CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recent accounting pronouncements to be adopted
|
|
|
|
Standard
|
Description
|
Effect on the condensed consolidated financial statements
|
ASU 2014-09 Revenue from Contracts with Customers
|
In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption.
|
The Corporation plans to apply the modified retrospective approach upon adoption and is currently evaluating the impact of adoption on its Condensed Consolidated Financial Statements as of January 1, 2018. We have performed a preliminary review of our customer contracts; however, our assessment is still ongoing and not yet complete. It is expected that the disclosures in our Notes to the Condensed Consolidated Financial Statements related to revenue recognition will be expanded under the new standard. The Corporation will continue to monitor interpretative guidance issued by the FASB which may cause our evaluation to change.
|
Date of adoption: January 1, 2018
|
ASU 2016-02 Leases
|
In February 2016, the FASB issued final guidance that will require lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The guidance requires the use of a modified retrospective approach.
|
The Corporation is currently evaluating the impact of the adoption of this standard on its Condensed Consolidated Financial Statements.
|
Date of adoption: January 1, 2019
|
ASU 2017-01
Clarifying the Definition of a Business
|
In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
|
The Corporation is currently evaluating the impact of the adoption of this standard on its Condensed Consolidated Financial Statements.
|
Date of adoption: January 1, 2018
|
ASU 2017-07
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
|
In March 2017, the FASB issued final guidance that will change how the net periodic benefit cost for defined benefit pension and other postretirement benefit plans are presented in the income statement and the respective capitalization of assets on the balance sheet. The guidance requires the use of a retrospective approach for the presentation of the income statement and a prospective approach for the presentation of the balance sheet.
|
The Corporation is currently evaluating the impact of the adoption of this standard on its Condensed Consolidated Financial Statements.
|
Date of adoption: January 1, 2018
|
2
. ACQUISITIONS
The Corporation continually evaluates potential acquisitions that either strategically fit within the Corporation’s existing portfolio or expand the Corporation’s portfolio into new product lines or adjacent markets. The Corporation has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Corporation's financial statements. This goodwill arises because the purchase prices for these businesses reflect the future earnings and cash flow potential in excess of the earnings and cash flows attributable to the current product and customer set at the time of acquisition. Thus, goodwill inherently includes the know-how of the assembled workforce, the ability of the workforce to further improve the technology and product offerings, and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations.
The Corporation allocates the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. In the months after closing, as the Corporation obtains additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and as the Corporation learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Only items identified as of the acquisition date are considered for subsequent adjustment. The Corporation will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
During the
six months ended June 30, 2017
, the Corporation acquired
two
businesses for an aggregate purchase price of
$233 million
, which are described in more detail below. No acquisitions were made during the
six months ended June 30, 2016
.
The Condensed Consolidated Statement of Earnings includes
$25 million
of total net sales and
$4 million
of net losses from the Corporation's
2017
acquisitions.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during the
six months ended June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
2016
|
Accounts receivable
|
|
$
|
5,020
|
|
|
$
|
—
|
|
Inventory
|
|
22,702
|
|
|
—
|
|
Property, plant, and equipment
|
|
4,598
|
|
|
—
|
|
Other current and non-current assets
|
|
2,815
|
|
|
—
|
|
Intangible assets
|
|
88,900
|
|
|
—
|
|
Current and non-current liabilities
|
|
(7,163
|
)
|
|
—
|
|
Due to seller, net
|
|
(509
|
)
|
|
—
|
|
Net tangible and intangible assets
|
|
116,363
|
|
|
—
|
|
Purchase price, net of cash acquired
|
|
232,630
|
|
|
—
|
|
Goodwill
|
|
$
|
116,267
|
|
|
$
|
—
|
|
|
|
|
|
|
Goodwill deductible for tax purposes
|
|
$
|
116,267
|
|
|
$
|
—
|
|
2017 Acquisitions
Teletronics Technology Corporation (TTC)
On
January 3, 2017
, the Corporation acquired 100% of the issued and outstanding capital stock of TTC for
$226.0 million
, net of cash acquired. The Share Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price deposited in escrow as security for potential indemnification claims against the seller. TTC is a designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems for critical aerospace and defense applications. For the year ended December 31, 2016, TTC generated sales of
$64 million
.
The acquired business operates within the Defense segment. The acquisition is subject to post-closing adjustments as the purchase price allocation is not yet complete.
Para Tech Coating, Inc. (Para Tech)
On
February 8, 2017
, the Corporation acquired certain assets and assumed certain liabilities of Para Tech for
$6.6 million
in cash. The Asset Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price held back as security for potential indemnification claims against the seller. Para Tech is a provider of parylene conformal coating services for aerospace & defense electronic components as well as critical medical devices. The acquired business operates within the Commercial/Industrial segment. The acquisition is subject to post-closing adjustments as the purchase price allocation is not yet complete.
3
. RECEIVABLES
Receivables primarily include amounts billed to customers, unbilled charges on long-term contracts consisting of amounts recognized as sales but not billed, and other receivables. Substantially all amounts of unbilled receivables are expected to be billed and collected within one year. An immaterial amount of unbilled receivables are subject to retainage provisions. The amount of claims and unapproved change orders within our receivables balances are immaterial.
The composition of receivables is as follows:
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2017
|
|
December 31, 2016
|
Billed receivables:
|
|
|
|
Trade and other receivables
|
$
|
374,691
|
|
|
$
|
340,091
|
|
Less: Allowance for doubtful accounts
|
(7,219
|
)
|
|
(4,832
|
)
|
Net billed receivables
|
367,472
|
|
|
335,259
|
|
Unbilled receivables:
|
|
|
|
Recoverable costs and estimated earnings not billed
|
158,006
|
|
|
149,847
|
|
Less: Progress payments applied
|
(23,262
|
)
|
|
(22,044
|
)
|
Net unbilled receivables
|
134,744
|
|
|
127,803
|
|
Receivables, net
|
$
|
502,216
|
|
|
$
|
463,062
|
|
4
. INVENTORIES
Inventoried costs contain amounts relating to long-term contracts and programs with long production cycles, a portion of which will not be realized within one year. Long-term contract inventory includes an immaterial amount of claims or other similar items subject to uncertainty concerning their determination or realization. Inventories are valued at the lower of cost or market.
The composition of inventories is as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2017
|
|
December 31, 2016
|
Raw materials
|
$
|
195,461
|
|
|
$
|
189,228
|
|
Work-in-process
|
85,321
|
|
|
73,843
|
|
Finished goods
|
123,362
|
|
|
112,478
|
|
Inventoried costs related to U.S. Government and other long-term contracts
|
60,008
|
|
|
57,516
|
|
Gross inventories
|
464,152
|
|
|
433,065
|
|
Less: Inventory reserves
|
(58,108
|
)
|
|
(54,988
|
)
|
Progress payments applied, principally related to long-term contracts
|
(9,799
|
)
|
|
(11,103
|
)
|
Inventories, net
|
$
|
396,245
|
|
|
$
|
366,974
|
|
Inventoried costs related to long-term contracts include capitalized contract development costs related to certain aerospace and defense programs of
$29.9 million
and
$28.8 million
, as of
June 30, 2017
and December 31,
2016
, respectively. These capitalized costs will be liquidated as production units are delivered to the customers. As of
June 30, 2017
and
December 31, 2016
,
$4.6 million
and
$3.9 million
, respectively, are scheduled to be liquidated under existing firm orders.
