Curtiss-Wright Corporation — 2011 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011; it is not a standalone fourth-quarter filing. Curtiss-Wright is a diversified supplier of engineered products and services for defense, power generation, oil and gas, commercial aerospace, and industrial markets. Its reportable segments are Flow Control, Motion Control, and Metal Treatment.
Financial performance
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $2,054.1 million | $1,893.1 million |
| Gross profit / margin | $676.1 million / 32.9% | $621.8 million / 32.8% |
| Operating income / margin | $205.0 million / 10.0% | $179.8 million / 9.5% |
| Net earnings | $130.4 million | $106.6 million |
| Diluted EPS | $2.77 | $2.30 |
| Cash from operations | $202.4 million | $171.7 million |
| Capital expenditures | $84.8 million | $53.0 million |
| Total debt | $586.4 million | $396.6 million |
- Revenue rose 9%; operating income rose 14% and net earnings rose 22%. Management attributed growth to higher volumes, especially in Metal Treatment, and noted acquisition contributions to sales growth.
- Operating cash flow increased $30.7 million. After capital expenditures, cash flow was approximately $117.5 million, versus $118.7 million in 2010.
- Year-end cash was $194.4 million, working capital $661.8 million, and the current ratio 2.3:1. The company reported $373 million of unused credit availability under its revolving facility.
- Net debt was approximately $392.0 million. The company issued $300 million of senior notes in December, with maturities in 2021 and 2026; proceeds were used partly to repay revolving borrowings. Long-term debt was $583.9 million.
- Annual dividends were $0.32 per share, unchanged from 2010.
Segment results
| Segment | 2011 sales | Change | 2011 operating income | Operating margin |
|---|---|---|---|---|
| Flow Control | $1,060.8 million | +4% | $103.4 million | 9.7% |
| Motion Control | $710.0 million | +10% | $81.0 million | 11.4% |
| Metal Treatment | $283.3 million | +28% | $44.0 million | 15.5% |
Metal Treatment’s growth and margin improvement reflected stronger volume, better overhead absorption, and acquisitions. Flow Control operating income declined slightly, with delays in international oil and gas projects and super-vessel start-up costs weighing on results. Motion Control sales grew, but margin fell from 12.4% to 11.4%, including effects from foreign currency and ACRA acquisition costs.
Fourth-quarter information
Unaudited fourth-quarter 2011 sales were $561.4 million, gross profit $187.6 million, net earnings $39.8 million, and diluted EPS $0.84. The comparable 2010 figures were $523.4 million, $173.7 million, $36.6 million, and $0.79, respectively.
Material changes and notable items
- Commercial-market sales increased 12%, led by commercial aerospace (+30%), general industrial (+17%), and power generation (+8%). Oil and gas sales declined 4%. Defense sales increased 4%; ground and naval defense were slightly lower.
- New orders increased to $2,066.0 million from $1,918.5 million; year-end backlog rose 2% to $1,695.4 million. Management cautions that backlog may be reduced or cancelled and is not necessarily predictive of future sales.
- The company completed eight acquisitions and sold assets of two businesses during 2011; acquisition spending was $178.1 million net of cash acquired. The acquisitions included businesses in nuclear inspection, aircraft handling, aerospace data acquisition, solenoid components, coatings, and materials testing.
- Research and development expense increased to $62.1 million from $54.1 million.
- The effective tax rate declined to 29.5% from 32.7%, largely reflecting a $4.1 million U.S. research and development tax credit.
Outlook, risks, and contingencies
- Management was cautiously optimistic about commercial and industrial markets in 2012, expecting continued commercial aerospace growth, improvement in power generation and oil and gas, and modest general industrial growth. The filing provides no quantified company-wide earnings or revenue guidance.
- Management expected U.S. defense spending to moderate or flatten. Potential sequestration cuts beginning in 2013, program delays or cancellations, and changes in procurement priorities could affect demand; the company cited C4ISR, unmanned systems, and certain naval programs as areas of opportunity, but timing and funding remain uncertain.
- On the AP1000 reactor coolant pumps for plants in China, a localized heating issue led to additional estimated costs that reduced 2011 operating income by $9.7 million. The company expected contract delivery dates and related damage or incentive provisions to be revised; it did not expect a material ultimate impact, subject to negotiations and outcomes.
- Pension funding is a substantial prospective cash requirement. The company contributed $35 million in 2011 and expected about $45 million in 2012 and cumulative contributions of approximately $243 million through 2016. The domestic qualified plan’s funded status deteriorated by $69 million in 2011, principally due to lower discount rates and, to a lesser extent, negative asset returns.
- Environmental reserves were $20.5 million at year-end. The company disclosed approximately 177 pending asbestos-related lawsuits, while stating it had not been found liable or paid material settlements in such cases and believed insurance coverage was adequate.
- Other key risks include dependence on government and major customers, fixed-price contract cost overruns and estimate changes, acquisition integration, supplier concentration, foreign exchange exposure, goodwill and intangible-asset impairment, and economic and regulatory uncertainty.
- The revolving credit facility, with $425 million of commitments and $373 million unused at year-end, was due to mature in August 2012. The company stated it believed its cash, operating cash flows, and available borrowing capacity were sufficient for capital needs.
Most important facts for investors to verify
- Whether 2012 defense budgets, sequestration, and program-level funding alter orders, backlog conversion, or margins.
- Whether the AP1000 pump issue is resolved on revised terms without further cost, schedule, or contractual exposure.
- Whether acquisitions deliver the expected sales and profitability, particularly given acquisition-related spending and goodwill of $759.4 million.
- How pension funding needs and the 2012 credit-facility maturity affect liquidity, refinancing, and capital allocation.
- Whether the rise in receivables and days sales outstanding—from 44 to 54 days—translates into timely collections and sustainable operating cash flow.