Yahoo Finance Curtiss-Wright Corporation (NYSE:CW) Q1 2024 Earnings Call Transcript
Curtiss-Wright Corporation (NYSE:CW) Q1 2024 Earnings Call Transcript May 2, 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 everyone to the Curtiss-Wright First Quarter 2024 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. [Operator Instructions] Now at this time, I will turn the call over to Jim Ryan, Vice President of Investor Relations. Mr. Ryan, please go ahead.
Jim Ryan: Thank you, Bob, and good morning, everyone. Welcome to Curtiss-Wright's first quarter 2024 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. 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 greater 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. I'll begin by covering the highlights of our first quarter performance and a few comments about our updated 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 with a focus on our recent commercial nuclear acquisition and some closing remarks before we move to Q&A. Starting with our first quarter 2024 highlights, we are off to a great start as we delivered strong overall results that exceeded our expectations. Sales of $713 million increased 13% year-over-year, driven by better-than-expected performance in the Defense Electronics segment, which continues to benefit from strong conversion on its healthy and growing backlog.
Our performance was led by growth in all of our aerospace and defense markets, highlighted by more than 30% sales growth in both aerospace and ground defense, along with strong growth in commercial aerospace. Operating income increased 23% year-over-year, exceeding our strong sales growth and resulted in 110 basis points of overall operating margin expansion. Diluted earnings per share of $1.99 increased 30% year-over-year and exceeded our expectations, primarily due to the higher sales. Adjusted free cash flow, while typically a first quarter outflow, reflected a year-over-year improvement of 37%. Chris will provide some additional color on the key drivers of these metrics later in our prepared remarks. New orders also demonstrated tremendous growth in the first quarter, up 26% year-over-year to more than $900 million and resulted in an overall book-to-bill of 1.26 times.
Within our A&D markets, we experienced strong demand globally for defense electronics, including our embedded computing and tactical communications equipment. Of note, the breadth of our tactical communications product portfolio continues to expand beyond its historically served US Army and Marine Corps customers. During the first quarter, this business was awarded their first win with the US Air Force, an exciting development, which we look forward to discussing in greater detail at our upcoming Investor Day. We also experienced strong order growth in Naval Defense supporting current and next-generation submarine programs. In our commercial markets, we continue to experience increasing demand for our commercial nuclear products. Overall, we reached a record backlog in excess of $3 billion, which provides us with great visibility and confidence in achieving our updated 2024 financial guidance.
Wrapping up my thoughts on the quarter, though our operational performance exceeded our overall expectations, we did face some challenges. This included an approximately $10 million headwind based on a change in estimate on a single naval contract within the Naval and Power segment. We encountered some technical challenges at a key milestone in the contract. We now have a path to resolution and are working closely with our customer while dedicating the proper resources towards its success. Finally, regarding our 2024 guidance, despite the impact of the naval contract adjustment, we were encouraged by the strong start to the year and have confidence to increase our overall guidance for sales, operating income and earnings per share. We now expect overall sales to increase 5% to 7%, driven by increases in all of our major end markets.
This outlook includes the contribution from our newest commercial nuclear acquisition of WSC, Inc., which I'll discuss in greater detail later in our remarks. We expect continued operating margin expansion in 2024, while making incremental investments in both internally and externally funded research and development. We remain on track to deliver solid growth in diluted EPS, which we now expect to range from 8% to 11% and also generate strong free cash flow. In summary, our strategy to grow the business continues to build momentum and Curtiss-Wright remains well-positioned to deliver another exceptional performance in 2024. Now, I would 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 first quarter 2024 performance by segment. I'll begin in Aerospace and Industrial, where our overall sales growth of 8% was in line with our expectations. Within the segment’s Commercial Aerospace market, we experienced strong OEM sales growth in excess of 25%, supporting the continued ramp-up in production across narrowbody and widebody platforms. In the segment’s Aerospace Defense market, we benefited from both higher development program revenues and sales of actuation products on US fighter jets. In the general industrial market, improved demand for our new power management electronics supporting the on-highway market was more than offset by reduced off-highway sales to construction markets.
And turning to the segment's profitability, favorable absorption on higher sales was offset by unfavorable mix and timing on lower-margin development programs. Next, in the Defense Electronics segment, sales growth of 31% exceeded our expectations as we continue to benefit from our strong increases in global demand for our products. The sales performance was principally driven by better-than-expected growth in our ground defense market where we experienced record-high sales for tactical communications equipment, which included growth to both domestic and direct foreign military customers. Within Aerospace and Defense, we experienced strong growth in embedded computing sales across a number of C5ISR programs, including the Seahawk helicopter, F-35 and Global Hawk UAV programs to name a few.