5
. GOODWILL
The changes in the carrying amount of goodwill for the
six months ended
June 30, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Commercial/Industrial
|
|
Defense
|
|
Power
|
|
Consolidated
|
December 31, 2016
|
$
|
436,141
|
|
|
$
|
327,655
|
|
|
$
|
187,261
|
|
|
$
|
951,057
|
|
Acquisitions
|
2,420
|
|
|
113,847
|
|
|
—
|
|
|
116,267
|
|
Foreign currency translation adjustment
|
6,468
|
|
|
9,044
|
|
|
108
|
|
|
15,620
|
|
June 30, 2017
|
$
|
445,029
|
|
|
$
|
450,546
|
|
|
$
|
187,369
|
|
|
$
|
1,082,944
|
|
6
. OTHER INTANGIBLE ASSETS, NET
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables present the cumulative composition of the Corporation’s intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Technology
|
|
$
|
240,858
|
|
|
$
|
(105,400
|
)
|
|
$
|
135,458
|
|
|
$
|
166,859
|
|
|
$
|
(98,266
|
)
|
|
$
|
68,593
|
|
Customer related intangibles
|
|
363,500
|
|
|
(168,351
|
)
|
|
195,149
|
|
|
349,742
|
|
|
(157,154
|
)
|
|
192,588
|
|
Other intangible assets
|
|
40,250
|
|
|
(24,866
|
)
|
|
15,384
|
|
|
36,709
|
|
|
(26,429
|
)
|
|
10,280
|
|
Total
|
|
$
|
644,608
|
|
|
$
|
(298,617
|
)
|
|
$
|
345,991
|
|
|
$
|
553,310
|
|
|
$
|
(281,849
|
)
|
|
$
|
271,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
six months ended June 30, 2017
, the Corporation acquired intangible assets of
$88.9 million
. The Corporation acquired Technology of
$73.0 million
, Customer related intangibles of
$12.9 million
, and Other intangible assets of
$3.0 million
, which have a weighted average amortization period of
15.0
years,
16.3
years, and
7.0
years, respectively.
Total intangible amortization expense for the
six months ended
June 30, 2017
was
$19.1 million
as compared to
$16.8 million
in the prior year period. The estimated amortization expense for the five years ending
December 31, 2017
through
2021
is
$38.7 million
,
$37.7 million
,
$36.0 million
,
$34.1 million
, and
$32.3 million
, respectively.
7
. FAIR VALUE OF FINANCIAL INSTRUMENTS
Forward Foreign Exchange and Currency Option Contracts
The Corporation has foreign currency exposure primarily in the United Kingdom, Europe, and Canada. The Corporation uses financial instruments, such as forward and option contracts, to hedge a portion of existing and anticipated foreign currency denominated transactions. The purpose of the Corporation’s foreign currency risk management program is to reduce volatility in earnings caused by exchange rate fluctuations. Guidance on accounting for derivative instruments and hedging activities requires companies to recognize all of the derivative financial instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets based upon quoted market prices for comparable instruments.
Interest Rate Risks and Related Strategies
The Corporation’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Corporation’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Corporation periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Corporation exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Corporation’s foreign exchange contracts and interest rate swaps are considered Level 2 instruments which are based on market based inputs or unobservable inputs and corroborated by market data such as quoted prices, interest rates, or yield curves.
Effects on Consolidated Balance Sheets
As of
June 30, 2017
and December 31, 2016, the fair values of the asset and liability derivative instruments are immaterial.
Effects on Condensed Consolidated Statements of Earnings
Undesignated hedges
The location and amount of losses or (gains) recognized in income on forward exchange derivative contracts not designated for hedge accounting for the
three and six
months ended
June 30,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
|
June 30,
|
|
June 30,
|
Derivatives not designated as hedging instrument
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Forward exchange contracts:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(93
|
)
|
|
$
|
4,452
|
|
|
$
|
614
|
|
|
$
|
5,036
|
|
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Debt
The estimated fair value amounts were determined by the Corporation using available market information that is primarily based on quoted market prices for the same or similar issues as of
June 30, 2017
. Accordingly, all of the Corporation’s debt is valued at a Level 2. The fair values described below may not be indicative of net realizable value or reflective of future fair values. Furthermore, the use of different methodologies to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
(In thousands)
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
5.51% Senior notes due 2017
|
150,000
|
|
|
152,161
|
|
|
150,000
|
|
|
154,509
|
|
3.84% Senior notes due 2021
|
100,000
|
|
|
104,107
|
|
|
100,000
|
|
|
102,463
|
|
3.70% Senior notes due 2023
|
225,000
|
|
|
232,173
|
|
|
225,000
|
|
|
226,946
|
|
3.85% Senior notes due 2025
|
100,000
|
|
|
103,389
|
|
|
100,000
|
|
|
100,338
|
|
4.24% Senior notes due 2026
|
200,000
|
|
|
211,038
|
|
|
200,000
|
|
|
203,592
|
|
4.05% Senior notes due 2028
|
75,000
|
|
|
77,685
|
|
|
75,000
|
|
|
74,630
|
|
4.11% Senior notes due 2028
|
100,000
|
|
|
104,158
|
|
|
100,000
|
|
|
99,876
|
|
Other debt
|
820
|
|
|
820
|
|
|
668
|
|
|
668
|
|
Total debt
|
950,820
|
|
|
985,531
|
|
|
950,668
|
|
|
963,022
|
|
Debt issuance costs, net
|
(907
|
)
|
|
(907
|
)
|
|
(984
|
)
|
|
(984
|
)
|
Unamortized interest rate swap proceeds
|
15,717
|
|
|
15,717
|
|
|
16,614
|
|
|
16,614
|
|
Total debt, net
|
$
|
965,630
|
|
|
$
|
1,000,341
|
|
|
$
|
966,298
|
|
|
$
|
978,652
|
|
8
. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The following tables are consolidated disclosures of all domestic and foreign defined pension plans as described in the Corporation’s
2016
Annual Report on Form 10-K.
Pension Plans
The components of net periodic pension cost for the
three and six
months ended
June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost
|
$
|
6,474
|
|
|
$
|
6,248
|
|
|
$
|
12,945
|
|
|
$
|
12,485
|
|
Interest cost
|
6,236
|
|
|
7,709
|
|
|
12,455
|
|
|
15,412
|
|
Expected return on plan assets
|
(13,310
|
)
|
|
(13,590
|
)
|
|
(26,595
|
)
|
|
(27,171
|
)
|
Amortization of prior service cost
|
(26
|
)
|
|
(11
|
)
|
|
(51
|
)
|
|
(23
|
)
|
Amortization of unrecognized actuarial loss
|
3,585
|
|
|
3,093
|
|
|
7,166
|
|
|
6,186
|
|
Net periodic benefit cost
|
$
|
2,959
|
|
|
$
|
3,449
|
|
|
$
|
5,920
|
|
|
$
|
6,889
|
|
During the
six months ended June 30, 2017
, the Corporation made no contributions to the Curtiss-Wright Pension Plan, and does not expect to make any contributions in
2017
. Contributions to the foreign benefit plans are not expected to be material in
2017
.
