Curtiss-Wright Corporation 1200 Wall Street West Lyndhurst, New Jersey 07071 solutions annual report 2000 engineered driven growing a tradition of engineering excellence Curtiss-Wright Corporation Curtiss-Wright Corporation Curtiss-Wright Corporation 1200 Wall Street West Lyndhurst, New Jersey 07071 solutions annual report 2000 engineered driven growing a tradition of engineering excellence Curtiss-Wright Corporation Curtiss-Wright Corporation contents 02 Challenges and Solutions 19 Forward-Looking Statements 24 Report of Independent Accountants 14 At a Glance 16 Letter to Shareholders 19 Quarterly Results of Operations 19 Consolidated Selected Financial Data 20 Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Report of the Corporation 25 Consolidated Financial Statements 29 Notes to Consolidated Financial Statements 41 Corporate Directory and Information company overview Curtiss-Wright Corporation is a diversified global provider of highly engineered products and services to the Motion Control, Flow Control, and Metal Treatment industries. The firm employs 2,286 people. More information on Curtiss-Wright can be found on the Internet at www.curtisswright.com net sales ($000s) sales per employee ($) operating income ($000s) net earnings ($000s) Return on sales Return on average assets Return on average stockholders’ equity 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Sales $329,575 180,000 60,000 Reported $52,185 Sales Per Employee $144,773 160,000 140,000 120,000 100,000 50,000 40,000 30,000 20,000 10,000 80,000 0 Normalized $47,986 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Reported $41,074 New orders Backlog at year-end Normalized $37,910 Year-End Financial Position Working capital Current ratio Total assets Stockholders’ equity Stockholders’ equity per common share Other Year-End Data Depreciation and amortization Capital expenditures Shares of common stock outstanding Number of stockholders Number of employees Dividends per Common Share 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 Compound annual growth rate for Sales was 18%. Compound annual growth rate for Normalized Operating Income was 33%. Compound annual growth rate for Normalized Net Earnings was 24%. (1)Earnings have been adjusted to exclude the effects of environmental insurance settlements, postretirement benefits, postemployment costs, recapitalization costs, a gain on sale of a nonoperating facility and consolidation costs. financial highlights (Dollars in thousands, except per share data; unaudited) 2000 1999 1998 Performance Net Sales Earnings before interest, taxes, depreciation, amortization and pension income Net earnings Normalized net earnings(1) Diluted earnings per common share Normalized diluted earnings per common share $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 329,575 74,247 41,074 37,910 4.03 3.72 12.5% 10.3% 15.0% 299,403 182,648 149,779 3.9 to 1 409,416 290,224 28.97 14,346 9,506 10,017,280 3,602 2,286 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 293,263 70,888 39,045 34,042 3.82 3.33 13.3% 10.6% 16.0% 295,709 212,820 124,438 3.2 to 1 387,126 258,355 25.73 12,864 19,883 10,040,250 3,854 2,267 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 249,413 52,600 29,053 27,817 2.82 2.70 11.6% 9.1% 13.4% 232,217 198,297 130,763 2.9 to 1 352,740 229,593 22.53 9.661 10.642 10,190,790 3,926 2,052 0.52 $ 0.52 $ 0.52 y g o l o n h c e T e c a p S & k e e W n o i t a i v A : t i d e r C h p a r g o t o h P 2 2 - F e a R n h o J : y h p a r g o t o h P d e t c e l e S o c s i c n a r F n a S / k r o Y w e N G C V : n g i s e D contents 02 Challenges and Solutions 19 Forward-Looking Statements 24 Report of Independent Accountants 14 At a Glance 16 Letter to Shareholders 19 Quarterly Results of Operations 19 Consolidated Selected Financial Data 20 Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Report of the Corporation 25 Consolidated Financial Statements 29 Notes to Consolidated Financial Statements 41 Corporate Directory and Information company overview Curtiss-Wright Corporation is a diversified global provider of highly engineered products and services to the Motion Control, Flow Control, and Metal Treatment industries. The firm employs 2,286 people. More information on Curtiss-Wright can be found on the Internet at www.curtisswright.com net sales ($000s) sales per employee ($) operating income ($000s) net earnings ($000s) Return on sales Return on average assets Return on average stockholders’ equity 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Sales $329,575 180,000 60,000 Reported $52,185 Sales Per Employee $144,773 160,000 140,000 120,000 100,000 50,000 40,000 30,000 20,000 10,000 80,000 0 Normalized $47,986 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Reported $41,074 New orders Backlog at year-end Normalized $37,910 Year-End Financial Position Working capital Current ratio Total assets Stockholders’ equity Stockholders’ equity per common share Other Year-End Data Depreciation and amortization Capital expenditures Shares of common stock outstanding Number of stockholders Number of employees Dividends per Common Share 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 Compound annual growth rate for Sales was 18%. Compound annual growth rate for Normalized Operating Income was 33%. Compound annual growth rate for Normalized Net Earnings was 24%. (1)Earnings have been adjusted to exclude the effects of environmental insurance settlements, postretirement benefits, postemployment costs, recapitalization costs, a gain on sale of a nonoperating facility and consolidation costs. financial highlights (Dollars in thousands, except per share data; unaudited) 2000 1999 1998 Performance Net Sales Earnings before interest, taxes, depreciation, amortization and pension income Net earnings Normalized net earnings(1) Diluted earnings per common share Normalized diluted earnings per common share $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 329,575 74,247 41,074 37,910 4.03 3.72 12.5% 10.3% 15.0% 299,403 182,648 149,779 3.9 to 1 409,416 290,224 28.97 14,346 9,506 10,017,280 3,602 2,286 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 293,263 70,888 39,045 34,042 3.82 3.33 13.3% 10.6% 16.0% 295,709 212,820 124,438 3.2 to 1 387,126 258,355 25.73 12,864 19,883 10,040,250 3,854 2,267 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 249,413 52,600 29,053 27,817 2.82 2.70 11.6% 9.1% 13.4% 232,217 198,297 130,763 2.9 to 1 352,740 229,593 22.53 9.661 10.642 10,190,790 3,926 2,052 0.52 $ 0.52 $ 0.52 y g o l o n h c e T e c a p S & k e e W n o i t a i v A : t i d e r C h p a r g o t o h P 2 2 - F e a R n h o J : y h p a r g o t o h P d e t c e l e S o c s i c n a r F n a S / k r o Y w e N G C V : n g i s e D annual report 2000 The cornerstone of Curtiss-Wright’s past successes and future growth is our ability to provide engineered solutions to our customers’ problems. Many of the products and services we provide require a close working relationship with our customers in order to satisfy their demanding performance parameters. Our engineering capabilities are an important part of the package that we bring to the marketplace. Whether it is actuation systems for wing flap systems, severe duty nuclear valves, or our metallurgical expertise in shot peening and heat treating, we work alongside our customers to solve their engineering challenges and ultimately improve the performance of the products or services they provide. Curtiss-Wright Corporation and Subsidiaries 1 challenge The F-22 is the next generation tactical fighter for the United States Air Force. The aircraft has a stealth design to minimize the chance of detection by radar. In order to maintain its invisibility, all weapons are carried within the aircraft rather than on its wings. The challenge was to develop a stealth system for opening the bomb bay doors, each of which is about the size of a garage door, to allow the weapons to be deployed without significantly changing the aircraft’s radar signature. Door opening and closing had to be accomplished in a matter of seconds while traveling at extremely high speeds and enduring extreme aerodynamic forces. 2 Curtiss-Wright Corporation and Subsidiaries solution n o . 1 8 6 6 0 0 FIGURE 1.1 WEAPONS BAY DOOR POWER DRIVE UNIT door power drive unit speed versus time Zero to 10,000 rpm in 0.2 of a second ) m p r ( d e e p S 12000 10000 8000 6000 4000 2000 0 100 500 1000 1500 2000 Time (milliseconds) Curtiss-Wright designed, tested and will manu- facture the actuation system, which will operate under the most demanding conditions. Not only will it be used on the F-22, but it will also provide an experience base for the development of similar systems for future military aircraft. It has already been adapted to a prototype for a new unmanned attack aircraft. 2 1 . E R U G I F Curtiss-Wright components and systems help make the F-22 the world’s most advanced tactical fighter, which will allow the United States to maintain its air superiority in the decades ahead. challenge In the past, components used in aircraft and automotive applications experienced metal fatigue failures due to the extreme loads under which they operated. In response to this challenge, Curtiss-Wright developed an application of our shot-peening process that improved the components’ resistance to metal fatigue and stress corrosion cracking, thereby extending their life and reliability. However, our customers had further requirements for improving the performance of their products. In addition to enhancing the mechanical properties of these components, there was the need to reduce the weight of the end products while maintaining durability. 6 Curtiss-Wright Corporation and Subsidiaries solution n o . A G 7 2 9 0 FIGURE 2.1 LASER PEENING laser peening provides 4x or more deeper levels of residual compressive stress Ordinary Shot Peening Curtiss-Wright is working with Lawrence Livermore National Laboratory in developing an advanced metal surface treatment process utilizing laser technology. The result is a deeper Lasershotsm Peened by MIC-LLNL surface compression that significantly improves resistance to metal fatigue and stress corrosion cracking beyond what is currently provided for by other surface treatment processes. ) i s k ( s s e r t S e v i s s e r p m o C 20 0 -20 -40 -60 -80 -100 -120 -140 -160 -180 .00 .01 .02 .03 .04 .05 Depth (inches) The potential benefits of developing a cost effective laser peening process, in addition to jet engines and other aerospace applications, would be life extension of automobile and truck transmissions and the weight reduction of vehicle frames, resulting in lower main- tenance and fuel costs for millions of drivers. F I G U R E . 2 2 challenge The processing industry has established programs to monitor and reduce the release of fugitive emissions into the air. One source of this leakage is through the stems of control valves used throughout today’s processing plants. The packing in the stems becomes worn over time, requiring the repair or replacement of the valve. The protection of our environment requires not only additional costs associated with the repair and replacement of valves but also additional expenses for monitoring all the valves in the plant to measure emission leakage rates and determine when corrective action has to be taken. 10 Curtiss-Wright Corporation and Subsidiaries solution n o . 9 5 1 6 9 FIGURE 3.1 ZERO EMISSION VALVE (ZEV) — MODELS 100 & 120 fugitive emissions vs. valve cycles Curtiss-Wright has produced valves for applications in nuclear submarines, aircraft carriers and Industry Standard power generation plants where, by necessity, they must be truly leakless in the most severe conditions. We have applied this leakless tech- nology to developing a high-performance control valve that totally eliminates hazardous valve-stem emissions in processing plants. ZEV Performance (Fugitive Emissions of 1 ppm) 5 25 50 75 100 Valve Cycles (000s) ) m p p ( s n o i s s i m E e v i t i g u F 550 500 450 400 350 300 250 200 150 100 50 0 -50 Thanks to Curtiss-Wright, processing plants now have a product available, certified by the California EPA, that prevents the release of hazardous emissions into the environment and reduces the cost of moni- toring, repairing or replacing non-compliant valves. F I G U R E . 3 2 at a glance The Wright Brothers and Glenn Curtiss were pioneers of aviation. Their ability to develop the technology driving early advancements in flight is a tradition that continues at Curtiss-Wright. Today, the Company operates across three business segments of approximately equal size, giving us diversification and balance. We provide highly engineered products and services to a number of global markets and pride ourselves in the strong customer relationships that have been developed over the years. Our Motion Control segment designs, engineers and manufactures actuation components and systems used for leading and trailing edge wing flaps on commercial and military aircraft, systems for opening and closing cargo doors on commercial aircraft and weapons bay doors on fighter aircraft, suspension systems and turret stabilizing and aiming systems for armored vehicles, and leveling systems for railroad car applications. Another important part of this business segment is providing maintenance, repair and overhaul services for commercial and military aerospace components. Our Metal Treatment segment is built around our leadership in providing shot- peening services through a network of thirty-nine facilities located throughout North America and Europe. Shot peening is a process applied to metal components that increases fatigue strength and improves resistance to stress corrosion, thereby increasing the life of the components. In addition to shot peening, we provide shot-peen forming services, which actually shape wing skins to create the aerodynamic curvature in the wing. We also provide a wide assortment of other metal treatment services, such as heat-treating, to an active base of over 5,000 customers. The Company’s involvement in the Flow Control segment began when the U.S. Navy came to us to design a valve for use on nuclear submarines under development. Since that time we have provided critical valves on every U.S. nuclear submarine and aircraft carrier that has gone to sea and continue to work closely with the Navy on the devel- opment of valves for new applications. We have expanded upon this base to be a supplier of flow control products and related services to the nuclear power generation and petrochemical industries and other processing industries. 