Q1 2020 Earnings Call
Gentlemen.
Thank you for standing by and welcome to the Curtiss Wright first quarter 2020 earnings Conference call.
At this time, all participants' lines are in a listen only mode.
After the speakers presentation.
There will be a question and answer session.
To ask a question during the session you wouldn't be to press star one on your telephone keypad.
Please be advised that today's conference is being recorded.
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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 to founder and good morning, everyone.
Welcome to Curtiss Wright's first quarter 2020 earnings conference call.
Joining me on the call today or do the Adams, our chairman and Chief Executive Officer.
Glenn Tynan, our vice President Finance and of course, Barcas, 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.
The available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright Dot 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 like United spot.
These statements are based on management's current expectations and are not guarantees of future performance.
We do tell those risks and uncertainties associated with a forward looking statements.
What are the impact of a pandemics, which was covered by chain and our public filings with the FCC.
That's a reminder, the company's results include an adjusted non-GAAP you that excludes first year purchase accounting cost associated with acquisitions.
One time transition costs associated with the relocation of the DRG business.
The restructuring cost and 2020.
Reconciliations for current and prior year periods are available in the earnings release 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 cope with my team 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, a return to wrap up our prepared remarks, as we head into Q1 <unk>.
On behalf of Curtiss Wright, our thoughts and prayers go out to all who have been affected by the covert 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.
Half of our entire organization.
Thank our employees for their perseverance and willingness to adapt and 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.
Well 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 cobot 19, and I'm happy to report that those operations are currently up and running at 100% capacity.
Currently the majority of Curtiss Wright's operations around the world have been granted to central business status, which will help us navigate through this downturn a.
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 a world emerges from this crisis, well not losing sight of our long term strategy.
Upon identification of the quickly spreading virus or leadership team immediately established a cross functional response team to identify risk to our business and develop and coordinate appropriate action plans.
Well up the real time reporting system to track potential cobot, 19 impacts which covers every site across the globe.
You may recall from prior earnings calls the emphasis we were placing up on developing a recession playbook as fears of a recession or emerging.
It turns out that process, including stress testing of each of our businesses has provided a jump start to our efforts to proactively address the potential impacts to our business.
Something from covert 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 and the first quarter.
Our recession playbook activities combined with a robust and growing defense market positions us well through this challenging period.
Additionally, Curtiss Wright has a very strong balance sheet with ample liquidity as Chris will review on a few minutes.
As we navigate through this period of substantial uncertainty and in keeping with our conservative nature.
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, where 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're currently facing a.
Adjusted operating income rose, 10% on a 4% increase in sales generating an 80 basis point improvement in adjusted operating margin of 13.3%.
These results principally reflects 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 want it to address the press release issued earlier this morning, where we announced the Glenn Tynan will be retiring later this year.
On behalf of the board of directors and the entire Curtiss Wright team I want to think Glenn for his tremendous leadership and dedication there's been a pleasure working with you over the past 20 years as a 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 most confidence in Chris as the new CFO Curtiss Wright.
His promotion as a Prime example of a longstanding succession planning process that we employ a Curtiss Wright.
To be the first to publicly congratulate Chris on his new role.
Glenn would you like to say few words.
Sorry, forgot didnt take it off.
<unk>.
Thank you David good morning, everyone.
Over the course of my career and there's been a privilege to lead a tremendous team focused on developing world class Finance Nightie organizations building and sustaining a strong balance sheet and driving significant free cash flow generation.
Over the years I build and enjoyed extensive relationships with our employees My management team the board of directors as well as the investment community I will surely Miss the regular interaction with all of you.
Chris I've worked closely together for more than 10 years as he assumed increasing levels responsibilities at Curtis right.
I look forward to working with him over the coming months just.
Mission into the CFO role.
And I are standpoint, Chris has been an active participant in our investor conferences and meetings throughout the past two and half years I'm pleased that many of you have had the opportunity to get to know him I.
I wish him the best in his role and have absolute confidence that he will continue to be a key driver and Curtiss Wright success.
Now, we'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.
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% is conditions began to worsen late in the quarter due to covert 19. So the overall sales impact was not material.
There are few items I'd like to highlight on this slide first enabled the sense, we experienced solid revenue growth on both the CVN 80 in CVN 81 aircraft carrier programs as both are 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 in a general drop in economic activity due to covert 19.
