Curtiss-Wright Corporation

Good day, ladies and gentlemen, and welcome to the CursusRight fourth quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jim Ryan, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, Blue, and good morning, everyone. Welcome to Curtis Wright's fourth quarter 2021 earnings conference call. Joining me on the call today are President and Chief Executive Officer Lynn Bamford and Vice President and Chief Financial Officer Chris Farkas. Our call today is being webcast and the press release as well as a copy of today's financial presentation It's available for download through the investor relations section of our company website at www.curtiswright.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 guaranteed for 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 include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtis 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. Gap to non-gap reconciliations for current and prior year periods are available in the earnings release at the end of this presentation 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 am pleased to share our results this morning upon the completion of my first year as CEO. I'm proud of where Curtis Wright is today and where we are headed. Over the course of this year, we took a number of steps to execute on the pivot to growth strategy presented during our investor day last May, including simplifying the business model, deepening and expanding our customer relationships, and advancing the one Curtis Wright vision. The strong results we delivered in the fourth quarter and full year 2021 are early proof points that our strategy is working. With that, let me turn to the key highlights of our fourth quarter and full year 2021 performance and some notable events that have taken place during the past two months. Then I'll turn the call over to Chris to provide a more detailed review of our 2021 financial results and initial 2022 guidance. Finally, I'll wrap up our prepared remarks before we move to Q&A. Starting with the fourth quarter 2021 adjusted highlights, we delivered a solid performance as sales and operating income each increased 2% while adjusted operating margin was strong at 19.7%. Our results reflect the strength of our combined portfolio, where top-line pressures from continued challenges within the supply chain were more than offset by strong commercial revenues and the benefits of our operational excellence initiatives. It's important to note that we achieved these results while overcoming a push-out of defense sales as well as lower cap 1,000 revenues, as this program continues to wind down. With our strong operational performance and the benefit of our share repurchase activity, adjusted diluted EPS was $2.40 in the fourth quarter. This was slightly above our expectations, especially considering that we overcame a higher than expected tax rate, which created a headwind of about six cents in the quarter. Free cash flow was strong, as expected, reflecting free cash flow conversion of 230%. Turning to our fourth quarter orders, we achieved 19% growth overall, driven by 26% increase in our A&D markets and a 6% growth in our commercial markets. As a result, book-to-bill exceeded one-time sales and supports our strong backlog heading into 2022. Next, I'll briefly touch upon our full year 2021 adjusted results, where we delivered a strong performance across the board, highlighted by 7% growth in sales and double-digit growth in operating income and diluted EPS. Similar to the discussion on the fourth quarter, our full year sales growth was within our guidance range and reflected the strength and resilience of our combined portfolio as we achieved 8% growth in our A&D markets, including PACSTAR, and 6% growth in our commercial markets. We also achieved 116% free cash flow conversion in 2021, building on our streak with our ninth consecutive year exceeding 100% conversion. Investors who have followed us for some time might recall that we originally set an operating margin target of 17% committing to achieve that three-year objective by the end of 2021. In the face of the pandemic, we lost more than $300 million in sales across our commercial markets, and we moved our target out by one year to 2022. However, I am pleased to report that this year we reached this target on our original timeline, a full year ahead of our pandemic schedule. Through the team's determination, we delivered a strong performance in our A&I segment this past year, eclipsing its 2019 profitability on significantly lower revenues. Beyond this, we have sustained high margins in both the defense electronics and the naval and power segments while continuing to reinvest in our innovation pipeline to the tune of $14 million or 60 basis points in incremental R&D this past year. In addition, the team has overcome the significant headwind associated with the wind down of the profitable CAP 1000 program in achieving this goal. So as I reflect on our performance, I'd like to commend the Curtis Wright team for its strong drive for operational excellence to achieve that margin target by its original date and position the company for continued profitable growth. Another major highlight from 2021 was our continued focus on returning capital to our shareholders, which reflects our Board of Directors' continued confidence in the company's strong financial position. We executed a record annual share repurchase of $350 million in 2021, building on the $200 million that we repurchased in 2020. Looking ahead, we will continue to incorporate share repurchases as a key component in our balanced approach to capital allocation. Next, I want to provide a brief overview of some recent events, which we'll discuss in greater detail later in the presentation. First, we reached a settlement agreement with Westinghouse covering both the U.S. and China AP1000 reactor coolant pump, or RCP, contracts dating back to 2007, including all outstanding claims on both sides. We are pleased to put this legacy matter squarely behind us, as this now has cleared the runway for Curtiss-Wright to receive new AP1000 orders for plants outside of China, where we see opportunity in Eastern Europe within the next three to five years. We're excited about the future for this Generation 3 Plus technology. We've also been active in the continued shaping of our portfolio, which, as you know, is a key part of the strategic vision articulated at our Investor Day in May. Last month, we announced the acquisition of Safran's arresting systems business, increasing the breadth of our global defense portfolio and firmly establishing Curtis Wright as a leader in these technologies. We also closed on the sale of the German valves business, allowing us to move past this legacy matter. Finally, I would like to introduce our full year 2022 adjusted guidance, where we are projecting organic sales growth of 3% to 5% driven by increases in all of our major end markets. We expect continued operating margin expansion while once again making incremental investments in R&D to enable future organic growth. We expect to achieve double-digit growth in diluted EPS while also generating strong pre-cash flow. To sum up, we are well positioned for continued profitable growth in 2022, and we remain very much on track to achieve our three-year financial targets for 2023. Now, I'd like to turn the call over to Chris to provide a more thorough review of our fourth quarter 2021 performance and our outlook for 2022.

