Curtiss-Wright Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Curtis Wright First Quarter 2020 Earnings Conference Call. At this time, all participants' lines are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, press star zero. I would now like to hand the conference over to your speaker today, Jim Ryan, Senior Director, Investor Relations. Thank you, sir. Please go ahead.

Thank you, DeSondra, and good morning, everyone. Welcome to Curtis Wright's first quarter 2020 earnings conference call. Joining me on the call today are Dave Adams, our chairman and chief executive officer, Glenn Tynan, our vice president of finance, and Chris Farkas, our newly named chief financial officer. Our call today is being webcast, and the press release, as well as a copy of today's financial presentation, is available for download through the investor relations section of our company website, at www.curtiswright.com. A replay of this webcast also can be found on the website. Please note, today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements including the impact of a pandemic such as COVID-19 and our public filings with the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes first-year purchase accounting costs associated with acquisitions, one-time transition costs associated with the relocation of the DRG business, and the restructuring costs in 2020. Reconciliations for current and prior year periods are available in the earnings released, at the end of this presentation and on our website. Any references to organic growth exclude the effects of foreign currency translation, acquisitions, and divestitures unless otherwise noted. Now we'd like to turn the call over to Dave to get things started. Dave?

Thanks, Jim. Good morning, everyone. I'll begin today with a review of the operational impacts of COVID-19 on our business, highlighting some of the critical actions we've taken in response to this pandemic. Then I'll provide some highlights of our first quarter and lastly introduce our latest succession planning success story. Chris will then provide a detailed review of our first quarter performance and outlook, as well as our strong balance sheet and liquidity position. Finally, I'll return to wrap up our prepared remarks as we head into Q&A. On behalf of Curtis Wright, our thoughts and prayers go out to all who have been affected by the COVID-19 pandemic. Since this crisis began, Our number one focus has been taking the necessary steps to ensure the health and safety of our global workforce. On behalf of our entire organization, I want to thank our employees for their perseverance and willingness to adapt in these challenging times. As an organization, we have been closely following the CDC guidelines, practicing social distancing and working from home where appropriate across all of our facilities. While the majority of our manufacturing sites worldwide are operational today, several have been impacted over the past two months due primarily to customer-driven delays as well as government-mandated closures. As we discussed on our February earnings call, our operations in China were experiencing a minor disruption from COVID-19, and I'm happy to report that those operations are currently up and running at 100% capacity. Currently, the majority of Kurdish rights operations around the world have been granted essential business status, which will help us navigate through this downturn. A bright spot within our portfolio is the continued defense business, which provides significant insulation to our overall sales and profitability from the impact of this pandemic. Together, our team is focused on how we preserve our profitability and cash as the world emerges from this crisis, while not losing sight of our long-term strategy. Upon identification of the quickly spreading virus, our leadership team immediately established a cross-functional response team to identify risk to our business and develop and coordinate appropriate action plans. We developed a real-time reporting system to track potential COVID-19 impacts, which covers every site across the globe. You may recall from prior earnings calls the emphasis we were placing upon developing a recession playbook as fears of a recession were emerging. As it turns out, that process, including stress testing of each of our businesses, has provided a jumpstart to our efforts to proactively address the potential impacts to our business resulting from COVID-19. Later in our prepared remarks, I'll provide a more thorough review of the cost containment and mitigation plans, which we began to implement in the first quarter. Our recession playbook activities, combined with a robust and growing defense market, positions us well through this challenging period. Additionally, Curtis Wright has a very strong balance sheet with ample liquidity, as Chris will review in a few minutes. As we navigate through this period of substantial uncertainty, And in keeping with our conservative nature, we've elected to suspend our full year 2020 guidance. We'll take the next few months to evaluate the performance of our markets, customers, and supply chain with the expectation of developing improved clarity on our performance for the remainder of 2020 as well as 2021. We'll provide an update at the appropriate time. Turning to slide five, I'll review the highlights of our first quarter 2020 adjusted results. Curtiss-Wright delivered a solid performance, which was slightly ahead of our expectations, despite the challenging environment that we are currently facing. Adjusted operating income rose 10% on a 4% increase in sales, generating an 80 basis point improvement in adjusted operating margin to 13.3%. These results principally reflect strong sales and improved profitability in the defense segment, led by strong aerospace and naval defense sales. Adjusted diluted EPS of $1.34 increased 3% year over year. Next, I wanted to address the press release issued earlier this morning where we announced that Glenn Tynan will be retiring later this year. On behalf of the board of the directors and the entire Curtis Wright team, I want to thank Glenn for his tremendous leadership and dedication. It has been a pleasure working with you over the past 20 years as our company has reached new heights and delivered remarkable results. I wish you the best in your well-deserved retirement. As part of the transition, the board and I are pleased to announce the appointment of Chris Farkas as CFO. His leadership and operational experience have provided him a solid foundation that will serve our corporation well into the future. I have the utmost confidence in Chris as the new CFO of Curtis Wright. His promotion is a prime example of the longstanding succession planning process that we employ at Curtis Wright. and I'd like to be the first to publicly congratulate Chris on his new role. Glenn, would you like to say a few words?

