2013.12.31-10K


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
or
[ ] 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
 
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
 
 
 
13925 Ballantyne Corporate Place, Suite 400, Charlotte, North Carolina
 
28277
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code: (704) 869-4600

Securities registered pursuant to Section 12(b) of the Act:

10 Waterview Boulevard 2nd Floor, Parsippany, New Jersey, 07054
(Former name, former address and former fiscal year, if changed since last report)
 
 
Name of each exchange
Title of each class
 
on which registered
Common stock, par value $1 per share
 
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.

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Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No
The aggregate market value of the voting and non-voting Common stock held by non-affiliates of the Registrant as of June 30, 2013 was approximately $1.7 billion.
The number of shares outstanding of the Registrant’s Common stock as of January 31, 2014:
 
 
 
Class
 
Number of shares
 
 
 
Common stock, par value $1 per share
 
48,023,652

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of the Registrant with respect to the 2014 Annual Meeting of Stockholders to be held on May 2, 2014 are incorporated by reference into Part III of this Form 10-K.

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INDEX TO FORM 10-K
 
 
 
 
 
PART I
 
 
Item 1.
Business
 
Item 1A.
Risk Factors
 
Item 1B.
Unresolved Staff Comments
 
Item 2.
Properties
 
Item 3.
Legal Proceedings
 
Item 4.
Mine Safety Disclosures
 
 
 
 
 
 
PART II
 
 
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6.
Selected Financial Data
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 8.
Financial Statements and Supplementary Data
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A.
Controls and Procedures
 
Item 9B.
Other Information
 
 
 
 
 
 
PART III
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
 
Item 11.
Executive Compensation
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
Item 14.
Principal Accounting Fees and Services
 
 
 
 
 
 
PART IV
 
 
Item 15.
Exhibits, Financial Statement Schedules
 
 
Schedule II – Valuation and Qualifying Accounts
 
 
Signatures
 


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PART I
FORWARD-LOOKING STATEMENTS
Except for historical information, this Annual Report on Form 10-K may be deemed to contain “forward-looking statements” within the meaning of the Private 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. In addition, other risks, uncertainties, assumptions, and factors that could affect our results and prospects are described in this report, including under the heading “Item 1A. Risk Factors” and elsewhere, and may further be described in the our prior and future filings with the Securities and Exchange Commission and other written and oral statements made or released by us. Such forward-looking statements in this Annual Report on Form 10-K include, without limitation, those contained in Item 1. Business, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 8. Financial Statements and Supplementary Data, including, without limitation, the Notes to Consolidated Financial Statements, and Item 11. Executive Compensation.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date they were made, and we assume no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.


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Item 1. Business.
BUSINESS DESCRIPTION
Curtiss-Wright Corporation is a global company that delivers highly engineered, critical function products and services to the commercial, industrial, defense and energy markets. We were formed in 1929 by the merger of the companies owned by the Wright brothers and Mr. Glenn Curtiss, both aviation pioneers. We are incorporated under the laws of the State of Delaware and headquartered in Charlotte, North Carolina. We are listed on the New York Stock Exchange (NYSE) and trade under the symbol CW.
Our strategy is to be an integrated, market-facing global company, seeking superior operating margin and return metrics, while maintaining a disciplined and balanced capital deployment strategy. We maintain a diversified business portfolio with revenues generated across our commercial, industrial, defense, and energy markets. Further, we intend to utilize our technical capabilities to maintain and expand our niche market positions.
We also continue to develop new core competencies and look for innovative ways to serve our customer base. Our technologies are intended to improve operating efficiency and meet demanding performance requirements. We compete globally primarily based on technology and pricing. Our business challenges include price pressure, environmental impact, and geopolitical events, such as the war on terrorism and diplomatic accords. Our ability to provide high-performance, advanced technologies on a cost-effective basis is fundamental to our strategy for meeting customer demand.
Business Segments
We manage and evaluate our operations based on the products we offer and the different markets we serve. Based on this approach we operate through three segments: Flow Control, Controls, and Surface Technologies.
Our principal manufacturing facilities are located in the United States in New York, Ohio, Oregon, North Carolina, Pennsylvania, and Texas, and internationally in Canada and the United Kingdom.
Flow Control
Our Flow Control segment specializes in the design and manufacture of highly engineered, critical-function products including valves, pumps, motors, generators, instrumentation, shipboard systems, vessels, control electronics, and energy production and processing solutions. These products manage the flow of liquids and gases, generate power, provide electronic operating systems, and monitor or provide critical functions. In 2013, net sales in our Flow Control segment of $1,300 million represented 52% of our total net sales.
This segment’s primary markets are naval defense, power generation, oil and gas, and general industrial.
The Flow Control segment operates through four operating divisions: Electro-Mechanical Systems, Nuclear Group, Oil and Gas Systems, and Marine and Power Products.
Electro-Mechanical Systems
Our Electro-Mechanical Systems division produces advanced electro-mechanical and pumping solutions for the naval defense, power generation, oil and gas, and general industrial markets. The division designs and manufactures advanced critical function pumps, motors, generators, ship propulsors, mechanical seals, control rod drive mechanisms, power conditioning electronics, integrated motor controls, composite materials applications, and protection technologies solutions.
In the naval defense market, we are a supplier for a wide array of ship building programs including nuclear aircraft carrier and submarine programs, offering power and propulsion technologies, as well as auxiliary systems. This division develops, designs, manufactures, and performs qualification testing of critical-function, electro-mechanical solutions for its primary customer, the U.S. Navy, including main coolant pumps, critical-function pumps, power-dense compact motors, main and ship generators, and secondary propulsion systems. The division has served the U.S. Navy for over 50 years and is a preferred supplier or single source provider of pumps that are used in nuclear propulsion systems. The division also overhauls and provides critical spares for units serving the fleet on operational platforms. Current platforms include the Nimitz and Ford class aircraft carriers and the Virginia, Los Angeles, Seawolf, and Ohio Class submarines.
Electro-Mechanical Systems’ products are also sold to the nuclear power generation market. We provide Reactor Coolant Pump (RCP) technology, pump seals, and control rod drive mechanisms for commercial nuclear power plants. We also have designed RCP technology for the Westinghouse AP1000 commercial nuclear reactor.

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In the general industrial market, we design, develop, and manufacture integrated motor-controls and protection technology solutions for original equipment manufacturers (OEMs) and industrial customers. We engineer and manufacture a range of rugged, reliable, and internationally compliant products that control the amount of electrical current provided to motors. Our installed base of control units supports customers in the industrial heating, ventilation, and air conditioning (HVAC) market, as well as in the municipal and energy processing markets, including petrochemicals, power generation, mining, and transportation.
Nuclear Group
The Nuclear Group division designs, manufactures, distributes, and qualifies flow control products for nuclear power plants, nuclear equipment manufacturers, hydroelectric energy producers, the U.S. Department of Energy (DoE), and the U.S. Department of Defense (DoD). This division offers a range of hardware, including pumps, valves, pressure vessels, fastening systems, specialized containment doors, airlock hatches, electrical units, and software for mobile device based business solutions. In addition, we provide a range of products including obsolescence solutions, bolting solutions, nuclear storage solutions, spent fuel management solutions, non-destructive examination (NDE), and fluid sealing technologies. We provide diagnostic equipment, consulting, testing, and inspection services that help support plant-life extensions and power upgrades on all 100 operating reactors in the United States, as well as operating reactors located throughout the world.
We maintain regulatory certifications (known as “N-stamps”) required to provide representations, certify, and qualify value-added nuclear-grade products both domestically and internationally. N-stamp certification indicates nuclear-grade status as designated by the Nuclear Regulatory Commission (NRC). We compete in this market through an array of nuclear technology, industry-benchmarked quality assurance programs, strategic alliances, resident expertise, and customer recognition.
Oil and Gas Systems
Our Oil and Gas Systems division provides energy production, processing, and environmental solutions; designs and manufactures valves, vessel products, and related equipment; and also provides Maintenance, Repair, and Overhaul (MRO) services and support to the global oil and gas industry. Primary products serving upstream and midstream customers include separators, combination separator/hydrator units, and flow back and oil treating equipment, as well as critical emissions control devices. The division also provides production and processing equipment to the U.S. shale oil and gas market. Products serving downstream refinery customers include coke unheading systems, fluidic catalytic cracking unit (FCCU) components, pressure relief valves, pressure protection systems, and engineering design tools for the refining, chemical, and process industries, and web-enabled control systems for refinery monitoring and process control.
In the process industry, our coke unheading system includes top and bottom unheading valves, isolation valves, cutting tools, valve automation, process control, and protection systems.
In addition, our FCCU product portfolio includes custom-designed valves, engineered pressure vessels, and complementary components that operate in industrial process applications including fluid, residual, and catalytic cracking units as well as power generation, steel manufacture, and ore reduction. We manufacture, repair, and modify orifice chambers, hydrotreaters, and American Society of Mechanical Engineers code pressure vessels. In addition, we provide field services, including equipment repair, modification, and replacement; inspection; maintenance planning and scheduling; diagnostic assistance; and on-site system training.
The division also is a supplier of global MRO products. Our safety relief valve and pressure protection system portfolio incorporates a broad range of valve sizes and ratings used in a wide range of chemical and process industry applications. The valves are marketed as individual components or at the subsystem/system level. The proprietary iPRSM® software provides a broad set of design and monitoring tools for process operators, incorporating the latest industry and regulatory standards.
Marine and Power Products
Our Marine and Power Products division produces high-performance, specialized valve solutions, designs and manufactures valves for commercial nuclear markets and valves, actuators and other shipboard naval systems including aircraft handling systems, cable handlings systems, and specialized electronic instrumentation and control equipment.
Our valve solutions control the flow of liquids and gases for vessels and equipment used in the defense, power generation, and general industrial markets. We design, engineer, and manufacture spring-loaded, pilot-operated pressure relief valves and solenoid operated valves, as well as ball valves used in standard and advanced applications, including high-cycle, high-pressure, extreme temperature, and corrosive plant environments. Our products are engineered to meet stringent performance and reliability requirements.

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In the naval defense market, we design valves that are utilized in the nuclear propulsion systems of nuclear submarines and aircraft carriers commissioned by the U.S. Navy. The division also designs and manufactures electro-mechanical systems for securing and traversing military aircraft and helicopters aboard naval vessels. These shipboard aircraft and helicopter handling systems are used by the U.S. Navy and more than ten other navies around the world. We also design and build shipboard specialized structures, including telescopic hangars and doors. Specialized cable handling systems are designed and manufactured for towing active and passive sonar systems for both submarines and surface ships. This division also provides custom designed and commercial-off-the-shelf (COTS) electronic circuit boards and systems to the U.S. Navy.
For commercial markets, we provide specialized valves to commercial nuclear power plants and general processing industries worldwide. We also provide towbarless and conventional aircraft handling systems to the commercial aerospace industry. Competition is based upon quality of technology, price, installed base, and delivery times.
Backlog
Total backlog includes both funded (unfilled orders for which funding is authorized, appropriated, and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated and/or contractually obligated by the customer). We are a subcontractor to prime contractors for the vast majority of our government business; as such substantially all amounts in backlog are funded. Backlog excludes unexercised contract options and potential orders under ordering type contracts (e.g. Indefinite Delivery / Indefinite Quantity). Backlog is adjusted for changes in foreign exchange rates and is reduced for contract cancellations and terminations in the period in which they occur. There were no significant contract cancellations which affected backlog in 2013.
Backlog for this segment at December 31, 2013, was $1,059 million, of which $722 million is expected to be shipped after one year, compared with backlog of $1,088 million at December 31, 2012.
Controls
Our Controls segment designs, develops, manufactures, and maintains mechanical actuation and drive systems, specialized sensors, motors and electronic controller units, and mission-critical embedded computing components and control systems. In 2013, net sales in our Controls segment of $898 million represented 36% of our total net sales.
This segment’s primary markets are commercial aerospace, aerospace defense, ground defense, and general industrial.
Our Controls segment is managed through four operating divisions: Defense Solutions, Flight Systems, Avionics and Industrial, and Integrated Sensing.
Defense Solutions
Our Defense Solutions division designs, develops, and manufactures rugged embedded computing board-level modules and integrated subsystems, primarily for the aerospace and ground defense markets, and supports the U.S. Government’s Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) applications. Using standard, commercially available electronics technologies, coupled with application-domain specific knowledge, we offer Commercial Off The Shelf (COTS) hardware and software modules based on open industry standards. Our COTS modules and integrated subsystems are designed to perform in harsh conditions where space, weight, and power constraints are critical. Our products are designed to perform in extreme temperatures and environments, enduring high shock and vibration, as well as in commercial environments for use in laboratory and benign environment applications. In addition, we also provide C4ISR products and individual warfighter, Size, Weight, Power and Cost (SWaP-C) optimized solutions. We also offer high performance electronic packaging and thermal management systems using custom and standards-based enclosures. Our advanced subsystems are integrated using standard modules and custom modules based on in-house intellectual property content as well as third-party technology.
We are a single source supplier for high-density radar processing, data communications, digital signal processing, video and graphics, recording and network storage, analog acquisition and reconstruction, radar, and integrated subsystems.
In the air, Defense Solutions supports technologically advanced military platforms including the Boeing P-8 Poseidon and the Lockheed Martin F-35 Lightning II Joint Strike Fighter (F-35 JSF). This division also provides the advanced mission management system, flight control computers, and the sensor management units for advanced aerospace platforms including the Global Hawk, the U.S. Air Force’s high-altitude and high-endurance unmanned aerial vehicle, as well as the U.S. Navy’s variant of the Global Hawk platform called Triton.

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On the ground, the division’s subsystem products are used in a wide variety of applications for military ground vehicles, including fire control, aiming, and stabilization (primarily turret drive stabilization systems), munitions loading, and environmental processors. These products are used on U.S. combat platforms such as the Bradley Fighting Vehicle, the Abrams Tank, and the Stryker family of vehicles, as well as several international ground platforms throughout Europe.
Our products are sold primarily to prime contractors and subsystem suppliers located principally in the United States, United Kingdom, and Canada, both directly and through a network of independent sales representatives. Competition in the embedded electronic systems market has migrated away from traditional board competitors toward fully integrated subsystem and system providers, selling to prime and second-tier defense and aerospace companies. Competition in this market is based on quality of technology, price, and delivery time to market.
Flight Systems
Our Flight Systems division’s product offerings to the commercial OEM and aerospace defense markets consist of electro-mechanical and hydro-mechanical actuation control components and systems that are designed to position aircraft control surfaces or operate flaps, slats, and utility systems such as canopies, cargo doors, weapons bay doors, and other moving devices used on aircraft. Aircraft applications include actuators and electro-mechanical control systems for the Boeing 737, 747, 747-8, 757, 767, 777, and 787 civil air transports, the Lockheed Martin F-16 Falcon fighter jet, the Boeing F/A-18 Hornet fighter jet, the P-8 Poseidon, the Bell Boeing V-22 Osprey, and the Sikorsky Black Hawk and Seahawk helicopters. The Flight Systems division is also developing flight control actuators and weapons handling systems for the F-35 JSF program. This division also provides commercial airlines, military and general aviation customers with component overhaul and repair of hydraulic, mechanical, and electro-mechanical components for a wide array of aircraft.
Flight Systems also designs, manufactures, and distributes electro-mechanical and electro-hydraulic actuation components and systems and electronic controls for military tracked and wheeled vehicles within the ground defense and commercial markets. These products include turret aiming and stabilization and weapons handling systems for armored military vehicles. In addition, we provide a range of general industrial products, such as fuel control valves for large commercial transport ships, stabilization systems, and a variety of commercial servo valves.
Flight Systems products are sold primarily through a direct domestic sales force and international network of independent sales representatives. Sales are made directly to OEMs, airlines, and government agencies.
Our Flight Systems products are sold in competition with a number of other suppliers, some of whom have broader product lines and greater financial, technical, and human resources. Competition is driven by price, technical capability, performance, service, and investment, together with an ability to offer solutions to perform control and actuation functions on new production programs.
Avionics and Industrial
The Avionics and Industrial division develops system-level products that acquire, consolidate, analyze, and record all of an aircraft’s critical sensor and avionics data. The division also is a supplier of highly engineered commercial products used in a wide range of industrial applications such as transportation, on-and off-highway equipment, small to medium electric vehicles, broadcasting and recording, and motorsports.
Our systems are deployed in a wide range of airborne applications including aerospace controllers, flight recording, air data computing, flight test, and aircraft ice, fire, and hazard systems, as well as space data handling systems. Our avionics products are used on a diverse set of aircraft platforms, including the Boeing 737 and 747-8 commercial airplanes and the Apache, Black Hawk, Stallion and Chinook military helicopter platforms.
The division’s airborne products include crash protected, mission, flight test, and usage data recorders which are designed to provide optimal performance in a wide range of environments. We also serve the avionics market as a supplier of flight test instrumentation and a broad range of sensors that provide key functionality in almost every type of vehicle, from aerial work platforms to championship Formula One race cars.

