Curtiss-Wright Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Curtiss-Wright is a diversified manufacturer and service provider serving defense, aerospace, power generation, and industrial markets.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $614.9 million | $595.4 million | $1,832.2 million | $1,763.2 million |
| Operating income | $105.6 million | $97.0 million | $283.3 million | $263.6 million |
| Operating margin | 17.2% | 16.3% | 15.5% | 15.0% |
| Net earnings | $82.5 million | $74.5 million | $218.2 million | $192.9 million |
| Diluted EPS | $1.92 | $1.68 | $5.07 | $4.33 |
| New orders | $646.6 million | $514.2 million | $1,994.1 million | $1,819.2 million |
- Q3 sales grew 3%; operating income grew 9%; diluted EPS increased 14%. For the nine months, sales increased 4%, operating income 7%, and diluted EPS 17%.
- Gross profit was $226.1 million in Q3 and $653.0 million year to date. The filing does not state a gross margin percentage.
- Cash from operations was $159.0 million for the nine months, versus $99.0 million in 2018. Capital expenditures were $49.9 million, compared with $30.3 million; investing cash outflow was $90.1 million and financing cash outflow was $41.4 million.
- Cash and cash equivalents were $297.7 million at September 30, 2019. Debt, net of issuance costs and swap proceeds, was approximately $761.1 million; there were no revolving-credit borrowings and $471 million of unused facility capacity. The company reported compliance with debt covenants and $1.7 billion of additional borrowing capacity under its debt-to-capitalization covenant.
- Dividends were $0.17 per share in Q3 and $0.49 per share year to date. The company repurchased approximately 322,000 shares for $37.9 million in the first nine months.
Changes and business drivers
- Defense markets led growth: nine-month defense sales increased 14%, including 20% growth in naval defense. Commercial markets declined 2%, principally because of weaker power generation and general industrial sales.
- Q3 operating income improved in Commercial/Industrial and Defense, while Power declined 7%. Year-to-date Power operating income increased 28%, aided by naval defense sales and the absence of first-year purchase-accounting costs related to the 2018 Dresser-Rand Government Business acquisition. Defense year-to-date operating income fell 7%, reflecting higher R&D costs and favorable prior-year contract adjustments that did not recur.
- Q3 consolidated margin improved 90 basis points; year-to-date margin improved 50 basis points. Management cited sales volume, favorable product mix, naval defense overhead absorption, and margin initiatives. Lower AP1000 China Direct sales were a partial offset.
- Operating cash flow increased $60 million year over year, primarily because 2018 included a voluntary $50 million pension contribution; current-period collections also helped, partly offset by higher disbursements.
- Foreign-currency translation reduced Q3 comprehensive income by $24.7 million, contributing to comprehensive income of $59.1 million versus $75.7 million a year earlier. Nine-month comprehensive income was $207.0 million versus $171.5 million.
Outlook, risks, and unusual items
- Backlog was approximately $2.2 billion at September 30, 2019; management expected about 92% to convert to sales over the next 12–36 months. New orders rose 26% in Q3 and 10% year to date, with timing of defense and aerospace awards and customer funding affecting comparisons.
- The filing provides no specific full-year revenue or earnings guidance. Management said cash, operating cash flow, available credit, and access to capital markets were sufficient for short- and long-term needs. The company expected to repurchase at least $50 million of additional shares during 2019.
- The CNRL refinery fire litigation is a significant uncertainty. CNRL’s claim, initially estimated at $1 billion or more, was reduced to approximately $400 million for mediation; the company could not estimate a loss range and warned an unfavorable outcome could materially affect results, financial condition, or cash flows. Mediation was planned for November 2019.
- AP1000 contract liquidated damages remain disputed. No accrual was recorded; the disclosed possible loss range was $0–$55.5 million. A fault at one Sanmen 2 reactor coolant pump was limited to a single part, with remediation not expected to have a material impact.
- Other notable items: adoption of lease accounting added approximately $151 million to assets and liabilities at January 1, 2019; a $50.1 million acquisition of Tactical Communications Group was completed in March 2019. Management reported no material change in risk factors or market risk.
Important facts for investors to verify
- Developments and potential exposure in the CNRL litigation, including insurance coverage and mediation outcome.
- Responsibility for AP1000 delivery delays and any change to the unaccrued $0–$55.5 million possible-loss range.
- Whether backlog converts as expected, and the timing and profitability of naval defense, aerospace, and AP1000 work.
- Cash conversion and working-capital trends, including receivables, inventory, and accounts payable and accrued expenses.
- Whether weaker power generation and general industrial demand, tariffs, foreign exchange, and higher R&D spending affect margins or outlook.