Regarding the segment's operating performance, we delivered a strong 22.7% operating margin, up 830 basis points year-over-year, reflecting favorable absorption on higher revenues and a shift in mix towards higher-margin C5ISR programs and tactical communications equipment. Turning to the Naval and Power segment, overall sales growth of 6% was essentially in line with our expectations. Starting in the segment Aerospace Defense market, our results reflected continued strong global demand for our aircraft arresting systems. Within the naval defense market, our results reflected higher revenues supporting the Columbia-class submarine program as well as higher fleet service center revenues supporting the US naval aftermarket. However, our results were partially offset by the timing of production revenues on the CVN-80 aircraft carrier and Virginia-class submarine programs.
In the Power and Process market, our performance was mainly driven by higher growth in the commercial nuclear market supporting existing operating reactors across North America. And turning to the segment's operating performance, despite favorable absorption on solid revenue growth, our results were negatively impacted by a naval contract adjustment as Lynn mentioned earlier in her prepared remarks. To sum up Curtiss-Wright's first quarter, overall, we generated solid absorption on the stronger-than-expected top-line performance, resulting in 110 basis points in operating margin expansion as we continue to leverage the consolidated portfolio to deliver profitable growth. Next, turning to our full-year 2024 guidance, I'll begin on Slide 5 with our end-market sales outlook.
We now expect total sales to grow 5% to 7%, reflecting strengthening demand in defense electronics and the added contribution from the WSC acquisition. Starting in Aerospace Defense, we now expect full-year sales growth of 6% to 8% based on a strong and growing order book for our embedded computing equipment on various C5ISR programs. Within ground defense, we now expect full-year sales growth of 10% to 12%, reflecting continued strong demand for our tactical communications equipment. In Naval Defense, our outlook for 3% to 5% sales growth remains unchanged and is mainly driven by the ramp-up in production on both the CVN-81 aircraft carrier and Columbia-class submarine programs. Looking more broadly across our defense markets, our updated guidance also reflects expectations for increased direct foreign military sales, where we now expect an improvement from mid up to high single-digit growth driven by the alignments of our technologies to support global defense priorities.
Turning to Commercial Aerospace, our outlook for 10% to 12% sales growth remains unchanged, driven by higher OEM production rates on narrowbody and widebody aircraft, while maintaining a conservative view as it relates to the 737 MAX program. Wrapping up our Aerospace and Defense markets, we now expect total sales to increase 6% to 8% in 2024. Moving on to our commercial markets. In the Power and Process market, we now expect full-year sales growth of 4% to 6%, which principally reflects the contribution from WSC. Within our commercial nuclear market, we've raised our outlook to a high single-digit full-year growth rate, principally reflecting the contribution of WSC sales in support of both the existing and small modular reactors. Elsewhere and partially offsetting the nuclear market improvement, we now expect process valve sales to decline modestly in 2024, mainly due to the timing of large capital projects.
As a result, we revised the overall process market down slightly to a low single digit full-year growth rate. And lastly, in the general industrial market, our expectations of 1% to 3% growth remain unchanged and are driven by increased sales of our power management electronics and industrial vehicles and increased sales of surface treatment services. Wrapping up our total commercial markets, we continue to target full-year sales growth of 2% to 4%. Moving on to our full-year outlook by segment on Slide 6. I'll begin in Aerospace and Industrial, where we continue to expect sales to grow 3% to 5%, principally driven by the strength in commercial aerospace. Regarding the segment's profitability, we continue to expect operating income of 5% to 8% and operating margin expansion of 20 basis points to 40 basis points to a range of 16.6% to 16.8%.
Next, in Defense Electronics, we now expect sales to grow 8% to 10%, driven by the strong first quarter performance and continued growth in the order book, which increased more than 20% in the first quarter, reflecting a book-to-bill of nearly 1.4 times. Regarding the segment's profitability and based on the improved top-line guide, operating income is now projected to grow 11% to 13%, while operating margin is expected to increase 50 basis points to 70 basis points and range from 24% to 24.2%. As a reminder, this segment's profitability also includes an incremental $5 million or 50 basis point headwind from internally funded R&D investments. And lastly, in Naval and Power, we continue to expect sales to grow 4% to 6%, driven by solid growth in our naval defense and commercial nuclear markets.
