Curtiss-Wright Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Curtiss-Wright supplies engineered products and services primarily to aerospace and defense markets, as well as commercial power, process, and industrial markets. It reports through Aerospace & Industrial, Defense Electronics, and Naval & Power.
Financial performance
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2021 period.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $630.5 | $620.6 | $1,799.4 | $1,839.2 |
| Gross profit | $232.2 | $237.0 | $662.1 | $671.5 |
| Operating income | $107.6 | $97.7 | $266.2 | $277.3 |
| Operating margin | 17.1% | 15.7% | 14.8% | 15.1% |
| Net earnings | $73.8 | $69.7 | $185.3 | $190.6 |
| Diluted EPS | $1.91 | $1.70 | $4.79 | $4.64 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.4 | $155.8 |
Q3 sales rose 2% and operating income rose 10%; nine-month sales declined 2% and operating income declined 4%. The nine-month diluted EPS increase despite lower net earnings reflects, in part, fewer weighted-average shares outstanding. Nine-month gross margin was approximately 36.8%, versus 36.5% in 2021; Q3 gross margin was approximately 36.8%, versus 38.2%.
- Segment trends: Q3 sales and operating income rose 9% and 27% in Aerospace & Industrial, and 6% and 17% in Naval & Power. Defense Electronics sales fell 11% and operating income fell 10%. For nine months, Aerospace & Industrial sales rose 6% and operating income 18%; Defense Electronics sales fell 14% and operating income 21%; Naval & Power sales fell 1% while operating income rose 2%.
- Orders and backlog: New orders increased 30% in Q3 and 17% for nine months, primarily reflecting order timing, the arresting-systems acquisition, and higher defense and commercial aerospace orders. Backlog was approximately $2.6 billion; the company expected about 90% to convert to sales over the following 36 months.
Cash, liquidity, and capital structure
- Cash was $113.6 million at September 30, 2022, down from $171.0 million at December 31, 2021. Nine-month operating cash flow was only $2.4 million, versus $155.8 million in 2021, mainly due to higher inventory purchases, lower defense revenue and advance receipts, and a $15 million AP1000 settlement payment.
- Investing cash outflow was $282.0 million, including $247.2 million for the arresting-systems acquisition. Financing cash inflow was $244.8 million, primarily reflecting net revolving-credit borrowings.
- Total debt was approximately $1.344 billion, including $202.5 million of senior notes due in 2023; long-term debt was $1.141 billion. The company reported $388 million drawn on its revolving facility, $347 million available under the facility, and compliance with debt covenants. It stated capacity for an additional $1.4 billion of borrowing under its debt-to-capitalization covenant.
- In May 2022, Curtiss-Wright replaced its revolving credit agreement with a $750 million facility expiring in May 2027, with a $250 million accordion feature. On October 27, 2022, it closed a separate $300 million senior-note offering: $200 million at 4.49% due 2032 and $100 million at 4.64% due 2034.
- Nine-month share repurchases were $44.4 million, versus $79.1 million in 2021. The quarterly dividend increased 6% beginning in Q2 to $0.19 per share.
Changes, outlook, and risks
- Management cited supply-chain disruption, longer lead times, and inflation in material and transportation costs, which have constrained production and delayed conversion of backlog to sales. It expected these trends to continue at least through the remainder of 2022.
- Defense Electronics was particularly affected by supply constraints and the delayed FY2022 defense budget, contributing to lower sales and unfavorable overhead absorption. Management attributed Aerospace & Industrial improvement to higher commercial aerospace and general industrial sales and operational initiatives.
- The June 2022 acquisition of Safran Aerosystems Arresting Company cost $247 million and added $14 million of nine-month sales; it contributed $6 million of net losses in the period. Purchase-price allocation remained provisional, and first-year purchase-accounting costs affected Naval & Power.
- The German industrial-valve business was sold in January 2022 for $3 million gross proceeds, with a $5 million loss recorded in Q1. Q3 comparisons also benefited from the prior-year impairment on the business.
- The company paid Westinghouse $15 million in March 2022 under an AP1000 settlement and must pay a further $10 million in Q1 2023. The settlement released open claims and included a right of first refusal for future AP1000 projects.
- There is no specific consolidated sales or earnings guidance in the provided filing text. Management said cash, expected operating cash flow, and borrowing capacity were sufficient for anticipated needs. Forward-looking results remain subject to risks including supply-chain and inflation pressures, COVID-19 effects, and the Russia-Ukraine conflict.
- Foreign-currency translation losses were $97.3 million for the nine months, contributing to comprehensive income falling to $101.7 million from $192.6 million. The filing also reports a $12 million nine-month loss on undesignated foreign-exchange contracts.
- The Inflation Reduction Act includes a 1% excise tax on share repurchases after December 31, 2022; the company was assessing its potential effect. It also includes a 15% corporate alternative minimum tax effective for the company’s fiscal year ending February 2, 2024.
Most important facts for investors to verify
- Whether supply constraints and inflation ease, and whether new orders convert into sales and operating cash flow.
- Defense Electronics performance and the timing of defense program funding and orders.
- Working-capital trends, especially inventory, receivables, customer advances, and deferred revenue, given the sharp year-to-date cash-flow decline.
- Debt maturities, borrowing costs, and the effect of the October 2022 $300 million note offering on liquidity and leverage.
- Final purchase accounting and operating contribution from the arresting-systems acquisition, plus the remaining AP1000 settlement payment.
- Potential effects of foreign-exchange movements, share-repurchase excise tax, and legal or environmental contingencies. Management stated it did not expect pending legal matters to have a material adverse effect.