Ladies and gentlemen, thank you for standing-by. And welcome to the Curtiss-Wright Third Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Mr. Jim Ryan, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, Sherrie, and good morning, everyone. Welcome to Curtiss-Wright’s third quarter 2020 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Chris Farkas, our Vice President and Chief Financial Officer. 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.curtisswright.com. A replay of this webcast also can be found on the website. Please note, today’s discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company’s results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency in the Curtiss-Wright ongoing operating and financial performance. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth, excluding the effects of restructuring, 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 today with highlights from our third quarter results. Chris will then provide a more detailed review of our third quarter financial performance, as well as updates to full year guidance. Finally, I’ll return to wrap up our prepared remarks with a discussion on several strategic topics, including restructuring plans within our commercial aerospace business, executing our balanced capital allocation strategy, and lastly, why we remain confident in defense as we enter a period of budget and election uncertainty. After that, we’ll move to Q&A. I remain pleased by our team’s agility, as we continue to navigate through this challenging period and ensure that Curtiss-Wright is well-positioned for the future. We’ve maintained a steadfast focus on keeping our employees safe by following CDC guidelines and all of our manufacturing sites remain operational to-date. The team is proactively address the demand conditions in our commercial markets, while remaining keenly focused on executing our restructuring plans and austerity measures. This includes our decision to reduce our footprint in commercial aerospace, while more than filling that sales gap with the Paxar acquisition announced in late September. Later in my remarks, I will expand upon the benefits of this acquisition and how we are implementing our plans to enable future profitable growth. Turning to our third quarter 2020 adjusted results, where we exceeded our operating margin and diluted EPS expectations for the quarter. Sales declined 7% compared with the prior year, but were sequentially higher than our second quarter results. We continue to experience strong growth in our defense markets, which increased 11%. Within our commercial markets orders and quoting activity have steadily improved from the lowest experience than the second quarter, which provides optimism as we look ahead to 2021. Adjusted operating income was down 7%, principally due to the reduced demand in our commercial markets. However, adjusted operating margin was flat at 17.4%, despite a $45 million reduction in sales, as we benefited from the savings generated by our ongoing cost containment and restructuring initiatives. Adjusted diluted EPS of $1.85 exceeded our expectations, partially due to the timing of defense sales, while also reflecting the accelerated benefits of our restructuring actions. Turning to our adjusted free cash flow, while we had a challenging third quarter, following our second quarter sales trial, we are up 12% year-to-date. We remain on track for a strong finish in 2020 led by our intense focus on working capital. Now, I’d like to turn the call over to Chris to provide a more thorough review of our third quarter performance and outlook for 2020. Chris?

Thank you, Dave, and good morning, everyone. I’ll begin with a review of our third quarter end market sales. Overall, we experienced an 11% increase in sales to our defense markets, while sales to our commercial markets declined 22% year-over-year. Looking at the deeper into our defense markets within aerospace defense, we had strong growth of 10%, due to increased demand on fighter jet and UAV program. Next naval defense, we experienced solid revenue growth due to the timing of production on both the Virginia and Columbia class submarine programs. Within our DRG business, we benefited from increased OEM production, as we ramped up in our new South Carolina facility. Turning to the commercial markets, in commercial aerospace, as anticipated, we experienced reduced sales on all major OEM platforms, due to customer-driven production slowdowns. And finally in the power generation market, domestic aftermarket sales continue to be impacted by social distancing-related delays, leading to reduced maintenance activity, while lower international sales have largely been driven by project delays. Next, I’ll discuss the key drivers of our third quarter operating performance. In the commercial industrial segment our results reflect unfavorable absorption on lower sales, partially offset by the benefits of our 2020 restructuring actions. These efforts significantly reduce the segment’s decremental margin to approximately 20% of sales. In the defense segment, adjusted operating income increased 11% and 12% increase in sales, while adjusted operating margin decreased 40 basis points to 25%. The strong growth in operating income reflects higher defense revenues, including a solid contribution from the 901D acquisition. The slight reduction in operating margin principally reflects unfavorable mix due to a higher percentage of lower margin system sales. In the power segment, adjusted operating margin increased 70 basis points to 17.7% is the benefits of our cost containment initiatives and…

