Q1 2021 Curtiss-Wright Corp Earnings Call

May 6, 2021

[music].

Okay.

Good day, and thank you for standing by and welcome to the Curtiss Wright first quarter, 2020 One financial results conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I wouldn't.

And I'd like to hand, the conference over to your Speaker today, Jim Ryan Senior Director of Investor Relations. Please go ahead.

Thank you Don and good morning, everyone and welcome to Curtiss Wright's first quarter 2021 earnings conference call joining.

Joining me on the call today, and our President and Chief Executive Officer, Lynn Bamford, and Vice President and Chief Financial Officer, Christopher <unk>.

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 Www Curtiss Wright Dot 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 and as defined in the private Securities Litigation Reform Act of 1095.

Statements are based on management's current expectations and are not guarantees of future performance, we detailed those risks and uncertainties associated with our forward looking statements and our public filings with the SEC as.

As a reminder, the company's results included an adjusted non-GAAP view that excludes certain costs early to provide greater transparency and to Curtiss Wright's ongoing operating and financial performance.

Also note that both our adjusted results and full year guidance exclude our build to print actuation product line that supported the 737 Max program as well as our German and valves business, which was classified as held for sale and the fourth quarter.

In addition discussions about our first quarter results and full year guidance reflect our new segment structure, which we announced earlier this year to provide greater clarity and transparency to our portfolio.

Reconciliations for current and prior year periods are available and the earnings release at the end of this presentation and on our website any references to organic growth exclude the effects of restructuring foreign currency translation acquisitions and divestitures unless otherwise noted.

Like to turn the call over to Lynn to get things started Glenn thank.

Thank you Jim and good morning, everyone I'll begin with the key highlights of the first quarter performance and an overview of our full year 2021 outlook, then I'll turn the call over to Chris to provide a more detailed review of our financial results and an update to our full year guidance finally, I'll wrap up our prepared remark before.

We move to Q&A.

Starting with the first quarter highlight we're off to a great start with higher sales and improved profitability driven by strong operational performance that exceeded our expectations. The net sales increase of 2% was led by solid growth and our aerospace and defense markets, which improved 8% and.

Adjusted operating income improved 15%, while adjusted operating margin increased 160 basis points.

And I think strong margin improvement and the defense electronics enable and power segments.

Our results also reflected our slip actions taken last year and response to the pandemic, where we committed to controlling our costs to preserve profitability and free cash flow restructuring savings, resulting from those efforts are reflected in our first quarter results and provide a strong base for our margin expansion over the course of.

The year.

We also continued to fuel our innovation pipeline with a $4 million year over year increase and research and development investment to support our strategic growth initiatives.

Adjusted diluted EPS was $1 51, and the first quarter, which increased 18% year over year as a reminder, our prior year first quarter results were largely unaffected by the pandemic.

Looking at our first quarter orders overall book to Bill was solid at approximately one time sales and the first quarter with one two times and our commercial markets.

This performance was led by a surge and demand for industrial vehicle products and both on and off highway markets.

Looking across the rest of our commercial markets. We have been encouraged by steady improvement since the third quarter of last year and remain optimistic for our continued solid rebound in the back half of this year. We also experienced solid new order growth and our A&D markets, principally led by higher demand for defense electronics.

And our recent acquisition of pack Dar speak.

Speaking of <unk>. The integration is on track and I am encouraged by their strong performance to begin the year.

As a reminder, <unk> is projected to deliver a high single digit revenue growth and.

And is aligned to one of the department of defense as top priorities and upgrading and modernizing the netcentric connected battlefield.

Next to our full year 'twenty, one guidance highlights where we raised our adjusted guidance for sales operating income margin and diluted earnings per share. These increases are based upon higher demand and defense electronics and improve profitability and enable and power segment.

We now expect adjusted operating margin to range from 16, 6% to 16, 7%. We also increased diluted EPS by <unk> <unk>.

To a new range of $7 10 to $7 30.

With the top end of our range, reflecting double digit growth compared to 2020.

Overall, we are encouraged by our solid start to the year, which supports our continued confidence to deliver strong results in 2021, now I would like to turn the call over to Chris to provide a more thorough review of our first quarter performance and our improved outlook for 2021, Chris.

Thank you Ryan and good morning, everyone.

I'll begin today with a review of our first quarter sales and profitability, where we again delivered another strong operational performance.

Starting in the aerospace and industrial segment sales were lower year over year as anticipated based upon reduced demand and wide body jets within the commercial aerospace market.

However on a positive note, we experienced an uplift and industrial vehicle product sales to both on and off highway markets driven by solid order growth as Glenn mentioned earlier.

The segment's operating performance, while bolstered by year over year restructuring savings, primarily reflects unfavorable absorption on lower sales and an immaterial impact to the supply chain constraints and both container shipments and electronic components.

