Curtiss-Wright Corporation — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. Curtiss-Wright is a diversified manufacturer and service provider serving commercial/industrial, defense, and power markets.
Financial results and position
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net sales | $2.109 billion | $2.206 billion | Down 4% |
| Gross profit / margin | $750.5 million / 35.6% | $783.3 million / 35.5% | Margin up about 10 bps |
| Operating income / margin | $308.1 million / 14.6% | $310.6 million / 14.1% | Income down 1%; margin up 50 bps |
| Continuing-operations earnings | $189.4 million | $192.2 million | Down 1% |
| Net earnings | $187.3 million | $145.5 million | Up 29% |
| Diluted EPS, continuing operations | $4.20 | $4.04 | Up 4% |
| Operating cash flow | $423.2 million | $162.5 million | Up $260.7 million |
| Capital expenditures | $46.8 million | $35.5 million | Up $11.3 million |
Net earnings include a $2.1 million discontinued-operations loss in 2016, compared with a $46.8 million loss in 2015, largely explaining the increase in total net earnings despite slightly lower continuing earnings. FY 2016 included a $20.4 million cash receipt from terminating interest-rate swaps, recorded as a bond premium to be amortized against interest expense; management also cited a one-time $20 million cash-flow benefit related to the termination.
Fourth quarter: Sales were $565.6 million versus $588.8 million in Q4 2015. Earnings from continuing operations were $70.7 million versus $70.8 million; diluted continuing-operations EPS was $1.58 versus $1.53.
Segments: Commercial/Industrial sales fell 6% to $1.119 billion and operating income fell 9% to $156.6 million; lower severe-service valve and surface-treatment volumes were key factors. Defense sales fell 2% to $466.7 million, while operating income was nearly flat at $98.3 million and margin rose to 21.1%. Power sales fell 4% to $523.5 million, but operating income rose 2% to $76.5 million and margin increased to 14.6%. Power’s backlog was $946.3 million, about 48% of consolidated backlog.
Liquidity and debt: Year-end cash was $553.8 million, up from $288.7 million. Current assets were $1.415 billion and current liabilities $675.3 million. Debt principal was $950.7 million, including $150.7 million due in 2017; net debt based on principal less cash was approximately $396.8 million. The balance sheet reports total debt, net of issuance costs and swap proceeds, of $966.3 million. The company had no revolving-credit borrowings, $453 million of unused availability, and reported covenant compliance. The credit facility’s maximum debt-to-capitalization covenant is 60%.
Share repurchases totaled $105.2 million in 2016, down from $294.1 million in 2015; dividends paid were $23.1 million. The quarterly dividend was $0.13 per share. Goodwill and other intangible assets totaled approximately $1.223 billion, about 40% of total assets; annual goodwill testing found no impairment.
Material changes versus the prior period
- Sales declined 4%, with lower Commercial/Industrial, Defense, and Power segment sales. General industrial sales by end market fell 13%, reflecting weakness in severe-service valves and related markets.
- Operating income declined only 1% and operating margin improved by 50 basis points, supported by cost and margin initiatives, favorable currency translation, and lower corporate expense. The prior-year comparison included a $7 million pension settlement charge.
- Operating cash flow increased substantially, reflecting the absence of the $145 million voluntary pension contribution made in 2015, collections on the AP1000 China Direct program, and improved working-capital collections.
- New orders fell to $2.149 billion from $2.585 billion, primarily because 2015 included a $468 million AP1000 China Direct order. Year-end backlog increased to $1.951 billion from $1.929 billion.
- Continuing-operations earnings were slightly lower, while reported net earnings increased as discontinued-operation losses narrowed substantially.
Outlook, commentary, risks, and unusual items
- Outlook: The filing does not provide a consolidated 2017 revenue or earnings guidance range. Management anticipated 2017 capital expenditures of $45–$55 million, dividends of approximately $23 million, and at least $50 million of share repurchases. It expected modest global economic improvement, continued defense opportunities, and a possible rebound in nuclear aftermarket opportunities in early 2018, while emphasizing uncertainty in order timing and budgets.
- Management expected defense-related markets to generate approximately 37% of 2017 revenue. It cited expected moderate U.S. defense-budget growth, but noted that funding and program outcomes remain uncertain.
- Acquisition after year-end: On January 4, 2017, the company acquired Teletronics Technology Corporation for $233 million in cash. The business joined the Defense segment; purchase accounting remained subject to post-closing adjustments.
- AP1000 contracts: Curtiss-Wright had missed certain delivery dates on domestic and China contracts. Westinghouse asserted entitlement to approximately $25 million of maximum China-contract liquidated damages; the company reported a possible loss range of $0–$55.5 million, made no accrual, and cited disputes over responsibility and legal defenses.
- CNRL claim: A claim arising from a 2011 refinery fire alleges damages estimated at $1 billion or more. Curtiss-Wright could not estimate its potential loss, intends to defend the claim, and cautioned that insurance may not cover all costs.
- Other risks include government contract cancellations and procurement compliance, long-term contract cost-estimate changes, defense-budget reductions, nuclear-market conditions, aerospace cyclicality, foreign exchange, tariffs and trade policy, environmental remediation, pension assumptions, and supplier availability. Foreign-currency sensitivity analysis indicates a 10% collective movement could change net earnings by approximately $14 million.
- Government sales represented 38% of consolidated sales in 2016. Backlog is subject to cancellation and is not necessarily indicative of future sales. Management identified no material goodwill impairment and reported effective disclosure controls and internal control over financial reporting; the independent auditor issued unqualified opinions.
Important facts for investors to verify
- Whether 2017 orders and sales replace the unusually large 2015 AP1000 China Direct order, and how backlog converts into revenue and cash.
- Progress, schedule, cost exposure, and any settlement or accrual related to the AP1000 delivery claims and the CNRL litigation.
- Whether cash-flow improvement is sustainable after the 2015 pension contribution and 2016 program collections, and the company’s capacity to meet the 2017 debt maturity.
- Performance in Commercial/Industrial markets, especially severe-service valves, surface treatment, and oil-and-gas-linked products, alongside trends in nuclear aftermarket demand.
- Integration, financing impact, and expected returns from the $233 million TTC acquisition, and the effect of repurchases on leverage and per-share results.
- Changes in goodwill, pension obligations, tax positions, and the adoption effects of new revenue-recognition and lease-accounting standards.