Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period of time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The following tables present the cumulative composition of the Corporation’s intangible assets:
The Corporation conducts a portion of its operations from leased facilities, which include manufacturing and service facilities, administrative offices, and warehouses. In addition, the Corporation leases vehicles, machinery, and office equipment under operating leases. Our leases have remaining lease terms of 1 year to 25 years, some of which include options for renewals, escalations, or terminations.
In November 2018, the Corporation entered into a build-to-suit lease of approximately $27 million for the construction of a new facility for DRG in Charleston, South Carolina. The lease has not been reflected in the Corporation’s condensed consolidated financial statements as of JuneSeptember 30, 2019 as the Corporation has not yet obtained the right to control the use of the facility.
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.
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.
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.
The following table is a consolidated disclosure of all domestic and foreign defined pension plans as described in the Corporation’s 2018 Annual Report on Form 10-K.
The Corporation does not expect to make any contributions to the Curtiss-Wright Pension Plan in 2019. Contributions to the foreign benefit plans are not expected to be material in 2019. During the sixnine months ended JuneSeptember 30, 2018, the Corporation made a $50 million voluntary contribution to the Curtiss-Wright Pension Plan.
Effective January 1, 2014, all non-union employees who were 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. Effective January 1, 2019, the Corporation increased the employer match opportunity, raising the maximum employer contribution from 6% to 7% of eligible compensation. During the three and sixnine months ended JuneSeptember 30, 2019, the expense relating to the plan was $4.2 million and $9.6$13.8 million, respectively. During the three and sixnine months ended JuneSeptember 30, 2018, the expense relating to the plan was $3.2$3.5 million and $7.4$10.9 million, respectively. The Corporation made $13.1$15.1 million in contributions to the plan during the sixnine months ended JuneSeptember 30, 2019, and expects to make total contributions of $15.1$17.0 million in 2019.
Diluted earnings per share was 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:
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.
Adjustments to reconcile operating income to earnings before income taxes are as follows:
The cumulative balance of each component of accumulated other comprehensive income (AOCI), net of tax, is as follows:
Details of amounts reclassified from accumulated other comprehensive income (loss) are below:
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(1)
| These items are included in the computation of net periodic pension cost. See Note 10, Pension Plans. |
| | | | | | | | | | | |
| (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 | $ | 463 | | | (1) |
| Amortization of actuarial losses | (6,593) | | | (1) |
| (6,130) | | | Total before tax |
| 1,504 | | | Income tax |
| Total reclassifications | $ | (4,626) | | | Net of tax |
(1)These items are included in the computation of net periodic pension cost. See Note 10, Pension Plans.
14. 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 as well as its acquired businesses’ operations and the relatively non-friable condition of asbestos in its historical 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 and indemnification agreements 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
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. All parties have agreed in principle to participate in a formal mediation in lateNovember 2019 with the intention of settling this claim. In an effort to induce the parties to participate in the formal mediation, CNRL agreed to reduce its claim to approximately $400 million, which reflects the monetary amount of property damage incurred as a result of the fire and explosion. The Corporation is currently unable to estimate an amount, or range of potential losses, if any, from this matter. The Corporation believes that 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.
Letters of Credit and Other Financial Arrangements
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 JuneSeptember 30, 2019 and December 31, 2018, there were $29.8$29.1 million and $21.7 million of stand-by letters of credit outstanding, respectively, and $10.9$10.2 million and $11.7 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 $45.6 million surety bond.
AP1000 Program
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 JuneSeptember 30, 2019, the Corporation has not met certain contractual delivery dates under its AP 1000 China and U.S. 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 JuneSeptember 30, 2019. As of JuneSeptember 30, 2019, the range of possible loss is $0 to $31 million for the AP1000 U.S. contract, for a total range of possible loss of $0 to $55.5 million.
Earlier this year, the Corporation was notified of a RCP fault at the Sanmen 2 AP1000 nuclear reactor in China. At this time,The root cause investigation of the root-cause of this situation is presentlyfault was concluded during the current period, with the matter limited to a single part on one RCP. We are inRemediation of the processfault is not expected to have a material impact on the Corporation's financial condition or results of evaluating the cause(s) in conjunction with Westinghouse and China. The Corporation’s legal liability is limited to the cost of repairing or replacing the RCP.operations.
