CW-2013.6.30-10Q



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, 2013

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  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: 47,071,898 shares (as of July 31, 2013).





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)
(In thousands, except per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net sales
$
617,687

 
$
526,386

 
$
1,210,374

 
$
1,028,047

Cost of sales
416,673

 
362,379

 
825,653

 
704,766

Gross profit
201,014

 
164,007

 
384,721

 
323,281

 
 
 
 
 
 
 
 
Research and development expenses
15,903

 
15,351

 
33,511

 
30,698

Selling expenses
38,900

 
32,888

 
75,696

 
65,369

General and administrative expenses
88,423

 
75,228

 
179,700

 
151,115

Operating income
57,788

 
40,540

 
95,814

 
76,099

 
 
 
 
 
 
 
 
Interest expense
(9,332
)
 
(6,526
)
 
(17,991
)
 
(13,008
)
Other income, net
224

 
130

 
698

 
232

 
 
 
 
 
 
 
 
Earnings from continuing operations before income taxes
48,680

 
34,144

 
78,521

 
63,323

Provision for income taxes
15,310

 
11,309

 
24,208

 
20,646

Earnings from continuing operations
33,370

 
22,835

 
54,313

 
42,677

 
 
 
 
 
 
 
 
Discontinued operations, net of taxes
 

 
 

 


 


Earnings from discontinued operations

 

 

 
3,059

Gain (loss) on divestiture

 
(95
)
 

 
18,316

Earnings (loss) from discontinued operations

 
(95
)
 

 
21,375

 
 
 
 
 
 
 
 
Net earnings
$
33,370

 
$
22,740

 
$
54,313

 
$
64,052

 
 
 
 
 
 
 
 
Basic earnings per share
 

 
 

 
 
 
 
Earnings from continuing operations
$
0.71

 
$
0.49

 
$
1.16

 
$
0.91

Earnings from discontinued operations

 

 

 
0.46

Total
$
0.71

 
$
0.49

 
$
1.16

 
$
1.37

 
 
 
 
 
 
 
 
Diluted earnings per share
 

 
 

 
 

 
 

Earnings from continuing operations
$
0.70

 
$
0.48

 
$
1.14

 
$
0.90

Earnings from discontinued operations

 

 

 
0.45

Total
$
0.70

 
$
0.48

 
$
1.14

 
$
1.35

 
 
 
 
 
 
 
 
Dividends per share
$
0.10

 
$
0.09

 
$
0.19

 
$
0.17

 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 

 
 

 
 
 
 
Basic
46,786

 
46,820

 
46,700

 
46,737

Diluted
47,507

 
47,501

 
47,478

 
47,519

 
 
 
 
 
 
 
 
See notes to condensed consolidated financial statements

Page 3


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


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net earnings
$
33,370

 
$
22,740

 
$
54,313

 
$
64,052

Other comprehensive income
 

 
 

 
 
 
 
Foreign currency translation, net of tax
$
(9,945
)
 
$
(19,672
)
 
$
(41,750
)
 
$
97

Pension and postretirement adjustments, net of tax
52,865

 
2,004

 
55,651

 
3,458

Other comprehensive income (loss), net of tax
42,920

 
(17,668
)
 
13,901

 
3,555

Comprehensive income
$
76,290

 
$
5,072

 
$
68,214

 
$
67,607


 
See notes to condensed consolidated financial statements

Page 4


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

 
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
143,043

 
$
112,023

Receivables, net
580,260

 
578,313

Inventories, net
436,291

 
397,471

Deferred tax assets, net
50,072

 
50,760

Other current assets
46,027

 
37,194

Total current assets
1,255,693

 
1,175,761

Property, plant, and equipment, net
493,400

 
489,593

Goodwill
1,033,887

 
1,013,300

Other intangible assets, net
430,545

 
419,021

Deferred tax assets, net
2,234

 
1,709

Other assets
13,182

 
15,204

Total assets
$
3,228,941

 
$
3,114,588

Liabilities
 

 
 

Current liabilities:
 

 
 

Current portion of long-term and short-term debt
$
126,089

 
$
128,225

Accounts payable
145,995

 
157,825

Dividends payable
4,693

 

Accrued expenses
120,723

 
131,067

Income taxes payable
6,084

 
7,793

Deferred revenue
167,614

 
171,624

Other current liabilities
38,086

 
43,214

Total current liabilities
609,284

 
639,748

Long-term debt
821,893

 
751,990

Deferred tax liabilities, net
67,660

 
50,450

Accrued pension and other postretirement benefit costs
222,281

 
264,047

Long-term portion of environmental reserves
15,138

 
14,905

Other liabilities
108,797

 
80,856

Total liabilities
1,845,053

 
1,801,996

Contingencies and commitments (Note 15)


