Curtiss-Wright Corporation (CW) Q4 2022 Earnings Report, Transcript and Summary

Please standby, the program is about to begin. [Operator Instructions] Welcome to the Curtiss-Wright Fourth Quarter and Full Year 2022 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] I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations.

Thank you, Leo and good morning, everyone. Welcome to Curtiss-Wright’s fourth quarter and full year 2022 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 the copy of today’s financial presentation 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 and our public filings with the SEC. As a reminder, the company’s results including an adjusted non-GAAP view that exclude certain costs in order to provide greater transparency in the 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?

Thank you, Jim. And good morning, everyone. I would like to start today’s presentation by sharing how exceptionally proud I am of the team’s resilience and agility to successfully navigate through numerous challenges this past year, including the supply chain, rising inflation and a more difficult staffing environment. Curtiss-Wright delivered solid operational performance in the fourth quarter, and hence a strong finish to 2022, as we achieve several new financial records, including full year sales, profitability and new orders. These results showcase the talent of our team, the strength of our combined portfolio and our execution of the Pivot to Growth strategy. Turning to today’s presentation, I’ll begin by covering the highlights of our fourth quarter and full year 2022 performance and a preview of our 2023 financial outlook. Then, I’ll turn the call over to Chris to provide a more in-depth review of our financials. Finally, I’ll wrap up our prepared remarks with the progress report on our 2021 Investor Day commitments before we move to Q&A. Starting with our fourth quarter 2022 results, sales increased 16% overall to a record $758 million, reflecting strong conversion on backlog and higher year-over-year sales in all of our A&D and Commercial markets. Within A&D, we achieved 20% growth in Defense, led primarily by higher Aerospace and Ground Defense market revenues and a strong contribution from the Arresting Systems acquisition completed last June. We also achieved double-digit growth in Commercial Aerospace, reflecting continued strong OEM demand. Outside of A&D, we once again delivered strong sales growth across our Commercial Nuclear Process and General Industrial end markets. Growth in operating income exceeded this very strong sales growth and we delivered 140 basis points in overall operating margin expansion to achieve 21.1% in the fourth quarter. This performance reflects higher sales in each of our three segments and the benefits of our prior year restructuring and companywide operational excellence initiative. As a result, fourth quarter adjusted diluted EPS increased 21% year-over-year to $2.92 and was in line with our expectations. We also delivered record fourth quarter adjusted free cash flow of nearly $300 million, achieving greater than 100% of our full year free cash flow in a single quarter, along with robust free cash flow conversion. Aside from the strong operational performance, if you recall, we were expecting a delay of a $40 million cash payment due upon the final delivery of our AP1000 reactor coolant pumps to China, anticipating a shift in timing from 2022 into 2023. Through negotiations with our customer, we received 50% or $20 million of that payment late in the fourth quarter and expect to recognize the remainder before shipping the final pumps in 2023. Growth in new orders remained strong, up 5% year-over-year, principally reflecting our boost and growing order book in Defense Electronics and the improved pace of Defense Outlays, as well as continued solid demand for Commercial Nuclear products. Next, our recap, our full 2022 results, where we delivered record sales, continued margin expansion, double-digit EPS growth and record orders. Sales increased 4% overall to a record $2.6 billion despite several macro level headwinds, including the ongoing supply chain challenges within our Defense Electronics segment and a 1% FX headwind based upon the strength of the US dollar. Operating income growth exceeded sales growth as we delivered 30 basis points and year-over-year operating margin expansion to reach 17.3%. The team achieved these record results, while overcoming the significant headwind associated with the wind down of the profitable CAP1000 program. New orders increased 15% year-over-year to a record $2.9 billion, reflecting 1.15 times book-to-bill overall. As a result, we conclude the year with a solid backlog of $2.6 billion. Another major highlight from 2022 was our continued focus on allocating capital to the highest and best use to improve shareholder value. We executed $50 million in total share repurchases in 2022, which was followed by a record annual share repurchase – purchase of $350 million in 2021. We also increased our annual dividend for the sixth straight year. Lastly, turning to acquisitions, I’d like to provide an update on our Arresting Systems business acquired in mid-2022, which is a great example of how Curtiss-Wright is delivering value through our acquisitions. Thus far, the business has performed extremely well, if not, even a little better than our expectations. Over the past few months, we have secured an impressive volume of OEM and aftermarket contracts. Integration is going very well and the business has proven to be a strong strategic fit within our Naval and Power segment, expanding our overall aftermarket sales, while boosting our International Military exposure, with contracts awarded by UAE, France, and other countries. In 2022, this business delivered solid profitability on mid-single-digit annualized sales growth and is expected to contribute to CW’s overall operating margin target of 17% over time. Finally, I would like to introduce our full year 2023 adjusted guidance, where we are projecting overall mid-single-digit sales growth driven by increases in nearly all of our major end markets. We expect continued operating margin expansion, while making incremental investments in both internally and externally funded research and development to deliver future organic growth. We expect to deliver solid growth in diluted EPS and generate strong free cash flow next year with the potential to reach double-digit EPS growth, and $400 million in free cash flow. Business fundamentals and underlying demand across our portfolio remains strong, and we enter the year with strong backlog which bodes extremely well for Curtiss-Wright’s long-term growth outlook. In summary, we are well positioned for continued success in 2023 and as we’ll demonstrate later in our remarks, we have line of sight to achieve the three-year financial target that we communicated at our 2021 Investor Day. Now, I’d like to turn the call over to Chris to continue with our prepared remarks. Chris?

