CW-2014.6.30-10Q



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

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2014

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.)
13925 Ballantyne Corporate Place,
 
 
Suite 400, Charlotte, North Carolina
 
28277
(Address of principal executive offices)
 
(Zip Code)

(704) 869-4602
(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  ý                        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  ý                        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 ý
 
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  ý

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: 48,134,633 shares (as of June 30, 2014).





CURTISS-WRIGHT CORPORATION and SUBSIDIARIES

TABLE of CONTENTS


PART I – FINANCIAL INFORMATION
PAGE
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
 
Item 1A.
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
 
Item 6.
 
 
 
 
 

Page 2







PART 1- FINANCIAL INFORMATION
Item 1. Financial Statements
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands, except per share data)
2014
 
2013
 
2014
 
2013
Product sales
$
521,815

 
$
491,056

 
$
1,032,187

 
$
953,506

Service sales
130,637

 
106,638

 
245,695

 
212,741

Total net sales
652,452

 
597,694

 
1,277,882

 
1,166,247

 
 
 
 
 
 
 
 
Cost of product sales
350,758

 
330,451

 
699,507

 
650,024

Cost of service sales
85,491

 
69,558

 
161,097

 
138,912

Total cost of sales
436,249

 
400,009

 
860,604

 
788,936

 
 
 
 
 
 
 
 
Gross profit
216,203

 
197,685

 
417,278

 
377,311

 
 
 
 
 
 
 
 
Research and development expenses
17,621

 
14,851

 
34,745

 
31,016

Selling expenses
37,047

 
37,202

 
75,295

 
72,006

General and administrative expenses
84,885

 
85,053

 
166,780

 
173,388

Operating income
76,650

 
60,579

 
140,458

 
100,901

Interest expense
(8,988
)
 
(9,342
)
 
(18,044
)
 
(18,005
)
Other income, net
64

 
200

 
118

 
645

Earnings from continuing operations before income taxes
67,726

 
51,437

 
122,532

 
83,541

Provision for income taxes
21,917

 
16,376

 
38,271

 
26,335

Earnings from continuing operations
45,809

 
35,061

 
84,261

 
57,206

Discontinued operations, net of taxes
 
 
 
 
 
 
 
Loss from discontinued operations
(4,994
)
 
(1,691
)
 
(8,282
)
 
(2,893
)
Loss on divestitures
(4,424
)
 

 
(4,424
)
 

Loss from discontinued operations
(9,418
)
 
(1,691
)
 
(12,706
)
 
(2,893
)
Net earnings
$
36,391

 
$
33,370

 
$
71,555

 
$
54,313

 
 
 
 
 
 
 
 
Basic earnings per share
 
 
 
 
 
 
 
Earnings from continuing operations
$
0.96

 
$
0.75

 
$
1.75

 
$
1.22

Loss from discontinued operations
(0.20
)
 
(0.04
)
 
(0.26
)
 
(0.06
)
Total
$
0.76

 
$
0.71

 
$
1.49

 
$
1.16

Diluted earnings per share
 
 
 
 
 
 
 
Earnings from continuing operations
0.93

 
0.74

 
1.72

 
1.20

Loss from discontinued operations
(0.19
)
 
(0.04
)
 
(0.26
)
 
(0.06
)
Total
0.74

 
0.70

 
1.46

 
1.14

Dividends per share
0.13

 
0.10

 
0.26

 
0.19

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
48,175

 
46,786

 
48,055

 
46,700

Diluted
49,239

 
47,507

 
49,160

 
47,478

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

Page 3


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


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net earnings
$
36,391

 
$
33,370

 
$
71,555

 
$
54,313

Other comprehensive income
 
 
 
 
 
 
 
Foreign currency translation, net of tax (1)
$
17,737

 
$
(9,945
)
 
$
7,820

 
$
(41,750
)
Pension and postretirement adjustments, net of tax (2)
914

 
52,865

 
1,700

 
55,651

Other comprehensive income, net of tax
18,651

 
42,920

 
9,520

 
13,901

Comprehensive income
$
55,042

 
$
76,290

 
$
81,075

 
$
68,214


(1) The tax benefit (expense) included in other comprehensive income for foreign currency translation adjustments for the three and six months ended June 30, 2014 were $0.4 million and $0.7 million, respectively. The tax benefit (expense) included in other comprehensive income for foreign currency translation adjustments for the three and six months ended June 30, 2013 were and $0.1 million and ($1.1) million, respectively.

(2) The tax benefit (expense) included in other comprehensive income for pension and postretirement adjustments for the three and six months ended June 30, 2014 were ($0.5) million and ($0.9) million, respectively. The tax benefit (expense) included in other comprehensive income for pension and postretirement adjustments for the three and six months ended June 30, 2013 were and ($1.4) million and ($2.9) million, respectively.

 
See notes to condensed consolidated financial statements

Page 4


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

 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
194,140

 
$
175,294

Receivables, net
621,415

 
603,592

Inventories, net
465,886

 
452,087

Deferred tax assets, net
48,272

 
47,650

Assets held for sale
10,799

 

Other current assets
69,053

 
58,660

Total current assets
1,409,565

 
1,337,283

Property, plant, and equipment, net
506,350

 
515,718

Goodwill
1,117,981

 
1,110,429

Other intangible assets, net
446,717

 
471,379

Other assets
26,022

 
23,465

Total assets
$
3,506,635

 
$
3,458,274

Liabilities
 

 
 

Current liabilities:
 
 
 