Chris? Thank you, Lynn, and good morning, everyone. I'll begin with the key drivers of our fourth quarter results by segment. Starting in aerospace and industrial, we experienced an 8% increase in sales driven by solid demand across all of our major markets. This included double-digit growth increases in general industrial where we continue to benefit from strong order activity and also within aerospace defense where we had higher revenues on various fighter jets. Within the segment's commercial aerospace market, we experienced improved OEM demand on narrow-body aircraft, which was partially offset by the wide-body delays due to the 787 certification. The segment's adjusted operating income increased 20%, while adjusted operating margin increased 200 basis points to 19.5%. Our results reflect favorable absorption on strong sales and various pricing and operational excellence initiatives that mitigated supply chain headwinds across our business. In the defense electronics segment, sales increased 10%, reflecting strong demand for PACSTARS communication equipment in ground defense and higher revenues in Virginia-class submarines and naval defense. Our results would have been even stronger if not for the timing and delayed receipt of electronic components resulting from the continued challenges affecting global supply chains. In aerospace defense, while we had higher revenues on the F-35 program, revenue timing was once again a factor as we experienced a shift of approximately $20 million in sales out of 2021. This segment's adjusted operating income increased 17% while adjusted operating margin increased 160 basis points to 26.5%, reflecting favorable absorption on sales and improved mix based upon the push-out of lower-margin system sales. Next, in the naval and power segment, our results reflect the timing of sales of our naval nuclear propulsion equipment and reduced Cap 1000 revenues as this program continues to wind down. Conversely, we experienced higher valve sales due to continued strong demand in the process markets and modest growth in the nuclear aftermarket, supporting existing operating reactors. This segment's adjusted operating income decreased 16%, while adjusted operating margin was 19.3%, reflecting unfavorable absorption on lower sales, as well as investments in operational excellence to help reposition the business for lower CAF 1000 program revenues. To sum up the fourth quarter results overall, both sales and adjusted operating income increased 2% with a strong but flat year-over-year operating margin of nearly 20%. Turning to our full year 2022 guidance, I'll begin on slide 5 with our end market sales outlook where we expect total Curtis Wright organic sales growth of 3% to 5%. This growth includes contributions from all of our end markets driven by 2% to 4% growth in A&D and 4% to 6% growth in commercial. For full year 2022, we expect our A&D markets will represent two-thirds of the total company sales prior to the acquisition of Safran. In aerospace defense, we expect higher sales for embedded computing equipment on various C5 ISR programs within our defense electronics segment. However, those gains will be mainly offset by the timing of actuation equipment sales within our A&I segment, principally on the F-35 program. In ground defense, we expect higher revenues for tactical battlefield communication systems to be slightly offset by lower domestic ground vehicle sales. And next, in naval defense, Higher revenues driven by the strong ramp-up on the CVN-81 aircraft carrier and increased production on the first Columbia-class submarine will be partially offset by the expected ramp-down in production on the CVN-80, which reached peak revenues for Curtis Wright in 2021. Please note that our guidance within those defense end markets not only reflects the continued impacts on our supply chain, principally for small electronics, but also the delayed signing of the DOD budget. We and industry are now faced with an extended continuing resolution to begin 2022, halting new program starts and the availability of additional funding until the appropriations bill is signed into law. We continue to monitor the current environment, and while it's difficult to estimate the immediate impact on our 2022 performance, we remain confident in our long-term position as a critical supplier to the defense industry. Rounding out our A&D markets and turning to commercial aerospace, which we expect to be our fastest growing end market in 2022 with 9% to 11% sales growth. This outlook is driven by strong growth in OEM sales on narrowbody aircraft, including the 737 and A320 programs, as well as a modest growth in aftermarket. Next, turning to our commercial markets, in power and process, we are expecting 1% to 3% growth overall, However, this outlook includes a revenue headwind from the Cap 1000 program of approximately $20 million as this program winds down. Looking beyond that impact, we expect mid-single-digit growth in both the nuclear aftermarket and process markets as they continue to rebound back to 2019 levels. In the nuclear aftermarket, our outlook principally reflects solid demand for ongoing maintenance and subsequent license renewals to extend the life of the nuclear power generation fleet. In the process market, we continue to see a strong rebound in MRO activity for our valve businesses, driven by higher demand as oil and gas prices continue to climb. And lastly, in the general industrial market, we anticipate building upon the strong 2021 performance with another solid outlook of 6% to 8% growth in 2022, which once again will be driven by orders for industrial vehicle products. Continuing with our full year outlook by segment on slide six, I'll begin in the aerospace and industrial segment, which we expect to be our fastest growing segment in 2022 with 4% to 6% sales growth. Our outlook for this segment is driven by strong growth in both commercial aerospace and general industrial, partially offset by lower sales and aerospace defense. We expect adjusted operating income growth of 9 to 12 percent and adjusted operating margin expansion of 70 to 90 basis points to a range of 16.2 to 16.4 percent, reflecting higher sales and the benefits of our prior year restructuring initiatives. In addition, we expect that the continued recovery in our commercial industrial markets, along with our strong backlog, will not only benefit our 2022 performance, but also future years' growth in sales and profitability in the A&I segment. Next, in the defense electronics segment, we expect sales to grow 2% to 4%, led by modest growth in aerospace and ground defense. The supply chain remains a dynamic issue for Curtiss-Wright and particularly within this segment where we continue to be faced with rapid changes in the availability of electronic components. While our sales and profitability for our defense electronics businesses are typically weighted to the second half, we expect a more pronounced shift in sales to the back half of 2022 driven by the supply chain. Operating income is projected to be flat to up 3%, while operating margin is projected to decline 40 to 60 basis points. However, it's worth noting that this outlook includes a year-over-year increase in strategic R&D investments of $7 million, impacting our full-year results by approximately 90 basis points. Lastly, in the naval and power segment, we expect sales to grow 2 to 3%, driven by solid growth in naval defense, as well as mid-single-digit growth in both the nuclear aftermarket and process market. Similar to the earlier guidance within the power and process market, the naval and power segment outlook includes the wind-down on the profitable Cap 1000 program. Operating income is projected to grow 1% to 4%, with an essentially flat but strong operating margin ranging from 18.1% to 18.3%. Excluding the cap 1,000 revenue headwind of approximately 20 million dollars, our results would reflect mid single-digit sales growth and a solid incremental margin expansion reflecting the benefit of our ongoing operational excellence initiatives, which we have tailored to effectively reposition the business. So in summary, we expect total Curtis Wright adjusted operating income to grow 3 to 6 percent overall on a 3 to 5 percent increase in sales. Operating margin is expected to improve 10 to 30 basis points ranging from 17.1 to 17.3%, including an $8 million increase in R&D investments and the aforementioned Cap 1000 headwinds. Continuing with our financial outlook on slide 7, we expect full year 2022 adjusted diluted EPS to range from $8.05 to $8.25, up 10 to 12%. reflecting both the contributions from our growth and operating income, as well as lower share count stemming from our record $350 million share repurchase activity in 2021 and our minimum commitment of $50 million in 2022. It's also important to note that this EPS growth includes the aforementioned increase in R&D, which equates to $0.16 per share. To aid in your quarterly modeling, we expect first quarter 2022 adjusted diluted EPS to be below the first quarter of 2021 results and are currently estimating approximately $1.20 per share based upon continued supply chain headwinds and significant changes in product mix. We then expect to follow a similar cadence to prior years with the first quarter being our lightest, followed by sequential quarterly improvement and the fourth quarter being our strongest again with a higher than normal weighting to the second half. Lastly, turning to our free cash flow guidance, cash flow from operations reflects solid growth of 2 to 10%, while capital expenditures are expected to increase $10 to $20 million as we look to invest to support future organic growth. As a result, we are projecting full year adjusted free cash flow guidance of $345 to $365 million. Finally, We expect to exceed our long-term free cash flow conversion target of 110% again in 2022, which would also represent our 10th consecutive year exceeding 100% conversion. Now I'd like to turn the call back over to Lynn to continue with our prepared remarks. Lynn?

