Curtiss-Wright Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 27, 2019. This is an annual filing, not a standalone fourth-quarter report. Curtiss-Wright is a diversified engineering, manufacturing and services company serving commercial/industrial, defense and power markets.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $2,411.8 million | $2,271.0 million | +6% |
| Operating income | $373.6 million | $325.1 million | +15% |
| Operating margin | 15.5% | 14.3% | +120 basis points |
| Earnings from continuing operations | $275.7 million | $214.9 million | +28% |
| Diluted EPS from continuing operations | $6.22 | $4.80 | +30% |
| Operating cash flow | $336.3 million | $388.7 million | Down $52.4 million |
| Capital expenditures | $53.4 million | $52.7 million | Approximately flat |
Gross profit was $871.3 million, or approximately 36.1% of sales; net earnings were $275.7 million, or approximately 11.4% of sales. Operating cash flow less capital expenditures was approximately $282.9 million, compared with $336.0 million in 2017. The cash-flow decline primarily reflected a voluntary $50 million pension contribution.
Fourth-quarter 2018 sales were $648.6 million, net earnings were $82.8 million and diluted EPS was $1.89, versus $611.9 million, $67.8 million and $1.52, respectively, in fourth-quarter 2017.
Segments and changes from the prior year
- Commercial/Industrial: Sales rose 4% to $1,209.2 million; operating income increased 9% to $182.7 million; margin expanded to 15.1% from 14.5%. Growth reflected industrial vehicle, controls and valve demand, higher volume and overhead absorption.
- Defense: Sales were essentially flat at $554.4 million, while operating income rose 17% to $128.4 million and margin increased to 23.2% from 19.7%. The improvement reflected the absence of first-year purchase-accounting costs from the TTC acquisition, favorable contract adjustments and margin initiatives. Orders fell 3%.
- Power: Sales increased 17% to $648.3 million and operating income increased 22% to $98.9 million; margin rose to 15.2% from 14.7%. The DRG acquisition contributed $64 million of sales; AP1000 China program profitability also improved.
Growth was 3% organic and 3% from acquisitions; currency had no material effect on sales growth. The 2018 effective tax rate declined to 22.6% from 28.3%, primarily due to the lower U.S. corporate tax rate and the foreign-derived intangible income deduction, partly offset by Tax Act-related foreign withholding tax and the loss of the Section 199 deduction. Curtiss-Wright adopted ASC 606 in 2018 using the modified retrospective method; prior-year figures were not restated. The company reported 2018 net earnings approximately $4.0 million lower than they would have been without adoption.
Cash, debt and liquidity
- Cash and cash equivalents were $276.1 million at year-end, down from $475.1 million. Current assets were $1,344.0 million and current liabilities were $687.3 million.
- Reported total debt, net, was $762.6 million, compared with $814.1 million in 2017. Debt was entirely fixed-rate; the company reported no borrowings on its revolving facility and $478 million of unused availability under the $500 million facility.
- The company repurchased approximately 1.7 million shares for $198.6 million and paid $26.3 million of dividends during 2018. The annual dividend per share was $0.60.
- Backlog was $2.03 billion, up from $2.01 billion; the company expected approximately 94% to be recognized as sales over the next 12–36 months. Backlog can be reduced or cancelled and is not a guarantee of future sales.
Outlook, risks and unusual items
The filing does not provide a specific 2019 sales or EPS guidance range. Management anticipated 2019 capital expenditures of approximately $75–$85 million and dividend payments of about $26 million, and said cash, operating cash flow and available borrowing capacity should meet near- and long-term needs. Management expressed cautious optimism about industrial markets, expected continued defense funding support and commercial aerospace production growth, and noted uncertainty in the timing of nuclear power orders. The company completed its $210 million acquisition of Dresser-Rand Government Business (DRG) in April 2018.
- Material litigation: Canadian Natural Resources Limited’s refinery fire claim was reduced for mediation purposes to approximately $400 million; the original alleged damages were estimated at $1 billion or more. Curtiss-Wright could not estimate a loss range, asserted legal defenses, and warned an unfavorable outcome could materially affect results or cash flows.
- AP1000 contracts: Potential liquidated damages on U.S. and China contracts ranged from $0 to $55.5 million at year-end. No accrual was recorded because responsibility for delays was disputed and uncertain.
- Government and contract exposure: Government end-use sales represented 40% of total sales; approximately 34% related to U.S. Government agencies and prime contractors. Government contracts may be delayed, reduced or terminated, and fixed-price work carries cost-overrun risk.
- Other risks: Foreign exchange and trade/tariff changes, defense budget shifts, commercial aerospace cycles, nuclear market conditions, supplier performance, long-term contract cost estimates, cybersecurity, environmental obligations and pension assumptions could affect results. Goodwill and other intangible assets totaled approximately $1.52 billion, about 47% of assets; annual goodwill testing found no impairment.
- WEC bankruptcy: In January 2019, Curtiss-Wright agreed to settle substantially all general unsecured claims with Westinghouse Electric Company; it expected to collect amounts due for post-petition work.
The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting. The audit excluded DRG’s controls from its 2018 internal-control assessment because it was acquired during the year.
Investor verification priorities
- Track the CNRL mediation and any change to the currently unestimable potential loss.
- Monitor AP1000 delivery disputes, possible liquidated damages and the profitability of China and U.S. programs.
- Assess whether cash generation recovers after the pension contribution and substantial acquisition and share-repurchase spending.
- Verify organic growth, margins and order trends separately from DRG acquisition contributions, especially in Power and Defense.
- Review backlog conversion, government funding exposure, and the effect of ASC 606 and the new lease standard on year-over-year comparability and reported balance-sheet amounts.