Curtiss-Wright Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Curtiss-Wright designs, manufactures, and services engineered products for aerospace, defense, power generation, and industrial markets. Results are unaudited; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Six months 2016 | Change vs. 2015 |
|---|---|---|---|
| Net sales | $532.8 million | $1,036.3 million | Down 2% and 5% |
| Gross profit / margin | $185.4 million / 34.8% | $357.3 million / 34.5% | Margin up about 140 bps and 30 bps |
| Operating income / margin | $68.1 million / 12.8% | $125.4 million / 12.1% | Income up 4% and down 9%; margin up about 80 bps and down about 60 bps |
| Continuing-operations earnings | $40.0 million | $72.8 million | Compared with $40.1 million and $83.3 million |
| Diluted EPS from continuing operations | $0.88 | $1.61 | Compared with $0.83 and $1.72 |
| Net earnings | $40.0 million | $72.8 million | Compared with $25.7 million and $41.7 million, including 2015 discontinued-operation losses |
| Operating cash flow | Not separately stated | $156.6 million | Compared with cash used of $111.3 million |
Second-quarter interest expense was $10.3 million; six-month expense was $20.2 million, up 14% and 12%. The effective tax rate was 31.0% for both 2016 periods. Dividends were $0.13 per share in Q2 and $0.26 for the first half.
Segments and material changes
- Commercial/Industrial: Sales fell 5% in Q2 and 6% for the half; operating income fell 14% and 22%. Lower severe-service valve sales to oil and gas and weaker industrial vehicle activity weighed on results. First-quarter restructuring costs were approximately $3 million.
- Defense: Sales declined 5% in Q2 and 6% for the half; operating income declined 24% and 16%. Lower commercial avionics, ground-defense and other program volumes contributed. Prior-year results included a favorable $4 million TDSS contract adjustment. New orders fell 38% in Q2 and 30% for the half, partly reflecting a large prior-year TDSS order and government-order timing.
- Power: Q2 sales rose 6% and operating income increased to $16.1 million from $1.5 million. Six-month sales declined 1%, while operating income rose 47% to $30.7 million. Current-period results benefited from AP1000 activity and the absence of a prior-year $11.5 million unfavorable contract adjustment; prior-year comparisons also included a $7 million termination-change-order benefit.
Consolidated new orders were approximately flat: $523.6 million in Q2 and $1.152 billion for the first half. Power and Commercial/Industrial order growth largely offset Defense declines. Sales weakness was concentrated in general industrial markets; six-month general industrial sales fell 15%.
Cash, debt and liquidity
- Cash and equivalents were $383.2 million at June 30, 2016, versus $288.7 million at year-end 2015. First-half cash increased $94.5 million.
- Operating cash flow of $156.6 million was driven in part by $83 million of AP1000-related net collections and a $20.4 million cash receipt from terminating interest-rate swaps. The 2015 comparison included a voluntary $145 million pension contribution.
- Debt totaled $951.1 million before unamortized costs and swap proceeds; the debt note reports net carrying value of $967.6 million. The balance sheet reports $966.5 million of long-term debt, net. The filing reports average debt outstanding of $950 million for the first half.
- No revolving-credit borrowings were outstanding; $465 million of credit-facility capacity was available. The company reported covenant compliance and capacity to borrow a further $829 million without breaching its debt-to-capitalization covenant.
- Capital expenditures were $15.7 million. The company repurchased $55.0 million of shares and paid $5.8 million in dividends during the first half.
Outlook, commentary and risks
The filing provides no formal company-wide earnings or sales guidance. Management stated that approximately 37% of 2016 revenue was expected to be defense-related and planned to repurchase at least $100 million of shares in 2016. Management said cash, operating cash flow, available credit and access to capital markets were sufficient for anticipated short- and long-term needs. It expected restructuring actions to generate cost savings in the second half of 2016, without quantifying the expected savings.
- AP1000 contract exposure: Westinghouse asserted entitlement to approximately $25 million of liquidated damages under the China contract. Curtiss-Wright had missed certain China and U.S. delivery dates, but responsibility for delays remained disputed. No accrual was recorded; the possible loss range was $0–$53 million.
- CNRL litigation: Alleged damages from a refinery fire and explosion were estimated to meet or exceed $1 billion. The company could not estimate its potential loss; insurance may not fully cover a judgment. Management intends to defend the matter, but an unfavorable outcome could materially affect results, financial condition or cash flows.
- Other risks: Foreign-currency movements, including a British-pound decline, reduced other comprehensive income. The company also disclosed asbestos claims, which management did not expect to have a material effect and believed were insured. Management reported no material change in market risks or risk factors.
- The company terminated interest-rate swaps in February, receiving $20.4 million; the remaining deferred benefit is being amortized as a reduction of future interest expense. Higher borrowing costs followed the termination.
Important facts for investors to verify
- Whether AP1000 delivery delays result in liability, and whether any accrual or estimate changes from the disclosed $0–$53 million range.
- Developments in the CNRL claim, including potential exposure and insurance coverage.
- Whether Commercial/Industrial and Defense sales and margins stabilize, and whether the expected restructuring savings materialize.
- Whether Power-segment improvement is sustained beyond AP1000 production, contract adjustments and prior-year comparison effects.
- Cash conversion and debt costs, including the sustainability of AP1000 collections and the company’s planned share repurchases.