Sorry, didn't take it off mute. Thank you, Dave, and good morning, everyone. Over the course of my career, it has been a privilege to lead a tremendous team focused on developing world-class finance and IT organizations, building and sustaining a strong balance sheet, and driving significant free cash flow generation. Over the years, I have built and enjoyed extensive relationships with our employees, our management team, the board of directors, as well as the investment community. I will surely miss the regular interaction with all of you. Chris and I have worked closely together for more than 10 years as he assumed increasing levels of responsibilities at Curtis Wright. I look forward to working with him over the coming months to support his transition into the CFO role. From the IR standpoint, Chris has been an active participant in our investor conferences and meetings throughout the past two and a half years, and I am pleased that many of you have had the opportunity to get to know him. I wish him the best in his new role and have absolute confidence that he will continue to be a key driver in Curtis Wright's success. Now I'd like to turn the call over to Chris to provide a more thorough review of our first quarter performance and our outlook for 2020. Chris?

Thank you, Dave and Glenn, and good morning, everyone. I'm excited to lead our world-class finance organization and to work with the outstanding leadership team and board to continue to execute on our long-term goals and deliver sustainable value for our stakeholders. Turning to our first quarter results, I'll begin with a review of our end market sales. Overall, we experienced a 26% increase in sales to our defense markets, 20% of which was organic. Meanwhile, sales to our commercial markets declined 11% as conditions began to worsen late in the quarter due to COVID-19, though the overall sales impact was not material. There are a few items I'd like to highlight on this slide. First, in naval defense, we experienced solid revenue growth on both the CVN-80 and CVN-81 aircraft carrier programs, as both were anticipated to ramp up in 2020, following strong orders in 2019. Shifting to the commercial markets, sales in the commercial aerospace market were down slightly, reflecting customer production slowdowns and plant closures, which began to impact our performance late in the quarter. This was partially offset by the steady production of actuation equipment on the 737 MAX program. In general industrial, our performance reflects a combination of market-specific drivers and a general drop in economic activity due to COVID-19. In industrial vehicles, which includes products serving the on and off-highway markets, sales were expected to be down, mainly due to reduced demand in the on-highway market. Finally, in our surface technologies business, which is most closely linked to global GDP growth, demand was essentially flat earlier in the quarter but began to weaken as the quarter progressed. Next, I'll discuss the drivers of our first quarter operating performance, which, as a reminder, is presented on an adjusted basis. In the commercial industrial segment, our results principally reflect higher sales of actuation products, as well as the benefits of our proactive cost containment initiatives implemented to mitigate the effects of COVID-19. Partially offsetting that improvement was unfavorable absorption on lower industrial vehicle sales. In the defense segment, adjusted operating income increased 49%, while adjusted operating margin improved 320 basis points. Although not shown on the slide, organic operating income increased 38% on a 13% increase in organic revenue. This performance reflects favorable absorption on strong defense electronics revenues, a $2 million gain on the sale of the product line, which is partially offset by a $1 million increase in research and development. In the power segment, our results reflect favorable absorption on solid naval defense revenues. However, more than offsetting that improvement was unfavorable absorption on reduced power generation sales, primarily due to lower international aftermarket sales as several prior year projects did not recur. Next, I'll discuss our 2020 financial outlook. Although we've elected to suspend our full-year guidance at this time, I'd like to provide the framework for some of our assumptions regarding sales and profitability. In our defense markets, we maintain a positive outlook for growth in 2020, particularly within naval defense. This optimism reflects our solid backlog following very strong orders in 2019, the contribution from the 901 acquisition, and our position as a premier supplier of nuclear propulsion equipment for the Navy's most critical programs. Further, we have strong visibility and anticipate higher naval defense orders on aircraft carriers and submarines in the second quarter. Turning to our commercial markets, where the onset of COVID-19 has provided numerous challenges. As we enter the second quarter, we expect significant headwinds, particularly in our commercial aerospace and general industrial markets. In commercial aerospace, I'll begin by putting our sales mix into context where commercial OEM customers represent nearly 90% of our sales, with the remainder tied to aftermarket. As expected, our sales