Current portion of long-term and short-term debt
$
775

 
$
1,334

Accounts payable
183,672

 
186,941

Accrued expenses
128,611

 
142,935

Income taxes payable
2,893

 
789

Deferred revenue
184,219

 
164,343

Other current liabilities
46,494

 
38,251

Total current liabilities
546,664

 
534,593

Long-term debt
933,489

 
958,604

Deferred tax liabilities, net
142,104

 
123,644

Accrued pension and other postretirement benefit costs
122,804

 
138,904

Long-term portion of environmental reserves
15,147

 
15,498

Other liabilities
111,854

 
134,326

Total liabilities
1,872,062

 
1,905,569

Contingencies and commitments (Note 13)


 


Stockholders' Equity
 
 
 
Common stock, $1 par value,100,000,000 shares authorized at June 30, 2014 and December 31, 2013; 49,189,702 shares issued at June 30, 2014 and December 31, 2013; outstanding shares were 48,134,633 at June 30, 2014 and 47,638,835 at December 31, 2013
49,190

 
49,190

Additional paid in capital
157,373

 
150,618

Retained earnings
1,440,000

 
1,380,981

Accumulated other comprehensive income
34,779

 
25,259

Common treasury stock, at cost (1,055,069 shares at June 30, 2014 and 1,550,867 shares at December 31, 2013)
(46,769
)
 
(53,343
)
Total stockholders' equity
1,634,573

 
1,552,705

Total liabilities and stockholders' equity
$
3,506,635

 
$
3,458,274

 
 
 
 
See notes to condensed consolidated financial statements

Page 5


CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended
 
June 30,
(In thousands)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net earnings
$
71,555

 
$
54,313

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
61,386

 
60,233

Loss on divestitures
7,106

 

Net loss (gain) on sale of assets
389

 
(92
)
Deferred income taxes
10,695

 
1,652

Share-based compensation
4,286

 
3,182

Change in operating assets and liabilities, net of businesses acquired and divested:
 

 
 
Accounts receivable, net
(19,801
)
 
9,133

Inventories, net
(29,604
)
 
(21,608
)
Progress payments
(7,164
)
 
(10,872
)
Accounts payable and accrued expenses
(26,567
)
 
(34,728
)
Deferred revenue
20,430

 
(4,010
)
Income taxes payable
1,924

 
(10,460
)
Net pension and postretirement liabilities
(15,545
)
 
10,752

Other current and long-term assets and liabilities
5,327

 
3,306

Net cash provided by operating activities
84,417

 
60,801

Cash flows from investing activities:
 

 
 

Proceeds from sales and disposals of long lived assets
328

 
944

Proceeds from divestitures, net of cash sold
52,098

 

Additions to property, plant, and equipment
(35,996
)
 
(32,126
)
Acquisition of businesses, net of cash acquired
(34,362
)
 
(97,886
)
Additional consideration on prior period acquisitions
(230
)
 
(4,107
)
Net cash used for investing activities
(18,162
)
 
(133,175
)
Cash flows from financing activities:
 

 
 

Borrowings under revolving credit facility
362,563

 
521,429

Borrowings on debt

 
400,000

Payment of revolving credit facility
(413,203
)
 
(817,776
)
Repurchases of common stock
(23,911
)
 

Proceeds from share-based compensation
26,476

 
8,853

Dividends paid
(6,277
)
 
(4,207
)
Excess tax benefits from share-based compensation plans
6,657

 
310

Net cash provided by (used for) financing activities
(47,695
)
 
108,609

Effect of exchange-rate changes on cash
286

 
(5,215
)
Net increase in cash and cash equivalents
18,846

 
31,020

Cash and cash equivalents at beginning of period
175,294

 
112,023

Cash and cash equivalents at end of period
$
194,140

 
$
143,043

Supplemental disclosure of non-cash activities:
 

 
 

Capital expenditures incurred but not yet paid
$
1,371

 
$
2,281

Property and equipment acquired under build to suit transaction
$
12,376

 
$

See notes to condensed consolidated financial statements

Page 6




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, 2012
$
49,190

 
$
151,883

 
$
1,261,377

 
$
(55,508
)
 
$
(94,350
)
Net earnings

 

 
137,981

 

 

Other comprehensive income, net of tax

 

 

 
80,767

 

Dividends paid

 

 
(18,377
)
 

 

Stock options exercised, net of tax

 
(5,728
)
 

 

 
34,451

Restricted stock

 
(2,127
)
 

 

 
5,796

Share-based compensation

 
6,920

 

 

 
430

Other

 
(330
)
 

 

 
330

December 31, 2013
$
49,190

 
$
150,618

 
$
1,380,981

 
$
25,259

 
$
(53,343
)
Net earnings

 

 
71,555

 

 

Other comprehensive income, net of tax

 

 

 
9,520

 

Dividends declared

 

 
(12,536
)
 

 

Stock options exercised, net of tax

 
5,131

 

 

 
26,719

Restricted stock

 
(2,051
)
 

 

 
3,155

Share-based compensation

 
4,052

 

 

 
234

Repurchase of common stock

 

 

 

 
(23,911
)
Other

 
(377
)
 

 

 
377

June 30, 2014
$
49,190

 
$
157,373

 
$
1,440,000

 
$
34,779

 
$
(46,769
)
 
 
 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

Page 7

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 commercial/industrial, defense, and energy markets.

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.

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, 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. In the three and six month periods ended June 30, 2014 and 2013, there were no individual significant changes in estimated contract costs. 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 2013 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.

Changes in Segment Presentation

As a result of certain organizational changes in 2014, the Corporation revised its reportable segments to align to the major markets it currently serves: Commercial/Industrial, Defense, and Energy. Prior period financial information has been reclassified to conform to the current period presentation. The change in reportable segments did not impact the Corporation's previously reported Condensed Consolidated Financial Statements. See Note 11 of the Notes to the Condensed Consolidated Financial Statements for more information on the Corporation's reportable segments.