 


Stockholders' Equity
 

 
 

Common stock, $1 par value
49,341

 
49,190

Additional paid in capital
154,599

 
151,883

Retained earnings
1,306,790

 
1,261,377

Accumulated other comprehensive loss
(41,607
)
 
(55,508
)
Less:  Cost of treasury stock
(85,235
)
 
(94,350
)
Total stockholders' equity
1,383,888

 
1,312,592

Total liabilities and stockholders' equity
$
3,228,941

 
$
3,114,588

 
 
 
 
See notes to condensed consolidated financial statements

Page 5


CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
 
Six Months Ended
 
June 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net earnings
$
54,313

 
$
64,052

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

 
 

Depreciation and amortization
60,233

 
46,638

Gain on divestiture

 
(29,430
)
Net gain on sales and disposals of long-lived assets
(92
)
 
(67
)
Deferred income taxes
1,652

 
319

Share-based compensation
3,182

 
4,803

Impairment of assets

 
4,847

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

 
 
Accounts receivable, net
9,133

 
(3,040
)
Inventories, net
(21,608
)
 
(34,374
)
Progress payments
(10,872
)
 
(2,113
)
Accounts payable and accrued expenses
(34,728
)
 
(42,868
)
Deferred revenue
(4,010
)
 
(2,418
)
Income taxes payable
(10,460
)
 
8,962

Net pension and postretirement liabilities
10,752

 
3,945

Other current and long-term assets and liabilities
3,306

 
(1,016
)
Net cash provided by operating activities
60,801

 
18,240

Cash flows from investing activities:
 

 
 

Proceeds from sales and disposals of long lived assets
944

 
369

Proceeds from divestiture

 
51,225

Acquisitions of intangible assets

 
(1,779
)
Additions to property, plant, and equipment
(32,126
)
 
(40,716
)
Acquisition of businesses, net of cash acquired
(97,886
)
 
(6,231
)
Additional consideration on prior period acquisitions
(4,107
)
 
(976
)
Net cash (used for) provided by investing activities
(133,175
)
 
1,892

Cash flows from financing activities:
 

 
 

Borrowings on debt
921,429

 

Principal payments on debt
(817,776
)
 
(50
)
Repurchases of common stock

 
(4,974
)
Proceeds from share-based compensation
8,853

 
9,055

Dividends paid
(4,207
)
 
(3,752
)
Excess tax benefits from share-based compensation plans
310

 
21

Net cash provided by financing activities
108,609

 
300

Effect of exchange-rate changes on cash
(5,215
)
 
(1,738
)
Net increase in cash and cash equivalents
31,020

 
18,694

Cash and cash equivalents at beginning of period
112,023

 
194,387

Cash and cash equivalents at end of period
$
143,043

 
$
213,081

Supplemental disclosure of non-cash activities:
 

 
 

Capital expenditures incurred but not yet paid
$
2,281

 
$
3,858

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, 2011
$
48,879

 
$
143,192

 
$
1,163,925

 
$
(65,131
)
 
$
(85,890
)
Net earnings

 

 
113,844

 

 

Other comprehensive income, net of tax

 

 

 
9,623

 

Dividends paid

 

 
(16,392
)
 

 

Stock options exercised, net of tax
311

 
6,431

 

 

 
10,077

Restricted stock

 
(6,233
)
 

 

 
6,233

Share-based compensation

 
8,907

 

 

 
521

Repurchase of common stock

 

 

 

 
(25,705
)
Other

 
(414
)
 

 

 
414

December 31, 2012
$
49,190

 
$
151,883

 
$
1,261,377

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

 

 
54,313

 

 

Other comprehensive loss, net of tax

 

 

 
13,901

 

Dividends declared

 

 
(8,900
)
 

 

Stock options exercised, net of tax
151

 
3,299

 

 

 
5,350

Restricted stock

 
(3,028
)
 

 

 
3,028

Share-based compensation

 
2,775

 

 

 
407

Other

 
(330
)
 

 

 
330

June 30, 2013
$
49,341

 
$
154,599

 
$
1,306,790

 
$
(41,607
)
 
$
(85,235
)
 
 
 
 
 
 
 
 
 
 
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 aerospace, defense, automotive, shipbuilding, processing, oil, petrochemical, agricultural equipment, railroad, power generation, security, and metalworking industries.
 