outlook has been tempered by plant closures, suspensions in production, and order deferrals and cancellations affecting our largest customers, Boeing and Airbus. Further, our commercial aerospace sales have been impacted by government-mandated shutdowns of two facilities in Mexico creating some additional risk within our internal supply chain. As a result, we expect sales in this market to trend lower for the foreseeable future, particularly in the second quarter. Next, in power generation within our nuclear aftermarket business, COVID-19 is impacting many U.S. nuclear plants. Social distancing measures are creating delays in equipment testing and are resulting in a reduction in the scope of customer outages. There's also a growing risk of plant operators delaying capital projects to preserve liquidity, which is likely to impact our international aftermarket business. Elsewhere, revenues on the Cap 1000 program have been generally unaffected to date. However, if this pandemic progresses late into the year, we may begin to experience delays in status checkpoints, which in turn could impact the timing of revenue recognition. In general industrial, We now expect reduced demand across all of our markets, which reflects our views for both market-specific drivers and weaker global economic activity. There are a few areas which I'd like to highlight. In industrial vehicles, where we were already forecasting softness in the on-highway market, we began to see production slowdowns and plant closures across the industry in March. We expect these trends to worsen in the second quarter and further impact our foliar sales. In industrial valves, We expect reduced demand for the remainder of 2020, as the tremendous drop in oil and gas prices is likely to generate a pullback in industry capital expenditures on both oil and gas and chemical projects. Additionally, our MRO work, which represents about 70% of our mix in industrial valves, has some risk due to delays in maintenance and turnarounds. However, it's worth noting that this market only represents about 4% of our annual sales. Next, to Surface Technologies, which maintains customer-facing facilities principally in the U.S., China, and Europe, we expect customer manufacturing to slow down in the second quarter and be down for the full year. Similar to our sales, we expect Curtis Wright's overall profitability to be challenged in 2020 as we manage through reduced volumes and under-absorption within our commercial businesses. We are currently expecting the second quarter to be our weakest quarter as the disruption from COVID-19 is expected to drive significantly weakened demand. However, Curtis Wright is an agile and flexible business, and we have a strong track record of proactively driving margin improvement. Dave will cover the specific details of our cost containment actions in a few minutes. Next, to help you better understand Curtis Wright's potential downside risk, We're providing an estimate ranging from 25 to 30% for decremental margins on reduced sales. This is quite similar to our estimate of overall incremental margins. Regarding our restructuring activity communicated in February, we remain on track with those initiatives. When considering the cost containment actions that we're currently implementing in response to COVID-19, we believe there may be some upside to potentially exceed the $20 million in annualized savings that was originally projected. However, As this is an evolving situation, we're not in a position to provide new figures at this time. Turning to slide nine, I'll focus on our balance sheet, where Curtis Wright is very well positioned with more than sufficient liquidity. Starting on the left-hand side of the slide, we concluded 2019 with a strong and healthy balance sheet, and we're well positioned for 2020. We have $750 million in private placement debt, at an average interest rate of roughly 4%, with only one note maturing before 2023. In terms of our revolver status, we have a $500 million revolver and a $200 million accordion feature, which can be opened for additional liquidity. As we've historically done, we started to borrow under the revolver in the first quarter simply for general corporate purposes and not related to concerns about COVID-19. Thus far in 2020, We've executed $112 million in share purchases, completed our acquisition at Dynaflow, and made a voluntary contribution to the defined benefit pension plan. Our debt ratios remain well below any internally or externally driven limitations where, for example, we have the ability to borrow $1.5 billion before approaching our debt covenants. Moving to the right-hand side of the slide, As a testament to our efficient capital structure, our operating leverage remains low. Our leverage ratios at 1.7 times total debt to EBITDA and 1.4 times net debt to EBITDA are in line with a strong investment grade rating. As you can see on the slide, we have conservatively averaged less than one times net debt to EBITDA over the past few years. In summary, Curtiss-Wright possesses a strong balance sheet and maintains a flexible yet conservative capital structure. providing further confidence that we can successfully navigate this downturn. Now I'd like to turn the call back over to Dave to continue with our prepared remarks. Dave?

