UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20162019
or
[ ]☐ 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
CURTISS-WRIGHT CORPORATION
(Exact name of Registrant as specified in its charter)
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| Delaware | | 13-0612970 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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incorporation or organization) 130 Harbour Place Drive, Suite 300 | | | |
| Davidson, | North Carolina | | 28036 |
13925 Ballantyne Corporate Place, Suite 400, Charlotte, North Carolina | | 28277 |
| (Address of principal executive offices) | | | (Zip Code) |
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Registrant's telephone number, including area code: (704) 869-4600 |
Registrant's telephone number, including area code: (704) 869-4600
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | Trading Symbol(s) | Name of each exchange |
Title of each class | | on which registered |
Common stock, par value $1 per shareStock | CW | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý☒ No o☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o☐ No ý☒
Indicate by check mark whether the Registrantregistrant (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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý☒ No o☐
Indicate by check mark whether the Registrantregistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ý☒No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
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| Emerging growth company | | ☐ |
Large accelerated filer x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | Accelerated filer o
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Non-accelerated filer o
| (Do not check if a smaller reporting company) | Smaller reporting company o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o
Yes ý☐ No☒
The aggregate market value of the voting and non-voting Common stock held by non-affiliates of the Registrant as of June 30, 20162019 was approximately $3.3 billion.$4.7 billion.
The number of shares outstanding of the Registrant’s Common stock as of January 31, 2017:
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| Class | | Number of shares |
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Class | | Number of shares |
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| Common stock, par value $1 per share | | 44,528,39842,708,603 | |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of the Registrant with respect to the 20172020 Annual Meeting of Stockholders to be held on May 11, 20177, 2020 are incorporated by reference into Part III of this Form 10-K.
INDEX TO FORM 10-K
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| PART I | | |
| PART I | | |
| Item 1. | | | |
| Item 1A. | | | |
| Item 1B. | | | |
| Item 2. | | | |
| Item 3. | | | |
| Item 4. | | | |
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| PART II | | |
| Item 5. | | | |
| Item 6. | | | |
| Item 7. | | | |
| Item 7A. | | | |
| Item 8. | | | |
| Item 9. | | | |
| Item 9A. | | | |
| Item 9B. | | | |
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| PART III | | |
| Item 10. | | | |
| Item 11. | | | |
| Item 12. | | | |
| Item 13. | | | |
| Item 14. | | | |
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| PART IV | | |
| Item 15. | | | |
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PART I
FORWARD-LOOKING STATEMENTS
Except for historical information, this Annual Report on Form 10-K may be deemed to contain “forward-looking statements” within the meaning of the Private 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, sales, volume, other income, earnings or loss per share, growth prospects, capital structure, liquidity requirements, and other financial terms, (b) statements of plans and objectives of management, (c) statements of future economic performance, (d) the effect of laws, rules, regulations, new accounting pronouncements, and (d)outstanding litigation on our business and future performance, and (e) 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 “anticipates,” “believes,” “continue,” “could,” “estimate,” “expects,” “intend,” “may,” “might,” “outlook,” “potential,” “predict,” “should,” “will,” 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. While we believe these forward-looking statements are reasonable, they are only predictions and are subject to known and unknown risks, uncertainties, and other factors, many of which are beyond our control, which could cause actual results, performance or achievement to differ materially from anticipated future results, performance or achievement expressed or implied by such forward-looking statements. In addition, other risks, uncertainties, assumptions, and factors that could affect our results and prospects are described in this report, including under the heading “Item 1A. Risk Factors” and elsewhere, and may further be described in our prior and future filings with the Securities and Exchange Commission and other written and oral statements made or released by us. Such forward-looking statements in this Annual Report on Form 10-K include, without limitation, those contained in Item 1. Business, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8. Financial Statements and Supplementary Data, including, without limitation, the Notes to Consolidated Financial Statements, and Item 11. Executive Compensation.Statements.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements speak only as of the date they were made, and we assume no obligation to update forward-looking statements to reflect actual results or changes in or additions to the factors affecting such forward-looking statements.
Item 1. Business.
BUSINESS DESCRIPTION
Curtiss-Wright Corporation and its subsidiaries (we, the Corporation, or the Company) is a global, diversified multinational manufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered products and services to the defense, general industrial, commercial aerospace, defense,and power generation and general industrial markets. We were formed in 1929 by the merger of companies founded by the Wright brothers and Glenn Curtiss, bothwho were aviation pioneers. We are incorporated under the laws of the State of Delaware and headquartered in Charlotte,Davidson, North Carolina. We list ourOur common stock is listed on the New York Stock Exchange (NYSE) and tradetrades under the symbol CW.
We are an integrated, global diversified industrial company and expect that the diversification and breadth of our portfolio should improve our competitive positions in our core markets, mitigate the impact of business cycle volatility, and allow us to realizedrive growth in new products and markets. We seek to leverage and build upon our critical mass to expand our global manufacturing capabilities, sales channels, and customer relationships. We strive for consistent organic sales growth, operating margin expansion, and free cash flow generation, while maintaining a disciplined and balanced capital deployment strategy.strategy in order to drive long-term shareholder value.
We are well positioned on high-performance platforms and critical applications that require our technical sophistication.sophistication and benefit from decades of engineering expertise. Our technologies are relied upon to improve safety, operating efficiency, and reliability, while meeting demanding performance requirements. Our ability to provide high-performance,these advanced technologies on a cost-effective basis is fundamental to our strategy to drive increased value to our customers. We compete globally, primarily based on technology and pricing. Our business challenges include price pressure, technological and economic developments, and geopolitical events, such as diplomatic accords.
Business Segments
We manage and evaluate our operations based on the products and services we offer and the different markets we serve. Based on this approach, we operate through three segments: Commercial/Industrial, Defense, and Power.
Our principal domestic manufacturing facilities are located in the United States inArizona, New York, North Carolina, Ohio, Pennsylvania, and Pennsylvania,South Carolina, and internationally in Canada, Mexico, and the United Kingdom.
Commercial / Industrial
Sales in the Commercial/Industrial segment are primarily to the general industrial and commercial aerospace markets and, to a lesser extent, the defense and power generation markets. The businesses in this segment provide a diversified offering of highly engineered products and services including: industrial vehicle products, such as electronic throttle control devices, joysticks, and transmission shifters;shifters, sensors, controls, and electro-mechanical actuation components and utility systems used on commercial aircraft;aircraft, severe-service valves primarily to both the industrial and naval defense markets;market, and surface technology services, such as shot peening, laser peening, coatings, and advanced analytical testing. The industrial businesses within our Commercial/Industrial segment are impacted primarily by general economic conditions, which may include consumer consumption or commercial construction rates, as the nature of their products and customersservices primarily support global industrial, commercial aerospace, oil and gas, industries, commercial vehicles, medical, and transportation industries. The commercial aerospace business, in particular, is impacted by OEM production rates of new aircraft, while the defense business is impacted by government funding and spending on new programs, primarily driven by the U.S. Government. As commercial industrial businesses, production and service processes rest primarily within material modification, machining, assembly, and testing and inspection at commercial grade specifications. The businesses distribute products through commercial sales and marketing channels and may be impacted by changes in the regulatory environment.channels.
Defense
Sales in the Defense segment are primarily to the defense markets and, to a lesser extent, to the commercial aerospace market. The businesses in this segment provide a diversified offering of products including: Commercial Off-the-Shelf (COTS)embedded computing board levelboard-level modules, integrated subsystems,data acquisition and flight test instrumentation equipment, integrated subsystems, instrumentation and control systems, turret aiming and stabilization products, and weapons handling systems. The businesses within our Defense segment are impacted primarily by government funding and spending, driven primarily by the U.S. Government. Our products typically support government entities in the aerospace defense, ground defense, and naval defense industries. As a result, we have varying degrees of content on most fighter jets, helicopters, unmanned aerial vehicles (UAVs), ground vehicle platforms, and nuclear and non-nuclear surface ships and submarines. Additionally, we provide avionics and electronics, flight test equipment, and aircraft data management solutions to the commercial aerospace market. Our defense businesses supporting government contractors typically utilize more advanced and ruggedized production and service processes than
compared to our commercial businesses and have more stringent specifications and performance requirements. The businesses in this segment typically market and distribute products through regulated government contracting channels.
Power
Sales in the Power segment are primarily to the commercial nuclear power generation market and to a lesser extent, to the naval defense market. The businesses in this segmentmarkets. For the commercial markets, we provide a diversified offering of products for commercial nuclear power plants and nuclear equipment manufacturers, including a wide range of hardware, pumps, valves, fastening systems, specialized containment doors, airlock hatches, and spent fuel management products, and fluid sealing technologies for nuclear power plants and nuclear equipment manufacturers.products. We also have been able to leverage existing technology and engineering expertise to provide Reactor Coolant Pump (RCP) technology, pump seals,Pumps (RCPs) and control rod drive mechanisms for commercial nuclear power plants, most notably to support the Westinghouse AP1000 reactor design. The businesses are dependent upon the need for ongoing maintenance, repair and overhaul of existing operating power generationplants, typically to U.S. customers, as well as the construction of new power plants globally. The businesses within our Power segmentdistribute products through commercial sales and marketing channels and are impacted by pricing and demand for various forms of energy (e.g. coal, natural gas, oil, and nuclear). The businesses are typically dependent upon the need for new construction, maintenance, and overhaul and repair by nuclear energy providers. The businesses arealso subject to changes in regulation which may impact demand, consumption, and underlying supply. The production processes are primarily material modifications, machining, assembly,For the defense markets, our products support the naval defense market, in which we specifically provide naval propulsion and testing and inspection that are typical of commercial grade or regulated specifications. The businesses distribute products through commercial sales and marketing channels and may be impacted by changes in the regulatory environment. Additional products within our Power segment includeauxiliary equipment, including main coolant pumps, power-dense compact motors, generators, steam turbines, valves, and secondary propulsion systems, primarily to the U.S. Navy. We also provide ship repair and maintenance for the U.S. Navy’s Atlantic and Pacific fleets through three service centers. The defense businesses in this segment are impacted by government funding and spending on shipbuilding programs, primarily driven by the U.S. Government.
OTHER INFORMATION
Certain Financial Information
For information regarding sales by geographic region, see Note 17 to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.
In 2016, 2015,2019, 2018, and 2014,2017, our foreign operations as a percentage of pre-tax earnings were 42%31%, 51%39%, and 51%40%, respectively.
Government Sales
Our sales to the U.S. Government and foreign government end use represented 38%43%, 36%40%, and 34%39% of consolidatedtotal net sales during 2016, 2015,2019, 2018, and 2014,2017, respectively.
In accordance with normal U.S. Government business practices, contracts and orders are subject to partial or complete termination at any time at the option of the customer. In the event of a termination for convenience by the government, there generally are provisions for recovery of our allowable incurred costs and a proportionate share of the profit or fee on the work completed, consistent with regulations of the U.S. Government. Fixed-price redeterminable contracts usually provide that we absorb the majority of any cost overrun. In the event that there is a cost underrun, the customer recoups a portion of the underrun based upon a formula in which the customer’s portion increases as the underrun exceeds certain established levels.
Generally, long-term contracts with the U.S. Government require us to invest in and carry significant levels of inventory. However, where allowable, we utilize progress payments and other interim billing practices on nearly all of these contracts, thus reducing the overall working capital requirements. It is our policy to seek customary progress payments on certain of our contracts. Where we obtain such payments under U.S. Government prime contracts or subcontracts, the U.S. Government generally has either title to or a secured interest incontrol of the materials and work in process allocable or chargeable to the respective contracts. (See Notes 1, 4, and 5 to the Consolidated Financial Statements, contained in Part II, Item 8, of this Annual Report on Form 10-K).
Customers
We have hundreds of customers in the various industries we serve. No commercial customer accounted for more than 10% of our total net sales during 2016, 2015,2019, 2018, or 2014.2017.
Approximately 32%38% of our total net sales for 2016, 30%2019, 34% for 2015,2018, and 28%33% for 20142017 were derived from contracts with agencies of, and prime contractors to, the U.S. Government. Information on the Company’sour sales to the U.S. Government, including both direct sales as a prime contractor and indirect sales as a subcontractor, is as follows:
| | | | | Year Ended December 31, | | Year Ended December 31, | |
| (In thousands) | | 2016 | | 2015 | | 2014 | (In thousands) | | 2019 | | 2018 | | 2017 |
| Commercial/Industrial | | $ | 187,498 |
| | $ | 177,827 |
| | $ | 150,388 |
| Commercial/Industrial | | $ | 218,094 | | | $ | 191,036 | | | $ | 178,202 | |
| Defense | | 305,459 |
| | 300,462 |
| | 290,413 |
| Defense | | 397,055 | | | 362,776 | | | 369,977 | |
| Power | | 181,851 |
| | 176,737 |
| | 179,399 |
| Power | | 321,556 | | | 261,188 | | | 191,733 | |
| Total Government sales | | $ | 674,808 |
| | $ | 655,026 |
| | $ | 620,200 |
| |
| Total U.S. Government sales | | Total U.S. Government sales | | $ | 936,705 | | | $ | 815,000 | | | $ | 739,912 | |
Patents
We own and license a number of United States and foreign patents and patent applications, which have been obtained or filed over a period of years. We also license intellectual property to and from third parties. Specifically, the U.S. Government receives licenses into our patents that are developed in performance of government contracts, and it may use or authorize others to use the technology covered by such patents for government purposes. Additionally, trade secrets, unpatented research and development, and engineering, some of which have been acquired by the company through business acquisitions, make an important contribution to our business. While our intellectual property rights in the aggregate are important to the operation of our business, we do not consider the success of our business or business segments to be materially dependent upon the timing of expiration or protection of any one or group of patents, patent applications, or patent license agreements under which we now operate.
