Curtiss-Wright - 10-Q quarterly report FY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2008

or

o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _________ to _______

Commission File Number 1-134

(Exact name of Registrant as specified in its charter)

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period of time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x                        No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer xAccelerated filer o

Non-accelerated filer                                           o                      (Do not check if a smaller reporting company)Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, par value $1.00 per share, 44,977,188 shares (as of October 31, 2008).

(In thousands)

Adjustments to reconcile to earnings before income taxes:

Except for historical information, this Quarterly Report on Form 10-Q may be deemed to contain "forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, (a) projections of or statements regarding return on investment, future earnings, interest income, other income, earnings or loss per share, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of management, (c) statements of future economic performance, and (d) statements of assumptions, such as economic conditions underlying other statements. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," “could,” "anticipates," as well as the negative of any of the foregoing or variations of such terms or comparable terminology, or by discussion of strategy. No assurance may be given that the future results described by the forward-looking statements will be achieved. Such statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Such statements in this Quarterly Report on Form 10-Q include, without limitation, those contained in Item 1. Financial Statements and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Important factors that could cause the actual results to differ materially from those in these forward-looking statements include, among other items:

These forward-looking statements speak only as of the date they were made and the Corporation assumes no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.

Curtiss-Wright Corporation is a diversified, multinational provider of highly engineered, technologically advanced, value-added products and services to a broad range of industries in the motion control, flow control, and metal treatment markets.  We are positioned as a market leader across a diversified array of niche markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers. We provide products and services to a number of global markets, such as defense, commercial aerospace, power generation, oil and gas, automotive, and general industrial. We have achieved balanced growth through the successful application of our core competencies in engineering and precision manufacturing, adapting these competencies to new markets through internal product development, and a disciplined program of strategic acquisitions. Our overall strategy is to be a balanced and diversified company, less vulnerable to cycles or downturns in any one market, and to establish strong positions in profitable niche markets.  Approximately 35% of our revenues are generated from defense-related markets.

We manage and evaluate our operations based on the products and services we offer and the different industries and markets we serve. Based on this approach, we have three reportable segments: Flow Control, Motion Control, and Metal Treatment.  For further information on our products and services and the major markets served by our three segments, please refer to our 2007 Annual Report on Form 10-K.

Throughout management’s discussion and analysis of financial condition and results of operations, the terms “incremental” and “base” are used to explain changes from period to period. The term “incremental” is used to highlight the impact acquisitions had on the current year results, for which there was no comparable prior-year period. Therefore, the results of operations for acquisitions are incremental for the first twelve months from the date of acquisition.  The remaining businesses are referred to as the “base” businesses, and growth in these base businesses is referred to as “organic”.  Additionally, on May 9, 2008, we sold our commercial aerospace repair and overhaul business located in Miami, Florida.  The results of operations for this business have been removed from the comparable prior year periods for purposes of calculating organic growth figures and are included as a reduction of our incremental results of operations from our acquisitions.

Therefore, for the three months ended September 30, 2008, our organic growth does not include one month of operating results for Benshaw, Inc. (“Benshaw”) and two months of operating results for IMC Magnetics Corporation (“IMC”), which are considered incremental.  Similarly, our organic growth calculation for the nine months ended September 30, 2008 excludes from operations four months of operating results for Scientech, five months of operating results of VSC, seven months of operating results for Benshaw, and eight months of operating results for IMC.  Additionally, the organic growth calculations for both the three months and nine months ended September 30, 2008 exclude three months and five months, respectively, of our 2007 operating results from our commercial aerospace repair and overhaul business, as noted above, and these amounts are included as a reduction of our incremental results of operations.

Sales for the third quarter of 2008 totaled $436 million, an increase of 10% from sales of $396 million for the third quarter of 2007.  New orders received for the current quarter of $442 million decreased 35% from new orders of $676 million for the third quarter of 2007.  The decrease is mainly due to the award of $245 million for the reactor coolant pump contracts with China’s State Nuclear Power Technology Corporation and Westinghouse Electric Company for four new AP 1000 reactors in the prior year.  The acquisitions made in 2007 contributed $9 million in incremental new orders received in the third quarter of 2008. Backlog increased 33% to $1,732 million at September 30, 2008 from $1,304 million at December 31, 2007.  Approximately 34% of our backlog is defense-related.