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 2018 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 42%43% of our 2019 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 sixnine month periods ended JuneSeptember 30, 2019. The financial information as of JuneSeptember 30, 2019 should be read in conjunction with the financial statements for the year ended December 31, 2018 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” and “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 | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | | | | | | | | | | | |
| Commercial/Industrial | $ | 304,888 | | | $ | 295,239 | | | 3 | % | | $ | 916,662 | | | $ | 904,343 | | | 1 | % |
| Defense | 149,854 | | | 138,372 | | | 8 | % | | 415,838 | | | 403,450 | | | 3 | % |
| Power | 160,138 | | | 161,782 | | | (1 | %) | | 499,690 | | | 455,420 | | | 10 | % |
| Total sales | $ | 614,880 | | | $ | 595,393 | | | 3 | % | | $ | 1,832,190 | | | $ | 1,763,213 | | | 4 | % |
| | | | | | | | | | | |
| Operating income | | | | | | | | | | | | |
| Commercial/Industrial | $ | 48,086 | | | $ | 44,786 | | | 7 | % | | $ | 143,768 | | | $ | 135,747 | | | 6 | % |
| Defense | 38,210 | | | 33,615 | | | 14 | % | | 85,524 | | | 91,984 | | | (7 | %) |
| Power | 26,362 | | | 28,249 | | | (7 | %) | | 80,650 | | | 62,792 | | | 28 | % |
| Corporate and eliminations | (7,089) | | | (9,603) | | | 26 | % | | (26,643) | | | (26,902) | | | 1 | % |
| Total operating income | $ | 105,569 | | | $ | 97,047 | | | 9 | % | | $ | 283,299 | | | $ | 263,621 | | | 7 | % |
| | | | | | | | | | | |
| Interest expense | 7,951 | | | 7,949 | | | — | % | | 23,183 | | | 25,719 | | | (10 | %) |
| Other income, net | 6,355 | | | 3,843 | | | 65 | % | | 17,704 | | | 12,497 | | | 42 | % |
| | | | | | | | | | | |
| Earnings before income taxes | 103,973 | | | 92,941 | | | 12 | % | | 277,820 | | | 250,399 | | | 11 | % |
| Provision for income taxes | (21,463) | | | (18,458) | | | 16 | % | | (59,645) | | | (57,485) | | | 4 | % |
| Net earnings | $ | 82,510 | | | $ | 74,483 | | | | | | $ | 218,175 | | | $ | 192,914 | | | | |
| | | | | | | | | | | |
| New orders | $ | 646,608 | | | $ | 514,160 | | | 26 | % | | $ | 1,994,115 | | | $ | 1,819,168 | | | 10 | % |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| Consolidated Statements of Earnings | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | | | | | | | | | | | |
| Commercial/Industrial | $ | 318,267 |
| | $ | 312,463 |
| | 2 | % | | $ | 611,774 |
| | $ | 609,104 |
| | — | % |
| Defense | 144,962 |
| | 146,177 |
| | (1 | )% | | 265,984 |
| | 265,078 |
| | — | % |
| Power | 175,767 |
| | 161,658 |
| | 9 | % | | 339,552 |
| | 293,638 |
| | 16 | % |
| Total sales | $ | 638,996 |
| | $ | 620,298 |
| | 3 | % | | $ | 1,217,310 |
| | $ | 1,167,820 |
| | 4 | % |
| | | | | | | | | | | | |
| Operating income | |
| | |
| | |
| | |
| | |
| | |
|
| Commercial/Industrial | $ | 56,236 |
| | $ | 51,736 |
| | 9 | % | | $ | 95,682 |
| | $ | 90,961 |
| | 5 | % |
| Defense | 29,661 |
| | 38,641 |
| | (23 | )% | | 47,314 |
| | 58,369 |
| | (19 | )% |
| Power | 30,069 |
| | 19,201 |
| | 57 | % | | 54,288 |
| | 34,543 |
| | 57 | % |
| Corporate and eliminations | (10,281 | ) | | (7,502 | ) | | (37 | )% | | (19,554 | ) | | (17,299 | ) | | (13 | )% |
| Total operating income | $ | 105,685 |
| | $ | 102,076 |
| | 4 | % | | $ | 177,730 |
| | $ | 166,574 |
| | 7 | % |
| | | | | | | | | | | | |
| Interest expense | 7,960 |
| | 9,566 |
| | (17 | )% | | 15,232 |
| | 17,770 |
| | (14 | )% |
| Other income, net | 5,871 |
| | 3,971 |
| | 48 | % | | 11,349 |
| | 8,654 |
| | 31 | % |
| | | | | | | | | | | | |
| Earnings before income taxes | 103,596 |
| | 96,481 |
| | 7 | % | | 173,847 |
| | 157,458 |
| | 10 | % |
| Provision for income taxes | (23,524 | ) | | (21,693 | ) | | 8 | % | | (38,182 | ) | | (39,027 | ) | | (2 | )% |
| Net earnings | $ | 80,072 |
| | $ | 74,788 |
| | |
| | $ | 135,665 |
| | $ | 118,431 |
| | |
|
| | | | | | | | | | | | |
| New orders | $ | 600,769 |
| | $ | 700,104 |
| | (14 | )% | | $ | 1,347,507 |
| | $ | 1,305,007 |
| | 3 | % |
| | | | | | | | | | | | |
Components of sales and operating income increase (decrease):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2019 vs. 2018 | | | | 2019 vs. 2018 | | |
| Sales | | Operating Income | | Sales | | Operating Income |
| Organic | 3 | % | | 8 | % | | 3 | % | | 5 | % |
| Acquisitions | 1 | % | | — | % | | 2 | % | | 1 | % |
| Foreign currency | (1 | %) | | 1 | % | | (1 | %) | | 1 | % |
| Total | 3 | % | | 9 | % | | 4 | % | | 7 | % |
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 vs. 2018 | | 2019 vs. 2018 |
| | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | 3 | % | | 3 | % | | 3 | % | | 4 | % |
| Acquisitions | 1 | % | | — | % | | 2 | % | | 2 | % |
| Foreign currency | (1 | %) | | 1 | % | | (1 | %) | | 1 | % |
| Total | 3 | % | | 4 | % | | 4 | % | | 7 | % |
Sales for the secondthird quarter of 2019 increased $19 million, or 3%, to $639$615 million, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial and PowerDefense segments increased $6$10 million and $14$11 million, respectively, with sales from the DefensePower segment decreasing $1$2 million.
Sales during the sixnine months ended JuneSeptember 30, 2019 increased $50$69 million, or 4%, to $1,217$1,832 million, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial, Defense, and Power segments increased $3$12 million, $1$13 million, and $46$44 million, respectively. Changes in sales by segment are discussed in further detail in the results by business segment section below.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Operating income in the secondthird quarter of 2019 increased $4$9 million, or 4%9%, to $106 million, and operating margin of 16.5% was flatincreased 90 basis points to 17.2% compared with the same period in 2018. The increases in operating income and operating margin were primarily due to higher sales volume and a favorable shift in mix in our defense electronics products in the Defense segment and favorable overhead absorption on higher naval defense sales in the Commercial/Industrial segment. These increases were partially offset by lower sales on the AP1000 China Direct program in the Power segment.