Discontinued operations

During the second quarter we sold our Benshaw and 3D Radar businesses, which had been previously reported within the Defense segment and reclassified the Vessels business, which had been previously reported within the Energy segment, as held for sale. Please refer to Footnote 3 of our Condensed Consolidated Financial Statements for further information. The results of operations of these businesses are reported as discontinued operations within our Condensed Consolidated Statements of Earnings. Prior year amounts have been restated to conform to the current year presentation.

Corrections to Prior Years Amounts

The presentation of net sales and cost of sales in the prior year's statement of earnings has been corrected to separately present the components of product and service sales and costs of sales. This change in presentation did not affect total net sales, total cost of sales, total gross profit, operating income, or net earnings.

Out of Period Correction of an Immaterial Error Related to Three and Six Month Periods ended June 30, 2013

In the third quarter of 2013, the Corporation recorded an out of period adjustment related to the three and six month periods ended June 30, 2013 of $18 million to decrease comprehensive income and increase our deferred tax liability to reflect the tax impact of a May 31, 2013 amendment to our Curtiss-Wright Pension Plan which required a plan remeasurement. This error did not affect our condensed consolidated statement of net earnings or condensed consolidated statements of cash flows for the three and nine month periods ended September 30, 2013 or the three and six month periods ended June 30, 2013.  The

Page 8

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


Corporation evaluated the effects of this error on the June 30, 2013 condensed consolidated financial statements and based on an analysis of quantitative and qualitative factors, the Corporation determined that the error was not material and, therefore, amendment of previously filed reports is not required. 

RECENTLY ISSUED ACCOUNTING STANDARDS

STANDARDS ISSUED BUT NOT YET EFFECTIVE

In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. The Corporation is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

In April 2014, new guidance was issued that amends the current discontinued operations guidance. The new guidance limits discontinued operation reporting to situations where the disposal represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results, and requires expanded disclosures for discontinued operations. The adoption of this new guidance will be effective prospectively for annual reporting periods beginning after December 15, 2014 and interim periods within those years, with early adoption permitted in certain instances. The Corporation plans to adopt the provisions of the new guidance during the first quarter of 2015. The significance of this guidance for the Corporation is dependent on any future divestitures or disposals.


2.           ACQUISITIONS

The Corporation evaluates potential acquisitions that either strategically fit within the Corporation’s existing portfolio or expand the Corporation’s portfolio into new product lines or adjacent markets. The Corporation has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Corporation's financial statements. This goodwill arises because the purchase prices for these businesses reflect the future earnings and cash flow potential in excess of the earnings and cash flows attributable to the current product and customer set at the time of acquisition.  Thus, goodwill inherently includes the know-how of the assembled workforce, the ability of the workforce to further improve the technology and product offerings, and the expected cash flows resulting from these efforts.  Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations.

The Corporation allocates the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. In the months after closing, as the Corporation obtains additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and as the Corporation learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price.  Adjustments to the purchase price allocation are made only for those items identified as of the acquisition date and prior to completion of the measurement period.

The Corporation acquired three businesses during the six months ended June 30, 2014, described in more detail below.

The amounts of net sales and net loss included in the Corporation’s consolidated statement of earnings from the acquisition date to the period ended June 30, 2014 are $6.8 million and $0.3 million, respectively.

COMMERCIAL/INDUSTRIAL

Component Coating and Repair Services Limited

On January 10, 2014, the Corporation acquired 100% of the issued and outstanding capital stock of Component Coating and Repair Services Limited (CCRS) for approximately £15 million ($25 million) in cash, net of cash acquired. The Share Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price deposited into escrow as security for potential indemnification claims

Page 9

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


against the sellers. CCRS operates out of two locations in Glasgow and Alfreton in the United Kingdom and will operate within the Corporation's Commercial/Industrial segment. CCRS is a provider of corrosion resistant coatings and precision airfoil repair services for aerospace and industrial turbine applications. Revenues were approximately $9.9 million in the latest fiscal year ending May 31, 2013.

The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values, as follows:

(In thousands)
CCRS

Accounts receivable
$
2,984

Inventory
64

Property, plant, and equipment
1,987

Other current and non-current assets
71

Intangible assets
9,560

Current and non-current liabilities
(1,754
)
Deferred income taxes
(2,058
)
Net tangible and intangible assets
10,854

Purchase price
24,644

Goodwill
$
13,790

 
 

Amount of tax deductible goodwill
$


ENERGY

Engemasa Pressure Relief Valves

On June 4, 2014, the Corporation acquired the valve division of Engemasa Engenharia E Materiais LTDA of Sao Carlos, Brazil
for approximately $1.8 million in cash. The division will operate within the Corporation's Energy segment.

Nuclear Power Services Inc.

On February 18, 2014, the Corporation acquired certain assets and assumed certain liabilities of Nuclear Power Services Inc. (NPSI) for approximately CAD 9 million (approximately $8.0 million) in cash. The Asset Purchase Agreement contains representations and warranties customary for a transaction of this type, including a portion of the purchase price held back as security for potential indemnification claims against the seller. NPSI is based in Ontario, Canada and will operate within the Corporation's Energy segment. NPSI provides qualified nuclear component sourcing, Equipment Qualification, Commercial Grade Dedication (CGD) services, and Instrumentation & Control component manufacturing primarily to the Canadian and International CANDU nuclear industry. NPSI generated revenues of approximately $4.9 million for the year ended December 31, 2013.

Supplemental Pro Forma Statements of Operations Data

The assets, liabilities and results of operations of the businesses acquired in 2014 were not material to the Corporation’s consolidated financial position or results of operations and therefore pro forma financial information for the acquisitions are not presented.