Sales growth for the third quarter of 2008, as compared to the same period last year, was due to solid organic growth of 7% and incremental sales of $11 million as compared to the prior year period.  Our Flow Control, Motion Control, and Metal Treatment segments experienced organic growth of 8%, 8%, and 4%, respectively, compared to the prior year period.

In our base businesses, higher sales to the power generation and defense markets, partially offset by a decrease in our oil and gas market, drove our organic sales growth. Sales to the power generation market increased $19 million, primarily within our Flow Control segment, mainly due to sales of our next generation reactor coolant pumps for the new AP1000 nuclear reactors being constructed in China.  Sales to the defense markets increased $17 million, driven primarily by our Motion Control segment’s sales to the ground and aerospace defense markets which increased by $12 million and $4 million, respectively.  The increased sales to the ground defense market relates primarily to content on the Bradley Fighting Vehicle, driven by the Improved Bradley Acquisition System (“IBAS”) program and the increase in the aerospace defense market relates mainly to integrated sensing products on various programs. Sales to the oil and gas market declined $7 million primarily due to the timing of new order placement, the impact of the recent hurricanes, and general economic conditions. In addition, foreign currency translation had a slightly unfavorable impact on sales for the quarter ended September 30, 2008, as compared to the prior year period.

Operating income for the third quarter of 2008 totaled $48 million, an increase of 8% over operating income for the same period last year of $44 million. Organic operating income increased 11% driven primarily by our Flow Control segment, which experienced organic operating income growth of 30% over the comparable prior year period. Our Motion Control and Metal Treatment segments experienced organic operating income growth of 10% and 6%, respectively, over the comparable prior year period.  Incremental operating losses of $1 million partially offset the organic operating income growth.

Overall operating income margins decreased 10 basis points, from 11.2% to 11.1%, with our base businesses experiencing 11.7% operating income margins, offset slightly by our third quarter 2007 acquisitions, whose operating margins were negatively impacted by amortization expense, which generally runs higher in the earlier years, and a negative inventory adjustment.  In our base businesses, the organic operating income growth is primarily attributable to improved operating performance as we experienced higher sales volume, improved profitability on several long-term contracts, and reduced research and development costs primarily related to the AP1000 design study conducted in 2007 that did not recur in 2008.  These favorable impacts were partially offset by increased general and administrative expenses, which in total were up $14 million, or 28% over the prior year period.  The 2007 acquisitions accounted for $7 million of incremental general and administrative expenses. The base businesses experienced general and administrative cost growth of 12% in the third quarter of 2008, ahead of the organic sales growth of 7%, primarily due to higher labor costs and associated employee benefits in support of our growing infrastructure.  Foreign currency translation favorably impacted operating income by $1 million for the quarter ended September 30, 2008, as compared to the prior year period.

Net earnings for the third quarter of 2008 totaled $28 million, or $0.60 per diluted share, an increase of 9% when compared to the prior year period as the higher operating income noted above was partially offset by $3 million increase in tax expense.  Our effective tax rate for the third quarter of 2008 was 34.4%, as compared to 32.0% during the third quarter of 2007.  The increase in our effective tax rate represents a prior year benefit for enhanced manufacturing deductions that did not recur.  In addition, interest expense decreased $1 million due to lower interest rates, partially offset by a slight increase in our average debt.

Sales for the first nine months of 2008 totaled $1,323 million, an increase of 21% from sales of $1,094 million for same period last year.  New orders received for the first nine months of 2008 of $1,769 million were up 23% over the new orders of $1,434 million for the first nine months of 2007.  The increase is mainly due a net $62 million increase in new orders related to the supply of reactor coolant pumps for the AP1000 design. The acquisitions made in 2007 contributed $111 million in incremental new orders received in the first nine months of 2008.

