Curtiss-Wright Corporation — Q3 2016 Form 10-Q
Business context and period: Diversified manufacturer and services provider serving commercial/industrial, defense, and power markets. This summary covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Financial amounts are in U.S. dollars; figures are rounded to millions unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $507.1 | $525.5 | $1,543.4 | $1,616.9 |
| Operating income | $76.6 | $63.8 | $201.9 | $202.1 |
| Operating margin | 15.1% | 12.1% | 13.1% | 12.5% |
| Continuing-operations earnings | $45.9 | $38.1 | $118.7 | $121.5 |
| Diluted EPS from continuing operations | $1.02 | $0.80 | $2.63 | $2.53 |
| Operating cash flow | Not separately presented | Not separately presented | $267.2 | $(4.7) |
- Profit and margins: Q3 operating income rose 20%, while sales fell 4%; management attributed much of the improvement to the prior-year $7 million pension settlement charge, plus Defense mix and smaller items. Nine-month operating income was essentially flat despite sales declining 5%. Gross profit was $184.5 million in Q3 and $541.8 million for nine months.
- Cash flow: Nine-month operating cash flow improved by $271.9 million year over year. Management cited a $145 million voluntary pension contribution in 2015, $97 million of 2016 AP1000-related net collections, and a one-time $20 million cash benefit from terminating interest-rate swaps. Investing used $24.2 million; capital expenditures were $26.1 million. Financing used $67.7 million, including $80.3 million of share repurchases and $11.6 million of dividends.
- Liquidity and debt: Cash was $452.1 million at September 30, versus $288.7 million at December 31, 2015. Current assets were $1,363.1 million and current liabilities $488.0 million. Long-term debt, net, was $966.0 million, with $0.8 million current debt. The company had no revolving-credit borrowings, $463 million of unused credit availability after letters of credit, and reported compliance with debt covenants.
- Orders and capital return: New orders were $500.1 million in Q3, up 1%, and $1,652.4 million for nine months, essentially flat year over year. The company repurchased about 1.035 million shares for $80.3 million during the nine-month period and said it planned to repurchase at least $100 million in 2016 under its $200 million program.
Material changes and segment trends
- Commercial/Industrial: Sales fell 6% in Q3 and nine months. Lower severe-service valve sales to oil and gas, surface-treatment activity, and industrial products weighed on results. Nine-month operating income declined 16%.
- Defense: Sales declined 3% in Q3 and 5% for nine months. Q3 operating income increased 13%, with a 25.3% margin, reflecting product mix and smaller non-recurring items. Nine-month operating income fell 5%, partly reflecting a favorable prior-year adjustment tied to a TDSS production contract.
- Power: Q3 sales rose 2%; nine-month sales were nearly flat. Nine-month operating income increased 30%, helped by AP1000 volume and lower costs, including comparison with an unfavorable $11.5 million contract estimate adjustment in 2015. Lower aftermarket demand for nuclear operating reactors remained a headwind.
- Comparability: 2015 results included discontinued operations losses of $4.3 million in Q3 and $45.9 million for nine months, including substantial impairment and divestiture losses. 2016 reported no discontinued-operations results; continuing-operations results are the more comparable measure.
- Currency and comprehensive income: Nine-month foreign-currency translation reduced other comprehensive income by $26.9 million, primarily due to the British pound, partly offset by Canadian-dollar gains. The company terminated interest-rate swaps in February 2016, received $20.4 million, and is amortizing the deferred benefit against future interest expense; interest expense rose year over year.
Outlook, risks, and contingencies
- The filing provides no specific earnings or sales guidance. Management expected approximately 38% of 2016 revenue to come from defense-related markets and said cash, operating cash flow, available credit, and capital-market access were sufficient for short- and long-term needs.
- CNRL litigation: A claim related to a 2011 refinery fire alleges damages estimated at $1 billion or more. Curtiss-Wright could not estimate potential losses, said insurance may not fully cover a judgment, and intends to defend the matter. Management warned an unfavorable development or outcome could materially affect future financial results, financial condition, or cash flows.
- AP1000 contracts: Westinghouse asserted entitlement to approximately $25 million in maximum liquidated damages under the China contract. Curtiss-Wright had missed certain China and U.S. delivery dates, but responsibility for delays was disputed. No accrual was recorded; the disclosed possible loss range was $0 to $55.5 million.
- The company also disclosed asbestos-related claims, standby letters of credit of $36.9 million, bank guarantees of $13.9 million, and a $56 million surety bond for facility decommissioning assurance. Management considered asbestos exposure unlikely to be material and said other legal matters were not expected to materially affect results or financial position.
- Management identified estimates for long-term contract costs, asset recoverability and useful lives, pensions, inventory reserves, legal reserves, and environmental costs as significant areas involving judgment.
Key facts for investors to verify
- Whether Commercial/Industrial weakness, especially severe-service valves and surface treatment, persists or improves.
- Whether AP1000 delivery performance, costs, and disputed liquidated-damages exposure change.
- Developments in the CNRL case, including potential exposure and insurance coverage, which the company could not quantify.
- How sustainable operating cash flow is after the unusual prior-year pension contribution comparison and 2016 AP1000 collections and swap-termination proceeds.
- Debt and interest-cost trends following the swap termination, alongside planned repurchases and dividend payments.