Curtiss-Wright Reports Third Quarter 2020 Financial Results

Curtiss-Wright Corporation (NYSE: CW) reports financial results for the third quarter ended September 30, 2020.

Third Quarter 2020 Highlights:

• Reported diluted earnings per share (EPS) of $1.55, with Adjusted diluted EPS of $1.85;
• Net sales of $572 million, down 7%, with defense market sales up 11%;
• Reported operating income of $85 million, with Reported operating margin of 14.8%;
• Adjusted operating income of $100 million, down 7%;
• Adjusted operating margin of 17.4%, flat compared to the prior year, as benefits of our cost containment and restructuring initiatives partially offset reduced commercial markets sales;
• Reported free cash flow (FCF) of $49 million, with Adjusted FCF of $55 million; Year-to-date Adjusted FCF of $138 million, up 12%; and
• Share repurchases of approximately $13 million.

“We generated solid third quarter Adjusted diluted EPS of $1.85 led by stronger than expected sales growth in our defense markets of 11%,” said David C. Adams, Chairman and CEO of Curtiss-Wright Corporation. “In addition, all three segments demonstrated sequential quarterly improvement in sales, operating income and operating margin, and also benefitted from the savings generated by our ongoing cost containment and restructuring initiatives. We remain on track to achieve our full-year 2020 guidance.”

Updated Full-Year 2020 Adjusted Guidance (compared to Full-Year 2019 Adjusted Actuals):

• Narrowed overall sales guidance by raising bottom end of range to down 4% to 5% (previously down 4% to 6%); Increased defense markets sales growth range to up 11% to 13% (previously up 8% to 10%);
• Increased Adjusted operating margin by 10 basis points to new range of 16.1% to 16.3% (previously 16.0% to 16.2%);
• Narrowed Adjusted diluted EPS guidance to new range of $6.70 to $6.85 (previously $6.60 to $6.85);
• Maintained Adjusted FCF guidance range of $350 to $380 million, with Adjusted FCF conversion of approximately 130%; and
• Updated guidance does not include the recently announced acquisition of Pacific Star Communications, Inc. (PacStar), a leading provider of advanced tactical communications solutions for battlefield network management, which is anticipated to close in the fourth quarter.

Mr. Adams continued, “Looking ahead to the remainder of 2020, we expect continued overall sales growth in our defense markets, which remain strong, and savings generated by our restructuring actions to drive sequential improvement in operating margin, diluted EPS and free cash flow.”

“We continue to leverage our strong and healthy balance sheet to implement our balanced capital allocation strategy. Last month, we announced our decision to acquire PacStar and today we are pleased to announce the authorization of an additional $200 million in share repurchases. In addition, as part of our previously announced 2020 restructuring actions, we have elected to discontinue our build-to-print actuation contract supporting the Boeing 737 MAX program at the conclusion of this year. Phasing out this historically low-margin and commodity-type business will lessen the Company’s overall exposure to the commercial aerospace market. Collectively, these actions are expected to aid our efforts to drive long-term profitable growth and deliver significant value for our shareholders.”

Company Announces New $200 Million Share Repurchase Authorization:

• Curtiss-Wright’s Board of Directors has authorized an additional $200 million for future share repurchases, increasing total available authorization to $250 million, which is immediately available for opportunistic share repurchases;
• Of this authorization, the Company intends to repurchase a minimum of $50 million in opportunistic share repurchases in the fourth quarter of 2020;
• The Company remains on track to complete its existing $50 million 10b5-1 share repurchase program authorized for 2020 by the end of the year, and had previously completed a $100 million opportunistic share repurchase program executed in March 2020; and
• Beginning in January 2021, the Company expects to repurchase $50 million additional shares via a 10b5-1 program throughout 2021, which is expected to more than offset potential dilution from compensation plans.