Thanks, Chris. Next, I'd like to review some of the cost containment and cash preservation actions that we began implementing in the first quarter. We expect these actions will enable Curtis Wright to emerge as an even stronger company once this pandemic subsides. First, I'll outline some of the procedures in place to protect our profitability. We immediately focused on reducing our operating expenses, particularly cutting discretionary spending across the organization. We're implementing furloughs from the corporate office to the operating units across the globe. And as is typical and unfortunate in these types of environments, we're implementing workforce reductions where necessary to align to future market demands. Next, in terms of our plans to preserve free cash flow and improve liquidity, we are aggressively managing working capital and have suspended all non-essential capital expenditures. Additionally, we are closely monitoring potential benefits resulting from changes in legislation, including tax deferral and seizing government contracting opportunities. The final set of actions is driven by Curtis Wright's strong financial operational discipline and which has allowed us to remain active in terms of shareholder distributions thus far in 2020. As the share price began to decline, we executed an opportunistic share repurchase program in March to provide a cushion as we face certain reductions in sales and profitability. In addition, as a testament to our ability to maintain strong free cash flow in the face of adversity, we have maintained our quarterly dividend payments. In summary, Curtis Wright remains well-positioned to weather this challenging environment. We enjoy a diversified business mix with defense markets approaching 50% of our total sales. Our outlook in defense remains positive and is supported by a solid backlog and order growth. Our commercial markets will no doubt be impacted by the reduced pace of economic growth, and we are implementing the necessary cost containment measures to reduce that impact to our profitability and free cash flow. We have a strong and healthy balance sheet and continue to seek profitable acquisitions to bolster our top line growth. We expect to maintain a very solid free cash flow level in 2020 with a targeted adjusted free cash flow conversion rate of at least 100%, despite any potential impacts from COVID-19 on our operations. As we progress through the next few months, we expect to gain additional insight into our operations, customers, and suppliers, and we'll reinstate our guidance when the timing is appropriate. Overall, we are confident that Curtis Wright is taking the prudent actions required today to continue to deliver long-term profitable growth for our shareholders. At this time, I'd like to open up today's conference call for questions.

Again, if you would like to ask a question, simply press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Peter Armit.

Hey, good morning, Dave, Glenn, Chris. Morning. Good morning. Congratulations, Glenn and Chris, to both of you. Glenn, it's been great to work with you all those years. Thank you. You'll be missed. Same here. Thank you. So, Dave, just on the cost containment efforts, can you maybe just think, walk us through what you think might, is this, a lot of this will be temporary in terms of your effort to, you know, when you take these actions, or do you think that you'll be able to keep some of these cost takeout measures on the other side of COVID?

I think generally, you know, as indicated in the narrative there, we're spending the $28 million to, to gain what we consider to be at least $20 million, which we had stated in the last call. And as Chris indicated, it's possibly going to be more than that. There's going to be some of it that sticks, I believe, and so it will be a longer-term prospect than that. As we've sort of rejiggered our recession planning playbook, which we did institute, and we took that into consideration last year and started working to that angle with consolidations and so forth, Now, you get to the part where you have furloughs and or rifts. Some of those will be, certainly the furloughs will reinstate those we can anticipate. In an overall period of time, certainly the rifts, some of them will be coming back, I'm sure. But for the most part, as we rejiggered that recession playbook and the $28 million spend, we had to take into consideration what further actions we could take given the indeterminate timeframe that we're dealing with with this pandemic, you know, should it resurface again toward the end of this year or every year, as some are describing it as a possibility. So I'd say, Peter, it's not easy to quantify, but I would think that some of them will be more permanent and others will be on a more temporary basis as we you know, get this thing geared back up again and industry will start coming back and we're able to hire some of those people back.

