Curtiss-Wright Corporation — Q1 2012 Form 10-Q
Business context and period. Diversified manufacturer and services provider reporting for the three months ended March 31, 2012, compared with Q1 2011. Operations are reported in Flow Control, Motion Control, and Metal Treatment; approximately 40% of revenue comes from defense-related markets. The Heat Treating business was sold on March 30, 2012 and is presented as discontinued operations for both periods.
Financial results
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $501.7 million | $452.9 million |
| Gross profit / margin | $159.3 million / 31.8% | $145.9 million / 32.2% |
| Operating income / margin | $35.6 million / 7.1% | $39.2 million / 8.7% |
| Continuing-operations earnings | $19.8 million; $0.42 diluted EPS | $23.0 million; $0.49 diluted EPS |
| Net earnings / diluted EPS | $41.3 million / $0.87 | $24.5 million / $0.52 |
| Operating cash flow | $(4.7) million | $(42.8) million |
Net earnings include $21.5 million of discontinued-operation earnings, including an $18.4 million after-tax divestiture gain. The gain makes headline earnings growth a poor indicator of continuing operating performance. Sales increased 11% (3% organic, 8% incremental; currency impact minimal), while operating income declined 9%. New orders were $515.1 million versus $480.2 million.
By segment, sales and operating income were: Flow Control $266.8 million and $18.5 million; Motion Control $165.1 million and $12.9 million; Metal Treatment $69.8 million and $9.9 million. Motion Control earnings fell 21%, while Metal Treatment earnings rose 30%. Commercial sales increased 17%, led by commercial aerospace; defense sales increased 1%.
Liquidity, debt, and balance sheet
Cash was $231.1 million at March 31, up from $194.4 million at year-end. Current assets were $1.249 billion and current liabilities $521.2 million; the reported current ratio was 2.4:1. Working capital was $728.2 million. Total debt was approximately $573.7 million, down from $586.4 million at December 31; cash exceeded current debt, but long-term debt remained $571.2 million. The company had $373 million of unused revolving credit availability and reported compliance with debt covenants. Its credit agreement expires in August 2012.
Investing activities provided $29.1 million, principally reflecting $51.2 million of divestiture proceeds; capital expenditures were $20.2 million. Cash used in operations improved year over year but remained negative, with working-capital changes including higher receivables and lower accounts payable. Days sales outstanding increased to 62 from 54; inventory turns declined to 4.3 from 4.6.
Material changes, outlook, and risks
- Heat Treating sale: Sold to Bodycote for a stated $52 million, subject to a post-closing adjustment. Management described the business as non-core and said the sale supports a focus on higher-technology services. The filing reports a $29.6 million pre-tax gain and $51.2 million cash proceeds.
- Operating pressures: Margin declined due to restructuring charges, defense-program sales mix and volume, Motion Control development and qualification investment, and Flow Control super-vessel start-up costs and initially low-margin orders. Interest expense rose 27%, primarily due to higher average debt following the 2011 senior-note issuance.
- Management expectations: No consolidated earnings or revenue guidance is stated in the supplied filing text. Management expected $65–$75 million of additional capital expenditures during the remainder of 2012. A Motion Control restructuring was expected to yield about $6 million in annual savings, with approximately $1 million of additional severance and $0.6 million of facility costs expected in 2012. Metal Treatment was evaluating potential restructuring estimated at approximately $12 million, expected to be completed by year-end.
- Commitments and contingencies: Expected 2012 contributions included approximately $45 million to the domestic pension plan, $4.3 million to foreign benefit plans, and $1.6 million to postretirement plans. Environmental liabilities were $21.5 million. Outstanding letters of credit were $60.1 million. A gender-bias lawsuit had an $8.6 million reserve; substantially all damage awards were set aside and a new damages trial was expected. Other litigation was not expected by management to have a material effect.
- AP1000 program: A pump stator heating issue delayed qualification of the reactor coolant pump. Qualification testing was completed in April 2012, and the first pump was expected to ship in Q2. Management did not expect a material operational or cash-flow impact, but delivery and customer terms remained relevant uncertainties.
- Management reported no material change in market risks or risk factors; disclosure controls were considered effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate recurring continuing-operations performance from the one-time Heat Treating divestiture gain; also confirm the final sale-price adjustment and related tax treatment.
- Track whether Motion Control recovers its margin and whether announced restructuring savings materialize, alongside the potential Metal Treatment restructuring costs.
- Monitor operating cash conversion, receivables collection, and inventory trends given negative quarterly operating cash flow and increased days sales outstanding.
- Confirm renewal or replacement of the revolving credit facility before its August 2012 expiration and assess debt service needs.
- Follow AP1000 pump deliveries and any resulting customer claims, and monitor developments in the damages trial and environmental obligations.