Curtiss-Wright Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts below are in millions of dollars unless noted. Curtiss-Wright designs, manufactures, and services engineered products for defense, aerospace, power generation, and industrial markets.
Financial performance
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $550.0 | $639.0 | $1,151.3 | $1,217.3 |
| Gross profit | $186.0 | $230.0 | $386.6 | $426.9 |
| Operating income | $55.3 | $105.7 | $127.8 | $177.7 |
| Operating margin | 10.1% | 16.5% | 11.1% | 14.6% |
| Net earnings | $31.0 | $80.1 | $82.8 | $135.7 |
| Diluted EPS | $0.74 | $1.86 | $1.95 | $3.15 |
| Operating cash flow | Not provided by quarter | $(52.2) | $40.4 |
Q2 sales fell 14% and operating income fell 48% year over year; H1 sales declined 5% and operating income declined 28%. Lower sales and overhead absorption, restructuring costs, and first-year acquisition accounting costs pressured results. H1 cash flow from operations was negative primarily because of a $150 million voluntary pension contribution and higher inventory; lower receivables partly offset these uses.
Q2 sales by segment: Commercial/Industrial $213.6 million, down 27%; Defense $170.0 million, up 7%; and Power $166.4 million, down 11%. H1 segment sales were $478.0 million, $336.1 million, and $337.2 million, respectively. Defense-market sales increased 14% in H1, while commercial-market sales declined 20%.
Balance sheet, debt, and liquidity
- At June 30, cash and equivalents were $155.4 million, versus $391.0 million at year-end 2019. Current assets were $1,267.2 million and current liabilities $662.0 million.
- Long-term debt was $834.8 million on the balance sheet; disclosed total debt carrying value before related adjustments was $825.0 million. Debt increased from $760.6 million at year-end. The company reported compliance with its debt covenants.
- The revolving facility had $75 million outstanding and $403 million of unused capacity; the company also reported $1.6 billion of additional borrowing capacity under its debt-to-capitalization covenant.
- H1 investing cash outflow was $108.9 million, including $82.0 million cash paid for acquisitions. Financing cash outflow was $51.9 million, including $124.6 million of share repurchases and $7.1 million of dividends. Exchange-rate effects reduced cash by $22.6 million.
Material changes, outlook, and risks
- COVID-19: Management attributed pressure mainly to commercial aerospace and general industrial demand, as well as supply-chain and production disruption. All manufacturing operations had resumed by June 30, though future restrictions and the duration and severity of demand effects remained uncertain. The company said cash, expected operating cash flow, and available borrowing capacity should cover expected needs through at least year-end.
- Restructuring: Charges were approximately $15 million in Q2 and $17 million in H1, including non-cash inventory and asset charges. The company expected approximately $35 million of 2020 charges, with actions substantially complete by year-end and estimated annual savings of approximately $40 million.
- Orders and backlog: Q2 new orders rose 3% to $620.2 million, while H1 orders fell 12% to $1,190.1 million. Backlog was approximately $2.2 billion; management expected to recognize about 89% as sales over the next 12–36 months.
- Financing: In May, the company priced $300 million of senior notes—$150 million at 3.10% due 2030 and $150 million at 3.20% due 2032—expected to close by August 13, 2020. Proceeds were intended for general corporate purposes. No broader earnings or sales guidance is provided in the supplied filing text.
- Unusual items: Other expense included a $9.6 million foreign-exchange loss on substantial liquidation of a Norwegian subsidiary; management cited approximately $10 million of accumulated translation losses. This also contributed to a higher effective tax rate, alongside a valuation allowance on certain foreign deferred tax assets.
- Contingencies: For the AP1000 nuclear reactor-pump contracts, the company disclosed a possible loss range of $0–$55.5 million, including a previously asserted approximately $25 million maximum claim under the China contract. Responsibility for delays was disputed; no accrual was recorded, and the company said it intended to defend the matter. The company also described asbestos litigation but stated it did not expect material liability and believed insurance and indemnification coverage was adequate.
Important facts for investors to verify
- Whether commercial aerospace and general industrial demand, customer orders, and collections recover or deteriorate further under COVID-19 conditions.
- Whether restructuring charges reach the projected $35 million and whether the anticipated $40 million annual savings are achieved.
- Completion and use of proceeds from the $300 million notes offering, and the resulting debt, interest expense, and liquidity position.
- Developments in AP1000 delivery-delay responsibility and potential exposure within the disclosed $0–$55.5 million range.
- Cash conversion and working-capital trends after the large pension contribution and H1 operating cash outflow.