Okay. Thank you, Lynn. I’ll begin with the key drivers of our fourth quarter 2022 results by segment. In Aerospace & Industrial, sales increased 8% overall, or more than 10% on an organic basis, but excluding the impact of FX. Within the segments Commercial Aerospace market, our results reflected continued strong demand on both narrowbody and widebody platforms. In the General Industrial market, our results reflected double-digit sales growth driven by higher sales of Industrial Vehicle Products and Surface Treatment Services. And those increases were partially offset by reduced sales in the segments Aerospace Defense market due to the timing of production on various programs. Regarding the segments’ profitability, our results reflect favorable absorption on higher organic sales as well as some unfavorable mix on products and services which impact that operating margin. Next in the Defense Electronics segment, despite the ongoing supply chain challenges, we concluded the year with a strong fourth quarter performance. Sales growth of 18% reflected higher revenues for Embedded Computing Equipment on various Fighter Jet and Helicopter programs in Aerospace Defense, as well as increased sales of Tactical Communications Equipment in Ground Defense. Turning to the segments’ operating performance, adjusted operating income increased 33%, while adjusted operating margin increased 320 basis points to 29.7%, reflecting strong absorption on higher A&D revenues. Next in the Naval & Power segment, sales growth of 20% was driven by high single-digit organic growth, as well as the contribution from our Arresting Systems business. In the Naval Defense market, higher revenues principally reflected the ramp up on the Columbia-class submarine program. However, our results were about $10 million lower than expected primarily due to the timing of revenues on the CVN-81 aircraft carrier program which shifted into 2023. In the Power & Process market are results reflected strong demand in the Nuclear Aftermarket supporting the operation of existing reactors, increased revenue supporting Gen 4 advanced reactors and higher valve sales in Process. These increases more than offset the wind down of production on the CAP1000 program in the fourth quarter, and of note, on a full year basis, CAP1000 program revenues decreased $25 million in 2022, and we expect to recognize the remaining $5 million in revenues on this program in 2023. Regarding the segments’ fourth quarter profitability, our results reflected favorable absorption on higher organic sales and the benefits of our prior year restructuring initiatives in addition to a strong performance from our Arresting Systems business. To sum up the fourth quarter results overall, we generated strong double-digit growth in sales, and 140 basis points in year-over-year operating margin expansion, highlighting the strength of our combined portfolio and a solid finish to 2022. Next, turning to our full year ‘23 guidance, I’ll begin on Slide 5 of their end market sales outlook, where we expect organic sales to grow 3% to 5% in line with our long-term guidance, and we’re projecting total sales growth of 4% to 6%, which includes the contribution from the Arresting Systems Acquisition, partially offset by a small headwind from FX. I’ll start with A&D markets, where sales are expected to increase 6% to 8%. In Aerospace Defense, growth of 9% to 11% reflects the contribution from our Arresting Systems business, as well as in mid-single-digit organic growth for Defense Electronics on various Fighter Jet programs, which will be partially offset by lower actuation revenues within the A&I segment. In Ground Defense, we expect growth of 4% to 6%, reflecting higher revenues for Tactical Battlefield Communication Systems, as well as increased international sales of our Turret Stabilization Systems. Next, in Naval Defense, our outlook for 4% to 6% sales growth principally reflects higher revenues, driven by the strong ramp up in production on both the Columbia-class submarine and the CVN-81 aircraft carrier programs. That wrap up our A&D markets and turning to Commercial Aerospace, our outlook for 5% to 7% sales growth is driven by higher OEM production rates on narrowbody aircraft including the 737 and A320 and widebody aircraft including the 787 and A350. Our guidance in this market also includes a 2% headwind from FX. Turning now to our Commercial Markets, where we expect overall sales to be flat to up 2%. In Power & Process, we’re expecting flat growth overall. However, this outlook includes a revenue headwind from the CAP1000 program of approximately $20 million. Excluding that impact, we expect mid-single-digit growth in the Commercial Nuclear market. This reflects solid demand for ongoing maintenance and subsequent license renewals that extend the life of existing nuclear power generation fleet, as well as increased sales supporting Gen 4 advanced reactors, most notably tied to our recent agreement with X-energy. We also expect mid-single-digit growth in the Process market, reflecting higher development revenues, supporting ongoing subsea pumping initiatives, and continued solid MRO demand for our valves. Lastly, in the General Industrial market, we expect growth of 2% to 4%, including a 1% headwind from FX, driven by higher sales of Industrial Vehicle Products and Surface Treatment Services. As we