SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities and Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
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
incorporation or organization) Identification No.)
4 Becker Farm Road
Roseland, New Jersey 07068
(Address of principal executive offices) (Zip Code)
(973) 597-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, par value $1.00 per share: 12,224,463 shares (as of April 30,
2004). Class B Common Stock, par value $1.00 per share: 8,764,246 shares (as of
April 30, 2004).
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
TABLE of CONTENTS
PAGE
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Consolidated Statements of Stockholders' Equity 6
Notes to Consolidated Financial Statements 7 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20 - 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
Forward-Looking Information 30 - 31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
Signature 32
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended
March 31,
-------------------
2004 2003
-------- --------
Net sales $214,933 $179,933
Cost of sales 143,338 120,901
-------- --------
Gross profit 71,595 59,032
Research and development expenses 8,212 5,305
Selling expenses 12,604 8,968
General and administrative expenses 25,249 21,414
Environmental remediation and administrative
expenses 240 --
Pension expense (income), net 40 (525)
-------- --------
Operating income 25,250 23,870
Other expense, net (489) (242)
Interest expense (2,265) (851)
-------- --------
Earnings before income taxes 22,496 22,777
Provision for income taxes 6,887 8,655
-------- --------
Net earnings $ 15,609 $ 14,122
======== ========
Basic earnings per share $ 0.75 $ 0.69
======== ========
Diluted earnings per share $ 0.74 $ 0.68
======== ========
Dividends per share $ 0.09 $ 0.08
======== ========
Weighted average shares outstanding:
Basic 20,881 20,564
Diluted 21,206 20,816
See notes to consolidated financial statements
3
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands)
March 31, December 31,
2004 2003
---------- ------------
Assets
Current Assets:
Cash and cash equivalents $ 33,322 $ 98,672
Receivables, net 164,137 143,362
Inventories, net 104,929 97,880
Deferred tax assets, net 24,377 23,630
Other current assets 12,661 10,979
---------- ---------
Total current assets 339,426 374,523
---------- ---------
Property, plant and equipment, net 246,301 238,139
Prepaid pension costs 77,861 77,877
Goodwill 284,217 220,058
Other intangible assets, net 78,829 48,268
Other assets 19,431 14,800
---------- ---------
Total Assets $1,046,065 $ 973,665
========== =========
Liabilities
Current Liabilities:
Short-term debt $ 1,034 $ 997
Dividends payable 1,889 --
Accounts payable 45,741 43,776
Accrued expenses 39,966 44,938
Income taxes payable 10,756 6,748
Other current liabilities 35,890 39,424
---------- ---------
Total current liabilities 135,276 135,883
---------- ---------
Long-term debt 276,508 224,151
Deferred tax liabilities, net 20,660 21,798
Accrued pension and other postretirement benefit costs 76,340 75,633
Long-term portion of environmental reserves 20,564 21,083
Other liabilities 19,829 16,236
---------- ---------
Total Liabilities 549,177 494,784
---------- ---------
Stockholders' Equity
Common stock, $1 par value 16,611 16,611
Class B common stock, $1 par value 8,765 8,765
Additional paid-in capital 49,698 52,998
Retained earnings 557,390 543,670
Unearned portion of restricted stock (50) (55)
Accumulated other comprehensive income 23,387 22,634
---------- ---------
655,801 644,623
Less: Cost of treasury stock (158,913) (165,742)
---------- ---------
Total Stockholders' Equity 496,888 478,881
---------- ---------
Total Liabilities and Stockholders' Equity $1,046,065 $ 973,665
========== =========
See notes to consolidated financial statements
4
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Three Months Ended
March 31,
--------------------
2004 2003
--------- --------
Cash flows from operating activities:
Net earnings $ 15,609 $ 14,122
--------- --------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 9,507 6,820
Non-cash pension expense (income) 40 (525)
Deferred income taxes (1,694) 2,323
Changes in operating assets and liabilities, net of
businesses acquired:
Increase in receivables (8,249) (3,561)
Increase in inventories (882) (1,121)
Decrease in progress payments (1,859) (2,103)
Decrease in accounts payable and accrued expenses (7,469) (2,683)
(Decrease) increase in deferred revenue (2,900) 1,938
Increase in income taxes payable 4,035 3,675
(Increase) decrease in other assets (886) 1,300
Decrease in other liabilities (535) (2,353)
--------- --------
Total adjustments (10,892) 3,710
--------- --------
Net cash provided by operating activities 4,717 17,832
--------- --------
Cash flows from investing activities:
Proceeds from sales of non-operating assets 1,084 --
Additions to property, plant and equipment (6,102) (9,830)
Acquisition of new businesses (118,588) (18,360)
--------- --------
Net cash used for investing activities (123,606) (28,190)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of debt 90,505 96,537
Principal payments on debt (40,531) (92,554)
Proceeds from exercise of stock options 3,521 721
--------- --------
Net cash provided by financing activities 53,495 4,704
--------- --------
Effect of foreign currency 44 (344)
--------- --------
Net decrease in cash and cash equivalents (65,350) (5,998)
Cash and cash equivalents at beginning of period 98,672 47,717
--------- --------
Cash and cash equivalents at end of period $ 33,322 $ 41,719
========= ========
Supplemental disclosure of investing activities:
Fair value of assets acquired in current year acquisitions $ 123,930 $ 17,894
Earn-out payments and release of holdback funds on previous years'
acquisitions 1,396 1,316
Liabilities assumed in current year acquisitions (6,738) (850)
--------- --------
Net cash paid for acquisitions $ 118,588 $ 18,360
========= ========
See notes to consolidated financial statements
5
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Unearned
Portion of Accumulated
Class B Additional Restricted Other
Common Common Paid in Retained Stock Comprehensive Treasury
Stock Stock Capital Earnings Awards Income Stock
------- ------- ---------- --------- ---------- ------------- ---------
December 31, 2002 $10,618 $4,382 $ 52,200 $ 508,298 $(60) $ 6,482 $(170,692)
Net earnings -- -- -- 52,268 -- -- --
Translation adjustments, net -- -- -- -- -- 16,152 --
Dividends -- -- -- (6,520) -- -- --
Stock options exercised, net -- -- 741 -- -- -- 4,812
Other -- -- 57 -- 5 -- 138
Two-for-one common stock split
effected in the form of a
100% stock dividend 5,993 4,383 -- (10,376) -- -- --
------- ------ -------- --------- ---- ------- ---------
December 31, 2003 16,611 8,765 52,998 543,670 (55) 22,634 (165,742)
------- ------ -------- --------- ---- ------- ---------
Net earnings -- -- -- 15,609 -- -- --
Translation adjustments, net -- -- -- -- -- 753 --
Dividends -- -- -- (1,889) -- -- --
Stock options exercised, net -- -- (3,291) -- -- -- 6,812
Other -- -- (9) -- 5 -- 17
------- ------ -------- --------- ---- ------- ---------
March 31, 2004 $16,611 $8,765 $ 49,698 $ 557,390 $(50) $23,387 $(158,913)
======= ====== ======== ========= ==== ======= =========
See notes to consolidated financial statements
6
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS of PRESENTATION
Curtiss-Wright Corporation and its subsidiaries (the "Corporation") is a
diversified multinational manufacturing and service company that designs,
manufactures, and overhauls precision components and systems and provides
highly engineered products and services to the aerospace, defense,
automotive, shipbuilding, processing, oil, petrochemical, agricultural
equipment, railroad, power generation, security, and metalworking
industries. Operations are conducted through 26 manufacturing facilities,
54 metal treatment service facilities, and 2 aerospace component overhaul
and repair locations.
