Curtiss-Wright Corporation — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Curtiss-Wright designs, manufactures, and services engineered products across aerospace, defense, power generation, oil and gas, and industrial markets. It reports three segments: Flow Control, Controls, and Surface Technologies. The filing identifies acquisitions as the primary driver of reported sales growth; organic sales were slightly lower year over year. The heat treating business sold in 2012 is reported as discontinued operations.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $617.7 | $526.4 | $1,210.4 | $1,028.0 |
| Operating income | $57.8 | $40.5 | $95.8 | $76.1 |
| Operating margin | 9.4% | 7.7% | 7.9% | 7.4% |
| Continuing-operations earnings | $33.4 | $22.8 | $54.3 | $42.7 |
| Diluted EPS from continuing operations | $0.70 | $0.48 | $1.14 | $0.90 |
| Net earnings | $33.4 | $22.7 | $54.3 | $64.1 |
Q2 sales grew 17%, operating income 43%, and continuing-operations earnings 46%. For the first half, sales grew 18%, operating income 26%, and continuing-operations earnings 27%. First-half 2012 net earnings included $21.4 million from discontinued operations, including a divestiture gain; therefore, reported net earnings declined year over year despite higher continuing-operations earnings.
- Growth mix: Acquisitions added approximately $103 million of Q2 sales and $193 million for the first half. Organic sales declined 2% in Q2 and 1% in the first half; currency effects were small.
- Markets: First-half commercial sales increased 34%, led by oil and gas and general industrial, while defense sales declined 8%. Defense represented approximately 30% of expected 2013 revenue.
- Segments: First-half sales increased 17% in Flow Control, 22% in Controls, and 12% in Surface Technologies. Controls’ first-half operating margin fell to 9.4% from 10.5%; Flow Control and Surface Technologies margins improved to 8.2% and 17.1%.
- Orders: New orders rose 24% in Q2 and 22% in the first half, substantially reflecting acquired businesses. Management cited acquisition-related orders of $102.5 million in Q2 and $191.5 million for the first half.
- Cash flow: First-half operating cash flow was $60.8 million, versus $18.2 million a year earlier. Investing activities used $133.2 million, including the $97.9 million net Phönix acquisition; capital expenditures were $32.1 million. Cash increased by $31.0 million to $143.0 million.
- Liquidity and debt: Current assets were $1,255.7 million and current liabilities $609.3 million. Total debt was $948.0 million, versus $880.2 million at year-end 2012; cash less total debt was approximately $805 million net debt. No revolver borrowings were outstanding, with $450 million available. The company reported compliance with debt covenants.
- Other items: Q2 dividend was $0.10 per share, an 11.1% increase year over year. The effective tax rate was 31.5% for Q2 and 30.8% for the first half. Pension remeasurement reduced the pension liability and improved the pension-related accumulated other comprehensive loss by $45 million before tax.
Management commentary, outlook, and risks
Management attributed earnings improvement to higher segment operating income, partly offset by increased pension and interest expense. Interest expense increased following the February 2013 issuance of $400 million in senior notes. No formal earnings or revenue guidance is provided in the supplied filing text. Management stated that liquidity sources were sufficient for short- and long-term needs and expected 2013 contributions of approximately $35 million to the Curtiss-Wright Pension Plan, $5 million to foreign benefit plans, and $1.7 million to postretirement plans.
- Defense budget reductions and sequestration could lead to contract delays, cancellations, or lower spending; management noted uncertainty over future defense budgets.
- The AP1000 reactor coolant pump program had missed certain delivery dates and includes potential liquidated-damage provisions. The filing reported no claim or threat at the time and management did not expect a material impact.
- Environmental liabilities were $16.6 million. The company also faces asbestos-related lawsuits, but said it did not expect material liability and maintained insurance coverage.
- Two 15-year build-to-suit facility leases were signed in June 2013, with initial annual rents of $1.9 million and $1.1 million, respectively, subject to escalation terms.
- Acquisition integration, contract cost estimates, pension assumptions, and customer and market demand are relevant uncertainties. Management reported no material change in risk factors or market-risk exposure during the period.
Important facts for investors to verify
- How much of future sales and order growth is organic versus acquisition-driven, and whether organic sales recover.
- Whether defense-market weakness, including lower production on named programs, affects segment performance or contracts further.
- Progress on AP1000 delivery schedules and any change in the status of potential liquidated damages.
- Debt levels, interest costs, covenant headroom, and the planned September 2013 issuance of an additional $100 million of senior notes.
- Realization of acquired-business performance and the effect of acquisition-related amortization and pension costs on margins and cash generation.