CURTISS WRIGHT CORP - Quarter Report: 2021 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2021
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _______
Commission File Number 1-134
CURTISS-WRIGHT CORPORATION
(Exact name of Registrant as specified in its charter)
| Delaware | 13-0612970 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 130 Harbour Place Drive, Suite 300 | |||||||||||
| Davidson, | North Carolina | 28036 | |||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(704) 869-4600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
| Common Stock | CW | New York Stock Exchange | ||||||
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.
Yes ☒ No ☐
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).
Yes ☒ No ☐
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.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | |||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||||||||||
| Emerging growth company | ☐ | |||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share: 40,883,999 shares as of July 31, 2021.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
TABLE of CONTENTS
| PART I – FINANCIAL INFORMATION | PAGE | ||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II – OTHER INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
Page 3
PART 1- FINANCIAL INFORMATION
Item 1. Financial Statements
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Product sales | $ | 515,392 | $ | 466,445 | $ | 1,024,367 | $ | 964,374 | |||||||||||||||
| Service sales | 106,103 | 83,602 | 194,187 | 186,904 | |||||||||||||||||||
| Total net sales | 621,495 | 550,047 | 1,218,554 | 1,151,278 | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Cost of product sales | 331,881 | 309,152 | 661,335 | 639,965 | |||||||||||||||||||
| Cost of service sales | 64,895 | 54,869 | 122,743 | 124,708 | |||||||||||||||||||
| Total cost of sales | 396,776 | 364,021 | 784,078 | 764,673 | |||||||||||||||||||
| Gross profit | 224,719 | 186,026 | 434,476 | 386,605 | |||||||||||||||||||
| Research and development expenses | 23,194 | 18,269 | 45,057 | 36,576 | |||||||||||||||||||
| Selling expenses | 29,564 | 25,193 | 59,160 | 56,781 | |||||||||||||||||||
| General and administrative expenses | 77,378 | 76,606 | 150,610 | 153,264 | |||||||||||||||||||
| Restructuring expenses | — | 10,609 | — | 12,189 | |||||||||||||||||||
| Operating income | 94,583 | 55,349 | 179,649 | 127,795 | |||||||||||||||||||
| Interest expense | 10,180 | 8,515 | 20,139 | 16,004 | |||||||||||||||||||
| Other income (expense), net | 440 | (4,105) | 5,283 | 1,427 | |||||||||||||||||||
| Earnings before income taxes | 84,843 | 42,729 | 164,793 | 113,218 | |||||||||||||||||||
| Provision for income taxes | (23,435) | (11,711) | (43,916) | (30,439) | |||||||||||||||||||
| Net earnings | $ | 61,408 | $ | 31,018 | $ | 120,877 | $ | 82,779 | |||||||||||||||
| Net earnings per share: | |||||||||||||||||||||||
| Basic earnings per share | $ | 1.50 | $ | 0.75 | $ | 2.95 | $ | 1.97 | |||||||||||||||
| Diluted earnings per share | $ | 1.49 | $ | 0.74 | $ | 2.94 | $ | 1.95 | |||||||||||||||
| Dividends per share | 0.18 | 0.17 | 0.35 | 0.34 | |||||||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | 40,915 | 41,629 | 40,921 | 42,092 | |||||||||||||||||||
| Diluted | 41,088 | 41,855 | 41,092 | 42,362 | |||||||||||||||||||
| See notes to condensed consolidated financial statements | |||||||||||||||||||||||
Page 4
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net earnings | $ | 61,408 | $ | 31,018 | $ | 120,877 | $ | 82,779 | |||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
Foreign currency translation adjustments, net of tax (1) | $ | 7,243 | $ | 24,185 | $ | 3,283 | $ | (26,090) | |||||||||||||||
Pension and postretirement adjustments, net of tax (2) | 4,442 | 4,002 | 10,042 | 8,683 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | 11,685 | 28,187 | 13,325 | (17,407) | |||||||||||||||||||
| Comprehensive income | $ | 73,093 | $ | 59,205 | $ | 134,202 | $ | 65,372 | |||||||||||||||
(1) The tax benefit included in foreign currency translation adjustments for the three and six months ended June 30, 2021 and June 30, 2020 was immaterial.
(2) The tax expense included in pension and postretirement adjustments for the three and six months ended June 30, 2021 was $1.5 million and $3.1 million, respectively. The tax expense included in pension and postretirement adjustments for the three and six months ended June 30, 2020 was $1.3 million and $2.7 million, respectively.
See notes to condensed consolidated financial statements
Page 5
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except per share data)
| June 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 197,508 | $ | 198,248 | |||||||
| Receivables, net | 644,089 | 588,718 | |||||||||
| Inventories, net | 446,689 | 428,879 | |||||||||
| Assets held for sale | 29,687 | 27,584 | |||||||||
| Other current assets | 83,417 | 57,395 | |||||||||
| Total current assets | 1,401,390 | 1,300,824 | |||||||||
| Property, plant, and equipment, net | 366,789 | 378,200 | |||||||||
| Goodwill | 1,466,735 | 1,455,137 | |||||||||
| Other intangible assets, net | 568,604 | 609,630 | |||||||||
| Operating lease right-of-use assets, net | 144,274 | 150,898 | |||||||||
| Prepaid pension asset | 105,963 | 92,531 | |||||||||
| Other assets | 31,230 | 34,114 | |||||||||
| Total assets | $ | 4,084,985 | $ | 4,021,334 | |||||||
| Liabilities | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | 100,000 | 100,000 | |||||||||
| Accounts payable | 166,253 | 201,237 | |||||||||
| Accrued expenses | 133,264 | 146,833 | |||||||||
| Deferred revenue | 260,358 | 253,411 | |||||||||
| Liabilities held for sale | 10,573 | 10,141 | |||||||||
| Other current liabilities | 104,024 | 98,755 | |||||||||
| Total current liabilities | 774,472 | 810,377 | |||||||||
| Long-term debt | 957,504 | 958,292 | |||||||||
| Deferred tax liabilities, net | 121,895 | 115,007 | |||||||||
| Accrued pension and other postretirement benefit costs | 97,143 | 98,345 | |||||||||
| Long-term operating lease liability | 127,136 | 133,069 | |||||||||
| Long-term portion of environmental reserves | 14,655 | 15,422 | |||||||||
| Other liabilities | 97,476 | 103,248 | |||||||||
| Total liabilities | 2,190,281 | 2,233,760 | |||||||||
Contingencies and commitments (Note 14) | |||||||||||
| Stockholders’ equity | |||||||||||
Common stock, $1 par value, 100,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 49,187,378 shares issued as of June 30, 2021 and December 31, 2020; outstanding shares were 40,871,691 as of June 30, 2021 and 40,916,429 as of December 31, 2020 | 49,187 | 49,187 | |||||||||
| Additional paid in capital | 119,946 | 122,535 | |||||||||
| Retained earnings | 2,776,884 | 2,670,328 | |||||||||
| Accumulated other comprehensive loss | (297,531) | (310,856) | |||||||||
Common treasury stock, at cost (8,315,687 shares as of June 30, 2021 and 8,270,949 shares as of December 31, 2020) | (753,782) | (743,620) | |||||||||
| Total stockholders’ equity | 1,894,704 | 1,787,574 | |||||||||
| Total liabilities and stockholders’ equity | $ | 4,084,985 | $ | 4,021,334 | |||||||
| See notes to condensed consolidated financial statements | |||||||||||
Page 6
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| (In thousands) | 2021 | 2020 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net earnings | $ | 120,877 | $ | 82,779 | |||||||
| Adjustments to reconcile net earnings to net cash provided by (used for) operating activities | |||||||||||
| Depreciation and amortization | 57,616 | 56,568 | |||||||||
| Gain on sale/disposal of long-lived assets | (590) | (373) | |||||||||
| Deferred income taxes | 6,293 | 4,208 | |||||||||
| Share-based compensation | 6,725 | 7,140 | |||||||||
| Foreign exchange loss on substantial liquidation of subsidiary | — | 9,550 | |||||||||
| Inventory write-downs | — | 9,015 | |||||||||
| Change in operating assets and liabilities, net of businesses acquired: | |||||||||||
| Receivables, net | (53,787) | 31,898 | |||||||||
| Inventories, net | (15,214) | (40,691) | |||||||||
| Progress payments | (2,680) | (470) | |||||||||
| Accounts payable and accrued expenses | (58,217) | (55,806) | |||||||||
| Deferred revenue | 6,663 | (12,622) | |||||||||
| Pension and postretirement liabilities, net | (4,017) | (149,514) | |||||||||
| Other current and long-term assets and liabilities | (15,193) | 6,109 | |||||||||
| Net cash provided by (used for) operating activities | 48,476 | (52,209) | |||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sale/disposal of long-lived assets | 2,982 | 2,411 | |||||||||
| Additions to property, plant, and equipment | (17,771) | (29,324) | |||||||||
| Acquisition of businesses, net of cash acquired | — | (82,003) | |||||||||
| Additional consideration paid on prior year acquisitions | (5,340) | — | |||||||||
