Curtiss-Wright Reports Fourth Quarter and Full-Year 2020 Financial Results; Issues Initial Full-Year 2021 Guidance

Curtiss-Wright Corporation (NYSE: CW) reports financial results for the fourth quarter and full-year ended December 31, 2020.

Fourth Quarter 2020 Highlights:

• Reported diluted earnings per share (EPS) of $1.30; Adjusted diluted EPS of $2.39, up 12%;
• Reported record free cash flow (FCF) of $246 million, with record Adjusted FCF of $256 million, up 3%;
• Net sales of $668 million, up 2%, led by strong 15% organic growth in defense markets;
• Reported operating income of $76 million, with Reported operating margin of 11.4%, including a $33 million non-cash impairment of a German valves business classified as held for sale;
• Adjusted operating income of $133 million, up 8%;
• Adjusted operating margin of 19.8%, up 100 basis points compared to the prior year, principally reflecting the benefits of cost containment and restructuring initiatives; and
• Share repurchases of approximately $62 million.

Full-Year 2020 Highlights:

• Reported diluted EPS of $4.80, with Adjusted diluted EPS of $6.87;
• Reported FCF of $214 million, with record Adjusted FCF of $394 million, up 6%, and an Adjusted free cash flow conversion of 137%;
• Net sales of $2.4 billion, down 4%, with defense market sales up 17% (up 10% organic);
• Reported operating income of $289 million, with Reported operating margin of 12.1%;
• Adjusted operating income of $391 million, down 5%;
• Adjusted operating margin of 16.3%, down 20 basis points compared to the prior year, as strength in our defense markets and the benefits of our cost containment and restructuring initiatives partially offset reduced commercial markets sales; and
• Total share repurchases of $200 million.

“As we reflect on Curtiss-Wright’s performance in 2020, I am proud of the team and their agility, resilience and focus to achieve exceptional results in a very challenging year,” said Lynn M. Bamford, President and CEO of Curtiss-Wright Corporation.

“We concluded 2020 by delivering solid fourth quarter results, driven by sequentially higher sales across all of our major end markets. During the quarter, we benefited from the acceleration of growth in our defense markets, the contribution from our recent PacStar acquisition and improving trends in our commercial markets. In addition, our strong financial performance reflects the savings generated by our restructuring actions and the benefit of our opportunistic share repurchase activity.

“Turning to our full-year 2020 results, we delivered strong full-year Adjusted operating margin, just shy of the prior year’s performance. We remain committed to achieving our 17% target in 2022. Further, we achieved record Adjusted free cash flow and leveraged our strong and healthy balance sheet to implement our balanced capital allocation strategy by completing our largest acquisition to date of $400 million, executing $200 million in share repurchases and maintaining a stable dividend.

“Looking ahead to 2021, we are projecting mid-to-high single digit growth in sales, Adjusted operating income and Adjusted diluted EPS. We are confident that our team can maintain its high level of performance and execution to keep us on a path to achieve our long-term targets. Additionally, today we are announcing new segment and end market structures to better align our business to our key strategies and industry drivers, while also helping to simplify our portfolio for investors. This is the first step, ahead of our planned May 2021 investor day, in communicating our new vision and strategy which will drive long-term profitable growth and deliver significant value for our shareholders.”

Fourth Quarter 2020 Operating Results

• Sales of $668 million, up $13 million, or 2%, reflect sequentially higher sales across all of our major end markets;
• Sales to the defense markets increased 27%, 15% of which was organic, led by strong growth in aerospace and naval defense, as well as the contribution of the PacStar acquisition in ground defense. Commercial sales decreased 18%, due to reduced demand in the commercial aerospace, general industrial and power generation markets. Please refer to the accompanying tables for an overall breakdown of sales by end market;
• Adjusted operating income was $133 million, up 8%, reflecting higher revenues in the Defense and Power segments, partially offset by reduced operating income on lower sales in the Commercial/Industrial segment;
• Adjusted operating margin increased 100 basis points to 19.8%, reflecting the benefits of our company-wide restructuring and cost containment actions, most notably in the Commercial/Industrial segment; and
• Non-segment expenses of $10 million increased by $2 million compared to the prior year, primarily due to higher corporate costs.

Free Cash Flow

• Reported free cash flow was $246 million, an increase of $4 million compared to the prior year, as lower cash earnings were offset by improvements in working capital and reductions in capital expenditures;
• Capital expenditures decreased $9 million to $11 million compared to the prior year, primarily due to lower capital investments within the Power segment; and
• Adjusted free cash flow was $256 million in the fourth quarter, producing a free cash flow conversion rate of 259%.