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.  The Corporation divested this non-core cyclical business to focus on higher technology engineered services such as specialty coatings and materials testing.  As a result of the divestiture, the results of operations for the heat treating business, which were previously reported as part of the Surface Technologies segment, have been reclassified as discontinued operations for all periods presented. Please refer to Footnote 3 of the Corporation's 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 $5.5 million on its long-term contract with Westinghouse for disassembly, inspection, and packaging costs related to the reactor coolant pumps (RCP) that the Corporation is 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 2012 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
 
Other Comprehensive Income:  Presentation of Comprehensive Income
 
In February 2013, new guidance was issued that amends the current comprehensive income guidance.  The new guidance requires entities to disclose the effect of each item that was reclassified in its entirety out of accumulated other comprehensive income and into net income on each affected net income line item.  For reclassification items that are not reclassified in their entirety into net income, a cross-reference to other required disclosures is required. The new guidance is to be applied prospectively for annual reporting periods beginning after December 15, 2012 and interim periods within those years.  The adoption of this new guidance did not have an impact on the Corporation’s consolidated financial position, results of operations, or cash flows.


Page 8

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



2.           ACQUISITION
 
The Corporation continually 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.  Only items identified as of the acquisition date are considered for subsequent adjustment.  The Corporation will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
 
Flow Control
 
2013 Acquisition
 
Phönix Group
 
On February 28, 2013, the Corporation acquired all the outstanding shares of Phönix Holding GmbH for $97.9 million, net of cash acquired.  The Share Purchase and Transfer 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 against the seller.  Management funded the purchase from the Corporation’s revolving credit facility and excess cash at foreign locations.
 
Phönix, headquartered in Germany, is a designer and manufacturer of valves, valve systems and related support services to the global chemical, petrochemical and power (both conventional and nuclear) markets.  Phönix has 282 employees and operates Phönix Valves in Volkmarsen, Germany; Strack, located in Barleben, Germany; and Daume Control Valves, located in Hanover, Germany. Phönix also owns sales subsidiaries with warehouses in Texas and France.
 
Revenues of the acquired business were approximately $60.0 million in 2012. The business operates within the Marine & Power Products Division of Curtiss-Wright's Flow Control segment.
 
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, 2013 are $19.6 million and $1.7 million, respectively.
 
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:

Page 9

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


(In thousands)
Phönix

Accounts receivable
$
12,226

Inventory
20,358

Property, plant, and equipment
14,068

Other current and non-current assets
1,029

Intangible assets
42,791

Current and non-current liabilities
(7,029
)
Pension and postretirement benefits
(6,472
)
Deferred income taxes
(14,192
)
Net tangible and intangible assets
62,779

Purchase price
97,886

Goodwill
$
35,107

 
 

Amount of tax deductible goodwill
$


Supplemental Pro Forma Statements of Operations Data
 
The assets, liabilities and results of operations of the business acquired in 2013 were not material to the Corporation’s consolidated financial position or results of operations, and therefore pro forma financial information for the Phonix acquisition is not presented.
 
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, 2012 as if the acquisitions had occurred on January 1, 2012 for purposes of the financial information presented for the periods ended June 30, 2012.
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
(In thousands, except per share data)
2012
 
2012
Net sales
$
611,976

 
$
1,197,251

Net earnings from continuing operations
25,559

 
47,460

Diluted earnings per share from continuing operations
0.54

 
1.00


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 we 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 $3.2 million and $6.4 million for the three and six months ended, June 30, 2012, respectively.
Elimination of historical interest expense of approximately $1.0 million and $2.0 million for the three and six months ended, June 30, 2012, respectively.
Additional interest expense associated with the incremental borrowings that would have been incurred to acquire these companies as of January 1, 2012 of $4.5 million and $9.0 million for the three and six months ended, June 30, 2012, respectively.


Page 10

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



3.           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 Surface Technologies segment, to Bodycote plc.  The Corporation divested this non-core business to focus on higher technology services such as specialty coatings and materials testing.  The heat treating business’ operating results are included in discontinued operations in the Corporation's Condensed Consolidated Statements of Earnings for all periods presented.
 
