Curtiss-Wright Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Curtiss-Wright is a diversified manufacturer and service provider serving aerospace, defense, power generation, and general industrial markets through its Commercial/Industrial, Defense, and Power segments.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $620.3 million | $567.7 million | $1,167.8 million | $1,091.2 million |
| Operating income | $102.1 million | $79.7 million | $166.6 million | $127.4 million |
| Operating margin | 16.5% | 14.0% | 14.3% | 11.7% |
| Net earnings | $74.8 million | $50.7 million | $118.4 million | $83.2 million |
| Diluted EPS | $1.68 | $1.13 | $2.66 | $1.86 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $26.7 million | $60.9 million |
- Q2 sales rose 9%; operating income increased 28% and net earnings increased about 48%. For the first half, sales rose 7%, operating income 31%, and net earnings about 42%.
- Q2 growth was broad-based: Commercial/Industrial sales increased 7%, Defense 16%, and Power 8%. Defense drove the strongest segment operating-income growth; Power operating income fell 20% in Q2 and 12% for the first half.
- Management attributed improved operating results principally to higher volume, overhead absorption, margin initiatives, improved Defense profitability, and favorable Defense contract adjustments. Power results were pressured by Dresser-Rand Government Business (DRG) purchase-accounting costs, lower AP1000 U.S. production, and weaker nuclear aftermarket profitability.
- First-half gross profit was $407.7 million versus $361.9 million. Interest expense declined to $17.8 million from $21.1 million for the first half; the company cited repayment of $150 million of senior notes in December 2017.
Cash, debt, and liquidity
- Cash and cash equivalents were $218.9 million at June 30, 2018, down from $475.1 million at year-end 2017. First-half operating cash flow was $26.7 million; investing cash use was $230.5 million, including the approximately $212.7 million DRG acquisition, and financing cash use was $45.9 million.
- Operating cash flow decreased $34.2 million year over year, primarily because of a voluntary $50 million pension contribution, partly offset by higher earnings. Receivables and inventory also used cash.
- Long-term debt was $813.2 million, with $1.0 million current debt; the debt note reports total debt, net, of $814.1 million. The company had no revolver borrowings and $480 million of unused credit available. It reported compliance with debt covenants and $1.443 billion of additional borrowing capacity under its debt-to-capitalization covenant.
- First-half share repurchases were $46.1 million; dividends paid were $6.6 million. The quarterly dividend was $0.15 per share, versus $0.13 a year earlier.
Business developments, outlook, and accounting
- The company acquired DRG on April 2, 2018 for approximately $212.7 million cash. DRG contributed $22 million in first-half sales and operated in the Power segment. The purchase-price allocation was not yet complete.
- New orders increased 28% in Q2 and 9% for the first half. Total backlog was approximately $2.2 billion at June 30; the company expected to recognize about 86% as sales over the next 12–36 months. The filing provides no specific full-year sales or earnings guidance.
- Management stated that cash, operating cash flow, available credit, and access to capital markets were expected to meet short- and long-term needs. It also noted that results for interim periods are not necessarily indicative of full-year results.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; prior periods were not restated. Adoption increased reported Q2 product sales by $5.5 million and net earnings by $1.0 million versus balances without adoption; first-half net earnings were higher by $2.8 million. This limits direct comparability with 2017.
- The six-month effective tax rate was 24.8%, versus 26.9% in 2017, primarily reflecting the lower U.S. corporate tax rate; additional provisional foreign withholding tax expense partly offset the benefit. The company recorded $6.5 million of additional provisional Tax Act expense in the first half.
Risks and contingencies
- A CNRL claim related to a 2011 refinery fire has been reduced to approximately $400 million for mediation purposes. Curtiss-Wright could not estimate a potential loss, if any; it said insurance may not cover all costs and that an adverse outcome could materially affect a future period. Mediation was anticipated in late 2018.
- For AP1000 China and U.S. contracts, the company reported delivery delays and uncertainty about responsibility. No accrual was recorded; the disclosed possible-loss range was $0–$55.5 million in total.
- The company reported approximately $2.9 million of pre-petition billings outstanding with Westinghouse, and expected to recover substantially all general unsecured claims under the approved reorganization plan. It continued to monitor the bankruptcy.
- Other disclosed exposure includes asbestos lawsuits, which management did not expect to create material liability, and letters of credit, bank guarantees, and a $56 million surety bond for facility decommissioning assurance.
- Foreign currency translation reduced comprehensive income by $43.8 million in Q2 and $28.4 million for the first half, despite higher net earnings.
Important facts for investors to verify
- How much reported growth and earnings improvement reflects ASC 606 adoption, acquisitions, and organic performance; 2017 comparative periods were not restated for ASC 606.
- Whether Defense margins and order growth persist, and whether Power performance improves as DRG integration costs, AP1000 production levels, and nuclear aftermarket demand evolve.
- Cash conversion and working-capital trends after the pension contribution and acquisition-related cash outflows.
- Developments in the CNRL mediation and AP1000 claims, including potential liability and insurance coverage.
- Conversion of the $2.2 billion backlog into revenue, including timing, customer funding, and contract execution.