as it's called the 2 Virginias and 1 Colombia is supported in the '26 bill. And so that will be very good for us. There's also a lot of funding in there for the industrial base. And we've been very good at going after this funding and receiving significant amounts of funding and have much more before us. And I think it's -- the amount of funding we're getting is indicative of the role the Navy sees Curtiss-Wright will play in the growth in shipbuilding. So it's not that the dollars are that significant, but it shows where we fit into the value chain. So that's one that's fantastic. The whole Golden Dome initiative surely will drive business in many different facets to Curtiss-Wright as we're participate in a lot of the systems that will build up the shields that the system is. We do things with hypersonics and then the connectivity that ties the Golden Dome surely is an area of expertise we have with all of our communication and networking equipment that is a real area of strength for us. There's aircraft -- there's nuclear deterrence, the B-21, we think will be a good platform for Curtiss-Wright and some of the new aircraft dominance programs, the F-47, the MV-75, these are all going to be great platforms for Curtiss-Wright and then upgrades to other aircraft, F-22, F-15EX, F-15s. Again, these all fit into our MOSA and SOSA compliant hardware, which is another interesting aspect of the bills going through and slightly different in the House and the Senate, but we'll see how they sort out is really the push for more commercial acquisition and more commercial solutions raising thresholds for where you have to have auditable business, but also a mandate that the MOSA and SOSA compliance systems be moved to a mandate from a benefit in how system selections are performed. And Curtiss-Wright is -- has the leading portfolio of products that are MOSA and SOSA compliance. So there's just a lot of different aspects about the bill, and that's only the U.S. half that is great for us.

I guess that leads me to the other portion, which is international defense markets. You mentioned on the last call that you're expecting direct FMS to grow 20% this year with expecting uplift. And obviously, from NATO spending like we saw earlier. Where do you see the biggest opportunities, this level of growth sustainable -- is it sustainable for the foreseeable future?

First of all, let me say it's a pleasure to follow Rheinmetall. We actually had a press release that we issued back in March, where we had won some work on turret drive stabilization systems supporting some of their vehicles, they're long-standing customers. So that was a treat, thank you. But just for some context, I think as you step back and look at when we talk about foreign military sales, we're talking about direct foreign military sales. Those sales to international customers that excludes that work that we do for Lockheed Martin on the F-35 that ultimately goes international. And we've seen order activity increasing globally and across many NATO countries over the past few years. We've been compounding sales in this area at a mid-teens growth rate for the past 2 years. And it's really based upon the broad defense electronics portfolio that we have. We've worked on more than 400 platforms and 3,000 programs globally. Obviously, there's a strong domestic content there, but also a very strong international content. And that's been helping to drive some of that growth along with content and naval arresting systems over the past few years. This year, as you mentioned, Tony, we are going to be growing 20%. So we're seeing that order activity accelerate. It's across many of the same products that we sell and have been benefiting from the past 2 years, but we're also seeing some increased growth in ground-based arresting systems this year. So it's been attractive for us. And this year, it will reach roughly 10% of Curtiss-Wright's total portfolio, which is $340 million. Now going forward, we see -- we continue to see this as an exciting growth area for us. I think as you step back and you look at the commitments that were made by NATO Secretary General, Mark Rutte alone, the NATO would reach 5% of military spending as a percentage of GDP. Over the next 10 years, 3.5% on that on core military spending, and then 1.5% on infrastructure and other defense cybersecurity and other defense spending. But if you just take that 3.5% alone, and you turn it into today's dollars, that's a $400 billion opportunity for U.S. defense contractors or defense contractors that are selling to international countries. And we believe that we're really well positioned to benefit from that going forward.

Yes. That's a huge opportunity, Chris. That's going to be impressive to watch. Maybe back to the sort of the commercial side. You recently highlighted a great opportunity with Honeywell in a press release to supply flight battery recorder technology to Boeing with aspirations to support Airbus and others. Help us understand that relationship with Honeywell and the potential upside for this critical update? And maybe give us a little background on what this all is?