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In the industrial transportation field, we serve three principal markets: on-highway, off-highway, and small-to-medium electric vehicles, delivering state-of-the-art performance to a diverse customer base. Our on-highway business is focused on class A trucks. Our off-highway business covers a multitude of vehicle types from John Deere tractors to specialty and utility vehicles. Our electric vehicles incorporate sophisticated wheelchairs, material handling, and high-end hybrid buses for inter-city transportation. Our products include electronic motor control systems, power management systems, electronic throttle control devices, sensors, joysticks and electronic shift-by-wire transmission controls. We also develop products for monitoring, recording, and controlling vehicles in service under extreme operating conditions, for critical applications such as position sensing, and controllers used in railway traction and maintenance vehicles.
Integrated Sensing
Our Integrated Sensing division develops and manufactures a broad range of sensors, controllers, and electronic control systems and subsystems for commercial aviation, aerospace defense, and general industrial markets. The division’s smoke detection sensors, solenoids, and solenoid valve products provide critical functionality for a variety of platforms including hydraulic, pneumatic, and fuel systems. They are also used in cooling fan and motor designs. In addition, the division provides controllers, rotary sensors, and electro-mechanical actuation subsystems used in flight, engine, and environmental controls for aircraft and space applications.
Competitive differentiators for Integrating Sensing include technical leadership and support, product price, and customer service. Integrated Sensing products are marketed through facilities in the United Kingdom, Germany, and the United States.
Backlog
Backlog for this segment at December 31, 2013, was $653 million, of which $420 million is expected to be shipped after one year, compared with a backlog of $563 million at December 31, 2012. Substantially all amounts in backlog are funded, and there were no significant contract cancellations which affected backlog in 2013.
Surface Technologies
Our Surface Technologies segment provides technical services to enhance the performance and durability, extend the life, and prevent premature fatigue and failure on customer-supplied metal components. In 2013, net sales of our Surface Technologies segment of $313 million contributed 12% to our total net sales.
This segment’s primary markets are commercial and defense aerospace, power generation, and general industrial markets, including automotive, transportation, construction equipment, and metal working industries.
This segment provides four primary technical services on highly stressed, critical function components: shot peening, laser peening, specialty coatings, and analytical services.
We focus on providing technical processing solutions for mission critical components. The functional properties of our processes extend the life and increase the performance of our customers' parts. Surface Technologies' operations are conducted throughout the world including in the United States, Canada, United Kingdom, Western Europe, and Asia, and a significant portion of our business is on new parts from leading OEMs for their sub tier suppliers. Our Surface Technologies' services are marketed by a direct sales force supported by centralized lead generation activities. We compete in this segment on the basis of quality, service, and price.
Shot Peening
Shot peening is a process by which the durability of metal parts is enhanced by bombarding the part’s surface with spherical media, such as steel shot or ceramic or glass beads, creating a layer of residual compressive stress that results in enhanced resistance to fatigue and stress failure. In addition, shot peen forming shapes metal panels with aerodynamic curvatures, which are assembled as wing skins of commercial and military aircraft. Curtiss-Wright conducts shot peen forming on wing panels and other components for Airbus, Boeing, and other aerospace OEMs.
Laser Peening
Laser peening is a sophisticated surface treatment process that utilizes a proprietary high energy laser developed in conjunction with the Lawrence Livermore National Laboratory. Although it is similar in nature to shot peening, the laser peening process results in unprecedented resistance to fatigue and stress failure. It is used in production to form the wing skins on the Boeing 747-8 aircraft, and also to extend the life of critical commercial and industrial components, including critical turbine engine fan blades.

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Specialty Coatings
Specialty coatings primarily consist of the application of solid film lubricant and corrosion resistant protective coatings to metal components used in critical applications for a broad range of industries. The coatings are applied by either an air spray or a dipping and spinning process for bulk applications.
We also supply thermal spray coatings to complement our existing portfolio of highly engineered coating technologies. Thermal spray coatings include high velocity oxygen fuel, plasma spray, and flame spray coatings.
We also have diversified our capabilities into the growing medical market by the addition of a vapor deposition process to apply parylene coatings to medical devices, including rubber and silicone seals and wire forming mandrels used in the manufacture of catheters. Parylene coatings provide resistance to solvents and moisture and are biocompatible.
Analytical Services
Analytical Services provides mechanical and metallurgical testing services to materials for the aerospace, power generation, and medical markets. This technology is used in the manufacturing value chain for components in premium industrial markets, providing a complete range of testing capabilities includes fatigue testing, metallurgical analysis, chemical analysis, mechanical testing, failure analysis, and training. Material testing is utilized in the on-going quality assurance of raw materials for production manufacturing as well as for the validation of new component designs. In addition to the aforementioned capabilities, this segment also provides nondestructive inspection, plating, and anodizing services.
Backlog
Backlog for this segment was $3 million, as of December 31, 2013 and 2012, all of which is expected to be recognized in the first quarter of 2014. Due to the nature of our Surface Technologies’ business, we operate with a very limited backlog of orders. Thus, the backlog of this segment is not indicative of our future sales. This segment’s sales and profitability are closely aligned with general industrial economic conditions and, in particular, the commercial aerospace market.
OTHER INFORMATION
Acquisitions
During 2013, we acquired 5 businesses and expect to continue to seek core "tuck in" acquisitions that are consistent with our long-term growth strategy.
Flow Control:
The Marine and Power Products division acquired the outstanding shares of Phönix Holding GmbH for $97.9 million, net of cash acquired. Phönix, headquarter in Germany, is a designer and manufacturer of valves and valve systems, to the global chemical, petrochemical, and power (both convention and nuclear) markets.

The Oil and Gas Systems division acquired the assets of Gulf33 Valve Pros, LLC, for $3.3 million in cash. Gulf33 provides valve repair and maintenance services to the offshore oil and gas market.

The Nuclear Group division acquired the assets of Ovalpath, Inc. for $2.3 million in cash. Ovalpath is a developer of proprietary software platforms used in mobile-device based applications servicing the commercial nuclear power market.

Controls:
The Defense Solutions division acquired the stock of Parvus Corporation for $37.1 million in cash. Parvus is a designer and manufacturer of rugged small form factor computers and communications subsystems for the aerospace, defense, homeland security, and industrial markets.

The Avionics and Industrial division acquired the membership interests of Arens Controls, LLC for $95.6 million in cash. Arens is a designer and manufacturer of highly-engineered, precision operator interface controls, and power management systems for commercial and off-road industrial vehicles.


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Certain Financial Information
For information regarding sales by geographic region, see Note 19 to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.
In 2013, 2012, and 2011, our foreign operations generated 51%, 59%, and 43%, respectively, of our pre-tax earnings.
Pre-tax foreign earnings, as a percent of total pre-tax earnings, decreased in 2013, as compared to 2012, primarily due to certain significant items, described below, that lowered 2012 domestic earnings and did not recur in the current year. In addition, our PG Drives acquisition, which is primarily based in the United Kingdom, contributed to higher foreign earnings in 2013, as compared to 2012. Pre-tax foreign earnings, as a percent of total pre-tax earnings, increased in 2012, as compared to 2011, primarily due to the accretive impact and operational improvements from our 2011 ACRA acquisition within our Controls segment. The decrease in 2012 domestic pre-tax earnings is mainly attributable to expenses from the 2012 restructuring initiative and significant items within the Flow Control segment such as the strike at our EMD facility and changes in estimates on our AP1000 long term contract. The impact of these changes is further described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Government Sales
Our direct sales to the U.S. Government and foreign government end use represented 30%, 37%, and 41% of consolidated revenue during 2013, 2012, and 2011, respectively. The decrease in government sales is primarily due to our strategy to diversify our business, which has been accomplished over the last three years through acquisitions serving commercial markets. U.S. Government sales, both direct and indirect, are generally made under standard types of government contracts, including fixed price, fixed price-redeterminable, and cost plus fixed or award fees.
In accordance with normal U.S. Government business practices, contracts and orders are subject to partial or complete termination at any time at the option of the customer. In the event of a termination for convenience by the government, there generally are provisions for recovery of our allowable incurred costs and a proportionate share of the profit or fee on the work completed, consistent with regulations of the U.S. Government. Fixed-price redeterminable contracts, usually provide that we absorb the majority of any cost overrun. In the event that there is a cost underrun, the customer recoups a portion of the underrun based upon a formula in which the customer’s portion increases as the underrun exceeds certain established levels.
Generally, long-term contracts with the U.S. Government require us to invest in and carry significant levels of inventory. However, where allowable, we utilize progress payments and other interim billing practices on nearly all of these contracts, thus reducing the overall working capital requirements. It is our policy to seek customary progress payments on certain of our contracts. Where we obtain such payments under U.S. Government prime contracts or subcontracts, the U.S. Government has either title to or a secured interest in the materials and work in process allocable or chargeable to the respective contracts. (See Notes 1.F, 4, and 5 to the Consolidated Financial Statements, contained in Part II, Item 8, of this Annual Report on Form 10-K).
Customers
We have hundreds of customers in the various industries we serve. No commercial customer accounted for more than 10% of our total sales during 2013, 2012, or 2011.
Approximately 25%, 30%, and 34% of our total sales for 2013, 2012, and 2011, respectively, were derived from contracts with agencies of, and prime contractors to, the U.S. Government. Information on the Company’s sales to the U.S. Government, including direct sales as a prime contractor and indirect sales as a subcontractor, is as follows:
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Flow Control
 
$
293,788

 
$
274,528

 
$
299,196

Controls
 
305,741

 
313,207

 
343,900

Surface Technologies
 
33,292

 
40,015

 
39,353

Total Government sales
 
$
632,821

 
$
627,750

 
$
682,449


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Patents
We own and are licensed under a number of United States and foreign patents and patent applications, which have been obtained or filed over a period of years. We also license intellectual property to and from third parties. Specifically, the U.S. Government has licenses in our patents that are developed in performance of government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes. Additionally, unpatented research, development, and engineering skills, some of which have been acquired by us through business acquisitions, make an important contribution to our business. While our intellectual property rights in the aggregate are important to the operation of our business, we do not consider the successful conduct of our business or business segments to be materially dependent upon the timing of expiration or protection of any one or group of patents, patent applications, or patent license agreements under which we now operate.
Research and Development
We conduct research and development activities under customer-sponsored contracts, shared development contracts, and our own independent research and development activities. Customer-sponsored research and development costs are charged to costs of goods sold when the associated revenue is recognized. Funds received under shared development contracts are a reduction of the total development expenditures under the shared contract and are shown net as research and development costs. Company-sponsored research and development costs are charged to expense when incurred. Customer-sponsored research and development activity amounted to $5 million, $19 million, and $30 million, in 2013, 2012, and 2011, respectively. Research and development expenses amounted to $69 million, $60 million, and $62 million in 2013, 2012, and 2011, respectively.
Raw Materials
Raw materials are generally available in adequate quantities from a number of suppliers; however, in our Controls segment we may utilize sole-source suppliers. Thus, the failure and or inability of a sole-source supplier to provide product to the Controls segment could have an adverse impact on the segment’s financial performance. While alternatives could be identified to replace a sole-source supplier, a transition could result in increased costs and manufacturing delays.
Environmental Protection
We are subject to federal, state, local, and foreign laws, regulations, and ordinances that govern activities or operations that may have adverse environmental effects, such as discharges to air and water. These laws, regulations, and ordinances may also apply to handling and disposal practices for solid and hazardous waste and impose liability for the costs of cleaning up and for certain damages resulting from sites of past spills, disposals, or other releases of hazardous substances.
At various times, we have been identified as a potentially responsible party pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), and analogous state environmental laws, for the cleanup of contamination resulting from past disposals of hazardous wastes at certain current and former facilities and at sites to which we, among others, sent waste. CERCLA requires potentially responsible persons to pay for cleanup of sites from which there has been a release or threatened release of hazardous substances. Courts have interpreted CERCLA to impose strict joint and several liability on all persons liable for cleanup costs. As a practical matter, however, at sites where there are multiple potentially responsible persons, the costs of cleanup typically are allocated among the parties according to volumetric or other standards.
Information concerning our specific environmental liabilities is described in Notes 1.N and 16 to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.

12



Executive Officers
Name
 
Current Position
 
Business Experience
 
Age
 
Executive
Officer Since
Martin R. Benante
 
Executive Chairman
 
Executive Chairman of the Board of Directors of the Corporation since April 2000. Served as Chief Executive Officer of the Corporation from April 2000 prior to his retirement from that position in August 2013. He has been a Director of the Corporation since 1999.
 
61
 
1999
David C. Adams
 
President and Chief Executive Officer
 
President and Chief Executive Officer of the Corporation since August 2013. Prior to his promotion, he served as Chief Operating Officer from October 2012 and as Co-Chief Operating Officer from November 2008. He has been a Director of the Corporation since August 2013.
 
59
 
2005
Thomas P. Quinly
 
Chief Operating Officer
 
Chief Operating Officer of the Corporation since October 2013. Prior to his promotion, he served as Vice President of the Corporation from November 2010 and served as President of Curtiss-Wright Controls, Inc. from November 2008.
 
55
 
2010
Glenn E. Tynan
 
Vice President of Finance and Chief Financial Officer
 
Vice President of Finance and Chief Financial Officer of the Corporation since June 2002.
 
55
 
2000
Michael J. Denton
 
Vice President, Secretary, and General Counsel
 
Vice President, Secretary, and General Counsel of the Corporation since August 2001.
 
58
 
2001
Glenn G. Coleman
 
Vice President and Corporate Controller
 
Vice President and Corporate Controller of the Corporation since May 2008.
 
46
 
2008
Harry S. Jakubowitz
 
Vice President and Treasurer
 
Vice President of the Corporation since May 2007 and Treasurer of the Corporation since September 2005.
 
61
 
2005
Paul J. Ferdenzi
 
Vice President- Human Resources, Associate General Counsel, and Assistant Secretary
 
Vice President - Human Resources of the Corporation since November 2011 and has served as Associate General Counsel and Assistant Secretary of the Corporation since June 1999 and May 2001, respectively.
 
46
 
2011
Employees
At the end of 2013, we had approximately 10,000 employees, 6% of which are represented by labor unions and covered by collective bargaining agreements.
Available information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements for our annual stockholders’ meetings, as well as any amendments to those reports, with the Securities and Exchange Commission (SEC). The public may read and copy any of our materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including our filings. These reports are also available free of charge through our web site at www.curtisswright.com as soon as reasonably practicable after we electronically file.

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Item 1A. Risk Factors.
We have summarized below the significant, known material risks to our business. Our business, financial condition, and results of operations and cash flows could be materially and adversely impacted if any of these risks materialize. Additional risk factors not currently known to us or that we believe are immaterial may also impair our business, financial condition, and results of operations. The risk factors below should be considered together with information included elsewhere in this Annual Report on Form 10-K as well as other required filings by us to the Securities Exchange Commission, such as our Form 10-Q’s, Form 8-K’s, proxy statements for our annual shareholder meetings, and subsequent amendments, if any.
A substantial portion of our revenues and earnings depends upon the continued willingness of the U.S. Government and our other customers in the defense industry to buy our products and services.
In 2013, approximately 30% of our revenues were derived from or related to defense programs. U.S. defense spending has historically been cyclical, and defense budgets tend to rise when perceived threats to national security increase the level of concern over the country’s safety. At other times, spending by the military can decrease. Competing demands for federal funds can put pressure on all areas of discretionary spending, which could ultimately impact the defense budget. A decrease in U.S. Government defense spending or changes in spending allocation could result in one or more of our programs being reduced, delayed, or terminated. Reductions in defense industry spending may or may not have an adverse effect on programs for which we provide products and services. In the event expenditures are reduced for products we manufacture or services we provide and are not offset by revenues from foreign sales, new programs, or products or services that we currently manufacture or provide, we may experience a reduction in our revenues and earnings and a material adverse effect on our business, financial condition, and results of operations.
As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.
We must comply with and are affected by laws and regulations relating to the award, administration, and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties or the termination of our contracts or debarment from bidding on contracts. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks, or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by government agencies. The failure to comply with the terms of our government contracts could harm our business reputation. It could also result in our progress payments being withheld.
In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate any of our government contracts and, in general, subcontracts, at its convenience as well as for default based on performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process, and an allowance for profit on work actually completed on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. Such allowable costs would normally include our cost to terminate agreements with our suppliers and subcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation.
A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the prime contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor.
In addition, our U.S. Government contracts typically span one or more base years and multiple option years. The U.S. Government generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance on the contract or does not receive funding to continue the program. U.S. Government procurement may adversely affect our cash flow or program profitability.
A significant reduction in the purchase of our products by the U.S. government could have a material adverse effect on our business. The risk that governmental purchases of our products may decline stems from the nature of our business with the U.S. government, where it may:
terminate, reduce, or modify contracts or subcontracts if its requirements or budgetary constraints change;
cancel multi-year contracts and related orders if funds become unavailable; and

14



shift its spending priorities.