And 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 that 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 covert 19.
Partially offsetting that improvement was unfavorable absorption on lower industrial vehicle sales.
And the defense segment adjusted operating income increased 49% well adjusted operating margin improved 320 basis points, although not shown on 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 dollar gain on the Sellable product line, which was partially offset by a 1 million dollar 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 occur.
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.
And our defense markets, we maintain a positive outlook for growth in 2020, particularly with the naval defense.
It's optimism reflects our solid backlog falling very strong orders in 2019, the contribution from the nine when de acquisition and our position as a premier supplier of nuclear propulsion equipment for the Navy's most critical programs further we had strong visibility and anticipate higher naval defense orders on aircraft carriers and submarines and.
Second quarter.
Turning to our commercial markets, where the onset of Cobot 19 has provided numerous challenges.
As we enter the second quarter, we expect significant headwinds, particularly in our commercial aerospace in general industrial markets.
In commercial aerospace I'll begin by putting our sales mix into context for commercial OEM customers represent nearly 90% of ourselves with the remainder tied to aftermarket.
As expected our sales outlook has been tempered by plant closures suspensions and production in 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 covert 19 is impacting many U.S. nuclear plants.
Social distancing measures are creating delays and equipment testing in are resulting in a reduction in the scope of customer outages.
He is also growing risk of plant operators Dwayne capital projects to preserve liquidity, which is likely to impact or international aftermarket business.
Elsewhere revenues on the cap 1000 program has been generally aren't affected today. However is this pandemic progress is late into the year. We may begin to experienced delays and 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 few areas, which I'd like to highlight.
And industrial vehicles, where we were already forecasting softness in the on highway market, we began to see production slowdowns in plant closures across the industry in March we expect these trends to worsen in the second quarter and further impact our full year sales.
And 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 and industrial valves has some risk due to delays and 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 began for the full year.
Similar to our sales, we expect Curtiss Wright's overall profitability to be challenged in 2020, as we manage through reduced volumes and under absorption within our commercial businesses.
We're currently expecting the second quarter to be our weakest quarter as the disruption from covert 19 is expected to drive significantly weakened demand. However, Curtiss Wright as an agile and flexible business and we got a strong track record proactively driving margin improvement.
Steve will cover the specific details of our cost containment actions in a few minutes.
Next to help me better understand Curtiss 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 or 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 covert 19, we believed there may be some upside to potentially exceed the $20 million an 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 Curtiss 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 and private placement debt at an average interest rate of roughly 4% with only one note maturing before 2023 in.
In terms of our revolver status, we have a 500 million dollar revolver and a 200 million dollar. According feature which can be open for additional liquidity.
As we've historically done we starting to borrow under the revolver in the first quarter simply for general corporate purposes, and not related to concerns about covert 19.
Thus far in 2020, we've executed $112 million and share repurchases completed our acquisition at diner flow and media voluntary contribution to the defined benefit pension plan, our debt ratios remain well below any internally or externally driven limitations, where for example, we had the ability to bar one point.
$5 billion before approaching our debt covenants.
Moving to the right hand side of the slide as a testament to our efficient capital structure or 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 Weve conservatively average 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 yeah 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 days.
Thanks, Chris next I'd like to review some of the cost containment and cash preservation actions that we began implementing on the first quarter.
We expect these actions will enable Curtiss Wright to emerge as an even stronger company. Once this pandemic subsides.
First of all outlined 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 are implementing furloughs from the corporate office to the operating units across the globe and as is typical and unfortunate and these types of environments, we're implementing workforce reductions where necessary to align to future market demands.
Next in terms of our plans to preserves free cash flow and improve liquidity, we are aggressively managing working capital and have suspended all non essential capital expenditures.
Additionally, we're closely monitoring potential benefits, resulting from changes in the legislation, including tax deferral and seizing government contracting opportunities.
A final set of actions is driven by Curtiss Wright's strong financial operational discipline, which has allowed us to remain active in terms of shareholder distributions, thus far and 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 the face of adversity, we have maintained our quarterly dividend payment.
In summary, Curtiss Wright remains well positioned to whether this challenging environment, we enjoy a diversified business mix would defense markets approaching 50% of our total sales our outlook in defense remains positive and to supported by solid backlog an order growth.
Commercial markets will no doubt be impacted by the reduced piece of economic growth and we are implementing unnecessary cost containment measures to reduce that impact or profitability and free cash flow.
