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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 JUNE 30, 2003
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: 5,935,665 shares (as of July 31, 2003).
Class B Common Stock, par value $1.00 per share: 4,382,123 shares (as of July
31, 2003).
Page 1 of 35
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 - 20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21 - 30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
Forward-Looking Information 31 - 32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33 - 34
Item 6. Exhibits and Reports on Form 8-K 34
Signature 35
Page 2 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $182,857 $121,777 $362,790 $219,564
Cost of sales 126,175 78,078 247,076 139,710
-------- -------- -------- --------
Gross profit 56,682 43,699 115,714 79,854
Research and development expenses 5,772 2,714 11,077 4,025
Selling expenses 10,307 7,144 19,275 12,886
General and administrative expenses 23,166 18,718 44,580 34,704
Environmental remediation and
administrative expenses, net -- 45 -- 247
-------- -------- -------- --------
Operating income 17,437 15,078 40,782 27,992
Pension income, net 528 2,254 1,053 4,508
Other income, net 515 448 273 520
Interest expense (942) (466) (1,793) (659)
-------- -------- -------- --------
Earnings before income taxes 17,538 17,314 40,315 32,361
Provision for income taxes 6,665 6,498 15,320 12,229
-------- -------- -------- --------
Net earnings $ 10,873 $ 10,816 $ 24,995 $ 20,132
======== ======== ======== ========
Basic earnings per share $ 1.06 $ 1.06 $ 2.43 $ 1.98
======== ======== ======== ========
Diluted earnings per share $ 1.04 $ 1.03 $ 2.40 $ 1.93
======== ======== ======== ========
Dividends per share $ 0.15 $ 0.15 $ 0.30 $ 0.30
======== ======== ======== ========
Weighted average shares outstanding:
Basic 10,301 10,203 10,292 10,163
Diluted 10,431 10,511 10,417 10,421
See notes to consolidated financial statements
Page 3 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
June 30, December 31,
2003 2002
----------- ------------
Assets
Current Assets:
Cash and cash equivalents $ 48,155 $ 47,717
Receivables, net 142,187 144,024
Inventories, net 91,346 79,100
Deferred tax assets, net 21,511 21,840
Other current assets 6,495 9,005
-------- --------
Total current assets 309,694 301,686
-------- --------
Property, plant and equipment, net 230,439 219,049
Prepaid pension costs 77,122 76,072
Goodwill 211,917 181,101
Other intangible assets, net 19,185 21,982
Other assets 12,638 13,034
-------- --------
Total Assets $860,995 $812,924
======== ========
Liabilities
Current Liabilities:
Short-term debt $ 32,887 $ 32,837
Dividends payable 1,545 --
Accounts payable 39,355 41,344
Accrued expenses 33,064 32,446
Income taxes payable 4,369 4,528
Other current liabilities 47,380 53,294
-------- --------
Total current liabilities 158,600 164,449
-------- --------
Long-term debt 142,055 119,041
Deferred tax liabilities, net 5,425 6,605
Accrued pension and other postretirement benefit costs 77,981 77,438
Long-term portion of environmental reserves 21,996 22,585
Other liabilities 14,089 11,578
-------- --------
Total Liabilities 420,146 401,696
-------- --------
Stockholders' Equity
Common stock, $1 par value 10,618 10,618
Class B common stock, $1 par value 4,382 4,382
Additional paid-in capital 52,353 52,200
Retained earnings 530,202 508,298
Unearned portion of restricted stock (50) (60)
Accumulated other comprehensive income 12,483 6,482
-------- --------
609,988 581,920
Less: Cost of treasury stock 169,139 170,692
-------- --------
Total Stockholders' Equity 440,849 411,228
-------- --------
Total Liabilities and Stockholders' Equity $860,995 $812,924
======== ========
See notes to consolidated financial statements
Page 4 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Six Months Ended
June 30,
2003 2002
--------- --------
Cash flows from operating activities:
Net earnings $ 24,995 $ 20,132
--------- --------
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 15,314 8,933
Net loss (gain) on sales of real estate and equipment 62 (59)
Non-cash pension income (1,053) (4,545)
Deferred income taxes (914) 169
Changes in operating assets and liabilities, net of
businesses acquired:
Proceeds from sales of short-term investments -- 77,050
Purchases of short-term investments -- (35,600)
Decrease (increase) in receivables 3,993 (3,700)
Increase in inventories (9,619) (1,019)
Decrease in accounts payable and accrued
expenses (2,465) (373)
Decrease in income taxes payable (203) (11,566)
Decrease (increase) in other assets 3,112 (3,264)
Decrease in other liabilities (3,950) (4,327)
--------- --------
Total adjustments 4,117 21,699
--------- --------
Net cash provided by operating activities 29,112 41,831
--------- --------
Cash flows from investing activities:
Proceeds from sales of real estate and equipment 442 275
Additions to property, plant and equipment (15,762) (13,105)
Acquisition of new businesses, net of cash acquired (37,157) (61,789)
--------- --------
Net cash used for investing activities (52,477) (74,619)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of debt 172,000 71,374
Principal payments on debt (149,144) (46,291)
Proceeds from exercise of stock options 1,706 4,449
Dividends paid (1,546) (1,526)
Common stock repurchases -- (50)
--------- --------
Net cash provided by financing activities 23,016 27,956
--------- --------
Effect of foreign currency 787 2,697
--------- --------
Net increase (decrease) in cash and cash equivalents 438 (2,135)
Cash and cash equivalents at beginning of period 47,717 25,495
--------- --------
Cash and cash equivalents at end of period $ 48,155 $ 23,360
========= ========
Supplemental disclosure of non-cash investing activities:
Fair value of assets acquired $ 38,274 $ 72,457
Liabilities assumed (1,117) (9,927)
Less: Cash acquired -- (741)
--------- --------
Net cash paid for acquisitions $ 37,157 $ 61,789
========= ========
See notes to consolidated financial statements
Page 5 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
Unearned Accumulated
Class B Additional Portion of Other
Common Common Paid in Retained Restricted Comprehensive Treasury
Stock Stock Capital Earnings Stock Awards Income Stock
------- ------- ---------- -------- ------------ ------------- --------
December 31, 2001 $10,618 $4,382 $52,532 $469,303 $(78) $(6,831) $179,972
Net earnings -- -- -- 45,136 -- -- --
Translation adjustments, net -- -- -- -- -- 13,313 --
Dividends -- -- -- (6,141) -- -- --
Stock options exercised, net -- -- (332) -- -- -- (9,280)
Amortization of earned portion of
restricted stock awards -- -- -- -- 18 -- --
------- ------ ------- -------- ---- ------- --------
December 31, 2002 10,618 4,382 52,200 508,298 (60) 6,482 170,692
------- ------ ------- -------- ---- ------- --------
Net earnings -- -- -- 24,995 -- -- --
Translation adjustments, net -- -- -- -- 6,001 --
Dividends -- -- -- (3,091) -- -- --
Stock options exercised, net -- -- 153 -- -- -- (1,553)
Amortization of earned portion of
restricted stock awards -- -- -- -- 10 -- --
------- ------ ------- -------- ---- ------- --------
June 30, 2003 $10,618 $4,382 $52,353 $530,202 $(50) $12,483 $169,139
======= ====== ======= ======== ==== ======= ========
See notes to consolidated financial statements
Page 6 of 35
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 highly engineered components and systems and
provides services to the defense, aerospace, power generation, automotive,
shipbuilding, processing, petrochemical, agricultural equipment, railroad,
security, and metalworking industries. Operations are conducted through
twenty manufacturing facilities, fifty-one metal treatment facilities, and
two aerospace component overhaul and repair locations.