Okay. And that's helpful. And just then just quickly on, on defense, you had 20% organic growth, really impressive. I know you're not giving guidance, but originally I think defense was, was, uh, talked about being up eight to 10%, uh, for the year. Was this, uh, due to timing more or less than this quarter or was it, you know, or, or is there a potential, you know, upside just given how strong the, uh, your position is in the Navy defense.

I'll give you a brief top-level answer and let Chris follow up with some more specifics. It's been extremely strong on the naval shipbuilding side, as you know, and orders continue to look really strong in that regard. We've won for the most part those that are. Most of it is sole source, but for those that are not sole source, we've done a very good job of securing those those long-term pieces as well. And then our embedded computing group has done exceptionally well, as well as the shipbuilding side. So across the board, it looks great. I mean, the defense sector, we're happy to be where we're at with it, and that's why we really like the mixed market industrial base that we have. And it's served us well and will continue to. With regard to the longer-term outlook and maybe what's pushed it, in a more intermediate timeframe. Chris, do you want to add anything to that?

Yeah, I would just say that, you know, Q1 is, you know, there is some timing that's going on there. I mean, we are maintaining a very positive outlook for growth in defense, you know, for the full year. You know, within aero defense, you know, we'll see growth from the sale of actuation equipment as well as embedded computing products across key platforms such as the F-35, various helicopters and UAVs. Within our naval business, we have a very strong backlog and DOD support. As you know, we're entrenched on the 8081 programs, the Columbia-class and Virginia-class submarine programs, and we'll have a $50 million contribution from the 901D business this year as well. We may have some headwinds in the timing of foreign military sales within our ground business, but it's still very early in the year, and we'll need more time to kind of sort that out.

Appreciate all the call. I'll jump back in queue. Thanks. Thanks, Peter.

Your next question comes from Nathan Jones of Stiefel.

Can you hear me? Yep. Yes. Okay. Sorry. I'll add my congratulations today. Sorry, not today, to Glenn. I'm retiring you early, Dave.

Thank you, Nathan.

Appreciate it. Maybe if I could ask, I mean, you're obviously looking at pretty good defense markets here. I think the power market or segment will probably be in the middle and commercial industry will probably be the worst of the three, at least in the second quarter and probably for the year. Is there any additional color you can give us or bands you can give us on the expectation for 2Q revenue between the segments to get to that down 25 to 30 in aggregates?

Yeah, I want to be clear. I mean, the 25 to 30 percent is really the decremental margins that we're expecting on reduced revenues. And, you know, we are, as you said, expecting the second quarter to be our weakest quarter. I mean, mainly driven by headwinds and commercial aero, industrial vehicles, valves, and surface treatment services. However, we are expecting higher naval defense orders on aircraft carriers and submarines for the second quarter. For the full year, as I said, we're maintaining a positive outlook for the defense markets, naval defense. We have a strong backlog, but we will face headwinds in those same markets, commercial markets, on the full year.

Maybe I phrased that correctly. You guys have said you think revenue in the second quarter will be down 25 to 30. I was wondering if you could give us any color or any ranges on how that breaks down between the segments.

Yeah, I mean, we won't be able to provide specific information at this point in time regarding the expectations for sales decreases, but, you know, the two main drivers for the second quarter will be within commercial aero, and they will be within general industrial. You know, headwinds in the commercial aero market, you know, we're expecting wide body to be hit harder than narrow body, but CW has a greater weighting towards narrow body products. You know, our actuation group is still producing at 52 per month on the 737 max, so we have stability there. And sensors and surface treatment services will be down, you know, but producing in line with Boeing estimates. And then, you know, in general industrial, I mean, the headwinds are driven by the overall market, and, you know, as you know, it's more GDP sensitive.

Okay, fair enough. I wonder then if maybe you could talk a little bit about, you know, as we're starting to reopen economies now, you're starting to hear more about that on the news every day, which of your businesses do you think will be quicker to recover versus which do you think are going to be slower to recover or more secularly challenged here?