In addition, as a defense contractor, we are subject to risks in connection with government contracts, including without limitation:

the frequent need to bid on programs prior to completing the necessary design, which may result in unforeseen technological difficulties and/or cost overruns;
the difficulty in forecasting long-term costs and schedules and the potential obsolescence of products related to long-term, fixed price contracts;
contracts with varying fixed terms that may not be renewed or followed by follow-on contracts upon expiration;
cancellation of the follow-on production phase of contracts if program requirements are not met in the development phase;
the failure of a prime contractor customer to perform on a contract;
the fact that government contract wins can be contested by other contractors; and
the inadvertent failure to comply with any the U.S. Government rules, laws and regulations, including the False Claims Act or the Arms Export Control Act.
Sequestration and regulatory changes related to the U.S. Government Defense Budget could negatively impact our revenues and results of operations.
In January 2014, President Obama signed into law the Consolidated Appropriations Act, 2014, an omnibus spending bill. The law provides $520.5 billion for defense and $491.7 billion for non-defense discretionary programs through September 30, 2014 and replaces what would have been the second round of across-the-board sequester cuts “sequestration” mandated by the 2011 Budget Control Act. The act provides for modest sequester relief in FY14 and provides the DoD additional stability and flexibility to entertain multi-year contracts. Despite these benefits, the DoD and contractors will still face significant challenges over the next decade as a result of sequestration. 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. 
The success of our growth strategy is dependent upon our ability to complete acquisitions and integrate acquired businesses.
Our strategy includes both growth through core "tuck-in" acquisitions and organic growth. As a result, our future growth depends in part on our ability to implement our acquisition strategy and successfully integrate acquired businesses into our existing operations. If we are unable to identify suitable candidates, negotiate appropriate acquisition terms, obtain financing, and successfully integrate acquired businesses into our existing operations, our growth strategy may not be successful. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, and products of the acquired company, the potential loss of key employees of the acquired company, and the diversion of our management’s attention from other business concerns. This is the case particularly in the fiscal quarters immediately following the completion of an acquisition since the operations of the acquired business are integrated into the acquiring businesses’ operations during this period. We cannot be sure that we will accurately anticipate all of the changing demands that any future acquisition may impose on our management or on our operational, financial, and management information systems. Once integrated, acquired operations may not achieve levels of revenue, profitability, or productivity comparable to those of our existing operations or may otherwise not perform as we expected. We may fail to discover liabilities relating to a pending acquisition during the due diligence investigation, liabilities for which we, as the successor owner, might be responsible. Although we seek to minimize the impact of potential undiscovered liabilities by structuring acquisitions to minimize liabilities and obtaining indemnities and warranties from the selling party, these methods may not fully protect us from the impact of undiscovered liabilities. For example, indemnities or warranties are often limited in scope, amount, and duration and may not fully cover the liabilities for which they were intended. If indemnities or warranties are limited, the liabilities that are not covered by the limited indemnities or warranties could have a material adverse effect on our business and financial condition.

15



We use estimates when accounting for long-term contracts. Changes in estimates could affect our profitability and overall financial position.
Long-term contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables. For example, assumptions have to be made regarding the length of time to complete the contract as costs also include expected increases in wages and prices for materials. Similarly, assumptions have to be made regarding the future impact of efficiency initiatives and cost reduction efforts. Incentives, awards, price escalations, liquidated damages, or penalties related to performance on contracts are considered in estimating revenue and profit rates and are recorded when there is sufficient information to assess anticipated performance. It is possible that materially different amounts could be obtained, because of the significance of the judgments and estimation processes described above, if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances, or estimates may have a material adverse effect upon future period financial reporting and performance. See “Critical Accounting Estimates and Policies” in Part II, Item 7 of this form 10-K.
If we fail to satisfy our contractual obligations our contracts may be terminated and we may incur significant costs or liabilities, including liquidated damages and penalties.
In general, our contracts may be terminated for our failure to satisfy our contractual obligations. In addition, some of our contracts contain substantial liquidated damages provisions and financial penalties related to our failure to satisfy our contractual obligations. For example, the terms of the Electro-Mechanical divisions’ AP1000 China and AP1000 United States contracts with Westinghouse include liquidated damage penalty provisions for failure to meet contractual delivery dates if we caused the delay and the delay was not excusable.  On October 10, 2013, we received a letter from Westinghouse stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract of approximately $25 million.  To date, we have not met certain contractual delivery dates under the AP 1000 China contract; however there are significant uncertainties as to which parties are responsible for the delays, and we believe we have adequate legal defenses. Consequently, as a result of the above matters, we may incur significant costs or liabilities, including penalties, which could have a material adverse effect on our financial position, results of operations, or cash flows.
Our backlog is subject to reduction and cancellation, which could negatively impact our revenues and results of operations.
Backlog represents products or services that our customers have committed by contract to purchase from us. Total backlog includes both funded (unfilled orders for which funding is authorized, appropriated, and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated and/or contractually obligated by the customer). The Corporation is a subcontractor to prime contractors for the vast majority of our government business; as such, substantially all amounts in backlog are funded. Backlog excludes unexercised contract options and potential orders under ordering type contracts (e.g. Indefinite Delivery / Indefinite Quantity). Backlog is adjusted for changes in foreign exchange rates and is reduced for contract cancellations and terminations in the period in which they occur. Backlog as of December 31, 2013 was $1,716 million. Backlog is subject to fluctuations and is not necessarily indicative of future sales. The U.S. government may unilaterally modify or cancel its contracts. In addition, under certain of our commercial contracts, our customers may unilaterally modify or terminate their orders at any time for their convenience. Accordingly, certain portions of our backlog can be cancelled or reduced at the option of the U.S. government and commercial customers. Our failure to replace cancelled or reduced backlog could negatively impact our revenues and results of operations.
Our future financial results could be adversely impacted by asset impairment charges.
At December 31, 2013, we had goodwill and other intangible assets, net of accumulated amortization, of approximately $1,582 million, which represented approximately 46% of our total assets. Our goodwill is subject to an impairment test on an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired. Any excess goodwill resulting from the impairment test must be written off in the period of determination. Intangible assets (other than goodwill) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business that will require us to record goodwill based on the purchase price and the value of the acquired assets. We may subsequently experience unforeseen issues with such business that adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a material adverse impact on our results of operations and financial condition.

16



We operate in highly competitive markets.
We compete against companies that often have greater sales volumes and financial, research, human, and marketing resources than we have. In addition, some of our largest customers could develop the capability to manufacture products or provide services similar to products that we manufacture or services that we provide. This would result in these customers supplying their own products or services and competing directly with us for sales of these products or services, all of which could significantly reduce our revenues. Furthermore, we are facing increased international competition and cross-border consolidation of competition. Our management believes that the principal points of competition in our markets are technology, product quality, performance, price, technical expertise, and timeliness of delivery. If we are unable to compete successfully with existing or new competitors in these areas, our business, financial position, results of operations, or cash flows, could be materially and adversely impacted.
Our future growth and continued success is dependent upon our key personnel.
Our success is dependent upon the efforts of our senior management personnel and our ability to attract and retain other highly qualified management and technical personnel. We face competition for management and qualified technical personnel from other companies and organizations. Therefore, we may not be able to retain our existing management and technical personnel or fill new management or technical positions or vacancies created by expansion or turnover at our existing compensation levels. Although we have entered into change of control agreements with some members of senior management, we do not have employment contracts with our key executives. We have made a concerted effort to reduce the effect of the loss of our senior management personnel through management succession planning. The loss of members of our senior management and qualified technical personnel could have a material and adverse effect on our business.
Our international operations are subject to risks and volatility.
During 2013, approximately 29% of our consolidated revenue was from customers outside of the United States, and we have operating facilities in foreign countries. Doing business in foreign countries is subject to numerous risks, including without limitation: political and economic instability; the uncertainty of the ability of non-U.S. customers to finance purchases; restrictive trade policies; and complying with foreign regulatory and tax requirements that are subject to change. While these factors or the impact of these factors are difficult to predict, any one or more of these factors could adversely affect our operations. To the extent that foreign sales are transacted in foreign currencies and we do not enter into currency hedge transactions, we are exposed to risk of losses due to fluctuations in foreign currency exchange rates, particularly for the Canadian dollar, the Euro, Swiss franc, and the British pound. Significant fluctuations in the value of the currencies of the countries in which we do business could have an adverse effect on our results of operations.
We may be unable to protect the value of our intellectual property.
Obtaining, maintaining, and enforcing our intellectual property rights and avoiding infringing on the intellectual property rights of others are important factors to the operation of our business. While we take precautionary steps to protect our technological advantages and intellectual property and rely in part on patent, trademark, trade secret, and copyright laws, we cannot assure that the precautionary steps we have taken will completely protect our intellectual property rights. Because patent applications in the United States are maintained in secrecy until either the patent application is published or a patent is issued, we may not be aware of third-party patents, patent applications, and other intellectual property relevant to our products that may block our use of our intellectual property or may be used in third-party products that compete with our products and processes. When others infringe on our intellectual property rights, the value of our products is diminished, and we may incur substantial litigation costs to enforce our rights. Similarly, we may incur substantial litigation costs and the obligation to pay royalties if others claim we infringed on their intellectual property rights. When we develop intellectual property and technologies with funding from U.S. Government contracts, the government has the royalty-free right to use that property.
In addition to our patent rights, we also rely on unpatented technology, trade secrets, and confidential information. Others may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We may not be able to protect our rights in unpatented technology, trade secrets, and confidential information effectively. We require each of our employees and consultants to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. There is no guarantee that we will succeed in obtaining and retaining executed agreements from all employees or consultants. Moreover, these agreements may not provide effective protection of our information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.

17



Our operations are subject to numerous domestic and international laws, regulations, and restrictions, and noncompliance with these laws, regulations, and restrictions could expose us to fines, penalties, suspension, or debarment, which could have a material adverse effect on our profitability and overall financial condition.
We have contracts and operations in many parts of the world subject to United States and foreign laws and regulations, including the False Claims Act, regulations relating to import-export control (including the International Traffic in Arms Regulation promulgated under the Arms Export Control Act), technology transfer restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act, and the anti-boycott provisions of the U.S. Export Administration Act. Although we have implemented policies and procedures and provided training that we believe are sufficient to address these risks, we cannot guarantee that our operations will always comply with these laws and regulations. Failure by us or our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil, or criminal liabilities and could, in the extreme case, result in suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on our business.
We are subject to liability under environmental laws.
Our business and facilities are subject to numerous federal, state, local, and foreign laws and regulations relating to the use, manufacture, storage, handling, and disposal of hazardous materials and other waste products. Environmental laws generally impose liability for investigation, remediation, and removal of hazardous materials and other waste products on property owners and those who dispose of materials at waste sites, whether or not the waste was disposed of legally at the time in question. We are currently addressing environmental remediation at certain current and former facilities, and we have been named as a potentially responsible party along with other organizations in a number of environmental clean-up sites and may be named in connection with future sites. We are required to contribute to the costs of the investigation and remediation and to establish reserves in our financial statements for future costs deemed probable and estimable. Although we have estimated and reserved for future environmental remediation costs, the final resolution of these liabilities may significantly vary from our estimates and could potentially have an adverse effect on our results of operations and financial position.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.
Our business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Changes to the tax system in the U.S. could have significant effects, positive or negative, on our effective tax rate and on our deferred tax assets and liabilities. In addition, audits by income tax authorities could result in unanticipated increases in our income tax expense.
Our current debt, and debt we may incur in the future, could adversely affect our business and financial position.
As of December 31, 2013, we had $960 million of debt outstanding, of which $959 million is long-term debt. Our level of debt could have significant consequences for our business including: requiring us to use our cash flow to pay the principal and interest on our debt, reducing funds available for acquisitions and other investments in our business; making us vulnerable to economic downturns and increases in interest rates; limiting us from obtaining additional debt; and impacting our ability to pay dividends.
A percentage of our workforce is employed under collective bargaining agreements.
Approximately 6% of our workforce is employed under collective bargaining agreements, which from time to time are subject to renewal and negotiation. We cannot ensure that we will be successful in negotiating new collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor, or that a breakdown in such negotiations will not result in the disruption of our operations. Although we have generally enjoyed good relations with both our unionized and non-unionized employees, if we are subject to labor actions, we may experience an adverse impact on our operating results.
For example, on August 24, 2012, the Electronic Mechanical Division (EMD) of Curtiss Wright’s Flow Control segment experienced a strike at its Cheswick, Pennsylvania facility. The financial impacts of the strike were an $18 million and $6 million shift in revenue and operating income, respectively, from 2012 to 2013, due to the temporary suspension of work, and an additional $5 million unfavorable impact to operating income as a result of unrecoverable absorption of overhead costs.

18



Substantial defaults by our customers related to accounts receivable or the loss of significant customers could have a significant negative impact on our business, results of operations, financial condition or liquidity.
A significant portion of our working capital consists of accounts receivable from customers. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for products and services, or were to become unwilling or unable to make payments in a timely manner, our business, results of operations, financial condition or liquidity could be adversely affected. An economic or industry downturn could adversely and materially affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collection costs, and defaults in excess of management’s expectations.
Our earnings and margins depend in part on subcontractor performance, as well as raw material and component availability and pricing.
Our businesses depend on suppliers and subcontractors for raw materials and components. At times subcontractors perform services that we provide to our customers. We depend on these subcontractors and vendors to meet their contractual obligations in full compliance with customer requirements. Generally, raw materials and purchased components are available from a number of different suppliers, though several suppliers are our sole source of certain components. If a sole-source supplier should cease or otherwise be unable to deliver such components, our operating results could be adversely impacted. In addition, our supply networks can sometimes experience price fluctuations. Our ability to perform our obligations as a prime contractor may be adversely affected if one or more of these suppliers are unable to provide the agreed-upon supplies or perform the agreed-upon services in a timely and cost-effective manner. While we have attempted to mitigate the effects of increased costs through price increases, there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to offset fully or on a timely basis the effects of higher raw materials costs through price increases.
Our business involves risks associated with complex manufacturing processes.
Our manufacturing processes depend on certain sophisticated and high-value equipment. Unexpected failures of this equipment may result in production delays, revenue loss, and significant repair costs. In addition, equipment failures could result in injuries to our employees. Moreover, the competitive nature of our businesses requires us to continuously implement process changes intended to achieve product improvements and manufacturing efficiencies. These process changes may at times result in production delays, quality concerns, and increased costs. Any disruption of operations at our facilities due to equipment failures or process interruptions could have a material adverse effect on our business.
The airline industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.
Governmental agencies throughout the world, including the U.S. Federal Aviation Administration (FAA) and the European Aviation Safety Agency, prescribe standards and qualification requirements for aircraft components, including virtually all commercial airline and general aviation products. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. We include, with the products that we sell to our aircraft manufacturing customers, documentation certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. In order to sell our products, we and the products we manufacture must also be certified by our individual OEM customers. If any of the material authorizations or approvals qualifying us to supply our products is revoked or suspended, then the sale of the subject product would be prohibited by law, which would have an adverse effect on our business, financial condition, and results of operations.
From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we may incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition, and results of operations.
Our future success will depend, in part, on our ability to develop new technologies.
Virtually all of the products produced and sold by us are highly engineered and require sophisticated manufacturing and system-integration techniques and capabilities. The commercial and government markets in which we operate are characterized by rapidly changing technologies. The product and program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance depends in part on our ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices.


