Business Context and Reporting Period
Company: Curtiss-Wright Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Curtiss-Wright designs and manufactures highly engineered, advanced technologies for defense, energy, commercial aerospace, and general industrial markets. The company operates through three segments: Flow Control, Motion Control, and Metal Treatment. It serves as a critical supplier to the U.S. Navy and other government defense programs, as well as commercial nuclear power and oil & gas sectors.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net Sales | $1,809.7 million | $1,830.1 million | (1.1%) |
| Net Earnings | $95.2 million | $109.4 million | (13.0%) |
| Diluted EPS | $2.08 | $2.41 | (13.7%) |
| Operating Income | $169.3 million | $196.6 million | (13.9%) |
| Operating Margin | 9.4% | 10.7% | (130 bps) |
| Total Assets | $2,142.0 million | $2,042.0 million | 4.9% |
| Total Debt | $465.1 million | $516.7 million | (10.0%) |
| Cash & Equivalents | $65.0 million | $60.7 million | 7.1% |
| Working Capital | $313.2 million | $350.3 million | (10.6%) |
| Backlog | $1,627 million | $1,679 million | (3.1%) |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 1% primarily due to a 2% decline in organic sales, driven by a 23% drop in the Metal Treatment segment and unfavorable foreign currency translation. This was partially offset by a 4% increase in Motion Control sales and incremental sales from acquisitions.
- Profitability Pressure: Operating income fell 14% due to under-absorption of overhead costs in the Metal Treatment and Flow Control segments resulting from lower volumes in general industrial and oil & gas markets. Motion Control operating income increased 34% due to cost reductions and favorable mix.
- Segment Performance:
- Flow Control: Sales up 1% to $985.2M; Operating income down 9% to $92.7M.
- Motion Control: Sales up 4% to $621.0M; Operating income up 34% to $80.9M.
- Metal Treatment: Sales down 23% to $203.5M; Operating income down 62% to $19.9M.
- Acquisitions: The company acquired EST Group, Nu-Torque, and Skyquest Systems in 2009. The Nu-Torque acquisition resulted in a $1.9 million bargain purchase gain.
- Debt Reduction: Total debt decreased by $51.6 million, primarily due to the maturity of $75 million in private placement debt and payments against the revolving credit line.
Guidance, Outlook, and Risks
- Outlook: Management expects commercial markets to face continued pressure from the global economic downturn but anticipates stable demand for defense and power generation products. Defense spending is expected to grow moderately, while commercial aerospace is expected to remain stable.
- Key Risks:
- Government Dependence: Approximately 42% of revenue is derived from defense programs. Changes in U.S. government budgets or contract terminations could materially impact results.
- Customer Concentration: Significant reliance on the U.S. Navy and Westinghouse Electric Company. Loss of these customers would have a material adverse effect.
- Goodwill Impairment: Goodwill represents 42% of total assets. The Oil & Gas reporting unit's fair value exceeded its carrying value by only approximately 10%, indicating sensitivity to market conditions.
- Environmental Liabilities: The company faces potential liabilities for environmental remediation, with reserves totaling $21 million.
- Unresolved SEC Comments: The company is responding to SEC comments regarding Compensation Discussion and Analysis (CD&A) disclosures from prior filings.
Investor Verification Checklist
- Defense Budget Exposure: Verify the stability of U.S. Navy funding for the Virginia-class submarine and CVN-78/79 aircraft carrier programs, which drive significant Flow Control revenue.
- Metal Treatment Recovery: Assess the timeline for recovery in the general industrial and commercial aerospace markets, which heavily impact the Metal Treatment segment's volume and margins.
- Goodwill Valuation: Monitor the Oil & Gas reporting unit for potential future impairment charges given the narrow margin between fair value and carrying value.
- Debt Covenants: Confirm continued compliance with the 60% debt-to-capitalization covenant under the Credit Agreement and Senior Notes.
- Environmental Reserves: Review updates on the Wood-Ridge, Caldwell Trucking, and Fairfield environmental sites for potential increases in remediation costs.