form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2012

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _________ to _______

Commission File Number 1-134

CURTISS-WRIGHT CORPORATION
(Exact name of Registrant as specified in its charter)

Delaware
 
13-0612970
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

10 Waterview Boulevard
   
Parsippany, New Jersey
 
07054
(Address of principal executive offices)
 
(Zip Code)

(973) 541-3700
(Registrant’s telephone number, including area code)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period of time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x                        No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x                        No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $1.00 per share: 46,946,564 shares (as of July 31, 2012).

 
Page 1 of 37

 

CURTISS-WRIGHT CORPORATION and SUBSIDIARIES

TABLE of CONTENTS




       
       
PART I – FINANCIAL INFORMATION
 
PAGE
       
       
Item 1.
Financial Statements (Unaudited):
 
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
   
8 – 20
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
21 -33
       
Item 3.
34
       
Item 4.
34
       
       
       
PART II – OTHER INFORMATION
 
       
       
Item 1.
35
       
Item 1A.
Risk Factors
35
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35
     
Item 4.
Mine Safety Disclosures
35
       
Item 5.
Other Information
35
       
Item 6.
Exhibits
36
       
Signatures
 
37

 
Page 2 of 37

 

PART 1- FINANCIAL INFORMATION
Item 1. Financial Statements


CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands, except per share data)

 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
 
 
 
   
 
   
 
   
 
 
Net sales
  $ 526,386     $ 505,672     $ 1,028,047     $ 958,603  
Cost of sales
    362,379       340,091       704,766       647,119  
Gross profit
    164,007       165,581       323,281       311,484  
 
                               
Research and development expenses
    15,351       15,129       30,698       28,726  
Selling expenses
    32,888       29,936       65,369       59,159  
General and administrative expenses
    75,228       71,590       151,115       135,482  
Operating income
    40,540       48,926       76,099       88,117  
 
                               
Interest expense
    (6,526 )     (4,967 )     (13,008 )     (10,088 )
Other income, net
    130       25       232       77  
 
                               
Earnings from continuing operations before income taxes
    34,144       43,984       63,323       78,106  
Provision for income taxes
    11,309       13,905       20,646       25,060  
Earnings from continuing operations
    22,835       30,079       42,677       53,046  
 
                               
Discontinued operations, net of taxes
                               
Earnings from discontinued operations
    -       1,717       3,059       3,266  
Gain (loss) on divestiture
    (95 )     -       18,316       -  
Earnings from discontinued operations
    (95 )     1,717       21,375       3,266  
 
                               
Net earnings
  $ 22,740     $ 31,796     $ 64,052     $ 56,312  
 
                               
Basic earnings per share
                               
Earnings from continuing operations
  $ 0.49     $ 0.65     $ 0.91     $ 1.15  
Earnings from discontinued operations
    -       0.04       0.46       0.07  
Total
  $ 0.49     $ 0.69     $ 1.37     $ 1.22  
 
                               
Diluted earnings per share
                               
Earnings from continuing operations
  $ 0.48     $ 0.64     $ 0.90     $ 1.13  
Earnings from discontinued operations
    -       0.04       0.45       0.07  
Total
  $ 0.48     $ 0.68     $ 1.35     $ 1.20  
 
                               
Dividends per share
  $ 0.09     $ 0.08     $ 0.17     $ 0.16  
 
                               
Weighted average shares outstanding:
                               
Basic
    46,820       46,311       46,737       46,250  
Diluted
    47,501       47,015       47,519       46,991  
 
                               
See notes to condensed consolidated financial statements
 

 
Page 3 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)


 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Net earnings
  $ 22,740     $ 31,796     $ 64,052     $ 56,312  
Other comprehensive income
                               
Foreign currency translation
    (19,672 )     7,516       97       25,210  
Pension and postretirement adjustments
    2,004       551       3,458       1,022  
Other comprehensive income (loss), net of tax
    (17,668 )     8,067       3,555       26,232  
Comprehensive income
  $ 5,072     $ 39,863     $ 67,607     $ 82,544  
 
                               
See notes to condensed consolidated financial statements
 

 
Page 4 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except par value)


 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
Assets
 
 
   
 
 
Current assets:
 
 
   
 
 
Cash and cash equivalents
  $ 213,081     $ 194,387  
Receivables, net
    556,194       556,026  
Inventories, net
    354,483       320,633  
Deferred tax assets, net
    54,154       54,275  
Other current assets
    35,647       41,813  
Total current assets
    1,213,559       1,167,134  
Property, plant, and equipment, net
    436,763       443,555  
Goodwill
    759,660       759,442  
Other intangible assets, net
    251,697       261,448  
Deferred tax assets, net
    10,414       12,137  
Other assets
    10,546       9,121  
Total assets
  $ 2,682,639     $ 2,652,837  
 
               
Liabilities
               
Current liabilities:
               
Current portion of long-term and short-term debt
  $ 2,466     $ 2,502  
Accounts payable
    125,333       150,281  
Dividends payable
    4,216       -  
Accrued expenses
    96,077       105,196  
Income taxes payable
    5,679       4,161  
Deferred revenue
    197,850       200,268  
Other current liabilities
    38,566       42,976  
Total current liabilities
    470,187       505,384  
Long-term debt
    585,660       583,928  
Deferred tax liabilities, net
    24,759       24,980  
Accrued pension and other postretirement benefit costs
    231,302       232,794  
Long-term portion of environmental reserves
    20,124       19,067  
Other liabilities
    52,247       57,645  
Total liabilities
    1,384,279       1,423,798  
Contingencies and commitments (Note 14)
               
 
               
Stockholders' Equity
               
Common stock, $1 par value
    49,021       48,879  
Additional paid in capital
    146,855       143,192  
Retained earnings
    1,244,073       1,187,989  
Accumulated other comprehensive loss
    (61,576 )     (65,131 )
 
    1,378,373       1,314,929  
Less:  Treasury stock, at cost
    (80,013 )     (85,890 )
Total stockholders' equity
    1,298,360       1,229,039  
Total liabilities and stockholders' equity
  $ 2,682,639     $ 2,652,837  
 