Operating income during the sixnine months ended JuneSeptember 30, 2019 increased $11$20 million, or 7%, to $178$283 million and operating margin increased 3050 basis points to 14.6%15.5%, compared with the same period in 2018. The increases in operating income for each of the respective periodsand operating margin were primarily due to favorable overhead absorption on higher naval defense sales and the absence of first year purchase accounting costs from our DRG acquisition in the Power
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
segment. Operating income and operating margin also benefited from the recognition of a gain on a building sale in the Commercial/Industrial segment. These increases were partially offset by decreases in the Defense segment primarily due to higher research and development expenses and favorable contract adjustments within our naval defense business in the prior year period which did not recur as well as an unfavorable shift in mix in the Defense segment. Operating income for the six months ended June 30, 2019 also benefited from the incremental impact of our DRG acquisition.recur.
Non-segment operating expense in the secondthird quarter and six months ended June 30, 2019 increaseddecreased $3 million, or 37%,26 %, to $10$7 million, and $2 million, or 13%, to $20 million, respectively, from the comparable prior year periods. These increases were primarily due to higher 401(k) expenses and higher foreign currency losses.lower environmental costs. Non-segment operating expense for the nine months ended September 30, 2019 of $27 million was essentially flat compared to the prior year period.
Interest expense in the secondthird quarter and sixof $8 million was essentially flat compared to the prior year period. During the nine months ended JuneSeptember 30, 2019, interest expense decreased $2 million, or 17%, to $8 million and $3 million, or 14%10%, to $15$23 million, respectively, primarily due to a discretionary $50 million prepayment on our 2013 Notes in October 2018.
The effective tax rate for the three months ended JuneSeptember 30, 2019 of 22.7% was essentially flat20.6% increased compared to an effective tax rate of 22.5%19.9% in the prior year period. The increase in rate was primarily driven by additional withholding tax expense recognized during the current period as well as the absence of a favorable prepaid and repair method change recognized in the prior year period. These increases were partially offset by the benefit of the Foreign Derived Intangible Income ("FDII") deduction recognized during the current period. The effective tax rate for the sixnine months ended JuneSeptember 30, 2019 of 22.0%21.5% decreased as compared to an effective tax rate of 24.8%23.0% in the prior year period, primarily due to additional tax expense associated with the Tax Act for foreign withholding taxes recognized in the prior year period. This decrease wasperiod as well as the current period benefit of the FDII deduction. These decreases were partially offset by the absence of a lower discrete tax benefit related to share-based compensationfavorable prepaid and repair method change recognized in the currentprior year period.
Comprehensive income in the secondthird quarter of 2019 was $82$59 million, compared to comprehensive income of $34$76 million in the prior year period. The change was primarily due to the following:
•Net earnings increased $5$8 million, primarily due to higher operating income.
•Foreign currency translation adjustments in the secondthird quarter resulted in a $1$25 million comprehensive gain,loss, compared to a $44$2 million comprehensive loss in the prior year period. The comprehensive gainloss during the current period was primarily attributed to increases in the Canadian dollar, partially offset by decreases in the British Pound.Pound and Euro.
Comprehensive income for the sixnine months ended JuneSeptember 30, 2019 was $148$207 million, compared to comprehensive income of $96$171 million in the prior year period. The change was primarily due to the following:
•Net earnings increased $17$25 million, primarily due to higher operating income, lower interest expense, and higher other income, net.
•Foreign currency translation adjustments for the sixnine months ended JuneSeptember 30, 2019 resulted in a $9$16 million comprehensive gain,loss, compared to a $28$31 million comprehensive loss in the prior period. The comprehensive gainloss during the current period was primarily attributed to decreases in the British Pound and Euro, partially offset by increases in the Canadian dollar.
•Pension adjustments for the nine months ended September 30, 2019 resulted in a $5 million gain, compared to a $9 million gain in the prior year period, primarily due to lower loss amortization during the current period.
New orders decreased $99increased $132 million during the secondthird quarter from the comparable prior year period. The decreaseincrease was primarily duedue to orders received on the timing of customer funding on naval defense orders in the Power segment, partially offset by737 platform as well as the timing of aerospace defense and naval defense orders in the Defense segment.Commercial/Industrial
New orders increased $43 million during the six months ended June 30, 2019
from the comparable prior year period, primarily due to the timing of naval defense orders in both the Commercial/Industrial and Defense segments.
RESULTS BY BUSINESS SEGMENT
Commercial/Industrial
The following tables summarize sales, operating income and margin, and new orders within the Commercial/Industrial segment.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
New ordersincreased $175 million during the nine months ended September 30, 2019 from the comparable prior year period. The increase was primarily due to orders received on the 737 platform as well as the timing of naval defense and aerospace defense orders in the Commercial/Industrial segment. New orders also benefited from the timing of customer funding in the Power segment.
