Curtiss-Wright Corporation (NYSE:CW) Q4 2023 Earnings Call Transcript
Curtiss-Wright Corporation (NYSE:CW) Q4 2023 Earnings Call Transcript February 15, 2024
Curtiss-Wright Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Curtiss-Wright Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations.
Jim Ryan: Thank you, Jamie and good morning everyone. Welcome to Curtiss-Wright’s fourth quarter and full year 2023 earnings conference call. Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas. Our call today is being webcast and the press release as well as a copy of today’s financial presentation is available for download through the Investor Relations section of our company website at curtisswright.com. A replay of this webcast also can be found on the website. Please note, today’s discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995.
These statements are based on management’s current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company’s results include an adjusted non-GAAP view that excludes certain costs in order to provide better transparency into Curtiss-Wright’s ongoing operating and financial performance. Any references to organic growth are on an adjusted basis and exclude foreign currency translation, acquisitions and divestitures, unless otherwise noted. GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website. Now, I’d like to turn the call over to Lynn to get things started.
Lynn Bamford: Thank you, Jim and good morning everyone. Curtiss-Wright delivered a solid operational performance in the fourth quarter and strong finish to 2023. For the second consecutive year, we achieved several new financial records as we continue to execute our pivot to growth strategy. We generated double-digit growth in sales and earnings per share in 2023 as we benefited from the underlying demand within our core portfolio. We achieved these results while maintaining our commitment to incremental investments in R&D, and we generated significant growth in orders, which are proof points that our strategy to build momentum in our organic growth is working. Overall, we delivered another outstanding year for our shareholders and I look forward with confidence to Curtiss-Wright’s future.
Turning to today’s presentation. I’ll begin by covering the highlights of our fourth quarter and full year 2023 performance and a brief preview of our 2024 financial outlook. Then I’ll turn the call over to Chris to provide a more in-depth review of our financials. Finally, I’ll wrap up our prepared remarks with a recap of our performance and the notable achievements against our 2021 Investor Day commitment before we move to Q&A. Starting with our fourth quarter 2023 highlights. Sales of $786 million increased 4% year-over-year and exceeded our expectations due to a stronger-than-expected performance in the Defense Electronics segment, which continues to benefit from a healthy backlog and easing in the supply chain. Our performance was once again led by growth in our aerospace and defense markets as we benefited from 20% growth in commercial aerospace along with higher tactical communications equipment revenues and ground defense.
We also experienced solid growth in our commercial nuclear and process markets. Adjusted operating income grew 2% year-over-year to a quarterly record of $163 million and resulted in a strong operating margin of 20.8%. Diluted earnings per share increased 8% year-over-year to a quarterly record of $3.16, while free cash flow was $270 million, resulting in a 221% free cash flow conversion. Next, I’ll turn your attention to the right-hand side of the slide and recap our full year 2023 results where key metrics, including sales, operating income, earnings per share, free cash flow, and orders were all records for the company. Sales increased 11% overall to more than $2.8 billion, driven by 10% organic growth as well as a better-than-expected contribution from the arresting systems business acquired in the mid-2022.
We delivered continued operating margin expansion, reaching 17.4% in 2023, which included more than $20 million in incremental strategic investments in research and development to further position us for future organic growth. Of note, for 2023, total R&D investments included both internal and customer funded projects exceeded 6.5% of total sales. We also overcame the significant headwind associated with the wind down of the profitable CAP1000 program. Diluted earnings per share of $9.38 increased 15% year-over-year, while adjusted free cash flow was $413 million, a reflection of our strong growth in earnings and working capital management. Growth in our order book was exceptionally strong in 2023, up 5% year-over-year to a record $3.1 billion, reflecting 1.1x book-to-bill overall and solid demand across the majority of our A&D and commercial markets.
Of note, we generated double-digit bookings in our Defense Electronics segment, driven by strong demand for embedded computing and tactical communications equipment, as well as higher growth in our Naval and Power segment for both commercial nuclear and process equipment. As a result, we concluded the year with a backlog of $2.9 billion, up 9% year-over-year. With this strong performance, we exceeded expectations for nearly all of our 3-year targets set at our 2021 Investor Day, including sales, operating income, EPS growth, and delivering close to 110% average free cash flow conversion. I’ll provide greater detail on our performance against our long-term targets later in the call. Overall, I am exceptionally proud of the team’s continued dedication to deliver consistent, profitable growth and a tremendous performance this past year.