Defined Contribution Retirement Plan
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Effective
January 1, 2014
, all non-union employees who are not currently receiving final or career average pay benefits became eligible to receive employer contributions in the Corporation’s sponsored 401(k) plan. The employer contributions include both employer match and non-elective contribution components, up to a maximum employer contribution of
6%
of eligible compensation. During the
six months ended
June 30, 2017
and
2016
, the expense relating to the plan was
$6.8 million
and
$6.0 million
, respectively. The Corporation made
$9.4 million
in contributions to the plan during the
six months ended June 30, 2017
, and expects to make total contributions of
$11.8 million
in
2017
.
9
. EARNINGS PER SHARE
Diluted earnings per share were computed based on the weighted-average number of shares outstanding plus all potentially dilutive common shares. A reconciliation of basic to diluted shares used in the earnings per share calculation is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic weighted-average shares outstanding
|
44,213
|
|
|
44,487
|
|
|
44,221
|
|
|
44,526
|
|
Dilutive effect of stock options and deferred stock compensation
|
594
|
|
|
677
|
|
|
604
|
|
|
669
|
|
Diluted weighted-average shares outstanding
|
44,807
|
|
|
45,164
|
|
|
44,825
|
|
|
45,195
|
|
For the three months and
six months ended June 30, 2017
, approximately
38,000
shares issuable under equity-based awards were excluded from the calculation of diluted earnings per share as they were anti-dilutive based on the average stock price during the period. For the three and
six months ended June 30, 2016
, there were no anti-dilutive equity-based awards.
10
. SEGMENT INFORMATION
The Corporation manages and evaluates its operations based on end markets to strengthen its ability to service customers and recognize certain organizational efficiencies. Based on this approach, the Corporation has three reportable segments: Commercial/Industrial, Defense, and Power.
The Corporation’s measure of segment profit or loss is operating income. Interest expense and income taxes are not reported on an operating segment basis as they are not considered in the segments’ performance evaluation by the Corporation’s chief operating decision-maker, its Chief Executive Officer.
Net sales and operating income by reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net sales
|
|
|
|
|
|
|
|
Commercial/Industrial
|
$
|
291,856
|
|
|
$
|
290,428
|
|
|
$
|
570,912
|
|
|
$
|
565,633
|
|
Defense
|
127,399
|
|
|
114,877
|
|
|
242,236
|
|
|
220,607
|
|
Power
|
149,970
|
|
|
129,123
|
|
|
280,565
|
|
|
252,869
|
|
Less: Intersegment revenues
|
(1,572
|
)
|
|
(1,662
|
)
|
|
(2,469
|
)
|
|
(2,836
|
)
|
Total consolidated
|
$
|
567,653
|
|
|
$
|
532,766
|
|
|
$
|
1,091,244
|
|
|
$
|
1,036,273
|
|
|
|
|
|
|
|
|
|
Operating income (expense)
|
|
|
|
|
|
|
|
Commercial/Industrial
|
$
|
43,693
|
|
|
$
|
38,957
|
|
|
$
|
74,314
|
|
|
$
|
69,009
|
|
Defense
|
21,187
|
|
|
18,609
|
|
|
32,342
|
|
|
35,454
|
|
Power
|
24,870
|
|
|
16,114
|
|
|
41,410
|
|
|
30,742
|
|
Corporate and eliminations
(1)
|
(6,479
|
)
|
|
(5,591
|
)
|
|
(13,568
|
)
|
|
(9,853
|
)
|
Total consolidated
|
$
|
83,271
|
|
|
$
|
68,089
|
|
|
$
|
134,498
|
|
|
$
|
125,352
|
|
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1)
Corporate and eliminations includes pension and other postretirement benefit expense, certain environmental costs related to remediation at legacy sites, foreign currency transactional gains and losses, and certain other expenses.
Adjustments to reconcile operating income to earnings before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Total operating income
|
$
|
83,271
|
|
|
$
|
68,089
|
|
|
$
|
134,498
|
|
|
$
|
125,352
|
|
Interest expense
|
10,750
|
|
|
10,273
|
|
|
21,127
|
|
|
20,206
|
|
Other income, net
|
190
|
|
|
101
|
|
|
502
|
|
|
335
|
|
Earnings before income taxes
|
$
|
72,711
|
|
|
$
|
57,917
|
|
|
$
|
113,873
|
|
|
$
|
105,481
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
June 30, 2017
|
|
December 31, 2016
|
Identifiable assets
|
|
|
|
Commercial/Industrial
|
$
|
1,420,411
|
|
|
$
|
1,391,040
|
|
Defense
|
1,013,636
|
|
|
751,859
|
|
Power
|
517,053
|
|
|
516,321
|
|
Corporate and Other
|
170,174
|
|
|
378,561
|
|
Total consolidated
|
$
|
3,121,274
|
|
|
$
|
3,037,781
|
|
11
. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The cumulative balance of each component of accumulated other comprehensive income (AOCI), net of tax, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Foreign currency translation adjustments, net
|
|
Total pension and postretirement adjustments, net
|
|
Accumulated other comprehensive income (loss)
|
December 31, 2015
|
$
|
(107,810
|
)
|
|
$
|
(118,118
|
)
|
|
$
|
(225,928
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
(64,840
|
)
|
|
(7,892
|
)
|
|
(72,732
|
)
|
Amounts reclassified from accumulated other comprehensive loss
(1)
|
—
|
|
|
6,904
|
|
|
6,904
|
|
Net current period other comprehensive loss
|
(64,840
|
)
|
|
(988
|
)
|
|
(65,828
|
)
|
December 31, 2016
|
$
|
(172,650
|
)
|
|
$
|
(119,106
|
)
|
|
$
|
(291,756
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
43,901
|
|
|
(507
|
)
|
|
43,394
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
(1)
|
—
|
|
|
4,201
|
|
|
4,201
|
|
Net current period other comprehensive income
|
43,901
|
|
|
3,694
|
|
|
47,595
|
|
June 30, 2017
|
$
|
(128,749
|
)
|
|
$
|
(115,412
|
)
|
|
$
|
(244,161
|
)
|
|
|
(1)
|
All amounts are after tax.
|
Details of amounts reclassified from accumulated other comprehensive income (loss) are below:
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
|
|
|
|
|
(In thousands)
|
Amount reclassified from AOCI
|
|
Affected line item in the statement where net earnings is presented
|
Defined benefit pension and other postretirement benefit plans
|
|
|
|
Amortization of prior service costs
|
379
|
|
|
(1)
|
Amortization of actuarial losses
|
(7,064
|
)
|
|
(1)
|
|
(6,685
|
)
|
|
Total before tax
|
|
2,484
|
|
|
Income tax
|
Total reclassifications
|
$
|
(4,201
|
)
|
|
Net of tax
|
|
|
(1)
|
These items are included in the computation of net periodic benefit cost. See Note
8
,
Pension and Other Postretirement Benefit Plans
.
|
12
. CONTINGENCIES AND COMMITMENTS
Legal Proceedings
The Corporation has been named in a number of lawsuits that allege injury from exposure to asbestos. To date, the Corporation has not been found liable for or paid any material sum of money in settlement in any case. The Corporation believes its minimal use of asbestos in its past operations and the relatively non-friable condition of asbestos in its products makes it unlikely that it will face material liability in any asbestos litigation, whether individually or in the aggregate. The Corporation maintains insurance coverage for these potential liabilities and believes adequate coverage exists to cover any unanticipated asbestos liability.