look at the combined total Commercial market, it’s important to note that excluding the wind down on the CAP1000 program, overall commercial sales growth would be of 3% to 5%. Continuing with our full year outlook by segment on Slide 6. I’ll begin in Aerospace & Industrial, where we expect sales to grow 1% to 3%, including a $10 million or 1% headwind from FX. Our outlook for this segment is driven by solid growth in both Commercial Aerospace and General Industrial, partially offset by the timing of sales and defense. We expect adjusted operating income growth of 4% to 7% and adjusted operating margin expansion of 50 to 70 basis points to a range of 17.0% to 17.2%, reflecting higher sales, and the continued benefits of our prior restructuring initiatives. Next, in Defense Electronics, we expect sales to grow 5% to 9%, principally driven by this business’s record 2022 order book and cautious expectations for improved supply chain stability. We expect adjusted operating income growth of 7% to 11% and adjusted operating margin expansion of 30 to 50 basis points to a range of 22.7% to 22.9% based upon the strong revenue growth. And lastly in the Naval & Power segment, we expect sales to grow 5% to 7%, driven by solid growth in Naval Defense, mid-single-digit growth in both the Commercial Nuclear and Process markets and the contribution from our Arresting Systems acquisition. Operating income is projected to be essentially flat, while our operating margin is expected to range from 17.5% to 17.7%, reflecting both negative mix on lower CAP1000 revenues, and a shift to lower margin development contracts in the Power & Process market. Excluding those items, operating margin in the segment will be nearly flat year-over-year. So to summarize our outlook, we expect total Curtiss-Wright operating income growth of 5% to 8% overall, in excess of sales growth, and expect operating margin to improve 10 to 30 basis points ranging from 17.4% to 17.6%. And I’m pleased to note, that we continue to deliver operating margin expansion as we maintain our strategic focus on investments. Our outlook for 2023 includes a year-over-year increase of more than $20 million in total research and development investments, including both contract and our A&D programs. Continuing with our 2023 financial outlook on Slide 7, I wanted to provide some color on a few non-operational items, and I’ll start with our pension plan. 2022 was a difficult year for most pension plan sponsors as returns were weak across nearly all asset classes. However, the Fed’s aggressive interest rate hikes and the resulting impact on pension discount rates helped to mitigate the impact of the short-term negative asset returns and resulted in a minimal impact on our funded status. In fact, our funded status percentage increased year-over-year. In early 2022, we also took steps to protect the funded status of the plan by implementing a glide path investment strategy that de-risks the plan, and by increasing our fixed income allocation to more closely match plan liabilities as the funded status improves. Our goal is to reduce volatility as the plan approaches the sunset of accruals. As a result, we are now expecting a tailwind of approximately $10 million in other income for 2023. And more importantly, we do not expect to make any cash contributions to the planned sunset date in 2028. Next, we anticipate higher interest expense in 2023, primarily due to rising interest rates and the impact of our revolver which represents a headwind of approximately $6 million or $0.12 compared with 2022. And lastly, our tax rate in 2023 is expected to be unchanged as we enter the year at approximately 24%. Turning to our EPS guidance, we expect full year 2023 adjusted diluted EPS to range from $8.65 to $8.90, up 6% to 10%, mainly reflecting our strong growth in operating income and an approximate 1% to 2% benefit from the below the line items. To aid in your quarterly modeling, we expect our 2023 quarterly EPS to follow a similar cadence to last year, with the first quarter expected to be our lightest, but reflecting mid-single-digit growth relative to our prior year first quarter adjusted EPS. For the remainder of 2023, we expect sequential quarterly improvement with the fourth quarter being our strongest, including approximately 40% of our full year earnings per share in the first half. Lastly, turning to our free cash flow guidance. We’re projecting full year adjusted free cash flow of $360 million to $400 million, up 22% to 36%. Our outlook is driven by expectations for higher cash earnings and improvements in working capital as we burn down through our excess inventory and continue to accelerate our cash collections, particularly for those businesses most impacted by the supply chain disruption. Our guidance also includes the collection of the remaining $20 million CAP1000 cash payment which we expect to receive upon final delivery of our reactor coolant pumps to China. Of note, we’re targeting this cash flow as we invest to support our future growth, and while also facing a $25 million headwind related to the section 174 R&D tax amortization. Based on these changes, our full year 2023 free cash flow conversion rate is expected to exceed 110% based upon the midpoint of our guidance. And now, I’d like to turn the call back over to Lynn to continue with our prepared remarks. Lynn?