Thanks Chris. Since 2013, we’ve discussed numerous initiatives in support of our relentless pursuit of top quartile performance. We’ve demonstrated an intense focus upon our cost structure and a continuous rationalization of our product and businesses, unit portfolios to drive margin improvement. We have been proactive in these pursuits and remain committed to achieving our most recent goal of 17% operating margin, albeit delayed slightly due to the impact of the pandemic. More recently, we’ve been discussing the balance between sustaining profitable growth for Curtiss-Wright and satisfying customer needs. This included the acceleration of restructuring actions within commercial aerospace, particularly in light of the expected volume declines facing this industry over the next several years. In yesterday’s press release, we highlighted the strategic decision by our management team to discontinue a portion of our commercial aerospace actuation business at the end of 2020. These actions include restructuring our operations that support the Boeing 737 MAX program, including a reduction in our manufacturing footprint in Mexico. To put a little color on the subject, our 737 actuation contracts with Boeing has seen continued margin erosion over the last decade. Prior to the last round of negotiations over our current contract, margins had slipped to a dilutive position to the overall enterprise. This was largely due to the build-to-print nature of the work. If you recall, as we enter 2019, we experienced some delays in negotiations on our current contract. After several months of dialog, we signed a contract at a substantially higher contract margin and establish a benchmark with regard to the future profit expectations on this product line. During 2020 pricing discussions continued with regard to future production against our strategic profitability interests. At the same time and as you are aware, Boeing has been accumulating inventory and we estimate…

[Operator Instructions] Our first question comes from Peter Arment with Baird. Please go ahead.

Chris. Hey. Clarification…

Good morning, Peter.

Clarification, Chris, I guess, when you mentioned the on power gen the push-out of the AP1000 revenues. Do you recapture all of that in 2021?

Yeah. We haven’t really -- we need to do a little bit more sharpening and the pencil on that. Right now it’s $20 million of push out. We are still expecting a steep sequential ramp revenues in between Q3 and Q4. But we expect ‘20 to be essentially flat year-over-year with 2019 levels, approximately $70 million and we will have $80 million of remaining revenues in 2021 and beyond. But we’ll provide more guidance on 2021 as we get into February and provide you next year’s guidance.

And then just -- maybe just a little more color on the aftermarket sales within power, how should we expect that to kind of trend, I get the impact that we’ve had from facility closures, things of that nature. What are you seeing there?

Yeah. So, in Q3, we had -- the domestic aftermarket was slightly down due to the pandemic related delays. We are expecting a strong sequential ramp on the domestic side in Q4 versus Q3. For the full year, domestic would be flat to slightly down versus the prior year and international aftermarket business, which is mainly composed large projects will take a little bit longer to recover. So not a lot of change is later in Q3 but most of that moving out into Q4.

Okay. And just last, I can squeeze one more and just Dave, you mentioned. Thanks for the color on defense and how you’re positioned, while ground defense is not really a huge contributor, it has been negative in terms of growth for this year. How are you thinking about how that position going forward? Is that still going to be a drag, when we compare to the overall defense business.

Yeah. I think ground defense will pick up with a modernization outlook and there is still a strong need for that. Also, you will see PacStar coming in the play next year and that really is more, it’s an army services side. So it would be right there with the ground defense side. So I think with the synergies that will drive from our acquisition of PacStar and then some of the anticipated monetization that we will start picking that up a little bit. As you are aware, the -- our international ground business is fairly lumpy, it comes in big and it lasts for a year or two, and then it drops for a little bit, it comes back again. So that remains sort of the same position and when it does come back, like, I said, it’s usually pretty good and we do have a lot of activity over there, but nothing that we can see that huge on the horizon. But I think that the ground defense will start picking up somewhat.

Appreciate the detail. Thanks.

Thank you. Our next question will come from Myles Walton with UBS. Please go ahead.

Thanks. Good morning.

Good morning, Myles.

Hi, Myles.

You can offer a by segment, maybe the orders and backlog. Just so you get a sense of within your different end markets [Technical Difficulty] How do you expect them to sort of finish the year and maybe in particular the shorter cycle businesses as well?

Yeah. So I’ll start with the top level, Myles. For Q3 we had a 1 times book-to-bill. We showed some strength in defense at 1.1 times and we were about 0.8 times in commercial. The backlog is up 1% year-over-year for Curtiss-Wright and I think it’s important to note that defense backlog is up 10% year-to-date. So as we look to closing out the year and where we’re headed for this next year, we’re in a very strong position. If we break it down by segment, within C&I, we had about a 0.9 times book-to-bill for the quarter, within defense we were at about 0.9 times and within power, we were at about 1.2 times. So…

Okay.