The unaudited consolidated financial statements include the accounts of
Curtiss-Wright Corporation and its majority-owned subsidiaries. All
material intercompany transactions and accounts have been eliminated.
The unaudited consolidated financial statements of the Corporation have
been prepared in conformity with accounting principles generally accepted
in the United States of America and such preparation requires management to
make estimates and judgments that affect the reported amount of assets,
liabilities, revenue, and expenses and disclosure of contingent assets and
liabilities in the accompanying financial statements. The most significant
of these estimates include the costs to complete long-term contracts under
the percentage of completion accounting method, the useful lives for
property, plant, and equipment, cash flows used for testing the
recoverability of assets, pension plan and postretirement obligation
assumptions, amount of inventory obsolescence, valuation of intangible
assets, warranty reserves, and future environmental costs. Actual results
may differ from these estimates. In the opinion of management, all
adjustments considered necessary for a fair presentation have been
reflected in these financial statements.
The unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in the Corporation's 2003 Annual Report on Form 10-K. The
results of operations for interim periods are not necessarily indicative of
trends or of the operating results for a full year.
Certain prior year information has been reclassified to conform to current
presentation.
Share and per share amounts have been adjusted to reflect the Corporation's
2-for-1 stock split during 2003.
2. ACQUISITIONS
The Corporation acquired two businesses during the three months ended March
31, 2004, as described in more detail below. All acquisitions have been
accounted for as purchases with the excess of the purchase price over the
estimated fair value of the net tangible and intangible assets acquired
recorded as goodwill. The Corporation makes preliminary estimates of the
value of identifiable intangibles with a finite life and records
amortization based upon the estimated useful life of those intangible
assets identified. The Corporation will adjust these estimates based upon
analysis of third party appraisals and the determination of fair value when
finalized. The Corporation does not consider the acquisitions made in the
first quarter of 2004 to be material, individually or in the
7
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
aggregate, to its financial position, liquidity, or results of operations,
and therefore no pro forma financial statements are provided. The results
of each acquired business have been included in the consolidated financial
results of the Corporation from the date of acquisition in the segment
indicated as follows:
Motion Control Segment
Dy 4
On January 31, 2004, the Corporation acquired the outstanding stock of Dy 4
Systems, Inc. and Dy 4 (US) Inc. (collectively "Dy 4") from Solectron
Corporation. The purchase price of the acquisition, subject to customary
adjustments as provided in the Stock Purchase Agreement, was $110.0 million
in cash. Management funded the purchase price with cash on hand and from
the Corporation's revolving credit facilities. The purchase price has been
allocated to the net tangible and intangible assets acquired, with the
remainder recorded as goodwill, on the basis of estimated fair values as of
March 31, 2004, as follows:
(In thousands)
Net working capital $ 10,661
Property, plant, and equipment 7,276
Intangible assets 29,700
--------
Net tangible and intangible assets 47,637
Purchase price, including capitalized acquisition costs 110,829
--------
Goodwill $ 63,192
========
The fair value of the net assets acquired was based on current estimates.
The Corporation may adjust these estimates based upon analysis of third
party appraisals and the final determination of fair value.
Dy 4 is considered the market leader in rugged embedded computing solutions
for the defense and aerospace industries. Using standard, commercially
available computing technologies, referred to as commercial-off-the-shelf
or COTS, Dy 4 customizes the products to perform reliably in rugged
conditions, such as extreme temperature, terrain and/or speed. Key
customers include BAE Systems, DRS, General Dynamics, Northrop Grumman,
Lockheed Martin and Raytheon. Based in Ottawa, Canada, Dy 4 has operations
in the United States and the United Kingdom. Revenues of the purchased
business for the fiscal year ending August 29, 2003 were $72.4 million.
Metal Treatment Segment
Evesham
On February 24, 2004, the Corporation purchased the assets of the E/M
Coatings business located in Evesham, United Kingdom ("Evesham") from
Morgan Advanced Ceramics, Ltd. The purchase price of the acquisition was
'L'3.4 million ($6.4 million) in cash and the assumption of certain
liabilities. The purchase price was funded from credit available under the
Corporation's revolving credit facilities. The excess of the purchase price
over the fair value of the net assets acquired is $2.3 million at March 31,
2004. The fair value of the net assets acquired was based on current
estimates. The Corporation may adjust these estimates based upon analysis
of third party appraisals
8
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
and the final determination of fair value. Revenues of the purchased
business were 'L'2.6 million ($4.2 million) for the year ended December
31, 2003.
Evesham manufactures and applies an extensive range of solid film lubricant
(SFL) coatings which provide lubrication, corrosion resistance and enhanced
engineering performance. Evesham is a sister facility to the six North
American E/M Coatings Service facilities that were acquired by
Curtiss-Wright in 2003. E/M Coatings constitutes the largest provider of
SFL coatings in North America. The coatings are used in a broad range of
products and industries whenever conventional wet lubricants provide
insufficient protection due to high temperatures, extreme loads, corrosion,
wear, chemical corrosion or other adverse operating conditions.
3. RECEIVABLES
Receivables at March 31, 2004 and December 31, 2003 include amounts billed
to customers and unbilled charges on long-term contracts consisting of
amounts recognized as sales but not billed as of the dates presented.
Substantially all amounts of unbilled receivables are expected to be billed
and collected within a year. The composition of receivables for those
periods is as follows:
(In thousands)
March 31, December 31,
2004 2003
--------- ------------
Billed Receivables:
Trade and other receivables $132,345 $111,068
Less: Allowance for doubtful accounts (3,676) (3,449)
-------- --------
Net billed receivables 128,669 107,619
-------- --------
Unbilled Receivables:
Recoverable costs and estimated earnings not billed 52,604 56,070
Less: Progress payments applied (17,136) (20,327)
-------- --------
Net unbilled receivables 35,468 35,743
-------- --------
Receivables, net $164,137 $143,362
======== ========
The net receivable balance at March 31, 2004 included $9.1 million related
to the Corporation's 2004 acquisitions.
9
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
4. INVENTORIES
In accordance with industry practice, inventoried costs contain amounts
relating to long-term contracts and programs with long production cycles, a
portion of which will not be realized within one year. Inventories are
valued at the lower of cost (principally average cost) or market. The
composition of inventories is as follows:
(In thousands)
March 31, December 31,
2004 2003
--------- ------------
Raw material $ 41,839 $ 40,624
Work-in-process 33,597 26,409
Finished goods and component parts 47,674 46,575
Inventoried costs related to U.S. Government and other
long-term contracts 21,651 20,544
-------- --------
Gross inventories 144,761 134,152
Less: Inventory reserves (24,506) (22,278)
Progress payments applied, principally related to
long-term contracts (15,326) (13,994)
-------- --------
Inventories, net $104,929 $ 97,880
======== ========
The net inventory balance at March 31, 2004 included $9.2 million related
to the Corporation's 2004 acquisitions.
5. GOODWILL
The Corporation accounts for acquisitions by assigning the purchase price
to tangible and intangible assets and liabilities. Assets acquired and
liabilities assumed are recorded at their fair values, and the excess of
the purchase price over the amounts assigned is recorded as goodwill.
