Curtiss-Wright 2018 Annual Report

Dear Fellow Shareholders:

Over the past five years, our company has steadily evolved under the One Curtiss-Wright vision into an integrated, market-facing business that is easier for our customers, employees, investors and other stakeholders to understand. We continue to leverage our critical mass and market leadership positions with our broad and highly diversified portfolio of products and services across the commercial aerospace, defense, general industrial and power generation markets.

We drive a continuous improvement culture at Curtiss-Wright. Our ongoing pursuit of operational excellence with financial discipline has led us to successfully achieve top quartile performance compared with our peer group across a range of critical financial metrics established at our 2013 Investor Day (and as highlighted on the inside front cover).

Our disciplined capital deployment strategy has been driven by continued operational performance, robust free cash flow generation and a strong balance sheet to generate solid returns to our shareholders, reinvestments back into the business and more recently, strategic acquisitions. Following a self-imposed hiatus on acquisitions—implemented in 2013—in order to focus on improving our operating metrics, we successfully completed two very solid and strategic acquisitions in the past two years, exemplified by our more recent acquisition of the Dresser-Rand government business (DRG) completed in 2018.

We continue to take the steps necessary to improve the competitiveness of Curtiss-Wright and generate strong returns for our shareholders over the long-term. To that end, We are Delivering on All Fronts.

David C. Adams

David C. Adams

Chairman and Chief Executive Officer

  • $2,412M

    Net Sales
  • $6.37

    Diluted Earnings Per Share
  • $382M

    Operating Income
  • $333M

    Free Cash Flow
  • 15.8%

    Operating Margin
Reliable and Sophisticated Electronic Solutions

Reliable and Sophisticated Electronic Solutions

Curtiss-Wright teams with off-highway vehicle OEMs to provide safety-critical solutions that offer optimal ergonomics to reduce fatigue and increase productivity in extreme environments. Key technologies include human machine interface consoles, shifters, joysticks, electronic throttles, power electronics and vibration-tolerant tilt sensors.

2018 Financial Performance

Curtiss-Wright achieved impressive results and delivered a highly successful performance in 2018, led by solid sales growth, continued operating margin expansion and strong free cash flow generation.

Net sales of $2.4 billion increased 6%, led by synchronized sales growth in all of our commercial and defense end markets. This performance included strong growth in the naval defense market, including the contribution from the DRG acquisition, as well as the general industrial market.

This performance reflects solid execution in all three segments and the benefits of our ongoing margin improvement initiatives.

Our adjusted diluted earnings per share increased 28% to $6.37, led by the strong operational performance, and the benefits of a lower tax rate and steady share buyback activity, as we repurchased approximately $200 million in shares this past year, including nearly $120 million in the fourth quarter alone.

In addition, we generated $333 million in adjusted free cash flow (excluding a $50 million pension contribution), driving an adjusted free cash flow conversion of 121%, led by the strong operational performance and our continued efforts to reduce working capital.

We maintain a healthy balance sheet, providing a strong base of financial flexibility enabling us to pursue our long-term growth strategies.

2018 Commercial/Industrial Segment Sales by End Market

General Industrial - 47%
Commercial Aerospace - 30%
Aerospace Defense - 10%
Naval Defense - 7%
Power Generation - 6%

We are Delivering Top Quartile Performance

Next, I’d like to reflect on our collective performance over the past five years. In 2013, we established a five-year goal to achieve top quartile performance versus our peer group across a range of financial metrics, including: Operating Margin, Earnings per Share, Return on Invested Capital (ROIC), Working Capital as a percentage of Sales, Capital Expenditures as a percentage of Sales and Free Cash Flow Conversion.

I am pleased to report that we achieved or exceeded all of the original targets and reached top quartile for every metric. Some notable achievements include the very strong results for operating margin and ROIC, which expanded 650 and 750 basis points, respectively, and a tremendous reduction in our working capital as a percentage of sales from 32% to less than 20%.

It has been an exciting journey to reach top quartile performance and I am very proud of the entire team’s accomplishments. We will remain focused on relentlessly driving operational improvement, leveraging the critical mass of One Curtiss-Wright across the enterprise, and maintaining our position in the top quartile of our peer group.

Next-Gen 'Black Boxes' Deliver 25 Hours of Cockpit Recording

Next-Gen "Black Boxes" Deliver 25 Hours of Cockpit Recording

Curtiss-Wright was selected as exclusive supplier for Honeywell’s next-generation recorders supporting the commercial and business jet markets. The lightweight Fortress™ “black boxes” are the first to support 25 hours of cockpit voice recording and real-time
aircraft connectivity.

Cockpit Voice Recorder

Disciplined Capital Allocation Strategy

Over the past five years, Curtiss-Wright’s commitment to a balanced capital allocation strategy consisting of a disciplined pace of acquisitions, reinvesting in our business, and providing steady distributions to our shareholders has created tremendous value.

