Curtiss-Wright Corporation — FY 2013 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2013, including fourth-quarter results. Curtiss-Wright supplies engineered products and services to defense, commercial aerospace, energy, and industrial markets through Flow Control, Controls, and Surface Technologies. In August 2013, David C. Adams became President and CEO; Martin R. Benante remained Executive Chairman.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $2,510.8 million | $2,097.7 million |
| Gross profit / gross margin | $811.1 million / 32.3% | $658.7 million / 31.4% |
| Operating income / margin | $233.6 million / 9.3% | $161.4 million / 7.7% |
| Earnings from continuing operations | $138.0 million | $92.3 million |
| Continuing-operations diluted EPS | $2.88 | $1.95 |
| Cash from operating activities | $237.8 million | $152.5 million |
| Capital expenditures | $72.2 million | $83.0 million |
| Cash and cash equivalents | $175.3 million | $112.0 million |
| Total debt | $959.9 million | $880.2 million |
| Backlog at year-end | $1,715.6 million | $1,653.9 million |
Current assets were $1,337.3 million and current liabilities $534.6 million at year-end, for a current ratio of approximately 2.5. Debt was predominantly long-term: $958.6 million was classified as long-term, with $1.3 million current. The company reported $408 million of unused capacity on its $500 million revolving facility after $50 million of borrowings and $42 million of letters of credit. Management said cash, operating cash flow, and available borrowing capacity were sufficient for near- and long-term needs.
Revenue growth was 20%, but acquisitions contributed about $400.5 million; organic sales growth was approximately 1%, excluding acquisitions and foreign exchange. Operating income rose 45%, reflecting stronger segment results and the non-recurrence of prior-year charges. Continuing-operations earnings rose 50%; 2012 net earnings also included $21.6 million from discontinued operations, including a divestiture gain, so total net earnings are not directly comparable.
Segment results
- Flow Control: sales of $1,299.7 million, up 19%; operating income of $116.5 million, up 48%, with a 9.0% margin. Acquisitions drove much of sales growth; organic sales were essentially flat.
- Controls: sales of $898.2 million, up 24%; operating income of $108.6 million, up 25%, with a 12.1% margin. Sales growth was primarily acquisition-related, while organic commercial aerospace demand improved and defense sales declined.
- Surface Technologies: sales of $312.9 million, up 14%; operating income of $51.0 million, up 85%, with a 16.3% margin. Results benefited from higher aerospace coating and peening volumes and the absence of $12.1 million of prior-year restructuring and impairment charges.
Cash, financing, and capital allocation
Operating cash flow increased by $85.4 million, mainly from higher cash earnings and timing of vendor payments and advance collections. Investing used $313.7 million, including $236.1 million for five acquisitions; financing provided $140.1 million. Cash increased by $63.3 million during the year. The company issued $500 million of senior notes in 2013 and repaid $125 million of maturing notes. Interest expense rose to $37.0 million from $26.3 million. The company was in compliance with its debt covenants, including a 60% debt-to-capitalization limit.
The quarterly dividend increased from $0.09 to $0.10 per share in the second quarter; full-year dividends were $0.39 per share. No shares were repurchased in 2013. Management expected 2014 capital expenditures of $80–$90 million, dividends of approximately $25 million, and pension contributions of approximately $40 million.
Outlook, risks, and unusual items
- Outlook: The filing does not provide a specific consolidated revenue or earnings forecast. Management described itself as cautiously optimistic about modest 2014 growth in commercial and industrial markets. It cited expected commercial aerospace production growth and modest general industrial growth, while noting uncertainty in oil and gas capital spending and defense budgets.
- Acquisition dependence: Five businesses were acquired for $236.1 million in 2013. Acquisition integration, purchase accounting, and realization of expected returns remain execution risks. Goodwill and other intangible assets totaled approximately $1.58 billion, about 46% of total assets.
- AP1000 contract dispute: Westinghouse asserted entitlement to approximately $25 million in maximum liquidated damages under the China contract for delivery delays. Curtiss-Wright disputed responsibility, stated it had legal defenses, and recorded no accrual; the disclosed possible loss range was $0–$25 million.
- CNRL claim: A claim concerning a 2011 refinery fire alleges damages estimated at $1 billion or more. The company could not estimate its potential loss, believes it has adequate defenses, and cautioned that insurance may not cover a judgment fully.
- Other exposures: The company disclosed approximately 243 pending asbestos lawsuits, environmental remediation reserves of $16.3 million, and risks from defense-spending changes, government contract cancellation, long-term contract cost estimates, foreign exchange, suppliers, pensions, and regulation.
- Goodwill sensitivity: No impairment was recorded, but the oil and gas reporting unit’s estimated fair value exceeded carrying value by 20%. Continued weak capital-project orders or failure to realize Cimarron integration synergies could pressure that cushion.
- Pension and reporting changes: Pension and postretirement adjustments contributed $87.4 million of other comprehensive income, largely from higher discount rates and asset returns; this was not operating earnings. Effective January 2014, the company reorganized reporting into Commercial/Industrial, Defense, and Energy segments.
Most important facts for investors to verify
- How much of future growth and earnings improvement is organic versus acquisition-driven, and whether acquired businesses meet return expectations.
- Progress and responsibility allocation for AP1000 delivery delays, and any change in the $0–$25 million potential penalty exposure.
- Developments in the CNRL litigation, the company’s potential share of damages, and available insurance coverage.
- Whether oil and gas revenue and cost assumptions support the 20% goodwill valuation cushion in that reporting unit.
- Debt levels, acquisition funding, operating cash conversion, and the company’s ability to meet planned capital spending, dividends, and pension contributions.