Thank you, Chris. I'll begin with some exciting news on the AP1000, where we have a significant opportunity to revitalize our long-term position on this critical Generation 3 Plus nuclear reactor program. As I noted in my initial comments, we reached a settlement agreement with Westinghouse covering all outstanding claims on both sides dating back to 2007. This agreement, in addition to resolving these legacy matters, strengthens the relationship between Curtis Wright and Westinghouse at a critical turning point for AP1000 technology where the demand continues to increase throughout Eastern Europe. Under the terms of the agreement, Curtis Wright has agreed to pay Westinghouse $25 million over the course of the next two years. In turn, we have secured Westinghouse's commitment to Curtis Wright's RCP technology in future AP1000 plans for their next multi-unit project likely in Poland, while also opening a vast opportunity to new AP1000 plans emerging in Eastern Europe. We now have a clear path moving forward that secures our future economic value with the potential to generate new RCP orders from Westinghouse within the next three to five years. Further, a reminder that our long-term guidance does not include any RCP orders and that this would be upside potential to any current guidance. We view this as positive news for our long-term shareholders. Turning to slide nine, I'd like to spend the next few minutes discussing some of the ongoing portfolio shaping that is taking place at Curtis Wright as we continue to drive our mix towards a higher percentage of A&D sales, which comprises two-thirds of our total sales. Starting at a high level, as you've seen over the years, we are actively looking for acquisitions to support our continued drive for profitable growth. In addition, we will not shy away from occasionally pruning businesses or product lines that do not meet our long-term objectives. We're looking for businesses to support our overall long-term growth in sales, profitability, and free cash flow, which in turn supports our capital allocation strategy to drive long-term shareholder value. I'll begin on the left-hand side of the slide with an update on PACSTAR, which, as a reminder, we acquired in the fourth quarter of 2020. PACSTAR has been an excellent addition to our defense electronics segment, with its industry-leading solutions for tactical battlefield communications and its strong contributions to our 2021 results, including high single-digit sales growth. The integration process is going better than expected where, for instance, we have integrated and are receiving benefits across all elements of our shared services. From an industry standpoint, PacStar is providing leadership in MOSA or the modular open systems approach by bringing a hybrid MOSA chassis and IQ core software support to multiple Curtis Wright products. The business is well positioned for continued strong top-line growth and is closely aligned with the Army's top modernization priorities. Turning to the right-hand side of the slide, in January, we completed the sale of our German valves business, Phoenix, concluding a year-long process to divest ourselves of an underperforming business. We had acquired this business back in 2013, and despite our efforts to restructure it over the past few years, we were not able to achieve expected synergies nor leverage its full growth outside of the European market. We are pleased to move past this legacy matter. Next, I'd like to review the recently announced acquisition of Safran's Aerospace Arresting Systems Business, or SAA, which would represent our sixth A&D-focused acquisition since 2017. SAA is a market-leading supplier of fixed-wing military aircraft arresting systems, with a tremendous installed base of more than 5,000 systems globally, demonstrating steady growth in both aftermarket and OEM revenues. Their products include hook and cable systems, net stanchion systems, and mobile systems for landing aircraft on airstrips or aircraft carrier decks. This is an exciting defense business with a long legacy, experienced management team, and strong customer relations, and we expect it to be a great fit with Curtis Wright. It aligns with the strategic priorities that we laid out during last year's Investor Day, particularly the focus on adjacent defense technologies, which positions Curtis Wright to become a leading global supplier of aircraft recovery systems. In terms of the key financials, our discussion today will be limited until we close on the transaction. though it's worth noting that SAA supports our long-term acquisition criteria and financial objectives of top-line growth, margin expansion, and free cash flow generation. We paid approximately 12 times next 12 months EBITDA in line with our most recent acquisition of PacStar. SAA generated about $70 million in revenues in 2021 and has been growing at low- to mid-single-digit pace for the past few years. We expect the continued growth in the fighter jet fleet, particularly on the F-35 program, to remain a key sales driver for SAA. We expect the deal to be dilutive overall to Curtis Wright's operating margin in the first year of ownership and have line of sight for this business to contribute to all our overall profitability and long-term operating margin expansion. We expect this transition to close early in the third quarter, if not sooner, and therefore we are not including SAA within our guidance at this time. As we have demonstrated today, Curtiss-Wright is well positioned to deliver profitable growth once again in 2022. While we remain cautious in light of the ongoing supply chain issues and the continuing resolution, our outlook for 3% to 5% sales growth is driven by increases in all A&D and commercial markets, driven by our strong backlog within our defense, commercial aerospace, and industrial markets. Our 2022 operating margin guidance of 17.1% to 17.3% reflects our ongoing focus on driving operational excellence, and our expectation for double-digit EPS growth is in line with our long-term guidance. Our adjusted free cash flow remains strong, and we are on track to achieve our 10th consecutive year of greater than 100% free cash flow conversion. With regards to our capital allocation and looking beyond SAP RAN acquisition, we maintain a strong and healthy balance sheet, and we are focused on investing our capital for the best possible returns to drive long-term shareholder value. Acquisitions have been and will continue to remain our highest priority for capital allocation under our pivot to growth strategy, supplemented by continued share repurchases and operational investments. We manage the company with an intense level of discipline and focus to ensure that newly added businesses have long-term strategic advantages and can demonstrate consistent growth in sales and profitability. In closing, Curtis Wright is well-positioned to deliver strong, profitable growth in 2022, driven by the strength of our combined portfolio, and we remain on track to achieve our long-term guidance communicated at last year's Investor Day. At this time, I would like to open up today's conference call for questions.