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Potential product liability risks exist from the products that we sell.
We manufacture highly engineered products, and such products may contain design or manufacturing errors or defects, which may result in product liability claims against us. For example, in December 2013, we, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) pertaining to a fire and explosion at a delayed coker unit at CNRL’s Fort McMurray refinery which 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 . We currently maintain what we believe to be suitable and adequate commercial, property and casualty, product liability, and other forms of insurance to cover this matter and other potential claims. There can be no assurance, however, that we will be able to maintain our insurance on acceptable terms or that such insurance will be provide adequate protection against these potential liabilities. In the event of a judgment against us on this matter or other claims against us, a lack of sufficient insurance coverage could have a material adverse effect on our business, financial condition, and results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our business, financial condition, results of operations, or cash flows, and on the ability to obtain suitable or adequate insurance.
Increasing costs of certain employee and retiree benefits could adversely affect our financial position, results of operations, or cash flows.
Our earnings may be positively or negatively impacted by the amount of income or expense we record for our pension and other postretirement benefit plans. U.S. GAAP requires that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions relating to financial market and other economic conditions. Changes in key economic indicators can change the assumptions. The most significant year-end assumptions used to estimate pension or other postretirement benefit expense for the following year are the discount rate, the expected long-term rate of return on plan assets, expected future medical cost inflation, and expected compensation increases. In addition, we are required to make an annual measurement of plan assets and liabilities, which may result in a significant change to equity through a reduction or increase to other comprehensive income. For a discussion regarding how our financial statements can be affected by pension and other postretirement benefit plans accounting policies, see “Management’s Discussion and Analysis—Critical Accounting Estimates and Policies—Pension and Other Postretirement Benefits” in Part II, Item 7 of this Form 10-K. Although U.S. GAAP expense and pension or other postretirement contributions are not directly related, the key economic factors that affect U.S. GAAP expense would also likely affect the amount of cash the company would contribute to the pension or other postretirement plans. Potential pension contributions include both mandatory amounts required under federal law, Employee Retirement Income Security Act, and discretionary contributions to improve the plans’ funded status. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses.
Our operating results and financial condition may be adversely impacted by the current worldwide economic conditions.
We currently generate significant operating cash flows, which combined with access to the credit markets provides us with significant discretionary funding capacity. However, financial markets in the United States, Europe, and Asia have been experiencing extreme disruption in recent years, including, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. While currently these conditions have not impaired our ability to operate our business, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies, which could impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors. We are unable to predict the likely duration and severity of a disruption in financial markets and adverse economic conditions and the effects they will have on our business and financial condition.
Future terror attacks, war, natural disasters, or other events beyond our control could adversely impact our businesses.
Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect of unforeseen interruptions to us through business continuity planning and disaster recovery plans, terrorist attacks, war, natural disasters, such as hurricanes, floods, tornados, pandemic diseases, or other events, such as strikes by a significant customer’s or supplier’s workforce, could adversely impact demand for or supply of our products and could also cause disruption to our facilities or systems, which could also interrupt operational processes and adversely impact our ability to manufacture our products and provide services and support to our customers. We operate facilities in areas of the world that are exposed to natural disasters, such as but not limited to hurricanes, floods, tornados, and pandemic diseases. Financial difficulties of our customers, delays by our customers in production of their products, high fuel prices, the concern of another major terrorist attack, and the overall decreased demand for our products could adversely affect our operating results and financial position.

20



Intrusion on our systems could damage our business.
We store sensitive data, including intellectual property, proprietary business information, and confidential employee information, on our servers and databases. Despite our implementation of firewalls, switchgear, and other network security measures, our servers, databases, and other systems may be vulnerable to computer hackers, physical or electronic break-ins, sabotage, computer viruses, worms, and similar disruptions from unauthorized tampering with our computer systems. We continue to review and enhance our computer systems to try to prevent unauthorized and unlawful intrusions, but in the future it is possible that we may not be able to prevent all intrusions. Such intrusions could result in our network security or computer systems being compromised and possibly result in the misappropriation or corruption of sensitive information or cause disruptions in our services. We might be required to expend significant capital and resources to protect against, remediate, or alleviate problems caused by such intrusions. Any such intrusion could cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could have a material adverse effect on our business, financial condition, and results of operations.
There are risks associated with owning our common stock.
Like any equity security, our common stock is subject to a number of risks that may adversely impact our share price including: there is a limited trading market in our common stock; we may not in the future be able to pay dividends on our common stock; we may issue common stock for acquisitions or other purposes that could be dilutive to current stockholders; and we have various anti-takeover defenses such as our rights plan and our ability to issue preferred stock that may discourage a potential acquirer.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters were located at a leased facility in Parsippany, New Jersey. As of January 1, 2014, we relocated our corporate headquarters to a leased facility in Charlotte, North Carolina. As of December 31, 2013, we had 222 facilities worldwide. Approximately 66% of our facilities operate as manufacturing and engineering, metal treatment, or aerospace overhaul plants, while the remaining 34% operate as selling and administrative office facilities. The number and type of facilities utilized by each of our reportable segments is summarized below:
Owned Facilities Location
 
Flow Control
 
Controls
 
Surface Technologies
 
Total
North America
 
18

 
3

 
9

 
30

Europe
 
3

 
1

 
11

 
15

Asia
 
1

 

 
1

 
2

Total
 
22

 
4

 
21

 
47

Leased Facilities Location
 
Flow Control
 
Controls
 
Surface Technologies
 
Total
North America
 
60

 
25

 
38

 
123

Europe
 
7

 
19

 
14

 
40

Asia
 
2

 
6

 
3

 
11

Total
 
69

 
50

 
55

 
174

Flow Control has principal manufacturing facilities located in Canada, Ohio, New York, Pennsylvania, and Texas. Controls has principal manufacturing facilities located in California, Canada, Oregon, and North Carolina. Surface Technologies has principal manufacturing facilities located in the United Kingdom. The buildings on the properties referred to in this Item are well maintained, in good condition, and are suitable and adequate for the uses presently being made of them. Management believes the productive capacity of our properties is adequate to meet our anticipated volume for the foreseeable future.

21




Item 3. Legal Proceedings.
In the ordinary course of business, we and our subsidiaries are subject to various pending claims, lawsuits, and contingent liabilities. We do not believe that the disposition of any of these matters, individually or in the aggregate, will have a material adverse effect on our consolidated financial position or results of operations.
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.
We have been named in approximately 243 pending lawsuits that allege injury from exposure to asbestos. In addition, to date, we have secured dismissals with prejudice and without prejudice in approximately 140 and 255 lawsuits, respectively, and are currently in discussions for similar dismissal of several other lawsuits, and have not been found liable or paid any material sum of money in settlement in any case. We believe that the minimal use of asbestos in our past and current operations and the relatively non-friable condition of asbestos in our products makes it unlikely that we will face material liability in any asbestos litigation, whether individually or in the aggregate. We do maintain insurance coverage for these potential liabilities and we believe adequate coverage exists to cover any unanticipated asbestos liability.

22





Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
MARKET INFORMATION
Our common stock is listed and traded on the New York Stock Exchange under the symbol CW.
Stock Price Range
 
2013
 
2012
 
 
High
 
Low
 
High
 
Low
Common Stock
 
 
 
 
 
 
 
 
First Quarter
 
$
37.18

 
$
33.46

 
$
41.91

 
$
35.35

Second Quarter
 
37.48

 
30.64

 
37.39

 
29.07

Third Quarter
 
48.40

 
36.46

 
33.11

 
28.55

Fourth Quarter
 
62.92

 
44.71

 
33.41

 
28.95

As of January 1, 2014, we had approximately 4,631 registered shareholders of our common stock, $1.00 par value.
DIVIDENDS
In the second quarter of 2013, the Corporation increased its dividend to ten cents per share, an 11.1% increase over the prior year dividend of nine cents per share.
 
 
2013
 
2012
Common Stock
 
 

 
 

First Quarter
 
$
0.09

 
$
0.08

Second Quarter
 
0.10

 
0.09

Third Quarter
 
0.10

 
0.09

Fourth Quarter
 
0.10

 
0.09


23



SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information regarding our equity compensation plans as of December 31, 2013 the end of our most recently completed fiscal year:
Plan category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights
 
 
Weighted average
exercise price of
outstanding options,
warrants, and rights
 
Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
the first column)
 
Equity compensation plans approved by security holders
 
3,184,313
(a)
 
$34.68
 
2,540,731
(b)
Equity compensation plans not approved by security holders
 
None
 
 
Not applicable
 
Not applicable
 

(a)
Consists of 3,007,702 shares issuable upon exercise of outstanding options and vesting of performance shares, restricted shares, and restricted stock units under the 2005 Long-Term Incentive Plan, 82,846 shares issuable under the Employee Stock Purchase Plan, and 93,765 shares outstanding under the 2005 Stock Plan for Non-Employee Directors.
(b)
Consists of 1,710,472 shares available for future option grants under the 2005 Long-Term Incentive Plan, 828,168 shares remaining available for issuance under the Employee Stock Purchase Plan, and 2,091 shares remaining available for issuance under the 2005 Stock Plan for Non-Employee Directors.

Issuer Purchases of Equity Securities
The following table provides information about our repurchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended December 31, 2013.
 
 
Total Number of
shares purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of a
Publicly
Announced
Program
 
Maximum
Number of
Shares that may
yet be
Purchased
Under the
Program
October 1 – October 31
 

 
$

 

 
2,599,213

November 1 – November 30
 

 

 

 
2,599,213

December 1 – December 31
 

 

 

 
2,599,213

For the quarter ended
 

 
$

 

 
2,599,213

We repurchase shares under a program announced on September 28, 2011, which authorizes the Corporation to repurchase up to 3,000,000 shares of our common stock, in addition to approximately 690,000 shares remaining under a previously authorized share repurchase program, and is subject to a $100 million repurchase limitation. Under the current program, shares may be purchased on the open market, in privately negotiated transactions and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.
The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any of our other filings under the Securities Act or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference therein.

24



PERFORMANCE GRAPH
The following graph compares the annual change in the cumulative total return on our Company’s Common Stock during the last five fiscal years with the annual change in the cumulative total return of the Russell 2000 Index, the S&P SmallCap 600 Index, and our self-constructed proxy peer group. The proxy peer group companies are as follows:
AAR Corp
EnPro Industries Inc.
Mueller Water Products Inc
Actuant Corp
Esterline Technologies Corp.
Orbital Sciences Corp
Applied Industrial Technologies Inc
Flowserve Corp.
Rockwell Collins Inc.
B/E Aerospace Inc
GenCorp Inc.
Spirit Aerosystems Holdings Inc
Barnes Group Inc
Hexcel Corp
Teledyne Technologies Inc.
CIRCOR International Inc
IDEX Corporation
Triumph Group Inc.
Crane Co.
Kaman Corp
Woodward Inc
Cubic Corp
Moog Inc.
 
The graph assumes an investment of $100 on December 31, 2008 and the reinvestment of all dividends paid during the following five fiscal years.
Company / Index
 
2008
 
2009
 
2010
 
2011
 
2012
 
2013
Curtiss-Wright Corp
 
100

 
94.79

 
101.51

 
109.12

 
102.50

 
196.14

S&P SmallCap 600 Index
 
100

 
125.57

 
158.60

 
160.22

 
186.37

 
263.37

Russell 2000
 
100

 
127.17

 
161.32

 
154.59

 
179.86

 
249.69

Peer group
 
100

 
135.46

 
172.64

 
171.90

 
198.73

 
298.92


25




Item 6. Selected Financial Data.
The following table presents our selected financial data from continuing operations. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Five-Year Financial Highlights
 
 
CONSOLIDATED SELECTED FINANCIAL DATA
(In thousands, except per share data)
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,510,771

 
$
2,097,716

 
$
2,016,742

 
$
1,854,513

 
$
1,781,979

Net earnings from continuing operations
 
137,981

 
92,289

 
118,620

 
97,884

 
93,170

Total assets
 
3,458,274

 
3,114,588

 
2,635,547

 
2,233,141

 
2,137,958

Total debt
 
959,938

 
880,215

 
586,430

 
396,644

 
465,093

Earnings per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.94

 
$
1.98

 
$
2.56

 
$
2.14

 
$
2.06

Diluted
 
$
2.88

 
$
1.95

 
$
2.52

 
$
2.12

 
$
2.04

Cash dividends per share
 
$
0.39

 
$
0.35

 
$
0.32

 
$
0.32

 
$
0.32

Item 7. Management’s Discussion and Analysis of Financial Condition and 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 had on the current year results, for which there was no comparable prior-year period. Therefore, the results of operations for acquisitions are incremental for the first twelve months from the date of acquisition. The remaining businesses are referred to as the “organic”. The definition of “organic” excludes the effect of foreign currency translation.
COMPANY ORGANIZATION
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations begins with an overview of our company, followed by economic and industry-wide factors impacting our company and the markets we serve, a discussion of the overall results of operations, and finally a more detailed discussion of those results within each of our reportable operating segments.
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, refer to the Business Description in Part I, Item I of this Annual Report on Form 10-K.
Market Analysis and Economic Factors
Economic Factors Impacting Our Markets
General Economy
Many of Curtiss-Wright’s industrial businesses are driven in large part by global economic growth. World economies continue to slowly recover from the 2008-2009 global recession, as well as from the aftermath of the tsunami that struck Japan early in 2011. However, pockets of global economic instability remain, particularly in Europe. In 2013, the U.S. economy, as measured by real gross domestic product (GDP), showed only modest growth of 1.9%, according to the most recent estimate, compared with a 2.8% increase in 2012 and a 1.8% increase in 2011. While U.S. GDP continues to grow modestly from the global economic recession, the U.S. continues to deal with high levels of unemployment, higher taxes, and uncertainty in the housing market.

26



Looking ahead to 2014, the broader U.S. economy is expected to continue to recover at a moderate pace, with current estimates for U.S. real GDP growth ranging from 2.5% to 3.0%. However, world economies may continue to experience volatility due to the impact of Europe’s debt crisis and possible contagion effects that could undermine economic growth in Europe and the rest of the world. Overall, 2014 GDP growth in world economies is expected to be higher than 2013, led by Brazil, Russia, India, and China, while European economies are expected to increase slightly. Given that backdrop, we remain cautiously optimistic that our commercial and industrial markets will continue to improve in 2014.
Defense
During 2013, approximately 30% of our business was attributed to the defense sector, predominantly in the United States, and characterized by long-term programs and contracts driven primarily by the DoD budgets and funding levels. We have a well-diversified portfolio of products and services that supply all branches of the U.S. military, with content on many high performance programs and platforms.
The U.S. Defense budget serves as a leading indicator of our defense market, and its future outlook has been marked with some uncertainty. Following a period of significant growth in defense spending and related supplemental budgets in the previous decade, future defense spending, as it relates to U.S. Defense spending, is expected to be flat over the next five years. In January 2014, President Obama signed into law the Consolidated Appropriations Act, 2014, an omnibus spending bill. The law provides $520.5 billion for defense and $491.7 billion for non-defense discretionary programs through September 30, 2014 and replaces what would have been the second round of across-the-board sequester cuts “sequestration” mandated by the 2011 Budget Control Act. The act provides for modest sequester relief in FY14 and provides the DoD additional stability and flexibility to entertain multi-year contracts.
While we monitor the budget process as it relates to programs in which we participate, we cannot predict the ultimate impact of future DoD budgets, which tend to fluctuate year-by-year and program-by-program. As a result, some of the budget reductions and program cancellations may negatively impact programs in which we participate. In our ground defense market, we anticipate ground vehicle upgrades and modernization programs to continue to be funded over the next five years, although the timing is uncertain following years of rapid growth from the supplemental defense budgets and the ongoing draw down of our forces from overseas operations. Additionally, we expect to benefit from increased funding levels on C4ISR, electronic warfare, unmanned systems, and communications programs within our aerospace defense market. In our naval defense market, we expect continued funding for the U.S. shipbuilding program, particularly as it relates to production on the CVN-79 Ford class aircraft carrier.
Commercial Aerospace
Approximately 17% of our revenue is derived from the global commercial aerospace market, including the commercial jet, regional jet, and commercial helicopter markets. Our primary focus in this market is OEM products and services for commercial jets where we provide a combination of flight control and utility actuation systems, sensors, and other sophisticated electronics, as well as shot and laser peening services, to our primary customers, in Boeing and Airbus. Shot and laser peening are also utilized on highly stressed components of turbine engine fan blades, landing gear, and aircraft structures.
The largest driver of our commercial aerospace business is OEM parts, which is highly dependent on new aircraft production. Industry data supports a solid increase in commercial aircraft deliveries over the next few years, as 2011 marked the first year in a multi-year production up-cycle for the commercial aerospace market. In the current cycle, OEM-oriented companies are expected to perform well, due to planned increases in production by Boeing and Airbus, on both legacy and new aircraft, with record-high backlogs on the latter. In addition, according to the International Air Transport Association (IATA), air travel continues to be robust and is likely to reach almost 3.3 billion passenger miles in 2014, although air freight is likely to remain relatively flat. As such, following a solid performance over the past three years, the commercial aerospace business is expected to continue its growth in 2014. Industry experts also expect a modest growth outlook for both regional and business jets.
Oil and Gas
Approximately 18% of our revenue is derived from the oil and gas market. We have a diverse offering of products to the oil and gas market, including critical-function valves, valve systems, large process vessels, control electronics, and surface treatment services on highly stressed metal components. Late in 2012, we expanded our offering to service the emerging shale oil and gas market, including hydraulic fracturing (fracking) techniques, and are now able to support upstream, midstream and downstream product offerings. We also maintain a significant MRO business that has been growing steadily for our pressure-relief valve technologies as refineries opportunistically service or upgrade equipment that has been operating at full capacity in recent years. In 2013, our oil and gas revenues were diversified between the upstream production, processing and environmental solutions business, our global MRO business, and our large capital projects business.