Yes. So Curtiss-Wright has been building flight data recorders for 60 years since there was the concept of a flight data recorder, but really never been in the commercial aerospace realm. And if you look back on our website, it was just over 5 years ago, we signed our partnership with Honeywell as the world came to the realization that the 2-hour recording time really was not significant and actually didn't provide the data it was supposed to on a couple of critical situations. And Europeans mandated 25 hours of recording several years ago, the U.S. mandated it last year. And so everyone knew it was coming. So, we've been getting ahead of it and working with Honeywell. It's a great partnership because they want -- they used to build flight recorders, they don't -- they wanted to get out of that business. This is a business we love, but we don't have the logistics arm to support the airlines. And so they use their logistics arms, we produce the hardware, and it's a great prototype. We're actually trying to duplicate around the business for some other examples where they have a better reach than we do, but we can build really quality hardware. And so the partnership has been going on with Boeing. We've been shipping for OEM content for about 2 years at this point in time. The part of the FAA mandate last summer was to retrofit the existing fleet in the U.S., and that's tens of thousands of airplanes that need retrofitted. And so as that's come into focus, we really are just experiencing the very beginning of that ramp in the back half of the year to be able to produce these recorders at the rate that's going to be needed to accomplish that. And we raised our guide in Q1 in Commercial Aerospace, the entire raise was tied to what we could see of the ramp in this area in the back. We are very active with Airbus. We have a type certified flight recorder across their A320 fleet. We think we'll receive that certification in the first half of next year. And so that's obviously opens up yet another big window of opportunity for us. And in addition, the FAA mandate really requires a 25-hour capability on all planes that have 30 or more passengers. So that reaches to a lot of the regional jets and it's early days of figuring that all out, which will work again with Honeywell as they reach into these fleets of airplanes. So we haven't really sized the opportunity from a dollar value yet, because there's still a lot of things being worked out. But this is going to be a significant driver. We realized this business through our Defense Electronics segment and is going to be yet another additional driver within that segment of the very strong profitable growth that they drive through the segment.

Another great win, Lynn. That's pretty nice upside there with those opportunities. Maybe we'll go to the commercial nuclear. Last year's Investor Day, you provided an impressive long-term outlook consisting of, as we've heard with some of the previous briefs, consisting of increased growth opportunities across the portfolio in commercial nuclear. Since then, we've seen tremendous support from the administration through a number of executive orders. How should we think about the timing on key new projects? And can you put some context around your long-term growth expectations in the commercial nuclear business?

Thank you for that. Again, that is an important part that's part of that Investor Day. So thank you for mentioning that. And a lot has happened since we put out those long-term targets. So just to kind of frame our nuclear business, for those who don't -- again, don't know Curtiss-Wright quite as well. It's about 12% of our overall revenues. And of that 12% today, 90% is the work we do in the aftermarket, which again, we've been doing since the inception of the industry. We are proud of that, and I think it's important. It shows our history and our knowledge of these industries. And that work is seeing nice ramp rates. A lot of the nuclear power plants in the U.S. are doing their 40- to 60-year life extensions and that drives extra aftermarket type of work and some other opportunities I won't dwell on. So that part of the business has got very healthy growth drivers in and of itself outside of the new build type approach that's going on. And the targets that we put out in our Investor Day were to double our business by 2028 and to reach a $1.5 billion run rate by the middle of the next decade. And all this activity in the U.S. through the executive orders obviously happened after we put those targets out. So maybe at some point, we'll be looking to refresh those targets. But you can say for now, it sure gives us confidence in those targets. But some specifics outside of the aftermarket is we have a long-standing relationship with Westinghouse in providing major componentry in their AP1000 builds, which we saw as part of the opportunity is them winning roughly half of the new large light water reactor plants in Eastern Europe, which they're really being a strong contender for. It's the only Gen III+, all passive safety systems reactor that's been built in the world. And so clearly, they're in a very strong position. So that business still exists in the executive orders, there was a mandate for 10 new large light water reactors, Gen III+ to be under construction by the end of the decade. And we're very engaged with Westinghouse on making sure we're ready to ramp for all this business that is coming. And we're -- we've been pretty public about saying we expect our first RCP order, which will be well north of $100 million per plant is our content on that, and we're still seeing additional content we can get, but in 2026. And so that's a really exciting thing for us as a business. And we've been doing the work to make sure we're ready for that, whether the anticipation is that will be Poland, but the things are moving amazingly fast in the U.S. with the firm applying for their licenses already this summer after the mandate. So it's pretty exciting to see the pace at which people are moving forward on this. And then the third area is the small modular reactors that are very much in the news right now. And one of the advantages we think Curtiss-Wright brings to a potential investor is our goal is to work with all the larger small modular reactor players, and we're doing a great job in this place and having meaningful content across the various providers. So we've targeted $20 million to $120 million of content per reactor and are well on track to receive this. One of the latest announcements we made was our strategic partnership with Rolls-Royce was announced about a month ago. And that's just the tip of the iceberg of the content I believe we will be able to drive with Rolls-Royce. And so we're in great shape across those. We've been doing design work for the past several years. That design work is going to turn to prototyping work in the next 12 to 18 months, estimate has begin to go. And that's really going to drive revenue growth. And then we've got to move to some of the -- we have over $100 million of content on a reactor, I'll leave it at that straightforward, but we have to prototype that work, and then move to production with it. And so as this moves out, it's really great work for us. So it's really -- to us, we're very excited. We're in the aftermarket. We're on the leading large light water reactor, and we're definitely securing content across the board on small modular reactors.