Thank you. At this time, to ask a question, you will need to press star one on your telephone. Again, that is star one to ask a question. To withdraw your question, just press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Christine Liwag from Morgan Stanley. Your line is now open.

Hey, good morning, guys.

Good morning, Christine.

Yes, good morning. Hey, Lynn. Can you provide more color on what drove the Westinghouse settlement? With Curtis Wright as the only company able to build the AP1000 reactor coolant pump today, one would assume that you have a lot of leverage for getting the future contracts.

So, you know, this situation has been going on for a long time, as we stated, since back to 2007. And we believe the opportunities to build out AP1000s across Eastern Europe are is within line of sight, and we really needed to move past this situation in a manner that was deemed to create economic value for both us and Westinghouse, and we feel as if it was the right way for us to set the relationship in a manner that we can really lean forward and work proactively together to attack this market, which we see as quite significant in Eastern European stand-alones. And so it felt like a good choice for Curtis Wright to create long-term economic value, which is what we're consistently focused on.

Thanks, Lynn. And, you know, in Eastern Europe today, I mean, it's clearly the topic of the day, and your opportunities are for Poland, Ukraine, Bulgaria, Czech Republic, and Slovenia. So how do unfolding events in Ukraine today change your outlook for these AP1000 plants, or is it too early to understand, you know, long-term outcomes? effect?

I think it's too early to really know the long-term effect. I mean, knowing that was going on, I mean, Westinghouse has signed an MOU with Ukraine, so we surely didn't want to discount it and not represent it in part of the total value, you know, potential business. But I can assure you that as, you know, we went through the negotiations at the end of December and into this year, we very much, you know, thought of that business very cautiously and discounted it significantly in our thinking as we went forward, but I think there's two sides to this. If you look into today's Europe, it's very significantly dependent on Russian natural gas. Finland gets 94% of its natural gas, Bulgaria 74%, Slovakia 70%, Germany 49%, Italy 46%, Poland 40%, France 24% from Russia, and they also get about a third of Europe's total crude oil. I think, if anything, the determination of why these countries were moving was both green and energy independence and security. And so I think the events of today, however this plays out in Ukraine, and we surely hope it plays out well for the Ukrainian people, but I think will surely increase the resolve of nations to want to have that energy independence. So it's two sides.

That's a really great color. And if I could squeeze one more and get back in the queue, how much of AP1000 is included in your 2022 outlook and also in your long-term outlook from the investor day? Can you just remind us?

So I'll say, you know, just to make sure everybody's baselines with the same fact, no new orders are included in our 22 or 23 guidance. And I'll let Chris go ahead and speak to the wind down of the current contract.

Yeah, Christine, we reached peak program revenues for this program. It was $105 million a year for 2018. As we were entering into 21, we said we had about $80 million of revenue remaining that would be ramped down over the next two years. That is through this year. Right now, we have about $30 million of revenue remaining on that project. So it's a pretty significant headwind that we talked about here in our prepared remarks. It's 1% to total Curtis Wright organic sales. And as we've said in the past, it's a profitable program. It's 23% plus plus margins. So to be able to continue to maintain those strong 18% margins and enable and empower and then also reach upward to the 17% goal that we had. I mean, this has been a significant headwind that we've been fighting, and the team's done a great job through operational excellence and to expand margin to position ourselves for this headwind.

Great. Thanks, Lynn. Thanks, Chris. Yep.

Thanks, Kiki. Your next question comes in the line of Miles Walton from UBS. Your line's now open.