Thank you, Chris. I wanted to spend the next few minutes providing some updates on the changing dynamics, both positive and negative that we have faced as an organization since our May 2021 Investor Day. I’ll follow that up with some proof points to demonstrate how we’re positioning our business and executing on the Pivot to Growth strategy to maintain line of sight to the three-year Investor Day commitments articulated in 2021. Starting on the left-hand side of the Slide, where we have a number of positive influence that continue to help shape Curtiss-Wright’s long-term growth. First, we’ve seen consistent strong bipartisan support for the US Defense budget. Most recently, Congress finds the FY ‘23 spending bill which appropriates $817 billion for the DoD budget, reflecting a 10% year-over-year growth. Within this legislation there is strong support for our largest end markets as Naval ship and these building continues to receive solid funding for two critical growth drivers, the Columbia-class submarine and the Ford-class aircraft carrier program. Outside of the US since the Russian-Ukraine conflict began, we have seen many NATO member countries propose a ramp up in defense spending to 2% or greater of GDP. An overall increase in Global Defense spending provides Curtiss-Wright with improved visibility and support for our long-term growth outlook across our defense end markets. Beyond the defense budget, we’ve seen several pieces of important US government legislation passed, including the Infrastructure Bill, the Inflation Reduction Act and the Chips Act. These bills provide opportunities for growth in our Industrial Vehicles business through investments in highways and construction, as well as our Nuclear businesses based upon funding to support both the existing nuclear infrastructure and the build out of the next-generation advanced reactors. We have also seen rising pro-nuclear sentiment globally, driven by the push for carbon-free energy and the strategic importance of energy independence. We are well positioned for long-term growth in this market based upon our alignment with Westinghouse to support future AP1000 power plants expected to be built in Eastern Europe, and the numerous Generation 4 small modular or advanced reactor developers. Notably two of our end markets have experienced a faster than expected recovery, as sales in our Industrial Vehicles and Process markets, each recovered to 2019 pre-pandemic levels one year faster than originally anticipated in 2021 and 2022, respectively. Of course, not everything has gone according to the plan over the past two years. Similar to many of the companies in our industries, we have faced disruption in our supply chain, along with several macro level headwinds, particularly impacting our A&I and Defense Electronics segments. Regarding the supply chain, these issues had a much more prolonged than expected impact on our Defense Electronics business. Conditions appear to be stabilizing and while lead times on critical components are not likely to return to previous levels in 2023, we expect that there should be some improvement as we move through the balance of the year. On the macro front, the accelerated rebound in US economic growth following the COVID-driven downturn in 2020 has led to rising inflation, labor costs and interest rates, as well as a strong US dollar. Today, we have continued to deliver on our final – financial targets despite these dynamics. Next in Defense, although the top line budget projections have been strong, if you recall, last year we faced – we were faced with the delayed signing of the FY 22 DoD budget following 180 day continuing resolution, which halted new program starts and slowed outlays on key programs. As a result, it greatly impacts the timing of revenues in 2022, and delayed the recognition of our very strong order book, pushing some sales into 2023 and beyond. Looking broadly across the performance in all of our end markets, the only market that really hasn’t quite lived up to our expectations in terms of targeted return to 2019 levels, is in Commercial Aerospace. This is principally due to a slower post-COVID recovery on production rates in both narrowbody platforms, including the 737 and A320 and even more in widebody on the 787 and A350 programs. We continue to work closely with our customers, and based on current production rate projections from Boeing and Airbus, we now expect our narrowbody business to recover by the end of 2024, while widebody, it will extend beyond 2025. Overall, this is about one year later than our pre – previous expectations. Next, I’d like to shift to the right-hand side of the slide and share several favorable outcomes since our Investor Day, which are a function of our strategic actions to position Curtiss-Wright for long-term profitable growth. We have remained committed to a disciplined capital allocation strategy as we have repurchased $400 million in shares and have added high quality acquisitions to the portfolio. We’ve remained focused on providing consistent returns to shareholders and finding acquisitions that are exceptional strategic and financial fit. In addition, as noted earlier, we generated record orders this past year of $2.9 billion, reflecting gains across the portfolio and strong demand for our products and services, including solid contributions from two of our more recent acquisitions, PacStar and the Arresting Systems business. Supporting this growth in our order books since 2021, we have maintained a consistent focus on investments in R&D and innovation, as well as collaboration across our Defense and Commercial businesses, which has led to a notable advancements and numerous crossover technology wins across the portfolio. We’ve highlighted a number of these in our press releases where for example, we have secured a strategic position with X-energy, supporting their new small modular reactor, which was achieved through strong collaboration across many teams within Curtiss-Wright, and more recently, with our win with Dynetics to provide Electromechanical Actuation technology, which was originally developed for Commercial Aerospace, to the Enduring Shield Ground Defense platform, we look forward to sharing many more examples in the months and years ahead. In regards to the last favorable outcome listed on this slide, I am extremely proud of our team’s ability to drive continued operational and commercial excellence and continued operating margin expansion. So as we reflect on our three-year financial targets introduced at our last Investor Day, which for reference are shown in the upper right-hand corner of the slide, we remain squarely on track to achieve the first four of those type – five targets and have line of sight on free cash flow conversion. Based upon the midpoint of our 2023 guidance, we expect to grow total revenue of CAGR in excess of 5% over the three-year period, including approximately 3% organic growth. Operating income is expected to grow at an 8% CAGR over that timeframe in excess of total revenue growth and we remain a top quartile operating margin performer relative to our peer group, as we’ve consistently demonstrated since 2016. We are also on track to reach our minimum adjusted EPS CAGR target of 10%. Again, based upon the midpoint of our 2023 guide. Regarding our final target to achieve 110% average free cash flow conversion, we’re very close at the midpoint of our current guide yields 108% average rate of conversion. Our team has been diligently focused on driving continued strong free cash flow generation, and we have the potential to generate a record $400 million this year. As a reminder, we’ve delivered more than 110% adjusted free cash flow conversion for nine of the past 10 years. Despite the continued pressures on our free cash flow, particularly due to supply chain challenges, impacting both our revenue and working capital, we are working every angle possible to achieve our conversion target and fully deliver on our entire slate of Investor Day financial commitments. In summary, we enter 2023 with strong backlog across A&D and Commercial markets, and are well positioned to deliver profitable growth yet again this year. We are projecting growth in operating income to exceed sales growth in line with our long-term guidance, reflecting the continued execution of our Pivot to Growth strategy. We are also on track to generate strong growth in adjusted free cash flow, while maintaining a strong and healthy balance sheet to support our capital allocation strategy. Looking beyond this year, the long-term prospects for Curtiss-Wright in the markets we serve remain very healthy, with strong alignment to favorable secular growth trends influencing our business. In closing, we look forward to generating a strong performance during our third and final year of our Investor Day commitments and remain committed to delivering long-term value for our shareholders. At this time, I would like to open up today’s conference call for questions.