27



The most prevalent driver impacting this market is capital spending by refiners for maintenance, upgrades, capacity expansion, safety improvements, and compliance with environmental regulations, which is experienced by both our domestic and international customers. Refiner profitability and global crude oil prices in general will impact their capital spending levels. In 2013, the oil and gas market continued to be hampered by a reduction in new capital equipment orders due to a lack of capital spending, particularly in international markets, despite a strong rebound in MRO activity.
Crude oil prices, based on West Texas Intermediate (WTI), averaged slightly less than $98/bbl in 2013, reflecting generally moderate economic activity in the U.S. and Europe and increasing North American supply. WTI crude oil prices are forecasted to average $93/bbl in 2014 and $90/bbl during 2015, according to the Energy Information Administration (EIA), reflecting higher total crude oil production in 2013 despite ongoing uncertainty in several international markets. EIA expects the discount of the WTI crude oil price to Brent Crude Oil to average $12/bbl in 2014. This increase in the projected WTI discount reflects increasing uncertainty of the existing refinery infrastructure's ability to absorb growing production of light sweet crude oil in North America at current prices.
Looking ahead, we believe a base level of maintenance capital spending will result in continued MRO demand. Furthermore, as global economies continue to rebound, we anticipate a modest turnaround in our large capital projects business. This includes our complete coker deheading system, which enables safer coke drum operation during the refining process. We also will look to capitalize on opportunities in the emerging shale oil and gas market, where we supply energy production and processing equipment and environmental solutions.
Longer term, as global dependence on natural resources persists, oil exploration deepens, and transport requirements widen, we anticipate additional opportunities will arise for energy products. Additionally, global environmental concerns will drive incremental spending to comply with more stringent emissions standards. We continue to take a long-term view that energy and energy production, transmission, and consumption will provide a foundation of economic growth.
Power Generation
Approximately 18% of our revenue is derived from the commercial nuclear power generation market, where we supply a variety of highly engineered products and services, including reactor coolant pumps, control rod drive mechanisms, valves, motors, spent fuel management, containment doors, bolting solutions, and enterprise resource planning and plant process controls through our Energy segment.
According to the NRC, nuclear power comprises approximately 20% of all the electric power produced in the United States, with 100 reactors operating across 65 nuclear power plants in 31 states. Our strong growth in recent years is a result of the U.S. plant recertification process. Nearly all of the operating U.S. nuclear power plants have applied for or will be applying for 20-year plant life extensions as they reach the end of their current 40-year operating lives. As of December 31, 2013, 73 reactors have received plant life extensions, applications from 14 additional reactors have been submitted and are pending approval, and letters of intent to apply have been submitted from 15 more reactors with expected application submittal dates from 2014 through 2020. During 2012, U.S. courts rejected the NRC’s waste confidence decision, requiring a general environmental impact study and evaluation of the storage of spent nuclear fuel before further life extensions will be approved. As a result of this legislation, no further license approvals (beyond the 73 completed or currently in process) will be granted until the waste confidence decision has been resolved, which is expected to take place in the fourth quarter of 2014. Curtiss-Wright’s diverse product offering may aid any necessary studies or spent fuel management solutions.
Additionally, as assessments and analysis from the events at Fukushima continue to drive safety and reliability improvements, we have seen and continue to expect increased opportunities worldwide for our vast portfolio of advanced nuclear technologies that are specifically designed to enhance plant safety, fire safety, seismic design and controls, spent fuel storage, backup site power, and also comply with other regulatory requirements on existing plants, particularly the Tier 1 regulations proposed by the NRC.
In addition to plant recertifications, there are several emerging factors that could precipitate an expansion in global commercial nuclear power demand over the next several years. The EIA forecasts that worldwide total energy consumption is expected to increase at an average annual rate of 0.3% between 2011 and 2040. Continued growth in global demand for electricity, especially in developing countries with limited supply such as China and India, will require increased capacity. In addition, the continued supply constraints and environmental concerns attributed to the current dependence on fossil fuels have led to a reassessment of the value of nuclear technology as the most efficient and environmentally friendly source of energy available today. As a result, we expect growth opportunities in this market both domestically and internationally, although the timing of orders remains uncertain.

28



Domestically, four new build reactors are under construction, and applications for 22 new reactors at 13 power plants have been submitted to the NRC. Thus far, the Westinghouse AP1000 reactor design, for which we are the sole supplier of reactor coolant pumps, has been selected for 12 of the potential new reactors.
Internationally, new nuclear plant construction is active. Currently, there are approximately 72 new plants under construction in 15 countries, with approximately 172 planned and over 312 more proposed. In particular, China intends to expand its nuclear power capabilities significantly through the construction of new nuclear power plants over the next several years.
As a result, we expect to see continued solid new order activity and increased sales for our vast array of nuclear technologies due to ongoing maintenance and upgrade requirements on operating nuclear plants, a renewed interest in products to aid safety and extend the reliability of existing reactors, and the continued emphasis on global nuclear power construction.
General Industrial
Approximately 17% of our revenue is derived from our diversified offering to the general industrial market, which consists of industrial sensors and control systems, surface treatment services, and motor and machine control systems. We supply our products and service to OEMs and industrial customers, including the transportation, commercial trucking, off-road equipment, construction, HVAC, automotive, and medical industries. Our performance in this market is typically sensitive to the performance of the U.S. and global economies, with gains in global GDP and industrial production leading to higher volumes, particular for our surface treatment services.
For 2013, we experienced a modest increase in our general industrial market, primarily related to improved performance in sensors and controls systems, most notably for electronic throttle controls, shift controls, and traction control systems, as well as surface treatment services including shot peening, engineered coatings, and analytical services. Increased demand for electronic control systems and sensors has been driven by the need for improved operational efficiency, safety, repeatability, reduced emissions, and greater fuel efficiencies to customers worldwide. Looking ahead, based on expectations for steadily improved economic conditions both domestically and internationally in 2014, the general industrial market is likely to experience continued modest growth based on higher volumes across several industries in which we participate.

29



RESULTS OF OPERATIONS
 
 
Year Ended December 31,
 
Percent changes
(In thousands, except percentages)
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
 
 
 
 
 
 
 
 
Sales:
 
 
 
 
 
 
 
 
 
 
Flow Control
 
$
1,299,679

 
$
1,095,349

 
$
1,060,774

 
19
 %
 
3
 %
Controls
 
898,168

 
726,678

 
709,159

 
24
 %
 
2
 %
Surface Technologies
 
312,924

 
275,689

 
246,809

 
14
 %
 
12
 %
Total sales
 
$
2,510,771

 
$
2,097,716

 
$
2,016,742

 
20
 %
 
4
 %
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
 
 
 
Flow Control
 
$
116,510

 
$
78,779

 
$
103,421

 
48
 %
 
(24
)%
Controls
 
108,558

 
86,515

 
75,423

 
25
 %
 
15
 %
Surface Technologies
 
50,992

 
27,494

 
31,476

 
85
 %
 
(13
)%
Corporate and eliminations
 
(42,441
)
 
(31,342
)
 
(23,466
)
 
(35
)%
 
(34
)%
Total operating income
 
$
233,619

 
$
161,446

 
$
186,854

 
45
 %
 
(14
)%
 
 
 
 
 
 
 
 
 
 
 
Interest expense
 
(37,020
)
 
(26,329
)
 
(20,834
)
 
41
 %
 
26
 %
Other income, net
 
1,354

 
245

 
862

 
453
 %
 
(72
)%
 
 
 
 
 
 
 
 
 
 
 
Earnings before income taxes
 
197,953

 
135,362

 
166,882

 
46
 %
 
(19
)%
Provision for income taxes
 
(59,972
)
 
(43,073
)
 
(48,262
)
 
39
 %
 
(11
)%
Earnings from continuing operations
 
$
137,981

 
$
92,289

 
$
118,620

 
50
 %
 
(22
)%
 
 
 
 
 
 
 
 
 
 
 
New orders
 
$
2,508,432

 
$
1,981,010

 
$
2,029,414

 
 
 
 
Backlog
 
$
1,715,622

 
$
1,653,942

 
$
1,694,650

 
 
 
 
Sales
Sales increased $413 million, or 20%, in 2013, as compared with 2012. The increase in sales in 2013 is primarily due to an increase in sales in our Flow Control and Controls segments of $204 million and $171 million, respectively. The increase in sales in our Flow Control and Controls segment were primarily due to the incremental impact of acquisitions of $204 million and $170 million, respectively. The increase in sales in our Surface Technologies segment was due to the incremental impact of acquisitions of $26 million and to a lesser extent strong organic demand for our shot peening, coatings, and analytical services.
Sales increased $81 million, or 4%, in 2012, as compared with 2011. The increase in sales in 2012 is primarily due to an increase in sales in our Flow Control and Surface Technologies segments of $35 million and $29 million, respectively. The increase in sales in our Flow Control segment was primarily due to the incremental impact of acquisitions of $50 million, while the increase in sales in our Surface Technologies segment was due to strong demand for our shot peening, coatings, and analytical services and the incremental impact of acquisitions.

30



Net sales by market
 
 
Year Ended December 31,
 
Percent changes
(In thousands, except percentages)
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
 
 
 
 
 
 
 
 
Defense markets:
 
 
 
 
 
 
 
 
 
 
Aerospace
 
$
277,593

 
$
307,263

 
$
310,515

 
(10
)%
 
(1
)%
Ground
 
93,472

 
107,411

 
119,381

 
(13
)%
 
(10
)%
Naval
 
373,095

 
337,698

 
362,826

 
10
 %
 
(7
)%
Other
 
16,711

 
27,146

 
32,534

 
(38
)%
 
(17
)%
Total Defense
 
$
760,871

 
$
779,518

 
$
825,256

 
(2
)%
 
(6
)%
 
 
 
 
 
 
 
 
 
 
 
Commercial markets:
 
 
 
 
 
 
 
 
 
 
Aerospace
 
$
418,364

 
$
363,832

 
$
299,816

 
15
 %
 
21
 %
Oil and Gas
 
448,418

 
253,745

 
241,369

 
77
 %
 
5
 %
Power Generation
 
462,041

 
433,747

 
385,452

 
7
 %
 
13
 %
General Industrial
 
421,077

 
266,874

 
264,849

 
58
 %
 
1
 %
Total Commercial
 
$
1,749,900

 
$
1,318,198

 
$
1,191,486

 
33
 %
 
11
 %
 
 
 
 
 
 
 
 
 
 
 
Total Curtiss-Wright
 
$
2,510,771

 
$
2,097,716

 
$
2,016,742

 
20
 %
 
4
 %
Components of sales and operating income growth (decrease):
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
Sales
 
Operating
Income
 
Sales
 
Operating
Income
Organic
 
1
%
 
32
%
 
 %
 
(12
)%
Acquisitions/divestitures
 
19
%
 
11
%
 
5
 %
 
(1
)%
Foreign currency
 
%
 
2
%
 
(1
)%
 
(1
)%
Total
 
20
%
 
45
%
 
4
 %
 
(14
)%
Year ended December 31, 2013 compared to year ended December 31, 2012
Sales
Defense sales decreased $19 million, or 2%, as compared to the prior year period, primarily due to lower sales in the aerospace defense and ground defense markets. In our Flow Control segment, naval defense sales increased due to increased production on the CVN-79, the ramping up of production on the Virginia Class submarine program, and a new shipboard helicopter handling systems contract. This was partially offset by lower levels of production on the DDG-1000 and DDG-51 destroyer programs and completion of production on the Advanced Arresting Gear program. In our Controls segment, sales decreased primarily in the aerospace defense and ground defense market. The decrease in sales in the aerospace defense market was primarily due to lower production levels on the Black Hawk and lower sales of embedded computing and sensors and controls products supporting various helicopter programs. In the ground defense market, sales decreased primarily due to lower production levels on the Bradley platform and lower comparable sales of embedded computing products.
Commercial sales increased $432 million, or 33%, to $1,750 million, as compared to the prior year period, mainly due to the incremental impact of acquisitions, which primarily contributed to higher sales in the oil and gas and general industrial markets. Organic commercial sales increased 3% from the comparable prior year period. In our Flow Control segment, organic commercial sales decreased due to lower sales in the general industrial market as a result of a previously announced and expected customer loss in the commercial heating, ventilation, and air conditioning (HVAC) business. In our Controls segment, organic commercial sales increased primarily due to higher sales of both our flight control products on all major Boeing aircraft and specialty production support on Boeing’s 787 aircraft in the commercial aerospace market. In our Surface

31



Technologies segment, organic commercial sales increased primarily due to an increase in volume in our coatings services as we continue to benefit from the ramp up in OEM production rates.
Operating income
During the year ended December 31, 2013, operating income increased $72 million, or 45%, to $234 million, compared with the same period in 2012, while operating margin increased 160 basis points to 9.3%. Acquisitions contributed incremental operating income of $17 million but were 100 basis points dilutive to operating margin. Acquisitions are generally dilutive to operating margin during their first year due to purchase price accounting adjustments and higher levels of intangible amortization expense. On a segment basis, the increase in operating income in our Flow Control segment of $38 million, or 48%, to $117 million, was primarily due to certain charges that occurred in the prior year period that did not recur in the current year period, as described in the Flow Control results of operations discussion, and the incremental contribution from our Cimarron acquisition. In our Control's segment, operating income increased $22 million, or 25%, to $109 million, primarily due to a $7 million incremental impact of acquisitions, a $3 million curtailment gain as a result of changes in our U.K. Pension Plans, and improved profitability in our defense businesses as a result of prior year restructuring initiatives. In our Surface Technologies segment, operating income increased $23 million, or 85%, to $51 million, due to $12 million of prior year restructuring charges that did not recur in the current year and related benefits of the restructuring activities, as well as increased organic coating sales, primarily in the commercial aerospace market.
Non-segment operating expense
Non-segment operating expense increased $11 million, to $42 million, primarily due to higher pension expenses and higher foreign currency exchange losses.
Interest expense
Interest expense increased $11 million, to $37 million, primarily due to the issuance of $400 million of Senior Notes in February 2013 and $100 million of Senior Notes in September 2013. During 2013, the Corporation's average debt outstanding and average borrowing rate was $991 million and 3.4%, respectively, compared to $602 million, and 3.9%, in the prior year period.
Effective tax rate
Our effective tax rates for 2013 and 2012 were 30.3% and 31.8%, respectively. The decrease in the effective tax rate in 2013, as compared to 2012, is primarily due to a reversal of certain valuation allowances as a result of improved profitability and an increase in research and development tax credits from certain foreign operations.
Net earnings
Net earnings increased $46 million, to $138 million, in 2013, as compared to the prior year period, primarily due to higher operating income in all of our segments, partially offset by the higher pension and interest expense discussed above.
Comprehensive income
Pension and Postretirement adjustments
For 2013, the $87 million pension and postretirement gain in other comprehensive income was mainly due to the actuarial gain resulting from the annual year-end remeasurement. This was driven by an increase in the CW Plan discount rate from 4.0% to 4.75% and favorable asset return performance.  In May 2013, the Company’s Board of Directors approved an amendment to the CW Pension Plan. The amendment, which is effective January 1, 2014, resulted in a gain to other comprehensive income, net of tax, of $3 million. In addition, the amendment to the Metal Improvement Company Salaried Staff pension scheme (U.K.) and the Penny & Giles Pension Plan (U.K.), resulted in a gain in other comprehensive income, net of tax, of $2 million.
Foreign Currency Translation adjustments
The decrease in foreign currency translation adjustments to comprehensive income of $33 million to a $7 million loss for the twelve months ended December 31, 2013 is primarily due to a decrease in the Canadian exchange rate versus the U.S. dollar during the twelve month period ended December 31, 2013 as compared to an increase in the Canadian exchange rate versus the U.S. dollar during the twelve month period ended December 31, 2012.