RESULTS BY BUSINESS SEGMENT
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | $ | 318,267 |
| | $ | 312,463 |
| | 2 | % | | $ | 611,774 |
| | $ | 609,104 |
| | — | % |
| Operating income | 56,236 |
| | 51,736 |
| | 9 | % | | 95,682 |
| | 90,961 |
| | 5 | % |
| Operating margin | 17.7 | % | | 16.6 | % | | 110 | bps | | 15.6 | % | | 14.9 | % | | 70 | bps |
| New orders | $ | 293,962 |
| | $ | 302,537 |
| | (3 | %) | | $ | 659,218 |
| | $ | 631,815 |
| | 4 | % |
Commercial/Industrial
The following tables summarize sales, operating income and margin, and new orders within the Commercial/Industrial segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | $ | 304,888 | | | $ | 295,239 | | | 3 | % | | $ | 916,662 | | | $ | 904,343 | | | 1 | % |
| Operating income | 48,086 | | | 44,786 | | | 7 | % | | 143,768 | | | 135,747 | | | 6 | % |
| Operating margin | 15.8 | % | | 15.2 | % | | 60 bps | | | 15.7 | % | | 15.0 | % | | 70 bps | |
| New orders | $ | 367,042 | | | $ | 275,289 | | | 33 | % | | $ | 1,026,260 | | | $ | 907,104 | | | 13 | % |
Components of sales and operating income increase (decrease):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2019 vs. 2018 | | | | 2019 vs. 2018 | | |
| Sales | | Operating Income | | Sales | | Operating Income |
| Organic | 4 | % | | 7 | % | | 3 | % | | 5 | % |
| Acquisitions | — | % | | — | % | | — | % | | — | % |
| Foreign currency | (1 | %) | | — | % | | (2 | %) | | 1 | % |
| Total | 3 | % | | 7 | % | | 1 | % | | 6 | % |
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 vs. 2018 | | 2019 vs. 2018 |
| | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | 3 | % | | 8 | % | | 2 | % | | 4 | % |
| Acquisitions | — | % | | — | % | | — | % | | — | % |
| Foreign currency | (1 | %) | | 1 | % | | (2 | %) | | 1 | % |
| Total | 2 | % | | 9 | % | | — | % | | 5 | % |
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 secondthird quarter increased $6$10 million, or 2%3%, to $318$305 million from the prior year period. period, primarily due to higher sales in the aerospace defense, commercial aerospace, and power generation markets. In the aerospace defense market, sales increased $7 million primarily due to higher sales of actuation systems on the F-35 fighter jet program. Sales in the commercial aerospace market increased $8 million primarily due to higher demand for sensors products and surface treatment services. Sales in the power generation market benefited $5 million primarily due to higher domestic and international valve production. These increases were partially offset by lower general industrial sales of $13 million primarily due to lower demand for industrial vehicles, industrial valves, and surface treatment services. Unfavorable foreign currency translation, which is reflected in the results above, reduced sales $3 million.
Sales during the sixnine months ended JuneSeptember 30, 2019 increased $3$12 million, or less than 1%, to $612$917 million from the prior year period. The increases for each of the respective periods wereperiod, primarily due to higher sales in the aerospace defense and commercial aerospace markets. In the aerospace defense market, sales in the second quarter and six months ended June 30, 2019 increased $5$12 million primarily due to higher sales of actuation systems on the F-35 fighter jet program. Sales in the commercial aerospace market increased $4$12 million in the second quarter and six months ended June 30, 2019 primarily due to higher demand for sensors products.products and surface treatment services. These increases were partially offset by lower general industrial sales of international surface treatment services and valves in the power generation market. In the naval defense market, sales in the second quarter increased$10 million primarily due to higher production on the Virginia-class submarine program, with sales during the six months ended June 30, 2019 decreasing primarily due to the timinglower
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of valve production on the CVN-80 aircraft carrier program.
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
demand for industrial vehicles, industrial valves, and surface treatment services. Unfavorable foreign currency translation, which is reflected in the results above, reduced sales $4 million and $8 million in the second quarter and six months ended June 30, 2019, respectively.$11 million.
Operating income during the secondthird quarter increased $5$3 million, or 9%7%, to $56$48 million from the prior year period, while operating margin increased 11060 basis points to 17.7%15.8%. The increases in operating income and operating margin were primarily due to favorable overhead absorption on higher naval defense sales, partially offset by higher research and development expenses and the impact of tariffs.
Operating income during the sixnine months ended JuneSeptember 30, 2019 increased $5$8 million, or 5%6%, to $96$144 million from the prior year period, while operating margin increased 70 basis points to 15.6%15.7%. The respective increases in operating income and operating margin were primarily due to the recognition of a gain on a building sale as well as the benefits of our ongoing margin improvement initiatives. These increases were partially offset by higher research and development expenses and the impact of tariffs.
New orders decreased $9increased $92 million and $119 million during the secondthird quarter and nine months ended September 30, 2019, respectively, from the comparable prior year period.periods. The decrease wasincreases were primarily duedue to a decline in new orders for industrial vehicles and surface treatment services. New orders increased $27 million duringreceived on the six months ended June 30, 2019 from the comparable prior year period, primarily due to737 platform as well as the timing of naval defense and aerospace defense orders.
