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CW > SEC Filings for CW > Form 10-K on 21-Feb-2014All Recent SEC Filings

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Form 10-K for CURTISS WRIGHT CORP


21-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Analytical Definitions
Throughout management's discussion and analysis of financial condition and results of operations, the terms "incremental" and "organic" are used to explain changes from period to period. The term "incremental" is used to highlight the impact acquisitions had on the current year results, for which there was no comparable prior-year period. Therefore, the results of operations for acquisitions are incremental for the first twelve months from the date of acquisition. The remaining businesses are referred to as the "organic". The definition of "organic" excludes the effect of foreign currency translation.
COMPANY ORGANIZATION
Our Management's Discussion and Analysis of Financial Condition and Results of Operations begins with an overview of our company, followed by economic and industry-wide factors impacting our company and the markets we serve, a discussion of the overall results of operations, and finally a more detailed discussion of those results within each of our reportable operating segments. We manage and evaluate our operations based on the products and services we offer and the different industries and markets we serve. Based on this approach, we have three reportable segments: Flow Control, Controls, and Surface Technologies. For further information on our products and services and the major markets served by our three segments, refer to the Business Description in Part I, Item I of this Annual Report on Form 10-K. Market Analysis and Economic Factors
Economic Factors Impacting Our Markets
General Economy
Many of Curtiss-Wright's industrial businesses are driven in large part by global economic growth. World economies continue to slowly recover from the 2008-2009 global recession, as well as from the aftermath of the tsunami that struck Japan early in 2011. However, pockets of global economic instability remain, particularly in Europe. In 2013, the U.S. economy, as measured by real gross domestic product (GDP), showed only modest growth of 1.9%, according to the most recent estimate, compared with a 2.8% increase in 2012 and a 1.8% increase in 2011. While U.S. GDP continues to grow modestly from the global economic recession, the U.S. continues to deal with high levels of unemployment, higher taxes, and uncertainty in the housing market.


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


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


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


RESULTS OF OPERATIONS

                                                 Year Ended December 31,                       Percent changes
(In thousands, except percentages)        2013            2012            2011         2013 vs. 2012      2012 vs. 2011

Sales:
Flow Control                          $ 1,299,679     $ 1,095,349     $ 1,060,774            19  %              3  %
Controls                                  898,168         726,678         709,159            24  %              2  %
Surface Technologies                      312,924         275,689         246,809            14  %             12  %
Total sales                           $ 2,510,771     $ 2,097,716     $ 2,016,742            20  %              4  %

Operating income:
Flow Control                          $   116,510     $    78,779     $   103,421            48  %            (24 )%
Controls                                  108,558          86,515          75,423            25  %             15  %
Surface Technologies                       50,992          27,494          31,476            85  %            (13 )%
Corporate and eliminations                (42,441 )       (31,342 )       (23,466 )         (35 )%            (34 )%
Total operating income                $   233,619     $   161,446     $   186,854            45  %            (14 )%

Interest expense                          (37,020 )       (26,329 )       (20,834 )          41  %             26  %
Other income, net                           1,354             245             862           453  %            (72 )%

Earnings before income taxes              197,953         135,362         166,882            46  %            (19 )%
Provision for income taxes                (59,972 )       (43,073 )       (48,262 )          39  %            (11 )%
Earnings from continuing operations   $   137,981     $    92,289     $   118,620            50  %            (22 )%

New orders                            $ 2,508,432     $ 1,981,010     $ 2,029,414
Backlog                               $ 1,715,622     $ 1,653,942     $ 1,694,650

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


Net sales by market
                                                Year Ended December 31,                       Percent changes
(In thousands, except percentages)       2013            2012            2011         2013 vs. 2012      2012 vs. 2011

Defense markets:
Aerospace                            $   277,593     $   307,263     $   310,515           (10 )%             (1 )%
Ground                                    93,472         107,411         119,381           (13 )%            (10 )%
Naval                                    373,095         337,698         362,826            10  %             (7 )%
Other                                     16,711          27,146          32,534           (38 )%            (17 )%
Total Defense                        $   760,871     $   779,518     $   825,256            (2 )%             (6 )%

Commercial markets:
Aerospace                            $   418,364     $   363,832     $   299,816            15  %             21  %
Oil and Gas                              448,418         253,745         241,369            77  %              5  %
Power Generation                         462,041         433,747         385,452             7  %             13  %
General Industrial                       421,077         266,874         264,849            58  %              1  %
Total Commercial                     $ 1,749,900     $ 1,318,198     $ 1,191,486            33  %             11  %

Total Curtiss-Wright                 $ 2,510,771     $ 2,097,716     $ 2,016,742            20  %              4  %

Components of sales and operating income growth (decrease):

                                2013 vs. 2012           2012 vs. 2011
                                       Operating                Operating
                             Sales       Income      Sales       Income
Organic                        1 %           32 %     -  %        (12 )%
Acquisitions/divestitures     19 %           11 %     5  %         (1 )%
Foreign currency               - %            2 %    (1 )%         (1 )%
Total                         20 %           45 %     4  %        (14 )%

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


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


Backlog and new orders . . .

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