Finally, I would like to introduce our full year 2024 guidance, where our successful pivot to growth journey continues. Overall, we are projecting mid-single-digit sales organic growth as we continue to benefit from our steadily growing backlog and the strong alignment of our technologies to favorable end market trends. We intend to continue our pursuit of investing for growth by making incremental investments in both internally and externally funded research and development. We expect to generate solid growth in diluted EPS and free cash flow this year, with the potential to reach double-digit EPS growth and up to $435 million of free cash flow at the high end of our guidance ranges. In summary, Curtiss-Wright remains well positioned to deliver another exceptional performance in 2024.
Now I’d like to turn the call over to Chris to continue with our prepared remarks.
Chris Farkas: Thank you, Lynn. On Slide 4, I’ll review the key drivers of our fourth quarter 2023 performance by segment. I’ll begin in Aerospace and Industrial, where overall sales growth of 7% is at the high end of our expectations. Within the segment’s commercial aerospace market, we experienced a strong 20% growth in OEM sales, supporting the ramp-up in production across narrow-body and wide-body platforms. This performance was partially offset by the timing of actuation development programs across the segment’s A&D markets. In the general industrial market, improved demand for our new power management electronics supporting the on-highway market was essentially offset by lower off-highway sales to the construction market.
And turning to the segment’s profitability, our results reflected favorable absorption on higher sales and a strong operating margin of 18.5%. Next in the Defense Electronics segment, our results exceeded our expectations and were slightly ahead of last year’s record fourth quarter results. This performance was principally driven by better-than-expected sales growth in our ground defense market resulting from continued stability in the supply chain and the conversion of our strong order book. Of note, we experienced higher sales of tactical communications equipment as well as increased sales of embedded computing equipment, most notably on the Stryker platform. Within Aerospace Defense, despite higher sales for flight test instrumentation on the F-35, our fourth quarter results were impacted by the timing of a bedded computing sales supporting C5ISR programs, principally on the Blackhawk helicopter.
Regarding the segment’s operating performance we delivered a strong 28.8% operating margin, reflecting favorable absorption on higher A&D revenues, mainly offset by higher strategic R&D investments. Turning to the Naval and Power segment. Overall sales growth of 3% was slightly ahead of our expectations. Starting in the naval defense market, our performance reflected higher revenues supporting the Columbia class and Virginia class submarine programs. However, our results were partially offset by the timing of production revenues on the CVN-81 aircraft carrier program. Within the segment’s Aerospace Defense market, our results reflected continued strong global demand for arresting resting systems equipment. In the Power and Process market, sales grew at a low single-digit pace overall, but reflected high single-digit growth when excluding CAP1000 production revenues.
This performance was principally driven by higher growth in the process market due to increased valve sales, supporting refinery maintenance and turnaround activity as well as higher subsea pump development revenues. Within our Commercial Nuclear market, we experienced higher development revenues mainly supporting the X-energy Advanced Reactor design. And turning to the segment’s operating performance, favorable absorption on solid revenue growth was offset by unfavorable mix on lower CAP1000 revenues, and increased margin pressure related to both SMR and subsea pump development contracts as we continue to advance these critical growth initiatives. To sum up our fourth quarter results, overall, we generated solid absorption on a stronger-than-expected top line performance, resulting in record fourth quarter operating income and a solid finish to 2023.
Next, turning to our full year 2024 guidance. I’ll begin on Slide 5 with our end market sales outlook, where we expect organic sales to grow 4% to 6%, driven by growth in all of our end markets. In Aerospace Defense, growth of 5% to 7% principally reflects higher embedded computing revenues in defense electronics on various fighter jet and helicopter programs as well as flight test instrumentation on the F-35 program supporting the Tech Refresh 3 or TR-3 upgrade. Next in Ground Defense, our outlook for 4% to 6% sales growth reflects continued strong demand for our tactical communications equipment and higher electromechanical actuation revenues, supporting ground missile launches within the A&I segment. We expect those increases to be partially offset by the timing of turret stabilization systems and lower sales on ground combat vehicles.
