James Ryan - Senior Director of IR David Adams - Chairman & CEO Glenn Tynan - VP & CFO.

Louis Raffetto - Deutsche Bank AG Michael Ciarmoli - SunTrust Robinson Humphrey George Godfrey - CL King & Associates Kristine Liwag - Bank of America Merrill Lynch.

Welcome to Curtiss-Wright Third Quarter 2017 Financial Results Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Ryan, senior Director, Investor Relations. Sir, you may begin..

Thank you, and good morning, everyone. Welcome to Curtiss-Wright's Third Quarter 2017 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer.

Our call today is being webcast, and the press release as well as the copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this call 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. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation.

Please note, any references to organic growth exclude the effects of foreign currency translation, acquisitions and divestitures, unless otherwise noted. And I would like to turn the call over to Dave to get things started.

Dave?.

Thanks, Jim. Good morning, everyone. For our agenda today, I will begin with the key highlights for the third quarter 2017, followed by Glenn, who will provide a thorough review of our quarterly financial performance, along with updates to our 2017 guidance. Then I'll return to wrap up our prepared remarks before we move on to Q&A.

Curtiss-Wright produced strong third quarter results, as the momentum experienced in the first half of the year continued. EPS was $1.43 for the quarter, which was well ahead of expectations, primarily led by higher sales and improved profitability as well as the lower tax rate.

Similar to last quarter, we achieved solid growth in sales and operating income in each of our 3 segments. Beginning with sales, we produced robust growth of 12%, 8% of which was organic. All of our end markets contributed to this growth.

We saw particular strength in the General Industrial market, as several areas that were challenged a year ago appeared to have turned the corner. Defense market sales were also positive led by a ramp-up in sales from TTC, our most recent Defense acquisition, completed earlier this year.

Operating income was once again strong driving overall operating margin up 190 basis points to 17%. This performance reflects the improved group sales volume, strong performance on the AP1000 program and solid margin contribution from TTC. Glenn will discuss these impacts in greater detail in a few minutes.

Overall, the execution of our operational and margin-improvement initiatives has been fantastic and continues to drive very positive results as seen by the strong growth and profitability across the organization. We also produced solid free cash flow of $90 million and generated a free cash flow conversion of approximately 140%.

Based on the strong year-to-date performance, improved sales outlook and expectations for higher profitability on the AP1000 program, we have increased our full year 2017 guidance for sales, operating income, operating margin and EPS. We now expect to achieve double-digit EPS growth between 11% and 13%.

We also raised our full year free cash flow guidance by $10 million to a new range of $270 million to $290 million. We look forward to a strong finish and another solid annual performance in 2017. Now, I'd like to turn the call over to Glenn to provide a more thorough review of our third quarter performance with updates to our 2017 financial outlook.

Glenn?.

Thank you, Dave, and good morning, everyone. I will begin with a review of our third quarter end market sales, where we achieved growth in all markets. Overall, we experienced a 13% increase in sales to our Defense markets and 11% increase in sales to our commercial markets.

Starting in the Defense markets, our results reflect 5% organic growth and an 8% contribution from TTC. In Aerospace/Defense, our results reflect solid demand for TTC's flight test equipment, primarily on the F-35 program, as well as higher sales of embedded computing products supporting UAV programs.

In Ground Defense, we benefited from higher sales of turret drive stabilization systems to international customers.

And finally, Naval Defense revenues were higher on both aircraft carriers and submarines, where higher development revenues on the Columbian Class submarine more than offset lower production on Virginia-class submarines, all due to program timing.

Moving on to the commercial markets, I will begin in commercial aerospace where we experienced higher sales of sensors and actuation equipment, most notably supporting narrow-body regional and business jets.

In Power Generation, our results reflect higher revenues on the 2015 China Direct AP1000 order, partially offset by lower revenues under the Domestic AP1000 order, which is approaching completion. In the Nuclear Aftermarket business, we benefited from improved international sales that more than offset lower domestic sales.