Thanks. So I'm going to pick up just quickly on the AP1000 for a second. Does the agreement with Westinghouse continue to cover your global presence of the AP1000, and you're just highlighting some recent MOUs, or is it an expansion in the relationship that is triggered by the settlement?

It's not limited to Eastern Europe. It's just that is, you know, the opportunities that seem to be the closest at hand, and the hence why we're really focusing on it in the presentation, but clearly not limited to there.

Okay. And just a quick one on that. You took a charge in the quarter, but I think it was $13 million was the charge, but $25 million is the cash outlay through next year. Is there a provision you had previously taken?

Yeah, so we handled this basically two different ways. So the settlement, first of all, was to resolve any and all open claims between the parties. Miles, this wasn't only the LDs, but there were significant claims and counterclaims between us and Westinghouse, and that also included certain warranty matters for first-of-a-kind reactor coolant pump technology. So the portion of the settlement that was not covered in our warranty reserves was $13 million. We recognize our warranty reserves as a percentage of sales over time, and that really covered the remainder of the settlement. We view the warranty side of the claim to be more in the normal course of business. We don't expect to change our accrual rates going forward, so that closes the balance.

Okay, perfect. And then on the supply chain issues, can you just give us some color? Is it mostly out of embedded computers? Is it coming from anywhere else within actuation? And then, you know, sort of the recovery profile that you're baking in for the year. I heard the comment you made about more back-end loaded than even usual, but maybe just put a finer point on that if you can as to your visibility in the recovery.

Sure. Thank you. It definitely is. I think the area we're most focused on is defense electronics with the component connection and being one of the greatest areas being impacted. But there are pockets of impact around the organization as certain materials and sheet metal and steel, like different things that is really broad sped. But clearly the team that is feeling the impact the greatest is defense electronics. And we're doing, I'm proud of what the team is doing to mitigate it. you know, their work continuing to spend time to qualify dual sourcing options, working with their partners, leveraging their D-pass ratings. A lot of this stuff we talked about last year is continuing ongoing. And, you know, we continue to refine our systems to look further out into our forecast and continuously, you know, be doing long lead item orders and, you know, working the data to maximize that. But to put, you know, some more specificity on it, overall at CW level, we're expecting about a 2% revenue push to the back half of the year versus our normal split, and most of that is in defense electronics. The other team that's slightly impacted is the aerospace, and in aerospace and industrial, we do have some of that business is tied to components, and it is also feeling some of that impact.

Okay, okay. And then in terms of the industrial growth that's implied in the guidance, one of the faster recoveries, I think, that's embedded in the guidance right now, can you give some picture as to your visibility of that recovery? How much is in backlog? Sort of which markets in particular are driving that high single-digit growth?

Yeah, sure. I mean, I'll start off, Miles, and then if you want to offer any additional color. But, you know, as we approach 22, our strongest end market growth is going to be within commercial aerospace, and that's, you know, 9% to 11% growth. In Q4, we saw sales in commercial aerospace were up $7 million, or about 11%, and that was both within the aerospace and industrial and defense electronics segments, mainly narrowbody. I think we talked about how we'd have a little bit of wide-body headwinds at the start of the year, and narrowbody would pick up. So overall on the year, sales finished flat, as we had projected. But orders in commercial aerospace have been sequentially improving Since those lows of the pandemic, you know, within both our short and long order cycle businesses. But in the fourth quarter, those orders were up 90% year over year. So our total orders in 21 across the entire year were up nearly 40%. So we've got a real strong order book and backlog in supporting that business as we enter into the full year. And most of it is within our long cycle. I mean, our surface tech has still been kind of one of the slower and steadier as it's improved. But, you know, we feel very good about the trajectory of that business and where we're headed in 2021. You know, on the GI side, Another strong year ahead of us, mainly due to industrial vehicle product orders. From this last year in Q3, I think we were talking about achieving historic highs in orders in 21. For the full year, our backlog nearly doubled. Now, as we're watching orders, they are starting to come down. So we're watching that cautiously to avoid any slack in demand. But I will say that those orders, even though they're down, are still above 2019 levels. So, you know, we're looking at 22 and expect the general industrial markets to grow roughly 6% to 8%. So some solid movements.

Okay.

Yeah, thanks for that. Oh, go ahead.

Yeah, I was just going to mention one other thing that, you know, is out there to, you know, drive some growth across the segment is, you know, as hopefully we get an appropriations bill and we start spending some of the infrastructure money, we really think there will be some tailwinds for us in both on-highway and off-highway vehicles as there's funding for electric buses and things of that sort and more construction work. And so that's something else that outside the aerospace we feel optimistic about.

Okay. And just one quick one. In terms of the acquisition of the arresting systems, do you have a sense as to cash versus incremental that you'd use for that deal, just as we look at your free cash flow this year and how much you would sort of have available or excess for incremental above the $50 million placeholder of repo?

You know, we have capacity and we'll have capacity on our revolver to do that, Miles, at that point in time. But I think, you know, it's always in our best interest to really take a look at where the market's headed, you know, long term and, you know, ensure that we're, you know, balancing our overall effective interest rate long-term for the company. So I'm not going to say that we're not thinking about other financing options at this point in time. We certainly are. But right now, I feel comfortable that we could execute that transaction on our revolver. Okay.

Thank you.

Thank you. Thank you.

Your next question comes from the line of Nathan Jones from Stiefel. Your line is now open. Good morning, everyone.

Good morning, Nathan. Good morning. I just wanted to follow up on the comment that you made there that general industrial orders are coming down a little bit. Maybe you can provide a little more color on where, what, and your expectations for that going forward.