Defense
The following tables summarize sales, operating income and margin, and new orders within the Defense segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | $ | 149,854 | | | $ | 138,372 | | | 8 | % | | $ | 415,838 | | | $ | 403,450 | | | 3 | % |
| Operating income | 38,210 | | | 33,615 | | | 14 | % | | 85,524 | | | 91,984 | | | (7 | %) |
| Operating margin | 25.5 | % | | 24.3 | % | | 120 bps | | | 20.6 | % | | 22.8 | % | | (220 bps) | |
| New orders | $ | 94,003 | | | $ | 114,794 | | | (18 | %) | | $ | 410,624 | | | $ | 408,049 | | | 1 | % |
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | $ | 144,962 |
| | $ | 146,177 |
| | (1 | %) | | $ | 265,984 |
| | $ | 265,078 |
| | — | % |
| Operating income | 29,661 |
| | 38,641 |
| | (23 | %) | | 47,314 |
| | 58,369 |
| | (19 | %) |
| Operating margin | 20.5 | % | | 26.4 | % | | (590 bps) |
| | 17.8 | % | | 22.0 | % | | (420 bps) |
|
| New orders | $ | 185,796 |
| | $ | 159,365 |
| | 17 | % | | $ | 316,621 |
| | $ | 293,254 |
| | 8 | % |
Components of sales and operating income increase (decrease):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2019 vs. 2018 | | | | 2019 vs. 2018 | | |
| Sales | | Operating Income | | Sales | | Operating Income |
| Organic | 6 | % | | 12 | % | | 2 | % | | (9 | %) |
| Acquisitions | 3 | % | | 1 | % | | 2 | % | | — | % |
| Foreign currency | (1 | %) | | 1 | % | | (1 | %) | | 2 | % |
| Total | 8 | % | | 14 | % | | 3 | % | | (7 | %) |
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 vs. 2018 | | 2019 vs. 2018 |
| | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | (3 | %) | | (25 | %) | | — | % | | (21 | %) |
| Acquisitions | 3 | % | | — | % | | 1 | % | | (1 | %) |
| Foreign currency | (1 | %) | | 2 | % | | (1 | %) | | 3 | % |
| Total | (1 | %) | | (23 | %) | | — | % | | (19 | %) |
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 secondthird quarter decreased $1increased $11 million, or 1%8%, to $145$150 million from the prior year period, asprimarily due to higher sales in the groundaerospace defense and naval defense markets. Sales in the aerospace defense market increased $10 million primarily due to higher demand for embedded computing equipment on the F-35 fighter jet program as well as the Apache and Seahawk helicopter programs. Aerospace defense sales also benefited from the incremental impact of our TCG acquisition. In the naval defense market, sales increased $7 million primarily due to higher demand for embedded computing equipment on the Virginia-class submarine program. These increases were partially offset by lower sales of embedded computing equipment on various international programs in the ground defense market.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Sales during the nine months ended September 30, 2019 increased $13 million, or 3%, to $416 million from the prior year period. In the aerospace defense market, sales increased $9 million primarily due to higher demand for embedded computing equipment on the Apache helicopter program as well as the incremental impact of our TCG acquisition. Sales in the naval defense and general industrial markets. Sales inmarket benefited $6 million primarily due to higher demand for embedded computing equipment on the Virginia-class submarine program. In the ground defense market, benefited primarily fromwe experienced higher production levels on the Abrams tank platform. In the naval defense market, we experienced lower sales of embedded computing equipment on various programs. The timing of an automotive contract completed in the prior year resulted in lower industrial controls sales in the general industrial market. Sales in the aerospace defense and commercial aerospace markets were essentially flat.
Sales during the six months ended June 30, 2019 increased $1 million, or less than 1%, to $266 million from the prior year period. Sales in the ground defense market benefited primarily from higher production levels on the Abrams tank platform. In the commercial aerospace market, we experienced higher demand for avionics and electronics equipment on various domestic and international platforms. These increases were partially offset by lower industrial controls sales in the general industrial market due to the timing of an automotive contract completed in the prior year period. Sales in the aerospace defense and naval defense markets were essentially flat.
Operating income during the secondthird quarter decreased $9increased $5 million, or 23%14%, to $30$38 million compared to the prior year period, and operating margin decreased 590increased 120 basis points from the prior year quarter to 20.5%25.5%. These increases were primarily due to higher sales volume and a favorable shift in mix in our defense electronics products, partially offset by higher research and development expenses.
Operating income during the sixnine months ended JuneSeptember 30, 2019 decreased $11$6 million, or 19%7%, to $47$86 million, and operating margin decreased 420220 basis points from the prior year period to 17.8%20.6%. The decreases in operating income and operating margin for each of the respective periods were primarily due to an unfavorable shift in mix, higher research and development expenses and favorable contract adjustments within our naval defense business in the prior year period which did not recur.
New orders increased $26 million and $23decreased $21 million during the secondthird quarter and six months ended June 30, 2019 from the comparable prior year periods,period primarily due to the timing of aerospace defense andorders.
New orders during the nine months ended September 30, 2019 increased $3 million from the comparable prior year period primarily due to the timing of naval defense orders. This increase was partially offset by the timing of aerospace defense orders.
Power
The following tables summarize sales, operating income and margin, and new orders within the Power segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | $ | 160,138 | | | $ | 161,782 | | | (1 | %) | | $ | 499,690 | | | $ | 455,420 | | | 10 | % |
| Operating income | 26,362 | | | 28,249 | | | (7 | %) | | 80,650 | | | 62,792 | | | 28 | % |
| Operating margin | 16.5 | % | | 17.5 | % | | (100 bps) | | | 16.1 | % | | 13.8 | % | | 230 bps | |
| New orders | $ | 185,563 | | | $ | 124,077 | | | 50 | % | | $ | 557,231 | | | $ | 504,015 | | | 11 | % |
Components of sales and operating income increase (decrease):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | Nine Months Ended | | |
| September 30, | | | | September 30, | | |
| 2019 vs. 2018 | | | | 2019 vs. 2018 | | |
| Sales | | Operating Income | | Sales | | Operating Income |
| Organic | (1 | %) | | (7 | %) | | 5 | % | | 22 | % |
| Acquisitions | — | % | | — | % | | 5 | % | | 6 | % |
| Foreign currency | — | % | | — | % | | — | % | | — | % |
| Total | (1 | %) | | (7 | %) | | 10 | % | | 28 | % |
Sales in the Power segment are primarily to the power generation and naval defense markets.
Sales in the third quarter decreased $2 million, or 1%, to $160 million from the prior year period. In the naval defense market, sales increased $17 million primarily due to increased production on the Virginia-class submarine and CVN-80 aircraft carrier programs as well as higher service center sales. This increase was more than offset by lower sales of $19 million in the power
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Sales | $ | 175,767 |
| | $ | 161,658 |
| | 9 | % | | $ | 339,552 |
| | $ | 293,638 |
| | 16 | % |
| Operating income | 30,069 |
| | 19,201 |
| | 57 | % | | 54,288 |
| | 34,543 |
| | 57 | % |
| Operating margin | 17.1 | % | | 11.9 | % | | 520 | bps | | 16.0 | % | | 11.8 | % | | 420 | bps |
| New orders | $ | 121,011 |
| | $ | 238,202 |
| | (49 | %) | | $ | 371,668 |
| | $ | 379,938 |
| | (2 | %) |
Components of sales and operating income increase (decrease):
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 vs. 2018 | | 2019 vs. 2018 |
| | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | 9 | % | | 57 | % | | 8 | % | | 47 | % |
| Acquisitions | — | % | | — | % | | 8 | % | | 10 | % |
| Foreign currency | — | % | | — | % | | — | % | | — | % |
| Total | 9 | % | | 57 | % | | 16 | % | | 57 | % |
Sales in the Power segment are primarily to the power generation and naval defense markets.