And finally, in the General Industrial market strong sales growth of 16% was primarily driven by continued solid demand for Industrial Vehicle products across all 3 product groups, on-highway, off-highway and medical mobility.

In addition, sales in Industrial Valves were up slightly year-over-year led by higher MRO sales to the domestic oil and gas, and chemical markets. Next, I will discuss the key drivers of our third quarter 2017 performance. Starting with the Commercial/Industrial segment. Operating income was up 20% and operating margin was up 170 basis points to 15.9%.

This performance reflects higher incremental margin on solid sales growth of 7% as well as the benefit of our margin improvement initiatives. In the Defense segment, operating income increased 17%, while operating margin decreased 160 basis points to 23.7%.

As expected, TTC was a solid contributor to our third quarter profitability accretive to both the Defense segment and overall CW margins, as we moved beyond margin dilution related to purchase accounting, which impacted first half results.

However, on an organic basis, Defense segment operating income was essentially flat on higher sales leading to a lower organic margin versus the prior year, as we experienced an unfavorable shift in sales mix within our embedded computing products.

Next in the Power segment, operating income increased 38%, while operating margin increased 280 basis points to 14.8%.

This performance was driven by higher revenues and profitability of the China Direct AP1000 order as well as improved profitability in our Nuclear Aftermarket business due to higher sales and the benefit from ongoing margin-improvement initiatives. Corporate costs were lower in the third quarter primarily due to lower pension and FX costs.

In summary, overall CW third quarter operating income increased 26%, which led to a strong 190 basis point improvement in margin to 17%. Next to our 2017 end market sales guidance, where we updated several items as shown in blue on the slide.

These changes reflect our expectation for overall Curtiss-Wright sales to grow between 5% and 7%, an improvement from our prior guidance of 4% to 6%.

In the Defense markets, overall sales are now expected to grow between 8% or 10%, up from the prior range of 7% to 9% due to the strong third quarter performance in Ground Defense as well as an improved outlook for Virginia-class submarine revenues in Naval Defense.

In the commercial markets beginning with commercial aerospace, we've increased our growth outlook following the solid third quarter performance and now expect full year sales to be up slightly year-over-year. We've also raised our General Industrial market sales guidance based on the ongoing solid performance in our Industrial Vehicles business.

We now expect sales in this market to grow between 5% and 7%, a sharp improvement from our prior guidance of 2% to 4%. As a result, total commercial sales are now expected to grow between 3% and 5%, an improvement from our prior guidance of 1% to 3%.

And finally, in the appendix to our presentation, you will find the 2017 end market sales waterfall chart. Continuing with our 2017 outlook, in addition to the aforementioned increase in sales, we are raising our full year guidance for operating income, operating margin and EPS.

Starting with the Commercial/Industrial segment, based on the increases to our end market guidance, we now expect this segment sales to be up 1% to 3%, an improvement from the previous guidance of flat to up 2%.

We've also increased operating income guidance in this segment by $1.5 million to reflect the higher sales volume, while operating margin guidance remains at 14.3% to 14.5%. Next, in the Defense segment, our guidance remains unchanged, as we continue to expect 16% to 18% sales growth and operating margin of 19.6% to 19.7%.

In Power segment, based on the increases within over end market guidance, we now expect this segment sales to be up 3% to 5%, an improvement from the previous guidance of flat to up 2%.

And as we look forward to the fourth quarter, we expect Power segment sales to be in line with the third quarter or below the prior year due to anticipated declines in both Virginia-class submarine and Nuclear Aftermarket sales.

In addition, based on our expectation for improved profitability on the China direct AP1000 quarter, we've increased the operating income guidance in this segment by $5.5 million and our operating margin guidance to new range 15.2% to 15.3%, reflecting a 60 basis point improvement over our previous guidance.