As it relates to the prior year, the following table presents unaudited consolidated pro forma financial information for the combined results of the Corporation and its completed business acquisitions during the year ended December 31, 2013 as if the acquisitions had occurred on January 1, 2013 for purposes of the financial information presented for the period ended June 30, 2013.

Page 10

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


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands, except per share data)
2013
 
2013
Net sales
$
636,480

 
$
1,257,699

Net earnings from continuing operations
33,985

 
56,039

Diluted earnings per share from continuing operations
0.72

 
1.18


The unaudited pro forma consolidated results were prepared using the acquisition method of accounting and are based on historical financial information.  The unaudited pro forma consolidated results are not necessarily indicative of what our consolidated results of operations actually would have been had the Corporation completed the acquisition on January 1, 2012. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations of the combined company nor do they reflect the expected realization of any cost savings associated with the acquisition. The unaudited pro forma consolidated results reflect primarily the following pro forma pre-tax adjustments:

Additional amortization expense related to the fair value of identifiable intangible assets acquired of approximately $1.1 million and $2.7 million for the three and six months ended, June 30, 2013, respectively.
Additional interest expense associated with the incremental borrowings that would have been incurred to acquire these companies as of January 1, 2012 of $1.3 million and $3.1 million for the three and six months ended, June 30, 2013, respectively.

3.           DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE

Benshaw

On June 30, 2014, the Corporation sold the assets of its Benshaw business, which had been reported in the Defense segment, to Regal-Beloit Corporation for $50 million in cash. Benshaw's operating results are included in discontinued operations in the Corporation’s Consolidated Statement of Earnings for all periods presented.

The following table summarizes the result of the Corporation's Benshaw business as discontinued operations:
 
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
14,342

 
$
17,709

 
$
29,029

 
$
38,138

Loss from discontinued operations before income taxes
 
(2,360
)
 
(252
)
 
(3,061
)
 
(319
)
Income tax benefit
 
803

 
161

 
1,068

 
280

Loss on divestiture, after tax of $2754
 
$
(5,144
)
 
$

 
$
(5,144
)
 
$

Loss from discontinued operations
 
$
(6,701
)
 
$
(91
)
 
$
(7,137
)
 
$
(39
)

Vessels

In the second quarter of 2014, management committed to a plan to sell the Vessels business, within the Energy segment. The Corporation decided to divest the business because it was not considered core and to allow the Corporation to concentrate on higher-growth opportunities. As of June 30, 2014, the business has been classified as held for sale and the results of operations for the business have been presented as discontinued operations.

The following table summarizes the result of the Corporation's Vessels business as discontinued operations:

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


 
 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Net sales
 
$
2,613

 
$
1,324

 
$
3,718

 
$
2,685

Loss from discontinued operations before income taxes
 
(4,902
)
 
(2,423
)
 
(8,054
)
 
(5,037
)
Income tax benefit
 
1,774

 
872

 
2,915

 
1,814

Loss from discontinued operations
 
$
(3,128
)
 
$
(1,551
)
 
$
(5,139
)
 
$
(3,223
)

The aggregate components of the assets classified as held for sale, are as follows:

(In thousands)
 
 
June 30, 2014
Assets held for sale:
 
 
 
Property, plant, and equipment, net
 
 
7,845

Goodwill
 
 
2,954

Total assets held for sale
 
 
10,799


3D Radar

On April 30, 2014, the Corporation sold the assets of the 3D Radar business, within the Defense segment, to Chemring Group PLC for $3.0 million in cash. Trade accounts receivable and payable were retained by the Corporation. The determination was made to divest the business as it was not considered a core business of the Corporation. The disposal resulted in a $0.7 million pre-tax gain and has been reported as discontinued operations in the Corporation's Consolidated Statement of Earnings. This business contributed $5.2 million in sales for the year ended December 31, 2013.


4.           RECEIVABLES

Receivables primarily include amounts billed to customers, unbilled charges on long-term contracts consisting of amounts recognized as sales but not billed, and other receivables.  Substantially all amounts of unbilled receivables are expected to be billed and collected within one year. An immaterial amount of unbilled receivables are subject to retainage provisions. The amount of claims and unapproved change orders within our receivables balances are immaterial.

The composition of receivables is as follows:
 
(In thousands)
 
June 30, 2014
 
December 31, 2013
Billed receivables:
 
 
 
Trade and other receivables
$
454,802

 
$
444,841

Less: Allowance for doubtful accounts
(6,435
)
 
(6,857
)
Net billed receivables
448,367

 
437,984

Unbilled receivables:
 
 
 
Recoverable costs and estimated earnings not billed
187,588

 
184,120

Less: Progress payments applied
(14,540
)
 
(18,512
)
Net unbilled receivables
173,048

 
165,608

Receivables, net
$
621,415

 
$
603,592




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


5.           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. Long term contract inventory includes an immaterial amount of claims or other similar items subject to uncertainty concerning their determination or realization. Inventories are valued at the lower of cost (principally average cost) or market. The composition of inventories is as follows:
 
(In thousands)
 
June 30, 2014
 
December 31, 2013
Raw materials
$
228,405

 
$
231,219

Work-in-process
120,551

 
114,372

Finished goods and component parts
122,200

 
117,444

Inventoried costs related to long-term contracts
60,552

 
58,796

Gross inventories
531,708

 
521,831

Less:  Inventory reserves
(53,670
)
 
(54,400
)
Progress payments applied
(12,152
)
 
(15,344
)
Inventories, net
$
465,886

 
$
452,087


As of June 30, 2014 and December 31, 2013, inventory also includes capitalized contract development costs of $40.9 million and $37.1 million, respectively, related to certain aerospace and defense programs.  These capitalized costs will be liquidated as production units are delivered to the customers.  As of June 30, 2014 and December 31, 2013, $10.2 million and $13.8 million, respectively, are scheduled to be liquidated under existing firm orders.


