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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Curtiss-Wright Corporation and its subsidiaries (the “Corporation”) is a diversified multinational manufacturing and service company that designs, manufactures, and overhauls precision components and systems and provides highly engineered products and services to the aerospace, defense, automotive, shipbuilding, processing, oil, petrochemical, agricultural equipment, railroad, power generation, security, and metalworking industries. Operations are conducted through 56 manufacturing facilities and 61 metal treatment service facilities.
A. Principles of Consolidation
The consolidated financial statements include the accounts of Curtiss-Wright and its majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated.
B. Use of Estimates
The financial statements of the Corporation have been prepared in conformity with accounting principles generally accepted in the United States of America, which requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, and expenses and disclosure of contingent assets and liabilities in the accompanying financial statements. The most significant of these estimates includes the estimate of costs to complete long-term contracts under the percentage-of-completion accounting methods, the estimate of useful lives for property, plant, and equipment, cash flow estimates used for testing the recoverability of assets, pension plan and postretirement obligation assumptions, estimates for inventory obsolescence, estimates for the valuation and useful lives of intangible assets, warranty reserves, legal reserves, and the estimate of future environmental costs. Actual results may differ from these estimates.
C. Revenue Recognition
The realization of revenue refers to the timing of its recognition in the accounts of the Corporation and is generally considered realized or realizable and earned when the earnings process is substantially complete and all of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the Corporation's price to its customer is fixed or determinable; and 4) collectability is reasonably assured.
The Corporation records sales and related profits on production and service type contracts as units are shipped and title and risk of loss have transferred or as services are rendered, net of estimated returns and allowances. Sales and estimated profits under certain long-term contracts are recognized under the percentage-of-completion methods of accounting, whereby profits are recorded pro rata, based upon current estimates of direct and indirect costs to complete such contracts. In addition, the Corporation also records sales under certain long-term government fixed price contracts upon achievement of performance milestones as specified in the related 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 revision becomes known. The excess of the billings over cost and estimated earnings on long-term contracts is included in deferred revenue.
D. Cash and 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.
E. Inventory
Inventories are stated at lower of production cost (principally average cost) or market. Production costs are comprised of direct material and labor and applicable manufacturing overhead.
F. Progress Payments
Certain long-term contracts provide for interim billings as costs are incurred on the respective contracts. Pursuant to contract provisions, agencies of the U.S. Government and other customers are granted title or a secured interest for materials and work-in-process included in inventory to the extent progress payments are received. Accordingly, these receipts have been reported as a reduction of unbilled receivables and inventories, as presented in Notes 3 and 4 to the Consolidated Financial Statements.
G. Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated depreciation. 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 are incurred. Depreciation is computed using the straight-line method based upon the estimated useful lives of the respective assets.
Average useful lives for property, plant, and equipment are as follows:
| Buildings and improvements | 5 to 40 years | |
| Machinery, equipment, and other | 3 to 15 years |
H. Intangible Assets
Intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, trademarks and service marks, and technology licenses. Definite lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 1 to 20 years, while indefinite lived intangible assets are not amortized. Indefinite lived intangible assets are reviewed for impairment annually based on the discounted future cash flows. See Note 7 to the Consolidated Financial Statements for further information on other intangible assets.
I. Impairment of Long-Lived Assets
The Corporation reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. If required, the Corporation compares the estimated fair value determined by either the undiscounted future net cash flows, or appraised value, to the related asset's carrying value to determine whether there has been an impairment. If an asset is considered impaired, the asset is written down to fair value, which is based either on discounted cash flows or appraised values in the period the impairment becomes known. In 2010, the Corporation recognized a $1.5 million impairment related to two facilities where it was determined that their carrying value exceeded their estimated fair value. In 2009, the Corporation recognized a $1.1 million impairment related to two facilities that were associated with the business restructuring plan. There were no such impairments recorded in 2008.
J. Goodwill
Goodwill results from business acquisitions. The Corporation accounts for business acquisitions by allocating the purchase price to tangible and intangible assets and liabilities. Assets acquired and liabilities assumed are recorded at their fair values, and the excess of the purchase price over the amounts allocated is recorded as goodwill. The recoverability of goodwill is subject to an annual impairment test or whenever an event occurs or circumstances change that would more likely than not result in an impairment. The impairment test is based on the estimated fair value of the underlying businesses. Goodwill impairment tests performed as of October 31, 2010, 2009, and 2008 concluded that no impairment charges were required as of those dates. See Note 6 to the Consolidated Financial Statements for further information on goodwill.
K. Pre-Contract Costs
The Corporation, from time to time, incurs costs to begin fulfilling the statement of work under a specific anticipated contract that has yet to be obtained from a customer. If it is determined that the recoveries of these costs are probable, the costs will be capitalized, excluding any start-up costs which are expensed as incurred. When circumstances change and the contract is no longer deemed probable, the capitalized costs will be recognized in earnings. There were no costs in 2010 and 2009 that were written off. There were $1.6 million in capitalized costs that were deemed not probable and expensed into earnings during 2008. Capitalized pre-contract costs were $0.7 million and $3.7 million at December 31, 2010 and 2009, respectively.
L. Fair Value of Financial Instruments
Accounting guidance requires certain disclosures regarding the fair value of financial instruments. Due to the short maturities of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, the net book value of these financial instruments is deemed to approximate fair value. See Notes 8 and 12 to the Consolidated Financial Statements for further information.
M. Research and Development
The Corporation funds research and development programs for commercial products and independent research and development and bid and proposal work related to government contracts. Development costs include engineering and field support for new customer requirements. Corporation-sponsored research and development costs are expensed as incurred.
Research and development costs associated with customer-sponsored programs are capitalized to inventory and are recorded in cost of sales when products are delivered or services performed. Funds received under shared development contracts are a reduction of the total development expenditures under the shared contract and are shown net as research and development costs.
N. Environmental Costs
The Corporation establishes a reserve for a potential environmental remediation liability on a site by site basis when it concludes that a determination of legal liability is probable and the amount of the liability can be reasonably estimated based on current law and existing technologies. 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 and no amount within the range is more probable than another, a reserve will be established at the low end of that range. At sites involving multiple parties, the Corporation accrues environmental liabilities based upon its expected share of the liability, taking into account the financial viability of other jointly liable partners. Such reserves, which are reviewed quarterly, are adjusted as assessment and remediation efforts progress or as additional information becomes available. Approximately 41.9% of the Corporation's environmental reserves as of December 31, 2010, represent the current value of anticipated remediation costs and are not discounted primarily due to the uncertainty of timing of expenditures. The remaining environmental reserves are discounted to reflect the time value of money since the amount and timing of cash payments for the liability are reliably determinable. All environmental reserves exclude any potential recovery from insurance carriers or third-party legal actions. See Note 15 to the Consolidated Financial Statements for additional information.
O. Accounting for Share-Based Payments
The Corporation follows the fair value based method of accounting for share-based employee compensation, which requires the Corporation to expense all share-based employee compensation. Share-based employee compensation is primarily a non-cash expense since the Corporation settles these obligations by issuing the shares of Curtiss-Wright Corporation instead of settling such obligations with cash payments.
Compensation expense for all non-qualified share options, performance shares, performance-based restricted shares, time-based restricted stock, and performance-based restricted stock units is recognized on a graded schedule over the requisite service period for the entire award based on the grant date fair value.
P. Capital Stock
The Corporation is authorized to repurchase 900,000 shares under its existing stock repurchase program. Purchases are authorized to be made from time to time in the open market or through privately negotiated transactions depending on market and other conditions, whenever management believes that the market price of the stock does not adequately reflect the true value of the Corporation and, therefore, represents an attractive investment opportunity. The shares are held at cost and reissuance is recorded at the weighted-average cost. Through December 31, 2010, the Corporation had repurchased 210,930 shares under this program. There was no stock repurchased during 2010, 2009, and 2008 and the Corporation does not expect to repurchase any shares during 2011.
Q. 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 basic EPS adjusted for all potentially dilutive shares issuable. The calculation of EPS is disclosed in Note 13 to the Consolidated Financial Statements.
R. Income Taxes
The Corporation accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
The Corporation records amounts related to uncertain income tax positions by 1) prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements and 2) the measurement of the income tax benefits recognized from such positions. The Corporation's accounting policy is to classify uncertain income tax positions that are not expected to be resolved in one year as a non-current income tax liability and to classify interest and penalties as a component of “Interest expense” and “General, and administrative expenses”, respectively. See Note 11 to the Consolidated Financial Statements for further information.
S. Foreign Currency
For operations outside the United States of America that prepare financial statements in currencies other than the U.S. dollar, the Corporation translates assets and liabilities at period-end exchange rates and income statement amounts using weighted-average exchange rates for the period. The cumulative effect of translation adjustments is presented as a component of accumulated other comprehensive income within stockholders' equity. This balance is affected by foreign currency exchange rate fluctuations and by the acquisition of foreign entities. Gains/(losses) from foreign currency transactions are included in general and administrative expenses within the results of operations, which amounted to $(4.2) million, $(4.7) million, and $14.3 million for the years ended December 31, 2010, 2009, and 2008, respectively.
T. Derivatives
The Corporation uses financial instruments, such as forward exchange and currency option contracts, to hedge a portion of existing and anticipated foreign currency denominated transactions. The purpose of the Corporation's foreign currency risk management program is to reduce volatility in earnings caused by exchange rate fluctuations. All of the derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments, with the gain or loss on these transactions recorded into earnings in the period in which they occur. These gains/(losses) are classified as general and administrative expenses in the Consolidated Statements of Earnings and amounted to $3.1 million, $2.5 million and $(19.1) million for the years ended December 31, 2010, 2009 and 2008, respectively. The Corporation does not use derivative financial instruments for trading or speculative purposes.
U. Recently Issued Accounting Standards
Adoption of New Standards
Disclosure of Supplementary Pro Forma Information for Business Combinations
In December 2010, new guidance was issued that clarifies proforma disclosures for material business combination(s). The new guidance clarifies that when an entity discloses proforma information for material business combination(s), the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in the update also expand the supplemental proforma disclosures to include a description of the nature and amount of material, nonrecurring proforma adjustments directly attributable to the business combination included in the reported proforma revenue and earnings. The adoption of this guidance did not have an effect on our disclosures.
Improving Disclosures About Fair Value Measurements
In February 2010, new guidance was issued which adds new requirements for disclosures about transfers into and out of Level 1 and 2 measurements and separate disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements.
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. In addition, employers' disclosures about postretirement benefit plan assets are required to disclose classes of assets instead of major categories of assets. The new guidance was effective for the first reporting period beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance did not have a material impact on our disclosures. See Note 8 to the Consolidated Financial Statements for additional information.
Amendments to Certain Recognition and Measurement Requirements
In February 2010, new guidance was issued to provide certain recognition and disclosure requirements surrounding subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires U.S. Securities and Exchange Commission (“SEC”) filers to evaluate subsequent events through the date that the financial statements are issued and by removing the requirement for SEC filers to disclose the date through which subsequent events have been evaluated. The new guidance was effective upon issuance.
Standards Issued But Not Yet Effective
Revenue Recognition – Milestone Method
In April 2010, new guidance was issued that provides the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate, as well as the associated disclosure requirements. The new guidance clarifies that a vendor can recognize consideration that is contingent on achieving a milestone as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. The new guidance is effective for fiscal years beginning after June 15, 2010. We do not anticipate that the adoption of this guidance will have a material impact on the Corporation's results of operations or financial condition.
