CW

Curtiss-Wright Corp. 10-Q Summary (Period Ended Sept 30, 2008)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, and the nine months ended on that date. Curtiss-Wright Corporation is a diversified, multinational manufacturer of precision components and systems serving aerospace, defense, automotive, power generation, and industrial markets. Operations are organized into three segments: Flow Control, Motion Control, and Metal Treatment. Approximately 35% of revenues are derived from defense-related markets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 10% in Q3 and 21% for the nine months ended Sept 30, 2008, compared to the prior year. Growth was driven by organic increases (7% in Q3, 9% for 9M) and incremental sales from acquisitions.
• Profitability: Operating income rose 8% in Q3 and 17% for the nine-month period. Net earnings increased 9% in Q3 and 16% for the nine months.
• Margin Pressure: Overall operating margins declined slightly (10 bps in Q3, 30 bps for 9M) due to higher general and administrative expenses and amortization from recent acquisitions, despite strong organic performance in base businesses.
• Segment Performance:
  • Flow Control: Sales up 13% (Q3) and 33% (9M); Operating income up 24% (Q3) and 51% (9M), driven by AP1000 nuclear reactor pump sales.
  • Motion Control: Sales up 8% (Q3) and 13% (9M); Operating income up 9% (Q3) and 6% (9M), driven by defense contracts (Bradley Fighting Vehicle, F-16/F-22).
  • Metal Treatment: Sales up 4% (Q3) and 7% (9M); Operating income up 6% (Q3) and 7% (9M), with strong margins (~20.4%).
• Backlog: Increased 33% to $1.73 billion at Sept 30, 2008, from $1.30 billion at year-end 2007.

Guidance, Outlook, Risks, and Unusual Items

• Acquisitions:
  • Subsequent Events: Acquired Mechetronics Ltd. (Oct 1, 2008) for ~$2.6M and VMetro ASA (Oct 15, 2008) for ~$46.2M cash plus debt assumption. VMetro acquisition included a currency hedge that resulted in a $1.8M pre-tax loss recorded in Q3 and an expected $1.4M loss in Q4.
  • Dispositions: Sold commercial aerospace repair business in Miami for $8.2M in May 2008, resulting in a $0.2M loss.
• Legal Contingencies: A $6.5M reserve exists for a gender bias lawsuit; management believes the punitive damages portion will be reversed on appeal. Environmental obligations totaled $22.1M.
• Market Risks: Management notes uncertainty in global credit markets and economic conditions could impact demand. Pension plan asset values have declined due to market conditions, potentially requiring accelerated contributions in 2009.
• Capital Expenditures: $71M incurred in the first nine months of 2008, with an additional $35M expected for the remainder of the year, largely for the AP1000 program.

Investor Verification Checklist

• AP1000 Program Execution: Verify the sustainability of revenue growth tied to the China AP1000 nuclear reactor contracts, which drove significant Flow Control segment performance.
• Acquisition Integration: Assess the impact of recent acquisitions (VMetro, Mechetronics, Parylene) on future margins, particularly regarding amortization expenses and integration costs.
• Pension Funding: Monitor the fair value of pension plan assets and the potential need for accelerated cash contributions in 2009 due to market declines.
• Defense Budget Exposure: Evaluate risks associated with the 35% revenue reliance on defense markets and potential shifts in U.S. and foreign government spending priorities.
• Working Capital Trends: Review the increase in inventory ($52M increase) and receivables days (55 days vs. 51 days) to ensure efficient capital management.