Curtiss-Wright Reports Third Quarter 2017 Financial Results; Raises Full-Year Sales, Operating Income, Operating Margin, EPS and Free Cash Flow Guidance

Curtiss-Wright Corporation (NYSE: CW) reports financial results for the third quarter and nine months ended September 30, 2017.

Third Quarter 2017 Highlights

• Diluted earnings per share (EPS) of $1.43, including $0.09 resulting from a lower tax rate, came in ahead of expectations and up 40% compared with the prior year;
• Net sales of $568 million, up 12%, including 8% organic growth, with higher sales in all end markets;
• Operating income of $97 million, up 26%;
• Operating margin of 17.0%, up 190 basis points;
• New orders of $517 million, up 3%;
• Backlog of $2.0 billion increased 5% from December 31, 2016; and
• Free cash flow of $90 million and free cash flow conversion of 140%, as defined in table below.

Full-Year 2017 Business Outlook

• Increasing sales guidance by $25 million to a new range of $2.21 to $2.25 billion, due to improved outlook in general industrial and defense markets;
• Increasing operating income guidance by $7 million to a new range of $328 to $336 million, driven by the higher sales outlook and improved profitability in the Power segment;
• Increasing operating margin guidance by 10 basis points to a new range of 14.8% to 14.9%;
• Increasing EPS guidance by $0.20 to a new range of $4.65 to $4.75, representing double-digit growth of 11% to 13%, due to strong operational performance as well as a lower tax rate; and
• Increasing free cash flow guidance by $10 million to a new range of $270 to $290 million.

“Our third quarter results exceeded our expectations driven by strong 12% top-line growth, 8% of which was organic, and improved profitability that generated a 17.0% operating margin and stronger than anticipated EPS of $1.43,” said David C. Adams, Chairman and CEO of Curtiss-Wright Corporation. “We achieved higher sales and operating income growth in each of our segments, driving solid operating margin expansion, particularly in our Commercial/Industrial and Power segments. In addition, our results reflect solid profitability associated with the Teletronics Technology Corporation (TTC) acquisition in the Defense segment, as well as the incremental benefits of our ongoing margin improvement initiatives across the enterprise.”

“As a result of our strong third quarter performance, improved overall sales outlook and higher profitability associated with the AP1000 China Direct program, we are increasing our full-year 2017 guidance for sales, operating income, operating margin and EPS. In addition, as a result of higher net earnings and lower working capital, we are raising our full-year free cash flow guidance by $10 million to a new range of $270 to $290 million. We look forward to continuing to deliver solid profitability and free cash flow to enhance shareholder value.”

Sales

Sales of $568 million in the third quarter increased $61 million, or 12%, compared with the prior year, reflecting a $41 million, or 8%, increase in organic sales, an $18 million, or approximately 4%, contribution from acquisitions, and a $2 million benefit from favorable foreign currency translation.

Higher organic sales were principally driven by improved demand in the Commercial/Industrial segment and higher revenues in the Power segment. Higher Defense segment sales primarily reflect the contribution from our acquisition of TTC.

From an end market perspective, sales to the defense markets increased 13%, while sales to the commercial markets increased 11%, compared with the prior year. Please refer to the accompanying tables for a breakdown of sales by end market.

Operating Income

Operating income in the third quarter was $97 million, an increase of $20 million, or 26%, compared with the prior year, due to strong performance in each of our segments. In the Commercial/Industrial segment, higher operating income was primarily driven by higher industrial revenues and the benefits of our margin improvement initiatives. In the Defense segment, our results primarily reflect solid profitability associated with the TTC acquisition. Finally, in the Power segment, our results reflect a strong improvement in operating income resulting from higher revenues and profitability on the AP1000 China Direct program and higher profitability in the aftermarket business.

Operating margin was 17.0%, an increase of 190 basis points over the prior year, reflecting higher revenues and the benefits of our ongoing margin improvement initiatives.

Non-segment Expense

Non-segment expenses decreased by $2 million compared with the prior year, primarily due to lower foreign currency transactional losses and lower pension expense.

Net Earnings

Third quarter net earnings increased 39% compared with the prior year, driven by higher operating income and lower taxes. The effective tax rate for the current quarter was 26.0%, a decrease from 31.0% in the prior year, principally driven by a discrete tax benefit for employee share-based payments and the reversal of certain valuation allowances.

Free cash flow, defined as cash flow from operations less capital expenditures, was $90 million for the third quarter of 2017, a decrease of $10 million compared with the prior year. Net cash provided by operating activities decreased $9 million to $101 million, as higher cash earnings were more than offset by higher trade receivables on increased sales. Capital expenditures increased by $1 million to $12 million, primarily due to capital investments being made in each of our segments.

New Orders and Backlog

New orders of $517 million in the third quarter increased 3% compared to the prior year, due to increases in all three segments. Backlog of $2.0 billion increased 5% from December 31, 2016, primarily due to increases in the Commercial/Industrial and Defense segments.

Other Items – Share Repurchase

During the third quarter, the Company repurchased 126,880 shares of its common stock for approximately $12 million.