In Naval Defense, our outlook for 3% to 5% sales growth principally reflects higher revenues, driven by the ramp up in production on both CVN-81 aircraft carrier and Columbia class submarine programs. We expect those increases to be partially offset by reduced year-over-year production revenues on the CVN-80 aircraft carrier program. I also wanted to highlight the expected contribution of Foreign Military Sales or FMS across these markets as increased global spending on defense continues to positively influence our performance. In 2024, we expect mid-single-digit growth in FMS to be driven by the alignment of our technologies to support global defense priorities, which follows a strong 20% growth in FMS in 2023. Turning to Commercial Aerospace.
Our outlook for 10% to 12% sales growth is driven by higher OEM production rates on narrow-body aircraft, including the A320 and wide-body aircraft, including the 787 and A350. We’re also beginning the year with some conservatism in our guidance relative to the 737 MAX based upon the FAA’s recent pause in Boeing’s production ramp. Wrapping up our Aerospace and Defense markets, we expect total sales to increase a healthy 5% to 7% in 2024. Outside of our A&D markets, in the Power and Process market, our outlook for 3% to 5% sales growth principally reflects increased demand for our commercial nuclear aftermarket products, and includes a 1% headwind related to the completion of the CAP1000 program early in 2023. Within our commercial nuclear market, we expect a mid single-digit full year growth rate, principally reflecting strong demand supporting the ongoing maintenance and subsequent license renewals that extend the life of existing nuclear reactors.
In the process market, we expect growth to be mainly driven by higher subsea pump development revenues, supporting the newly announced Petrobras contract. In addition, following very strong 20% growth in valve sales in 2023, we expect these sales to be essentially flat in 2024, with higher MRO sales being offset by the timing of large capital projects. And lastly, in the general industrial market, we expect growth of 1% to 3%, driven by higher sales of industrial vehicle products, notably due to increased sales of our power management electronics and increased sales of surface treatment services. Wrapping up our total commercial markets, we are targeting full year sales growth of 2% to 4%. Continuing with our full year outlook by segment on Slide 6, I’ll begin in Aerospace and Industrial, where we expect sales to grow 3% to 5%, principally driven by double-digit growth in commercial aerospace and low single-digit growth in general industrial.
Regarding the segment’s profitability, we expect operating income growth of 5% to 8%, and operating margin expansion of 20 to 40 basis points to a range of 16.6% to 16.8%, reflecting higher sales and improved product mix in power management electronics, partially offset by incremental R&D investments. Next in Defense Electronics. We expect sales to grow 5% to 7%, principally driven by this business’ record 2023 order book, reflecting solid growth in our A&D markets. Regarding the segment’s profitability, we expect operating income to grow 3% to 6%, and full year operating margin to range from 23.1% to 23.3%, which includes a $5 million or 50 basis point headwind from internally funded R&D investments. And lastly, in Naval and Power, we expect sales to grow 4% to 6%, driven by solid growth in our enabled defense, commercial nuclear and process markets.
Regarding the segment’s profitability, operating income is expected to grow 2% to 5%, while operating margin is expected to range from 17% to 17.2%. While we anticipate favorable absorption on the overall increase in sales, our outlook reflects margin pressures associated with the shift to development contracts for both advanced small modular reactors and subsea pumps as well as a $3 million internally funded R&D project increase, which will collectively create a 50 basis point headwind on our projections. So to summarize our outlook, overall, we expect total Curtiss-Wright operating income to grow 4% to 7% in excess of sales growth, and operating margin to improve 10 basis points at the midpoint of our guide, ranging from 17.4% to 17.6%.