Research and Development
We primarily conduct our own research and development activities. Company-sponsored research and development costs are charged to expense when incurred. Total research and development expenses amounted to $59 million, $61 million, and $68 million in 2016, 2015, and 2014, respectively.
Executive Officers
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| Name | | Current Position | | Business Experience | | Age | | Executive
Officer Since |
| David C. Adams | | Chairman and Chief Executive Officer
| | Chairman and Chief Executive Officer of the Corporation since January 2015. Prior to this, he served as President and Chief Executive Officer of the Corporation from August 2013. He also served as President and Chief Operating Officer of the Corporation from October 2012 and as Co-Chief Operating Officer of the Corporation from November 2008. He has been a Director of the Corporation since August 2013. | | 65 | | | 2005 |
| Thomas P. Quinly | | Vice President and Chief Operating Officer | | Vice President of the Corporation since November 2010 and Chief Operating Officer of the Corporation since October 2013. He also served as President of Curtiss-Wright Controls, Inc. from November 2008.
| | 61 | | | 2010 |
| Glenn E. Tynan | | Vice President and Chief Financial Officer | | Vice President and Chief Financial Officer of the Corporation since June 2002. | | 61 | | | 2000 |
| Paul J. Ferdenzi | | Vice President, General Counsel, and Corporate Secretary
| | Vice President, General Counsel, and Corporate Secretary of the Corporation since March 2014. Prior to this, he served as Vice President-Human Resources of the Corporation from November 2011 and also served as Associate General Counsel and Assistant Secretary of the Corporation from June 1999 and May 2001, respectively. | | 52 | | | 2011 |
| K. Christopher Farkas | | Vice President of Finance and Corporate Controller | | Vice President of Finance since December 2017. Prior to this, he served as Vice President and Corporate Controller of the Corporation from September 2014 and also served as Assistant Corporate Controller from May 2009.
| | 51 | | | 2014 |
| Harry S. Jakubowitz | | Vice President and Treasurer | | Vice President of the Corporation since May 2007 and Treasurer of the Corporation since September 2005. | | 67 | | | 2007 |
|
| | | | | | | | |
| Name | | Current Position | | Business Experience | | Age | | Executive Officer Since |
| David C. Adams | | Chairman and Chief Executive Officer
| | Chairman and Chief Executive Officer of the Corporation since January 2015. Prior to this, he served as President and Chief Executive Officer of the Corporation from August 2013. He also served as President and Chief Operating Officer of the Corporation from October 2012 and as Co-Chief Operating Officer of the Corporation from November 2008. He has been a Director of the Corporation since August 2013. | | 63 | | 2005 |
| Thomas P. Quinly | | Vice President and Chief Operating Officer | | Vice President of the Corporation since November 2010 and Chief Operating Officer of the Corporation since October 2013. He also served as President of Curtiss-Wright Controls, Inc. from November 2008.
| | 58 | | 2010 |
| Glenn E. Tynan | | Vice President of Finance and Chief Financial Officer | | Vice President of Finance and Chief Financial Officer of the Corporation since June 2002. | | 58 | | 2000 |
| Paul J. Ferdenzi | | Vice President, General Counsel, and Corporate Secretary
| | Vice President, General Counsel, and Corporate Secretary of the Corporation since March 2014. Prior to this, he served as Vice President-Human Resources of the Corporation from November 2011 and also served as Associate General Counsel and Assistant Secretary of the Corporation from June 1999 and May 2001, respectively. | | 49 | | 2011 |
| K. Christopher Farkas | | Vice President and Corporate Controller | | Vice President and Corporate Controller of the Corporation since September 2014. Prior to this, he served as Assistant Corporate Controller of the Corporation from May 2009.
| | 48 | | 2014 |
| Harry S. Jakubowitz | | Vice President and Treasurer | | Vice President of the Corporation since May 2007 and Treasurer of the Corporation since September 2005. | | 64 | | 2007 |
Employees
At the end of 2016,2019, we had approximately 8,0009,100 employees, 8%7% of which are represented by labor unions and covered by collective bargaining agreements.
Available information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements for our annual stockholders’ meetings, as well as any amendments to those reports, with the Securities and Exchange Commission (SEC). The public may read and copy any of our materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including our filings. These reports are also available free of charge through the Investor Relations section of our web site at www.curtisswright.com as soon as reasonably practicable after we electronically file.
Item 1A. Risk Factors.
We have summarized below the significant, known, material risks to our business.business below. Our business, financial condition, and results of operations and cash flows could be materially and adversely impacted if any of these risks materialize. Additional risk factors not currently known to us or that we believe are immaterial may also impair our business, financial condition, and results of operations.operations and cash flows. The risk factors below should be considered together with information included elsewhere in this Annual Report on Form 10-K as well as other required filings by us to the Securities Exchange Commission, such as our Form 10-Q’s, Form 8-K’s, proxy statements for our annual shareholder meetings, and subsequent amendments, if any.
Intrusion on our systems could damage our business.
We store sensitive data, including intellectual property, proprietary business information, and confidential employee information on our servers and databases. Various privacy and securities laws require us to manage and protect sensitive and confidential information, including personal data of our employees, from disclosure. For example, the European Union's General Data Protection Regulation, which became effective in May 2018, extends the scope of the European Union data protection laws to all companies processing data of European Union residents, regardless of the company's location. Despite our implementation of firewalls, switchgear, and other network security measures, our servers, databases, and other systems may be vulnerable to computer hackers, physical or electronic break-ins, sabotage, computer viruses, worms, and similar disruptions from unauthorized tampering with our computer systems. We continue to review and enhance our computer systems as well as provide training to our employees in an attempt to prevent unauthorized and unlawful intrusions, but in the future it is possible that we may not be able to prevent all intrusions. Such intrusions could result in our network security or computer systems being compromised and possibly result in the misappropriation or corruption of sensitive information or cause disruptions in our services. While we carry cyber insurance, we still may be required to expend significant capital and resources to protect against, remediate, or alleviate problems caused by such intrusions. Any such intrusion could cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could have a material adverse effect on our business, financial condition, and results of operations.
Our future growth and continued success is dependent upon our key personnel.
Our success is dependent upon the efforts of our senior management personnel and our ability to attract and retain other highly qualified management and technical personnel. We face competition for management and qualified technical personnel from other companies and organizations. Therefore, we may not be able to retain our existing management and technical personnel or fill new management or technical positions or vacancies created by expansion or turnover at our existing compensation levels. Although we have entered into change of control agreements with some members of senior management, we do not have employment contracts with our key executives. As some of our key executives approach retirement age, we have made a concerted effort to reduce the effect of the loss of our senior management personnel through management succession planning. However, we may be required to devote significant time and resources to identify and integrate key new personnel should key management losses occur earlier than anticipated. The loss of members of our senior management and qualified technical personnel could have a material adverse effect on our business.
Implementing our acquisition strategy involves risks, and our failure to successfully implement this strategy could have a material adverse effect on our business.
As part of our capital allocation strategy, we aim to grow our business by selectively pursuing acquisitions to supplement our organic growth. We are continuing to actively pursue additional acquisition opportunities, some of which may be material to our business and financial performance. Although we have been successful with this strategy in the past, we may not be able to grow our business in the future through acquisitions for a number of reasons, including:
•Encountering difficulties identifying and executing acquisitions;
•Increased competition for targets, which may increase acquisition costs;
•Consolidation in our industry, reducing the number of acquisition targets;
•Competition laws and regulations preventing us from making certain acquisitions; and
•Acquisition financing not being available on acceptable terms or at all.
In addition, there are potential risks associated with growing our business through acquisitions, including the failure to successfully integrate and realize the expected benefits of an acquisition. For example, with any past or future acquisition, there is the possibility that:
•The business culture of the acquired business may not match well with our culture;
•Technological and product synergies, economies of scale, or cost reductions may not occur as expected;
•Management may be distracted from overseeing existing operations by the need to integrate acquired businesses;
•We may acquire or assume unexpected liabilities;
•We may experience unforeseen difficulties in integrating operations and systems;
•We may fail to retain or assimilate employees of the acquired business;
•We may experience problems in retaining customers or integrating customer bases; and
•We may encounter difficulties in entering new markets in which we may have little or no experience.
Failure to successfully implement our acquisition strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business, financial condition, and results of operations.
Our business, financial condition, and results of operations could be materially adversely affected if the United States were to withdraw from or materially modify certain international trade agreements, or if tariffs or other restrictions on the foreign-sourced goods that we sell were to increase.
A significant portion of our business activities are conducted in foreign countries, including Mexico and Canada. Our business benefits from free trade agreements such as the North American Free Trade Agreement (NAFTA) and also relies on various U.S. corporate tax provisions related to international commerce as we build, market, and sell our products globally. On November 30, 2018, President Trump signed the United States-Mexico-Canada Agreement (USMCA) to replace NAFTA. The USMCA maintains duty-free access for most products and leaves most key provisions of the NAFTA agreement largely intact. The USMCA has been approved by the U.S. and Mexico, but still requires approval by Canada’s Parliament before becoming effective. Additionally, in December 2018, President Trump announced his intention for the United States to withdraw from NAFTA. The outcome of the approval process is uncertain, but it is possible that withdrawal from NAFTA or failure of Canada’s Parliament to approve the USMCA could cause an increase in customs duties. This in turn could adversely affect intercompany transactions among our operating subsidiaries in Canada, Mexico, and the U.S., as well as increase transaction costs with third-party suppliers and customers.
Furthermore, the current administration has threatened to impose more stringent trade terms with China and other countries. Despite the execution of the trade deal between the U.S. and China in January 2020, tariffs in some cases will remain in place, albeit at a lower rate. All of this could lead to increased costs and diminished sales opportunities in the U.S. and China markets. Media and political reactions in the affected countries could potentially exacerbate the impact on our operations in those countries. The U.S. Administration’s assertive trade policies could result in further conflicts with U.S. trading partners, which could affect our supply chains, sourcing, and markets. Foreign countries may impose additional burdens on us through the use of local regulations, tariffs, or other requirements, which could increase our operating costs in those foreign jurisdictions. At this time, it remains unclear what actions, if any, President Trump will take with respect to other international trade agreements as well as U.S. tax provisions related to international commerce.
A substantial portion of our revenues and earnings depends upon the continued willingness of the U.S. Government and our other customers in the defense industry to buy our products and services.
In 2016,2019, approximately 32%38% of our domestictotal net sales were derived from or related to U.S. defense programs. U.S. defense spending has historically been cyclical, and defense budgets tend to rise when perceived threats to national security increase the level of concern over the country’s safety. At other times, spending by the military can decrease. Competing demands for federal funds can put pressure on all areasIn August 2011, Congress enacted the Budget Control Act of 2011 (BCA), which imposed spending caps and certain reductions in defense spending over a ten-year period through 2021. These spending caps and reductions, referred to as sequestration, went into effect in March 2013. Through a series of bipartisan agreements, Congress has been able to temporarily lift discretionary spending limits every year through 2019. On August 2, 2019, President Trump signed the Bipartisan Budget Act of 2019 (BBA) into law, which raised the BCA budget caps for both defense and non-defense spending in 2020 and 2021. The BBA also temporarily suspends the public debt limit through July 31, 2021. However, the BCA remains in place, extended through 2029. Absent additional legislative or other remedial action, the sequestration could ultimately impact the defense budget. Arequire reduced U.S. federal government spending from fiscal 2022 through fiscal 2029. As a result of this uncertainty, a decrease in U.S. Government defense spending or changes in spending allocation could result in one or more of our programs being reduced, delayed, or terminated. Reductions in defense industry spending mayIn the event that one or may not have an adverse effect onmore of our programs are reduced, delayed, or terminated for which we provide products and services. In the event expenditures are reduced for products we manufacture or services we provide and are not offset by revenues from foreign sales, new programs, or products or services that we currently manufacture or provide, we may experience a reduction in our revenues and earnings and a material adverse effect on our business, financial condition, and results of operations.
If we fail to satisfy our contractual obligations, our contracts may be terminated and we may incur significant costs or liabilities, including liquidated damages and penalties.
In general, our contracts may be terminated for our failure to satisfy our contractual obligations. In addition, some of our contracts contain substantial liquidated damages provisions and financial penalties related to our failure to satisfy our contractual obligations. For example, the terms of the Electro-Mechanical Division's AP1000 China and AP1000 United States contracts with Westinghouse include liquidated damage penalty provisions for failure to meet contractual delivery dates if we caused the delay and the delay was not excusable. On October 10, 2013, we received a letter from Westinghouse stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract of approximately $25 million. To date, we have not met certain contractual delivery dates under the AP 1000 China and domestic contracts; however there are significant uncertainties as to which parties are responsible for the delays, and we believe we have adequate legal defenses. Consequently, as a result of the above matters, we may incur significant costs or liabilities, including penalties, which could have a material adverse effect on our financial position, results of operations, or cash flows. As of December 31, 2016, the range of possible loss for liquidated damages on the Westinghouse domestic and China contracts is $0 to $55.5 million.
As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.