New Orders and Backlog

• New orders of $573 million decreased 2% compared with the prior year period, as solid demand for defense electronics and the contribution from our PacStar acquisition were more than offset by reduced commercial aerospace orders; and
• Backlog of $2.2 billion was unchanged from December 31, 2019, as growth in our defense markets of 12% was offset by lower commercial market demand principally driven by the pandemic.

Share Repurchase and Dividends

• During the fourth quarter, the Company repurchased 613,953 shares of its common stock for approximately $62 million, or an average of $101.32 per share;
• Year-to-date, the Company repurchased 1.98 million shares for $200 million, or an average of $100.82 per share, which included $150 million repurchased opportunistically; and
• The Company also declared a quarterly dividend of $0.17 a share, unchanged from the previous quarter.

Other Items – Business Held for Sale

• During the fourth quarter, the Company classified its German valves business within its Commercial/Industrial segment as held for sale and its results have been adjusted from comparisons between our future financial guidance and prior year results.

Fourth Quarter 2020 Segment Performance

Commercial/Industrial

• Sales of $249 million decreased $47 million, or 16%, but improved sequentially across our major commercial and industrial end markets compared with third quarter 2020 results;
• Commercial aerospace market revenues were driven by reduced OEM sales of actuation and sensors equipment, as well as surface treatment services, as expected due to customer-driven production slowdowns;
• General industrial market revenue declines principally reflect reduced year-over-year sales for industrial valves;
• Reported operating income was $7 million, with Reported operating margin of 3.0%; and
• Adjusted operating income was $47 million, down 4% from the prior year, while Adjusted operating margin increased 230 basis points to 19.0%, principally driven by the benefits of our cost containment and restructuring initiatives.

Defense

• Sales of $217 million, up $44 million, or 26%;
• Higher aerospace defense market revenues were driven by increased sales of embedded computing and flight test instrumentation equipment on various fighter jet programs, partially offset by the timing of orders on Unmanned Aerial Vehicle (UAV) platforms;
• Higher ground defense market revenues principally reflect the contribution from the PacStar acquisition;
• Strong naval defense market revenue growth reflected the timing of production and acceleration of valve revenues on submarine and aircraft carrier programs, as well as the contribution from the 901D acquisition;
• Reported operating income was $42 million, with Reported operating margin of 19.4%; and
• Adjusted operating income was $53 million, up 20% from the prior year, while Adjusted operating margin decreased 130 basis points to 24.2%, as the benefits of our cost containment and restructuring initiatives were more than offset by higher research and development costs.

Power

• Sales of $202 million, up $15 million, or 8%;
• Strong naval defense market revenue growth reflected higher production revenues on Virginia and Columbia class submarines, CVN-80 and CVN-81 aircraft carriers and higher service center sales;
• Reduced power generation market sales principally reflect lower domestic and international aftermarket revenues, as well as lower revenues on the CAP1000 program;
• Reported operating income was $37 million, with Reported operating margin of 18.2%; and
• Adjusted operating income was $43 million, up 12%, while Adjusted operating margin increased 70 basis points to 21.1%, driven by improved overhead absorption on higher naval defense sales and the benefits of our cost containment and restructuring initiatives.

Full-Year 2021 Guidance

The Company’s full-year 2021 Adjusted financial guidance is as follows:

New Segment Structure and Realignment:

Beginning in the first quarter of 2021, the Corporation is realigning its segments, as follows:

• The Company will now operate under the following three segments: Aerospace & Industrial, Defense Electronics, and Naval & Power;
• The Aerospace & Industrial segment will be comprised of actuation and sensors products and surface treatment services serving the defense and commercial aerospace markets, as well as electronic components and systems, industrial automation and surface treatment services serving the general industrial market;
• The Defense Electronics segment will be comprised primarily of the electronics businesses serving the aerospace and defense markets;
• The Naval & Power segment will be comprised of major naval propulsion equipment serving the naval defense market, as well as process and energy solutions serving both the nuclear and process markets; and
• In addition, the Company is concentrating all of its valves related operations – which presently reside within the current Commercial/Industrial and Defense segments – solely into the new Naval & Power segment.