6.           GOODWILL

The changes in the carrying amount of goodwill, revised to reflect the Corporation's new segment structure, for the six months ended June 30, 2014 are as follows:
 
(In thousands)
 
Commercial/Industrial
 
Defense
 
Energy
 
Consolidated
December 31, 2013
$
347,819

 
$
485,431

 
$
277,179

 
$
1,110,429

Acquisitions
13,790

 

 
4,705

 
18,495

Assets held for sale

 

 
(2,954
)
 
(2,954
)
Divestitures

 
(11,355
)
 

 
(11,355
)
Goodwill adjustments
(1,002
)
 
(254
)
 

 
(1,256
)
Foreign currency translation adjustment
2,541

 
1,761

 
320

 
4,622

June 30, 2014
$
363,148

 
$
475,583

 
$
279,250

 
$
1,117,981




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



 7.           OTHER INTANGIBLE ASSETS, NET
 
The following tables present the cumulative composition of the Corporation’s intangible assets:
 
 
(In thousands)
June 30, 2014
 
Gross
 
Accumulated Amortization
 
Net
Technology
 
$
207,507

 
$
(88,626
)
 
$
118,881

Customer related intangibles
 
422,307

 
(129,871
)
 
292,436

Other intangible assets
 
59,186

 
(23,786
)
 
35,400

Total
 
$
689,000

 
$
(242,283
)
 
$
446,717

 
 
 
 
 
 
 
 
 
(In thousands)
December 31, 2013
 
Gross
 
Accumulated Amortization
 
Net
Technology
 
$
213,888

 
$
(88,644
)
 
$
125,244

Customer related intangibles
 
430,604

 
(127,194
)
 
303,410

Other intangible assets
 
66,436

 
(23,711
)
 
42,725

Total
 
$
710,928

 
$
(239,549
)
 
$
471,379


During the first six months of 2014, the Corporation acquired intangible assets of $13.5 million, primarily consisting of Customer related intangibles of $13.2 million with a weighted average amortization period of 13.3 years.
Total intangible amortization expense for the six months ended June 30, 2014 was $24.6 million as compared to $24.2 million in the prior year period.  The estimated amortization expense for the five years ending December 31, 2014 through 2018 is $46.8 million, $43.8 million, $42.5 million, $41.9 million, and $40.4 million, respectively.

8.           FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Forward Foreign Exchange and Currency Option Contracts
 
The Corporation has foreign currency exposure primarily in the United Kingdom, Europe, and Canada.  The Corporation uses financial instruments, such as forward and option 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.

The notional amounts of the Corporation’s outstanding interest rate swaps designated as fair value hedges were $400 million at June 30, 2014.

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.

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



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 condensed consolidated balance sheet are below.
 
(In thousands)
 
June 30, 2014
 
December 31, 2013
Assets
 
 
 
Undesignated for hedge accounting
 
 
 
Forward exchange contracts
$
257

 
$
605

Total asset derivatives (A)
$
257

 
$
605

Liabilities
 
 
 
Designated for hedge accounting
 
 
 
Interest rate swaps
$
24,911

 
$
49,845

Undesignated for hedge accounting
 
 
 
Forward exchange contracts
$
394

 
$
277

Total liability derivatives (B)
$
25,305

 
$
50,122


(A)Forward exchange derivatives are included in Other current assets and interest rate swap assets are included in Other assets.
(B)Forward exchange derivatives are included in Other current liabilities and interest rate swap liabilities are included in Other liabilities.

Effects on Condensed Consolidated Statements of Earnings
 
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
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Other income, net
 
$
12,159

 
$
(25,623
)
 
$
24,934

 
$
(36,573
)
 
$
(12,159
)
 
$
25,623

 
$
(24,934
)
 
$
36,573


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:

Page 15

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



 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Derivatives not designated as hedging instrument
 
2014
 
2013
 
2014
 
2013
Forward exchange contracts:
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
2,020

 
$
(4,275
)
 
$
(930
)
 
$
(5,836
)

Debt

The estimated fair value amounts were determined by the Corporation using available market information that is primarily based on quoted market prices for the same or similar issues as of June 30, 2014.  Accordingly, all of the Corporation’s debt is valued at a Level 2.  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.

 
June 30, 2014
 
December 31, 2013
(In thousands)
Carrying Value
 
Estimated Fair Value
 
Carrying Value
 
Estimated Fair Value
Industrial revenue bond, due 2023
$
8,400

 
$
8,400

 
$
8,400

 
$
8,400

Revolving credit agreement, due 2017

 

 
50,000

 
50,000

5.51% Senior notes due 2017
150,000

 
164,094

 
150,000

 
163,059

3.84% Senior notes due 2021
99,523

 
99,523

 
98,632

 
98,632

3.70% Senior notes due 2023
225,000

 
220,111

 
225,000

 
209,140

3.85% Senior notes due 2025
94,253

 
94,253

 
88,555

 
88,555

4.24% Senior notes due 2026
186,572

 
186,572

 
173,557

 
173,557

4.05% Senior notes due 2028
69,741

 
69,741

 
64,411

 
64,411

4.11% Senior notes due 2028
100,000

 
95,431

 
100,000

 
89,252

Other debt
775

 
775

 
1,383

 
1,383

Total debt
$
934,264

 
$
938,900

 
$
959,938

 
$
946,389


9.           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 2013 Annual Report on Form 10-K.  The postretirement benefits information includes the domestic Curtiss-Wright Corporation, Williams, 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, 2014 and 2013 are as follows:

 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
6,372

 
$
10,899

 
$
12,742

 
$
21,718

Interest cost
7,552

 
6,781

 
15,096

 
13,516

Expected return on plan assets
(10,425
)
 
(8,875
)
 
(20,838
)
 
(17,761
)
Amortization of prior service cost
157

 
254

 
315

 
554

Amortization of unrecognized actuarial loss
1,483

 
3,935

 
2,966

 
8,207

Curtailments

 
2,711

 

 
2,711

Net periodic benefit cost
$
5,139

 
$
15,705

 
$
10,281

 
$
28,945


Page 16

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



During the six months ended June 30, 2014, the Corporation made $22.7 million in contributions to the Curtiss-Wright Pension Plan, and expects to make total contributions of $40.0 million in 2014.  In addition, contributions of $2.8 million were made to the Corporation’s foreign benefit plans during the six months ended June 30, 2014.  Contributions to the foreign benefit plans are expected to be $3.4 million in 2014.

Other Postretirement Benefit Plans

The components of the Corporation's net postretirement benefit cost for the three and six months ended June 30, 2014 and 2013 are as follows:
 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
70

 
$
99

 
$
141

 
$
199

Interest cost
219

 
209

 
438

 
417

Amortization of prior service cost
(164
)
 
(157
)
 
(328
)
 
(314
)
Amortization of unrecognized actuarial gain
(202
)
 
(160
)
 
(405
)
 
(320
)
Net postretirement benefit cost (income)
$
(77
)
 
$
(9
)
 
$
(154
)
 
$
(18
)

During the six months ended June 30, 2014, the Corporation paid $0.7 million to the postretirement plans.  During 2014, the Corporation anticipates contributing $1.7 million to the postretirement plans.

Defined Contribution Retirement Plan

Effective January 1, 2014, all non-union employees who are not currently receiving final or career average pay benefits became eligible to receive employer contributions in the Corporation's sponsored 401(k) plan. The employer contributions include both employer match and non-elective contribution components, up to a maximum employer contribution of 6% of eligible compensation.  The expense relating to the plan was $7.7 million for the six months ended June 30, 2014.  The Corporation made $3.4 million in contributions to the plan during the six months ended June 30, 2014, and expects to make total contributions of $7.0 million in 2014. 
 

10.           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)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Basic weighted-average shares outstanding
48,175

 
46,786

 
48,055

 
46,700

Dilutive effect of stock options and deferred stock compensation
1,064

 
721

 
1,105

 
778

Diluted weighted-average shares outstanding
49,239

 
47,507

 
49,160

 
47,478


As of June 30, 2014, there were no options outstanding that were considered anti-dilutive. As of June 30, 2013 there were 618,000 stock options outstanding 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 17

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



11.           SEGMENT INFORMATION
 
Prior to the first quarter of 2014, the Corporation reported its results of operations through three segments: Flow Control, Controls, and Surface Technologies. Beginning in the first quarter of 2014, the Corporation realigned its reportable segments with its end markets to strengthen its ability to service customers and recognize certain organizational efficiencies. As result of this realignment the Corporation has three new reportable segments: Commercial/Industrial, Defense, and Energy. The Corporation's former Surface Technologies segment is consolidated within the new Commercial/Industrial segment. The commercial businesses which were in the former Controls segment form part of the new Commercial/Industrial segment. The Corporation's defense businesses, which were primarily in the Corporation’s former Controls segment and to a lesser extent in the former Flow Control segment, are now consolidated within the new Defense segment. The Corporation's Oil and Gas and Nuclear divisions, which were in the former Flow Control segment, form the new Energy segment.

The Corporation's measure of segment profit or loss is operating income. Interest expense and income taxes are not reported on an operating segment basis because they are not considered in the segments’ performance evaluation by the Corporation’s chief operating decision-maker, its Chief Executive Officer.

Net sales and operating income by reportable segment was as follows:

 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net sales
 
 
 
 
 
 
 
Commercial/Industrial
$
276,280

 
$
241,960

 
$
543,205

 
$
462,416

Defense
192,690

 
193,632

 
380,336

 
381,807

Energy
185,233

 
164,074

 
357,972

 
325,617

Less: Intersegment revenues
(1,751
)
 
(1,972
)
 
(3,631
)
 
(3,593
)
Total consolidated
$
652,452

 
$
597,694

 
$
1,277,882

 
$
1,166,247

 
 
 
 
 
 
 
 
Operating income (expense)
 
 
 
 
 
 
 
Commercial/Industrial
$
37,741

 
$
27,010

 
$
70,224

 
$
47,063

Defense
24,454

 
29,854

 
47,723

 
47,057

Energy
20,720

 
15,791

 
36,361

 
29,155

Corporate and eliminations (1)
(6,265
)
 
(12,076
)
 
(13,850
)
 
(22,374
)
Total consolidated
$
76,650

 
$
60,579

 
$
140,458

 
$
100,901


(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,
 
2014
 
2013
 
2014
 
2013
Total operating income
$
76,650

 
$
60,579

 
$
140,458

 
$
100,901

Interest expense
(8,988
)
 
(9,342
)
 
(18,044
)
 
(18,005
)
Other income, net
64

 
200

 
118

 
645

Earnings from continuing operations before income taxes
$
67,726

 
$
51,437

 
$
122,532

 
$
83,541



Page 18

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


 
(In thousands)
 
June 30, 2014
 
December 31, 2013
Identifiable assets
 
 
 
Commercial/Industrial
$
1,383,435

 
$
1,310,521

Defense
1,212,268

 
1,292,462

Energy
816,769

 
798,028

Corporate and Other
94,163

 
57,263

Total consolidated
$
3,506,635

 
$
3,458,274




12.           ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The 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, net
 
Accumulated other comprehensive income (loss)
December 31, 2012
$
65,722

 
$
(121,230
)
 
$
(55,508
)
Current period other comprehensive income (loss)
(6,619
)
 
87,386

 
80,767

December 31, 2013
$
59,103

 
$
(33,844
)
 
$
25,259

Other comprehensive income before reclassifications (1)
7,820

 
71

 
7,891

Amounts reclassified from accumulated other comprehensive income (1)

 
1,629

 
1,629

Net current period other comprehensive income
7,820

 
1,700

 
9,520

June 30, 2014
$
66,923

 
$
(32,144
)
 
$
34,779


(1)
All amounts are after tax.