32



Backlog and new orders
Backlog increased 4% to $1,716 million at December 31, 2013 from $1,654 million at December 31, 2012. New orders increased $527 million to $2,508 million at December 31, 2013 primarily due to the incremental impact of acquisitions of $397 million.
Year ended December 31, 2012 compared to year ended December 31, 2011
Sales
Defense sales decreased $46 million, or 6%, as compared to the prior year period, primarily due to lower sales in the naval and ground defense markets. In our Flow Control segment, lower defense sales were due to the winding down of certain naval defense programs, partially offset by increased production on the CVN-79. In our Controls segment, sales decreased primarily in the ground defense market, due to lower production levels on the TOW Improved Target Acquisition System (ITAS) and Abrams platforms, slightly offset by higher sales of turret drive systems to international customers. Defense sales in our Surface Technologies segment were essentially flat.
Commercial sales increased $127 million, or 11%, as compared to the prior year period, driven by increased sales across all of our major commercial markets. In our Flow Control segment, the incremental impact of acquisitions contributed favorably to our power generation market, which was somewhat offset by lower sales due to slower orders from our (HVAC) customers in the general industrial market. In our Controls segment, the incremental impact of acquisitions contributed to increased sales in the general industrial market. In addition, higher sales of our flight control products and the incremental impact of acquisitions contributed favorably to sales in the commercial aerospace market. In our Surface Technologies segment, strong demand from our base businesses and the incremental impact from acquisitions contributed to higher sales in the commercial aerospace and general industrial markets, respectively.
Operating income
Operating income decreased $25 million, or 14%, as compared to the prior year period. In our Flow Control segment, operating income decreased $25 million to $79 million, impacted by certain one-time items, including a strike, additional assembly and preparation for shipment costs related to the Reactor Coolant Pumps (RCPs) for the AP1000 program, and restructuring costs. In our Controls segment, operating income grew $11 million to $87 million, as a result of our cost reduction and containment efforts and the expected accretive impact and operational improvements from our ACRA acquisition. In our Surface Technologies segment, operating income decreased $4 million to $27 million, and was negatively impacted by $12 million of restructuring costs, of which $5 million were non-cash charges as we re-aligned our business for strategic growth. Excluding restructuring costs, operating income grew $8 million, to $40 million in our Surface Technologies segment. Acquisitions, net of divestitures, were $3 million dilutive to year-to-date operating income, while the effects of foreign currency translation were not significant.
Non-segment operating expense
Non-segment operating expense increased $8 million to $31 million, primarily due to higher pension expense. The increase in pension expense was primarily due to a decrease in the discount rate of our pension benefit obligation.
Interest expense
Interest expense increased $5 million to $26 million in 2012, primarily due to higher average debt levels and borrowing rates compared to the same period in 2011.
Effective tax rate
Our effective tax rates for 2012 and 2011 were 31.8%, and 28.9%, respectively. The increase in the effective tax rate in 2012, as compared to 2011, is primarily due to a $4.1 million research and development tax credit recognized in 2011 that did not recur in the current year period.
Net earnings
Net earnings decreased $26 million to $92 million in 2012, as compared to the prior year period, primarily due to the impacts of the strike and additional investments on the AP1000 program within our Flow Control segment, restructuring costs in our Surface Technologies segment, and higher interest expense and effective tax rates discussed above.


33



Comprehensive income
Pension and Postretirement adjustments
For 2012, the $16 million pension and postretirement loss in other comprehensive income was mainly due to the actuarial loss resulting from the annual year-end remeasurement. This was driven by a decrease in the CW Plan discount rate from 4.5% to 4.0% and was partially offset by favorable asset return performance. 
Foreign Currency Translation adjustments
The increase in foreign currency translation adjustments to comprehensive income of $44 million, to $26 million in comprehensive income, for the twelve months ended December 31, 2012 is primarily due to an increase in the Canadian, British Pound, and Euro exchange rates during the twelve month period ended December 31, 2012 as compared to an decrease in the Canadian, British Pound, and Euro exchange rate during the twelve month period ended December 31, 2011.
Backlog and new orders
Backlog decreased 2% to $1,654 million at December 31, 2012 from $1,695 million at December 31, 2011. New orders decreased $48 million in 2012 as compared to the prior year period, primarily due to the timing of funding on certain naval defense programs and lower demand of capital refinery projects and services in the oil and gas market. Acquisitions, net of divestitures, contributed $86 million of incremental new orders.
RESULTS BY BUSINESS SEGMENT
Flow Control
The following tables summarize sales, operating income and margin, and new orders, and certain items impacting comparability within the Flow Control segment.
 
 
Year Ended December 31,
 
 
 
 
(In thousands, except percentages)
 
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
 
 
 
 
 
 
 
 
 
 
 
Sales
 
$
1,299,679

 
$
1,095,349

 
$
1,060,774

 
19
 %
 
3
 %
Operating income
 
116,510

 
78,779

 
103,421

 
48
 %
 
(24
)%
Operating margin
 
9.0
%
 
7.2
%
 
9.7
%
 
180
 bps
 
(250) bps

Items impacting comparability
 
 
 
 
 
 
 
 
 
 
Restructuring charges
 

 
(3,690
)
 
(200
)
 
NM

 
NM

Change in estimate:
 
 
 
 
 
 
 
 
 
 
AP1000
 

 
(23,684
)
 
(9,721
)
 
NM

 
NM

Tech Transfer
 

 
14,213

 

 
NM

 
NM

Impacts of strike (1):
 
 
 
(11,348
)
 
 
 
 
 
 
New orders
 
$
1,233,786

 
$
977,377

 
$
1,072,969

 
26
 %
 
(9
)%
Backlog
 
$
1,058,726

 
$
1,087,689

 
$
1,154,147

 
(3
)%
 
(6
)%
NM - not meaningful
 
 
 
 
 
 
 
 
 
 

(1)
On August 24, 2012, workers at EMD's Cheswick, Pennsylvania facility went on strike. The financial impacts of the strike were an $18 million and $6 million shift in revenue and operating income, respectively, from 2012 to 2013, due to the temporary suspension of work and an additional $5 million unfavorable impact to operating income as a result of unrecoverable absorption of overhead costs. On September 24, 2012, the Company ratified an agreement with the union to end the strike.




34



Components of sales and operating income growth (decrease):
 
 
2013 vs 2012
 
2012 vs 2011
 
 
Sales
 
Operating
Income
 
Sales
 
Operating
Income
Organic
 
 %
 
36
%
 
 %
 
(23
)%
Acquisitions/divestitures
 
19
 %
 
11
%
 
4
 %
 
(1
)%
Foreign currency
 
 %
 
1
%
 
(1
)%
 
 %
Total
 
19
 %
 
48
%
 
3
 %
 
(24
)%

Year ended December 31, 2013 compared to year ended December 31, 2012
Sales
Sales increased $204 million, or 19%, to $1,300 million, as compared to the prior year period, primarily due to the incremental impact of our Cimarron, Phönix, and AP Services acquisitions, which contributed $135 million, $53 million, and $17 million, of incremental sales, respectively.
Sales in the defense market increased 6% due to increased production on the CVN -79 aircraft carrier program, the ramping up of production on the Virginia Class submarine program, and a new shipboard helicopter handling systems contract. This was partially offset by lower levels of production on the DDG-1000 and DDG-51 destroyer programs, and completion of production on the Advanced Arresting Gear program.
Sales in the commercial market increased 24%, primarily due to the incremental impact of our Cimarron and Phönix acquisitions, which favorably impacted sales in the oil and gas market, as well as our AP Services acquisition, which favorably impacted sales in the power generation market. In the power generation market, excluding the impact of our AP Services acquisition, higher sales of instrumentation and control products and deliveries of our spent fuel management NETCO SNAP-IN® product used in existing operating reactors, more than offset competitive pressure from low natural gas prices and fewer plant outages. Sales in the oil and gas market were essentially flat, excluding the impact of Phönix and Cimarron acquisitions, as increased pressure relief valve sales were mostly offset by lower levels of production for international capital refinery products. In the general industrial market, lower sales were primarily due to a previously announced customer loss.
Operating income
Operating income increased $38 million, or 48%, to $117 million, and operating margin increased 180 basis points to 9.0%. Acquisitions contributed $9 million of incremental operating income. Excluding the items impacting comparability noted in the first table above and the contributions from acquisitions, operating income was essentially flat as higher compensation costs partially offset improved performance in our oil and gas division as a result of in-sourcing Cimarron manufacturing.
Backlog and new orders
Backlog decreased $29 million to $1,059 million as compared to the prior year period. New orders increased $256 million to $1,234 million, from the prior year period, primarily due to incremental new orders from acquisitions of $210 million.
Year ended December 31, 2012 compared to year ended December 31, 2011
Sales
Sales increased $35 million, or 3%, as compared to the prior year period, primarily due to higher sales in the commercial market of 7%, somewhat offset by lower sales of 6% in the defense market. The incremental impact of acquisitions, net of divestitures, contributed $40 million, or 4%, of incremental sales, while the effects of foreign currency rate changes decreased current period sales by $2 million or less than 1%.

35



The increase in sales in our commercial market was primarily due to the incremental effects of our 2011 acquisitions of Anatec and LMT, which favorably impacted sales in our power generation market. To a lesser extent, the incremental impact of our 2011 Douglas acquisition, a supplier of aviation towing tractors, improved sales in our commercial aerospace market. In our oil and gas market, increased aftermarket MRO and pressure relief valve projects and the incremental impact of our Cimarron acquisition more than offset the lower orders for capital refinery projects and services. In our general industrial market, sales decreased due to slower orders from our HVAC customers due to slowing economic conditions.
The decrease in sales in our defense market was primarily due to the temporary suspension of production on certain naval defense programs as a result of the strike, which shifted revenue recognition milestones into 2013. In addition, the timing of production on the Virginia class submarine program, the completion of production on the Advanced Arresting Gear and the Electromagnetic Aircraft Launching System programs and certain aircraft handling systems programs, contributed to lower naval defense sales.
Operating income
Operating income decreased $25 million, or 24%, to $79 million, as compared to the prior year period. Operating income was unfavorably impacted by several factors including the impact of the strike, unanticipated additional costs in connection with the assembly and shipment of the RCPs for the China AP1000 nuclear reactor of $24 million, and restructuring charges of $4 million. Somewhat offsetting these unfavorable items was a favorable change in estimate of our cost assumptions on the AP1000 technology transfer contract. The change in estimate was primarily due to the achievement of several significant milestones for the AP1000 program, including the final qualification of the RCPs and a reduced scope of work being performed by third party suppliers. Excluding the impact of these items, operating income decreased slightly primarily due to higher than anticipated costs for the construction of super vessels and lower orders for capital refinery products and services in our oil and gas business. Acquisitions reduced operating income by $2 million.
Backlog and new orders
Backlog decreased $66 million to $1,088 million as compared to the prior year period. New orders decreased $96 million, primarily due to the timing of funding on certain naval defense programs and lower demand of capital refinery projects and services in the oil and gas market. Acquisitions contributed $40 million to new orders, while the prior year period included $18 million of orders associated with a divested business line.
Controls
The following tables summarize sales, operating income and margin, and new orders, and certain items impacting comparability within the Controls segment.
 
 
Year Ended December 31,
 
Percent Changes
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
 
 
(In thousands, except percentages)
Sales
 
$
898,168

 
$
726,678

 
$
709,159

 
24
%
 
2
%
Operating income
 
108,558

 
86,515

 
75,423

 
25
%
 
15
%
Operating margin
 
12.1
%
 
11.9
%
 
10.6
%
 
20
 bps

130
 bps
Restructuring charges
 

 
(3,426
)
 

 
NM

 
NM

Curtailment gain
 
2,818

 

 

 
NM

 
NM

New orders
 
$
961,246

 
$
727,354

 
$
709,194

 
32
%
 
3
%
Backlog
 
$
653,466

 
$
563,299

 
$
538,139

 
16
%
 
5
%
NM - not meaningful
 
 
 
 
 
 
 
 
 
 






36



Components of sales and operating income growth (decrease):
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
Sales
 
Operating
Income
 
Sales
 
Operating
Income
Organic
 
 %
 
13
%
 
(2
)%
 
18
 %
Acquisitions/divestitures
 
24
 %
 
8
%
 
5
 %
 
(3
)%
Foreign currency
 
 %
 
4
%
 
(1
)%
 
 %
Total
 
24
 %
 
25
%
 
2
 %
 
15
 %
Year ended December 31, 2013 compared to year ended December 31, 2012
Sales
Sales increased $171 million, or 24%, to $898 million, from the comparable prior year period, primarily due to the incremental impact of our Williams Controls, PG Drives, Exlar, Arens, and Parvus acquisitions, which contributed $59 million, $46 million, $44 million, $14 million, and $7 million of incremental sales, respectively.
Defense sales decreased 7%, as compared to the prior year period, primarily in the defense aerospace market, due to lower production levels on the Black Hawk and Global Hawk, lower sales of embedded computing products on helicopter programs, and lower sales of sensing products on other foreign military aircraft. In the ground defense market, sales decreased primarily due to lower production levels on the Bradley platform, lower comparable sales of turret drive systems, and lower sales of embedded computing products.
The increase in sales in the commercial market was primarily due to the aforementioned acquisitions coupled with strong organic growth in the commercial aerospace market. Sales in the commercial aerospace market increased primarily due to higher sales of our flight control products on all major Boeing aircraft, as well as strong demand for sensor and control products serving the regional jet and commercial helicopter markets.
Operating income
Operating income increased $22 million, or 25%, to $109 million, compared with the same period in 2012, while operating margin was essentially flat at 12.1%. Acquisitions contributed $7.1 million of operating income and were 180 basis points dilutive to current period results. Current year results were favorably impacted by a curtailment gain as a result of a change in our U.K. pension plans and certain licensing agreements that were entered into during the year.
Excluding the items impacting comparability noted in the first table above, contributions from acquisitions, and foreign currency translation, operating income, and margin were essentially flat as benefits driven by our prior year restructuring initiatives within our defense businesses offset acquisition dilution and the impact of purchase price accounting adjustments from our fourth quarter 2013 acquisitions.
Backlog and new orders
Backlog increased $90 million to $653 million at December 31, 2013 from $563 million at December 31, 2012. New orders increased $234 million, as compared to the prior year, primarily due to the incremental impact of acquisitions of $161 million.
Year ended December 31, 2012 compared to year ended December 31, 2011
Sales
Sales increased $18 million, or 2%, as compared to the prior year period, driven by increases in the commercial markets of 18%, partially offset by lower sales in the defense markets of 6%. Acquisitions contributed $33 million, or 5%, to the increase in sales, while the effect of foreign currency translation decreased sales by $5 million, or 1%.
The increase in sales in the commercial market was primarily due to 22% growth in the commercial aerospace market due to higher sales of both our flight control products on Boeing aircraft and emergent and specialty production support on Boeing’s 787 aircraft. In addition, strong demand for sensor and control products serving the regional jet and commercial helicopter markets contributed to increased commercial aerospace sales. To a lesser extent, the incremental effect of repairs and overhaul sales from our ACRA acquisition contributed favorably to the commercial aerospace market.

37



The decrease in sales in the defense market was primarily due to lower production levels on the TOW ITAS and Abrams platform in the ground defense market. To a lesser extent, sales decreased in the defense aerospace market, primarily due to the winding down of the Global Hawk program and lower production work on the V-22 Osprey program.
Operating income
Operating income increased $11 million, or 15%, to $87 million, as compared to the prior year period. Operating margin increased 130 basis points from the prior year period to 11.9%, primarily due to our cost containment efforts and the expected accretive impact and operational improvements from our ACRA acquisition. ACRA had a dilutive impact on operating income in the comparable prior period due to higher intangible amortization expenses and purchase accounting adjustments. Acquisitions completed in the fourth quarter of 2012 had a dilutive impact on operating income of $2 million.
Backlog and new orders
Backlog increased 5% to $563 million at December 31, 2012 from $538 million at December 31, 2011. New orders increased $18 million, as compared to the prior year period, primarily due to the incremental impact of acquisitions of $47 million somewhat offset by lower orders in our defense business.
Surface Technologies
The following tables summarize sales, operating income and margin, new orders, and certain items impacting comparability within the Surface Technologies segment.
 