The changes in the carrying amount of goodwill for the three months ended
March 31, 2004 are as follows:
(In thousands)
Motion Flow Metal
Control Control Treatment Consolidated
-------- ------- --------- ------------
December 31, 2003 $110,850 $93,418 $15,790 $220,058
Goodwill from 2004 acquisitions 63,192 -- 2,284 65,476
Change in previous estimates of fair
value of net assets acquired (677) 22 (854) (1,509)
Currency translation adjustment 193 97 (98) 192
-------- ------- ------- --------
March 31, 2004 $173,558 $93,537 $17,122 $284,217
======== ======= ======= ========
The purchase price allocations relating to businesses acquired during the
twelve months ended March 31, 2004 are based on estimates and have not yet
been finalized.
10
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
6. OTHER INTANGIBLE ASSETS, net
Intangible assets are generally the result of acquisitions and consist
primarily of purchased technology, customer related intangibles, trademarks
and service marks, and technology licenses. Intangible assets are amortized
over useful lives that range between 1 and 20 years.
The following tables present the cumulative composition of the
Corporation's intangible assets and include $1.0 million of indefinite
lived intangible assets within other intangible assets for both periods
presented.
(In thousands)
Accumulated
March 31, 2004 Gross Amortization Net
-------------- ------- -------------- -------
Developed technology $62,916 $(4,031) $58,885
Customer related intangibles 15,729 (1,174) 14,555
Other intangible assets 6,758 (1,369) 5,389
------- ------- -------
Total $85,403 $(6,574) $78,829
======= ======= =======
(In thousands)
Accumulated
December 31, 2003 Gross Amortization Net
----------------- ------- -------------- -------
Developed technology $32,892 $(2,966) $29,926
Customer related intangibles 14,469 (863) 13,606
Other intangible assets 5,902 (1,166) 4,736
------- ------- -------
Total $53,263 $(4,995) $48,268
======= ======= =======
The following table presents the changes in the net balance of other
intangibles assets during the three months ended March 31, 2004.
Customer Other
Developed Related Intangible
(In thousands) technology, net Intangibles, net Assets, net Total
--------------- ---------------- ----------- -------
December 31, 2003 $29,926 $13,606 $4,736 $48,268
Acquired during 2004 29,709 -- 928 30,637
Amortization expense (1,027) (311) (204) (1,542)
Change in estimate of fair
value related to purchase
price allocations -- 1,260 (60) 1,200
Net currency translation
adjustment 277 -- (11) 266
------- ------- ------ -------
March 31, 2004 $58,885 $14,555 $5,389 $78,829
======= ======= ====== =======
11
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Total estimated future amortization expense of purchased intangible assets
is as follows:
(In thousands)
FY 2005 $ 6,584
FY 2006 6,544
FY 2007 6,544
FY 2008 6,288
FY 2009 5,035
Thereafter 47,834
7. WARRANTY RESERVES
The Corporation provides its customers with warranties on certain
commercial and governmental products. Estimated warranty costs are charged
to expense in the period the related revenue is recognized based on
quantitative historical experience. Estimated warranty costs are reduced as
these costs are incurred and as the warranty period expires and may be
otherwise modified as specific product performance issues are identified
and resolved. Warranty reserves are included within accrued expenses on the
Corporation's Consolidated Balance Sheet. In accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB Statements
No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34", the
following table presents the changes in the Corporation's warranty
reserves:
(In thousands)
2004 2003
------- ------
Warranty reserves at January 1, $10,011 $9,504
Increase due to acquisitions 860 --
Provision for current year sales 477 182
Change in estimates to pre-existing warranties (144) (189)
Current year claims (459) (384)
Translation adjustment 79 15
------- ------
Warranty reserves at March 31, $10,824 $9,128
======= ======
12
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
8. DEBT
Debt at March 31, 2004 and December 31, 2003 consists of the following:
(In thousands)
March 31, December 31,
2004 2003
--------- ------------
Industrial Revenue Bonds, due through 2028. Weighted average interest $ 14,337 $ 14,296
rate is 1.13% and 1.24% per annum for the three months ended March
31, 2004 and the year ended December 31, 2003, respectively.
Revolving Credit Agreement Borrowing, due 2007. Weighted average interest
rate is 1.84% and 1.97% per annum for the three months ended March
31, 2004 and the year ended December 31, 2003, respectively. 51,685 8,868
Short-Term Credit Agreement Borrowing, due 2005. Weighted average
interest rate is 3.93% and 2.27% per annum for the three months
ended March 31, 2004 and the year ended December 31, 2003,
respectively. 7,000 --
5.13% Senior Notes due 2010 75,754 75,217
5.74% Senior Notes due 2013 127,772 125,747
Other debt 994 1,020
-------- --------
Total debt 277,542 225,148
Less: Short-term debt 1,034 997
-------- --------
Total Long-term debt $276,508 $224,151
======== ========
The debt under the Corporation's revolving credit agreement includes
amounts denominated in Swiss francs, which were 11.0 million Swiss francs
($8.7 million) at March 31, 2004 and 11.0 million Swiss francs ($8.9
million) at December 31, 2003.
The estimated fair values of the Corporation's debt instruments at March
31, 2004 aggregated $282.8 million compared to a carrying value of $277.5
million. The carrying amount of the variable interest rate long-term debt
approximates fair value because the interest rates are reset periodically
to reflect current market conditions. Fair values for the Corporation's
fixed rate debt were estimated based on valuations provided by third
parties in accordance with their proprietary models.
The carrying amount of the interest rate swaps reflects their fair value as
provided by third parties in accordance with their proprietary models. The
fair values described above may not be indicative of net realizable value
or reflective of future fair values. Furthermore, the use of different
methodologies to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
13
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Aggregate maturities of debt for the twelve months ended March 31, are as
follows:
(In thousands)
--------------
FY 2005 $ 1,034
FY 2006 7,073
FY 2007 59
FY 2008 56,745
FY 2009 63
Thereafter 209,042
--------
Total $274,016
========
Amounts exclude a $3.5 million adjustment to the fair value of long-term
debt relating to the Corporation's interest rate swap agreements that will
not be settled in cash.
9. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Pension Plans
The components of net periodic pension cost (benefit) for the three months
ended March 31, 2004 and 2003 were:
(In thousands)
Curtiss-Wright Plans EMD Plans
--------------------- ---------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Service cost $ 2,318 $ 2,259 $ 841 $ 648
Interest cost 1,954 1,938 1,999 1,959
Expected return on plan assets (4,255) (4,518) (2,022) (1,589)
Amortization of prior service cost 22 20 -- --
Amortization of net loss (gain) 2 (203) -- --
Amortization of transition obligation (1) (1) -- --
Cost of settlement -- 15 -- --
------- ------- ------- -------
Net periodic benefit cost (income) $ 40 $ (490) $ 818 $ 1,018
======= ======= ======= =======
No contributions have been made to the pension plans during the three
months ended March 31, 2004. The Corporation anticipates contributing $2.5
million, the estimated minimum required amount, to the EMD pension plan
during 2004. No contributions are estimated to be made to the
Curtiss-Wright Pension plan due to its funded status.
Other Postretirement Benefit Plans
The components of the net postretirement benefit cost for the three months
ended March 31, 2004 and 2003 were:
(In thousands)
Curtiss-Wright Plans EMD Plans
--------------------- ---------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
--------- --------- --------- ---------
Service cost $ -- $ -- $219 $176
Interest cost 8 10 616 597
Expected return on plan assets -- -- -- --
Amortization of prior service cost -- -- -- --
Amortization of net (gain) loss (15) (18) -- --
Amortization of transition obligation -- -- --
---- ---- ---- ----
Net periodic benefit (income) cost $ (7) $ (8) $835 $773
==== ==== ==== ====
14
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
During the three months ended March 31, 2004, the Corporation has paid zero
and $0.8 million on the Curtiss-Wright and EMD post-retirement plans,
respectively. During 2004, the Corporation anticipates contributing $0.1
million and $3.3 million to the post-retirement plans, respectively.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
was signed into law on December 8, 2003. In accordance with FASB Staff
Position 106-1, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
"Act")", the Company has made a one-time election to defer recognition of
the effects of the law in the accounting for its plan under FAS 106 and in
providing disclosures related to the plan until authoritative guidance on
the accounting for the federal prescription drug subsidy is issued. Any
measures of accumulated postretirement benefit obligation or net periodic
postretirement benefit cost in this report do not reflect the effects of
the Act on the plans. Authoritative guidance is pending and, when issued,
could require the Company to change previously reported information.
