Curtiss-Wright Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results; dollar amounts below are in millions unless noted.
Business context
Curtiss-Wright is a diversified manufacturer and service provider operating through Flow Control, Motion Control, and Metal Treatment. It serves defense, aerospace, power generation, oil and gas, industrial, and other markets; management reported approximately 40% of revenue from defense-related markets.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $462.2 | $447.4 | $903.9 | $871.2 |
| Gross profit | $154.4 | $144.6 | $292.4 | $280.3 |
| Operating income | $43.4 | $43.8 | $74.5 | $74.9 |
| Net earnings | $25.9 | $24.5 | $42.2 | $40.3 |
| Diluted EPS | $0.56 | $0.54 | $0.91 | $0.88 |
- Revenue grew 3% in Q2 and 4% year to date. Year-to-date organic growth was 2%; acquisitions and foreign exchange also contributed.
- Gross margin was approximately 33.4% in Q2 versus 32.3%, and 32.3% for the first half versus 32.2%. Consolidated operating margin was 9.4% versus 9.8% in Q2 and 8.2% versus 8.6% year to date. Management said segment organic margins improved 130 basis points in both comparisons, while currency and higher corporate costs weighed on reported results.
- Operating cash flow was only $2.6 million for the first half, down from $34.3 million. The filing attributes significant working-capital use to receivables growth; receivables increased $48.3 million since year-end, including higher unbilled contract receivables.
- Cash and equivalents were $71.7 million. Current assets were $906.6 million and current liabilities $487.7 million; working capital was $418.9 million and the current ratio 1.9. Days sales outstanding rose to 57 from 44 at year-end.
- Total debt was $536.8 million ($77.7 million current and $459.1 million long-term), up from $465.1 million at December 31, 2009. The company reported $196 million of unused revolving-credit capacity at June 30. Fixed-rate debt fair value was $380.8 million against $350.0 million carrying value; variable-rate debt fair value approximated carrying value.
- First-half capital expenditures were $22.3 million; management expected approximately $53 million more in the second half. Cash used for acquisitions was $42.1 million. Dividends were $0.08 per share quarterly.
Material changes and segment trends
- Flow Control sales rose 4% in Q2 and 4% year to date; operating income rose 14% and 18%, respectively. Strength in defense, industrial demand, and contract performance was partly offset by delayed traditional oil-and-gas valve orders.
- Motion Control sales were essentially flat in Q2 and up 2% year to date. Operating income declined 6% in Q2 and 4% year to date. Lower ground-defense sales, including effects of the cancelled Army Future Combat Systems program, offset growth in aerospace defense, commercial aerospace, and industrial markets.
- Metal Treatment sales increased 11% in Q2 and 6% year to date; operating income increased 45% and 13%. Higher industrial and aerospace demand and restructuring savings supported results.
- Company new orders fell 3% in Q2 but increased 4% for the first half. Backlog was $1.614 billion at June 30, down 1% from year-end.
- Two Motion Control acquisitions closed in June: Hybricon for $18.8 million and Specialist Electronics Services for $22.2 million, net of cash acquired. Goodwill from the acquisitions totaled $26.3 million and was stated to be nondeductible for tax purposes.
Outlook, commentary, and risks
- The filing provides no overall revenue or earnings guidance. Management cited signs of recovery in some commercial markets and modest organic growth, but continuing weakness or delays in oil and gas and ground defense.
- Management expected restructuring activities to be largely completed by year-end 2010, with approximately $10–15 million of annualized cash savings after completion. First-half restructuring charges were $2.5 million; total expected and incurred restructuring costs were $16.1 million.
- Management expected $25–30 million of contributions to the qualified pension plan in 2011; it expected $4.8 million of 2010 contributions to foreign plans and $1.7 million to postretirement plans.
- A $75 million private-placement debt maturity was due in September 2010. Management said cash, operating cash flow, and available credit were sufficient to meet it. The revolving credit agreement expires in August 2012.
- Environmental liabilities were $20.1 million. The company had $43.9 million of contingent liabilities under outstanding letters of credit. A gender-bias case remained before the New Jersey Supreme Court; a $6.5 million reserve had been recorded. Management did not expect other legal matters, including asbestos claims, to have a material adverse effect.
- A new Baytown, Texas facility lease carries annual fixed rent of $1.4 million for 20 years, with five years of free rent at the end of the 25-year initial term. A one-time, noncash $0.8 million charge was recorded in Q1 due to retiree-health tax-law changes.
- Key stated risks include contract execution and cost estimates, supplier and capacity constraints, demand and pricing, government defense-budget changes and contract awards, financing, foreign exchange, and environmental remediation. Management reported no material change in market risks or risk factors and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the pronounced decline in operating cash flow and rising receivables convert into cash collections in subsequent periods.
- The September 2010 debt repayment, revolving-credit availability and terms, and the increase in total debt following acquisitions.
- Whether order trends, backlog, and delayed oil-and-gas orders support future revenue, particularly amid ground-defense program reductions.
- Actual restructuring costs, timing, and delivery of the stated $10–15 million annualized savings, alongside planned capital spending and pension contributions.
- Developments in the New Jersey litigation, environmental obligations, and the long-term facility lease commitment.