Curtiss-Wright Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless noted otherwise, figures below are in U.S. dollars; financial amounts are in millions.
Business context
Curtiss-Wright is a diversified manufacturer and service provider operating in Flow Control, Controls, and Surface Technologies. It serves defense and commercial markets, including aerospace, oil and gas, power generation, and general industry. Management expected approximately 30% of 2013 revenue to come from defense markets.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Net sales | $600.7 | $479.2 | $1,811.0 | $1,507.3 |
| Operating income | $62.9 | $23.4 | $158.7 | $99.5 |
| Operating margin | 10.5% | 4.9% | 8.8% | 6.6% |
| Net earnings from continuing operations | $36.4 | $11.4 | $90.7 | $54.1 |
| Diluted EPS from continuing operations | $0.76 | $0.24 | $1.90 | $1.14 |
| New orders | $595.8 | $473.3 | $1,816.0 | $1,473.6 |
Q3 sales rose 25% and nine-month sales rose 20%. Acquisitions accounted for most of the reported sales growth; organic sales grew 3% in Q3 and were flat for the nine-month period. Q3 commercial-market sales rose 43%, while defense sales declined 3%; for nine months, commercial sales rose 37% and defense sales declined 7%. Nine-month growth was strongest in oil and gas and general industry, while defense aerospace was weaker.
Gross profit was $194.7 million in Q3 and $579.4 million for nine months. The filing does not provide gross margin percentages directly. Effective tax rates were 32.1% for Q3 and 31.4% for nine months. Interest expense increased 46% in Q3 and 41% for nine months, mainly reflecting higher debt following note issuances.
For the first nine months, operating cash flow was $134.4 million, versus $53.9 million a year earlier. Investing cash use was $163.9 million, including $101.2 million for business acquisitions; capital expenditures were $57.9 million. Cash increased to $171.4 million from $112.0 million at year-end 2012.
At September 30, 2013, total debt was $920.0 million and cash was $171.4 million; net debt was approximately $748.6 million. The company had no borrowings under its revolving credit agreement and reported $454 million of unused availability. It stated it could borrow an additional $1.2 billion without breaching its 60% debt-to-capitalization covenant and was in compliance with its debt covenants.
Material changes and unusual items
- Q3 operating income increased substantially from the prior year, which included $12.2 million of AP1000 contract cost-estimate charges and adverse effects from the 2012 EMD strike. These prior-year items did not recur. Management noted that, excluding comparability items and acquisition contributions, Flow Control operating income declined, primarily due to higher compensation costs.
- In February 2013, the company issued $400 million of senior notes; it issued another $100 million in September. It repaid $125 million of senior notes that matured in September. Average debt outstanding for the first nine months was $966 million, compared with $584 million in 2012.
- The company acquired Phönix for $97.9 million, Gulf33 for $4.1 million, and other businesses during the period. Three acquisitions announced after quarter-end—Parvus, Ovalpath, and Arens Controls—were completed in October.
- Pension plan amendments and remeasurement reduced the U.S. pension liability by $45 million, with a $32 million after-tax gain recorded in accumulated other comprehensive income. The company also disclosed an immaterial out-of-period adjustment: an $18 million tax effect recorded in Q3 that reduced comprehensive income and increased deferred tax liabilities, without affecting net earnings or cash flows.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said available cash, operating cash flow, revolver capacity, and access to capital markets were sufficient for anticipated short- and long-term needs, including acquisitions and shareholder returns. The quarterly dividend was increased to $0.10 per share in Q2 2013.
On October 10, 2013, Westinghouse asserted entitlement to approximately $25 million in maximum liquidated damages under the AP1000 China contract for delivery delays. Curtiss-Wright disputed responsibility, cited significant uncertainty and legal defenses, and recorded no accrual at September 30; the disclosed possible loss range was $0–$25 million. The company also identified potential effects from U.S. defense spending reductions, contract delays or cancellations, and lower commercial demand in some markets. Environmental reserves were $16.8 million. Management did not expect pending legal matters, including asbestos claims, to have a material effect and stated insurance coverage was adequate for potential asbestos liabilities.
Most important facts for investors to verify
- How much of continuing sales and profit growth is sustainable organically, given acquisitions drove most reported revenue growth and organic nine-month sales were flat.
- The ultimate responsibility and financial exposure, if any, for the AP1000 China delivery delays and Westinghouse’s $25 million liquidated-damages assertion.
- Debt, interest costs, covenant headroom, and the effect of post-quarter acquisitions on leverage and liquidity.
- Whether weaker defense aerospace demand and exposure to U.S. defense budget reductions affect future orders and results.
- The impact of pension assumptions and plan changes, including the disclosed out-of-period tax adjustment, on future earnings and comprehensive income.