14 Curtiss-Wright Corporation and Subsidiaries revenues ($ in thousands) products and services major markets 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Control and Actuation Components Aerospace Manufacturing & Systems Aerospace Overhaul Services Hydropneumatic Suspension Systems Commercial Airlines Airfreight Haulers Military Air Forces Electromechanical Drives & Systems Military Vehicle Manufacturing Electrohydraulic Drives & Systems Railway Car Manufacturing Rescue Tools Diesel Engine Manufacturing Rescue Tool Industry motion control $126,771 96 97 98 99 00 Valve Reed Manufacturing Aerospace Manufacturing Automotive Manufacturing Metalworking Industries Oil & Gas Drilling/Exploration Power Generation Jet Engine Manufacturing Agricultural Equipment Transportation Construction & Mining metal treatment Among the approximately 50 services we provide are: $105,318 96 97 98 99 00 Aluminum/Nonferrous Treating Annealing/Stress Relieving Austempering/Brazing Blast Cleaning Carbonitriding/Nitriding Carbon Testroration/Carburizing Cryogenic Treatments Deburring Edge, Vibratory & Superfinishing Engineering & Field Services Fabrication of Machinery, Tooling, Parts & Supplies Fatigue & Physical Testing Flame, Induction & Precipitation Hardening Laser Peening Marquenching/Normalizing Nondestructive Testing Painting/Plating Shot-Peening Shot-Peen Forming Straightening Texturizing Vacuum Treatments flow control Military & Commercial Nuclear/ U.S. Navy Propulsion Systems Non-nuclear Valves (globe, gate, U.S. Navy Shipbuilding control, safety, solenoid and relief) Nuclear Power Plants Fluid Power Products & Systems Petrochemical/Chemical Industry $97,486 Valve Overhaul & Repair Entertainment Industry Engineering, Inspection & Testing Services Petroleum Production/Refining Air-Driven Hydraulic Pumps & Gas Boosters Pharmaceutical Industry Industrial Gases Industry Automotive/Truck Industry 96 97 98 99 00 to our shareholders I am pleased to report that Curtiss-Wright achieved another year of strong profitability and cash flow. The year 2000 represents the fourth consecutive year that we have grown normalized operating income at double-digit rates and our objective is to continue this growth rate into the foreseeable future. In spite of downturns in a few of our markets, we increased sales by 12% from 1999 and our normalized operating income increased by 13%. These achievements are a result of the balance and diversification that we have within Curtiss-Wright and our three business segments as well as the corporate wide cost reduction/profitability improvement programs that we have put in place. Where we were once a company dependent on the OEM aerospace market and exposed to the cyclical nature of that industry, we have taken actions to broaden ourselves within the core businesses we operate. We have seen the benefits of this diversification in 2000 and will continue to build upon the basic strengths of the organization to further broaden ourselves and to generate balanced growth in the future. Our long-term performance placed us on Forbes magazine’s list of America’s 200 Best Small Companies for the second year in a row. Curtiss-Wright has a long history, with roots going back to the Wright Brothers’ first flight in 1903. Today we continue on the path they began as a company centered upon engineering excellence. Our present successes have been a direct result of our expertise in developing highly engineered products and services to serve a variety of specific markets. Successful application of our engineering expertise is the core quality that unites our business units and allows us to position ourselves within niche segments serving the Motion Control, Metal Treatment and Flow Control markets where we operate and earn attractive profit margins. We will continue to use this asset to drive the growth we seek and to create value. We at Curtiss-Wright expect to expand our technical know-how into areas related to our existing products and services and, as a result, to achieve even higher profit and sales growth. Our expertise in metallurgical and application engineering will provide the basis for growing into other metal-treating processes as well as sustaining our continued growth in shot peening and heat treating. Our capabilities in motion control mechanisms and systems are expected to strengthen our existing position in the aerospace industry and enable us to enter new markets. We have also expanded our engineered valve capability, which will provide the groundwork for further penetration of market segments related to highly engineered valves, actuators and controls for complete integrated systems. Growth Opportunities Our Company has established strong positions in the markets that we serve and has an excellent reputation among our customer base. We will take advantage of our position to expand into related product lines and markets. This will take place through organic development of programs and through strategic acquisitions that expand our current operations. Our planned growth can and will take on several forms. We have opportunities to apply our technology and engineering capabilities to new areas and product lines. In some markets, such as Flow Control, where we have high-end technology, we see market needs moving up to where we are. This is evident in the market movement to smart valves and systems that manage flow control processes by collecting operational data, analyzing it and providing new instruction feedback to the system components. We are positioning ourselves in this area through internal capa- bilities and through partnering arrangements to take advantage of the movement toward these more sophisticated systems. 16 Curtiss-Wright Corporation and Subsidiaries sales by business segment sales by industry Metal Treatment 32% Military Aerospace 7% Marine 6% Commercial Aerospace 40% Motion Control 38% Flow Control 30% Agriculture 1% Automotive 5% Construction & Mining 2% Oil & Petroleum 7% Other 12% Power Generation 10% Non-Aviation Military 2% Transportation 7% Rescue 1% “We have seen the benefits of diversification in 2000 and will continue to build upon the basic strengths of the organization to further broaden ourselves and to generate balanced growth in the future.” Martin R. Benante Chairman and Chief Executive Officer We have expanded our international presence, and we see this as an area that continues to offer additional growth opportunities. An example of this is in our Metal Treatment business segment. Of our thirty-nine facilities, nine are outside of North America. We are aggressively looking for additional markets where new facili- ties can be established and we anticipate opening several new shot-peening facilities over the next five years in Europe, Asia and Latin America. We are also continuing to improve our Flow Control product distribution network to increase our penetration into overseas markets. A growing trend affecting a few of our businesses is the increasing importance of aftermarket product and services. In the aerospace and flow control markets, we continue to expand our capabilities not only for the sale of spare parts for products we manufacture but also for the repair and overhaul of products manufactured by other companies. We have grown our aerospace overhaul and repair activities in our Motion Control business segment, which were virtually nonexistent eight years ago, to become a global market player. Today we operate from three certified repair stations and produce a sales level nearly equal to the sales of the aerospace OEM products we manufacture. We plan to continue this growth by providing additional services such as aviation inventory logistics and piece-part overhaul and repair services. provided us with a competitive advantage, and we will seek to duplicate this in other services we provide. We are also exploring other services such as plating, which will allow us to provide a complete metal-treatment package from full-service locations, thereby reducing logistics problems and turnaround times for our customers. Customer Relations Strong customer relationships continue to be one of our greatest advantages. Each relationship is built upon our ability to provide superior technical products with a high level of service. We have earned an excellent reputation in all the markets we serve. One prime example of this is our reputation in Metal Treatment. We are recognized as the technological leader in the field of shot peening. This business has been built upon our ability to solve our customers’ stress problems. We cost-effectively increase the resistance of components to stress corrosion, thereby reducing failures in our customers’ products and improving performance. By helping our customers improve their products we increase the satisfaction of their customers. The fact that we have an active base of over 5,000 customers illustrates the importance of the Metal Treatment services we provide. In our Metal Treatment business segment we will be expanding our capabilities to broaden the products and services we can deliver to our customer base. We will be increasing the number of heat-treating facilities from our current number of seven to establish a network similar to that which we have built in our shot-peening business. Developing a network of facilities has Our excellent customer relationships extend through our other business segments as well. Motion Control has gained a strong reputation as a “can-do” supplier. Boeing Military Airplane Co. was aware of Curtiss-Wright’s unique capabilities in developing complex actuation systems and as a result, we were asked to participate in the development of their next generation aircraft, the Boeing Unmanned Combat Air Vehicle or UCAV. It will be a Curtiss-Wright Corporation and Subsidiaries 17 stealth aircraft that carries all of its armament internally, similar to the Lockheed/Boeing F-22 manned fighter. Based upon our success in developing the F-22 Weapons Bay Door actuation sys- tem, Boeing contracted with us for the development of a similar system for the UCAV. We were able to leverage our experience with the F-22 program to meet a rapid development schedule and the successful rollout of the first UCAV in November 2000. attract additional analyst coverage of Curtiss-Wright. Additional analyst coverage will enhance the market’s awareness of Curtiss-Wright and stimulate demand from new investors. We believe these improvements will enhance our ability to grow our Company and over the long-term benefit the valuation of Curtiss-Wright’s common stock in the marketplace. In our Flow Control business segment we have supplied product to the U.S. Navy for every nuclear submarine and aircraft carrier that has gone to sea. Curtiss-Wright is now considered the premier supplier of valves for U.S. Navy nuclear applications. We are now using this long-standing relationship and our renowned engineering and manufacturing capabilities to provide product for other non-nuclear shipboard and land-based applications. The Navy is currently evaluating our titanium valves, which have been specially engineered to provide greater resistance to seawater corrosion. The Navy is also testing our leakless valves for use in aviation fuel transport systems aboard its aircraft carriers. Positioning the Organization In 2000 we have initiated some key programs to position ourselves for future growth and continued improvements in the performance of our operations. We strive to be the most innovative, cost- effective and profitable producer in each of our markets. We work consistently to improve our Company’s operations, increase efficiency and reduce costs, thereby maximizing operating margins and cash flow. To ensure that we maintain the quality and depth of our management ranks to support our growth expectations and our acquisition program, we will be making new, significant investments in our employee resources. We have evaluated the performance levels of each of our operating units against industry standards. While all three of our business segments rank among the industry leaders in areas of operating performance, control of working capital requirements and return on investment, we continue to implement programs to meet and exceed those industry standards. Activities to improve profitability and investment returns are as important as those geared toward the future growth of the organization. Broadening of Shareholder Base In November of 2000 we announced plans which will allow Unitrin, Inc., our largest shareholder holding 44% of our stock, to distribute their shares to their approximately 8,000 shareholders in a tax-free