CW - NYSE

Welcome to the Curtiss-Wright Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations.

Thank you, Jamie and good morning everyone. Welcome to Curtiss-Wright’s fourth quarter and full year 2023 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 a copy of today’s financial presentation is available for download through the Investor Relations section of our company website at curtisswright.com. A replay of this webcast also can be found on the website. Please note, today’s discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company’s results include an adjusted non-GAAP view that excludes certain costs in order to provide better transparency into 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.

Thank you, Jim and good morning everyone. Curtiss-Wright delivered a solid operational performance in the fourth quarter and strong finish to 2023. For the second consecutive year, we achieved several new financial records as we continue to execute our pivot to growth strategy. We generated double-digit growth in sales and earnings per share in 2023 as we benefited from the underlying demand within our core portfolio. We achieved these results while maintaining our commitment to incremental investments in R&D, and we generated significant growth in orders, which are proof points that our strategy to build momentum in our organic growth is working. Overall, we delivered another outstanding year for our shareholders and I look forward with confidence to Curtiss-Wright’s future. Turning to today’s presentation. I’ll begin by covering the highlights of our fourth quarter and full year 2023 performance and a brief preview of our 2024 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 a recap of our performance and the notable achievements against our 2021 Investor Day commitment before we move to Q&A. Starting with our fourth quarter 2023 highlights. Sales of $786 million increased 4% year-over-year and exceeded our expectations due to a stronger-than-expected performance in the Defense Electronics segment, which continues to benefit from a healthy backlog and easing in the supply chain. Our performance was once again led by growth in our aerospace and defense markets as we benefited from 20% growth in commercial aerospace along with higher tactical communications equipment revenues and ground defense. We also experienced solid growth in our commercial nuclear and process markets. Adjusted operating income grew 2% year-over-year to a quarterly record of $163 million and resulted in a strong operating margin of 20.8%. Diluted earnings per share increased 8% year-over-year to a quarterly record of $3.16, while free cash flow was $270 million, resulting in a 221% free cash flow conversion. Next, I’ll turn your attention to the right-hand side of the slide and recap our full year 2023 results where key metrics, including sales, operating income, earnings per share, free cash flow, and orders were all records for the company. Sales increased 11% overall to more than $2.8 billion, driven by 10% organic growth as well as a better-than-expected contribution from the arresting systems business acquired in the mid-2022. We delivered continued operating margin expansion, reaching 17.4% in 2023, which included more than $20 million in incremental strategic investments in research and development to further position us for future organic growth. Of note, for 2023, total R&D investments included both internal and customer funded projects exceeded 6.5% of total sales. We also overcame the significant headwind associated with the wind down of the profitable CAP1000 program. Diluted earnings per share of $9.38 increased 15% year-over-year, while adjusted free cash flow was $413 million, a reflection of our strong growth in earnings and working capital management. Growth in our order book was exceptionally strong in 2023, up 5% year-over-year to a record $3.1 billion, reflecting 1.1x book-to-bill overall and solid demand across the majority of our A&D and commercial markets. Of note, we generated double-digit bookings in our Defense Electronics segment, driven by strong demand for embedded computing and tactical communications equipment, as well as higher growth in our Naval and Power segment for both commercial nuclear and process equipment. As a result, we concluded the year with a backlog of $2.9 billion, up 9% year-over-year. With this strong performance, we exceeded expectations for nearly all of our 3-year targets set at our 2021 Investor Day, including sales, operating income, EPS growth, and delivering close to 110% average free cash flow conversion. I’ll provide greater detail on our performance against our long-term targets later in the call. Overall, I am exceptionally proud of the team’s continued dedication to deliver consistent, profitable growth and a tremendous performance this past year. Finally, I would like to introduce our full year 2024 guidance, where our successful pivot to growth journey continues. Overall, we are projecting mid-single-digit sales organic growth as we continue to benefit from our steadily growing backlog and the strong alignment of our technologies to favorable end market trends. We intend to continue our pursuit of investing for growth by making incremental investments in both internally and externally funded research and development. We expect to generate solid growth in diluted EPS and free cash flow this year, with the potential to reach double-digit EPS growth and up to $435 million of free cash flow at the high end of our guidance ranges. In summary, Curtiss-Wright remains well positioned to deliver another exceptional performance in 2024. Now I’d like to turn the call over to Chris to continue with our prepared remarks.