               
See notes to condensed consolidated financial statements
         

 
Page 5 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)


 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2012
   
2011
 
Cash flows from operating activities:
 
 
   
 
 
Net earnings
  $ 64,052     $ 56,312  
Adjustments to reconcile net earnings to net cash used for operating activities:
               
Depreciation and amortization
    46,638       42,244  
Gain on divestiture
    (29,430 )     -  
Net (gain) on sale of assets
    (67 )     (302 )
Deferred income taxes
    319       (2,955 )
Share-based compensation
    4,803       5,193  
Impairment of assets
    4,847       -  
Change in operating assets and liabilities, net of businesses acquired:
               
Accounts receivable, net
    (3,040 )     (31,991 )
Inventories, net
    (34,374 )     (35,324 )
Progress payments
    (2,113 )     911  
Accounts payable and accrued expenses
    (42,868 )     (19,319 )
Deferred revenue
    (2,418 )     806  
Income taxes payable
    8,962       284  
Net pension and postretirement liabilities
    3,945       (7,019 )
Other current and long-term assets and liabilities
    (1,016 )     6,213  
Total adjustments
    (45,812 )     (41,259 )
Net cash provided by operating activities
    18,240       15,053  
Cash flows from investing activities:
               
Proceeds from sales and disposals of long-lived assets
    369       307  
Proceeds from divestiture
    51,225       -  
Acquisitions of intangible assets
    (1,779 )     (16 )
Additions to property, plant, and equipment
    (40,716 )     (37,539 )
Acquisitions of businesses, net of cash acquired
    (6,231 )     (53,604 )
Additional consideration of prior period acquisitions
    (976 )     -  
Net cash provided by (used for) investing activities
    1,892       (90,852 )
Cash flows from financing activities:
               
Borrowings on debt
    -       455,000  
Principal payments on debt
    (50 )     (390,048 )
Repurchases of common stock
    (4,974 )     -  
Proceeds from exercise of stock options
    9,055       5,915  
Dividends paid
    (3,752 )     (3,710 )
Excess tax benefits from share-based compensation
    21       867  
Net cash provided by financing activities
    300       68,024  
Effect of exchange-rate changes on cash
    (1,738 )     2,744  
Net  increase (decrease) in cash and cash equivalents
    18,694       (5,031 )
Cash and cash equivalents at beginning of period
    194,387       68,119  
Cash and cash equivalents at end of period
  $ 213,081     $ 63,088  
Supplemental disclosure of non-cash investing activities:
               
Capital expenditures incurred but not yet paid
  $ 3,858     $ 1,147  
 
               
See notes to condensed consolidated financial statements
 

 
Page 6 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)


 
 
Common Stock
   
Additional Paid in Capital
   
Retained Earnings
   
Accumulated Other Comprehensive Loss
   
Treasury Stock
 
 
 
 
   
 
   
 
   
 
   
 
 
December 31, 2010
  $ 48,558     $ 130,093     $ 1,072,459     $ (2,813 )   $ (88,194 )
Net earnings
    -       -       130,423       -       -  
Other comprehensive income, net
    -       -       -       (62,318 )     -  
Dividends paid
    -       -       (14,893 )     -       -  
Stock options exercised, net
    321       5,312       -       -       8,648  
Share-based compensation
    -       8,046       -       -       1,575  
Repurchase of common stock
    -       -       -       -       (8,178 )
Other
    -       (259 )     -       -       259  
December 31, 2011
  $ 48,879     $ 143,192     $ 1,187,989     $ (65,131 )   $ (85,890 )
Net earnings
    -       -       64,052       -       -  
Other comprehensive income, net
    -       -       -       3,555       -  
Dividends declared
    -       -       (7,968 )     -       -  
Stock options exercised, net
    142       3,296       -       -       6,415  
Share-based compensation
    -       781       -       -       4,022  
Repurchase of common stock
    -       -       -       -       (4,974 )
Other
    -       (414 )     -       -       414  
June 30, 2012
  $ 49,021     $ 146,855     $ 1,244,073     $ (61,576 )   $ (80,013 )
 
                                       
 
                                       
See notes to condensed consolidated financial statements
 

 
Page 7 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

1.           BASIS OF PRESENTATION
 
Curtiss-Wright Corporation and its subsidiaries (“the Corporation” or “the Company”) is a diversified, multinational manufacturing and service company that designs, manufactures, and overhauls precision components and systems and provides highly engineered products and services to the aerospace, defense, automotive, shipbuilding, processing, oil, petrochemical, agricultural equipment, railroad, power generation, security, and metalworking industries.  Operations are conducted through 62 manufacturing facilities and 58 metal treatment service facilities.
 
The unaudited condensed consolidated financial statements include the accounts of Curtiss-Wright and its majority-owned subsidiaries.  All intercompany transactions and accounts have been eliminated.
 
On March 30, 2012, the Corporation sold its Heat Treating business to Bodycote plc.  As a result of the divestiture, the results of operations for the Heat Treating business, which were previously reported as part of the Metal Treatment segment, have been reclassified as discontinued operations for all periods presented. Please refer to Footnote 2 of our Condensed Consolidated Financial Statements for further information.
 
The unaudited condensed consolidated financial statements of the Corporation have been prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, and expenses and disclosure of contingent assets and liabilities in the accompanying financial statements.  Actual results may differ from these estimates. The most significant of these estimates includes the estimate of costs to complete long-term contracts under the percentage-of-completion accounting methods, the estimate of useful lives for property, plant, and equipment, cash flow estimates used for testing the recoverability of assets, pension plan and postretirement obligation assumptions, estimates for inventory obsolescence, estimates for the valuation and useful lives of intangible assets, warranty reserves, legal reserves, and the estimate of future environmental costs. Changes in estimates of contract sales, costs, and profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. Accordingly, the effect of the changes on future periods of contract performance is recognized as if the revised estimate had been the original estimate.  During the second quarter of 2012, the Corporation incurred unanticipated additional costs of $6 million on its long-term contract with Westinghouse for disassembly, inspection, and packaging costs related to the reactor coolant pumps (“RCP”) that we are supplying for the AP1000 nuclear power plants in China.  In the opinion of management, all adjustments considered necessary for a fair presentation have been reflected in these financial statements.
 