And the defense electronics segment, the strong 31% growth and revenues reflects the contribution from our <unk> acquisition, and a 4% increase and organic growth principally and aerospace defense for our commercial off the shelf for cotton products.

Segment operating performance was very strong as adjusted operating income increased 42%, while adjusted operating margin increased 170 basis points to 29%.

Key drivers of this performance included higher organic sales volumes favorable mix towards our cost products and the benefit of our cost containment efforts, which more than offset higher investments in research and development.

Of note. This performance did include the acceleration of some revenues from the second quarter and several customers took action to stabilize their supply chains due to global concerns for potential shortage and electronic components.

And enable and power segment, we experienced solid revenue growth for our naval nuclear propulsion equipment and higher fleet services, which was mainly offset by lower aftermarket revenues to our commercial power and process markets.

Adjusted operating income increased 21%, while adjusted operating margin increased 300 basis points to 17, 7% due to favorable sales mix within our naval defense markets and an increased benefit from our 2020 restructuring actions.

To sum up the first quarter results overall, adjusted operating income increased 15%, which drove margin expansion of 160 basis points year over year.

Turning to our full year 2021 guidance I'll begin with our end market sales outlook, where we've made a few changes highlighted in blue on the slide reflecting a modest increase in total Curtiss Wright sales.

Our outlook for overall aerospace and defense market sales growth is now 7% to 9% based upon strong first quarter demand and higher orders for our defense electronics equipment.

This positions Curtiss Wright to once again grew our defense revenues faster than the base Dod budget.

And our commercial markets. Our overall sales growth is unchanged at 68% and we are encouraged by the strong one two times book to Bill recorded and the first quarter.

We now expect total Curtiss Wright sales growth of 7% to 9% of which 2% to 4% is organic.

Continuing with our outlook by segment, I'll begin and aerospace and industrial where topline guidance of one 3% sales growth remains unchanged and.

And we continue to project solid growth and operating income and margin, mainly reflecting the benefits of our prior restructuring initiatives.

As we look across the remainder of the year, we continue to monitor the impact on our industrial supply chain very closely we believes and we can fully mitigate any such impact through various initiatives and expect this to be immaterial to our full year performance.

Next and the defense electronics segment.

Based on the solid first quarter orders within our defense markets. We now expect segment sales to grow 22% to 24% driven by a combination of 4% to 6% organic growth and a strong contribution from Baxter.

Segment operating income guidance increased $2 million on a $5 million increase and sales and as a result, we're now projecting segment operating income to grow 10% to 13% while operating margin is projected to range from 21, three to 21, 5%.

Of note and segment profitability reflects a $6 million year over year increase and research and development unfavorable mix due to a ramp up and lower margin system sales and inorganic sales from texstar, which will be dilutive to overall Curtiss Wright margins in year one.

And the enable and power segment, our top line guidance of 1% to 3% sales growth remains unchanged. However, we increased adjusted operating income guidance to reflect an additional $2 million benefit from our prior year restructuring actions.

Segment adjusted operating income is now projected to grow 2% to 5% while adjusted operating margin is expected to increase 20 to 30 basis points to a range of $18 two to 18, 3%.

So to summarize our outlook, we expect full year 2021, adjusted operating income to grow 9% to 11% overall on a 7% to 9% increase and sales.

Operating margin is expected to improve 30 to 40 basis points to 16, 6% to 16, 7%, reflecting the strong profitability and savings generated by our restructuring initiatives.

Continuing with our 2021 financial outlook, where we've increased our full year adjusted diluted EPS guidance by 10 to a new range of $7 10 to $7 30.

Reflecting growth of 8% to 11%.

Following our strong first quarter performance, we now expect second quarter diluted EPS to be similar to the first.

Load by sequential quarterly improvement during the second half of 2021 with the fourth quarter being our strongest.

Turning to our full year free cash flow outlook, our guidance remains unchanged with a range of $330 million to $360 million.

During the first quarter, which reflected our typical outflow of cash we experienced a solid 34% year over year improvement and adjusted free cash flow due to higher cash earnings and lower capital expenditures.

Our solid first quarter performance provides us with confidence and we remain on track to achieve our full year free cash flow guidance and exceed our long term conversion target of 110% again in 2021.

Now I'd like to turn the call back over to Lynn for some closing remarks Glenn.

Thank you Chris in summary, we expect to deliver strong results and 2021, we are well positioned to deliver a high single digit growth rate and sales and double digit growth and operating income and diluted EPS in 2021, while continuing to expand our margins to reach 17% and 2022.

We expect to accomplish these results, while making an additional $10 million of strategic investment and R&D to fuel future organic growth. Our adjusted free cash flow remains strong as we expect to generate north of 110% free cash flow conversion. We also continue to maintain our health.

<unk> and balanced capital allocation strategy to support our top and bottom line growth our balance sheet remains very strong and we have sufficient capacity to spend up to $1 6 billion and strategic acquisitions.