I think overall. Yeah, roughly 1 and the strength came out of our defense markets.

And what about some of the commercial industrial, I know slicing a little bit deeper, but obviously that’s been a tougher one for you to put a finger on in terms of where that might trend on basically kind of curious if the orders there have stabilized and you’re seeing more recovery in your general industrial markets?

Yeah. Q2, as you know, is a pretty rough quarter for us. But overall at the CW level, we increased in our commercial orders by about 13% in Q3 and we’re expecting a steeper sequential improvement in Q4. We’ve had some modest improvements in aerospace here in Q3 and continuing into October, some signs of positivity within valves and we’re continuing to kind of watch that closely, but a faster recovery in vehicle orders. We’re seeing some good signs here with improvements in on-highway Class 8 and [inaudible] ACT Research. So I think we’re seeing some signs of optimism here, too early really to comment on 2021 at this point, but things are picking up.

Okay. And Dave I know you said that the 70%, it’s split out a little bit. Is it fair to at this point to say you can hit in 2022, given what you see and given the customers you’ve made and the decision not to re-up the activation contract and acquiring this new acquisition. It seems, at least as good, if not accretive to margins, maybe in that year?

Yeah. Myles, I think, that we were sorely disappointed that we were going to hit it this year and then we said that we would hit it in ‘21, a couple of years ago and from what I can see trajectory wise with how we’ve been performing and how we did it obviously in Q3 and then over the next several quarters. We’ve got the wherewithal to march our way towards ‘17. I would hope it’s before ‘22 and I would feel optimistic that we could possibly do that. We haven’t put a timeline on it. But we always, I mean, like, you know as well, we under-promise and over-deliver. We’re going to continue like I said in my narrative that relentless pursuit of that margin. And so that story remains in the forefront. You’re absolutely right, PacStar is going to be a fantastic acquisition for us and especially as we start to derive those synergies we talked about and as we replace that business that we are putting aside with the actuation products. And so we think it’s absolutely phenomenal swap given the IP-related aspect of it, probably, the most important. And so all things, all things being said, I’m very optimistic about the answer to your question.

Okay. All right. Fair enough. I will leave it there. Thanks.

Our next question will come from Nathan Jones with Stifel. Please go ahead.

Hi. This is Matt on for Nathan Jones.

Hi. Good morning.

Good morning. A quick question, regarding orders on the defense side, you cited, I think, in the press release embedded computing and valve products more -- were more than offset by reduced demand across commercial markets. But last quarter, I think, you guys noted that naval defense orders offset the reduced demand in commercial markets. Can you give kind of a little color on what led to lower defense orders in the quarter, was it timing related?

Yeah. We -- our defense orders are a little bit lumpy. I think if you go back to 2019, as an example, our biggest quarter was in Q1. This year it just so happens to be that that was in Q2. We issued a press release back in July that we signed $220 million in new naval multiyear defense orders and about $170 million of that fell into Q2. So as we look at where we are year-over-year, year-to-date, I mean, defense orders are up, I think, 3% to 4%. So we’re on a strong trajectory. As I said earlier, our defense backlog is up 10% year-to-date and it’s really more about timing than anything else.

Go it. And then how should we think about kind of orders and order rates going into 2021 if you’re willing to provide any color there?

Yeah. So, I mean, as I had mentioned to, Myles, I mean, we are seeing orders pick up across the Board, a faster recovery in vehicle orders. Those were kind of watching carefully, aerospace slow but steady. Without being specific, it is just kind of driving down into general industrial because commercial aero is going to be a long road to recovery. The ACT Research and it is indicating a strong recovery in on highway in Class 8, while we think off-highway and ag and construction will see more of a modest recovery, now slowly rebounding, too early to tell. Industrial controls, we expect to see some improvement there as conditions improve and industrial manufacturing and we do have some optimism with surface tech as we’re expecting U.S. and global GEP rates to grow about 4% next year. So, I think, from a GI standpoint, I think, things are looking positive and with our position here in defense and where our backlog is at this point in time of the year heading into next year, I think, we’re pretty well-positioned.

Good to hear. I appreciate you taking my questions. I will return back in queue.

Okay.

Thank you. And our next question will come from Michael Ciarmoli with Truist. Please go ahead.

Hey, Mike. Good morning.

Good morning. Maybe, Dave, just maybe a bigger picture portfolio kind of shaping question, you’ve obviously exited the MAX build-to-print, just given where aero is, you’re probably looking at maybe $250 million or so. Do you think about potentially exiting more of the commercial aerospace? Are you comfortable with the remaining content and the profit profile of the different product lines you have?

