Curtiss-Wright Corporation — Q3 2020 Form 10-Q
Business context and period: Curtiss-Wright is a diversified manufacturer and service provider serving defense, commercial aerospace, power generation, and general industrial markets. This unaudited filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $571.6 | $614.9 | $1,722.9 | $1,832.2 |
| Gross profit | $212.8 | $226.1 | $599.4 | $653.0 |
| Operating income | $84.6 | $105.6 | $212.4 | $283.3 |
| Operating margin | 14.8% | 17.2% | 12.3% | 15.5% |
| Net earnings | $64.6 | $82.5 | $147.4 | $218.2 |
| Diluted EPS | $1.55 | $1.92 | $3.49 | $5.07 |
| Operating cash flow | — | $3.8 | $159.0 |
- Revenue mix and segment trends: Q3 sales declined 7%; nine-month sales declined 6%. Defense sales rose 12% in Q3 and 14% year to date, while Commercial/Industrial fell 20% and 17%, respectively. Power sales fell 4% and 6%. The largest pressure was weaker commercial aerospace and general industrial demand.
- Profitability: Q3 operating income fell 20% and nine-month operating income fell 25%. Management cited lower sales and unfavorable overhead absorption, especially in Commercial/Industrial, plus restructuring costs. Ongoing margin-improvement initiatives partly offset these pressures.
- Liquidity and cash flows: Cash was $426.8 at September 30, versus $391.0 at year-end 2019. Nine-month operating cash flow was only $3.8, chiefly reflecting a voluntary $150 pension contribution, working-capital effects, and timing of customer advances. Investing cash use was $115.9, including $82.1 for acquisitions; financing provided $157.9.
- Debt: Long-term debt was $1,058.7, up from $760.6 at year-end. The company issued $300 of senior notes in August, split between 3.10% notes due 2030 and 3.20% notes due 2032. It reported no revolver borrowings and $478 of unused revolver capacity; it was in compliance with debt covenants.
- Other measures: New orders declined 14% in Q3 and 12% for nine months. Backlog was approximately $2.2 billion; the company expected to recognize about 90% as sales over the next 12–36 months. The dividend was $0.17 per share in Q3.
Material changes and notable items
- COVID-19 weakened commercial aerospace and general industrial demand and disrupted supply chains and production. All manufacturing operations had resumed by September 30, though management noted continued uncertainty.
- Restructuring charges were $11.2 in Q3 and $28.5 for nine months, including inventory write-downs. Full-year 2020 pretax charges were expected to be $35, with approximately $40 of annual savings anticipated; actions were expected to be substantially complete by year-end.
- The company acquired two businesses for approximately $90 during the first nine months of 2020. Subsequent to quarter-end, it had agreed to acquire PacStar for $400, subject to customary closing conditions; PacStar was expected to generate more than $120 in 2020 sales.
- Share repurchases totaled $137.2 for the first nine months. In October, the board authorized an additional $200, bringing total available authorization to $250.
- Nine-month other income declined substantially, partly because the company recognized $9.5 of foreign-currency translation losses on the substantial liquidation of its Norwegian subsidiary.
Outlook, risks and contingencies
- The filing does not provide a clear consolidated revenue or earnings guidance range. Management said available cash, expected remaining-year operating cash flow, and borrowing capacity were expected to cover operating needs, capital spending, debt interest, leases, pension funding, and dividends through at least year-end.
- Management highlighted uncertain COVID-19 effects on demand, supply chains, production, customer collections, and future operating costs. Commercial aerospace and general industrial markets were particularly exposed.
- For the AP1000 reactor coolant pump contracts, the company disclosed potential liquidated damages if it is found responsible for delivery delays. The possible loss range was $0–$55.5 million; no accrual was recorded because responsibility remained uncertain. The company said it intended to defend the matter.
- The company also disclosed asbestos-related lawsuits, but stated it did not expect pending claims, individually or collectively, to materially affect its financial condition, results, or cash flows.
Important facts for investors to verify
- Whether the severe year-to-date operating cash flow decline was primarily temporary, given the pension contribution and working-capital movements.
- Whether commercial aerospace and general industrial demand stabilizes, and whether lower orders translate into continued sales pressure.
- Progress and realized savings from the restructuring program compared with expected charges and annual savings.
- Closing, financing, and integration outcomes for the PacStar acquisition, alongside the company’s increased debt and planned repurchases.
- Developments in the AP1000 delivery-delay dispute and any change to the disclosed potential loss range or accrual status.