Of course should acquisitions not transpire as expected then we will consider additional share repurchase activity as we have done historically to ensure maximum return to our shareholders.

Later this month on the morning of May 26, we will be conducting our virtual investor day event. During the event, we will share Curtiss Wright, new vision and pivot to growth strategy driven by a renewed focus on top line acceleration.

We will provide an overview of our new operating growth plan led by our continued focus on operational excellence as well as a deeper dive into the segment, where we have tremendous potential to leverage technological leadership across the corporation as we will demonstrate we continued to build upon the company's.

Wrong Foundation, and decades of engineering expertise through ongoing innovation and collaboration this in turn drives our continued strategic investment we will conclude the day by delivering our new three year targets.

Building upon our top quartile performance, while driving solid growth and operating income EPS and free cash flow. We hope that you will join us and a few weeks as we reinforce Curtiss Wright's strong culture of innovation proven operational excellence and dedication to delivering long term value for our stakeholders.

At this time I would like to open up todays call for questions.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

And our first question comes from the line of buy share Molly.

With chewy.

Hey, good morning, guys. Thanks for taking the questions nice results.

Thanks, Michael.

Good morning, Lynn or Chris I mean, you mentioned supply chain.

Chris times throughout the prepared remarks could you just maybe give a little bit more color.

And where specifically you're seeing the tightness is it.

At the printed circuit board semiconductor level and <unk>.

Mentioned.

Some good pickup and on road off road vehicles is there is there any concern.

On that side of the market regarding supply.

Supply chain constraints, and then even dovetailing and there maybe just what youre seeing on raw material input prices as well as it relates to the whole supply chain.

So I'll start off and then I'll, let Chris add some color to it I think theres a couple yes, we are seeing some impact from supply chain, it's nothing tightened.

Tightness and delays nothing thats going to date, we don't feel or impact us materially, but it's really something we're definitely focused on and keeping a close eye on.

The areas, where we're seeing some impact is a little bit of margin impact with increased increased freight costs.

We're seeing some delays due to container shipments specifically around Los Angeles Port again. These are all things, we're managing and we work closely with our customers to make sure they understand where we're seeing delays and find mitigation approaches for them.

I would say the one that's on.

Top of our list for paying attention to is electronic components.

These obviously come into play for both our Eni segment, specifically for the vehicle programs and.

And then obviously defense electronics, and we're really doing a lot of different things to drive to mitigate the risks and this area, we have long standing relationships with our supply chain that we.

Take advantage of we dual source, where we can.

And then and some areas where we can use.

Government priorities to expedite our electronic suite for sure take advantage of all of those types of situations. So at this point, we feel we have the situation under hand, but things can change.

Those are the main areas, where we're seeing delays and we think we're managing them.

Yes.

I would only go on to add debt a little bit of cost erosion, Mike as you look at the aerospace and industrial group, but thats, a pretty flexible and agile group and.

And our reacting to shifts and material cost and whether it's passing and onto the customer kind of tightening the belt to kind of offset that I think we've got that under control and and our guidance for the year and and on the defense side, it's really more about customers react and trying to pull and a little bit out of Q2 into Q1 to get add on us, but I think and there it's more time.

And.

And then anything but.

And you said it well.

Got it perfect and then just one more bigger picture on the overall defense budget, obviously, we've only seen the skinny version of the top line right now, but if you guys sort of size up the portfolio any anythings kind of bubble and to the surface area of risk joint strike fighter any of your other platforms and then we are.

Also hearing that kind of.

And if it is related to infrastructure investment.

Investing and the shipyards and that seems to be a key priority of the navy, which might have some positives for dresser Rand, but and any comments on the overall trajectory of defense spending or programs.

I would say overall, we feel pretty confident and remain pretty optimistic for our outlook and what we know.

The news coming through on what's expected when the present and budget has put forward. We think is going to very much support where we have our business I mean I think.

It's pretty publicly.

Open about that.

And it is the pacing threat, which clearly ties right to ship building, which is the largest portion of our defense business and we and lots of data points that we're picking up that there is clear bipartisan support for the shipbuilding industry. So that is.

And we don't see any disruption there and again I know I've mentioned it before but.

The input we get from our customer base is a continuous challenge that we can ramp up.

So we see that as a good sign and some support support for making some capital investments to be prepared for that ramp up so all good news in that space and again.

And if there is trimming a budget.

All programs are subject to that and so it's not as if we think there is no risk at all across the business, but we do know that places where we're heavily.

We have larger amounts of revenue are the top priorities and specifically when I think of Pac star.

Being our largest acquisition and wanting to make sure. It performs expectations. It continues and it had great start to the year our outlook is optimistic and it remains a high high priority within the Dod so.

I don't want to be naive and say there is no risk.

Clearly, we have and I feel it but we really feel solid about where we have our programs and I guess, one last comment I'd make is.