manner. Unitrin has held this interest since 1976. While we appreciate the long relationship we have had with Unitrin we believe the proposed transaction will result in additional benefits to all of our shareholders. It will significantly increase the liquidity and public float of Curtiss-Wright’s capital stock and this, with a broader shareholder base, is expected to Outlook Much of our business is driven by the general growth of the basic industries we serve, such as aerospace and defense, automotive, oil and gas exploration, petrochemical and other processing industries, agriculture, transportation and construction. While some of these markets may experience a downturn in 2001, we feel that our diversification will create offsets in other markets, resulting in overall higher sales and improved profitability. A portion of our aerospace business is related to the build rate of commercial airliners, which is cyclical and experienced a decline in 2000 from the level of 1999. Airbus and Boeing, both customers of Curtiss-Wright, are projecting increases in their production schedules in 2001. The Company also expects to be supplying several systems for the F-22 Raptor, the new U.S. Air Force air superiority fighter. Advancing this program into full production would be an important addition for our Motion Control business segment. Our strong balance sheet will continue to be a tool generating growth for the Company independent of the general economy. Our three business segments provide us with multiple opportunities not only for acquisitions but also for investment in programs for organic growth. In addition, we look to expand our geographical presence and to build upon our engineering capabilities and the high regard we enjoy from our customers to improve our competitive position in our existing markets. We can achieve our objectives only through the individual successes of our employees. Curtiss-Wright’s employees are talented and dedicated and have worked together as teammates to achieve these common objectives. We will continue to foster a work environment that provides the resources necessary for their continued success. Their efforts have produced the growth that the Curtiss-Wright organization has delivered over the last five years. As shareholders, you may be assured that all of us at Curtiss-Wright will continue working to deliver the very best results we can for you in the years ahead. Martin R. Benante Chairman and Chief Executive Officer 18 Curtiss-Wright Corporation and Subsidiaries quarterly results of operations (unaudited) (In thousands, except per share data) First Second Third Fourth 2000 Net Sales Gross profit Net earnings Earnings per share: Basic earnings per common share Diluted earnings per common share Dividends per common share 1999 Net Sales Gross profit Net earnings Earnings per share: Basic earnings per common share Diluted earnings per common share Dividends per common share consolidated selected financial data (In thousands, except per share data) Net Sales Net earnings Total assets Long-term debt Basic earnings per common share Diluted earnings per common share Cash dividends per common share $82,237 28,929 9,229 $ $ $ .92 .91 .13 $70,350 25,018 7,982 $ $ $ .79 .78 .13 $83,050 30,471 10,644 $ 1.06 $ 1.05 .13 $ $70,195 24,680 8,279 $ $ $ .82 .79 .13 $81,878 30,767 11,079 $ 1.11 $ 1.09 .13 $ $69,009 23,881 13,985 $ 1.38 $ 1.38 .13 $ $82,410 30,803 10,122 $ 1.01 .99 $ .13 $ $83,709 28,832 8,799 $ $ $ .87 .87 .13 2000 1999 1998 1997 1996 $329,575 41,074 409,416 24,730 4.10 4.03 .52 $ $ $ $293,263 39,045 387,126 34,171 3.86 3.82 .52 $ $ $ $249,413 29,053 352,740 20,162 2.85 2.82 .52 $ $ $ $219,395 27,885 284,708 10,347 2.74 2.71 .50 $ $ $ $170,536 16,109 267,164 10,347 1.59 1.58 .50 $ $ $ See notes to consolidated financial statements for additional financial information. forward-looking statements This Annual Report contains not only historical information but also Form 10-K for a discussion relating to forward-looking statements forward-looking statements regarding expectations for future com- contained in this Annual Report and factors that could cause future pany performance. Forward-looking statements involve risk and results to differ from current expectations. uncertainty. Please refer to the Company’s 2000 Annual Report on Curtiss-Wright Corporation and Subsidiaries 19 management’s discussion and analysis of financial condition and results of operations Results of Operations Curtiss-Wright Corporation posted consolidated net sales of $329.6 Excluding these nonrecurring items, “normalized” net earnings for 2000 of $37.9 million, or $3.72 per diluted share, were 11% higher million and net earnings of $41.1 million, or $4.03 per diluted share, than “normalized” net earnings of $34.0 million, or $3.33 per for the year ended December 31, 2000. Sales for the current year diluted share, for 1999 and 36% higher than “normalized” net earn- increased 12% over 1999 sales of $293.3 million, and 32% over ings of $27.8 million, or $2.70 per diluted share, for 1998. Exclud- 1998 sales of $249.4 million. Net earnings for 2000 improved 5% ing the net recoveries from insurance settlements and facility over prior year net earnings of $39.0 million, or $3.82 per diluted consolidation costs, “normalized” operating income from the Corpo- share and 41% over net earnings of 1998, which totaled $29.1 mil- ration’s three operating segments totaled $49.2 million for 2000, an lion, or $2.82 per diluted share. Net earnings for all three years improvement of 17% and 42%, respectively, when compared with include several nonrecurring items, which impact a year-to-year com- “normalized” operating income of $42.1 million for 1999 and $34.6 parison. The following table depicts the Corporation’s “normalized” million for 1998. Adversely impacting financial results for 2000 was results, which should present a clearer picture of its after-tax perfor- a significant decline in foreign exchange rates. Comparing this year’s mance: Normalized Net Earnings: results to those of the prior year, weak European currencies nega- tively impacted sales by $5.2 million and operating income by $1.7 million. (In thousands, except per share data) 2000 1999 1998 Net earnings Environmental insurance $ 41,074 $ 39,045 $ 29,053 The improvement in financial results comparing 2000 to 1999 largely reflects the full year contributions from the acquisitions of Farris Engineering, Sprague Products and Metallurgical Processing settlements, net (1,894) (7,354) (1,754) Inc., made by the Corporation in 1999. Improvements in 1999 Postretirement benefits and postemployment costs, net Facility consolidation costs Gain on sale of nonoperating property Recapitalization costs Normalized net earnings Normalized net earnings (1,336) 50 — 2,351 — 518 (894) 910 — — $ 37,910 $ 34,042 $ 27,817 — — per diluted share $ 3.72 $ 3.33 $ 2.70 Environmental Insurance Settlements The Corporation had previously filed lawsuits against several insurance carriers seeking recovery for environmental costs and reached settlements with the remaining carriers in 2000, after having settled with two carriers in 1999 and one in 1998. The amounts reported above are recoveries, net of associated expenses and additional expenses related to ongoing environmental liabilities of the Corporation. Further information on environmental costs is contained in Note 11 to the Consolidated Financial Statements. Postretirement Benefits and Postemployment Costs In 2000, the Corporation recognized a reduction in general and administrative expenses related to the curtailment of postretirement benefits associated with the closing of the Fairfield, New Jersey facility, partially offset by the recognition of other postemployment costs. Further information on retirement plans is contained in Note 12 to the Consolidated Financial Statements. Facility Consolidation Costs Beginning in 1998, the Corporation incurred costs associated with the consolida- tion of manufacturing operations within the Motion Control segment. These costs include costs relative to the shutdown of the Fairfield, New Jersey facility, the consolidation of manufacturing operations into an expanded Shelby, North Carolina facility, and the move of certain overhaul and repair services to a new location in Gastonia, North Carolina. Sale of Nonoperating Property In September 2000, the Corporation recorded a net after-tax gain of $0.9 million on the sale of a nonoperating Metal Treatment facility located in Chester, England. Recapitalization Costs During 2000, the Corporation incurred costs related to a proposed transaction between Curtiss-Wright and Unitrin, the holder of approximately 44% of its out- standing common stock. Further information on this transaction is contained later in this section—see “Recapitalization.” 20 Curtiss-Wright Corporation and Subsidiaries from 1998 reflect a full year of contributions from the businesses acquired in 1998. Since April 1998, the Corporation has acquired seven new businesses: EF Quality Heat Treating Company, Alpha Heat Treaters, Enertech, Drive Technology, Metallurgical Processing, Farris Engineering and Sprague Products. New orders received in 2000 totaled $299.4 million, only slightly above 1999 total new orders of $295.7 million but 29% higher than new orders received in 1998. Backlog at December 31, 2000 stands at $182.6 million compared with $212.8 million at Decem- ber 31, 1999 and $198.3 million at December 31, 1998. It should be noted that metal treatment services, repair and overhaul services and after-market sales, which represent more than 50% of the Cor- poration’s total sales for 2000, are sold with very modest lead times. Accordingly, the backlog for these businesses is less of an indication of future sales than the backlog of the majority of the Motion Control and Flow Control segments, in which a significant portion of sales are derived from long-term contracts. Segment Performance Motion Control Sales for the Corporation’s Motion Control segment totaled $126.8 million in 2000, 2% above sales of $124.2 million in 1999. Sales of aerospace overhaul and repair services for 2000 improved over 1999 but were largely offset by lower Boeing commercial aircraft production. Additional revenue was provided by a Boeing 757 retro- fit program, which was largely offset by declines in other Boeing programs. Sales of Motion Control products for 2000 also reflect continued growth in the ground defense aiming and stabilization markets from its Drive Technology business in Europe as compared ness in several of its primary markets, which offset the benefits from to the prior year. Operating income for the Motion Control segment acquisitions and facility expansions made in 1998. Operating showed substantial improvements in 2000. Included in 1999 income for 1999 was significantly below that of 1998, due to lower results were costs related to the consolidation of the Fairfield, NJ margins and increased operating expenses, including costs for facil- operation into Motion Control’s low-cost, state-of-the-art facilities in ity expansions in both North America and Europe. During 1999 three North Carolina. Expenses related to the consolidation activities of this segment’s operations relocated into larger facilities and totaled approximately $3.8 million in 1999. In 2000, the Corpora- incurred higher operating costs and temporary start-up costs as a tion began to realize cost savings relative to the consolidation. The result. cost savings were partially offset by lower operating income in the overhaul and repair business due to lower gross margins caused by softening in many of their served markets. Flow Control The Corporation’s Flow Control segment posted sales of $97.5 million for 2000, compared with sales of $65.0 for 1999. Operating The Corporation’s Motion Control segment sales for 1999 were 18% income for 2000 was also significantly higher than 1999. The sig- above the sales reported for 1998 of $105.4 million. The higher nificant improvements in both sales and operating income were sales largely reflected the acquisition of Drive Technology on Decem- largely the result of the acquisition of the Farris and Sprague busi- ber 31, 1998. Sales of commercial aircraft actuation products in nesses, which occurred in August of 1999. Sales and earnings from 1999 also improved over the prior year, reflecting a contract exten- the traditional product lines in the Flow Control segment exceeded sion with Boeing signed in the first quarter of 1999. Sales for the air- the levels achieved in 1999. Sales of marine product lines to the craft component overhaul and repair business improved slightly in U.S. Navy continued to perform well, as did sales from retrofit and 1999, as compared to 1998, but sales of military aircraft actuation service programs for domestic nuclear utilities, and the sale of products declined during the same period. Sales of military actuation valves for new, foreign nuclear power plant construction programs. products for 1998 benefited from the completion of “safety of flight” Industrial valve sales continued to perform well notwithstanding a testing on F-22 components and final sales for a previously received general softness in two primary markets—petrochemical and chemi- F-16 shaft retrofit contract. Operating income for the Motion Control cal process industries. In the third quarter of 2000, the Flow Control segment was impacted in 1999 by the aforementioned consolidation segment sold a small hydraulic products distribution business, costs and in 1998 by several cost, efficiency and inventory valuation consisting of net inventory and other