We must comply with and are affected by laws and regulations relating to the award, administration, and performance of U.S. Government contracts. Government contract laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of specific laws and regulations could result in the imposition of fines and penalties, or the termination of our contracts, or debarment from bidding on contracts. These fines and penalties could be imposed for failing to follow procurement integrity and bidding rules, employing improper billing practices or otherwise failing to follow cost accounting standards, receiving or paying kickbacks, or filing false claims. We have been, and expect to continue to be, subjected to audits and investigations by government agencies. The failure to comply with the terms of our government contracts could harm our business reputation. It could also result in our progress payments being withheld. In some instances, these laws and regulations impose terms or rights that are more favorable to the government than those typically available to commercial parties in negotiated transactions. For example, the U.S. Government may terminate any of our government contracts and, in general, subcontracts, at its convenience as well as for default based on performance. Upon termination for convenience of a fixed-price type contract, we normally are entitled to receive the purchase price for delivered items, reimbursement for allowable costs for work-in-process, and an allowance for profit on work actually completed on the contract or adjustment for loss if completion of performance would have resulted in a loss. Upon termination for convenience of a cost reimbursement contract, we normally are entitled to reimbursement of allowable costs plus a portion of the fee. Such allowable costs would normally include our cost to terminate agreements with our suppliers and subcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and is determined by negotiation.
A termination arising out of our default could expose us to liability and have a material adverse effect on our ability to compete for future contracts and orders. In addition, on those contracts for which we are teamed with others and are not the prime
contractor, the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our services as a subcontractor.
In addition, ourOur U.S. Government contracts typically span one or more base years and multiple option years. The U.S. Government generally has the right to not exercise option periods and may not exercise an option period if the agency is not satisfied with our performance on the contract or does not receive funding to continue the program. U.S. Government procurement may adversely affect our cash flow or program profitability.
A significant reduction in the purchase of our products by the U.S. government could have a material adverse effect on our business. The risk that governmental purchases of our products may decline stems from the nature of our business with the U.S. government, where it may:
terminate, reduce, or modify contracts or subcontracts if its requirements or budgetary constraints change;
cancel multi-year contracts and related orders if funds become unavailable; and
shift its spending priorities.
In addition, as a defense contractor,Furthermore, we are subject to other risks in connection with government contracts, including without limitation:
•the frequent need to bid on programs prior to completing the necessary design, which may result in unforeseen technological difficulties and/or cost overruns;
•the difficulty in forecasting long-term costs and schedules and the potential obsolescence of products related to long-term, fixed price contracts;
•contracts with varying fixed terms that may not be renewed or followed by follow-on contracts upon expiration;
•cancellation of the follow-on production phase of contracts if program requirements are not met in the development phase; and
the failure of a prime contractor customer to perform on a contract;
•the fact that government contract wins can be contested by other contractors;contractors.
Our operations are subject to numerous domestic and international laws, regulations, and restrictions. Noncompliance with these laws, regulations, and restrictions could expose us to fines, penalties, suspension, or debarment, which could have a material adverse effect on our profitability and overall financial condition.
We have contracts and operations in many parts of the inadvertent failureworld subject to comply with any the U.S. Government rules,United States and foreign laws and regulations, including the False Claims Act, orregulations relating to import-export control (including the International Traffic in Arms Regulation promulgated under the Arms Export Control Act), technology transfer restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act, and the anti-boycott provisions of the U.S. Export Administration Act. Although we have implemented policies and procedures and provided training that we believe are sufficient to address these risks, we cannot guarantee that our operations will always comply with these laws and regulations. From time to time, we may file voluntary disclosure reports with the U.S. Department of State, the Department of Energy, and the Department of Commerce regarding certain violations of U.S. export control laws and regulations discovered by us in the course of our business activities, employee training, or internal reviews and audits. To date, our voluntary disclosures have not resulted in a fine, penalty, or export privilege denial or restriction that has had a material adverse impact on
our financial condition or ability to export. Our failure, or failure by our sales representatives or consultants to comply with these laws and regulations could result in administrative, civil, or criminal liabilities and could, in the extreme case, result in suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on our business.
The airline industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.
Governmental agencies throughout the world, including the U.S. Federal Aviation Administration (FAA) and the European Aviation Safety Agency, prescribe standards and qualification requirements for aircraft components, including virtually all commercial airline and general aviation products. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. We include documentation with our products sold to aircraft manufacturing customers certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. In order to sell our products, the Corporation as well as the products we manufacture must also be certified by our individual original equipment manufacturers (OEM) customers. If any of the material authorizations or approvals qualifying us to supply our products is revoked or suspended, then the sale of such product would be prohibited by law, which would have an adverse effect on our business, financial condition, and results of operations.
From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we may incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition, and results of operations.
Our future success will depend, in part, on our ability to develop new technologies.
Virtually all of the products produced and sold by us are highly engineered and require sophisticated manufacturing and system-integration techniques and capabilities. The commercial and government markets in which we operate are characterized by rapidly changing technologies. The product and program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance depends in part on our ability to: identify emerging technological trends in our current and target markets, develop and manufacture competitive products, systems, and services, enhance our offerings by adding technological innovations that differentiate our products, systems, and services from those of our competitors, and develop, manufacture, and bring those products, systems, and service to market quickly at cost-effective prices.
We operate in highly competitive markets.
Many of our products and services are sold in highly competitive markets and are affected by varying degrees of competition. We compete against companies that often have higher sales volumes and greater financial, technological, research and development, human, and marketing resources than we have. As a result, they may be better able to withstand the effects of periodic economic downturns. In addition, some of our largest customers could develop the capability to manufacture products or provide services similar to products that we manufacture or services that we provide. This would result in these customers supplying their own products or services and competing directly with us for sales of these products or services, all of which could significantly reduce our revenues. Furthermore, we are facing increased international competition and cross-border consolidation of competition. Our management believes that the principal points of competition in our markets are technology, product quality, product performance, price, technical expertise, timeliness of delivery, superior customer service and support, and continued certification under customer quality requirements and assurance programs. If we are unable to compete successfully with existing or new competitors in these areas, we may experience a material adverse effect on our business, financial condition, and results of operations.
A downturn in the aircraft market could adversely affect our business.
Our sales to large commercial aircraft manufacturers are cyclical in nature and can be adversely affected by a number of factors, including current and future passenger traffic levels, increasing fuel and labor costs, intense price competition, the retirement of older aircraft, regulatory changes, outbreak of infectious disease, terrorist attacks, general economic conditions, worldwide airline profits, and backlog levels, all of which can be unpredictable and are outside our control. Any decrease in demand resulting from a downturn in the aerospace market could adversely affect our business, financial condition, and results of operations.
Global economic conditions may adversely affect our business, operating results and financial condition.
Although we currently generate significant operating cash flows, which combined with access to the credit markets provides us with significant discretionary funding capacity, global macroeconomic uncertainty, including escalating trade disputes between the United States and China, the United Kingdom’s withdrawal from the European Union, and uncertainty regarding the stability of global credit and financial markets could affect our ability to fund our operations. In addition, certain of our customers and suppliers could be affected directly by an economic downturn and could face credit issues or cash flow problems that could give rise to payment delays, increased credit risk, bankruptcies, and other financial hardships, which could impact customer demand for our products as well as our ability to manage normal commercial relationships with our customers and suppliers. Depending on their severity and duration, the effects and consequences of a global economic downturn could have an adverse impact on our results of operations and financial condition.
Political and economic changes in foreign countries and markets, including foreign currency fluctuations, may have a material effect on our operating results.
During 2019, approximately 31% of our total net sales were to customers outside of the United States. Additionally, we also have operating facilities located in foreign countries. Doing business in foreign countries is subject to numerous risks, including without limitation: political and economic instability, the uncertainty of the ability of non-U.S. customers to finance purchases, restrictive trade policies, changes in the local labor-relations climate, economic conditions in local markets, health concerns, and complying with foreign regulatory and tax requirements that are subject to change. While these factors or the impact of these factors are difficult to predict, any one or more of these factors could adversely affect our operations. To the extent that foreign sales are transacted in foreign currencies and we do not enter into currency hedge transactions, we are exposed to risk of losses due to fluctuations in foreign currency exchange rates, particularly for the British Pound, Euro, and Canadian dollar. Significant fluctuations in the value of the currencies of the countries in which we do business could have an adverse effect on our results of operations.
Potential product liability risks exist from the products that we sell.
We may be exposed to liabilities for personal injury, death, or property damage due to the failure of a product that we have sold. We typically agree to indemnify our customers against certain liabilities resulting from the products we sell, and any third-party indemnification we seek from our suppliers and our liability insurance may not fully cover our indemnification obligations to customers. We may also not be able to maintain insurance coverage in the future at an acceptable cost. Any liability for which third-party indemnification is not available that is not covered by insurance could have a material adverse effect on our business, financial condition, and results of operations.
In addition, an accident caused by one of our products could damage our reputation for selling quality products. We believe that our customers consider safety and reliability as key criteria in selecting our products and believe that our reputation for quality assurance is a significant competitive strength. If an accident were to be caused by one of our products, or if we were to otherwise fail to maintain a satisfactory record of safety and reliability, our ability to retain and attract customers may be materially adversely affected.
We are subject to liability under warranty obligations.
The majority of our contracts contain provisions which expose us to potential liability for warranty claims made by customers or third parties with respect to products that have been designed, manufactured, or serviced by us or our suppliers. Material product warranty obligations could have a material adverse effect on our business, financial condition, and results of operations. Further, our reputation may be adversely affected by such defective product claims, whether or not successful, including potential negative publicity about our products.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our cash flows and financial condition.
Our business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. In addition, the amount of income taxes paid by us is subject to examination by U.S. federal, state, and local tax authorities and by non-U.S. tax authorities. We regularly assess the likelihood of an adverse outcome resulting from such examinations to determine the adequacy of our provision for taxes. There can be no assurance as to the outcome of any such examinations. If the ultimate determination of our taxes owed were for an amount in excess of amounts reserved, our operating results, cash flows, and financial condition could be materially and adversely affected.
If we fail to satisfy our contractual obligations, our contracts may be terminated and we may incur significant costs or liabilities, including liquidated damages and penalties.
In general, our contracts may be terminated for our failure to satisfy our contractual obligations. In addition, some of our contracts contain substantial liquidated damages provisions and financial penalties related to our failure to satisfy our contractual obligations. For example, the terms of the Electro-Mechanical Division's AP1000 China and AP1000 U.S. contracts with Westinghouse Electric Company (WEC) include liquidated damage penalty provisions for failure to meet contractual delivery dates if we caused the delay and the delay was not excusable. On October 10, 2013, we received a letter from WEC stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract of approximately $25 million. To date, we have not met certain contractual delivery dates under the AP 1000 China and U.S. contracts; however there are significant uncertainties as to which parties are responsible for the delays, and we believe we have adequate legal defenses. Consequently, as a result of the above matters, we may incur significant costs or liabilities, including penalties, which could have a material adverse effect on our financial position, results of operations, or cash flows. As of December 31, 2019, the range of possible loss for liquidated damages on the WEC U.S. and China contracts is $0 to $55.5 million.
We are subject to liability under environmental laws.
Our business and facilities are subject to numerous federal, state, local, and foreign laws and regulations relating to the use, manufacture, storage, handling, and disposal of hazardous materials and other waste products. Environmental laws generally impose liability for investigation, remediation, and removal of hazardous materials and other waste products on property owners and those who dispose of materials at waste sites, whether or not the waste was disposed of legally at the time in question. We are currently addressing environmental remediation at certain current and former facilities, and we have been named as a potentially responsible party along with other organizations in a number of environmental clean-up sites and may be named in connection with future sites. We are required to contribute to the costs of the investigation and remediation and to establish reserves in our financial statements for future costs deemed probable and estimable. Although we have estimated and reserved for future environmental remediation costs, the final resolution of these liabilities may significantly vary from our estimates and could potentially have an adverse effect on our results of operations and financial position.
We use estimates when accounting for long-term contracts. Changes in estimates could affect our profitability and overall financial position.
Long-term contract accounting requires judgment relative to assessing risks, estimating contract revenues and costs, and making assumptions for schedule and technical issues. Due to the size and nature of many of our contracts, the estimation of total revenues and costs at completion is complicated and subject to many variables. For example, assumptions have to be made regarding the length of time to complete the contract as costs also include expected increases in wages and prices for materials. Similarly, assumptions have to be made regarding the future impact of efficiency initiatives and cost reduction efforts. Incentives, awards, price escalations, liquidated damages, or penalties related to performance on contracts are considered in estimating revenue and profit rates and are recorded when there is sufficient information to assess anticipated performance. It is possible that materially different amounts could be obtained, because of the significance of the judgments and estimation processes described above, if different assumptions were used or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances, or estimates may have a material adverse effect upon future period financial reporting and performance. See “Critical Accounting Estimates and Policies” in Part II, Item 7 of this Form 10-K.
Our backlog is subject to reduction and cancellation, which could negatively impact our revenues and results of operations.