The floor is now open for questions. [Operator Instructions] Thank you. Our first question is coming from Peter Arment of Baird.

Yes. Good morning, Lynn and Chris. Jim, how are you?

Good morning.

Good morning, Peter.

Good morning.

Hey, Lynn, maybe just first start on the supply chain side. It sounds like the competence is improving that some of these supply chain stresses is going to abate in the second half. Maybe if you could just provide a little more detail on just your competence level on that? Thanks.

Yeah, thank you. It’s clearly an important topic for us and something we put a lot of time in last year and continue this year to really analyze, you know how we can predict our competence in the supply chain. And, you know, we have a variety of measures, I think you’ve heard us mentioned over past calls that, you know, we very much measure component lead time, supplier on-time deliver – delivery, vendor commitment volatility, parts on allocation, just a variety of things. And to be frank, we’re not really seeing improvements in those numbers, we’re seeing stability in those numbers, but they’re not great performance that we’re stabilizing on. So, you know, we’re not really saying dramatically things are going to be you know be better in the supply chain. But I think we, as a company, have continued to improve over the course of, you know, the back end of ‘21 through ‘22 to really work in this environment that, you know, continues to have a very long lead time and volatility, we are definitely hearing from our suppliers that they believe lead times will come down and some of those other metrics will reduce in the back half of the year as commercial demand for some of these parts that, you know, very much out in the public is expected to abate in the back half of this year. So there’s reason for optimism, but we’re not, you know, we’re still working with a mindset that we’re going to live in a pretty volatile market. But you know, there’s also, you know, we’ve changed our system. I think I mentioned in the Q3 call last year, that we’ve turned on a new tool that leverages AI technology to help us do scenario playing for, you know, how, you know, various predictions on incoming supplies based on the volatility of the suppliers, and an order patterns and things until we turn that on in the end of ‘22. But it’s really just beginning to take hold and helping us to really maximize how we can deliver in the volatile environment. And so, I think the bottom line is, you know, the business is healthy, we had a great order book, the demand is there. Honestly, we’re off to a great start this year in January and February with the order book looking just to continue on being strong. So we feel very good about the business. But we really pick the guidance range of $725 million to $750 million to provide some adequate consideration for the variability we could still face in 2023.

Appreciate those details. And just as a quick follow-up. Just in the Nuclear space if we think back to the 2021 period, where that on your Investor Day you were talking about kind of a low-single-digit growth, and that was including – excluding any new [technical difficulty] that was part of the most recent commentary in today’s you know, presentation, you were talking about mid-single-digit growth in Nuclear and Process. It seems like, you know, this could be end up being one of your faster growing markets, how do we expect that kind of the order flow? You know whether it’s, you know, we’re going to see some initial activity with Poland or some of the small modular reactor activity, just how should we think about either backlog or water flow when we think about growth for this year? Thanks.

So, you know, it is definitely an exciting part of our portfolio, and one that, you know, we had optimism for, you know, growth when we did the Investor Day, but that has surely expanded and, you know, the money flowing from the advanced reactors that we’re definitely, you know, recognizing revenue on, you know we continue almost half of the US fleet has applied for their sub – license renewals, Canada is in the same process that, you know. I think, you know, what Chris speak to, you know, what we’re predicting, but there is really great tailwind between the aftermarket, the new build and you know, another area we’ve talked about, we’ve put a focus on is not just the traditional markets, where we’ve had presence, you know, here in the US, Canada and South Korea. But really trying to work more internationally, across the Eastern European block, both in support of the existing reactors, and then obviously working with Westinghouse for new build, but also into France, as they have a lot of maintenance issues in some of their fleet. And so, we’re really trying to push the boundaries geographically to also support growth in that area.

Yeah. And I’ll just say that, you know, more recently, you know in Q4 our orders were up 22%. On the full year, they were up 15%, I mean, really showing just, you know, solid improvement in the aftermarket, strong increases in outage maintenance. And then, of course, you know, the new project wins that we have on advanced small modular reactors. You know entering into ‘23, it’s going to be mid-single-digit growth. And I think that that, you know, puts us at, you know two years of solid growth you know within this market. And you know, we expect that to continue into the future and hopefully pick up here when some of these more significant projects that we’re working on like the AP1000 and X-energy when we start to turn over into the – to the development and production you know side of that contract, but that’s a – that’ll be beyond ‘23 at this point and our thinking, but really encouraged by you know the shift and change from that low-single-digit you know run rate over the past 10 years to now, mid-single-digit or higher.

Appreciate the details. Thanks, guys.

Yep.

Our next question is coming from Myles Walton of Wolfe Research.

Thanks. Good morning.

