Curtiss-Wright Reports Third Quarter 2018 Financial Results; Raises Full-Year Operating Margin, EPS and Free Cash Flow Guidance

Curtiss-Wright Corporation (NYSE: CW) reports financial results for the third quarter ended September 30, 2018.

Beginning in the second quarter of 2018, the Company elected to change the presentation of its financials and guidance to include an Adjusted (non-GAAP) view that excludes first year purchase accounting costs associated with its acquisitions.

Third Quarter 2018 Highlights

• Reported diluted earnings per share (EPS) of $1.68, with Adjusted diluted EPS of $1.70, up 19% compared with the prior year;
• Net sales of $595 million, up 5%, including 2% organic growth (defined below);
• Reported operating income of $97 million, with Adjusted operating income of $98 million, up 6%;
• Reported operating margin of 16.3%, with Adjusted operating margin of 16.5%, up 20 basis points;
• Free cash flow of $62 million, down 31%;
• New orders of $514 million, down 1%; and
• Share repurchases of approximately $33 million.

Full-Year 2018 Business Outlook

• Full-year 2018 Adjusted guidance reflects higher sales (now up 7-9%), operating income (up 11-14%), operating margin of 15.3% to 15.5% (now up 60-80 bps) and diluted EPS (now up 23-26%), compared with Adjusted 2017 financial results;
• Increased full-year 2018 Adjusted diluted EPS guidance by $0.10 to new range of $6.10 to $6.25, compared with prior range of $6.00 to $6.15, reflecting improved profitability in the Defense and Power segments, as well as expectations for a lower tax rate and share count; and
• Increased Reported free cash flow by $10 million to new range of $260 to $280 million and Adjusted free cash flow to a new range of $310 to $330 million, which excludes a $50 million voluntary pension contribution made in the first quarter of 2018.

“Our third quarter results exceeded our expectations, as we generated solid 5% top-line growth, led by a better than expected performance in the Power segment,” said David C. Adams, Chairman and CEO of Curtiss-Wright Corporation. “As a result, we delivered a strong Adjusted operating margin of 16.5% and Adjusted diluted EPS of $1.70.”

“We remain on track for a solid operational performance in 2018 which includes higher sales in all end markets, double-digit growth in operating income, strong margin expansion and solid free cash flow generation. Based on the solid year-to-date results and outlook for the remainder of 2018, we have increased our full-year Adjusted diluted EPS guidance to a new range of $6.10 to $6.25. In addition, we have raised our full-year Adjusted free cash flow guidance to a new range of $310 to $330 million. We look forward to continuing to deliver solid profitability and free cash flow in order to enhance shareholder value.”

Third Quarter 2018 Operating Results

• Sales of $595 million up $27 million, or 5%, compared with the prior year (2% organic, 3% acquisitions);
• Higher organic revenues were principally driven by strong power generation and general industrial sales, partially offset by lower defense and commercial aerospace revenues;
• From an end market perspective, total sales to the defense markets increased 4%, principally associated with the acquisition of Dresser-Rand’s government business (“DRG”), while total sales to the commercial markets increased 5%, most of which was organic, compared with the prior year. Please refer to the accompanying tables for a breakdown of sales by end market;
• Reported operating income was $97 million, with Reported operating margin of 16.3%;
• Adjusted operating income of $98 million, up $6 million, or 6%, compared with the prior year, principally reflects higher power generation revenues in the Power segment, most notably due to the China Direct AP1000 program, as well as the benefits of our DRG acquisition;
• Adjusted operating margin of 16.5%, up 20 basis points compared with the prior year, was primarily driven by higher revenues and favorable overhead absorption in the Power segment, as well as the benefits of our ongoing margin improvement initiatives; and
• Non-segment expenses of $10 million increased by $4 million compared with the prior year, primarily due to higher pension costs.

• Reported net earnings of $74 million and reported diluted EPS of $1.68;
• Adjusted net earnings of $75 million, up $12 million, or 18%, compared with the prior year, reflecting higher operating income, lower interest expense and a lower tax rate;
• Adjusted diluted earnings per share of $1.70, up $0.27, or 19%, compared with the prior year, reflecting higher operating income, lower interest expense and a lower tax rate, as well as a slightly lower share count; and
• The effective tax rate (ETR) for the third quarter was 19.9%, a decrease from 26.0% in the prior year quarter, primarily driven by the current period reduction of the U.S. corporate income tax rate from 35% to 21% associated with the 2017 Tax Cuts and Jobs Act (TCJA).

• Free cash flow of $62 million, defined as cash flow from operations less capital expenditures, decreased $28 million compared with the prior year, as higher earnings were more than offset by the timing of collections; and
• Capital expenditures decreased by $1 million to $10 million compared with the prior year period, due to higher capital investments in the prior year period.

New Orders and Backlog

• New orders of $514 million, were down 1% compared with the prior year, as solid growth in naval defense orders, including the contribution from the DRG acquisition, were more than offset by lower commercial orders, most notably in the power generation market;
• Year-to-date, new orders of $1.8 billion are up 6% compared with the prior year; and
• Backlog of $2.0 billion was flat with December 31, 2017.

Other Items – Share Repurchase

• During the third quarter, the Company repurchased 250,394 shares of its common stock for approximately $33 million; and
• Year-to-date, the Company repurchased 611,665 shares for approximately $79 million.