In December 2013, the Corporation, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) filed in the Court of Queen’s Bench of Alberta, Judicial District of Calgary. The claim pertains to a January 2011 fire and explosion at a delayed coker unit at its Fort McMurray refinery that resulted in the injury of five CNRL employees, damage to property and equipment, and various forms of consequential loss, such as loss of profit, lost opportunities, and business interruption. The fire and explosion occurred when a CNRL employee bypassed certain safety controls and opened an operating coker unit. The total quantum of alleged damages arising from the incident has not been finalized, but is estimated to meet or exceed
$1 billion
. The Corporation maintains various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance may not be adequate to cover the costs associated with a judgment against us. The Corporation is currently unable to estimate an amount, or range of potential losses, if any, from this matter. The Corporation believes it has adequate legal defenses and intends to defend this matter vigorously. The Corporation’s financial condition, results of operations, and cash flows, could be materially affected during a future fiscal quarter or fiscal year by unfavorable developments or outcome regarding this claim.
In addition to the CNRL litigation, the Corporation is party to a number of other legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material effect on the Corporation’s results of operations or financial position.
Westinghouse Bankruptcy
On March 29, 2017, Westinghouse Electric Company (“WEC”) filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York, Case No. 17-10751. The Bankruptcy Court overseeing the Bankruptcy Case has approved, on an interim basis, an
$800 million
Debtor-in-Possession Financing Facility to help WEC finance its business operations during the reorganization process. The Corporation had approximately
$6.5 million
in pre-petition billings outstanding with WEC as of June 30, 2017. The Corporation will continue, for the time being and while it monitors and evaluates the Bankruptcy Case, to honor its executory contracts and expects to collect all post-petition amounts due. At this time, the Corporation has assessed that any pre-petition amounts will be substantially recoverable and does not believe that rejection of the outstanding contracts with WEC, taken in part or combined, would have a material adverse impact on the Company’s cash flow or operations. The Corporation continues to monitor the status of the WEC bankruptcy as well as the status of the plant construction projects for potential impacts on our business.
Letters of Credit and Other Financial Arrangements
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Corporation enters into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to guarantees of repayment, future performance on certain contracts to provide products and services, and to secure advance payments from certain international customers. As of
June 30, 2017
and
December 31, 2016
, there were
$48.8 million
and
$47.2 million
of stand-by letters of credit outstanding, respectively, and
$13.9 million
and
$12.8 million
of bank guarantees outstanding, respectively. In addition, the Corporation is required to provide the Nuclear Regulatory Commission financial assurance demonstrating its ability to cover the cost of decommissioning its Cheswick, Pennsylvania facility upon closure, though the Corporation does not intend to close this facility. The Corporation has provided this financial assurance in the form of a
$56.0 million
surety bond.
AP1000 Program
The Electro-Mechanical Division, which is within the Corporation’s Power segment, is the reactor coolant pump (RCP) supplier for the Westinghouse AP1000 nuclear power plants under construction in China and the United States. The terms of the AP1000 China and United States contracts include liquidated damage penalty provisions for failure to meet contractual delivery dates if the Corporation caused the delay and the delay was not excusable. On October 10, 2013, the Corporation received a letter from Westinghouse stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract from Westinghouse of approximately
$25 million
. The Corporation would be liable for liquidated damages under the contract if certain contractual delivery dates were not met and if the Corporation was deemed responsible for the delay. As of
June 30, 2017
, the Corporation has not met certain contractual delivery dates under its AP 1000 China and US contracts; however there are significant uncertainties as to which parties are responsible for the delays. The Corporation believes it has adequate legal defenses and intends to vigorously defend this matter. Given the uncertainties surrounding the responsibility for the delays, no accrual has been made for this matter as of
June 30, 2017
. As of
June 30, 2017
, the range of possible loss is
$0
to
$31 million
for the AP1000 US contract, for a total range of possible loss of
$0
to
$55.5 million
.
13
. SUBSEQUENT EVENTS
On
July 20, 2017
, the Board of Directors unanimously authorized a
$0.02
, or
15%
, increase in the Corporation’s quarterly dividend to
$0.15
per share. The increase will be reflected in the Corporation’s third quarter distribution, to be paid in October 2017.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I- ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Except for historical information, this Quarterly Report on Form 10-Q may be deemed to contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to: (a) projections of or statements regarding return on investment, future earnings, interest income, sales, volume, other income, earnings or loss per share, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of management, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions underlying other statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “continue,” “could,” “estimate,” “expects,” “intend,” “may,” “might,” “outlook,” “potential,” “predict,” “should,” “will,” as well as the negative of any of the foregoing or variations of such terms or comparable terminology, or by discussion of strategy. No assurance may be given that the future results described by the forward-looking statements will be achieved. While we believe these forward-looking statements are reasonable, they are only predictions and are subject to known and unknown risks, uncertainties, and other factors, many of which are beyond our control, which could cause actual results, performance, or achievement to differ materially from anticipated future results, performance, or achievement expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those described in “Item 1A. Risk Factors” of our
2016
Annual Report on Form 10-K, and elsewhere in that report, those described in this Quarterly Report on Form 10-Q, and those described from time to time in our future reports filed with the Securities and Exchange Commission. Such forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, those contained in Item 1. Financial Statements and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date they were made, and we assume no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
COMPANY ORGANIZATION
Curtiss-Wright Corporation is a diversified, multinational provider of highly engineered, technologically advanced, value-added products and services to a broad range of industries which are reported through our Commercial/Industrial, Defense, and Power segments. We are positioned as a market leader across a diversified array of niche markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers. We provide products and services to a number of global markets and have achieved balanced growth through the successful application of our core competencies in engineering and precision manufacturing. Our overall strategy is to be a balanced and diversified company, less vulnerable to cycles or downturns in any one market, and to establish strong positions in profitable niche markets. Approximately 38% of our
2017
revenues are expected to be generated from defense-related markets.
RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand the results of operations and financial condition of the Corporation for the three and
six
month periods ended
June 30, 2017
. The financial information as of
June 30, 2017
should be read in conjunction with the financial statements for the year ended
December 31, 2016
contained in our Form 10-K.
The MD&A is organized into the following sections: Consolidated Statements of Earnings, Results by Business Segment, and Liquidity and Capital Resources. Our discussion will be focused on the overall results of continuing operations followed by a more detailed discussion of those results within each of our reportable segments.
Our three reportable segments are generally concentrated in a few end markets; however, each may have sales across several end markets. An end market is defined as an area of demand for products and services. The sales for the relevant markets will be discussed throughout the MD&A.
Analytical Definitions
Throughout management’s discussion and analysis of financial condition and results of operations, the terms “incremental” and “organic” are used to explain changes from period to period. The term “incremental” is used to highlight the impact acquisitions and divestitures had on the current year results. The results of operations for acquisitions are incremental for the first twelve months from the date of acquisition. Additionally, the results of operations of divested businesses are removed from the comparable prior year period for purposes of calculating “organic” or “incremental” results. The definition of “organic” excludes the effect of foreign currency translation.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Earnings
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
% change
|
|
2017
|
|
2016
|
|
% change
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
Commercial/Industrial
|
$
|
291,599
|
|
|
$
|
290,046
|
|
|
1
|
%
|
|
$
|
570,421
|
|
|
$
|
564,773
|
|
|
1
|
%
|
Defense
|
126,361
|
|
|
113,961
|
|
|
11
|
%
|
|
241,023
|
|
|
219,352
|
|
|
10
|
%
|
Power
|
149,693
|
|
|
128,759
|
|
|
16
|
%
|
|
279,800
|
|
|
252,148
|
|
|
11
|
%
|
Total sales
|
$
|
567,653
|
|
|
$
|
532,766
|
|
|
7
|
%
|
|
$
|
1,091,244
|
|
|
$
|
1,036,273
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial/Industrial
|
$
|
43,693
|
|
|
$
|
38,957
|
|
|
12
|
%
|
|
$
|
74,314
|
|
|
$
|
69,009
|
|
|
8
|
%
|
Defense
|
21,187
|
|
|
18,609
|
|
|
14
|
%
|
|
32,342
|
|
|
35,454
|
|
|
(9
|
)%
|
Power
|
24,870
|
|
|
16,114
|
|
|
54
|
%
|
|
41,410
|
|
|
30,742
|
|
|
35
|
%
|
Corporate and eliminations
|
(6,479
|
)
|
|
(5,591
|
)
|
|
(16
|
)%
|
|
(13,568
|
)
|
|
(9,853
|
)
|
|
(38
|
)%
|
Total operating income
|
$
|
83,271
|
|
|
$
|
68,089
|
|
|
22
|
%
|
|
$
|
134,498
|
|
|
$
|
125,352
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
10,750
|
|
|
10,273
|
|
|
5
|
%
|
|
21,127
|
|
|
20,206
|
|
|
5
|
%
|
Other income, net
|
190
|
|
|
101
|
|
|
NM
|
|
|
502
|
|
|
335
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before taxes
|
72,711
|
|
|
57,917
|
|
|
26
|
%
|
|
113,873
|
|
|
105,481
|
|
|
8
|
%
|
Provision for income taxes
|
(22,061
|
)
|
|
(17,954
|
)
|
|
23
|
%
|
|
(30,676
|
)
|
|
(32,699
|
)
|
|
(6
|
)%
|
Net earnings
|
$
|
50,650
|
|
|
$
|
39,963
|
|
|
|
|
|
$
|
83,197
|
|
|
$
|
72,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
$
|
548,201
|
|
|
$
|
523,649
|
|
|
5
|
%
|
|
$
|
1,192,477
|
|
|
$
|
1,152,269
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
NM- not a meaningful percentage
|
|
|
|
|
|
|
Components of sales and operating income increase (decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017 vs. 2016
|
|
2017 vs. 2016
|
|
Sales
|
|
Operating Income
|
|
Sales
|
|
Operating Income
|
Organic
|
5
|
%
|
|
22
|
%
|
|
4
|
%
|
|
12
|
%
|
Acquisitions
|
3
|
%
|
|
(2
|
%)
|
|
2
|
%
|
|
(6
|
%)
|
Foreign currency
|
(1
|
%)
|
|
2
|
%
|
|
(1
|
%)
|
|
1
|
%
|
Total
|
7
|
%
|
|
22
|
%
|
|
5
|
%
|
|
7
|
%
|
Sales
for the
second quarter
of
2017
increased
$35 million
, or
7%
, to
$568 million
, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial segment, Defense segment, and Power segment
increased
$2 million
,
$12 million
, and
$21 million
, respectively.
Sales during the
six months ended June 30, 2017
increased
$55 million
, or
5%
, to
$1,091 million
, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial, Defense and Power segments increased $5 million, $22 million, and $28 million, respectively. Changes in sales by segment are discussed in further detail in the results by business segment section below.
Operating income
in the
second quarter
of
2017
increased
$15 million
, or
22%
, to
$83 million
, and operating margin
increased
190
basis points to
14.7%
compared with the same period in
2016
. Increases in operating income and operating margin were primarily attributable to higher production levels on the AP1000 China Direct program and improved profitability in the
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
aftermarket business in our Power segment. Operating income and operating margin also benefited from improved volume on industrial vehicle products in the Commercial/Industrial segment, and our ongoing margin improvement initiatives.
Operating income during the
six months ended June 30, 2017
increased
$9 million
, or
7%
, to
$134 million
and operating margin
increased
20
basis points to
12.3%
, compared with the same period in 2016. Increases in operating income and operating margin were primarily attributable to higher production levels in our Power segment on the AP1000 China Direct Program, improved volume on industrial vehicle products in the Commercial/Industrial segment, and our ongoing margin improvement initiatives. These increases were partially offset by first year purchase accounting costs on the TTC acquisition, which reduced operating income by $7 million.
Non-segment operating expense
in the
second quarter
and
six months ended June 30, 2017
increased
$1 million
, or
16%
, to
$6 million
and
$4 million
, or
38%
, to
$14 million
, respectively, from the comparable prior year periods. These increases were primarily due to foreign exchange losses and other corporate costs.
Interest expense
in the
second quarter
and
six months ended June 30, 2017
of $11 million and $21 million, respectively, was essentially flat as compared to the respective prior year periods.
The effective tax
rate for the
three months ended June 30, 2017
was
30.3%
, as compared to an effective tax rate of
31.0%
in the prior year period. The reduction in rate was principally driven by changes in valuation allowances. The effective tax rate for the
six months ended June 30, 2017
of
26.9%
as compared to an effective tax rate of
31.0%
in the prior year period, was primarily due to our current year adoption of ASU 2016-09
Improvements to Employee Share-Based Payment Accounting
and changes in valuation allowances. Without the adoption of ASU 2016-09, our effective tax rate for the
six months ended June 30, 2017
was 30.
5
%.