10. EARNINGS PER SHARE
Diluted earnings per share were computed based on the weighted average
number of shares outstanding plus all potentially dilutive common shares. A
reconciliation of basic to diluted shares used in the earnings per share
calculation is as follows:
Three Months Ended
March 31,
------------------
(In thousands) 2004 2003
------ ------
Basic weighted average shares outstanding 20,881 20,564
Dilutive effect of stock options and deferred stock
compensation 325 252
------ ------
Diluted weighted average shares outstanding 21,206 20,816
====== ======
There were no antidilutive shares for the three months ended March 31,
2004. For the three months ended March 31, 2003 the antidilutive shares
were 162,000.
11. STOCK COMPENSATION PLANS
In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Corporation has elected to account for its stock-based compensation
under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." As such, the Corporation does not recognize
compensation expense for stock options granted to employees when the
exercise price of the options is equal to the market price of the
underlying stock on the date of the grant.
Pro forma information regarding net earnings and earnings per share is
required by SFAS No. 123, as amended, and has been determined as if the
Corporation had accounted for its employee stock option grants under the
fair value method prescribed by that Statement. Information regarding the
number of options granted, market price of the grants, vesting
requirements, and the maximum term of the options granted by plan type is
included in the Corporation's 2003 Annual Report on Form 10-K.
15
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
The Corporation's pro forma results are as follows:
Three Months Ended
March 31,
------------------
(In thousands, except per share data) 2004 2003
------- -------
Net earnings, as reported $15,609 $14,122
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (306) (178)
------- -------
Pro forma net earnings $15,303 $13,944
======= =======
Net earnings per share:
As reported:
Basic $ 0.75 $ 0.69
Diluted $ 0.74 $ 0.68
Pro forma:
Basic $ 0.73 $ 0.68
Diluted $ 0.72 $ 0.67
12. ENVIRONMENTAL MATTERS
The Corporation establishes a reserve for a potential environmental
liability when it concludes that a determination of legal liability is
probable based upon the advice of counsel. Such amounts reflect the
Corporation's estimate of the amount of that liability. If only a range of
potential liability can be estimated, a reserve will be established at the
low end of that range. Such reserves represent current values of
anticipated remediation not reduced by any potential recovery from
insurance carriers or through contested third-party legal actions and are
not discounted for the time value of money.
The Corporation has been named as a potentially responsible party ("PRP"),
as have many other corporations and municipalities, in a number of
environmental clean-up sites. The Corporation continues to make progress in
resolving these claims through settlement discussions and payments from
established reserves. Significant sites remaining open at the end of the
year are: Caldwell Trucking landfill superfund site, Fairfield, New Jersey;
Sharkey landfill superfund site, Parsippany, New Jersey; Amenia landfill
site, Amenia, New York; and Chemsol, Inc. superfund site, Piscataway, New
Jersey. The Corporation believes that the outcome for any of these
remaining sites will not have a materially adverse effect on the
Corporation's results of operations or financial condition.
In the first quarter of 2004, the Corporation signed a PRP agreement
joining a number of other companies to respond to a U.S.E.P.A. Request For
Information concerning the Lower Passaic River site. As of March 31, 2004,
the Corporation considers itself a nominal participant and the outcome of
this matter would not have a materially adverse effect on the Corporation's
results of operation or financial condition.
16
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
13. SEGMENT INFORMATION
The Corporation manages and evaluates its operations based on the products
and services it offers and the different markets it serves. Based on this
approach, the Corporation has three reportable segments: Flow Control,
Motion Control, and Metal Treatment.
(In thousands)
Three Months Ended March 31, 2004
---------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other (1) Totals
------- ------- --------- -------- ----------- ------------
Revenue from external customers $89,395 $83,344 $42,194 $214,933 $ -- $214,933
Intersegment revenues -- -- 184 184 (184) --
Operating income 10,431 8,289 6,577 25,297 (47) 25,250
(1) Corporate and Other includes pension income/expense, which has been
reclassified from prior year presentation.
(In thousands)
Three Months Ended March 31, 2003
---------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other (1) Totals
------- ------- --------- -------- ----------- ------------
Revenue from external customers $93,341 $57,040 $29,552 $179,933 $ -- $179,933
Intersegment revenues -- -- 132 132 (132) --
Operating income 14,318 5,090 3,751 23,159 711 23,870
(1) Corporate and Other includes pension income/expense, which has been
reclassified from prior year presentation.
(In thousands)
Identifiable Assets
---------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other Totals
-------- -------- --------- -------- --------- ------------
March 31, 2004 $336,536 $437,347 $180,297 $954,180 $ 91,885 $1,046,065
December 31, 2003 323,689 317,631 170,547 811,867 161,798 973,665
Reconciliation:
(In thousands)
Three Months Ended
March 31,
------------------
2004 2003
------- -------
Total segment operating income $25,297 $23,159
Corporate and other, excluding pension
(expense) income (7) 186
Pension (expense) income, net (40) 525
------- -------
Operating income 25,250 23,870
Other expense, net (489) (242)
Interest expense (2,265) (851)
------- -------
Earnings before income taxes $22,496 $22,777
======= =======
17
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
14. COMPREHENSIVE INCOME
Total comprehensive income for the three months ended March 31, 2004 and
2003 are as follows:
(In thousands)
Three Months Ended
March 31,
------------------
2004 2003
------- -------
Net earnings $15,609 $14,122
Equity adjustment from foreign currency translations 753 229
------- -------
Total comprehensive income $16,362 $14,351
======= =======
The equity adjustment from foreign currency translation represents the
effect of translating the assets and liabilities of the Corporation's
non-U.S. entities. This amount is impacted year-over-year by foreign
currency fluctuations and by the acquisitions of foreign entities.
15. CONTINGENCIES AND COMMITMENTS
The Corporation, through its subsidiary located in Switzerland, entered
into a credit agreement with UBS AG ("UBS") for a credit facility in the
amount of 6.0 million Swiss francs ($4.7 million) for the issue of
performance guarantees related to long-term contracts. The Corporation
received prepayments on these contracts, which are being used as collateral
against the credit facility. The customers can draw down on the line of
credit for nonperformance up to the amount of pledged collateral, which is
released from restriction over time as the Corporation meets its
obligations under the long-term contracts. Under the terms of this credit
facility agreement, the Corporation is not permitted to borrow against the
line of credit. The Corporation is charged a commitment fee on the
outstanding balance of the collateralized cash. As of March 31, 2004, the
amount of restricted cash under this facility was $1.3 million, all of
which is expected to be released from restriction within one year.
The Corporation's, through its EMD subsidiary, has several NRC licenses
necessary for the continued operation of the business. In connection with
these licenses, the NRC required financial assurance from the Corporation
(in the form of a parent company guarantee) representing estimated
environmental decommissioning and remediation costs associated with the
commercial operations covered by the licenses. The guarantee for the
decommissioning costs of the refurbishment facility, which is estimated for
2017, is $2.8 million.