| Net cash used for investing activities | (20,129) | (108,916) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings under revolving credit facility | 163,507 | 306,797 | |||||||||
| Payment of revolving credit facility | (163,507) | (231,797) | |||||||||
| Repurchases of common stock | (24,395) | (124,613) | |||||||||
| Proceeds from share-based compensation | 4,919 | 5,189 | |||||||||
| Dividends paid | (6,961) | (7,089) | |||||||||
| Other | (462) | (429) | |||||||||
| Net cash used for financing activities | (26,899) | (51,942) | |||||||||
| Effect of exchange-rate changes on cash | (2,188) | (22,583) | |||||||||
| Net decrease in cash and cash equivalents | (740) | (235,650) | |||||||||
| Cash and cash equivalents at beginning of period | 198,248 | 391,033 | |||||||||
| Cash and cash equivalents at end of period | $ | 197,508 | $ | 155,383 | |||||||
| See notes to condensed consolidated financial statements | |||||||||||
Page 7
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
| For the six months ended June 30, 2021 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | |||||||||||||||||||||||||
| December 31, 2020 | $ | 49,187 | $ | 122,535 | $ | 2,670,328 | $ | (310,856) | $ | (743,620) | |||||||||||||||||||
| Net earnings | — | — | 120,877 | — | — | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 13,325 | — | ||||||||||||||||||||||||
| Dividends declared | — | — | (14,321) | — | — | ||||||||||||||||||||||||
| Restricted stock | — | (9,007) | — | — | 9,007 | ||||||||||||||||||||||||
| Employee stock purchase plan and stock options exercised | — | 411 | — | — | 4,508 | ||||||||||||||||||||||||
| Share-based compensation | — | 6,604 | — | — | 121 | ||||||||||||||||||||||||
Repurchase of common stock (1) | — | — | — | — | (24,395) | ||||||||||||||||||||||||
| Other | — | (597) | — | — | 597 | ||||||||||||||||||||||||
| June 30, 2021 | $ | 49,187 | $ | 119,946 | $ | 2,776,884 | $ | (297,531) | $ | (753,782) | |||||||||||||||||||
| For the three months ended June 30, 2021 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | |||||||||||||||||||||||||
| March 31, 2021 | $ | 49,187 | $ | 119,172 | $ | 2,722,829 | $ | (309,216) | $ | (743,808) | |||||||||||||||||||
| Net earnings | — | — | 61,408 | — | — | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 11,685 | — | ||||||||||||||||||||||||
| Dividends declared | — | — | (7,353) | — | — | ||||||||||||||||||||||||
| Restricted stock | — | (2,600) | — | — | 2,600 | ||||||||||||||||||||||||
| Share-based compensation | — | 3,374 | — | — | 24 | ||||||||||||||||||||||||
Repurchase of common stock (1) | — | — | — | — | (12,598) | ||||||||||||||||||||||||
| June 30, 2021 | $ | 49,187 | $ | 119,946 | $ | 2,776,884 | $ | (297,531) | $ | (753,782) | |||||||||||||||||||
Page 8
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
| For the six months ended June 30, 2020 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | |||||||||||||||||||||||||
| December 31, 2019 | $ | 49,187 | $ | 116,070 | $ | 2,497,111 | $ | (325,274) | $ | (562,722) | |||||||||||||||||||
| Net earnings | — | — | 82,779 | — | — | ||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (17,407) | — | ||||||||||||||||||||||||
| Dividends declared | — | — | (14,163) | — | — | ||||||||||||||||||||||||
| Restricted stock | — | (4,115) | — | — | 4,115 | ||||||||||||||||||||||||
| Employee stock purchase plan and stock options exercised | — | 106 | — | — | 5,081 | ||||||||||||||||||||||||
| Share-based compensation | — | 6,923 | — | — | 217 | ||||||||||||||||||||||||
Repurchase of common stock (1) | — | — | — | — | (124,613) | ||||||||||||||||||||||||
| Other | — | (517) | — | — | 517 | ||||||||||||||||||||||||
| June 30, 2020 | $ | 49,187 | $ | 118,467 | $ | 2,565,727 | $ | (342,681) | $ | (677,405) | |||||||||||||||||||
| For the three months ended June 30, 2020 | |||||||||||||||||||||||||||||
| Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | |||||||||||||||||||||||||
| March 31, 2020 | $ | 49,187 | $ | 114,911 | $ | 2,541,777 | $ | (370,868) | $ | (665,170) | |||||||||||||||||||
| Net earnings | — | — | 31,018 | — | — | ||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | 28,187 | — | ||||||||||||||||||||||||
| Dividends declared | — | — | (7,068) | — | — | ||||||||||||||||||||||||
| Employee stock purchase plan and stock options exercised | — | (244) | — | — | 365 | ||||||||||||||||||||||||
| Share-based compensation | — | 3,800 | — | — | — | ||||||||||||||||||||||||
Repurchase of common stock (1) | — | — | — | — | (12,600) | ||||||||||||||||||||||||
| June 30, 2020 | $ | 49,187 | $ | 118,467 | $ | 2,565,727 | $ | (342,681) | $ | (677,405) | |||||||||||||||||||
| See notes to condensed consolidated financial statements | |||||||||||||||||||||||||||||
(1) For the three and six months ended June 30, 2021, the Corporation repurchased approximately 0.1 million and 0.2 million shares of its common stock, respectively. For the three and six months ended June 30, 2020, the Corporation repurchased approximately 0.1 million and 1.2 million shares of its common stock, respectively.
Page 9
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Curtiss-Wright Corporation and its subsidiaries (the "Corporation" or the "Company") is a global, diversified manufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered products and services to the aerospace, defense, power & process, and general industrial markets.
The unaudited condensed consolidated financial statements include the accounts of Curtiss-Wright and its majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated.
The unaudited condensed consolidated financial statements of the Corporation have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted as permitted by such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of these financial statements.
Management is required to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, and expenses and disclosure of contingent assets and liabilities in the accompanying financial statements. Actual results may differ from these estimates. The most significant of these estimates includes the estimate of costs to complete using the over-time revenue recognition accounting method, pension plan and postretirement obligation assumptions, estimates for inventory obsolescence, fair value estimates around assets and assumed liabilities from acquisitions, estimates for the valuation and useful lives of intangible assets, legal reserves, and the estimate of future environmental costs. Changes in estimates of contract sales, costs, and profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. Accordingly, the effect of the changes on future periods of contract performance is recognized as if the revised estimate had been the original estimate. During the three and six months ended June 30, 2021 and 2020, there were no significant changes in estimated contract costs. In the opinion of management, all adjustments considered necessary for a fair presentation have been reflected in these financial statements.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s 2020 Annual Report on Form 10-K. The results of operations for interim periods are not necessarily indicative of trends or of the operating results for a full year.
On January 1, 2021, the Corporation implemented an organizational change to simplify its reportable segments and align its product sales with its end market structure. As a result, the Corporation now operates under the following three reportable segments: Aerospace & Industrial, Defense Electronics, and Naval & Power. This change resulted in the transfer of the Corporation's valve-related operations into the new Naval & Power segment. While this organizational change resulted in the recasting of previously reported amounts across all reportable segments, it did not impact the Corporation’s previously reported consolidated financial statements.
2. REVENUE
The Corporation recognizes revenue when control of a promised good and/or service is transferred to a customer in an amount that reflects the consideration that the Corporation expects to be entitled to in exchange for that good and/or service.
Performance Obligations
The Corporation identifies a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of its assessment, the Corporation considers all goods and/or services promised in the contract, regardless of whether they are explicitly stated or implied by customary business practices. The Corporation’s contracts may contain either a single performance obligation, including the promise to transfer individual goods or services that are not separately distinct within the context of the respective contracts, or multiple performance obligations. For contracts with multiple performance obligations, the Corporation allocates the overall transaction price to each performance obligation using standalone selling prices, where available, or utilizes estimates for each distinct good or service in the contract where standalone prices are not available.
