Curtiss-Wright Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Curtiss-Wright is a diversified manufacturer and service provider operating in Flow Control, Motion Control, and Metal Treatment, serving defense, aerospace, power generation, oil and gas, and industrial markets. Approximately 40% of revenue comes from defense-related markets.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $516.0 | $465.8 | $1,492.8 | $1,369.8 |
| Operating income | $50.1 | $48.1 | $143.5 | $122.6 |
| Net earnings | $34.4 | $27.8 | $90.7 | $70.0 |
| Diluted EPS | $0.73 | $0.60 | $1.93 | $1.51 |
| Operating margin | 9.7% | 10.3% | 9.6% | 9.0% |
| Net margin | 6.7% | 6.0% | 6.1% | 5.1% |
| Operating cash flow | — | — | $53.8 | $37.7 |
Q3 revenue rose 10.8%, operating income 4.3%, and net earnings 23.7% year over year. For the nine-month period, revenue rose 9.0%, operating income 17.1%, and net earnings 29.5%. The lower Q3 operating margin reflects weaker Flow Control and Motion Control results, partly offset by strong Metal Treatment performance. Nine-month gross margin was approximately 32.7%, broadly unchanged from the prior year.
- Segment trends: Nine-month sales increased 3.9% in Flow Control, 10.3% in Motion Control, and 28.3% in Metal Treatment. Metal Treatment operating income increased 81.2%; Motion Control operating income was essentially flat, with margin down 110 basis points.
- Cash flow and investment: Nine-month operating cash flow was $53.8 million. Capital expenditures were $61.2 million, and net cash used in investing activities was $183.9 million, including $132.3 million for acquisitions. Cash declined to $55.0 million from $68.1 million at year-end 2010.
- Liquidity: Working capital was $352.9 million and the current ratio was 1.5:1, versus 2.1:1 at year-end. Management attributed much of the working-capital decline to $225 million of debt reclassified as current because the revolving credit agreement expires in August 2012.
- Debt: Balance-sheet debt totaled approximately $511.2 million ($227.2 million current and $284.0 million long-term), versus $396.6 million at December 31, 2010. The company had $142 million of unused revolver capacity. Average borrowing rates were 3.3% in Q3 and 3.5% for the nine months.
Material changes and drivers
- Excluding acquisitions, divestitures, and foreign-currency translation, sales increased 4% in both the quarter and nine-month period. Acquisitions contributed approximately $27 million of Q3 sales and $52 million year to date.
- Commercial sales grew 19.5% in Q3, led by commercial aerospace, power generation, and industrial demand; defense sales declined 1.1% for the quarter, including lower naval sales due to program production timing.
- Metal Treatment benefited from higher volumes and improved overhead absorption; Q3 results also included an insurance recovery that improved the segment’s operating margin by 180 basis points.
- Q3 effective tax rate was 23.8%, compared with 34.4%, principally due to research and development tax credits. Nine-month rates were 29.4% and 34.0%, respectively. Lower interest expense also supported earnings.
- New orders increased to $579.5 million in Q3 from $465.0 million and to $1,559.7 million for nine months from $1,358.9 million.
- The company acquired five businesses and sold two business operations during the first nine months. A further $10 million acquisition, South Bend Controls, closed on October 11, 2011.
Outlook, risks, and unusual items
- The filing gives no specific full-year revenue or earnings guidance. Management said available cash, operating cash flow, and borrowing capacity should meet near- and long-term capital needs; the company was monitoring financing options ahead of the August 2012 revolver expiry.
- Management expected $10–$15 million of additional capital expenditures in the remainder of 2011, no further 2011 contribution to the Curtiss-Wright Pension Plan after $34 million contributed through September, and pension contributions of approximately $45–$50 million in 2012.
- AP1000 program: A localized heating issue was detected in a reactor coolant pump stator during final testing. The company increased estimated contract costs in Q2 without material financial impact. It expected contract delivery dates and related damage or incentive provisions to be revised, and did not expect a material impact on operations or cash flows.
- Legal and environmental: A gender-bias lawsuit remained unresolved; the reserve was approximately $10.3 million. Environmental liabilities totaled $20.7 million. Outstanding letters of credit represented contingent liabilities of $59.6 million.
- The company authorized a share-repurchase program subject to a $100 million limit; no shares had been repurchased by September 30. It was evaluating additional restructuring activity in its Oil and Gas division, but anticipated no significant further cost from the existing initiative.
- Foreign-currency translation reduced nine-month comprehensive income, with a $44.6 million negative translation adjustment in Q3. Management reported no material changes in market risk or risk factors during the period.
Key facts for investors to verify
- Whether the AP1000 pump issue affects delivery timing, contract economics, or costs beyond the estimates disclosed.
- How the August 2012 revolving-credit maturity will be refinanced or extended, and the effect of current-debt classification on reported liquidity.
- Whether operating cash generation improves as receivables and inventories rise, and whether planned capital spending and 2012 pension contributions are met.
- Whether Metal Treatment’s margin gains, including the insurance recovery, are sustainable and whether Motion Control margins recover.
- Developments in the gender-bias litigation, environmental obligations, and acquisition purchase-price allocations or contingent consideration.