Revenue Arrangements with Multiple Deliverables
In September 2009, new guidance was issued on revenue arrangements with multiple deliverables. The new guidance modifies the requirements for determining whether a deliverable can be treated as a separate unit of accounting by removing the criteria that verifiable and objective evidence of fair value exists for undelivered items, establishes a selling price hierarchy to help entities allocate arrangement consideration to separate units of account, requires the relative selling price allocation method for all arrangements, and expands required disclosures. The new guidance is effective for fiscal years beginning after June 15, 2010. We do not anticipate that the adoption of this guidance will have a material impact on the Corporation's results of operations or financial condition.
HYPERLINK "http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175819295959&blobheader=application/pdf"Certain Revenue Arrangements That Include Software Elements
In September 2009, guidance was issued on certain revenue arrangements that include software elements. The guidance amended past guidance on software revenue recognition to exclude from scope all tangible products containing both software and non-software elements that function together to interdependently deliver the product's essential functionality. The new guidance is effective for fiscal years beginning after June 15, 2010. We do not anticipate that the adoption of this guidance will have a material impact on the Corporation's results of operations or financial condition.
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2. ACQUISITIONS AND DISPOSITION OF LONG LIVED ASSET
The Corporation has determined that the goodwill is tax deductible.
EST provides engineered products and comprehensive repair services for heat management and cooling systems utilized in the energy and defense markets. EST had 99 employees as of the date of the acquisition and is headquartered in Hatfield, PA with an additional location in Baytown, TX, and a sales office in the Netherlands. Revenues of the acquired business were $19.6 million for the fiscal year ended September 30, 2008.
Nu-Torque
On January 16, 2009, the Corporation acquired certain assets of the Nu-Torque division (“Nu-Torque”) of Tyco Valves & Controls LP. The purchase price of the acquisition was $5.3 million in cash after giving effect to post-closing customary adjustments as provided for in the Asset Purchase Agreement and the assumption of certain liabilities of Nu-Torque. Management funded the purchase from the Corporation's revolving credit facility.
The acquisition has been accounted for as a bargain purchase under the guidance for business combinations. The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a gain. The Corporation has estimated that $0.8 million of the acquired intangible assets will be tax deductible.
| (In thousands) | |||
| Accounts receivable | $ | 853 | |
| Inventory | 4,329 | ||
| Property, plant, and equipment | 161 | ||
| Other current assets | 47 | ||
| Intangible assets | 2,900 | ||
| Current and non-current liabilities | (1,021) | ||
| Net tangible and intangible assets | 7,269 | ||
| Purchase price | 5,332 | ||
| Gain on Bargain Purchase | $ | 1,937 |
Nu-Torque is a designer and manufacturer of electric and hydraulic valve actuation and control devices primarily for Navy ships. Nu-Torque is located in Redmond, WA and had 37 employees as of the date of the acquisition. Revenues of the acquired business were $7.9 million for the fiscal year ended September 30, 2008.
MOTION CONTROL
Specialist Electronics Services Limited
On June 21, 2010, the Corporation acquired all the issued and outstanding stock of Specialist Electronics Services Ltd. (“SES”) for £15.0 million ($22.1 million), net of cash acquired. Under the terms of the Share Purchase Agreement, the Corporation deposited £1.9 million ($2.8 million) into escrow as security for potential indemnification claims against the seller. The escrow amount will be held for a period of twenty-four months, provided that 50% of the escrow will be released after twelve months subject to amounts held back for pending claims. Management funded the purchase from a combination of cash generated from foreign operations and the Corporation's revolving credit facility.
The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values, as follows:
| (US dollars in thousands) | |||
| Accounts receivable | $ | 1,683 | |
| Inventory | 977 | ||
| Property, plant, and equipment | 74 | ||
| Other current assets | 25 | ||
| Intangible assets | 8,115 | ||
| Current and non-current liabilities | (2,188) | ||
| Deferred Income Taxes | (2,255) | ||
| Net tangible and intangible assets | 6,431 | ||
| Purchase price | 22,131 | ||
| Goodwill | $ | 15,700 | |
The goodwill of £10.6 million ($15.7 million) consists largely of synergies achieved through the introduction of SES products to the Corporation's distribution channels as well as synergies achieved from combining the operations of SES with the Corporation's United Kingdom based operations. The Corporation has determined that the goodwill will not be deductible for tax purposes.
SES provides a range of rugged products for airborne and other severe environments, with particular expertise in solid state data recording, computing and control display units. Key platforms include fixed-wing, rotary-wing, and unmanned aircraft, tactical vehicles, and navy vessels. SES is located in Camberley, United Kingdom and had 41 employees as of the date of the acquisition. Revenues of the acquired business were £4.7 million ($7.5 million) for the fiscal year ended May 31, 2010.
Hybricon Corporation
On June 1, 2010, the Corporation acquired all the issued and outstanding stock of Hybricon Corporation (“Hybricon”) for $19.0 million in cash. Under the terms of the Stock Purchase Agreement, the Corporation deposited $2.3 million into escrow as security for potential indemnification claims against the seller. The escrow amount will be held for a period of eighteen months, provided that 50% of the escrow will be released after twelve months subject to amounts held back for pending claims. Management funded the purchase from the Corporation's revolving credit facility.
The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values, as follows:
| (In thousands) | |||
| Accounts receivable | $ | 2,273 | |
| Inventory | 2,075 | ||
| Property, plant, and equipment | 151 | ||
| Other current assets | 68 | ||
| Intangible assets | 6,677 | ||
| Current and non-current liabilities | (1,420) | ||
| Deferred income taxes | (2,287) | ||
| Net tangible and intangible assets | 7,537 | ||
| Purchase price | 18,976 | ||
| Goodwill | $ | 11,439 | |
The goodwill of $11.4 million consists largely of synergies from combining the operations of Hybricon with the Corporation's Electronic Systems business in Littleton, MA as well as value associated with the acquisition's assembled workforce. The Corporation has determined that the goodwill will not be deductible for tax purposes.
Hybricon designs and manufactures custom and standards-based enclosures and electronic backplanes for defense and commercial applications, and is a leading supplier for predominant embedded commercial-off-the-shelf system architectures. Hybricon had 72 employees as of the date of the acquisition and was located in Ayer, MA prior to their relocation to the existing Curtiss-Wright facility in Littleton, MA in December 2010. Revenues of the acquired business were $16.8 million for the fiscal year ended June 30, 2009.
Skyquest Systems Limited
On December 18, 2009, the Corporation acquired all of the issued and outstanding capital stock of Skyquest Systems Limited (“SSL” or “Skyquest”). The purchase price of the acquisition, subsequent to customary adjustments provided for in the Stock Purchase Agreement, was £9.8 million ($15.8 million) in cash and the assumption of certain liabilities.
In addition, the Stock Purchase Agreement provides for additional consideration to the selling shareholders contingent upon SSL exceeding certain sales targets over a two-year period. Based on the estimated amount of sales over the two year measurement period, the Corporation recorded a liability of the estimated fair value of the contingent consideration in the amount of £1.8 million ($2.9 million). Based on fiscal 2010 sales results, Skyquest did not attain the contingent consideration target for the first measurement period, resulting in a gain from operations of £0.4 million ($0.7 million). The remaining liability for contingent consideration is £1.4 million ($2.2 million) as of December 31, 2010. Under the terms of the Stock Purchase Agreement, the Corporation deposited £1.5 million ($2.4 million) into escrow as security for potential indemnification claims against the seller. Any amount of holdback remaining after the claims for indemnification have been settled will be paid as follows: (i) an initial release of one-third of the holdback less amounts held in reserve to cover pending claims for indemnification in 12 months after the closing date and (ii) a final release of the remaining balance of the holdback less amounts held in reserve to cover pending claims for indemnification in 24 months after the closing date. Since no claims were raised during the 12 months following the closing, one-third of the funds held in escrow was released to the seller. Management funded the acquisition from the Corporation's available cash.
The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values, as follows:
| (US dollars in thousands) | |||
| Accounts receivable | $ | 1,635 | |
| Inventory | 1,448 | ||
| Property, plant, and equipment | 189 | ||
| Other current assets | 52 | ||
| Intangible assets | 7,748 | ||
| Current Liabilities | (1,519) | ||
| Deferred Income Taxes | (2,270) | ||
| Contingent consideration | (2,925) | ||
| Net tangible and intangible assets | 4,358 | ||
| Purchase price | 15,790 | ||
| Goodwill | $ | 11,432 | |
Skyquest is a supplier of aircraft video displays, recorders, and video/radar converters for surveillance aircraft applications in the aerospace and defense markets. Skyquest's display and recorder technology supports demanding airborne surveillance missions with proven reliability in harsh environments. Key products include the Video Management System, which provides fully integrated systems that enable observers and pilots to independently select, view, and record images with maximum fidelity. Skyquest also develops lightweight, airworthy standard and High Definition video recorders for airborne surveillance.
Located in Basildon, United Kingdom, SSL was formed from two businesses, Skyquest Ltd. and Real-Time Vision Ltd., founded in 1996 and 1998, respectively. SSL is a part of the Corporation's Motion Control segment within the Embedded Computing division. Revenues of the acquired business were £5.0 million ($8.0 million) for the year ended December 31, 2009.
VMETRO ASA
On October 15, 2008, the Corporation completed a voluntary cash tender offer for all of the issued and outstanding capital stock of VMETRO ASA (“VMETRO”) at Norwegian Kroner (“NOK”) 12.06 per share. The purchase price of the acquisition was NOK 292.3 million ($46.3 million) in cash and the assumption of NOK 148 million ($23.5 million) of net debt. Management funded the acquisition from the Corporation's revolving credit facility. VMETRO is part of the Corporation's Motion Control segment within the Embedded Computing division. Revenues of the purchased business were 307 million NOK ($52.5 million) for the period ended December 31, 2007.
The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill, on the basis of estimated fair values. The excess of the purchase price over the fair value of the net assets acquired is NOK 287 million ($49.3 million) at December 31, 2010. The goodwill is not deductible for tax purposes.
As part of the acquired liabilities of VMETRO, the Corporation established a $7.6 million restructuring accrual as of the acquisition date for costs to exit the activities of certain facilities, including lease cancellation costs and external legal and consulting fees, as well as severance and relocation costs for certain employees of the acquired business. The major activities of these closed facilities have been integrated into other existing embedded computing facilities. Employees identified for involuntary termination consist of engineers, sales personnel, and administrative and executive staff. The exit activities were completed in the third quarter of 2010. See Note 10 to the Consolidated Financial Statements for further financial information regarding this restructuring accrual.
VMETRO is a supplier of commercial off-the-shelf board and system-level embedded computing products for applications in aerospace, defense, industrial, communication, and medical markets. Key products provide real-time computing capabilities, high-density radar processing, data recording, and network storage systems. Application of these products as components or subsystems enables improved response time and critical protection in server and storage appliances, utility mapping, and ground penetrating radar.
VMETRO operates globally with its headquarters and principal engineering located in Oslo, Norway. Additional sales, engineering, and distribution networks are established in Germany, France, the United States, and the United Kingdom.
Mechetronics Holdings Limited
On October 1, 2008, the Corporation acquired all of the issued and outstanding capital stock of Mechetronics Holding Ltd. and all subsidiaries (“Mechetronics”). The purchase price of the acquisition, subject to customary adjustments provided for in the Stock Purchase Agreement, was £1.3 million ($2.3 million) in cash and the assumption of certain liabilities. Management funded the acquisition from the Corporation's available cash. The business is a part of the Corporation's Motion Control segment within the Integrated Sensing division. Revenues of the purchased business were approximately £5.0 million ($10.0 million) for the period ended July 31, 2008.
The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the remainder recorded as goodwill, on the basis of estimated fair values. The excess of the purchase price over the fair value of the net assets acquired is £2.2 million ($3.5 million) at December 31, 2010. The goodwill is not deductible for tax purposes.