The Corporation’s performance obligations are satisfied either at a point-in-time or on an over-time basis. Typically, over-time revenue recognition is based on the utilization of an input measure used to measure progress, such as costs incurred to date
Page 10
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
relative to total estimated costs. If a performance obligation does not qualify for over-time revenue recognition, revenue is then recognized at the point-in-time in which control of the distinct good or service is transferred to the customer, typically based upon the terms of delivery.
The following table illustrates the approximate percentage of revenue recognized for performance obligations satisfied over-time versus at a point-in-time for the three and six months ended June 30, 2021 and 2020:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Over-time | 52 | % | 54 | % | 52 | % | 53 | % | |||||||||||||||
| Point-in-time | 48 | % | 46 | % | 48 | % | 47 | % | |||||||||||||||
Contract backlog represents the remaining performance obligations that have not yet been recognized as revenue. Backlog includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Total backlog was approximately $2.2 billion as of June 30, 2021, of which the Corporation expects to recognize approximately 87% as net sales over the next 36 months. The remainder will be recognized thereafter.
Disaggregation of Revenue
The following table presents the Corporation’s total net sales disaggregated by end market and customer type:
| Total Net Sales by End Market and Customer Type | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Aerospace & Defense | |||||||||||||||||||||||
| Aerospace Defense | $ | 99,977 | $ | 109,305 | $ | 210,993 | $ | 211,133 | |||||||||||||||
| Ground Defense | 48,221 | 20,029 | 103,967 | 42,686 | |||||||||||||||||||
| Naval Defense | 177,724 | 164,941 | 355,629 | 330,633 | |||||||||||||||||||
| Commercial Aerospace | 71,555 | 71,084 | 128,824 | 171,765 | |||||||||||||||||||
| Total Aerospace & Defense | $ | 397,477 | $ | 365,359 | $ | 799,413 | $ | 756,217 | |||||||||||||||
| Commercial | |||||||||||||||||||||||
| Power & Process | $ | 125,333 | $ | 112,787 | $ | 230,837 | $ | 236,713 | |||||||||||||||
| General Industrial | 98,685 | 71,901 | 188,304 | 158,348 | |||||||||||||||||||
| Total Commercial | $ | 224,018 | $ | 184,688 | $ | 419,141 | $ | 395,061 | |||||||||||||||
| Total | $ | 621,495 | $ | 550,047 | $ | 1,218,554 | $ | 1,151,278 | |||||||||||||||
Contract Balances
Timing of revenue recognition and cash collection may result in billed receivables, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Condensed Consolidated Balance Sheet. The Corporation’s contract assets primarily relate to its rights to consideration for work completed but not billed as of the reporting date. Contract assets are transferred to billed receivables when the rights to consideration become unconditional. This is typical in situations where amounts are billed as work progresses in accordance with agreed-upon contractual terms or upon achievement of contractual milestones. The Corporation’s contract liabilities primarily consist of customer advances received prior to revenue being earned. Revenue recognized during the three and six months ended June 30, 2021 included in the contract liabilities balance as of January 1, 2021 was approximately $65 million and $142 million, respectively. Revenue recognized during the three and six months ended June 30, 2020 included in the contract liabilities balance as of January 1, 2020 was approximately $71 million and $160 million, respectively. Contract assets and contract liabilities are reported in the "Receivables, net" and "Deferred revenue" lines, respectively, within the Condensed Consolidated Balance Sheet.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. 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 numerous 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 acquisition purchase price reflects 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. 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, 2021, the Corporation did not complete any acquisitions. However, the Corporation paid $5 million during the six months ended June 30, 2021 in regard to prior period acquisitions, which included a working capital adjustment on the acquisition of Pacific Star Communications, Inc. (PacStar), as well as a portion of the purchase price on the acquisition of Dyna-Flo Control Valve Services Ltd. (Dyna-Flo), which was initially held back as security for potential indemnification claims against the seller in accordance with the terms of the Purchase Agreement.
During the six months ended June 30, 2020, the Corporation acquired two businesses for an aggregate purchase price of $90 million, which are described in more detail below. The Condensed Consolidated Statement of Earnings for the six months ended June 30, 2020 included $7 million of total net sales and $1 million of net losses from the Corporation's 2020 acquisitions.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for the acquisitions consummated during the six months ended June 30, 2020.
| (In thousands) | 2020 | |||||||
| Accounts receivable | $ | 3,204 | ||||||
| Inventory | 10,233 | |||||||
| Property, plant, and equipment | 1,332 | |||||||
| Other current and non-current assets | 188 | |||||||
| Intangible assets | 39,384 | |||||||
| Operating lease right-of-use assets, net | 1,992 | |||||||
| Current and non-current liabilities | (10,590) | |||||||
| Net tangible and intangible assets | 45,743 | |||||||
| Goodwill | 43,862 | |||||||
| Total purchase price | $ | 89,605 | ||||||
| Goodwill deductible for tax purposes | $ | 38,469 | ||||||
2020 Acquisitions
PacStar
On October 30, 2020, the Corporation acquired 100% of the issued and outstanding stock of PacStar for $406 million. The 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. PacStar is a provider of tactical communications solutions for battlefield network management. The
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
acquired business operates within the Defense Electronics segment. The acquisition is subject to post-closing adjustments with the purchase price allocation not yet complete.
Interactive Analysis and Display System (IADS)
On April 20, 2020, the Corporation acquired the IADS product line for approximately $29 million. The Asset Purchase Agreement contains representations and warranties customary for a transaction of this type. IADS is a real-time display and post-test analysis product for flight tests. The acquired product line operates within the Defense Electronics segment.
Dyna-Flo
On February 28, 2020, the Corporation acquired 100% of the issued and outstanding share capital of Dyna-Flo for $60 million, net of cash acquired. The Purchase Agreement contains 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. Dyna-Flo specializes in control valves, actuators, and control systems for the chemical, petrochemical, and oil and gas markets. The acquired business operates within the Naval & Power segment.
4. ASSETS HELD FOR SALE
During the fourth quarter of 2020, the Corporation committed to a plan to sell its industrial valve business in Germany, which is reported within its Naval & Power segment. The business met the criteria to be classified as held for sale in the fourth quarter of 2020. Accordingly, the assets and liabilities of the business are presented as held for sale in the Corporation's Condensed Consolidated Balance Sheet. The aforementioned assets and liabilities classified as held for sale have been measured at the lower of carrying value or fair value less costs to sell, which resulted in an impairment loss of $33 million in the fourth quarter of 2020. No impairment loss was recorded on the assets or liabilities held for sale during the six months ended June 30, 2021.
The aggregate components of assets and liabilities classified as held for sale are as follows:
| (In thousands) | June 30, 2021 | December 31, 2020 | |||||||||
| Assets held for sale: | |||||||||||
| Receivables, net | $ | 10,792 | $ | 9,902 | |||||||
| Inventories, net | 17,616 | 16,401 | |||||||||
| Other current assets | 1,845 | 1,798 | |||||||||
| Property, plant, and equipment, net | 4,606 | 4,821 | |||||||||
| Reserve for assets held for sale | (5,172) | (5,338) | |||||||||
| Total assets held for sale, current | $ | 29,687 | $ | 27,584 | |||||||
| Liabilities held for sale: | |||||||||||
| Accounts payable | $ | (3,787) | $ | (2,654) | |||||||
| Accrued expenses | (1,180) | (1,375) | |||||||||
| Other current liabilities | (157) | (748) | |||||||||
| Accrued pension and other postretirement benefit costs | (5,449) | (5,364) | |||||||||
| Total liabilities held for sale, current | $ | (10,573) | $ | (10,141) | |||||||
5. 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:
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (In thousands) | June 30, 2021 | December 31, 2020 | |||||||||
| Billed receivables: | |||||||||||
| Trade and other receivables | $ | 373,222 | $ | 361,460 | |||||||
| Unbilled receivables (contract assets): | |||||||||||
| Recoverable costs and estimated earnings not billed | 279,753 | 238,309 | |||||||||
Less: Progress payments applied | (1,538) | (3,291) | |||||||||
| Net unbilled receivables | 278,215 | 235,018 | |||||||||
Less: Allowance for doubtful accounts | (7,348) | (7,760) | |||||||||
| Receivables, net | $ | 644,089 | $ | 588,718 | |||||||
6. 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 net realizable value.