Organic sales growth was 9% for the first nine months of 2008, as compared to the same period last year, with each of our segments contributing to the growth. Our Motion Control, Flow Control, and Metal Treatment segments increased organic sales 10%, 9% and 7%, respectively, in the first nine months of 2008, as compared to the prior year period. Sales for the first nine months of 2008 also benefited from incremental sales of $127 million.

In our base businesses, increased sales to the power generation, defense, oil and gas, and commercial aerospace markets drove our organic sales growth. Sales to the power generation market increased $46 million, primarily within our Flow Control segment, mainly due to sales of our next generation reactor coolant pumps for the new AP1000 nuclear reactors being constructed in China.  Sales to the defense markets increased $33 million, driven primarily by our Motion Control segment’s increased sales to ground and aerospace defense markets of $27 million and $8 million, respectively.  The increased sales to the ground defense market relates primarily to content on the Bradley Fighting Vehicle, driven by the IBAS program, while the increase in sales to the aerospace defense market was experienced across all of our major programs.  Sales to the oil and gas market increased $10 million organically, driven primarily by our Flow Control segment’s traditional valve products, engineering services, and field service work as the oil and gas market continues its increased capital spending.  Sales to the commercial aerospace market increased by $7 million and are driven primarily by our Metal Treatment segment as this segment continues to experience increased demand for its shot peening services.  In addition, foreign currency translation favorably impacted sales by $9 million for the first nine months of 2008, as compared to the prior year period.

Operating income for the first nine months of 2008 totaled $139 million, up 17% over the $118 million of operating income from the same period last year. Overall organic operating income increased 14% over the comparable period driven primarily by our Flow Control segment, which experienced organic operating income growth of 42%.  Our Metal Treatment and Motion Control segments experienced organic operating income growth of 7% and 5%, respectively.  The first nine months of 2008 also benefited from $3 million of incremental operating income.

Overall operating income margins for the first nine months of 2008 declined 30 basis points from 10.8% in the comparable prior year period to 10.5%. Our base businesses experienced 11.3% operating income margins in the first nine months of 2008, while our 2007 acquisitions experienced operating income margins of 3.1% during the same time period.  Operating margins from our 2007 acquisitions were negatively impacted by first year intangible amortization expense, which generally runs higher in the earlier years.  In our base businesses, the organic operating income growth is primarily attributable to improved operating performance as we experienced higher 2008 sales volume and improved profitability on several long-term contracts.  In addition, the 2007 cost overruns on fixed-price development contracts for the U.S. Navy and business consolidation costs in our Flow Control segment that did not recur in 2008.  These favorable impacts were partially offset by increased general and administrative expenses, which in total were up $49 million, or 35% over the prior year period.  The 2007 acquisitions accounted for $32 million of incremental expense, including $8 million of amortization expense. The base businesses experienced an increase of 11% in general and administrative costs during the first nine months of 2008, ahead of organic sales growth of 9%, primarily due to higher labor costs and associated employee benefits in support of our growing infrastructure.  Additionally, foreign currency translation had an unfavorable impact of $2 million on operating income for the first nine months of 2008, as compared to the prior year period.

Net earnings for the first nine months of 2008 totaled $76 million, or $1.68 per diluted share, an increase of 16% as compared to the net earnings for the first nine months of 2007 of $66 million, or $1.47 per diluted share. Interest expense increased $2 million on higher average debt levels partially offset by lower interest rates. Our effective tax rate for the first nine months of 2008 was 35.4% as compared to 34.4% in 2007.

Sales for the Corporation’s Flow Control segment increased 13% to $216 million for the third quarter of 2008 from $191 million in the third quarter of 2007, an increase of $25 million.  The increase in sales was driven by strong organic sales growth of 8% and contributions from our 2007 acquisitions of $10 million. The organic sales growth was driven by an increase in sales to the power generation market of $19 million, and general industrial market of $3 million.  These increases were partially offset by a decrease in sales to the oil and gas market of $7 million.  Higher organic sales to the power generation market were mainly driven by sales of $16 million of our next-generation reactor coolant pumps for the new AP1000 nuclear reactors being constructed in China.  The remaining increase is due to a large international construction order for our specialty hardware products.  The increase in the general industrial market was mainly due to higher demand for mission-critical motor controls and protection solutions.  The decrease in the oil and gas market was driven primarily by the timing of new order placement, the impact of the recent hurricanes, and general economic conditions on our operations.  Foreign currency translation had a slightly negative impact on the sales for the third quarter of 2008, as compared to the prior year period.