Third Quarter 2018 Segment Performance

• Sales of $295 million were nearly flat compared with the prior year (1% organic, 1% unfavorable foreign currency translation);
• Lower aerospace and naval defense market sales reflect lower sales of sensors on various fighter jet programs and lower sales of valves on the CVN-80 Ford class aircraft carrier program, respectively;
• Commercial aerospace market sales were down slightly, as higher sales of sensors and controls products were more than offset by lower revenues resulting from FAA directives, which are winding down;
• General industrial market sales growth was driven by solid demand for industrial valves and industrial controls products, and surface treatment services;
• Reported operating income of $45 million, down $2 million, or 4%, compared with the prior year ((5%) organic, 1% favorable foreign currency translation); and
• Reported operating margin decreased 70 basis points to 15.2%, reflecting unfavorable mix and lower profitability for sensors and controls products, which more than offset the benefits of our ongoing margin improvement initiatives.

• Sales of $138 million, down $4 million, or 3%, compared with the prior year ((2%) organic, 1% unfavorable foreign currency translation);
• Sales in the aerospace defense market were flat, as higher sales of flight test equipment on fighter jet and bomber programs were offset by lower sales of embedded computing equipment on helicopter and unmanned aerial vehicle (UAV) platforms;
• Lower ground defense market sales principally reflect reduced sales of embedded computing equipment on various domestic and international programs; and
• Reported operating income of $34 million was flat compared with the prior year, while reported operating margin increased 60 basis points to 24.3%, as unfavorable absorption was offset by favorable foreign currency translation.

• Sales of $162 million, up $30 million, or 23%, compared with the prior year (15% acquisition, 8% organic);
• Strong naval defense market sales were driven by higher CVN-80 aircraft carrier revenues and solid DRG service center revenues;
• Strong power generation market sales reflect higher revenues on the China Direct AP1000 program, which more than offset lower revenues on the domestic AP1000 program, as well as improved domestic aftermarket sales supporting currently operating nuclear reactors;
• Reported operating income was $28 million, with Reported operating margin of 17.5%; and
• Adjusted operating income of $30 million, up $12 million, or 66%, compared with the prior year, while Adjusted operating margin increased 470 basis points to 18.2%, reflecting higher sales and improved profitability on the China Direct AP1000 program.

Full-Year 2018 Guidance

The Company is updating its full-year 2018 financial guidance as follows:

Notes:

• Full-year 2018 Adjusted guidance reflects higher sales (now up 7-9%), operating income (up 11-14%), operating margin of 15.3% to 15.5% (now up 60-80 bps) and diluted EPS (now up 23-26%), compared with Adjusted 2017 financial results;
• Revised full-year 2018 Adjusted diluted EPS guidance to new range of $6.10 to $6.25, compared with prior range of $6.00 to $6.15; reflecting improved profitability in the Defense and Power segments, reduced profitability in the Commercial/Industrial segment, and higher corporate costs, as well as expectations for a lower effective tax rate and share count;
• Full-year 2018 Adjusted operating income guidance includes revised assumptions for first year acquisition-related purchase accounting costs following a $6 million true-up in DRG’s inventory step up valuation, which reduced the full-year, non-GAAP adjustment from $14 million to $8 million, and shifted $6 million into core operating performance;
• Full-year 2018 Adjusted diluted EPS guidance also reflects change in inventory valuation, which reduced the full-year, non-GAAP adjustment from $0.25 to $0.14, and shifted $0.11 into core operating performance; and
• Increased Reported free cash flow by $10 million to new range of $260 to $280 million and Adjusted free cash flow range of $310 to $330 million, which excludes a $50 million voluntary pension contribution made in the first quarter of 2018.
• A more detailed breakdown of the Company’s 2018 guidance by segment and by market can be found in the accompanying schedules.

Conference Call & Webcast Information

The Company will host a conference call to discuss third quarter 2018 financial results at 9:00 a.m. EDT on Wednesday, October 31, 2018. 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. We believe that disclosing non-GAAP financial measures provides useful supplemental data that should not be considered in isolation, nor be considered a substitute for financial measures prepared in accordance with GAAP, and allows for greater transparency in the review of our financial and operational performance. 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.

Beginning with the second quarter of 2018, coinciding with the initial reporting of the DRG acquisition, the Company elected to present its financials and guidance on an Adjusted, non-GAAP basis for operating income, operating margin, net earnings and diluted earnings per share to exclude first year purchase accounting costs associated with its acquisitions, specifically one-time inventory step-up, backlog amortization and transaction costs for current and prior year acquisitions that are included under GAAP. This press release refers to "Adjusted" amounts, which are Non-GAAP financial measures described below.

Management believes that this approach will provide improved transparency to the investment community in order to measure Curtiss-Wright’s core operating and financial performance, provide quarter-over-quarter comparisons excluding one-time items and show better comparisons among company peers. Additional details and tables reconciling the GAAP to non-GAAP financial measures are included within this release. All per share amounts are reported on a diluted basis.

The following definitions are provided:

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

These Adjusted financials are defined as Reported Operating Income, Operating Margin, Net Income and Diluted EPS under GAAP excluding 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.

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.