Third Quarter 2020 Operating Results

• Sales of $572 million, down $43 million, or 7%;
• Sales to the defense markets increased 11%, 6% of which was organic, led by strong growth in aerospace and naval defense, while sales to the commercial markets decreased 22%, due to reduced demand in the commercial aerospace, general industrial and power generation markets. Please refer to the accompanying tables for an overall breakdown of sales by end market;
• Adjusted operating income was $100 million, down 7%, reflecting unfavorable overhead absorption on lower revenues in the Commercial/Industrial segment, partially offset by increased profitability in the Power segment;
• Adjusted operating margin was flat at 17.4%, reflecting the benefits of our company-wide restructuring and cost containment actions; and
• Non-segment expenses of $8 million increased by $1 million, or 10%, compared to the prior year, primarily due to higher corporate costs.

Net Earnings and Diluted EPS

• Reported net earnings of $65 million, down 22% from the prior year, reflecting lower segment operating income and higher interest expense;
• Reported diluted EPS of $1.55, down 19% from the prior year, reflecting lower net earnings, partially offset by a lower share count;
• Adjusted net earnings of $77 million, down 8%;
• Adjusted diluted EPS of $1.85, down 5%; and
• Effective tax rate of 20.2% decreased slightly compared to the prior year quarter.

Free Cash Flow

• Reported free cash flow was $49 million, a decrease of $53 million compared to the prior year, principally driven by lower cash earnings and lower collections, partially offset by a reduction in capital expenditures;
• Capital expenditures decreased $9 million to $7 million compared to the prior year, primarily due to lower capital investments within the Power segment; and
• Adjusted free cash flow was $55 million in the third quarter.

New Orders and Backlog

• New orders of $559 million decreased 14% compared with the prior year period, as strong growth in embedded computing and valves products serving the defense markets was more than offset by reduced demand across the commercial markets; Order activity within our commercial and industrial markets continued to demonstrate solid monthly improvement compared with the lows experienced in May; and
• Backlog of $2.2 billion increased 1% from December 31, 2019.

Share Repurchase and Dividends

• During the third quarter, the Company repurchased 133,673 shares of its common stock for approximately $13 million;
• Year-to-date, the Company repurchased 1.37 million shares for approximately $138 million, which included a $100 million opportunistic share repurchase program executed in March; and
• The Company also declared a quarterly dividend of $0.17 a share, unchanged from the previous quarter.

Third Quarter 2020 Segment Performance

Commercial/Industrial

• Sales of $223 million, down $56 million, or 20%;
• Higher aerospace defense revenues reflect increased sales of actuation and sensors equipment on various fighter jet programs;
• Lower commercial aerospace market revenues reflect reduced OEM sales of actuation and sensors equipment, as well as surface treatment services;
• General industrial market revenue declines reflect reduced year-over-year sales for industrial vehicle, valve and controls products, as well as surface treatment services;
• Reported operating income was $25 million, with Reported operating margin of 11.2%; and
• Adjusted operating income was $33 million, while Adjusted operating margin decreased 100 basis points to 14.6%, principally reflecting unfavorable absorption on lower commercial sales partially offset by the benefits of our cost containment and restructuring initiatives.

Defense

• Sales of $180 million, up $20 million, or 12%;
• Higher aerospace defense market revenues were principally driven by increased sales of embedded computing equipment on various programs, most notably on Unmanned Aerial Vehicle (UAV) platforms;
• Strong naval defense market revenue growth reflected timing of production of valves on submarine and aircraft carrier programs, as well as the contribution from the 901D acquisition;
• Reduced ground defense market revenues reflect lower sales on international tank platforms;
• Reported operating income was $42 million, with Reported operating margin of 23.0%; and
• Adjusted operating income was $45 million, up 11% from the prior year, while Adjusted operating margin decreased 40 basis points to 25.0%, reflecting unfavorable mix on strong sales of our defense electronics products, mainly offset by the contribution from acquisitions and the benefits of our cost containment actions.

