Curtiss-Wright Corporation: Q2 2009 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2009. Curtiss-Wright Corporation is a diversified, multinational manufacturer of precision components and systems serving aerospace, defense, automotive, power generation, and industrial markets. The company operates through three reportable segments: Flow Control, Motion Control, and Metal Treatment. Approximately 40% of revenues are derived from defense-related markets.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (YTD) | 2008 (YTD) | Change |
|---|---|---|---|
| Net Sales | $871.2 million | $886.8 million | (1.8%) |
| Gross Profit | $280.3 million | $295.7 million | (5.2%) |
| Operating Income | $74.9 million | $90.4 million | (17.1%) |
| Net Earnings | $40.3 million | $48.9 million | (17.6%) |
| Diluted EPS | $0.88 | $1.08 | (18.5%) |
| Operating Cash Flow | $34.3 million | $59.2 million | (42.1%) |
| Long-Term Debt | $559.4 million | $513.5 million | +9.0% |
| Cash & Equivalents | $59.2 million | $60.7 million | (2.5%) |
Material Changes vs. Prior Period
- Revenue Decline: Organic sales decreased 5% year-over-year, driven primarily by the Metal Treatment segment (-27% organic sales) due to weak global economic conditions affecting automotive and commercial aerospace markets. This was partially offset by incremental sales from 2009 acquisitions.
- Profitability Pressure: Operating income fell 17% due to under-absorption of overhead costs in the Metal Treatment and Flow Control segments. However, the Motion Control segment saw a 16% increase in operating income, driven by defense market growth and cost reduction programs.
- Foreign Currency Impact: A stronger U.S. dollar negatively impacted reported sales by $28 million but had a favorable impact on operating income of $10 million due to the company's Canadian operations (sales in USD, costs in CAD).
- Acquisitions: The company acquired four businesses, including EST Group, Inc. ($40 million) and Nu-Torque ($5 million). The Nu-Torque acquisition resulted in a $1.9 million bargain purchase gain.
Outlook, Risks, and Management Commentary
- Restructuring: Management committed to a consolidation plan in Q1 2009, incurring $3.3 million in costs with an expected total of $13 million. Annualized cash savings are estimated at $10 million upon completion.
- Market Risks: Continued weakness in general industrial, oil and gas, and commercial aerospace markets remains a primary risk. Conversely, defense and power generation markets (specifically AP1000 nuclear reactors) showed growth.
- Liquidity: Working capital increased to $428 million. The company utilized $201 million of its revolving credit facility during the period, with $168 million remaining available. No contributions are expected to the domestic pension plan in 2009.
- Contingencies: Environmental obligations totaled $21.7 million. A pending gender bias lawsuit has a $6.5 million reserve recorded, though management believes the punitive damages portion will be reversed on appeal.
Key Facts for Investor Verification
- Segment Performance Disparity: Verify the sustainability of the Metal Treatment segment's recovery given the 60% drop in operating income and heavy reliance on cyclical automotive markets.
- Acquisition Integration: Monitor the integration of EST Group and Nu-Torque to ensure incremental sales and operating income targets are met, as early amortization costs currently weigh on results.
- Backlog Trends: Total backlog increased slightly to $1.685 billion, but new orders dropped 35% year-over-year. Verify the composition of new orders to ensure defense contracts are offsetting commercial weakness.
- Debt Levels: Long-term debt increased by ~$46 million; verify the company's ability to service debt given the decline in operating cash flow.