 
Year Ended December 31,
 
Percent Changes
(In thousands, except percentages)
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
 
 
 
 
 
 
 
 
 
 
 
Sales
 
$
312,924

 
$
275,689

 
$
246,809

 
14
%
 
12
 %
Operating income
 
50,992

 
27,494

 
31,476

 
85
%
 
(13
)%
Operating margin
 
16.3
%
 
10.0
%
 
12.8
%
 
630
 bps
 
(280) bps

Restructuring and impairment charges
 

 
(12,085
)
 

 
NM

 
NM

New orders
 
$
313,400

 
$
276,279

 
$
247,251

 
13
%
 
12
 %
NM - not meaningful
 
 
 
 
 
 
 


 


Components of sales and operating income growth (decrease):
 
 
2013 vs. 2012
 
2012 vs. 2011
 
 
Sales
 
Operating
Income
 
Sales
 
Operating
Income
Organic
 
4
%
 
82
 %
 
6
 %
 
(12
)%
Acquisitions
 
10
%
 
4
 %
 
7
 %
 
1
 %
Foreign currency
 
%
 
(1
)%
 
(1
)%
 
(2
)%
Total
 
14
%
 
85
 %
 
12
 %
 
(13
)%

38



Year ended December 31, 2013 compared to year ended December 31, 2012
Sales
Sales increased $37 million, or 14%, to $313 million, from the comparable prior year period, primarily due to a $26 million incremental impact from our Gartner acquisition, which contributed incremental sales to the oil and gas and general industrial markets. In addition, sales in the commercial aerospace market were up 10% due to an increase in volume in coatings, shot peening, and laser peening services as we continue to benefit from the ramp up in OEM production rates. This performance was partially offset by lower sales in the aerospace defense market for our shot and laser peening services.
Operating income
Operating income increased $23 million, or 85%, to $51 million and operating margin increased 630 basis points to 16.3%.  Our Gartner acquisition contributed $1 million of incremental operating income and was 110 basis points dilutive to current period results.  
Excluding the $12 million of restructuring charges in the prior year, and contributions from acquisitions and foreign currency translation in the current year, operating income and margin increased primarily due to operational benefits as the result of closing an underperforming facility in the prior year.
New orders
New orders increased $37 million to $313 million, compared with the same period in 2012, primarily due to the incremental impact of our Gartner acquisition.
Year ended December 31, 2012 compared to year ended December 31, 2011
Sales
Sales increased $29 million, or 12%, as compared to the prior year period, due to increased demand across all of our major lines of business and markets, particularly for our shot peening, coatings, and analytical services. Sales in the commercial aerospace and general industrial market increased 18% and 10%, respectively. Acquisitions contributed $17 million to current year sales while the effects of foreign currency translation decreased sales $3 million.
Operating income
Operating income, excluding the effects of restructuring charges, increased $8 million, or 26%, to $40 million, and operating margin increased to 14.4%, a 160 basis point improvement over the prior year. The improvement was driven primarily by increased sales volume resulting in favorable absorption of fixed overhead costs, mainly in our shot peening and coatings businesses.
New orders
New orders increased $29 million, from the prior year, due to increased orders for coatings and shot peening services. Acquisitions contributed $17 million of new orders to the current period.
Liquidity and Capital Resources
Sources and Uses of Cash
We derive the majority of our operating cash inflow from receipts on the sale of goods and services and cash outflow for the procurement of materials and labor; cash flow is therefore subject to market fluctuations and conditions. A substantial portion of our business is in the defense sector, which is characterized by long-term contracts. Most of our long-term contracts allow for several billing points (progress or milestone) that provide us with cash receipts as costs are incurred throughout the project rather than upon contract completion, thereby reducing working capital requirements.

39



Consolidated Statement of Cash Flows
 
December 31, 2013
 
December 31, 2012
 
December 31, 2011
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
237,827

 
$
152,474

 
$
201,853

Investing activities
(313,692
)
 
(492,998
)
 
(251,827
)
Financing activities
140,138

 
254,241

 
179,804

Effect of exchange rates
(1,002
)
 
3,919

 
(3,562
)
Net increase (decrease) in cash and cash equivalents
$
63,271

 
$
(82,364
)
 
$
126,268

Year ended December 31, 2013 compared to year ended December 31, 2012
Cash provided by operating activities increased $85 million to $238 million during the twelve months ended December 31, 2013, as compared to the prior year period, primarily due to higher cash earnings, the timing of vendor payments in the current year, and the timing of advanced collections.
Investing Activities
Capital Expenditures
Our capital expenditures were $72 million in 2013 as compared to $83 million in 2012. Capital expenditures were lower in 2013, as compared to 2012, primarily due to our Flight Systems facility expansion in 2012.
Acquisitions
During 2013 we acquired five businesses and expect to continue to seek "tuck in" acquisitions that are consistent with our long-term growth strategy. A combination of cash resources, including cash on hand, funds available under our credit agreement, and proceeds from our Senior Notes, were utilized to fund the acquisitions, which totaled $236 million. In 2012, we acquired eight businesses with a total purchase price of $460 million.
Additional acquisitions will depend, in part, on the availability of financial resources at a cost of capital that meet our stringent criteria. As such, future acquisitions, if any, may be funded through the use of our cash and cash equivalents, through additional financing available under the credit agreement, or through new financing alternatives.

40



Financing Activities
Debt Issuances
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 were issued on September 26, 2013 that mature on September 26, 2028. The 2013 Notes are senior unsecured obligations, 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%. The debt to capitalization ratio is calculated using the same formula for all of the Corporation's debt agreements and is a measure of the Corporation's indebtedness (as defined per the Notes Purchase Agreement and Credit Agreement) to capitalization, where capitalization equals debt plus equity. The Corporation had the ability to borrow additional debt of $1.3 billion without violating our debt to capitalization covenant. The 2013 Notes also contain a cross default provision with respect to the Corporation’s other senior indebtedness.  
In September 2013, we repaid the $125 million 2003 senior notes that had matured.
Revolving Credit Agreement
As of December 31, 2013, the Corporation had $50 million of borrowings under the 2012 Senior Unsecured Revolving Credit Agreement (the Credit Agreement or credit facility) and $42 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement at December 31, 2013 was $408 million, which could be borrowed in full without violating any of our debt covenants. 
Repurchase of Common Stock
On September 28, 2011, the Company received authorization from its board of directors to enter into a share repurchase program. The share repurchase program authorizes the Company to purchase up to approximately 3,000,000 shares of its common stock, in addition to approximately 690,000 shares remaining under a previously authorized share repurchase program, and is subject to a $100 million repurchase limitation.
The Company did not repurchase any shares of its common stock during 2013. During the twelve months ended December 31, 2012, the Company repurchased approximately 830,000 shares of our common stock for $26 million.
Dividends
In the second quarter of 2013, the Corporation increased its quarterly dividend to ten cents ($0.10) a share, an 11.1% increase over the prior year dividend. Cash used to make dividend payments during the twelve months ended December 31, 2013 and 2012 were $18 million and $16 million, respectively.
Year ended December 31, 2012 compared to year ended December 31, 2011
Operating Activities
Cash provided by operating activities decreased $49 million to $152 million during the twelve months ended December 31, 2012 as compared to the prior year period, primarily due to lower advanced payments on long-term contracts and, to a lesser extent, lower net earnings.
Investing Activities
Capital Expenditures
Our capital expenditures were $83 million in 2012 as compared to $84 million in 2011. Capital expenditures in 2012, as compared to 2011, were essentially flat as facility expansions in 2011 within our oil and gas and commercial aerospace businesses were offset by higher investments in 2012 in the Surface Technologies segment for laser peening equipment and international facility improvements. Capital expenditures relate primarily to new and replacement machinery and equipment, the expansion of new product lines within the business segments, and the construction of new facilities and upgrade of existing facilities.

41



Acquisitions and divestitures of businesses
During both 2012 and 2011, we acquired eight businesses and expect to continue to seek acquisitions that are consistent with our long-term growth strategy. A combination of cash resources, including cash on hand, funds available under our credit agreement, and proceeds from our Senior Notes were utilized to fund our acquisitions, which totaled $460 million and $178 million in 2012 and 2011, respectively. Additional acquisitions will depend, in part, on the availability of financial resources at a cost of capital that meet our stringent criteria. As such, future acquisitions, if any, may be funded through the use of our cash and cash equivalents, through additional financing available under the credit agreement, or through new financing alternatives.
Our 2012 heat treat divestiture resulted in $52 million of cash proceeds while divestitures in 2011 resulted in $8 million of proceeds.
Financing Activities
Debt Issuances
In August 2012, we amended and refinanced our existing credit facility by entering into a Third Amended and Restated Credit Agreement (Credit Agreement) with a syndicate of financial institutions, led by Bank of America N.A., Wells Fargo, N.A, and JP Morgan Chase Bank, N.A. The proceeds available under the Credit Agreement are to be used for working capital, internal growth initiatives, funding of future acquisitions, and general corporate purposes. Under the terms of the Credit Agreement, we have a borrowing capacity of $500 million. In addition, the Credit Agreement provides an accordion feature which allows us to borrow an additional $100 million. As of December 30, 2012, we had $47 million in letters of credit supported by the credit facility and $287 million of borrowings under the credit facility. The unused credit available under the credit facility at December 31, 2012 was $166 million, which we had the ability to borrow in full without violating our debt to capitalization covenant.
The Credit Agreement contains covenants that we consider usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated net debt-to-capitalization ratio of 60 percent. The agreement has customary events of default, such as non-payment of principal when due; nonpayment of interest, fees, or other amounts; cross-payment default and cross-acceleration with the Corporation’s other senior indebtedness.
Borrowings under the Credit Agreement will accrue interest based on (i) Libor or (ii) a base rate of the highest of (a) the federal funds rate plus 0.5%, (b) BofA’s announced prime rate or (c) the Eurocurrency rate plus 1%, plus a margin. The interest rate and level of facility fees are dependent on certain financial ratios, as defined in the Credit Agreement. The Credit Agreement also provides customary fees, including administrative agent and commitment fees. In connection with the Credit Agreement, we paid customary transaction fees that have been deferred and are being amortized over the term of the Credit Agreement.
On December 8, 2011, we issued $300 million of Senior Notes (the "2011 Notes"). The 2011 Notes consist of $100 million of 3.84% Senior Notes that mature on December 1, 2021 and $200 million of 4.24% Senior Series Notes that mature on December 1, 2026. The 2011 Notes are senior unsecured obligations, equal in right of payment to our existing senior indebtedness. We, at our option, can prepay at any time all or any part of our 2011 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with our 2011 Notes, we paid customary fees that have been deferred and are being amortized over the term of our 2011 Notes. We are required under the Note Purchase Agreement to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. The 2011 Notes also contain a cross default provision with our other senior indebtedness.
Repurchase of Common Stock
During the twelve months ended December 31, 2012, the Company repurchased approximately 830,000 shares of our common stock for $26 million. During the twelve months ended December 31, 2011, the Company repurchased 261,000 shares of our common stock for $8 million.
Dividends
In the second quarter of 2012, the Corporation increased its quarterly dividend to nine cents ($0.09) a share, a 12.5% increase over the prior year dividend. Cash used to make dividend payments during the twelve months ended December 31, 2012 and 2011 were $15 million, and $15 million, respectively.

42



Prior debt issuances
On December 1, 2005, we issued $150 million of 5.51% Senior Series Notes (the "2005 Notes"). Our 2005 Notes mature on December 1, 2017 and are senior unsecured obligations, equal in right of payment to our existing senior indebtedness. We, at our option, can prepay at any time all or any part of our 2005 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with our 2005 Notes, we paid customary fees that have been deferred and are being amortized over the term of our 2005 Notes. We are required under the Note Purchase Agreement to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. The 2005 Notes also contains a cross default provision with our other senior indebtedness.
On September 25, 2003, we issued $200 million of Senior Notes (the "2003 Notes"). The 2003 Notes consisted of $75 million of 5.13% Senior Notes that matured and were repaid on September 25, 2010 and $125 million of 5.74% Senior Notes that matured and were repaid on September 25, 2013.
Capital Resources
Cash in Foreign Jurisdictions
Cash and cash equivalents at December 31, 2013 were $175 million, of which $149 million were held by foreign subsidiaries. Our Canadian subsidiaries held a substantial portion of the Company's cash and cash equivalents, approximately $73 million at December 31, 2013. Our domestic operations generate significant cash flow from operations, however, such amounts were used to pay-down the Company's revolving credit facility and for general corporate purposes including funding the purchase of acquisitions. There are no legal or economic restrictions, absent certain regulatory approvals in China, where less than $4 million of our foreign cash resides, on the ability of any of our subsidiaries to transfer funds. The Company regularly assesses its cash needs and the available sources to fund these needs. Our assessment does not demonstrate the need to repatriate foreign cash and cash equivalents to fund U.S. operations.
Cash Utilization
Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, and increased dividends to determine the most beneficial use of available capital resources. We believe that our cash and cash equivalents, cash flow from operations, available borrowings under the credit facility, and ability to raise additional capital through the credit markets are sufficient to meet both the short-term and long-term capital needs of the organization, including the return of capital to shareholders through dividends and share repurchases and growing our business through acquisitions.
Debt Compliance
As of December 31, 2013, we were in compliance with all debt agreements and credit facility covenants, including our most restrictive covenant, which is our debt to capitalization ratio limit of 60%. As of December 31, 2013 we had the ability to incur total additional indebtedness of $1.3 billion without violating our debt to capitalization covenant.
Future Commitments
Cash generated from operations should be adequate to meet our planned capital expenditures of approximately $80 to $90 million and expected dividend payments of approximately $25 million in 2014. There can be no assurance, however, that we will continue to generate cash from operations at the current level. If cash generated from operations is not sufficient to support these operating requirements and investing activities, we may be required to reduce capital expenditures, borrow from our existing credit line, refinance a portion of our existing debt, or obtain additional financing. While all companies are subject to economic risk, we believe that our cash and cash equivalents, cash flow from operations, and available borrowings are sufficient to meet both the short-term and long-term capital needs of the organization.
In 2013, we made contributions of approximately $41 million to the Curtiss-Wright Pension Plan and expect to make contributions of approximately $40 million in 2014. In addition, through 2018, we expect to make cumulative pension plan contributions of $101 million. For more information on our pension and other postretirement benefits plans, please see Note 17 to the Consolidated Financial Statements.

43



The following table quantifies our significant future contractual obligations and commercial commitments as of December 31, 2013:
(In thousands)
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
Debt Principal Repayments
 
$
959,938

 
$
1,334

 
$
33

 
$
16

 
$
200,000

 
$

 
$
758,555

Interest Payment on Fixed Rate Debt
 
402,463

 
39,940

 
39,908

 
39,908

 
39,206

 
31,643

 
211,858

Operating Leases
 
211,418

 
32,970

 
29,804

 
25,879

 
22,439

 
18,108

 
82,218

Total
 
$
1,573,819

 
$
74,244

 
$
69,745

 
$
65,803

 
$
261,645

 
$
49,751

 
$
1,052,631

We do not have material purchase obligations. Most of our raw material purchase commitments are made directly pursuant to specific contract requirements.
We enter into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to future performance on certain contracts to provide products and services and to secure advance payments we have received from certain international customers. At December 31, 2013, we had contingent liabilities on outstanding letters of credit due as follows:
(In thousands)
 
Total
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter (1)
Letters of Credit
 
$
55,779

 
$
9,948

 
$
4,743

 
$
25,804

 
$
2,838

 
$
2,784

 
$
9,662

(1) Amounts indicated as Thereafter are letters of credit that expire during the revolving credit agreement term but will automatically renew on the date of expiration. In addition, amounts exclude bank guarantees of approximately $23.2 million.

44



Non-GAAP Measures
Management reviews key performance indicators including revenue, segment operating income and margins, and new orders, among others. In addition, we consider certain measures to be useful to management and investors when evaluating our operating performance for the periods presented. 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.
 
Year Ended December 31, 2013
 
Flow Control
 
Controls
 
Surface Technologies
 
Corporate & Other
 
Total Curtiss - Wright
 
2013
 
2012
Chg
 
2013
 
2012
Chg
 
2013
 
2012
Chg
 
2013
 
2012
Chg
 
2013
 
2012
Chg
Sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Organic
1,097.0

 
1,095.3

%
 
726.4

 
726.7

 %
 
286.8

 
275.7

4
%
 

 

 
 
2,110.2

 
2,097.7

1
%
Incremental (1)
204.4

 

 
 
170.2

 

 
 
25.9

 

 
 

 

 
 
400.5

 

 
Foreign Currency Fav (Unfav) (2)
(1.7
)
 

 
 
1.6

 

 
 
0.2

 

 
 

 

 
 
0.1

 

 
Total net sales
1,299.7

 
1,095.3

19
%
 
898.2

 
726.7

24
 %
 
312.9

 
275.7

14
%
 

 

 
 
2,510.8

 
2,097.7

20
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Organic
106.8

 
78.8

36
%
 
98.1

 
86.5

13
 %
 
50.2

 
27.5

82
%
 
(41.9
)
 
(31.3
)
34
%
 
213.2

 
161.5

32
%
OI Margin %
9.7
%
 
7.2
%
250
 bps
 
13.5
%
 
11.9
%
160
 bps
 
17.5
%
 
10.0
%
750
 bps
 
 
 
 
 
 
10.1
%
 
7.7
%
240
 bps
Incremental (1)
9.1

 

 
 
7.1

 

 
 
1.0

 

 
 
(0.4
)
 
 
 
 
16.8

 

 
Foreign Currency Fav (Unfav) (2)
0.6

 

 
 
3.3

 

 
 
(0.2
)
 

 
 
(0.2
)
 
 
 
 
3.5

 

 
Total operating income (expense)
116.5

 
78.8

48
%
 
108.5

 
86.5

25
 %
 
51.0

 
27.5

85
%
 
(42.5
)
 
(31.3
)
35
%
 
233.5

 
161.5

45
%
OI Margin %
9.0
%
 
7.2
%
180
 bps
 
12.1
%
 
11.9
%
20
 bps
 
16.3
%
 
10.0
%
630
 bps
 
 
 
 
 
 
9.3
%
 
7.7
%
160
 bps

(1) The term incremental is used to highlight the impact acquisitions had on the current year results, for which there was no comparable prior year data. Therefore, the results of operations for acquisitions are incremental for the first twelve months from the date of acquisition and are removed from our organic results. Additionally, the results of operations for divested businesses are removed from the comparable prior year period for purposes of calculating organic results. The remaining businesses are referred to as organic.