Power

• Sales of $169 million, down $7 million, or 4%;
• Naval defense market revenues increased slightly, as higher Columbia class submarine production revenues were mainly offset by lower service center sales;
• Reduced power generation market sales principally reflect lower domestic and international aftermarket revenues, partially offset by increased revenues on the CAP1000 program;
• Reported operating income was $26 million, with Reported operating margin of 15.4%; and
• Adjusted operating income was $30 million, flat compared to the prior year, while Adjusted operating margin increased 70 basis points to 17.7%, principally driven by the benefits of our cost containment and restructuring initiatives.

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A more detailed breakdown of the Company’s 2020 financial guidance by segment and by market, as well as all reconciliations of Reported GAAP amounts to Adjusted non-GAAP amounts can be found in the accompanying schedules.

Conference Call & Webcast Information

The Company will host a conference call to discuss its third quarter financial results and business outlook at 10:00 a.m. ET on Thursday, October 29, 2020. A live webcast of the call and the accompanying financial presentation, as well as a replay of the call, will be made available on the internet by visiting the Investor Relations section of the Company’s website at www.curtisswright.com.

Use of Non-GAAP Financial Information (Unaudited)

The Corporation supplements its financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial information. Curtiss-Wright believes that these non-GAAP measures provide investors with additional insight into the Company’s ongoing business performance. These non-GAAP measures should not be considered in isolation or as a substitute for the related GAAP measures, and other companies may define such measures differently. Curtiss-Wright encourages investors to review its financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

The Company’s presentation of its financials and guidance includes an Adjusted (non-GAAP) view that excludes significant restructuring costs in 2020 associated with its operations, including one-time actions taken in response to COVID-19, a non-cash impairment of capitalized development costs related to a commercial aerospace program, first year purchase accounting costs associated with its acquisitions, as well as one-time transition and IT security costs, and capital investments, specifically associated with the relocation of the DRG business in the Power segment. Transition costs include relocation of employees and equipment as well as overlapping facility and labor costs associated with the relocation. We believe this Adjusted view will provide improved transparency to the investment community in order to better measure Curtiss-Wright’s ongoing operating and financial performance and better comparisons of our key financial metrics to our peers. Reconciliations of “Reported” GAAP amounts to “Adjusted” non-GAAP amounts are furnished within this release.

The following definitions are provided:

Adjusted Operating Income, Operating Margin, Net Earnings and Diluted EPS

These Adjusted financials are defined as Reported Operating Income, Operating Margin, Net Earnings and Diluted Earnings per Share (EPS) under GAAP excluding: (i) the impact of first year purchase accounting costs associated with acquisitions for current and prior year periods, specifically one-time inventory step-up, backlog amortization and transaction costs; (ii) one-time transition and IT security costs associated with the relocation of a business in the current year period; (iii) the non-cash impairment of capitalized development costs related to a commercial aerospace program; and (iv) significant restructuring costs in 2020 associated with its operations.

Organic Sales and Organic Operating Income

The Corporation discloses organic sales and organic operating income because the Corporation believes it provides investors with insight as to the Company’s ongoing business performance. Organic sales and organic operating income are defined as sales and operating income excluding the impact of restructuring costs, foreign currency fluctuations and contributions from acquisitions made during the last twelve months.

Free Cash Flow and Free Cash Flow Conversion

The Corporation discloses free cash flow because it measures cash flow available for investing and financing activities. Free cash flow represents cash available to repay outstanding debt, invest in the business, acquire businesses, return capital to shareholders and make other strategic investments. Free cash flow is defined as cash flow provided by operating activities less capital expenditures. Adjusted free cash flow excludes: (i) a capital investment in the Power segment related to the new, state-of-the-art naval facility principally for DRG; (ii) a voluntary contribution to the Company’s corporate defined benefit pension plan made in the first quarter of 2020; and (iii) the cash impact from restructuring in 2020. The Corporation discloses free cash flow conversion because it measures the proportion of net earnings converted into free cash flow and is defined as free cash flow divided by net earnings from continuing operations. Adjusted free cash flow conversion is defined as Adjusted free cash flow divided by Adjusted net earnings.