This outlook reflects at least 25% incremental margins across the consolidated portfolio as well as a year-over-year increase of more than $20 million in our total engineering spending on both internal and customer-funded programs, equating to a record pace of investment and ahead of last year’s 6.5% of sales. To aid in your quarterly modeling the sales and operating margin, we expect first quarter 2024 sales to grow by mid-single digits relative to the first quarter of 2023, followed by sequential quarterly improvement. Regarding our first quarter 2024 profitability, starting with the A&I segment, we expect that operating margin will be in line with the first quarter 2023 results. Within the Naval and Power segment, as discussed, the ramp-up in development cost is expected to drive profitability below our first quarter 2023 results, followed by a steady improvement in segment operating margin over the course of the year.
And lastly, we expect our Defense Electronics segment to demonstrate strong growth and profitability in excess of last year’s first quarter results. In summary, at the overall Curtiss-Wright level, we are expecting modest improvement in year-over-year first quarter operating margin on solid organic sales growth. Continuing with our financial outlook on Slide 7 and starting with our EPS guidance. We expect full year 2024 diluted EPS to range from $10 to $10.30, up 7% to 10%, mainly driven by our strong growth in operating income. Our guidance also reflects higher interest income as well as lower borrowing based upon our strong free cash flow generation and healthy balance sheet as we prepare for greater capital deployment in 2024. To aid in your quarterly EPS modeling, we expect our 2024 quarterly EPS to follow a similar cadence to the last year.
We expect the first quarter EPS to reflect low teens growth relative to the first quarter of 2023, and to generate approximately 40% of our full year earnings per share in the first half. For the remainder of 2024, we expect sequential quarterly improvement, with the fourth quarter being our strongest. And lastly, turning to our free cash flow guidance. We are projecting full year free cash flow of $415 million to $435 million, up 0% to 5%. Growth in cash flow from operations is driven by expectations for higher cash earnings and our intense focus on working capital management, while capital expenditures are expected to increase $10 million at the midpoint of our guide as we continue to invest in support of our future organic growth. And as a reminder, we recognized the remaining $5 million in revenues and $20 million in cash on the CAP1000 program in the first quarter of 2023 as we essentially completed the contract.
While the revenue will no longer be a substantial headwind for us, we do expect the $20 million cash headwind to impact our first quarter and full year 2024 comparisons year-over-year. Absent this headwind, our 2024 free cash flow guidance would reflect strong growth of 5% to 10%. And finally, our 2024 free cash flow conversion rate is expected to be near 110% based upon the midpoint of our guidance and in-line with our recent strong performance. Now I’d like to turn the call back over to Lynn.
Lynn Bamford: Thank you, Chris. And turning to Slide 8. As I reflect upon the past 3 years, our Pivot to Growth strategy and the Investor Day commitments established in 2021, I’m pleased with our team’s execution and our overall financial performance. I’d like to spend the next few minutes revisiting the four key messages from our 2021 Investor Day as shown on the top of the slide, and discuss how our accomplishments have translated into meaningful results for Curtiss-Wright, providing confidence that our strategy is working. First, our commitment to accelerating Curtiss-Wright’s top line growth, both organically and through acquisitions, as discussed throughout our prepared remarks, we have maintained our commitment to incremental R&D investments and supplemented this target spending with an intense and dedicated focus on innovation and collaboration across our three segments.
We’ve also discussed the alignment of our technologies to key secular trends, which has propelled organic growth in all of our markets over the past 3 years. In addition, our top line growth has been underpinned by a very disciplined approach to capital allocation, and we have grown through acquisitions as a means to enhance our customer offering and the strategic accelerator of top line growth. Closely following the strategic and financial criteria that we laid out in 2021, we have added some very complementary businesses such as the arresting systems business acquired in 2022, which has expanded our market share and international presence. Second, our focus on the customer, where we have been leveraging the critical mass of one Curtiss-Wright through our sales channels and technologies to provide better value to our customers, expand relations and build upon the content on key platforms such as the inclusion of our critical commercial nuclear technologies on several advanced small modular reactor designs.