As a result of all of these guidance updates, total Curtiss-Wright operating income is now expected to grow 6% to 9%, while operating margin is now accepted to grow 20 to 30 basis points to a new range of 14.8% to 14.9%. This reflects a $7 million increase in operating income and a 10 basis point improvement in margin compared to the prior guidance.

Excluding TTC, overall CW organic operating margin would have been 15.2%, a 60 basis point improvement over 2016. Based on all of the aforementioned guidance changes, we've increased diluted earnings per share by $0.20 to a new range of $4.65 to $4.75, which represents double-digit growth of 11% to 13%.

This change was driven by a strong operational performance, which accounted for $0.11 on the EPS increase as well as a lower effective tax rate. As a result of the tax benefit recognized in the third quarter of $0.09, we now expect our full year tax rate to be 27.8% compared to the prior guidance of 29.1%. And next, the free cash flow.

Third quarter free cash flow was $90 million, generating free cash flow conversion of approximately 140%.

As a result of our expectations for higher net earnings and lower working capital, we are raising our full year free cash flow guidance to a new range of $270 million to $290 million with an excepted free cash flow conversion ranging from 130% to 136%. Now I'd like to turn the call back over to Dave to conclude our prepared remarks.

Dave?.

Thanks, Glenn. Before I wrap up and we move on to Q&A, I wanted to provide a brief -- few brief remarks on the AP1000 program. Our expectations with regard to the impact of the Westinghouse bankruptcy, the shipment status of the domestic RCPs and the status of the startup of the 2 plants in China remained in line with our views from last quarter.

We continue to expect that the successful commercial operation of the 2 Chinese AP1000 plants should open the door for additional China interest in new AP1000 plants and Curtiss-Wright reactor coolant pumps. Our biggest future opportunities still lie with China, India and the U.K.

Now from an enterprise perspective, Curtiss-Wright is performing well, and we're positioned to deliver solid results in 2017. On the heels of the strong third quarter performance and increased full year guidance, we expect solid organic sales growth in both our Commercial and Defense markets this year.

This improved sales outlook along with the contributions from TTC and our ongoing margin-improvement initiatives are expected to drive solid operating margin expansion and double-digit EPS growth.

As we look ahead to next year, we expect the benefit from the continued rebound in our Industrial and Nuclear Aftermarket businesses, along with anticipated steady improvements in Defense and AP1000 revenues. This provides us with increased optimism for solid growth in sales, operating income, margin and EPS in 2018.

We look forward to continuing to deliver on our long-term strategy and generating solid financial results for our stockholders. At this time, I would like to open up today's conference call for questions..

[Operator Instructions]. Our first question comes from Myles Walton with Deutsche Bank..

Guys, you've got Louis again here. So just the cash flow guidance range for $10 million this year.

Are you still looking at working capital being maybe a $40 million benefit to next year or is it $30 million given the higher number now?.

It's probably $30 million because we were operating from a different base when we gave you that number. Yes..

Okay. Sounds good. Just wanted to make sure. And then TTC sales, obviously, impressive ramp and your implied guidance for 4Q is another pretty big ramp-up.

Is anything anomalous this year or is that sort of type of ramp you expect to see in future years?.

Well, TTC does follow the same -- very similar to our Defense segment as it exists today, which is a relatively low first quarter and relatively and their highest quarter being the fourth quarter. And they're definitely H2 -- half 2 loaded.

So this is our first year with them, so we don't really have much history to go on, but they are following the same path as our Defense segment, so I would expect it to be somewhat similar going forward..

All right. Great. Thank you. Just one last quick one. Just making sure I have this right. So Virginia-class sub overall revenues were down, but they were up in Power and down in Commercial.

Is that correct?.

Yes. It's two different products. The valves are in the Commercial/Industrial segment and pumps are in the Power segment. So yes, you got it right..

Our next question comes from Michael Ciarmoli with SunTrust..

Dave, certainly, you've got momentum here in a lot of the end markets. I mean, as we look into '18, I think maybe the only headwind I could see is probably a little bit of wind down of the initial AP1000 direct revenues.