Mechetronics is a global supplier of solenoids and solenoid valves to OEMs. A solenoid is an electromagnetic actuator used as a mechanical switch or integrated with a valve to provide control in pneumatic or hydraulic systems. The Mechetronics products are used in a variety of applications including business machines, switchgear and vehicle braking systems.
Mechetronics operations are headquartered in a 27,000 square-foot facility in Bishop Auckland, United Kingdom, and include a new production facility opened in Zhuhai, China in 2007.
Curtiss-Wright Accessory Services
On May 9, 2008, the Corporation sold its third-party commercial aerospace repair and overhaul business located in Miami, Florida for $8.0 million. The determination was made to divest the business because third-party repair work was not considered a core business of the Corporation. This business was part of the Motion Control segment and contributed $18.5 million in sales and $1.8 million in pretax income for the year ended December 31, 2007. On the date of sale, the business had assets of $8.7 million and liabilities of $1.1 million, which combined with transaction costs of $0.7 million, resulted in a $0.3 million loss, which is classified as a reduction of Other Income, net on the Consolidated Statements of Earnings. The Corporation did not report the disposal as discontinued operations as the amounts are not considered significant. On March 31, 2008, the Corporation performed a goodwill impairment test of the portion of the reporting unit that was retained and concluded that no impairment charges were required.
METAL TREATMENT
Parylene Coating Services
On September 4, 2008, the Corporation acquired certain assets and certain liabilities of Parylene Coating Services, Inc. (“PCS”). The purchase price of the acquisition was $7.6 million after giving effect to customary post-closing adjustments as provided for in the Asset Purchase Agreement (“APA”) and the assumption of certain liabilities of PCS. Management funded the purchase from the Corporation's revolving credit facility.
The purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of fair values. The excess of the purchase price over the fair value of the net assets acquired is $5.0 million at December 31, 2010. The Corporation has determined that the goodwill is tax deductible.
PCS applies parylene coatings primarily for the medical device industry. PCS applies parylene coatings to medical devices, including coronary artery stents, rubber/silicone seals, and wire forming mandrels used in the manufacture of catheters. The conformal coating provides lubricity; resistance to solvents, radiation, and bacteria; and is also biocompatible. In addition to medical applications, parylene coatings are uniquely suited for use in niche electronic, oil and gas, and general industrial applications. PCS is headquartered and operates one facility in Katy, Texas. Revenues of the acquired business were $2.6 million for the year ended December 31, 2007.
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3. RECEIVABLES
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4. INVENTORIES
| (In thousands) | 2010 | 2009 | |||||
| Raw material | $ | 147,950 | $ | 131,108 | |||
| Work-in-process | 69,302 | 67,351 | |||||
| Finished goods and component parts | 73,419 | 84,674 | |||||
| Inventoried costs related to U.S. Government and other long-term contracts | 41,029 | 53,597 | |||||
| Gross inventories | 331,700 | 336,730 | |||||
| Less: Inventory reserves | (41,596) | (39,739) | |||||
| Progress payments applied, principally related to long-term contracts | (9,001) | (11,383) | |||||
| Inventories, net | $ | 281,103 | $ | 285,608 | |||
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5. PROPERTY, PLANT, AND EQUIPMENT
The composition of property, plant, and equipment is as follows as of December 31:
| (In thousands) | 2010 | 2009 | ||||
| Land | $ | 22,315 | $ | 20,970 | ||
| Buildings and improvements | 175,832 | 170,468 | ||||
| Machinery, equipment, and other | 605,233 | 574,541 | ||||
| Property, plant, and equipment, at cost | 803,380 | 765,979 | ||||
| Less: Accumulated depreciation | (406,100) | (364,830) | ||||
| Property, plant, and equipment, net | $ | 397,280 | $ | 401,149 |
Depreciation expense for the years ended December 31, 2010, 2009, and 2008 was $53.9 million, $50.1 million, and $47.2 million, respectively.
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6. GOODWILL
| (In thousands) | Flow Control | Motion Control | Metal Treatment | Consolidated | ||||||||||
| December 31, 2008 | $ | 285,592 | $ | 294,836 | $ | 28,470 | $ | 608,898 | ||||||
| Goodwill from 2009 acquisitions | 15,612 | 11,782 | - | 27,394 | ||||||||||
| Change in estimate to fair value of net | ||||||||||||||
| assets acquired in prior year | (37) | (3,662) | - | (3,699) | ||||||||||
| Additional consideration of prior years’ acquisitions | 544 | 619 | 3 | 1,166 | ||||||||||
| Foreign currency translation adjustment | 6,340 | 7,971 | 382 | 14,693 | ||||||||||
| December 31, 2009 | $ | 308,051 | $ | 311,546 | $ | 28,855 | $ | 648,452 | ||||||
| Goodwill from 2010 acquisitions | 27,139 | 27,139 | ||||||||||||
| Change in estimate to fair value of net | ||||||||||||||
| assets acquired in prior year | 16 | 16 | ||||||||||||
| Additional consideration of prior years’ acquisitions | (1,066) | (1,066) | ||||||||||||
| Other adjustments | (902) | (902) | ||||||||||||
| Foreign currency translation adjustment | 1,980 | 17,890 | 63 | 19,933 | ||||||||||
| December 31, 2010 | $ | 310,047 | $ | 354,607 | $ | 28,918 | $ | 693,572 | ||||||
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7. OTHER INTANGIBLE ASSETS, NET
| (In thousands, except years data) | 2010 | 2009 | ||||||||
| Amount | Years | Amount | Years | |||||||
| Technology | $ | 5,384 | 7.0 | $ | 10,675 | 9.3 | ||||
| Customer related intangibles | 10,721 | 11.9 | 16,427 | 13.1 | ||||||
| Other intangible assets | 295 | 3.0 | 1,586 | 7.0 | ||||||
| Total | $ | 16,400 | 10.1 | $ | 28,688 | 11.3 | ||||
| (In thousands) | Accumulated | ||||||||||
| 2010 | Gross | Amortization | Net | ||||||||
| Technology | $ | 148,820 | $ | (54,994) | $ | 93,826 | |||||
| Customer related intangibles | 189,567 | (68,663) | 120,904 | ||||||||
| Other intangible assets | 37,005 | (11,538) | 25,467 | ||||||||
| Total | $ | 375,392 | $ | (135,195) | $ | 240,197 | |||||
| (In thousands) | Accumulated | ||||||||||
| 2009 | Gross | Amortization | Net | ||||||||
| Technology | $ | 135,879 | $ | (44,051) | $ | 91,828 | |||||
| Customer related intangibles | 174,884 | (54,614) | 120,270 | ||||||||
| Other intangible assets | 38,887 | (8,479) | 30,408 | ||||||||
| Total | $ | 349,650 | $ | (107,144) | $ | 242,506 | |||||
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8. FAIR VALUE OF FINANCIAL INSTRUMENTS
| Fair Values of Derivative Instruments | ||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Asset Derivative | Liability Derivative | |||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||||||
| Foreign exchange contracts: | ||||||||||||||||||||
| Transactional | Other Current Assets | $ | 324 | $ | - | Other Current Liabilities | $ | 309 | $ | 342 | ||||||||||
| Forecasted | Other Current Assets | 208 | 41 | Other Current Liabilities | - | - | ||||||||||||||
| Total | $ | 532 | $ | 41 | $ | 309 | $ | 342 | ||||||||||||
| Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Amount of Gain (Loss) Recognized in Income on Derivatives | ||||||||
| Twelve Months Ended | ||||||||||
| 2010 | 2009 | |||||||||
| (In thousands) | ||||||||||
| Foreign exchange contracts: | ||||||||||
| Transactional | General and Administrative Expenses | $ | 2,567 | $ | 649 | |||||
| Forecasted | General and Administrative Expenses | 547 | 1,377 | |||||||
| Total | $ | 3,114 | $ | 2,026 | ||||||
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10. FACILITIES RELOCATION AND RESTRUCTURING
| Flow Control | Severance and Benefits | Facility Closing Costs | Relocation Costs | Total | ||||||||||
| December 31, 2008 | $ | - | $ | - | $ | - | $ | - | ||||||
| Provisions | 909 | 100 | 656 | 1,665 | ||||||||||
| Payments | (852) | (100) | (656) | (1,608) | ||||||||||
| Adjustments | - | - | - | - | ||||||||||
| Net currency translation adjustment | - | - | - | - | ||||||||||
| December 31, 2009 | $ | 57 | $ | - | $ | - | $ | 57 | ||||||
| Provisions | 895 | 732 | 352 | 1,979 | ||||||||||
| Payments | (900) | (522) | (352) | (1,774) | ||||||||||
| Adjustments | - | - | - | - | - | - | ||||||||
| Net currency translation adjustment | - | - | - | - | - | - | ||||||||
| December 31, 2010 | $ | 52 | $ | 210 | $ | - | $ | 262 | ||||||
| Motion Control | ||||||||||||||
| December 31, 2008 | $ | 3,616 | $ | 1,902 | $ | 628 | $ | 6,146 | ||||||
| Provisions | 3,492 | 90 | 50 | 3,632 | ||||||||||
| Payments | (5,497) | (934) | (553) | (6,984) | ||||||||||
| Adjustments | - | - | - | - | ||||||||||
| Net currency translation adjustment | (66) | 22 | - | (44) | ||||||||||
| December 31, 2009 | $ | 1,545 | $ | 1,080 | $ | 125 | $ | 2,750 | ||||||
| Provisions | 668 | 71 | 103 | 842 | ||||||||||
| Payments | (1,714) | (621) | (228) | (2,563) | ||||||||||
| Adjustments | (358) | (497) | - | (855) | ||||||||||
| Net currency translation adjustment | (23) | (28) | - | (51) | ||||||||||
| December 31, 2010 | $ | 118 | $ | 5 | $ | - | $ | 123 | ||||||
| Metal Treatment | ||||||||||||||
| December 31, 2008 | $ | - | $ | - | $ | - | $ | - | ||||||
| Provisions | 282 | 524 | - | 806 | ||||||||||
| Payments | (282) | (524) | - | (806) | ||||||||||
| Adjustments | - | - | - | - | ||||||||||
| Net currency translation adjustment | - | - | - | - | ||||||||||
| December 31, 2009 | $ | - | $ | - | $ | - | $ | - | ||||||
| Provisions | - | 66 | 153 | 219 | ||||||||||
| Payments | - | (66) | (153) | (219) | ||||||||||
| Adjustments | - | - | - | - | ||||||||||
| Net currency translation adjustment | - | - | - | - | ||||||||||
| December 31, 2010 | $ | - | $ | - | $ | - | $ | - | ||||||
| Total Curtiss-Wright | ||||||||||||||
| December 31, 2008 | $ | 3,616 | $ | 1,902 | $ | 628 | $ | 6,146 | ||||||
| Provisions | 4,683 | 714 | 706 | 6,103 | ||||||||||
| Payments | (6,631) | (1,558) | (1,209) | (9,398) | ||||||||||
| Adjustments | - | - | - | - | ||||||||||
| Net currency translation adjustment | (66) | 22 | - | (44) | ||||||||||
| December 31, 2009 | $ | 1,602 | $ | 1,080 | $ | 125 | $ | 2,807 | ||||||
| Provisions | 1,563 | 869 | 608 | 3,040 | ||||||||||
| Payments | (2,614) | (1,209) | (733) | (4,556) | ||||||||||
| Adjustments | (358) | (497) | - | (855) | ||||||||||
| Net currency translation adjustment | (23) | (28) | - | (51) | ||||||||||
| December 31, 2010 | $ | 170 | $ | 215 | $ | - | $ | 385 | ||||||
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11. INCOME TAXES
Earnings before income taxes for the years ended December 31 consist of:
| (In thousands) | 2010 | 2009 | 2008 | ||||||||
| Domestic | $ | 100,948 | $ | 94,695 | $ | 71,976 | |||||
| Foreign | 57,347 | 50,564 | 97,126 | ||||||||
| $ | 158,295 | $ | 145,259 | $ | 169,102 | ||||||
The provision for income taxes for the years ended December 31 consists of:
| (In thousands) | 2010 | 2009 | 2008 | ||||||||
| Current: | |||||||||||
| Federal | $ | 25,856 | $ | 33,046 | $ | 28,644 | |||||
| State | 7,357 | 6,486 | 8,906 | ||||||||
| Foreign | 15,663 | 16,974 | 28,532 | ||||||||
| 48,876 | 56,506 | 66,082 | |||||||||
| Deferred: | |||||||||||
| Federal | 5,517 | (4,324) | (5,410) | ||||||||
