How much of Curtiss-Wright's 2007 growth came from acquisitions versus the existing business?

About 13% of the 24% sales growth was organic. Acquisitions from 2006 and 2007 added $142.1 million in incremental sales. Organic operating income grew about 20%, which indicates that acquired businesses contributed to growth but that the base business also performed well.

Is the record backlog dependable, given how concentrated the new orders were?

Backlog grew to $1,303.8 million, but approximately $293 million of the new orders came from one China AP1000 program. Much of Flow Control's backlog is long-term nuclear and naval work, and about 40% of backlog ships after one year. Investors should note that a large share of growth depends on a few programs and on U.S. Government funding timing.

Why did margins decline in Flow Control and Motion Control even as sales grew?

Gross margins fell mainly because the company bid lower-margin development contracts and new programs to win follow-on production work. It also took cost overruns on fixed-price contracts, including a $3.5 million loss on a Navy pump development contract, and absorbed higher material costs. Management expects some of these investments to pay off through future production orders, but near-term margin pressure may persist.

How has the company's leverage changed, and can it support further acquisitions?

Long-term debt increased to $511 million from $359 million, largely to fund 2007 acquisitions. The company had $224.4 million of unused revolver capacity and roughly $820 million of additional debt capacity under its 60% debt-to-capitalization covenant. Interest expense rose to $27.4 million. Leverage is manageable, but further large acquisitions would need additional financing, and the company said it would consider alternatives to maintain its capital structure.

How exposed is Curtiss-Wright to U.S. defense budget changes?

Defense-related revenue is about 40% of sales, and U.S. Government sales are 38% of total revenue. Navy-related sales declined in Flow Control in 2007 due to procurement timing. Management expects defense spending to grow moderately and cites a proposed 7.5% increase in the FY2009 budget. Still, the company acknowledges that contracts can be terminated for convenience and that program delays or budget shifts could reduce revenue.

CW 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2008. Cited figures are marked; the original filing is the authoritative source.

Curtiss-Wright (CW) closed fiscal 2007 with strong top-line and earnings growth.

Net sales rose 24% to $1,592.1 million^a from $1,282.2 million, driven by 13% organic growth and $142.1 million of incremental sales from 2006 and 2007 acquisitions. Operating income increased 27% to $179.2 million, and net earnings rose 30% to $104.3 million, or $2.32 per diluted share. Backlog reached $1,303.8 million, up roughly 49% from $875.5 million a year earlier, with new orders of $1,870.4 million (up 40%).

Roughly $293 million^b of new orders came from reactor coolant pump awards for four AP1000 reactors in China, so a meaningful part of the order strength is concentrated in a single program. Margins were mixed. Gross margin slipped from 33.6% to 32.9%, mainly because of lower-margin development contracts, cost overruns on fixed-price programs, and higher material costs in Flow Control and Motion Control.

Overall operating margin improved 30 basis points to 11.3%, helped by cost reduction and lower corporate expense, which included a $6.5 million^c litigation reserve recorded in 2006 that did not recur. Segment performance was uneven: Metal Treatment grew operating income 20% with a 20.0% margin, Motion Control grew 17%, and Flow Control grew 21% on acquisitions even though its margin fell 120 basis points to 9.8%. The balance sheet took on more leverage to fund roughly $289 million of 2007 acquisitions, including Scientech, Valve Systems and Controls, Benshaw, and IMC Magnetics.

Total debt rose to $512 million^d, with $152 million drawn on a revolver. Operating cash flow was $139.1 million, slightly below 2006, and free cash flow after $54.4 million of capex was about $85 million. Working capital build-up and receivables growth absorbed cash.

Defense-related revenue is about 40% of sales, and U.S. Government sales are 38% of the total, so budget and contract-timing risk remains significant. The company also reports approximately 114 pending asbestos-related lawsuits, which management does not consider material.

02—Key points

Key Highlights

Net sales grew 24% to $1.59 billion, with 13% organic growth and $142.1 million from acquisitions.
Operating income rose 27% to $179.2 million; operating margin improved to 11.3% from 11.0%.
Diluted EPS increased to $2.32 from $1.82 (+27%), and net earnings rose 30% to $104.3 million.
Record backlog of $1.30 billion (up 49% year over year) and new orders of $1.87 billion (up 40%), including about $293 million from AP1000 reactor coolant pumps for China.
Gross margin declined to 32.9% from 33.6% due to development-contract losses, fixed-price cost overruns, and higher material costs.
Total debt increased to $512 million after roughly $289 million of acquisitions; roughly 70% of debt remains at fixed rates.
Dividend increased 33% to $0.08 per quarter, and the company continues to rely on acquisitions for growth, having acquired over 25 businesses since 2002.

03—Questions

Frequently Asked Questions

How much of Curtiss-Wright's 2007 growth came from acquisitions versus the existing business?
About 13% of the 24% sales growth was organic. Acquisitions from 2006 and 2007 added $142.1 million in incremental sales. Organic operating income grew about 20%, which indicates that acquired businesses contributed to growth but that the base business also performed well.
Is the record backlog dependable, given how concentrated the new orders were?
Backlog grew to $1,303.8 million, but approximately $293 million of the new orders came from one China AP1000 program. Much of Flow Control's backlog is long-term nuclear and naval work, and about 40% of backlog ships after one year. Investors should note that a large share of growth depends on a few programs and on U.S. Government funding timing.
Why did margins decline in Flow Control and Motion Control even as sales grew?
Gross margins fell mainly because the company bid lower-margin development contracts and new programs to win follow-on production work. It also took cost overruns on fixed-price contracts, including a $3.5 million loss on a Navy pump development contract, and absorbed higher material costs. Management expects some of these investments to pay off through future production orders, but near-term margin pressure may persist.
How has the company's leverage changed, and can it support further acquisitions?
Long-term debt increased to $511 million from $359 million, largely to fund 2007 acquisitions. The company had $224.4 million of unused revolver capacity and roughly $820 million of additional debt capacity under its 60% debt-to-capitalization covenant. Interest expense rose to $27.4 million. Leverage is manageable, but further large acquisitions would need additional financing, and the company said it would consider alternatives to maintain its capital structure.
How exposed is Curtiss-Wright to U.S. defense budget changes?
Defense-related revenue is about 40% of sales, and U.S. Government sales are 38% of total revenue. Navy-related sales declined in Flow Control in 2007 due to procurement timing. Management expects defense spending to grow moderately and cites a proposed 7.5% increase in the FY2009 budget. Still, the company acknowledges that contracts can be terminated for convenience and that program delays or budget shifts could reduce revenue.

04—Continue

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