The composition of inventories is as follows:
| (In thousands) | June 30, 2021 | December 31, 2020 | |||||||||
| Raw materials | $ | 193,066 | $ | 177,828 | |||||||
| Work-in-process | 85,377 | 80,729 | |||||||||
| Finished goods | 120,702 | 120,767 | |||||||||
Inventoried costs related to U.S. Government and other long-term contracts (1) | 53,603 | 56,599 | |||||||||
| Inventories, net of reserves | 452,748 | 435,923 | |||||||||
| Less: Progress payments applied | (6,059) | (7,044) | |||||||||
| Inventories, net | $ | 446,689 | $ | 428,879 | |||||||
(1) As of June 30, 2021 and December 31, 2020, this caption also includes capitalized development costs of $27.5 million and $29.7 million, respectively, related to certain aerospace and defense programs. These capitalized costs will be liquidated as units are produced under contract. As of June 30, 2021 and December 31, 2020, capitalized development costs of $12.6 million and $13.0 million, respectively, are not currently supported by existing firm orders.
7. GOODWILL
In connection with the change in reportable segments on January 1, 2021, the Corporation recast its previously reported goodwill balances as of December 31, 2020 on a relative fair value basis. As a result, the Corporation performed an interim quantitative impairment assessment as of March 31, 2021 on each of its reporting units, and concluded that no impairment exists. Refer to Note 12 to the Condensed Consolidated Financial Statements for additional information on the Corporation’s reportable segments.
The changes in the carrying amount of goodwill for the six months ended June 30, 2021 are as follows:
| (In thousands) | Aerospace & Industrial | Defense Electronics | Naval & Power | Consolidated | |||||||||||||||||||
| December 31, 2020 | $ | 316,921 | $ | 703,915 | $ | 434,301 | $ | 1,455,137 | |||||||||||||||
Adjustments (1) | — | 9,845 | — | 9,845 | |||||||||||||||||||
| Foreign currency translation adjustment | 650 | 250 | 853 | 1,753 | |||||||||||||||||||
| June 30, 2021 | $ | 317,571 | $ | 714,010 | $ | 435,154 | $ | 1,466,735 | |||||||||||||||
(1) Amount primarily relates to post-closing adjustments on the Corporation's acquisition of PacStar in October 2020.
8. OTHER INTANGIBLE ASSETS, NET
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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, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| (In thousands) | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||
| Technology | $ | 275,817 | $ | (157,064) | $ | 118,753 | $ | 280,595 | $ | (148,064) | $ | 132,531 | ||||||||||||||||||||||||||
| Customer related intangibles | 570,874 | (256,534) | 314,340 | 573,722 | (239,798) | 333,924 | ||||||||||||||||||||||||||||||||
Programs (1) | 144,000 | (23,400) | 120,600 | 144,000 | (19,800) | 124,200 | ||||||||||||||||||||||||||||||||
| Other intangible assets | 49,758 | (34,847) | 14,911 | 51,493 | (32,518) | 18,975 | ||||||||||||||||||||||||||||||||
| Total | $ | 1,040,449 | $ | (471,845) | $ | 568,604 | $ | 1,049,810 | $ | (440,180) | $ | 609,630 | ||||||||||||||||||||||||||
(1) Programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology, and trademarks underlying the associated program.
Total intangible amortization expense for the six months ended June 30, 2021 was $30.1 million, as compared to $28.7 million in the comparable prior year period. The estimated amortization expense for the five years ending December 31, 2021 through 2025 is $60 million, $55 million, $52 million, $48 million, and $46 million, respectively.
9. 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.
Effects on Condensed Consolidated Balance Sheets
As of June 30, 2021 and December 31, 2020, the fair values of the asset and liability derivative instruments were immaterial.
Effects on Condensed Consolidated Statements of Earnings
Undesignated hedges
The gains and losses on forward exchange derivative contracts not designated for hedge accounting are recognized to general and administrative expenses within the Condensed Consolidated Statements of Earnings. The gains for the three and six months ended June 30, 2021 were immaterial. The gains and (losses) for the three and six months ended June 30, 2020 were $0.7 million and ($7.4) million, respectively.
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 issuances as of June 30, 2021. Accordingly, all of the Corporation’s debt is valued as a Level 2 financial instrument. 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.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| June 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (In thousands) | Carrying Value | Estimated Fair Value | Carrying Value | Estimated Fair Value | |||||||||||||||||||
3.84% Senior notes due 2021 | $ | 100,000 | $ | 101,125 | $ | 100,000 | $ | 102,173 | |||||||||||||||
3.70% Senior notes due 2023 | 202,500 | 210,302 | 202,500 | 211,790 | |||||||||||||||||||
3.85% Senior notes due 2025 | 90,000 | 96,308 | 90,000 | 97,429 | |||||||||||||||||||
4.24% Senior notes due 2026 | 200,000 | 220,055 | 200,000 | 224,390 | |||||||||||||||||||
4.05% Senior notes due 2028 | 67,500 | 73,758 | 67,500 | 75,440 | |||||||||||||||||||
4.11% Senior notes due 2028 | 90,000 | 98,562 | 90,000 | 101,047 | |||||||||||||||||||
3.10% Senior notes due 2030 | 150,000 | 152,292 | 150,000 | 155,805 | |||||||||||||||||||
3.20% Senior notes due 2032 | 150,000 | 150,877 | 150,000 | 155,048 | |||||||||||||||||||
| Total debt | 1,050,000 | 1,103,279 | 1,050,000 | 1,123,122 | |||||||||||||||||||
| Debt issuance costs, net | (1,038) | (1,038) | (1,147) | (1,147) | |||||||||||||||||||
| Unamortized interest rate swap proceeds | 8,542 | 8,542 | 9,439 | 9,439 | |||||||||||||||||||
| Total debt, net | $ | 1,057,504 | $ | 1,110,783 | $ | 1,058,292 | $ | 1,131,414 | |||||||||||||||
10. PENSION PLANS
Defined Benefit Pension Plans
The following table is a consolidated disclosure of all domestic and foreign defined pension plans as described in the Corporation’s 2020 Annual Report on Form 10-K.
The components of net periodic pension cost for the three and six months ended June 30, 2021 and 2020 were as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Service cost | $ | 7,120 | $ | 6,611 | $ | 13,990 | $ | 13,222 | |||||||||||||||
| Interest cost | 4,511 | 6,058 | 8,817 | 12,116 | |||||||||||||||||||
| Expected return on plan assets | (15,191) | (16,896) | (30,371) | (33,792) | |||||||||||||||||||
| Amortization of prior service cost | (369) | (71) | (432) | (142) | |||||||||||||||||||
| Amortization of unrecognized actuarial loss | 7,574 | 5,750 | 14,717 | 11,499 | |||||||||||||||||||
| Cost of settlements | 3,075 | — | 3,075 | — | |||||||||||||||||||
| Net periodic pension cost | $ | 6,720 | $ | 1,452 | $ | 9,796 | $ | 2,903 | |||||||||||||||
The Corporation does not expect to make any contributions to the Curtiss-Wright Pension Plan in 2021. Contributions to the foreign benefit plans are not expected to be material in 2021. During the six months ended June 30, 2020, the Corporation made a $150 million voluntary contribution to the Curtiss-Wright Pension Plan.
During the three and six months ended June 30, 2021, the Company recognized a settlement charge related to the retirement of a former executive. The settlement charge represents an event that is accounted for under guidance on employers’ accounting for settlements and curtailments of defined benefit pension plans.
Defined Contribution Retirement Plan
The Company also maintains a defined contribution plan for all non-union employees who are not currently receiving final or career average pay benefits for its U.S. subsidiaries. The employer contributions include both employer match and non-elective contribution components up to a maximum employer contribution of 7% of eligible compensation. During the three and six months ended June 30, 2021, the expense relating to the plan was $4.3 million and $9.6 million, respectively. During the three and six months ended June 30, 2020, the expense relating to the plan was $4.3 million and $10.3 million, respectively. The
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Corporation made $13.9 million in contributions to the plan during the six months ended June 30, 2021, and expects to make total contributions of $19.0 million in 2021.
11. EARNINGS PER SHARE
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:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Basic weighted-average shares outstanding | 40,915 | 41,629 | 40,921 | 42,092 | |||||||||||||||||||
| Dilutive effect of stock options and deferred stock compensation | 173 | 226 | 171 | 270 | |||||||||||||||||||
| Diluted weighted-average shares outstanding | 41,088 | 41,855 | 41,092 | 42,362 | |||||||||||||||||||
For the three and six months ended June 30, 2021, approximately 34,000 and 61,000 shares, respectively, 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. There were no anti-dilutive equity-based awards for three and six months ended June 30, 2020.
12. SEGMENT INFORMATION
Prior to the first quarter of 2021, the Corporation reported its results of operations through three reportable segments: Commercial/Industrial, Defense, and Power. On January 1, 2021, the Corporation implemented an organizational change to simplify its reportable segments and align its product sales with its end market structure. As a result, the Corporation now reports its results of operations through the following reportable segments: Aerospace & Industrial, Defense Electronics, and Naval & Power. While this organizational change resulted in the recasting of previously reported amounts across all reportable segments, it did not impact the Corporation’s previously reported consolidated financial statements.