| State | (208) | 1,600 | (1,704) | ||||||||
| Foreign | (1,630) | (3,799) | 388 | ||||||||
| 3,679 | (6,523) | (6,726) | |||||||||
| Valuation allowance | (858) | 55 | 356 | ||||||||
| Provision for income taxes | $ | 51,697 | $ | 50,038 | $ | 59,712 | |||||
The effective tax rate varies from the U.S. federal statutory tax rate for the years ended December 31, principally:
| 2010 | 2009 | 2008 | ||||||||||
| U.S. federal statutory tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
| Add (deduct): | ||||||||||||
| State and local taxes, net of federal benefit | 2.5 | 2.7 | 2.6 | |||||||||
| Rate changes | 0.0 | 0.4 | 0.1 | |||||||||
| R&D tax credits | (3.3) | (1.7) | (1.2) | |||||||||
| Foreign rate differential | (1.8) | (0.8) | (1.3) | |||||||||
| All other, net | 0.3 | (1.2) | 0.1 | |||||||||
| Effective tax rate | 32.7 | % | 34.4 | % | 35.3 | % | ||||||
The 2010 effective tax rate included a tax benefit of $4.2 million due to foreign cash repatriation. This was offset by a $0.8 million charge to write off a portion of deferred tax assets related to postretirement health care obligations. New health care legislation impacting the tax deductible prescription drug costs related to Medicare Part D will reduce the amount of the federal subsidy beginning in 2013 and reduce the deductible temporary difference relating to the benefit obligation. There was also a favorable impact as a result of a U.K. tax rate change which was offset by an unfavorable change in state tax rates. During 2010, the Company recorded a decrease of $1.0 million in the valuation allowance primarily related to the utilization of net operating loss carryforwards. The 2009 effective tax rate included a tax benefit of $1.4 million principally due to a Canadian tax rate change which was offset by $2.0 million increase in the state tax expense, net of federal benefit, principally as a result of a reduction in state rates thereby reducing the state deferred tax assets. The 2009 effective tax rate was also favorably impacted by an increase in research and development tax credits from the Canadian and U.K. operations. During 2009, the valuation allowance increased principally due to foreign translation of $0.6 million. During 2008, a valuation allowance of $5.0 million was established through purchase accounting and an additional valuation allowance of $0.4 million was established through income tax provision. The components of the Corporation's deferred tax assets and liabilities at December 31 are as follows:
| (In thousands) | 2010 | 2009 | |||||
| Deferred tax assets: | |||||||
| Environmental reserves | $ | 7,854 | $ | 7,961 | |||
| Inventories | 15,875 | 15,206 | |||||
| Postretirement/postemployment benefits | 14,271 | 15,751 | |||||
| Incentive compensation | 7,276 | 4,639 | |||||
| Accrued vacation pay | 4,905 | 4,892 | |||||
| Warranty reserves | 3,964 | 3,632 | |||||
| Legal reserves | 3,997 | 3,764 | |||||
| Share-based payments | 8,798 | 7,826 | |||||
| Pension plans | 45,833 | 40,177 | |||||
| Net operating loss | 6,843 | 5,405 | |||||
| Deferred revenue | 5,491 | 9,135 | |||||
| Other | 11,590 | 8,857 | |||||
| Total deferred tax assets | 136,697 | 127,245 | |||||
| Deferred tax liabilities: | |||||||
| Depreciation | 35,364 | 31,195 | |||||
| Goodwill amortization | 39,987 | 32,532 | |||||
| Other intangible amortization | 33,007 | 31,192 | |||||
| Other | 3,219 | 3,920 | |||||
| Total deferred tax liabilities | 111,577 | 98,839 | |||||
| Valuation allowance | 4,974 | 5,924 | |||||
| Net deferred tax assets | $ | 20,146 | $ | 22,482 | |||
Deferred tax assets and liabilities are reflected on the Corporation's consolidated balance sheet at December 31 as follows:
| (In thousands) | 2010 | 2009 | ||||
| Net current deferred tax assets | $ | 48,568 | $ | 48,777 | ||
| Net current deferred tax liabilities | 2,640 | 2,740 | ||||
| Net noncurrent deferred tax assets | 1,033 | 1,994 | ||||
| Net noncurrent deferred tax liabilities | 26,815 | 25,549 | ||||
| Net deferred tax assets | $ | 20,146 | $ | 22,482 |
The Corporation has income tax net operating loss carryforwards related to international operations of approximately $25.7 million of which $17.3 million have an indefinite life and $8.4 million expire through 2019. The Corporation has state income tax net operating loss carryforwards of approximately $3.3 million which expire through 2029. The Corporation has recorded a deferred tax asset of $6.8 million reflecting the benefit of the loss carryforwards.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three year period ended December 31, 2010 in one of the Corporation's foreign locations. Such objective evidence limits the ability to consider other subjective evidence such as projections for future growth. The Corporation has a valuation allowance of $5.0 million, as of December 31, 2010, in order to measure only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth.
Income tax payments of $55.7 million were made in 2010, $69.5 million in 2009, and $65.3 million in 2008.
No provision has been made for U.S. federal or foreign taxes on certain foreign subsidiaries' undistributed earnings considered to be permanently reinvested, which at December 31, 2010 was $154.5 million. It is not practicable to estimate the amount of tax that would be payable if these amounts were repatriated to the United States; however, it is expected there would be minimal or no additional tax because of the availability of foreign tax credits.
Interest costs related to unrecognized tax benefits are classified as a component of “Interest expense” in the accompanying Consolidated Statements of Earnings. Penalties are recognized as a component of “General and administrative expenses.” The Corporation has recognized a liability for interest of $0.5 million and penalties of $0.3 million as of December 31, 2010. These amounts were essentially unchanged from 2009 and 2008.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| (In thousands) | 2010 | 2009 | 2008 | ||||||
| Balance at January 1, | $ | 3,374 | $ | 4,445 | $ | 4,502 | |||
| Additions for tax positions of prior periods | 6 | 53 | 595 | ||||||
| Additions for tax positions related to the current year | 1,954 | 369 | 358 | ||||||
| Settlements | (161) | (424) | (347) | ||||||
| Lapses of statute of limitations | (680) | (1,100) | (398) | ||||||
| Foreign currency translation | (3) | 31 | (265) | ||||||
| Balance at December 31, | $ | 4,490 | $ | 3,374 | $ | 4,445 |
In many cases the Corporation's uncertain tax positions are related to tax years that remain subject to examination by tax authorities. The following describes the open tax years, by major tax jurisdiction, as of December 31, 2010:
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12. DEBT
Debt consists of the following as of December 31:
| (In thousands) | 2010 | 2009 | ||||
| Industrial Revenue Bonds, due from 2011 through 2023 | $ | 9,102 | $ | 9,198 | ||
| Revolving Credit Agreement, due 2012 | 110,000 | 100,000 | ||||
| 5.13% Senior Notes due 2010 | - | 74,957 | ||||
| 5.74% Senior Notes due 2013 | 125,038 | 125,052 | ||||
| 5.51% Senior Notes due 2017 | 150,000 | 150,000 | ||||
| Other debt | 2,504 | 5,886 | ||||
| Total debt | 396,644 | 465,093 | ||||
| Less: Current portion of long-term debt and short-term debt | 2,602 | 80,981 | ||||
| Total Long-term debt | $ | 394,042 | $ | 384,112 |
The weighted-average interest rate of the Corporation's Industrial Revenue Bonds was 0.57% and 0.81% in 2010 and 2009, respectively. The weighted-average interest rate of the Corporation's Revolving Credit Agreement was 0.80% and 1.60% in 2010 and 2009, respectively.
The fair value of the Corporation's debt is prepared in accordance with the requirements of U.S. GAAP, as noted in Note 8 of the Consolidated Financial Statements. The estimated fair value amounts were determined by the Corporation using available market information which is primarily based on quoted market prices for the same or similar issues. The carrying amount of the Revolving Credit Agreement and Industrial Revenue Bonds approximates fair value as the interest rates on this variable debt are reset periodically to reflect market conditions and rates. Fair values for the Corporation's fixed rate debt totaled $302 million and $362 million at December 31, 2010 and 2009, respectively. These fair values were estimated by management. The fair values described above may not be indicative of net realizable value or reflective of future fair values. Furthermore, the use of different methodologies to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
Aggregate maturities of debt are as follows:
| (In thousands) | |||
| 2011 | $ | 2,602 | |
| 2012 | 110,101 | ||
| 2013 | 125,105 | ||
| 2014 | 108 | ||
| 2015 | 110 | ||
| Thereafter | 158,580 | ||
| Total | $ | 396,606 |
Interest payments of $21 million, $24 million, and $27 million were made in 2010, 2009, and 2008, respectively.
On August 10, 2007, the Corporation and certain of its subsidiaries amended and refinanced its existing credit facility and entered into a Second Amended and Restated Credit Agreement (“Credit Agreement”). The proceeds available under the Credit Agreement are to be used for working capital, internal growth initiatives, funding of future acquisitions, and general corporate purposes. The Corporation's available credit under the credit facility increased from $400 million to $425 million from a syndicate of banks, led by Bank of America, N.A. and JP Morgan Chase Bank, N.A. as the co-arrangement banks. The Credit Agreement also contains an accordion feature which can expand the overall credit line to a maximum aggregate amount of $600 million. The consortium membership has remained relatively the same. The Credit Agreement extends the maturity from July 23, 2009 to August 10, 2012, at which time all amounts then outstanding under the Credit Agreement will be due and payable. In addition, the Credit Agreement provides for improved pricing and more favorable covenant terms, reduced facility fees, and increased availability of the facility for letters of credit. Borrowings under the Credit Agreement bear interest at a floating rate based on market conditions. In addition, the interest rate and level of facility fees are dependent on certain financial ratio levels, as defined in the Credit Agreement. The Corporation is subject to annual facility fees on the commitments under the Credit Agreement. In connection with the Credit Agreement, the Corporation paid customary transaction fees that have been deferred and are being amortized over the term of the Credit Agreement. The Corporation is required under the Credit Agreement to maintain certain financial ratios and meet certain financial tests, the most restrictive of which is a debt to capitalization limit of 60% and a cross default provision with other senior indebtedness. As of December 31, 2010, the Corporation had the flexibility to issue additional debt of approximately $1.3 billion without exceeding the covenant limit defined in the Credit Agreement. The Corporation would consider other financing alternatives to maintain capital structure balance and ensure compliance with all debt covenants. The Corporation had $110 million and $100 million in borrowings outstanding (excluding letters of credit) under the Credit Agreement at December 31, 2010 and 2009, respectively. The unused credit available under the Credit Agreement at December 31, 2010 and 2009 was $258 million and $267 million, respectively.