Consistent with other entities its size, the Corporation is party to
several legal actions and claims, none of which individually or in the
aggregate, in the opinion of management, are expected to have a material
adverse effect on the Corporation's results of operations or financial
position.
18
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
16. SUBSEQUENT EVENTS
Everlube Products
On April 2, 2004, the Corporation purchased selected assets of Morgan
Advanced Ceramics, Inc. engaged in the business of developing and producing
engineered coatings including solid film lubricants ("Everlube Products").
The purchase price of the acquisition, subject to adjustment as provided in
the Asset Purchase Agreement, was $4.4 million in cash and the assumption
of certain liabilities. The purchase price was funded from the
Corporation's revolving credit facilities.
Everlube Products is a manufacturer of solid film lubricant (SFL) and other
specialty engineered coatings with more than 180 formulations available.
Everlube Products' engineered coatings improve the functional performance
of metal components in lubrication, temperature and corrosion resistance.
The coatings are developed for use in high performance, niche applications
and are generally either "approved for use" or "specified" after extensive
testing and evaluation by a customer. The company is located in Peachtree,
GA and had 2003 sales of $2.9 million.
Debt
On May 7, 2004, the Corporation entered into an agreement to extend the
expiration of the Short-Term Credit Agreement from May 7, 2004 to August 5,
2004. Any amounts owed under the agreement at the time of expiration are
due one year from the expiration date.
19
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
PART I - ITEM 2
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS
COMPANY ORGANIZATION
The Corporation manages and evaluates its operations based on the products and
services it offers and the different markets it serves. Based on this approach,
the Corporation has three reportable segments: Flow Control, Motion Control, and
Metal Treatment. The Flow Control segment primarily designs, manufactures,
distributes, and services a broad range of highly engineered flow control
products for severe service military and commercial applications. The Motion
Control segment primarily designs, develops, and manufactures mechanical
systems, drive systems, and electronic controls and sensors for the aerospace,
defense, and general industrial markets. Metal Treatment provides a variety of
metallurgical services, principally "shot peening", "heat treating", and
coatings for various industries, including aerospace, automotive, construction
equipment, oil and gas, petrochemical, and metal working.
RESULTS of OPERATIONS
Sales for the first quarter of 2004 totaled $214.9 million, an increase of 19%
from sales of $179.9 million for the first quarter of 2003. New orders received
for the current quarter of $235.4 million were up 14% over the orders of $206.0
million for the first quarter of 2003. Acquisitions made in 2003 and 2004
contributed $32.3 million in incremental new orders received in the first
quarter of 2004. Backlog increased 10% to $558.0 million at March 31, 2004 from
$505.5 million at December 31, 2003. Acquisitions made during 2004 represented
$26.7 million of the backlog at March 31, 2004. Approximately 70% of our backlog
is from military business.
Sales for the first quarter of 2004 as compared to the same period last year
benefited from the acquisitions completed in 2003 and the first quarter of 2004,
which contributed $29.6 million in incremental sales (or 84% of the overall
increase) in the first quarter of 2004. The majority of these incremental sales
came from the 6 acquisitions made within our Motion Control segment. The sales
for the first quarter of 2004 also benefited from organic growth of 4%, led by
the Metal Treatment and Motion Control segments, which grew organically 17% and
10% over the comparable prior year period, respectively. Sales within our Flow
Control segment decreased 4% for the first quarter of 2004 mainly due to the
shipment of two large projects completed in the first quarter of 2003 that did
not reoccur in 2004. These projects generated approximately $14 million in sales
for the first quarter of 2003.
Higher sales from our military aerospace and domestic ground defense businesses,
an increase of $4.6 million, higher sales of flow control products to the
nuclear and non-nuclear navy markets, an increase of $6.5 million and the
commercial power generation market, an increase of $2.6 million, and higher
sales from our laser peening and global shot peening services, an increase of
$3.0 million, all contributed to the organic growth in the quarter as compared
to the prior year period. Foreign exchange translation also had a favorable
impact on sales for the first quarter of 2004, contributing $4.8 million to the
sales increase from the prior year period.
Operating income for the first quarter of 2004 totaled $25.3 million, an
increase of 6% from operating income of $23.9 million for the same period last
year. The increase is primarily attributable to the contributions of
acquisitions completed in 2003 and the first quarter of 2004, which amounted to
$2.3 million in incremental operating income. Operating income from our base
businesses decreased 3% over the same period last year. The lower organic
operating income within our Flow Control segment was mainly due to the
completion of two large projects in the first quarter of 2003 that did not
reoccur in 2004. This decline was offset by operating
20
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
margin improvements within our Metal Treatment and Motion Control segments,
where operating income grew organically 51% and 39%, respectively. Operating
margins from the segments increased in the first quarter of 2004 as compared to
the same period last year mainly due to higher volume and favorable sales mix.
The pension income for the first quarter of 2004 decreased $0.6 million due to
additional service cost resulting from the acquisitions and slightly lower
investment returns. Foreign exchange translation had a favorable impact of $1.0
million on operating income for the first quarter of 2004, as compared to the
prior year period.
Net earnings for the first quarter of 2004 totaled $15.6 million, or $0.74 per
diluted share, which represents an increase of 11% over the net earnings for the
first quarter of 2003 of $14.1 million, or $0.68 per diluted share (adjusted for
the December 2003 2-for-1 stock split). Higher segment operating income in the
first quarter of 2004 more than offset the decrease in the Corporation's pension
income and higher interest expense as compared to the first quarter of 2003. The
net earnings for the first quarter of 2004 included a one-time tax benefit of
$1.5 million resulting from a change in legal structure of one of our
subsidiaries.
Segment Operating Performance:
Three Months Ended
March 31,
----------------------------
%
2004 2003 Change
-------- -------- ------
Sales:
Flow Control $ 89,395 $ 93,341 -4.2%
Motion Control 83,344 57,040 46.1%
Metal Treatment 42,194 29,552 42.8%
-------- -------- ------
Total Sales $214,933 $179,933 19.5%
Operating Income:
Flow Control $ 10,431 $ 14,318 -27.1%
Motion Control 8,289 5,090 62.8%
Metal Treatment 6,577 3,751 75.3%
-------- -------- ------
Total Segments 25,297 23,159 9.2%
Pension Income (40) 525 -107.6%
Corporate & Other (7) 186 -103.8%
-------- -------- ------
-------- -------- ------
Total Operating Income $ 25,250 $ 23,870 5.8%
======== ======== ======
Operating Margins:
Flow Control 11.7% 15.3%
Motion Control 9.9% 8.9%
Metal Treatment 15.6% 12.7%
Total Curtiss-Wright 11.7% 13.3%
21
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Flow Control
The Corporation's Flow Control segment posted sales of $89.4 million for the
first quarter of 2004, a decrease of 4% from $93.3 million in the first quarter
of 2003. Lower overall sales were mainly due to the completion of two large
projects in 2003, which did not reoccur in 2004. These projects generated
approximately $14 million in sales for the first quarter of 2003. The loss of
sales from these two large projects was partially offset by a 12% increase in
sales for the segment's remaining businesses over the comparable prior year
period. Higher sales resulting from new orders of flow control and electronic
products to the nuclear and non-nuclear naval markets, higher sales to the
commercial power generation market due to expedited customer orders, and higher
sales of our coke de-heading valve to the oil and gas industry, partially offset
the decrease in sales resulting from the aforementioned projects. In addition,
foreign currency translation favorably impacted sales for the first quarter of
2004 by $0.8 million, as compared to the prior year period.