Comprehensive
income
in the
second quarter
of
2017
was
$85 million
, compared to comprehensive income of
$10 million
in the prior year period. The change was primarily due to the following:
|
|
•
|
Net earnings increased
$11 million
, primarily due to the higher operating income discussed above.
|
|
|
•
|
Foreign currency translation adjustments in the
second quarter
resulted in a
$33 million
comprehensive gain, compared to a
$32 million
comprehensive loss in the prior year period. The comprehensive gain during the current period was primarily attributed to increases in the British Pound and Euro.
|
|
|
•
|
Pension and postretirement adjustments within comprehensive income of
$2 million
were essentially flat against the comparable prior year period.
|
Comprehensive income for the
six months ended June 30, 2017
was
$131 million
, compared to comprehensive income of
$61 million
in the prior year period. The change was primarily due to the following:
|
|
•
|
Net earnings increased
$10 million
, primarily due to the higher operating income discussed above.
|
|
|
•
|
Foreign currency translation adjustments for the
six months ended June 30, 2017
resulted in a
$44 million
comprehensive gain, compared to a
$15 million
comprehensive loss in the prior period. The comprehensive gain during the current period was primarily attributed to increases in the British Pound, Euro, and Canadian dollar.
|
|
|
•
|
Pension and postretirement adjustments within comprehensive income of
$4 million
were essentially flat against the comparable prior year period.
|
New orders
increased
$25 million
and
$40 million
during the three and
six months ended June 30, 2017
, from the comparable prior year periods. The increase in new orders for each of the respective periods was primarily due to the acquisition of TTC in the Defense segment and a significant government order and higher demand for our industrial vehicle products in the Commercial/Industrial segment. These increases were partially offset by a decrease in the Power segment due to the timing of funding for pumps and generators with government customers. New orders during the
six months ended June 30, 2017
also benefited favorably from a government order for aircraft handling systems in the Defense segment, partially offset by the timing of funding from government customers in the Commercial/Industrial segment.
RESULTS BY BUSINESS SEGMENT
Commercial/Industrial
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
The following tables summarize sales, operating income and margin, and new orders within the Commercial/Industrial segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
% change
|
|
2017
|
|
2016
|
|
% change
|
Sales
|
$
|
291,599
|
|
|
$
|
290,046
|
|
|
1
|
%
|
|
$
|
570,421
|
|
|
$
|
564,773
|
|
|
1
|
%
|
Operating income
|
43,693
|
|
|
38,957
|
|
|
12
|
%
|
|
74,314
|
|
|
69,009
|
|
|
8
|
%
|
Operating margin
|
15.0
|
%
|
|
13.4
|
%
|
|
160
|
bps
|
|
13.0
|
%
|
|
12.2
|
%
|
|
80
|
bps
|
New orders
|
$
|
315,014
|
|
|
$
|
280,332
|
|
|
12
|
%
|
|
$
|
642,921
|
|
|
$
|
637,719
|
|
|
1
|
%
|
Components of sales and operating income increase (decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017 vs. 2016
|
|
2017 vs. 2016
|
|
Sales
|
|
Operating Income
|
|
Sales
|
|
Operating Income
|
Organic
|
2
|
%
|
|
12
|
%
|
|
2
|
%
|
|
7
|
%
|
Acquisitions
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Foreign currency
|
(1
|
%)
|
|
—
|
%
|
|
(1
|
%)
|
|
1
|
%
|
Total
|
1
|
%
|
|
12
|
%
|
|
1
|
%
|
|
8
|
%
|
Sales
in the Commercial/Industrial segment are primarily generated from the commercial aerospace and general industrial markets, and to a lesser extent the defense and power generation markets.
Sales in the
second quarter
increased
$2 million
, or
1%
, to
$292 million
from the prior year period. In the general industrial market, sales increased $10 million primarily due to higher demand for our industrial vehicle products. This increase was partially offset by lower sales in the naval defense market, primarily due to the timing of production on the Virginia-class submarine program. Sales in the commercial aerospace market decreased primarily due to lower sales of actuation and sensors products.
Sales during the
six months ended June 30, 2017
increased
$6 million
, or
1%
, to
$570 million
from the prior year period. In the general industrial market, we experienced higher sales of $18 million primarily due to increased demand for our industrial vehicle and industrial automation products. This increase was partially offset by lower sales in the naval defense and commercial aerospace markets primarily due to the timing of production on the Virginia-class submarine program and lower sales of actuation and sensors products, respectively. Unfavorable foreign currency translation reduced sales by $8 million.
Operating income
during the
second quarter
increased
$5 million
, or
12%
, to
$44 million
from the prior year period, while operating margin
increased
160 basis points
to
15.0%
. Operating income during the
six months ended June 30, 2017
increased
$5 million
, or
8%
, to
$74 million
from the prior year period, while operating margin
increased
80 basis points
to
13.0%
. The increases in operating income and operating margin for each of the respective periods were primarily due to ongoing margin improvement initiatives and improved volume on industrial vehicle and medical mobility products. These increases were partially offset by lower profitability for sensors and controls products due to lower volume and unfavorable mix.
New orders
increased
$35 million
and
$5 million
during the three and
six months ended June 30, 2017
from the comparable prior year periods, primarily due to a government order for the F-35 Joint Strike Fighter (JSF) and increased demand for our industrial vehicle products. The increase in new orders during the
six months ended June 30, 2017
was partially offset by the timing of funding from government customers.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Defense
The following tables summarize sales, operating income and margin, and new orders within the Defense segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
% change
|
|
2017
|
|
2016
|
|
% change
|
Sales
|
$
|
126,361
|
|
|
$
|
113,961
|
|
|
11
|
%
|
|
$
|
241,023
|
|
|
$
|
219,352
|
|
|
10
|
%
|
Operating income
|
21,187
|
|
|
18,609
|
|
|
14
|
%
|
|
32,342
|
|
|
35,454
|
|
|
(9
|
%)
|
Operating margin
|
16.8
|
%
|
|
16.3
|
%
|
|
50
|
bps
|
|
13.4
|
%
|
|
16.2
|
%
|
|
(280
|
) bps
|
New orders
|
$
|
118,048
|
|
|
$
|
92,732
|
|
|
27
|
%
|
|
$
|
252,021
|
|
|
$
|
198,624
|
|
|
27
|
%
|
Components of sales and operating income increase (decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017 vs. 2016
|
|
2017 vs. 2016
|
|
Sales
|
|
Operating Income
|
|
Sales
|
|
Operating Income
|
Organic
|
—
|
%
|
|
14
|
%
|
|
—
|
%
|
|
8
|
%
|
Acquisitions
|
12
|
%
|
|
(7
|
%)
|
|
11
|
%
|
|
(20
|
%)
|
Foreign currency
|
(1
|
%)
|
|
7
|
%
|
|
(1
|
%)
|
|
3
|
%
|
Total
|
11
|
%
|
|
14
|
%
|
|
10
|
%
|
|
(9
|
%)
|
Sales
in the Defense segment are primarily to the defense markets and, to a lesser extent, the commercial aerospace and the general industrial markets.