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s 2011 Annual Report on Form 10-K.  The results of operations for interim periods are not necessarily indicative of trends or of the operating results for a full year.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
ADOPTION OF NEW STANDARDS
 
Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in United States of America generally accepted accounting principles (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”)
 
In May 2011, new guidance was issued that amends the current fair value measurement and disclosure guidance to increase transparency around valuation inputs and investment categorization.  The new guidance does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or IFRS.  The new guidance is effective for annual and interim reporting periods beginning on or after December 15, 2011 and is to be adopted prospectively as early adoption is not permitted.  The adoption of this guidance did not have an impact on the Corporation’s results of operations or financial condition.
 

 
Page 8 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

Other Comprehensive Income: Presentation of Comprehensive Income
 
In June 2011, new guidance was issued that amends the current comprehensive income guidance. The new guidance allows the option of presenting the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single or continuous statement of comprehensive income or in two separate but consecutive statements.  The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The new guidance is to be applied retrospectively and is effective for fiscal years, and interim periods, beginning after December 15, 2011.  In December 2011, the FASB issued authoritative guidance to defer the effective date for those aspects of the guidance relating to the presentation of reclassification adjustments out of accumulated other comprehensive income.  The adoption of this new guidance did not have an impact on the Corporation’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation of other comprehensive income.
 
Intangibles—Goodwill and Other:  Testing Goodwill for Impairment
 
In September 2011, new guidance was issued that amends the current testing requirements of goodwill for impairment purposes.  The new guidance gives companies the option to perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying amount.  If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  The new guidance is to be applied prospectively effective for annual and interim goodwill impairment tests beginning after December 15, 2011, with early adoption permitted.  The adoption of this standard did not have an impact on the Corporation’s results of operations or financial condition.
 
2           DISCONTINUED OPERATIONS
 
On March 30, 2012, the Corporation sold the assets and real estate of its Heat Treating business, which had been reported in the Metal Treatment segment, to Bodycote plc.  The sales price was $52 million and is subject to a post-closing adjustment based on the final closing balance sheet.  The Heat Treating business’ operating results are included in discontinued operations in the Corporation's Condensed Consolidated Statement of Earnings for all periods presented.
 
Components of earnings from discontinued operations for the three and six months ended June 30, were as follows:
 
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Net sales
  $ -     $ 9,233     $ 10,785     $ 18,152  
Earnings from discontinued operations before income taxes
    -       2,767       4,929       5,263  
Provision for income taxes
    -       (1,050 )     (1,870 )     (1,997 )
Gain (loss) on divestiture, net of year-to-date taxes of $11,114
    (95 )     -       18,316       -  
Earnings from discontinued operations
  $ (95 )   $ 1,717     $ 21,375     $ 3,266  


 
Page 9 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

3.           RECEIVABLES
 
Receivables at June 30, 2012 and December 31, 2011 include amounts billed to customers, claims, other receivables, and unbilled charges on long-term contracts consisting of amounts recognized as sales but not billed.  Substantially all amounts of unbilled receivables are expected to be billed and collected within one year.
 
The composition of receivables is as follows:
 
 
 
(In thousands)
 
 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
Billed receivables:
 
 
   
 
 
Trade and other receivables
  $ 354,610     $ 369,109  
Less: Allowance for doubtful accounts
    (6,172 )     (6,880 )
Net billed receivables
    348,438       362,229  
Unbilled receivables:
               
Recoverable costs and estimated earnings not billed
    238,947       227,957  
Less: Progress payments applied
    (31,191 )     (34,160 )
Net unbilled receivables
    207,756       193,797  
Receivables, net
  $ 556,194     $ 556,026  

4.           INVENTORIES
 
Inventoried costs contain amounts relating to long-term contracts and programs with long production cycles, a portion of which will not be realized within one year.  Inventories are valued at the lower of cost (principally average cost) or market.  The composition of inventories is as follows:
 
 
 
(In thousands)
 
 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
Raw material
  $ 183,181     $ 168,619  
Work-in-process
    106,471       97,420  
Finished goods and component parts
    80,015       81,544  
Inventoried costs related to U.S. Government and other long-term contracts
    47,312       35,347  
Gross inventories
    416,979       382,930  
Less: Inventory reserves
    (47,890 )     (48,547 )
Progress payments applied, principally related to long-term contracts
    (14,606 )     (13,750 )
Inventories, net
  $ 354,483     $ 320,633  

As of June 30, 2012 and December 31, 2011, inventory also includes capitalized contract development costs of $23.6 million and $17.5 million, respectively, related to certain aerospace and defense programs.  These capitalized costs will be liquidated as production units are delivered to the customer.  As of June 30, 2012  and December 31, 2011, $8.1 million and $9.4 million, respectively, are scheduled to be liquidated under existing firm orders.
 


 
Page 10 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

5.           GOODWILL
 
The Corporation accounts for acquisitions by assigning the purchase price to acquired tangible and intangible assets and liabilities assumed.  Assets acquired and liabilities assumed are recorded at their fair values, and the excess of the purchase price over the amounts assigned is recorded as goodwill.
 
The changes in the carrying amount of goodwill for the six months ended June 30, 2012 are as follows:
 
 
 
(In thousands)
 
 
 
Flow Control
   
Motion Control
   
Metal Treatment
   
Consolidated
 
December 31, 2011
  $ 328,219     $ 385,784     $ 45,439     $ 759,442  
Acquisitions
    3,068       -       -       3,068  
Divestitures
    -       -       (3,649 )     (3,649 )
Goodwill adjustments
    184       40       -       224  
Foreign currency translation adjustment
    297       286       (8 )     575  
June 30, 2012
  $ 331,768     $ 386,110     $ 41,782     $ 759,660  

On April 19, 2012, the Corporation acquired two product lines from the Amidyne Group for approximately $7 million.  The product lines serve the commercial nuclear power market, and consist of original equipment and re-engineered replacement products for obsolete equipment. The Corporation will integrate both product lines into its Flow Control segment.  In connection with this acquisition, we recorded approximately $3 million in identifiable intangible assets, consisting primarily of finite-lived customer relationships, and approximately $3 million in Goodwill. The purchase price allocation relating to the business acquired is based on an initial estimate, and subject to revision, based upon final analysis including input from third party appraisals, when deemed appropriate.  The determination of fair value is finalized no later than twelve months from the date of acquisition.
 