On December 1, 2005, the Corporation issued $150.0 million of 5.51% Senior Notes (the “2005 Notes”). The 2005 Notes mature on December 1, 2017. The Notes are senior unsecured obligations and are equal in right of payment to the Corporation's existing senior indebtedness. The Corporation, at its option, can prepay at any time all or any part of the 2005 Notes, subject to a make-whole amount in accordance with the terms of the Note Purchase Agreement. In connection with the Notes, the Corporation paid customary fees that have been deferred and will be amortized over the terms of the Notes. The Corporation is required under the Note Purchase Agreement to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60% and a cross default provision with the Corporation's other senior indebtedness. On September 25, 2003, the Corporation issued $200 million of Senior Notes (the “2003 Notes”). The 2003 Notes consist of $75 million of 5.13% Senior Notes that matured on September 25, 2010 and $125 million of 5.74% Senior Notes that mature on September 25, 2013. The $75 million 5.13% Senior Notes were paid during the third quarter of 2010 by drawing down on our revolver. The 2003 Notes are senior unsecured obligations and are equal in right of payment to the Corporation's existing senior indebtedness. The Corporation, at its option, can prepay at any time all or any part of the 2003 Notes, subject to a make-whole amount in accordance with the Note Purchase Agreement. The Corporation paid customary fees that have been deferred and will be amortized over the terms of the 2003 Notes. The Corporation is required under the Note Purchase Agreement to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60% and a cross default provision with the Corporation's other senior indebtedness.
At December 31, 2010, substantially all of the industrial revenue bond issues are collateralized by real estate, machinery, and equipment. Certain of these issues are supported by letters of credit, which total $9 million. The Corporation had various other letters of credit totaling $49 million. Substantially all letters of credit are included under the Credit Agreement.
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13. EARNINGS PER SHARE
| Weighted-Average | Earnings | ||||||||
| (In thousands, except per share data) | Net Income | Shares Outstanding | Per Share | ||||||
| 2010: | |||||||||
| Basic earnings per share | $ | 106,598 | 45,823 | $ | 2.33 | ||||
| Effect of dilutive securities: | |||||||||
| Employee share-based compensation awards | 426 | ||||||||
| Deferred director share-based compensation | 73 | ||||||||
| Diluted earnings per share | $ | 106,598 | 46,322 | $ | 2.30 | ||||
| 2009: | |||||||||
| Basic earnings per share | $ | 95,221 | 45,237 | $ | 2.10 | ||||
| Effect of dilutive securities: | |||||||||
| Employee share-based compensation awards | 389 | ||||||||
| Deferred director share-based compensation | 69 | ||||||||
| Diluted earnings per share | $ | 95,221 | 45,695 | $ | 2.08 | ||||
| 2008: | |||||||||
| Basic earnings per share | $ | 109,390 | 44,716 | $ | 2.45 | ||||
| Effect of dilutive securities: | |||||||||
| Employee share-based compensation awards | 596 | ||||||||
| Deferred director share-based compensation | 62 | ||||||||
| Diluted earnings per share | $ | 109,390 | 45,374 | $ | 2.41 | ||||
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15. ENVIRONMENTAL COSTS
The Corporation has continued the operation of the ground water and soil remediation activities at the Wood-Ridge, New Jersey, site through 2010. The cost of constructing and operating this site was provided for in 1990 when the Corporation established a reserve to remediate the property. Even though this property was sold in December 2001, the Corporation retained the responsibility for this remediation in accordance with the sale agreement. The reserve balance as of December 31, 2010, was $7.4 million, a $1.3 million increase from the prior year.
The Corporation has been named as a potentially responsible party, as have many other corporations and municipalities, in a number of environmental clean-up sites. The Corporation continues to make progress in resolving these claims through settlement discussions and payments from established reserves. Significant sites remaining open at the end of the year are: Caldwell Trucking landfill superfund site, Fairfield, New Jersey; Sharkey landfill superfund site, Parsippany, New Jersey; and Chemsol, Inc. superfund site, Piscataway, New Jersey. The Corporation believes that the outcome for any of these remaining sites will not have a materially adverse effect on the Corporation's results of operations or financial condition.
In the first quarter of 2005, the Corporation sold its Fairfield, New Jersey, property, which was formerly an operating facility for the Corporation's Motion Control segment. Under the sale agreement, the Corporation has retained the responsibility to continue the ongoing environmental remediation on the property. At the date of the sale, remediation costs associated with the Fairfield site were anticipated to be incurred over three to five years with an estimated cost of $1.5 million. As of December 31, 2010, the Corporation's reserve balance was $0.8 million, which is essentially unchanged from the prior year.
In 1992, the Corporation was named as a PRP in the Caldwell Trucking superfund site. Through 2010, the majority of the costs for this site have been for the soil and groundwater remediation. As of December 31, 2010, the Corporation's reserve balance was $4.5 million, which largely represents continuing operation and maintenance costs over the next 30 years.
The Corporation maintains several NRC licenses necessary for the continued operation of the EMD facility in Cheswick, Pennsylvania. In connection with these licenses, the NRC requires financial assurance from the Corporation in the form of a parent company guarantee representing estimated environmental decommissioning and remediation costs associated with the commercial operations covered by the licenses. In addition, the Corporation has obligations for additional environmental remediation costs at this facility, which are ongoing. The Corporation has partial environmental insurance coverage specifically for this facility. The policy provides coverage for losses due to on or off-site pollution conditions, which are pre-existing and unknown. As of December 31, 2010, the Corporation's reserve balance was $7.8 million, which is a $0.6 million decrease from the prior year.
The Corporation's aggregate environmental obligation at December 31, 2010 was $20.8 million compared to $20.9 million at December 31, 2009. Approximately 41.9% of the Corporation's environmental reserves as of December 31, 2010, represent the current value of anticipated remediation costs and are not discounted primarily due to the uncertainty of timing of expenditures. The remaining environmental reserves are discounted using an appropriate discount rate to reflect the time value of money since the amount and timing of cash payments for the liability are reliably determinable. All environmental reserves exclude any potential recovery from insurance carriers or third-party legal actions. As of December 31, 2010, the undiscounted cash flows associated with the discounted reserves were $20.0 million and are anticipated to be paid over the next 30 years.
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16. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation maintains eleven separate and distinct pension and other postretirement defined benefit plans, consisting of four domestic pensions and other postretirement benefit plans and seven separate foreign pension plans. The Corporation maintains the following domestic plans: a qualified pension plan, a non-qualified pension plan, and a postretirement health-benefits plan (the “Curtiss-Wright Plans”), and a postretirement health benefits plan for EMD employees.
The foreign plans consist of three defined benefit pension plans in the United Kingdom, two in Mexico, and one plan each in Canada and Switzerland. In 2010, the defined benefit plan in Norway was terminated and replaced with a defined contribution plan. The total projected benefit obligation related to all foreign plans is $78.4 million as of December 31, 2010. Each plan and further information on the Norway plan termination is described below.
Domestic Plans
The Curtiss-Wright Plans
The Corporation maintains a defined benefit pension plan, the CW Pension Plan, covering all employees under four benefit formulas: a non-contributory non-union and union formula for all Curtiss-Wright (“CW”) employees and a contributory union and non-union benefit formula for employees at the EMD business unit.
The formula for CW non-union employees is composed of a “traditional” benefit based on years of credited service, the five highest consecutive years' compensation during the last ten years of service, and a “cash balance” benefit. CW union employees who have negotiated a benefit under the CW Pension Plan are entitled to a benefit based on years of service multiplied by a monthly pension rate. Employees become participants under the CW Pension Plan after one year of service and are vested after three years of service. The formula for EMD employees covers both union and non-union employees and is designed to satisfy the requirements of relevant collective bargaining agreements. Employee contributions are withheld each pay period and are equal to 1.5% of salary. The benefits for the EMD employees are based on years of service and compensation.
Effective February 1, 2009, the Corporation amended the CW Pension Plan to close the traditional benefit to new entrants. All new employees hired on or after the effective date will be eligible for the cash balance benefit. The amendment does not affect CW employees that are subject to collective bargaining agreements or employees of EMD.
At December 31, 2010 and 2009, the Corporation had a noncurrent pension liability of $112.1 million and $65.9 million, respectively. The Corporation made $0.8 million of contributions to the CW Pension Plan in 2010 and we expect to make a contribution of approximately $36.0 million in 2011 and cumulative contributions of approximately $195.0 million through 2015.
The Corporation also maintains a non-qualified restoration plan (the “CW Restoration Plan”) covering those employees of CW and EMD whose compensation or benefits exceed the IRS limitation for pension benefits. Benefits under the CW Restoration Plan are not funded, and, as such, the Corporation had an accrued pension liability of $18.6 million and $16.0 million as of December 31, 2010 and 2009, respectively. The Corporation's contributions to the CW Restoration Plan are expected to be $0.9 million in 2011.
The Corporation provides postretirement health benefits to certain employees (the “CW Retirement Plan”). In 2002, the Corporation restructured the postretirement medical benefits for certain active employees, effectively freezing the plan. The obligation associated with these active employees was transferred to the CW Pension Plan. The plan continues to be maintained for retired employees. The Corporation had an accrued postretirement benefit liability of $0.6 and $0.7 million as of December 31, 2010 and 2009, respectively. Benefits under the plan are not funded. The Corporation's contributions to the CW Retirement Plan are not expected to be material in 2011.
EMD Plan
The Corporation, through an administration agreement with Westinghouse, maintains the Westinghouse Government Services Group Welfare Benefits Plan (the “EMD Retirement Plan”), a retiree health and life insurance plan for substantially all of the Curtiss-Wright EMD employees. The EMD Retirement Plan provides basic health and welfare coverage on a non-contributory basis. Benefits are based on years of service and are subject to certain caps. Effective January 1, 2011, the Corporation modified the benefit design for post-65 retirees by introducing Retiree Reimbursement Accounts (“RRA's) to participants in lieu of the traditional benefit delivery. Participant accounts will be funded a set amount annually that can be used to purchase supplemental coverage on the open market, effectively capping the benefit. The plan was amended and remeasured for accounting purposes on November 1, 2010, the date the plan changes were communicated to participants. This change reduced the benefit obligation by approximately $7.0 million.
The Corporation had an accrued postretirement benefit liability at December 31, 2010 and 2009 of $19.4 million and $29.1 million, respectively. Pursuant to the Asset Purchase Agreement, the Corporation has a discounted receivable from Washington Group International to reimburse the Corporation for a portion of these postretirement benefit costs. At December 31, 2010 and 2009, the discounted receivable included in other assets was $2.7 million and $2.9 million, respectively. The Corporation expects to contribute $1.5 million to the EMD Retirement Plan during 2011.
Foreign Plans
Indal Technologies Hourly Plan (Canada)
The Pension Plan for Hourly Employees of Indal Technologies, Inc. (“Indal Plan”) commenced on March 1, 2005 in connection with the acquisition of Indal by the Corporation. This non-contributory defined benefit plan provides monthly benefits to eligible members equal to a member's credited service multiplied by a fixed dollar amount. As of December 31, 2010 and 2009, the Corporation had an accrued pension liability of $0.4 million and $0.2 million, respectively. The Corporation's contributions to the Indal Plan are expected to be $0.3 million in 2011.
Metal Improvement Company – Salaried Staff Pension Scheme (U.K.)