You're definitely in a good position, Lynn. Back to ramping, you discussed, given the breadth of the opportunities cited like you've just -- you went through in detail, is there a limit to how much commercial exposure you can actually accommodate? I mean it seems like this is, again, sort of unconstrained demand here? And then what would the CapEx be on that horizon?

I feel fortunate to be a CFO that's got to solve for the growth problem. And I think we have been very efficient with our capital expenditures historically, 2% on sales on average, maybe a little bit less. But with the growth that we have now and the growth that's ahead of us, we've been increasing that CapEx. It's 30% last year, roughly 30% again this year. And fortunately, we also have been very focused on working capital management. So as we've been increasing that capital spending, we've also been maintaining extremely high conversion margins. Last year, it was 111%. This year, it's going to be 108%. So we've been generating more cash flow as we've been investing as we move forward. And with all this work in these growth vectors that Lynn has been mentioning, we've been spending a lot of time looking at capital expenditures, how do we best accommodate the strong volume that we have going forward, not just from a CapEx standpoint, but also from a head count standpoint, engaging with our customers, engaging with our suppliers to make sure that all of the right things are happening to support this going forward. And we feel extremely well positioned as we're looking out over the next few years, even though we've got this growth in front of us, we're not looking at anything extraordinary that's going to disrupt the pace and growth of our cash flow expectations going forward. And then I think as you look out towards the end of the decade and you start to think about, well, you've got this specifically as it relates to commercial nuclear work, this great aftermarket base, you've got AP1000 work kicking in domestically and internationally, and then the SMR starts to shift from prototype to production, and we could potentially see ourselves greenfielding a site at the end of the decade. But if we put that money down on CapEx, that's going to be an incredibly positive signal for our investors regarding where the growth in revenue is going for this business going forward. And it does feel more realistic now than it's felt at any other point in time in my career. The momentum is certainly there. So I'm excited about it.

Yes. It's very exciting, Chris. Adding to that, last year, you bought 2 commercial nuclear companies. One was Ultra. How is the integration going? And where does this provide the most long-term upside for you guys?

Yes. We're really very pleased to be able to put 2 nuclear acquisitions into the company. And use some capital to that end last year. The integration is going fantastic. They're having a very strong year. They were the focal point of the strategic partnership we announced with Rolls-Royce. It's their reactor protection system that was that point. And Rolls-Royce really likes that we now have a major nuclear facility in the U.K., that we're having many discussions with how we can drive more localization through that site. So we're working -- the fit is just fantastic where we have customer reach and content, some places in the U.S. where they didn't. We're having great fortunes introducing them to those customers and really leveraging what they have over in the U.K. with good interactions with Rolls Royce ahead of time, but Rolls-Royce was very pleased to see us do this as localization is just such a big part of this. So we've done a lot of the mechanics of integrating them. And that's gone very smoothly. The teams have worked hard to make it work that way, but we know how important that is. And I think they're a very excited part of Curtiss-Wright that has such a big focus on nuclear and there's so much emphasis as a company that it's, I think, rewarding for them to be part of the company and part of this much bigger nuclear team. So we're on track to drive $80 million of revenue out of the team this year. So that's quite an achievement. And they're not accretive to margins yet, but we have a clear path to make that happen, and we'll be focused on that over the next couple of years as we just continue to capture more business.

