Business context and reporting period
Curtiss-Wright Corporation (NYSE: CW) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company supplies engineered products, solutions, and services primarily to aerospace and defense markets, as well as commercial power, process, and industrial markets. It reports through Aerospace & Industrial, Defense Electronics, and Naval & Power segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $609.4 million | $621.5 million | $1,168.8 million | $1,218.6 million |
| Gross profit | $228.5 million | $224.7 million | $429.9 million | $434.5 million |
| Operating income | $98.1 million | $94.6 million | $158.6 million | $179.6 million |
| Operating margin | 16.1% | 15.2% | 13.6% | 14.7% |
| Net earnings | $70.9 million | $61.4 million | $111.6 million | $120.9 million |
| Diluted EPS | $1.83 | $1.49 | $2.89 | $2.94 |
Gross margin was approximately 37.5% in Q2 and 36.8% for the first half, compared with approximately 36.2% and 35.7%, respectively, in 2021. New orders rose 11% in both Q2 ($776.2 million) and the first half ($1,410.4 million). Backlog was approximately $2.4 billion at June 30; the company expects to recognize about 88% as sales over the next 36 months.
Operating cash flow was negative $93.3 million for the first half, versus positive $48.5 million a year earlier. Capital expenditures were $19.5 million; investing cash outflow was $18.2 million. Cash was $171.4 million at June 30. Total debt, net, was approximately $1.209 billion, including $202.5 million current; unused capacity under the revolving facility was $480 million. The company reported compliance with debt covenants and capacity to borrow an additional $1.5 billion under its debt-to-capitalization covenant.
Material changes versus prior comparable periods
- Q2 sales declined 2%, while operating income rose 4% and net earnings rose 15%. First-half sales fell 4%, operating income fell 12%, and net earnings fell 8%.
- Defense Electronics was the principal area of weakness: first-half sales declined 15%, operating income 28%, and margin 290 basis points, mainly due to lower sales and unfavorable overhead absorption amid supply-chain constraints and delayed approval of the FY22 defense budget.
- Aerospace & Industrial first-half sales increased 5% and operating income increased 12%. Naval & Power Q2 operating income rose 16%, but first-half operating income declined 5%, including the effect of the German industrial-valve divestiture loss.
- First-half operating cash flow deteriorated by $141.7 million, chiefly due to timing of advance receipts, higher inventory receipts, and the WEC settlement payment. Receivables and inventory increased from year-end by $52.5 million and $71.2 million, respectively.
- Comprehensive income fell to $34.5 million in Q2 and $74.2 million for the first half, primarily reflecting foreign-currency translation losses, attributed mainly to the weaker British pound.
Outlook, management commentary, risks and unusual items
The filing provides no quantitative full-year earnings or sales guidance. Management said cash, expected operating cash flows, and available borrowing capacity should be sufficient for operating needs and planned commitments. It cited supply-chain disruption, COVID-19 developments, inflation, interest rates, and the Russia-Ukraine conflict among uncertainties relevant to forward-looking statements. No material change to the company’s disclosed risk factors was reported.
- On June 30, the company completed its $247 million acquisition of Safran Aerosystems Arresting Company. The purchase price was recorded as due to seller at quarter-end; purchase-price allocation remained preliminary. The business joins Naval & Power.
- The German industrial-valve business sale closed in January for $3 million gross proceeds and generated a $4.7 million first-half loss.
- Under a February AP1000 settlement, the company paid Westinghouse $15 million in March and owes a further $10 million in Q1 2023. The settlement releases open claims and includes a right of first refusal for future AP1000 projects.
- In May, the company replaced its revolving credit agreement with a facility expiring in May 2027, sized at $750 million with a $250 million accordion feature. On August 1, it announced a planned $300 million senior-notes private placement, expected to close in Q4 subject to customary conditions.
- Other notable items include $5 million of Q2 foreign-exchange derivative losses and a 6% increase in the quarterly dividend to $0.19 per share beginning in Q2. Management said pending legal proceedings, including asbestos matters, were not expected to have a material adverse effect based on available information and insurance coverage.
Important facts for investors to verify
- Whether working-capital use and negative first-half operating cash flow reverse as advance receipts, inventory, and deferred revenue timing normalize.
- Whether Defense Electronics sales and margins recover as supply constraints ease and defense-budget timing improves.
- Whether the SAA acquisition performs as expected, including final purchase-price adjustments and settlement of the $247 million seller payable.
- Progress on the additional $10 million AP1000 settlement payment and the planned $300 million notes offering.
- Backlog conversion, foreign-exchange effects, and any developments in legal, environmental, or other contingencies.