I mean, do all your end markets look like they're going to be in growth mode next year? And I can't recall that, that happening in quite some time, which would probably give you even more leverage in the model and higher incrementals.

But as you sit here today, I mean, do you feel confident in all the end market as you look into next year?.

Yes. We've been hoping that we could call a trough eventually. And it looks like we're probably the last ones to have called it, and things are -- all things are looking up right now, and we feel fairly positive.

I would say the only thing that is not really with a nice uptick symbol on it, when I look at my paperwork, that is in the oil and gas side, although that is better than it has been. It's been down considerably, like down 30%. So anything with a positive trending trajectory is good in that side, and we are seeing it at as somewhat flat at this point.

So I would consider that very positive. And so in light of the recent history on it, but all the other end markets look pretty good. And we're just knocking on wood every chance we can, because we'd like to see this sustain for a period of time, and we don't see anything in its way, right now. So yes, it's looking pretty positive for us..

Are there any other headwinds? I mean, is the only one that I called out, kind of the domestic nuclear, which trends down? But I mean, that's a little bit offset with the China still ramping up.

But are there any other headwinds that you guys see in the model, whether it's just programs winding down or shifting or any other changes that we should be aware of?.

No. The Navy side has been winding down, but now it's picking up again. So we're at the end of that wind down, and '18 should see a pick up there. We've got the Industrial class picking up with big double-digit gains across the board in that one. In terms of our markets and large-class trucks midsize, those are doing well.

The Power side, you mentioned it. You called it already that the China Direct is ramping, and then the existing business we have on reactor coolant pumps, domestic, that's sort of winding down, but way offset by the China direct deal. So no, I don't see any other headwinds out there that would affect us..

Okay. And then just last one and I'll jump back in the queue here. But for a starting point as well, the 60 basis points of dilution, that will roll off in '18 from TTC. So I mean, we should technically be thinking about, maybe, a margin starting point of 15.5% or so for next year.

Is that, again, the right way to think about the margin trajectory?.

Well, we said we'd be at 60 basis points from '16, so it's technically like 15.2%. Conservatively, yes, you're right..

Our next question comes from George Godfrey with CL King..

I just wanted to follow up, Dave, on the China plans going live.

Can you remind me on the time line of when both of those plants go fully live? And then could you just talk qualitatively about the pipeline of activity in each of the 3 countries that you mentioned, China, India and the U.K., please?.

Yes. The go-live situation is, as last we heard, the NNSA, which is the Chinese regulatory agency similar to our nuclear regulatory agency, is their safety administration side of it has given the authorization for fuel loading on the first one, Sanmen 1. And they might have given it on Haiyang 1 also. I don't know that for a fact.

I do know that Sanmen 1 was given that authorization. So they are okay to proceed. And as soon as we hear anything, then we'll certainly be passing it along to you all. But that's the latest on it.

And then they would presumably after that -- after their loading start up with limited commercial operation and then advancing to full operation of Sanmen 1 and then followed on its heels by Haiyang 1. So that's moving along, and it's been very positive for us.

We anticipate, as we indicated in the past, that once that fueling commences and we see some energy produced, we believe that will be a resumption -- very strong interest in the nuclear energy and as related directly to the AP1000, with that being the safest and the newest generation III plus system in the world.

So we think that will accelerate some interest and hopefully, turn into some orders for us. We don't have a timeline on that. But relative to the pipeline in terms of opportunities, it still remains China/Asia, the largest market in the world for these products are reactor coolant pumps.

And China being the first with the need of, we've talked about in the past, of 72 reactor coolant pumps with -- and that's reflective of the sites that have already been designated to use the AP1000 technology, and then you just do simple math and that gets you the 72 pumps.

And that, as I indicated, will hopefully be energized by the production of electricity, and we start that flow again and get some orders booked. And then India is an ongoing discussion between India and certain construction companies.