Good morning, Myles –

Get back to the Investor Day and you actually at the Investor Day talked about commercial strategy, in particular, pricing. And, you know, I think wouldn’t it be interesting pieces of the results in ‘22? is – it seems like you’re able to offset inflation pretty well. And I’m curious is that one of the things that’s tracking perhaps better than you expected or as good as you expected on the commercial strategies, and in particular, pricing front?

Yeah, really, the teams have done you know a really great job across the board. And, you know, as much as you know, the impact it would be needed to have, you know, as inflation ramped that you know, in a way we didn’t necessarily anticipate at the Investor Day, you know, I’m really you know glad the team had taken this on already and started, you know, really working in our contracts to make sure we had escalation clauses and such. So it is an area that has gone very well, you know, we do our monthly financial reviews across all the teams, and they report out, you know, how they’re tracking towards targets that we’ve set, and we can really see it’s bringing results to the organization, which you know most fundamentally is seen in our ability to expand operating margin, because there is no doubt that, you know, the inflationary pressures on material is real, you know, we are working to make sure we’re paying our staff at a rate that is, you know, market competitive and, you know, keeps them, you know, enthused to be working at Curtiss-Wright. And so, you know, that has driven some cost pressures in the organization. But with that, we delivered the operating you know margin expansion and. You know in 2022, we had completed our OGP assessments across every one of the businesses and have scored the teams you know identified best practices across you know the teams that various teams other very specific things that they’re doing really great that can be shared. And this year is really sharing of those best practices, and you know working to action plans that came out of those OGP scorings. And so it has been very, you know, a very strong contributor to Curtiss-Wright and the results we’ve been able to achieve.

And maybe sticking to the margins for just a second, the Naval & Power trend down here in ‘23. I heard mix and then the development side. Is the bulk of this the decline in CAP1000 high margin revenue? And therefore, you know, this would be the level loaded number for ‘24? Or is there any type of longer-term mix shift here on the development side?

I think that’s fair, Myles. It is you know the bulk of this is you know related to the AP1000 you know mix and downturn. But, you know we do also had a shift you know we talked about increasing our total R&D investments for this next year, we do have an overall increase of about $14 million in C-Wright. And I would say a sizable portion of that roughly two-thirds is going to be subsea pumping development contracts in this segment, and we’re seeing a little bit of unfavorable mix as a result of that. So, those are really the two main drivers. And you know we do have $5 million remaining on revenue on the AP1000 contracts. I don’t want to say that we’re completely done talking about mix on this contract as we look forward to fiscal year ‘24. But that’s a main driver.

Okay. And just one cleanup on capital deployment. So I think you’ve got 2023 notes coming due this year as the anticipation in the interest guidance to refi or repay, and then maybe just a broader comment if you can on M&A in the pipeline?

Sure, I’ll start off with the financing, and then maybe ask Lynn to talk a little bit more about the pipeline. We do have $202 million in notes coming due this month. We actually finished the year successfully off of the revolver. So we are able to build up a little bit of cash here at year end. But you know, we’ll be paying down those notes. And I think what that’s going to do is it’s going to put us on the revolver you know typically Q1 is a cash outflow quarter for us anyway, but we’ll be on the revolver to the tune of about $150 million, I would say, you know, average across, you know, three quarters and you know we were looking at the variable interest rates and you know, we are, you know, conservatively estimating that those will climb to about 6% they might be slightly below there, but you know, with a few more movements here we can easily be in that 6% range. So, you know, we you know as we look at our balance sheet, I mean, we still feel very good about what – where we are. And we feel great about the rates that we got on those notes that we took back in November to kind of position us for this year. And, you know, absent any major share buyback programs or acquisitions, you know, we’ll finish the year you know below 2 times debt-to-EBITDA.

And then, I guess, just to touch on the acquisition pipeline. There’s definitely properties that are, you know, being floated out in industry and properties that were engaged with, I know you’ve heard us say over the years that, you know, we will, you know, easily start the process on 10 properties to have one come across the finish line. So, I’d say we’re actively working it, there’s some very interesting properties that were in early discussions, I would say with, but things that I could see potentially, you know, fitting both that you know, financial and strategic fit within Curtiss-Wright, which is, you know, a pretty high bar for us, but I do feel confident we’ll continue to find properties.

Okay, thank you.

Thank you.

Our next question is coming from Nathan Jones of Stifel.

Good morning, everyone.

Hey, good morning, Nathan.

Good morning, Nathan.

Maybe if you could just broaden the supply chain discussion, you know, from Defense Electronics to the to the rest of the business, and just provide a little more color on, you know, if it’s improving, where it’s improving, where it’s not improving, and what you’re expecting from the rest of the supply chain for 2023?

Yeah, it’s a good question, because we’ve talked so much about Defense Electronics being the biggest you know impact to Curtiss-Wright. You know, I just mentioned few minutes ago, we did our monthly financial reviews yesterday, and there’s still volatility, you know, across the teams in other aspects of it, you know, specifically, one thing we got talked about was in the procurements of various metals we use that, you know, still have, you know, extended lead times and some of the delivery issues that we have. But none of those seem to, you know, when we talk extended lead times in Defense, you know we’re talking up, you know, 52 plus weeks in some consideration. So, the extended lead times you know may make some pressure in the quarter, for example, but things that are managed within the year, so we don’t see any – anything else really being, you know, materially impactful to Curtiss-Wright, but it is something the teams are definitely having to deal with. So, you know, good things like break has come, you know, has pretty much stabilized in some of those other parts of us are building and delivering products, you know, those have pretty much returned to normal and more normal cost structure. So that’s a good thing for us.