We have a strong and healthy balance sheet and continue to seek profitable acquisitions to bolster our topline growth.
We expect to maintain a very solid free cash flow level and 2020 with a targeted adjusted free cash flow conversion rate of at least 100% despite any potential impacts from covert 19 on our operations.
As we progressed 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 as appropriate.
Overall, we are confident the Curtiss 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 todays conference call for questions.
Again, if you would like to ask your question simply press Star then a number one on your telephone keypad well pause for just a moment to compile the Q and a roster.
Your first question comes from the line of Peter Arment.
Hey, good morning, Dave Glenn Chris offering.
Good morning.
Graduations going and Chris to both the Glenn it's been thank you great work with you all those years. So thank you will either.
The man same here. Thank you.
ER, so I'm, Dave just on the cost containment efforts can you maybe just think a walk us through what you think might is a lot of this will be temporary in terms of your effort to or when you take these actions or do you think that you'll be able to keep some of these cost takeout measures to us on the other side.
I think I think generally you know as indicated on the for the narrative. There we were spending of 28 man to the gain what will it we consider to be at least a 20 million, which we had stated in the last call and as Chris indicated its possibly going to be more than that there's going to be some of it that sticks I believe and so it will.
We'll be a longer term prospect than that as we've sort of rejiggered, our recession planning playbook, which we did institute and where we took that into consideration last year and started to work into that angle with consolidations and so forth. Now you know you get to the part where you have furloughs.
And or riffs. Some of those will be certainly the furloughs will reinstate those we can anticipate it into over a period of time certainly the riffs 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 spin.
And we had to take into consideration what further actions, we could take given the indeterminant timeframe that we're dealing with with this pandemic capital should it resurface again towards the end of this year or every year as it somewhere describing as a possibility. So I'd say up Peter it's not.
It's not easy to quantify but I would think that some of them will be more permanent and others, who will be on a more temporary basis as we get this thing geared back up again and industrial start coming back and we're able to hire some of those people back.
Okay. That's helpful. And just then just quickly on defense you, 20% organic growth really impressive I know, you're not giving guidance, but originally I think defense was.
Talked about being up 8% to 10% for the year was this.
Due to timing more or less than this quarter or was it you know or or is there potential you know upside just given how strong the your position is in the Navy ads.
I'll just I'll give you a brief the top level answer and let Chris follow up with some more specifics <unk>. It's been extremely strong on the the naval ship building side as you know in orders continue to look really strong in that regard.
Had some we want to for the most part those that.
Our because most of it as sole source, but for those that are not sole source was done very Java, securing 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 the defense sector were 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 served us well and we'll continue to a with regard to the longer term outlook and maybe whats pushed it on the anymore intermediate timeframe, Chris you want to add anything to that.
Yeah, I would you say that Q1 is you know there's some timing that's going on there.
And we are maintaining a very positive outlook for growth in the sense, yeah for the full year within Aero defense, Yeah, 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 annuities, yeah within our enabled business we have.
Very strong backlog and de support as you know you know where entrenched on the 80 81 programs to Columbia class and Virginia class submarine programs and it will have a 50 million dollar contribution from the nine to one di business. This year as well you know we may have some headwinds and the timing of foreign military sales.
Within our ground business, but it's still very early in the here and we'll need more time to consumer data.
Appreciate the color I'll jump back in queue. Thanks.
Peter.
Your next question comes from Nathan Jones of Stifel.
[noise] [noise] can you hear me.
Yep, yes, okay sorry.
I'll add my congratulations did I, Oh, sorry, not to Dr., Glenn [laughter] [laughter] [laughter].
[laughter].
Maybe if I could ask I mean, you're obviously looking at pretty good defense market here I think the power market will no segment will probably be in the middle and commercial industrial would probably be the west of they are.
For at least in the second quarter and probably for the year is there any additional color you can give us all bad you can give us on the expectation for two key revenue between the segments to get to that down 25 to 30 in aggregate.
Yeah, I want to be clear I mean, the 25% to 30% is really the decremental margins. They were expecting on reduced revenues and 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 served.
His treatment services. However, we are expecting higher naval defense orders on aircraft carriers and submarines for the second quarter.
Yes for the full year, yeah, as I said, one we're maintaining a positive outlook for the defense markets Naval Defense, we had a strong backlog, but we will face headwinds in those same markets commercial markets.