We've really taken a strategy and our defense electronics to be to really have state of the art products that are kind of program agnostic and this press and adoption of the most standard just continues and.

We put out that press release on the F 22 adoption just as an example to really try and be more transparent about where we are winning business and <unk>.

And why we're optimistic.

Got it helpful. Thanks, guys I'll jump back in the queue.

Thanks, Mike.

Your next question comes from the line of Peter Ahmad with Baird.

Hey, good morning, and Linda Chris Jim Nice quarter.

Good morning.

And so commercial markets book to Bill one two maybe you could just if you could just give us a little more color on what youre seeing there and if you view it to be kind of sustainable or this is just an initial snapback and.

And order activity.

So I'd say our most.

A clear point of optimism and it's a fair question because as we've seen the orders pick up and the strong first quarter, whether it was just advanced buying or something that's going to continue as a trend and so that's definitely a question we had for ourselves.

We really do believe it is the beginning of a trend and.

Yes, the uptick in the industrial on and off highway vehicles is just so encouraging and.

Yes.

And it's the orders that had been placed and the dialogues, we're having with our customers that really lead us to believe that thats going to continue on and the commercial aerospace areas. Our actuation and sensors are really getting signals that we're going to see a solid rebound in the second half of the year and if there's any one area that we're still a little bit and a wait and see it's around our surf.

And as tech business that they are.

They are kind of.

They don't have been the short cycle, you don't see the pick up or as far in advance there and so we're optimistic we're going to start seeing a little bit more there and the second half it has picked up some.

But it isn't quite as strong as we're seeing and the others and Chris I'll, let people go and add any color to that I think you said it well I only go on to say when you when youre looking at the commercial.

Book to Bill of one two times, so it's not only the vehicle orders.

We have seen a steady sequential ramp.

And the process markets now theyre not back to where they were.

And the prior year, but things are looking good from that perspective, and then as you look at nuclear within power and process and the nuclear aftermarket and they had a very good quarter here and the first quarter 'twenty, one as well not quite as great as where they were in Q1 of 'twenty.

And just continued sequential improvement and they are on a strong ramp and then when you do shift over to A&D and you look at commercial aerospace just to reinforce what Lynn was saying about our long order cycle and shorter cycle businesses, and we have been getting a lot of feedback from customers asking about readiness.

And expecting volumes to ramp and the second half so while we're looking at surface tech with some caution.

And given its short order cycle nature, I think it speaks favorably to support our full year guide and beyond and okay.

Chris you mentioned and the power.

Reduce valves to the energy market kind of and a little bit of a headwind do you just need capex spending to pick up there in order to see that recover as well.

Yes, I think it's a little bit of Capex spending, but I also think it's really just timing and climbing back to pre pandemic levels and.

Things are starting to open up here, we're starting to see improvements and.

And we're headed in.

And in a good direction here I think it's really timing, we are expecting to see improvements here and the back half of the year and the orders signals that we're getting and power and process support that.

And then just the last question on the M&A Lynn just you mentioned kind of the.

Significant capacity you have for M&A, but I think you guys have been very very much focused on kind of adding and niche niche com.

Company's niche technologies and it sounds like that's still the focus but where are you comfortable in terms of if it was the right fit taking leverage up to.

So.

I highlight that we have $1 6 billion and capacity because for a very specific strategic company.

And that really added to our capabilities and build out on what we have to offer I think we would go there and potentially beyond would be possible. So.

You are right that we have historically added.

$500 million companies I think we showed our willingness to go beyond that with <unk> and I would feel comfortable continuing on and that <unk>.

Direction and with that I'll turn it over to Chris to talk a little bit more about the leverage yes, I think from where we are from a debt to EBITDA standpoint, and about two five times and we are within investment grade, we view investment grade to be in that three X.

And we're below.

Level and something transformational came along and we felt it would be a good opportunity for <unk>.

US and our stakeholders and shareholders to get up to a three five to four times.

For the right property, we would do that and I think we quickly use the cash to delever back down to investment grade.

We found our sweet spot right now and I think.

We have great capacity.

I appreciate all the color and nice results. Thanks. Thank.

Thank you. Thank you.

Your next question comes from the line and Myles Walton with UBS.

Hey, good morning.

And then maybe you can you can touch on the performance and the quarter, obviously better than and you all as.

We expected and and.

And maybe <unk> central and EPS and you raised the full year by 10.

And my right to think that the comments about some of the pre buy I guess from <unk> into <unk> explains why the full beat versus your expectation maybe it doesn't drop to the full year.

Yes that is that is it Myles I think as you look at what we did here on the full year guidance and increasing.

Sales by $5 million in the defense electronics segment, and $2 million of Oi, and we really had a much stronger pull from Q2 into Q1. So that's really half of what I would say youre seeing above consensus.

But the rest is just strength and orders and what we're seeing for that business for the remainder of the year. We're also.

And some better restructuring savings and the enable and power segment and that will translate to the full year I think that was roughly $2 million as well so you're right on yeah, Okay and.