Sales in the second quarter increased $14 million, or 9%, to $176 million from the prior year period. In the naval defense market, sales increased $18 million primarily due to increased production on the Virginia-class submarine program and higher aircraft carrier sales. The naval defense market also benefited from higher spares and service center sales. This increase was partially offset by lower sales in the power generation market primarily due to the timing of production on the AP1000 China Direct program.program and lower domestic aftermarket sales.
Sales forduring the sixnine months ended JuneSeptember 30, 2019 increased $46$44 million, or 16%10%, to $340$500 million from the prior year period, primarily due to the impact of our DRG acquisition in the second quarter of 2018, which contributed incremental sales of $31$42 million during the current period. Excluding the impact of DRG, sales in the naval defense market increased $18$24 million primarily due to increased production on the Virginia-class submarine and CVN-80 aircraft carrier programs. These increases were partially offset by lower sales of $25 million in the power generation market primarily due to the timing of production on the AP1000 China Direct program.
Operating income in the secondthird quarter of 2019 increased $11decreased $2 million, or 57%7%, to $30$26 million, and operating margin increased 520decreased 100 basis points from the prior year period to 17.1%16.5%. These decreases were primarily due to lower sales on the AP1000 China Direct program, partially offset by favorable overhead absorption on higher naval defense sales and the benefits of our ongoing margin improvement initiatives.
Operating income during the sixnine months ended JuneSeptember 30, 2019 increased $20$18 million, or 57%28%, to $54$81 million, and operating margin increased 420230 basis points from the prior year period to 16.0%16.1%. The increases in operating income and operating margin for each of the respective periods were primarily due to favorable overhead absorption on higher naval defense sales and the absence of first year purchase accounting costs from our DRG acquisition.acquisition, partially offset by lower sales on the AP1000 China Direct program.
New orders decreased $117increased $61 million and $8$53 million during the secondthird quarter and sixnine months ended JuneSeptember 30, 2019 from the comparable prior year periods, primarily due to the timing of customer funding in the naval defense market.
SUPPLEMENTARY INFORMATION
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 | | | | | | Nine Months Ended | | | | |
| September 30, | | | | | | September 30, | | | | |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Defense markets: | | | | | | | | | | | |
| Aerospace | $ | 110,742 | | | $ | 94,002 | | | 18 | % | | $ | 293,955 | | | $ | 272,809 | | | 8 | % |
| Ground | 22,231 | | | 25,167 | | | (12 | %) | | 69,383 | | | 68,463 | | | 1 | % |
| Naval | 143,430 | | | 116,620 | | | 23 | % | | 424,371 | | | 352,456 | | | 20 | % |
| Total Defense | $ | 276,403 | | | $ | 235,789 | | | 17 | % | | $ | 787,709 | | | $ | 693,728 | | | 14 | % |
| | | | | | | | | | | |
| Commercial markets: | | | | | | | | | | | |
| Aerospace | $ | 109,015 | | | $ | 101,872 | | | 7 | % | | $ | 320,237 | | | $ | 305,893 | | | 5 | % |
| Power Generation | 88,543 | | | 106,842 | | | (17 | %) | | 278,194 | | | 307,477 | | | (10 | %) |
| General Industrial | 140,919 | | | 150,890 | | | (7 | %) | | 446,050 | | | 456,115 | | | (2 | %) |
| Total Commercial | $ | 338,477 | | | $ | 359,604 | | | (6 | %) | | $ | 1,044,481 | | | $ | 1,069,485 | | | (2 | %) |
| | | | | | | | | | | |
| Total Curtiss-Wright | $ | 614,880 | | | $ | 595,393 | | | 3 | % | | $ | 1,832,190 | | | $ | 1,763,213 | | | 4 | % |
Note: Certain amounts in the prior year have been reclassed to conform to the current year presentation.
Defense markets
Sales during the third quarter increased $41 million, or 17%, to $276 million against the comparable prior year period, primarily due to higher sales in the naval defense and aerospace defense markets. The naval defense market benefited from increased
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
|
| | | | | | | | | | | | | | | | | | | | | |
| Net Sales by End Market | Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| (In thousands) | 2019 | | 2018 | | % change | | 2019 | | 2018 | | % change |
| Defense markets: | | | | | | | | | | | |
| Aerospace | $ | 104,426 |
| | $ | 99,654 |
| | 5 | % | | $ | 183,213 |
| | $ | 178,808 |
| | 2 | % |
| Ground | 26,394 |
| | 20,777 |
| | 27 | % | | 47,151 |
| | 43,296 |
| | 9 | % |
| Naval | 149,853 |
| | 132,347 |
| | 13 | % | | 280,941 |
| | 235,835 |
| | 19 | % |
| Total Defense | $ | 280,673 |
| | $ | 252,778 |
| | 11 | % | | $ | 511,305 |
| | $ | 457,939 |
| | 12 | % |
| | | | | | | | | | | | |
| Commercial markets: | | | | | | | | | | | |
| Aerospace | $ | 108,000 |
| | $ | 104,617 |
| | 3 | % | | $ | 211,222 |
| | $ | 204,021 |
| | 4 | % |
| Power Generation | 93,171 |
| | 102,316 |
| | (9 | %) | | 189,652 |
| | 200,635 |
| | (5 | %) |
| General Industrial | 157,152 |
| | 160,587 |
| | (2 | %) | | 305,131 |
| | 305,225 |
| | — | % |
| Total Commercial | $ | 358,323 |
| | $ | 367,520 |
| | (3 | %) | | $ | 706,005 |
| | $ | 709,881 |
| | (1 | %) |
| | | | | | | | | | | | |
| Total Curtiss-Wright | $ | 638,996 |
| | $ | 620,298 |
| | 3 | % | | $ | 1,217,310 |
| | $ | 1,167,820 |
| | 4 | % |
Note: Certain amountsproduction on the Virginia-class submarine and CVN-80 aircraft carrier programs, which contributed higher sales of $13 million and $6 million, respectively. Sales in the prior year have been reclassedaerospace defense market increased primarily due to conform tohigher demand for embedded computing equipment on the current year presentation.Apache and Seahawk helicopter programs and higher sales of actuation systems and embedded computing equipment on the F-35 fighter jet program.