The unaudited consolidated financial statements include the accounts of
Curtiss-Wright 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 2002 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.
Page 7 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
2. ACQUISITIONS
Motion Control Segment
Collins Technologies
On February 28, 2003, the Corporation acquired the assets of Collins
Technologies ("Collins") from G.L. Collins Corporation. The purchase price
of the acquisition, subject to adjustment as provided for in the Asset
Purchase Agreement, was $12.0 million in cash and the assumption of certain
liabilities. Included in the purchase price is a holdback of $0.5 million
held as security for potential indemnification claims. The amount of
holdback remaining after claims for indemnification will be paid one year
after the acquisition date. Management funded the purchase price from
credit available under the Corporation's Short-Term Credit Agreement.
Revenues of the purchased business were approximately $8.3 million for the
year ended March 31, 2002. The excess of the purchase price, excluding the
holdback, over the fair value of the net assets acquired is approximately
$9.5 million. 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 determination of fair value
when finalized. The Corporation does not consider this acquisition to be
material to its financial position, liquidity or results of operations.
Collins designs and manufactures Linear Variable Displacement Transducers
("LVDTs"), primarily for aerospace flight and engine control applications.
Industrial LVDTs are used mostly in industrial automation and test
applications. Collins' operations are located in Long Beach, California.
Metal Treatment Segment
E/M Engineered Coatings Solutions
On April 2, 2003, the Corporation purchased selected assets of E/M
Engineered Coatings Solutions ("E/M Coatings"). The purchase price of the
acquisition, subject to adjustment as provided in the Asset Purchase
Agreement, was $16.7 million in cash and the assumption of certain
liabilities. The purchase price was funded from credit available under the
Corporation's Short-Term Credit Agreement. Revenues of the purchased
business were approximately $26.0 million for the year ended December 31,
2002. The excess of the purchase price over the fair value of the net
assets acquired is approximately $10.6 million. 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
determination of fair value when finalized. The Corporation does not
consider this acquisition to be material to its financial position,
liquidity or results of operations.
The Corporation acquired six E/M Coatings facilities operating in Chicago,
IL; Detroit, MI; Minneapolis, MN; Hartford, CT; and North Hollywood and
Page 8 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Chatsworth, CA. Combined, these facilities are one of the leading providers
of solid film lubricant coatings in the United States. The E/M Coatings
facilities have the capability of applying over 1,100 different coatings to
impart lubrication, corrosion resistance, and certain cosmetic and
dielectric properties to selected components.
Advanced Material Process
On March 11, 2003, the Corporation acquired selected assets of Advanced
Material Process Corp. ("AMP"), a private company with operations located
in Wayne, Michigan. The purchase price of the acquisition, subject to
adjustment as provided for in the Asset Purchase Agreement, was $5.7
million in cash and the assumption of certain liabilities. Included in the
purchase price is a holdback of $0.2 million held as security for potential
indemnification claims. The amount of holdback remaining after claims for
indemnification will be paid one year after the acquisition date. There are
provisions in the agreement for additional payments upon the achievement of
certain financial performance criteria over the next five years up to a
maximum additional payment of $1.0 million. Management funded the purchase
price from credit available under the Corporation's Short-Term Credit
Agreement. Sales of the purchased business were approximately $5.1 million
for the year ended December 31, 2002. The excess of the purchase price over
the fair value of the net assets acquired is approximately $2.6 million.
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 determination of fair value when finalized. The
Corporation does not consider this acquisition to be material to its
financial position, liquidity or results of operations.
AMP is a supplier of commercial shot-peening services primarily to the
automotive market in the Detroit area.
Brenner Tool & Die
On November 14, 2002, the Corporation acquired selected assets and
liabilities of Brenner Tool and Die, Inc. ("Brenner") relating to Brenner's
metal finishing operations in Bensalem, Pennsylvania. Brenner provides
non-destructive testing, chemical milling, chromic and phosphoric
anodizing, and painting services.
The purchase price of the acquisition, subject to adjustment as provided
for in the Asset Purchase Agreement, was $10.0 million in cash, which
approximated the fair value of the net assets acquired. There are
provisions in the agreement for additional payments upon the achievement of
certain financial performance criteria over the next five years up to a
maximum additional payment of $10.0 million. 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
determination of fair value when finalized. The Corporation does not
consider this acquisition to be material to its financial position,
liquidity or results of operations.