Thank you, Lynn. On Slide 4, I’ll review the key drivers of our fourth quarter 2023 performance by segment. I’ll begin in Aerospace and Industrial, where overall sales growth of 7% is at the high end of our expectations. Within the segment’s commercial aerospace market, we experienced a strong 20% growth in OEM sales, supporting the ramp-up in production across narrow-body and wide-body platforms. This performance was partially offset by the timing of actuation development programs across the segment’s A&D markets. In the general industrial market, improved demand for our new power management electronics supporting the on-highway market was essentially offset by lower off-highway sales to the construction market. And turning to the segment’s profitability, our results reflected favorable absorption on higher sales and a strong operating margin of 18.5%. Next in the Defense Electronics segment, our results exceeded our expectations and were slightly ahead of last year’s record fourth quarter results. This performance was principally driven by better-than-expected sales growth in our ground defense market resulting from continued stability in the supply chain and the conversion of our strong order book. Of note, we experienced higher sales of tactical communications equipment as well as increased sales of embedded computing equipment, most notably on the Stryker platform. Within Aerospace Defense, despite higher sales for flight test instrumentation on the F-35, our fourth quarter results were impacted by the timing of a bedded computing sales supporting C5ISR programs, principally on the Blackhawk helicopter. Regarding the segment’s operating performance we delivered a strong 28.8% operating margin, reflecting favorable absorption on higher A&D revenues, mainly offset by higher strategic R&D investments. Turning to the Naval and Power segment. Overall sales growth of 3% was slightly ahead of our expectations. Starting in the naval defense market, our performance reflected higher revenues supporting the Columbia class and Virginia class submarine programs. However, our results were partially offset by the timing of production revenues on the CVN-81 aircraft carrier program. Within the segment’s Aerospace Defense market, our results reflected continued strong global demand for arresting resting systems equipment. In the Power and Process market, sales grew at a low single-digit pace overall, but reflected high single-digit growth when excluding CAP1000 production revenues. This performance was principally driven by higher growth in the process market due to increased valve sales, supporting refinery maintenance and turnaround activity as well as higher subsea pump development revenues. Within our Commercial Nuclear market, we experienced higher development revenues mainly supporting the X-energy Advanced Reactor design. And turning to the segment’s operating performance, favorable absorption on solid revenue growth was offset by unfavorable mix on lower CAP1000 revenues, and increased margin pressure related to both SMR and subsea pump development contracts as we continue to advance these critical growth initiatives. To sum up our fourth quarter results, overall, we generated solid absorption on a stronger-than-expected top line performance, resulting in record fourth quarter operating income and a solid finish to 2023. Next, turning to our full year 2024 guidance. I’ll begin on Slide 5 with our end market sales outlook, where we expect organic sales to grow 4% to 6%, driven by growth in all of our end markets. In Aerospace Defense, growth of 5% to 7% principally reflects higher embedded computing revenues in defense electronics on various fighter jet and helicopter programs as well as flight test instrumentation on the F-35 program supporting the Tech Refresh 3 or TR-3 upgrade. Next in Ground Defense, our outlook for 4% to 6% sales growth reflects continued strong demand for our tactical communications equipment and higher electromechanical actuation revenues, supporting ground missile launches within the A&I segment. We expect those increases to be partially offset by the timing of turret stabilization systems and lower sales on ground combat vehicles. In Naval Defense, our outlook for 3% to 5% sales growth principally reflects higher revenues, driven by the ramp up in production on both CVN-81 aircraft carrier and Columbia class submarine programs. We expect those increases to be partially offset by reduced year-over-year production revenues on the CVN-80 aircraft carrier program. I also wanted to highlight the expected contribution of Foreign Military Sales or FMS across these markets as increased global spending on defense continues to positively influence our performance. In 2024, we expect mid-single-digit growth in FMS to be driven by the alignment of our technologies to support global defense priorities, which follows a strong 20% growth in FMS in 2023. Turning to Commercial Aerospace. Our outlook for 10% to 12% sales growth is driven by higher OEM production rates on narrow-body aircraft, including the A320 and wide-body aircraft, including the 787 and A350. We’re also beginning the year with some conservatism in our guidance relative to the 737 MAX based upon the FAA’s recent pause in Boeing’s production ramp. Wrapping up our Aerospace and Defense markets, we expect total sales to increase a healthy 5% to 7% in 2024. Outside of our A&D markets, in the Power and Process market, our outlook for 3% to 5% sales growth principally reflects increased demand for our commercial nuclear aftermarket products, and includes a 1% headwind related to the completion of the CAP1000 program early in 2023. Within our commercial nuclear market, we expect a mid single-digit full year growth rate, principally reflecting strong demand supporting the ongoing maintenance and