Curtiss-Wright Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Amounts below are USD millions, except per-share data and where noted. Curtiss-Wright is a diversified manufacturer and service provider operating in Flow Control, Motion Control, and Metal Treatment; approximately 40% of revenue is defense-related.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $526.4 | $505.7 | $1,028.0 | $958.6 |
| Gross profit | $164.0 | $165.6 | $323.3 | $311.5 |
| Operating income | $40.5 | $48.9 | $76.1 | $88.1 |
| Continuing-operations earnings | $22.8 | $30.1 | $42.7 | $53.0 |
| Net earnings | $22.7 | $31.8 | $64.1 | $56.3 |
| Diluted EPS, continuing operations | $0.48 | $0.64 | $0.90 | $1.13 |
| Diluted EPS, total | $0.48 | $0.68 | $1.35 | $1.20 |
- Revenue grew 4% in Q2 and 7% year to date. Acquisitions net of divestitures added $18 million and $53 million, respectively; foreign currency reduced revenue by approximately $5 million and $6 million.
- Gross margin was approximately 31.2% in Q2 and 31.4% year to date, versus 32.7% and 32.5% in the prior-year periods. Reported operating margin was 7.7% in Q2 and 7.4% year to date, versus 9.7% and 9.2%.
- Q2 operating income declined 17%; year-to-date operating income fell 14%. Management said results excluding restructuring charges were essentially flat for Q2 and down $1 million year to date. The quarter included $8.0 million of restructuring costs, including $4.8 million of non-cash asset write-downs in Metal Treatment.
- Q2 continuing-operations earnings fell 24%; year-to-date continuing earnings fell 20%. Six-month total net earnings rose because the Heat Treating divestiture contributed a $18.3 million after-tax gain; discontinued operations also included $3.1 million of operating earnings. Q2 discontinued operations recorded a $0.1 million loss.
- Operating cash flow was $18.2 million for the first six months, compared with $15.1 million a year earlier. Investing activities provided $1.9 million, including $51.2 million of divestiture proceeds; capital spending was $40.7 million. Financing activities provided $0.3 million. Cash increased to $213.1 million from $194.4 million at year-end.
- At June 30, current assets were $1,213.6 million and current liabilities $470.2 million; working capital was $743.4 million and the current ratio 2.6:1. Total debt carrying value was approximately $588.1 million, including $585.7 million long-term debt; cash exceeded current debt, leaving net debt of about $375 million. Unused revolving-credit availability was $373 million. The company reported compliance with debt covenants.
Changes and segment trends
- Motion Control was the strongest Q2 operating performer: sales rose 3%, operating income 25%, and margin increased to 13.0%, aided by acquisitions, foreign exchange, and organic improvements. Year-to-date sales and operating income rose 3% and 4%.
- Flow Control sales increased 3% in Q2 and 7% year to date, but operating income fell 30% and 18%, respectively. The segment cited lower defense program activity, initial low-margin vessel orders, restructuring, and unexpected AP1000 contract costs.
- Metal Treatment sales increased 13% in Q2 and 20% year to date. Reported operating income declined 22% in Q2 and increased 4% year to date, including $5.2 million of restructuring and impairment charges; excluding the non-cash charges, management reported stronger operating income and margins.
- Commercial sales increased 9% in Q2 and 12% year to date, led by commercial aerospace and power generation. Defense sales declined 3% in Q2 and increased 1% year to date. New orders were $485.1 million in Q2 and $1,000.2 million year to date, approximately flat and up 4%, respectively, versus prior-year periods.
Outlook, management commentary, and risks
- No formal full-year revenue or earnings guidance is provided in the supplied filing text. Management expected second-half restructuring savings of approximately $2 million in Flow Control, $3 million in Motion Control, and $7 million in Metal Treatment-related charges, primarily in Q4. Capital expenditures of $40 million to $50 million were expected for the rest of 2012.
- The company expected 2012 contributions of approximately $48 million to its domestic pension plan, $4.3 million to foreign benefit plans, and $1.6 million to postretirement plans. Domestic pension contributions were $17 million in the first half.
- Heat Treating was sold to Bodycote on March 30, 2012 for $52 million, subject to a post-closing adjustment. Results are presented as discontinued operations. The sale is a material comparability factor for segment and consolidated results.
- AP1000 reactor coolant pump qualification testing was completed in April after a localized stator heating issue. The first pump was expected to be ready for shipment in Q3. The company incurred $6 million of unanticipated additional contract costs in Q2; management believed revised delivery dates mitigated performance risk and did not expect a material ultimate effect on results or cash flows.
- An interim goodwill test for the Flow Control oil and gas reporting unit found no impairment, but estimated fair value was not substantially above carrying value. The unit had $105 million of goodwill. Ongoing delays in international customer capital expenditures and further deterioration in key assumptions could trigger additional testing or impairment.
- Management warned that U.S. defense budget reductions and possible sequestration beginning in 2013 could delay or cancel programs and materially affect results. The company also disclosed $21.2 million of environmental liabilities and $55.8 million of contingent letters of credit.
- A gender-bias lawsuit was settled in July 2012 for $5.2 million; the same amount was reserved at June 30. Other disclosed legal matters, including asbestos claims, were not expected by management to have a material adverse effect.
- The revolving credit facility was due to expire August 10, 2012. Renewal negotiations were underway, and management anticipated renewal on or before expiry with similar capacity and terms. The company had no borrowings under the facility at June 30.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit-facility renewal was completed on schedule and on comparable terms.
- Progress, shipment timing, and any further costs or contractual effects related to AP1000 pumps.
- Performance of the oil and gas reporting unit, including customer capital-spending delays and goodwill impairment assumptions.
- Whether segment trends and restructuring actions deliver the expected savings, particularly in Flow Control and Metal Treatment.
- Final Heat Treating sale-price adjustment and the effect of divestiture-related items on comparable results.
- Potential effects of defense budget reductions or sequestration on contract demand, awards, and program timing.