Details of amounts reclassified from accumulated other comprehensive income (loss) are below:
 
 
(In thousands)
 
Amount reclassified from Accumulated other comprehensive income (loss)
 
Affected line item in the statement where net earnings is presented
Defined benefit pension and other postretirement benefit plans
 
 
 
Amortization of prior service costs
13

 
(1)
Amortization of actuarial losses
(2,561
)
 
(1)
 
(2,548
)
 
Total before tax
 
919

 
Income tax
Total reclassifications
$
(1,629
)
 
Net of tax

(1)
These items are included in the computation of net periodic pension cost.  See Note 9, Pension and Other Postretirement Benefit Plans.

Page 19

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



13.           CONTINGENCIES AND COMMITMENTS

Legal Proceedings

The Corporation has been named in a number of lawsuits that allege injury from exposure to asbestos.  To date, the Corporation has not been found liable for or paid any material sum of money in settlement in any case.  The Corporation believes its minimal use of asbestos in its past and current operations and the relatively non-friable condition of asbestos in its products makes it unlikely that it will face material liability in any asbestos litigation, whether individually or in the aggregate.  The Corporation maintains insurance coverage for these potential liabilities and believes adequate coverage exists to cover any unanticipated asbestos liability.

In December 2013, the Corporation, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) filed in the Court of Queen's Bench of Alberta, Judicial District of Calgary. The claim pertains to a January 2011 fire and explosion at a delayed coker unit at its Fort McMurray refinery that resulted in the injury of five CNRL employees, damage to property and equipment, and various forms of consequential loss, such as loss of profit, lost opportunities, and business interruption. The fire and explosion occurred when a CNRL employee bypassed certain safety controls and opened an operating coker unit. The total quantum of alleged damages arising from the incident has not been finalized, but is estimated to meet or exceed $1 billion.  The Corporation maintains various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance may not be adequate to cover the costs associated with a judgment against us. The Corporation is currently unable to estimate an amount, or range of potential losses, if any, from this matter. The Corporation believes it has adequate legal defenses and intends to defend this matter vigorously. The Corporation's financial condition, results of operations, and cash flows, could be materially affected during a future fiscal quarter or fiscal year by unfavorable developments or outcome regarding this claim.

In addition to the CNRL litigation, the Corporation is party to a number of other 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 Corporation’s results of operations or financial position.

Environmental Matters

The aggregate environmental liability was $15.9 million at June 30, 2014 and $16.3 million at December 31, 2013.  All environmental reserves exclude any potential recovery from insurance carriers or third-party legal actions.

Letters of Credit and Other Financial Arrangements

The Corporation enters into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to guarantees of repayment, future performance on certain contracts to provide products and services, and to secure advance payments from certain international customers. At June 30, 2014 and December 31, 2013, there were $36.6 million and $47.2 million of stand-by letters of credit outstanding, respectively, and $25.9 million and $23.2 million of bank guarantees outstanding, respectively.   In addition, the Corporation is required to provide the Nuclear Regulatory Commission financial assurance demonstrating its ability to cover the cost of decommissioning its Cheswick, Pennsylvania facility upon closure, though the Corporation does not intend to close this facility.  The Corporation has provided this financial assurance in the form of a $52.9 million surety bond.

AP1000 Program

Within the Corporation’s Defense segment, our Electro-Mechanical Division is the reactor coolant pump (RCP) supplier for the Westinghouse AP1000 nuclear power plants under construction in China and the United States.  The terms of the AP1000 China and United States contracts include liquidated damage provisions for failure to meet contractual delivery dates if the Corporation caused the delay and the delay was not excusable. The Corporation would be liable for liquidated damages if the Corporation was deemed responsible for not meeting the delivery dates. On October 10, 2013, the Corporation received a letter from Westinghouse stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract from Westinghouse of approximately $25 million. As of June 30, 2014, the Corporation has not met certain contractual delivery dates under its AP 1000 China and US contracts; however there are significant uncertainties as to which parties are responsible for the delays.  Given the uncertainties surrounding the responsibility for the delays no accrual has been made for this matter as of June 30, 2014.  As of June 30, 2014, the range of possible loss is $0 to $35 million for the delivery dates that have not been met.


Page 20


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 2013 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.


Page 21


CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
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 industries which are reported through our Commercial/Industrial, Defense, and Energy segments. 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 and have achieved balanced growth through the successful application of our core competencies in engineering and precision manufacturing. 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 29% of our 2014 revenues are expected to be generated from defense-related markets.
 
Beginning in the first quarter of 2014, the Corporation realigned its reportable segments with its end markets to strengthen its ability to service customers and recognize certain organizational efficiencies. As result of this realignment the Corporation has three new reportable segments: Commercial/Industrial, Defense, and Energy. Please refer to Note 11 of the Corporation's Condensed Consolidated Financial Statements for further information.