Backlog represents products or services that our customers have contractually committed by contract to purchase from us. Total backlog includes both funded (unfilled orders for which funding is authorized, appropriated, and contractually obligated by the customer) and unfunded backlog (firm orders for which funding has not been appropriated and/or contractually obligated by the customer). The Corporation isWe are a subcontractor to prime contractors for the vast majority of our government business; as such, substantially all amounts in backlog are funded. Backlog excludes unexercised contract options and potential orders under ordering type contracts (e.g. Indefinite Delivery / Indefinite Quantity). Backlog is adjusted for changes in foreign exchange rates and is reduced for contract cancellations and terminations in the period in which they occur. Backlog as of December 31, 20162019 was $2.0$2.2 billion. Backlog is subject to fluctuations and is not necessarily indicative of future sales. The U.S. governmentGovernment may unilaterally modify or cancel its contracts. In addition, under certain of our commercial contracts, our customers may unilaterally modify or terminate their orders at any time for their convenience. Accordingly, certain portions of our backlog can
be cancelled or reduced at the option of the U.S. Government and commercial customers. Our failure to replace cancelled or reduced backlog could negatively impact our revenues and results of operations.
We operate in highly competitive markets.
We compete against companies that often have greater sales volumes and financial, research, human, and marketing resources than we have. In addition, some of our largest customers could develop the capability to manufacture products or provide services similar to products that we manufacture or services that we provide. This would result in these customers supplying their own products or services and competing directly with us for sales of these products or services, all of which could significantly reduce our revenues. Furthermore, we are facing increased international competition and cross-border consolidation of competition. Our management believes that the principal points of competition in our markets are technology, product quality, performance, price, technical expertise, and timeliness of delivery. If we are unable to compete successfully with existing or new competitors in these areas, our business, financial position, results of operations, or cash flows could be materially and adversely impacted.
A downturn in the aircraft market could adversely affect our business.
The aerospace industry is cyclical in nature and can be adversely affected by periodic downturns by a number of factors, including a recession, increasing fuel and labor costs, intense price competition, outbreak of infectious disease, and terrorist attacks, as well as economic cycles, all of which can be unpredictable and are outside our control. Any decrease in demand resulting from a downturn in the aerospace market could adversely affect our business, financial condition, and results of operations.
Our future growth and continued success is dependent upon our key personnel.
Our success is dependent upon the efforts of our senior management personnel and our ability to attract and retain other highly qualified management and technical personnel. We face competition for management and qualified technical personnel from other companies and organizations. Therefore, we may not be able to retain our existing management and technical personnel or fill new management or technical positions or vacancies created by expansion or turnover at our existing compensation levels. Although we have entered into change of control agreements with some members of senior management, we do not have employment contracts with our key executives. We have made a concerted effort to reduce the effect of the loss of our senior management personnel through management succession planning. The loss of members of our senior management and qualified technical personnel could have a material and adverse effect on our business.
Our international operations are subject to risks and volatility.
During 2016, approximately 30% of our consolidated revenue was from customers outside of the United States, and we have operating facilities in foreign countries. Doing business in foreign countries is subject to numerous risks, including without limitation: political and economic instability; the uncertainty of the ability of non-U.S. customers to finance purchases; restrictive trade policies; changes in the local labor-relations climate; economic conditions in local markets; health concerns; and complying with foreign regulatory and tax requirements that are subject to change. While these factors or the impact of these factors are difficult to predict, any one or more of these factors could adversely affect our operations. To the extent that foreign sales are transacted in foreign currencies and we do not enter into currency hedge transactions, we are exposed to risk of losses due to fluctuations in foreign currency exchange rates, particularly for the Canadian dollar, the Euro, Swiss franc, and the British Pound. Significant fluctuations in the value of the currencies of the countries in which we do business could have an adverse effect on our results of operations.
Intrusion on our systems could damage our business.
We store sensitive data, including intellectual property, proprietary business information, and confidential employee information on our servers and databases. Despite our implementation of firewalls, switchgear, and other network security measures, our servers, databases, and other systems may be vulnerable to computer hackers, physical or electronic break-ins, sabotage, computer viruses, worms, and similar disruptions from unauthorized tampering with our computer systems. We continue to review and enhance our computer systems to try to prevent unauthorized and unlawful intrusions, but in the future it is possible that we may not be able to prevent all intrusions. Such intrusions could result in our network security or computer systems being compromised and possibly result in the misappropriation or corruption of sensitive information or cause disruptions in our services. We might be required to expend significant capital and resources to protect against, remediate, or
alleviate problems caused by such intrusions. Any such intrusion could cause us to be non-compliant with applicable laws or regulations, subject us to legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence in our products and services, any of which could have a material adverse effect on our business, financial condition, and results of operations.
We may be unable to protect the value of our intellectual property.
Obtaining, maintaining, and enforcing our intellectual property rights and avoiding infringing on the intellectual property rights of others are important factors to the operation of our business. While we take precautionary steps to protect our technological advantages and intellectual property and rely in part on patent, trademark, trade secret, and copyright laws, we cannot assure that the precautionary steps we have taken will completely protect our intellectual property rights. Because patent applications in the United States are maintained in secrecy until either the patent application is published or a patent is issued, we may not be aware of third-party patents, patent applications, and other intellectual property relevant to our products that may block our use of our intellectual property or may be used in third-party products that compete with our products and processes. When others infringe on our intellectual property rights, the value of our products is diminished, and we may incur substantial litigation costs to enforce our rights. Similarly, we may incur substantial litigation costs and the obligation to pay royalties if others claim we infringed on their intellectual property rights. When we develop intellectual property and technologies with funding from U.S. Government contracts, the government has the royalty-free right to use that property.
In addition to our patent rights, we also rely on unpatented technology, trade secrets, and confidential information. Others may independently develop substantially equivalent information and techniques or otherwise gain access to or disclose our technology. We may not be able to protect our rights in unpatented technology, trade secrets, and confidential information effectively. We generally require each of our employees and consultants to execute a confidentiality agreement at the commencement of an employment or consulting relationship with us. There is no guarantee that we will succeed in obtaining and retaining executed agreements from all employees or consultants. Moreover, these agreements may not provide effective protection of our information or, in the event of unauthorized use or disclosure, they may not provide adequate remedies.
Our future financial results could be adversely impacted by asset impairment charges.
AtAs of December 31, 2016,2019, we had goodwill and other intangible assets, net of accumulated amortization, of approximately $1,223$1,647 million, which represented approximately 40%44% of our total assets. Our goodwill is subject to an impairment test on an annual basis and is also tested whenever events and circumstances indicate that goodwill may be impaired. Any excess goodwill resulting from the impairment test must be written off in the period of determination. Intangible assets (other than goodwill) are generally amortized over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business that will require us to record goodwill based on the purchase price and the value of the acquired assets. We may subsequently experience unforeseen issues with such business that adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of the recoverability of the recorded goodwill and intangible assets for such business. Future determinations of significant write-offs of goodwill or intangible assets as a result of an impairment test or any accelerated amortization of other intangible assets could have a material adverse impact on our results of operations and financial condition.
Our operations are subject to numerous domestic and international laws, regulations, and restrictions, and noncompliance with these laws, regulations, and restrictions could expose us to fines, penalties, suspension, or debarment, which could have a material adverse effect on our profitability and overall financial condition.
We have contracts and operations in many parts of the world subject to United States and foreign laws and regulations, including the False Claims Act, regulations relating to import-export control (including the International Traffic in Arms Regulation promulgated under the Arms Export Control Act), technology transfer restrictions, repatriation of earnings, exchange controls, the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act, and the anti-boycott provisions of the U.S. Export Administration Act. Although we have implemented policies and procedures and provided training that we believe are sufficient to address these risks, we cannot guarantee that our operations will always comply with these laws and regulations. Failure by us, our sales representatives, or consultants to comply with these laws and regulations could result in administrative, civil, or criminal liabilities and could, in the extreme case, result in suspension or debarment from government contracts or suspension of our export privileges, which could have a material adverse effect on our business.
We are subject to liability under environmental laws.
Our business and facilities are subject to numerous federal, state, local, and foreign laws and regulations relating to the use, manufacture, storage, handling, and disposal of hazardous materials and other waste products. Environmental laws generally
impose liability for investigation, remediation, and removal of hazardous materials and other waste products on property owners and those who dispose of materials at waste sites, whether or not the waste was disposed of legally at the time in question. We are currently addressing environmental remediation at certain current and former facilities, and we have been named as a potentially responsible party along with other organizations in a number of environmental clean-up sites and may be named in connection with future sites. We are required to contribute to the costs of the investigation and remediation and to establish reserves in our financial statements for future costs deemed probable and estimable. Although we have estimated and reserved for future environmental remediation costs, the final resolution of these liabilities may significantly vary from our estimates and could potentially have an adverse effect on our results of operations and financial position.
Unanticipated changes in our tax provisions or exposure to additional income tax liabilities could affect our profitability.
Our business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, thereby affecting our income tax expense and profitability. Corporate tax reform continues to be a priority in the U.S. and other jurisdictions. Changes to the tax system in the U.S. could have significant effects, positive or negative, on our effective tax rate and on our deferred tax assets and liabilities. In addition, audits by income tax authorities could result in unanticipated increases in our income tax expense.
Our business, financial condition, and results of operations could be materially adversely affected if the United States were to withdraw from or materially modify NAFTA or certain other international trade agreements, or if tariffs or other restrictions on the foreign-sourced goods that we sell were to increase.
A significant portion of our business activities are conducted in foreign countries, including Mexico and China. Our business benefits from free trade agreements such as the North American Free Trade Agreement (NAFTA) and we also rely on various U.S. corporate tax provisions related to international commerce as we build, market and sell our products globally. President Trump has made comments suggesting that he is not supportive of certain existing international trade agreements, including NAFTA, and made comments suggesting that he supports significantly increasing tariffs on goods imported into the United States from certain countries such as China and Mexico. At this time, it remains unclear what actions, if any, President Trump will take with respect to NAFTA, other international trade agreements, U.S. tax provisions related to international commerce, and tariffs on goods imported into the United States. If the United States were to withdraw from or materially modify NAFTA, or other international trade agreements to which it is a party, or change corporate tax policy related to international commerce, or if tariffs were raised on the foreign-sourced goods that we sell, such goods may no longer be available at a commercially attractive price or at all, which in turn could have a material adverse effect on our business, financial condition and results of operations.
Our current debt, and debt we may incur in the future, could adversely affect our business and financial position.
As of December 31, 2016,2019, we had $951$761 million of debt outstanding, of which $816 million is long-term debt.outstanding. Our level of debt could have significant consequences for our business including: requiring us to use our cash flow to pay the principal and interest on our debt, reducing funds available for acquisitions and other investments in our business;business, making us vulnerable to economic downturns and increases in interest rates;rates, limiting us from obtaining additional debt;debt, and impacting our ability to pay dividends.
A percentage of our workforce is employed under collective bargaining agreements.
Approximately 8%7% of our workforce is employed under collective bargaining agreements, which from time to time are subject to renewal and negotiation. We cannot ensure that we will be successful in negotiating new collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor, or that a breakdown in such negotiations will not result in the disruption of our operations. Although we have generally enjoyed good relations with both our unionized and non-unionized employees, if we are subject to labor actions, we may experience an adverse impact on our operating results.results if we are subject to labor actions.
Our earnings and margins depend in part on subcontractor performance, as well as raw material and component availability and pricing.
Our businesses depend on suppliers and subcontractors for raw materials and components. At times subcontractors perform services that we provide to our customers. We depend on these subcontractors and vendors to meet their contractual obligations in full compliance with customer requirements. Nonperformance or underperformance by subcontractors and vendors could materially impact our ability to perform obligations to our customers, which could result in a customer terminating our contract for default, expose us to liability, and substantially impair our ability to compete for future contracts and orders. Generally, raw
materials and purchased components are available from a number of different suppliers, though several suppliers are our sole source of certain components. If a sole-source supplier should cease or otherwise be unable to deliver such components, our operating results could be adversely impacted. In addition,
our supply networks can sometimes experience price fluctuations. Our ability to perform our obligations as a prime contractor may be adversely affected if one or more of these suppliers are unable to provide the agreed-upon supplies or perform the agreed-upon services in a timely and cost-effective manner. While we have attempted to mitigate the effects of increased costs through price increases, there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to offset fully or on a timely basisoffset the effects of higher raw materials costs through price increases.increases on a timely basis.
Our business involves risks associated with complex manufacturing processes.
Our manufacturing processes depend on certain sophisticated and high-value equipment. Unexpected failures of this equipment may result in production delays, revenue loss, and significant repair costs. In addition, equipment failures could result in injuries to our employees. Moreover, the competitive nature of our businesses requires us to continuously implement process changes intended to achieve product improvements and manufacturing efficiencies. These process changes may at times result in production delays, quality concerns, and increased costs. Any disruption of operations at our facilities due to equipment failures or process interruptions could have a material adverse effect on our business.
The airline industry is heavily regulated, and if we fail to comply with applicable requirements, our results of operations could suffer.
Governmental agencies throughout the world, including the U.S. Federal Aviation Administration (FAA) and the European Aviation Safety Agency, prescribe standards and qualification requirements for aircraft components, including virtually all commercial airline and general aviation products. Specific regulations vary from country to country, although compliance with FAA requirements generally satisfies regulatory requirements in other countries. We include, with the products that we sell to our aircraft manufacturing customers, documentation certifying that each part complies with applicable regulatory requirements and meets applicable standards of airworthiness established by the FAA or the equivalent regulatory agencies in other countries. In order to sell our products, we and the products we manufacture must also be certified by our individual original equipment manufacturers (OEM) customers. If any of the material authorizations or approvals qualifying us to supply our products is revoked or suspended, then the sale of the subject product would be prohibited by law, which would have an adverse effect on our business, financial condition, and results of operations.