Components of earnings from discontinued operations were as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2012
 
2012
Net sales
$

 
$
10,785

Earnings from discontinued operations before income taxes

 
4,929

Provision for income taxes

 
(1,870
)
Gain (loss) on divestiture, net of taxes (1)
(95
)
 
18,316

Earnings (loss) from discontinued operations
$
(95
)
 
$
21,375


(1) Net of year-to-date 2012 taxes of $11,114

4.           RECEIVABLES
 
Receivables 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, 2013
 
December 31, 2012
Billed receivables:
 
 
 
Trade and other receivables
$
420,510

 
$
402,891

Less: Allowance for doubtful accounts
(7,501
)
 
(7,013
)
Net billed receivables
413,009

 
395,878

Unbilled receivables:
 

 
 

Recoverable costs and estimated earnings not billed
185,142

 
207,679

Less: Progress payments applied
(17,891
)
 
(25,244
)
Net unbilled receivables
167,251

 
182,435

Receivables, net
$
580,260

 
$
578,313



Page 11

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.  Inventories are valued at the lower of cost (principally average cost) or market. The composition of inventories is as follows:
 
 
(In thousands)
 
June 30, 2013
 
December 31, 2012
Raw materials
$
230,208

 
$
224,613

Work-in-process
104,246

 
92,761

Finished goods and component parts
116,547

 
107,173

Inventoried costs related to long-term contracts
51,360

 
38,000

Gross inventories
502,361

 
462,547

Less:  Inventory reserves
(54,846
)
 
(50,333
)
Progress payments applied
(11,224
)
 
(14,743
)
Inventories, net
$
436,291

 
$
397,471


As of June 30, 2013 and December 31, 2012, inventory also includes capitalized contract development costs of $26.7 million and $23.8 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, 2013 and December 31, 2012, $2.3 million and $5.4 million, respectively, are scheduled to be liquidated under existing firm orders.

6.           GOODWILL
 
The Corporation accounts for acquisitions by assigning the purchase price to acquired tangible and intangible assets and liabilities. 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, 2013 are as follows:
 
 
(In thousands)
 
Flow Control
 
Controls
 
Surface Technologies
 
Consolidated
December 31, 2012
$
418,184

 
$
541,226

 
$
53,890

 
$
1,013,300

Acquisitions
35,107

 

 

 
35,107

Goodwill adjustments
2,478

 
(283
)
 
525

 
2,720

Foreign currency translation adjustment
(3,412
)
 
(13,629
)
 
(199
)
 
(17,240
)
June 30, 2013
$
452,357

 
$
527,314

 
$
54,216

 
$
1,033,887



Page 12

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, 2013
 
Gross
 
Accumulated Amortization
 
Net
Technology
 
$
202,069

 
$
(80,953
)
 
$
121,116

Customer related intangibles
 
375,340

 
(109,148
)
 
266,192

Other intangible assets
 
64,471

 
(21,234
)
 
43,237

Total
 
$
641,880

 
$
(211,335
)
 
$
430,545

 
 
 
 
 
 
 
 
 
(In thousands)
December 31, 2012
 
Gross
 
Accumulated Amortization
 
Net
Technology
 
$
186,869

 
$
(76,067
)
 
$
110,802

Customer related intangibles
 
337,558

 
(95,880
)
 
241,678

Other intangible assets
 
86,157

 
(19,616
)
 
66,541

Total
 
$
610,584

 
$
(191,563
)
 
$
419,021


During the first six months of 2013, the Corporation acquired intangible assets of $42.8 million. The Corporation acquired Technology of $12.6 million, Customer related intangibles of $27.6 million, and Other intangibles of $2.6 million, which have a weighted average amortization period of 15, 16.1, and 7 years, respectively.
Total intangible amortization expense for the six months ended June 30, 2013 was $24.2 million as compared to $15.1 million in the prior year period.  The estimated amortization expense for the five years ending December 31, 2013 through 2017 is $48.0 million, $41.0 million, $39.0 million, $38.1 million, and $37.6 million, respectively.

8.           FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Forward Foreign Exchange and Currency Option Contracts
 
The Corporation has foreign currency exposure primarily in 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.

In March 2013, the Corporation entered into fixed-to-floating interest rate swap agreements to convert the interest payments of the $100 million, 3.85% notes, due February 26, 2025, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 1.77% spread, and the interest payments of the $75 million, 4.05% notes, due February 26, 2028, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 1.73% spread.
 

Page 13

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


In January 2012, the Corporation entered into 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. In addition, the Corporation also entered into a 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 Corporation’s outstanding interest rate swaps designated as fair value hedges were $400 million at June 30, 2013.
 
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 condensed consolidated balance sheet are below.
 