The recoverability of goodwill is subject to an annual impairment test based on the estimated fair value of the underlying businesses.  As further described in our 2011 annual report on Form 10-K, to calculate the fair value of a reporting unit, we consider both comparative market multiples as well as estimated discounted cash flows for the reporting unit.  The test is performed in the fourth quarter, which coincides with the completion of our five-year strategic operating plan. Additionally, goodwill is tested for impairment when an event occurs or if circumstances change that could more likely than not reduce the fair value of a reporting unit below its carrying amount.
 
During the second quarter of 2012, the Corporation performed an interim goodwill impairment test for its oil and gas reporting unit, within its Flow Control segment, as a result of on-going customer delays of international capital expenditures.  Based on the interim impairment analysis, the Corporation determined that its oil and gas reporting unit’s estimated fair value was not substantially in excess of its carrying amount. For further discussion on the Corporation’s interim impairment analysis please refer to our Critical Accounting Policy section in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 


 
Page 11 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

6.           OTHER INTANGIBLE ASSETS, NET
 
Intangible assets are generally the result of acquisitions and consist primarily of purchased technology and customer related intangibles.  Intangible assets are amortized over useful lives that range between 1 to 20 years.
 
The following tables present the cumulative composition of the Corporation’s intangible assets and include $9.9 million of indefinite lived intangible assets within Other intangible assets for both periods presented.
 
 
(In thousands)
 
June 30, 2012
Gross
 
Accumulated Amortization
 
Net
 
Technology
  $ 156,377     $ (70,407 )   $ 85,970  
Customer related intangibles
    223,474       (85,952 )     137,522  
Other intangible assets
    44,728       (16,523 )     28,205  
Total
  $ 424,579     $ (172,882 )   $ 251,697  
 
                       
 
(In thousands)
 
December 31, 2011
Gross
 
Accumulated Amortization
 
Net
 
Technology
  $ 155,406     $ (65,291 )   $ 90,115  
Customer related intangibles
    219,498       (77,945 )     141,553  
Other intangible assets
    44,555       (14,775 )     29,780  
Total
  $ 419,459     $ (158,011 )   $ 261,448  

During the first six months of 2012, the Corporation acquired intangible assets of $5.4 million. The Corporation acquired Technology of $2.5 million, Customer related intangibles of $2.8 million, and Other intangibles of $0.1, which have a weighted average amortization period of 15, 18, and 10 years, respectively.
 
Total intangible amortization expense for the six months ended June 30, 2012 was $15.1 million as compared to $13.4 million in the prior year period.  The estimated amortization expense for the five years ending December 31, 2012 through 2016 is $27.8 million, $25.8 million, $24.0 million, $22.7 million, and $22.5 million, respectively.
 
7.           FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Forward Foreign Exchange Contracts
 
The Corporation has foreign currency exposure primarily in Europe and Canada.  The Corporation uses financial instruments, such as forward contracts, to hedge a portion of existing and anticipated foreign currency denominated transactions.  The purpose of the Corporation’s foreign currency risk management program is to reduce volatility in earnings caused by exchange rate fluctuations.  Guidance on accounting for derivative instruments and hedging activities requires companies to recognize all of the derivative financial instruments as either assets or liabilities at fair value in the Condensed Consolidated Balance Sheets based upon quoted market prices for comparable instruments.
 
Interest Rate Risks and Related Strategies
 
The Corporation’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Corporation’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Corporation periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Corporation exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
 
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
 
 
 
Page 12 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 
 
In January 2012, the Company entered into three fixed-to-floating interest rate swap agreements to convert the interest payments of the $200 million, 4.24% notes, due December 1, 2026, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 2.02% spread, and one fixed-to-floating interest rate swap agreement to convert the interest payments of $25 million of the $100 million, 3.84% notes, due December 1, 2021, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 1.90% spread. The notional amounts of the Company’s outstanding interest rate swaps designated as fair value hedges were $200 million and $25 million at June 30, 2012.
 
The Corporation utilizes the bid ask pricing that is common in the dealer markets to determine the fair value of its interest rate swap agreements and forward foreign exchange contracts.  The dealers are ready to transact at these prices which use the mid-market pricing convention and are considered to be at fair market value.
 
The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
 
Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.
 
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.
 
Level 3: Inputs are unobservable data points that are not corroborated by market data.
 
Based upon the fair value hierarchy, all of the forward foreign exchange contracts and interest rate swaps are valued at a Level 2.
 
Effects on Consolidated Balance Sheets
 
The location and amounts of derivative instrument fair values in the consolidated balance sheet are segregated below between designated, qualifying hedging instruments, and ones that are not designated for hedge accounting.
 
 
 
 
   
 
 
 
 
(In thousands)
 
 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
Assets
 
 
   
 
 
Designated for hedge accounting
 
 
   
 
 
Interest rate swaps
  $ 1,791     $ -  
Undesignated for hedge accounting
               
Forward exchange contracts
  $ 215     $ 13  
Total asset derivatives (A)
  $ 2,006     $ 13  
 
               
Liabilities
               
Undesignated for hedge accounting
               
Forward exchange contracts
  $ 60     $ 356  
Total liability derivatives (B)
  $ 60     $ 356  
 
(A)  
Foreign exchange derivative assets are included in Other current assets and all interest rate swaps are included in Other assets.
 
(B)  
Forward exchange derivative liabilities  are included in Other current liabilities.
 