And maybe ill start and it sounds like it's performing well I think it was supposed to be dilutive to the segment margins and so we started the gates is that the case, how dilutive or maybe just color on what the underlying business wasn't even better on the margin side by how much.

So thanks for that.

Our very encourage debt how.

Things have performed with Texstar and Q1, the integration into the company the them leveraging yeah, we definitely did talk about them being dilutive in year, one and I'll, let Chris add some color to that but.

And we're well on the path towards leveraging our supply chain and channel to really.

Help them drive their operating margins and really the pull for their products is quite outstanding and we're very encouraged by what we see as and outlook for them.

And I'm not going to provide a lot of color on the dilution to <unk>, Martin, but I will say that.

So to Lynn's point.

They are off to a good start and we are very encouraged by how well the integration into.

Our defense Electronics segment is going.

They will be dilutive to our full year margins Curtiss Wright overall margins this year.

But.

We're going to bring them to 17% over time, so they're going to they're going to be a contributor and we like how things are going so far.

Okay. Thanks, so much.

Thanks, Bob Yeah, Thank you miles.

Thank you and there are no further questions at this time.

I'll now turn.

I'm, sorry, I will now turn the call back over to the President and Chief Executive Officer Lynn Bamford.

So everyone. Thank you for joining US today, we look forward to speaking with you again at our upcoming Investor day event and have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

And.

[music].

Yes.

Okay.

And.

Yeah.

Okay.

And.

Okay.

Yes.

Okay.

Yes.

Okay.

And.

Okay.

Thanks.

Okay.

And.

Okay.

And.

Okay.

And.

Yes.

Okay.

And.

Okay.

Yes.

And.

Okay.

And.

Yes.

And.

Okay.

Yes.

Okay.

And.

Okay.

Great.

And.

Okay.

And.

Yes.

Okay.

Thanks.

Okay.

And.

And <unk>.

Okay.

And.

Okay.

And.

Yes.

And.

Yes.

Okay.

And.

Okay.

Yes.

Good day, and thank you for standing by and welcome to the Curtiss Wright first quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer.

Session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to your Speaker today, Jim Ryan Senior Director of Investor Relations. Please go ahead.

Hey.

Thank you Don and good morning, everyone and welcome to Curtiss Wright's first quarter 2021 earnings conference call.

Joining me on the call today, and our President and Chief Executive Officer, Lynn Bamford, and Vice President and Chief Financial Officer, Christopher <unk>.

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 Www at Curtiss Wright Dot 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 90 95.

Statements are based on management's current expectations and are not guarantees of future performance, we detail those risks and uncertainties associated with forward looking statements and our public filings with the SEC.

As a reminder, the company's results included an adjusted non-GAAP view that excludes certain costs growth.

And with greater transparency and to Curtiss Wright's ongoing operating and financial performance.

Also note that both our adjusted results and full year guidance exclude our build to print actuation product line that supported a 737 Max program.

As well as our German valves business, which was classified as held for sale and the fourth quarter.

In addition, discussions about our first quarter results and full year guidance reflect our new segment structure.

Earlier, this year to provide greater clarity and transparency to our portfolio.

Conciliations for current and prior year periods are available and the earnings release at the end of this presentation and on our website.

Any references to organic growth exclude the effects of restructuring foreign currency translation acquisitions and divestitures unless otherwise noted.

Now I'd like to turn the call over to win to get things started.

Before we move to Q&A.

Starting with the first quarter highlights we're off to a great start with higher sales and improved profitability driven by strong operational performance that exceeded our expectations. The net sales increase of 2% was led by solid growth and our aerospace and defense markets, which improved 8%.

Adjusted operating income improved 15%, while adjusted operating margin increased 160 basis points, reflecting strong margin improvement and the defense electronics enable and power segments.

Our results also reflected our slipped actions taken last year and response to the pandemic, where we committed to controlling our costs to preserve profitability and free cash flow restructuring savings, resulting from those efforts are reflected in our first quarter results and provide a strong base for our margin expansion over the course.

Of the year.

We also continued to fuel our innovation pipeline with a $4 million year over year increase and research and development investment to support our strategic growth initiatives.

Adjusted diluted EPS was $1 51, and the first quarter, which increased 18% year over year as a reminder, our prior year first quarter results were largely unaffected by the pandemic.

Looking at our first quarter orders overall book to Bill was solid at approximately one time sales and the first quarter with one two times and our commercial markets.

This performance was led by a surge and demand for industrial vehicle products and both on and off highway markets.

Looking across the rest of our commercial markets. We have been encouraged by steady improvements since the third quarter of last year and remain optimistic for our continued solid rebound and the back half of this year. We also experienced solid new order growth and our A&D markets, principally led by higher demand for defense electronics and.

Our recent acquisition of pack Star speak.

