01—Abstract
Summary
Summary of the 10-K filed March 10, 2004. Cited figures are marked; the original filing is the authoritative source.
Curtiss-Wright Corporation (NYSE: CW, CW.B) reported a strong 2003 for its fiscal year ended December 31, 2003, with net sales rising 45% to $746.1 milliona from $513.3 million, and net earnings up 16% to $52.3 million, or $2.50 per diluted share (post 2-for-1 split in December 2003).
Growth was driven largely by acquisitions, most notably the full-year contribution of Electro-Mechanical Division (EMD, acquired October 2002) and 2003 deals in electronics and metal treatment. Organic growth in the base businesses was about 6%, led by Flow Control at 13%. Operating income rose 29% to $89.3 millionb, though the operating margin fell to 12.0% from 13.5%, which management attributes to lower-margin acquisitions and reduced pension income.
Backlog reached $505.5 millionc and new orders were $743.1 million, up 55%. The company is roughly 50% defense-related, with the U.S. Government accounting for 46% of 2003 revenue. The balance sheet shifted meaningfully toward leverage.
In September 2003 Curtiss-Wright issued $200 milliond of senior notes (5.13% due 2010 and 5.74% due 2013), used to pay down revolver borrowings and fund acquisitions. Debt-to-capitalization rose to 32% from 27%, and total debt was about $225 million at year-end. Cash rose to $98.7 million.
Management guided to roughly $8-10 million of 2004 interest payments and about $40 million of 2004 capital expenditures. Subsequent to year-end, the company completed the $110 million acquisition of Dy 4 Systems on January 31, 2004, funded with cash and revolver borrowings.
Key investor considerations include dependence on U.S. Navy and defense procurement, customer concentration (one subcontract customer, Bechtel, was 16% of revenue), commercial aerospace softness, rising leverage after acquisitions, and an expected decline in pension income in 2004. The company also declared a 20% dividend increase in November 2003 and undertook a stock split to broaden the shareholder base.
02—Key points
Key Highlights
- Net sales up 45% to $746.1 million; net earnings up 16% to $52.3 million, or $2.50 per diluted share
- Operating income up 29% to $89.3 million, but operating margin declined to 12.0% from 13.5% due to acquisition mix and lower pension income
- Record backlog of $505.5 million and new orders of $743.1 million (up 55%), supported by a $320 million Navy-related Flow Control backlog
- Debt-to-capitalization rose to 32% (from 27%) after issuing $200 million of senior notes; cash climbed to $98.7 million
- Acquired Dy 4 Systems for $110 million on January 31, 2004, expanding embedded computing in Motion Control
- Heavy defense exposure: U.S. Government represented 46% of 2003 revenue, and about 50% of revenue is defense-related
- Commercial aerospace remains soft, with management expecting a flat 2004 market; 20% dividend increase approved in November 2003
03—Questions
Frequently Asked Questions
What drove the large increase in Curtiss-Wright's 2003 revenue?
Most of the 45% increase came from acquisitions. The full year of Electro-Mechanical Division (acquired October 2002) and Tapco, plus 2003 acquisitions such as E/M Coatings, Collins Technologies, and Systran, contributed $221.8 million of incremental sales. Organic growth in the remaining businesses was about 6%, led by Flow Control at 13%.
Why did operating margins decline even though profits grew?
Operating income grew 29%, but margin fell from 13.5% to 12.0%. Management attributes this to acquired businesses carrying lower margins than the traditional business, lower commercial aerospace volume, cost overruns and inventory adjustments in Flow Control, and reduced pension income (down $5.6 million). Management views this as a short-term cost of diversification.
How much debt does the company carry and what are the financing terms?
Total debt was about $225 million at December 31, 2003, including $200 million of senior notes issued in September 2003 (5.13% due 2010 and 5.74% due 2013). Interest-rate swaps convert $80 million of those notes to variable rates, leaving about 46% of debt floating. Revolving and short-term credit facilities totaling $225 million were largely undrawn, with $197.1 million unused at year-end. A one-point rate change would affect interest expense by about $1 million.
How concentrated is the customer base and what are the main risks?
Dependence on government business is the central risk. Sales to Bechtel, a U.S. Navy prime contractor, were 16% of consolidated revenue, and losing this customer would have a material adverse effect. Other risks include defense budget changes, contract termination for convenience, the limited term of government contracts, sole-source suppliers, environmental liabilities, and foreign currency exposure to the Canadian dollar, pound, and euro. About 1,019 of 4,655 employees are unionized.
04—Continue