Good day, ladies and gentlemen, and welcome to the Curtiss-Wright First Quarter 2019 Financial Results Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Jim Ryan, Senior Director of Investor Relations. Please go ahead.

Thank you, Chris, and good morning, everyone. Welcome to Curtiss-Wright's First Quarter 2019 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer. Our call today is being webcast and the press release as well as the copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.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 detailed those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results and guidance, including adjusted non-GAAP view that excludes first year purchase accounting cost associated with this acquisition, including the recent TCG acquisition in the Defense segment. 2019 adjusted guidance also excludes one-time transition and IT security costs specifically associated with the relocation of the DRG business in the Power segment. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. In addition, any references to organic growth exclude the effects of foreign currency translation, acquisitions and divestitures unless otherwise, noted. Now, I'd like to turn the call over to Dave to get things started. Dave?

Thanks, Jim. Good morning, everyone. I'll begin with the key highlights of the first quarter performance and an overview of our full year 2019 outlook. Next, I'll turn it over to Glenn to provide a more detailed review of our first quarter performance and updates to our full year guidance. Then I'll return to discuss the strategic and financial rationale behind our recent acquisition of Tactical Communications Group or TCG, which we acquired in mid-March for approximately $50 million in cash. Finally, I'll wrap up our prepared remarks before we move to Q&A. Starting with first quarter highlights. We're off to a great start as higher sales and improved profitability drove strong operational performance. The net sales increase of 6% was led by double-digit growth in our defense markets, primarily in Naval defense. From a segment perspective, we experienced higher organic sales in all three segments. Adjusted operating income improved 12%, principally driven by strong margin improvement in the Power segment. This performance resulted in adjusted diluted EPS of $1.30, a 33% increase over the prior year, which also included the benefits of both the lower effective tax rate and share repurchase activity. We also experienced robust new order growth of 23%, a majority of which was organic, led by higher naval defense orders on aircraft carriers and submarines, which we expect to benefit current and future years' sales. Book-to-bill was strong at 1.3. Turning to our full year 2019 guidance highlights. We raised our guidance for sales, adjusted operating income, margin and diluted earnings per share. These increases are based upon an improved outlook in the Commercial/Industrial segment, the expected contribution from TCG and the exclusion of one-time costs related to the relocation of the DRG facility. We believe that DRG adjustment is appropriate since it presents a better view of our ongoing operations, and we are already adjusting the related capital investment in our free cash flow guidance. In addition, we increased our adjusted free cash flow guidance and expect to generate a conversion rate of approximately 110%. All in all, a strong start to the year, which provides continued confidence for the remainder of 2019. Now, I'd like to turn the call over to Glenn to provide a more thorough review of our first quarter performance and financial outlook for 2019. Glenn?

Thank you, Dave, and good morning, everyone. I will begin with a review of our first quarter end market sales. Overall, we experienced a 12% increase in sales to our defense markets, while sales to our commercial markets grew up 2% year-over-year. In Aerospace Defense, our results were mixed as higher defense electronic sales on helicopters, primarily in the Apache were mainly offset by reduced sales on various UAV programs. In Ground Defense, we experienced the slight reduction in sales due to timing as our full year 2019 guidance remains on target. In Naval defense, strong growth of 27%, 7% of which was organic, reflects increased sales on the CVN-80 aircraft carrier and the Virginia-class submarine programs. In Commercial Aerospace, we experienced higher sales of sensors and electronics equipment on various platforms, including a 7% increase in the core OEM sales in the quarter. In Power Generation, revenues were down slightly as higher sales to the domestic nuclear aftermarket were offset by reduced international aftermarket sales. And finally in the general industrial market, we experienced increased demand for industrial valve products with the Oil & Gas market and also for vehicle products for the on and off-highway markets. Next, I'll discuss the key drivers of our first quarter 2019 operating performance, which we are presenting on an adjusted basis for the Defense segment in overall Curtiss-Wright, which excludes first year purchase accounting cost associated with the TCG acquisition. In the Commercial/Industrial segment, operating income increased 1% and operating margin was up 20 basis points to 13.4%. This performance reflects favorable absorption in both our industrial valve and sensor businesses, mainly offset by unfavorable absorption in the actuation business. Our results in this segment also include savings generated from our ongoing margin improvement initiatives, partially offset by the net impact from…