Speaking of packs are the integration is on track and I am encouraged by their strong performance to begin the year.

As a reminder, <unk> is projected to deliver a high single digit revenue growth and.

And is aligned to one of the department of defense as top priorities and upgrading and modernizing the netcentric connected battlefield.

We now expect adjusted operating margin to range from 16, 6% to 16, 7%. We also increased diluted EPS by <unk> 10.

To a new range of $7 10 to $7 30.

And with the top end of our range, reflecting double digit growth compared to 2020.

Overall, we are encouraged by our solid start to the year, which support our continued confidence to deliver strong results in 2021, now I would like to turn the call over to Chris to provide a more thorough review of our first quarter performance at our improved outlook for 2021, Chris.

Thank you Ryan and good morning, everyone I'll.

I'll begin today with a review of our first quarter sales and profitability, where we again delivered another strong operational performance.

Starting in the aerospace and industrial segment sales were lower year over year as anticipated based upon reduced demand on wide body jets within the commercial aerospace market.

However on a positive note, we experienced an uplift and industrial vehicle product sales to both on and off highway markets driven by solid order growth as Glenn mentioned earlier.

This segment's operating performance, while bolstered by year over year restructuring savings, primarily reflects unfavorable absorption on lower sales and an immaterial impact due to supply chain constraints and both container shipments and electronic components.

Segment operating performance was very strong as adjusted operating income increased 42%, while adjusted operating margin increased 170 basis points to 29%.

Of note. This performance did include the acceleration of some revenues from the second quarter and several customers took action to stabilize their supply chains and due to global concerns for potential shortage and electronic components.

Adjusted operating income increased 21%, while adjusted operating margin increased 300 basis points to 17, 7% due to favorable sales mix within our enabled defense markets and an increased benefit from our 2020 restructuring actions.

To sum up the first quarter results overall, adjusted operating income increased 15%, which drove margin expansion of 160 basis points year over year.

Turning to our full year 2021 guidance I'll begin with our end market sales outlook, where we've made a few changes highlighted in blue on the slide.

Reflecting a modest increase in total Curtiss Wright sales.

Our outlook for overall aerospace and defense market sales growth is now 7% to 9% based upon strong first quarter demand and higher orders for our defense electronics equipment.

This positions Curtiss Wright to once again grow our defense revenues faster than the base Dod budget.

And our commercial markets. Our overall sales growth is unchanged at 68% and we are encouraged by the strong one two times book to Bill recorded and the first quarter.

We now expect total Curtiss Wright sales growth of 7% to 9% of which 2% to 4% is organic.

Continuing with our outlook by segment, I'll begin and aerospace and industrial where top line guidance of one 3% sales growth remains unchanged and we continue to project solid growth and operating income and margin, mainly reflecting the benefits of our prior restructuring initiatives.

As we look across the remainder of the year, we continue to monitor the impact on our industrial supply chain very closely.

We believe that we can fully mitigate any such impact through various initiatives and expect this to be immaterial to our full year performance.

Next and the defense electronics segment.

Based on the solid first quarter orders within our defense markets. We now expect the segment sales to grow 22% to 24% driven by a combination of 4% to 6% organic growth and a strong contribution from Baxter.

Segment operating income guidance increased $2 million on our $5 million increase and sales and as a result, we're now projecting segment operating income to grow 10% to 13% while operating margin is projected to range from 21, three to 21, 5%.

Of note segment profitability reflects a $6 million year over year increase and research and development unfavorable mix due to a ramp up and lower margin system sales and inorganic sales from texstar, which will be dilutive to overall Curtiss Wright margins in year one.

Segment adjusted operating income is now projected to grow 2% to 5% while adjusted operating margin is expected to increase 20% to 30 basis points to a range of $18 two to 18, 3%.

So to summarize our outlook, we expect full year 2021, adjusted operating income to grow 9% to 11% overall on a 7% to 9% increase and sales.

Operating margin is expected to improve 30 to 40 basis points to 16, 6% to 16, 7%, reflecting the strong profitability and savings generated by our restructuring initiatives.

Continuing with our 2021 financial outlook, where we've increased our full year adjusted diluted EPS guidance by 10 to a new range of $7 10 to $7 30.

Reflecting growth of 8% to 11%.

Following our strong first quarter performance, we now expect second quarter diluted EPS to be similar to the first followed by sequential quarterly improvement during the second half of 2021 with the fourth quarter being our strongest.

Turning to our full year free cash flow outlook, our guidance remains unchanged with a range of $330 million to $360 million.

Now I'd like to turn the call back over to Lynn for some closing remarks Glenn thank.

Of course should acquisitions not transpire as expected then we will consider additional share repurchase activity as we have done historically to ensure maximum return to our shareholders.

And on operational excellence as well as a deeper dive into the segment, where we have tremendous potential to leverage technological leadership across the corporation as we will demonstrate we continued to build upon the company's strong foundation and decades of engineering expertise through ongoing innovation and <unk>.