(2) Organic results exclude the effects of current period foreign currency translation.


45



Critical Accounting Estimates and Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations:
Revenue Recognition
The realization of revenue refers to the timing of its recognition in our accounts and is generally considered realized or realizable and earned when the earnings process is substantially complete and all of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) our price to our customer is fixed or determinable; and 4) collectability is reasonably assured.
We determine the appropriate method by which we recognize revenue by analyzing the terms and conditions of each contract or arrangement entered into with our customers. Revenue is recognized on certain product sales, which represents approximately 55% of our total revenue, as production units are shipped and title and risk of loss have transferred. Revenue is recognized on service type contracts, which represents approximately 17% of our total revenue, as services are rendered. The majority of our service revenues are generated within our Surface Technologies’ segment. The significant estimates we make in recognizing revenue are primarily for long-term contracts generally accounted for using the cost-to-cost method of percentage of completion accounting that are associated with the design, development and manufacture of highly engineered industrial products used in commercial and defense applications.
Percentage of completion accounting
Revenue recognized using the cost-to-cost method of percentage of completion accounting represented approximately 18% of our total net sales in 2013. The average length of our contracts that utilize the cost to cost method of percentage of completion accounting is 4 years. This method recognizes revenue and profit as the contracts progress towards completion. Under the cost to cost method of percentage of completion accounting, sales and profits are recorded based on the ratio of costs incurred to an estimate of costs at completion.
Application of the cost to cost method of percentage-of-completion accounting requires the use of reasonable and dependable estimates of the future material, labor, and overhead costs that will be incurred and a disciplined cost estimating system in which all functions of the business are integrally involved. These estimates are determined based upon industry knowledge and experience of our engineers, project managers, and financial staff. These estimates are significant and reflect changes in cost and operating performance throughout the contract and could have a significant impact on our operating performance. Adjustments to original estimates for contract revenue, estimated costs at completion, and the estimated total profit are often required as work progresses throughout the contract and more information is obtained, even though the scope of work under the contract may not change. These changes are recorded on a cumulative basis in the period they are determined to be necessary.
Under the cost to cost method of percentage-of-completion accounting, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses are determined to be probable. However, costs may be deferred in anticipation of future contract sales if follow-on production orders are deemed probable. Amounts representing contract change orders are included in revenue only when they can be estimated reliably and their realization is reasonably assured.
In 2013, the aggregate net changes in estimates of contract costs resulted in an increase to sales and operating income of $7 million and $3 million, respectively. In 2012, the aggregate net changes in estimates of contract costs resulted in a decrease to sales and operating income of $9 million and $13 million, respectively. The aggregate net changes in estimates of contract costs for 2011 were not material to the consolidated statement of operations for such annual period.

46



Inventory
Inventory costs include materials, direct labor, and purchasing and manufacturing overhead costs, which are stated at the lower of cost or market, where market is limited to the net realizable value. We estimate the net realizable value of our inventories and establish reserves to reduce the carrying amount of these inventories to net realizable value, as necessary. We continually evaluate the adequacy of the inventory reserves by reviewing historical scrap rates, on-hand quantities as compared with historical and projected usage levels, and other anticipated contractual requirements. We generally hold reserved inventory for extended periods, before scrapping and disposing of the reserved inventory, which contributes to a higher level of reserved inventory relative to the level of annual inventory write-offs. The stated inventory costs are also reflective of the estimates used in applying the percentage-of-completion revenue recognition method.
We purchase materials for the manufacture of components for sale. The decision to purchase a set quantity of a particular item is influenced by several factors including: current and projected price, future estimated availability, existing and projected contracts to produce certain items, and the estimated needs for our businesses.
For certain of our long-term contracts, we utilize progress billings, which represent amounts billed to customers prior to the delivery of goods and services and are recorded as a reduction to inventory and receivables. Amounts are first applied to unbilled receivables and any remainder is then applied to inventory. Progress billings are generally based on costs incurred, including direct costs, overhead, and general and administrative costs.
Pension and Other Postretirement Benefits
In consultation with our actuaries, we determine the appropriate assumptions for use in determining the liability for future pension and other postretirement benefits. The most significant of these assumptions include the number of employees who will receive benefits, their tenure, their salary levels, their projected mortality, expected return on plan assets, the discount rates used to determine plan obligations, and the trends in the costs of medical and other health care benefits in the case of the postretirement benefit obligations. Changes in these assumptions, if significant in future years, may have an effect on our pension and postretirement expense, associated pension and postretirement assets and liabilities, and our annual cash requirements to fund these plans.
The discount rate used to determine the plan benefit obligations as of December 31, 2013, and the annual periodic costs for 2014, was increased from 4.0% to 4.75% for the Curtiss-Wright Pension Plan and from 3.75% to 4.5% for the EMD postretirement benefit plan to reflect current economic conditions. The rates reflect the hypothetical rates at which the projected benefit obligations could be effectively settled or paid out to participants on that date. We determine our discount rates utilizing selected bond yield curves developed by our actuaries, by using the rates of return on high-quality, fixed-income corporate bonds available at the measurement date with maturities that match the plan’s expected cash outflows for benefit payments. The discount rate for the Curtiss-Wright Restoration and postretirement benefit plans increased to 4.5% and 3.5%, respectively, in 2013 to reflect the shorter duration of liabilities of these plans. These changes contributed to a reduction in the benefit obligation of $34 million. The rate of compensation increase for the pension plans remained at a weighted average of 4.0% based upon a graded scale of 5.0% to 3.0% that decrements as pay increases, which reflects the experience over the past years and the Company’s expectation of future salary increases. We also utilized the RP 2000 mortality tables, which assume mortality improvements into the future for the U.S. pension and postretirement benefit plans.
The overall expected return on assets assumption is based primarily on the expectations of future performance. Expected future performance is determined by weighting the expected returns for each asset class by the plan’s asset allocation. The expected returns are based on long-term capital market assumptions provided by our investment consultants. We have consistently used the 8.5% rate as a long-term overall average return, and consider this rate to be a reasonable assumption of the future long-term investment returns.
The long-term medical trend assumptions start with a current rate that is in line with expectations for the near future. The trend’s rate is then graded down over time until it reaches an ultimate rate that is close to expectations for growth in GDP. The reasoning is that medical trends cannot continue to be higher than the rate of GDP growth in the long term. The health care cost trend rates used to determine the benefit obligations of the plans as of December 31, 2013, and the annual periodic costs for 2013 were on an initial trend of 8.0% grading down to an ultimate trend of 5.0% in 2026. In 2010 and 2012, respectively, we modified the EMD and Williams postretirement benefit designs for post-65 retirees. This effectively capped the plans to future medical inflation. As a result, any change in the expectation of these rates to return to a normal level should not have a material impact on the amount of expense we recognize.
The timing and amount of future pension income or expense to be recognized each year is dependent on the demographics and expected compensation of the plan participants, the expected interest rates in effect in future years, inflation, and the actual and expected investment returns of the assets in the pension trust.

47



The funded status of the Curtiss-Wright Pension Plan increased by $116 million in 2013, primarily due to the increase in the discount rate used to value plan obligations at December 31, 2013. To a lesser extent, the increase in the funded status was due to positive asset returns of 19.2% in 2013. Recent favorability in financial market performance and increasing interest rates have decreased our future cash funding requirements and future pension expense. We contributed $41 million to the Curtiss-Wright Pension Plan in 2013, and expect to contribute approximately $101 million more over a five year period beginning in 2014. Additionally, we expect pension expense of $16 million associated with this plan in 2014.
The following table reflects the impact of changes in selected assumptions used to determine the funded status of the Company’s U.S. qualified and nonqualified pension plans as of December 31, 2013 (in thousands, except for percentage point change):
Assumption
 
Percentage
Point Change
 
Increase in
Benefit
Obligation
 
Increase in
Expense
Discount rate
 
(0.25
)%
 
$
18,279

 
$
2,475

Rate of compensation increase
 
0.25
 %
 
2,758

 
688

Expected return on assets
 
(0.25
)%
 

 
1,071

See Note 17 to the Consolidated Financial Statements for further information on our pension and postretirement plans.
Environmental Reserves
We provide for environmental reserves on a site-by-site basis when, in conjunction with internal and external legal counsel, it is determined that a liability is both probable and estimable. In many cases, the liability is not fixed or capped when we first record a liability for a particular site. If only a range of potential liability can be estimated and no amount within the range is more probable than another, a reserve will be established at the low end of that range. At sites involving multiple parties, we accrue environmental liabilities based upon our expected share of the liability, taking into account the financial viability of our other jointly liable partners. Judgment is required when we make assumptions and estimate costs expected to be incurred for environmental remediation activities because of, among other factors, difficulties in assessing the extent and type of environmental remediation to be performed, the impact of complex environmental regulations and remediation technologies, and agreements between potentially responsible parties to share in the cost of remediation. In estimating the future liability and continually evaluating the sufficiency of such liabilities, we weigh certain factors including our participation percentage due to a settlement by or bankruptcy of other potentially responsible parties, a change in the environmental laws requiring more stringent requirements, an increase or decrease in the estimated time required to remediate, a change in the estimate of future costs that will be incurred to remediate the site, and changes in technology related to environmental remediation. We do not believe that continued compliance with environmental laws applicable to our operations will have a material adverse effect on our financial condition or results of operation. However, given the level of judgment and estimation used in the recording of environmental reserves, it is reasonably possible that materially different amounts could be recorded if different assumptions were used or if circumstances were to change, such as environmental regulations or remediation solution remedies.
As of December 31, 2013, our environmental reserves totaled $16 million, the majority of which is long term. Approximately 27.4% of the environmental reserves represent the current value of our anticipated remediation costs and are not discounted primarily due to the uncertainty of timing of expenditures. The remaining environmental reserves are discounted to reflect the time value of money since the amount and timing of cash payments for the liability are reasonably determinable. All environmental reserves exclude any potential recovery from insurance carriers or third-party contribution legal actions.

48



Purchase Accounting
We apply the purchase method of accounting to our acquisitions. Under this method, we allocate the cost of business acquisitions to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, commonly referred to as the purchase price allocation. As part of the purchase price allocations for our business acquisitions, identifiable intangible assets are recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented, or exchanged. The purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess recorded as goodwill. We determine the fair values of such assets and liabilities, generally in consultation with third-party valuation advisor's. Such fair value assessments require significant judgments and estimates such as projected cash flows, discount rates, royalty rates, and remaining useful lives that can differ materially from actual results. The analysis, while substantially complete, is finalized no later than twelve months from the date of acquisition. The fair value of assets acquired (net of cash) and liabilities assumed of our 2013 acquisitions were estimated to be $285 million and $49 million, respectively.
Goodwill
We have $1,110 million in goodwill as of December 31, 2013. Generally, the largest separately identifiable asset from the businesses that we acquire is the value of their assembled workforces, which includes the additional benefit received from management, administrative, marketing, business development, engineering, and technical employees of the acquired businesses. The success of our acquisitions, including the ability to retain existing business and to successfully compete for and win new business, is based on the additional benefit received from management, administrative, marketing, and business development, scientific, engineering, and technical skills and knowledge of our employees rather than on productive capital (plant and equipment, technology, and intellectual property). Therefore, since intangible assets for assembled workforces are part of goodwill, the substantial majority of the intangible assets for our acquired business acquisitions are recognized as goodwill.
The recoverability of goodwill is subject to an annual impairment test based on the estimated fair value of the underlying businesses. We test for goodwill impairment at the reporting unit level, which is at or one level below the operating segment level. The test is performed in the fourth quarter, which coincides with the preparation of our five-year strategic operating plan. Additionally, goodwill is tested for impairment when an event occurs or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain. Actual results may differ from those estimates. To calculate the fair value of a reporting unit, we consider both comparative market multiples as well as estimated discounted cash flows for the reporting unit. The significant estimates and assumptions include, but are not limited to, revenue growth rates, operating margins, and future economic and market conditions. The discount rates are based upon the reporting unit’s weighted average cost of capital.
The first step in the analysis is to identify any potential impairment by comparing the carrying value of the reporting unit to its fair value. As a supplement, we conduct additional sensitivity analysis to assess the risk for potential impairment based upon changes in the key assumptions such as the discount rate, expected long-term growth rate, and cash flow projections. If an impairment is identified, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of the goodwill on the reporting unit. Based upon the completion of our annual test, we determined that there was no impairment of value and that all reporting units estimated fair values, with the exception of the oil and gas reporting unit within the Flow Control segment, were substantially in excess of their carrying amounts. Therefore, it is not reasonably likely that significant changes in these estimates would occur that would result in an impairment charge.
Our oil and gas reporting unit’s fair value exceeded its net book value by 20%.  The key assumption that drives the estimated fair value of our oil and gas reporting unit are the revenue and cost projections. If the revenue projections were not able to be obtained due to continued low orders for capital refinery projects or if we are unable to obtain the projected cost synergies by successfully integrating Cimarron, acquired in 2012, it would have a negative effect on the estimated fair value of our oil and gas reporting unit.

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As of December 31, 2013, the amount of goodwill for our oil and gas reporting unit amounted to $189 million.  While we determined that there was no goodwill impairment of the oil and gas reporting unit as of October 31, 2013, management continues to actively evaluate the current and expected revenue and earnings performance of the reporting unit and is actively managing the successful integration of the Cimarron acquisition.  A significant adverse change in business climate or a change in strategic direction, impacting the business’s revenue or earnings, the inability to achieve the revenue and cost projections resulting from the successful integration of Cimarron, a material negative change in relationships with the reporting unit’s significant customers, a significant decline or delay in capital projects, unanticipated competition, or an adverse action or assessment by a regulator, would require an interim assessment prior to the next required annual assessment as of October 31, 2014. If management determines that impairment exists, the impairment will be recognized in the period in which it is identified.
Other Intangible Assets
Other intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, and trademarks. Intangible assets are recorded at their fair values as determined through purchase accounting, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from follow on sales. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which generally range from 1 to 20 years, while indefinite-lived intangible assets are not amortized. Customer related intangibles primarily consist of customer relationships, which reflect the value of the benefit derived from the incremental revenue and related cash flows as a direct result of the customer relationship. We review the recoverability of all intangible assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. We would record any impairment in the reporting period in which it has been identified.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to certain market risks from changes in interest rates and foreign currency exchange rates as a result of our global operating and financing activities. We seek to minimize any material risks from foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We used forward foreign currency contracts to manage our currency rate exposures during the year ended December 31, 2013. In addition, in order to manage our interest rate risk, we may, from time to time, enter into interest rate swaps to balance the ratio of fixed to floating rate debt. We do not use such instruments for trading or other speculative purposes. Information regarding our accounting policy on financial instruments is contained in Note 1-L to the Consolidated Financial Statements.
Interest Rates
The market risk for a change in interest rates relates primarily to our debt obligations. Our fixed rate interest exposure was 94% and 65%, at December 31, 2013 and December 31, 2012, respectively. In order to manage our interest rate exposure, from time to time, we enter into interest rate swap agreements to manage our mix of fixed-rate and variable-rate debt. With the interest rate swap agreements that were in place as of December 31, 2013, and December 31, 2012, our fixed rate interest exposure was 55% and 40%, respectively. As of December 31, 2013, a change in interest rates of 1% would have an impact on consolidated interest expense of less than $5 million. Information regarding our 2013, 2011, 2005 and 2003 Notes, Revolving Credit Agreement, and Interest Rate Swaps is contained in Note 13 to the Consolidated Financial Statements.
Foreign Currency Exchange Rates
Although the majority of our sales, expenses, and cash flows are transacted in U.S. dollars, we do have market risk exposure to changes in foreign currency exchange rates, primarily as it relates to the value of the U.S. dollar versus the Canadian dollar, the British pound, the Euro, and the Swiss franc. Any significant change against the U.S. dollar in the value of the currencies of those countries in which we do business could have an effect on our business, financial condition, and results of operations. If foreign exchange rates were to collectively weaken or strengthen against the dollar by 10%, net earnings would have been reduced or increased, respectively, by approximately $23 million as it relates exclusively to foreign currency exchange rate exposures.
Financial instruments expose us to counter-party credit risk for non-performance and to market risk for changes in interest and foreign currency rates. We manage exposure to counter-party credit risk through specific minimum credit standards, diversification of counter-parties, and procedures to monitor concentrations of credit risk. We monitor the impact of market risk on the fair value and cash flows of our investments by investing primarily in investment grade interest-bearing securities, which have short-term maturities. We attempt to minimize possible changes in interest and currency exchange rates to amounts that are not material to our consolidated results of operations and cash flows.

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