The Corporation maintains the Salaried Staff Pension scheme (“MIC Plan”) for the benefit of Metal Treatment employees in the U.K. This contributory plan provides defined benefits to eligible members equal to one-sixtieth of final pensionable salary for each year of pensionable service. Members contribute at the rate of 6% of their pensionable salary, and the Corporation funds the balance of the cost to provide benefits. The plan provides for early retirement at reduced benefits and was closed to new entrants as of January 1, 2004. As of December 31, 2010 and 2009, the Corporation had an accrued pension liability of $5.2 million and $4.1 million, respectively. The Corporation's contributions to the MIC Plan are expected to be approximately $0.9 million in 2011.
Penny & Giles Pension Plan (U.K.)
The Penny & Giles Pension Plan (“P&G Plan”) is a contributory plan that provides for both defined benefit and defined contribution benefits. Defined benefit members are entitled to final salary related benefits equal to one-sixtieth of final pensionable salary for each year of pensionable service. The P&G Plan provides for early retirement at reduced benefits and was closed to new entrants at time of acquisition in 2002. The following disclosures include information for the Penny & Giles defined benefit section only, which represents the majority of the P&G Plan's costs. As of December 31, 2010 and 2009, the Corporation had an accrued pension liability of $5.3 million and $1.9 million, respectively. The Corporation's contributions to the P&G Plan are expected to be approximately $2.0 million in 2011.
Mechetronics Limited Retirement Benefits Scheme (U.K.)
The Corporation assumed defined benefit obligations as a result of our Mechetronics acquisition on October 1, 2009. The plan is based on final pensionable salary and years of service. As a result of the restructuring of Mechetronics and the consolidation of U.K. operations, there are no active employees in the pension plan as of December 31, 2010 as the employees became deferred vested participants. See Note 10 to the Consolidated Financial Statements for further information regarding the restructuring. As of December 31, 2010 and 2009, the Corporation had an accrued pension liability of $4.8 million and $3.6 million, respectively. The Corporation's contributions to the plans are expected to be $0.4 million in 2011.
Curtiss Wright Antriebstechnik GmbH (“CWAT”) Pension Plan (Switzerland)
CWAT sponsors a defined contribution plan covering 84 employees as of December 31, 2010. Under Swiss Law, there is a guaranteed minimum benefit requirement which must be valued as a defined benefit obligation for U.S. GAAP purposes. As of December 31, 2010 and 2009, the Corporation had an accrued pension liability of $2.4 million and $1.4 million, respectively. The Corporation's contributions to the plans are expected to be $0.8 million in 2011.
Curtiss-Wright de Mexico Pension Plans (subsidiary of CW Integrated Sensing, Inc.)
The Corporation assumed defined benefit obligations as a result of our IMC Magnetics acquisition in 2008. Under Federal Labor Law in Mexico, all full-time employees of PSI de Mexico are entitled to benefits under two plans: Seniority Premium and Termination Indemnity. The Seniority Premium plan enables employees to receive benefits in the event of death, disability, dismissal, voluntary separation, and retirement. Benefits under voluntary separation and retirement are subject to certain requirements. The benefit is equal to 12 days of salary per year of accreditable service, payable in a lump sum. The Termination Indemnity enables employees to receive benefits in the event of dismissal or retirement. The benefit is equal to three months of salary plus bonuses, plus twenty days of salary plus bonus per year of accredited service, payable in a lump sum. As of December 31, 2010 and 2009, the Corporation had an accrued pension liability of $0.3 million and $0.2 million, respectively. The Corporation's contributions to the plans are expected to be immaterial in 2011.
VMETRO ASA Pension Plan
The Corporation assumed defined benefit obligations as a result of our VMETRO acquisition on October 15, 2008. The group pension plan entitles the employees of the Norwegian companies with future benefits based on years of service, the wage level at time of retirement, and benefits from the national insurance plan. Effective December 31, 2010, the Corporation terminated the existing defined benefit plan and replaced it with a defined contribution plan covering employee service beginning on January 1, 2011. The plan termination resulted in one-time curtailment and settlement gains of approximately $1.6 million in 2010. The Corporation did not have an accrued pension liability as of December 31, 2010. As of December 31, 2009, the Corporation had an accrued pension liability of $0.3 million.
The following table details the components of net periodic pension expense for all Pension Plans:
| Components of net periodic benefit expense: (In thousands) | 2010 | 2009 | 2008 | ||||||
| Service cost | $ | 33,332 | $ | 27,067 | $ | 23,197 | |||
| Interest cost | 25,248 | 24,234 | 21,069 | ||||||
| Expected return on plan assets | (28,904) | (29,039) | (30,170) | ||||||
| Amortization of prior service cost | 1,111 | 646 | 635 | ||||||
| Recognized net actuarial loss | 1,815 | 2,287 | 718 | ||||||
| Cost of settlements/curtailments | (1,245) | 1,418 | 119 | ||||||
| Net periodic benefit cost | $ | 31,357 | $ | 26,613 | $ | 15,568 |
Net periodic benefit cost, specifically service and interest cost, has increased over the reported periods due to growth in headcount and service accruals related to existing employees under the age and service-based formula in the plan. The 2009 expense includes a $2.0 million correction of an immaterial error in the Curtiss-Wright Pension and Restoration plans. The actuarial calculation error resulted in an understatement of expense in the 2009 valuation. The additional $2.0 million is reflected in each component of expense.
The “Cost of settlements/curtailments” indicated above represent events that are accounted for under guidance on employers' accounting for settlements and curtailments of defined benefit pension plans. In 2010, the gain resulted from the termination of the defined benefit plan in Norway, offset by settlement charges due to workforce reductions in Mexico and retirements in Switzerland. In 2009, a settlement charge of $1.5 million resulted from the retirement of a key executive and his subsequent election to receive his pension benefit as a single lump sum payout. As a result of this single lump sum payout, special settlement requirements were triggered. This charge was partially offset by curtailment gains associated with reductions in workforce in Norway and Mexico. The settlement charge in 2008 is resulting from the retirement of an employee in Switzerland.
The following table details the components of net periodic expense for the CW and EMD Postretirement Benefit Plans:
| (In thousands) | 2010 | 2009 | 2008 | ||||||
| Service cost | $ | 578 | $ | 666 | $ | 684 | |||
| Interest cost | 1,342 | 1,601 | 1,778 | ||||||
| Amortization of prior service cost | (105) | - | - | ||||||
| Recognized net actuarial gain | (1,132) | (853) | (575) | ||||||
| Net periodic postretirement benefit cost | $ | 683 | $ | 1,414 | $ | 1,887 |
In the following table, the pension benefits information is a consolidated disclosure of all domestic and foreign plans described earlier. The postretirement benefits information includes the domestic CW and EMD postretirement benefit plans, as there are no foreign postretirement benefit plans. All plans were valued using a December 31, 2010 measurement date to comply with the requirements of U.S. GAAP to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position.
| Pension Benefits | Postretirement Benefits | ||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | |||||||||
| Change in benefit obligation: | |||||||||||||
| Beginning of year | $ | 443,801 | $ | 398,713 | $ | 29,874 | $ | 28,818 | |||||
| Service cost | 33,332 | 27,067 | 578 | 666 | |||||||||
| Interest cost | 25,248 | 24,234 | 1,342 | 1,601 | |||||||||
| Plan participants’ contributions | 2,257 | 2,150 | 455 | 382 | |||||||||
| Amendments | 594 | 4,547 | (6,978) | - | |||||||||
| Actuarial loss (gain) | 43,651 | 14,011 | (3,391) | 358 | |||||||||
| Benefits paid | (25,717) | (28,752) | (2,015) | (2,038) | |||||||||
| Retiree drug subsidy received | - | - | 107 | 87 | |||||||||
| Curtailments | (821) | (808) | - | - | |||||||||
| Settlements | (1,471) | (2,777) | - | - | |||||||||
| Currency translation adjustments | 431 | 5,416 | - | - | |||||||||
| End of year | $ | 521,305 | $ | 443,801 | $ | 19,972 | $ | 29,874 | |||||
| Change in plan assets: | |||||||||||||
| Beginning of year | $ | 350,370 | $ | 298,891 | $ | - | $ | - | |||||
| Actual return on plan assets | 40,967 | 70,970 | - | - | |||||||||
| Employer contribution | 5,466 | 6,717 | 1,560 | 1,656 | |||||||||
| Plan participants’ contributions | 2,257 | 2,150 | 455 | 382 | |||||||||
| Benefits paid | (25,717) | (28,752) | (2,015) | (2,038) | |||||||||
| Settlements | (1,471) | (3,709) | - | - | |||||||||
| Plan terminations | (128) | - | - | - | |||||||||
| Currency translation adjustments | 455 | 4,103 | - | - | |||||||||
| End of year | $ | 372,199 | $ | 350,370 | $ | - | $ | - | |||||
| Funded status | $ | (149,106) | $ | (93,431) | $ | (19,972) | $ | (29,874) | |||||
| Pension Benefits | Postretirement Benefits | ||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | |||||||||
| Amounts recognized on the balance sheet | |||||||||||||
| Current liabilities | (916) | (710) | (1,571) | (1,665) | |||||||||
| Noncurrent liabilities | (148,190) | (92,721) | (18,401) | (28,209) | |||||||||
| Total | $ | (149,106) | $ | (93,431) | $ | (19,972) | $ | (29,874) | |||||
| Amounts recognized in accumulated other comprehensive income (AOCI) | |||||||||||||
| Net actuarial loss (gain) | 106,752 | 76,383 | (12,768) | (10,509) | |||||||||
| Prior service cost | 7,889 | 8,322 | (6,873) | - | |||||||||
| Total | $ | 114,641 | $ | 84,705 | $ | (19,641) | $ | (10,509) | |||||
| Amounts in AOCI expected to be recognized in net periodic cost in the coming year: | |||||||||||||
| Loss (gain) recognition | 4,948 | 2,938 | (925) | (624) | |||||||||
| Prior service cost recognition | 1,196 | 1,110 | (629) | - | |||||||||
| Accumulated benefit obligation | $ | 476,792 | $ | 394,084 | N/A | N/A | |||||||
| Information for pension plans with an accumulated benefit obligation in excess of plan assets: | |||||||||||||
| Projected benefit obligation | 497,237 | 425,090 | N/A | N/A | |||||||||
| Accumulated benefit obligation | 462,416 | 382,646 | N/A | N/A | |||||||||
| Fair value of plan assets | 353,473 | 333,816 | N/A | N/A | |||||||||
Plan Assumptions
| Pension Benefits | Postretirement Benefits | |||||||||||||
| (In thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||
| Weighted-average assumptions in | ||||||||||||||
| determination of benefit obligation: | ||||||||||||||
| Discount rate | 5.16 | % | 5.89 | % | 5.21 | % | 5.98 | % | ||||||
| Rate of compensation increase | 3.99 | % | 4.04 | % | N/A | N/A | ||||||||
| Health care cost trends: | ||||||||||||||
| Rate assumed for subsequent year | N/A | N/A | 8.50 | % | 9.50 | % | ||||||||
| Ultimate rate reached in 2014 and 2012, respectively | N/A | N/A | 5.50 | % | 5.50 | % | ||||||||
| Weighted-average assumptions in | ||||||||||||||
| determination of net periodic benefit cost: | ||||||||||||||
| Discount rate | 5.89 | % | 5.89 | % | 5.98 | % | 6.00 | % | ||||||
| Expected return on plan assets | 8.09 | % | 8.15 | % | N/A | N/A | ||||||||
| Rate of compensation increase | 4.04 | % | 4.02 | % | N/A | N/A | ||||||||
| Health care cost trends: | ||||||||||||||
| Rate assumed for subsequent year | N/A | N/A | 9.50 | % | 8.50 | % | ||||||||
| Ultimate rate reached in 2014 and 2012, respectively | N/A | N/A | 5.50 | % | 5.50 | % | ||||||||
The discount rate for each plan is determined by discounting the plan's expected future benefit payments using a yield curve developed from high quality bonds that are rated Aa or better by Moody's as of the measurement date. The yield curve calculation matches the notional cash inflows of the hypothetical bond portfolio with the expected benefit payments to arrive at one effective rate for each plan.