assets, for approximately its issues. In the aggregate, accounting adjustments, cost overruns on book value. military development contracts and costs related to the consolidation of manufacturing operations resulted in a charge to net earnings of $3.9 million, or $0.38 per share, in 1998. Metal Treatment The Corporation’s Flow Control segment reported sales for 1999 which were 71% above sales for 1998 of $38 million. The improved sales reflected contributions from the acquisitions of Enertech in July 1998 and the Farris and Sprague business units in August Sales for the Corporation’s Metal Treatment segment totaled $105.3 1999. Sales in 1999 also reflected additional U.S. Navy valve million for 2000, slightly above sales of $104.1 million for 1999. business, while 1998 sales reflected higher commercial valve Sales improvements in 2000 from the prior year reflect an acquisi- product sales for a foreign nuclear power plant. Operating income tion that occurred in mid-1999, and increased sales volume in the for 1999 benefited from acquisitions but higher administrative commercial European aerospace market, which were largely offset by expenses largely offset those improvements. Operating income for the negative effect of foreign currency translation. Weak European 1998 had also benefited from improved cost performance on valve currencies adversely impacted sales in 2000 (from 1999) by $3.5 remakes and upgrade programs. million. Operating income for the Metal Treatment segment showed a slight decrease when comparing 2000 to 1999. For 2000, improve- ments in heat-treating operations were largely offset by lower income at both European and North American shot-peening operations. As with sales, income from European shot-peening operations were adversely impacted by foreign currency translation. Foreign currency translation reduced operating income in 2000 by $1.6 million. Corporate and Other Expenses Operating income for the Corporation includes the recognition of environmental remediation costs, related administrative expenses, costs for legal services to pursue claims against related parties and related recoveries of such claims. Details of environmental expenses and related recoveries are discussed further in Note 11 to the Con- solidated Financial Statements. Also included in nonsegment oper- The Corporation’s Metal Treatment segment reported sales for 1999 ating income for 2000 is a $2.9 million benefit resulting from the were slightly lower than the record sales for metal treatment services curtailment of postretirement medical coverage for former employ- in 1998 of $106.0 million. Sales for 1999 were depressed by soft- ees of the Corporation’s Fairfield, NJ plant due to its closure in Curtiss-Wright Corporation and Subsidiaries 21 December 1999, offset partially by postemployment expenses allows for cash borrowings of $40.0 million. The unused credit related to the retirement of the former chairman and chief executive available under these agreements at December 31, 2000 was officer. Administrative expenses for 2000 also include approxi- $67.1 million. Cash borrowings under the Revolving Credit Agree- mately $0.9 million associated with the Corporation’s proposed ment were $11.3 million at December 31, 2000 and were $19.5 recapitalization transaction (see “Recapitalization” later in this million at December 31, 1999. During 2000, the Corporation paid section for more information). Earnings for 1999 included income $7.6 million towards its Swiss franc denominated loan, financed related to the termination of benefits for former employees of its under the Revolving Credit Agreement. In 2001, the Corporation Buffalo, NY plant. expects to payoff two Industrial Revenue Bond loans totaling Other Revenues The Corporation recorded other nonoperating net revenues for 2000 approximately $5.3 million. Capital expenditures were $9.5 million in 2000, decreasing from aggregating $15.5 million compared with $13.4 million in 1999 $19.9 million spent in 1999 and $10.6 million in 1998. Principal and $11.7 million in 1998. Noncash pension income, net of bene- expenditures were for additional machinery and equipment. Capital fits paid, recognized as a result of the Corporation’s overfunded pen- expenditures in 1999 included construction of a new, state-of-the-art sion plan increased 19% to $7.8 million for 2000. Rental income Metal Treatment facility in Chester, England. declined in 2000 largely due to the settlement of a real estate tax appeal recorded in 1999, but was 10% above 1998 levels. Invest- ment income improved over the prior year but was 11% below investment income of 1998, reflecting the Corporation’s acquisition activity in 1999 and 1998. In 2000, the Corporation sold a nonop- erating property in Chester, England resulting in a pretax gain of approximately $1.4 million. Changes in Financial Position Liquidity and Capital Resources In 2001, capital expenditures are expected to increase significantly due to the continued expansion of the Metal Treatment segment. In addition, expenditures for machinery and equipment in both the Motion Control and Flow Control segments are expected to continue. At December 31, 2000, the Corporation had capital commitments of approximately $1.1 million primarily for the purchase of equip- ment in 2001. During 2000, the Corporation also repurchased 41,270 shares of its common stock at a total cost of approximately $1.5 million. Since The Corporation’s working capital increased 20% at December 31, inception, the Corporation has repurchased a total of 210,930 2000, totaling $149.8 million as compared with $124.4 million at shares of its common stock at an approximate cost of $7.5 million. December 31, 1999. The ratio of current assets to current liabilities improved to 3.9 to 1 at December 31, 2000 compared with 3.2 to 1 at the end of 1999. The Corporation’s balance of cash and short- term investments totaled $71.5 million at December 31, 2000, which increased $36.4 million from the balance at December 31, 1999. The Corporation’s cash and short-term investments had been used to finance the acquisition of three businesses in 1999, which involved aggregate cash outflows of $49.3 million. Working capital changes were highlighted by significant decreases in trade receivables and net inventories during the year. The Corpora- tion has reduced its days sales outstanding and improved its inven- tory turnover. Days sales outstanding at December 31, 2000 was reduced to 63 days from 77 at December 31, 1999 and inventory turnover improved to 3.8 turns from 3.2 turns at the prior year end. The decline in receivables was also due, in part, to the receipt of a real estate tax appeal recovery in early 2000. Cash generated from operations and current short-term investment holdings are considered adequate to meet the Corporation’s overall cash requirements for the upcoming year, including anticipated debt repayments, planned capital expenditures, dividends, satisfying environmental obligations and working capital requirements. Recapitalization On November 6, 2000, the Corporation and Unitrin, the holder of approximately 44% of the Corporation’s outstanding capital stock, announced a series of transactions that will permit Unitrin to distribute to its stockholders, in a tax-free distribution, the approxi- mately 4.4 million shares of the Corporation’s common stock cur- rently held by Unitrin. In order to permit this distribution to be tax-free for U.S. federal income tax purposes, the Corporation pro- poses to make certain changes to its capital structure as more thor- oughly described in the Company’s proxy statement filed on or about February 16, 2001. In addition, if the distribution occurs, the Cor- At December 31, 2000, the Corporation had two credit agreements poration will pay a special cash dividend of $0.25 per share to all in effect aggregating $100.0 million with a group of five banks. A holders of record of its common stock, other than Unitrin, which has Revolving Credit Agreement commits a maximum of $60.0 million waived its right to the cash dividend. to the Corporation for cash borrowings and letters of credit. The Cor- poration also has in effect a Short-Term Credit Agreement, which 22 Curtiss-Wright Corporation and Subsidiaries The Corporation and Unitrin have entered into a merger agreement cal, including with respect to voting rights on fundamental transac- that provides for a recapitalization of the Corporation involving the tions affecting the Corporation, and the right to receive dividends. creation of a new class of common stock (Class B). In order for the The minimum number of directors on our board will be set at distribution to be tax-free to Unitrin and its stockholders, Unitrin five so the holders of common stock will always be assured of must own, at the time of the distribution, capital stock of the Corpo- representation. All of the Class B common stock issued to Unitrin in ration having the right to elect at least 80% of our board of direc- the recapitalization will be distributed by Unitrin to its stockholders tors, and must distribute all of that stock to its stockholders in a immediately following the recapitalization. single transaction. The shares of common stock held by Unitrin will be converted into an equivalent number of shares of the new Class B common stock. Each Corporation stockholder other than Unitrin will retain its shares of the Corporation’s common stock. These transac- tions are referred to as the recapitalization. Newly Issued Accounting Pronouncements Effective January 1, 2001, the Corporation will begin accounting for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivatives and Hedging Activities” (SFAS No. 133). SFAS No. 133 requires that all The holders of shares of Class B common stock will be entitled to derivative instruments be recorded on the balance sheet at their fair elect at least 80% of our board of directors. The holders of shares of value. Changes in the fair value of derivatives are recorded each common stock will have the right to elect the remaining members of period in current earnings or other comprehensive income, depend- our board of directors. In all other respects the rights of the holders ing on whether a derivative is designated as part of a hedge transac- of the common stock and the Class B common stock will be identi- tion and, if it is, the type of hedge transaction. Management of the Corporation anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will have no effect on its results of operations or its financial position. Curtiss-Wright Corporation and Subsidiaries 23 report of the corporation The consolidated financial statements appearing on pages 25 PricewaterhouseCoopers LLP, independent certified public accoun- through 40 of this Annual Report have been prepared by the Corpo- tants, have examined the Corporation’s consolidated financial state- ration in conformity with generally accepted accounting principles. ments as stated in their report. Their examination included a study The financial statements necessarily include some amounts that are and evaluation of the Corporation’s accounting systems, procedures based on the best estimates and judgments of the Corporation. and internal controls, and tests and other auditing procedures, all of Other financial information in the Annual Report is consistent with a scope deemed necessary by them to support their opinion as to the that in the financial statements. fairness of the financial statements. The Corporation maintains accounting systems, procedures and The Audit Committee of the board of directors, composed entirely of internal accounting controls designed to provide reasonable assur- directors from outside the Corporation, among other things, makes ance that assets are safeguarded and that transactions are executed recommendations to the board as to the nomination of independent in accordance with the appropriate corporate authorization and are auditors for appointment by stockholders and considers the scope of properly recorded. The accounting systems and internal accounting the independent auditors’ examination, the audit results and the controls are augmented by written policies and procedures; organi- adequacy of internal accounting controls of the Corporation. The zational structure providing for a division of responsibilities; independent auditors have direct access to the Audit Committee, selection and training of qualified personnel and an internal audit and they meet with the committee from time to time with and with- program. The design, monitoring, and revision of internal accounting out management present, to discuss accounting, auditing, internal control systems involve, among other things, management’s judg- control and financial reporting matters. ment with respect to the relative cost and expected benefits of specific control measures. report of independent accountants To the Board of Directors and Shareholders of Curtiss-Wright Corporation In our opinion, the accompanying consolidated balance sheets and the audit to obtain reasonable assurance about whether the financial the related consolidated statements of earnings and stockholders’ statements are free of material misstatement. An audit includes equity and of cash flows present fairly, in all material respects, examining, on a test basis, evidence supporting the amounts and the financial position of Curtiss-Wright Corporation and its sub- disclosures in the financial statements, assessing the accounting sidiaries at December 31, 2000 and 1999, and the results of their principles used and significant estimates made by management, operations and their cash flows for each of the three years in the and evaluating the overall financial statement presentation. We period ended December 31, 2000, in conformity with accounting believe that our audits provide a reasonable basis for our opinion. principles generally accepted in the United States. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the Florham Park, New Jersey United States of America, which require that we plan and perform January 31, 2001 24 Curtiss-Wright Corporation and Subsidiaries consolidated statements of earnings For the years ended December 31, (In thousands, except per share data) Net sales Cost of sales Gross profit Research and development costs Selling expenses General and administrative expenses Environmental remediation and administrative recoveries, net of expenses Operating income Investment income, net Rental income, net Pension income, net Other income (expense), net Interest expense Earnings before income taxes Provision for income taxes Net earnings Net Earnings per Common Share: Basic earnings per share Diluted earnings per share See notes to consolidated financial statements. 2000 1999 1998 $329,575 208,605 $293,263 190,852 $249,413 167,399 120,970 3,443 18,591 49,792 102,411 2,801 17,015 43,121 82,014 1,346 11,606 34,277 (3,041) (11,683) (1,562) 52,185 2,862 3,638 7,813 1,216 (1,743) 65,971 24,897 51,157 2,295 4,580 6,574 (8) (1,289) 63,309 24,264 36,347 3,206 3,299 5,126 87 (485) 47,580 18,527 $ 41,074 $ 39,045 $ 29,053 $ $ 4.10 4.03 $ $ 3.86 3.82 $ $ 2.85 2.82 Curtiss-Wright Corporation and Subsidiaries 25 consolidated balance sheets At December 31, (In thousands) Assets: Current assets: Cash and cash equivalents Short-term investments Receivables, net Inventories, net Deferred tax assets Other current assets Total current assets Property, plant and equipment, at cost: Land Buildings and improvements Machinery, equipment and other Less: accumulated depreciation Property, plant and equipment, net Prepaid pension costs Goodwill, net Property held for sale Other assets Total assets Liabilities: Current liabilities: Current portion of long-term debt Accounts payable Accrued expenses Income taxes payable Other current liabilities Total current liabilities Long-term debt Deferred income taxes Accrued postretirement benefit costs Other liabilities Total liabilities Contingencies and Commitments (Notes 9, 13 & 15) Stockholders’ Equity: Preferred stock, $1 par value, 650,000 shares authorized, none issued Common stock, $1 par value, 22,500,000 shares authorized, 15,000,000 shares issued; Outstanding shares were 10,017,280 and 10,040,250 at December 31, 2000 and 1999, respectively Additional paid-in capital Retained earnings Unearned portion of restricted stock Accumulated other comprehensive income Less: treasury stock, at cost (4,982,720 shares and 4,959,750 shares at December 31, 2000 and 1999, respectively) Total stockholders’ equity Total liabilities and stockholders’ equity See notes to consolidated financial statements. 26 Curtiss-Wright Corporation and Subsidiaries 2000 1999 $ 8,692 62,766 67,815 50,002 9,378 3,419 $ 9,547 25,560 70,729 60,584 8,688 5,262 202,072 180,370 5,024 95,965 145,907 246,896 156,443 5,267 95,631 141,102 242,000 147,422 90,453 94,578 59,765 47,543 2,460 7,123 50,447 50,357 2,653 8,721 $409,416 $387,126 $ 5,347 13,766 19,389 4,157 9,634 $ 4,047 13,304 19,463 5,203 13,915 52,293 55,932 24,730 21,689 5,479 15,001 34,171 14,113 8,515 16,040 119,192 128,771 — — 15,000 51,506 411,866 (22) (5,626) 15,000 51,599 376,006 (24) (2,622) 472,724 439,959 182,500 181,604 290,224 258,355 $409,416 $387,126 consolidated statements of cash flows For the years ended December 31, (In thousands) Cash flows from operating activities: Net earnings Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization Noncash pension income Net (gains) losses on sales and disposals of real estate and equipment Net (gains) losses on short-term investments Deferred income taxes Changes in operating assets and liabilities, net of businesses acquired: Proceeds from sales of trading securities Purchases of trading securities Decrease (increase) in receivables Decrease (increase) in inventories (Decrease) increase in progress payments Increase (decrease) in accounts payable and accrued expenses (Decrease) increase in income taxes payable Decrease (increase) in other assets (Decrease) increase in other liabilities Other, net Total adjustments Net cash provided by operating activities Cash flows from investing activities: Proceeds from sales and disposals of real estate and equipment Additions to property, plant and equipment Acquisition of new businesses Net cash used for investing activities Cash flows from financing activities: Proceeds from short-term borrowing Proceeds from long-term borrowing Principal payments on long-term debt Common stock repurchases Dividends paid 2000 1999 (1) 1998 (1) $ 41,074 $ 39,045 $ 29,053 14,346 (7,813) (1,390) (206) 6,886 523,656 (560,656) 3,702 11,534 (1,552) 338 (1,046) 4,499 (10,081) 838 12,864 (6,574) — 390 2,300 394,355 (353,861) 6,878 2,830 (13,057) (1,734) 151 (1,016) 241 (1,936) 9,661 (5,126) 94 (266) 1,494 374,802 (379,097) (7,181) 734 (1,248) 2,470 207 (320) (236) 392 (16,945) 41,831 (3,620) 24,129 80,876 25,433 3,765 (9,506) (1,961) 2,586 (19,883) (49,322) 950 (10,642) (41,711) (7,702) (66,619) (51,403) — — (7,575) (1,489) (5,214) — — — (5,440) (5,257) 20,523 9,815 — (611) (5,309) Net cash (used for) provided by financing activities (14,278) (10,697) 24,418 Effect of foreign currency Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year (3,004) 178 489 (855) 9,547 3,738 5,809 (1,063) 6,872 Cash and cash equivalents at end of year $ 8,692 $ 9,547 $ 5,809 Supplemental disclosure of noncash investing activities: Fair value of assets acquired Liabilities assumed Cash acquired Net cash paid (1) Certain prior year information was reclassified to conform to current presentation. See notes to consolidated financial statements. $ 2,231 (270) — $ 54,868 (5,034) (512) $ 54,635 (10,857) (2,067) $ 1,961 $ 49,322 $ 41,711 Curtiss-Wright Corporation and Subsidiaries 27 consolidated statements of stockholders’ equity (In thousands) Common Stock Additional Paid in Capital Retained Earnings Unearned Portion of Restricted Stock Awards Accumulated Other Comprehensive Income Comprehensive Income Treasury Stock December 31, 1997 $15,000 $52,010 $318,474 $(342) $(3,289) $177,000 Comprehensive income: Net earnings Translation adjustments, net Total comprehensive income Common dividends Common stock repurchase Stock options exercised, net Amortization of earned portion of restricted stock awards — — — — — — — — — — — — (341) 29,053 — — (5,309) — — — — — — — — — — 302 — 489 — — — — — December 31, 1998 15,000 51,669 342,218 (40) (2,800) Comprehensive income: Net earnings Translation adjustments, net Total comprehensive income Common dividends Common stock repurchase Stock options exercised, net Amortization of earned portion of restricted stock awards — — — — — — — — — — — — (70) 39,045 — — (5,257) — — — — December 31, 1999 15,000 51,599 376,006 Comprehensive income: Net earnings Translation adjustments, net Total comprehensive income Common dividends Common stock repurchase Stock options exercised, net Restricted stock awards Amortization of earned portion of restricted stock awards — — — — — — — — — — — — — (94) 1 41,074 — — (5,214) — — — — — 17 — — — — — — 16 (24) — — — — — — (15) — 178 — — — — — (2,622) — (3,004) — — — — — — $29,053 489 $29,542 $39,045 178 $39,223 $41,074 (3,004) $38,070 — — — 612 (1,158) — 176,454 — — — — 5,400 (290) — 181,604 — — — — 1,489 (579) (14) — December 31, 2000 $ 15,000 $ 51,506 $ 411,866 $ (22) $ (5,626) $ 182,500 See notes to consolidated financial statements. 28 Curtiss-Wright Corporation and Subsidiaries notes to consolidated financial statements 1. Summary of Significant Accounting Policies Curtiss-Wright Corporation and its subsidiaries (the “Corporation”) In accordance with industry practice, inventoried costs contain amounts relating to contracts and programs with long production is a diversified multinational manufacturing and service company cycles, a portion of which will not be realized within one year. that designs, manufactures and overhauls precision components and systems, and provides highly engineered services to the aero- space, defense, automotive, shipbuilding, processing, oil, petro- chemical, agricultural equipment, railroad, power generation and metalworking industries. Operations are conducted through eight manufacturing facilities, thirty-nine metal treatment service facili- ties and four component overhaul locations. A. Principles of Consolidation E. Property, Plant and Equipment Property, plant and equipment are carried at cost. Major renewals and betterments are capitalized, while maintenance and repairs that do not improve or extend the life of the asset are expensed in the period they occur. Depreciation is computed using the straight-line method based upon the estimated useful lives of the respective assets. The financial statements of the Corporation have been prepared in Average useful lives for property and equipment are as follows: conformity with generally accepted accounting principles and such preparation has required the use of management’s estimates in pre- senting the consolidated accounts of the Corporation, after elimina- tion of all significant intercompany transactions and accounts. Management’s estimates include assumptions that affect the reported amount of assets, liabilities, revenue and expenses in the accompanying financial statements. Actual results may differ from these estimates. Certain prior year information has been reclassified to conform with current presentation. B. Cash Equivalents Cash equivalents consist of money market funds and commercial paper that are readily convertible into cash, all with original maturity dates of three months or less. C. Progress Payments Progress payments received under prime contracts and subcontracts have been deducted from receivables and inventories as disclosed in the appropriate following notes. Buildings and improvements Machinery and equipment Office furniture and equipment F. Intangible Assets 5 to 40 years 5 to 15 years 3 to 10 years Intangible assets consist primarily of the excess purchase price of the acquisitions over the fair value of net assets acquired. The Cor- poration amortizes such costs on a straight-line basis over the esti- mated period benefited but not exceeding 30 years. Amortization of intangibles, consisting primarily of goodwill, totaled $2,561,000, $1,618,000 and $385,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The Corporation reviews the recoverability of all long-term assets, including the related amortization period, whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. The Corporation determines whether there has been an impairment by comparing the anticipated undis- counted future net cash flows to the related asset’s carrying value. If With respect to government contracts, the government has a lien on an asset is considered impaired, the asset is written down to fair all materials and work-in-process to the extent of progress payments. value which is either determined based on discounted cash flows or D. Revenue Recognition The Corporation records sales and related profits for the majority appraised values, depending on the nature of the asset. There were no such write-downs in 2000, 1999 or 1998. of its operations as units are shipped or services are rendered. G. Fair Value of Financial Instruments Sales and estimated profits under long-term valve contracts are The financial instruments with which the Corporation is involved are recognized under the percentage-of-completion method of account- primarily of a traditional nature. The Corporation’s short-term invest- ing. Profits are recorded pro rata, based upon current estimates of direct and indirect manufacturing and engineering costs to complete such contracts. Losses on contracts are provided for in the period in which the losses become determinable. Revisions in profit estimates are reflected on a cumulative basis in the period in which the basis for such revisions becomes known. ments are comprised of equity and debt securities, all classified as trading securities, which are carried at their fair value based upon the quoted market prices of those investments at December 31, 2000 and 1999. Accordingly, net realized and unrealized gains and losses on trading securities are included in net earnings. Due to the short maturities of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, the carrying value of these financial instruments approximates fair value. The carrying amount Curtiss-Wright Corporation and Subsidiaries 29 of long-term debt approximates fair value because the interest rates period. The Corporation had antidilutive options of approximately are reset periodically to reflect current market conditions and rates. 