New End Market Structure and Realignment:

• The Company’s new end market structure will consist of two primary markets, (1) Aerospace & Defense and (2) Commercial;
• Aerospace & Defense markets will now represent approximately two-thirds of total 2021 estimated revenue, and will include all current Defense market revenues (aerospace, ground, naval) and all Commercial Aerospace market revenues;
• Commercial markets will now represent approximately one-third of total 2021 estimated revenue and will be comprised of two major end markets: Power & Process and General Industrial;
• The new Power & Process end market will be comprised of 1) Nuclear and 2) Process, while the new General Industrial end market will now be comprised of 1) Industrial Vehicles and 2) Industrial Automation and Services;
• In addition, our new Power & Process market revenues will be concentrated within the new Naval & Power segment, and the new General Industrial market revenues will be concentrated within the new Aerospace & Industrial segment; and
• Historical financial results in the new segment structure for 2020 and 2019 periods can be found in this release and available in the Investor Relations section of our website.

A more detailed breakdown of the Company’s 2021 financial guidance by segment and by market, as well as all reconciliations of Reported GAAP amounts to Adjusted non-GAAP amounts can be found in the accompanying schedules.

Conference Call & Webcast Information

The Company will host a conference call to discuss fourth quarter and full-year 2020 financial results and expectations for 2021 guidance at 10:00 a.m. ET on Thursday, February 25, 2021. A live webcast of the call and the accompanying financial presentation, as well as a replay of the call, will be made available on the internet by visiting the Investor Relations section of the Company’s website at www.curtisswright.com.

(Tables to Follow)

Use of Non-GAAP Financial Information (Unaudited)

The Corporation supplements its financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial information. Curtiss-Wright believes that these non-GAAP measures provide investors with additional insight into the Company’s ongoing business performance. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. Curtiss-Wright encourages investors to review its financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

The Company’s presentation of its financials and guidance includes an Adjusted (non-GAAP) view that excludes an impairment of a German valves business classified as held for sale, significant restructuring costs in 2020 associated with its operations, including one-time actions taken in response to COVID-19, a non-cash impairment of capitalized development costs related to a commercial aerospace program, first year purchase accounting costs associated with its acquisitions, as well as one-time transition and IT security costs, and capital investments, specifically associated with the relocation of the DRG business in the Power segment. Transition costs include relocation of employees and equipment as well as overlapping facility and labor costs associated with the relocation. We believe this Adjusted view will provide improved transparency in order to better measure Curtiss-Wright’s ongoing operating and financial performance and better comparisons of our key financial metrics to our peers. Reconciliations of “Reported” GAAP amounts to “Adjusted” non-GAAP amounts are furnished within this release.

The following definitions are provided:

Adjusted Operating Income, Operating Margin, Net Earnings and Diluted EPS
These Adjusted financials are defined as Reported Operating Income, Operating Margin, Net Earnings and Diluted Earnings per Share (EPS) under GAAP excluding: (i) the impact of first year purchase accounting costs associated with acquisitions for current and prior year periods, specifically one-time inventory step-up, backlog amortization and transaction costs; (ii) one-time transition and IT security costs associated with the relocation of a business in the current year period; (iii) the non-cash impairment of capitalized development costs related to a commercial aerospace program; and (iv) significant restructuring costs in 2020 associated with its operations, and (v) an impairment of a German valves business classified as held for sale.

Organic Sales and Organic Operating Income
The Corporation discloses organic sales and organic operating income because the Corporation believes it provides investors with insight as to the Company’s ongoing business performance. Organic sales and organic operating income are defined as sales and operating income excluding the impact of restructuring costs, impairment of assets held for sale, foreign currency fluctuations and contributions from acquisitions made during the last twelve months.

Free Cash Flow and Free Cash Flow Conversion
The Corporation discloses free cash flow because it measures cash flow available for investing and financing activities. Free cash flow represents cash available to repay outstanding debt, invest in the business, acquire businesses, return capital to shareholders and make other strategic investments. Free cash flow is defined as cash flow provided by operating activities less capital expenditures. Adjusted free cash flow excludes: (i) a capital investment in the Power segment related to the new, state-of-the-art naval facility principally for DRG; (ii) a voluntary contribution to the Company’s corporate defined benefit pension plan made in the first quarter of 2020; and (iii) the cash impact from restructuring in 2020. The Corporation discloses free cash flow conversion because it measures the proportion of net earnings converted into free cash flow and is defined as free cash flow divided by net earnings from continuing operations. Adjusted free cash flow conversion is defined as Adjusted free cash flow divided by Adjusted net earnings.