Curtiss-Wright Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Curtiss-Wright supplies engineered products, solutions, and services, primarily to aerospace and defense markets, through Aerospace & Industrial, Defense Electronics, and Naval & Power segments. Approximately 67% of 2023 revenue was expected to come from aerospace and defense markets.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $724.3m | $630.5m | $2,059.6m | $1,799.4m |
| Operating income | $132.5m | $107.6m | $323.9m | $266.2m |
| Operating margin | 18.3% | 17.1% | 15.7% | 14.8% |
| Net earnings | $96.8m | $73.8m | $234.6m | $185.3m |
| Diluted EPS | $2.51 | $1.91 | $6.09 | $4.79 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $165.7m | $2.4m |
Q3 revenue increased 15%, operating income 23%, and net earnings 31% year over year. For the first nine months, revenue rose 14%, operating income 22%, and net earnings 27%. Revenue growth was broad-based; Defense Electronics led, with Q3 sales up 34% and operating margin at 26.0%. Q3 gross profit was $281.5m, or approximately 38.9% of sales, versus $232.2m, or approximately 36.8%, a year earlier.
- Segment trends: Nine-month sales increased 6% in Aerospace & Industrial, 27% in Defense Electronics, and 14% in Naval & Power. Defense Electronics’ operating margin rose to 21.3% from 18.6%. Naval & Power’s margin declined to 15.9% from 16.2%; management cited unfavorable naval contract adjustments and product mix.
- Orders and backlog: New orders rose 3% in Q3 and 8% year to date. Backlog was approximately $2.9bn at September 30; the company expected to recognize about 89% as sales over the next 36 months.
- Cash and liquidity: Cash was $148.8m, down from $257.0m at year-end 2022. Nine-month operating cash flow improved by $163.3m year over year, primarily on higher cash earnings and improved working capital, partly offset by higher tax payments. Investing used $31.6m; financing used $245.0m. The company reported $728m of unused credit-facility capacity.
- Debt: Long-term debt was $1,050.7m, with no current debt classified as due at September 30, following repayment of $202.5m of 2013 Notes in February. Approximate net debt, calculated as reported debt less cash, was $901.9m. The company reported compliance with debt covenants and $2.2bn of additional borrowing capacity under its debt-to-capitalization covenant.
- Shareholder returns: Nine-month repurchases totaled $37.4m; dividends paid totaled $15.0m. The quarterly dividend increased to $0.20 per share beginning in Q2 2023.
Material changes, commentary, and risks
- Management attributed operating improvement mainly to higher sales and favorable overhead absorption. Q3 Defense Electronics benefited from higher demand for tactical communications and defense electronics products. Naval & Power results also benefited from lower first-year purchase accounting costs related to the arresting-systems acquisition.
- Interest expense was $40.4m for the first nine months, up 21%, chiefly reflecting the 2022 issuance of senior notes and higher credit-facility rates, partly offset by repayment of the 2013 Notes. Other income increased, primarily due to lower pension costs.
- Prior-period error: The company identified an error on one long-term Naval & Power contract involving pandemic-related contract changes, labor inefficiencies, and facility-relocation hiring delays. Previously reported 2020 sales and net earnings were overstated by approximately $8m and $7m; 2021 by approximately $5m and $4m. The company judged the error not material to any single affected prior period and said amendments were not required, but revised applicable prior-period information in this filing. It plans to revise its 2021 financial statements with its 2023 Form 10-K. The error did not affect prior-period operating cash flow.
- Management said cash, operating cash flow, available credit, and access to capital should meet short- and long-term needs. No specific earnings or revenue guidance was provided in the supplied filing text. The company cautioned that forward-looking statements are subject to risks, including supply-chain disruption, inflation, interest rates, geopolitical events, and other factors; it reported no material changes to risk factors or market risk during the period.
- Legal matters include asbestos-related lawsuits and other proceedings; management does not expect them, individually or collectively, to materially adversely affect financial condition, results, or cash flows. Standby letters of credit were $22m and bank guarantees $14m at September 30. A $35m surety bond supports required financial assurance for the Cheswick facility.
Investor verification priorities
- Review the contract-error revisions and the planned 2021 restatement in the 2023 Form 10-K, including effects on segment results and retained earnings.
- Assess whether order growth and the $2.9bn backlog convert into revenue on schedule, particularly given timing of naval orders and unfavorable contract adjustments.
- Track working-capital trends, cash conversion, and liquidity after the decline in cash and repayment of the 2013 Notes.
- Monitor the sustainability of Defense Electronics’ margin gains and the offsetting effects of product mix, contract adjustments, interest rates, and currency movements.