Curtiss-Wright Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Curtiss-Wright supplies engineered products and services, primarily to aerospace and defense markets, and reports Aerospace & Industrial, Defense Electronics, and Naval & Power segments. Management expected approximately 67% of 2023 revenue from aerospace and defense markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $704.4 million | $609.4 million | $1,335.3 million | $1,168.8 million |
| Operating income | $112.8 million | $98.1 million | $191.4 million | $158.6 million |
| Net earnings | $81.0 million | $70.9 million | $137.8 million | $111.6 million |
| Diluted EPS | $2.10 | $1.83 | $3.58 | $2.89 |
| Operating margin | 16.0% | 16.1% | 14.3% | 13.6% |
| New orders | $841.6 million | $776.2 million | $1,559.4 million | $1,410.4 million |
Q2 sales, operating income, and net earnings rose 16%, 15%, and 14%, respectively. For the first half, those measures rose 14%, 21%, and 24%. The six-month effective tax rate was 23.1%, versus 24.0% a year earlier. Interest expense increased to $28 million for the first half from $19 million, primarily reflecting 2022 notes issuance and higher revolving-credit rates.
Segments and demand
- Aerospace & Industrial: Q2 sales increased 8% and operating income 10%; margin was 15.8%, up 20 basis points. Higher sales and overhead absorption were partly offset by unfavorable actuation and sensors mix.
- Defense Electronics: Q2 sales increased 32% and operating income 77%; margin rose 540 basis points to 21.8%, mainly on higher sales and favorable overhead absorption. Tactical communications demand contributed to growth.
- Naval & Power: Q2 sales increased 12%, but operating income fell 6% and margin declined 320 basis points to 16.7%. Unfavorable mix and first-year purchase accounting costs for the arresting systems acquisition outweighed overhead benefits.
Aerospace and defense sales increased 23% in Q2, compared with 4% growth in commercial markets. Total backlog was approximately $2.8 billion; the company expected to recognize about 90% as sales over the next 36 months. The filing reports order growth, but does not provide specific full-year earnings or sales guidance in the text provided.
Cash, debt, and liquidity
- First-half operating cash flow was $19.4 million, versus cash use of $93.3 million in 2022. Management attributed the improvement to higher cash earnings and improved working capital, partly offset by higher tax payments.
- Cash and equivalents were $158.7 million at June 30, down from $257.0 million at year-end. Capital expenditures were $22.7 million; investing cash use totaled $22.2 million.
- Long-term debt, net, was $1,176.1 million, with no current debt portion reported. The company repaid $202.5 million of notes that matured in February. It had $125 million drawn on its revolving facility and $604 million of unused availability under that facility.
- Average debt outstanding was $1.2 billion for the first half, at an average interest rate of 4.0%. The company reported compliance with debt covenants and $1.9 billion of additional borrowing capacity under its debt-to-capitalization covenant.
- First-half share repurchases were $24 million. The quarterly dividend increased to $0.20 per share beginning in Q2.
Material changes, risks, and contingencies
Growth reflected stronger organic sales, particularly in Defense Electronics, as well as the incremental contribution from the arresting systems acquisition. Naval & Power results faced unfavorable product mix and acquisition-related purchase accounting costs. The China Direct AP1000 program continued to wind down. First-half results also benefited from the absence of the prior-year industrial valve divestiture loss. Foreign currency translation generated a $34 million first-half comprehensive gain, versus a $47 million loss in the prior-year period.
Management cited ongoing exposure to supply-chain disruptions, inflation, interest-rate changes, and geopolitical conditions in its forward-looking statement discussion; actual results may differ from expectations. Management said there were no material changes in risk factors or market risk during the half-year. The company reported ordinary-course legal matters, including asbestos-related lawsuits, but did not expect them to have a material adverse effect based on current information, accruals, and insurance. It also disclosed $21 million of standby letters of credit, $14 million of bank guarantees, and a $35 million surety bond for nuclear-facility decommissioning assurance.
Significant estimates include contract costs to complete, pension assumptions, inventory obsolescence, acquisition valuations, legal reserves, and environmental costs. The filing reported $8.3 million of capitalized development costs not then supported by existing firm orders. Management stated that cash, operating cash flow, credit availability, and access to capital markets were sufficient for expected needs.
Important facts for investors to verify
- Whether backlog converts to revenue on the expected timetable, and whether order growth persists across segments.
- Whether operating cash flow strengthens as working-capital requirements, including receivables and inventory, evolve.
- How higher borrowing costs affect interest expense and whether liquidity and covenant headroom remain adequate.
- Whether Naval & Power margins recover as acquisition-related purchase accounting costs and product-mix pressures change.
- Developments in supply chains, the AP1000 program wind-down, environmental and legal exposures, and development costs without firm orders.