Sales in the
second quarter
increased
$12 million
, or
11%
, to
$126 million
from the prior year period, primarily due to the incremental impact of our TTC acquisition which contributed $13 million in sales. Excluding the impact of TTC, sales were relatively flat as higher foreign military sales and increased unmanned aerial vehicle (UAV) production in the aerospace defense market were largely offset by declines in helicopter sales.
Sales during the
six months ended June 30, 2017
increased
$22 million
, or
10%
, to
$241 million
from the prior year period, primarily due to the incremental impact of our TTC acquisition which contributed
$23 million
in sales. Excluding the impact of TTC, sales were relatively flat. In the aerospace defense market, higher foreign military sales and increased UAV production were largely offset by declines in helicopter sales. Sales in the ground defense market decreased primarily due to lower sales of embedded computing products on the G/ATOR program, partially offset by increased demand for our turret drive stabilization systems (TDSS) on international ground defense platforms.
Operating income
during the
second quarter
increased
$
3 million
, or
14%
, to $
21 million
, and operating margin
increased
50 basis points
from the prior year quarter to
16.8%
. The increases in operating income and operating margin were primarily driven by favorable mix for our defense electronics products, as well as the benefits of our margin improvement initiatives. Favorable foreign currency translation also benefited operating income by approximately $1 million.
Operating income during the
six months ended June 30, 2017
decreased
$3 million
, or
9%
, to
$32 million
, and operating margin
decreased
280 basis points
from the prior year period to
13.4%
. The decreases in operating income and operating margin were primarily due to first year purchase accounting costs on the TTC acquisition which reduced operating income by $7 million. This decrease was partially offset by increased volume on our COTS products.
New orders
increased
$25 million
during the
three months ended June 30, 2017
from the comparable prior year period, primarily due to the acquisition of TTC. New orders
increased
$53 million
during the
six months ended June 30, 2017
from the comparable prior year period, primarily due to the acquisition of TTC and a government order for aircraft handling systems.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Power
The following tables summarize sales, operating income and margin, and new orders within the Power segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
% change
|
|
2017
|
|
2016
|
|
% change
|
Sales
|
$
|
149,693
|
|
|
$
|
128,759
|
|
|
16
|
%
|
|
$
|
279,800
|
|
|
$
|
252,148
|
|
|
11
|
%
|
Operating income
|
24,870
|
|
|
16,114
|
|
|
54
|
%
|
|
41,410
|
|
|
30,742
|
|
|
35
|
%
|
Operating margin
|
16.6
|
%
|
|
12.5
|
%
|
|
410
|
bps
|
|
14.8
|
%
|
|
12.2
|
%
|
|
260
|
bps
|
New orders
|
$
|
115,139
|
|
|
$
|
150,585
|
|
|
(24
|
%)
|
|
$
|
297,535
|
|
|
$
|
315,926
|
|
|
(6
|
%)
|
Components of sales and operating income increase (decrease):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017 vs. 2016
|
|
2017 vs. 2016
|
|
Sales
|
|
Operating Income
|
|
Sales
|
|
Operating Income
|
Organic
|
16
|
%
|
|
54
|
%
|
|
11
|
%
|
|
35
|
%
|
Acquisitions
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Foreign currency
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
16
|
%
|
|
54
|
%
|
|
11
|
%
|
|
35
|
%
|
Sales
in the Power segment are primarily to the power generation and naval defense markets.
Sales in the
second quarter
increased
$21 million
, or
16%
, to
$150 million
, primarily due to higher production levels on the AP1000 China Direct and domestic programs which resulted in increased sales of $16 million and $4 million, respectively. The power generation market also benefited from improved aftermarket sales supporting currently operating domestic nuclear reactors primarily due to a strong spring outage season. In the naval defense market, higher production levels of CVN-80 pumps and valves were offset by the timing of production on the Virginia-class submarine program.
Sales for the
six months ended June 30, 2017
increased
$28 million
, or
11%
, to
$280 million
from the prior year period, as higher production revenues on the AP1000 China Direct and domestic programs of $35 million and $6 million, respectively, were partially offset by lower aftermarket sales of $12 million supporting domestic and international nuclear reactors. In the naval defense market, higher production levels of CVN-80 pumps and valves were offset by the timing of production on the Virginia-class submarine program and lower sales of CVN-79 pumps and valves as production is nearing completion.
Operating income
in the
second quarter
of
2017
increased
$9 million
, or
54%
, to
$25 million
, and operating margin
increased
410 basis points
from the prior year period to
16.6%
. Operating income during the
six months ended June 30, 2017
increased
$11 million
, or
35%
, to
$41 million
, and operating margin
increased
260 basis points
from the prior year period to
14.8%
. The increases in operating income and operating margin for each of the respective periods were primarily driven by higher production levels on the AP1000 China Direct program, as well as improved profitability in the nuclear aftermarket business and the benefits of our ongoing margin improvement initiatives.
New orders
decreased
$35 million
during the
three months ended June 30, 2017
from the comparable prior year period primarily due to the timing of funding for pumps and generators with government customers. New orders
decreased
$18 million
during the
six months ended June 30, 2017
from the comparable prior year period primarily due to the timing of funding of government orders and a commercial order for pumps in the prior year period. The decrease for the six months ended June 30, 2017 was partially offset by new orders for international nuclear reactors.
SUPPLEMENTARY INFORMATION
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
The table below depicts sales by end market. End market sales help provide an enhanced understanding of our businesses and the markets in which we operate. The table has been included to supplement the discussion of our consolidated operating results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by End Market
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In thousands)
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
% change
|
|
2017
|
|
2016
|
|
% change
|
Defense markets:
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
88,097
|
|
|
$
|
76,558
|
|
|
15
|
%
|
|
$
|
153,880
|
|
|
$
|
138,107
|
|
|
11
|
%
|
Ground
|
17,515
|
|
|
19,880
|
|
|
(12
|
%)
|
|
37,251
|
|
|
39,055
|
|
|
(5
|
%)
|
Naval
|
100,048
|
|
|
103,998
|
|
|
(4
|
%)
|
|
191,018
|
|
|
196,950
|
|
|
(3
|
%)
|
Other
|
5,964
|
|
|
2,541
|
|
|
135
|
%
|
|
13,007
|
|
|
3,794
|
|
|
243
|
%
|
Total Defense
|
$
|
211,624
|
|
|
$
|
202,977
|
|
|
4
|
%
|
|
$
|
395,156
|
|
|
$
|
377,906
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial markets:
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace
|
$
|
101,631
|
|
|
$
|
102,595
|
|
|
(1
|
%)
|
|
$
|
200,455
|
|
|
$
|
204,781
|
|
|
(2
|
%)
|
Power Generation
|
114,773
|
|
|
95,628
|
|
|
20
|
%
|
|
220,325
|
|
|
195,518
|
|
|
13
|
%
|
General Industrial
|
139,625
|
|
|
131,566
|
|
|
6
|
%
|
|
275,308
|
|
|
258,068
|
|
|
7
|
%
|
Total Commercial
|
$
|
356,029
|
|
|
$
|
329,789
|
|
|
8
|
%
|
|
$
|
696,088
|
|
|
$
|
658,367
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Curtiss-Wright
|
$
|
567,653
|
|
|
$
|
532,766
|
|
|
7
|
%
|
|
$
|
1,091,244
|
|
|
$
|
1,036,273
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
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Note: Certain amounts in the prior year have been reclassed to conform to the current year presentation.