And collaboration this in turn drives our continued strategic investment we will conclude the day by delivering our new three year targets.

<unk> and dedication to delivering long term value for our stakeholders at this time I would like to open up todays call for questions.

As a reminder to ask a question you and.

And the press Star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

And our first question comes from the line of buy share Molly.

With truest.

Hey, good morning, guys. Thanks for taking the questions nice results.

Thanks, Michael.

Good morning, Lynn or Chris I mean, you mentioned supply chain.

Various times throughout the prepared remarks can you just maybe give a little bit more color.

Where specifically you're seeing the tightness is it.

At the printed circuit board semiconductor level and.

You mentioned.

And some good pickup and on road off road vehicles is there is there any concern.

On that side of the market regarding supply.

And why chain constraints, and then even dovetailing and there may be just what youre seeing on raw material input prices as well as it relates to the whole supply chain.

So I'll start off and net I'll, let Chris add some color to it and Theres. A couple yes, we are seeing some impact from supply chain. It's nothing.

Tightness and delays nothing thats going to date, we don't feel or impact us materially, but it is really something we're definitely focused on and keeping a close eye on.

And the areas, where we're seeing some impact is a little bit of margin impact with increased increased freight costs.

And the one that's on.

Top of our list for paying attention to is electronic components.

These obviously come into play for both our Eni segments, specifically for the vehicle programs and.

Take advantage of we dual source, where we can.

And then and some areas where we can use.

Government priorities to expedite our electronic suite for sure take advantage of all of those types of situations. So at this point, we feel we have the situation under hand, but things can change.

Those are the main areas, where we're seeing delays and we think we're managing them.

Yes.

I would only go on to add debt a little bit of cost erosion, Mike as you look and see aerospace.

And industrial group, but thats, a pretty flexible and agile group in.

And reacting to shifts in and material cost and whether.

And whether it's passing and onto the customer kind of tightening the belt to kind of offset that I think we've got that under control and and our guidance for the year and and.

On the defense side, it's really more about <unk>.

<unk> react and trying to pull and a little bit out of Q2 into Q1 to get add on us, but I think and there it's more timing than anything but.

Glenn said it well.

Got it perfect and then just one more bigger picture on the overall defense budget, obviously, we've only seen the skinny version of the top line right now, but as you guys sort of size up the portfolio any anythings kind of bubble and to the surface area of risk joint strike fighter or any of your other platforms and then we are.

Also we're hearing that.

If it is related to infrastructure investment.

I would say overall, we feel pretty confident and remain pretty optimistic for our outlook and what we know.

The news coming through on what's expected when the present budget has put forward. We think is going to very much support where we have our business I mean, I think that is.

Pretty publicly.

Spoken about that.

China is the pacing thread, which clearly ties right to ship building, which is the largest portion of our defense business and we and lots of data points that we're picking up that there is clear bipartisan support for the shipbuilding industry. So that is.

We don't see any disruption there and again I know I've mentioned it before but the.

The input we get from our customer base is a continuous challenge that we can ramp up.

So we see that as a good sign and some support support for making some capital investments to be prepared for that ramp up so all good news in that space and again.

And if there is trimming a budget.

All programs are subject to that and so it's not as if we think there is no risk at all across the business, but we do know that places.

Places, where we're heavily.

Yes, we have larger amounts of revenue are the top priorities and specifically when I think of Pac star.

Being our largest acquisition and wanting to make sure. It performs expectations. It continues and it had a great start to the year our outlook is optimistic and it remains a high high priority within the Dod so.

I don't want to be naive and say there is no risk.

Clearly, we have and I feel it but we really feel solid about where we have our programs and I guess the one last comment I'd make is.

We put out that press release on the F 22 adoption just as an example to really try and be more transparent about where we're winning business and <unk>.

And why we're optimistic.

Got it helpful. Thanks, guys I'll jump back in the queue.

Thanks, Mike.

Your next question comes from the line of Peter Ahmad with Baird.

Hey, good morning, and Linda Chris Jim Nice quarter.

Good morning.

In order activity.

So I'd say our most.

Clear point of optimism and it's a fair question because as we've seen the orders pick up and the strong first quarter, whether it was just advanced buying or something thats going to continue as a trend and so that's definitely a question we'd had for ourselves.

And we really do believe it is the beginning of a trend and.

Yes, the uptick in the industrial on and off highway vehicles is just so encouraging and.

Yes.

It's the orders that had been placed and the dialogues, we're having with our customers that really lead us to believe that thats going to continue on and the commercial aerospace areas. Our actuation and sensors are really getting signals that we're going to see a solid rebound in the second half of the year and if there's any one area that we're still a little bit and wait and see it's around our surf.

<unk> Tec business that they are.

And there are kind of.

But it isn't quite as strong as we're seeing and the others and Chris I'll, Let you go and add any color to that I think you said it well I only go on to say when you. When you are looking at the commercial.