Regarding the segment's profitability, while we anticipate favorable absorption on the overall increase in sales, our updated guidance reflects the impact of the first quarter naval contract adjustment. As a result, operating income is now projected to decrease 1% to 3%, while adjusted operating margin is expected to range from 16.1% to 16.3%. Of note, and as discussed on our February earnings call, our full-year outlook also reflects margin pressures associated with the notable ramp-up in development programs across Naval and Power. For your quarterly modeling purposes, we anticipate this segment's second-quarter sales to grow modestly year-over-year. In addition, in this segment, we expect sequential quarterly improvement in operating margin over the remainder of the year with slightly more pressure in the second quarter based upon the timing of development programs.
So to summarize our outlook, overall we now expect total Curtiss-Wright operating income to grow 5% to 8% and operating margin to range from 17.4% to 17.6%, including a year-over-year increase of more than $20 million in total engineering spending. Continuing with our financial outlook on Slide 7 and starting with our EPS guidance. We expect full-year 2024 diluted EPS to now range from $10.10 to $10.40, up 8% to 11%, principally reflecting improved sales and profitability within defense electronics. Building upon our solid first-quarter performance, we expect sequential quarterly EPS improvement throughout 2024 and we expect to generate approximately 40% of our full-year earnings per share in the first half. And lastly, turning to free cash flow.
In Q1, we experienced a solid year-over-year improvement, reflecting growth of 37% on an adjusted basis. As a reminder and included in the comparison, we also overcame the $20 million cash headwind associated with the collection of the final CAP1000 payment in the first quarter of 2023. Overall, we had a good start to the year, and that provides us with increased confidence in our full-year free cash flow guidance ranging from $415 million to $435 million and our ability to deliver a free cash flow conversion rate well in excess of 100%. Now I'd like to turn the call back over to Lynn.
Lynn Bamford: Thank you, Chris. And turning to Slide 8. Today, we have discussed how the strength of our backlog and our alignment to the industry growth drivers will accelerate organic growth in all of our major markets in 2024. Adding to that, we have remained extremely disciplined in our approach to capital allocation and have strategically pursued acquisitions as an accelerator of our top-line growth. In April, we announced the acquisition of WSC, which is a leading supplier of state-of-the-art power plant control room simulation technology. Established nearly 30 years ago, WSC's product lines range from plant simulators, as you see pictured on the slide to simulation-assisted engineering, which is the starting point in major plant upgrades and new plant designs.
Today, the business enjoys a strong installed base of over 225 plant simulators and provides critical support to both existing commercial nuclear operating reactors and other power generation plants across the globe. Further, as nuclear operators conduct maintenance and plant life extensions, simulation-assisted engineering is used in major upgrades, providing an additional opportunity for Curtiss-Wright's broad suite of products to help solve our customer's needs. The acquisition advances Curtiss-Wright's position as a strategic partner, providing us with early visibility and influence into the design of leading small modular reactors, including WSC's established positions with TerraPower, GE Hitachi [Technical Difficulty]. Beyond that, the acquisition closely aligns with our strategic and financial filters and our focus on expanding our commercial nuclear presence.
In terms of key financials, WSC aligns with our long-term acquisition criteria and financial objectives of top-line growth, margin expansion and free cash flow generation. WSC generated about $15 million in revenue in 2023, and we are projecting that it will grow at high single-digit annualized pace for the foreseeable future. This is an exciting business with a long legacy, experienced management team and strong customer relationships and it is a great fit with Curtiss-Wright. In closing, Curtiss-Wright is well positioned to demonstrate strong profitable growth and we're building momentum on our Pivot to Growth strategy. We are confident in our ability to generate 5% to 7% sales growth this year and to deliver incremental operating margin expansion, while making strategic investments in our research and development to accelerate our long-term organic growth.
This performance puts us on path to reach double-digit EPS growth yet again, while steadily achieving in excess of 100% free cash flow conversion. Curtiss-Wright maintains a very healthy balance sheet, allowing for continued investment as we position the company for future organic growth and drive tremendous long-term value for our stakeholders. Looking ahead, our upcoming May 21 Investor Day is only a few weeks away. We look forward to connecting in person in New York City or via webcast to recap the successful execution of our Pivot to Growth strategy throughout the past three years and to share the many exciting avenues for growth across Curtiss-Wright's portfolio. We'll focus on how we have the right people, systems and infrastructure in place to enable organic growth and how we're investing in critical technologies across our end markets to ensure Curtiss-Wright remains well positioned to meet the needs of our customers, both today and well into the future.
We'll also introduce new financial targets, demonstrating our continued drive for long-term profitable growth. As a reminder, we'll be hosting a commercial nuclear panel comprised of leading industry experts from the Nuclear Energy Institute, Westinghouse and Energy Northwest to share their perspectives on the industry at large and the tremendous global support for the advancement of clean energy. We hope that you will join us. Thank you. And at this time, I would like to open up today's conference call for questions.
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