Curtiss-Wright Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Curtiss-Wright is a diversified engineered-products and services company reporting Commercial/Industrial, Defense, and Power segments. Results exclude businesses classified as discontinued operations; prior-year figures were recast. Amounts below are in U.S. dollars unless noted.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $525.5 million | $558.4 million | $1,616.9 million | $1,670.5 million |
| Gross profit | $185.5 million | $193.3 million | $558.9 million | $576.2 million |
| Operating income | $63.8 million | $74.2 million | $202.1 million | $207.4 million |
| Operating margin | 12.1% | 13.3% | 12.5% | 12.4% |
| Continuing-operations earnings | $38.1 million | $44.4 million | $121.5 million | $123.8 million |
| Net earnings | $33.9 million | $25.0 million | $75.6 million | $96.6 million |
| Diluted EPS, continuing operations | $0.80 | $0.90 | $2.53 | $2.52 |
| Diluted EPS, total | $0.71 | $0.51 | $1.57 | $1.97 |
- Gross margin was approximately 35.3% in Q3 2015 versus 34.6% a year earlier; nine-month gross margin was approximately 34.6% versus 34.5%.
- Q3 discontinued-operations loss was $4.3 million, compared with $19.3 million in Q3 2014. Nine-month discontinued-operations loss was $45.9 million versus $27.2 million, including a $40.8 million held-for-sale impairment recorded in Q1.
- New orders fell 15% in Q3 to $494.1 million and 11% for the first nine months to $1,648.1 million. Management attributed much of the comparison decline to large prior-year Defense and Power orders that did not recur or were timed differently.
Segment performance
- Commercial/Industrial: Q3 sales declined 6% to $292.6 million and operating income fell 21% to $40.3 million; margin contracted to 13.8% from 16.3%. Lower severe-service valve, industrial vehicle, and surface-treatment sales weighed on results. Nine-month sales were down 4% and operating income down 5%.
- Defense: Q3 sales declined 8% to $117.4 million, while operating income rose 13% to $25.5 million and margin expanded to 21.7% from 17.7%. Nine-month operating income increased 21% despite sales declining 2%, reflecting margin initiatives and favorable currency effects.
- Power: Q3 sales fell 3% to $115.5 million, but operating income rose 22% to $13.5 million as AP1000 program costs eased after testing and modifications were substantially concluded in Q2. Nine-month operating income declined 14% amid higher AP1000 costs and lower sales.
Cash flow, liquidity, and debt
- Operating cash flow was negative $4.7 million for the first nine months, versus positive $153.2 million in 2014. Management cited a voluntary $145.0 million pension contribution and higher prior-year deferred-revenue collections.
- Investing activities provided $1.3 million, versus $32.7 million used in the prior-year period. Financing activities used $186.3 million, including $185.2 million of share repurchases and $12.3 million of dividends.
- Cash declined $202.2 million from year-end 2014 to $247.9 million at September 30, 2015. Current assets were $1,266.6 million and current liabilities $458.6 million.
- Total debt was $958.9 million, including $957.5 million of long-term debt; the company reported average debt interest rates of 3.3%. It had no revolver borrowings, $460 million of unused credit-facility availability after letters of credit, and reported covenant compliance. Management said liquidity was sufficient for short- and long-term needs.
- Capital returns accelerated: the company repurchased approximately 2.665 million shares for $185.2 million in the first nine months, compared with $44.6 million in the prior-year period. It had $114.8 million remaining under the repurchase program at quarter-end.
Material changes, outlook, and significant items
- Consolidated sales declined 6% in Q3 and 3% year to date. Management cited weaker Commercial/Industrial demand, lower commercial-market sales, and currency effects; Defense and Power trends varied by program and market.
- Q3 operating income declined 14%; management attributed the decrease primarily to lower Commercial/Industrial sales and a one-time pension settlement charge. The charge was $7.3 million for the quarter, principally related to the former chairman’s lump-sum pension election. Nine-month pension contributions totaled $145.0 million.
- The company recorded $11.5 million of additional estimated costs in Q2 for Westinghouse AP1000 reactor coolant pump contracts, reflecting production modifications following engineering and endurance testing. Q3 Power results improved as those activities substantially concluded.
- Through October 2015, all five businesses previously classified as held for sale had been divested. The Downstream oil and gas sale generated additional pre-tax losses, including a $4.3 million Q3 working-capital adjustment; other divestitures included Engineered Packaging and Aviation Ground Support.
- No specific earnings or revenue guidance is provided in the supplied filing text. Management described its capital resources as adequate and highlighted ongoing margin-improvement efforts. It cautioned that forward-looking statements are subject to risks and uncertainties.
- Significant contingencies include Canadian Natural Resources Limited litigation related to a refinery incident, with alleged damages estimated at $1 billion or more. The company could not estimate its potential loss and stated insurance might not fully cover an adverse judgment; an unfavorable outcome could materially affect results, financial condition, or cash flows.
- For AP1000 contracts, Westinghouse asserted entitlement to approximately $25 million of maximum China-contract liquidated damages. Curtiss-Wright said responsibility for delivery delays was uncertain, had made no accrual, and disclosed a possible loss range of $0 to $48 million.
Important facts for investors to verify
- Whether Commercial/Industrial demand and consolidated order intake recover, and how the backlog converts to sales and cash.
- Whether AP1000 delivery obligations, cost estimates, and liquidated-damage exposure change; verify the disclosed $0–$48 million possible-loss range.
- Developments in the CNRL litigation, including insurance coverage and any ability to estimate exposure.
- Cash generation after the unusually large pension contribution, pension funding requirements, and the effect of continued repurchases on liquidity and share count.
- Performance of continuing operations separately from discontinued operations and divestiture-related charges, including the remaining effects of the held-for-sale impairment and disposal losses.