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. These measures provide a tool for evaluating our ongoing operations from period to period. These metrics, however, are not measures of financial performance under accounting principles generally accepted in the United States of America (GAAP) and should not be considered a substitute for measures determined in accordance with GAAP. The non-GAAP financial measures that we disclose are organic revenue and organic operating income - defined as revenue and operating income, excluding the impact of foreign currency fluctuations and contributions from acquisitions and divestitures made during the last twelve months. When used in the MD&A, we have provided the comparable GAAP measure in the discussion. As discussed in footnote 3, during the second quarter we sold our Benshaw and 3D Radar businesses, which had been previously reported within the Defense segment and reclassified the Vessels business, which had been previously reported within the Energy segment, as held for sale. The results of operations of these businesses are reported as discontinued operations within our Condensed Consolidated Statements of Earnings. Prior year amounts have been restated to conform to the current year presentation.

Our three reportable segments are generally concentrated in a few end markets; however, each may have sales across several end markets.  The Corporation’s end markets are shown in the accompanying Net sales by end market table included within the Consolidated Statements of Earnings section of our MD&A. A market is defined as an area of demand for products and services.  The sales trends for the relevant markets will be discussed for each of the three reportable segments.
 
The MD&A is organized into the following sections: Consolidated Statements of Earnings, Results by Business Segment, Liquidity and Capital Resources and a reconciliation of Non-GAAP measures.

Page 22


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


Consolidated Statements of Earnings
 
 
 
 
 
 
 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
Sales
 
 
 
 
 
 
 
 
 
 
 
Commercial/Industrial
$
275,674

 
$
241,703

 
14
 %
 
$
542,102

 
$
461,989

 
17
 %
Defense
192,309

 
193,357

 
(1
)%
 
379,170

 
380,980

 
 %
Energy
184,469

 
162,634

 
13
 %
 
356,610

 
323,278

 
10
 %
Total sales
$
652,452

 
$
597,694

 
9
 %
 
$
1,277,882

 
$
1,166,247

 
10
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 

 
 

 
 

 
 

 
 

 
 

Commercial/Industrial
$
37,741

 
$
27,010

 
40
 %
 
$
70,224

 
$
47,063

 
49
 %
Defense
24,454

 
29,854

 
(18
)%
 
47,723

 
47,057

 
1
 %
Energy
20,720

 
15,791

 
31
 %
 
36,361

 
29,155

 
25
 %
Corporate and eliminations
(6,265
)
 
(12,076
)
 
48
 %
 
(13,850
)
 
(22,374
)
 
38
 %
Total operating income
$
76,650

 
$
60,579

 
27
 %
 
$
140,458

 
$
100,901

 
39
 %
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(8,988
)
 
(9,342
)
 
(4
)%
 
(18,044
)
 
(18,005
)
 
 %
Other income, net
64

 
200

 
NM

 
118

 
645

 
NM

 
 
 
 
 
 
 
 
 
 
 
 
Earnings before taxes
67,726

 
51,437

 
32
 %
 
122,532

 
83,541

 
47
 %
Provision for income taxes
21,917

 
16,376

 
34
 %
 
38,271

 
26,335

 
45
 %
Net earnings from continuing operations
$
45,809

 
$
35,061

 
 

 
$
84,261

 
$
57,206

 
 

 
 
 
 
 
 
 
 
 
 
 
 
New orders
$
750,229

 
$
579,107

 
30
 %
 
$
1,413,023

 
$
1,173,814

 
20
 %
 
 
 
 
 
 
 
 
 
 
 
 
NM- not a meaningful percentage
 
 
 
 
 
 

Sales
 
Sales for the second quarter of 2014 increased $55 million, or 9%, to $652 million, compared with the same period in 2013. On a segment basis, the Commercial/Industrial segment and the Energy segment contributed $34 million and $22 million, of increased sales, respectively, while sales in the Defense segment were flat.

Sales for the first six months of 2014 increased $112 million, or 10%, to $1,278 million, compared with the same period in 2013.   On a segment basis, the Commercial/Industrial segment and the Energy segment contributed $80 million and $33 million of increased sales, respectively, while sales in the Defense segment were flat.

The first table below further depicts our sales by market, while the second table depicts the components of our sales and operating income growth.


Page 23


CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
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,
 
2014
 
2013
 
% change
 
2014
 
2013
 
% change
Defense markets:
 
 
 
 
 
 
 
 
 
 
 
Aerospace
$
67,023

 
$
67,815

 
(1
%)
 
$
140,583

 
$
130,125

 
8
%
Ground
19,895

 
21,464

 
(7
%)
 
36,396

 
44,642

 
(18
%)
Naval
100,022

 
90,035

 
11
%
 
188,825

 
173,540

 
9
%
Other
1,544

 
5,292

 
(71
%)
 
2,809

 
10,202

 
(72
%)
Total Defense
$
188,484

 
$
184,606

 
2
%
 
$
368,613

 
$
358,509

 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
Commercial markets:
 
 
 
 
 
 
 
 
 
 
 
Aerospace
$
113,251

 
$
104,197

 
9
%
 
$
223,475

 
$
198,920

 
12
%
Oil and Gas
133,050

 
109,850

 
21
%
 
261,555

 
209,710

 
25
%
Power Generation
109,061

 
116,627

 
(6
%)
 
217,531

 
233,444

 
(7
%)
General Industrial
108,606

 
82,414

 
32
%
 
206,708

 
165,664

 
25
%
Total Commercial
$
463,968

 
$
413,088

 
12
%
 
$
909,269

 
$
807,738

 
13
%
 
 
 
 
 
 
 
 
 
 
 
 
Total Curtiss-Wright
$
652,452

 
$
597,694

 
9
%
 
$
1,277,882