Yeah, so they've declined, Nathan, but they're still above pre-pandemic levels. I mean, they're really strong. I think this last year, when you look at historic highs and your backlog doubling, I mean, it's More Color 21 was up 20% versus our next highest order year, which was back in fiscal year 18. So just an incredibly strong year last year. And we spent a lot of time talking to our customers about what's happening here, just trying to make sure that they're not placing orders to get ahead of what's happening here with the electronic component shortages and some of the other issues that we're facing in the supply chain. to avoid a slack in demand. But the feedback has been, there's a little bit of a mix of both that's going on here, but we feel very comfortable entering into the year with what we've seen here in January and February so far, that order levels continue to be strong. So we're certainly well positioned here for 2022. And I think, you know, as we look out into 2023, I mean, we're going to continue to watch this closely. And if we see anything that, you know, makes us think that there is a, you know, potential change coming, then we'll react accordingly. Okay, thanks for that.

And I do have one on the AP1000RTP. You call that the potential for $1.5 billion in orders. Based on your understanding, are those projects – highly likely for Westinghouse to win them, then obviously you're the only approved supplier on that. Could you talk about how confident you are Westinghouse is going to win those projects, and then what the timing of this would be? I mean, obviously these things are very long-term contracts. When would you start seeing the orders? When would you likely start seeing revenue, and over what kind of period would it be spread out?

Okay, yeah, thank you. It's a very... reasonable question than one that we anticipated, so I appreciate you asking it. It is a long-term value that we're looking for, and clearly there's potential in Ukraine. We don't know what's going to happen across the country, but we definitely discounted it in how we thought about putting forth that $1.5 billion number. But to go more directly to the timing, Poland is where we believe we will pick back up on building AP-1000s with Westinghouse is the most likely. And it's very public that Poland has put forth a timeline of when they want to see the commission of the first nuclear reactor, and that is 2033. That's very put out in the press. And if you just simply back up from that, that means they really need to be pouring out the plant's foundation in 2028. And equipment needs to be procured 40 months before the concrete date. And so that puts you into 2024 to start procuring concrete. Now, we know these things don't always go to schedule. They've been making nice progress so far with, you know, kicking off the feed studies and stuff last summer and, you know, are marching along with it. But You know, that would have implied, you know, procurement in 2024. We said three to five years as, you know, to allow for there some, you know, delays. And so we feel like that's a conservative timeframe, but that's how we got to, you know, putting forward the timeframe. And if you go through not all the, you know, not everything is in the public, but, you know, I think today, you know, as mentioned earlier, is just an event that's regardless how it goes, it's going to increase the resolve of a lot of Eastern European nations and European nations to drive for their own energy independence. And there's definitely, we've been saying it, a growing recognition that nuclear reactors need to be a part of that. But that also continues to continue to increase our enthusiasm and optimism for all the work we're doing with SMRs and NuScale and X-Energy and the work on that side that Some will be more traditional plants is really what Eastern Europeans seem to be talking about, but I think it'll be a mix with the others. So I think we've just got a great capability or a good position to really attack this trend that's happening around the world.

And just to give you a little more color, and certainly there's a lot to be determined yet in terms of pricing and how that'll all play out and the quantities that will come in that first multi-unit order. But if we turn back to 2015 when we signed the last agreement with China in December, that was a $450 million contract for the RCPs, and those RCPs were about $28 million a pop. As I said earlier, we reached peak revenues on that in 2018, and that was $105 million. As you look at it, it's kind of on a bell curve. I think this contract's been extended a little bit based upon the China contract, based upon the customer's needs. But that hopefully gives you kind of a good idea as to what this could mean. And that last contract was the one we're closing out on now is 23% plus plus. We haven't really said how much higher than the 23 plus, but it's a plus plus.

Just one other piece of color on Poland, as you said, is the example to walk back the timeline. We have received a budgetary RFP for 24 RCPs tied to those plants. And so we're pleased at the pace we're seeing things move along.

Okay, just for one clarification, assuming that the timeline goes as planned there and you're commissioning in 2023, when would you actually see the order and when would you actually start realizing revenues?

So 2033, I know that's what you meant, but just to make sure we're all on the same page.

2033, yeah.

Yeah. You know, backing in, the traditional timelines would imply they start procuring in 2024. We're saying, you know, the way things go in the world, you know, we'll predict a one-year slip to that. But, you know, if you just take a straight traditional timeline of, five years prior for concrete and 40 months prior for procurement, it would imply 2024.

Yeah, straight up public information says 2024.

Yeah. Perfect, thanks very much.

Your next question comes from the line of Peter Armand from Baird. Your line's now open.

Yeah, good morning, Lynn and Chris. Hey, Chris, thanks for the details on the kind of the headwinds that you've been fighting on the AP1000. You guys have been doing a great job. But can you maybe talk a little bit how you're kind of managing the inflation headwinds that are out there and what you're able to pass along? And just any commentary there would be helpful.

Sure. Thank you for that. You know, we really, you know, started feeling the inflation, I think, most in the components as the component shortage was going up. But we really are seeing this across the board in metals and shipping materials and transportation prices. So it is real. Between Kevin and myself, we've put in some new reporting mechanisms. We started this in last year, but added it to our monthly financial reviews with the team that give us much more detailed tracking of what we're seeing with inflation and how we're passing it on when possible to our customers with price increases, which people are understanding is going to come as all the raw materials kind of go up across a lot of our product offerings. So it's very much top of mind, something that we started tackling last year, and we've just continued our focus on it.

That's helpful. And if I could just follow up on your R&D investments that are a little bit of a headwind this year in defense electronics. Can you give a little more color around that at that Is that a continuation? I think you've had some R&D spending, you know, last year, and do you see that increasing as we go forward, or is this wrapping up this year?