Thanks, Glenn. Next, I'd like to share some thoughts on our recent acquisition of TCG. Similar to our previous acquisitions completed during the past two years, we expect this business to support our long-term financial objectives of organic growth, margin expansion and free cash flow generation. TCG's leading edge tactical Datalink software solutions are used by the military for the transmission and exchange of real time secured wireless communications. TCG is positioned to provide avenues for growth and cross-selling within our defense electronics portfolio, and it will drive increased support for our similar military customers. We paid approximately 10 times next 12 months EBITDA, essentially, in line with what we've historically paid. In 2019, we expect TCG to contribute $10 million to revenues, produce an adjusted operating margin that is accretive to overall Curtiss-Wright and be $0.04 accretive to adjusted EPS. Further, we expect that TCG will be accretive to our overall free cash flow, generating conversion rate above 110% and meet our long-term acquisition criteria for ROIC. Regarding our overall capital allocation strategy, our balance sheet is very strong. We have a $500 million untapped revolving credit agreement with a $200 million accordion and ample capacity to spend up to $1.5 billion in meaningful acquisitions. Of course, should acquisitions not materialize as expected, then we will consider additional share repurchase activity as we've done in the past few years to ensure maximum returns. In summary, Curtiss-Wright is performing well, and we expect to deliver strong results in 2019. We are positioned to deliver sales growth across all markets, generating 4% to 6% overall growth. We are continuing to expand our margins, expect it to be up 40 to 50 basis points this year driven by higher sales and our ongoing margin improvement initiatives. Further, we expect to accomplish these results despite an additional $10 million in strategic R&D investments this year, which are expected to drive future organic growth. In addition, our outlook reflects solid growth in adjusted diluted EPS this year with a midpoint north of $7 per share, and we remain confident that we can reach our target of $8.50 by the end of 2021. Lastly, our adjusted free cash flow remains strong as we expect to generate nearly $340 million and a conversion rate of approximately 110%. We are executing on our long-term strategy and expect to continue to deliver significant value for our stockholders. At this time, I would like to open up today's conference call for questions.

[Operator Instructions] And our first question comes from the line of Peter Arment with Baird.

Dave, maybe just to touch upon what you just mentioned regarding your '21 -- 2021 targets. Could you maybe just talk in the context of -- if you get an incremental Virginia-class submarine or the pull-forward schedule on the Ford, how that impacts kind of your longer-range forecast?

Yes, we haven't -- as we've talked before, we haven't included any of bump to those possible orders in our forecast, and so are just pretty linear. We've got the 5-year build on the carriers and then the two Virginias per year and then the Columbia is stretched out a little bit further. So from a numerical standpoint, you could take some estimate in terms of our shipset content and sort of estimate where it's going. But like I said, we haven't built anything into it in the forecast in terms of upside if there is from what we hear with Huntington Ingalls and others talking about what's coming. We don't think it's going to happen this year, we are not going to gain any sales this year as a result of that in our estimation, but we could later. Glenn, do you want add anything to that?

No. Just, again, numerically, just to remind you that our content on a Virginia-class is 65 million and Columbia class is 105 million and aircraft carrier is 380 million. So as Dave said, we're yet to see how that's all going to space out over the next couple of years. We really have very little in some of our valve businesses, expecting some sales in 2020, beginning in 2020. But it's hard to tell you because not only do we not know when our order is going to start, but we're all at different phases across the business. The valves are at one point in the bill, the pumps are at another point in the bill, the electronics at another point in the bill. So we're yet to be able to do that, but there is certainly nothing in '19 and we'll know more probably in 2020.

Appreciate that. And then just as a quick follow-up, Dave, any update on the AP1000, any feedback you got from related to the -- this shut down that occurred in China?

No, we're at pretty much the same position we were in when we released the press release a little while ago. And, as we've got an agreement with both of our customers, the Chinese and Westinghouse that they have asked us not to disclose any information until we get to the bottom of the root cause of the shutdown, and we're actively engaged in that, as you can imagine. And it's progressing fairly well. So it's not going to be that long before we have some information on it, but we just really can't disclose anything at this point.

And our next question comes from the line of Nathan Jones with Stifel.