subsequent license renewals that extend the life of existing nuclear reactors. In the process market, we expect growth to be mainly driven by higher subsea pump development revenues, supporting the newly announced Petrobras contract. In addition, following very strong 20% growth in valve sales in 2023, we expect these sales to be essentially flat in 2024, with higher MRO sales being offset by the timing of large capital projects. And lastly, in the general industrial market, we expect growth of 1% to 3%, driven by higher sales of industrial vehicle products, notably due to increased sales of our power management electronics and increased sales of surface treatment services. Wrapping up our total commercial markets, we are targeting full year sales growth of 2% to 4%. Continuing with our full year outlook by segment on Slide 6, I’ll begin in Aerospace and Industrial, where we expect sales to grow 3% to 5%, principally driven by double-digit growth in commercial aerospace and low single-digit growth in general industrial. Regarding the segment’s profitability, we expect operating income growth of 5% to 8%, and operating margin expansion of 20 to 40 basis points to a range of 16.6% to 16.8%, reflecting higher sales and improved product mix in power management electronics, partially offset by incremental R&D investments. Next in Defense Electronics. We expect sales to grow 5% to 7%, principally driven by this business’ record 2023 order book, reflecting solid growth in our A&D markets. Regarding the segment’s profitability, we expect operating income to grow 3% to 6%, and full year operating margin to range from 23.1% to 23.3%, which includes a $5 million or 50 basis point headwind from internally funded R&D investments. And lastly, in Naval and Power, we expect sales to grow 4% to 6%, driven by solid growth in our enabled defense, commercial nuclear and process markets. Regarding the segment’s profitability, operating income is expected to grow 2% to 5%, while operating margin is expected to range from 17% to 17.2%. While we anticipate favorable absorption on the overall increase in sales, our outlook reflects margin pressures associated with the shift to development contracts for both advanced small modular reactors and subsea pumps as well as a $3 million internally funded R&D project increase, which will collectively create a 50 basis point headwind on our projections. So to summarize our outlook, overall, we expect total Curtiss-Wright operating income to grow 4% to 7% in excess of sales growth, and operating margin to improve 10 basis points at the midpoint of our guide, ranging from 17.4% to 17.6%. This outlook reflects at least 25% incremental margins across the consolidated portfolio as well as a year-over-year increase of more than $20 million in our total engineering spending on both internal and customer-funded programs, equating to a record pace of investment and ahead of last year’s 6.5% of sales. To aid in your quarterly modeling the sales and operating margin, we expect first quarter 2024 sales to grow by mid-single digits relative to the first quarter of 2023, followed by sequential quarterly improvement. Regarding our first quarter 2024 profitability, starting with the A&I segment, we expect that operating margin will be in line with the first quarter 2023 results. Within the Naval and Power segment, as discussed, the ramp-up in development cost is expected to drive profitability below our first quarter 2023 results, followed by a steady improvement in segment operating margin over the course of the year. And lastly, we expect our Defense Electronics segment to demonstrate strong growth and profitability in excess of last year’s first quarter results. In summary, at the overall Curtiss-Wright level, we are expecting modest improvement in year-over-year first quarter operating margin on solid organic sales growth. Continuing with our financial outlook on Slide 7 and starting with our EPS guidance. We expect full year 2024 diluted EPS to range from $10 to $10.30, up 7% to 10%, mainly driven by our strong growth in operating income. Our guidance also reflects higher interest income as well as lower borrowing based upon our strong free cash flow generation and healthy balance sheet as we prepare for greater capital deployment in 2024. To aid in your quarterly EPS modeling, we expect our 2024 quarterly EPS to follow a similar cadence to the last year. We expect the first quarter EPS to reflect low teens growth relative to the first quarter of 2023, and to generate approximately 40% of our full year earnings per share in the first half. For the remainder of 2024, we expect sequential quarterly improvement, with the fourth quarter being our strongest. And lastly, turning to our free cash flow guidance. We are projecting full year free cash flow of $415 million to $435 million, up 0% to 5%. Growth in cash flow from operations is driven by expectations for higher cash earnings and our intense focus on working capital management, while capital expenditures are expected to increase $10 million at the midpoint of our guide as we continue to invest in support of our future organic growth. And as a reminder, we recognized the remaining $5 million in revenues and $20 million in cash on the CAP1000 program in the first quarter of 2023 as we essentially completed the contract. While the revenue will no longer be a substantial headwind for us, we do expect the $20 million cash headwind to impact our first quarter and full year 2024 comparisons year-over-year. Absent this headwind, our 2024 free cash flow guidance would reflect strong growth of 5% to 10%. And finally, our 2024 free cash flow conversion rate is expected to be near 110% based upon the midpoint of our guidance and in-line with our recent strong performance. Now I’d like to turn the call back over to Lynn.