We understand and we heard that India is feeling like they can do it indigenously from a construction perspective and that where Westinghouse would remain the design agent and the maintenance side of it. And, of course, Westinghouse is working that side out on their own because they, obviously -- so they're not going to construct any longer.

So India remains there. As to when that occurs, we don't know. It takes a while for those things to happen. That's a big one. And certainly, the Westinghouse bankruptcy didn't help matters, indeed, it kind of slowed it down.

But to the degree that it did, we don't know, and we're still very positive that there could be tremendous opportunity for us there. And that's on the order of 24 reactor coolant pumps that have been designated in the 6 power plants of the AP1000 type that they plan to put in place in that country. Then lastly is the U.K.

with Mooreside, and they're now with the Westinghouse bankruptcy, they're, again, trying to figure out who's going to do the construction. And they had designated it as an AP1000 site, that would be 12 reactor coolant pumps needed and that's still being worked on. We don't know what the resolution will be on that.

Several have expressed interest in the construction side. And so we know that it's ongoing in dialogue, and they are reviewing all of their plans at this point. So we're still optimistic that, that one could happen in a relative near term. But again, you got to get that construction side taken care of..

Understood. Thank you for that clarification.

So in India and U.K., those deals can proceed independently of any additional activity in China, that they are not waiting for Sanmen 1 fuel and Sanmen 2 fuel loading? Or are those countries waiting to watch that as well?.

As far as we know, no. There is no tie to that. That's totally China -- dependent upon China, and those two are dependent upon themselves..

[Operator Instructions]. Our next question comes from Kristine Liwag with Bank of America..

If Industrial demand continues to grow next year, how should we think about incremental margins in your Commercial/Industrial business?.

Well, we don't really go down to that level, Kristine. To really find that, you guys got to -- in the Commercial/Industrial segment, we have 3 divisions, and below the 3 divisions, they have multiple business units and incremental margins really determine that at a business unit level because everybody has different cost structures.

So we've done 25% but we said 25% on an overall basis for Curtiss-Wright, but we haven't really done -- it's a lot of work to get down to that level. No, we haven't really done it and we'll have to roll it up. So we use 25% as basis..

Great. That's helpful. And then maybe switching gears, in your Defense business, I think you highlighted a recovery in UAV embedded computing.

I was wondering, how much of your Defense business is from embedded computing? And from my understanding, there are a few shifts going on in the industry and Primes may be outsourcing more content and also one of your competitors is consolidating smaller players.

Can you discuss opportunities and challenges that you're seeing in this industry?.

I'll talk to the macro level of it and we are -- yes, we see a little consolidation with specific niche technologies by one of the competitors. And while that's interesting, it fits the needs that they have in their strategy, which has been different than ours in years past.

And -- so we see a path forward and our continued growth in the segments that we're after and again, in continued M&A discussions and approaches with like TTC, the likes of which are complementary with what we're doing. So we're seeing that the outsourcing that you indicated, it is absolutely correct.

It continues and it continues from a rigorous perspective that's very beneficial to our embedded computing side, whereas, those primes don't have to then develop the necessary electronics and the processing boards and so forth that they would otherwise have to do.

They focus then on algorithms and software and those elements that really make their systems stand-alone and/or much different than -- the differentiating factor than the other primes that they are competing with. So we're seeing real opportunities there, and that's been the lifeblood of that Defense solutions business for us for many years.

And we feel that that's going to continue. And also with the pickup in the defense budget, as we're seeing it, the move towards eliminating sequestration at some point, I mean that's all trending very positively for us.

So I think, generally speaking, it looks to be a positive outlook for years to come and certainly notwithstanding a huge element of it is the 350-Ship Navy that the administration is aiming towards..

Great. It's great color. And maybe lastly for me. You mentioned the U.S. Navy. The U.S. Navy is also discussing higher procurement of submarines, right? There's discussion that the Virginia-class maintain a 2 per year even as we procure the Columbia class. And there is even discussion of increasing the Virginia-class to 3 per year.