I think generally it's the surface technology side. I look at it that way as, you know, I've indicated for years that that's our weather vane, and when things change, go down they tend to go down first right there and you know if we look back probably six months ago nine months ago maybe we were seeing a little bit of a challenge in terms of our outlook with regard to particularly business emanating from europe and and that was sort of a precursor of what we all thought was a you know recession and then obviously the covid just hit everybody by surprise that was a slamming of the door kind of deal. But I would think that with the short cycle business that that is, we would see that starting to pick up early on as inventories start to increase in some of the factories out there. They need some of the products that we do up front because it goes from raw material to a manufactured part and then directly into our our surface technologies businesses, which will apply coatings or shot peening or whatever is necessary. And so it's a very early step in that process. So I would just – my conjecture is that that would be the case. I don't know what else I might add to that. Chris, do you have anything that you would add to that?

I think that covers it, Dave. I mean, we've got our short cycle businesses, and they tend to be within the commercial industrial segment. We'll see the rebound there first.

Okay, thanks very much for taking my questions.

Thanks, Nathan.

Your next question comes from the line of Michael Ciamoli of SunTrust.

Hey, good morning, guys. Thanks for taking the questions, Glenn. Pleasure working with you over the years. Yeah, it's been a while, so congrats. Thank you. Try and keep the blood pressure down this fall watching the Giants. And Chris – That'll never happen. Congrats. Thank you. Nothing like taking the reins with a lot of market tailwinds here. I guess just on commercial aerospace, I just want to make sure I understand this just for modeling. The 737 MAX, so you're in the good position now where you can keep shipping under this new contract at a rate of 52 per month, but How should we think about next year? I mean, if Boeing is only going to do 100, I mean, they might have enough inventory for all of 21 and probably some of 22, and I think you guys have about 190,000 of content. So should we think about realistically maybe 120 million whole next year on the max? Assuming, you know, I mean, even best case, if Boeing is only doing 31 a month at some point next year, it still seems like they're going to have a lot of inventory there.

Well, we take this forecast, particularly with the commercial aerospace, as being a part of a portal and one that we access in terms of the need and driven largely by that. So we take it basically, I was going to say one day at a time, but it might be even one quarter at a time as that portal does change. And we haven't gone out that far. We don't have to at this point. So I've talked about this for a long time, that with that business, when the contract comes back up for discussions and whether or not we see value in it, really the revenue associated with it is largely dependent upon that. So depending on where that is and then where the need is, then we'll readdress it when that comes around. But Right now, we're not at that point. We feel fortunate that we are under contract to ship these at the rate we are for the balance of this year, and then I think some might leak over into next year. But in any way, it's something that we haven't forecasted or projected at this point. Got it.

But it is 52 a month for the rest of this year, and that's pretty ironclad? Yes. Okay. And then maybe just on the short cycle, you know, businesses, the surface treatment, can you guys just maybe even give us some color as to what maybe the trends and ordering activity looked like, you know, in April and even, you know, quarter to date, maybe diving into some of those, you know, the auto exposed end markets, you know, kind of what you're seeing out there.

Yeah, I mean, I can't really comment too much on April, Mike. I mean, it is going to be – orders are going to be in line with our estimates for, you know, revenues and margin, which will be our weakest quarter. The impact to Q1 was very immaterial. I would say, you know, as we got deeper into the quarter, maybe within the last two weeks or so, you know, we started to see some weakness in order patterns that were coming out of general industrial orders. and within our surface treatment businesses. But we've seen some drops in global GDP. The surface technologies business has content across most of our markets, but there are concentrations in commercial aerospace and there are concentrations in general industrials. So we really can't offer much more than it will be our weakest quarter.

Okay. Last question on free cash flow inventory up sequentially from the fourth quarter. Should we think about inventory destocking being a source of cash, you know, as you go through the year, or just maybe if you could, you know, maybe decompose the kind of what you're trying to do with working capital to drive some cash flow?