Operating income for the third quarter of 2008 was $23 million, an increase of 24% as compared to $19 million for the same period last year, driven mainly by organic growth of 30%.  Overall operating income margins for this segment increased 90 basis points to 10.7% for the three months ended September 30, 2008.  The increase in the margin is mainly related to enhance operating performance, as we experienced improved profitability on several long-term contracts and a reduction in research and development costs.  Offsetting our organic operating income growth was an inventory adjustment in the third quarter of 2008 at our Benshaw facility, which led to an incremental operating loss of $1 million.  Foreign currency translation had a slightly negative impact on the segment’s operating income in the third quarter of 2008, as compared to the prior year.

Sales for the first nine months of 2008 were $654 million, an increase of 33% over the same period last year of $492 million.  Acquisitions contributed $116 million to this segment’s sales during the first nine months of 2008.  This segment also experienced organic sales growth of 9% in the first nine months of 2008 as compared to the prior year period primarily resulting from higher sales to the power generation market of $42 million and higher sales to the oil and gas market of $8 million.  Partially offsetting these improvements were lower sales to the defense market of $6 million.  Higher organic sales to the power generation market were mainly driven by sales of $43 million for our next generation reactor coolant pumps for the new AP1000 nuclear reactors being constructed in China.  Increased sales to the oil and gas market were driven primarily by increased demand for our traditional valve products, engineering services, and field service work as worldwide refineries increased capital spending and maintenance expenditures.  This was partially offset by a decrease in the sales of our coker valve product primarily due to timing of new order placement, the effects of the recent hurricanes, and general economic conditions.  The lower sales to the defense market were driven primarily by decreased generator and pump sales of $3 million to the U.S. Navy resulting from the wind down of funded contracts for the Virginia-class submarines.  Partially offsetting these declines in the naval defense market in the first nine months of 2008 were higher sales of instrumentation control devices to the U.S. Navy.  Foreign currency translation had a favorable impact of $1 million on this segment’s sales for the first nine months of 2008, as compared to the prior year period.

Operating income for the first nine months of 2008 was $58 million, an increase of 51% as compared to $39 million for the same period last year.  The improvement in the first nine months of 2008 was driven by strong organic operating income growth of 42%.  In addition, acquisitions contributed $3 million in incremental operating income.  Overall operating income margins for this segment increased by 100 basis points to 8.9% for the nine months ended September 30, 2008.  The organic operating income growth was mainly due to better cost performance and improved profitability on several long-term contracts in the oil and gas market.  Additionally, the operating income in the prior year was adversely impacted by cost overruns on fixed priced U.S. Navy development contracts and business consolidation costs associated with integrating our Tapco and Enpro business units, and higher material costs within our oil and gas market.  Foreign currency translation negatively impacted this segment’s operating income in the first nine months of 2008 by $1 million, as compared to the prior year period.

New orders received for the Flow Control segment totaled $204 million in the third quarter of 2008 and $1,030 million for the first nine months of 2008, representing a decrease of 55% and an increase of 33%, respectively, over the same periods in 2007.  The quarter decline was due to AP1000 new orders received in the prior year period that did not recur in the current year period.  The increase in the first nine months of 2008 was largely due to a net $62 million increase in new orders related to the supply of reactor coolant pumps for the AP1000 design.  The 2007 acquisitions contributed $10 million and $100 million in incremental new orders received in the third quarter and first nine months of 2008, respectively, over the prior year periods.  Backlog increased 48% to $1,148 million at September 30, 2008 from $776 million at December 31, 2007.

