Curtiss-Wright Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Curtiss-Wright designs, manufactures, and services engineered products across commercial/industrial, defense, and power markets. Segment presentation was realigned in 2015; prior-period segment results were reclassified.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $545.2 million | $569.2 million | $1,091.4 million | $1,112.2 million |
| Operating income | $65.4 million | $72.2 million | $138.3 million | $133.2 million |
| Operating margin | 12.0% | 12.7% | 12.7% | 12.0% |
| Continuing-operations earnings | $40.1 million | $43.0 million | $83.3 million | $79.4 million |
| Net earnings | $25.7 million | $36.4 million | $41.7 million | $71.6 million |
| Diluted EPS | $0.53 | $0.74 | $0.86 | $1.46 |
- Q2 sales fell 4% and operating income fell 9%; six-month sales declined 2%, while operating income rose 4%. Six-month continuing-operations earnings increased 5%.
- Q2 gross profit was $182.4 million, versus $198.2 million a year earlier. The filing does not state gross margin as a percentage.
- Discontinued operations reduced net earnings by $14.4 million in Q2 and $41.6 million for the six months. The six-month loss included approximately $40.8 million of held-for-sale impairment expense.
- New orders declined 24% in Q2 and 9% for the six months, primarily due to Power orders and the timing of prior-year Virginia-class submarine pump and generator orders.
Segment results and changes
- Commercial/Industrial: Q2 sales declined 3% to $304.5 million; operating income was nearly flat at $45.3 million, with margin improving to 14.9%. Six-month sales fell 2%, but operating income increased 5%.
- Defense: Q2 sales rose 1% to $119.7 million, while operating income increased 35% to $24.4 million and margin expanded to 20.4%. Six-month operating income rose 26%, supported by product demand and margin initiatives.
- Power: Q2 sales fell 12% to $121.1 million; operating income dropped 90% to $1.5 million, with margin falling to 1.2%. Six-month operating income declined 28%. Higher AP1000 program costs and weaker domestic nuclear aftermarket sales were key factors.
Cash, debt, and liquidity
- Cash and equivalents were $245.0 million at June 30, down from $450.1 million at year-end 2014. Operating cash flow was negative $111.3 million for the six months, versus positive $84.4 million a year earlier, chiefly reflecting a voluntary $145 million pension contribution and higher prior-year deferred-revenue collections.
- Investing cash outflow was $5.8 million; financing cash outflow was $90.0 million, including $97.1 million of share repurchases and $6.2 million of dividends. Capital expenditures were $15.7 million.
- Total debt was approximately $950.0 million, including $949.0 million of long-term debt. Average debt interest rate was 3.3%. No revolving-credit borrowings were outstanding; $448 million of unused facility capacity remained, with $52 million in letters of credit supported by the facility.
- Management reported compliance with debt covenants and stated available cash, operating cash flow, credit capacity, and access to capital markets were sufficient for short- and long-term needs.
Outlook, unusual items, and risks
- The filing provides no specific earnings or revenue guidance. Management described ongoing margin-improvement initiatives and a strategy to maintain a diversified business; approximately 34% of 2015 revenue was expected to come from defense-related markets.
- In Q2, the company recorded $11.5 million of additional estimated costs on its Westinghouse AP1000 reactor coolant pump contract, due to production modifications following engineering and endurance testing.
- For AP1000 delivery delays, Westinghouse had asserted entitlement to approximately $25 million in China-contract liquidated damages. The company had not accrued a loss; the disclosed possible loss range was $0–$48 million, with responsibility for delays disputed.
- A Downstream oil and gas business was sold in Q2 for $19 million net of transaction costs, following a first-quarter $40 million impairment; the Q2 sale generated an additional pretax divestiture loss of $14 million. Engineered Packaging was sold in July 2015 for approximately $13 million.
- A Canadian Natural Resources claim relating to a 2011 refinery fire alleges damages estimated at $1 billion or more. Curtiss-Wright could not estimate its potential loss, said insurance may be insufficient, and intends to defend the claim. Management warned an unfavorable outcome could materially affect future results, financial condition, or cash flows.
- Other noted exposures include asbestos litigation, environmental and pension obligations, foreign-currency movements, and long-term contract cost estimates. Management reported no material change in risk factors or market risk during the six-month period.
Important facts for investors to verify
- Whether AP1000 cost overruns, delivery delays, and potential liquidated damages affect future Power-segment margins and cash flow.
- The status and potential financial exposure of the CNRL litigation and AP1000 claims, including insurance coverage and any subsequent accruals.
- Cash generation after the unusually large pension contribution, and the effect of continued repurchases on liquidity and debt levels.
- Whether declining orders, especially in Power, translate into lower future revenue, and whether Defense growth and margin gains persist.
- Final sale proceeds and any further impairment or divestiture costs for businesses classified as discontinued operations or held for sale.