Thank you, Chris. And turning to Slide 8. As I reflect upon the past 3 years, our Pivot to Growth strategy and the Investor Day commitments established in 2021, I’m pleased with our team’s execution and our overall financial performance. I’d like to spend the next few minutes revisiting the four key messages from our 2021 Investor Day as shown on the top of the slide, and discuss how our accomplishments have translated into meaningful results for Curtiss-Wright, providing confidence that our strategy is working. First, our commitment to accelerating Curtiss-Wright’s top line growth, both organically and through acquisitions, as discussed throughout our prepared remarks, we have maintained our commitment to incremental R&D investments and supplemented this target spending with an intense and dedicated focus on innovation and collaboration across our three segments. We’ve also discussed the alignment of our technologies to key secular trends, which has propelled organic growth in all of our markets over the past 3 years. In addition, our top line growth has been underpinned by a very disciplined approach to capital allocation, and we have grown through acquisitions as a means to enhance our customer offering and the strategic accelerator of top line growth. Closely following the strategic and financial criteria that we laid out in 2021, we have added some very complementary businesses such as the arresting systems business acquired in 2022, which has expanded our market share and international presence. Second, our focus on the customer, where we have been leveraging the critical mass of one Curtiss-Wright through our sales channels and technologies to provide better value to our customers, expand relations and build upon the content on key platforms such as the inclusion of our critical commercial nuclear technologies on several advanced small modular reactor designs. In addition, our continued execution provides our customers the confidence in Curtiss-Wright to drive increased funding and investment for key projects, which we expect to contribute to our future organic growth. Third, our focus on advancing our strong track record of operational and financial excellence. This has led to continued top quartile operating margin performance relative to our peers. We have made great strides advancing the operational growth platform, or OGP, by combining our strong performance in operational excellence with new opportunities in commercial excellence and strategic pricing and the development of new systems and tools to improve Curtiss-Wright’s overall efficiency. These efforts have created underlining margin expansion to support our ramp-up in R&D investments or to cover first year dilution from acquisitions as we invest significantly for our future. And last but not least, our focus on simplifying the business model. This started with the new segment structure released in 2021, aimed at reducing the complexity of our business mix and diverse end market exposure. Since then, we’ve improved the clarity of our messaging regarding our strategies to leverage inherent synergies and crossover technologies that exist throughout our portfolio, and continue to illustrate why these technologies remain a part of Curtiss-Wright today. We’ve communicated these efforts through a number of channels and offer continuous proof points to ensure the benefits of our combined portfolio were well understood. With that in mind and shifting to the bottom of the slide, I’m proud to say that the team has successfully achieved nearly all of our major targets issued in 2021. Starting with the top line, where we projected a total revenue CAGR ranging from 5% to 10%, with organic growth ranging from 3% to 5%. As you can see, we firmly achieved those goals by generating a 7.4% CAGR for total revenue, along with a 4.7% organic CAGR. Operating income grew at 9.6% CAGR over the 3-year period and exceeded our strong sales growth, while operating margin expanded 110 basis points over the period to a record of 17.4% in 2023. As a result, we maintained top quartile financial performance compared with our peers. Diluted EPS grew at 12.5% CAGR over the 3-year period, well in excess of the 10% minimum target, benefiting from the solid operational performance and continued share repurchases. Regarding our final metric, we have generated more than $1 billion in adjusted free cash flow over the past 3 years despite the impact of the pandemic and the very challenging supply chain environment. Those factors left us just shy of achieving our target as we delivered an average free cash flow conversion of 108% over the 3-year period. As a reminder, aside from 2022, we have consistently delivered greater than 100% adjusted free cash flow conversion for the past decade. Our initial 2024 free cash flow conversion guidance maintains the strong pattern of performance. In closing, our journey continues. Based on a healthy outlook for the near and long-term prospects for Curtiss-Wright and the continued momentum in the key markets we serve, we are primed to deliver a strong performance yet again this year. We entered the year with a very healthy balance sheet and remain committed to growing diligently through strategic acquisitions while continuing to provide solid returns to our shareholders through consistent share repurchases. Finally, I wanted to make a few comments about our upcoming Investor Day, which will take place on Tuesday, May 21, in Midtown New York City. We’re excited to once again host an in-person event, where you will not only have the opportunity to hear from me and Chris, but several members of our senior leadership team, including the general managers responsible for various A&D and commercial businesses. We look forward to providing a more thorough recap of the success of our Pivot to Growth strategy in the past 3 years of performance against our prior Investor Day targets. We also intend to discuss our long-term strategy and organic growth initiatives and establish new financial targets as we drive this business forward. In addition, we’re pleased to announce that we will be hosting what we anticipate being a very engaging and educational commercial nuclear panel. Joining us will be three highly knowledgeable and respected industry experts to cover several facets of the nuclear industry from the aftermarket to advances in small modular reactor technology. We are excited to provide a deeper dive into an industry where the momentum has never been stronger, and one that will surely fuel Curtiss-Wright the potential for long-term growth. Please look out for the formal registration within a few weeks, and we hope that you will join us. This represents one of the many exciting events taking place at Curtiss-Wright in our 95th year as a public company, as we look forward to delivering tremendous value for our shareholders, our employees and our customers. Thank you. And at this time, I would like to open up today’s conference call for questions.