Page 9 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
3. RECEIVABLES
Receivables at June 30, 2003 and December 31, 2002 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)
June 30, December 31,
2003 2002
-------- ------------
Billed Receivables:
Trade and other receivables $109,436 $108,710
Less: Progress payments applied (575) (2,838)
Allowance for doubtful accounts (3,093) (2,170)
-------- --------
Net billed receivables 105,768 103,702
-------- --------
Unbilled Receivables:
Recoverable costs and estimated earnings not billed 41,824 45,997
Less: Progress payments applied (5,405) (5,675)
-------- --------
Net unbilled receivables 36,419 40,322
-------- --------
Receivables, net $142,187 $144,024
======== ========
The net receivable balance at June 30, 2003 included $6.8 million related
to the Corporation's 2003 acquisitions.
4. INVENTORIES
Inventories are valued at the lower of cost (principally average cost) or
market. The composition of inventories at June 30, 2003 and December 31,
2002 is as follows:
(In thousands)
June 30, December 31,
2003 2002
-------- ------------
Raw material $ 42,560 $ 42,932
Work-in-process 31,435 23,858
Finished goods and component parts 49,444 42,797
Inventoried costs related to US Government
and other long-term contracts 19,959 20,866
-------- --------
Gross inventories 143,398 130,453
Less: Inventory reserves (25,230) (24,277)
Progress payments applied,
principally related to long-term
contracts (26,822) (27,076)
-------- --------
Inventories, net $ 91,346 $ 79,100
======== ========
Page 10 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
The net inventory balance at June 30, 2003 included $1.8 million related to
the Corporation's 2003 acquisitions.
5. GOODWILL
Goodwill results from acquisitions. 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 six months ended
June 30, 2003 are as follows:
(In thousands)
Flow Motion Metal
Control Control Treatment Consolidated
------- ------- --------- ------------
December 31, 2002 $95,409 $78,727 $ 6,965 $181,101
Goodwill from 2003 acquisitions -- 9,472 13,166 22,638
Change in previous estimates of fair value
of net assets acquired 2,503 3,073 13 5,589
Currency translation adjustment 1,290 1,151 148 2,589
------- ------- ------- --------
June 30, 2003 $99,202 $92,423 $20,292 $211,917
======= ======= ======= ========
The purchase price allocations relating to businesses acquired during the
twelve months ended June 30, 2003 are based on estimates and have not yet
been finalized.
6. OTHER INTANGIBLE ASSETS, net
Other intangible assets consist primarily of purchased technology, backlog
and technology licenses. The following tables present the cumulative
composition of the Corporation's intangible assets as of June 30, 2003 and
December 31, 2002.
(In thousands)
Accumulated
June 30, 2003 Gross Amortization Net
------------- ------- -------------- -------
Technology $19,667 $(2,118) $17,549
Other intangible assets 3,446 (1,810) 1,636
------- ------- -------
Total $23,113 $(3,928) $19,185
======= ======= =======
Page 11 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(In thousands)
Accumulated
December 31, 2002 Gross Amortization Net
----------------- ------- -------------- -------
Technology $21,371 $(1,452) $19,919
Other intangible assets 3,411 (1,348) 2,063
------- ------- -------
Total $24,782 $(2,800) $21,982
======= ======= =======
The following table presents the changes in the net balance of other
intangibles assets during the six months ended June 30, 2003.
(In thousands)
Other
Developed Intangible
Technology, net Assets, net Total
--------------- -------------- -------
December 31, 2002 $19,919 $2,063 $21,982
Amortization expense (645) (457) (1,102)
Change in estimate of fair value
related to purchase price
allocations (1,771) -- (1,771)
Net currency translation adjustment 46 30 76
------- ------ --------
June 30, 2003 $17,549 $1,636 $19,185
======= ====== =======
Total estimated future amortization expense of purchased intangible assets
for the next five fiscal years is as follows:
(In thousands)
2004 $1,755
2005 1,494
2006 1,401
2007 1,401
2008 1,401
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. These estimates are adjusted in the
period in which actual results or better information is obtained. 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, the following table
presents the changes in the Corporation's warranty reserves:
Page 12 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(In thousands)
Warranty reserves at December 31, 2002 $ 9,892
Provision for current year sales 718
Change in estimates to pre-existing warranties (446)
Current year claims (1,292)
Translation adjustment 131
-------
Warranty reserves at June 30, 2003 $ 9,003
=======
8. DEBT
On May 1, 2003, the Corporation entered into an agreement with the bank
group to extend the expiration date of its Short-Term Credit Agreement from
May 9, 2003 to May 7, 2004.
9. EARNINGS PER SHARE
Diluted earnings per share were computed based on the weighted average
number of shares outstanding plus all potentially dilutive common shares. A
reconciliation of basic to diluted shares used in the earnings per share
calculation is as follows:
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------- -------- ------- ------
Basic weighted average
shares outstanding 10,301 10,203 10,292 10,163
Dilutive effect of stock options
and deferred stock
compensation 130 308 125 258
------ ------ ------ ------
Diluted weighted average
shares outstanding 10,431 10,511 10,417 10,421
====== ====== ====== ======
The Corporation had antidilutive options outstanding of approximately
80,405 as of June 30, 2003. There were no antidilutive options outstanding
as of June 30, 2002.
10. 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.
Page 13 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
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 2002 Annual Report on Form 10-K.
The Corporation's pro forma results are as follows:
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------- -------- ------- -------
Net earnings, as reported $10,873 $10,816 $24,995 $20,132
Deduct: Total stock-based
employee compensation
expense determined under fair
value based method for all
awards, net of related tax effects (452) (557) (630) (762)
------- ------- ------- -------
Pro forma net earnings $10,421 $10,259 $24,365 $19,370
======= ======= ======= =======
Net earnings per share:
As reported:
Basic $ 1.06 $ 1.06 $ 2.43 $ 1.98
Diluted $ 1.04 $ 1.03 $ 2.40 $ 1.93
Pro forma:
Basic $ 1.01 $ 1.01 $ 2.37 $ 1.91
Diluted $ 1.00 $ 0.98 $ 2.34 $ 1.86
11. 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 continued the operation of the ground water and soil
remediation activities at a previously owned facility located in
Wood-Ridge, New
Page 14 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Jersey, which was sold in December 2001. The Corporation remains
responsible for this remediation in accordance with the sale agreement.
