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

Hi. Good afternoon, everyone. I'm Kristine Liwag, Morgan Stanley's Aerospace and Defense analyst. Super excited to have you join us for our next session. We have Curtis Wright with Lynn Bamford, CEO and Chairman of Curtiss-Wright and Chirs Farkas, CFO. So what an exciting time. Before we get started, I'm going to read our standard disclosures, for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley representatives. Okay. I really don't know who goes to that website. Yes. But it keeps the lawyers employed. When we support the lawyer industry.

So with that, Lynn, Chris, - maybe starting out capital allocation. Curtiss-Wright you guys have been a historically acquisitive company. You've gone through the ebbs and flows of deals you did before a pause and you're back to the pivot to growth where you've been more active in the acquisition front, -- more recently, you've done smaller deals in the commercial nuclear realm. Can you talk about what that M&A pipeline is currently? I think in the last earnings call, you've suggested you were in due diligence. So can you talk about what's happening in the M&A space?

Absolutely. I first want to say thank you for inviting us to you, Justin and to Morgan Stanley. I also have a disclaimer statement that today's remarks may contain forward-looking statements. They come with risks and uncertainties, and they are outlined on our website. So now we've both done our exception statement. So again, I know there's many familiar faces here, but I also see a lot of new faces. So if you are less familiar with Curtis Wright, to give some context to today's comments, I'd encourage you to go to our website, curtisswright.com, and look in the Investor Relations section, you look at our Q2 earnings material, some other presentations in our 2024 Investor Day that set out our 3-year targets that we're wrapping up at the end of the year. And so give you a good baseline and overview of the company. So first is starting out talking about the pipeline. The pipeline has been strong. We have looked at quite a few companies over the past 18 months. And again, we're a diversified company, which gives us opportunity to look at various different end markets. We're pretty quick to say one of our top priorities is to add on to our defense electronics capability. It's our highest margin segment. We know how to buy business in that segment and bring them in and have them reap the benefits of being part of that bigger team. Major naval propulsion and safety systems is another priority where we're always looking commercial nuclear remains an area where we look, there's not as nearly as many targets in that space, but it is an area we look and specialized aerospace components that really have differentiated IP and durability would be another place we would look. And so I think one of the things, as you pointed out, Curtiss-Wright has had M&A is our top priority for our use of our capital, and it absolutely remains there. But as we very consistently say we are looking for a strategic and a financial fit and are willing to walk away from properties if they do not have both of those characteristics. And I think through our acquisitive history, we've really developed very good strong processes and call it a playbook, whatever for how we go about approaching diligence and betting forecasts and such. And with that, I think we do a really good job of bringing in companies that are going to meet financial targets within the company. And so I'm really proud of what the team does. We've walked away from a handful of properties over the past 18 months, as I just said, where those -- the willingness of others to pay very, very high multiples up into the 20s on forward-looking EBITDA -- it's just not an area where we're thinking we'll be willing to go. You never put absolute limits on things, but they digita made financial sense. So we continue to look and exercise our diligence process and we will find things to acquire, I feel confident about it.

And Lynn, with the strategic and financial targets, can you just give us a little bit more color on what those thresholds are?

Sure. Maybe Chris can talk about the financial target.

Sure. I think as you take a look across the business, it's going to be very hard to find one that you can instantly integrate into the business and me Curtiss-Wright's 19% ROS target, and especially -- we don't measure EBITDA. We do it on a loss basis. So we cover the depreciation and amortization when we bring business -- but it has to be able to accrete to that in a relatively short period of time. We want businesses that are going to be also accretive to the top line growth and strong cash flow generators and the ability to hit our rock targets, which given some of the higher multiples that you're seeing in the market today, you may not be able to hit cost of capital by year 3, but these are long-term investments. So we'll hit it by year but we'll be flexible. I think you're not going to hit every KPI every single time. To me, it's as a finance guy, it's strategic strategic fit, strategic financials. But we do take a lot of time and care to make sure that, that alignment is there.

And then I guess just harkening back to the strategic fit and many things I imagine you can -- we're looking to build our positions in our end markets. We're not looking to add a fourth leg to the company. But we really want companies that own their intellectual property. There's very good durability of the revenue streams, high strategic barriers, companies that have good alignment to our culture and places companies that maybe could extend our customer reach or we can use our customer reach to extend for them. And so it's a lot of different things depending on which end market you're looking at. But as Chris said, we start there and that they don't make the strategic that we don't go on to the financial fit, but they have to pass both.

