Curtiss-Wright Corp. 10-Q Summary (Period Ended Sept 30, 2007)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, and the nine months ended on that date. Curtiss-Wright Corporation is a diversified multinational manufacturer of precision components and systems serving aerospace, defense, oil and gas, and industrial markets. Operations are organized into three segments: Flow Control, Motion Control, and Metal Treatment. The company is a large accelerated filer with 44,473,024 shares of common stock outstanding as of October 31, 2007.
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Net Sales | $396.3M | $311.8M | $1,094.5M | $904.0M |
| Operating Income | $44.5M | $37.3M | $118.0M | $94.9M |
| Net Earnings | $25.2M | $20.4M | $66.1M | $53.7M |
| Diluted EPS | $0.56 | $0.46 | $1.47 | $1.21 |
| Operating Margin | 11.2% | 11.9% | 10.8% | 10.5% |
| Effective Tax Rate | 32.0% | 35.4% | 34.4% | 31.2% |
Liquidity and Debt: Cash and cash equivalents decreased to $59.3M from $124.5M at year-end 2006. Total debt consists of $0.9M short-term and $572.0M long-term. The company maintains a revolving credit facility with $164.2M available as of September 30, 2007. Working capital increased to $385.5M.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 27% in Q3 and 21% for the nine months, driven by 12% and 13% organic growth respectively, plus incremental contributions from four acquisitions completed in 2007 (IMC Magnetics, Benshaw, Valve Systems & Controls, and Scientech).
- Profitability: Net earnings rose 24% in Q3 and 23% for the nine months. Operating income grew 19% in Q3 and 24% for the nine months.
- Margin Pressure: Consolidated operating margin declined 70 basis points in Q3 (to 11.2%) due to lower-margin acquisitions, increased R&D spending, and unfavorable sales mix in the Motion Control segment, despite productivity gains in Metal Treatment.
- Backlog and Orders: New orders surged 109% in Q3 to $675.7M, largely due to $245M in reactor coolant pump contracts for AP1000 reactors. Total backlog increased 57% to $1,376.8M.
- Acquisition Impact: Acquisitions contributed $48.1M in incremental sales and $4.4M in incremental operating income for Q3. Goodwill increased by $156.4M during the period.
Outlook, Risks, and Unusual Items
- Guidance: The filing does not provide specific numerical guidance for the full year 2007 or 2008. Management expects to make approximately $30.0M in additional capital expenditures for the remainder of 2007.
- Debt Refinancing: On August 10, 2007, the company refinanced its credit facility, increasing capacity to $425M (expandable to $600M) and extending maturity to 2012.
- Accounting Adjustments: A $2.8M adjustment was recorded in Q2 2007 to increase loss reserves for long-term contracts in the Flow Control segment, deemed immaterial to the 2006 annual results. The company also adopted FIN 48, resulting in a $0.5M charge to retained earnings.
- Risks: Key risks include dependence on U.S. defense budgets, foreign currency fluctuations, supply chain constraints, and the integration of recent acquisitions. The company is currently under audit in Canada and Germany.
Investor Verification Checklist
- Verify the sustainability of the 109% increase in new orders, specifically the $245M AP1000 reactor contracts.
- Monitor the integration progress and margin accretion of the four 2007 acquisitions, which currently have lower margins than base businesses.
- Review the impact of rising interest rates and increased debt levels on future interest expense.
- Assess the timing of U.S. Navy procurement cycles, which caused a temporary decline in Flow Control sales.
- Confirm the status of the $1.7M environmental remediation receivable from the U.S. Government.