The Corporation is joined with many other corporations and municipalities
as potentially responsible parties in a number of environmental cleanup
sites, which include but are not limited to the Caldwell Trucking landfill
superfund site, Fairfield, New Jersey; Sharkey landfill superfund site,
Parsippany, New Jersey; Pfohl Brothers landfill site, Cheektowaga, New
York; Amenia landfill site, Amenia, New York; and Chemsol, Inc. superfund
site, Piscataway, New Jersey.
In October 2002, the Corporation acquired the Electro-Mechanical Division
("EMD") facility from Westinghouse Government Services LLC ("Seller").
Included in the purchase was the assumption of several Nuclear Regulatory
Commission ("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)
for the settlement of estimated environmental decommissioning and
remediation costs associated with the commercial operations covered by the
licenses. In addition, the Corporation has established reserves for
additional potential environmental remediation costs. Remediation and
investigation of the EMD facility are ongoing. The Corporation obtained
partial environmental insurance coverage specifically for the EMD facility.
The policy provides coverage for losses due to on or off-site pollution
conditions that were pre-existing and unknown at the time of acquisition.
The Corporation believes that the outcome of any of the above mentioned
matters would not have a material adverse effect on the Corporation's
results of operations or financial condition.
12. SEGMENT INFORMATION
The Corporation manages and evaluates its operations based on the products
and services it offers and the different markets it serves. Based on this
approach, the Corporation has three reportable segments: Flow Control,
Motion Control, and Metal Treatment.
(In thousands)
-------------------------------------------------------------------
Three Months Ended June 30, 2003
-------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other Totals
------- ------- --------- -------- --------- ------------
Revenue from external customers $85,617 $60,984 $36,256 $182,857 $ -- $182,857
Intersegment revenues -- -- 136 136 (136) --
Operating income 8,748 4,107 5,030 17,885 (448) 17,437
Page 15 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
(In thousands)
-------------------------------------------------------------------
Three Months Ended June 30, 2002
-------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other Totals
------- ------- --------- -------- --------- ------------
Revenue from external customers $34,752 $59,771 $27,254 $121,777 $ -- $121,777
Intersegment revenues -- -- 119 119 (119) --
Operating income 4,634 7,332 3,576 15,542 (464) 15,078
(In thousands)
---------------------------------------------------------------------
Identifiable Assets
---------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other Totals
-------- -------- --------- -------- --------- ------------
June 30, 2003 $312,511 $278,339 $159,799 $750,649 $110,346 $860,995
December 31, 2002 319,272 260,984 125,642 705,898 107,026 812,924
(In thousands)
---------------------------------------------------------------------
Six Months Ended June 30, 2003
---------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment Totals & Other Totals
-------- -------- --------- -------- --------- ------------
Revenue from external customers $178,958 $118,024 $65,808 $362,790 $ -- $362,790
Intersegment revenues -- -- 268 268 (268) --
Operating income 23,066 9,197 8,781 41,044 (262) 40,782
(In thousands)
-------------------------------------------------------------------------
Six Months Ended June 30, 2002
-------------------------------------------------------------------------
Flow Motion Metal Segment Corporate Consolidated
Control Control Treatment(1) Totals & Other(2) Totals
-------- -------- ------------ -------- ---------- ------------
Revenue from external customers $64,870 $102,023 $52,671 $219,564 $ -- $219,564
Intersegment revenues -- -- 228 228 (228) --
Operating income 8,290 14,114 6,336 28,740 (748) 27,992
(1) 2002 operating income for Metal Treatment includes non-recurring costs of
$451 associated with the relocation of a shot-peening facility.
(2) 2002 operating income for Corporate includes $247 of net environmental
remediation and administrative expenses.
Page 16 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Reconciliation:
(In thousands)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Total segment operating income $17,885 $15,542 $41,044 $28,740
Corporate and administrative (448) (464) (262) (748)
Pension income, net 528 2,254 1,053 4,508
Other income, net 515 448 273 520
Interest expense (942) (466) (1,793) (659)
------- ------- ------- -------
Earnings before income taxes $17,538 $17,314 $40,315 $32,361
======= ======= ======= =======
13. COMPREHENSIVE INCOME
Total comprehensive income for the three months and six months ended June
30, 2003 and 2002 are as follows:
(In thousands)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
Net earnings $10,873 $10,816 $24,995 $20,132
Equity adjustment from
foreign currency translations 5,772 9,344 6,001 8,032
------- ------- ------- -------
Total comprehensive income $16,645 $20,160 $30,996 $28,164
======= ======= ======= =======
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.
14. CONTINGENCIES AND COMMITMENTS
The Corporation's subsidiary located in Switzerland entered into sales
agreements with two European defense organizations which contain offset
obligations to purchase approximately 43.0 million Swiss francs of product
from suppliers located in the two European countries over multi-year
periods which expire in 2005 and 2007. The agreements contain a penalty of
5-10% of the unfulfilled obligation at the end of the term of the
agreements. As of June 30, 2003, the Corporation has accrued 0.6 million
Swiss francs (approximately $0.4 million) included in current liabilities
as a contingency against not achieving compliance with these agreements.
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 (approximately $4.4 million) for the
issue of performance
Page 17 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
guarantees related to a long-term contract. As of June 30, 2003, the amount
of restricted cash under this facility was $2.3 million, all of which is
expected to be released from restriction within one year.
In October 2002, the Corporation acquired EMD. Included in the purchase was
the assumption of 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), for the settlement of estimated environmental
decommissioning and remediation costs associated with the commercial
operations covered by the licenses. The guarantee for the decommissioning
costs of the nuclear facility is $2.8 million, which is scheduled for
completion in 2017.
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.
15. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." This statement addresses financial accounting and reporting
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. The statement requires the
Corporation to recognize the fair value of a liability for an asset
retirement obligation in the period in which it is incurred, if a
reasonable estimate can be made. Upon initial recognition of such a
liability, if any, the Corporation would capitalize the asset retirement
cost as an asset equal to the fair value of the liability and allocate such
cost to expense systematically over the useful life of the underlying
asset. The estimated future liability would be subject to change, with the
effects of such change affecting the asset retirement cost and the related
expense as appropriate. The provisions of this statement are effective for
fiscal years beginning after June 15, 2002. The adoption of this statement
did not have a material impact on the Corporation's results of operation or
financial condition.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." This statement applies to costs
associated with exit or disposal activities and requires that liabilities
for costs associated with these activities be recognized and measured
initially at its fair value in the period in which the liability is
incurred. The provisions of this statement are effective for exit or
disposal activities initiated after December 31, 2002. The adoption of this
statement did not have a material impact on the Corporation's results of
operation or financial condition.
In November 2002, the FASB issued Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Page 18 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
Guarantees of Indebtedness of Others." This interpretation relates to a
guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. This interpretation requires the issuer of a guarantee
to recognize a liability at the inception of that guarantee. The
Corporation is required to apply the interpretation to all guarantees
issued or modified after December 31, 2002. The disclosure requirements of
this interpretation are effective for financial statements of interim and
annual periods ending after December 15, 2002. The adoption of this
statement did not have a material impact on the Corporation's results of
operation or financial condition.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement provides
alternate methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, the statement requires additional disclosures about the methods
of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of this statement are
effective for fiscal years beginning after December 15, 2002. The
Corporation intends on continuing to account for its stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and thus the adoption of the new standard did not have a
material impact on the Corporation's results of operation or financial
condition.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities ("VIE"s)" ("FIN 46"). This interpretation of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements,"
addresses when a company should include in its financial statements the
assets and liabilities of unconsolidated VIEs. FIN 46 is effective for VIEs
created or acquired after January 31, 2003. It applies in the first interim
period beginning after June 15, 2003, to VIEs in which an enterprise holds
a VIE it acquired before February 1, 2003. The adoption of this statement
did not have a material impact on the Corporation's results of operation or
financial condition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This Statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). The Statement is effective for financial instruments
entered into or modified after May 31, 2003. It applies in the first
interim period beginning after June 15, 2003, to entities with financial
instruments acquired before May 31, 2003. The adoption of this statement
did not have a material impact on the Corporation's results of operation or
financial condition.
Page 19 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
NOTES to CONSOLIDATED FINANCIAL STATEMENTS, Continued
(UNAUDITED)
16. SUBSEQUENT EVENTS
Acquisition
Peritek
On August 4, 2003, the Corporation acquired the assets and liabilities of
Peritek Corporation ("Peritek"). The purchase price of the acquisition,
subject to adjustment as provided in the Asset Purchase Agreement, was $3.0
million in cash and the assumption of certain liabilities. The purchase
price was funded from cash available from operations. Annual revenues of
the purchased business are approximately $3.0 million.
Peritek is a leading supplier of video and graphic display boards for the
embedded computing industry and supplies a variety of industries including
aviation, defense and medical. Its graphics controllers include PMC, PCI,
CompactPCI and VME solutions that support a number of operating languages
including Solaris, Windows, Linux, VxWorks and LynuxOS. In addition,
Peritek supplies products for bomb detection, industrial automation and
medical imaging application. Management intends to integrate the operations
of Peritek into the Corporation's Motion Control Segment.
Page 20 of 35
PART I - ITEM 2
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS
RESULTS of OPERATIONS
Three months ended June 30, 2003
Sales for the second quarter of 2003 totaled $182.9 million, an increase of 50%
from sales of $121.8 million for the second quarter of 2002. New orders received
for the current quarter of $185.1 million were up 57% over the orders of $117.8
million for the second quarter of 2002. Backlog increased 7% to a new record
high of $511.5 million at June 30, 2003 from $478.5 million at December 31,
2002. Approximately 70% of our backlog is from military business. Sales for the
second quarter of 2003 as compared to the same period last year benefited from
the acquisitions completed in the fourth quarter of 2002 and the first six
months of 2003, which contributed $59.5 million to sales in the quarter. Sales
adjusted to exclude those acquisitions were $123.4 million in the second quarter
of 2003, an increase of 1% over the same period last year. Higher sales of flow
control products to the non-nuclear naval program, the nuclear power generation,
and European valve markets, higher sales from our domestic ground defense
business and from our shot peening services, all contributed to the growth in
base businesses. Sales to the commercial aerospace OEM and overhaul and repair
markets were down for the quarter. Foreign exchange translation also had a
favorable impact on sales, contributing approximately 3% to the sales increase
from the prior year.
Operating income for the second quarter of 2003 totaled $17.4 million, an
increase of 16% from operating income of $15.1 million for the same period last
year. The increase is primarily attributable to the contributions of
acquisitions completed in the fourth quarter of 2002 and the first six months of
2003, which amounted to $6.1 million. Operating income excluding these
acquisitions was $11.3 million, a 25% decrease over the same period last year.
Operating margins from the base business units decreased in the second quarter
of 2003 as compared to the prior year mainly due to unfavorable sales mix, lower
volume within the Motion Control segment, higher facility start-up costs and the
bankruptcy of a major customer for the Metal Treatment segment, and higher
research and development costs, partially offset by favorable foreign currency
translation.
Net earnings for the second quarter of 2003 totaled $10.9 million, or $1.04 per
diluted share, which represents an increase of 1% over the net earnings for the
second quarter of 2002 of $10.8 million, or $1.03 per diluted share. Higher
business segment operating income in the second quarter of 2003 more than offset
the decrease in the Corporation's pension income as compared to the second
quarter of 2002.
