Curtiss-Wright Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Curtiss-Wright is a diversified manufacturer and service provider serving aerospace, defense, power generation, and industrial markets, through Commercial/Industrial, Defense, and Power segments.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $639.0 million | $620.3 million | $1,217.3 million | $1,167.8 million |
| Operating income | $105.7 million | $102.1 million | $177.7 million | $166.6 million |
| Operating margin | 16.5% | 16.5% | 14.6% | 14.3% |
| Net earnings | $80.1 million | $74.8 million | $135.7 million | $118.4 million |
| Diluted EPS | $1.86 | $1.68 | $3.15 | $2.66 |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $40.4 million | $26.7 million |
- For the first half, sales increased 4%, operating income 7%, and net earnings 15% year over year. Q2 sales rose 3% and net earnings rose 7%.
- Q2 operating margin was flat year over year; first-half margin improved 30 basis points. Q2 growth in operating income reflected stronger Power and Commercial/Industrial results, partly offset by lower Defense profit.
- Interest expense was $15.2 million in the first half, down 14%. The effective tax rate was 22.0% versus 24.8% in the first half of 2018.
Segments, orders, and backlog
- Power: First-half sales rose 16% to $339.6 million and operating income rose 57% to $54.3 million. Growth reflected the DRG acquisition, increased naval defense production, and improved overhead absorption; the prior year included first-year acquisition purchase-accounting costs.
- Commercial/Industrial: First-half sales were nearly flat at $611.8 million, while operating income rose 5% to $95.7 million. A building-sale gain and margin initiatives contributed to profit growth.
- Defense: First-half sales were nearly flat at $266.0 million, but operating income fell 19% to $47.3 million and margin declined to 17.8% from 22.0%. The company cited unfavorable mix, higher R&D, and favorable prior-year naval contract adjustments that did not recur.
- First-half new orders increased 3% to $1.35 billion, but Q2 orders fell 14% to $600.8 million, primarily due to timing of customer funding for naval defense orders in Power. Backlog was approximately $2.2 billion; the company expected to recognize about 90% as sales over the next 12–36 months.
- Defense markets generated $511.3 million of first-half sales, up 12%; commercial markets declined 1% to $706.0 million. Management estimated defense-related markets would account for approximately 42% of 2019 revenue.
Cash, liquidity, debt, and capital allocation
- Cash and cash equivalents were $216.3 million at June 30, 2019, down $59.7 million from year-end 2018. First-half operating cash flow was $40.4 million; capital expenditures were $33.5 million.
- Investing cash outflow was $74.8 million, including $50.1 million for the Tactical Communications Group acquisition. Financing cash outflow was $26.7 million, including $25.1 million of share repurchases.
- Long-term debt was $761.5 million on the balance sheet; the debt table reports $750 million of principal debt outstanding. No borrowings were outstanding under the revolving credit facility, with $470 million available after letters of credit. The company stated it was in compliance with covenants and had $1.6 billion of additional borrowing capacity under its debt-to-capitalization limit.
- The company repurchased approximately 220,000 shares for $25 million in the first half. It said it expected to repurchase at least an additional $50 million of shares during 2019. The quarterly dividend was $0.17 per share.
Outlook, changes, and notable items
- The filing provides no clear quantified earnings or revenue guidance. Management said cash, operating cash flow, available credit, and access to capital markets were sufficient for short- and long-term needs.
- Operating cash flow improved from the prior-year period, primarily because 2018 included a $50 million voluntary pension contribution; current-period cash flow also benefited from higher receivable collections and lower inventory receipts, partly offset by higher disbursements.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, adding approximately $151 million to both assets and liabilities at adoption. At June 30, operating lease liabilities totaled $141.1 million.
- Management reported no material changes in market risks or risk factors during the first half. It identified estimates for contract costs, asset recoverability, pensions, inventory, acquisitions, legal reserves, and environmental costs as areas requiring significant judgment.
Contingencies and risks
- CNRL litigation: A claim related to a 2011 refinery fire has an alleged total value estimated at $1 billion or more; CNRL reduced its claim to approximately $400 million for mediation. The company could not estimate a loss range, noted insurance may be insufficient, and warned an unfavorable outcome could materially affect future results, financial condition, or cash flows.
- AP1000 contracts: The company reported possible liquidated damages of $0–$31 million for the U.S. contract and a combined possible-loss range of $0–$55.5 million. It made no accrual because responsibility for delays is uncertain. A fault in one Sanmen 2 reactor coolant pump was under investigation; stated liability is limited to repair or replacement cost.
- The company also faces asbestos-related lawsuits, but management does not expect material liability and cites insurance and indemnification coverage.
Investor facts to verify
- Progress and potential financial exposure in the CNRL mediation, including the adequacy of insurance.
- Responsibility, potential penalties, and resolution of AP1000 delivery delays, plus the Sanmen 2 pump investigation.
- Whether the Q2 decline in orders reflects timing or a sustained change, particularly in naval defense, and how backlog converts into revenue.
- Whether Defense segment margins recover after the first-half decline and whether Power’s acquisition-related growth and margin gains continue.
- Cash conversion, working-capital movements, planned capital spending, and execution of the announced share repurchases.