You know, really, we kind of resisted putting out predictions for year-over-year R&D increases, other than the year we're in, to really allow ourselves to have a free hand to make those judgments and tradeoffs as we enter the years as to what the potential projects are, and what's the best use of dollars. But much of the increases this year are continuations along the lines of things that you've heard us talk about in the past. Predominantly, it's in the defense electronics area around continuing to build out the MOSA product lines. Some are more traditional board type of offerings, some within the PACSTAR type of equipment. So that push for the adoption of MOSA across The defense industry just keeps gaining speed, and we believe we're in a leading position right now with it and want to make sure we maintain that leading position. But we're also spending some money in our A&I segment around the electrification. Again, we've positioned ourselves well with technology, and as more and more vehicle manufacturers look to convert, Often we have to make investments to have the right products for them to fit their specific vehicles, and that's money that we're very much leaning forward in spending.

Yeah, and I would just add, I mean, to Lynn's point, it's really all about seizing the opportunity. But, you know, we are doing and have been doing a lot of work to ensure that the R&D monies that we're spending are going to the highest and best use. And, you know, we talked a little bit about this at Investor Day. And we feel like we have an opportunity to be a little more influential in how that works at the local levels and feel very good about where we're investing right now. We also look, although it's less relevant, to where we are relative to our peers in the industry. And we feel like we're well positioned. We're not in an overspend position. I think maybe creeping up a little bit past the 50th percentile. But really, it's mostly about just kind of seizing the opportunities and making sure that we're really being effective with the way that we're spending that money. And I feel like things are – we're doing a good job there.

Appreciate all that, Colin. Thanks.

Again, to ask a question, please press star 1. Again, if you want to ask a question, please press star 1. Your next question comes from the line of Christopher Riger from Barenburg Capital. Your line is now open.

Good morning, Lynn, Chris, and Jim. Thank you very much for the time. Could you walk through the assumptions you have baked into your guidance with regard to the ongoing continuing resolution and sort of your defense budget expectations and sort of somewhat related? Is there anything in particular that you are looking for in the upcoming 2023 budget request?

I'll start that off, and Chris might want to add a little color when I'm done. So I'd start off to say, you know, we're pleased to have our A&D growth this year to, again, exceed the DOD budget and speaks to our track record of, you know, being able to outgrow the defense budget in a wide variety of environments. You know, our long-term visibility on the key platforms still maintains very strong bipartisan support. And I guess, you know, as much as, you know, We're not liking that we're still in a continuing resolution. This really isn't new. The average days our country has faced the CR since back in the mid-'70s is 53 days. This has been increasing over the past two years, and the two years that it was the longest was 2017 and 2018, which were 200 and 170 days, respectively. If we come out of this CR on March 11th, it will have been 160 days, so nearing the highest levels. And, you know, as much as we say we're largely insulated from the continuing resolutions, a lot of our naval business is long-term, there is some impact. And, you know, one specific example that I thought it would just put a little color on it if people were interested is across our defense electronics group, we sell a new RDT&E program sparks. It's not all new programs, but as you probably know, the continuing resolution limits their ability to start new programs, and it also clamps down their ability to drive increases in volumes on some things they intend to ramp up the volume of productions on. And so across the defense electronics, we have about $30 million of business we do annually from lab equipment that is usually largely tied to new program starts, not all, but a good portion of it. And so that's a headwind for us as it continues on through the year that some of those revenues get delayed. And so we're anticipating the delays to be about 1% for defense electronics in 2022, but that's included in the guidance that we've put forward.

Yeah, and I would only add that if, you know, obviously if this continues and goes further into the year, you know, 1% might become 2 or 3 or 4, right? I mean, depending on the severity, you know, and if they decide to hold the budgetary levels flat year over year, which would be the case under a CR, that could be the case. But, you know, Chris, just to kind of reemphasize a couple things that we talked about a little bit earlier, We are expecting a 1% to 2% push in total Curtis Wright sales to the back half of the year. The majority of that is going to be within the defense electronics group. We've provided this, I'll call it, harder guide to Q1, which we don't normally do to really help people understand the headwind that we're facing. The majority of that 1% to 2% push is going to be within defense electronics. We do expect that to improve sequentially as we get deeper into the year, but it's a fairly dynamic issue within the supply chain and And also, you know, the continuing resolution ads makes it a little less clear, but, you know, we feel good about where we're positioned and are trying to take a, you know, conservative approach given what we know today.

Great. Thank you very much. That was very helpful. And one more. Lynn, I guess just looking back at your first year as CEO, what are your biggest takeaways? What were the challenges, perhaps a little bit more pronounced than you would have anticipated? And... Is there anything you know now that you wish you had realized a year ago?

That's an excellent question. It's something I think about a lot. I think the challenges are things that I think... First, I'd like to lead off and say one of the things I've been really pleased with, and that is really the way the team members across Curtis Wright have embraced the pivot to growth and the challenges to increase the innovation across the company and are ability to collaborate and really look for opportunities together across the organization. And we have unearthed a lot of examples of places that we're able to pull commercial technology into defense environments. We have a recent example that we hope to be press releasing here in the next couple months of taking some of our commercial actuation technology and applying it to defense systems and this is a great way for Curtis Wright to grow, and it's something that surely I set my hand to at the beginning of my tenure, but I think the significance and the magnitude of what we have to gain business by working more collaborative across the organization, I would say is something that if we could have turned the heat up on that, I would have turned the heat up on that sooner rather in my tenure. But I'm pleased we've done it. It's only one year, and we've got a lot of opportunities and examples of things like that, from whether it's the electrification, the actuation, just a whole variety of different opportunities where we're finding that working together, we can take technology to new markets, which is just great. So I would say that's probably one of my biggest takeaways and things I wish I would have known, and maybe put more emphasis on earlier, but we're here today, and it's surely something that's high on my mind and something we talk about across the teams, and so it's something we're going to continue to drive.

