Curtiss-Wright Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Curtiss-Wright is a diversified manufacturer and service provider serving commercial/industrial, defense, and power markets. Results are unaudited.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $523.6 million | $503.5 million | +4% |
| Gross profit / margin | $170.8 million / 32.6% | $171.9 million / 34.1% | Profit down 1%; margin down about 150 bps |
| Operating income / margin | $51.2 million / 9.8% | $57.3 million / 11.4% | Down 11%; margin down 160 bps |
| Net earnings | $32.5 million | $32.8 million | Down 1% |
| Diluted EPS | $0.73 | $0.73 | Unchanged |
| New orders | $644.3 million | $628.6 million | +2% |
| Operating cash flow | $(24.9) million | $70.3 million | Down $95.2 million |
Sales growth reflected 3% organic growth, a 2% contribution from acquisitions, and a 1% negative foreign-currency effect. The effective tax rate was 20.9%, versus 31.0%; management attributed the reduction primarily to a $4 million tax benefit from adopting share-based payment accounting guidance. Excluding that item, the current-period rate was 30.5%. Interest expense was $10.4 million.
Segments and operating drivers
- Commercial/Industrial: Sales of $278.8 million, up 1%; operating income of $30.6 million, up 2%; margin 11.0%, versus 10.9%. Industrial vehicle and automation demand and margin initiatives supported results; new orders fell 8%, mainly on timing of government funding.
- Defense: Sales of $114.7 million, up 9%, largely from acquired TTC; operating income fell 34% to $11.2 million and margin declined to 9.7% from 16.0%. TTC contributed about $10 million in sales and reduced operating income by about $6 million; excluding TTC, operating income and margin were essentially flat. New orders rose 27%.
- Power: Sales of $130.1 million, up 5%; operating income rose 13% to $16.5 million and margin increased to 12.7% from 11.9%. Higher AP1000 China Direct production and improved aftermarket profitability were partly offset by weaker reactor aftermarket sales. New orders rose 10%.
Consolidated operating income was also pressured by corporate and eliminations expense, which increased to $7.1 million from $4.3 million, primarily due to foreign-exchange losses. Management cited stronger AP1000 China Direct production as a partial offset to acquisition-related pressure.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $272.9 million at March 31, 2017, down from $553.8 million at year-end. Current assets were $1.19 billion and current liabilities $624.8 million.
- Operating cash use was $24.9 million. Management attributed the year-over-year decline primarily to prior-year AP1000-related net collections of $66 million and a one-time $20 million benefit from terminating an interest-rate swap.
- Investing cash use was $249.7 million, including approximately $239 million for acquisitions. Financing cash use was $8.0 million, including $12.9 million of share repurchases.
- Balance-sheet debt was approximately $965.8 million; cash less debt was approximately $692.9 million net debt. A $150 million senior-note issue was due in 2017. The company reported no revolver borrowings, $448 million of unused credit-facility availability, and compliance with debt covenants. It said it could borrow an additional $878 million without breaching its debt-to-capitalization covenant.
- The company repurchased approximately 133,000 shares for $12.9 million during the quarter. Management said it planned to repurchase at least $50 million of shares in 2017 and considered cash, operating cash flow, borrowing capacity, and access to capital markets sufficient for short- and long-term needs.
Acquisitions, outlook, and notable matters
- The company acquired Teletronics Technology Corporation (TTC) on January 3 for $232.8 million, net of cash acquired, and acquired certain assets of Para Tech Coating on February 8 for $6.6 million. The acquisitions contributed $11 million of Q1 sales and $4 million of net losses. Purchase-price valuations remained subject to post-closing adjustments.
- The filing provides no specific consolidated earnings or sales guidance. Management noted that defense-related markets were expected to generate approximately 38% of 2017 revenue. New orders rose modestly, but management cited timing of government funding as a factor in order changes.
- Westinghouse bankruptcy: Curtiss-Wright had about $8 million of pre-petition billings outstanding. It considered those amounts substantially recoverable, expected to collect post-petition amounts, and continued to monitor potential effects on contracts and plant projects.
- AP1000 liquidated damages: Curtiss-Wright disclosed possible losses of $0 to $55.5 million relating to delivery delays; it recorded no accrual because responsibility for delays was uncertain. Westinghouse had asserted maximum damages of approximately $25 million under the China contract.
- CNRL litigation: The claim relating to a 2011 refinery incident alleges damages estimated to meet or exceed $1 billion. Curtiss-Wright could not estimate a potential loss, if any, and said an unfavorable outcome could materially affect a future period. It intends to defend the claim; insurance may not cover all costs.
- The company reported asbestos-related lawsuits but said it had not been found liable or paid material settlements and believed insurance coverage was adequate. No material changes to risk factors or market-risk disclosures were reported.
Important facts for investors to verify
- Whether operating margins recover as TTC is integrated, given the acquisition’s reported Q1 operating-income drag.
- Cash conversion and working-capital trends, particularly following negative Q1 operating cash flow and substantial acquisition spending.
- The outcome and recoverability of Westinghouse-related amounts, contract exposure, and AP1000 delay claims.
- Developments in the CNRL litigation, for which the company disclosed no estimable loss range.
- Progress toward the stated 2017 share-repurchase plan and the company’s ability to manage the $150 million 2017 note maturity.