From time to time, the FAA or equivalent regulatory agencies in other countries propose new regulations or changes to existing regulations, which are usually more stringent than existing regulations. If these proposed regulations are adopted and enacted, we may incur significant additional costs to achieve compliance, which could have a material adverse effect on our business, financial condition, and results of operations.
Our future success will depend, in part, on our ability to develop new technologies.
Virtually all of the products produced and sold by us are highly engineered and require sophisticated manufacturing and system-integration techniques and capabilities. The commercial and government markets in which we operate are characterized by rapidly changing technologies. The product and program needs of our government and commercial customers change and evolve regularly. Accordingly, our future performance depends in part on our ability to identify emerging technological trends, develop and manufacture competitive products, and bring those products to market quickly at cost-effective prices.
Potential product liability risks exist from the products that we sell.
We manufacture highly engineered products, which may result in product liability claims against us. For example, in December 2013, we, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) pertaining to a fire and explosion at a delayed coker unit at CNRL’s Fort McMurray refinery which resulted in the injury of five CNRL employees, damage to property and equipment, and various forms of consequential loss such as loss of profit, lost opportunities, and business interruption. The fire and explosion occurred when a CNRL employee bypassed certain safety controls and opened an operating coker unit. The total quantum of alleged damages arising from the incident has not been finalized, but is estimated to meet or exceed $1 billion. We currently maintain what we believe to be suitable and adequate commercial, property and casualty, product liability, and other forms of insurance to cover this matter and other potential claims. The Corporation is currently unable to estimate an amount, or range of potential losses, if any, from this matter. The Corporation believes it has adequate legal defenses and intends to defend this matter vigorously. There can be no assurance, however, that we will be able to maintain our insurance on acceptable terms or that such insurance will provide adequate protection against these potential liabilities. In the event of a judgment against us on this matter or other claims against us, a lack of sufficient insurance coverage could have a material adverse effect on our business, financial condition, and results of operations. Moreover, even if we maintain adequate insurance, any successful claim could have a material adverse effect on our business, financial condition, results of operations, or cash flows, and on the ability to obtain suitable or adequate insurance.
We self-insure health benefits and may be adversely impacted by unfavorable claims experience.
We are primarily self-insured for our health benefits. If the number or severity of claims increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessment, our operating results would be adversely affected. Our future claims expense might exceed historical levels, which could reduce our earnings. We expect to periodically assess our self-insurance strategy. We are required to periodically evaluate and adjust our claims reserves to reflect our experience. However, ultimate results may differ from our estimates, which could result in losses over our reserved amounts. In addition, because we do not carry “stop loss” insurance, a significant increase in the number of claims that we must cover under our self-insurance retainage could adversely affect our profitability.
Increasing costs of certain employee and retiree benefits could adversely affect our financial position, results of operations, or cash flows.
Our earnings may be positively or negatively impacted by the amount of income or expense we record for our pension and other postretirement benefit plans. U.S. GAAP requires that we calculate income or expense for the plans using actuarial valuations. These valuations reflect assumptions relating to financial markets and other economic conditions. Changes in key economic indicators can change the assumptions. The most significant year-end assumptions used to estimate pension or other postretirement benefit expense for the following year are the discount rate, the expected long-term rate of return on plan assets, expected future medical cost inflation, and expected compensation increases. In addition, we are required to make an annual measurement of plan assets and liabilities, which may result in a significant change to equity through a reduction or increase to other comprehensive income. For a discussion regarding how our financial statements can be affected by pension and other postretirement benefit plans accounting policies, see “Management’s Discussion and Analysis—Critical Accounting Estimates and Policies—Pension and Other Postretirement Benefits” in Part II, Item 7 of this Form 10-K. Although U.S. GAAP expense and pension or other postretirement contributions are not directly related, the key economic factors that affect U.S. GAAP expense would also likely affect the amount of cash the companywe would contribute to the pension or other postretirement plans. Potential pension contributions include both mandatory amounts required under federal law, Employee Retirement Income Security Act, and discretionary contributions to improve the plans’ funded status. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses.
Our operating results and financial condition may be adversely impacted by the current worldwide economic conditions.
We currently generate significant operating cash flows, which combined with access to the credit markets provides us with significant discretionary funding capacity. However, financial markets in the United States, Europe, and Asia had experienced extreme disruption in previous years, that included, among other things, extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. While previously these conditions had not impaired our ability to operate our business, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies, which could impact customer demand for our products as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors. We are unable to predict the likely duration and severity of a disruption in financial markets and adverse economic conditions and the effects they will have on our business and financial condition.
Implementing our acquisition strategy involves risks, and our failure to successfully implement this strategy could have a material adverse effect on our business.
As part of our capital allocation strategy, we aim to grow our business by selectively pursuing acquisitions to supplement our organic growth. We are continuing to actively pursue additional acquisition opportunities, some of which may be material to our business and financial performance. Although we have been successful with this strategy in the past, we may not be able to grow our business in the future through acquisitions for a number of reasons, including:
Encountering difficulties identifying and executing acquisitions;
Increased competition for targets, which may increase acquisition costs;
Consolidation in our industry reducing the number of acquisition targets;
Competition laws and regulations preventing us from making certain acquisitions; and
Acquisition financing not being available on acceptable terms or at all.
In addition, there are potential risks associated with growing our business through acquisitions, including the failure to successfully integrate and realize the expected benefits of an acquisition. For example, with any past or future acquisition, there is the possibility that:
The business culture of the acquired business may not match well with our culture;
Technological and product synergies, economies of scale and cost reductions may not occur as expected;
Management may be distracted from overseeing existing operations by the need to integrate acquired businesses;
We may acquire or assume unexpected liabilities;
Unforeseen difficulties may arise in integrating operations and systems;
We may fail to retain and assimilate employees of the acquired business;
We may experience problems in retaining customers and integrating customer bases; and
Problems may arise in entering new markets in which we may have little or no experience.
Failure to successfully implement our acquisition strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business, financial condition and results of operations.
War,Future terror attacks, war, natural disasters, pandemic diseases, or other events beyond our control could adversely impact our businesses.
Despite our concerted effort to minimize risk to our production capabilities and corporate information systems and to reduce the effect of unforeseen interruptions to us through business continuity planning and disaster recovery plans, we could be adversely impacted by terror attacks, war, natural disasters such as hurricanes, floods, tornadoes, pandemic diseases, or other events such as strikes by the workforce of a significant customer’scustomer or supplier’s workforce,supplier. These risks could adverselynegatively impact demand for or supply of our products and could also cause disruption to our facilities or systems, which could also interrupt operational processes and adversely impact our ability to manufacture our products and provide services and support to our customers. We operate facilities in areas of the world that are exposed to natural disasters, such as but not limited to hurricanes, floods, tornados, and pandemic diseases.disasters. Financial difficulties of our customers, delays by our customers in production of their products, high fuel prices, the concern of another major terrorist attack, and the overall decreased demand for our products could adversely affect our operating results and financial position.condition.
Our business, financial condition, and results of terrorist activity aroundoperations could be materially adversely affected by climate change regulations.
Climate change regulations at the worldfederal, state, or local level or in international jurisdictions could cause economic conditionsrequire us to deterioratelimit emissions, change our manufacturing processes, obtain substitute materials which may cost more or be less available, increase our investment in control technology for greenhouse gas emissions, fund offset projects, or undertake other costly activities. These regulations could significantly increase our costs and adversely impactrestrict our businesses.manufacturing operations by virtue of requirements for new equipment. New permits may be required for our current operations, or expansions thereof. Failure to timely receive permits could result in fines, suspension of production, or cessation of operations at one or more facilities. In addition, restrictions on carbon dioxide or other greenhouse gas emissions could result in significant costs such as higher energy costs and the passing down of carbon taxes, emission cap and trade programs, and renewable portfolio standards by utility companies. The cost of complying, or of failing to comply, with these and other climate change and emissions regulations could have an adverse effect on our operating results.
InIncreasing focus on environmental, social, and governance responsibility may impose additional costs on us and expose us to new risks.
Increasing focus on environmental, social, and governance responsibility may impose additional costs on us and expose us to new risks. Regulators, stockholders, and other interested constituencies have focused increasingly on the past, terrorist attacks have negatively impacted general economic, market,environmental, social, and political conditions. In particular, the 2001 terrorist attacks, compoundedgovernance practices of companies. Our customers may require us to implement environmental, social, or governance responsibility procedures or standards before they continue to do business with changesus. Additionally, we may face reputational challenges in the national economy, resulted in reduced revenues inevent that our environmental, social, or governance responsibility procedures or standards do not meet the aerospace and general industrial markets in 2002 and 2003. Although economic conditionsstandards set by certain constituencies. The occurrence of any of the foregoing could have improved considerably, additional terrorist acts such as the 2015 Paris terrorist attacks could cause damage or disruption to our business, our facilities, or our employees, which could significantly impacta material adverse effect on our business, financial condition, orand results of operations. The potential for additional future terrorist attacks and the national and international responses to terrorist attacks, have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. In addition, with manufacturing facilities located worldwide, including facilities located in the United States, Western Europe, and the People’s Republic of China, we may be impacted by terrorist actions not only against the United States but in other parts of the world as well. In some cases, we are not insured for losses and interruptions caused by terrorist acts.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our corporate headquarters is located at a leased facility in Charlotte,Davidson, North Carolina. As of December 31, 2016,2019, we had 173155 facilities worldwide, including four corporate and shared-services facilities. Approximately 87%83% of our facilities operate as manufacturing and engineering, metal treatment, or aerospace overhaul plants, while the remaining 13%17% operate as selling and administrative office facilities. The number and type of facilities utilized by each of our reportable segments are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Owned Facilities Location | | Commercial/ Industrial | | Defense | | Power | | Total |
| North America | | 14 | | | 1 | | | 3 | | | 18 | |
| Europe | | 10 | | | — | | | — | | | 10 | |
| Total | | 24 | | | 1 | | | 3 | | | 28 | |
|
| | | | | | | | |
| Owned Facilities Location | | Commercial/ Industrial | | Defense | | Power | | Total |
| North America | | 16 | | 1 | | 3 | | 20 |
| Europe | | 14 | | 1 | | — | | 15 |
| Total | | 30 | | 2 | | 3 | | 35 |
| | | Leased Facilities Location | | Commercial/ Industrial | | Defense | | Power | | Total | Leased Facilities Location | | Commercial/ Industrial | | Defense | | Power | | Total |
| North America | | 52 | | 11 | | 23 | | 86 | North America | | 45 | | | 13 | | | 26 | | | 84 | |
| Europe | | 28 | | 4 | | — | | 32 | Europe | | 22 | | | 5 | | | — | | | 27 | |
| Asia | | 16 | | — | | — | | 16 | Asia | | 12 | | | — | | | — | | | 12 | |
| Total | | 96 | | 15 | | 23 | | 134 | Total | | 79 | | | 18 | | | 26 | | | 123 | |
The buildings on the properties referred to in this Item are well maintained, in good condition, and are suitable and adequate for the uses presently being made of them.current needs. Management believes that the productive capacity of our properties is adequate to meet our anticipated volume for the foreseeable future.
Item 3. Legal Proceedings.
In the ordinary course of business, wethe Corporation and ourits 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,condition, results of operations, and cash flows.
In December 2013, the Corporation, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) filed in the Court of Queen's Bench of Alberta, Judicial District of Calgary. The claim pertains to a January 2011 fire and explosion at a delayed coker unit at its Fort McMurray refinery that resulted in the injury of five CNRL employees, damage to property and equipment, and various forms of consequential loss such as loss of profit, lost opportunities, and business interruption. The fire and explosion occurred when a CNRL employee bypassed certain safety controls and opened an operating coker unit. The total quantum of alleged damages arising from the incident has not been finalized, but is estimated to meet or exceed $1 billion. Although theIn November 2019, all parties tentativelyparticipated in a formal mediation and agreed to mediatesettle the claim no progress has beenfor approximately $38 million. Our portion of the settlement amount was $6 million, which was fully paid in 2020 by our primary and excess insurance coverage. No admission of liability was made by us as part of the settlement agreement. We do not expect to further pursue the claim. The Corporation maintains various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance may not be adequateincur any additional liabilities related to cover the costs associated with a judgment against us. The Corporation is currently unable to estimate an amount or range of potential losses, if any, from this matter. The Corporation believes it has adequate legal defenses and intends to defend this matter vigorously. The Corporation's financial condition, results of operations, and cash flows could be materially affected during a future fiscal quarter or fiscal year by unfavorable developments or outcome regarding this claim.
We have been named in pending lawsuits that allege injury from exposure to asbestos. To date, we have not been found liable or paid any material sum of money in settlement in any asbestos-related case. We believe that the minimal use of asbestos in our past operations and the relatively non-friable condition of asbestos in our products makesmake it unlikely that we will face material liability in any asbestos litigation, whether individually or in the aggregate. We maintain insurance coverage for these potential liabilities and we believe adequate coverage exists to cover any unanticipated asbestos liability.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
MARKET INFORMATION
Our common stock is listed and traded on the New York Stock Exchange (NYSE) under the symbol CW.
|
| | | | | | | | | | | | | | | | |
| Stock Price Range | | 2016 | | 2015 |
| | | High | | Low | | High | | Low |
| Common Stock | | | | | | | | |
| First Quarter | | $ | 75.93 |
| | $ | 62.57 |
| | $ | 74.63 |
| | $ | 64.40 |
|
| Second Quarter | | 87.76 |
| | 73.95 |
| | 77.57 |
| | 70.13 |
|
| Third Quarter | | 91.65 |
| | 81.52 |
| | 73.90 |
| | 61.59 |
|
| Fourth Quarter | | 107.61 |
| | 83.48 |
| | 71.86 |
| | 60.73 |
|
As of January 1, 2017,2020, we had approximately 3,7703,150 registered shareholders of our common stock, $1.00 par value.
