Curtiss-Wright Corporation — Q2 2011 Form 10-Q
Period: Quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Amounts below are in millions of dollars unless stated otherwise. Curtiss-Wright is a diversified manufacturer and service provider operating in Flow Control, Motion Control, and Metal Treatment; approximately 40% of revenue comes from defense-related markets.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $514.9 | $462.2 | $976.8 | $903.9 |
| Operating income | $51.7 | $43.4 | $93.4 | $74.5 |
| Net earnings | $31.8 | $25.9 | $56.3 | $42.2 |
| Diluted EPS | $0.68 | $0.56 | $1.20 | $0.91 |
| Operating margin | 10.0% | 9.4% | 9.6% | 8.2% |
| Gross margin | 32.8% | 33.4% | 32.5% | 32.3% |
| New orders | $492.0 | $392.1 | $980.2 | $893.9 |
Q2 sales rose 11.4%, operating income 19.0%, and net earnings 22.8% year over year. First-half increases were 8.1%, 25.3%, and 33.3%, respectively. Management attributed earnings growth mainly to higher volume and improved overhead absorption, plus lower interest expense. Acquisitions contributed about $19 million of Q2 sales and $26 million in the first half; currency translation added about $8 million and $11 million, respectively.
First-half segment performance: Flow Control sales were $505.7 million and operating income $45.2 million; Motion Control sales were $336.3 million and operating income $35.1 million; Metal Treatment sales were $134.7 million and operating income $20.5 million. Metal Treatment recorded the strongest growth, with first-half sales up 24.3% and operating income up 63.8%. Motion Control’s Q2 operating margin declined to 10.7% from 11.8%, primarily due to unfavorable currency effects; Flow Control and Metal Treatment margins improved.
Cash flow, balance sheet, and liquidity
- First-half operating cash flow was $15.1 million, compared with $2.6 million in 2010. Capital expenditures were $37.5 million, making operating cash flow less capital expenditures negative $22.5 million. Acquisitions used $53.6 million; investing cash flow was negative $90.9 million.
- Cash was $63.1 million at June 30, 2011, versus $68.1 million at year-end 2010. Current assets were $985.0 million and current liabilities $419.2 million; the current ratio was 2.4 to 1. Working capital was $565.8 million.
- Total debt was approximately $461.6 million, including $459.0 million long-term debt and $2.6 million current debt; cash-adjusted debt was approximately $398.5 million. Long-term debt increased from $394.0 million at year-end. Fixed-rate debt’s estimated fair value was $308 million versus $275 million carrying value.
- The company reported $175 million drawn under its revolving credit agreement and $183 million unused at quarter-end. Average borrowing rates were 3.4% in Q2 and 3.6% for the first half. The facility expires in August 2012; management said cash, operating cash flow, and available borrowing capacity should meet capital needs.
- Receivables increased $40.2 million and inventory increased $51.6 million from year-end. Management linked working-capital growth to strong year-end collections, inventory builds for future sales and new programs, and long-lead-time purchases. Inventory turns were 4.2 versus 4.5 at year-end; days sales outstanding remained 49.
Changes, outlook, and material matters
- Revenue growth was broad-based, with strength in commercial aerospace, general industrial, power generation, and defense aerospace and naval markets. Oil and gas sales declined due mainly to timing of international capital projects. New orders increased $100 million in Q2 and $86 million for the first half; reported drivers included power-generation orders and oil-and-gas maintenance and project demand.
- Three businesses were acquired in the first half for total cash consideration reflected in acquisition cash outflow of $53.6 million: BASF Surface Technologies, Douglas Equipment, and Predator Systems. Subsequent to quarter-end, Curtiss-Wright acquired IMR Test Labs and ACRA Control, and sold a non-core legacy distribution business for $4.6 million, subject to adjustment.
- No full-year revenue or earnings guidance is provided in the supplied filing text. The company expected $30–$40 million of additional capital expenditures in the rest of 2011, pension contributions of about $13 million, and $0.1–$0.5 million of additional oil-and-gas restructuring costs. It expected remaining restructuring payments by year-end.
- AP1000 reactor coolant pump testing identified localized stator heating. The company increased estimated contract costs in Q2 without a material quarterly impact and was negotiating revised delivery dates and contract provisions. Management did not expect a material effect on operations or cash flows, but outcomes remain subject to negotiations and resolution of the technical issue.
- A gender-bias lawsuit had a $10.6 million accrual at June 30; appellate proceedings remained unresolved. Environmental liabilities totaled $20.7 million. Outstanding letters of credit and similar contingent arrangements were $57.2 million, up from $47.0 million at year-end. The company also disclosed asbestos claims but said it had not incurred material settlements and believed insurance coverage adequate.
- Management identified estimates for long-term contract costs, pensions, inventory obsolescence, warranties, legal matters, and environmental obligations as significant judgments. It reported no material change in market risk or risk factors, and concluded disclosure controls were effective with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the AP1000 pump issue is resolved, and the final delivery schedule, cost exposure, and revised contract terms.
- Whether operating cash generation improves as receivables and inventory rise, and how planned capital spending and pension contributions affect liquidity.
- Progress on refinancing or replacing the revolving credit facility before its August 2012 expiration.
- Integration, purchase-price allocations, and returns from the three first-half acquisitions and two post-quarter acquisitions.
- Developments in the gender-bias litigation, environmental reserves, and other contingent commitments.