Book to Bill of one two times, so it's not only the vehicle orders.

But we have seen a steady sequential ramp.

And the process markets now theyre not back to where they were and.

And the prior year, but things are looking good from that perspective and then.

As you look at nuclear within power and process and the nuclear aftermarket and they had a very good quarter here and the first quarter 'twenty, one as well not quite as great as where they were in Q1 of 'twenty, but just continued sequential improvement and they are on a strong ramp and then when you do shift over to A&D.

And you look at commercial aerospace just to reinforce what Glen was saying about our long order cycle and shorter cycle businesses and we have been getting a lot of feedback from customers asking about readiness and expecting volumes to ramp and the second half. So while we're looking at surface tech with some caution.

Given the short order cycle nature, I think it speaks favorably to support our full year guide and beyond okay.

Chris You mentioned and the power like there was some reduce valves to the energy market kind of and <unk>.

Little bit of a headwind do you just need capex spending to pick up there in order to see that recover as well.

Yes, I think it's a little bit of Capex spending, but I also think it's really just timing and climbing back to pre pandemic levels as things are starting to open up here, we're starting to see improvements and.

And we are headed and Ah.

And in a good direction here I think it's really timing.

And are expecting to see improvements here and the back half of the year and the orders signals that we're getting and power and process support that.

And then just the last question on the M&A Lynn just you mentioned kind of the.

The significant capacity you have for M&A, but I think you guys have been <unk>.

Very much focused on kind of adding and niche niche companies niche technologies and it sounds like that's still the focus but where are you comfortable in terms of if it was the right fit taking leverage up to.

So.

I highlight that we have $1 $6 billion of capacity because for a very specific strategic company.

And that really added to our capabilities and build out on what we have to offer I think we would go there and potentially beyond would be possible. So.

You are right that we have historically added.

$500 million companies I think we showed our willingness to go beyond that with <unk> and I would feel comfortable continuing on and that.

Direction and with that I'll turn it over to Chris to talk a little bit more about the leverage yes, I think premier where we are from a debt to EBITDA standpoint, and about two five times and we are within investment grade review and investment grade to be in that three X.

We are below.

A level and something transformational came along and we felt it would be a good opportunity for us.

US and our stakeholders and shareholders to get up to a three five to four times.

For the right property, we would do that and I think we quickly use the cash to delever back down to investment grade.

But we found our sweet spot right now and I think we are.

Grid capacity.

I appreciate all the color and nice results. Thanks. Thank.

Thank you. Thank you.

Your next question comes from the line and Myles Walton with UBS.

Hey, good morning.

And then maybe you can you can touch on the performance and the quarter, obviously better than and you all as.

Expected and and.

And maybe <unk> and EPS and you raised the full year by 10.

And my right to think that the comments about some of the pre buy I guess from <unk> into <unk> explains why the full beat versus your expectation maybe doesn't drop to the full year.

Yes that is that is it Myles I think as you look at what we did here on the full year guidance and increasing.

And the sales.

<unk> 5 million in the defense electronics segment, and $2 million of Oi, and we really had a much stronger pull from Q2 into Q1. So that's really half of what I would say youre seeing above consensus.

The rest is just strength and orders and what we're seeing.

For that business for the remainder of the year. We're also.

We had some better restructuring savings and the enable and power segment and that will translate to the full year I think that was roughly $2 million as well so youre right on yep, Okay and.

And maybe on <unk> it sounds like it's performing well.

It was supposed to be dilutive to the segment margins at least out of the gates is that the case, how dilutive or maybe just color on what the underlying business was even better on the margin side by how much.

So thanks for that we are very encouraged stead.

Things have performed with Pac Star and Q1, the integration into the company the them leveraging <unk>.

Definitely did talk about them being dilutive in year, one and I'll, let Chris add some color to that but.

And we're well on the path towards leveraging our supply chain and channel to really.

Help them drive their operating margins and really the pull for their products is quite outstanding and we're very encouraged by what we see as and outlook for them.

And I'm not going to provide a lot of color on the dilution to <unk>, Martin, but I will say that try and.

So to Lynn's point and then.

We are off to a good start and we are very encouraged by how well the integration into our defense electronics segment is going.

<unk> will be dilutive to our full year margins Curtiss Wright overall margins this year.

But.

We're going to bring them to 17% over time, so they're going to they're going to be a contributor.

And we like how things are going so far.

Okay. Thanks, so much.

Thanks, Bob Yeah, Thank you miles.

Thank you and there are no further questions at this time I will now turn.

I'm, sorry, I will now turn the call back over to the President and Chief Executive Officer Lynn Bamford.

So everyone. Thank you for joining US today, we look forward to speaking with you again at our upcoming Investor day event have a great day.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q1 2021 Curtiss-Wright Corp Earnings Call

Request a DemoDemo

Curtiss Wright

Earnings