Curtiss-Wright Corporation — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013. Curtiss-Wright is a diversified engineered-products and services company operating through Flow Control, Controls, and Surface Technologies. Comparisons reflect continuing operations: the heat-treating business sold in March 2012 is classified as discontinued operations.
Financial performance and liquidity
- Sales: $592.7 million, up 18% year over year. Management attributed the increase primarily to acquisitions; organic sales were essentially flat and foreign-exchange effects were minimal. New orders rose to $617.1 million from $515.1 million, with $89 million of the increase attributed to acquisitions.
- Profit and margins: Operating income was $38.0 million, up 7%; operating margin was 6.4%, down 70 basis points. Continuing-operations earnings were $20.9 million, up from $19.8 million; diluted continuing-operations EPS was $0.44 versus $0.42. Gross profit was $183.7 million, or approximately 31.0% of sales, compared with $159.3 million, or approximately 31.8%.
- Segment results: Flow Control sales were $310.6 million and operating income $24.1 million; Controls sales were $204.6 million and operating income $12.1 million; Surface Technologies sales were $77.5 million and operating income $12.1 million. Controls operating income declined 6%, primarily due to acquisition-related dilution.
- Cash flow: Operating activities used $1.1 million, versus $4.7 million used in Q1 2012. Investing activities used $114.7 million, including $98.5 million for the Phönix acquisition. Capital expenditures were $15.0 million. Financing activities provided approximately $125.3 million, and cash increased $6.8 million to $118.8 million.
- Debt and liquidity: Total debt was $987.9 million at quarter-end, compared with $880.2 million at December 31, 2012. Cash was $118.8 million. Unused availability under the revolving credit facility was $438.1 million; the company reported compliance with debt covenants. The current portion of debt was $126.4 million and long-term debt was $861.5 million.
- Other metrics: Interest expense increased 34% to $8.7 million, primarily following new debt issuance. The effective tax rate was 29.8%, down from 32.0%, mainly reflecting the retroactive R&D tax credit. Quarterly dividends were $0.09 per share.
Material changes versus the prior comparable period
- Q1 2013 sales growth was acquisition-led, with organic sales essentially flat. Commercial-market sales increased 34%, while defense sales declined 8%.
- Continuing-operations earnings improved modestly, but reported net earnings fell to $20.9 million from $41.3 million. Q1 2012 included $21.5 million of discontinued-operations earnings, including an $18.4 million after-tax divestiture gain.
- Operating margin declined despite higher operating income. Acquisitions were 110 basis points dilutive to consolidated margin; higher pension costs and foreign-currency transaction losses also increased corporate and non-segment expense.
- Cash used by operations narrowed year over year. Investing cash flow shifted from a $29.1 million source in Q1 2012—primarily heat-treating sale proceeds—to a $114.7 million use in Q1 2013, principally because of the Phönix acquisition.
- Comprehensive income was a loss of $8.1 million, versus income of $62.5 million, principally reflecting a $31.8 million after-tax foreign-currency translation loss.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year sales or earnings guidance. Management said approximately 30% of 2013 revenue was expected to come from defense-related markets.
- In February, the company acquired German valve maker Phönix for $98.5 million net of cash acquired. The acquired business contributed $4.8 million of sales and a $0.9 million net loss from acquisition through quarter-end. The purchase-price allocation includes $35.7 million of goodwill.
- The company issued $400 million of senior notes in February, with maturities from 2023 to 2028 and coupon rates of 3.70% to 4.05%. It used $272.8 million of proceeds to repay revolving-credit borrowings. An additional $100 million note issuance was scheduled for September 2013.
- Management identified uncertainty around future U.S. defense spending and sequestration; reductions, cancellations, or delays affecting defense programs could materially affect results, financial position, or cash flows.
- For the AP1000 nuclear program, the company reported missed delivery dates under contracts containing liquidated-damages provisions. It said no claim had been made and did not expect a material impact, but the matter remains a risk.
- Environmental liabilities were $16.7 million. The company also disclosed asbestos-related lawsuits, which management did not expect to have a material effect and believed were adequately insured. Outstanding standby letters of credit were $52.4 million; a $52.9 million surety bond supports required financial assurance for its Cheswick facility.
- Defined-benefit pension cost rose to $13.2 million from $11.0 million. The company contributed $7.0 million to its domestic pension plan in Q1 and expected approximately $35.0 million of domestic contributions for 2013.
- Management stated that disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much future sales and earnings growth is organic versus attributable to acquisitions, and whether acquired businesses improve margins after integration.
- Whether Controls’ acquisition-related margin dilution and unfavorable long-term contract performance improve in subsequent quarters.
- Cash conversion and working-capital trends, including receivables, inventories, progress payments, and the funding needs of long-cycle contracts.
- Debt levels, interest costs, covenant headroom, the planned September 2013 note issuance, and pension contribution requirements.
- Developments in U.S. defense budgets and sequestration, AP1000 delivery milestones and potential contract claims, and environmental or other legal contingencies.