DIVIDENDS
During 20162019 and 2015,2018, the Company paid quarterly dividends of thirteen cents ($0.13) a share.as follows:
| | | | | | | | | | | | | | |
| | 2019 | | 2018 |
| Common Stock | | | | |
| First Quarter | | $ | 0.15 | | | $ | 0.15 | |
| Second Quarter | | 0.17 | | | 0.15 | |
| Third Quarter | | 0.17 | | | 0.15 | |
| Fourth Quarter | | 0.17 | | | 0.15 | |
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information regarding our equity compensation plans as of December 31, 2016,2019, the end of our most recently completed fiscal year:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Plan category | | Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights | | | Weighted average
exercise price of
outstanding options,
warrants, and rights | | Number of securities remaining
available for future issuance under
equity compensation plans
(excluding securities reflected in
the first column) | |
| Equity compensation plans approved by security holders | | 398,574 | (a) | | $105.77 | | 2,398,008 | (b) |
| Equity compensation plans not approved by security holders | | None | | | Not applicable | | Not applicable | |
|
| | | | | | | | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | | | Weighted average exercise price of outstanding options, warrants, and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |
| Equity compensation plans approved by security holders | | 968,891 | (a) | | $52.95 | | 2,474,816 | (b) |
| Equity compensation plans not approved by security holders | | None | | | Not applicable | | Not applicable | |
(a)Consists of 360,539 shares issuable upon exercise of outstanding options and vesting of performance share units, restricted shares, restricted stock units, and shares to non-employee directors under the 2005 and 2014 Omnibus Incentive Plan, and 38,035 shares issuable under the Employee Stock Purchase Plans.
| |
(a) | Consists of 922,306 shares issuable upon exercise of outstanding options and vesting of performance share units, restricted shares, restricted stock units, and shares to non-employee directors under the 2005 and 2014 Omnibus Incentive Plan, 46,585 shares issuable under the Employee Stock Purchase Plans. |
| |
(b) | Consists of 2,076,115 shares available for future option grants under the 2014 Omnibus Incentive Plan, 398,701 shares remaining available for issuance under the Employee Stock Purchase Plan. |
(b)Consists of 1,530,256 shares available for future option grants under the 2014 Omnibus Incentive Plan, and 867,752 shares remaining available for issuance under the Employee Stock Purchase Plan.
Issuer Purchases of Equity Securities
The following table provides information about our repurchases of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended December 31, 2016.
2019.
| | | | | Total Number of shares purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of a Publicly Announced Program | | Maximum Dollar amount of shares that may yet be Purchased Under the Program | | Total Number of
shares purchased | | Average Price
Paid per Share | | Total Number of
Shares Purchased
as Part of a
Publicly
Announced
Program | | Maximum
Dollar amount of shares that may
yet be
Purchased
Under the
Program |
| October 1 – October 31 | | 95,100 | | $87.70 | | 1,129,747 | | $111,364,432 | October 1 – October 31 | | 36,210 | | | $127.01 | | | 358,381 | | | $208,333,969 | |
| November 1 – November 30 | | 89,100 | | 93.41 | | 1,218,847 | | 103,041,289 | November 1 – November 30 | | 28,866 | | | 138.54 | | | 387,247 | | | 204,334,899 | |
| December 1 – December 31 | | 80,700 | | 102.73 | | 1,299,547 | | 94,751,213 | December 1 – December 31 | | 29,877 | | | 140.55 | | | 417,124 | | | 200,135,555 | |
| For the quarter ended December 31 | | 264,900 | | $94.20 | | 1,299,547 | | $94,751,213 | For the quarter ended December 31 | | 94,953 | | | $134.78 | | | 417,124 | | | $200,135,555 | |
On December 9, 2015,2, 2019, the Corporation announced the authorization of a $200 millionadopted two written trading plans in connection with its previously authorized share repurchase program, which allows for the purchase of its outstanding common stock up to $200 million. The first trading plan will include share repurchases of $50 million, to be executed equally throughout the year. The second trading plan will include opportunistic share repurchases up to $100 million to be executed through a 10b5-1 program. The Company initiatedopportunistic share repurchases are to be made in accordance with the program in January 2016 and repurchased over $100 million of shares in 2016. Onpurchase grid attached to the Company’s Form 8-K filed with the SEC on December 7, 2016, the2, 2019. The Corporation authorized an additional $100 million for future share repurchases. The Company plans to repurchase at least $50 million in shares in 2017. Underof its common stock during the current program, shares may be purchased on the open market, in privately negotiated transactions, and under plans complying with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended.2020 calendar year.
The following performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any of our other filings under the Securities Act or the Securities Exchange Act of 1934, except to the extent we specifically incorporate this information by reference therein.
PERFORMANCE GRAPH
On January 29, 2016, S&P Dow Jones Indices added Curtiss-Wright to the S&P MidCap 400 Index. The Company was previously a member of the S&P SmallCap 600 Index. The following graph compares the annual change in the cumulative total return on our Company’s Common Stockcommon stock during the last five fiscal years with the annual change in the cumulative total return of the Russell 2000 Index, the S&P MidCap 400 Index, and our self-constructed proxy peer group. The proxy peer group companies are as follows:
|
| | | | |
| AAR Corp | MoogITT Inc. |
Crane Co.Aerojet Rocketdyne Holdings, Inc. | Orbital ATK, Inc.Kaman Corp |
Cubic CorpCrane Co. | Rockwell CollinsMoog Inc. |
EnPro Industries Inc.Cubic Corp | Spirit Aerosystems Holdings Inc. |
Esterline Technologies CorpEnPro Industries Inc. | Teledyne Technologies Inc. |
Hexcel CorpFLIR Systems, Inc. | TransDigm Group Inc. |
IDEX CorporationHexcel Corp | Triumph Group Inc. |
Kaman CorpIDEX Corporation | Woodward Inc. |
ITT Corp | |
The graph assumes an investment of $100 on December 31, 20112014 and the reinvestment of all dividends paid during the following five fiscal years.
|
| | | | | | | | | | | | | | | | | | |
| Company / Index | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
| Curtiss-Wright Corp | | 100 |
| | 93.93 |
| | 179.74 |
| | 205.49 |
| | 200.89 |
| | 290.19 |
|
| S&P MidCap 400 Index | | 100 |
| | 117.88 |
| | 157.37 |
| | 172.74 |
| | 168.98 |
| | 204.03 |
|
| Russell 2000 | | 100 |
| | 116.35 |
| | 161.52 |
| | 169.43 |
| | 161.95 |
| | 196.45 |
|
| Peer group | | 100 |
| | 113.68 |
| | 164.65 |
| | 181.73 |
| | 187.70 |
| | 215.75 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Company / Index | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| Curtiss-Wright Corp | | 100 | | | 97.77 | | | 141.23 | | | 175.92 | | | 148.15 | | | 205.49 | |
| S&P MidCap 400 Index | | 100 | | | 97.82 | | | 118.11 | | | 137.30 | | | 122.08 | | | 154.07 | |
| Russell 2000 | | 100 | | | 95.59 | | | 115.95 | | | 132.94 | | | 118.30 | | | 148.49 | |
| Peer group | | 100 | | | 97.58 | | | 117.67 | | | 155.26 | | | 152.18 | | | 221.07 | |
Item 6. Selected Financial Data.
The following table presents our selected financial data from continuing operations. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Five-Year Financial Highlights
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | CONSOLIDATED SELECTED FINANCIAL DATA | | | | | | | | |
| (In thousands, except per share data) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | |
| Net sales | | $ | 2,487,961 | | | $ | 2,411,835 | | | $ | 2,271,026 | | | $ | 2,108,931 | | | $ | 2,205,683 | |
| Earnings from continuing operations | | 307,583 | | | 275,749 | | | 214,891 | | | 189,382 | | | 192,248 | |
| Total assets | | 3,764,261 | | | 3,255,385 | | | 3,236,321 | | | 3,037,781 | | | 2,989,611 | |
| Total debt, net | | 760,639 | | | 762,556 | | | 814,139 | | | 966,298 | | | 953,205 | |
| Earnings per share from continuing operations: | | | | | | | | | | |
| Basic | | $ | 7.20 | | | $ | 6.28 | | | $ | 4.86 | | | $ | 4.27 | | | $ | 4.12 | |
| Diluted | | $ | 7.15 | | | $ | 6.22 | | | $ | 4.80 | | | $ | 4.20 | | | $ | 4.04 | |
| Cash dividends per share | | $ | 0.66 | | | $ | 0.60 | | | $ | 0.56 | | | $ | 0.52 | | | $ | 0.52 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | CONSOLIDATED SELECTED FINANCIAL DATA |
| (In thousands, except per share data) | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | | | | | | | | | |
| Net sales | | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
| | $ | 2,118,081 |
| | $ | 1,823,307 |
|
| Net earnings from continuing operations | | 189,382 |
| | 192,248 |
| | 169,949 |
| | 139,404 |
| | 104,081 |
|
| Total assets | | 3,037,781 |
| | 2,989,611 |
| | 3,382,448 |
| | 3,458,274 |
| | 3,114,588 |
|
| Total debt, net | | 966,298 |
| | 953,205 |
| | 954,348 |
| | 959,938 |
| | 880,215 |
|
| Earnings per share from continuing operations: | | | | | | | | | | |
| Basic | | $ | 4.27 |
| | $ | 4.12 |
| | $ | 3.54 |
| | $ | 2.97 |
| | $ | 2.23 |
|
| Diluted | | $ | 4.20 |
| | $ | 4.04 |
| | $ | 3.46 |
| | $ | 2.91 |
| | $ | 2.20 |
|
| Cash dividends per share | | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.39 |
| | $ | 0.35 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) begins with an overview of our company, followed by economic and industry-wide factors impacting our company and the markets we serve, a discussion of the overall results of operations, and finally a more detailed discussion of those results within each of our reportable operating segments.
COMPANY ORGANIZATION
Curtiss-Wright Corporation and its subsidiaries is a global, diversified industrial provider ofmanufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered technologically advanced, products and services to a broad range of industries which are reportedthe defense, general industrial, commercial aerospace, and power generation markets. We report our operations through our Commercial/Industrial, Defense, and Power segments. 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, including the commercial aerospace, defense, power generation, and industrial markets. Our overall strategy is to be a balanced and diversified company, less vulnerable to cycles or downturns in any one market, with a focus on establishing and to establishexpanding strong technological breadth, market positions, in profitable niche markets. Approximately 37% of our 2017 revenues are expected to be generated from defense-related markets.and financial performance.
As discussed in Note 2 to the Corporation's Consolidated Financial Statements, we have completed our 2014 divestiture activities. The results of operations of the divested businesses are reported as discontinued operations within our Consolidated Statements of Earnings.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations begins with an overview of our company, followed by economic and industry-wide factors impacting our company and the markets we serve, a discussion of the overall results of continuing operations, and finally a more detailed discussion of those results within each of our reportable operating segments.
Impacts of inflation, pricing, and volume
We have not historically been and do not expect to be significantly impacted by inflation. Increases in payroll costs and any increases in raw material costs that we have encountered are generally able to be offset through lean manufacturing activities.activities or price increases, if our terms and conditions provide for such increases. We have consistently made annual investments in capital that deliver efficiencies and cost savings. The benefits of these efforts generally offset the margin impact of competitive pricing conditions in all of the markets we serve.
Analytical Definitions
Throughout management’s discussion and analysis of financial condition and results of operations,MD&A, the terms “incremental” and “organic” are used to explain changes from period to period. The term “incremental” is used to highlight the impact that acquisitions and divestitures had on the current year results for which there was no comparable prior-year period. Therefore, theresults. The results of
operations for acquisitions are incremental for the first twelve months from the date of acquisition. The remainingAdditionally, the results of operations of divested businesses are referred to asremoved from the comparable prior year period for purposes of calculating “organic”. and “incremental” results. The definition of “organic” excludes the effect of foreign currency translation.
Market Analysis and Economic Factors
Economic Factors Impacting Our Markets
Curtiss-Wright Corporation is a global, diversified multinational manufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered products and services to the aerospace, defense, general industrial, and power generation and general industrial markets. Many of Curtiss-Wright’s industrial businesses are driven in large part by global economic growth.growth, primarily led by operations in the U.S., Canada, Europe, and world economies continueChina. During January 2020, it was reported that a coronavirus outbreak originated in China, which resulted in travel in and out of China being restricted along with the temporary halting of manufacturing activities. However, it is too premature to recover fromaccurately predict the 2008-2009 financial crisis and global recession, with most measures of economic growth only recently reaching the comparable levels achieved in 2008.impact that such outbreak will have on business activity or our operations.
The U.S. economy, as measured by real gross domestic product (GDP), has slowly improved since 2009,over the last ten years, aided by decreased levels of unemployment, improvements in the housing market, and a low interest rate environment.