Sales for our Motion Control segment increased 8% to $154 million in the third quarter of 2008 from $143 million in the third quarter of 2007, an increase of $11 million.  The increase in sales was driven by strong organic growth of 8% and the incremental sales of $1 million.  The organic sales growth was primarily due to higher sales of $12 million and $4 million to the ground and aerospace defense markets, respectively.  This was offset by lower sales to the naval defense and commercial aerospace markets of $2 million each.  Ground defense product sales were driven primarily by higher sales of embedded computing products for tanks and light armored vehicles across the major platforms we serve, including the Bradley Fighting Vehicle and Future Combat Systems (“FCS”).  The increase in sales to the aerospace defense market was primarily driven by increased demand for our engineered systems products on various programs, including the F-16 and F-22.  Lower revenues for the naval defense market resulted from lower sales of embedded computing radar systems.  In addition, the commercial aerospace market has been negatively impacted by the Boeing strike, a delay in the Boeing 787 program, and a realignment of production efforts on the Eclipse program.  Foreign currency translation had a slight favorable impact on sales for the third quarter of 2008, as compared to the prior year period.

Operating income for the third quarter of 2008 grew 9% to $16 million over the prior year period, driven mainly by organic growth of 10%.  Overall operating income margins for this segment increased 10 basis points to 10.5% for the three months ended September 30, 2008.  The slight increase in margin is primarily due to favorable foreign currency translation of $1 million.  Excluding the impact from foreign currency translation, our organic operating margin decreased 20 basis points, due mainly to the impacts from the Boeing strike, the delay in the 787 program, and a delay on the Eclipse program.  In addition, we continue to have downward pressure on margins due to continued development work primarily within our embedded computing group which will impact future sales.

Sales for the first nine months of 2008 increased 13% to $465 million from sales of $413 million during the first nine months of 2007.  The increase in sales was driven by strong organic growth of 10% and incremental sales of $11 million.  The sales growth was driven by higher sales across most of the segment’s major markets.  The majority of the growth was driven by increased sales to the ground and aerospace defense markets of $27 million and $8 million, respectively.  The increase in ground defense sales was due to increased upgrades that are continuing on the Bradley Fighting Vehicle platform.  Sales of our embedded computing products for the new IBAS program added $13 million to the increase, while the remaining increase was due to higher sales of power control and distribution production and spares units, increases on the Stryker platform, the amphibious Expeditionary Fighting Vehicle program, and the TOW Improved Target Acquisition System.  These increases were partially offset by a year to date reduction of sales for the FCS.  The improvement in the aerospace defense market for the year-to-date is due primarily to increased demand on the F-16, F-22, V-22, Global Hawk and various military helicopter programs.  Sales to the commercial aerospace market increased slightly as demand from original equipment aircraft manufacturers on the Boeing 700 series platforms caused increased shipments for our products on the 737, 747, and 777 aircrafts, which was partially offset by the Boeing 787 delay and a realignment of production efforts on the Eclipse program.  Foreign currency translation favorably impacted sales for the first nine months of 2008 by $5 million, as compared to the prior year period.

Operating income for the first nine months of 2008 was $46 million, an increase of 6% over the same period last year of $44 million.  Overall operating income margins for this segment declined by 70 basis points to 9.9% for nine months ended September 30, 2008.  The decrease in the margin was due to unfavorable foreign currency translation of $2 million.  Excluding the impact from foreign currency translation, our organic operating margin increased by 10 basis points.  The higher sales volume noted above led to overall growth in margins, which was offset by unfavorable sales mix and additional work on development and new production programs.  In addition, the Boeing strike, the 787 delay, and the delay on the Eclipse program also had negative impacts on our operating margins for the nine months ended September 30, 2008.  Research and development costs increased $3 million, or 14% as compared to the prior year period due to the support of strategic initiatives, primarily within our embedded computing group.

