Curtiss-Wright Corporation — Q1 2019 Form 10-Q
Business context and period: Global manufacturer and service provider serving aerospace, defense, power generation, and general industrial markets, reported through Commercial/Industrial, Defense, and Power segments. This unaudited quarter ended March 31, 2019; comparisons are with the three months ended March 31, 2018. Amounts are U.S. dollars.
Financial performance and position
- Revenue: $578.3 million, up 6% year over year. Management attributed the change to 2% organic growth, 5% from acquisitions, and a 1% reduction from foreign currency. Product sales were $471.6 million; service sales were $106.7 million.
- Profit and margins: Gross profit was $196.9 million, or approximately 34.0% of sales. Operating income was $72.0 million, up 12%, with operating margin of 12.5%, up 70 basis points. Net earnings rose 27% to $55.6 million; diluted EPS was $1.29 versus $0.98. The effective tax rate declined to 20.9% from 28.4%.
- Segment trends: Power sales increased 24% to $163.8 million and operating income rose 58% to $24.2 million; margin expanded to 14.8%. Defense sales increased 2% to $121.0 million, but operating income declined 11% to $17.7 million and margin fell to 14.6%. Commercial/Industrial sales declined 1% to $293.5 million; operating income was essentially flat at $39.4 million and margin was 13.4%.
- Orders and backlog: New orders increased 23% to $746.7 million. Backlog was approximately $2.3 billion at quarter-end; the company expected to recognize about 93% as sales over the next 12–36 months.
- Cash flow: Operating cash use was $51.9 million, compared with $71.3 million in Q1 2018. Management attributed the improvement primarily to a $50 million voluntary pension contribution in the prior-year quarter, partially offset by higher current-period disbursements. Investing cash use was $64.9 million, including $49.0 million for an acquisition and higher capital spending. Financing cash use was $8.1 million. Cash declined $121.6 million to $154.4 million.
- Debt and liquidity: Balance-sheet debt carrying value was approximately $762.1 million, versus cash of $154.4 million. No revolving-credit borrowings were outstanding; $476 million remained available under the credit agreement. The company reported compliance with debt covenants and capacity to borrow an additional $1.5 billion under its debt-to-capitalization covenant.
- Other key metrics: Total assets were $3.33 billion and total liabilities were $1.74 billion at March 31, 2019. The quarterly dividend was $0.15 per share. The company repurchased approximately 110,000 shares for $12.5 million.
Material changes and notable items
- Growth was concentrated in Power and naval defense activity. Higher naval defense sales and the acquisition of Dresser-Rand Government Business (DRG) supported Power results; unfavorable product mix reduced Defense profitability.
- On March 15, 2019, the company acquired Tactical Communications Group for approximately $49 million, net of cash acquired. The business operates in the Defense segment; the acquisition added $21.1 million of goodwill and $26.0 million of intangible assets.
- Adoption of the new lease standard, ASC 842, on January 1, 2019 increased reported assets and liabilities by approximately $151 million. The company also reclassified $26 million from accumulated other comprehensive loss to retained earnings following adoption of ASU 2018-02.
- Operating cash use remained negative despite improving year over year. Inventory increased by $23.6 million from year-end, and cash was also used for the acquisition, capital expenditures, and share repurchases.
Outlook, risks, and contingencies
- The filing provides no specific full-year revenue or earnings guidance. Management stated that cash, operating cash flow, available credit, and access to capital markets were sufficient for short- and long-term needs. It expected approximately 42% of 2019 revenue to come from defense-related markets.
- CNRL litigation: A claim relating to a 2011 refinery fire and explosion was reduced by the claimant to approximately $400 million; the original alleged damages were estimated at $1 billion or more. Curtiss-Wright said it could not estimate a loss or range, intended to defend the matter, and warned an unfavorable outcome could materially affect a future period. Insurance may not cover all costs.
- AP1000 contracts: The company disclosed potential liquidated-damages exposure relating to delivery delays, with a possible loss range of $0–$55.5 million. No accrual was recorded because responsibility for delays remained uncertain.
- The company also faces asbestos-related lawsuits but said it had not been found liable or paid a material settlement and believed insurance and indemnification were adequate. It reported no material changes in risk factors or market risk during the quarter.
Important facts for investors to verify
- Whether order growth and the $2.3 billion backlog convert to revenue on the expected schedule, and how much reported growth depends on acquisitions.
- Whether Power’s acquisition-supported growth and Defense’s margin decline persist in subsequent quarters.
- Cash conversion, working-capital movements, and liquidity following the quarter’s acquisition and capital spending.
- Developments in the CNRL and AP1000 matters, including potential financial exposure and insurance coverage.