In 2016,2019, U.S. GDP showedis expected to show modest growth of 1.6%2.3%, accordingcompared to the most recent estimate, despite a slight acceleration in the second halfGDP growth of the year, while U.S. GDP grew 2.6% in 20152.9% and 2.4% in 2014.
2018 and 2017, respectively. The U.S. Federal Reserve’s decision to increase interest rates in late 2015 and again in 2016 was aimed at keeping ahead of inflationary pressures, marking the endprojected slowing growth is primarily due to the near-zero borrowing costs that had prevailed since thelengthy impact of U.S./China trade tensions and ongoing concerns about global financial crisis.
recessionary conditions. Looking ahead to 2017,2020, economists have mixed views on the broader U.S. economy, with current estimates for U.S. real GDP growth indicating a growth rate of growth of approximately 2%2.0%, despite the new administration’s goal to raise the pace of expansion to 4%at least 3.0% per year through increased fiscal stimulus.
Meanwhile, the global environment contains pockets of economic instability, particularly in China, which continues to be faced with lower relative levels of economic activity, while uncertainty surrounds the U.K. following its June 2016 vote in favor of leaving the European Union. Furthermore, world economies continue to experience volatility due to the slower than expectedenvironment’s rebound in economic activity a worsening ofthat began in mid-2016 has moderated from recent peak levels, influenced by international trade tensions, tightening financial conditions, and rising geopolitical tensions, the continued low oil price environment and excess crude oil supply, declining commodity prices, and the potential for further increases in U.S. interest rates.
uncertainty. As a result, overall, 20172020 GDP growth in world economies is expected to grow by approximately 3.4%3.3%, up from 3.1% in 2016,compared to the 2019 growth rate of 2.9%, but below the 2018 growth rate of 3.6%, according to the International Monetary Fund. This growth is expected to be aided by slight improvements in U.S and European economies as well as an improved outlook for emerging market and developing economies. Looking ahead to the next few years, we remain cautiously optimistic that our economically-sensitive commercial and industrial markets will improve when we return tobased on normalized global conditions.
Defense
Curtiss-Wright hasWe have a well-diversified portfolio of products and services that supply all branches of the U.S. military, with content on many high performance programs and platforms, as well as a growing international defense business. A significant portion of our defense business operations is attributed to the United States market, and characterized by long-term programs and contracts driven primarily by the Department of Defense (DoD) budgets and funding levels.
The U.S. Defense budget serves as a leading indicator of our growth in the defense market. OverFollowing across-the-board sequestration mandated by the past decade, we experienced a period of significant growth inBCA, defense spending and related supplemental budgets followed by across-the-board sequester cuts (“sequestration”) mandatedbottomed in 2015. However, growth has stabilized in recent years. In early 2018, Congress signed a bill to provide relief against the spending caps associated with the BCA. In addition, the Fiscal Year 2019 Defense Appropriations Bill, signed by the 2011President in September 2018, was the first to be signed into law on time in over a decade. Most recently, the two-year, Bipartisan Budget Control Act. However, defenseAct signed by the President in August 2019 brought an improved sense of security to federal agencies, essentially cancelling the last two years of the BCA and its sequestration caps, while setting solid topline spending figures for 2020 and 2021 in excess of $700 billion. Looking ahead, the Fiscal Year 2021 budget spending has stabilized and is expected to demonstrate moderate annual growth of at least 3% through 2021.
The FY2017 Defense budget request which began in October 2016, was $524 billion (base) or $583 billion (including base plus overseas contingency operations (OCO)), showing modest growth of 1% compared to the prior year period. However, Congress elected not to approve the 2017 President's Budget until after the November presidential election, and hence the DoD began the year under a Continuing Resolution (CR), essentially maintaining funding at the previous year’s levels.
The proposed FY2018 Defense budget, which begins in October 2017, is expected to be approximately $740 billion, essentially in excess of $600 billion (base), a positive forline with the industry as it would provide the DoD additional stability and flexibility to enter into multi-year contracts, without the impact of sequestration.Fiscal Year 2020 budget.
Curtiss-Wright derivesWe derive revenue from the naval defense, aerospace defense, and ground defense markets. In the naval defense market, we expect continued solid funding for the U.S. shipbuilding program,programs, particularly as it relates to production on the Ford class aircraft carrier, as well as the Ohio Replacement Program (ORP)Columbia class and Virginia class submarine programs. The Company hassubmarines. We have a long legacy of providing products that support nuclear propulsion systems on naval vessels. In addition, through our service centers, we are a critical provider of ship repair and maintenance for the U.S. Navy’s Atlantic and Pacific fleets. In the aerospace defense market, we expect to benefit from increased funding levels on Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR), electronic warfare, unmanned systems, and communications programs. As a leading supplier of COTS and COTS+ solutions, we continue to demonstrate that electronics technology will enhance our ability to design and develop future generations of advanced systems and products for high performance applications, while also meeting the military’s Size, Weight, and Power (SWaP) considerations. We are also a leading designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems.In the ground defense market, the modernization of the existing U.S. ground vehicle fleet is expected to recover slowly, while international demand should remain solid, particularly for our turret drive stabilization systems (TDSS).
While we monitor the budget process as it relates to programs in which we participate, we cannot predict the ultimate impact of future DoD budgets, which tend to fluctuate year-by-year and program-by-program. As a result, there may be budget reductions and program cancellations that would negatively impact programs in which we participate.
Commercial Aerospace
Curtiss-Wright derives revenue from the global commercial aerospace market, principally to the commercial jet market, and to a lesser extent the regional jet and commercial helicopter markets. Our primary focus in this market is OEM products and services for commercial jets, which is highly dependent on new aircraft production.production from our primary customers, Boeing and Airbus. We provide a combination of flight control and utility actuation systems, sensors, and other sophisticated electronics, as well as shot and laser peening services to our primary customers, Boeing and Airbus. Shot and laser peening are also utilized on highly stressed components of turbine engine fan blades, landing gear, and aircraft structures.
Fiscal 2011 marked the first year in a multi-year production up-cycle for the commercial aerospace market, and industry data supports a steady increase in commercial aircraft deliveries over the next few years. In the current cycle, OEM-oriented companies are expected to perform well, due to planned increases in production by Boeing and Airbus on both legacy and new aircraft, along with strong backlogs.
Steady growth in airline travel, along with the demand for and the delivery of new aircraft to replace an aging fleet, continue to be key drivers in the commercial aerospace market. According toFiscal 2011 marked the International Air Transport Association (IATA), air travel continues to be strongbeginning of a multi-year production up-cycle for the commercial aerospace market. This up-cycle has been driven by increases in production by Boeing and Airbus on both legacy and new aircraft, particularly narrow-body aircraft, and is likely to display growth of approximately 5.0% in 2017, which is essentially in-line withfurther supported by their strong backlogs. Additionally, the 20-year trend. The steady decline in oil prices during the past few years has been a key contributor to the increased passenger growth, as the fall in the price ofdeclining fuel hasprices have led to cheaper airfares for consumers. According to the International Air Transport Association, air travel continues to be solid with passenger growth expected to be approximately 4.1% in 2020. The projected 2020 rate of growth is essentially in-line with 2019 but slower than the 20-year trend. Industry experts also expectdata supports a modest long-term growth outlook for both regional and business jets. continued, steady increase in commercial aircraft deliveries to meet this growing demand.
While we closely monitor these industry metrics, our success and future growth in the commercial aerospace market is primarily tied to the growth in aircraft production rates, the timing of our order placement, and continued partnering with aerospace original equipment manufacturers.
Power Generation
Curtiss-Wright derivesWe derive revenue from the commercial nuclear power generation market, where we supply a variety of highly engineered products and services, including reactor coolant pumps, control rod drive mechanisms, valves, motors, spent fuel management, containment doors, bolting solutions, enterprise resource planning, plant process controls, and coating services. Curtiss-Wright providesWe provide equipment and services to both the aftermarket and new build markets and hashave content on almost every reactor operating in the U.S. today.
According to the Nuclear Regulatory Commission (NRC), nuclear power comprises approximately 20% of all the electric power produced in the United States, with 9996 reactors operating across 6158 nuclear power plants in 3029 states. Our growth inopportunities for aftermarket products and services is partiallyare driven by the U.S. plant recertification process, as nearly all of the operating U.S. nuclear power plants have appliedaging, plant closures, requirements for or will be applying for 20-yearplanned outages, plant life extensions as they reach(from the end of their currentoriginal 40-year operating lives. Aslives to 60-year and now 80-year lives), the levying of December 31, 2016, 87 reactors have received plant life extensions beyond 40 years (though four are expected to close), applications from 8 additional reactors have been submittedregulatory requirements, suppliers abandoning the commercial nuclear market, and are pending approval,plants seeking technology and lettersinnovation advances.
One of intent to apply have been submitted from 4 more reactors with expected application submittal dates from 2016 through 2021. The NRC is now preparing to consider extending operating licenses beyond 60 out to 80 years.
Thethe industry’s most significant challengechallenges is electricity market competitiveness, primarily driven by sustained low natural gas prices. As a result, the industry’s goal is to rethinkindustry has been tasked with reassessing operating practices, improveimproving efficiency, and reducereducing costs to help keep nuclear power competitive in a changing electricity market.market, which are collectively referred to as "Delivering the Nuclear Promise." Additionally, U.S. reactor operators have also beenwere faced with increased security and Fukushimapost-Fukushima regulatory requirements that have divertedover most of the past decade. All of these factors contributed to plant operators diverting and deferring their typical plant capital expenditure budgets significantly duringaway from planned maintenance. However, in late 2017, as those necessary requirements abated and plant operators resumed a more normalized maintenance schedule, the past few years. While these factors have ledindustry began to deferred plant maintenance and fewer planned outages forturn the past few years,corner. As a result, we expect increased opportunities worldwide for our vast portfolio of advanced nuclear technologies likely rebounding in early 2018.moving forward.
Longer term, there are several factors that are expected to drive global commercial nuclear power demand. The Energy Information Administration (EIA) forecasts that worldwide total energy consumptionelectricity generation is expected to increase at an average annual rate of 1.4%1.8% through 2040.2050. Continued growth in global demand for electricity,, especially in developing countries with limited power supply such as China and India, will require increased capacity. In addition, the continued supply constraints and environmental concerns attributed to the current dependence on fossil fuels have led to a greater appreciation of the value of nuclear technology as the most efficient and environmentally friendly source of energy available today. As a result, we expect growth opportunities in this market both domestically and internationally, although the timing of orders remains uncertain.
Curtiss-WrightWe also playsplay an important role in the new build market as a key supplier of RCPs for the Westinghouse AP1000 reactor design. Domestically, 4 new build reactors are under construction utilizing the AP1000 design, for which we are the solea supplier of reactor coolant pumps,RCPs and also expect to supply a variety of ancillary plant products and services. Applications for an additional 6Domestically, two new domesticbuild reactors at 3 future power plants have been submitted to the NRC, withremain under construction in Georgia utilizing the AP1000 design having been selected for 4 of the potential new reactors, although the timing of orders remains uncertain.design. On a global basis, nuclear plant construction is active. Currently,Currently, there are approximately 6053 new reactors under construction across 1318 countries, with approximately 165 110
planned and 345330 proposed over the next several decades.decades according to the World Nuclear Organization. In particular, China intends to expand its nuclear power capabilities significantly through the construction of new nuclear power plants, includingplants over the next few decades, led by the successful start-up and operation of the first two AP1000 plants currently under construction that(four reactors) in late 2018 and early 2019, which are expected to be the first Generation III designIII+ reactors in operation with several more new build plants on the horizon. Curtiss-Wright continuesworldwide. We continue to expect to play a role in China’s growingnew build nuclear power programplant construction with our largest opportunities in China and India.
Our future success in the fourth quarter of 2015 was awarded a $468 million contract for sixteen RCPs and the sale of certain non-recurring rights (China Direct order).
As a result, we are positioned for strong expectedthis industry will be led by new order activity for our vast array of nuclear technologies due to ongoing maintenance and upgrade requirements on operating nuclear plants, a renewed interest in products to aid safety and extend the reliability of existing reactors, and the continued emphasis on global nuclear power construction.
General Industrial
Revenue derived from our widely diversified offering to the general industrial market consists of industrial sensors and control systems, critical-function valves and valve systems, as well as surface treatment services. We supply our products and services to OEMs and aftermarket industrial customers, including the transportation, commercial trucking, off-road equipment, agriculture, construction, automotive, chemical, and oil and gas industries. Our performance in these markets is typically sensitive to the performance of the U.S. and global economies, with changes in global GDP rates and industrial production driving our sales, particularly for our surface treatment services.
One of the key drivers within our general industrial market is our sensors and controls systems products, most notably for electronic throttle controls, shift controls, joysticks, power management systems, and traction control systems, servingsystems. These products serve the on-and-off highway, medical mobility, and specialty vehicles markets. Increased industry demand for electronic control systems and sensors has been driven by the need for improved operational efficiency, safety, repeatability, reduced emissions, enhanced functionality, and greater fuel efficiencies to customers worldwide. Key to our future growth is expanding the human-machine interface technology portfolio and providing a complete system solution to our customers. Existing and emerging trends in commercial vehicle safety, emissions control, and improved driver efficiency are propelling commercial vehicle OEMs toward higher performance subsystems. These trends are accelerating the evolution from discrete human machine interface components towards a more integrated vehicle interface architecture. Meanwhile, our surface treatment services, includingwhich include shot and laser peening, engineered coatings, and analytical testing services, which are used to increase the safety, reliability, and longevity of components operating in harsh environments. Sales are primarily driven by global demand from general industrial customers.