Just a couple of questions here around guidance. If I put all the pieces together of about a $0.14 paid, $0.11 of DRG cost exclusion, $0.04 from the acquisition and $0.04 from higher C&I, I get $0.30, $0.35 of increase from where you were before. Can you guys talk about, is this just being a little bit conservative, did it bias you to the high end of the range? Are there some other things that are maybe offsetting that at all, just any color you can give us on that?

Sure. So our performance in the first quarter was really based on the benefit of the Power segment and some of the tactics which are timing issues for us, okay? As you know, we didn't increase the Power segment guidance other than adjustment for DRG and the taxes are one-time items, discreet items that happened in the quarter. So that's the first quarter. And what we raised, our guidance is what's going to happen in the future. So we raised our guidance in Commercial/Industrial based on our Navy valves, which had higher level of orders across all of the defense, but certainly in the valves business in the first quarter and also for TCG, which is going to benefit the next three quarters. So it's really two different time periods. So the guidance was based on what's going to happen going forward and the first quarter is really based on looking back to the prior year.

Okay. I think that makes sense. You pulled some expected profit in the Power segment forward into 1Q versus where you'd expected it to hit?

Correct. Exactly.

That actually lays into my second question, which was on the Power segment margins, which were really strong in the quarter. Can you talk about what drove that, was the timing of revenue coming forward, was it mix that you'd had expected, some of those things to hit later on, just any information you can give us on what drove such good performance in that segment in the first quarter?

Yes. It’s sales driven for the most part. Obviously, sales were up year-over-year $32 million, a good piece of that was DRG, which was in our first quarter last year, but the remainder of that was organic, so it's favorable absorption on the higher sales, and also we had higher profitability on the CAP1000 program, which continues to favorably impact our segment margins, so it's a combination of those two items.

Okay. Last one on the M&A funnel then. Obviously, your balance sheet is still in a very strong position. And you guys talked about having up to $1.5 billion to spend on acquisitions. And you have publically been taking a bit more of an aggressive posture on M&A. Can you talk about how the funnel is, what your ideas are for being able to spend that 1.5 billion or what fraction of that you would think you would be able to get done before we reach these 2021 targets?

Yes, we're looking at it pretty closely, Nathan, with regard to what kind of revenue we're looking for, what kind of price we’d have to pay to get such revenue in the specific areas of interest. And so from our vantage point, it looks pretty good to be able to accommodate that. And this -- as we've always discussed with M&A, it comes opportunistically. But right now, we're -- I'm personally reviewing various acquisition opportunities on basically, if not a daily basis, it's on a weekly basis talking to my M&A team and the folks out there that are spearheading the effort. And we're talking about opportunities and the funnel is pretty tight for us because as I indicated, we have a little over $1 billion to spend, but I put in there in pretty large letters on meaningful acquisitions and meaningful means, it's got to meet certain criteria, and we've talked about those for a long time. But we wanted them to be accretive to our story and very complementary with high watermark in terms of IP level and making decent money, and we don't want to pay too much. So too much is probably in some ranges that we've seen at the very high multiples. But we're comfortable with what we've been paying so far. And I feel like we've gotten some quality opportunities in the last, let's say, month or so that are surfacing now, and so I feel pretty good about it. Now if we could do one every March or January, March like we did the last two years, that would be ideal, TCG was a small one, but it looks really nice, fits in perfectly with what we're doing. So if we have to go that route, then we will incrementally build it up to get to the level of revenue that we want to add to the business. We can do it with the smaller bolt-ons or with the bigger ones, so if all comes out about the same cost for us, but yields about the same results when we stick to our netting in terms of the benchmarks that we've set forward.

Is it fair to say that as you've taken a little more aggressive posture here on M&A that you've widened the aperture a little bit in terms of size and are looking at maybe some larger deals than you would have in the last 3 or 4 years?

For sure. We've opened that aperture on the size perspective, and looked for acquisitions that are very meaty. Along with that, it’s sort of -- the lens becomes a little bit more focused with regard to how much -- how many warts or how much hair there is on that dog when they come in because everybody has got pots and pans, the larger they get, they tend to have some of those things that you want to shed and/or maybe didn't want them in the first place. But for the most part, yes, we are looking at larger ones and like I said, we take it with a couple of big ones or several of the smaller ones, that's okay too. It does require probably about the same amount of work to do the little ones as it does to some of the big ones.