Yeah, I'd be happy to, Mike. Back in the first quarter of last year, I think we were at about $447 million in inventory, and we've only increased $2 million year over year, and we were expecting back in February that we'd ramp our sales growth up 4% to 6%. So our inventory position is actually pretty good, I think, year over year when you look at the quarters. But we have taken several actions to preserve liquidity on the full year. I mean, besides the cost containment actions that Dave spoke to you about, within our – I'll break it down by component. Within accounts receivable, we've reallocated resources within our shared service centers to focus more on collections. We've implemented COVID-related credit risk assessments that kind of evaluate companies not only by their credit worthiness but also the geography in which they operate in. We are experiencing some pressure for short-term extension of payment terms with our customers, but we're managing and demanding value in return. On the inventory side, we did do some pull-forwards with defense suppliers, and we implemented DFAR DX priority ratings to create stability where we felt it was appropriate. But as you look across our overall inventory, particularly on the commercial side, we're scrutinizing risk orders and buffer stock in response to the expected changes in volume. For accounts payable, we're stretching vendor payment terms where appropriate, and we're absolutely reinvigorating our supply chain finance efforts. We've suspended nonessential purchases in CapEx, and David mentioned we are utilizing other government programs such as the CARES Act and the Federal Acquisition Regulations to improve cash flow Yeah, we're increasing our progress payment rates from 80% to 90%. We're seeking advanced funding on military programs, and we're deferring tax payments where we have the ability to, such as in Social Security, federal, state, or foreign tax payments.

Perfect. Good call. Thanks, guys. I'll jump back in the queue.

Thanks, Mike.

Again, if you would like to ask a question, simply press star, then the number one on your telephone keypad now. Again, that's star, then the number one. Your next question comes from the line of Miles Walton of UBS.

I didn't know if you guys were blocking me out. Good morning.

Good morning. Good morning. I remember your first road show 18 years ago. That's been a long time. Congratulations. Well, thank you. I appreciate it. You gave color on some of the softness by end markets, and I guess I know you don't know crystal ball like nobody else, but I'm curious in your first quarter what you observed in your industrial business is, how did they fare up to what you were baseline assuming at the start of the year? That is, how much of the COVID impact started to hit you in March? And then maybe if you can just give any real-time data points you want to share as you looked at the April results so that we can better triangulate the near term.

Yeah, we really aren't going to provide much on April at this point, just other than we're expecting it to be our weakest quarter. I mean, things are changing rapidly here, and we're managing through the environment. I mean, the impact of Q1 from what had happened with COVID was fairly immaterial. I would say that the impact on sales was less than $10 million across our commercial industrial businesses. It hit us very late in the quarter. As we look at Q1, it was $1.34 VPS. We were 3% up versus the prior year. We did have higher defense revenues. That was mainly driven by the defense segment and the strength of our position on naval and defense aero contracts. The small headwind in FX transactional losses and a little bit of tax losses headwind in front of us as well. Our effective tax rate for Q1 was 26.6% versus the 20.9% year-over-year. But overall, I think we had a very good first quarter. Didn't really see much of the effects hitting us, and we are starting to see those impacts, and that's reflective in our forecast for Q2.

Okay. And then I guess the other side of it is, as it relates to the nuclear aftermarket, pretty big size in a relative proportion. I'm less familiar as to how that kind of responds economically. Usually it's not terribly economically sensitive, but I understand the COVID and the social distancing aspect. Is there any way to think about how we should think about the downside there?

Yeah, we were, you know, within the power generation market coming into this year, we were initially expecting modest declines, you know, based upon the timing of international projects and some of the things that we saw this last year. You know, related to COVID, we will have some headwinds. I mean, social distancing is causing, you know, some delays in international orders and project scope reduction at some of the plants that we service. But very early in the year to say anything further on that at this point. When we look at the CAP 1000 program, while we haven't seen any delays to date, there could possibly be a slowing effect on the cadence of revenues based upon potential delays in the receipt of approvals from China. But it's way too early to tell. We'll have to see how the year progresses.

Okay. All right. And the last one on cash flow. So the CARES Act from a tax perspective and maybe getting tax refunds on lookbacks, the progress payments from the DOD, are either of those two going to be material helps to you for 2020, or is it more just what you already described in terms of managing normal work and capital dynamics in a downturn?

Yeah, I wouldn't say that the progress payment rate increase is really going to be material to our free cash flow. You know, I'd estimate that impact at less than $5 million across the corporation and If we defer the tax payments out of 2020, there would be a more significant effect on the deferral of Social Security.

Okay. All right. Well, thanks again.

Thanks, Miles.

I am showing there are no further questions at this time. I would now like to turn the conference back over to Dave Adams, Chairman and Chief Executive Officer.

Thanks, Alfred, and thank you all for joining us today. Stay healthy out there, and we look forward to speaking with you again during our second quarter 2020 earnings call. Have a great day. Bye-bye.