Page 21 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
RESULTS of OPERATIONS
Six months ended June 30, 2003
Sales for the first six months of 2003 increased 65% to $362.8 million, as
compared to $219.6 million for the same period last year. Acquisitions made
during the last fifteen months contributed $134.8 million in incremental sales
during the first six months of 2003. New orders of $391.0 million were 83%
higher than the first six months of 2002, mainly due to the above-mentioned
acquisitions, and were split evenly between military and commercial. Higher
sales of flow control products for the commercial nuclear power generation,
non-nuclear naval program, and European valve markets, higher sales from our
domestic ground defense business, and higher metal treatment related services
mostly offset declines in aerospace component overhaul and repair services,
sales of commercial aerospace OEM products and European ground defense business.
In addition, foreign currency translation had a favorable impact on sales of
approximately $7.4 million for the year.
Operating income for the first six months of 2003 totaled $40.8 million, an
increase of 46% from operating income of $28.0 million for the same period last
year. The increase is primarily attributed to the contributions of acquisitions
made during the last fifteen months, which amounted to $16.1 million in
incremental operating income, and solid organic growth in our base flow control
and metal treatment businesses. These improvements were offset by lower margins
as a result of lower volume in the commercial aerospace and overhaul and repair
businesses and lower margins attributable to unfavorable sales mix within the
European ground defense business and the oil and gas markets. Another factor
contributing to the change was a favorable foreign currency translation.
Net earnings for the first six months of 2003 totaled $25.0 million, or $2.40
per diluted share, an increase of 24% from net earnings for the first six months
of 2002 of $20.1 million, or $1.93 per diluted share. This increase reflects the
higher business segment operating income in 2003, which offset the decrease in
the lower non-operating pension income.
Operating Performance:
Flow Control
The Corporation's Flow Control segment posted sales of $85.6 million for the
second quarter of 2003, an increase of 146% when compared with $34.8 million in
the second quarter of 2002. Acquisitions completed in the fourth quarter of 2002
represented $49.4 million of this increase, while the balance of the segment's
businesses increased $1.5 million, or 4%, as compared to the second quarter of
2002. The organic growth was due to stronger sales of products for the
non-nuclear navy and commercial power generation markets, and higher
international valve sales. In addition, foreign currency translation favorably
impacted sales for the second quarter of 2003 by approximately $0.6 million.
Page 22 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Operating income for the second quarter of 2003 was $8.7 million, an increase of
89% as compared to $4.6 million for the same period last year. Acquisitions made
in the fourth quarter of 2002 generated operating income of $5.0 million, while
the balance of the segment businesses declined 19% over the comparable period
last year. The lower operating margins were due to unfavorable sales mix and
higher research and development costs for new product development.
Sales for the first six months of 2003 were $179.0 million, an increase of 176%
over the same period last year of $64.9 million. The improvement was largely due
to the acquisitions made during the last fifteen months and solid sales in most
of the base businesses, including non-nuclear products for the navy and
commercial power generation plants, and higher sales to the domestic and
international oil and gas markets. Foreign currency translation also favorably
impacted the sales growth.
Operating income for the first six months of 2003 was $23.1 million, an increase
of 178% over the same period last year of $8.3 million. The improvement resulted
from the higher sales volumes, improved margins on flow control products for
commercial nuclear applications and heavy truck markets, and overall cost
reduction programs. Operating income for the first six months of 2003 from our
base businesses increased 7% as compared to the prior year period.
New orders received for the Flow Control segment totaled $68.1 million in the
second quarter of 2003 and $192.3 million for the first six months of 2003,
representing an increase of 123% and 169%, respectively from the same periods in
2002. New orders from the acquisitions made during the last fifteen months
amounted to $30.3 million and $123.8 million for the three and six months ended
June 30, 2003, respectively. Backlog increased 4% to $317.6 million at June 30,
2003 from $304.3 million at December 31, 2002.
Motion Control
Sales for the Corporation's Motion Control segment improved 2% to $61.0 million
in the second quarter of 2003, from $59.8 million in the second quarter of 2002,
primarily due to the contribution of the acquisition of Collins Technologies in
February 2003. Excluding the acquisition, the base business experienced a
decline of 2% from the second quarter of 2002 mainly due to the reduction in
commercial aircraft production, lower sales associated with the overhaul and
repair services provided to the global airline industry, and a slight drop in
the European ground defense business. These lower sales were partially offset by
stronger domestic ground defense sales primarily related to the expedited
deliveries of the Bradley fighting vehicle and an increase in sales of military
aerospace products, primarily F-16 spare parts. In addition, foreign currency
translation favorably impacted sales for the second quarter of 2003 by
approximately $2.2 million.
Page 23 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Operating income for the second quarter of 2003 was $4.1 million, a decrease of
44% from the same period last year of $7.3 million. Lower margins were driven by
lower sales volume as mentioned above, unfavorable sales mix, higher than
planned research and development costs, and the timing of certain trade show
expenses. The contribution from the Collins Technologies acquisition partially
offset these declines. The business segment also benefited from favorable
foreign currency translation as compared to the second quarter of 2002.
Sales for the first six months of 2003 were $118.0 million, an increase of 16%
over the same period last year of $102.0 million. The improvement was largely
due to the acquisitions made during the last fifteen months and the strong sales
of defense related products, partially offset by lower aerospace component
overhaul and repair services and commercial aerospace OEM products. Foreign
currency translation also favorably impacted the sales growth.
Operating income for the first six months of 2003 was $9.2 million, a decrease
of 35% over the same period last year of $14.1 million. The lower operating
income was due to lower sales volume and unfavorable sales mix, partially offset
by the contributions from the acquisitions made during the last fifteen months
and the favorable impact of foreign currency translations.
New orders received for the Motion Control segment totaled $80.5 million in the
second quarter of 2003 and $132.4 million for the first six months of 2003, an
increase of 34% and 48%, respectively, from the same periods in 2002. New orders
from the 2002 and 2003 acquisitions amounted to $14.8 million and $45.1 million
for the three and six months ended June 30, 2003, respectively. Backlog
increased 11% to $192.4 million at June 30, 2003 from $173.2 million at December
31, 2002.