Thank you. [Operator Instructions] Our first question is coming from Myles Walton with Wolfe Research.

Thanks. Good morning. If I look back on the 2023 performance on revenue, it looks like the ground defense was actually probably the largest single contributor. Can you correct me if I’m off on that. And it even looked like you had momentum carrying you into the fourth quarter above where you were thinking. So just looking at the 2024 outlook, could you talk maybe about ground defense specifically, but more broadly, the areas of upside and downside risk on your end market growth rates?

Yes. Thank you for that. And maybe I’ll speak a bit at a high level, and then Chris can put a little financial details behind that. So we’re really pleased with what happened this past year, very strong demand for our tactical communications system sales. It was really the primary driver in that outstanding growth. But it is more broad than that. We’re looking to move towards the initial volumes towards Enduring Shield and our current stabilization capability that is produced over in Europe that we’ve talked about as being aligned with some of the increased foreign military spending as countries move towards funding their NATO commitments. So really a lot of different pockets across the organization driving that. And I’ll have maybe Chris to speak to what we’re expecting here in ‘24.

Yes, sure. It certainly was a significant part of what we had this last year, Myles. And across 2023, I mean, we saw a fairly strong improvement in the supply chain, right? And that acceleration of material continued as we got deeper into 2023, which contributed towards our beat in sales here at year-end. For ‘24, we’re entering the year with a very strong order book, and we – we are not expecting lead times to improve, we expect continued stability in the supply chain and on-time delivery from our suppliers, which will continue to strong growth in tactical comms for ‘24, we expect that business is going to grow at a mid-teens pace. So – and it’s been on a mid-teens pace since we bought the PacStar acquisition several years back. Within the Defense Electronics segment, though, we do have a few things that are going to offset that growth rate. And one is the timing of sales to international PDSs and we spent a lot of time earlier this year talking about the opportunities that were emerging in the European theater, with international PDS and some of the programs we’re working on, such as the challenger. And those programs can be a little bit lumpy, and there is timing. And then beyond that, there – we talked a little bit about how the Stryker program had benefited our ground defense market this year with some of the modernization that was going on there for that ground vehicle. So this helped to boost ‘23. I’ll say those kind of more lumpy ground defense items are not going to exist here in 2024, but it’s still a very healthy growth rate in tactical comps as we look forward. And then as Lynn had mentioned, just briefly outside of the Defense Electronics segment, we’ve got the CM actuation on the enduring shield platform, which was a development contract for us a little over a year ago and now that’s starting to kind of transition into production. So we will see a little bit of benefit there to a much lesser extent than the things I’ve talked about within the A&I segment sales.

Okay. And then maybe, could you comment on the M&A pipeline? It’s been a bit since the last larger deal. And just curious as the leverage has come down here, but the size that you’re looking at is as well as end market preferences at this point?

Yes. I mean, definitely, we booked a lot of properties in ‘23 and didn’t find one that we felt really matched the criteria. And I’ll tell you, when I do reflect on how the ESCO business and the PacStar business are contributing to our growth, I mean, Chris just talked a little bit about the PacStar acquisition. It really reinforces why you remain very diligent in not acquiring for acquiring’s sake. But with that said, I will say that the acquisition pipeline right now is as healthy as I can remember it being for many years. And it’s not just there is acquisitions, there is always properties coming available. These are properties that we see as being potentially very strong strategic fit for Curtiss-Wright and rounding out product capabilities and customer access in markets that are very important and critical to our growth. Several of these, we’ve had pre looks at, and you’ll know they will be coming to the market. Any chance we can have them be exclusively with Curtiss-Wright, we always have a keen eye to pursue that, whether we accomplish that or not, it’s TBD. We are in due diligence with a fairly small property right now that I anticipate we will close on. It’s not meaningful, really, from a revenue standpoint, but in a critical piece of technology. So that might be something coming out in the near future. But the other properties we’re looking at that are in the pipeline will significantly move the needle revenue and profitability wise for Curtiss-Wright, and we feel that they can become part of Curtiss-Wright, and over a couple of years, continue to be accretive to our overall margin expansion. So the acquisition pipeline is really great, and some of that is with our current cash position, knowing that and the cost of capital to borrow is – we’ve given ourselves a bit of a pause of how we’re using the cash we have on hand to make sure we’re ready to act and can do it in the most affordable way for Curtiss-Wright.

That’s great. Thanks so much.

Thank you.

We will go next to Nathan Jones with Stifel.

Good morning. This is Adam Farley on for Nathan Jones.

Hi, Adam.

Hi, good morning. I was wondering if we could first start with some of the increased R&D spend? Can you talk about where the investments are being made? Expected commercialization and maybe sort of an impact on growth for the future?