On the full year.
Maybe I phrase that correctly you guys have said you think revenue in the second quarter will be down 25 to study I was wondering if you could give us any color any ranges on how that breaks down between your segments.
Yeah, I mean, we're not that 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 was in general industrial.
Yeah headwinds in the commercial Aero market.
You know, we're expecting wide body to be hit harder than narrow body, but CW as a greater waiting towards narrow body products Youre actuation group is still producing at 52 per month on the 737, Max So he has stability there I in sensors and surface treatment services will be down but producing in line with Boeing estimates and then.
Yeah, and general industrial I mean headwinds are driven by the overall market and a you know as you know it's more GDP sensitive.
Okay fair enough.
I Wonder if anything 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 and use every day, which of your businesses. Do you think will be quick hits every khabab does is which do you think I'm going to be slow it to recover or more Secularly challenge day.
I think generally the wood.
It's a surface technology side I look at it that way as indicated for years that that's our weather vane and when things go down to the tend to go down first right there and 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 that was sort of a precursor of what we all thought was a recession and then obviously the covert just hit it but everybody by surprise that was a slamming of the door kind of deal but.
I would think that with the short cycle business. It 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 upfront because it goes from raw material to a manufactured.
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 I don't know what else I might add to that Chris you have anything that you would add to that.
No 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.
I see the re down there first.
Okay. Thanks, very much for taking my questions.
Thanks Nathan.
Your next question comes from the line of Michael.
<unk> of Suntrust.
Hey, good morning, guys. Thanks for taking the questions Glenn a pleasure working with you over the years, that's been a up in a while so congrats thank you try and keep the they're trying to keep the blood pressure down this fall watching the Giants and Chris [laughter] I don't know congrats.
Congrats here, it's not nothing like taking arranged with a a lot of market Tailwinds here I.
I guess just on on commercial aerospace I just wanted to make sure I understand this for just for modeling 737, Max or you're you're in the good position now where you can keep shipping.
On 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, and I mean, you might be might have enough inventory for all of 21 and probably some of 22 and I think you guys have about 190000 of content. So should we think about.
Realistically, maybe a 120 million whole next year on the Max assuming you know I mean, even best case, it Boeing's only doing 31 a months at some point next year. It still seems like you're gonna have a lot of inventory there.
Well it we take this forecast with particularly with the the commercial aerospace as being a part of a portal and one that we access in terms of need and driven largely by that but so we take it basically.
See I was going to say one day at a time, but might be even one quarter at a time as that portal does change and we haven't gone out that far Oh, we don't have to at this point. So you know I've talked about this for a long time that would that business. The when the contract comes back up for discussions and.
Whether or not we see value in it.
This is really just the revenue associated with those larger depended upon that so depending on where that is and then where the need is then we look we'll re address it when that comes around but right. Now. We're just we're not at that point, where we feel fortunate that we are.
Under contract to ship. These at the rate we are for the balance of this year and then that I think some might leak over into next year, but in any way, it's something that we haven't forecast that are projected at this point.
Got it but it it is 52 a month for the rest of this year and that's pretty iron clad.
Yes.
Okay, and then maybe just a on the short cycle you know businesses.
The surface treatment can you guys, just maybe even give us some color as to what maybe that the trends and ordering activity looks 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, it's kind of what you're seeing out there.
Yeah, I mean, you I can't really comment too much on on April Mike I mean, it is going at the orders are going to be in line with our estimates for you know revenues and margin, which it will be our weakest quarter has the impact to Q1 I was very.
A material I would say yeah, as we got a deeper into the quarter, maybe within the last two weeks or so you know we started to see some weakness.
In order patterns, they were coming out of general industrial and and within our surface treatment businesses.
But you know we've seen some drops in global GDP. The surface technologies business has a content across most of our markets, but there are concentrations in commercial aerospace and our concentrations in general industrial so yeah, we really can't offer much more than it'll be our weakest quarter.
Okay.
Last question on on free cash flow inventory up.
Sequentially from the fourth quarter.
Should we think about inventory destocking being a.
A source of cash you know as you 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 my gut back in the first quarter last year I think we were at about 447 million and inventory and we've only increased $2 million year over year, and we were expecting you know back in February that we ramp our sales growth of 4% to 6% so our inventory positions actually yeah pretty good.