Metal Treatment
Sales for the Corporation's Metal Treatment segment totaled $36.3 million for
the second quarter of 2003, up 33% when compared with $27.3 million in the
second quarter of 2002. The improvement was mainly due to contributions from the
2002 and 2003 acquisitions, which contributed $7.8 million of sales to the
second quarter of 2003. The main contributor to this increase was the E/M
Coatings business, which was acquired on April 2, 2003. Higher sales of shot
peening services for the aerospace and automotive industries in Europe and sales
from our new laser peening technology also contributed to the higher sales for
the quarter. In addition, foreign currency translation favorably impacted sales
for the second quarter of 2003 by approximately $1.4 million.
Operating income for the second quarter of 2003 increased 41% to $5.0 million
from $3.6 million for the same period last year. The increase was due to higher
sales volume, cost reduction programs, and favorable foreign currency
translation. A major customer bankruptcy and facility start-up costs partially
offset the above mentioned margin improvements.
Page 24 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Sales for the first six months of 2003 were $65.8 million, an increase of 25%
over the same period last year of $52.7 million. The increase was mainly due to
the contribution from the acquisition of E/M Coatings, higher sales of shot
peening and laser peening services, and the favorable impact from foreign
currency translation.
Operating income for the first six months of 2003 was $8.8 million, an increase
of 39% over the same period last year of $6.3 million. The increase was due to
the higher sales volume, cost reduction programs, and favorable foreign currency
translation. These improvements were partially offset by the above mentioned
bankruptcy and start-up costs.
New orders received for the Metal Treatment segment totaled $36.5 million in the
second quarter of 2003 and $66.3 million for the first six months, increases of
22% and 28%, respectively, from the same periods in 2002. Backlog increased 50%
to $1.5 million from $1.0 million at December 31, 2002.
Corporate and Other Expenses
The Corporation had a non-segment operating loss in the first half of 2003 of
$0.3 million as compared to $0.7 million in the same period last year. The
decrease was primarily due to the collection in 2003 on a settlement from a 2002
lawsuit, whereby the Corporation was awarded damages associated with our former
Wood-Ridge Business Complex facility. The non-segment operating loss for the
first half of 2002 also included net environmental remediation costs.
Non-Operating Revenues/Expense
For the second quarter of 2003, the Corporation recorded other non-operating net
revenues totaling $1.0 million, compared with $2.7 million for the second
quarter of 2002. The decrease was primarily caused by lower pension income,
primarily due to lower investment returns on the Corporation's pension assets
and lower interest rates.
The Corporation recorded other non-operating net losses for the first six months
of 2003 totaling $1.3, compared with other non-operating net revenues of $5.0
million for the same period last year. The decrease was also related primarily
to the above-mentioned lower returns on pension income.
CHANGES IN FINANCIAL CONDITION
Liquidity and Capital Resources
The Corporation's working capital was $151.1 million at June 30, 2003, an
increase of $13.9 million from the working capital at December 31, 2002 of
$137.2 million. The ratio of current assets to current liabilities was 2.0 to 1
at June 30, 2003 versus 1.8 to 1 at December 31, 2002.
Page 25 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
Cash and cash equivalents totaled $48.2 million in the aggregate at June 30,
2003, up 1% from $47.7 million at the prior year-end. In addition to the impact
of the three acquisitions completed during the first six months of 2003, working
capital changes were highlighted by a net increase to inventory of $9.6 million
due to higher forecasted sales. Days sales outstanding at June 30, 2003 was 52
days as compared to 54 days at December 31, 2002. Inventory turns were 5.9 for
the six months ended June 30, 2003 as compared to 4.1 during the same period a
year ago.
At June 30, 2003, 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 expires May 7, 2004, and may be extended, with the consent of the bank
group, for additional periods not to exceed 364 days each. Borrowings under
these agreements bear interest at a floating rate based on market conditions. In
addition, the Corporation's rate of interest and payment of facility fees are
dependent on certain financial ratios of the Corporation, as defined in the
agreements. As of June 30, 2003, the Corporation pays annual facility fees on
the entire commitments of the Revolving Credit Agreement and Short-Term Credit
Agreement. The Corporation is required under these agreements to maintain
certain financial ratios and meet certain net worth and indebtedness tests. Cash
borrowings (excluding letters of credit) under the two credit agreements at June
30, 2003 were $159.6 million compared with cash borrowings of $33.4 million at
June 30, 2002. The unused credit available under these agreements at June 30,
2003 was $45.2 million.
Industrial revenue bonds, which are collateralized by real estate, machinery,
and equipment, were $14.4 million at June 30, 2003 and $13.4 million at June 30,
2002. The loans outstanding under the Revolving Credit Agreement and Industrial
Revenue Bonds had variable interest rates averaging 2.1% and 2.4% for the second
quarter of 2003 and 2002, respectively.
During the six months ended June 30, 2003, internally available funds were
adequate to meet capital expenditures of $15.8 million. Capital expenditures
incurred during the period were for 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
$30 million during the balance of the year on machinery and equipment for
ongoing operations at the business segments, expansion of existing facilities,
and investments in new product lines and facilities. Included in the capital
expenditures during the first quarter of 2003 was $3.1 million from the
businesses acquired in 2003 and 2002.
Cash generated from operations is considered adequate to meet the Corporation's
cash requirements for the upcoming year, including anticipated debt repayments,
planned
Page 26 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
capital expenditures, dividends, satisfying environmental obligations, and
working capital requirements. Undistributed earnings from the Corporation's
foreign subsidiaries are considered to be permanently reinvested.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are based on the selection and application
of significant accounting policies, which require management to make significant
estimates and assumptions. 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
which serve commercial markets.
For certain contracts that require substantial 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 government contracts that contain a significant number
of external performance milestones, as defined by the customer, sales are
recorded based upon achievement of these external 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 external milestones exist, the cost-to-cost method of
accounting is used. 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, direct
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
Page 27 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
reflect changes in cost and operating performance throughout the contract and
could have a significant impact on operating performance.
Under certain commercial contracts that take less than a year to complete and
where the contract amount is less than one million dollars, the completed
contract method is utilized. Under the completed contract method, revenue and
costs are recognized when the Corporation substantially completes work under the
contract.