Maybe we could follow up still with capital allocation. You haven't bought anybody. I know we've talked about on the calls, I asked you a couple of times on the calls about acquisitions in 2025. Could you maybe once again discuss M&A activity pipeline? What are you seeing today? And then how do we think about the other parts of capital allocation, share repurchases in this environment?

Okay. So maybe I'll talk a little bit about the pipeline and then ask Chris to speak a little bit to the share repurchases. So I would say we've been an active acquirer for many, many years, but we're a very stringent acquirer and have a pretty high bar for both the strategic fit and the financial fit, and we're not afraid to walk away from properties. And we've done that so far in 2025. But the pipeline is full. This is part of our DNA and how we're going to grow is acquiring companies. And really throughout the businesses, our teams are always looking for companies out there that maybe they work with that they understand maybe are still private or whatever the circumstance might be and court them over years sometimes to have them when it is the time for them to sell, that they want to sell their businesses to Curtiss-Wright. And we've had many of our acquisitions come to us that way. And those are really great. We're active in the banking community, but acquisitions is our top priority of our use for our capital, but that doesn't mean we're going to force something that isn't a good strategic and financial fit. So we'll see what the future holds, but I'm sure we'll be announcing acquisitions in the future. But with that, maybe you'd like to talk about share repurchase.

Yes. And with that strong free cash flow that I have mentioned, we are a strong supporter of returning capital to shareholders. We believe that share buyback is the most effective way to do this. Excluding this year over the past 3 years, it was $750 million worth of buyback. We expanded our authorization with the Board earlier this year to get another $400 million of share repurchase authorization. In August, we just bought back another $200 million worth of stock. I think it's very important for you to know that when we make these decisions, it's not just a function of there's not an acquisition or something out there in the market that we can leap upon right now. It's really a conscious decision regarding valuation and what we see in the stock going forward. Lynn and I have a lot of thoughtful conversations along those lines and also with the Board. So you can tell by the $200 million that we just repurchased that we are very excited for the future and all of these things that we see. Beyond that, we'll have more conversations as we typically do with the Board in September regarding the strong cash position that we're in and other opportunities that we have. But while share repurchases are our most preferred method of returning capital to shareholders, it's also important to note that we are committed to increasing our dividend in alignment with our growth in sales, I mean a little bit of a catch-up this year because the growth is getting faster than our expectations that we started the year, and we increased our dividend 14% and that's the ninth consecutive year. So we are excited to be able to return capital to shareholders.

Very nice. I'll open the questions up to the audience.

The [indiscernible] session this week working on the NDAA. And as you noted, there's been a lot of growth in terms of awareness and appreciation, if you will, for the supply chain, the industrial base for large shipbuilding certainly. What -- do you have a wish list of things you'd like to see in the NDAA and what would that mean for the business?

So gaining industrial-based funding has definitely been a focus across our teams. And at our Investor Day, we gave the figure that we had received $15 million of industrial-based funding. Today, that number is up to $21 million, and it's going to grow significantly in the future. So really having the money be available, and then we make proposals in through the Navy and BPMI and different contracting arms for the things that we need to support the growth that is coming to us. And again, as I commented earlier, the funding that we see coming our way through that, I think, very much reflects the importance we play in that shipbuilding industrial base that they want to make sure we're ready to grow. And so it's -- we like a lot of what we're seeing coming through the NDAA. We just hope it gets passed.

I would just offer on top of that, that you've seen some proposals put together for the acts, the FoRGED Act and the SPEED Act coming out of the House and Senate, and we expect those to hopefully coalesce as we get deeper into the year. But the support that you've seen in those acts for commercial contracting for MOSA and not just making that a preferred contracting mechanism is something that you actually must have within your proposal in order to win. Those are all very good things for Curtiss-Wright, our most profitable segment, which [indiscernible] before becoming CEO is the Defense Electronics group. And you can see by that entity's margins, what we are able to do when we are giving a chance to compete against other contractors commercially, I think it's a very good thing for us, and I'm encouraged by the changes in regulation that lie ahead.

Well, Lynn and Chris, thank you so much for being here. It's really an honor that we get you. And congratulations on your great performance, and we're hoping to get you back next year. Great job.

Thank you.

Thank you very much.