Curtiss-Wright Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Curtiss-Wright is a diversified manufacturer and service provider serving aerospace, defense, power generation, and general industrial markets through its Commercial/Industrial, Defense, and Power segments. Unless noted, figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Net sales | $595.4m | $567.9m | $1,763.2m | $1,659.1m |
| Operating income | $97.0m | $92.4m | $263.6m | $219.8m |
| Operating margin | 16.3% | 16.3% | 15.0% | 13.3% |
| Net earnings | $74.5m | $63.9m | $192.9m | $147.1m |
| Diluted EPS | $1.68 | $1.43 | $4.33 | $3.29 |
| Operating cash flow | Not presented separately | Not presented separately | $99.0m | $162.3m |
Q3 sales grew 5%, operating income 5%, and net earnings about 16% year over year. Nine-month sales grew 6%, operating income 20%, and net earnings about 31%. Nine-month gross profit was $630.2m versus $569.4m. Interest expense declined to $25.7m for the nine-month period from $31.6m, primarily after repayment of $150m of 5.51% notes in December 2017. The nine-month effective tax rate was 23.0%, compared with 26.5%.
Segments and drivers
- Commercial/Industrial: Nine-month sales rose 5% to $904.3m and operating income rose 12% to $135.7m. Q3 operating income declined 4%, with lower sensors and controls profitability.
- Defense: Nine-month sales rose 5% to $403.5m and operating income rose 40% to $92.0m. Improved absorption, the absence of prior-year TTC purchase-accounting costs, favorable contract adjustments, and margin initiatives supported results.
- Power: Nine-month sales rose 11% to $455.4m and operating income rose 10% to $62.8m. Q3 sales increased 23% and operating income 59%, helped by the DRG acquisition and stronger AP1000 China Direct program profitability. Nine-month margin was nearly flat, with DRG purchase-accounting costs, lower AP1000 U.S. production, and weaker nuclear aftermarket profitability among offsets.
Management attributed nine-month operating improvement to higher volumes, favorable overhead absorption, program profitability, and ongoing margin initiatives. Q3 operating margin was flat year over year. New orders were $514.2m in Q3, down 1%, and $1,819.2m for nine months, up 6%. Backlog was approximately $2.1bn at September 30; the company expected to recognize about 89% as sales over the next 12–36 months.
Cash, debt, and liquidity
Cash and equivalents were $245.9m at September 30, down from $475.1m at year-end 2017. Nine-month operating cash flow fell $63.3m year over year, which management attributed mainly to a voluntary $50m pension contribution, collection timing for receivables, and higher inventory receipts. Investing used $237.2m, including $210.2m for the DRG acquisition; financing used $80.7m, including $78.9m of share repurchases and $13.2m of dividends. Cash declined by $229.2m over the period.
Debt was approximately $813.8m carrying value, including debt issuance costs and swap-related amounts, versus $814.1m at December 31, 2017. The company had no revolver borrowings at quarter-end and reported $477m of unused credit availability; it was in compliance with debt covenants. Management stated that cash, operating cash flow, available credit, and capital-market access were sufficient for expected short- and long-term needs. On October 15, the company prepaid $50m of its 2013 Notes; on October 17, it extended its $500m revolver maturity to October 2023 and expanded its accordion feature.
Outlook, accounting, and key risks
- The filing provides no specific earnings or revenue guidance. Management noted that interim results are not necessarily indicative of full-year results.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; prior periods were not restated. Adoption reduced reported nine-month 2018 net earnings by $4.7m versus balances without adoption. The company expected adoption of the new lease standard in 2019 to add approximately $155m–$165m to assets and liabilities, without a material earnings or cash-flow impact.
- The 2018 DRG acquisition cost approximately $210m and contributed $41m of nine-month sales and $2m of net losses. Its purchase price allocation remained subject to post-closing adjustments.
- CNRL litigation: The refinery-fire claim was reduced to approximately $400m to facilitate planned 2019 mediation. Curtiss-Wright could not estimate a potential loss, if any, and warned an unfavorable development or outcome could materially affect results, financial condition, or cash flows.
- AP1000 contracts: Potential liquidated damages were estimated at $0–$55.5m across U.S. and China contracts. No accrual was recorded because responsibility for delays remained uncertain.
- Other exposures include asbestos litigation, environmental costs, currency movements, pension assumptions, acquisition integration and purchase accounting, and customer/order timing. The company reported no material change in risk factors or market risk during the period.
Important facts for investors to verify
- Whether operating cash conversion improves as receivables and inventory balances normalize after the reported working-capital outflows.
- DRG integration, purchase-accounting effects, and the durability of Power segment margins and AP1000 China program profitability.
- Backlog conversion, order timing, and demand trends, particularly in naval defense, aerospace, and commercial power generation.
- Developments in the CNRL mediation and AP1000 claims, including insurance coverage and any change to loss estimates or accruals.
- The impact of ASC 606 comparability and the expected balance-sheet effects of lease-standard adoption.