Defense markets
Sales during the second quarternine months ended September 30, 2019 increased $28$94 million, or 11%14%, to $281$788 million, against the comparable prior year period, primarily due to higher sales in the naval defense and groundaerospace defense markets. The naval defense market benefited from increased production on the Virginia-class submarine program, which contributed $12 million in sales. Sales in the ground defense market increased primarily due to higher production levels on the Abrams tank platform.
Sales during the six months ended June 30, 2019 increased $53 million, or 12%, to $511 million, primarily due to higher sales in the naval defense market. This increase was primarily due to the impact of our DRG acquisition in the second quarter of 2018, which contributed incremental sales of $31$42 million during the current period. Excluding the impact of DRG, sales in the naval defense market increased $14$30 million primarily due to increased production on the Virginia-class submarine program. Sales in the groundaerospace defense market increased primarily due to higher production levelsdemand for embedded computing equipment on various helicopter programs and higher sales of actuation systems on the Abrams tank platform.F-35 fighter jet program.
Commercial markets
Sales during the secondthird quarter decreased $9$21 million, or 3%6%, to $358$338 million against the comparable prior year period, while sales during the sixnine months ended JuneSeptember 30, 2019 decreased $4$25 million, or 1%2%, to $706$1,044 million. The decreases in each of the respective periods were primarily due to lower sales in the power generation market,and general industrial markets, partially offset by increases in the commercial aerospace market. In the power generation market, we experienced lower sales due to the timing of production on the AP1000 China Direct program as well asand lower international sales ofdomestic aftermarket sales. Sales in the general industrial market decreased primarily due to lower demand for industrial vehicles, industrial valves, and surface treatment services and valves.services. Sales in the commercial aerospace market increased primarily due tobenefited from higher demand for sensors products.products and surface treatment services.
LIQUIDITY AND CAPITAL RESOURCES
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
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
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.
| | | | | | | | | | | |
| Condensed Consolidated Statements of Cash Flows | Nine Months Ended | | |
| (In thousands) | September 30, 2019 | | September 30, 2018 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 159,015 | | | $ | 98,975 | |
| Investing activities | (90,052) | | | (237,187) | |
| Financing activities | (41,367) | | | (80,669) | |
| Effect of exchange-rate changes on cash | (5,950) | | | (10,322) | |
| Net increase (decrease) in cash and cash equivalents | 21,646 | | | (229,203) | |
|
| | | | | | | |
| Condensed Consolidated Statements of Cash Flows | Six Months Ended |
| (In thousands) | June 30, 2019 | | June 30, 2018 |
| Cash provided by (used in): | | | |
| Operating activities | $ | 40,386 |
| | $ | 26,685 |
|
| Investing activities | (74,773 | ) | | (230,489 | ) |
| Financing activities | (26,712 | ) | | (45,934 | ) |
| Effect of exchange-rate changes on cash | 1,377 |
| | (6,484 | ) |
| Net decrease in cash and cash equivalents | (59,722 | ) | | (256,222 | ) |
Net cash provided by operating activities increased $14$60 million from the prior year period. The increase in net cash provided is primarily due to a prior year period voluntary pension contribution of $50 million. Net cash provided during the current period also benefited from higher collections of accounts receivable and lower inventory receipts, partially offset by higher disbursements.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Net cash used for investing activities decreased $156147 million from the comparable prior year period primarily due to less cash used for acquisitions and higher capital expenditures in the current period.period, partially offset by higher capital expenditures. The Corporation acquired one business during the sixnine months ended JuneSeptember 30, 2019 for approximately $50 million. The Corporation acquired one business during the sixnine months ended JuneSeptember 30, 2018 for approximately $213$210 million. Capital expenditures for the sixnine months ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018 were $33$50 million and $20$30 million, respectively. The increase in capital expenditures was primarily due to additional investment related to the new DRG facility in Charleston, South Carolina.
Financing Activities
Debt
The Corporation’s debt outstanding had an average interest rate of 3.6% and 3.7% for the three and nine months ended September 30, 2019, respectively, and 3.7% for both the three and sixnine months ended June 30, 2019 and JuneSeptember 30, 2018. The Corporation’s average debt outstanding was $750 million for both the three and sixnine months ended JuneSeptember 30, 2019 and $905$800 million and $853$835 million for the three and sixnine months ended JuneSeptember 30, 2018, respectively.
Revolving Credit Agreement
As of JuneSeptember 30, 2019, the Corporation had no outstanding borrowings under the 2012 Senior Unsecured Revolving Credit Agreement (the “Credit Agreement” or “credit facility”) and $30$29 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement as of JuneSeptember 30, 2019 was $470$471 million which could be borrowed without violating any of our debt covenants.
Repurchase of common stock
During the sixnine months ended JuneSeptember 30, 2019, the Corporation used $25$38 million of cash to repurchase approximately 220,000322,000 outstanding shares under its share repurchase program. During the sixnine months ended JuneSeptember 30, 2018, the Corporation used $46$79 million of cash to repurchase approximately 357,000608,000 outstanding shares under its share repurchase program.
