CW

Curtiss-Wright Corp. 10-Q Summary: Period Ended September 30, 2006

Business Context and Reporting Period

Curtiss-Wright Corporation is a diversified multinational manufacturer of precision components and systems serving aerospace, defense, automotive, oil and gas, and power generation industries. Operations are organized into three segments: Flow Control, Motion Control, and Metal Treatment. This report covers the quarterly period ended September 30, 2006, and the nine months ended on that date. The company completed a 2-for-1 stock split on April 21, 2006, and all share data has been adjusted accordingly.

Key Financial Metrics

Liquidity: The company maintains a current ratio of 2.5 to 1. Unused credit availability under the Revolving Credit Agreement was $340.0 million as of September 30, 2006.

Material Changes vs. Prior Period

• Revenue Growth: Q3 sales increased 15% and 9M sales increased 11% year-over-year. Growth was driven by organic increases in all three segments and contributions from three acquisitions made in 2006 (Enpro Systems, Swantech, and Allegheny Coatings).
• Profitability: Operating income rose 15% in Q3 and 2% for the nine-month period. The 9M increase was modest due to a non-recurring $2.8M gain on the sale of real estate in Q1 2005 and higher corporate costs in 2006.
• Segment Performance:
  • Motion Control: Strongest performer with 37% organic operating income growth in Q3, driven by embedded computing products for ground defense and commercial aerospace.
  • Metal Treatment: 21% operating income growth in Q3 due to higher volumes in shot peening and heat treating.
  • Flow Control: Flat operating income in Q3 despite 11% organic sales growth, offset by higher material costs and integration expenses.
• Balance Sheet: Receivables increased $21.7M and inventories increased $30.3M compared to year-end 2005, reflecting higher sales volume and build-up for Q4 demand. Long-term debt increased by $21.0M.

Guidance, Outlook, and Risks

• Outlook: Management expects continued growth driven by defense, oil and gas, and commercial aerospace markets. Capital expenditures for the remainder of 2006 are estimated at approximately $10 million.
• Accounting Changes: The company adopted FAS 123(R) for share-based compensation in 2006, resulting in an additional $3.4M expense for the nine months ended Sept 30. The company is evaluating the impact of SFAS 158 (pension accounting) and FIN 48 (income tax uncertainty), which will be effective in 2007.
• Risks: Key risks include fluctuations in foreign currency exchange rates (specifically the Canadian dollar), changes in U.S. defense budgets, supply constraints, and the ability to execute on long-term contracts. Approximately 50% of revenues are defense-related.
• Subsequent Events: A $1.5M tax reserve release related to a former facility sale is expected to impact Q4 2006 earnings.

Investor Verification Checklist

• Acquisition Integration: Verify the timeline for the three 2006 acquisitions to reach profitability, as they currently contribute to integration costs.
• Working Capital Trends: Monitor Days Sales Outstanding (increased to 53 days) and Inventory Turns (decreased to 4.9) to ensure cash flow efficiency does not deteriorate.
• Defense Contract Timing: Assess the impact of contract timing on Flow Control and Motion Control segments, particularly regarding submarine and aircraft carrier programs.
• Pension Obligations: Review the impact of SFAS 158 adoption on the balance sheet in the upcoming fiscal year-end.
• Foreign Currency Exposure: Evaluate the sensitivity of operating income to fluctuations in the Canadian dollar, which adversely impacted results in the first nine months.