And then maybe if you could give us any color on price cost in ‘22, and what you’re expecting in ‘23, we neutral to positive on $1 basis on price cost in 2022. Do you expect to pay again in 2023? Was it diluted to margins? And then if you’d be willing to give us the estimated price impact or price contribution to organic growth in ‘23?

Sure, yeah, I’ll take that one. You know, we had some good successes as Lynn pointed to, you know, mainly within, you know, the commercial side or within our commercial businesses, you know, a lot of our government contracts have built in escalation clauses. So I won’t kind of wrap that into the discussion here. But, you know, as you look across the A&I segment, I would say that, you know, that represented approximately 1% of our growth rate in 2022, we were able to stay you know slightly ahead of the inflationary cost pressures. And as you look at what the net impact was to our margin, I would say it’s roughly 10 basis points. And, you know, it’s, as we look forward into this next year, we’ve already heard some good news coming out of some of our businesses on the commercial side about, you know, continued price increases that they’ve been able to secure through renegotiation of long-term contract. And we’re projecting for this year that the pricing will be 1% of our growth rate as well. So I think you know it’s just kind of a good fair assessment, whether you’re talking ‘22 or ‘23.

Great. Thanks very much for taking my questions.

Yeah.

Thank you.

Our next question is from Kristine Liwag of Morgan Stanley.

Hey. Good morning, guys.

Good morning.

Good morning.

So, Lynn, Chris, you bought Safran’s arresting business last year for about $240 million. You’re already trending to be below 2 times leverage. For future M&A, how are you thinking about small bolt-on acquisitions like you’ve done in the past versus a more transformative opportunity? I think it looks like there are some potential assets in the market that are chunkier in size. There’s discussion of Raytheon’s actuation business, there’s Crane’s industrial and aerospace assets. I know you can’t speak about specific deals. But can you give us an idea of how you think about small bolt-ons versus larger chunkier transformative acquisitions?

So we’re definitely open to both, and you’re right, there’s quite a few properties that are either in play or, you know, being headlined to be coming, you know, to the market in you know the next three months to six months. And so, there is – it is an active time. I mean, monitoring our cost from interest rates is something that Chris might very actively talk about, and it does weigh into our decision making and something we consider carefully. But, you know, I think you take the principal about your cost of capital, and your return on capital. And, you know, we still challenge ourselves to meet those financial goals, and maybe it raises the bar a bit for an acquisition that we would consider, but, you know, really, you know when we find a good strategic fit, you know, even if it doesn’t, you know, isn’t accretive to our 17% overall margin, you know, in year one, we definitely don’t – not consider it, you know, that’s part of our, you know, our ongoing operational excellence initiatives is to create margin dollars to cover dilution from acquisitions that, but again, you know, those are ones we are willing to do that when we’re really confident of the strategic fit and the growth trajectories out of that business. So, we’re active, I would say, you know, I think we know the properties that are you know projected to come. I think we have good connections in the finance and banking community. So you know we’re considered and you know, we’re a reliable buyer that, you know, we do the process with the company, we take it across the finish line and close on businesses. So, I think in general, we’re considered somebody very positive to engage with.

Again, I’ll say our debt is investment graded, and I consider us to be kind of a BBB plus, but we’ve done been fairly successful in the notes market with that you know those last notes we secured more in the pricing range, I would say of an A. We have about $1.7 billion of capacity available for debt right now. And I think when you’re talking about the acquisition strategy, and you know we look back at how we’ve been doing since 2017, and we’re pretty pleased with the way that we’ve been using the balance sheet and deploying that. Now, if something more you know transformational were to come along, you know, I think, you know, the highest we’d probably go from a debt-to-EBITDA perspective is, you know, 3.5% or 4%, but, you know, we would quickly you know de-lever that back down to a 3.0%. And I think, you know, when you’re starting to talk about, you know, more transformational acquisitions, you just have to think about financing differently, right, you have to explore different options between short-term notes, you know, how much you can put on to the revolver, you know, and I suppose, you know, while we’re very, very focused on, you know, EPS growth, the better our stock performs, the better that currency is on the market. So there’s a lot of different ways to potentially think about pulling in businesses that are right strategic and financial fit.

Great, thanks for the color, Lynn and Chris. And maybe if I could do a follow-up question on Nuclear Power. You know, you’ve highlighted the MoUs that you received from some of the Eastern European countries. And look, you know, the war in Ukraine is dragging on longer than many anticipated, I can’t believe we’re here lapping the first year already. What are you hearing from your customers? Are there any indications that they could accelerate orders? Or where does you know, power independence rank with their competing funding priorities with either more security investments or preparation for an upcoming recession? Should it happen? It just seems like right, historically, we’ve seen countries take a long time to make these decisions. So any color you could provide in terms of how they’re seeing priority for Nuclear Power would be great.