Since 2013, I’m proud to say that we have accomplished the following:

  • Returned nearly $850 million to shareholders through steady share repurchases and dividends
  • Completed two significant acquisitions for nearly $500 million
  • Spent $500 million on operational investments, including capital expenditures, voluntary pension contributions and debt prepayments

We have maintained an active share buyback program, as we repurchased approximately $715 million in shares and reduced our share count by 8.7 million shares over the past five years. We expect to repurchase at least $50 million in shares in 2019. We have also maintained a steady pace of dividend payouts in the past five years. Our strong financial position and continued ability to deliver solid earnings growth and free cash flow have enabled us to consistently provide a steady and solid return to our shareholders.

In early 2018, we completed the acquisition of DRG (from Siemens) for $210 million in cash. DRG is the preferred supplier of steam turbines and main engine guard valves on aircraft carriers, and has significant content on submarines and other surface ships. This acquisition significantly increased our shipset content and our footprint on new U.S. Navy Nuclear vessels, and also expanded our naval aftermarket business through its prominent presence at U.S. Navy shipyards. DRG has been a great addition to our defense portfolio, particularly during a period of increasing naval defense budgets, and the integration has been going very well.

2018 Defense Segment Sales
by End Market

Aerospace Defense - 48%
Naval Defense - 23%
Ground Defense - 17%
Commercial Aerospace - 9%
General Industrial - 3%

New 3-Year Targets

Now that we successfully achieved those five-year targets set in 2013, we are moving forward with the next phase of our evolution, driven by a renewed focus on delivering top-line growth. We have issued the following long-term targets for the period ending in 2021:

  • 5–7% Total Sales CAGR
  • 17% Adjusted Operating Margin
  • 10% Adjusted diluted EPS CAGR (goal to deliver $8.50 in diluted EPS)
  • $1 Billion in cumulative Free Cash Flow (with 110% average free cash flow conversion)

We expect to accomplish this accelerated sales growth target both organically—aided by increased research and development and other growth investments—and through acquisitions—utilizing our strong balance sheet. Within the defense markets, we expect to continue to benefit from the favorable trends in U.S. military spending and rising defense budgets, particularly as they relate to our content on critical fighter jet, ground vehicle, submarine and aircraft carrier programs. In the commercial markets, we expect to leverage the continued production ramp up in commercial aerospace, ongoing support for operating and new build reactors in the commercial nuclear power industry and favorable trends across our numerous industrial businesses.

Beginning in 2019, we are shifting our capital allocation strategy slightly via two critical areas – internal growth investments and acquisitions.

Getting Closer to Our End Users: DRG Acquisition Significantly Expands Naval Defense Capabilities

Getting Closer to Our End Users: DRG Acquisition Significantly Expands Naval Defense Capabilities

Our new Fleet Solutions business performs vital maintenance, repair and overhaul services at U.S. Navy shipyards worldwide.

We are investing the necessary capital and resources to position us to deliver long-term growth and margin expansion, and our 2019 forecast includes increased research and development spending across all three segments. We have had considerable success with our R&D investments in recent years leading to significant awards and long term sustainable growth for Curtiss-Wright. Regarding capital investments, we committed to a $20 million investment in the DRG business in 2019 to drive improved operating efficiencies and long-term margin expansion.

We also intend to increase our allocation of capital to high-quality, profitable acquisitions to supplement our organic growth, building on our success with the acquisitions of TTC in 2017 and DRG in 2018. We seek acquisitions that support our long-term strategic and financial objectives, while also remaining both diligent and disciplined in our approach. Our confidence comes from a long track record of M&A, and a team that is very good at integration.

Along with those investments, we will continue to focus on returns to shareholders through steady buybacks and dividends, and at a minimum, repurchase sufficient shares to cover annual dilution from stock compensation.

We remain focused on driving long-term profitability, while also maintaining top-quartile status compared with our peer group.

We expect to generate more than $1 billion in cumulative free cash flow over the next three years, and have raised our minimal annual free cash flow target base from $250 million to at least $300 million. Our continued focus on working capital and improved operational performance will help us reach this goal.

2018 Power Segment Sales
by End Market

Power Generation - 58%
Naval Defense - 42%

In Recognition

It is with sincere best wishes that we announce the retirement of our colleague Dr. Allen A. Kozinski from our Board of Directors. Allen has been an integral member of our Board since 2007, serving as a member and Chairperson of the Committee on Directors and Governance, and member of the Executive Compensation and Finance Committees, and from 2017–2018, as Lead Independent Director of the Board. I would like to personally thank Allen for his enduring dedication and many years of service to Curtiss-Wright and wish him well in his future endeavors.

Finally, I would like to thank our approximately 9,000 global employees for their steadfast drive and determination for making this past year a strong success.

As we enter 2019 and look ahead to celebrating our 90th anniversary listing on the New York Stock Exchange this August, I remain confident that our long-term commitment to delivering strong operational performance will enhance Curtiss-Wright’s shareholder value for years to come.

David Adams signature

David C. Adams

Chairman and Chief Executive Officer