Yeah. We feel pretty good about it, Mike. I think that once we do exit this and we right-size our facilities and our operations all -- that are all associated with the commercial aerospace. And by the way, I’ll just talk and there were relative to the rightsizing. We are able to migrate some defense folks on -- that were on the commercial side now back on to defense. So, as we win that -- those particular areas off of the commercial side, we can backfill with some of the defense side it work that we have. So that’s gives us something positive, gives us a lot of absorption opportunities. And so I think as we right-size, restructure and through our consolidations, which we do every year and this year is no exception, then we will be in a position that the remnant of that business of the aerospace side like you -- you’ve talked about a couple of $100 million will contribute to the overall margin targets that we’ve set forth and they are good. I mean they are good products and it’s not that the product that we just -- that we’re exiting is not good, it’s been great business for us. It’s just a remnant of past that was filled with build-to-print type work and our intellectual property is really where it’s at for us. And so I think going forward, we’re going to be in pretty good shape. In terms of adding to that space, I don’t really see, always had the opinion, at least in the seven years I’ve been CEO that the pricing of any properties within that space has been pretty high and now like, COVID raises ugly head and the MAX had its own issues, that’s -- this is sort of put a damper on things as you’re well aware and we focused in other areas. But let’s say, we’ll have a very small piece in our business or portfolio associated with commercial aerospace, the strength lies on the defense side and then the balance of our niche orientation in our other product areas. So, I think, when I can go out and actively search for acquisition opportunities put that one.

Got it. And then just on defense, maybe to play double that little a bit on PacStar. I mean you paid 12 times, just trying to get your comfort level there. I know you talked -- you mentioned a couple of times on modernization. They are more tactically exposed. There is more ground exposure there. It seems like the Army doesn’t really have a seat of the table and the future conflicts with China and Russia. How confident are you in the visibility at PacStar, if some of these potential programs get delayed or curtailed. Did that go into the thinking there? I mean you kind of said you paid a 12 times forward multiple, which was a bit higher. But as you’re sort of trying to calibrate the risk there, how do you get comfortable with PacStar?

Yeah. As we alluded to it in our discussion, the narrative we had going earlier on. We did spend a considerable amount of time internally and externally reviewing this through consultancies, think tanks and so forth to see really how PacStar is positioned for the future. And also of -- while at the same time, how our other technologies stand products built up for the future. How -- what would they withstand. And we really looked at the high priority Army investment areas and we look for the top six priorities in specifically in the Army side. And you’re right, typically traditionally Army doesn’t get really the best seat in the table, if anything they’re back against the wall. But in this character -- in the characterization and as I talked about it with the war fighting theater, this -- in particular PacStar participate in network modernization, which is among the Army’s top six priorities and it’s well among those. So if I can in the middle of the top six and it’s the DoD modernization strategy is really driving the creation of a more expeditionary mobile force structure, which is independent of the size of the force. So while the Army usually get hit with personnel cutbacks. This is not tied to the actual soldier out in the field. It’s more tied to the infrastructure and that’s what PacStar is really shining a light in that. By every account the people we’ve talked to, on the Army side and other think tank areas, the battlefield network operations are -- and inter-platform connectivity has been a fantastic area of potential growth and PacStar just has a commanding hold on it in terms of IP-related tactical networks. And so now we add that to TCG. We added to some of the other products that we provide on the embedded computing side and we look at it really to be a one plus one, we think it is going to be more than two. So I hear what you’re saying and we vetted that in so many different ways, I can’t even over explain that. So the priority areas that we looked at the operating on the GPS denied environments where we are, the hypersonics, flight test equipment where we are active, the security side and this is commercial systems for classified areas, we are heavy in that, open-systems for government industrial compliant products, we are very heavily in that and lastly, the defense acquisition policy regarding other transactional authority. We research that tremendously to make certain that we’re going to be situated in a good spot. So those are all reasons we feel pretty secure.

Got it. Very helpful. I will jump back in the queue. Thanks, guys.

Thanks, Mike.

Thanks, Mike.

Ladies and gentlemen, that concludes today’s question-and-answer session. I would now like to turn the call back over to Chairman and CEO, Mr. Dave Adams, for any further remarks.

Thanks everybody for joining us today. We look forward to speaking you again during our fourth quarter 2020 earnings call. Have a great day and stay safe.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.