New orders received for the Motion Control segment totaled $172 million in the third quarter of 2008, an increase of 9% over the same period last year of $158 million, and $536 million for the first nine months of 2008, representing an increase of 14% from 2007 of $469 million.  Contributions of $10 million are attributed to incremental new orders in 2008.  The year-to-date increase was mainly due to significant contract wins within naval and ground defense markets.  Total backlog increased 11% to $582 million at September 30, 2008 from $526 million at December 31, 2007.

Sales for our Metal Treatment segment increased 4% to $66 million for the third quarter of 2008 from sales of $63 million in the third quarter of 2007.  The sales growth was predominately organic and driven by increased sales in most of this segment’s major markets, partially offset by a decline in sales to the automotive industry.  Sales to the commercial aerospace and aerospace defense markets each increased $1 million over the prior year.  In the commercial aerospace market, higher European shot peening sales and higher coatings sales, were partially offset by lower North American shot peening sales primarily due to the sale of a shot peening machine in the third quarter of 2007 that did not recur.  The increase in sales to the aerospace defense market was driven by higher demand for our North American shot peening services.  Sales were down for the automotive market by $1 million, primarily in our North American shot

peening business, due to the industry’s lower production requirements.  Sales included in the third quarter 2008 from the September acquisition of the Parylene Coating Services (“PCS”) business were insignificant.  Foreign currency translation had a slight unfavorable impact on third quarter 2008 sales, as compared to the prior year period.

Operating income for the third quarter of 2008 increased 6% over the prior year period.  The growth in operating income was mostly organic and due to the increase in sales and favorable product mix. Operating margin increased by 40 basis points to 20.4%, which was due to higher gross margin partially offset by an increase in operating expenses related to the growth of the business. The higher gross margin was driven by increased European shot peening sales, which carry a higher gross margin than this segment’s other products and services, in combination with lower North American shot peening sales.  PCS’s operating income for the quarter was insignificant.  Foreign currency translation had a slight unfavorable impact on operating income for the quarter, as compared to the prior year period.

Sales for the first nine months of 2008 increased 7% to $203 million from sales of $190 million for the first nine months of 2007.  The sales growth was predominately organic and driven by increased sales in all of this segment’s major markets except for the automotive industry.  Sales to the commercial aerospace market increased $5 million over the prior year period, while sales to the general industrial, power generation, and aerospace defense markets increased $4 million, $3 million, and $2 million, respectively.  The increase in sales to the commercial aerospace market was driven by sales of our European shot peening and North American coatings services to OEM’s based on their increased production requirements.  The increase experienced within the general industrial market was driven by European demand for shot peening services and domestic demand of our coating and heat treating services.  Sales to the power generation market were higher than the prior year primarily due to a shot peening development project in that market.  The increase in sales to the aerospace defense market was driven by higher demand for our North American shot peening services.  These sales increases were partially offset by a sales decline of $4 million to the automotive market.  The decline was most prominent in our North American shot peening business as demand was lower due in part to a United Auto Workers strike and to depressed sales in the industry.  Foreign currency translation favorably impacted sales for the first nine months of 2008 by $3 million, as compared to the prior year period.

Operating income for the nine months of 2008 increased 7% to $41 million from $39 million over the prior year period.  The growth in operating income was mostly organic and due primarily to the higher sales volume.  Operating margin increased 10 basis points to 20.4% for the nine months ended September 30, 2008, which was due to a slight improvement in gross margin, partially offset by higher operating expenses.  The improvement in gross margin was the result of favorable sales mix and productivity gains, partially offset by increased labor costs and start up costs related to new shot peening facilities.  The operating expense increase was primarily due to increased labor costs to support the growth of the business.  Foreign currency translation had a $1 million favorable impact on operating income, as compared to the prior year period.

Non-segment operating expense increased for the third quarter of 2008 versus the comparable prior year period by $3 million.  The increase in the third quarter was primarily due to higher unallocated medical costs under the Corporation’s self-insured medical insurance plan, higher pension expense associated with the Curtiss-Wright pension plans resulting from higher service and interest costs, and higher foreign exchange losses on a forward contract associated with the VMetro acquisition.  During the third quarter of 2008, we entered into a forward currency transaction to provide downside protection of the cash purchase price for the VMetro acquisition. As a result of this transaction and the significant strengthening of the U.S. dollar that subsequently occurred, we realized a net cash savings and reduction in the purchase price of approximately $4 million and $7 million, respectively, from the offer date and recorded a pretax charge of $2 million in the third quarter of 2008, and a pre-tax charge of $1 million, which will be recorded in the fourth quarter of 2008.