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 | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Aerospace & Industrial | $ | 200,254 | $ | 177,612 | $ | 381,392 | $ | 404,633 | |||||||||||||||
| Defense Electronics | 163,468 | 139,927 | 345,766 | 280,238 | |||||||||||||||||||
| Naval & Power | 259,496 | 233,035 | 495,076 | 468,049 | |||||||||||||||||||
| Less: Intersegment revenues | (1,723) | (527) | (3,680) | (1,642) | |||||||||||||||||||
| Total consolidated | $ | 621,495 | $ | 550,047 | $ | 1,218,554 | $ | 1,151,278 | |||||||||||||||
| Operating income (expense) | |||||||||||||||||||||||
| Aerospace & Industrial | $ | 31,977 | $ | 9,615 | $ | 51,002 | $ | 41,755 | |||||||||||||||
| Defense Electronics | 29,271 | 24,736 | 65,894 | 48,799 | |||||||||||||||||||
| Naval & Power | 43,095 | 29,146 | 81,152 | 57,256 | |||||||||||||||||||
Corporate and other (1) | (9,760) | (8,148) | (18,399) | (20,015) | |||||||||||||||||||
| Total consolidated | $ | 94,583 | $ | 55,349 | $ | 179,649 | $ | 127,795 | |||||||||||||||
(1) 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.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Adjustments to reconcile operating income to earnings before income taxes are as follows:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Total operating income | $ | 94,583 | $ | 55,349 | $ | 179,649 | $ | 127,795 | |||||||||||||||
| Interest expense | 10,180 | 8,515 | 20,139 | 16,004 | |||||||||||||||||||
| Other income (expense), net | 440 | (4,105) | 5,283 | 1,427 | |||||||||||||||||||
| Earnings before income taxes | $ | 84,843 | $ | 42,729 | $ | 164,793 | $ | 113,218 | |||||||||||||||
| (In thousands) | June 30, 2021 | December 31, 2020 | |||||||||
| Identifiable assets | |||||||||||
| Aerospace & Industrial | $ | 1,022,568 | $ | 1,020,294 | |||||||
| Defense Electronics | 1,551,428 | 1,542,686 | |||||||||
| Naval & Power | 1,285,349 | 1,255,325 | |||||||||
| Corporate and Other | 195,953 | 175,445 | |||||||||
| Assets held for sale | 29,687 | 27,584 | |||||||||
| Total consolidated | $ | 4,084,985 | $ | 4,021,334 | |||||||
13. 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, 2019 | $ | (130,019) | $ | (195,255) | $ | (325,274) | |||||||||||
Other comprehensive income (loss) before reclassifications (1) | 41,282 | (44,513) | (3,231) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (1) | — | 17,649 | 17,649 | ||||||||||||||
| Net current period other comprehensive loss | 41,282 | (26,864) | 14,418 | ||||||||||||||
| December 31, 2020 | $ | (88,737) | $ | (222,119) | $ | (310,856) | |||||||||||
Other comprehensive income (loss) before reclassifications (1) | 3,283 | (3,126) | 157 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss (1) | — | 13,168 | 13,168 | ||||||||||||||
| Net current period other comprehensive income | 3,283 | 10,042 | 13,325 | ||||||||||||||
| June 30, 2021 | $ | (85,454) | $ | (212,077) | $ | (297,531) | |||||||||||
(1) All amounts are after tax.
Details of amounts reclassified from accumulated other comprehensive income (loss) are below:
| (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 | $ | 432 | Other income, net | ||||||||
| Amortization of actuarial losses | (14,717) | Other income, net | |||||||||
| Settlements | (3,075) | Other income, net | |||||||||
| (17,360) | Earnings before income taxes | ||||||||||
| 4,192 | Provision for income taxes | ||||||||||
| Total reclassifications | $ | (13,168) | Net earnings | ||||||||
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. CONTINGENCIES AND COMMITMENTS
From time to time, the Corporation and its subsidiaries are involved in legal proceedings that are incidental to the operation of our business. Some of these proceedings allege damages relating to asbestos and environmental exposures, intellectual property matters, copyright infringement, personal injury claims, employment and employee benefit matters, government contract issues, commercial or contractual disputes, and acquisitions or divestitures. The Corporation continues to defend vigorously against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including assessment of the merits of the particular claim, as well as current accruals and insurance coverage, the Corporation does not expect that such legal proceedings will have a material adverse impact on its condensed consolidated financial statements.
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 asbestos-related 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.
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 June 30, 2021 and December 31, 2020, there were $23.4 million and $21.1 million of stand-by letters of credit outstanding, respectively, and $4.7 million and $5.6 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
Within the Corporation’s Naval & Power segment, Electro-Mechanical Division (EMD) is the reactor coolant pump (RCP) supplier for the Westinghouse Electric Company (WEC) AP1000 nuclear power plants in China and the United States. The terms of the AP1000 U.S. and China contracts include liquidated damage provisions for failure to meet contractual delivery dates if the Corporation caused the delay and the delay was not excusable. While the Corporation did not meet certain contractual delivery dates under its AP1000 U.S. and China contracts, there are significant counterclaims and uncertainties as to which parties are responsible for the delay.
In June 2021, the Corporation and WEC participated in non-binding mediation in an effort to settle all open disputes under the U.S. and China contracts. The mediation efforts were ultimately unsuccessful. WEC has filed a notice of arbitration in regard to the China contract, asserting that it is entitled to liquidated damages of $25 million. Additionally, WEC has also filed claims in Georgia claiming damages on the U.S. contract. The Corporation believes that it has adequate legal defenses and intends to vigorously defend these matters.
As it relates to the U.S. contract, the range of possible loss is $0 to $31 million. The Corporation believes that the likelihood of any potential liability stemming from liquidated damages on the U.S. contract is remote. As it relates to the China contract, the range of possible loss is $0 to $25 million. As of June 30, 2021, the Corporation believes that it is adequately accrued regarding this matter, and that the ultimate resolution will not have a significant impact on its condensed consolidated financial statements.
15. RESTRUCTURING COSTS
During the year ended December 31, 2020, the Corporation executed restructuring activities across all of its segments to support its ongoing effort of improving capacity utilization and operating efficiency. These restructuring activities, which included workforce reductions and consolidation of facilities, were substantially completed as of December 31, 2020. As of June 30, 2021 and December 31, 2020, the restructuring liability associated with these restructuring activities was $2.1 million
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NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and $6.9 million, respectively, with such liability expected to be substantially settled as of December 31, 2021. These balances are reported within Other Current Liabilities on the Condensed Consolidated Balance Sheet.
******
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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 potential impacts from COVID-19, including the impacts to supply and demand, and measures taken by governments and private industry in response, 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 2020 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.
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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 Aerospace & Industrial, Defense Electronics, and Naval & 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 55% of our 2021 revenues are expected to be generated from defense-related markets.
COVID-19
In March 2020, the World Health Organization characterized the outbreak of COVID-19 as a pandemic. The pandemic has adversely affected certain elements of our business, including our supply chain and production levels, due to temporary shutdowns of our customers’ and suppliers’ facilities. The extent to which COVID-19 continues to adversely impact our operations depends on future developments, including the impact of the global rollout of COVID-19 vaccines, as well as the emergence and impact of any new COVID-19 variants. However, given the diversified breadth of our company, we believe that we are well-positioned to mitigate any material risks arising as a result of COVID-19 or any of its variants. From an operational perspective, our current cash balance, coupled with expected cash flows from operating activities for the remainder of the year as well as our current borrowing capacity under the Revolving Credit Agreement, are expected to be more than sufficient to meet operating cash requirements, planned capital expenditures, interest payments on long-term debt obligations, payments on lease obligations, pension and postretirement funding requirements, and dividend payments through the current year and beyond.
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, 2021. The financial information as of June 30, 2021 should be read in conjunction with the financial statements for the year ended December 31, 2020 contained in our Form 10-K.
The MD&A is organized into the following sections: Condensed Consolidated Statements of Earnings, Results by Business Segment, and Liquidity and Capital Resources. Our discussion will be focused on the overall results of 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.
On January 1, 2021, the Corporation implemented an organizational change to simplify its reportable segments and align its product sales with its end market structure. As a result, the Corporation operates under the following three reportable segments: Aerospace & Industrial, Defense Electronics, and Naval & Power. This change resulted in the transfer of the Corporation's valve-related operations into the Naval & Power segment. While this organizational change resulted in the recasting of previously reported amounts across all reportable segments, it did not impact the Corporation’s previously reported consolidated financial statements.
