Curtiss-Wright Corp. 10-Q Summary: Period Ended September 30, 2005
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2005, and the nine months ended on that date. Curtiss-Wright Corporation is a diversified multinational provider of highly engineered products and services for high-performance platforms, serving defense, commercial aerospace, nuclear power, oil and gas, automotive, and general industrial markets. Operations are conducted through three reportable segments: Flow Control, Motion Control, and Metal Treatment. During the period, the company completed a recapitalization combining two classes of common stock into one and acquired Indal Technologies, Inc.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2005 | 9 Months Ended Sep 30, 2005 |
|---|---|---|
| Net Sales | $271,355 | $813,035 |
| Gross Profit | $93,515 | $279,583 |
| Operating Income | $32,441 | $93,106 |
| Net Earnings | $17,519 | $49,976 |
| Diluted EPS | $0.80 | $2.28 |
| Cash and Equivalents | $47,685 | $47,685 (Balance Sheet) |
| Operating Cash Flow (9mo) | $32,812 | |
| Total Debt | $409,969 | |
| Working Capital | $290,713 (Current Assets $477,063 - Current Liab $186,350) |
Margins (9 Months): Gross Margin was 34.4%; Operating Margin was 11.5%.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.7% for the quarter and 20.6% for the nine months compared to the prior year. Growth was driven by acquisitions (contributing 61% of the nine-month increase) and organic growth of 8%.
- Profitability: Operating income rose 27.4% for the quarter and 22.4% for the nine months. Net earnings increased 19% for the quarter and 12% for the nine months.
- Acquisitions: The company acquired Indal Technologies, Inc. for $63.0 million in cash in March 2005, adding $29.4 million in goodwill. This acquisition contributed significantly to backlog and sales in the Motion Control segment.
- Debt Levels: Total debt increased from $342.5 million at year-end 2004 to $410.0 million at September 30, 2005, primarily due to borrowings to fund acquisitions. Interest expense increased 56% for the quarter and 66% for the nine months.
- One-Time Items: The nine-month results included a $2.8 million pre-tax gain on the sale of the Fairfield, New Jersey property. Conversely, pension expense increased significantly ($1.1 million for the nine months) due to plan adjustments.
Outlook, Risks, and Management Commentary
- Backlog: Total backlog increased 20% to $752.1 million, with approximately 70% derived from military business. The Motion Control segment backlog grew 44%.
- Segment Performance:
- Flow Control: Strong organic growth driven by oil and gas markets (coker valves) and U.S. Navy contracts.
- Motion Control: Growth driven by commercial aerospace recovery and military programs (F/A-22), though offset by timing shifts in government contracts and foreign exchange impacts.
- Metal Treatment: Benefited from global economic recovery, particularly in aerospace and automotive shot peening services.
- Liquidity: The company maintains a $400 million revolving credit agreement with $179.9 million available. Management expects to fund future capital expenditures and potential acquisitions through cash, credit facilities, or new financing.
- Risks: Key risks include U.S. government defense budget constraints, timing of government-funded programs, foreign currency fluctuations, and the ability to negotiate financing. The company is also subject to environmental remediation obligations totaling $25.9 million.
- Accounting Changes: The company is monitoring the impact of FAS 123(R) regarding stock-based compensation, effective January 1, 2006.
Investor Verification Checklist
- Acquisition Integration: Verify the timeline for Indal Technologies to reach profitability, as recent acquisitions currently show incremental operating losses due to program timing.
- Debt Covenants: Confirm compliance with the 55% debt-to-capitalization limit under the revolving credit agreement and the 60% limit under the Senior Notes.
- Government Contract Timing: Assess the risk of revenue volatility related to the shifting of U.S. Navy and defense program funding schedules.
- Pension Obligations: Review the funded status of pension plans, noting the $10.7 million contribution made to the EMD plan in the first nine months of 2005.
- Environmental Reserves: Monitor the $25.9 million environmental reserve, specifically the $1.5 million estimated cost for the Fairfield site remediation retained after the property sale.