Curtiss-Wright Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Curtiss-Wright designs, manufactures, and services engineered products for aerospace, defense, power generation, and industrial markets. Results are unaudited.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $567.9 million (+12%) | $507.1 million | $1,659.1 million (+8%) | $1,543.4 million |
| Operating income | $96.6 million (+26%) | $76.6 million | $231.0 million (+14%) | $201.9 million |
| Operating margin | 17.0% (+190 bps) | 15.1% | 13.9% (+80 bps) | 13.1% |
| Net earnings | $63.9 million | $45.9 million | $147.1 million | $118.7 million |
| Diluted EPS | $1.43 | $1.02 | $3.29 | $2.63 |
| New orders | $517.3 million (+3%) | $500.1 million | $1,709.7 million (+3%) | $1,652.4 million |
Q3 gross profit was $210.8 million, versus $184.5 million. The effective tax rate was 26.0% for Q3 and 26.5% year to date, compared with 31.0% in both prior-year periods. Management attributed lower rates principally to valuation-allowance changes and adoption of share-based payment accounting guidance.
Cash flow, balance sheet, and capital
- Operating cash flow for the nine months was $162.3 million, down from $267.2 million. Management cited prior-year AP1000 program collections of $97 million and a $20 million one-time benefit from terminating an interest-rate swap.
- Investing cash outflow was $259.6 million, including $232.6 million net cash for acquisitions and $34.9 million in capital expenditures. Financing cash outflow was $39.4 million, including $38.9 million of share repurchases and $11.5 million of dividends.
- Cash was $432.2 million at September 30, 2017, down from $553.8 million at year-end 2016. Current assets were $1.389 billion and current liabilities $669.2 million.
- Total debt was $950.4 million before debt issuance costs and swap proceeds; the balance sheet reported $964.8 million net debt. The company had no revolving-credit borrowings, $477 million of unused facility capacity, and reported covenant compliance. Management stated it could borrow an additional $1.132 billion without breaching its debt-to-capitalization covenant.
- Share repurchases totaled $39 million for the nine months; the company said it planned to repurchase at least $50 million in 2017.
Material changes and segment performance
- Sales growth was 8% organic and 4% from acquisitions in Q3; year-to-date growth was 5% organic and 4% from acquisitions. The 2017 acquisitions, principally Teletronics Technology Corporation (TTC), contributed $45 million in sales and $1 million in net losses. Acquisition consideration was approximately $233 million.
- Commercial/Industrial: Q3 sales rose 7% to $293.9 million and operating income rose 20% to $46.8 million; nine-month sales increased 3% and operating income 12%. Industrial vehicle demand and margin-improvement initiatives supported results.
- Defense: Q3 sales rose 25% to $141.9 million, largely reflecting TTC; operating income increased 17%, but margin declined 160 bps to 23.7%. Nine-month sales increased 15%, while operating income rose 3% and margin fell 210 bps to 17.2%. TTC purchase accounting and unfavorable defense-electronics mix weighed on margins.
- Power: Q3 sales rose 12% to $132.0 million and operating income rose 38% to $19.5 million. Nine-month sales rose 11% and operating income 36%. Higher AP1000 China Direct production and improved nuclear aftermarket profitability were key drivers.
- Company-wide operating income benefited from higher AP1000 China Direct production, industrial vehicle volume, and margin initiatives. Year-to-date results also faced unfavorable defense-electronics mix. Foreign-currency translation contributed $69.3 million of other comprehensive income for the nine months, versus a $26.9 million loss in the prior-year period.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said available cash, operating cash flow, credit capacity, and access to capital markets were sufficient for short- and long-term needs.
- The company expected to adopt the new revenue-recognition standard on January 1, 2018, using the modified retrospective method. Its assessment was ongoing; it anticipated certain contracts and repair/overhaul work would move from point-in-time to over-time recognition.
- A Canadian Natural Resources Limited claim related to a 2011 refinery incident alleges damages of at least $1 billion. Curtiss-Wright could not estimate potential losses, said insurance may not fully cover a judgment, and intended to defend the case. The parties agreed in principle to mediation in late 2018.
- Potential AP1000 liquidated damages remained unresolved. The company reported a possible loss range of $0 to $55.5 million, including a $0 to $31 million range for the U.S. contract; no accrual was recorded because responsibility for delays was uncertain.
- Westinghouse was in Chapter 11. Curtiss-Wright had approximately $6.5 million of pre-petition billings outstanding and assessed them as substantially recoverable; it continued monitoring the bankruptcy and related plant projects.
- Management reported no material changes in risk factors or market-risk exposure. Disclosure controls were deemed effective as of September 30, 2017.
Key facts for investors to verify
- Whether operating cash generation improves, given the year-over-year decline and acquisition-related spending.
- How TTC integration, purchase-accounting costs, and defense product mix affect Defense segment margins.
- Progress and potential financial consequences of the CNRL and AP1000 matters, including the adequacy of insurance and any eventual loss estimates.
- The final impact of revenue-recognition adoption on reported sales, earnings, and contract timing.
- Exposure to Westinghouse and developments affecting AP1000 construction and deliveries.