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 are 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 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. 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 a reduction to inventory and receivables. Progress
billings are generally based on costs incurred, including direct costs,
overhead, and general and administrative costs and are a reduction to inventory.
Pension and other postretirement benefits: The Corporation, in consultation with
its actuary, determines the appropriate assumptions for use in determining the
liability for future pension and other postemployment 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.
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CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
For the six months ended June 30, 2003, the Corporation recognized non-cash
pension income from the Curtiss-Wright Pension Plan of approximately $1.1
million because the excess of amounts funded for the pension plan in prior years
yields returns that exceed the calculated costs associated with the liability in
the current year. As of June 30, 2003, the Corporation had a prepaid pension
asset of approximately $77.1 million and accrued pension and other
postretirement costs of $2.4 million relating to the Curtiss-Wright Retirement
Plan and the Curtiss-Wright Restoration Plan. As a result of the acquisition of
EMD in October 2002, the Corporation assumed underfunded pension and
postretirement liabilities of $73.7 million. Expenses incurred during the six
months ended June 30, 2003 related to the EMD plans were approximately $3.7
million. Additionally, the Corporation made a $2.5 million contribution to the
EMD Pension Plan on April 15, 2003.
The timing and amount of future pension income or expense to be recognized each
year is dependent on the demographics and expected earnings of the plan
participants, the expected interest rates in effect in future years, and the
actual and expected investment returns of the assets in the pension trust.
Additionally, the Corporation will experience additional pension and
postretirement costs in the future due to the acquisition of EMD and the
assumption of its pension plan.
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, in
consultation with third-party valuation advisors, determines the fair values of
such assets and liabilities. During 2003, the fair value of assets acquired and
liabilities assumed through acquisitions were estimated to be $38.3 million and
$2.8 million, respectively. The assigned initial fair value to these
acquisitions are tentative and may be revised prior to finalization, which is to
be completed within a reasonable period, generally within one year of
acquisition.
Goodwill: As a result of acquisitions made, the Corporation has approximately
$211.9 million in goodwill as of June 30, 2003. 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
Page 29 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
MANAGEMENT'S DISCUSSION and ANALYSIS of
FINANCIAL CONDITION and RESULTS of OPERATIONS, continued
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. 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 that it has been
identified.
Other intangible assets: Other intangible assets are the result of acquisitions
and consist primarily of purchased technology, backlog, and technology licenses.
Intangible assets are recorded at their fair values as determined through
purchase accounting and are amortized ratably to match their cash flow streams
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 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.
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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
six months ended June 30, 2003. 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, 2002.
Item 4. CONTROLS AND PROCEDURES
As of June 30, 2003, management, including the Company's Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based upon, and
as of the date of that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures were
effective, in all material respects, to ensure that information required to be
disclosed in the reports the Company files and submits under the Exchange Act is
recorded, processed, summarized, and reported as and when required.
There have been no significant changes in the Company's internal controls, or in
other factors that could significantly affect internal controls, subsequent to
the date the Chief Executive Officer and Chief Financial Officer completed their
evaluation.
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
Page 31 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
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 levels, and (viii) other factors that generally affect the
business of companies operating in the Corporation's Segments.
Page 32 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
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.
Item 4. SUBMISSION of MATTERS to a VOTE of SECURITY HOLDERS
On May 23, 2003, the Registrant held its annual meeting of stockholders. The
matters submitted to a vote by the stockholders were the election of directors,
the amendment of the 1995 Long-Term Incentive Plan, the amendment to the
Certificate of Incorporation, the adoption of the Employee Stock Purchase Plan,
and the appointment of independent accountants for the Registrant.
The vote received by the director nominees was as follows:
For Withheld
Class B common:
Martin R. Benante 3,822,616 30,205
James B. Busey IV 3,795,123 57,697
Dave Lasky 3,823,769 29,050
William B. Mitchell 3,815,686 37,135
John Myers 3,816,413 36,408
William W. Sihler 3,789,329 36,408
J. McLain Stewart 3,830,501 22,318
Common:
S. Marce Fuller 4,722,241 385,062
There were no votes against or broker non-votes.
The stockholders voting as a single class approved the amendment to the 1995
Long-Term Incentive Plan to authorize non-employee directors to participate
under the plan. The holders of 8,009,548 shares voted in favor; 885,598 voted
against and 64,968 abstained. There were no broker non-votes.
Page 33 of 35
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
The stockholders voting as a single class approved the amendment to the
Certificate of Incorporation authorizing the increase of authorized shares of
Common Stock from 11,250,000 shares to 33,750,000 shares. The holders of
6,475,212 shares voted in favor; 2,433,259 voted against and 51,540 abstained.
There were no broker non-votes.
The stockholders voting as a single class approved the adoption of the 2003
Employee Stock Purchase Plan. The holders of 7,108,508 shares voted in favor;
217,933 voted against and 43,746 abstained.
The stockholders approved the appointment of Deloitte & Touche LLP, independent
accountants for the Registrant. The holders of 8,826,149 shares voted in favor;
97,876 voted against and 35,875 abstained. There were no broker non-votes.
Item 6. EXHIBITS and REPORTS on FORM 8-K
(a) Exhibits
Exhibit 3 Amended and Restated Certificate of Incorporation as
amended May 23, 2003.
Exhibit 10.1 Amended and Restated Curtiss-Wright Corporation
1995 Long-Term Incentive Plan (incorporated by
reference to Appendix VI to Registrant's
Definitive Proxy Statement on Schedule 14A filed
on April 11, 2003)
Exhibit 10.2 Mutual Separation Agreement dated May 21, 2003
between Gary A. Benschip and Registrant
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
1. On July 31, 2003 filed a Current Report on Form 8-K, dated
July 30, 2003, (a) reporting under Item 12 thereof the
results of the Company's operations for the quarter ended
June 30, 2003, and (b) filing under Item 7 thereof the
related press release.
Page 34 of 35
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: August 13, 2003
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