Curtiss-Wright Corporation — Q3 2010 Form 10-Q
Business context and reporting period. Diversified manufacturer and services provider operating through Flow Control, Motion Control, and Metal Treatment. About 40% of revenue is defense-related. This unaudited filing covers the quarter and nine months ended September 30, 2010; financial amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $465.8 | $435.8 | $1,369.8 | $1,306.9 |
| Gross profit / margin | $155.7 / 33.4% | $142.3 / 32.7% | $448.1 / 32.7% | $422.7 / 32.3% |
| Operating income / margin | $48.1 / 10.3% | $36.2 / 8.3% | $122.6 / 9.0% | $111.1 / 8.5% |
| Net earnings | $27.8 | $20.1 | $70.0 | $60.4 |
| Diluted EPS | $0.60 | $0.44 | $1.51 | $1.32 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $37.7 | $81.0 |
- Q3 sales rose 7%, with organic growth of 5%; operating income increased 33% and diluted EPS increased 36%. Management attributed improved margins chiefly to higher production volumes and cost-reduction and restructuring efforts.
- Nine-month sales increased 5%, operating income 10%, and net earnings 16%. Organic operating income grew about 18%, partly offset by $8 million of unfavorable foreign-currency translation.
- For the first nine months, capital expenditures were $38.8 million and acquisitions used $42.2 million. Operating cash flow less capital expenditures was approximately negative $1.1 million, before acquisitions and other investing activity.
- Cash was $83.9 million at September 30, versus $65.0 million at December 31, 2009. Total debt was approximately $526.6 million, versus $465.1 million at year-end. Current assets were $944.9 million and current liabilities $401.8 million; working capital was $543.1 million and the current ratio was 2.4:1.
- Days sales outstanding increased to 54 from 44 at year-end; inventory turns were 4.2 versus 4.3. Receivables rose $68 million from year-end, primarily reflecting higher trade and unbilled receivables.
Segments and material changes
- Q3 sales increased in all three segments: Flow Control 5%, Motion Control 9%, and Metal Treatment 10%. Q3 segment operating income increased 17%, 32%, and 30%, respectively.
- For the first nine months, segment sales rose 4% in Flow Control, 5% in Motion Control, and 7% in Metal Treatment. Segment operating income rose 18%, 7%, and 18%, respectively.
- Commercial aerospace and general industrial demand improved, including demand for sensors, controls, embedded computing, and metal-treatment services. Defense aerospace and naval activity benefited from Global Hawk and Virginia-class submarine programs. These gains were partly offset by declining ground-defense sales, including effects from cancellation of the Future Combat Systems program.
- Oil and gas remained challenging due to delayed orders for traditional valves; power-generation sales were broadly flat. Overall backlog was $1.63 billion at September 30, nearly unchanged from year-end. Flow Control backlog declined 5% to $1.13 billion, while Motion Control backlog rose 13% to $501 million.
- Two 2010 acquisitions—Hybricon and Specialist Electronics Services—were funded partly through the revolving credit facility. Their combined reported purchase amounts were about $41 million; acquisition-related sales contributed $8 million in Q3 and $16 million for the nine-month period.
Liquidity, outlook, and risks
- The company reported $128 million of unused availability under its revolving credit agreement at September 30, 2010; the facility expires in August 2012. It drew on the revolver to repay $75 million of senior notes maturing in September. Management said cash, operating cash flow, and available borrowings were sufficient for short- and long-term needs.
- Management expected about $30 million of additional capital expenditures in the remainder of 2010. It expected $35–$40 million of contributions to the qualified pension plan in 2011, and $1.5 million to foreign benefit plans and $0.6 million to postretirement plans in Q4 2010.
- Management estimated annualized cash savings of $20–$25 million from restructuring after completion. The 2009 restructuring plan was completed; $2.9 million of additional restructuring costs were incurred in the first nine months of 2010.
- No formal earnings or revenue guidance is stated in the supplied filing text. The company cautioned that forecasts are subject to risks including contract performance and awards, government defense-budget changes, market demand, supplier and capacity constraints, acquisition integration, financing, and legal or environmental matters.
- Environmental liabilities were $21.0 million. Outstanding letters of credit were $46.6 million. A former executive’s gender-bias case remained pending before the New Jersey Supreme Court; the company had recorded a $6.5 million reserve. The company also disclosed asbestos-related lawsuits but said it did not expect material liability.
- A 20-year facility lease carries annual fixed rent of $1.4 million, with five years of free rent at the end of the 25-year initial term. A one-time, non-cash $0.8 million charge related to retiree-health tax-law changes was recorded in Q1. Q3 postretirement expense was reduced by $0.8 million following favorable claims and demographic experience.
Key facts for investors to verify
- Whether improved segment margins and commercial-market demand persist, and whether defense ground-market declines or oil-and-gas delays deepen.
- Cash conversion and working-capital trends, particularly receivables, unbilled contract balances, and deferred revenue, given the decline in nine-month operating cash flow.
- Debt and revolver availability after acquisitions, note repayment, and expected capital spending; also assess the 2011 pension contribution requirement.
- Backlog conversion, contract estimates-to-complete, and the timing of major defense and commercial program orders.
- Final acquisition purchase-price allocations and integration performance, as well as exposure to litigation, environmental obligations, and long-term lease commitments.