 
(In thousands)
 
June 30, 2013
 
December 31, 2012
Assets
 
 
 
Designated for hedge accounting
 
 
 
Interest rate swaps
$

 
$
677

Undesignated for hedge accounting
 

 
 

Forward exchange contracts
$
317

 
$
250

Total asset derivatives (A)
$
317

 
$
927

Liabilities
 
 
 
Designated for hedge accounting
 
 
 
Interest rate swaps
$
36,573

 
$
1,419

Undesignated for hedge accounting
 
 
 
Forward exchange contracts
$
311

 
$
170

Total liability derivatives (B)
$
36,884

 
$
1,589


(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
 

Page 14

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


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
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Other income, net
 
$
(25,623
)
 
$
14,503

 
$
(36,573
)
 
$
1,791

 
$
25,623

 
$
(14,503
)
 
$
36,573

 
$
(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:
 

 
(In thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
Derivatives not designated as hedging instrument
 
2013
 
2012
 
2013
 
2012
Forward exchange contracts:
 
 
 
 
 
 
 
 
General and administrative expenses
 
$
(4,275
)
 
$
(1,146
)
 
$
(5,836
)
 
$
(170
)

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, 2013.  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.
 
The carrying amount of the variable interest rate debt approximates fair value as the interest rates are reset periodically to reflect current market conditions.
 
On February 26, 2013, the Corporation issued $400 million of Senior Notes (the 2013 Notes).  The 2013 Notes consist of $225 million of 3.70% Senior Notes that mature on February 26, 2023, $100 million of 3.85% Senior Notes that mature on February 26, 2025, and $75 million of 4.05% Senior Notes that mature on February 26, 2028.  An additional $100 million of 4.11% Senior Notes that mature on September 26, 2028, will be issued in September of 2013. The 2013 Notes are senior unsecured obligations, that are equal in right of payment to the Corporation's existing senior indebtedness. The Corporation, at its option, can prepay at any time all or any part of the 2013 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement.  In connection with the issuance of the 2013 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of the 2013 Notes.  Under the terms of the Note Purchase Agreement, the Corporation is required to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%, and funding obligations under the defined pension plan.  The 2013 Notes also contain a cross default provision with respect to the Corporation’s other senior indebtedness.  

Page 15

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


 
June 30, 2013
 
December 31, 2012
 
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

 

 
286,800

 
286,800

5.74% Senior notes due 2013
125,003

 
126,090

 
125,011

 
128,198

5.51% Senior notes due 2017
150,000

 
163,096

 
150,000

 
168,491

3.84% Senior notes due 2021
99,072

 
99,072

 
100,677

 
100,677

3.70% Senior notes due 2023
225,000

 
216,224

 

 

3.85% Senior notes due 2025
91,478

 
91,478

 

 

4.24% Senior notes due 2026
180,518

 
180,518

 
198,581

 
198,581

4.05% Senior notes due 2028
67,359

 
67,359

 

 

Other debt
1,152

 
1,152

 
10,746

 
10,746

Total debt
$
947,982

 
$
953,389

 
$
880,215

 
$
901,893



9.           WARRANTY RESERVES
 
The Corporation provides its customers with warranties on certain 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)
 
2013
 
2012
Warranty reserves at January 1,
$
18,169

 
$
16,076

Provision for current year sales
3,666

 
3,765

Current year claims
(3,019
)
 
(2,792
)
Change in estimates to pre-existing warranties
(2,206
)
 
(1,120
)
Increase due to acquisitions
79

 
75

Foreign currency translation adjustment
(237
)
 
(176
)
Warranty reserves at June 30,
$
16,452

 
$
15,828




Page 16

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



10.           FACILITIES RELOCATION AND RESTRUCTURING
 
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
 
Controls
 
Surface Technologies
 
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

 

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
 
Controls
 
Surface Technologies
 
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
During the three and six month periods ended June 30, 2012, the Flow Control segment recorded $2.3 million and $2.7 million, respectively, of restructuring charges, primarily for severance and benefits costs associated with headcount reductions to streamline operations.
Controls
During the three and six month periods ended June 30, 2012, the Controls segment recorded $0.5 million and $3.1 million, respectively, of restructuring charges, primarily for severance and benefits costs associated with headcount reductions to streamline operations.
Surface Technologies
During the three and six month periods ended June 30, 2012, the Surface Technologies segment recorded $5.2 million of restructuring charges consisting of cash charges of $0.4 million and non-cash charges of $4.8 million. 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.

