Curtiss-Wright Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company designs, manufactures, and services engineered products for aerospace, defense, power and process, and industrial markets. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $597.1 million | $601.2 million | Down 1% |
| Gross profit / margin | $209.8 million / 35.1% | $200.6 million / 33.4% | Margin up about 170 bps |
| Operating income / margin | $85.1 million / 14.2% | $72.4 million / 12.1% | Up 17%; margin up 220 bps |
| Net earnings | $59.5 million | $51.8 million | Up 15% |
| Diluted EPS | $1.45 | $1.21 | Up 20% |
| Operating cash flow | $(26.6) million | $(192.6) million | Cash use improved by $166.0 million |
Product sales rose to $509.0 million from $497.9 million, while service sales fell to $88.1 million from $103.3 million. The effective tax rate was 25.6%, compared with 26.6% a year earlier. Interest expense increased 33% to $10.0 million, primarily reflecting $300 million of senior notes issued in August 2020.
Segments and material changes
- Aerospace & Industrial: Sales fell 20% to $180.3 million and operating income fell 41% to $19.0 million. Commercial aerospace weakness related to COVID-19 was the main pressure; segment margin declined to 10.6% from 14.2%.
- Defense Electronics: Sales rose 30% to $181.2 million and operating income rose 52% to $36.6 million. Growth included the PacStar acquisition and stronger demand for defense electronics; margin increased to 20.2% from 17.2%.
- Naval & Power: Sales were essentially flat at $235.5 million, while operating income increased 35% to $38.1 million. Margin improved to 16.2% from 12.0%, helped by restructuring savings, product mix, and the absence of prior-year facility transition costs.
The company reorganized its reportable segments effective January 1, 2021, moving valve-related operations into Naval & Power. Prior-period segment figures were recast; consolidated results were unchanged. Overall new orders increased 2% to $579.4 million. Backlog was approximately $2.1 billion, with about 88% expected to convert to sales within 36 months.
Cash, debt, and liquidity
- Cash and cash equivalents were $147.1 million at March 31, 2021, down from $198.2 million at year-end 2020.
- Debt, net of issuance costs and other adjustments, was approximately $1.058 billion, broadly unchanged from year-end. The balance sheet included $100 million current debt and $957.9 million long-term debt.
- There were no revolving-credit borrowings; $480 million remained available under the credit facility after letters of credit. The company reported additional covenant borrowing capacity of $1.6 billion and compliance with its debt covenants.
- Investing cash use was $12.9 million, including $8.5 million of capital expenditures and $5.3 million of additional consideration for prior acquisitions. Financing cash use was $7.1 million, including $11.8 million of share repurchases.
- Operating cash use improved substantially from Q1 2020, largely because the prior-year period included a $150 million voluntary pension contribution, as well as higher current-period cash earnings.
Outlook, risks, and unusual items
- The filing does not provide specific revenue or earnings guidance. Management said cash, expected operating cash flows, and borrowing capacity should be sufficient for operating needs, planned capital expenditures, debt interest, leases, pension obligations, and dividends through 2021 and beyond.
- Management described continuing COVID-19 uncertainty, including potential supply-chain and production effects and volatile demand in commercial aerospace and general industrial markets. It noted vaccine rollout and possible new variants as factors affecting future impacts. Approximately 55% of 2021 revenue was expected to come from defense-related markets.
- For AP1000 nuclear-plant contracts, possible liquidated damages were estimated at $0 to $55.5 million across the U.S. and China contracts. The company and Westinghouse agreed to non-binding mediation, tentatively scheduled for late Q2 2021; management said the ultimate resolution was not expected to materially affect the consolidated statements.
- The company had committed to sell its German industrial valve business. It recorded a $33 million impairment in Q4 2020 and no further impairment in Q1 2021.
- Asbestos-related lawsuits and other ordinary-course claims remain pending. Management does not expect these matters, individually or in aggregate, to have a material adverse effect; it cited insurance and indemnification coverage for asbestos claims.
- The company repurchased approximately 102,000 shares for $11.8 million in Q1. It planned to repurchase at least $50 million of stock through a 10b5-1 program during 2021.
Important facts for investors to verify
- Whether commercial aerospace demand and related margins recover, given the sharp segment sales decline and continuing pandemic uncertainty.
- How much Defense Electronics growth reflects PacStar acquisition contributions versus organic demand, and whether the segment’s higher margins persist.
- Whether backlog converts to revenue on the expected schedule and how naval order timing affects new orders.
- The eventual outcome and financial exposure from AP1000 mediation, including any liquidated damages.
- Cash-flow conversion through the rest of 2021, debt maturities and refinancing needs, and execution of planned repurchases and the German valve-business sale.