That makes sense. So good luck. I hope you find what you're looking for. So with that, staying on capital allocation, you increased your share buyback by $100 million. I think now your new share repurchase authorization totals about $700 million, and you're on pace for $460 million in buyback this year pretty much around the same level of your record year last year of the. Can you talk about what's driving this incremental spend? And also, has there been a change in your strategic priority where buybacks is now more higher up on the list.

So I'd just start off by talking about the strategic priorities and then turn it over to Chris. But the strategic priorities have definitely not changed. And I see -- we haven't bought back a lot of stock that is right there in plain sight. But acquisitions for growth in our end markets is absolutely our strategic fit. And we just sort of talked about what those criteria are. I look at the future for Curtiss-Wright. I feel so confident in where we're taking this company that we're not going to push the limits on an acquisition that could be harmful to the value I know we can create to our shareholders with the investments we're making in ourselves and the growth that we have before us.

Yes. So I agree with Lynn. Absolutely, the answer is no. I think the key for us is discipline, right? I mean I think it's a disciplined capital allocation strategy. So as you take a look at what we're generating very, very strong cash flow. And if you take a look at how much capital we've deployed, since 2021 through 2025 is $2.5 billion. Now half of that went to organic investments and inorganic investments. And the other half of that went to returning capital to shareholders. And I think you can see in the stock price growth over the past few years, a very, very good investment. Now more recently, the Board approved that $700 million of additional authorization. And we saw some opportunity here in the market in the month of August and now we've launched another $100 million plan here, which is going to extend through October. But we look at everything. This isn't really just a cash jump. We'll take a look at the valuation. We understand where we stand relative to other mid-teens earnings compounders, we recognize the dynamics in the industry. But the thing that we see that we don't share because we don't typically guide more than 1 year unless we're at an Investor Day is that tremendous growth in earnings that's ahead of us. So we are absolutely a great buy right now.

I mean you see the stock price, I mean, and this new buyback, I could see that the confidence that you're signaling is clear.

Yes, I'm sure we're going to touch on future questions that -- we're just so well positioned in so many of our end markets and the technologies that we bring. But I'll let you ask questions about those in the order you choose.

Sounds good. So I mean I guess the next order is you see the administration, this administration has been vocal about different priority set that's important for the war fighter. Can you talk about the alignment of Curtis Wright portfolio in these key priorities? And what -- where opportunities do you see are most interesting?

Yes. So Obviously, we've been in the defense industry and naval shipbuilding since the inception of the nuclear Navy and defense electronics since the kind of birth of the cost industry. And so we're long-standing players in these industries. And naval shipbuilding, the budget has nearly doubled from '26 to '27. I mean, that's pretty amazing. And we're aligned across all the major platforms. They're trying to get to a rhythm of 2 Virginia and 1 Columbia. That's great for us. We have major content on each of those platforms. They're moving forward with the CBN 82 long lead material funding. So these are all very good developments for Curtiss-Wright. And then across our defense electronics portfolio, we have been in this industry for years. We have a global reach to where we sell our products. And whether it's aircraft modernization, we announced C17 program with Boeing is 1 program that we can announce what we're doing. There are so many times we win things that are not able to announce what we're doing, whether it's that an advanced threat detection system that will go across multiple rotorcraft that has got a huge future for us to whether it's tactical communications whether it's just so many different things of pushing electronics out to the war fighter and making the battlefield more advanced technology. We play in many of those places. And then that's not to mention having a great reach for Golden Dome, which is obviously another priority.

So I think that's a great segue. Golden Dome, there's been a lot of discussion about project. I mean it's a big priority for President Trump. But at the same time, the funding for Golden Dome for fiscal year '27 and certain it was mostly funded out of the reconciliation budget, which unlikely there are discussions of maybe folding some of it into the base budget. I guess with all this uncertainty and funding for Golden Dome, let's take a step back. Where do you see the program? Where is Curtiss-Wright positioned? And how do you think about that in terms of your core business versus optionality?