Page 17

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


Nonrecurring measurements
In connection with our 2012 restructuring initiative, during the second quarter of 2012, the Corporation announced a plan to cease operations at a certain facility within our Surface Technologies segment by the fourth quarter of 2012. This decision resulted in a reduction of the useful life of the asset group at the facility. In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets guidance of FASB Codification Subtopic 360-10, long-lived assets held and used with a carrying amount of $4.8 million were written down to their fair value of zero, resulting in an impairment charge of $4.8 million. The fair value of the impairment charge was determined using the income approach over the reduced useful life of the asset group. In accordance with the fair value hierarchy, the impairment charge is classified as a Level 3 measurement as it is based on significant other observable inputs.
11.           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 2012 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, 2013 and 2012 are as follows:
 
 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
10,899

 
$
9,978

 
$
21,718

 
$
20,133

Interest cost
6,781

 
6,676

 
13,516

 
13,131

Expected return on plan assets
(8,875
)
 
(8,356
)
 
(17,761
)
 
(16,770
)
Amortization of prior service cost
254

 
300

 
554

 
601

Amortization of unrecognized actuarial loss
3,935

 
3,015

 
8,207

 
5,511

Curtailments
2,711

 

 
2,711

 

Net periodic benefit cost
$
15,705

 
$
11,613

 
$
28,945

 
$
22,606


In May 2013, the Corporation's Board of Directors approved an amendment to the CW Pension Plan.   The amendment, which is effective January 1, 2014, changes the time period used to calculate final and career average pay formulas and resulted  
in a $3 million reduction to the projected benefit obligation of the plan and a second quarter curtailment charge of $2.2 million. The plan curtailment also required a remeasurement of the assets and liabilities of the Curtiss-Wright Pension Plan.  Due to favorable asset performance and an increase in the discount rate, the remeasurement decreased the pension liability and decreased the net pre-tax actuarial loss component of Accumulated other comprehensive loss by $45 million.

During the six months ended June 30, 2013, the Corporation made $14.5 million in contributions to the Curtiss-Wright Pension Plan, and expects to make total contributions of approximately $35.0 million in 2013.  In addition, contributions of $2.6 million were made to the Corporation’s foreign benefit plans during the six months ended June 30, 2013.  Contributions to the foreign benefit plans are expected to be $5.0 million in 2013.


Page 18

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, 2013 and 2012 are as follows:
 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Service cost
$
99

 
$
110

 
$
199

 
$
220

Interest cost
209

 
231

 
417

 
463

Amortization of prior service cost
(157
)
 
(157
)
 
(314
)
 
(314
)
Amortization of unrecognized actuarial gain
(160
)
 
(179
)
 
(320
)
 
(359
)
Net postretirement benefit cost (income)
$
(9
)
 
$
5

 
$
(18
)
 
$
10


During the six months ended June 30, 2013, the Corporation paid $0.5 million to the postretirement plans.  During 2013, the Corporation anticipates contributing $1.7 million to the postretirement plans.
 

12.           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,
 
2013
 
2012
 
2013
 
2012
Basic weighted-average shares outstanding
46,786

 
46,820

 
46,700

 
46,737

Dilutive effect of stock options and deferred stock compensation
721

 
681

 
778

 
782

Diluted weighted-average shares outstanding
47,507

 
47,501

 
47,478

 
47,519


As of June 30, 2013 and 2012, there were 618,000 and 638,000 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 19

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



13.           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 operates through three segments: Flow Control, Controls, and Surface Technologies.
 
 
(In thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2013
 
2012
 
2013
 
2012
Net sales
 
 
 
 
 
 
 
Flow Control
$
321,069

 
$
274,653

 
$
631,684

 
$
541,444

Controls
217,965

 
183,678

 
422,932

 
351,823

Surface Technologies
80,226

 
71,067

 
158,133

 
141,156

Less: Intersegment revenues
(1,573
)
 
(3,012
)
 
(2,375
)
 
(6,376
)
Total consolidated
$
617,687

 
$
526,386

 
$
1,210,374

 
$
1,028,047

 
 
 
 
 
 
 
 
Operating income (expense)
 

 
 

 
 

 
 

Flow Control
$
27,704

 
$
18,614

 
$
51,838

 
$
37,141

Controls
27,425

 
23,527

 
39,522

 
36,456

Surface Technologies
14,735

 
5,937

 
26,828

 
15,793

Corporate and eliminations (1)
(12,076
)
 
(7,538
)
 
(22,374
)
 
(13,291
)
Total consolidated
$
57,788

 
$
40,540

 
$
95,814

 
$
76,099


(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,
 
2013
 
2012
 
2013
 
2012
Total operating income
$
57,788

 
$
40,540

 
$
95,814

 
$
76,099

Interest expense
(9,332
)
 
(6,526
)
 
(17,991
)
 
(13,008
)
Other income, net
224

 
130

 
698

 
232

Earnings from continuing operations before income taxes
$
48,680

 
$
34,144

 
$
78,521

 
$
63,323

 
 