 
Page 13 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 
 
 
Effects on Condensed Consolidated Statements of Income
 
Fair value hedge
 
The location and amount of gains or losses on the hedged fixed rate debt attributable to changes in the market interest rates and the offsetting gain (loss) on the related interest rate swaps for the three and six months ended June 30, were as follows:

 
 
 
(In thousands)
 
 
 
Gain/(Loss) on Swap
 
Gain/(Loss) on Borrowings
 
 
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
June 30,
 
June 30,
Income Statement Classification
 
2012 
 
2011 
 
2012 
 
2011 
 
2012 
 
2011 
 
2012 
 
2011 
Other income, net
 
$
 14,503 
 
$
 - 
 
$
 1,791 
 
$
 - 
 
$
 (14,503)
 
$
 - 
 
$
 (1,791)
 
$
 - 

Undesignated hedges
 
The location and amount of gains and (losses) recognized in income on forward exchange derivative contracts not designated for hedge accounting for the three and six months ended June 30, were as follows:
 
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
 
June 30,
Derivatives not designated as hedging instrument
 
2012 
 
2011 
 
2012 
 
2011 
Foreign exchange contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
 (1,146)
 
$
 51 
 
$
 (170)
 
$
 943 

Debt
 
The estimated fair value amounts were determined by the Corporation using available market information which is primarily based on quoted market prices for the same or similar issues as of June 30, 2012.  In accordance with the fair value accounting guidance, all of the Corporation’s debt is classified as Level 2.
 
The carrying amount of the variable interest rate debt approximates fair value because the interest rates are reset periodically to reflect current market conditions.
 
The fair values described below may not be indicative of net realizable value or reflective of future fair values.  Furthermore, the use of different methodologies to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
 

 
Page 14 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 


 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
 
 
Carrying Value
   
Estimated Fair Value
   
Carrying Value
   
Estimated Fair Value
 
Industrial revenue bonds, due from 2012 through 2023
  $ 8,826     $ 8,826     $ 9,004     $ 9,004  
5.74% Senior notes due September 25, 2013
    125,017       132,179       125,024       134,982  
5.51% Senior notes due December 1, 2017
    150,000       170,890       150,000       172,871  
3.84% Senior notes due December 1, 2021
    100,597       100,597       100,000       101,886  
4.24% Senior notes due December 1, 2026
    201,194       201,194       200,000       204,965  
Other debt
    2,492       2,492       2,402       2,402  
 
  $ 588,126     $ 616,178     $ 586,430     $ 626,110  

8.           WARRANTY RESERVES
 
The Corporation provides its customers with warranties on certain commercial and governmental products.  Estimated warranty costs are charged to expense in the period the related revenue is recognized based on quantitative historical experience.  Estimated warranty costs are reduced as these costs are incurred and as the warranty period expires or may be otherwise modified as specific product performance issues are identified and resolved.  Warranty reserves are included within Other current liabilities in the Condensed Consolidated Balance Sheets.  The following table presents the changes in the Corporation’s warranty reserves:
 
 
 
(In thousands)
 
 
 
2012
   
2011
 
Warranty reserves at January 1,
  $ 16,076     $ 14,841  
Provision for current year sales
    3,765       4,814  
Current year claims
    (2,792 )     (2,450 )
Change in estimates to pre-existing warranties
    (1,120 )     (781 )
Increase due to acquisitions
    75       -  
Foreign currency translation adjustment
    (176 )     270  
Warranty reserves at June 30,
  $ 15,828     $ 16,694  

9.           RESTRUCTURING ACTIVITIES
 
2012 Restructuring Initiative
 
The Corporation focuses on being the low-cost provider of its products by reducing operating costs and implementing lean manufacturing initiatives, which have in part led to the involuntary termination of certain positions and the consolidation of facilities and product lines.
 
During the second quarter of 2012, the Corporation recorded restructuring costs by segment as follows:
 
 
 
(In thousands)
 
 
Three Months Ended
 
 
June 30,2012
 
 
Flow Control
 
Motion Control
 
Metal Treatment
 
Consolidated
 
Cost of sales
  $ 1,105     $ 398     $ 394     $ 1,897  
Selling expenses
    312       -       -       312  
General and administrative
    842       86       4,847       5,775  
Total
  $ 2,259     $ 484     $ 5,241     $ 7,984  

 
 
Page 15 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 
 
During the first six months of 2012, the Corporation recorded restructuring costs by segment as follows:
 
 
 
(In thousands)
 
 
Six Months Ended
 
 
June 30,2012
 
 
Flow Control
 
Motion Control
 
Metal Treatment
 
Consolidated
 
Cost of sales
  $ 1,285     $ 2,136     $ 394     $ 3,815  
Selling expenses
    312       -       -       312  
General and administrative
    1,137       922       4,847       6,906  
Total
  $ 2,734     $ 3,058     $ 5,241     $ 11,033  

The components of the restructuring costs by segment are as follows:
 
Flow Control
 
The Flow Control segment recorded $2.3 million of restructuring charges in the second quarter of 2012 primarily for severance and benefits costs associated with headcount reductions to streamline operations. The segment recorded charges to Cost of sales of $1.1 million; charges to Selling expenses of $0.3 million; and charges to General and administrative expenses of $0.8 million.
 
In the first six months of 2012, the Flow Control segment recorded $2.7 million of restructuring charges primarily for severance and benefits costs associated with headcount reductions to streamline operations. The segment recorded charges to Cost of sales of $1.3 million; charges to Selling expenses of $0.3 million; and charges to General and administrative expenses of $1.1 million.
 
The Corporation expects to incur additional restructuring charges of $2 million related to our 2012 restructuring activities within the Flow Control segment.
 
Motion Control
 
The Motion Control segment recorded $0.5 million of restructuring charges in the second quarter of 2012 primarily for severance and benefits costs associated with headcount reductions to streamline operations. The segment recorded charges to Cost of sales of $0.4 million; and charges to General and administrative expenses of $0.1 million.
 
In the first six months of 2012, the Motion Control segment recorded $3.1 million of restructuring charges primarily for severance and benefits costs associated with headcount reductions to streamline operations. The segment recorded charges to Cost of sales of $2.1 million; and charges to General and administrative expenses of $0.9 million.
 
The Corporation expects to incur additional restructuring charges of $1 million related to our 2012 restructuring activities within the Motion Control segment.
 
