CW

Curtiss-Wright Corp. 10-Q Summary (Period Ended Sept 30, 2009)

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for Curtiss-Wright Corporation, a diversified multinational manufacturer of precision components and systems for aerospace, defense, automotive, and industrial markets. The report covers the three and nine months ended September 30, 2009. The company operates through three segments: Flow Control, Motion Control, and Metal Treatment. Approximately 40% of revenues are derived from defense-related markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales were flat for the quarter ($435.8M vs. $435.7M in 2008) and down 1.2% for the nine-month period ($1.307B vs. $1.323B). Organic sales declined due to weak global economic conditions in general industrial, oil and gas, and commercial aerospace markets.
• Profitability: Operating income decreased 25% for the quarter and 20% for the nine months. Net earnings fell 27% for the quarter and 21% for the nine months compared to the prior year.
• Segment Performance:
  • Flow Control: Sales increased 4.8% (quarter) and 3.8% (nine months), driven by defense and power generation growth, offset by declines in oil and gas.
  • Motion Control: Sales increased 3.6% (quarter) and 2.3% (nine months), with strong defense growth offset by commercial aerospace weakness.
  • Metal Treatment: Sales declined significantly, down 24.5% (quarter) and 25.5% (nine months), primarily due to reduced demand for shot peening services in commercial aerospace and industrial markets.
• Acquisitions: The company acquired EST Group, Inc. ($40M) and Nu-Torque ($5.3M) in 2009. The Nu-Torque acquisition resulted in a $1.9 million "gain on bargain purchase."

Guidance, Outlook, and Risks

• Outlook: Management expects continued weakness in general industrial, oil and gas, and commercial aerospace markets. However, strong organic growth is anticipated in power generation and defense markets, specifically related to the Ford class aircraft carrier, Global Hawk UAV, and AP1000 nuclear reactor programs.
• Restructuring: The company is executing a consolidation plan with estimated total costs of $13 million, expecting annualized cash savings of $10–15 million upon completion.
• Pension Obligations: No contributions are expected to the domestic pension plan in 2009 or 2010 due to regulatory changes. Significant contributions of $15–20 million are expected in 2011.
• Legal Contingencies: A gender bias lawsuit resulted in a $6.5 million reserve. The punitive damages were set aside on appeal, but the plaintiff has petitioned the New Jersey Supreme Court for review. Asbestos litigation is ongoing but not expected to be material.
• Debt Maturity: $75 million of debt was reclassified to short-term due to a maturity in September 2010. Management believes cash flows and credit facilities are sufficient to meet this obligation.

Investor Verification Checklist

• Segment Margin Compression: Verify the sustainability of operating margins in the Metal Treatment segment, which dropped from 20.4% to 8.8% year-over-year.
• Order Backlog: Confirm the stability of the $1.683 billion backlog, noting the 27% decline in new orders for the nine-month period driven by the non-recurrence of a large AP1000 order from the prior year.
• Pension Funding: Monitor the $15–20 million cash outflow expected for pension contributions in 2011.
• Debt Refinancing: Assess the company's ability to refinance or repay the $75 million debt maturing in September 2010.
• Acquisition Integration: Review the performance of 2009 acquisitions (EST and Nu-Torque) to ensure they offset the organic decline in industrial markets.