Curtiss-Wright Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; compared with the three months ended March 31, 2013. Curtiss-Wright is a diversified manufacturer and services provider serving commercial/industrial, defense, and energy markets. The company reorganized its reporting segments in Q1 2014; prior-period segment data was reclassified, with no effect on previously reported consolidated financial statements.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $641.4 million | $592.7 million | +8% |
| Gross profit | $202.2 million | $183.7 million | +10% |
| Gross margin | 31.5% | 31.0% | +0.5 percentage points |
| Operating income | $59.1 million | $38.0 million | +55% |
| Operating margin | 9.2% | 6.4% | +2.8 percentage points |
| Net earnings | $35.2 million | $20.9 million | +68% |
| Diluted EPS | $0.72 | $0.44 | +$0.28 |
| New orders | $677.7 million | $617.1 million | +10% |
Product sales were $526.4 million and service sales were $115.1 million. The effective tax rate was 29.8%, essentially unchanged year over year. Management attributed higher earnings to improved operating income across all segments and lower non-segment operating expense.
Segments
- Commercial/Industrial: Sales of $266.4 million (+21%); operating income of $33.0 million (+60%); margin 12.4%, up 3.0 percentage points. Growth reflected acquisitions, commercial aerospace and industrial valve sales, and operating improvements.
- Defense: Sales of $201.7 million (-4%); operating income of $21.2 million (+25%); margin 10.5%, up 2.5 percentage points. Lower nuclear power and ground-defense sales were partly offset by aerospace and naval defense demand; productivity actions and a licensing milestone supported earnings.
- Energy: Sales of $173.2 million (+7%); operating income of $12.6 million (+16%); margin 7.2%, up 0.5 percentage points. Oil-and-gas growth and fixed-overhead absorption were partly offset by lower power-generation margins and weather-delayed outage work.
Across the company, organic sales increased 2%; acquisitions contributed 5% and foreign currency 1%. Organic operating income increased 48%, according to the company’s non-GAAP presentation. Acquisitions contributed approximately $1.2 million of operating income, while currency contributed approximately $1.7 million.
Cash flow, balance sheet, and capital
- Operating cash flow: Used $14.6 million, versus $1.1 million used in Q1 2013. Management cited the timing of collections and advance payments, partly offset by higher earnings.
- Investing cash flow: Used $51.0 million, including $18.4 million in capital expenditures and $32.9 million for acquisitions. Q1 2013 investing outflow was $114.7 million, mainly reflecting higher acquisition spending.
- Financing cash flow: Provided $20.8 million. Cash declined $47.3 million during the quarter to $128.0 million.
- Liquidity: Current assets were $1.321 billion and current liabilities $499.6 million at March 31, 2014. The revolving facility had $50 million drawn, $36 million of letters of credit supported by it, and $414 million of unused availability. The company reported covenant compliance and approximately $1.4 billion of additional debt capacity under its debt-to-capitalization covenant.
- Debt: Total debt was $972.0 million, compared with $959.9 million at year-end 2013; long-term debt on the balance sheet was $971.3 million. Cash less total debt implied net debt of approximately $844 million, versus approximately $785 million at year-end. Average debt outstanding was $1.019 billion and its average interest rate was 3.2%.
- Shareholder returns: The quarterly dividend increased 30% to $0.13 per share. The company repurchased approximately 77,600 shares for $5.0 million during the quarter.
Changes, outlook, and notable items
- Q1 2014 acquisitions included CCRS, a UK coatings and airfoil-repair business, and Nuclear Power Services Inc. Combined post-acquisition results included $2.7 million of sales and a $0.3 million net loss. Acquisitions contributed approximately $31.7 million to Q1 sales under the company’s analysis.
- New orders rose across all three segments, with acquisitions contributing $24 million of the increase. Management did not provide specific full-year financial guidance in this filing. It stated that cash, operating cash generation, credit availability, and access to capital markets should be sufficient for short- and long-term needs; approximately 28% of 2014 revenue was expected to come from defense-related markets.
- Foreign-currency translation reduced comprehensive income by $9.9 million in Q1 2014, versus a $31.8 million reduction a year earlier. Comprehensive income was $26.0 million, compared with a loss of $8.1 million.
- The company recorded no goodwill impairment following a segment-related interim assessment. The Oil and Gas reporting unit’s estimated fair value exceeded carrying value by 20%; management identified revenue and cost projections, including Cimarron integration and refinery-project demand, as key assumptions.
- CNRL litigation: A claim related to a 2011 refinery fire alleges total damages of at least $1 billion. The company cannot estimate its potential loss, says insurance may not be sufficient, and intends to defend the matter. The asserted amount is the total claim, not an estimate of Curtiss-Wright’s exposure.
- AP1000 contracts: Westinghouse asserted entitlement to approximately $25 million in maximum liquidated damages under the China contract. The company reported delivery delays, disputes responsibility, accrued no loss, and disclosed a possible loss range of $0–$25 million.
- Environmental reserves were $16.2 million. The company also reported asbestos litigation, which management does not expect to be material and believes is covered by insurance.
Important facts for investors to verify
- Whether earnings growth and margin expansion persist, particularly after separating organic performance from acquisition and currency effects.
- Cash conversion and working-capital trends, given negative operating cash flow and quarter-end cash decline.
- Developments in the CNRL claim and AP1000 delivery/liquidated-damages dispute, including any changes to estimated exposure or insurance coverage.
- Oil and Gas reporting-unit performance against the revenue and cost assumptions supporting its 20% goodwill valuation cushion.
- Debt, covenant capacity, acquisition integration, and the sustainability of increased dividends and share repurchases.