In addition, our continued execution provides our customers the confidence in Curtiss-Wright to drive increased funding and investment for key projects, which we expect to contribute to our future organic growth. Third, our focus on advancing our strong track record of operational and financial excellence. This has led to continued top quartile operating margin performance relative to our peers. We have made great strides advancing the operational growth platform, or OGP, by combining our strong performance in operational excellence with new opportunities in commercial excellence and strategic pricing and the development of new systems and tools to improve Curtiss-Wright’s overall efficiency. These efforts have created underlining margin expansion to support our ramp-up in R&D investments or to cover first year dilution from acquisitions as we invest significantly for our future.
And last but not least, our focus on simplifying the business model. This started with the new segment structure released in 2021, aimed at reducing the complexity of our business mix and diverse end market exposure. Since then, we’ve improved the clarity of our messaging regarding our strategies to leverage inherent synergies and crossover technologies that exist throughout our portfolio, and continue to illustrate why these technologies remain a part of Curtiss-Wright today. We’ve communicated these efforts through a number of channels and offer continuous proof points to ensure the benefits of our combined portfolio were well understood. With that in mind and shifting to the bottom of the slide, I’m proud to say that the team has successfully achieved nearly all of our major targets issued in 2021.
Starting with the top line, where we projected a total revenue CAGR ranging from 5% to 10%, with organic growth ranging from 3% to 5%. As you can see, we firmly achieved those goals by generating a 7.4% CAGR for total revenue, along with a 4.7% organic CAGR. Operating income grew at 9.6% CAGR over the 3-year period and exceeded our strong sales growth, while operating margin expanded 110 basis points over the period to a record of 17.4% in 2023. As a result, we maintained top quartile financial performance compared with our peers. Diluted EPS grew at 12.5% CAGR over the 3-year period, well in excess of the 10% minimum target, benefiting from the solid operational performance and continued share repurchases. Regarding our final metric, we have generated more than $1 billion in adjusted free cash flow over the past 3 years despite the impact of the pandemic and the very challenging supply chain environment.
Those factors left us just shy of achieving our target as we delivered an average free cash flow conversion of 108% over the 3-year period. As a reminder, aside from 2022, we have consistently delivered greater than 100% adjusted free cash flow conversion for the past decade. Our initial 2024 free cash flow conversion guidance maintains the strong pattern of performance. In closing, our journey continues. Based on a healthy outlook for the near and long-term prospects for Curtiss-Wright and the continued momentum in the key markets we serve, we are primed to deliver a strong performance yet again this year. We entered the year with a very healthy balance sheet and remain committed to growing diligently through strategic acquisitions while continuing to provide solid returns to our shareholders through consistent share repurchases.
Finally, I wanted to make a few comments about our upcoming Investor Day, which will take place on Tuesday, May 21, in Midtown New York City. We’re excited to once again host an in-person event, where you will not only have the opportunity to hear from me and Chris, but several members of our senior leadership team, including the general managers responsible for various A&D and commercial businesses. We look forward to providing a more thorough recap of the success of our Pivot to Growth strategy in the past 3 years of performance against our prior Investor Day targets. We also intend to discuss our long-term strategy and organic growth initiatives and establish new financial targets as we drive this business forward. In addition, we’re pleased to announce that we will be hosting what we anticipate being a very engaging and educational commercial nuclear panel.
Joining us will be three highly knowledgeable and respected industry experts to cover several facets of the nuclear industry from the aftermarket to advances in small modular reactor technology. We are excited to provide a deeper dive into an industry where the momentum has never been stronger, and one that will surely fuel Curtiss-Wright the potential for long-term growth. Please look out for the formal registration within a few weeks, and we hope that you will join us. This represents one of the many exciting events taking place at Curtiss-Wright in our 95th year as a public company, as we look forward to delivering tremendous value for our shareholders, our employees and our customers. Thank you. And at this time, I would like to open up today’s conference call for questions.
Operator: Thank you. [Operator Instructions] Our first question is coming from Myles Walton with Wolfe Research.
Myles Walton: Thanks. Good morning. If I look back on the 2023 performance on revenue, it looks like the ground defense was actually probably the largest single contributor. Can you correct me if I’m off on that. And it even looked like you had momentum carrying you into the fourth quarter above where you were thinking. So just looking at the 2024 outlook, could you talk maybe about ground defense specifically, but more broadly, the areas of upside and downside risk on your end market growth rates?
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