Yes. So it's interesting because there's different opinions on the reconciliation. But a lot of Golden Dome is essentially taking a lot of existing systems, either using them as they are upgrading and networking them together to make a unified front for defending the homeland. And as just mentioned, we've been in the cost industry since its inception. -- we are on so many of the things that will be part of the buildup of Golden Dome. So those will come in their existing form and we'll participate in that way, whether it's on the sensor side to look for threats coming in. effectors to look for countermeasures to take action and whether that's counter UAV unblistic missiles. These are all areas where our technology is very relevant. And things like our NVIDIA Black Belt product that we brought to market last year are all critical pieces for when you think of the time and the speed and the decision-making, these are all critical capabilities that our Fabric 100 capabilities for the fastest interconnect that exists in the industry. These are all things we have, and we can work with the defense industry to build these things out. And then our tactical communications equipment is critical for the networking. And Personally, I think they're going to find ways to put the important pieces that being developed and acquired into the budget 1 way or the other. And I think we're very well positioned to make more advanced technologies where they're going to spend money in that way or to build out the existing platforms that will be built into the Golden Done.

Great. So it sounds like you're very bullish on the Golden Dome.

Yes, very much. One other aspect of the golden dome that hasn't come up yet is one part that is already being well funded. And again, the IFPC program we do the electromechanical actuation. We just announced a $40 million award at the end of August in that. And so Again, that has been fielded in Guam is going very well. That program is going to lead to the follow-on CAM program, which is another multi-domain launcher. And again, these things are finding ways to be funded. So the reconciliation that money in out I believe the pull for this equipment is so strong that it's going to find its way in the defense budgets.

That's super helpful. And maybe bringing to the 2026 outlook. At the last earnings call, you've called about a flattish and then another recovery in 4Q. And some of this is most of it, I guess, the key variable is defense electronics. Can you walk us through your confidence level about that level setting of that cadence? And then also, how much visibility do you have in the supply chain that gives you confidence that you would have that big.

Yes. So I think when you're talking about confidence, and I'll just kind of step it up a level for those that are maybe less familiar with Curtiss-Wright, we had a beat and raise in Q1, we obese in Q2. So overall, we feel very comfortable with the guidance of the corporation and where we're headed. And if you've come to know us over the years, we do what we say we're going to do. So on the second quarter call, we did talk a little bit about Defense Electronics and some flatness in the revenue between Q2 and Q3. But if I go back a little bit further, it's very gratifying for Lynn and I to talk about things that actually come to fruition and given the fact that last year was a full year continuing resolution. We had a shutdown for 45 days. There's been changes to the PMO offices, a lot of confusion last year. But what we said in the fourth quarter was that as soon as the NDA was signed, and we got through this, we'd start to see order patterns resume to a more normal cadence. And 60 to 90 days later, we would start to see that uplift. And Q1 was a very solid order book. Q2 was a record order book. It was up 47% year-over-year. We're seeing another strong order book here in Q3. So very gratifying to be able to forecast as that's happening and where we are. But we also said that there would be some timing issues relative to the revenue recognition. And while the pipeline for Defense Electronics is incredibly healthy and the business is doing is really doing great. It's just a matter of execution. So 4% to 6% revenue increase in revenue guidance this year. We didn't increase it. It's just the time -- the short time frame that we have to turn this around. Now when it comes to the supply chain, yes, most manufacturers that participate in our space are facing problems with maybe memory and processors and things like that. But I'll tell you, when we went through this back in 2022 when this issue was more systemic through the industry, and wider scale in nature, the team learned a lot, a lot of best practices that we're incorporating today. We started placing advanced buys knowing this was coming earlier this year. We got PaaS ratings that were flowing down to suppliers. We're building healthier, stronger relationships with our suppliers, and we feel very well positioned. We've got the materials that we need for 2026, and we're working on 2027 credit to the team.

Wonderful. You recently announced your $80 million investment in your Chez, Pennsylvania. I think that's how you pronounce it. I've actually been there maybe 10 years ago, we beat time for another trip -- but $80 million in investment. Can you give us more color on -- and by the way, on a separate note, that's the biggest pump I've ever received in my entire life. I thought reactor coolant -- I mean as massive giant pump. No wonder it costs millions of dollars?

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