Curtiss-Wright Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 19, 2015. Curtiss-Wright supplies engineered products and services across commercial/industrial, defense, and energy markets. The company realigned its reporting segments in 2014; prior-period segment results were recast.
Key financial results
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $2,243.1 million | $2,118.1 million | Up 6% |
| Gross profit / margin | $776.5 million / 34.6% | $735.8 million / 34.7% | Margin down about 0.1 percentage point |
| Operating income / margin | $282.4 million / 12.6% | $237.1 million / 11.2% | Up 19%; margin up 1.4 points |
| Earnings from continuing operations | $169.9 million; diluted EPS $3.46 | $139.4 million; diluted EPS $2.91 | Up 22% |
| Net earnings; diluted EPS | $113.3 million; $2.31 | $138.0 million; $2.88 | Down 18% |
| Operating cash flow | $331.8 million | $237.8 million | Up $93.9 million |
| Capital expenditures | $67.1 million | $72.2 million | Down $5.1 million |
| Cash and cash equivalents | $450.1 million | $175.3 million | Up $274.8 million |
| Total debt | $954.3 million | $959.9 million | Down $5.6 million |
| Backlog / new orders | $1,674.1 million / $2,409.2 million | $1,597.0 million / $2,161.3 million | Backlog up 5%; orders up |
The current ratio was approximately 2.7 at year-end, based on current assets of $1,571.1 million and current liabilities of $572.0 million. The company had no revolving-credit borrowings and $446 million of unused credit availability; it reported compliance with debt covenants. Cash less total debt was approximately negative $504 million.
Changes and operating performance
- Sales growth reflected approximately 2% organic growth and 4% from acquisitions/divestitures; foreign exchange had no material sales impact. Commercial/Industrial sales rose 13% to $1,074.8 million, Energy rose 8% to $430.8 million, and Defense declined 4% to $737.6 million.
- Commercial/Industrial operating income rose 36% to $142.8 million, with margin increasing to 13.3%, supported by volume, acquisitions, and cost initiatives. Energy operating income rose 18% to $67.6 million, with margin at 15.7%, driven mainly by oil-and-gas valve demand and margin improvements.
- Defense operating income fell 12% to $102.3 million and margin declined to 13.9%. Management cited higher costs on the AP1000 China program and lower production on domestic AP1000 work, partly offset by cost containment and the Parvus acquisition.
- Interest expense was $35.8 million, slightly below 2013; the effective tax rate increased to 31.2% from 30.7%. Research and development expense was $67.8 million versus $63.6 million.
- Continuing earnings improved, but total net earnings fell because discontinued operations recorded a $56.6 million loss, including $41.4 million of held-for-sale impairment charges and losses on business sales. The comparable 2013 discontinued-operations loss was $1.4 million.
Outlook, risks, and unusual items
- Management was cautiously optimistic about continued moderate improvement in commercial and industrial markets in 2015. Its outlook cited expected growth in commercial aerospace production, selected defense programs, and nuclear maintenance and upgrades, while noting uncertainty in order timing, government budgets, and global conditions. Approximately 32% of 2015 revenue was expected to be defense-related.
- For 2015, the company planned capital expenditures of $50–$60 million and expected dividend payments of approximately $25 million. The quarterly dividend increased to $0.13 per share in 2014. A new share-repurchase authorization of up to $300 million was approved, with at least $200 million announced for repurchase beginning in 2015.
- In 2014, Curtiss-Wright sold four businesses for aggregate cash proceeds of approximately $153 million and classified additional businesses as held for sale. Those held-for-sale operations generated $181.2 million of 2014 sales and a pre-tax loss of $41.4 million. The company also acquired three businesses for approximately $34 million.
- A voluntary $145 million pension contribution was made in January 2015, following approximately $40 million contributed in 2014. The pension funded status worsened during 2014, primarily reflecting a lower discount rate and updated mortality assumptions.
- Material contingencies include Westinghouse claims for AP1000 China liquidated damages; the company disclosed a possible loss range of $0–$40 million and recorded no accrual, citing uncertainty over responsibility for delays. A CNRL refinery incident claim alleges damages of at least $1 billion; the company could not estimate its potential loss and intends to defend the matter. It also reported approximately 211 pending asbestos lawsuits, with no material liability paid to date.
- Other key exposures include U.S. defense-budget changes, government-contract termination and compliance requirements, long-term contract cost estimates, foreign-exchange movements, pension obligations, environmental remediation, supply-chain disruption, product liability, and goodwill/intangible-asset impairment. Goodwill impairment testing found no impairment in 2014.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Separate continuing-operations growth from the reported decline in total net earnings; review the held-for-sale impairments, divestiture losses, and discontinued-operations results.
- Track AP1000 delivery performance, contract cost estimates, and the outcome and accounting treatment of the $0–$40 million liquidated-damages exposure.
- Monitor developments in the CNRL litigation, insurance coverage, and any change in the currently unestimable potential loss.
- Assess the sustainability of operating cash flow and the effect of the $145 million pension contribution, planned repurchases, dividends, and acquisition spending on liquidity and leverage.
- Review order trends and backlog conversion by segment, particularly Defense and Energy, and the company’s execution of planned divestitures and segment changes.