Defense markets
Sales during the
three months ended June 30, 2017
increased
$9 million
, or
4%
, to
$212 million
against the comparable prior year period while sales during the
six months ended June 30, 2017
increased
$17 million
, or
5%
, to
$395 million
. The increases in each of the respective periods were primarily due to higher sales in the aerospace defense and other defense markets, partially offset by decreased sales in the ground defense and naval defense markets. The sales increases in the aerospace defense market were primarily due to the incremental impact of our TTC acquisition, which contributed $8 million and $15 million in sales, respectively, during the three and six months ended June 30, 2017. The aerospace defense market also benefited favorably from increased demand for UAVs, partially offset by declines in helicopter sales. Sales in the ground defense market decreased primarily due to lower sales of embedded computing products on the G/ATOR program, partially offset by increased demand for our TDSS products on international ground defense platforms. Lower sales in the naval defense market were primarily due to the timing of production on the Virginia-class submarine program and the substantial completion of CVN-79 pump and valve production. These decreases were partially offset by higher production levels of CVN-80 pumps and valves. Other defense sales increased during both respective periods due to various projects across government entities.
Commercial markets
Sales during the
three months ended June 30, 2017
increased
$26 million
, or
8%
, to
$356 million
against the comparable prior year period while sales during the
six months ended June 30, 2017
increased
$38 million
, or
6%
, to
$696 million
. The increases in each of the respective periods were primarily due to increased sales in the general industrial and power generation markets. In the general industrial market, we experienced higher demand for our industrial vehicle products. Within the power generation market, we generated higher production revenues of $16 million and $35 million on the AP1000 China Direct Program for the three and six months ended June 30, 2017, respectively. Higher sales in the power generation market for the six months ended June 30, 2017 were partially offset by lower aftermarket sales of $10 million supporting domestic and international nuclear reactors. Increases in the general industrial and power generation markets were partially offset by lower actuation system sales in the commercial aerospace market.
LIQUIDITY AND CAPITAL RESOURCES
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Sources and Use of Cash
We derive the majority of our operating cash inflow from receipts on the sale of goods and services and cash outflow for the procurement of materials and labor; cash flow is therefore subject to market fluctuations and conditions. Most of our long-term contracts allow for several billing points (progress or milestone) that provide us with cash receipts as costs are incurred throughout the project rather than upon contract completion, thereby reducing working capital requirements. In some cases, these payments can exceed the costs incurred on a project. Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, increased dividends, and paying down debt, to determine the most beneficial use of available capital resources. We believe that our cash and cash equivalents, cash flow from operations, available borrowings under the credit facility, and ability to raise additional capital through the credit markets, are sufficient to meet both the short-term and long-term capital needs of the organization.
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|
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|
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|
|
Condensed Consolidated Statements of Cash Flows
|
|
|
|
(In thousands)
|
June 30, 2017
|
|
June 30, 2016
|
Cash provided by (used):
|
|
|
|
Operating activities
|
$
|
60,932
|
|
|
$
|
156,631
|
|
Investing activities
|
(255,569
|
)
|
|
(15,784
|
)
|
Financing activities
|
(27,021
|
)
|
|
(41,891
|
)
|
Effect of exchange-rate changes on cash
|
10,521
|
|
|
(4,502
|
)
|
Net increase (decrease) in cash and cash equivalents
|
(211,137
|
)
|
|
94,454
|
|
Net cash provided by operating activities
decreased
$96 million
from the prior year period. The
decrease
in net cash provided is primarily due to prior period net collections of $83 million related to the AP1000 program and a one-time prior period benefit of $20 million as a result of the interest rate swap termination.
Net cash used for investing activities
increased
$240 million
from the comparable prior year period primarily due to current year acquisitions. The Corporation acquired two businesses during the six months ended June 30, 2017 for approximately
$233 million
, net of cash acquired. The Corporation did not acquire any businesses during the six months ended June 30, 2016. The capital expenditures for the
six months ended June 30, 2017
and
June 30, 2016
were
$23 million
and
$16 million
, respectively.
Financing Activities
Debt
The Corporation’s debt outstanding had an average interest rate of
4.0%
for both the three and
six months ended June 30, 2017
as compared to an average interest rates of 4.0% and 3.9% for the comparable periods ended
June 30, 2016
. The Corporation’s average debt outstanding was
$950 million
for both the three and
six months ended June 30, 2017
and
June 30, 2016
, respectively.
Revolving Credit Agreement
As of
June 30, 2017
, the Corporation had no outstanding borrowings under the 2012 Senior Unsecured Revolving Credit Agreement (the “Credit Agreement” or “credit facility”) and
$49 million
in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement as of
June 30, 2017
was
$451 million
, which could be borrowed without violating any of our debt covenants.
Repurchase of common stock
During the
six months ended June 30, 2017
, the Corporation used
$26 million
of cash to repurchase approximately
284,000
outstanding shares under its share repurchase program. During the
six months ended June 30, 2016
, the Corporation used
$55 million
of cash to repurchase approximately
745,000
outstanding shares.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Dividends
The Corporation made dividend payments of
$6 million
during each of the
six months ended June 30, 2017
and
June 30, 2016
, respectively.
Debt Compliance
As of the date of this report, we were in compliance with all debt agreements and credit facility covenants, including our most restrictive covenant, which is our debt to capitalization limit of 60%. The debt to capitalization limit is a measure of our indebtedness (as defined per the notes purchase agreement and credit facility) to capitalization, where capitalization equals debt plus equity, and is the same for and applies to all of our debt agreements and credit facility.
As of
June 30, 2017
, we had the ability to borrow additional debt of
$986 million
without violating our debt to capitalization covenant.
CRITICAL ACCOUNTING POLICIES
Our condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our
2016
Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 21, 2017, in the Notes to the
Consolidated Financial Statements, Note 1, and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CURTISS WRIGHT CORPORATION and SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material changes in our market risk during the
six
months ended
June 30, 2017
. Information regarding market risk and market risk management policies is more fully described in item “7A.Quantitative and Qualitative Disclosures about Market Risk” of our
2016
Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
As of
June 30, 2017
, our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of
June 30, 2017
insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and they include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended June 30, 2017, we implemented new controls as part of our efforts to adopt the new revenue recognition standard. Those efforts resulted in changes to our accounting processes and procedures related to monitoring the adoption process. As we continue the implementation process, we expect that there will be additional changes in our internal control over financial reporting. However, there have been no other changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
June 30, 2017
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.