Curtiss-Wright Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Curtiss-Wright is a diversified manufacturer and service provider serving aerospace, defense, power generation, and industrial markets through its Commercial/Industrial, Defense, and Power segments. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance
- Q2 revenue: $567.7, up 7% year over year. Product sales were $459.8 and service sales were $107.9.
- Q2 earnings: Operating income was $83.3, up 22%, with a 14.7% operating margin, up 190 basis points. Net earnings were $50.7 versus $40.0; diluted EPS was $1.13 versus $0.88.
- First-half revenue and earnings: Revenue was $1,091.2, up 5%; operating income was $134.5, up 7%, and operating margin was 12.3%, up 20 basis points. Net earnings were $83.2 versus $72.8; diluted EPS was $1.86 versus $1.61.
- Segment trends: Q2 sales increased 1% in Commercial/Industrial, 11% in Defense, and 16% in Power. Power’s Q2 operating income rose 54%, supported by AP1000 production and nuclear aftermarket profitability. Defense first-half operating income fell 9%, partly due to $7 million of first-year TTC purchase-accounting costs.
- Cash flow: First-half operating cash flow was $60.9, down from $156.6. Management attributed the decline mainly to prior-year AP1000 collections and a one-time $20.4 million interest-rate-swap termination benefit. Investing cash outflow was $255.6, including $232.6 for acquisitions; capital expenditures were $23.3. Cash declined $211.1 to $342.7.
- Margins and taxes: Q2 gross profit was $198.8 on revenue of $567.7. The Q2 effective tax rate was 30.3%; first-half rate was 26.9%, including an approximately $4 million tax benefit from adopted share-based-payment accounting guidance. Management said the first-half rate would have been 30.5% absent that adoption.
- Debt and liquidity: Balance-sheet debt, net of issuance costs and including unamortized swap proceeds, was $965.6 at June 30; cash was $342.7. The company had no revolving-credit borrowings, $451 million of unused facility availability after letters of credit, and reported compliance with debt covenants. It said it could borrow an additional $986 million without breaching its debt-to-capitalization covenant.
- Other: New orders rose 5% in Q2 and 3% in the first half. The board subsequently approved a 15% quarterly dividend increase, from $0.13 to $0.15 per share, beginning with the October 2017 payment.
Material changes and management commentary
- Two businesses were acquired for approximately $233 million: Teletronics Technology Corporation (TTC), acquired for $226 million and reported in Defense, and Para Tech Coating, acquired for $6.6 million and reported in Commercial/Industrial. The acquisitions contributed $25 million of first-half sales and $4 million of net losses; purchase-price allocations remained subject to adjustment.
- Management attributed Q2 operating improvement principally to higher AP1000 China Direct production, stronger Power aftermarket profitability, improved industrial-vehicle volume, and margin-improvement initiatives. First-half growth also reflected those factors, partly offset by TTC purchase-accounting costs.
- Management stated that cash, operating cash flow, available credit, and access to capital markets were sufficient for short- and long-term needs. The filing provides no specific earnings or revenue guidance for the remainder of 2017.
Risks, contingencies, and unusual items
- AP1000 contracts: Curtiss-Wright had missed certain delivery dates under China and U.S. contracts; responsibility for delays was uncertain, and no accrual was recorded. The disclosed possible-loss range was $0–$55.5 million, including up to approximately $25 million under the China contract.
- CNRL litigation: A claim related to a 2011 refinery fire alleges damages estimated at $1 billion or more. The company could not estimate its potential loss, believes it has defenses, and warned an unfavorable outcome could materially affect future results, financial condition, or cash flows; insurance may not be sufficient.
- Westinghouse bankruptcy: Pre-petition billings outstanding were approximately $6.5 million. The company expected substantial recovery and did not expect contract rejection to materially affect operations or cash flow, but continued to monitor the bankruptcy and related plant projects.
- Asbestos-related lawsuits were disclosed; the company reported no material liability or settlements to date and believes insurance coverage is adequate. Standby letters of credit were $48.8 million, bank guarantees $13.9 million, and a $56 million surety bond supported decommissioning assurance for its Cheswick facility.
- Foreign-currency translation generated a $43.9 million first-half comprehensive-income gain, compared with a $14.5 million loss in the prior-year period. The filing reported no material change in market risk.
Key facts for investors to verify
- Whether AP1000 delivery delays, responsibility determinations, or Westinghouse developments change the disclosed potential exposure or project outlook.
- Developments in the CNRL litigation, including any estimate of potential loss and the scope of applicable insurance.
- TTC integration, purchase-accounting costs, acquisition-related earnings contribution, and final purchase-price allocations.
- Operating cash conversion and working-capital trends, given the year-over-year decline in first-half operating cash flow.
- Power-segment order timing and whether strong AP1000 production and aftermarket performance are sustained.