I think you're over year when you look at the quarters, yeah, but we have taken several actions to preserve liquidity on the full year I mean, besides the cost containment actions that they spoke tease out yeah within our Oh I'll break it down by component within accounts receivable, yeah, we've reallocated resources within our shared service centers.
To focus more on collections as we've implemented Tobin related credit risk assessment to kind of evaluate companies not only by gather credit worthiness, but also the geography, which they operate and we are experiencing some pressure for short term extension of payment terms with our customers, but we're managing and demanding value.
Return on the inventory side, Yeah, we did do some pull forwards with defense suppliers and we implemented deep part D ex priority ratings to create stability, where we felt it was appropriate but you know 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 stretching vendor payment terms, where appropriate and we're absolutely reinvigorating our supply chain finance efforts.
We've suspended non essential purchases and Capex and and David mentioned, we are utilizing other government programs such as a carrier Zac and federal acquisition regulations to improve cash flow yeah, we're increasing our progress payment rates from 80% to 90% are seeking advance funding on military programs and were deferred.
During tax payments, where we had the ability to such as in social security federal state or foreign tax payments.
Perfect a good color, thanks, guys I'll jump back into queue.
It's Mike.
[noise] again, if you would like to ask a question simply press Star then the number one on your telephone keypad now.
Again that star than a number one.
Your next question comes on line of Myles Walton of you'd be yes.
I didn't know if you guys are block and me out.
Good morning.
Good morning work and good morning, I remember your first Roadshow 18 years ago, that's been a longtime congratulations well. Thank you.
You gave color and some of the softness landmark its and I guess I know you don't know crystal ball like nobody else, but I'm curious on your first quarter, which you, which you observed in your industrial businesses.
How did they how did they fair up to what you were baseline assuming at the started the year that is how much of the coated.
Hi Tech started to it you in March and then maybe if you can just give any real time data points you'd want to share as you looked at the April results. So we can better triangulate the near term.
Yeah, we really are going to provide much on April at this point, yeah. We just a other than we're expecting it to be our weakest quarter. I mean things are changing rapidly here and and yeah, we're managing through the and the environment and the impact to Q1 from what is happening with Covidien was fairly in.
Material, Yeah, I would say that the impact on sales was less than $10 million across our commercial industrial businesses. It is very late in the quarter you know as we look at Q1.
It was $1.34 bps for 3% up versus the prior year. Yeah. We did have higher defense revenues that was mainly driven by the defense segment and the strength of our position on on Knievel, a in defense Arrow contracts.
Small headwind and FX transactional losses, and and a little bit of tax headwind in front of us as well our effective tax rate for Q1 was 26.6 versus the 20.9% year over year, but you 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 a those impacts and that's that's reflected in our forecast for for Q2.
Okay, and then I guess the other side of it is as it relates to the commercial nuclear aftermarket pretty big size in a relative proportion I'm less familiar as to how you know that kind of response economically usually it's not terribly economically sensitive, but I understand that the co bid in the so.
So distancing aspect is there any way to think about how how we should think about it.
You know the downside there.
Yeah, we were at you know within the power generation market coming into this year. We were initially expecting modest declines yet based upon the timing is of a international product projects and some of the things that we saw this last year.
You know related to co bid, we will have some headwinds and social distancing is is a is causing some delays in international orders and project scope reduction at some of our the plants that we service, but you're very early in the year to to say anything further.
We're on that at this point yeah. When we look at the cap 1000 program, while we haven't seen any delays today, you know there could possibly be a slowing effect on the cadence or revenues based upon potential delays in the receipt of approvals from China, but it's way too early to tell a lot to see how the year progresses.
Okay and then the last one on on cash flow. So the cures act from a tax perspective, and maybe getting tax refunds on look backs the progress payments from the D are either those two I'm going to be material helps to you for for 2020 or is it more just which you already described in terms of managing.
Normal working capital dynamics in a downturn.
Yeah, I wouldn't say that the progress payment rate increases really going to be material to our free cash flow you know I'd estimate that impacted less than $5 million across the corporation.
If we if we defer the tax payments you know out of 2020, you know there they're being more significant effect on on the deferral of social security.
Okay, all right well thanks again.
Thanks, Mike.
I am showing there no further questions at this time I.
I would now like to turn the conference back over to Dave Adams, Chairman and Chief Executive Officer.
Thanks, operator, 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.