Curtiss-Wright Corporation — Q1 2016 Form 10-Q
Business context and period: Diversified manufacturer and services provider serving aerospace, defense, power generation and industrial markets through Commercial/Industrial, Defense and Power segments. Results cover the three months ended March 31, 2016, compared with Q1 2015; amounts below are in U.S. dollars.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $503.5 million | $546.2 million | Down 8% |
| Gross profit / margin | $171.9 million / 34.1% | $191.1 million / 35.0% | Margin down 0.9 percentage points |
| Operating income / margin | $57.3 million / 11.4% | $72.8 million / 13.3% | Income down 21%; margin down 1.9 points |
| Continuing earnings | $32.8 million | $43.2 million | Down 24% |
| Diluted EPS from continuing operations | $0.73 | $0.89 | Down 18% |
| Net earnings | $32.8 million | $16.0 million | Prior period included $27.2 million discontinued-operations loss |
| Operating cash flow | $70.3 million | $(171.1) million | Improved $241.4 million |
| Capital expenditures | $8.8 million | $9.1 million | Approximately flat |
Cash and cash equivalents were $337.3 million at quarter-end, versus $288.7 million at December 31, 2015. Current assets were $1.260 billion and current liabilities $457.2 million. Long-term debt, net, was $966.9 million, with $0.9 million of current debt. The company reported no revolving-credit borrowings and $464 million of unused facility capacity; it said it was compliant with debt covenants.
Performance and material changes
- Sales declined organically 7%; foreign currency reduced sales by 1%. Total new orders were essentially unchanged at $628.6 million.
- Commercial/Industrial sales fell 8% and operating income 31%; margin declined to 10.9% from 14.5%. Lower energy-related valve and industrial vehicle sales, weaker surface-treatment services, and about $3 million of restructuring costs weighed on results. Orders rose 6%.
- Defense sales and operating income each fell 7%; margin edged up to 16.0%. Lower embedded-computing deliveries and unfavorable mix were partly offset by currency effects. Orders fell 21%, largely reflecting timing.
- Power sales fell 8%, operating income fell 25%, and margin declined to 11.9%. The prior-year comparison included a $10 million sales benefit and $7 million operating-income benefit from an AP1000 termination change order. Orders increased 5%.
- Commercial markets were down 10%, led by general industrial (down 15%) and power generation (down 12%); defense markets declined 4%. Lower commercial industrial demand included a $15 million reduction in severe-service valve sales to energy markets.
- Q1 2016 operating cash flow benefited from stronger collections and a $20.4 million receipt on terminating interest-rate swaps. Q1 2015 cash flow had been reduced by a voluntary $145 million pension contribution, limiting direct comparability.
Outlook, risks and unusual items
- No specific consolidated revenue or earnings guidance is stated in the provided filing text. Management expected approximately 35% of 2016 revenue to come from defense-related markets and said restructuring costs were expected to produce savings in the second half of 2016.
- The company repurchased approximately 428,500 shares for $29.6 million in the quarter. Under its $200 million authorization, it planned to repurchase at least $100 million of shares in 2016; $170.4 million remained authorized at quarter-end.
- Termination of interest-rate swaps generated $20.4 million cash and a deferred gain; $18.0 million remained recorded as an increase to debt and is to reduce interest expense over the related notes’ remaining terms. Interest expense nevertheless rose 10% year over year, partly due to the swap termination.
- A Canadian Natural Resources Limited claim related to a refinery incident alleges damages estimated at $1 billion or more. Curtiss-Wright cannot estimate any potential loss; insurance may not cover a judgment fully, and an unfavorable outcome could materially affect results, financial condition or cash flows.
- For AP1000 contracts, the company disclosed a possible loss range of $0–$48 million related to liquidated damages, including a Westinghouse claim for approximately $25 million under the China contract. Responsibility for delays is disputed and no accrual was recorded.
- The company also faces asbestos-related claims, which it believes are unlikely to result in material liability and says are insured. Management identified significant estimation areas including long-term contract costs, pensions, inventory, intangible assets, legal reserves and environmental costs.
Important facts for investors to verify
- Whether order trends convert to revenue, particularly the Defense segment’s 21% order decline and Commercial/Industrial’s order growth.
- Progress on the expected second-half restructuring savings and recovery in segment margins.
- Developments, insurance coverage and potential financial exposure in the CNRL and AP1000 matters; the CNRL loss estimate remains unavailable.
- Cash-flow sustainability after accounting for the prior-year pension contribution and Q1 2016 swap-termination receipt.
- Debt, liquidity and capital-allocation plans, including the remaining share-repurchase authorization and the company’s planned 2016 repurchases.