Curtiss-Wright Corporation — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 22, 2018. The company designs, manufactures, and services engineered products for commercial/industrial, defense, and power markets.
Financial performance
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net sales | $2.271 billion | $2.109 billion | +8% |
| Operating income | $339.7 million | $308.1 million | +10% |
| Operating margin | 15.0% | 14.6% | +40 basis points |
| Earnings from continuing operations | $214.9 million | $189.4 million | +13% |
| Diluted EPS from continuing operations | $4.80 | $4.20 | +14% |
| Operating cash flow | $388.7 million | $423.2 million | −8% |
| Capital expenditures | $52.7 million | $46.8 million | +13% |
| Cash and cash equivalents | $475.1 million | $553.8 million | −$78.7 million |
| Total debt, net | $814.1 million | $966.3 million | −$152.2 million |
Gross profit was $818.6 million, or approximately 36.1% of sales. Operating cash flow less capital expenditures was approximately $336 million. Current assets were $1.402 billion and current liabilities $591.0 million. The company reported $479 million of unused revolving-credit capacity, no revolver borrowings, and compliance with debt covenants. Cash dividends were $0.56 per share, up from $0.52.
Segments and changes versus 2016
- Commercial/Industrial: Sales rose 4% to $1.163 billion; operating income rose 8% to $168.3 million and margin improved to 14.5%. Growth reflected industrial vehicle products and surface treatment services.
- Defense: Sales rose 19% to $555.5 million, including $65 million from the Teletronics Technology Corporation (TTC) acquisition. Operating income rose 11% to $109.4 million, but margin fell 140 basis points to 19.7%, partly due to acquisition purchase-accounting costs and product mix.
- Power: Sales rose 6% to $552.9 million; operating income rose 11% to $85.3 million and margin increased to 15.4%. Higher AP1000 China Direct production was partly offset by lower nuclear aftermarket sales.
Organic sales increased 5%; acquisitions contributed 3%. Total orders increased to $2.290 billion and year-end backlog to $2.011 billion, up 3% from 2016. The 2017 results included $71 million of sales and $5 million of net earnings from two acquisitions. The company repaid $150 million of notes at maturity and repurchased approximately 526,000 shares for $52 million.
Fourth-quarter 2017 sales were $611.9 million and earnings from continuing operations were $67.8 million; diluted continuing-operations EPS was $1.52. Fourth-quarter 2016 comparatives were $565.6 million, $70.7 million, and $1.58, respectively.
Outlook, commentary, and notable items
- Management anticipated 2018 capital expenditures of approximately $50–$60 million and dividend payments of approximately $26 million. It considered cash, operating cash generation, and available borrowing capacity sufficient for planned needs, while noting projections were subject to change.
- Management described a more favorable defense-spending outlook following February 2018 legislation raising spending caps, and expected continued commercial aerospace production and improving nuclear aftermarket opportunities. It cautioned that budgets, program timing, customer funding, and market conditions remain uncertain.
- In February 2018, the company made a voluntary $50 million pension contribution and agreed to acquire the Dresser-Rand Government Business for $212.5 million in cash.
- The 2017 Tax Act increased the reported tax provision by approximately $10 million overall. The effective tax rate was 28.3%, versus 29.3% in 2016; the company recorded a provisional $23.7 million transition-tax liability payable over eight years.
- The company expected a roughly $2 million after-tax reduction to retained earnings when adopting the new revenue-recognition standard on January 1, 2018, with corresponding balance-sheet adjustments. Adoption effects and subsequent estimates merit monitoring.
Risks and contingencies
- Westinghouse/AP1000: The company disclosed possible liquidated damages of $0–$55.5 million across U.S. and China contracts; it made no accrual, citing uncertainty over responsibility for delays and its legal defenses.
- CNRL claim: A claim arising from a 2011 refinery fire was reduced to approximately $400 million for mediation, but the company could not estimate a potential loss. It warned an unfavorable outcome could materially affect future results, financial position, or cash flows.
- Westinghouse bankruptcy: Approximately $4.9 million of pre-petition billings were outstanding. The company expected to recover substantially all general unsecured claims under the proposed reorganization plan; approval remained pending at filing.
- Other key exposures include U.S. defense-budget changes and government-contract termination or compliance risks; foreign exchange and trade-policy changes; nuclear-industry and commercial-aerospace cycles; supplier performance; environmental and product-liability claims; pension assumptions; and potential impairment of goodwill and intangibles. Goodwill and other intangible assets totaled approximately $1.426 billion, about 44% of assets; no goodwill impairment was recorded in 2017.
Important facts for investors to verify
- How much 2017 sales and profit growth was acquired versus organic, especially the sustainability and integration results of TTC.
- Whether AP1000 deliveries, dispute outcomes, and any liquidated-damages exposure change; separately, the status and potential exposure of the CNRL claim.
- Whether Westinghouse’s reorganization plan and expected recovery of pre-petition receivables were completed as anticipated.
- Cash conversion and working-capital trends: operating cash flow declined despite higher earnings, partly reflecting prior-year AP1000 collections and other timing effects.
- The eventual effects of the Tax Act and new revenue-recognition and lease accounting standards, and the funding sensitivity of pension obligations.
- Execution and financing of the Dresser-Rand acquisition, alongside planned capital spending, dividends, and share repurchases.