Curtiss-Wright Corporation: Q2 2008 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended June 30, 2008. 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 reportable segments: Flow Control, Motion Control, and Metal Treatment. Approximately 35% of revenues are derived from defense-related markets.
Key Financial Metrics
| Metric (in thousands) | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Net Sales | $453,464 | $365,576 | $886,843 | $698,185 |
| Gross Profit | $157,234 | $118,023 | $295,703 | $229,410 |
| Operating Income | $49,672 | $38,409 | $90,399 | $73,551 |
| Net Earnings | $27,077 | $21,390 | $48,856 | $40,893 |
| Diluted EPS | $0.60 | $0.48 | $1.08 | $0.91 |
| Operating Margin | 11.0% | 10.5% | 10.2% | 10.5% |
Liquidity and Balance Sheet (as of June 30, 2008):
- Cash and Cash Equivalents: $85.2 million (up from $66.5 million at year-end 2007).
- Working Capital: $403 million (Current Assets $795.5M / Current Liabilities $392.6M).
- Debt: Short-term debt of $0.98 million; Long-term debt of $509.0 million.
- Backlog: Increased 34% to $1.745 billion.
- Dividends: $0.08 per share declared for the quarter.
Material Changes vs. Prior Period
- Revenue Growth: Q2 sales increased 24% year-over-year, driven by 11% organic growth and $49 million in incremental sales from 2007 acquisitions. YTD sales grew 27%.
- Profitability: Operating income rose 29% in Q2 and 23% YTD. The Flow Control segment was the primary driver, with operating income up 112% in Q2 due to the resolution of prior-year cost overruns on U.S. Navy contracts and strong demand in power generation and oil/gas markets.
- Segment Performance:
- Flow Control: Sales up 39% (Q2) and 45% (YTD). Significant growth from AP1000 nuclear reactor pump sales and oil/gas valve products.
- Motion Control: Sales up 13% (Q2) and 15% (YTD). Growth driven by defense embedded computing (F-16, F-22, Bradley Fighting Vehicle) and commercial aerospace.
- Metal Treatment: Sales up 11% (Q2) and 8% (YTD). Organic growth in aerospace and industrial markets offset by a decline in automotive sales due to the UAW strike.
- Expenses: General and administrative expenses increased 43% in Q2 and 39% YTD, largely due to incremental costs from acquisitions and higher labor/benefit costs in base businesses.
Outlook, Risks, and Unusual Items
- Divestiture: Sold the third-party commercial aerospace repair and overhaul business in Miami for $8.2 million in May 2008, resulting in a $0.2 million loss. This business is no longer considered core.
- Capital Expenditures: $47 million incurred in the first six months of 2008, with approximately $18 million related to the AP1000 program. Management expects an additional $60 million in CapEx for the remainder of 2008.
- Legal Contingencies:
- Gender Bias Lawsuit: A former executive was awarded ~$9.0 million in damages. The company has recorded a $6.5 million reserve and is appealing the punitive damages portion, which is not reserved.
- Environmental: Aggregate environmental obligation is $22.3 million. Includes a $4.1 million guarantee for nuclear decommissioning.
- Asbestos: No material liability expected; insurance coverage maintained.
- Risk Factors: Key risks include dependence on U.S. and foreign defense budgets, supply chain constraints, foreign currency fluctuations, and the ability to execute on long-term contracts.
Investor Verification Checklist
- AP1000 Project Execution: Verify the timeline and revenue recognition stability for the $300+ million in new orders for reactor coolant pumps in China and the U.S.
- Acquisition Integration: Assess the margin trajectory of 2007 acquisitions, which currently operate at lower margins (4.1% Q2) due to amortization and integration costs.
- Defense Budget Exposure: Monitor U.S. Navy procurement cycles, as naval sales were down in Q2 due to timing, though backlog remains strong.
- Legal Reserve Adequacy: Track the status of the gender bias lawsuit appeal to determine if the $6.5 million reserve is sufficient or if the punitive damages appeal could result in further liability.
- Working Capital Trends: Review the increase in inventory ($36 million increase) and receivables days (54 days) to ensure they align with production schedules and do not signal collection issues.