Sure. I’d love to take that question. So I’m pleased to say that we have really opportunities across all three of our segments that we have products and technologies that are very much aligned to healthy end market trends that we feel passionate about the investments we’re making. Just to restate what you heard, we increased our total engineering spend in ‘23 by $20 million, and we’re targeting another $20 million increase in 2024. Those are some significant investments that are really, very laser-focused, that driving organic growth that we know will be profitable organic growth going forward. And so just as walking across the segments, we spend most of our IRAD in Defense Electronics. We continue to look to drive increased IR&D spending in that segment again this year, with very much of focus around building out our MOSA and SOSA cost product offering, which is just really the open standard approach that our DoD is demanding as being the key criteria and system selection and just continuing to gain force across all branches of the government. So, that’s kind the most notable from R&D. But right behind it, in the A&I segment, we are building out of our power electronics capability, and we’ve talked about that as – are bringing new products to market in this area is really what’s underpinning our ability to put forth growth in this industrial area that is not seen a lot of natural growth in the market, but it’s really our new product injunctions and bringing new products and winning new customers that is driving that. So that’s another area of the IR&D. And then I think of some of the CR&D increases, also up in the A&I segment, a lot of there were a lot of electromechanical actuation capabilities. We’re still executing on the – our first win with Airbus for electromechanical actuation. It is going very well, and then affording us opportunities for new and additional programs with Airbus, which is just going to provide great growth for Curtiss-Wright going forward. But also some of that same electromechanical actuation on a variety of defense platforms. And we talk about Endurant Shield, some of the other ones we can’t really speak about openly. But a lot the capability that, that team has is pretty unique and outstanding and we’re finding homes for it, both across Commercial and Defense markets. And then last but not least, in our Naval & Power segment, there is a lot – if you read the presses across naval platforms, there is a lot of work going on for next-generation platforms across many critical platforms. Curtiss-Wright is a thought leader with our navy in these spaces and doing advanced work to help position our technologies and content on those future platforms. That’s one area. And then obviously, the work that we’ve been very much highlighting around our investments we’re making along with customers to assure that we have strong positions across all the SMR platforms. So we’ve talked openly about a few of those announcements with X-energy and TerraPower. And – but I assure you, we are active with all the major providers that are building out, we will have future next-generation SMRs. And so that’s all I think really some of the top areas, but these are exciting investments and are really great about what it’s going to do for Curtiss-Wright for decades to come.

That’s really helpful detail. Thank you. I will leave it there.

Thank you.

We will turn next to Peter Arment with Baird.

Hi, good morning, Lynn and Chris. Maybe just to pick up on the R&D question. Just – where do you see you are like in – kind of like baseball analogy of like – I mean, it feels like electronics and kind of the investments that you’re making there on an IRAD perspective would be – you’d be further along, just given your market position and where you are. Whereas I would think that the kind of the investments you’re making in Naval and Power, particularly tied to the commercial nuclear, is probably still earlier innings and that might linger. I guess I’m just trying to wonder whether we see this as a further headwind as we get into ‘25 and beyond? Things like that.

So very reasonable question. I think we’re really proud in the Defense Electronics space. I’d say we’re very proud of the product offering we have in industry today. We have a couple – actual quite a handful of really major developments that will hit the market in this calendar year. But I’d say, to some degree, I appreciate your point. We will be very solidly into delivering what we need to do to have the state-of-the-art product offering. Always in this area, though, there is new technology coming to bear, that are of interest by our defense department for finding different applications. And we are also always – our goal isn’t to just have next generation on the current platforms we have, but to really broaden our product offering to be able to attack more and more of the market. I mean we have talked, I think at our last Investor Day that it’s hard to exactly size, but the belief for us is that the total spend just in the U.S. on ruggedized electronics is somewhere north of $40 billion. And it’s probably because we are – the size of our Defense Electronics team, which is still under $1 billion, there is a heck of a lot of electronics content out there that we can go after with maybe doing customer-funded projects that are spins of our own technologies we have invested in. And so I don’t think we are going to see a rapid acceleration in that space, but I think we don’t – certainly don’t want to let our foot off the pedal as we really become such a dominant player and without going too deep into it, but there are some issues going on in the industry across some of our competition. And when you have those types of situations, it’s the perfect time to strike. And we are making sure we are aggressive to get in with customers and to provide solutions where some of those opportunities begin. So, you are fair – a good point in the SMRs and even in some of these naval platforms, these are going to carry on for a handful of more years. And I think we talked about anticipating there is – everywhere you turn, everyone is trying to have their first new platforms beyond their producing power 2030, 2031, 2032. There is lots of examples, whether new AP1000 plants or the AP300s over in the UK or wherever. And so we are going to move through development work for the next couple of years with that. But that should be turning to prototyping work and early production work in this decade towards the back half of this decade. And I don’t want to say, the design work will go away, but you don’t redesign an SMR every year. And so I think as we do work through some of the development work right now, tied to these next-generation reactors, we will see that slowdown as we move through the next couple of years.

That’s super helpful color on that. Thanks. How do you see – not to take any thunder from your Investor Day, where you are going to spend all this time on nuclear, but how do you see the bookings environment right now in terms of, I guess the timeline?

I missed it, you said, how do I see what environment?

The bookings environment in terms of the kind of SMR and some of the other projects that you are working on in commercial nuclear going forward.

So, it seems steady as these companies secure their funding and move to their contracts that we just continue to work with them. We saw a pretty nice surge in 2023. I don’t think we are going to see a big surge in 2024 over top of that. I will say though, where the order book does remain very strong compared to these next-generation reactors is in the aftermarket work. And talking with some key individuals in that business yesterday, really celebrate how strong the order book is already out of the gate this year. And then obviously, the needle-moving activity of when the first AP1000 RCP pumps, obviously unlike any other type of orders, we really get across this organization. So, I would say the SMR development is more steady than expanding.