(In thousands)
 
June 30, 2013
 
December 31, 2012
Identifiable assets
 
 
 
Flow Control
$
1,525,234

 
$
1,417,047

Controls
1,342,433

 
1,365,112

Surface Technologies
307,415

 
302,079

Corporate and Other
53,859

 
30,350

Total consolidated
$
3,228,941

 
$
3,114,588




Page 20

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



14.           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, 2011
$
39,768

 
$
(104,899
)
 
$
(65,131
)
Current period other comprehensive income (loss)
25,954

 
(16,331
)
 
9,623

December 31, 2012
$
65,722

 
$
(121,230
)
 
$
(55,508
)
Other comprehensive income (loss) before reclassifications (1)
(41,750
)
 
47,740

 
5,990

Amounts reclassified from accumulated other comprehensive loss (1)

 
7,911

 
7,911

Net current period other comprehensive income (loss)
(41,750
)
 
55,651

 
13,901

June 30, 2013
$
23,972

 
$
(65,579
)
 
$
(41,607
)

(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
(240
)
 
(1)
Amortization of actuarial losses
(7,887
)
 
(1)
Curtailments
(2,711
)
 
(1)
 
(10,838
)
 
Total before tax
 
2,927

 
Income tax
Total reclassifications
$
(7,911
)
 
Net of tax

(1)
These items are included in the computation of net periodic pension cost.  See Note 11, Pension and Other Postretirement Benefit Plans.

Page 21

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




15.           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.
 
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 Corporation’s results of operations or financial position.
 
Environmental Matters
 
The aggregate environmental liability was $16.6 million at June 30, 2013 and $16.4 million at December 31, 2012.  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, 2013 and December 31, 2012, there were $54.6 million and $51.8 million of stand-by letters of credit outstanding, respectively, and $12.5 million and $6.8 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
 
The Corporation’s 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 contract include liquidated damage penalty provisions if the Corporation is responsible for the failure to meet specified contractual milestone dates. To date, the Corporation has not met certain delivery dates under the contract.  However, currently, there has not been any threat, allegation, or claim for liquidated damages.  Based upon the evaluation of the Corporation's performance and other legal analysis, the Corporation does not believe it will be subject to liquidated damages penalties. The Corporation believes that all future delivery dates will be revised to mitigate any performance risk and that adequate legal defenses exist should a liquidated damages claim be alleged against the Corporation. Based upon the information available to date, the Corporation does not believe that the ultimate outcome will result in a material impact to its results of operations, financial condition, or cash flows.
 
U.S. Government Defense Budget/Sequestration
 
In August 2011, the Budget Control Act (the Act) announced a reduction in the Department of Defense (DoD) top line budget by approximately $490 billion over 10 years starting in 2013.  The initial and mandatory budget cuts (or sequestration) as outlined in the Act were to be implemented starting on January 2, 2013. However, on January 1, 2013, Congress elected to delay the impact of sequestration until at least March 1, 2013, and these cuts were to be automatically implemented if an agreement had not been reached by March 27, 2013.  On March 26, 2013, President Obama signed into law a continuing budget resolution which provides additional funding and flexibility for U.S. Government agencies to reallocate funds to priority areas in FY2013.  In April 2013, the President released his initial budget proposal for FY2014, which leaves uncertainty as to how the sequester to be imposed on defense spending next year will be determined.  While such reductions to future DoD spending levels are largely undetermined, any reduction in levels of DoD spending, cancellations or delays impacting existing contracts or programs, including through sequestration, could have a material impact on the Corporation’s results of operations, financial position, or cash flows. 


Page 22

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


Lease Agreements

On June 3, 2013, the Corporation entered into a build to suit agreement for the construction and lease of a new manufacturing facility in Bethlehem, Pennsylvania. The new facility will consist of two buildings totaling approximately 178,975 square feet situated on 12.5 acres, and will serve as a facility for warehousing, heavy manufacturing, research and development, general office, and hazardous material storage for the Electro Mechanical division in the Flow Control segment. Under the terms of the lease agreement, the Corporation is obligated to pay annual fixed rent of $1.9 million every year for the first eight years with rent escalation of 2.5% every year thereafter for a total of fifteen years.

On June 5, 2013, the Corporation entered into a build to suit agreement for the construction and lease of a new facility in Idaho Falls, Idaho. The new facility will consist of two buildings totaling approximately 112,000 square feet situated on 8.6 acres, and will serve as a general office, assembly, and testing facility for the Nuclear Group division in the Flow Control segment. Under the terms of the lease agreement, the Corporation is obligated to pay initial annual rent of $1.1 million with rent escalation of 2.5% every year thereafter for a total of fifteen years.