And our next question comes from the line of Michael Ciarmoli with SunTrust.

Nice quarter, nice results. Maybe Dave, just on -- can you elaborate on the margin improvement story. I would have thought we're kind of in the later innings here. You're still capturing efficiency gains and driving margin expansion. Can you just maybe elaborate on where you are finding the additional savings, whether it's by market, by product line, by facility, maybe just give us a little bit more color there and how much runway you've got left.

Yes, we set out with the '21 goal of getting to 17% over the next three years, and you can see how we're doing so far. I mean, we're making some headway to achieve that. We -- it was easier to pick that fruit off over the last 6 years, but we still have runway in the supply chain side, and as a matter of fact our supply chain group -- our -- we call, supply chain council was here in my office a week ago, and we were talking about that very subject, what are the primary goals? And what I said to them was, someone asked me like, what is that you look forward from us, and from this group of approximately 12, 15 people? And I said, well, first and foremost that's what I said, 5, 6 years ago, and that was, I want to get at least 3% out of our spend of a billion plus dollars. And we still have yet to achieve that. So we've got opportunities there to capitalize on it and take advantage of it and they know that. So they know right from the horse's mouth, here's what I expect, and they're marching to those orders, and then they're going to do a fantastic job. We talked in that meeting about certain things that they were going after, and so supply chain is always a big one. Then you get to the consolidations, we do some of those, we've done some really big ones, and the 8-to-1 we've talked about for a long time, and then some other ones that we don't talk about as much that are smaller, but you pick up a few dollars here and a few dollars there, that adds to the bottom line. And then you get to the growth side and some of the meaningful acquisitions. You do that, and you march up with a few dollars there, you get to maybe cut out, let's say, the very bottom performers that aren't -- they are not meeting the goals that we have. And so, therefore, you cut some of them just like we did with oil and gas years ago and then that adds up. So long story, short. It's really a mixed approach, taking into account all those things that you mentioned, the ones that I just came up with. And we're basically incentivizing everybody to get there. So as you know, we've got that baked into our incentives on the margin side, and we have for the last 5, 6 years, and it's worked, and we'll continue to do that. Glenn, you want to add anything?

Yes, I'd just say as an example, restructuring, you’ve heard us talk about over the last couple of years, it's still a big part of our ongoing margin improvement program. And for 2019, for example, we've spent $2 million mostly, if not entirely in the first quarter to yield an $8 million annualized savings, and we'll see that through Q2 and Q4 in 2019. So that's kind of the stuff that's going on behind the scenes that leads to our margin improvement when we give guidance. And if we do better than we planned, maybe it may help us increase that. But that's just an example of some of the ongoing activity that continues.

Got it. That's helpful. And then maybe staying on that topic, I mean, I love seeing the margin expansion, the target out to '21. But how are you guys thinking about, I'm assuming, the revenue recognition on the AP1000 China hasn't changed, so if you -- you guys are doing 108 million this year, I know you've smoothed out the revenues, but you're still going to have, I mean, knowing that the margins on that program, 23%-plus, 108 million at 23% drop into 30 million in '21, which is sort of that target year. I mean, that's a pretty big chunk of operating income to fill in the Power segment. I mean, how are you guys thinking about managing the margin expansion in the face of what's going to be a decline in higher-margin revenues from that program?

Yes. I'll comment on it. I mean, obviously, that's in our plan. We know that's coming in 2021, which is the year three of our plan. So we have margin improvement activity around that, all the categories, consolidations, restructuring, supply chain, lean, focus on our bottom 10 performing businesses, blah, blah, blah. It's all of that above and it’s part of our plan to march to the 17%. So it will be, again, without going particularly, it's going to be about our margin improvement ongoing program. Including that gap, but I should step back because I also said, if you remember in February, we -- I think shown a chart, a big chunk of that gap is going to be filled by increased Navy business, albeit at not quite the same margins, but healthy margins, and so the gap is a little bit smaller than you might think, and we have plans to fill it.

Got it. And then last one, Dave, you kept the end market guidance, commercial aero, how are you guys thinking about. I know you are not wildly exposed to the 737, but how are you guys thinking about that platform and implications on Commercial Aerospace? Are you seeing any -- I know production from a lot of suppliers continues to be sustained at 52 a month, but how are you thinking about that exposure?

