Curtiss-Wright Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Curtiss-Wright is a diversified manufacturer and services provider serving defense, aerospace, power generation, and industrial markets. Results are compared with Q1 2019 unless otherwise noted.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $601.2 million | $578.3 million | +4% |
| Gross profit | $200.6 million | $196.9 million | +$3.7 million |
| Operating income | $72.4 million | $72.0 million | +1% |
| Operating margin | 12.0% | 12.5% | Down 50 basis points |
| Net earnings | $51.8 million | $55.6 million | Down 7% |
| Diluted EPS | $1.21 | $1.29 | Down 6% |
| Operating cash flow | $(192.6) million | $(51.9) million | Use increased $140.7 million |
| Cash and cash equivalents | $157.8 million | $391.0 million at Dec. 31, 2019 | Down $233.3 million |
| Total debt, net, per debt note | $906.6 million | $760.6 million at Dec. 31, 2019 | Up $146.0 million |
Higher income-tax expense reduced earnings: the effective tax rate rose to 26.6% from 20.9%, primarily due to a valuation allowance against certain foreign deferred tax assets. Comprehensive income fell to $6.2 million from $65.5 million, largely reflecting a $50.3 million foreign-currency translation loss versus a gain in the prior-year quarter.
Operating cash use included a voluntary $150 million pension contribution. Investing cash use was $67.7 million, including $51.0 million paid for an acquisition and $18.6 million of capital expenditures. Financing provided $39.3 million, including net revolving-credit borrowings; the company also spent $112.0 million repurchasing shares. At quarter-end, it had $146 million drawn on its revolver, $324 million of unused credit under that facility, and reported compliance with debt covenants.
Segment results and material changes
- Commercial/Industrial: Sales declined 2% to $264.4 million; operating income was nearly flat at $35.0 million and margin improved to 13.2%. General industrial sales were weaker, partly offset by defense and commercial aerospace demand.
- Defense: Sales rose 24% to $166.1 million; operating income increased 38% to $28.7 million and margin reached 17.3%. Growth reflected higher demand in defense programs and acquisition contributions, including 901D.
- Power: Sales declined 2% to $170.8 million; operating income fell 19% to $20.6 million and margin decreased to 12.1%, primarily due to transition costs at the DRG facility and lower international aftermarket sales.
New orders decreased 24% to $569.8 million, which management attributed primarily to timing of naval defense orders and sensor-product orders. Defense-market sales increased 26%, while commercial-market sales declined 11%. The company reported approximately $2.1 billion of backlog and expects to recognize about 91% as sales over the next 12–36 months.
On February 26, 2020, Curtiss-Wright acquired Dyna-Flo Control Valve Services for approximately $60 million; purchase-price allocation was not complete. On April 20, after quarter-end, it acquired the IADS product line for $29 million.
Outlook, risks, and unusual items
- COVID-19: Management said the pandemic had not materially affected Q1 results, but expected possible negative demand effects in commercial aerospace and general industrial markets in Q2 and beyond. Supply-chain, distribution, production, workforce, and customer-collection disruptions were identified as risks. Temporary government-related suspensions occurred at facilities in Mexico and India. The duration and financial impact were uncertain.
- Liquidity outlook: Management expected cash, remaining operating cash flows, and available borrowing capacity to cover operating needs, planned capital spending, debt interest, lease payments, pension funding, and dividends through at least the remainder of 2020. It cautioned that uncertainty could increase borrowing or capital costs and potentially affect liquidity.
- Restructuring: Q1 pre-tax charges were approximately $3 million, including inventory write-downs. Full-year charges were estimated at $25–$30 million, with about $20 million in annual savings expected; actions were expected to be substantially complete by year-end.
- AP1000 contracts: Curtiss-Wright disclosed potential liquidated damages relating to delayed China and U.S. reactor-pump deliveries. It recorded no accrual, citing uncertainty over responsibility for delays. The disclosed possible loss range was $0–$55.5 million.
- Other items: Share repurchases totaled approximately 1.1 million shares for $112 million. The company planned to repurchase at least $150 million of stock during 2020. Asbestos claims were disclosed; the company said it had not faced material settlements and believed insurance and indemnification coverage was adequate.
The filing provides no earnings or sales guidance. Management noted that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How COVID-19 affected subsequent commercial aerospace and industrial demand, orders, production, supply chains, and collections.
- Whether order trends and backlog convert to revenue as expected, particularly given the 24% year-over-year decline in new orders.
- The cash-flow and leverage implications of pension funding, acquisitions, capital spending, and planned share repurchases.
- Whether restructuring charges remain within the $25–$30 million estimate and deliver the expected annual savings.
- Developments in AP1000 delivery-delay responsibility and potential exposure of up to $55.5 million.
- Final purchase accounting and operating contribution from Dyna-Flo, and the post-quarter IADS acquisition.