The overall expected return on assets assumption is based on a combination of historical performance of the pension fund and expectations of future performance. Expected future performance is determined by weighting the expected returns for each asset class by the plan's asset allocation. The expected returns are based on long-term capital market assumptions utilizing a ten-year time horizon through consultation with investment advisors. While consideration is given to recent performance and historical returns, the assumption represents a long-term prospective return.
The effect on the CW and EMD Retirement Plans of a 1% change in the health care cost trend is as follows:
| (In thousands) | 1% Increase | 1% Decrease | ||||
| Total service and interest cost components | $ | 2 | $ | (1) | ||
| Postretirement benefit obligation | $ | 31 | $ | (28) | ||
Pension Plan Assets
The overall objective for plan assets is to earn a rate of return over time to meet anticipated benefit payments in accordance with plan provisions. The long-term investment objective of the domestic retirement plans is to achieve a total rate of return, net of fees, which exceeds the actuarial overall expected return on assets assumption used for funding purposes and which provides an appropriate premium over inflation. The intermediate-term objective of the domestic retirement plans, defined as three to five years, is to outperform each of the capital markets in which assets are invested, net of fees. During periods of extreme market volatility, preservation of capital takes a higher precedence than outperforming the capital markets.
The Corporation's Retirement Plan Committee is responsible for formulating investment policies, developing investment manager guidelines and objectives, and approving and managing qualified advisors and investment managers. The guidelines established define permitted investments within each asset class and apply certain restrictions such as limits on concentrated holdings, and prohibits selling securities short, buying on margin, and the purchase of any securities issued by the Corporation.
The Corporation maintains the funds of the CW Pension Plan under a trust and are diversified across investment classes and among investment managers to achieve an optimal balance between risk and return. In accordance with this policy, the Corporation has established target allocations for each asset class and ranges of expected exposure. The Corporation's domestic retirement assets are invested within this allocation structure in three major categories: domestic equity securities, international equity securities, and debt securities. Below are the Corporation's actual and established target allocations for the CW Pension Plan, representing 84% of consolidated assets:
| As of December 31, | Target | Expected | ||||||||
| Asset class | 2010 | 2009 | Exposure | Range | ||||||
| Domestic equities | 52 | % | 49 | % | 50 | % | 40%-60% | |||
| International equities | 16 | % | 17 | % | 15 | % | 10%-20% | |||
| Total equity | 68 | % | 66 | % | 65 | % | 55%-75% | |||
| Fixed income | 32 | % | 34 | % | 35 | % | 25%-45% | |||
The Corporation may from time to time require the reallocation of assets in order to bring the retirement plans into conformity with these ranges. The Corporation may also authorize alterations or deviations from these ranges where appropriate for achieving the objectives of the retirement plans.
Foreign plan assets represent 16.1% of consolidated plan assets, with the majority of the assets supporting the U.K. plans. The U.K. foreign plans follow a similar asset allocation strategy, while other plans are more heavily weighted in fixed income resulting in a weighted expected return on assets assumption of 5.99% for all foreign plans.
Fair Value Measurements
The following table presents consolidated plan assets using the fair value hierarchy as of December 31, 2010:
| Quoted Prices | |||||||||||||
| in Active | |||||||||||||
| Markets for | Significant | Significant | |||||||||||
| Identical | Observable | Unobservable | |||||||||||
| Assets | Inputs | Inputs | |||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||
| Cash | $ | 7,354 | $ | 989 | $ | 6,365 | $ | - | |||||
| Equity Securities: | |||||||||||||
| U.S. Large Cap (a) | 120,865 | 120,475 | 390 | - | |||||||||
| U.S. Small Cap (b) | 28,048 | 28,048 | - | - | |||||||||
| Foreign Large Cap (c ) | 60,355 | 60,355 | - | - | |||||||||
| Foreign Mid Cap | 116 | 116 | - | - | |||||||||
| Foreign Index Funds (d) | 26,062 | 68 | 25,994 | - | |||||||||
| Balanced Funds (e) | 5,432 | - | 5,432 | - | |||||||||
| Total Equities | $ | 240,878 | $ | 209,062 | $ | 31,816 | $ | - | |||||
| Fixed Income Securities: | |||||||||||||
| U.S. Corporate Bonds (f) | 18,120 | - | 18,120 | - | |||||||||
| U.S. Government Bonds | 1,427 | 1,427 | - | - | |||||||||
| U.S. Fixed Income Mutual Fund (g) | 54,808 | 54,808 | - | - | |||||||||
| US Other Fixed Income (h) | 21,658 | - | 21,658 | - | |||||||||
| Foreign Government Bonds (i) | 4,788 | 1,509 | 3,279 | - | |||||||||
| Foreign Corporate Bonds (i) | 3,215 | 1,494 | 1,721 | - | |||||||||
| Foreign Government Index Funds (j) | 1,449 | - | 1,449 | - | |||||||||
| Foreign Corporate Bond Index Funds (j) | 8,802 | - | 8,802 | - | |||||||||
| Total Fixed Income Securities | $ | 114,267 | $ | 59,238 | $ | 55,029 | $ | - | |||||
| Alternative Investments: | |||||||||||||
| Insurance Contracts (k) | 8,903 | - | - | 8,903 | |||||||||
| Total Alternative Investments | $ | 8,903 | $ | - | $ | - | $ | 8,903 | |||||
| Real Estate: | |||||||||||||
| Foreign Real Estate (l) | 797 | - | - | 797 | |||||||||
| Total Real Estate | $ | 797 | $ | - | $ | - | $ | 797 | |||||
| Total Assets | $ | 372,199 | $ | 269,289 | $ | 93,210 | $ | 9,700 | |||||
The following table presents consolidated plan assets using the fair value hierarchy as of December 31, 2009:
| Quoted Prices | |||||||||||||
| in Active | |||||||||||||
| Markets for | Significant | Significant | |||||||||||
| Identical | Observable | Unobservable | |||||||||||
| Assets | Inputs | Inputs | |||||||||||
| Asset Category | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||
| Cash | $ | 11,217 | $ | 6,101 | $ | 5,116 | $ | - | |||||
| Equity Securities: | |||||||||||||
| U.S. Large Cap (a) | 120,665 | 120,665 | - | - | |||||||||
| U.S. Small Cap (b) | 20,917 | 20,917 | - | - | |||||||||
| Foreign Large Cap (c ) | 52,183 | 52,017 | 166 | - | |||||||||
| Foreign Mid Cap | 85 | 85 | - | - | |||||||||
| Foreign Index Funds (d) | 18,827 | - | 18,827 | - | |||||||||
| Balanced Funds (e) | 3,005 | - | 3,005 | - | |||||||||
| Total Equities | $ | 215,682 | $ | 193,684 | $ | 21,998 | $ | - | |||||
| Fixed Income Securities: | |||||||||||||
| U.S. Corporate Bonds (f) | 24,506 | 12 | 24,390 | 104 | |||||||||
| U.S. Fixed Income Mutual Fund (g) | 67,450 | 67,450 | - | - | |||||||||
| U.S. Other Fixed Income (h) | 3,482 | - | 3,482 | - | |||||||||
| Foreign Government Bonds (i) | 6,082 | 1,617 | 4,465 | - | |||||||||
| Foreign Corporate Bonds (i) | 4,267 | 1,545 | 2,344 | 378 | |||||||||
| Foreign Government Index Funds (j) | 1,240 | - | 1,240 | - | |||||||||
| Foreign Corporate Bond Index Funds (j) | 7,216 | - | 7,216 | - | |||||||||
| Total Fixed Income Securities | $ | 114,243 | $ | 70,624 | $ | 43,137 | $ | 482 | |||||
| Alternative Investments: | |||||||||||||
| Insurance Contracts (k) | 8,162 | - | - | 8,162 | |||||||||
| Total Alternative Investments | $ | 8,162 | $ | - | $ | - | $ | 8,162 | |||||
| Real Estate: | |||||||||||||
| Foreign Real Estate (l) | 1,066 | - | - | 1,066 | |||||||||
| Total Real Estate | $ | 1,066 | $ | - | $ | - | $ | 1,066 | |||||
| Total Assets | $ | 350,370 | $ | 270,409 | $ | 70,251 | $ | 9,710 | |||||
Valuation
Equity securities and exchange-traded equity and bond mutual funds are valued using a market approach based on the quoted market prices of identical instruments. Pooled institutional funds are valued at their net asset values and are calculated by the sponsor of the fund.
Fixed income securities are primarily valued using a market approach utilizing various underlying pricing sources and methodologies. Real estate investment trusts are priced at net asset value based on valuations of the underlying real estate holdings using inputs such as discounted cash flows, independent appraisals, and market-based comparable data.
Cash balances in the United States are held in a pooled fund and classified as a Level 2 asset. Non-U.S. cash is valued using a market approach based on quoted market prices of identical instruments.
The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2010 and 2009:
| Insurance | Corporate | Real | ||||||||||
| Contracts | Bonds | Estate | Total | |||||||||
| December 31, 2008 | $ | 6,936 | $ | 1,765 | $ | 1,146 | $ | 9,847 | ||||
| Actual return on plan assets: | ||||||||||||
| Relating to assets still held | ||||||||||||
| at the reporting date | 128 | 22 | 65 | 215 | ||||||||
| Relating to assets sold during | ||||||||||||
| the period | - | 36 | - | 36 | ||||||||
| Purchases, sales, and settlements | 840 | 39 | (145) | 734 | ||||||||
| Transfers in and/or out of Level 3 | - | (1,380) | - | (1,380) | ||||||||
| Foreign currency translation adjustment | 258 | - | - | 258 | ||||||||
| December 31, 2009 | $ | 8,162 | $ | 482 | $ | 1,066 | $ | 9,710 | ||||
| Actual return on plan assets: | ||||||||||||
| Relating to assets still held | ||||||||||||
| at the reporting date | 163 | - | 31 | 194 | ||||||||
| Relating to assets sold during | ||||||||||||
| the period | - | 12 | - | 12 | ||||||||
| Purchases, sales, and settlements | (290) | - | (365) | (655) | ||||||||
| Transfers in and/or out of Level 3 | - | (494) | (494) | |||||||||
| Foreign currency translation adjustment | 868 | - | 65 | 933 | ||||||||
| December 31, 2010 | $ | 8,903 | $ | - | $ | 797 | $ | 9,700 | ||||
Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from the plans:
| Pension | Postretirement | ||||||||
| (In thousands) | Plans | Plans | Total | ||||||
| 2011 | $ | 33,392 | $ | 1,571 | $ | 34,963 | |||
| 2012 | 35,608 | 1,588 | 37,196 | ||||||
| 2013 | 37,352 | 1,577 | 38,929 | ||||||
| 2014 | 39,413 | 1,571 | 40,984 | ||||||
| 2015 | 40,563 | 1,561 | 42,124 | ||||||
| 2016 - 2020 | 225,957 | 7,680 | 233,637 |
Other Pension and Postretirement Plans
The Corporation offers all of its domestic employees the opportunity to participate in a defined contribution plan. Costs incurred by the Corporation in the administration and record keeping of the defined contribution plan are paid for by the Corporation and are not considered material.