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 effects of restructuring-related expenses and foreign currency translation.
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| Condensed Consolidated Statements of Earnings | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | % change | 2021 | 2020 | % change | |||||||||||||||||||||||||||||
| Sales | |||||||||||||||||||||||||||||||||||
| Aerospace & Industrial | $ | 199,713 | $ | 177,411 | 13 | % | $ | 380,044 | $ | 404,139 | (6 | %) | |||||||||||||||||||||||
| Defense Electronics | 162,351 | 139,613 | 16 | % | 343,563 | 279,194 | 23 | % | |||||||||||||||||||||||||||
| Naval & Power | 259,431 | 233,023 | 11 | % | 494,947 | 467,945 | 6 | % | |||||||||||||||||||||||||||
| Total sales | $ | 621,495 | $ | 550,047 | 13 | % | $ | 1,218,554 | $ | 1,151,278 | 6 | % | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||||||||||||||
| Aerospace & Industrial | $ | 31,977 | $ | 9,615 | 233 | % | $ | 51,002 | $ | 41,755 | 22 | % | |||||||||||||||||||||||
| Defense Electronics | 29,271 | 24,736 | 18 | % | 65,894 | 48,799 | 35 | % | |||||||||||||||||||||||||||
| Naval & Power | 43,095 | 29,146 | 48 | % | 81,152 | 57,256 | 42 | % | |||||||||||||||||||||||||||
| Corporate and other | (9,760) | (8,148) | (20 | %) | (18,399) | (20,015) | 8 | % | |||||||||||||||||||||||||||
| Total operating income | $ | 94,583 | $ | 55,349 | 71 | % | $ | 179,649 | $ | 127,795 | 41 | % | |||||||||||||||||||||||
| Interest expense | 10,180 | 8,515 | (20 | %) | 20,139 | 16,004 | (26 | %) | |||||||||||||||||||||||||||
| Other income (expense), net | 440 | (4,105) | 111 | % | 5,283 | 1,427 | 270 | % | |||||||||||||||||||||||||||
| Earnings before income taxes | 84,843 | 42,729 | 99 | % | 164,793 | 113,218 | 46 | % | |||||||||||||||||||||||||||
| Provision for income taxes | (23,435) | (11,711) | (100 | %) | (43,916) | (30,439) | (44 | %) | |||||||||||||||||||||||||||
| Net earnings | $ | 61,408 | $ | 31,018 | $ | 120,877 | $ | 82,779 | |||||||||||||||||||||||||||
| Restructuring-related expenses | $ | — | $ | 14,596 | NM | $ | — | $ | 17,380 | NM | |||||||||||||||||||||||||
| New orders | $ | 689,728 | $ | 620,249 | 11 | % | $ | 1,269,175 | $ | 1,190,050 | 7 | % | |||||||||||||||||||||||
Components of sales and operating income increase (decrease):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||
| Sales | Operating Income | Sales | Operating Income | ||||||||||||||||||||
| Organic | 6 | % | 46 | % | (1 | %) | 26 | % | |||||||||||||||
| Acquisitions | 6 | % | 4 | % | 6 | % | 4 | % | |||||||||||||||
| Restructuring | — | % | 26 | % | — | % | 14 | % | |||||||||||||||
| Foreign currency | 1 | % | (5 | %) | 1 | % | (3 | %) | |||||||||||||||
| Total | 13 | % | 71 | % | 6 | % | 41 | % | |||||||||||||||
Sales in the second quarter increased $71 million, or 13%, to $621 million, compared with the prior year period. On a segment basis, sales from the Aerospace & Industrial, Defense Electronics, and Naval & Power segments increased $22 million, $23 million, and $26 million, respectively.
Sales during the six months ended June 30, 2021 increased $67 million, or 6%, to $1,219 million, compared with the prior year period. On a segment basis, sales from the Defense Electronics and Naval & Power segments increased $64 million and $27
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million, respectively, with sales from the Aerospace & Industrial segment decreasing $24 million. Changes in sales by segment are discussed in further detail in the results by business segment section below.
Operating income in the second quarter increased $39 million, or 71%, to $95 million, and operating margin increased 510 basis points to 15.2% compared with the same period in 2020. In the Aerospace & Industrial segment, increases in operating income and operating margin were primarily due to favorable overhead absorption on higher sales in the general industrial market, as well as the benefits from our ongoing operational excellence and prior year restructuring initiatives. Operating income and operating margin in the Defense Electronics segment also benefited from our operational excellence initiatives, as well as the incremental impact from our PacStar acquisition. These increases were partially offset by unfavorable mix in defense electronics and higher research and development costs. In the Naval & Power segment, increases in operating income and operating margin were primarily due to favorable overhead absorption on higher sales as well as current year savings recognized as a result of our prior year restructuring initiatives.
Operating income during the six months ended June 30, 2021 increased $52 million, or 41%, to $180 million and operating margin increased 360 basis points to 14.7%, compared with the same period in 2020. In the Aerospace & Industrial segment, increases in operating income and operating margin were primarily due to the benefits from our ongoing operational excellence and prior year restructuring initiatives. Operating income and operating margin in the Defense Electronics segment benefited from our operational excellence initiatives, the incremental impact from our PacStar acquisition, as well as the absence of first year purchase accounting costs from our 901D acquisition. These increases were partially offset by higher research and development costs and unfavorable foreign currency translation. In the Naval & Power segment, increases in operating income and operating margin were primarily due to favorable overhead absorption as well as current year savings recognized as a result of our prior year restructuring initiatives.
Non-segment operating expense in the second quarter increased $2 million, or 20%, to $10 million, primarily due to higher environmental and other corporate costs. Non-segment operating expense during the six months ended June 30, 2021 decreased $2 million, or 8%, to $18 million, primarily due to lower foreign exchange losses.
Interest expense in the second quarter and six months ended June 30, 2021 increased $2 million, or 20%, to $10 million, and $4 million, or 26%, to $20 million, respectively, primarily due to the issuance of $300 million Senior Notes in August 2020.
Other income, net in the second quarter and six months ended June 30, 2021 increased $5 million, or 111%, to $1 million, and $4 million, or 270%, to $5 million, respectively, primarily due to the prior year recognition of accumulated foreign currency translation losses of $10 million related to the substantial liquidation of our Norwegian subsidiary. These increases were partially offset by a one-time pension settlement charge related to the retirement of a former executive, which was recognized in the current period.
The effective tax rate of 27.6% in the second quarter increased compared to an effective tax rate of 27.4% in the prior year period. This increase was primarily driven by a provisional charge related to the remeasurement of deferred tax liabilities due to a corporate tax rate change in the United Kingdom. The effective tax rate of 26.6% for the six months ended June 30, 2021 decreased as compared to an effective tax rate of 26.9%, primarily due to the recognition of accumulated foreign currency translation losses in the prior year period related to the substantial liquidation of our Norwegian subsidiary, which are not deductible for tax purposes.in the prior year period.
Comprehensive income in the second quarter was $73 million, compared to comprehensive income of $59 million in the prior year period. The change was primarily due to the following:
•Net earnings increased $30 million, primarily due to higher operating income.
•Foreign currency translation adjustments in the second quarter resulted in a $7 million comprehensive gain, compared to a $24 million comprehensive gain in the prior year period. The comprehensive gain during the current period was primarily attributed to increases in the Canadian dollar.
Comprehensive income during the six months ended June 30, 2021 was $134 million, compared to comprehensive income of $65 million in the prior year period. The change was primarily due to the following:
•Net earnings increased $38 million, primarily due to higher operating income.
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•Foreign currency translation adjustments for the six months ended June 30, 2021 resulted in a $3 million comprehensive gain, compared to a $26 million comprehensive loss in the prior period. The comprehensive gain during the current period was primarily attributed to increases in the Canadian dollar.
New orders in the second quarter and six months ended June 30, 2021 increased $69 million and $79 million, respectively, from the comparable prior year periods, primarily due an increase in new orders for industrial vehicles and sensors and actuation equipment in the Aerospace & Industrial segment, as well as the incremental impact of our PacStar acquisition in the Defense Electronics segment. These increases were partially offset by the timing of naval defense orders in the Naval & Power segment.