Operating income for the first quarter of 2004 was $10.4 million, a decrease of
27% as compared to $14.3 million for the same period last year. The reduction in
operating income was mainly due to the profit impact related to the two large
higher margin contracts in the first quarter of 2003 that did not reoccur in
2004. The loss in operating income from these two large projects was partially
offset by a 6% increase in operating income for this segment's remaining
businesses over the comparable prior year period. Higher volume for our
commercial power generation products and higher volume and favorable sales mix
for the non-nuclear naval and oil and gas products, were partially offset by
less favorable sales mix of electronic components and lower margin on certain
valve orders for the nuclear navy. The business segment also slightly benefited
from favorable foreign currency translation in the first quarter of 2004, as
compared to the first quarter of 2003.
New orders received for the Flow Control segment totaled $115.1 million in the
first quarter of 2004 representing a decrease of 7% from the same period in
2003. The decrease is primarily due to the timing of orders. Backlog increased
8% to $343.7 million at March 31, 2004 from $317.8 million at December 31, 2003.
Motion Control
Sales for the Corporation's Motion Control segment improved 46% to $83.3 million
in the first quarter of 2004 from $57.0 million in the first quarter of 2003,
primarily due to the contribution of the acquisitions of Dy 4 Systems Inc. in
January 2004, and Novatronics, Pickering, and Systran in December 2003, which
contributed $21.7 million in incremental sales (or 82% of the overall increase)
for the first quarter of 2004. Organic sales growth was 10% in the first quarter
of 2004. This organic growth was mainly due to an increase in sales of military
aerospace products, primarily F-16 spare parts (new orders), F/A-22 production
(additional ship sets), additional orders of electronic components for the
Global Hawk program, and higher Joint Strike Fighter development revenue, which
began development in the second quarter of 2003. In addition, slightly higher
domestic ground defense sales and European sensor and drive sales contributed to
the organic growth. These higher sales were partially offset by lower European
ground defense sales resulting from expedited deliveries in 2003 and lower sales
associated with the overhaul and repair services provided to the global airline
industry. Foreign
22
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
currency translation favorably impacted sales for the first quarter of 2004 by
$2.1 million, as compared to the prior year period.
Operating income for the first quarter of 2004 was $8.3 million, an increase of
63% from the same period last year of $5.1 million. The improvement was driven
by higher volume as mentioned above, favorable sales mix on military programs,
and implemented cost control initiatives. These improvements were partially
offset by lower margins at our European ground defense business. Additionally,
the operating margins for the overhaul and repair business improved slightly
over the comparable prior year period mainly as a result of implemented cost
control initiatives. The business segment also benefited from favorable foreign
currency translation in the first quarter of 2004, as compared to the first
quarter of 2003.
New orders received for the Motion Control segment totaled $77.6 million in the
first quarter of 2004, an increase of 50% from the same period in 2003.
Acquisitions made in 2003 and 2004 contributed $25.0 million in incremental new
orders received in the first quarter of 2004. Backlog increased 14% to $212.4
million at March 31, 2004 from $186.3 million at December 31, 2003. Acquisitions
made during 2004 represented $26.7 million of the backlog at March 31, 2004.
Metal Treatment
Sales for the Corporation's Metal Treatment segment totaled $42.2 million for
the first quarter of 2004, up 43% when compared with $29.6 million in the first
quarter of 2003. Approximately two thirds of the improvement was due to
contributions from 2003 and 2004 acquisitions, which contributed $7.9 million of
incremental sales in the first quarter of 2004. The main contributor to this
increase was our EM Coatings business, which was acquired on April 2, 2003. In
addition, organic sales growth was 17% in the first quarter of 2004. The
improvement was due to strong sales growth from our new laser peening technology
as well as solid growth in our core shot peening services in North America due
to new programs and additional customer orders. Sales from the heat treating
division were up slightly over the prior year period. In addition, foreign
currency translation favorably impacted sales for the first quarter of 2004 by
$2.0 million, as compared to the prior year period.
Operating income for the first quarter of 2004 increased 75% to $6.6 million
from $3.8 million for the same period last year. Overall margin improvement was
due to higher sales volume, favorable sales mix in our shot peening units (laser
peening), and implemented cost reduction initiatives. The margins were down
slightly in the heat treating division due to higher energy costs. The
business segment also benefited from favorable foreign currency translation in
the first quarter of 2004, as compared to the first quarter of 2003.
New orders received for the Metal Treatment segment totaled $42.9 million in the
first quarter of 2004, an increase of 43% from the same period in 2003.
Acquisitions made in 2003 and 2004 contributed $7.3 million in incremental new
orders received in the first quarter of 2004. Backlog increased 33% to $1.9
million at March 31, 2004 from $1.4 million at December 31, 2003.
Non-Operating Revenues/Expense
For the first quarter of 2004, the Corporation recorded other non-operating net
expenses (excluding interest expense) totaling $0.5 million, compared with $0.2
million for the first quarter of 2003. The increase in interest expense of $1.4
million for the first quarter of 2004 was due to higher debt levels associated
with the funding of our acquisitions.
23
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
CHANGES IN FINANCIAL CONDITION
Liquidity and Capital Resources
The Corporation derives the majority of its operating cash inflow from receipts
on the sale of goods and services and cash outflow for the procurement of
materials and labor, and is therefore subject to market fluctuations and
conditions. A substantial portion of the Corporation's 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 milestones)
that provide the Corporation with cash receipts as costs are incurred throughout
the project rather than upon contract completion, thereby reducing working
capital requirements. In some cases, these payments can exceed the costs
incurred on a project.
Operating Activities
The Corporation's working capital was $204.1 million at March 31, 2004, a
decrease of $34.5 million from the working capital at December 31, 2003 of
$238.6 million. The ratio of current assets to current liabilities was 2.5 to 1
at March 31, 2004 versus 2.8 to 1 at December 31, 2003.
Cash and cash equivalents totaled $33.3 million in the aggregate at March 31,
2004, down from $98.7 million at December 31, 2003. The decrease is due to the
use of available cash to fund the acquisition of Dy 4 Systems Inc. on January
31, 2004. Days sales outstanding at March 31, 2004 was 54 days as compared to 56
days at December 31, 2003. Inventory turns were 5.7 for the three months ended
March 31, 2004 as compared to 5.5 at December 31, 2003.
Excluding cash, working capital increased $30.9 million from December 31, 2003,
partially due to the acquisitions made in the first quarter of 2004. In addition
to the impact of these acquisitions, working capital changes were highlighted by
an increase in accounts receivable due to the timing of sales, a decrease in
accounts payable and accrued expenses due to the payment of interest and the
payment of material procured in late 2003, and a decrease in deferred revenue
due to a reduction in those contracts whose billings were in excess of
incurred costs.
Investing Activities
The Corporation acquired two businesses in the first quarter of 2004. A
combination of cash resources and funds available under the Corporation's credit
agreements were utilized for the funding of these acquisitions, which totaled
$117.2 million. As indicated in Note 2 to the Consolidated Financial Statements,
certain acquisition agreements contain contingent purchase price adjustments,
such as potential earn-out payments. In the first quarter of 2004, the
Corporation made approximately $1.4 million in earn-out payments.
Capital expenditures were $6.1 million in the first quarter of 2004. Internally
available funds were adequate to meet the capital expenditures. Principal
expenditures included new and replacement machinery and equipment within the
business segments and for the expansion of new product lines. The Corporation is
expected to make additional capital expenditures of approximately $35 million
during the remainder of 2004 on machinery and equipment for ongoing operations
at the business segments, expansion of existing facilities, and investments in
new product lines and facilities.
