Curtiss-Wright Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below. Curtiss-Wright supplies engineered products and services across defense, power generation, oil and gas, aerospace, and industrial markets through Flow Control, Controls, and Surface Technologies.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $2.098 billion | $2.017 billion |
| Gross profit / margin | $658.7 million / 31.4% | $656.9 million / 32.6% |
| Operating income / margin | $161.4 million / 7.7% | $186.9 million / 9.3% |
| Continuing-operations earnings | $92.3 million | $118.6 million |
| Diluted EPS, continuing operations | $1.95 | $2.52 |
| Net earnings, including discontinued operations | $113.8 million | $126.4 million |
| Operating cash flow | $152.5 million | $201.9 million |
| Capital expenditures | $83.0 million | $84.3 million |
| Total debt at year-end | $880.2 million | $586.4 million |
| Cash at year-end | $112.0 million | $194.4 million |
Approximate free cash flow, calculated as operating cash flow less capital expenditures, was $69.5 million versus $117.5 million. Current assets were $1.176 billion and current liabilities $639.7 million at year-end (current ratio approximately 1.84). The filing states the company was in compliance with debt covenants.
Segment sales and operating income were: Flow Control, $1.095 billion and $78.8 million; Controls, $726.7 million and $86.5 million; Surface Technologies, $275.7 million and $27.5 million. Segment margins were 7.2%, 11.9%, and 10.0%, respectively.
Fourth-quarter results: Sales were $590.4 million, continuing-operations earnings $38.2 million, and diluted continuing-operations EPS $0.81. The comparable 2011 quarter, as restated and reclassified, reported sales of $550.5 million, continuing earnings of $36.3 million, and diluted continuing-operations EPS of $0.77.
Material changes versus prior year
- Sales grew 4%, but operating income fell 14% and continuing-operations earnings fell 22%. Commercial-market sales rose 11%; defense sales declined 6%.
- Flow Control operating income declined 24%, reflecting strike impacts, approximately $23.7 million of additional AP1000 reactor coolant pump costs, and restructuring charges. Controls operating income rose 15%; Surface Technologies operating income fell 13%, including $12.1 million of restructuring and impairment charges.
- Operating cash flow decreased $49.4 million, principally because of lower advance payments on long-term contracts and lower earnings. Investing cash use increased with $460.4 million of acquisitions, compared with $178.1 million in 2011.
- Debt rose by approximately $293.8 million, largely supporting acquisitions. Goodwill increased to $1.013 billion from $759.4 million; goodwill and other intangible assets together were approximately 46% of total assets.
- Backlog was $1.654 billion, down 2% from $1.695 billion; new orders decreased to $1.981 billion from $2.029 billion.
Outlook, risks, and unusual items
- Outlook: Management expressed cautious optimism for moderate U.S. economic growth and continued commercial aerospace strength in 2013; it anticipated modest general industrial growth and a possible oil-and-gas capital-project recovery. Defense spending and program timing remained uncertain. This is directional commentary, not formal earnings guidance.
- Management expected 2013 capital expenditures of approximately $90 million, dividends of approximately $16 million, and pension contributions of approximately $35 million. It expected cumulative pension contributions of about $220 million from 2013 through 2017.
- The 2012 EMD strike shifted an estimated $18 million of revenue and $6 million of operating income into 2013 and caused an additional $5 million unfavorable operating-income impact from unrecovered overhead. The union ratified an agreement in September 2012.
- The heat-treating business was sold for $52 million in March 2012. Discontinued operations included an $18.5 million after-tax divestiture gain; therefore, reported net earnings exceeded continuing-operations earnings.
- The company acquired eight businesses during 2012 for approximately $460 million net of cash acquired. Management also disclosed a January 2013 agreement to acquire Germany’s Phönix Group for approximately €82 million ($106 million).
- Prior-period error: a Controls subsidiary’s long-term contract accounting and fixed-asset errors were corrected retrospectively. The errors overstated retained earnings by a cumulative $24.1 million at December 31, 2011; the company said they were not material to any individual prior period, but would have been material if booked in 2012.
- Key risks include potential U.S. defense budget cuts and sequestration, government contract termination or cost overruns, AP1000 delivery/cost exposure, acquisition integration, long-term contract estimate changes, pension funding, foreign exchange, supplier constraints, environmental obligations, and goodwill impairment. Oil-and-gas goodwill of $187 million was not impaired, but that reporting unit’s estimated fair value was not substantially above carrying value.
- Environmental reserves were $16.4 million. The company reported no material expected effect from pending legal matters; it had approximately 111 pending asbestos lawsuits and stated that it had not been found liable or paid a material settlement in those cases. AP1000 shipments had been delayed and could theoretically prompt liquidated damages, but the company reported no claim or threat and did not expect a material impact.
Important facts for investors to verify
- Whether 2013 results recover from the Flow Control strike and AP1000 cost overruns, and whether remaining pump deliveries meet revised schedules.
- How acquisition integration, financing costs, and acquired-business performance affect earnings, cash generation, and leverage.
- Whether defense-budget actions or program delays reduce orders, backlog conversion, or revenue.
- The assumptions behind pension obligations and required contributions, and whether the oil-and-gas reporting unit remains above impairment thresholds.
- The effects of the retrospective accounting correction on comparability and the effectiveness of controls at acquired businesses, which were excluded from management’s 2012 internal-control assessment.
- Near-term refinancing of the $125 million senior notes due in September 2013 and available borrowing capacity under the revolving facility.