Dividends
The Corporation made dividend payments of $6$14 million and $7$13 million during the sixnine months ended JuneSeptember 30, 2019 and JuneSeptember 30, 2018, respectively.
Debt Compliance
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
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 JuneSeptember 30, 2019, we had the ability to borrow additional debt of $1.6$1.7 billion without violating our debt to capitalization covenant.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
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 2018 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 27, 2019, 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the sixnine months ended JuneSeptember 30, 2019.2019. 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 2018 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
As of JuneSeptember 30, 2019,, 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 JuneSeptember 30, 2019 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 JuneSeptember 30, 2019, there have been no 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) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Corporation and its subsidiaries are subject to various pending claims, lawsuits, and contingent liabilities. We do not believe that the disposition of any of these matters, individually or in the aggregate, will have a material adverse effect on our consolidated financial condition, results of operations, and cash flows.
In December 2013, the Corporation, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL), which was 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. We maintain 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. All parties have agreed in principle to participate in a formal mediation in lateNovember 2019 with the intention of settling this claim. In an effort to induce the parties to participate in the formal mediation, CNRL agreed to reduce its claim to approximately $400 million, which reflects the monetary amount of property damage incurred as result of the fire and explosion. We are currently unable to estimate an amount, or range of potential losses, if any, from this matter. We believe that we have adequate legal defenses and intend to defend this matter vigorously. Our 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.
We have been named in pending lawsuits that allege injury from exposure to asbestos. To date, we have not been found liable or paid any material sum of money in settlement in any case. We believe that the minimal use of asbestos in our past operations as well as our acquired businesses and the relatively non-friable condition of asbestos in our historical products make it unlikely that we will face material liability in any asbestos litigation, whether individually or in the aggregate. We maintain insurance coverage and indemnification agreements for these potential liabilities and we believe adequate coverage exists to cover any unanticipated asbestos liability.
Item 1A. RISK FACTORS
There have been no material changes in our Risk Factors during the sixnine months ended JuneSeptember 30, 2019.2019. Information regarding our Risk Factors is more fully described in Item “1A. Risk Factors” of our 2018 Annual Report on Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table provides information about our repurchase of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended JuneSeptember 30, 20192019.
.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Number of shares purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program | | Maximum Dollar amount of shares that may yet be Purchased Under the Program |
| July 1 - July 31 | | 34,719 | | | $ | 126.72 | | | 254,908 | | | $ | 221,332,428 | |
| August 1 - August 31 | | 36,179 | | | 121.61 | | | 291,087 | | | 216,932,759 | |
| September 1 - September 30 | | 31,084 | | | 128.67 | | | 322,171 | | | 212,933,029 | |
| For the quarter ended September 30, 2019 | | 101,982 | | | $ | 125.50 | | | 322,171 | | | $ | 212,933,029 | |
|
| | | | | | | | | | | | | | |
| | | Total Number of shares purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program | | Maximum Dollar amount of shares that may yet be Purchased Under the Program |
| April 1 - April 30 | | 37,249 |
| | $ | 112.66 |
| | 147,713 |
| | $ | 34,129,633 |
|
| May 1 - May 31 | | 38,385 |
| | 114.54 |
| | 186,098 |
| | 229,732,917 |
|
| June 1 - June 30 | | 34,091 |
| | 117.36 |
| | 220,189 |
| | 225,731,999 |
|
| For the quarter ended June 30, 2019 | | 109,725 |
| | $ | 114.78 |
| | 220,189 |
| | $ | 225,731,999 |
|
On December 12, 2018, the Corporation authorized $100 million of share repurchases through a 10b5-1 program. Of this authorization, the Corporation used $50 million for opportunistic share repurchases in December 2018. On May 15, 2019, the
Corporation authorized an additional $200 million of share repurchases. For the current year, the Corporation expects to repurchase at least $50 million of additional shares through a 10b5-1 program.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
There have been no material changes in our procedures by which our security holders may recommend nominees to our board of directors during the sixnine months ended JuneSeptember 30, 2019.2019. Information regarding security holder recommendations and nominations for directors is more fully described in the section entitled “Stockholder Recommendations and Nominations for Director” of our 2019 Proxy Statement on Schedule 14A, which is incorporated by reference to our 2018 Annual Report on Form 10-K.
Item 6. EXHIBITS
| | | | | | | | | | | | | | | | | |
| | | Incorporated by Reference | | Filed |
| Exhibit No. | | Exhibit Description | Form | Filing Date | Herewith |
| | | | | |
| 3.1 | | | | 8-A12B/A | May 24, 2005 | |
| | | | | |
| 3.2 | | | Incorporated by Reference | Filed |
Exhibit No. | | Exhibit Description | Form | Filing Date | Herewith |
| | | | | |
3.1 | | | 8-A12B/A | May 24, 2005 | |
| | | | | |
3.2 | | | 8-K | May 18, 2015 | |
| | | | | |
| 10.1 | | | 10-Q | August 1, 2019 | X |
| | | | | |
| 10.2 | | | 10-Q | August 1, 2019 | X |
| | | | | |
| 31.1 | | | | | | X |
| | | | | |
| 31.2 | | | | | | X |
| | | | | |
| 32 | | | | | | X |
| | | | | |
| 101.INS | | XBRL Instance Document | | | X |
| | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | X |
| | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | X |
| | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | X |
| | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | X |
| | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | X |
| | | | | |
| * | | Indicates contract or compensatory plan or arrangement | | | |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
CURTISS-WRIGHT CORPORATION
(Registrant)
By: /s/ Glenn E. Tynan
Glenn E. Tynan
Vice President and Chief Financial Officer
Dated: August 1,October 31, 2019