24
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Financing Activities
At March 31, 2004, the Corporation had two credit agreements aggregating $225.0
million with a group of eight banks. The Revolving Credit Agreement offers a
maximum of $135.0 million over five years to the Corporation for cash borrowings
and letters of credit. The Revolving Credit Agreement expires May 13, 2007, but
may be extended annually for successive one-year periods with the consent of the
bank group. The Corporation also has in effect a Short-Term Credit Agreement,
which allows for cash borrowings up to $90.0 million. The Short-Term Credit
Agreement expired May 7, 2004, and has been extended for 90 days to August 5,
2004, while the Corporation considers consolidation of its credit facility. Any
amounts owed under the Short-Term Credit Agreement at the time of expiration
mature one year from the expiration date. Borrowings under these agreements bear
interest at a floating rate based on market conditions. In addition, the
Corporation's interest rate and level of facility fees are dependent on
maintenance of certain financial ratios, as defined in the agreements. The
Corporation is subject to annual facility fees on the commitments under the
Revolving Credit Agreement and Short-Term Credit Agreement. The Corporation is
required under these agreements to maintain certain financial ratios and meet
certain other financial tests, of which the Corporation is in compliance at
March 31, 2004. Cash borrowings (excluding letters of credit) under the two
credit agreements at March 31, 2004 were $58.7 million as compared to $8.9
million at December 31, 2003. The unused credit available under these agreements
at March 31, 2004 was $150.0 million.
On September 25, 2003 the Corporation issued $200.0 million of Senior Notes (the
"Notes"). The Notes consist of $75.0 million of 5.13% Senior Notes that mature
on September 25, 2010 and $125.0 million of 5.74% Senior Notes that mature on
September 25, 2013. The Notes are senior unsecured obligations and are equal in
right of payment to the Corporation's existing senior indebtedness. The
Corporation, at its option, can prepay at any time, all or from time to time any
part of, the Notes, subject to a make-whole amount in accordance with the terms
of the Note Purchase Agreement. The Corporation paid customary fees that have
been deferred and will be amortized over the terms of the Notes. The Corporation
is required under the Note Purchase Agreement to maintain certain financial
ratios and meet certain net worth and indebtedness tests, of which the
Corporation is in compliance at March 31, 2004.
On November 6, 2003 the Corporation entered into two interest rate swap
agreements with notional amounts of $20 million and $60 million to effectively
convert the fixed interest rates on the $75 million 5.13% Senior Notes and $125
million 5.74% Senior Notes, respectively, to variable rates based on specified
spreads over six-month LIBOR. In the short-term, the swaps are expected to
provide the Corporation with a lower level of interest expense related to the
Notes.
Industrial revenue bonds, which are collateralized by real estate, machinery,
and equipment, were $14.3 million at March 31, 2004 and December 31, 2003. The
loans outstanding under the Senior Notes, Interest Rate Swaps, Revolving Credit
Agreements, and Industrial Revenue Bonds had variable interest rates averaging
3.8% during the first quarter of 2004; 2003 loans outstanding under the
Revolving Credit Agreements and Industrial Revenue Bonds had variable interest
rates averaging 2.1% for the first quarter of 2003.
Cash generated from operations is considered adequate to meet the Corporation's
cash requirements for the upcoming year, including anticipated debt repayments,
planned capital expenditures, dividends, satisfying environmental obligations,
and working capital requirements.
25
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Undistributed earnings from certain of the Corporation's foreign subsidiaries
are considered to be permanently reinvested.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes are prepared in
accordance with generally accepted accounting principles 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 the accounts of the Corporation 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)
the Corporation's price to its customer is fixed or determinable; and 4)
collectibility is reasonably assured.
The Corporation records sales and related profits on production and service type
contracts as units are shipped and title and risk of loss have transferred or as
services are rendered. This method is used in our Metal Treatment segment and in
some of the business units within the Motion Control and Flow Control segments
that serve commercial markets.
For certain contracts in our Flow Control and Motion Control segments that
require performance over an extended period before deliveries begin, sales and
estimated profits are recorded by applying the percentage-of-completion method
of accounting. The percentage-of-completion method of accounting is used
primarily for the Corporation's defense contracts and certain long-term
commercial contracts. This method recognizes revenue and profit as the contracts
progress towards completion. For certain contracts that contain a significant
number of performance milestones, as defined by the customer, sales are recorded
based upon achievement of these performance milestones. The performance
milestone method is an output measure of progress towards completion made in
terms of results achieved. For certain fixed price contracts, where none or a
limited number of milestones exist, the cost-to-cost method is used, which is an
input measure of progress towards completion. Under the cost-to-cost input
method, sales and profits are recorded based on the ratio of costs incurred to
an estimate of total costs at completion.
Application of percentage-of-completion methods of revenue recognition requires
the use of reasonable and dependable estimates of the future material, labor,
and overhead costs that will be incurred. The percentage-of-completion method of
accounting for long-term contracts requires a disciplined cost estimating system
in which all functions of the business are integrally involved. These estimates
are determined based upon the industry knowledge and experience of the
Corporation's 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 operating performance.
Adjustments to original estimates for contract revenue, estimated costs at
completion, and the estimated total profit are often required
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
as work progresses throughout the contract and as experience and more
information is obtained, even though the scope of work under the contract may
not change. These changes are recorded on a cumulative retroactive basis in the
period they are determined to be necessary.
Under the percentage-of-completion and completed contract methods, provisions
for estimated losses on uncompleted contracts are recognized in the period in
which the likelihood of such losses is determined. Certain contracts contain
provisions for the redetermination of price and, as such, management defers a
portion of the revenue from those contracts until such time as the price has
been finalized.
Some of the Corporation's customers withhold certain amounts from the billings
they receive. These retainages are generally not due until the project has been
completed and accepted by the customer.
Inventory: Inventory costs include materials, direct labor, and manufacturing
overhead costs, which are stated at the lower of cost or market, where market is
limited to the net realizable value. The Corporation estimates the net
realizable value of its inventories and establishes 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. The
stated inventory costs are also reflective of the estimates used in applying the
percentage-of-completion revenue recognition method.
The Corporation purchases 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 its businesses.
For certain of its long-term contracts, the Corporation utilizes 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.
Progress billings are generally based on costs incurred, including direct costs,
overhead, and general and administrative costs.
Pension and other postretirement benefits: The Corporation, in consultation with
its actuaries, determines 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 along with the tenure and salary level of those employees, the
expected return on plan assets, the discount rates used on plan obligations, and
the trends in health care costs. Changes in these assumptions in future years
will have an effect on the Corporation's pension and postretirement costs and
associated pension and postretirement assets and liabilities.
The discount rates and compensation rates increases used to determine the
benefit obligations of the plans as of December 31, 2003 and the annual periodic
costs for 2004 were lowered in 2003 to better reflect current economic
conditions. The reduction in the discount rates increased the benefit obligation
on the plans. A corresponding decrease in future compensation costs, which
occurred due to the impact of lower inflationary effects, had an offsetting
decrease to the benefit obligation. The change in these two assumptions were
based upon current and future economic indicators.
