Curtiss-Wright Corp. 10-Q Summary: Period Ended June 30, 2005
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2005, and the six 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 on May 24, 2005, combining its two classes of common stock into a single class. Additionally, the company acquired Indal Technologies, Inc. on March 1, 2005, for approximately $62.8 million in cash.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended June 30, 2005 |
3 Months Ended June 30, 2004 |
6 Months Ended June 30, 2005 |
6 Months Ended June 30, 2004 |
|---|---|---|---|---|
| Net Sales | $283,193 | $222,428 | $541,680 | $437,361 |
| Gross Profit | $100,299 | $76,022 | $186,068 | $147,617 |
| Operating Income | $33,186 | $25,413 | $60,665 | $50,576 |
| Net Earnings | $17,934 | $14,324 | $32,457 | $29,933 |
| Diluted EPS | $0.82 | $0.67 | $1.49 | $1.40 |
| Operating Cash Flow (6mo) | $27,228 | $34,026 | ||
| Free Cash Flow (6mo) (Op Cash Flow - CapEx) |
||||
| Total Debt | $403,495 | $342,490 | ||
| Cash & Equivalents | $47,983 | $41,038 |
Note: Free Cash Flow calculated as Operating Cash Flow ($27,228) less Additions to PP&E ($22,032) = $5,196 for the six months ended June 30, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 27% in Q2 and 24% year-to-date (YTD) compared to 2004. Growth was driven by acquisitions (contributing 52% of Q2 sales increase) and organic growth (12% in Q2, 8% YTD).
- Profitability: Operating income rose 31% in Q2 and 20% YTD. Net earnings increased 25% in Q2 and 8% YTD. The YTD earnings increase was partially offset by higher interest expense and a one-time tax benefit in the prior year.
- Acquisitions: The acquisition of Indal Technologies added $38.2 million in revenue for the year ended Dec 31, 2004, and contributed significantly to backlog and sales in 2005. Goodwill increased by $28.6 million due to this acquisition.
- Debt Levels: Total debt increased by approximately $61 million to $403.5 million, primarily due to borrowings under the revolving credit facility to fund acquisitions. Interest expense increased $1.8 million in Q2 and $3.8 million YTD due to higher debt levels and interest rates.
- Unusual Items: The company recognized a pre-tax gain of $2.8 million in Q1 2005 from the sale of its Fairfield, New Jersey property. Pension expense increased significantly ($0.5 million in Q2, $0.9 million YTD) due to service costs from acquisitions.
Guidance, Outlook, and Risks
Management Commentary: Management attributes growth to strong demand in commercial aerospace, oil and gas, and defense markets. Organic growth was double-digit in all segments for Q2. Backlog increased 18% to $740.6 million, with approximately 70% derived from military business.
Capital Expenditures: Capital expenditures were $22.0 million for the first six months. The company expects to spend an additional $23 million in the remainder of 2005 for machinery, equipment, and facility expansion.
Risks and Contingencies:
- Market Risk: No material changes in market risk were reported. The company uses interest rate swaps to manage exposure on fixed-rate debt.
- Legal Proceedings: The company is subject to various claims, including asbestos litigation. Management believes liability is unlikely to be material and that insurance coverage is adequate.
- Environmental: Environmental reserves totaled $26.1 million. The company retained responsibility for remediation at the sold Fairfield property, estimated at $1.5 million.
- Accounting Changes: The company is evaluating the impact of SFAS No. 123(R) regarding stock-based compensation, effective Jan 1, 2006.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of synergies and revenue targets from the Indal Technologies acquisition, which contributed significantly to Q2 results.
- Debt Covenants: Confirm continued compliance with the 55% debt-to-capitalization limit under the revolving credit agreement and the 60% limit under the Senior Notes.
- Defense Budget Exposure: Assess the impact of potential U.S. government defense budget constraints, given that 70% of the backlog is military-related.
- Pension Obligations: Monitor the funded status of pension plans and the impact of future contribution requirements, particularly for the EMD plan.
- Stock-Based Compensation: Review the potential impact of the upcoming adoption of SFAS 123(R) on future net earnings and EPS.