Metal Treatment
 
The Metal Treatment segment recorded $5.2 million of restructuring charges in the second quarter and first six months of 2012.  The segment recorded cash charges to Cost of sales of $0.4 million; and non-cash charges of $4.8 million to General and administrative expenses.  The cash costs were primarily associated with severance and benefits costs related to headcount reductions, while the $4.8 million of non-cash costs were primarily related to fixed asset write-downs.
 
The Corporation expects to incur additional restructuring charges of $7 million, primarily in the fourth quarter of 2012, related to additional restructuring activities within the Metal Treatment segment.
 
The following table summarizes the cash components of the Corporation’s restructuring plans.  Accrued restructuring costs are included in Other current liabilities in the accompanying balance sheet.
 
 
 
(In thousands)
 
 
 
Severance and Benefits
   
Abandonment of facility costs
   
Total
 
December 31, 2011
  $ -     $ -     $ -  
Provisions
    5,776       410       6,186  
Payments
    3,451       31       3,482  
June 30, 2012
  $ 2,325     $ 379     $ 2,704  

 
The Corporation expects to pay accrued cash restructuring costs primarily over the remainder of 2012.
 

 
Page 16 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 
 
10.           PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
 
The following tables are consolidated disclosures of all domestic and foreign defined pension plans as described in the Corporation’s 2011 Annual Report on Form 10-K.  The postretirement benefits information includes the domestic Curtiss-Wright Corporation and EMD postretirement benefit plans, as there are no foreign postretirement benefit plans.
 
Pension Plans
 
The components of net periodic pension cost for the three and six months ended June 30, 2012 and 2011 are as follows:
 
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Service cost
  $ 9,978     $ 9,342     $ 20,133     $ 18,657  
Interest cost
    6,676       6,566       13,131       13,108  
Expected return on plan assets
    (8,356 )     (7,995 )     (16,770 )     (15,962 )
Amortization of prior service cost
    300       301       601       600  
Amortization of unrecognized actuarial loss
    3,015       1,246       5,511       2,489  
Curtailment loss
    -       53       -       53  
Net periodic benefit cost
  $ 11,613     $ 9,513     $ 22,606     $ 18,945  

During the six months ended June 30, 2012, the Corporation made $17 million in contributions to the Curtiss-Wright Pension Plan, and expects to make total contributions of approximately $48 million in 2012.  In addition, contributions of $2.0 million were made to the Corporation’s foreign benefit plans during the six months ended June 30, 2012.  Contributions to the foreign benefit plans are expected to be $4.3 million in 2012.
 

 
Page 17 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

Other Postretirement Benefit Plans
 
The components of the net postretirement benefit cost for the Curtiss-Wright and EMD postretirement benefit plans for the three and six months ended June 30, 2012 and 2011 are as follows:
 
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2012
 
2011
 
2012
 
2011
 
Service cost
  $ 110     $ 94     $ 220     $ 188  
Interest cost
    231       250       463       500  
Amortization of prior service cost
    (157 )     (157 )     (314 )     (314 )
Amortization of unrecognized actuarial gain
    (179 )     (231 )     (359 )     (463 )
Net periodic postretirement benefit cost
  $ 5     $ (44 )   $ 10     $ (89 )

During the six months ended June 30, 2012, the Corporation paid $0.5 million to the postretirement plans.  During 2012, the Corporation anticipates making total contributions of $1.6 million to the postretirement plans.
 
11.           EARNINGS PER SHARE
 
Diluted earnings per share were computed based on the weighted average number of shares outstanding plus all potentially dilutive common shares.  A reconciliation of basic to diluted shares used in the earnings per share calculation is as follows:
 
 
 
(In thousands, except stock options outstanding)
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Basic weighted average shares outstanding
    46,820       46,311       46,737       46,250  
Dilutive effect of stock options and deferred stock compensation
    681       704       782       741  
Diluted weighted average shares outstanding
    47,501       47,015       47,519       46,991  

As of June 30, 2012 and 2011, there were 638,000 and 660,000 stock options outstanding, respectively, that could potentially dilute earnings per share in the future, which were excluded from the computation of diluted earnings per share as they would be considered anti-dilutive.
 


 
Page 18 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 

12.           SEGMENT INFORMATION
 
The Corporation manages and evaluates its operations based on the products and services it offers and the different markets it serves.  Based on this approach, the Corporation has three reportable segments: Flow Control, Motion Control, and Metal Treatment.
 
 
 
(In thousands)
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Net sales
 
 
   
 
   
 
   
 
 
Flow Control
  $ 274,653     $ 266,614     $ 541,444     $ 505,756  
Motion Control
    183,678       176,893       351,823       337,163  
Metal Treatment
    71,067       62,826       141,156       117,168  
Less: Intersegment revenues
    (3,012 )     (661 )     (6,376 )     (1,484 )
Total consolidated
  $ 526,386     $ 505,672     $ 1,028,047     $ 958,603  
 
                               
Operating income (expense)
                               
Flow Control
  $ 18,614     $ 26,532     $ 37,141     $ 45,164  
Motion Control
    23,527       18,804       36,456       35,090  
Metal Treatment
    5,937       7,644       15,793       15,209  
Corporate and eliminations (1)
    (7,538 )     (4,054 )     (13,291 )     (7,346 )
Total consolidated
  $ 40,540     $ 48,926     $ 76,099     $ 88,117  

(1) Corporate and eliminations includes pension expense, environmental remediation and administrative expenses, legal, foreign currency transactional gains and losses, and other expenses.
 