27
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
The overall expected return on assets assumption is based on a combination of
historical performance of the pension fund and expectations of future
performance. The historical returns are determined using the market-related
value of assets, which is the same value used in the calculation of annual net
periodic benefit cost. The market-related value of assets includes the
recognition of realized and unrealized gains and losses over a five- year
period, which effectively averages the volatility associated with the actual
performance of the plan's assets from year to year. Although over the last ten
years the market related value of assets had an average annual yield of 11.6%,
the actual returns averaged 8.5% during the same period. The Corporation has
consistently used the 8.5% rate as a long-term overall average return. Given the
uncertainties of the current economic and geopolitical landscapes, we consider
the 8.5% to be a reasonable assumption of the future long-term investment
returns.
The long-term medical trend assumptions starts with a current rate that is in
line with expectations for the near future, and then grade the rates 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. Any change in the expectation of these
rates to return to a normal level will have an impact on the Corporation.
See Note 9 to the Corporation's Consolidated Financial Statements in Item 1 of
this quarterly report for further information on the Corporation's pension and
postretirement plans, including an estimate of future cash contributions.
Environmental reserves: The Corporation provides for environmental reserves
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 the Corporation first records a liability for a
particular site. In estimating the future liability and continually evaluating
the sufficiency of such liabilities, the Corporation weighs certain factors
including the Corporation's participation percentage due to a settlement by or
bankruptcy of other potentially responsible parties, a change in the
environmental laws requiring more stringent requirements, a change in the
estimate of future costs that will be incurred to remediate the site, and
changes in technology related to environmental remediation.
Purchase accounting: The Corporation applies the purchase method of accounting
to its acquisitions. Under this method, the purchase price, including any
capitalized acquisition costs, 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. The Corporation,
usually in consultation with third-party valuation advisors, determines the fair
values of such assets and liabilities.
Goodwill: The recoverability of goodwill is subject to an annual impairment test
based on the estimated fair value of the underlying businesses. 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. These estimated fair values are based on estimates of
future cash flows of the businesses. Factors affecting these future cash flows
include the continued market acceptance of the products and services offered by
the businesses, the development of new products and services by the businesses
and the underlying cost of development, the future cost structure of the
businesses, and future technological changes. Estimates are also used for the
Corporation's cost of capital in discounting the projected future cash flows.
The Corporation utilizes an independent third party
28
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
cost of capital analysis in determination of its estimates. If it has been
determined that an impairment has occurred, the Corporation may be required to
recognize an impairment of its asset, which would be limited to the difference
between the book value of the asset and its fair value. Any such impairment
would be recognized in full in the reporting period in which it has been
identified.
Other intangible assets: Other intangible assets are generally the result of
acquisitions and consist primarily of purchased technology, customer related
intangibles, trademarks and service marks, and technology licenses. Intangible
assets are recorded at their fair values as determined through purchase
accounting and are amortized on a straight-line basis over their estimated
useful lives, which range from 1 to 20 years. The Corporation reviews the
recoverability of intangible assets, including the related useful lives,
whenever events or changes in circumstances indicate that the carrying amount
might not be recoverable. Any impairment would be recorded in the reporting
period in which it has been identified.
Recent Developments
Please refer to Note 16 of the Corporation's Consolidated Financial Statements
in Part 1, Item 1 of this quarterly report.
29
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Corporation's market risk during the
three months ended March 31, 2004. Information regarding market risk and market
risk management policies is more fully described in item "7A. Quantitative and
Qualitative Disclosures about Market Risk" of the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2003.
Item 4. CONTROLS AND PROCEDURES
As of March 31, 2004, the Corporation's management, including the Corporation's
Chief Executive Officer and Chief Financial Officer, conducted an evaluation of
the Corporation's disclosure controls and procedures; as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Based on such evaluation, the Corporation's Chief
Executive Officer and Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures are effective, in all material respects, to
ensure that information required to be disclosed in the reports the Corporation
files and submits under the Exchange Act is recorded, processed, summarized, and
reported as and when required.
There have not been any changes in the Corporation's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
FORWARD-LOOKING INFORMATION
Except for historical information contained herein, this Quarterly Report on
Form 10-Q does contain "forward-looking" information within the meaning of
Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act
of 1934. Examples of forward-looking information include, but are not limited
to, (a) projections of or statements regarding return on investment, future
earnings, interest income, other income, earnings or loss per share, investment
mix and quality, 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 information can be
identified by the use of forward looking terminology such as "believes,"
"expects," "may," "will," "should," "anticipates," or the negative of any of the
foregoing or other variations thereon or comparable terminology, or by
discussion of strategy. No assurance can be given that the future results
described by the forward-looking information will be achieved. Such statements
are subject to risks, uncertainties, and other factors, which are outside our
control that could cause actual results to differ materially from future results
expressed or implied by such forward-looking information. Readers are cautioned
not to put undue reliance on such forward-looking information. Such statements
in this Report include, without limitation, those contained in Part I, Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Notes to the Consolidated Financial Statements including,
without limitation, the Environmental Matters Note. Important factors that could
cause the actual results to differ materially from those in these
forward-looking statements include, among other items, (i) a reduction in
anticipated orders, (ii) change in governmental spending, (iii) an economic
downturn, (iv) unanticipated environmental remediation expenses or claims, (v)
changes in the need for additional machinery and equipment and/or in the cost
for the expansion of the Corporation's operations, (vi) changes in the
competitive marketplace and/or customer requirements, (vii) an inability to
perform customer contracts at anticipated cost
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
levels, and (viii) other factors that generally affect the business of companies
operating in the Corporation's Segments.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Corporation and its subsidiaries are
subject to various pending claims, lawsuits and contingent liabilities. The
Corporation does not believe that disposition of any of these matters will have
a material adverse effect on the Corporation's consolidated financial position
or results of operations.
Curtiss-Wright Corporation or its subsidiaries have been named in approximately
90 lawsuits that allege injury from exposure to asbestos. To date,
Curtiss-Wright has secured its dismissal without prejudice in approximately 15
lawsuits, and is currently in discussions for similar dismissal in several
others, and has not been found liable or paid any sum of money in settlement in
any case. Curtiss-Wright believes that the minimal use of asbestos in its
operations and the relatively non-friable condition of asbestos in its products
makes it unlikely that it will face material liability in any asbestos
litigation, whether individually or in the aggregate. Curtiss-Wright does
maintain insurance coverage for these lawsuits and it believes adequate coverage
exists to cover any unanticipated asbestos liability.
Item 6. EXHIBITS and REPORTS on FORM 8-K
(a) Exhibits
Exhibit 2.1 Asset Purchase Agreement dated January 31, 2004
between Solectron Corporation and Curtiss-Wright
Corporation, (incorporated by reference to Exhibit
(10)(xviii) in the Company's Annual Report on Form 10-K
for Fiscal Year Ended December 31, 2003)
Exhibit 10.1 Curtiss-Wright Electro-Mechanical Division Savings
Plan dated January 1, 2004 (incorporated by reference to
Exhibit (2)(vii) in the Company's Annual Report on Form
10-K for Fiscal Year Ended December 31, 2003)
Exhibit 31.1 Certification of Martin R. Benante, Chairman and CEO,
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
Exhibit 31.2 Certification of Glenn E. Tynan, Chief Financial Officer,
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed
herewith
Exhibit 32 Certification of Martin R. Benante, Chairman and CEO, and
Glenn E. Tynan, Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, filed herewith
(b) Reports on Form 8-K
On February 6, 2004, the Company filed a report on Form 8-K under Item
9 announcing that management provided an investors presentation at an
investor's conference sponsored by Gabelli Asset Management, Inc.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CURTISS-WRIGHT CORPORATION
(Registrant)
By: /s/ Glenn E. Tynan
------------------------------------
Glenn E. Tynan
Vice President Finance / C.F.O.
Dated: May 10, 2004
32
STATEMENT OF DIFFERENCES
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