334,000 at December 31, 1999 and no antidilutive options at H. Environmental Costs The Corporation establishes a reserve for a potential environmental responsibility when it concludes that a determination of legal liabil- ity is probable, based upon the advice of counsel. Such amounts, if quantifiable, 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 today’s values of anticipated remediation, not recognizing any recovery from insurance carriers or third-party legal actions, and are not discounted. I. Accounting for Stock-Based Compensation The Corporation follows Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25), in accounting for its employee stock options, rather than the alterna- tive method of accounting provided under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Com- pensation” (SFAS No. 123). Under APB No. 25, the Corporation does not recognize compensation expense on 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. Fur- ther information concerning options granted under the Corporation’s Long-Term Incentive Plan is provided in Note 10. J. Capital Stock In October 1998, the Corporation initiated a stock repurchase pro- gram, approved by its board of directors, under which the Company is authorized to purchase up to 300,000 shares or approximately 3% of its outstanding common stock. Purchases were authorized to be made from time to time in the open market or privately negoti- ated transactions, depending on market and other conditions, based upon the view of the Corporation that market prices of the stock did not adequately reflect the true value of the Corporation and, there- fore, represented an attractive investment opportunity. Through December 31, 2000, the Corporation has repurchased 210,930 shares under this program. K. Earnings Per Share The Corporation is required to report both basic earnings per share (EPS), based on the weighted average number of common shares outstanding, and diluted earnings per share based on the weighted average number of common shares outstanding plus all potentially dilutive common shares issuable. At December 31, 2000, the Cor- poration had approximately 124,000 additional stock options out- standing that could potentially dilute basic EPS in the future. The effect of these options was not included in the computation of diluted EPS because to do so would have been antidilutive for the 30 Curtiss-Wright Corporation and Subsidiaries December 31, 1998. Earnings per share calculations for the years ended December 31, 2000, 1999 and 1998 are as follows: (In thousands, except per share data) 2000: Basic earnings per share Effective of dilutive securities: Stock options Deferred stock compensation Weighted Average Shares Outstanding Earnings Per Share Amount Net Income $ 41,074 10,015 $ 4.10 176 3 Diluted earnings per share $ 41,074 10,194 $ 4.03 1999: Basic earnings per share Effective of dilutive securities: Stock options Deferred stock compensation $39,045 10,115 $3.86 99 1 Diluted earnings per share $39,045 10,215 $3.82 1998: Basic earnings per share Effective of dilutive securities: Stock options Deferred stock compensation $29,053 10,194 $2.85 109 2 Diluted earnings per share $29,053 10,305 $2.82 L. Newly Issued Accounting Pronouncements Effective January 1, 2001, the Corporation will begin accounting for derivative instruments in accordance with Statement of Financial Accounting Standards No. 133 “Accounting for Derivatives and Hedging Activities” (SFAS No. 133). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depend- ing on whether a derivative is designated as part of a hedge transac- tion and, if it is, the type of hedge transaction. Management of the Corporation anticipates that, due to its limited use of derivative instruments, the adoption of SFAS No. 133 will have no effect on its results of operations or its financial position. 2. Acquisitions The Corporation acquired one business in 2000 and three busi- nesses in 1999, as described below. All companies acquired have been accounted for as purchases with the excess of the purchase price over the estimated fair value of the net assets acquired recorded as goodwill. The results of each operation have been The Corporation acquired the stock of MPI for $7.4 million in cash included in the consolidated financial results of the Corporation (of which $1.0 million has been deferred for two years) and from the date of acquisition. EF Quality Heat Treating Company On December 14, 2000, the Corporation acquired EF Quality Heat Treating Company (“EF”), a Midwest provider of quality heat treat- ing services primarily to the automotive industry. EF provides high quality atmosphere normalizing, annealing and stress relieving ser- vices from its Salem, Ohio location. The Corporation acquired the net assets of the EF business for approximately $2.2 million, subject to adjustment as provided for in the agreement. This acquisition has been accounted for as a pur- chase in the fourth quarter of 2000. The excess of the purchase price over the fair value of the net assets acquired is approximately $1.0 million and is being amortized over 25 years. The fair value of the net assets acquired was based on preliminary estimates and may be revised at a later date. Farris Engineering and Sprague Products On August 27, 1999, the Corporation completed its acquisition of the Farris and Sprague business units of Teledyne Fluid Systems, an Allegheny Teledyne Incorporated company. Farris is one of the world’s leading manufacturers of pressure-relief valves for use in processing industries, which include refineries, petrochemical/chemical plants and pharmaceutical manufacturing. Products are manufactured in Brecksville, Ohio and Brantford, Ontario. A service and distribution center is located in Edmonton, Alberta. The Sprague business, also located in Brecksville, Ohio, provides specialty hydraulic and pneumatic valves and air-driven pumps and gas boosters under the “Sprague” and “PowerStar” trade names for general industrial applications as well as directional control valves for truck transmissions and car transport carriers. The Corporation acquired the net assets of the Farris and Sprague businesses for $42.9 million in cash. This acquisition has been accounted for as a purchase in the third quarter of 1999. The excess of the purchase price over the fair value of the net assets acquired was $18.5 million and is being amortized over 30 years. accounted for the acquisition as a purchase in the second quarter of 1999. The excess of the purchase price over the fair value of the net assets acquired was $2.2 million and is being amortized over 25 years. 3. Short-term Investments The composition of short-term investments is as follows: December 31, 2000 1999 (In thousands) Cost Fair Value Cost Fair Value Money market preferred stock $16,700 $16,700 $11,400 $11,400 Common and preferred stocks 2,104 2,166 2,104 1,960 Tax exempt revenue bonds 43,900 43,900 12,200 12,200 Total short-term investments $62,704 $62,766 $25,704 $25,560 Investment income for the years ended December 31 consists of: (In thousands) 2000 1999 1998 Net realized gains on the sales of trading securities Interest and dividend income, net Net unrealized holding gains (losses) $ 135 $ 274 $ 141 2,521 2,361 2,940 206 (340) 125 Investment income, net $2,862 $2,295 $3,206 4. Receivables Receivables include current notes, amounts billed to customers, claims and other receivables and unbilled revenue on long-term con- tracts consisting of amounts recognized as sales but not billed. Sub- stantially all amounts of unbilled receivables are expected to be Metallurgical Processing Inc. billed and collected in the subsequent year. On June 30, 1999, the Corporation acquired Metallurgical Process- ing, Inc. (MPI), a Midwest supplier of commercial heat-treating ser- vices, primarily to the automotive and industrial markets. MPI provides a number of metal-treatment processes including carburiz- ing, hardening, and carbonitriding and services a broad spectrum of customers from its Fort Wayne, Indiana location. Credit risk is generally diversified due to the large number of entities comprising the Corporation’s customer base and their geographic dispersion. The largest single customer represented 7% of the total outstanding billed receivables at December 31, 2000 and 8% of the total outstanding billed receivables at December 31, 1999. This same customer of the Motion Control segment accounted for 13% of consolidated revenue in 2000, 14% in 1999 and 16% in 1998. In Curtiss-Wright Corporation and Subsidiaries 31 addition, the Corporation is either a prime or subcontractor of various agencies of the U.S. government. Revenues derived either 5. Inventories Inventories are valued at the lower of cost (principally average cost) directly or indirectly from government sources (primarily the or market. The composition of inventories is as follows: U.S. government) totaled $56,400,000, or 17% of consolidated revenue in 2000, $50,116,000, or 17% in 1999 and $41,565,000, or 17% in 1998. The Corporation performs ongoing credit evaluations of its customers and establishes appropriate allowances for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. The composition of receivables is as follows: (In thousands) December 31, 2000 1999 Billed Receivables: Trade and other receivables Less: progress payments applied allowance for doubtful accounts $59,904 $66,652 (1,922) (3,230) (1,508) (2,659) Net billed receivables 55,737 61,500 Unbilled Receivables: Recoverable costs and estimated earnings not billed Less: progress payments applied 18,091 (7,040) 16,473 (7,244) Net unbilled receivables 11,051 9,229 Notes Receivable 1,027 — Total receivables, net $67,815 $70,729 (In thousands) December 31, 2000 1999 Raw material Work-in-process Finished goods/component parts Inventoried costs related to U.S. government and other long-term contracts Gross Inventories Less: inventory reserves progress payments applied, principally related to long-term contracts $ 11,955 10,815 32,621 $ 12,952 15,493 36,276 5,961 7,714 61,352 (10,944) 72,435 (10,511) (406) (1,340) Net inventories $ 50,002 $ 60,584 6. Accrued Expenses and Other Current Liabilities Accrued expenses consist of the following: (In thousands) December 31, 2000 1999 Accrued compensation Accrued taxes other than income taxes Accrued insurance All other $ 9,117 2,073 1,812 6,387 $ 7,545 1,961 1,623 8,334 Total accrued expenses $19,389 $19,463 Other current liabilities consist of the following: (In thousands) December 31, 2000 1999 Customer advances Current portion of environmental reserves Anticipated losses on long-term contracts Due tenants on tax recovery All other $3,734 1,393 1,322 — 3,185 $ 2,338 2,717 2,280 3,520 3,060 Total other current liabilities $9,634 $13,915 32 Curtiss-Wright Corporation and Subsidiaries 7. Income Taxes Earnings before income taxes for the years ended December 31 The components of the Corporation’s deferred tax assets and liabili- ties at December 31 are as follows: consist of: (In thousands) Domestic Foreign Total 2000 1999 1998 $48,550 $47,088 $33,320 14,260 16,221 17,421 $65,971 $63,309 $47,580 The provision for income taxes for the years ended December 31 consist of: (In thousands) Current: Federal State Foreign Deferred: Federal State Foreign 2000 1999 1998 $ 9,342 $11,843 $ 8,835 3,045 3,619 5,019 6,000 2,571 5,809 17,722 21,462 16,899 5,953 966 256 2,143 407 252 1,231 397 — 7,175 2,802 1,628 Provision for income taxes $24,897 $24,264 $18,527 The effective tax rate varies from the U.S. federal statutory tax rate for the years ended December 31 principally due to the following: U.S. Federal statutory tax rate Add (deduct): Dividends received deduction and tax exempt income State and local taxes All other, net 2000 1999 1998 35.0% 35.0% 35.0% (0.8) 3.5 — (0.8) 4.1 — (1.4) 4.7 0.6 Effective tax rate 37.7% 38.3% 38.9% (In thousands) Deferred tax assets: Environmental cleanup Inventories Postretirement/postemployment benefits Incentive compensation Vacation pay Other 2000 1999 $ 5,416 4,440 $ 6,119 4,407 2,229 1,737 1,159 1,953 3,540 1,589 1,048 3,372 Total deferred tax assets $16,934 $20,075 Deferred tax liabilities: Retirement plans Depreciation Other $22,929 4,270 2,046 $19,265 4,697 1,538 Total deferred tax liabilities $29,245 $25,500 Net deferred tax liabilities $12,311 $ 5,425 Deferred tax assets and liabilities are reflected on the Corporation’s consolidated balance sheets at December 31 as follows: 2000 1999 Current deferred tax assets Noncurrent deferred tax liabilities $ 9,378 (21,689) $ 8,688 (14,113) Net deferred tax liabilities $(12,311) $ (5,425) Income tax payments of $15,466,000 were made in 2000, $20,954,000 in 1999, and $16,321,000 in 1998. At December 31, 2000, the balance of undistributed earnings of foreign subsidiaries was $2,760,000. It is presumed that ultimately these earnings will be distributed to the Corporation. The tax effect of this presumption was determined by assuming that these earn- ings were remitted to the Corporation in the current period, and that the Corporation received the benefit of all available tax alternatives, tax credits and deductions. Under these assumptions, no federal income tax provision was required. Curtiss-Wright Corporation and Subsidiaries 33 8. Long-term Debt Long-term debt at December 31 consists of the following: (In thousands) 2000 1999 Industrial Revenue Bonds, due from 2001 to 2028. Weighted average interest rate is 4.07% and 3.12% per annum for 2000 and 1999, respectively Revolving Credit Agreement Borrowing, due 2004. Weighted average interest rate is 3.49% for 2000 and 2.94% for 1999 19,471 Total debt $18,747 $18,747 31, 1999. Cash borrowings under the Revolving Credit Agreement at December 31, 2000 were $11,330,000 with a weighted average interest rate of 3.49%. Cash borrowings at December 31, 1999 were $19,471,000 with a weighted average interest rate of 2.94%. The commitment made under the Revolving Credit Agreement expires December 17, 2004, but may be extended annually for suc- cessive 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 of $40,000,000, of which $40,000,000 was available at December 31, 2000 and December 31, 1999. The Short-Term Credit Agreement expires December 14, 2001. The Less: Portion due within one year (5,347) (4,047) 30,077 38,218 11,330 Short-Term Credit Agreement may be extended for additional peri- ods, with the consent of the bank group, for additional periods not to exceed 364 days each. The Corporation is required under these Agreements to maintain certain financial ratios, and meet certain net worth and indebtedness tests for which the Corporation is in Total Long-term Debt $24,730 $34,171 compliance. Debt under the Corporation’s revolving credit agreement is denomi- bond issues are collateralized by real estate, machinery and equip- nated in Swiss francs. Actual borrowings were 18,250,000 and ment. Certain of these issues are supported by letters of credit, 31,000,000 Swiss francs at December 31, 2000 and 1999, which total approximately $17,793,000. The Corporation has vari- respectively. The carrying amount of long-term debt approximates ous other letters of credit totaling approximately $3,800,000, most fair value because the interest rates are reset periodically to reflect of which are now included under the Revolving Credit Agreement. At December 31, 2000, substantially all of the industrial revenue market conditions and rates. Aggregate maturities of debt are as follows: (In thousands) 2001 2002 2003 2004 2005 2006 and beyond 10. Stock Compensation Plans Stock-Based Compensation: Pro forma information regarding net earnings and earnings per share is required by SFAS No. 123 and has been determined as if the Corporation had accounted for its 2000, 1999 and 1998 employee stock option grants under the fair value method of that Statement. Information with regard to the number of options granted, market price of the grants, vesting requirements and the maximum term of the options granted appears by plan type in the sections below. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: 2000 1999 1998 $ 5,347 — — 11,330 — 13,400 $30,077 Risk-free interest rate Expected volatility Expected dividend yield Weighted average option life Interest payments of approximately $1,006,000, $818,000 and $470,000 were made in 2000, 1999 and 1998, respectively. 9. Credit Agreements The Corporation has two credit agreements in effect aggregating $100,000,000 with a group of five banks. The credit agreements allow for borrowings to be denominated in a number of foreign cur- rencies. The Revolving Credit Agreement commits a maximum of $60,000,000 to the Corporation for cash borrowings and letters of credit. The unused credit available under this facility at December 31, 2000 was $27,086,000 and was $18,226,000 at December 34 Curtiss-Wright Corporation and Subsidiaries 5.87% 4.80% 6.09% 23.96% 25.06% 18.80% 1.38% 1.37% 7 years 7 years 1.09% 7 years The estimated fair value of the option grants are amortized to Under this Plan, the Corporation has granted nonqualified stock expense over the options’ vesting period beginning January 1 of the options in 2000, 1999 and 1998 to key employees. Stock options following year, due to the timing of the grants. The Corporation’s pro granted under this Plan expire ten years after the date of the grant forma information for the years ended December 31, 2000, 1999 and are exercisable as follows: up to one-third of the grant after one and 1998 is as follows: full year, up to two-thirds of the grant after two full years and in full three years from the date of grant. Stock option activity during the (In thousands, except per share data) 2000 1999 1998 periods is indicated as follows: Net earnings: As reported Pro forma Net earnings per common share: As reported: Basic Diluted Pro forma: Basic Diluted $41,074 $39,045 $29,053 $40,074 $38,430 $28,509 $ 4.10 $ 3.86 $ 2.85 $ 4.03 $ 3.82 $ 2.82 $ 4.00 $ 3.80 $ 2.80 $ 3.93 $ 3.76 $ 2.77 Long-Term Incentive Plan: Under a Long-Term Incentive Plan approved by stockholders in 1995, an aggregate total of 1,000,000 shares of common stock (after 1997 2 for 1 stock split) were reserved for issuance under said Plan. No more than 50,000 shares of common stock subject to the Plan may be awarded in any year to any one participant in the Plan. Under this Plan, the Corporation awarded 1,604,825 performance units in 2000, 1,539,778 in 1999 and 1,184,604 in 1998 to cer- Weighted Average Exercise Price Options Exercisable $24.76 216,398 37.66 19.13 30.59 Shares 369,826 118,886 (31,554) (20,657) 436,501 147,551 (6,155) (20,276) 28.63 242,071 37.82 21.01 34.78 557,621 124,398 (16,080) (13,225) 30.92 310,586 47.72 22.93 37.18 Outstanding at December 31, 1997 Granted Exercised Forfeited Outstanding at December 31, 1998 Granted Exercised Forfeited Outstanding at December 31, 1999 Granted Exercised Forfeited tain key employees. The performance units are denominated in dol- Outstanding at lars and are contingent upon the satisfaction of performance December 31, 2000 652,714 $ 34.19 396,049 objectives keyed to profitable growth over a period of three fiscal years commencing with the fiscal year following such awards. The anticipated cost of such awards is expensed over the three-year per- formance period. However, the actual cost of the performance units may vary from total value of the awards depending upon the degree to which the key performance objectives are met. Stock Plan for Non-Employee Directors: The Stock Plan for Non- Employee Directors, approved by stockholders in 1996, authorized the grant of restricted stock awards and, at the option of the direc- tors, the payment of regular stipulated compensation and meeting fees in equivalent shares. In April 2000, the Corporation granted its newest non-employee director restricted stock, valued at $38.19 per share, the market price on the date of the award. The cost of the restricted stock awards is being amortized over a five-year restriction period from the date of grant. At December 31, 2000, the Corpora- tion had provided for an aggregate additional 11,210 shares, at an average price of $33.27, for its non-employee directors pursuant to election by directors to receive such shares in lieu of payment for earned compensation under the Plan. Depending on the extent to which the non-employee directors elect to receive future compensa- tion in shares, total awards under this Plan could reach or exceed 16,000 shares by April 12, 2006, the termination date of the Plan. Pursuant to elections, 1,546 shares were issued as compensation in 2000 under the Plan. Curtiss-Wright Corporation and Subsidiaries 35 11. Environmental Costs The Corporation has continued the operation of the ground water 12. Pension and Other Postretirement Benefit Plans The Corporation maintains a noncontributory defined benefit pen- and soil remediation activities at the Wood-Ridge, New Jersey sion plan covering substantially all employees. The Curtiss-Wright site through 2000. The cost of constructing and operating this site Retirement Plan formula for nonunion employees is based on years was provided for in 1990 when the Corporation established a of credited service and the five highest consecutive years’ compen- $21,000,000 reserve to remediate the property. Costs for operating sation during the last ten years of service and a “cash balance” ben- and maintaining this site totaled $490,000 in 2000, $563,000 in efit. Union employees who have negotiated a benefit under this Plan 1999, and $854,000 in 1998. The Corporation has previously filed lawsuits against several insur- ance carriers seeking recovery for environmental costs. The Corpora- tion settled with one carrier in 1998 and two carriers in 1999. During 2000, the Corporation settled with the remaining carriers. The amount of these settlements in 2000 totaled $4,409,000, net of associated expenses. No potential recovery from this lawsuit has been utilized to offset or reduce any of the Corporation’s environ- mental liabilities. During the year, several sites required increases in are entitled to a benefit based on years of service multiplied by a monthly pension rate. Employees are eligible to participate in this Plan after one year of service and are vested after five years of ser- vice. At December 31, 2000 and December 31, 1999, the Corpora- tion had prepaid pension costs of $59,765,000 and $50,447,000, respectively, under this Plan. At December 31, 2000, approximately 35% of the Plan’s assets are invested in debt securities, including a portion in U.S. government issues. Approximately 65% of plan assets are invested in equity securities. the previously established reserve for those sites in the amount of In addition, the Corporation provided postretirement health benefits $1,746,000. In addition, one site required a decrease in the reserve to certain employees. during 2000 in the amount of $381,000. The Corporation also maintains a nonqualified Restoration Plan cov- The Corporation has been named as a potentially responsible party, ering those employees whose compensation or benefits exceeds the as have many other corporations and municipalities, in a number of IRS limitation for pension benefits. Benefits under this Plan are not environmental clean-up sites. The Corporation continues to make funded and as such, the Corporation had an accrued pension liabil- progress in resolving these claims through settlement discussions ity of $1,226,000 and $2,102,000 at December 31, 2000 and and payments from reserves previously established. Significant sites 1999, respectively. In addition, the Corporation had foreign pension remaining open at the end of the year are: Caldwell Trucking landfill costs under retirement plans of $864,000, $734,000 and superfund site, Fairfield, New Jersey; Sharkey landfill superfund $367,000 in 2000, 1999 and 1998, respectively. site, Parsippany, New Jersey; Pfohl Brothers landfill site, Cheek- towaga, New York; Amenia landfill site, Amenia, New York; and Chemsol, Inc. superfund site, Piscataway, New Jersey. The Corpora- tion believes that the outcome for any of these remaining sites will not have a materially adverse effect on the Corporation’s results of operations or financial condition. The noncurrent environmental obligation on the books at December 31, 2000 was $9,925,000, compared to $8,857,000 at December 31, 1999. 36 Curtiss-Wright Corporation and Subsidiaries (In thousands) Change in Benefit Obligation: Benefit obligation at beginning of year Service cost Interest cost Plan participants’ contributions Actuarial gain Benefits paid Change due to curtailment of benefits Benefit obligation at end of year Change in Plan Assets: Fair value of plan assets, beginning of year Actual return on plan assets Employer contribution Plan participants’ contribution Benefits paid Fair value of plan assets at end of year Funded status Unrecognized net actuarial gain Unrecognized transition obligation Unrecognized prior service costs Prepaid (accrued) benefit costs Components of Net Periodic Benefit Cost (Revenue): Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of transition obligation Recognized net actuarial gain Benefit cost reduction due to curtailment Cost of settlement Pension Benefits Postretirement Benefits 2000 1999 2000 1999 $106,965 4,803 7,256 — 2,022 (17,619) — $109,487 4,703 7,377 — (338) (14,264) — $ 3,955 118 181 158 (168) (280) (1,937) $ 5,187 191 298 42 (264) (401) (1,098) 103,427 106,965 2,027 3,955 237,813 30,107 2,381 — (17,619) 216,882 35,105 90 — (14,264) 252,682 237,813 149,255 (88,765) (2,206) 255 130,848 (78,326) (4,394) 217 — — 122 158 (280) — (2,027) (2,532) — (920) — — 359 42 (401) — (3,955) (2,925) — (1,635) $ 58,539 $ 48,345 $(5,479) $(8,515) $ 4,803 7,256 (16,973) (36) (2,188) (2,090) — 1,415 $ 4,703 7,377 (15,579) (36) (2,188) ( 851) — — $ 118 181 — (123) — (200) (2,890) — $ 191 298 — (193) — (184) (813) — Net periodic benefit revenue $ (7,813) $ (6,574) $(2,914) $ (701) Weighted-average assumptions as of December 31: Discount rate Expected return on plan assets Rate of compensation increase 7.00% 8.50% 4.50% 7.00% 8.50% 4.50% 7.00% — — 7.00% — — Curtiss-Wright Corporation and Subsidiaries 37 For measurement purposes, a 7.85% annual rate of increase in the At December 31, 2000, the approximate future minimum rental per capita cost of covered health care benefits was assumed for income and commitment under operating leases that have initial 2000. The rate was assumed to decrease gradually to 5.5% over the or remaining noncancelable lease terms in excess of one year are next seven years and remaining at that level thereafter. as follows: Effect of change in health care cost trend on: (In thousands) 1% Increase 1% Decrease Total service and interest cost components Postretirement benefit obligation $ 30 $252 $ (40) $(230) The Corporation discontinued postretirement medical coverage for former employees of its Fairfield, NJ plant due to its closure, which resulted in income of $2,890,000 in 2000 and for the former employees of its Buffalo, NY plant, which resulted in income of $813,000 in 1999. 13. Leases Buildings and Improvements Leased to Others. The Corporation leases certain of its buildings and related improvements to outside parties under noncancelable operating leases. Cost and accumu- lated depreciation of the leased buildings and improvements at December 31, 2000, were $49,575,000 and $44,166,000, respectively, and at December 31, 1999, were $50,878,000 and $44,095,000, respectively. Facilities and Equipment Leased from Others. The Corporation con- ducts a portion of its operations from leased facilities, which include manufacturing and service facilities, administrative offices and warehouses. In addition, the Corporation leases automobiles, machinery and office equipment under operating leases. Rental expenses for all operating leases amounted to approximately (In thousands) 2001 2002 2003 2004 2005 2006 and beyond Rental Income Rental Commitment $ 5,470 3,783 2,592 2,004 1,171 9,133 $ 4,189 3,931 3,689 3,062 1,577 2,000 $24,153 $18,448 14. Industry Segments The Corporation manages and evaluates its operations in three reportable segments: Motion Control, Metal Treatment and Flow Control. The operating segments are managed separately because each offers different products and serves different markets. The principal products and major markets of the three operating segments are described in the At a Glance section of this Annual Report. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Interest income is not reported on an operating segment basis because short-term investments and returns on those investments are aggregated and evaluated separately from business operations. Interest expense and income taxes are also not reported on an operating segment basis because they are not considered in the performance evaluation by the Corporation’s chief operating $4,273,000 in 2000, $2,770,000 in 1999 and $2,586,000 in decision-maker, its chairman and CEO. 1998. The Corporation had one commercial customer in the Motion Control segment, which accounted for 13% of consolidated revenue in 2000, 14% in 1999 and 16% in 1998. 38 Curtiss-Wright Corporation and Subsidiaries Consolidated Industry Segment Information: (In thousands) Year Ended December 31, 2000: Revenue from external customers Intersegment revenues Operating income Depreciation and amortization expense Segment assets at year end Expenditures for long-lived assets Year Ended December 31, 1999: Revenue from external customers Intersegment revenues Operating income Depreciation and amortization expense Segment assets at year end Expenditures for long-lived assets Year Ended December 31, 1998: Revenue from external customers Intersegment Revenues Operating income (loss) Depreciation and amortization expense Segment assets at year end Expenditures for long-lived assets Motion Control(1) Metal Treatment Flow Control Segment Total Corporate & Other Consolidated Total $ 126,771 — 15,383 4,086 96,955 1,776 $124,155 — 8,667 5,056 112,943 3,433 $ 105,318 508 23,502 5,031 84,538 5,451 $104,143 337 23,551 4,407 83,350 14,530 $105,400 — (1,413) 3,608 119,351 2,111 $105,999 554 30,020 3,792 68,198 6,053 $ 97,486 — 10,276 4,124 82,670 1,826 $64,965 — 6,082 2,355 95,214 1,543 $38,014 — 5,161 1,246 40,080 2,180 $ 329,575 508 49,161 13,241 264,163 9,053 $293,263 337 38,300 11,818 291,507 19,506 $249,413 554 33,768 8,646 227,629 10,344 $ $ — — 3,024 1,105 145,253 453 — — 12,857 1,046 95,619 377 $ — — 2,579 1,015 125,111 298 $ 329,575 508 52,185 14,346 409,416 9,506 $293,263 337 51,157 12,864 387,126 19,883 $249,413 554 36,347 9,661 352,740 10,642 (1) Operating income for the Motion Control segment includes consolidation costs for the relocation of operations in the amount of $3.8 million for 1999 and $0.8 million for 1998. Curtiss-Wright Corporation and Subsidiaries 39 Reconciliations: For the years ended December 31, (In thousands) Revenues: Total segment revenue Intersegment revenue Elimination of intersegment revenue Total consolidated revenues Earnings before taxes: Total segment operating income Insurance settlements, net Corporate and other Investment income, net Rental income, net Pension income, net Other income (expense), net Interest expense Total consolidated earnings before tax Assets (at December 31): Total assets for reportable segments Short-term investments Pension assets Other assets Elimination of intersegment receivables Total consolidated assets 2000 1999 1998 $329,575 508 (508) $293,263 337 (337) $249,413 554 (554) $329,575 $293,263 $249,413 $ 49,161 3,041 (17) 2,862 3,638 7,813 1,216 (1,743) $ 38,300 11,683 1,174 2,295 4,580 6,574 (8) (1,289) $ 33,768 1,562 1,017 3,206 3,299 5,126 87 (485) $ 65,971 $ 63,309 $ 47,580 $264,163 62,766 59,765 22,801 (79) $291,507 25,560 50,447 19,652 (40) $227,629 66,444 43,822 14,914 (69) $409,416 $387,126 $352,740 December 31, (In thousands) 2000 1999 1998 Geographic Information: United States United Kingdom Other foreign countries Consolidated total Revenues(1) Long-Lived Assets Revenues(1) Long-Lived Assets Revenues(1) Long-Lived Assets $213,343 32,133 84,099 $211,964 22,666 12,266 $200,253 29,762 63,248 $209,370 20,986 11,644 $165,567 32,320 51,526 $217,668 11,454 8,093 $329,575 $246,896 $293,263 $242,000 $249,413 $237,215 (1) Revenues are attributed to countries based on the location of the customer. 15. Contingencies and Commitments The Corporation’s Drive Technology subsidiary located in Switzerland the total obligation by 10% per milestone. The first milestone occurs in February 2001 and has been met. It is expected that the entered into a sales agreement with the Spanish Ministry of Defense second milestone will be met as well. In addition, the agreement which contained an offset obligation for the purchase of approxi- contains a penalty of 5% of the total obligation if it is not met by the mately 24 million Swiss francs of product from Spanish suppliers end of the seven-year period. The Corporation expects to fully com- over a seven-year period which began in 1999. The offset obligation ply with its obligations under this agreement. contains two interim milestones, which, if not met, could increase 40 Curtiss-Wright Corporation and Subsidiaries corporate directory Directors Martin R. Benante Officers Martin R. Benante Chairman and Chief Executive Officer Chairman and Chief Executive Officer Admiral James B. Busey IV Admiral, U.S. Navy (Ret.) Former President and Chief Executive Officer of AFCEA Interna- tional Aviation Safety and Security Consultant S. Marce Fuller President and Chief Executive Officer of Mirant Corporation, Inc. (formerly known as Southern Energy, Inc.) David Lasky Director, Primex Technologies, Inc. Former Chairman and Chief Executive Officer of Curtiss-Wright Corporation William B. Mitchell Director, Mitre Corporation Former Vice-Chairman of Texas Instruments Inc. John R. Myers Chairman of Tru-Circle Corporation Management Consultant Former Chairman of the Board of Garrett Aviation Services Dr. William W. Sihler Ronald E. Trzcinski Professor of Business Administration Darden Graduate School of Business Administration University of Virginia J. McLain Stewart Former Director, McKinsey & Co. Management Consultants Gerald Nachman Executive Vice President George J. Yohrling Vice President Joseph Napoleon Vice President Robert A. Bosi Vice President—Finance Brian D. O’Neill Secretary and General Counsel Gary J. Benschip Treasurer Glenn E. Tynan Controller Gary R. Struening Assistant Controller James V. Maher Assistant Secretary Curtiss-Wright Corporation and Subsidiaries 41 corporate information Corporate Headquarters Certificate Transfers 1200 Wall Street West, Lyndhurst, New Jersey 07071 Stock Transfer Department, P.O. Box 3312, Tel. (201) 896-8400 Fax. (201) 438-5680 South Hackensack, NJ 07606 Annual Meeting Please include your name, address, and telephone number The 2001 annual meeting of stockholders will be held on May 4, with all correspondence. Telephone inquiries may be made 2001, at 2:00 p.m., at the Renaissance Meadowlands Hotel, 801 to (800) 416-3743. Foreign: (201) 329-8660. Domestic Rutherford Avenue, Rutherford, New Jersey. hearing-impaired: (800) 231-5469. Foreign hearing-impaired: Stock Exchange Listing The Corporation’s common stock is listed and traded on the (201) 329-8354. Internet inquiries should be addressed to http://www.mellon-investor.com. New York Stock Exchange. The stock transfer symbol is CW. Investor Information Common Stockholders As of December 31, 2000, the approximate number of holders of record of common stock, par value $1.00 per share, of the Corporation was 3,602. Stock Transfer Agent and Registrar For services such as changes of address, replacement of lost certificates or dividend checks, and changes in registered owner- Investors, stockbrokers, security analysts, and others seeking infor- mation about Curtiss-Wright Corporation should contact Robert A. Bosi, Vice President—Finance, or Gary J. Benschip, Treasurer, at the Corporate Headquarters; telephone (201) 896-1751. Internet Address Use http://www.curtisswright.com to reach the Curtiss-Wright home page for information about Curtiss-Wright. ship, or for inquiries as to account status, write to Mellon Investor Financial Reports Services LLC, at the following addresses: This Annual Report includes most of the periodic financial informa- Stockholder Inquiries/Address Changes/Consolidations P.O. Box 3315, South Hackensack, NJ 07606 Duplicate Mailings tion required to be on file with the Securities and Exchange Com- mission. The Company also files an Annual Report on Form 10-K, a copy to which may be obtained free of charge. These reports, as well as additional financial documents such as quarterly shareholder If you receive duplicate mailings because of slight differences in the reports, proxy statements, and quarterly reports on Form 10-Q, may registration of your accounts and wish to eliminate the duplication, be obtained by written request to Gary J. Benschip, Treasurer, at please call Mellon’s toll-free number, (800) 416-3743, or write to Corporate Headquarters. Mellon Investor Services LLC, 85 Challenger Road, Ridgefield Park, NJ 07660 for instructions on combining your accounts. Common Stock Price Range Direct Stock Purchase Plan/Dividend Reinvestment Plan A plan is available to purchase or sell shares of Curtiss-Wright that provides a low cost alternative to the traditional methods of buying, holding, and selling stock. The plan also provides for the automatic reinvestment of Curtiss-Wright dividends. For more information con- tact our transfer agent, Mellon Investor Services LLC, toll-free at (888) 266-6793. Lost Certificates/Certificate Replacement Estoppel Department, P.O. Box 3317, South Hackensack, NJ 07606 First Quarter Second Quarter Third Quarter Fourth Quarter Dividends First Quarter Second Quarter Third Quarter Fourth Quarter 42 Curtiss-Wright Corporation and Subsidiaries 2000 1999 High Low High Low $40.3125 $35.0000 $40.6250 $31.0000 31.1875 30.3750 31.5000 39.8750 33.4375 48.3750 36.5000 51.1250 43.3750 39.0625 38.8750 38.6250 2000 1999 $0.130 $0.130 $0.130 $0.130 $0.130 $0.130 $0.130 $0.130 contents 02 Challenges and Solutions 19 Forward-Looking Statements 24 Report of Independent Accountants 14 At a Glance 16 Letter to Shareholders 19 Quarterly Results of Operations 19 Consolidated Selected Financial Data 20 Management’s Discussion and Analysis of Financial Condition and Results of Operations 24 Report of the Corporation 25 Consolidated Financial Statements 29 Notes to Consolidated Financial Statements 41 Corporate Directory and Information company overview Curtiss-Wright Corporation is a diversified global provider of highly engineered products and services to the Motion Control, Flow Control, and Metal Treatment industries. The firm employs 2,286 people. More information on Curtiss-Wright can be found on the Internet at www.curtisswright.com net sales ($000s) sales per employee ($) operating income ($000s) net earnings ($000s) Return on sales Return on average assets Return on average stockholders’ equity 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Sales $329,575 180,000 60,000 Reported $52,185 Sales Per Employee $144,773 160,000 140,000 120,000 100,000 50,000 40,000 30,000 20,000 10,000 80,000 0 Normalized $47,986 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Reported $41,074 New orders Backlog at year-end Normalized $37,910 Year-End Financial Position Working capital Current ratio Total assets Stockholders’ equity Stockholders’ equity per common share Other Year-End Data Depreciation and amortization Capital expenditures Shares of common stock outstanding Number of stockholders Number of employees Dividends per Common Share 96 97 98 99 00 96 97 98 99 00 96 97 98 99 00 Compound annual growth rate for Sales was 18%. Compound annual growth rate for Normalized Operating Income was 33%. Compound annual growth rate for Normalized Net Earnings was 24%. (1)Earnings have been adjusted to exclude the effects of environmental insurance settlements, postretirement benefits, postemployment costs, recapitalization costs, a gain on sale of a nonoperating facility and consolidation costs. financial highlights (Dollars in thousands, except per share data; unaudited) 2000 1999 1998 Performance Net Sales Earnings before interest, taxes, depreciation, amortization and pension income Net earnings Normalized net earnings(1) Diluted earnings per common share Normalized diluted earnings per common share $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 329,575 74,247 41,074 37,910 4.03 3.72 12.5% 10.3% 15.0% 299,403 182,648 149,779 3.9 to 1 409,416 290,224 28.97 14,346 9,506 10,017,280 3,602 2,286 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 293,263 70,888 39,045 34,042 3.82 3.33 13.3% 10.6% 16.0% 295,709 212,820 124,438 3.2 to 1 387,126 258,355 25.73 12,864 19,883 10,040,250 3,854 2,267 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 249,413 52,600 29,053 27,817 2.82 2.70 11.6% 9.1% 13.4% 232,217 198,297 130,763 2.9 to 1 352,740 229,593 22.53 9.661 10.642 10,190,790 3,926 2,052 0.52 $ 0.52 $ 0.52 y g o l o n h c e T e c a p S & k e e W n o i t a i v A : t i d e r C h p a r g o t o h P 2 2 - F e a R n h o J : y h p a r g o t o h P d e t c e l e S o c s i c n a r F n a S / k r o Y w e N G C V : n g i s e D Curtiss-Wright Corporation 1200 Wall Street West Lyndhurst, New Jersey 07071 solutions annual report 2000 engineered driven growing a tradition of engineering excellence Curtiss-Wright Corporation Curtiss-Wright Corporation