Curtiss-Wright Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included. Curtiss-Wright supplies engineered products and services to commercial/industrial, defense, and power markets.
Financial performance
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $2,205.7 million | $2,243.1 million | Down 2% |
| Operating income | $310.6 million | $282.4 million | Up 10% |
| Operating margin | 14.1% | 12.6% | Up 150 basis points |
| Earnings from continuing operations | $192.2 million | $169.9 million | Up 13% |
| Diluted EPS from continuing operations | $4.04 | $3.46 | Up 17% |
| Net earnings | $145.5 million | $113.3 million | Up 28% |
| Operating cash flow | $162.5 million | $331.8 million | Down $169.3 million |
Gross profit was $783.3 million, equivalent to a 35.5% gross margin. Capital expenditures were $35.5 million; operating cash flow less capital expenditures was approximately $127.0 million. Cash and equivalents totaled $288.7 million at year-end, versus $450.1 million a year earlier. Total debt was $954.3 million, including $953.1 million long-term; the company had no revolving-credit borrowings and $463 million of unused facility capacity. It reported compliance with debt covenants.
Net earnings include a $46.8 million loss from discontinued operations. Continuing operations are therefore a clearer view of ongoing earnings. The effective tax rate on continuing operations was 30.1%, versus 31.2%.
Fourth-quarter results
Q4 2015 net sales were $588.8 million, compared with $572.6 million in Q4 2014. Earnings from continuing operations were $70.8 million versus $46.1 million; diluted continuing-operations EPS was $1.53 versus $0.94. The quarter included a one-time $20 million operating-income benefit from selling AP1000 intellectual-property rights as part of a new China order.
Segments and material changes
- Commercial/Industrial: Sales declined 4% to $1,184.8 million and operating income declined 4% to $171.5 million; margin held at 14.5%. Lower oil-price-related valve sales and weaker surface-technology activity weighed on results.
- Defense: Sales declined 3% to $477.4 million, while operating income rose 20% to $98.9 million and margin increased to 20.7%. Favorable currency effects contributed $11 million to operating income; new orders fell 19%.
- Power: Sales increased 3% to $543.5 million and operating income rose 46% to $75.0 million. Results benefited from the $20 million non-recurring rights fee; an $11.5 million unfavorable estimate adjustment on the AP1000 China contract partially offset the improvement.
Total new orders increased to $2,585.0 million from $2,385.1 million, driven mainly by a $468 million China AP1000 order for 16 reactor coolant pumps and rights. Year-end backlog was $1,928.7 million, up from $1,671.5 million. Backlog can be changed or cancelled and is not necessarily indicative of future sales.
The company completed divestitures of its remaining businesses classified as held for sale. Discontinued operations generated a $46.8 million loss in 2015, including $40.8 million of impairment expense and losses on sales. The segment structure was realigned in 2015; prior-period figures were recast to the current presentation.
Cash, debt, outlook, and risks
Operating cash flow fell substantially, primarily because of a $145 million voluntary pension contribution in early 2015 and higher customer advance payments in the prior year. Management said it did not anticipate further contributions to the qualified pension plan for five years. Share repurchases used $294.1 million in 2015; the prior $300 million program was substantially completed, and a new $200 million authorization began in January 2016, with at least $100 million of repurchases planned for 2016. Management anticipated 2016 capital expenditures of $50–$60 million and dividends of approximately $24 million.
The filing does not provide consolidated revenue or EPS guidance for 2016. Management described expected moderate defense-budget growth, opportunities in commercial aerospace and nuclear markets, and uncertainty around order timing and global economic conditions. It expected defense-related markets to represent approximately 36% of 2016 revenue.
- Contract and legal exposure: Westinghouse asserted entitlement to maximum China AP1000 liquidated damages of approximately $25 million. No accrual was recorded; the disclosed possible-loss range was $0–$48 million. A separate CNRL refinery fire claim alleges damages of at least $1 billion; Curtiss-Wright said it could not estimate its potential loss and intends to defend the claim.
- Market and execution risks: Defense spending and contract funding, customer cancellations, fixed-price contract cost estimates, AP1000 delivery schedules, commercial aerospace cycles, and nuclear-project timing could affect results.
- Other exposures: Foreign currency movements, environmental remediation, pension assumptions, supplier availability, and goodwill/intangible-asset valuation are identified risks. Goodwill and other intangible assets totaled approximately $1.283 billion; the 2015 annual goodwill test found no impairment.
- Currency and rates: Management estimated that a 10% broad currency movement against the U.S. dollar would change net earnings by approximately $7 million. A 1% interest-rate change was estimated to affect interest expense by approximately $4 million.
The company reported unqualified audit opinions on its financial statements and internal control over financial reporting.
Investor verification priorities
- Separate recurring operating performance from the $20 million AP1000 rights fee and the $11.5 million contract-cost adjustment.
- Review the drivers of lower operating cash flow, the pension contribution, and the company’s cash allocation through repurchases and dividends.
- Track AP1000 delivery progress, contract estimates, the $0–$48 million liquidated-damages exposure, and the CNRL claim’s development and insurance coverage.
- Assess whether the $468 million China order converts into production revenue and backlog execution as planned, and monitor segment order trends.
- Reconcile continuing-operations earnings with net earnings, including remaining discontinued-operation costs and divestiture impacts.