Great. I will leave it there. Thanks again. Nice results.

Thank you, Peter.

We will turn next to Michael Ciarmoli with Truist.

Hi. Good morning guys. Nice results.

Good morning.

Thanks for taking the questions. Chris, maybe just a housekeeping modeling, first. I think I heard you correct. First quarter ‘24 earnings are going to be up low teens. I guess you gave the margins for each segment, but I guess it implies Defense Electronics would be somewhere maybe 18% or so? Do we have that right? Did I hear that correct?

Well, I didn’t provide an exact number, but we definitely said that Defense Electronics margins were going to be very strong here in the first quarter. So, I think you are thinking in the right direction for sure.

Okay. Got it. I just want to make sure I heard EPS low-teens. And then maybe just on to the last question, defense kind of disruption in that Defense Electronics marketplace, some of your competitors. Are you guys looking to move anything to any different market segments like higher-end radar processing or some of that subsystem or are you kind of sticking to your knitting and maybe taken some of the opportunities in your sweet spot?

So, I think we are going to protect the core always as a priority. But we kind of talk – adding at a high level without tipping our hands of some strategic investments we are making as part of always pushing the window of what types of products we can bring to bear in the market. And we have talked about an area for focus for investments is around the topics of encryption and cyber security and the anti-tamper, and so that is an area that I will say, hopefully, that we are continuing to focus on and is a critical capability that we could bring there in the markets that will allow us to grow our market share. And I will leave it at that.

Okay. And then, yes, Lynn, not to kind of make you spill the beans here on the upcoming Investor Day, but you guys have done a tremendous job with margin expansion. But if I – I guess I am just trying to figure out, you have got the R&D investment. You have got, I guess some of the initial dilutive development work for SMRs. I mean should we think about the sort of operating model being mature here for the next kind of couple of years? And maybe even just color on when some of these SMR development programs might flip to margin accretion? And I guess this is also thinking absent any big high-margin AP1000 orders that would come in, that would clearly – you guys haven’t modeled for that, but just thinking about kind of steady state business. Should we think about some – just some normal margin pressure with some of these bigger development programs?

Yes. So, I mean obviously, we are projecting modest margin expansion next year. I don’t want to at all project that, that is the new normal, and there isn’t more opportunity long-term outside of that. I mean these – all this has – we are doing a significant amount of work in developing these SMRs. And even the subsea pump that – the Petrobras press release last week. When you are getting paid development work from your customers, you are not making margins that are going to be accretive to the corporation. And we are the development work is significant. Shell and TITAN continue to go on. And so we have all that going on. Those projects will turn to production revenue, all of them, late in this decade and later this decade and really have the ability to provide meaningful margin expansion as the low-margin work goes away and is replaced with a very solid margin production work. And so – and then I think we can drive the type of growth, we think there are the possible in our Defense Electronics team, which delivers very accretive margin to Curtiss-Wright. That continues to provide uplift across the organization. And I will comment that a couple of the acquisitions we are looking at, the devil is in the detail and you have to do due diligence, but some of those have very healthy looking margin profile. So, right now, the guide for ‘24 is doing the right things in this year to really secure a fantastic future for Curtiss-Wright. Again, we will continue to look at top quartile and challenge ourselves to be in the top quartile. We do talk about that openly inside of the company with everyone that we have a goal quite a few years ago, getting to 17%, but that was then. And top quartile margins continue to go up amongst our peer group. And so we need to continue to challenge ourselves to do that. So, I know that you weren’t expecting me to say, yes, here is our new 3-year margin target, but hopefully, that puts some color on the thinking.

Last one and I will get out of the way. Bookings looked like the weakest level since first quarter ‘22. I know you called out off-highway, just in general being weaker. Anything to read into that timing, or even if you could parse through the bookings a little bit more strength, weaknesses in there?

Sure. Let me take that one, Mike. So, in the fourth quarter, we continue to see like positive order trends across Commercial Aerospace and Commercial Nuclear, both fairly strong quarters for us. But we definitely faced some softness in aero and ground defense. We saw pressure in A&D from – turn back to the fourth quarter of this last year, we had a few large multiyear orders. And the main decline year-over-year was actually within Defense Electronics for us. We were down about $45 million. So, that was really the timing of some of those large multiyear orders, but also the continuing resolution. Within Defense Electronics, I mean we had these F-30 FTI orders that we – on the F-35, we talked a little bit about that earlier this year in the press release. But we also had large multiyear orders outside of Defense Electronics and the arresting systems business and then also a large multiyear laser peening contract on the F-35 within the A&I segment. As we look at ground defense, ground defense, in fact, the full communications, we saw this is last year, with that direct connectivity that they have to the government customer, they feel the CRs a little bit harder than most. So, sometimes you get a rush to get ahead of those orders into Q3 before things said and – but I would say year-over-year, Q4-to-Q4 within that business, very similar levels. So, nothing there that would kind of concern us. And then I think on a positive note, I mean as you look forward into 2024, we had a very strong January. Our order book was up $70 million over the prior year January, and $40 million of that within Defense Electronics. So, I know the NDA got signed here in December. People are feeling a little bit more confident in their spending. Obviously, we have got the CR, that’s still kind of an overhang. But I think in 2024, we feel good about the guidance that we are providing in sales. And if there is any watch areas for us here from a market perspective, it’s really just in the general industrial space and maybe a little bit in processing doubts, but those are more economically sensitive and prudent to be cautious as you approach those.

