Curtiss-Wright Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Curtiss-Wright is a diversified manufacturer and service provider serving commercial/industrial, defense, and power markets. Unless otherwise noted, comparisons are with Q1 2017.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $547.5 million | $523.6 million | +5% |
| Gross profit | $181.2 million | $166.9 million | +9% |
| Operating income | $64.5 million | $47.7 million | +35% |
| Operating margin | 11.8% | 9.1% | +270 basis points |
| Earnings before taxes | $61.0 million | $41.2 million | +48% |
| Net earnings | $43.6 million | $32.5 million | +34% |
| Diluted EPS | $0.98 | $0.73 | +34% |
| New orders | $604.9 million | $644.3 million | -6% |
Sales rose 3% organically and 2% from foreign-currency translation; acquisitions contributed no reported year-over-year growth. Management attributed higher operating income primarily to increased industrial vehicle and surface-treatment sales, margin-improvement initiatives, and improved Defense profitability after first-year purchase-accounting costs related to the 2017 TTC acquisition.
Segments and markets
- Commercial/Industrial: Sales of $296.6 million (+6%); operating income $39.2 million (+28%); margin 13.2%, up 220 basis points. Higher industrial vehicle sales and margin initiatives supported results.
- Defense: Sales of $118.9 million (+4%); operating income $19.7 million (+78%); margin 16.6%, up 690 basis points. Higher data-acquisition, flight-test, and ground-defense demand contributed.
- Power: Sales of $132.0 million (+1%); operating income $15.3 million (-1%); margin 11.6%, down 30 basis points. Lower AP1000 U.S. program production and nuclear aftermarket profitability offset higher China program and naval-defense activity.
Defense-market sales increased 12%; commercial-market sales were nearly flat. Power-segment orders fell 22%, mainly because Q1 2017 included a government CVN-80 aircraft-carrier pump order. Total orders declined 6% for the same principal reason; orders in Commercial/Industrial and Defense were essentially flat.
Cash flow, balance sheet, and liquidity
- Operating cash flow: Used $71.3 million, versus $24.9 million used in Q1 2017. The company attributed the increase primarily to a voluntary $50 million pension contribution; working-capital outflows also included $79.6 million from accounts payable and accrued expenses.
- Investing cash flow: Used $9.7 million, compared with $249.7 million used a year earlier, when the company acquired two businesses for about $239 million.
- Financing cash flow: Used $5.5 million, including $12.3 million for share repurchases.
- Cash: $396.5 million at March 31, down from $475.1 million at year-end 2017.
- Debt: Long-term debt was $813.6 million on the balance sheet; the debt note reports total debt net of issuance costs and including swap proceeds of $814.6 million. Average debt outstanding was $800 million and its average interest rate was 3.7%.
- Liquidity: No revolving-credit borrowings; $479 million of unused availability under the credit facility after supporting letters of credit. The company reported compliance with debt covenants and $1.4 billion of additional borrowing capacity under its debt-to-capitalization covenant.
- Other balance-sheet items: Total assets were $3.18 billion; total liabilities $1.60 billion. The current ratio was approximately 2.5x, based on reported current assets and liabilities.
Outlook, accounting, and notable items
- The filing provides no quantified earnings or revenue guidance. Backlog was approximately $2.1 billion; management expected about 88% to be recognized as sales over the next 12–36 months.
- On April 2, 2018, the company acquired Dresser-Rand Government Business for $212.5 million in cash; it will be part of the Power segment.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, so prior periods were not restated. Adoption reduced Q1 2018 reported net earnings by $1.8 million versus the amount that would have been reported without adoption; opening retained earnings was reduced by $2.3 million. About 31% of Q1 sales were recognized over time.
- Q1 income tax expense included an additional $6.5 million provisional charge for foreign withholding taxes associated with the 2017 Tax Act. The effective tax rate was 28.4%, versus 20.9% a year earlier; management cited the Tax Act charge and elimination of the Section 199 deduction, partly offset by the lower U.S. corporate tax rate.
- Management said cash, operating cash generation, available credit, and access to capital markets were sufficient for short- and long-term needs. It expected no further 2018 contribution to the principal pension plan after the $50 million Q1 contribution.
Risks and contingencies
- CNRL litigation: A claim related to a 2011 refinery fire was reduced by the claimant to approximately $400 million from an initially alleged amount of at least $1 billion. Curtiss-Wright could not estimate any potential loss, said insurance might not cover a judgment, and warned an unfavorable outcome could materially affect a future period. Mediation was anticipated in late 2018.
- AP1000 contracts: Potential liquidated damages relate to delivery delays and responsibility for them remains disputed. The company accrued no loss; the disclosed total possible-loss range was $0–$55.5 million, including up to $31 million for the U.S. contract.
- Westinghouse bankruptcy: Approximately $2.9 million of pre-petition billings were outstanding. The company expected to recover substantially all general unsecured claims under the approved reorganization plan and expected collection for post-petition work.
- The company also faces asbestos-related lawsuits, but reported no material liability to date and believed insurance coverage adequate. It stated there were no material changes to its risk factors or market-risk disclosures during the quarter.
Key facts for investors to verify
- Whether operating-margin improvement persists, particularly in Defense and Commercial/Industrial, and whether Power-segment profitability recovers.
- How order trends and the $2.1 billion backlog translate into sales, especially given the decline in total Q1 orders and Power orders.
- Cash conversion and working-capital movements after the unusually large pension contribution.
- Final tax effects under the Tax Act and comparability of results following ASC 606 adoption.
- Developments in the CNRL claim and AP1000 liquidated-damages disputes, including any changes to estimated exposure or insurance coverage.
- Integration, financing, and expected contribution of the April 2018 Dresser-Rand acquisition.