Operating income by reportable segment and the reconciliation to income from continuing operations before income taxes are as follows:
 
 
 
(In thousands)
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Total operating income
  $ 40,540     $ 48,926     $ 76,099     $ 88,117  
Interest expense
    (6,526 )     (4,967 )     (13,008 )     (10,088 )
Other income, net
    130       25       232       77  
Earnings before income taxes
  $ 34,144     $ 43,984     $ 63,323     $ 78,106  

 
 
(In thousands)
 
 
 
June 30,
   
December 31,
 
 
 
2012
   
2011
 
Identifiable assets
 
 
   
 
 
Flow Control
  $ 1,223,497     $ 1,257,142  
Motion Control
    1,019,518       1,034,225  
Metal Treatment
    254,051       286,084  
Corporate and other
    185,573       75,386  
Total consolidated
  $ 2,682,639     $ 2,652,837  

 
 
Page 19 of 37

 
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)

 
 
13.           ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Total cumulative balance of each component of accumulated other comprehensive (loss) income, net of tax, is as follows:
 
 
(In thousands)
 
 
Foreign currency translation adjustments, net
 
Total pension and postretirement adjustments
 
Accumulated other comprehensive loss
 
December 31, 2011
  $ 39,768     $ (104,899 )   $ (65,131 )
Current period other comprehensive income
    97       3,458       3,555  
June 30, 2012
  $ 39,865     $ (101,441 )   $ (61,576 )

14.           CONTINGENCIES AND COMMITMENTS
 
Legal Proceedings
 
In January 2007, a former executive was awarded approximately $9.0 million in punitive and compensatory damages plus legal costs related to a gender bias lawsuit filed in 2003.  The Corporation recorded a $6.5 million reserve related to the lawsuit.  In August of 2009, the New Jersey Appellate Division reversed in part and affirmed in part the judgment of the trial court, resulting in the setting aside of the punitive damage award and the front pay award of the Plaintiff’s compensatory damages award.  The Plaintiff filed a Petition for Certification with the Supreme Court of New Jersey requesting review of the Appellate Division’s decision.  In December 2010, the Supreme Court of New Jersey issued an opinion reversing the Appellate Division’s decision, and reinstated the judgment rendered by the trial court.  The Corporation filed a Motion for Reconsideration with the Supreme Court of New Jersey. In the motion, the Corporation requested that the Supreme Court of New Jersey remand the case back to the lower Appellate Division to resolve certain arguments raised by the Corporation regarding the appropriateness of damages.  The Supreme Court of New Jersey granted the Corporation’s request for reconsideration and remanded the case back to the lower Appellate Division to decide the remaining undecided arguments raised by the Corporation.  In September 2011, the Appellate Court heard argument on the remaining unresolved issues in the case.  On April 5, 2012, the Appellate Court issued its decision in this matter and found that the Corporation is not entitled to a new trial on liability with regards to the retaliation claim.  However, the Appellate Division did set aside substantially all of the damage awards in the case and authorized a new trial on damages.
 
Neither party petitioned the Supreme Court of New Jersey for Certification.  In July 2012, the parties mutually settled the outstanding judgment for the amount of $5.2 million.  Accordingly, the total reserve related to the lawsuit as of June 30, 2012 is $5.2 million and recorded within Other current liabilities of the Condensed Consolidated Balance Sheets.
 
Consistent with other entities its size, the Corporation is party to a number of legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material effect on the Corporations’ results of operations or financial position.
 
Environmental Matters
 
The Corporation’s environmental obligations have not changed significantly from December 31, 2011.  The aggregate environmental liability was $21.2 million at June 30, 2012 and $20.5 million at December 31, 2011.  All environmental reserves exclude any potential recovery from insurance carriers or third-party legal actions.
 
The Corporation, through its Flow Control segment, has several Nuclear Regulatory Commission (“NRC”) licenses necessary for the continued operation of its commercial nuclear operations.  In connection with these licenses, the NRC required financial assurance from the Corporation in the form of a parent company guarantee, representing estimated environmental decommissioning and remediation costs associated with the commercial operations covered by the licenses.  The guarantee for the decommissioning costs of the refurbishment facility is $4.7 million.
 
Letters of Credit and Other Arrangements
 
The Corporation enters into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to guarantees of repayment on certain Industrial Revenue Bonds, future performance on certain contracts to provide products and services, and to secure advance payments the Corporation has received from certain international customers.  At June 30, 2012 and December 31, 2011, the Corporation had contingent liabilities on outstanding letters of credit of $55.8 million and $55.8 million, respectively.
 
AP1000 Program
 
The Corporation’s Electro-Mechanical Division is the reactor coolant pump (“RCP”) supplier for the Westinghouse AP1000 nuclear power plants under construction in China.  The first RCP was scheduled for delivery in the fourth quarter of 2011, however, the Corporation detected a localized heating issue in the pump stator during the final phase of qualification testing.  The Corporation has taken the necessary steps to ensure the long-term reliability and safety of the RCP and successfully completed qualification testing in April of 2012.  The first RCP is expected to be ready for shipment during the third quarter.   Based upon these circumstances and our current negotiations with the customer, the Corporation believes that the revised delivery dates mitigate any performance risk and that any damage or incentive provisions will be revised accordingly.  Based upon the information available, the Corporation does not believe that the ultimate outcome will result in a material impact to its results of operations or cash flows.
 
U.S. Government Defense Budget/Sequestration
 
In August 2011, the Budget Control Act (the Act) reduced the United States Department of Defense (U.S. DoD) top line budget by approximately $490 billion over 10 years starting in 2013.  In addition, barring Congressional action, further budget cuts (or sequestration) as outlined in the Act will be implemented starting in January 2013. Sequestration would lead to additional reductions of approximately $500 billion from the Pentagon's top line budget over the next decade, resulting in aggregate reductions of about $1 trillion over 10 years.  In June 2012, the Office of Management and Budget announced that the budget for Overseas Contingency Operations and any unobligated balances in prior year funds will also be included in aggregate reductions.  The U.S. DoD has taken the position that such reductions would generate significant operational risks and may require the termination of certain, as yet undetermined, procurement programs. Any reduction in levels of U.S. DoD spending, cancellations or delays impacting existing contracts or programs, including through sequestration, could have a material impact on the Corporation’s operating results.
 