Page 23


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 2012 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 24


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 Flow Control, Controls, and Surface Technologies 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, such as defense, commercial aerospace, commercial nuclear power generation, oil and gas, automotive, 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 30% of our 2013 revenues are expected to be 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, Controls, and Surface Technologies.  For further information on our products and services and the major markets served by our three segments, please refer to our 2012 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. 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 current year. When used in the MD&A, we have provided the comparable GAAP measure in the discussion.

On March 30, 2012, we completed the sale of our heat treating business, which had been previously reported within the Surface Technologies segment.  The results of operations of this business and the gain that was recognized on the sale are reported within discontinued operations.
 
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 25


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,
 
2013
 
2012
 
% change
 
2013
 
2012
 
% change
Sales
 
 
 
 
 
 
 
 
 
 
 
Flow Control
$
321,045

 
$
274,653

 
17
%
 
$
631,660

 
$
541,444

 
17
%
Controls
216,865

 
181,090

 
20
%
 
421,437

 
346,176

 
22
%
Surface Technologies
79,777

 
70,643

 
13
%
 
157,277

 
140,427

 
12
%
Total sales
$
617,687

 
$
526,386

 
17
%
 
$
1,210,374

 
$
1,028,047

 
18
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 

 
 

 
 

 
 

 
 

 
 

Flow Control
$
27,704

 
$
18,614

 
49
%
 
$
51,838

 
$
37,141

 
40
%
Controls
27,425

 
23,527

 
17
%
 
39,522

 
36,456

 
8
%
Surface Technologies
14,735

 
5,937

 
148
%
 
26,828

 
15,793

 
70
%
Corporate and eliminations
(12,076
)
 
(7,538
)
 
60
%
 
(22,374
)
 
(13,291
)
 
68
%
Total operating income
$
57,788

 
$
40,540

 
43
%
 
$
95,814

 
$
76,099

 
26
%
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(9,332
)
 
(6,526
)
 
43
%
 
(17,991
)
 
(13,008
)
 
38
%
Other income, net
224

 
130

 
NM

 
698

 
232

 
NM

 
 
 
 
 
 
 
 
 
 
 
 
Earnings before taxes
48,680

 
34,144

 
43
%
 
78,521

 
63,323

 
24
%
Provision for income taxes
15,310

 
11,309

 
35
%
 
24,208

 
20,646

 
17
%
Net earnings from continuing operations
$
33,370

 
$
22,835

 
 

 
$
54,313

 
$
42,677

 
 

 
 
 
 
 
 
 
 
 
 
 
 
New orders
$
603,086

 
$
485,148

 
24
%
 
$
1,220,194

 
$
1,000,248

 
22
%
 
 
 
 
 
 
 
 
 
 
 
 
NM- not meaningful
 
 
 
 
 
 

Sales
 
Sales for the second quarter of 2013 increased $91.3 million, or 17%, to $617.7 million, compared with the same period in 2012.  This increase was primarily due to the incremental impact of acquisitions, as organic sales were down slightly and the effects of foreign currency translation were not significant.  On a segment basis, Flow Control contributed $46.4 million of increased sales, while Controls and Surface Technologies contributed $35.8 million and $9.1 million of increased sales, respectively.  


Sales for the first six months of 2013 increased $182.3 million or 18%, to $1,210.4 million, compared with the same period in 2012.  This increase was primarily due to the incremental impact of acquisitions, as organic sales were down slightly and the effects of foreign currency translation were not significant.  On a segment basis, Flow Control contributed $90.2 million of increased sales, while Controls and Surface Technologies contributed $75.3 million and $16.9 million of increased sales, respectively.  

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 26


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,
 
2013
 
2012
 
% change
 
2013
 
2012
 
% change
Defense markets:
 
 
 
 
 
 
 
 
 
 
 
Aerospace
$
67,814

 
$
80,683

 
(16
%)
 
$
130,125

 
$
149,839

 
(13
%)
Ground
21,557

 
25,898

 
(17
%)
 
46,560

 
49,930

 
(7
%)
Naval
90,034

 
88,031

 
2
%
 
173,541

 
177,641

 
(2
%)
Other
5,293

 
6,590

 
(20
%)
 
10,202

 
14,483

 
(30
%)
Total Defense
$
184,698

 
$
201,202

 
(8
%)
 
$
360,428

 
$
391,893

 
(8
%)