Got it. Thanks guys.

Thanks Mike.

We will go now to Louie DiPalma with William Blair.

Lynn, Chris and Jim, good morning.

Good morning.

There has been higher volumes for many of the end market ground defense and aero defense platforms that you are providing content to associate it with the elevated geopolitical tensions and higher commercial aero demand. Beyond the higher volumes, were you able to increase scope of content that you are providing to the different platforms in 2023? And are there expectations for like market share increases and scope increases for the next several years based on your research and development investments?

Thank you for that. So, I would say, broadly, the content stays relatively stable on the platform. So, that’s a starting point. Now, we are always looking to change that. And there are tech refreshes. There has been a lot of tech revisions in ground vehicles over the past years. And they will – we are consistently chasing those, which are opportunities for new content on those platforms. And there is a lot of special operations provisions and new capabilities added to older fighter jets. So, as much as the F-35 is relatively stable to funding [ph] in TR-3, that’s a growth area for us as we have all our support we provide for the testing of those aircraft. It’s – we look to grow our content on those – across those production platforms as they have new and incremental capabilities that they are looking for. But the default is they are stable. So, I don’t know if that’s the answer to your question, but…

Yes. No, I was thinking also along the lines of the Columbia-class and Virginia-class submarines in which the supply chain has repeatedly been described as fragile. And you seem to be executing very well on those platforms. So, I was thinking, perhaps, there is the potential for you to add content from other suppliers that may be struggling to handle the demand?

Those are not decisions that the Navy would make on a very rapid fire basis. I mean they – these are very stable platforms that they want stable suppliers. But we are a solid supplier across the submarine platforms and stay in close contact with our customers that if there is opportunities to take over supply and capability, that we are there to explore new opportunities. They don’t come very often, but our reputation across Virginia and the Columbia-class program would afford us to be that person or that company, I think if a relevant opportunity became available. But I would be cautious to speak to anything specifically as that’s not really how the Navy runs itself on a normal basis.

Great. And one final one, you spoke very enthusiastically about the Enduring Shield program. I believe you are partnering with Dynetics/Leidos for that. Is there significant growth for that program in 2024?

Go ahead, Chris. I will let you…

Yes, sure. So, we are, as I mentioned, transitioning out of a development contract and into production this year. And it’s a significant program for us. I mean it showcases our EM maturation technology and ground defense applications. And leading-edge ground defense applications. So, we are very proud of what’s happening there. Overall, I think as you look at the increase year-over-year, the contribution to the A&I segment, I would put that somewhere in the range of about $5 million. But despite the size, it’s enough to kind of move the ground defense market. And there are some other things that are happening there clearly to offset what we are seeing. But it’s an exciting program and we are excited about its future.

Yes. I think Louie, when you put it in perspective, quite frankly, some of the things going on around the world and the ever visible critical role that these types of systems play for countries where there is active conflicts, I think our enthusiasm isn’t tied only to 2024. It’s more what we know is going on and the long-term potential for where this capability will be deployed around the globe to provide protection. That is some of the excitement.

Great. Thanks everyone.

Thank you.

[Operator Instructions] We will turn next to Kristine Liwag with Morgan Stanley.

Hi. This is Justin on for Kristine. Thanks for taking the questions. Just a quick one on AP1000, there was some reporting earlier this week. It looks like the Polish Government might be reevaluating the feasibility of the 2033 target. I know you have laid out a framework for when to expect an order to materialize, but just any updates on this at this point? Is there sort of around timing expectations?

No, not at this point in time. I know there is some pressure. But really broadly, things have gone very well in Poland, and they are making steady progress. And so I think from our perspective, and working closely with Westinghouse, we don’t see any change out of what we are expecting.

I mean I will say though, that we have learned enough in time regarding these large orders and these large projects that there is a lot of people and a lot of things that need to get aligned to get them off the ground. And that’s why we provided this range when we said, hey, this is the timing for our next order. I think you could back into the initial production timelines and schedules that they provided and the order. Initially, what we are looking at, it should have been in our hands immediately, but these things do take a little bit of time, they are moving through some engineering contracts, and we still continue to hold to the timeline that we initially established.

Okay. It makes sense. Thanks.

Thank you.

At this time, as there are no further questions standing by, I would like to turn the floor over to Lynn Bamford, Chair and Chief Executive Officer, for additional or closing remarks.

Thank you everybody and I look forward to speaking with you again at our Q1 earnings call, and hopefully seeing all of you at our Investor Day. Thank you.