Curtiss-Wright Corporation — Q3 2012 Form 10-Q
Business context and period. Diversified manufacturer and services company serving defense, aerospace, power generation, oil and gas, and industrial markets through Flow Control, Motion Control, and Metal Treatment. This unaudited filing covers the three and nine months ended September 30, 2012; comparisons are with 2011, and prior-period figures were restated for an accounting error. Amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $479.2 | $509.1 | $1,507.3 | $1,466.3 |
| Gross profit / margin | $141.4 / 29.5% | $167.3 / 32.9% | $464.7 / 30.8% | $475.3 / 32.4% |
| Operating income / margin | $23.4 / 4.9% | $46.1 / 9.1% | $99.5 / 6.6% | $130.7 / 8.9% |
| Continuing-operations earnings | $11.4 | $31.9 | $54.1 | $82.3 |
| Net earnings | $11.3 | $34.5 | $75.4 | $88.2 |
| Diluted EPS, total | $0.24 | $0.73 | $1.59 | $1.88 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $53.9 | $52.8 |
Q3 sales fell 6% and operating income fell 49%; nine-month sales grew 3% while operating income declined 24%. Nine-month net earnings included a $18.2 million after-tax gain on the Heat Treating divestiture; the business’s results are presented as discontinued operations. Nine-month cash flow from operations less capital expenditures was approximately negative $2.1 million.
Liquidity, debt, and capital
- At September 30, cash was $239.5, total current assets $1,226.1, and current liabilities $615.1; working capital was $611.0 and the current ratio was 2.0, versus 2.3 at year-end 2011.
- Debt carrying value totaled $588.1, including $127.5 classified as current and $460.6 long-term. The $125 million senior notes due September 2013 account for most of current debt. Cash exceeded the reported debt balance by approximately $348.6.
- The amended revolving credit facility provides $500 million of capacity plus a $100 million accordion. There were no facility borrowings at quarter-end; $39 million of letters of credit were supported by it. The company reported compliance with debt covenants.
- Cash increased $45.2 from year-end to $239.5. Investing used $12.8, including $56.0 of capital expenditures, offset principally by $52.1 of divestiture proceeds. The company expected another $25–$35 million of capital expenditures in the remainder of 2012.
Material changes and management commentary
- Flow Control and AP1000: A strike at the Cheswick facility from August 24 to September 24 temporarily suspended work. Management attributed $5 million of operating-income impact to under-absorbed overhead and $18 million of deferred sales and $6 million of deferred operating income to shifted contract milestones, expected to be recognized in 2013. Additional unanticipated AP1000 reactor-coolant-pump assembly and shipment costs were $12 million in Q3 and $20 million year to date.
- Segment trends: Q3 Flow Control sales declined 11% and operating income declined 95%; Motion Control operating income rose 19%, with margin increasing to 13.1%; Metal Treatment sales rose 5% and operating income was essentially flat. For the first nine months, commercial aerospace strength and acquisitions supported growth, while naval and ground defense weakness weighed on results.
- Orders: New orders fell 17% in Q3 to $473.3 million and 4% year to date to $1,473.6 million. Management cited order timing for submarine programs, a prior-year power-generation order that did not recur, and softer defense demand.
- Restructuring and impairment: Nine-month restructuring charges were $12.7 million, including a $4.8 million noncash impairment of a Metal Treatment facility. Management expected fourth-quarter charges of $6.4 million for Metal Treatment and less than $1 million in each of Flow Control and Motion Control.
- Pensions and taxes: The company contributed $40 million to its domestic pension plan in the first nine months and expected no further domestic contributions in 2012. The nine-month effective tax rate was 32.3%, versus 28.8%, mainly because a $4.1 million 2011 R&D tax credit did not recur.
Outlook, risks, and unusual items
- The filing provides no consolidated full-year revenue or earnings guidance. Management stated it believed liquidity and borrowing capacity were sufficient for operations, capital needs, shareholder returns, and acquisitions.
- Management expected AP1000 delivery dates and related incentive or liquidated-damages provisions to be revised in customer negotiations and did not expect a material ultimate impact, but acknowledged shipment delays and cost overruns. Verify subsequent contract developments and remaining program economics.
- Defense budget reductions and possible sequestration beginning in 2013 could cause procurement cancellations or delays and materially affect results. Ongoing customer delays in international oil-and-gas capital spending also left the related Flow Control goodwill reporting unit’s estimated fair value not substantially above its carrying amount; no Q3 impairment indicators were reported.
- Environmental liabilities were $21.6 million at quarter-end. The company also disclosed asbestos claims, which management did not expect to result in material liability and for which it reported insurance coverage. A $5.2 million settlement with a former executive was paid in Q3; no further payments were required.
- A prior-period error identified in a Motion Control subsidiary involved long-term contract accounting and other items, including fixed-asset capitalization. The company restated comparative information, reducing December 31, 2011 retained earnings by approximately $24 million. It said the errors were not material to individual prior periods, but would have been material if corrected in the current periods. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
- After quarter-end, Curtiss-Wright completed the $64 million PG Drives Technology acquisition and the $30 million AP Services acquisition, and signed a definitive agreement to acquire Williams Controls for approximately $119 million, subject to closing conditions. Pro forma financial information was unavailable in the filing.
Investor verification priorities
- Review the accounting-error restatement, its impact on reported trends, and the remediation of contract-accounting controls.
- Track AP1000 cost estimates, delivery timing, customer negotiations, and any exposure to damages or incentives.
- Assess whether order declines, defense budget uncertainty, and deferred Flow Control milestones affect 2013 growth and margins.
- Monitor Flow Control goodwill valuation given customer delays, along with the expected restructuring costs and savings.
- Verify the financing, integration, and subsequent results of the three post-quarter-end acquisitions, and the 2013 note maturity and refinancing plans.