In addition, the Corporation had foreign pension costs under various defined contribution plans of $2.8 million, $2.6 million, and $2.6 million in 2010, 2009, and 2008, respectively.
|
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17. LEASES
The Corporation conducts a portion of its operations from leased facilities, which include manufacturing and service facilities, administrative offices, and warehouses. In addition, the Corporation leases vehicles, machinery, and office equipment under operating leases. The leases expire at various dates and may include renewals and escalations. Rental expenses for all operating leases amounted to $31.2 million in 2010, $29.2 million in 2009, and $29.0 million in 2008.
At December 31, 2010, the approximate future minimum rental commitments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows:
| Rental | |||
| (In thousands) | Commitments | ||
| 2011 | $ | 24,283 | |
| 2012 | 23,889 | ||
| 2013 | 21,704 | ||
| 2014 | 19,568 | ||
| 2015 | 20,808 | ||
| Thereafter | 55,909 | ||
| Total | $ | 166,161 | |
|
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18. INDUSTRY SEGMENTS
The Corporation manages and evaluates its operations based on the products and services it offers and the different markets it serves. Based on this approach, the Corporation has three reportable segments: Flow Control, Motion Control, and Metal Treatment. The Flow Control segment primarily designs, manufactures, distributes, and services a broad range of highly engineered flow control products including valves, pumps, motors, generators, instrumentation, and control electronics for severe service military and commercial applications. The Motion Control segment primarily designs, develops, and manufactures mechanical systems, drive systems, and mission-critical embedded computing products and sensors mainly for the aerospace and defense industries. Metal Treatment provides various metallurgical services, principally shot peening, laser peening, coatings, anodizing, and heat treating. The segment provides these services to a broad spectrum of customers in various industries, including aerospace, automotive, construction equipment, oil and gas, petrochemical, and metal working.
The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Interest expense and income taxes are not reported on an operating segment basis because they are not considered in the segments' performance evaluation by the Corporation's Chairman and CEO, its chief operating decision-maker.
During 2010, 2009, and 2008, the Corporation had no direct defense customer or commercial customer representing more than 10% of consolidated revenue.
| December 31, | |||||||||
| 2010 | 2009 | 2008 | |||||||
| (In thousands) | |||||||||
| Net sales | |||||||||
| Flow Control | $ | 1,024,860 | $ | 985,201 | $ | 971,776 | |||
| Motion Control | 653,030 | 624,932 | 598,998 | ||||||
| Metal Treatment | 222,160 | 204,857 | 264,944 | ||||||
| Less: Intersegment Revenues | (6,916) | (5,300) | (5,578) | ||||||
| Total Consolidated | $ | 1,893,134 | $ | 1,809,690 | $ | 1,830,140 | |||
| Operating income (expense) | |||||||||
| Flow Control | $ | 104,391 | $ | 92,721 | $ | 102,394 | |||
| Motion Control | 80,410 | 80,949 | 60,359 | ||||||
| Metal Treatment | 25,842 | 19,891 | 52,142 | ||||||
| Corporate and Eliminations (1) | (30,820) | (24,242) | (18,333) | ||||||
| Total Consolidated | $ | 179,823 | $ | 169,319 | $ | 196,562 | |||
| Depreciation and amortization expense | |||||||||
| Flow Control | $ | 35,086 | $ | 35,582 | $ | 35,104 | |||
| Motion Control | 27,903 | 25,210 | 23,882 | ||||||
| Metal Treatment | 15,498 | 14,473 | 14,176 | ||||||
| Corporate and Eliminations | 1,459 | 1,216 | 1,089 | ||||||
| Total Consolidated | $ | 79,946 | $ | 76,481 | $ | 74,251 | |||
| Segment assets | |||||||||
| Flow Control | $ | 1,102,417 | $ | 1,099,960 | $ | 984,753 | |||
| Motion Control | 873,074 | 771,355 | 772,675 | ||||||
| Metal Treatment | 233,356 | 232,658 | 235,413 | ||||||
| Corporate and Eliminations | 33,171 | 38,068 | 49,189 | ||||||
| Total Consolidated | $ | 2,242,018 | $ | 2,142,041 | $ | 2,042,030 | |||
| Capital expenditures | |||||||||
| Flow Control | $ | 18,795 | $ | 43,781 | $ | 64,795 | |||
| Motion Control | 18,178 | 11,816 | 18,002 | ||||||
| Metal Treatment | 13,884 | 16,853 | 19,436 | ||||||
| Corporate and Eliminations | 2,123 | 2,082 | 750 | ||||||
| Total Consolidated | $ | 52,980 | $ | 74,532 | $ | 102,983 | |||
| (1) Corporate and Eliminations includes pension expense, environmental remediation and administrative expenses, legal, foreign currency transactional gains and losses, and other expenses. | |||||||||
| Reconciliations | |||||||||
| December 31, | |||||||||
| 2010 | 2009 | 2008 | |||||||
| (In thousands) | |||||||||
| Earnings before taxes: | |||||||||
| Total segment operating income | $ | 210,643 | $ | 193,561 | $ | 214,895 | |||
| Corporate and administrative | (30,820) | (24,242) | (18,333) | ||||||
| Other income, net | 579 | 1,006 | 1,585 | ||||||
| Interest expense | (22,107) | (25,066) | (29,045) | ||||||
| Total consolidated earnings before tax | $ | 158,295 | $ | 145,259 | $ | 169,102 | |||
| Assets: | |||||||||
| Total assets for reportable segments | $ | 2,208,847 | $ | 2,103,973 | $ | 1,992,841 | |||
| Non-segment cash | 299 | 4,460 | 5,988 | ||||||
| Other assets | 32,872 | 33,608 | 43,201 | ||||||
| Total consolidated assets | $ | 2,242,018 | $ | 2,142,041 | $ | 2,042,030 | |||
| Geographic Information | |||||||||
| December 31, | |||||||||
| 2010 | 2009 | 2008 | |||||||
| (In thousands) | |||||||||
| Revenues | |||||||||
| United States of America | $ | 1,340,754 | $ | 1,283,174 | $ | 1,328,071 | |||
| United Kingdom | 115,331 | 104,606 | 164,409 | ||||||
| Canada | 58,855 | 63,644 | 62,437 | ||||||
| Other foreign countries | 378,194 | 358,266 | 275,223 | ||||||
| Consolidated total | $ | 1,893,134 | $ | 1,809,690 | $ | 1,830,140 | |||
| Long-Lived Assets | |||||||||
| United States of America | $ | 285,035 | $ | 285,392 | $ | 262,925 | |||
| United Kingdom | 39,479 | 46,384 | 42,563 | ||||||
| Canada | 33,578 | 32,405 | 30,096 | ||||||
| Other foreign countries | 39,188 | 36,968 | 28,448 | ||||||
| Consolidated total | $ | 397,280 | $ | 401,149 | $ | 364,032 | |||
|
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19. CONTINGENCIES AND COMMITMENTS
|
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20. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive loss as of December 31, 2010 and 2009 consisted of:
| (In thousands) | Pre-tax | Deferred tax | Net of tax | |||||||
| 2010 | amount | (asset) liability | amount | |||||||
| Foreign currency translation adjustments | $ | 57,242 | $ | 998 | $ | 58,240 | ||||
| Pension and postretirement adjustments: | ||||||||||
| Net actuarial gain | (93,984) | 33,778 | (60,206) | |||||||
| Prior service costs | (1,016) | 169 | (847) | |||||||
| Total pension and postretirement adjustments | (95,000) | 33,947 | (61,053) | |||||||
| Accumulated other comprehensive (loss)/income | $ | (37,758) | $ | 34,945 | $ | (2,813) | ||||
| (In thousands) | Pre-tax | Deferred tax | Net of tax | |||||||
| 2009 | amount | (asset) liability | amount | |||||||
| Foreign currency translation adjustments | $ | 28,526 | $ | (1,869) | $ | 26,657 | ||||
| Pension and postretirement adjustments: | ||||||||||
| Net actuarial gain | (65,874) | 24,870 | (41,004) | |||||||
| Prior service costs | (8,322) | 3,064 | (5,258) | |||||||
| Total pension and postretirement adjustments | (74,196) | 27,934 | (46,262) | |||||||
| Accumulated other comprehensive (loss)/income | $ | (45,670) | $ | 26,065 | $ | (19,605) | ||||
Other comprehensive income (loss) for the periods ending December 31, 2010, 2009 and 2008 were as follows:
| (In thousands) | Pre-tax | Tax (expense) | Net of tax | |||||||
| 2010 | amount | benefit | amount | |||||||
| Foreign currency translation adjustments | $ | 28,716 | $ | 2,867 | $ | 31,583 | ||||
| Pension and postretirement adjustments: | ||||||||||
| Net actuarial (loss)/gain | (28,110) | 8,908 | (19,202) | |||||||
| Prior service cost | 7,306 | (2,895) | 4,411 | |||||||
| Total pension and postretirement adjustments | (20,804) | 6,013 | (14,791) | |||||||
| Other comprehensive income | $ | 7,912 | $ | 8,880 | $ | 16,792 | ||||
| (In thousands) | Pre-tax | Tax (expense) | Net of tax | |||||||
| 2009 | amount | benefit | amount | |||||||
| Foreign currency translation adjustments | $ | 40,586 | $ | (3,990) | $ | 36,596 | ||||
| Pension and postretirement adjustments: | ||||||||||
| Net actuarial gain/(loss) | 29,712 | (10,855) | 18,857 | |||||||
| Prior service cost | (3,937) | 1,430 | (2,507) | |||||||
| Total pension and postretirement adjustments | 25,775 | (9,425) | 16,350 | |||||||
| Other comprehensive income/(loss) | $ | 66,361 | $ | (13,415) | $ | 52,946 | ||||
| (In thousands) | Pre-tax | Tax (expense) | Net of tax | |||||||
| 2008 | amount | benefit | amount | |||||||
| Foreign currency translation adjustments | $ | (84,951) | $ | 6,208 | $ | (78,743) | ||||
| Pension and postretirement adjustments: | ||||||||||
| Net actuarial (loss)/gain | (138,550) | 52,040 | (86,510) | |||||||
| Prior service cost | (1,260) | 457 | (803) | |||||||
| Total pension and postretirement adjustments | (139,810) | 52,497 | (87,313) | |||||||
| Other comprehensive (loss)/income | $ | (224,761) | $ | 58,705 | $ | (166,056) | ||||
|
|
|||
| (In thousands, except per share data) | First | Second | Third | Fourth | ||||||||
| 2010 | ||||||||||||
| Net sales | $ | 441,775 | $ | 462,165 | $ | 465,813 | $ | 523,381 | ||||
| Gross profit | 137,984 | 154,383 | 155,717 | 173,669 | ||||||||
| Net earnings | 16,335 | 25,898 | 27,784 | 36,581 | ||||||||
| Earnings per share: | ||||||||||||
| Basic earnings per share | 0.36 | 0.57 | 0.61 | 0.80 | ||||||||
| Diluted earnings per share | 0.35 | 0.56 | 0.60 | 0.79 | ||||||||
| Dividends per share | 0.08 | 0.08 | 0.08 | 0.08 | ||||||||
| 2009 | ||||||||||||
| Net sales | $ | 423,792 | $ | 447,371 | $ | 435,750 | $ | 502,777 | ||||
| Gross profit | 135,760 | 144,582 | 142,315 | 172,874 | ||||||||
| Net earnings | 15,805 | 24,454 | 20,115 | 34,847 | ||||||||
| Earnings per share: | ||||||||||||
| Basic earnings per share | $ | 0.35 | $ | 0.54 | $ | 0.44 | $ | 0.77 | ||||
| Diluted earnings per share | 0.35 | 0.54 | 0.44 | 0.76 | ||||||||
| Dividends per share | 0.08 | 0.08 | 0.08 | 0.08 | ||||||||
See notes to the consolidated financial statements for additional financial information.