Can you discuss how much of an opportunity this is for you? And how we should think about the timing of our revenue? And lastly, your capacity to build today, and if you have to make investments to meet these possibly highly ramp?.

Yes. It will be beautiful for us. We'd love it, because that's $60 million of content on every Virginia. And then as to the timing, I don't know, because we don't know when it would be thrown in the works as far as a buildup of up to 3. But we certainly looked at capacity.

We've been asked by our customer many times recently to tell them what would we need to do. It would be some capital, probably not a whole lot and mostly in the area of test loops, because you have to test these things. And if they're going to build 3, you'll probably going to have 1 or so in parallel. So that wouldn't be a huge amount of money.

We've got the footprint, the geography to do so and the plants that actually build these equipments. And then also from capacity -- from a manpower-loading perspective, it would actually fit very nicely in the way we model it. So the outlook on it is fantastic, if it turns into something positive on the Ohio Class, that's $90 million a piece.

And then on the carriers, if they were to narrow that down from a 5-year current build to a 4-year, that's $250 million of content that we provide. So you can just do the math on whatever scenario you want to play out and then it's a 5-year for the carrier. It's a year so for the Virginias, and then the Ohio remains to be determined.

So it's pretty straightforward for us. But yes, we'd love to see that happen..

And just a follow-up for that Virgina content.

So if you're providing 2 per year, does it take you 1 full year to build the RCPs for that or does it take you -- is that a multiyear program that you divide up over a period of time, like 2 years, 3 years?.

The submarine, it does go over multiyear year because we never really hit or rarely, once in a while we hit 120 in a year. But usually hovers around 100, which will tell you there is some multiyear, primarily, basically, namely, 1 year, but it's probably a little bit over 3 most likely, with this second year being the big one..

And we have a follow-up question from Michael Ciarmoli with SunTrust..

Dave, I think -- I'm not sure if it's for Dave or Glenn. Just talking about the updated guidance with the Power margins, and I think you called out, highly profits on the AP1000 China Direct Order. Have you seen -- I think those orders were initially priced with the margin sort of in the 23% range.

Are you guys still operating at that 23%? Or are you actually putting up better margins and seeing upside versus sort of that initial expectation?.

If you remember back at the Investor Day, we came out with 23% plus as our starting margin, and we are clearly in the plus category. So the margin is currently performing above 23%.

And again, as we said back in the Investor Day, under POC accounting, I mean, all things are based on estimated cost, if your cost estimates change, obviously, your margin will change. And we also said we -- the contract included risk contingencies. And as you mitigate risks, obviously, that can have a positive impact on our margin.

So we are progressing very nicely on that contract. And we are performing above that 23%..

And we have a follow-up question from George Godfrey with CL King..

Just a bookkeeping question.

Do you have the orders by segments there, Glenn, by any chance?.

Orders by segment, Yes..

Commercial. Okay..

Commercial/Industrial is about 290, Defense is about 130 and Power is about 100..

Got it. Okay. And then just looking at the book-to-bill, which has -- by my math, was 0.91 this quarter down from 0.99. And part of that, I'm sure, was the fact that the stronger revenue makes the book-to-bill challenging.

Is there any detectable softness or timing issues on the order flow of this year versus prior years?.

Not really on the orders, but just generally, the way book-to-bill typically works for us is the first quarter is typically the highest, first quarter this year we were at 1.23, mostly driven by -- that's when a large Defense orders -- they pan out. And then throughout the year, book-to-bill decreases because our sales increases.

Our sales are lower in the first quarter and higher in the fourth quarter. And so it's like an inverse relationship between the 2. But at the end of the day, we're projecting to be at least 1x by the end of this year..

At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Dave Adams, Chairman and Chief Executive Officer, for closing remarks..

Thanks guys. And thank you for joining us today, everyone. We look forward to speaking with you again during our fourth quarter 2017 earnings call. Have a great day. Bye..

Bye-bye..

Ladies and gentlemen, Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day..