Great. Thank you very much.

Your next question comes from the line of Michael Charmoly from Truist Securities. Your line is now open.

Hey, good morning, guys. Thanks for sticking around to take the question. And I guess just on the defense electronics segment, I'm assuming, you know, you kind of mentioned some of the delays and headwinds there. But I think you called out $20 million getting pushed out of 21 into 22. And it kind of implies, I guess, then, you know, even though you got the growth there of 2% to 4%, with that slide out, you kind of just have – almost flat growth. Is there anything else going on there, that 20 million pushout? Does that hit this year, or is it just, are we looking at, you know, kind of what you just said, general continuing resolution, supply chain constraints, kind of pressure on that?

Yeah, I mean, our backlog is strong heading into the year. Mike, it's not a backlog issue, really, for the business. I mean, we're in that low single digits growth, you know, and and that really aligns to kind of what we're projecting there. You know, obviously, you know, PACSTAR is doing well. There is a little bit of a push out, but we are approaching the year here with some caution, you know, mainly based upon, you know, what we've been seeing. And I think that, you know, it's safe to say that this issue is certainly going to continue, you know, as we get deeper into the year. You know, we do expect conditions to improve, but there could be some hangover here, you know, going into 2023. So, Just given what we're facing here, particularly as we're entering into Q1, I think it's important to look at that. The only other thing I'm going to say about Q1 here, while we have that opportunity and really talking about that push out of the lower margin system sales from Q4, is that I will supplement the guide to say that for modeling purposes, we expect both the defense electronics and enable and power operating margins to be 14% in Q1. Now, These businesses have been at these levels in the past, but they are slightly down. And within defense electronics, a lot of this has to do with the mix and the push out of that $20 million of lower margin system sales. So you'll see a little bit more than you usually see in our decremental margins, which that 25% to 30% range we give is generally more over time. But in the initial quarter of a decrease in revenue, those can be more steep and And then just once again, we're dealing with a little mix on lower AP1000 and lower margin system sales for those two segments.

Got it. Helpful. And maybe that's a good segue. I wanted to go back to what Peter was asking on inflation and you know, can you give more specifics? I mean, where you're specifically able to pass along pricing, you know, within, say, commercial aerospace? I mean, you just mentioned defense. I mean, are you kind of getting squeezed under, you know, current fixed price contracts until they get re-upped or, you know, just any specifics you can give on the ability to push through pricing and you know, maybe related, I know you had, you know, kind of a dedicated, you know, I think you have a dedicated slide towards your pricing strategies at the investor day. I mean, are you, you implementing more of that above and beyond sort of the inflationary environment?

So it's an excellent question and it is not something that we can kind of universally go across our revenues and just raise prices. You know, a lot of our businesses on long-term agreements, we have businesses in backlog. You know, one thing I would say, you know, We're making sure we understand that and we're very crisp on when LTAs expire and as we are implementing new LTAs. This really did start last year as the inflationary pressures were already there of making sure we have appropriate indices tied to us being able to raise our prices. It's a journey to work through all your contracts and LTAs to be able to make sure they're priced appropriately, but it is a high, high priority for the team. I will say we're not, you know, cases where we have LTAs and some, you know, long-term contracts where we're seeing high levels of pressure. We're going back to our customers and working with them to get some adjustments, even though the contract maybe technically didn't allow it. And in general, I'd say most of our customers are trying to work with us in a reasonable level, where they know, you know, things that have been hit the hardest, you know, even though we have locked pricing, that... to go ahead and make some adjustments for us. You've got to go really be a little transparent with your customers and show them some data and work with them. But it is something that is, again, the teams are reviewing it consistently. It's reviewed by me on a monthly basis on what progress we've made in that journey, really customer by customer, part by part. And so it's a lot of work by the team, but we are on it.

And I'll just supplement that real quick, Mike. I mean, in the fourth quarter, I think you can see that we had, you know, 200 basis points of operating margin expansion in the aerospace and industrial segment. You know, we are starting to see those pricing initiatives take hold. And, you know, just to echo what Lynn said, you know, we're seeing more opportunity on the commercial side in the short term than we would on the defense sides of the business. But some good things are starting to happen, and we're improving the quality of information supporting those people that are pricing in the field by trying to get ahead of inflation indicators and other material cost increases. Got it.

Got it. And then just the last one I had, going back to the AP-1000, you know, looking at the kind of $1.5 billion, you know, opportunity you threw out there, you know, I guess that would imply maybe 50 pumps or so using your $28 million. Does anything change as part of the settlement? I think you mentioned you're still looking at pricing, but pricing and margin profile, was that as part of the conversation with the settlement with Westinghouse?

I think it's really too early to comment on pricing. I think, you know, when you take a look at the pricing that we had offered, you know, on that last contract, I mean, it's out there. It's $28 million. But, you know, we're talking about pricing right now and trying to figure out, well, how do we make sure that, you know, we're doing the right thing for the business going forward? So, As we get deeper into those commercial negotiations to resolve that, I think that will become clear. But we're really pleased with the program, the profitability, and the work and relationship that we have done with Westinghouse to date. Got it. Thanks, Gus.

Thanks, Mike. There are no further questions at this time. I would now like to hand the conference back over to Lynn Bamford, President and Chief Executive Officer.

So thank you everyone for joining us today and please enjoy the rest of your day. Goodbye.

This concludes today's conference call. Thank you for participating and have a wonderful day.