Full-Year 2017 Guidance

The Company is updating its full-year 2017 financial guidance as follows:

Notes:

• Full-year 2017 guidance includes the acquisition of TTC, which is expected to contribute $65 million in sales to the Defense segment and to be slightly accretive to operating income and earnings per share, including purchase accounting costs.
• Full-year 2017 tax rate guidance includes the impact of a discrete tax benefit of $5.4 million from the adoption of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting, which results in a $0.12 increase to our EPS, a $0.03 increase from the first quarter.
• A more detailed breakdown of the Company’s 2017 guidance by segment and by market can be found in the accompanying schedules.

Sales for the third quarter were $294 million, an increase of $18 million, or 7%, over the prior year. Organic sales increased $17 million, or 6%, while favorable foreign currency translation added $1 million, or 1%. Our results primarily reflect higher sales in the general industrial market, due to continued solid demand for industrial vehicle products and improved sales of severe-service valves to the energy markets. In addition, our results reflect an increase in the commercial aerospace market, primarily due to higher sensors and actuation systems sales on narrowbody airplanes and business jets. In the naval defense market, we experienced lower revenues on the Virginia-class submarine program, based on the timing of production.

Operating income in the third quarter was $47 million, an increase of $8 million, or 20%, compared with the prior year, while operating margin increased 170 basis points to 15.9%. The increase in operating income and margin primarily reflects higher sales and improved profitability for industrial vehicle products, sensors and controls products, and surface treatment services, including the benefits of our ongoing margin improvement initiatives.

Sales for the third quarter were $142 million, an increase of $28 million, or 25%, from the prior year. These results primarily reflect an $18 million contribution from the acquisition of TTC, while organic sales increased $10 million, or 8%, and favorable foreign currency translation added nearly $1 million, or 1%. In the aerospace defense market, our results reflect higher sales of data acquisition and flight test equipment from TTC, most notably on the F-35 Joint Strike Fighter program, as well as increased sales to unmanned aerial vehicle (UAV) programs. In the ground defense market, our results reflect higher sales of our turret drive stabilization systems for armored tanks to international customers.

Operating income in the third quarter was $34 million, an increase of $5 million, or 17%, compared with the prior year, while operating margin decreased 160 basis points to 23.7%. Excluding a $6 million, or 20%, benefit from the TTC acquisition, organic operating income was flat on higher sales, mainly due to an unfavorable shift in mix for our defense electronics products. Meanwhile, unfavorable foreign currency translation reduced current quarter operating income by approximately $1 million, or 3%.

Sales for the third quarter were $132 million, an increase of $15 million, or 12%, from the prior year. In the naval defense market, our results reflect higher revenues on the Virginia-class submarine program, based on the timing of production, as well as the new Columbia class submarine program, supporting the ramp-up in development. In the power generation market, our results were primarily driven by higher revenues on the AP1000 China Direct program, as well as solid international aftermarket sales supporting currently operating nuclear reactors, partially offset by reduced domestic sales.

Operating income in the third quarter was $19 million, an increase of $5 million, or 38%, compared with the prior year, while operating margin increased 280 basis points to 14.8%. This performance reflects higher production and profitability on the AP1000 China Direct program, as well as improved profitability in the aftermarket business driven by higher sales and the benefits of our ongoing margin improvement initiatives.

Conference Call & Webcast Information

The Company will host a conference call to discuss third quarter 2017 financial results at 9:00 a.m. EDT on Thursday, October 26, 2017. 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.

(Tables to Follow)

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 following definitions are provided:

Organic Revenue and Organic Operating Income

The Corporation discloses organic revenue and organic operating income because the Corporation believes it provides investors with insight as to the Company’s ongoing business performance. Organic revenue and organic operating income are defined as revenue and operating income excluding the impact of 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. 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.

About Curtiss-Wright Corporation

Curtiss-Wright Corporation (NYSE: CW) is a global innovative company that delivers highly engineered, critical function products and services to the commercial, industrial, defense and energy markets. Building on the heritage of Glenn Curtiss and the Wright brothers, Curtiss-Wright has a long tradition of providing reliable solutions through trusted customer relationships. The company employs approximately 8,000 people worldwide. For more information, visit www.curtisswright.com.

Certain statements made in this press release, including statements about future revenue, financial performance guidance, quarterly and annual revenue, net income, operating income growth, future business opportunities, cost saving initiatives, the successful integration of the Company’s acquisitions, and future cash flow from operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements present management's expectations, beliefs, plans and objectives regarding future financial performance, and assumptions or judgments concerning such performance. Any discussions contained in this press release, except to the extent that they contain historical facts, are forward-looking and accordingly involve estimates, assumptions, judgments and uncertainties. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those expressed or implied. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Such risks and uncertainties include, but are not limited to: a reduction in anticipated orders; an economic downturn; changes in the competitive marketplace and/or customer requirements; a change in government spending; an inability to perform customer contracts at anticipated cost levels; and other factors that generally affect the business of aerospace, defense contracting, electronics, marine, and industrial companies. Such factors are detailed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and subsequent reports filed with the Securities and Exchange Commission.

This press release and additional information are available at www.curtisswright.com.

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