Non-segment operating expense increased for the nine months of 2008 versus the comparable prior year period by $4 million.  Similar to the third quarter of 2008, the non-segment operating expense increase in the first nine months of 2008 was primarily due to higher pension expense and higher unallocated medical costs, as well as higher legal costs.

Interest expense decreased $1 million for the third quarter and increased $2 million for the first nine months of 2008 versus the comparable prior year periods, respectively. The decrease for the third quarter was due to lower average interest rates partially offset by higher average outstanding debt levels resulting from our acquisitions. The increase for the first nine months was due to higher average outstanding debt partially offset by lower interest rates. Our average outstanding debt increased approximately 3% for the third quarter and 29% for the nine months of 2008, while our average rate of borrowing decreased 90 basis points for the third quarter of 2008 and 70 basis points for the first nine months of 2008, as compared to the comparable prior year periods.

We derive the majority of our operating cash inflow from receipts on the sale of goods and services and cash outflow for the procurement of materials and labor; cash flow is therefore subject to market fluctuations and conditions.  A substantial portion of our business is in the defense sector, which is characterized by long-term contracts.  Most of our long-term contracts allow for several billing points (progress or milestone) that provide us with cash receipts as costs are incurred throughout the project rather than upon contract completion, thereby reducing working capital requirements.  In some cases, these payments can exceed the costs incurred on a project.

Our working capital was $423 million at September 30, 2008, an increase of $63 million from the working capital at December 31, 2007 of $360 million.  The ratio of current assets to current liabilities was 2.1 to 1.0 at September 30, 2008 versus 1.9 to 1.0 at December 31, 2007.  Cash and cash equivalents totaled $77 million at September 30, 2008, up from $67 million at December 31, 2007.  Days sales outstanding at September 30, 2008 were 55 days as compared to 51 days at December 31, 2007.  Inventory turns were 4.5 for the nine months ended September 30, 2008, as compared to 5.3 at December 31, 2007.

Excluding cash, working capital increased $54 million from December 31, 2007.  Working capital changes were primarily affected by an increase in inventory of $52 million due to build up for future 2008 sales, stocking of new programs, and purchase of long lead materials and a decrease of $35 million in accounts payable and accrued expenses due to lower days payable outstanding and the timing of various accruals.  Offsetting these working capital increases was an increase in deferred revenue of $24 million due primarily to the advance payments related mainly to the domestic AP1000 project.

The company currently generates significant operating cash flows, which combined with access to the credit markets provides us with significant discretionary funding capacity. However, current uncertainty in the global economic conditions resulting from the recent disruption in credit markets pose a risk to the overall economy that could impact consumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers and creditors. If the current situation deteriorates significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, or supplier or customer disruptions resulting from tighter credit markets. Additionally, as a result of the significant and recent decline in the securities markets, the fair value of our pension plan assets has been reduced.  If these losses are not recovered, we may be required to make accelerated contributions to the master trust of the CW and EMD Pension Plans in 2009 and beyond where none existed in 2008.

Capital expenditures were $71 million in the first nine months of 2008.  Principal capital expenditures included new and replacement machinery and equipment and the expansion of new product lines and facilities within the business segments, specifically the AP1000 program, which accounted for $28 million in the first nine months of 2008.  We expect to make additional capital expenditures of approximately $35 million during the remainder of 2008 on machinery and equipment for ongoing operations at the business segments, expansion of existing facilities, and investments in new product lines and facilities, primarily related to the AP1000 project.