Yes, same thing, Mike. It's -- we're holding at 52 a month, and haven't seen any change to that, but don't anticipate any at this point. So it's -- your guess is as good as mine if that's going to modify any, but we're holding our own, and looks like we're going to just continue onward as we have.

[Operator Instructions] And our next question comes from the line of George Godfrey with CL King.

Dave, I wanted to ask about the acquisition pipeline and specifically you talked about larger deals, and I want to -- I'd like to put a finer number on that. Deal sizes that have annual revenue run rates of say 10% or more of your projected target this year, so call it, $250 million. Can you quantify how many opportunities that are legitimate within the pipeline and how many you can do due diligence on or keep in contact with, with the M&A team. Deal sizes that really move the needle. And I recognize the recent acquisition, like [indiscernible] $10 million or $12 million, it looks like an annual revenue run rate. So I'm really trying to get at deal sizes that are larger in size what the quantity is there?

Yeah. As you can imagine, the quantity is not as robust as with the smaller ones. Certainly, TCG, very small deal. We've got others like that that are in the range of between, let's say, $10 million and $40 million, they’re sort of run of the mill. I'm going to call them not the run of the mill that they were not interested, that just seems to be sort of the sweet spot of the companies that come up as either at a PE holding or privately-held, and some corporate spinoffs, which don't tend to be very large. Every once in a while, we'll see one in the $100 million, $150 million, maybe close to $200 million range, and I don't -- I never put a real number on those. But they're not that often. And we do chase corporate carve-outs, and we are going to continue to pursue with opportunities from some of the big corporate groups that maybe have changed their strategies. And we do have line of sight on some that we're, let's say, on a continuous basis, knocking on that door to see if we can wedge ourselves in. But it's not the high frequency that we get to $250 million and above. So I'm just -- my guess is that, unless one of those comes in with a lot of really interesting nuances for us to consider and meets all our criteria and so forth, then not withstanding maybe we have to part out something that we didn't really want as part of like the pots and pans I mentioned, then I'm guessing that what we will see will be a continuation of, let's call it, spending the 100 or so million dollars on these kinds of acquisitions, that would be smaller in revenue. But like I said, we've done the math all the way around, and carefully -- we've done an outlook that said, well, to spend that kind of money over 3 years, would that -- does it make a difference to go after big or small, like the $500 million or $200 million deals or add up the smaller ones, and financially we end up at the same spot. It is -- it will -- it would achieve our objectives going either way. I'd love to get some fairly large ones because that just gives us a lot more to share amongst all the groups more than likely, all of our segments and those are just -- they're more fun, I mean to me and I think to our executive staff who enjoy integration and so forth. So our desire is there. If they come up, then we are all over it. But I can only wish for it at this point and that we try to make them happen when we can.

Got it, okay. Thank you, Dave. And then one question for Glenn. Do you have the bookings number in Commercial/Industrial?

Booking numbers, Commercial/Industrial, round about $365 million.

$365 million in Commercial/Industrial.

Our next question comes from the line of Myles Walton with UBS.

It's Lou Raffetto on for Myles. So just back to the margins real quick. I know, Glenn, you guys have talked about the higher R&D spending this year of $10 million. If we think forward, do you actually see that maybe stabilizing or is that, I mean, you've got an investment business which is completely big, but is that part of getting you backup or getting you up to 17%?

Well the R&D is based on focus -- our focus area is on organic growth. I mean that's -- we have multiple products across each one, for instance in our Defense segment, which is the highly electronics, defense electronics we're looking at anti-tamper and encryption, Cybersecurity type technologies are all leading edge, which should lead to future opportunities for us. In the Power segment, it's the 50 hertz AP1000, which is obviously a future item for us, and also subsea pumps, which is starting to take off a little bit right now. And in the Commercial/Industrial, there's hybrid power, a number of differential products, World Traction Inverter is probably the biggest one. But the increased R&D is, really our focus is to supplementing inorganic growth, but with our increased organic growth.

And that does conclude today's question-and-answer session. I would now like to turn the call back to Dave Adams, Chairman and Chief Executive Officer for any further remarks.

Thanks to all of you for joining us today. We look forward to speaking with you, again, during our second quarter 2019 earnings call. Have a great day.

Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may now disconnect. Everyone, have a great day.