 
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CURTISS WRIGHT CORPORATION and SUBSIDIARIES
PART I- ITEM 2
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS


FORWARD-LOOKING STATEMENTS
 
Except for historical information, this Quarterly Report on Form 10-Q may be deemed to contain "forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Examples of forward-looking statements include, but are not limited to: (a) projections of or statements regarding return on investment, future earnings, interest income, sales, volume, other income, earnings or loss per share, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of management, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions underlying other statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as "anticipates," "believes," “continue,” "could," “estimate,” "expects," “intend,” "may," “might,” “outlook,” “potential,” “predict,” "should,"  "will," as well as the negative of any of the foregoing or variations of such terms or comparable terminology, or by discussion of strategy.  No assurance may be given that the future results described by the forward-looking statements will be achieved.  While we believe these forward-looking statements are reasonable, they are only predictions and are subject to known and unknown risks, uncertainties, and other factors, many of which are beyond our control, which could cause actual results, performance or achievement to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those described in “Item 1A. Risk Factors” of our 2011 Annual Report on Form 10-K, and elsewhere in that report, those described in this Quarterly Report on Form 10-Q, and those described from time to time in our future reports filed with the Securities and Exchange Commission.  Such forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, those contained in Item 1. Financial Statements and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements.  These forward-looking statements speak only as of the date they were made and we assume no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.
 

 
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued


COMPANY ORGANIZATION
 
Curtiss-Wright Corporation is a diversified, multinational provider of highly engineered, technologically advanced, value-added products and services to a broad range of markets in the flow control, motion control, and metal treatment industries.  We are positioned as a market leader across a diversified array of niche markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers. We provide products and services to a number of global markets, such as defense, commercial aerospace, commercial nuclear power generation, oil and gas, and general industrial. We have achieved balanced growth through the successful application of our core competencies in engineering and precision manufacturing, adapting these competencies to new markets through internal product development, and a disciplined program of strategic acquisitions. Our overall strategy is to be a balanced and diversified company, less vulnerable to cycles or downturns in any one market, and to establish strong positions in profitable niche markets.  Approximately 40% of our revenues are generated from defense-related markets.
 
We manage and evaluate our operations based on the products and services we offer and the different industries and markets we serve. Based on this approach, we have three reportable segments: Flow Control, Motion Control, and Metal Treatment.  For further information on our products and services and the major markets served by our three segments, please refer to our 2011 Annual Report on Form 10-K.
 
RESULTS OF OPERATIONS
 
Analytical Definitions
 
Throughout management’s discussion and analysis of financial condition and results of operations, the terms “incremental” and “organic” are used to explain changes from period to period. The term “incremental” is used to highlight the impact acquisitions and divestitures had on the current year results.  The results of operations for acquisitions are incremental for the first twelve months from the date of acquisition. Additionally, the results of operations of divested businesses are removed from the comparable prior year period for purposes of calculating “organic” or “incremental” results.  The definition of “organic” excludes the effect of foreign currency translation. On March 30, 2012, we completed the sale of our Heat Treating business, which had been previously reported with the Metal Treatment Segment.  The results of operations of this business and the gain that was recognized on the sale are reported within discontinued operations and prior year amounts have been restated to conform to the current year presentation.
 
The discussion below is structured to separately discuss our Consolidated Statements of Earnings, Results by Business Segment, and our Liquidity and Capital Resources.
 

 
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued



 
 
 
 
(In thousands)
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2012
   
2011
   
% of change
   
2012
   
2011
   
% of change
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Sales
 
 
   
 
   
 
   
 
   
 
   
 
 
Flow Control
  $ 274,653     $ 266,608       3 %   $ 541,444     $ 505,748       7 %
Motion Control
    181,090       176,512       3 %     346,176       336,292       3 %
Metal Treatment
    70,643       62,552       13 %     140,427       116,563       20 %
Total sales
  $ 526,386     $ 505,672       4 %   $ 1,028,047     $ 958,603       7 %
 
                                               
Operating income
                                               
Flow Control
  $ 18,614     $ 26,532       (30 %)   $ 37,141     $ 45,164       (18 %)
Motion Control
    23,527       18,804       25 %     36,456       35,090       4 %
Metal Treatment
    5,937       7,644       (22 %)     15,793       15,209       4 %
Corporate and eliminations
    (7,538 )     (4,054 )     (86 %)     (13,291 )     (7,346 )     (81 %)
Total operating income
  $ 40,540     $ 48,926       (17 %)   $ 76,099     $ 88,117       (14 %)
 
                                               
Interest expense
    (6,526 )     (4,967 )     (31 %)     (13,008 )     (10,088 )     (29 %)
Other income, net
    130       25       420 %     232       77       201 %
 
                                               
Earnings before income taxes
    34,144       43,984       (22 %)     63,323       78,106       (19 %)
Provision for income taxes
    11,309       13,905       (19 %)     20,646       25,060       (18 %)
 
                                               
Net earnings from continuing operations
  $ 22,835     $ 30,079       (24 %)   $ 42,677     $ 53,046       (20 %)
 
                                               
New orders
  $ 485,148     $ 482,699             $ 1,000,248     $ 962,916          


 
Sales
 
Sales increased $21 million, or 4%, and $69 million, or 7%, over the comparable prior year quarter and year-to-date periods, respectively. The increase in sales for the current quarter and first six months primarily reflects higher volume in all segments, with the largest percent increase occurring in the Metal Treatment segment. The incremental effects of acquisitions, net of divestitures, contributed $18 million and $53 million of sales, in the current year quarter and first six months of 2012, respectively, while the effect of foreign currency translation decreased sales by approximately $5 million and $6 million in the current quarter and first six months of 2012, respectively.
 
The table below further depicts our sales by market.  Certain prior year amounts in our sales by market table have been reclassified to conform to the fiscal year 2012 presentation.
 

 
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT’S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS OF OPERATIONS, continued



 
 
(In thousands)
 
 
 
Three Months Ended
   
Six Months Ended
 
 
 
June 30,
   
June 30,
 
 
 
2012
   
2011
   
% change
   
2012
   
2011
   
% change
 
 
 
 
   
 
   
 
   
 
   
 
   
 
 
Defense markets:
 
 
   
 
   
 
   
 
   
 
   
 
 
Aerospace
  $ 81,150     $ 76,076       7 %   $ 150,843     $ 141,806       6 %
Ground
    25,898       31,013       (16 %)     49,927       58,023       (14 %)
Naval
    88,094       92,919       (5 %)     177,576       176,300       1 %
Other
    6,571       7,273       (10 %)     14,623       14,028       4 %
Total Defense
  $ 201,713     $ 207,281       (3 %)   $ 392,969     $ 390,157       1 %