During the first nine months of 2008, we used $160 million in available credit under the 2007 Senior Unsecured Revolving Credit Agreement to fund investing activities.  The unused credit available under this 2007 Senior Unsecured Revolving Credit Agreement at September 30, 2008 was $211 million.  The 2007 Senior Unsecured Revolving Credit Agreement expires in August 2012.  The loans outstanding under the 2003 and 2005 Senior Notes, 2007 Senior Unsecured Revolving Credit Agreement, and Industrial Revenue Bonds had fixed and variable interest rates averaging 4.7% during the third quarter of 2008 and 5.6% for the comparable prior year period.

Our condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. A summary of significant accounting policies and a description of accounting policies that are considered critical may be found in our 2007 Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on February 27, 2008, in the Notes to the Consolidated Financial Statements, Note 1, and the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) will change the accounting treatment for certain specific items, including, but not limited to: acquisition costs will be generally expensed as incurred; non-controlling interests will be valued at fair value at the acquisition date; acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) also includes several new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact that the adoption of this statement will have on the Corporation’s results of operation or financial condition will depend on future acquisitions.

On March 19, 2008, the FASB issued Statement of Financial Accounting Standards No. 161,Disclosures About Derivative Instruments and Hedging Activities (“SFAS No. 161) – an amendment of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).  SFAS No. 161 amends SFAS No. 133 by requiring expanded disclosures about an entity’s derivative

instruments and hedging activities, but does not change the statement’s scope or accounting.  SFAS No. 161 requires increased qualitative, quantitative, and credit-risk disclosures.  The disclosure will require companies to explain how and why the entity is using the derivative instrument, how the entity is accounting for the instrument, and how the instrument affects the entity’s financial position, financial performance, and cash flows.  SFAS No. 161 also amends Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments (“SFAS No. 107”), to clarify that the derivative instruments are subject to SFAS No. 107’s concentration of credit risk disclosures.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early adoption permitted.  We do not expect the adoption of this statement will have a material impact on the Corporation’s results of operations or financial condition.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The objective of FSP 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), and other generally accepted accounting principles accepted in the United States. FSP 142-3 applies to all intangible assets, whether acquired in a business combination or otherwise and shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. We do not anticipate that the adoption of this FSP will have a material impact on the Corporation’s results of operation or financial condition.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. The adoption of this statement will not have a material impact on the Corporation’s results of operation or financial condition.

There have been no material changes in the Corporation’s market risk during the nine months ended September 30, 2008.  Information regarding market risk and market risk management policies is more fully described in item “7A. Quantitative and Qualitative Disclosures about Market Risk” of the Corporation’s 2007 Annual Report on Form 10-K.

As of September 30, 2008, the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Corporation’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective, in all material respects, to ensure that information required to be disclosed in the reports the Corporation files and submits under the Exchange Act is recorded, processed, summarized, and reported as and when required.

There have not been any changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

In the ordinary course of business, we and our subsidiaries are subject to various pending claims, lawsuits, and contingent liabilities. We do not believe that the disposition of any of these matters, individually or in the aggregate, will have a material adverse effect on our consolidated financial position or results of operations.

We or our subsidiaries have been named in a number of lawsuits that allege injury from exposure to asbestos.  To date, neither us nor our subsidiaries have been found liable for or paid any material sum of money in settlement in any case.  We believe that the minimal use of asbestos in our past and current operations and the relatively non-friable condition of asbestos in our products makes it unlikely that we will face material liability in any asbestos litigation, whether individually or in the aggregate.  We do maintain insurance coverage for these potential liabilities and we believe adequate coverage exists to cover any unanticipated asbestos liability.

There have been no material changes in our Risk Factors during the nine months ended September 30, 2008.  Information regarding our Risk Factors is more fully described in Item “1A. Risk Factors” of the Corporation’s 2007 Annual Report on Form 10-K.

There have been no material changes in our procedures by which our security holders may recommend nominees to our board of directors during the three and nine months ended September 30, 2008.  Information regarding security holder recommendations and nominations for directors is more fully described in the section entitled “Stockholder Recommendations and Nominations for Director” of the Corporation’s 2008 Proxy Statement on Schedule 14A, which is incorporated by reference to the Corporation’s 2007 Annual Report on Form 10-K.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.