I think there have been, you know, I think it stays at the forefront of their priorities. And that’s definitely what we’re hearing. And when you think of, as you said, can you believe it’s been going on for a year? It’s terrible. And but does that not just galvanize energy independence as being an absolute necessity? And so, we’re hearing that, you know, there was a little press this morning that there was additional movement between Poland and Westinghouse yesterday with President Biden’s trip to Poland. So, again, no indication of what that means for us. But I think those things just continue to show, you know, the continued drumbeat of activity across the various Bulgaria-Romania, you know, and there still continued discussions with Ukraine about helping them once this war ends. And how that’s going to be returned. So, I feel like it’s the priority level remains very consistent.

Great. Thank you for that color.

Thank you.

[Operator Instructions] Our next question is coming from Michael Ciarmoli of Truist Securities.

Hey, good morning, guys. Thanks for taking the question.

Good morning.

Maybe, Lynn – how are you? Maybe, Lynn just stay on that topic. I mean, do you actually expect to get an AP1000 pump order this year? Or how are you guys thinking about order timing, if at all?

So, you know, when we you know had the call a year ago, and we said, we anticipated that Poland was kind of one of the most on the forefront of saying, you know, their timeline, which really backed us into an order in the 2024-2025 timeframe. And, you know, we said three to five years, because things, you know, as Kristine was just commenting, it usually takes longer, not less time. So we – that’s still, you know, put an order in two years, two to four years at this point in time, you know, based on that. Now, I mean, this was, you know, a little snippet news article about what was agreed to and signed between Poland and Westinghouse, but they’re trying to pull their program to the left, and whether that, you know, pulls our order potential to the left. We don’t know that yet. So I wouldn’t speculate on it. But I do think it just shows the consistent, you know, push to get these plants up and running. And, you know, I think there’s similar little news bytes across these other, you know, companies and, you know, we’ve worked very closely with Westinghouse, you know, they know, you know, we’re working very hard to really think through our ability to scale, you know, operationally in these areas, you know, to build AP1000 pumps, and then layer in some of the subsea pumps, and then layer in some of the, you know, advanced reactor builds. So it’s you know we’re very transparent with our customers, because we want to be a really, you know, solid, reliable supplier. And so we’ll have good line of sight to be able to make sure we’re prepared. So at this point, definitely, we’re not predicting an order this year. So definitely not, you know, put the two to four years pull left? We don’t know that. But if we do learn of details of that, we’ll definitely share them even in our few on calls if there’s a little more color on that.

Got it. Thanks. And then you actually mentioned something I wanted to touch on the subsea pumps, it sounds like you’re spending a little bit more on development. Sounds like it’s a little bit of a margin headwind this year, but can you maybe elaborate on what the expected revenue opportunity you know is in that market? And maybe just give us a little bit more color about the subsea pumps?

Yeah, so the projects are going well. So I mean, it is, as Chris mentioned, you know, we’re plowing through really, you know, the back portion of development on those pumps this year. And, you know, this really, you know, has the opportunity to be a very significant major revenue driver for Curtiss-Wright, you know, in this decade. And, you know, for, you know, as we size the market today, between Shell and Taipan, we think each one of those has $100 million value you know by 2030. So, and you know we don’t intend to stop with those two companies or potential customers to this pump. And so, you know, that just, it’s gotten less talk. So I appreciate you bringing it up. But you know, it is yet another area that Curtiss-Wright has really fantastic technology, provides a unique capability to our customer that is very beneficial to them. And, you know, hence we’ve struck a very reasonable price targets with them that will make this great business for Curtiss-Wright you know in this decade and for years to come.

Got it. Got it, helpful. And then just last one, going back to the M&A. I mean, do you guys have whether it’s tuck-in or something more transformational? Do you have a target market in mind? Are you comfortable with the overall mix of the portfolio right now? You know, you’re certainly a little bit skewed more heavily towards defense, you know, maybe just you know, any color you could provide on how you see, you know, the overall end markets rounding out with additional M&A?

So, you know, our preference as you’ve seen over the past handful of years has been defense, I would definitely say, we are not limited to that, but it is an area we very much have focused on and you know, mission-critical safety systems, the Defense Electronics area, are all areas that are top priority for us, but you know, we’re definitely you know, as you look at our growth trajectories across our end markets. We really do like all of our end markets and could see the potential to acquire across them you know come you know a target that might help us build out our capability to maximize revenue on the Gen 4 reactors, you know, could be interesting. Our Industrial team continues to build out and expand the product offerings that they’re bringing to the market in Industrial Vehicles. So that’s not an area we’ve seen a lot of potential targets, but an area we would be open to. So, you know, really pretty broad that you know we are very you know pleased with the trajectories we can see in our end markets, and so we’ll carefully consider a potential acquisition really across the board.

Got it. Perfect. Thanks, guys. I’ll jump back in the queue.

Thanks, Michael.

Right, thanks.

And there are no further questions at this time. I’d be happy to return the call to Lynn Bamford, Chair and Chief Executive Officer for additional or closing remarks.

Thank you, everyone for joining us today and we look forward to speaking with you again during our first quarter 2023 earnings call. Have a great day.

Thank you. This concludes today’s Curtiss-Wright fourth quarter and full year 2022 earnings conference call. Please disconnect your line at this time and have a wonderful day.