RESULTS BY BUSINESS SEGMENT
Aerospace & Industrial
The following tables summarize sales, operating income and margin, and new orders within the Aerospace & Industrial segment.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | % change | 2021 | 2020 | % change | |||||||||||||||||||||||||||||
| Sales | $ | 199,713 | $ | 177,411 | 13 | % | $ | 380,044 | $ | 404,139 | (6 | %) | |||||||||||||||||||||||
| Operating income | 31,977 | 9,615 | 233 | % | 51,002 | 41,755 | 22 | % | |||||||||||||||||||||||||||
| Operating margin | 16.0 | % | 5.4 | % | 1,060 | bps | 13.4 | % | 10.3 | % | 310 | bps | |||||||||||||||||||||||
| Restructuring-related expenses | $ | — | $ | 5,586 | NM | $ | — | $ | 5,870 | NM | |||||||||||||||||||||||||
| New orders | $ | 222,825 | $ | 121,068 | 84 | % | $ | 421,940 | $ | 325,407 | 30 | % | |||||||||||||||||||||||
Components of sales and operating income increase (decrease):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||
| Sales | Operating Income | Sales | Operating Income | ||||||||||||||||||||
| Organic | 10 | % | 174 | % | (8 | %) | 8 | % | |||||||||||||||
| Acquisitions | — | % | — | % | — | % | — | % | |||||||||||||||
| Restructuring | — | % | 59 | % | — | % | 14 | % | |||||||||||||||
| Foreign currency | 3 | % | — | % | 2 | % | — | % | |||||||||||||||
| Total | 13 | % | 233 | % | (6 | %) | 22 | % | |||||||||||||||
Sales in the Aerospace & Industrial segment are primarily generated from the commercial aerospace and general industrial markets, and to a lesser extent the defense and power & process markets.
Sales in the second quarter increased $22 million, or 13%, to $200 million from the prior year period. Sales in the general industrial market increased $25 million, primarily due to higher industrial vehicle sales. This increase was partially offset by lower sales in the commercial aerospace market, primarily due to the exit of our build-to-print product line in the fourth quarter of 2020.
Sales during the six months ended June 30, 2021 decreased $24 million, or 6%, to $380 million from the prior year period, primarily due to the impact of the COVID-19 pandemic on the commercial aerospace market. In the commercial aerospace market, sales decreased $50 million, the majority of which occurred in the first quarter of 2021 due to lower demand for actuation and sensors equipment as well as surface treatment services. Sales in the commercial aerospace market were also negatively impacted by the exit of our build-to-print product line in the fourth quarter of 2020. These decreases were partially
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offset by sales increases of $28 million in the general industrial market, primarily due to higher demand for industrial vehicle products and surface treatment services.
Operating income in the second quarter increased $22 million, or 233%, to $32 million from the prior year period, and operating margin increased 1,060 basis points to 16.0%. The increases in operating income and operating margin were primarily due to favorable overhead absorption on higher sales in the general industrial market, as well as the benefits from our ongoing operational excellence and prior year restructuring initiatives.
Operating income during the six months ended June 30, 2021 increased $9 million, or 22%, to $51 million from the prior year period, and operating margin increased 310 basis points to 13.4%. The increases in operating income and operating margin were primarily due to current year savings recognized as a result of our ongoing operational excellence and prior year restructuring initiatives.
New orders in the second quarter and six months ended June 30, 2021 increased $102 million and $97 million, respectively, from the comparable prior year periods, primarily due to an increase in new orders for industrial vehicles and sensors and actuation equipment.
Defense Electronics
The following tables summarize sales, operating income and margin, and new orders within the Defense Electronics segment.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | % change | 2021 | 2020 | % change | |||||||||||||||||||||||||||||
| Sales | $ | 162,351 | $ | 139,613 | 16 | % | $ | 343,563 | $ | 279,194 | 23 | % | |||||||||||||||||||||||
| Operating income | 29,271 | 24,736 | 18 | % | 65,894 | 48,799 | 35 | % | |||||||||||||||||||||||||||
| Operating margin | 18.0 | % | 17.7 | % | 30 | bps | 19.2 | % | 17.5 | % | 170 | bps | |||||||||||||||||||||||
| Restructuring-related expenses | $ | — | $ | 1,671 | NM | $ | — | $ | 2,470 | NM | |||||||||||||||||||||||||
| New orders | $ | 174,791 | $ | 165,995 | 5 | % | $ | 357,091 | $ | 313,896 | 14 | % | |||||||||||||||||||||||
Components of sales and operating income increase (decrease):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||
| Sales | Operating Income | Sales | Operating Income | ||||||||||||||||||||
| Organic | (6 | %) | 12 | % | (1 | %) | 26 | % | |||||||||||||||
| Acquisitions | 22 | % | 9 | % | 23 | % | 12 | % | |||||||||||||||
| Restructuring | — | % | 7 | % | — | % | 5 | % | |||||||||||||||
| Foreign currency | — | % | (10 | %) | 1 | % | (8 | %) | |||||||||||||||
| Total | 16 | % | 18 | % | 23 | % | 35 | % | |||||||||||||||
Sales in the Defense Electronics segment are primarily to the defense markets and, to a lesser extent, the commercial aerospace market.
Sales in the second quarter increased $23 million, or 16%, to $162 million from the prior year period, primarily due to higher sales in the ground defense and commercial aerospace markets. Sales in the ground defense market increased $28 million primarily due to the incremental impact of our PacStar acquisition. In the commercial aerospace market, sales increased $7 million due to higher demand for avionics and flight test equipment on various domestic and international platforms. These increases were partially offset by lower sales of $13 million in the aerospace defense market, primarily due to the timing of orders for embedded computing equipment on various domestic programs.
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Sales during the six months ended June 30, 2021 increased $64 million, or 23%, to $344 million from the prior year period, primarily due to the incremental impact of our PacStar acquisition in the ground defense market, which contributed sales of $64 million.
Operating income in the second quarter increased $5 million, or 18%, to $29 million compared to the prior year period, and operating margin increased 30 basis points from the prior year period to 18.0%. Operating income during the six months ended June 30, 2021 increased $17 million, or 35%, to $66 million, while operating margin increased 170 basis points from the prior year period to 19.2%. The increases in operating income and operating margin for each of the respective periods were primarily due to the benefits from our ongoing operational excellence and prior year restructuring initiatives, the incremental impact of our PacStar acquisition, as well as the absence of first year purchase accounting costs from our 901D acquisition. These increases were partially offset by unfavorable mix in defense electronics and higher research and development costs.
New orders in the second quarter and six months ended June 30, 2021 increased $9 million and $43 million, respectively, from the comparable prior year periods, primarily due to the incremental impact of our PacStar acquisition. These increases were partially offset by the timing of naval defense and aerospace defense orders.
Naval & Power
The following tables summarize sales, operating income and margin, and new orders within the Naval & Power segment.
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | % change | 2021 | 2020 | % change | |||||||||||||||||||||||||||||
| Sales | $ | 259,431 | $ | 233,023 | 11 | % | $ | 494,947 | $ | 467,945 | 6 | % | |||||||||||||||||||||||
| Operating income | 43,095 | 29,146 | 48 | % | 81,152 | 57,256 | 42 | % | |||||||||||||||||||||||||||
| Operating margin | 16.6 | % | 12.5 | % | 410 | bps | 16.4 | % | 12.2 | % | 420 | bps | |||||||||||||||||||||||
| Restructuring-related expenses | $ | — | $ | 7,339 | NM | $ | — | $ | 9,040 | NM | |||||||||||||||||||||||||
| New orders | $ | 292,112 | $ | 333,186 | (12 | %) | $ | 490,144 | $ | 550,747 | (11 | %) | |||||||||||||||||||||||
Components of sales and operating income increase (decrease):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2021 vs. 2020 | 2021 vs. 2020 | ||||||||||||||||||||||
| Sales | Operating Income | Sales | Operating Income | ||||||||||||||||||||
| Organic | 10 | % | 24 | % | 4 | % | 28 | % | |||||||||||||||
| Acquisitions | — | % | — | % | — | % | — | % | |||||||||||||||
| Restructuring | — | % | 26 | % | — | % | 16 | % | |||||||||||||||
| Foreign currency | 1 | % | (2 | %) | 2 | % | (2 | %) | |||||||||||||||
| Total | 11 | % | 48 | % | 6 | % | 42 | % | |||||||||||||||
Sales in the Naval & Power segment are primarily to the naval defense and power & process markets.
Sales in the second quarter increased $26 million, or 11%, to $259 million from the prior year period, primarily due to higher sales in the naval defense and power & process markets. In the naval defense market, sales increased $14 million primarily due to higher production on the CVN-80 and CVN-81 aircraft carrier programs as well as higher service center sales. In the power & process market, sales increased $12 million primarily due to higher nuclear aftermarket sales and increased demand for industrial valve products.
