Curtiss-Wright Corporation — Q2 2014 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2014. Curtiss-Wright designs, manufactures, and services engineered products for commercial/industrial, defense, and energy markets. Beginning in 2014, it reorganized reporting into those three segments and recast prior-period segment information; it also reclassified certain businesses as discontinued operations.
Financial results and position
- Q2 revenue: $652.5 million, up 9% year over year. Product sales were $521.8 million and service sales $130.6 million.
- Q2 profitability: Gross profit was $216.2 million (33.1% margin versus 33.1% in Q2 2013). Operating income rose 27% to $76.7 million; operating margin increased 160 basis points to 11.7%. Continuing-operations earnings rose 31% to $45.8 million; diluted continuing-operations EPS was $0.93 versus $0.74. Net earnings were $36.4 million, or $0.74 diluted EPS, including $9.4 million of discontinued-operations losses.
- First-half results: Revenue rose 10% to $1.278 billion; operating income increased 39% to $140.5 million, with margin improving to 11.0% from 8.7%. Continuing-operations earnings increased 47% to $84.3 million; diluted continuing-operations EPS was $1.72 versus $1.20. Net earnings were $71.6 million, or $1.46 diluted EPS, after $12.7 million in discontinued-operations losses.
- Segments, first half: Commercial/Industrial revenue increased 17% to $542.1 million and operating income rose 49% to $70.2 million. Defense revenue was essentially flat at $379.2 million and operating income increased 1% to $47.7 million. Energy revenue increased 10% to $356.6 million and operating income rose 25% to $36.4 million.
- Orders: New orders rose 30% to $750.2 million in Q2 and 20% to $1.413 billion for the first half, driven principally by naval defense programs. Management did not provide a quantified full-year sales or earnings forecast in the supplied filing text.
- Cash flow: First-half operating cash flow was $84.4 million, compared with $60.8 million in 2013. Investing used $18.2 million, including $36.0 million of capital spending and $34.4 million for acquisitions, partly offset by $52.1 million in divestiture proceeds. Financing used $47.7 million, including $23.9 million of share repurchases and $6.3 million of dividends. Cash increased $18.8 million to $194.1 million.
- Liquidity and debt: At June 30, cash was $194.1 million; current assets were $1.410 billion and current liabilities $546.7 million. Total debt was $934.3 million, down from $959.9 million at year-end 2013. There were no revolving-credit borrowings; $466 million of credit-facility capacity remained available after letters of credit. The company reported compliance with debt covenants and $1.5 billion of additional borrowing capacity under its debt-to-capitalization covenant.
- Other metrics: The effective tax rate was 32.4% for Q2 and 31.2% for the first half. First-half pension-plan contributions were $22.7 million; management expected $40.0 million for 2014. The quarterly dividend increased 30% to $0.13 per share.
Material changes and management commentary
Growth was led by Commercial/Industrial and Energy, with higher commercial aerospace, oil and gas, and general industrial sales. Management attributed improved operating results to higher sales, acquisition contributions, organizational realignment, and productivity initiatives. Defense operating income declined 18% in Q2, mainly because of lower production on AP1000 domestic and China programs, although first-half segment operating income was nearly flat. The company said cash, operating cash flow, available credit, and access to capital markets were sufficient for short- and long-term needs.
During Q2, Curtiss-Wright sold Benshaw for $50 million cash and 3D Radar for $3 million cash; Benshaw and 3D Radar results are presented as discontinued operations. The company also classified its Vessels business as held for sale and discontinued operations. Discontinued-operations losses included a divestiture loss. The company acquired three businesses in the first half; those acquisitions were not material to consolidated results, according to the filing.
Risks, contingencies, and unusual items
- CNRL litigation: Canadian Natural Resources Limited alleges damages estimated at $1 billion or more relating to a 2011 refinery fire and explosion. Curtiss-Wright could not estimate any potential loss range; insurance may not cover a judgment in full. The company intends to defend the claim and says an unfavorable outcome could materially affect future results, financial condition, or cash flows.
- AP1000 delivery claims: Westinghouse asserted entitlement to the maximum liquidated damages under the China contract, approximately $25 million. The company reported a possible loss range of $0–$35 million for missed delivery dates across China and U.S. contracts, with responsibility for delays uncertain; no accrual was recorded.
- Other exposures: Environmental reserves were $15.9 million. The company also disclosed asbestos claims, for which it reports insurance coverage and no material settlements to date, as well as letters of credit, bank guarantees, and a $52.9 million surety bond related to facility decommissioning assurance.
- Comparability and accounting: Prior periods were recast for discontinued operations and segment presentation. Q2 2013 comprehensive income included a large pension-plan remeasurement/curtailment adjustment; the filing also disclosed an immaterial prior-period comprehensive-income correction that did not affect net earnings or cash flows.
- Controls and outlook: Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material change in market-risk disclosures or risk factors was reported. Forward-looking statements remain subject to the risks described in the filing and prior annual report.
Important facts for investors to verify
- Whether commercial/industrial and energy growth and margin improvements are sustainable, and how much reflects acquisitions, currency, or organic performance.
- AP1000 production schedules, responsibility for delivery delays, and any change to the disclosed $0–$35 million possible-loss range or lack of accrual.
- Developments in the CNRL lawsuit, potential insurance coverage, and whether the company can estimate exposure.
- Completion and financial effects of the Vessels sale, and final accounting for the Benshaw and 3D Radar divestitures.
- Cash conversion, working-capital requirements, debt levels, and the company’s ability to fund pension contributions, investment, dividends, and repurchases.