Curtiss-Wright Corporation — Q1 2011 Form 10-Q
Business context and period: Diversified manufacturer and service provider serving defense, aerospace, power generation, oil and gas, and industrial markets through Flow Control, Motion Control, and Metal Treatment segments. The unaudited quarter ended March 31, 2011; comparisons are with Q1 2010 unless otherwise noted. Approximately 40% of revenue was defense-related.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Net sales | $461.9 million | $441.8 million | +4.5% |
| Gross profit / margin | $149.0 million / 32.3% | $138.0 million / 31.2% | Margin +1.1 percentage points |
| Operating income / margin | $41.7 million / 9.0% | $31.1 million / 7.0% | Income +34.1% |
| Net earnings | $24.5 million | $16.3 million | +50.1% |
| Diluted EPS | $0.52 | $0.35 | +48.6% |
| Operating cash flow | $(42.8) million | $(23.0) million | Greater cash use |
| Capital expenditures | $19.2 million | $10.9 million | Higher by $8.4 million |
The effective tax rate was 33.0%, versus 36.1%, largely because Q1 2010 included a one-time healthcare-law-related tax charge. Interest expense declined to $5.1 million from $5.7 million. Dividends were $0.08 per share in both periods.
Liquidity, debt, and cash flow
- Cash was $52.0 million at March 31, 2011, down from $68.1 million at year-end 2010. Cash declined $16.2 million during the quarter.
- Current assets were $943.2 million and current liabilities $404.0 million; the reported current ratio was 2.3 to 1. Working capital was $539.2 million, compared with $472.1 million at year-end.
- Long-term debt was $447.0 million and current debt $2.6 million, for total reported debt of approximately $449.6 million, up from $396.6 million at December 31, 2010. Debt fair value for fixed-rate instruments was estimated at $301 million versus $275 million carrying value; variable-rate debt approximated fair value.
- The company used $163 million of available credit under its revolving credit agreement during the quarter; $204 million remained available at March 31. The agreement expires in August 2012. Management stated cash, operating cash flow, and borrowing availability were sufficient for short- and long-term needs.
- Negative operating cash flow reflected working-capital uses, including receivables, inventory, accounts payable/accruals, and pension/postretirement liabilities. DSO rose to 56 days from 49 at year-end, and inventory turns fell to 4.2 from 4.5.
Performance changes and segment results
- Sales increased $20 million: approximately $10 million organic growth, $7 million incremental acquisition sales, and $3 million favorable foreign-currency translation. Operating income rose $11 million, chiefly from organic improvement and cost-reduction benefits, partly offset by higher costs on certain long-term contracts.
- Flow Control: Sales $239.1 million, down 0.7%; operating income $18.6 million, up 11.8%; margin 7.8%, versus 6.9%. Growth in naval defense and general industrial was offset by weaker oil and gas. Orders fell 14.9% to $251.6 million, mainly due to timing of Virginia-class submarine orders.
- Motion Control: Sales $159.8 million, up 8.4%; operating income $16.3 million, up 16.7%; margin 10.2%, versus 9.5%. Sales included acquisition contributions and organic growth in commercial and defense markets. Orders increased 13.9% to $173.0 million.
- Metal Treatment: Sales $62.9 million, up 17.3%; operating income $10.1 million, up 66.5%; margin 16.0%, versus 11.3%. Higher volume and overhead absorption supported improvement. Orders increased 17.4% to $63.6 million.
- Consolidated new orders declined to $488.2 million from $501.8 million, primarily reflecting lower Flow Control orders, partly offset by increases in Motion Control and Metal Treatment.
Outlook, commentary, and notable items
- No consolidated earnings or revenue guidance was stated in the supplied filing text. Management expected $45–$55 million of additional capital expenditures during the remainder of 2011, after $19 million in Q1.
- Expected 2011 contributions included approximately $32 million to the Curtiss-Wright Pension Plan, of which $17 million was contributed in Q1; $4.5 million to foreign benefit plans; and $1.5 million to postretirement plans.
- The Oil and Gas division restructuring was expected to incur a further $1–$2 million of costs during the rest of 2011. Q1 charges were $0.1 million; approximately $0.3 million had been paid by March 31.
- In January, the company acquired Predator Systems for $13.3 million cash, funded through the revolver. Two subsequent acquisitions closed in April: Douglas Equipment for approximately $20 million and BASF Surface Technologies for approximately $20 million, also funded through the revolver.
- Risks and contingencies include long-term contract cost estimates, pension assumptions, inventory and intangible-asset valuations, environmental obligations, and litigation. The company had $20.7 million of environmental liabilities and $48.0 million of contingent liabilities on outstanding letters of credit at March 31.
- A gender-bias lawsuit remained pending after remand to the New Jersey Appellate Division; the recorded reserve was $10.6 million. The company also disclosed asbestos-related lawsuits but stated it did not expect material liability and maintained insurance coverage.
- Management reported no material change in market risks or risk factors and concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Investor verification points
- Assess whether the Q1 improvement in operating margins is sustainable, particularly given higher costs on certain long-term contracts.
- Monitor Flow Control order timing and the decline in consolidated orders, alongside segment-level order trends.
- Track receivables, inventory, DSO, and operating cash conversion; Q1 operating cash use increased year over year.
- Review debt and revolver usage after the April acquisitions, as well as the August 2012 credit-facility maturity.
- Verify final purchase-price allocations and integration effects for Predator Systems and the two April acquisitions.
- Follow developments in the gender-bias case, environmental reserves, pension funding, and restructuring costs.