Sales during the six months ended June 30, 2021 increased $27 million, or 6%, to $495 million from the prior year period. In the naval defense market, sales increased $32 million primarily due to increased production on the CVN-81 aircraft carrier
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MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
program as well as higher service center and foreign military sales. This increase was partially offset by lower sales in the power & process market primarily due to lower sales of industrial valve products.
Operating income in the second quarter increased $14 million, or 48%, to $43 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, 2021 increased $24 million, or 42%, to $81 million, and operating margin increased 420 basis points from the prior year period to 16.4%. The increases in operating income and operating margin for each of the respective periods were primarily due to favorable overhead absorption on higher sales as well as current year savings recognized as a result of our prior year restructuring initiatives. Operating income and operating margin during the six months ended June 30, 2021 also benefited from the absence of prior period transition costs associated with our DRG facility.
New orders in the second quarter and six months ended June 30, 2021 decreased $41 million and $61 million, respectively, from the comparable prior year periods, primarily due to the timing of naval defense orders.
SUPPLEMENTARY INFORMATION
The table below depicts sales by end market and customer type, as it helps 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.
| Total Net Sales by End Market and Customer Type | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | % change | 2021 | 2020 | % change | |||||||||||||||||||||||||||||
| Aerospace & Defense markets: | |||||||||||||||||||||||||||||||||||
| Aerospace Defense | $ | 99,977 | $ | 109,305 | (9 | %) | $ | 210,993 | $ | 211,133 | — | % | |||||||||||||||||||||||
| Ground Defense | 48,221 | 20,029 | 141 | % | 103,967 | 42,686 | 144 | % | |||||||||||||||||||||||||||
| Naval Defense | 177,724 | 164,941 | 8 | % | 355,629 | 330,633 | 8 | % | |||||||||||||||||||||||||||
| Commercial Aerospace | 71,555 | 71,084 | 1 | % | 128,824 | 171,765 | (25 | %) | |||||||||||||||||||||||||||
| Total Aerospace & Defense | $ | 397,477 | $ | 365,359 | 9 | % | $ | 799,413 | $ | 756,217 | 6 | % | |||||||||||||||||||||||
| Commercial markets: | |||||||||||||||||||||||||||||||||||
| Power & Process | $ | 125,333 | $ | 112,787 | 11 | % | $ | 230,837 | $ | 236,713 | (2 | %) | |||||||||||||||||||||||
| General Industrial | 98,685 | 71,901 | 37 | % | 188,304 | 158,348 | 19 | % | |||||||||||||||||||||||||||
| Total Commercial | $ | 224,018 | $ | 184,688 | 21 | % | $ | 419,141 | $ | 395,061 | 6 | % | |||||||||||||||||||||||
| Total Curtiss-Wright | $ | 621,495 | $ | 550,047 | 13 | % | $ | 1,218,554 | $ | 1,151,278 | 6 | % | |||||||||||||||||||||||
Aerospace & Defense markets
Sales in the second quarter increased $32 million, or 9%, to $397 million against the comparable prior year period, primarily due to higher sales in the ground defense and naval defense markets. The ground defense market benefited from the impact of our PacStar acquisition, which contributed incremental sales of $31 million. Sales in the naval defense market increased primarily due to higher production on the CVN-80 and CVN-81 aircraft carrier programs. These increases were partially offset by the timing of orders for embedded computing equipment on various domestic programs in the aerospace defense market.
Sales during the six months ended June 30, 2021 increased $43 million, or 6%, to $799 million, primarily due to higher sales in the ground defense and naval defense markets. The ground defense market benefited from the impact of our PacStar acquisition, which contributed incremental sales of $64 million. In the naval defense market, sales benefited from increased production on the CVN-81 aircraft carrier program as well as higher service center and foreign military sales. These increases were partially offset by lower sales in the commercial aerospace market during the first quarter of 2021 due to a pandemic-driven decline in demand for sensors products and surface treatment services. Sales in the commercial aerospace market were also negatively impacted by the exit of our build-to-print product line in the fourth quarter of 2020.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Commercial markets
Sales in the second quarter increased $39 million, or 21%, to $224 million primarily due to higher sales in both the general industrial and power & process markets. In the general industrial market, sales benefited from higher demand for industrial vehicle products and surface treatment services. In the power & process market, sales increased primarily due to higher nuclear aftermarket sales and increased demand for industrial valve products.
Sales during the six months ended June 30, 2021 increased $24 million, or 6%, to $419 million primarily due to higher demand for our industrial vehicle products in the general industrial market. This increase was partially offset by lower sales in the power & process market primarily due to lower sales of industrial valve products.
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 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 | Six Months Ended | ||||||||||
| (In thousands) | June 30, 2021 | June 30, 2020 | |||||||||
| Cash provided by (used in): | |||||||||||
Operating activities | $ | 48,476 | $ | (52,209) | |||||||
Investing activities | (20,129) | (108,916) | |||||||||
Financing activities | (26,899) | (51,942) | |||||||||
| Effect of exchange-rate changes on cash | (2,188) | (22,583) | |||||||||
| Net decrease in cash and cash equivalents | (740) | (235,650) | |||||||||
Net cash provided by operating activities increased $101 million from the prior year period, primarily due to a prior year voluntary pension contribution of $150 million and higher net earnings during the current period. This increase was partially offset by higher outstanding receivables during the current period.
Net cash used in investing activities decreased $89 million from the comparable prior year period primarily due to prior period acquisitions and lower current period capital expenditures. The Corporation acquired two businesses during the six months ended June 30, 2020 for approximately $90 million. The Corporation did not make any acquisitions during the six months ended June 30, 2021. Capital expenditures for the six months ended June 30, 2021 and June 30, 2020 were $18 million and $29 million, respectively, with the decrease primarily due to lower capital spending during the current period as well as lower current period investment related to the new DRG facility.
Financing Activities
Debt
The Corporation’s debt outstanding had an average interest rate of 3.5% for both the three and six months ended June 30, 2021, and 3.3% and 3.4% for the three and six months ended June 30, 2020, respectively. The Corporation’s average debt outstanding was $1,062 million and $1,059 million for the three and six months ended June 30, 2021, respectively, and $890 million and $842 million for the three and six months ended June 30, 2020, respectively.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued
Credit Agreement
As of June 30, 2021, the Corporation had no outstanding borrowings under the 2018 Senior Unsecured Revolving Credit Agreement (the “Credit Agreement” or “credit facility”) and $23 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement as of June 30, 2021 was $477 million, which could be borrowed without violating any of our debt covenants.
Repurchase of common stock
During the six months ended June 30, 2021, the Corporation used $24 million of cash to repurchase approximately 0.2 million outstanding shares under its share repurchase program. During the six months ended June 30, 2020, the Corporation used $125 million of cash to repurchase approximately 1.2 million outstanding shares under its share repurchase program.
Cash Utilization
Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, and increased dividends 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.
Dividends
The Corporation made dividend payments of $7 million during both the six months ended June 30, 2021 and June 30, 2020.
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, 2021, we had the ability to borrow additional debt of $1.7 billion without violating our debt to capitalization covenant.
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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 2020 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 25, 2021, 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the six months ended June 30, 2021. 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 2020 Annual Report on Form 10-K.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2021, 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, 2021 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, 2021, 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.
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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.
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 asbestos-related 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 six months ended June 30, 2021. Information regarding our Risk Factors is more fully described in "Item 1A. Risk Factors" of our 2020 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 June 30, 2021.
| 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 | 33,899 | 123.88 | 136,034 | $ | 184,140,677 | |||||||||||||||||||||
| May 1 - May 31 | 31,438 | 127.21 | 167,472 | 180,141,506 | ||||||||||||||||||||||
| June 1 - June 30 | 35,374 | 124.38 | 202,846 | 175,741,703 | ||||||||||||||||||||||
| For the quarter ended June 30, 2021 | 100,711 | 125.10 | 202,846 | $ | 175,741,703 | |||||||||||||||||||||
In October 2020, the Corporation announced that its Board of Directors has authorized an additional $200 million for future share repurchases. The Corporation plans to repurchase at least $50 million of its common stock via a 10b5-1 program during the 2021 calendar year.
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 six months ended June 30, 2021. 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 2021 Proxy Statement on Schedule 14A, which is incorporated by reference to our 2020 Annual Report on Form 10-K.
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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 | 8-K | May 18, 2015 | |||||||||||||||
| 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 | |||||||||||||||
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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/ K. Christopher Farkas
K. Christopher Farkas
Vice President and Chief Financial Officer
Dated: August 4, 2021
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