Looking ahead, based on expectations for steadily improving global economic conditions, these businesses are likely to experience continued modest growth based on higher sales volumes and new international emissions regulations affecting several industries in which we participate.
We also service the oil and gas, chemical, and petrochemical industries through numerous industrial valve products, wherein which nearly all of our industrial valve sales are to the downstream markets. We maintain a global maintenance, repair, and overhaul (MRO)
business for our pressure-relief valve technologies as refineries opportunistically service or upgrade equipment that has been operating at or near full capacity in recent years.capacity. We also produce severe service, operation-critical valves for the power and process industries. EarlierSales in the decade through mid-2014, the industry had experienced solid performancethese industries are driven by new explorationglobal supply and expansion of sub-segments, including offshore drilling and shale gas, which boosted end-user demand. As a result of these market initiatives and reduced global economic growth, the industry experienced an excess of oil supply globally, driving a steady decline indemand, crude oil prices, throughout 2014 and 2015, as well as reducing capital expenditures. Though oil prices rebounded in late 2016 to drive some fresh optimism, they remain well below the recent 2014 peak,industry regulations, and the challenges facing the oil and gas industry are expected to continue for the foreseeable future. Despite the challenges in the oil and gas market, we have seen an industrial renaissance in the U.S. chemical industry due to plentiful, affordable natural gas which has led to further adoption of severe service valve technology. market. Over the long run, we believe improved economic conditions and continued global expansion will be key drivers for future growth of our severe service and operationally criticaloperation-critical valves serving the process industry.
RESULTS OF OPERATIONS
The following MD&A is intended to help the reader understand the results of operations and financial condition of the Corporation for the year ended December 31, 2019, as compared to the year ended December 31, 2018. Discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018, as compared to the year ended December 31, 2017, is contained in our 2018 Annual Report on Form 10-K, filed with the SEC on February 27, 2019.
| | | | | Year Ended December 31, | | Percent changes | | Year Ended December 31, | | | Percent
change |
| (In thousands, except percentages) | | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | (In thousands, except percentages) | | 2019 | | 2018 | | 2019 vs. 2018 |
| | | | | | | | | | | | | | | | | |
| Sales: | | | | | | | | | | | Sales: | |
| Commercial/Industrial | | $ | 1,118,768 |
| | $ | 1,184,791 |
| | $ | 1,228,097 |
| | (6 | %) | | (4 | %) | Commercial/Industrial | | $ | 1,239,881 | | | $ | 1,209,178 | | | 3 | % |
| Defense | | 466,654 |
| | 477,413 |
| | 489,857 |
| | (2 | %) | | (3 | %) | Defense | | 579,329 | | | 554,374 | | | 5 | % |
| Power | | 523,509 |
| | 543,479 |
| | 525,172 |
| | (4 | %) | | 3 | % | Power | | 668,751 | | | 648,283 | | | 3 | % |
| Total sales | | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
| | (4 | %) | | (2 | %) | Total sales | | $ | 2,487,961 | | | $ | 2,411,835 | | | 3 | % |
| | | | | | | | | | | | |
| Operating income: | | | | | | | | | | | Operating income: | |
| Commercial/Industrial | | $ | 156,550 |
| | $ | 171,525 |
| | $ | 178,684 |
| | (9 | %) | | (4 | %) | Commercial/Industrial | | $ | 196,455 | | | $ | 182,669 | | | 8 | % |
| Defense | | 98,291 |
| | 98,895 |
| | 82,552 |
| | (1 | %) | | 20 | % | Defense | | 129,653 | | | 128,446 | | | 1 | % |
| Power | | 76,472 |
| | 74,987 |
| | 51,449 |
| | 2 | % | | 46 | % | Power | | 112,954 | | | 98,858 | | | 14 | % |
| Corporate and eliminations | | (23,215 | ) | | (34,790 | ) | | (30,312 | ) | | 33 | % | | (15 | %) | Corporate and eliminations | | (35,109) | | | (36,347) | | | 3 | % |
| Total operating income | | $ | 308,098 |
| | $ | 310,617 |
| | $ | 282,373 |
| | (1 | %) | | 10 | % | Total operating income | | $ | 403,953 | | | $ | 373,626 | | | 8 | % |
| | | | | | | | | | | | |
| Interest expense | | 41,248 |
| | 36,038 |
| | 35,794 |
| | 14 | % | | 1 | % | Interest expense | | 31,347 | | | 33,983 | | | (8) | % |
| Other income, net | | 1,111 |
| | 615 |
| | 365 |
| | NM |
| | NM |
| Other income, net | | 23,856 | | | 16,596 | | | 44 | % |
| | | | | | | | | | | | | | | | |
| Earnings before income taxes | | 267,961 |
| | 275,194 |
| | 246,944 |
| | (3 | %) | | 11 | % | Earnings before income taxes | | 396,462 | | | 356,239 | | | 11 | % |
| Provision for income taxes | | (78,579 | ) | | (82,946 | ) | | (76,995 | ) | | (5 | %) | | 8 | % | Provision for income taxes | | (88,879) | | | (80,490) | | | 10 | % |
| Earnings from continuing operations | | $ | 189,382 |
| | $ | 192,248 |
| | $ | 169,949 |
| | (1 | %) | | 13 | % | |
| Net earnings | | Net earnings | | $ | 307,583 | | | $ | 275,749 | | | 12 | % |
| | | | | | | | | | | | | | | | |
| New orders | | $ | 2,149,191 |
| | $ | 2,585,038 |
| | $ | 2,385,066 |
| | | | | New orders | | $ | 2,579,617 | | | $ | 2,426,682 | | |
| Backlog | | $ | 1,950,750 |
| | $ | 1,928,727 |
| | $ | 1,671,482 |
| | | | | Backlog | | $ | 2,166,764 | | | $ | 2,032,451 | | |
NM - not meaningful
Components of sales and operating income growth (decrease):
| | | | | | | | | | | | | | |
| | 2019 vs. 2018 | | |
| | Sales | | Operating
Income |
| Organic | | 2 | % | | 6 | % |
| Acquisitions | | 2 | % | | 1 | % |
| Foreign currency | | (1) | % | | 1 | % |
| Total | | 3 | % | | 8 | % |
|
| | | | | | | | | | | | |
| | | 2016 vs. 2015 | | 2015 vs. 2014 |
| | | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | | (4 | %) | | (4 | %) | | — | % | | 6 | % |
| Acquisitions/divestitures | | — | % | | — | % | | — | % | | — | % |
| Foreign currency | | — | % | | 3 | % | | (2 | %) | | 4 | % |
| Total | | (4 | %) | | (1 | %) | | (2 | %) | | 10 | % |
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales for the year decreased $97increased $76 million, or 4%3%, to $2,109$2,488 million, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial, Defense, and Power segments decreased $66increased $31 million, $11$25 million, and $20 million, respectively. Changes in sales by segment are discussed in further detail below in the results"Results by Business Segment" section below.
Operating income for the year increased $30 million, or 8%, to $404 million, and operating margin increased 70 basis points compared with 2018. The increases in operating income and operating margin were primarily due to favorable overhead absorption on higher naval defense sales and the absence of first year purchase accounting costs from segment operations.
our DRG acquisition in the Power segment. Operating income and operating margin also benefited from gains recognized on the sales of a product line and building in the Commercial/Industrial segment. The benefits of our ongoing margin improvement initiatives were recognized across all segments. These increases were partially offset by an unfavorable shift in mix within our defense electronic products, higher research and development expenses, and favorable contract adjustments in the prior year period which did not recur in the Defense segment as well as the impact of tariffs in the Commercial/Industrial segment. The timing of sales on the AP1000 China Direct program negatively impacted operating income in the Power segment.
Non-segment operating expense of $35 million was essentially flat compared to the prior year period.
Interest expense for the year decreased $3 million, or 1%8%, to $308$31 million, and operating margin increased 50 basis points compared with 2015. The decrease in operating income is primarily driven by lower sales volumes of our severe-service industrial valves and surface treatment services in the Commercial/Industrial segment. This decrease was partially offset by favorable foreign currency translation of approximately $9 million and lower corporate expenses primarily due to a priordiscretionary $50 million prepayment on our 2013 Notes in October 2018.
Other income, net for the year period pension settlement charge ofincreased $7 million, relatedor 44%, to the retirement of the company’s former Chairman. Operating margin benefited from our margin improvement and cost containment initiatives during the current period.
Non-segment operating expense decreased $12 million, to $23$24 million, primarily due to lower pension expense as a result of a one-time pension settlement charge during the prior year periodhigher income related to the retirement of the company's former Chairman.our pension and other post-retirement benefit plans.
Interest expense increased $5 million to $41 million, primarily due to the termination of our interest rate swaps in the first quarter of 2016.
The effective tax rates from continuing operationsfor 20162019 and 20152018 were 29.3%22.4% and 30.1%22.6%, respectively. TheThe decrease in the effective tax rate in 2016,2019, as compared to 2015,2018, was primarily due to a reduction of unrecognizedadditional tax benefits and a reversal of certain valuation allowances, partially offset by lower research and development credits.
New orders decreased $436 million to $2,149 million at December 31, 2016, primarily due to a $468 million order received inexpense associated with the Power segmentTax Act for foreign withholding taxes recognized in the prior year period as well as the current period benefit related to research and development credits and foreign-derived intangible income (FDII) deduction. These decreases were primarily offset by reduced stock compensation benefits and the absence of a decrease in new orders of $58 millionfavorable prepaid and repair method change recognized in the Defenseprior year period. Refer to Note 12 to the Consolidated Financial Statements for more information.
New orders increased $153 million, or 6%, from the prior year period to $2,580 million, primarily due to strong organic growth in naval defense orders across all segments. New orders also benefited from higher demand for our commercial aerospace products in the Commercial/Industrial segment. These decreasesincreases were partially offset by an increasea decline in new orders of $35 millionfor our industrial vehicle, industrial controls, and industrial valve products in the Commercial/Industrial segment and the timing of government orders for pumps and generators of $40 million in the Power segment. Changes in new orders by segment are discussed in further detail in the results"Results by business segmentBusiness Segment" section below.
Comprehensive income (loss)
Pension and postretirement adjustmentswithin comprehensive income during the year ended December 31, 2016,2019 were a $1$29 million loss, compared with a $10$19 million loss for the priorprior year period. The changes wereloss during the current period was primarily due to plan asset and salary gains in 2016 versus losses for the same assumptionsan increase in the prior period. These gains werediscount rate, partially offset by discount rate losses in the current period versus gains higher asset returns. The loss in the prior period and lower loss amortizationwas primarily due to lower asset returns, partially offset by a decrease in the prior period settlement charge related to the retirement of the company's former Chairman.discount rate.
Foreign currency translation adjustmentsduring the year ended December 31, 2016, were2019 resulted in a $65gain of $18 million, loss compared withto a foreign currency translation lossesloss of $88$52 million in the comparable prior period. The comprehensive lossgain during the current period was primarily attributed to increases in the British Pound and Canadian dollar with the prior period comprehensive loss primarily attributed to decreases in the British Pound with the prior year period impacted by decreases in theand Canadian dollar.
Year ended December 31, 2015 compared to year ended December 31, 2014
Sales for the year decreased $37 million, or 2%, to $2,206 million, compared with the prior year period. The main driver of the decrease in sales was lower sales in the Commercial/Industrial segment of $43 million. The increase in sales in the Power segment was driven by the China Direct order, but was partially offset by lower sales in the Defense segment. Changes in sales by segment are discussed in further detail below in the results from segment operations.
Operating income for the year increased $28 million, or 10%, to $311 million, and operating margin increased 150 basis points compared with 2014. The increase in operating income and margin is primarily attributable to a $20 million non-recurring fee as a result of the sale of certain rights, discussed in further detail below, in the Power segment results from segment operations. Additionally, higher operating income in our Defense segment was primarily due to an $11 million favorable impact of foreign currency.
Non-segment operating expense increased $4 million, to $35 million, primarily due to higher pension expense as a result of a one-time pension settlement charge related to the retirement of the company's former Chairman.
Interest expense of $36 million was essentially flat as compared to the prior year period.
The effective tax rates from continuing operationsfor 2015 and 2014 were 30.1% and 31.2%, respectively. The decrease in the effective tax rate in 2015, as compared to 2014, was primarily due to an increase in the foreign rate differential and the reenactment and enhancement of certain tax credits and deductions.
New orders increased $200 million to $2,585 million at December 31, 2015, primarily due to a new order received in the Power segment for $468 million, partially offset by lower new orders in the Commercial/Industrial segment and Defense segment, as discussed in further detail below in the results from segment operations.
Comprehensive income (loss)
Pension and postretirement adjustmentswithin comprehensive income during the year ended December 31, 2015, were a $10 million loss compared with a $74 million loss for the prior year period. The changes were primarily due to discount rate and mortality assumption gains in 2015 versus losses for the same assumptions in the prior period. Additionally, higher loss amortization and the settlement charge in the current period resulted in a reduction to accumulated comprehensive income. These changes were partially offset by asset losses in the current period due to market under performance.
Foreign currency translation adjustmentsduring the year ended December 31, 2015, were an $88 million loss compared with foreign currency translation losses in the comparable prior period of $79 million. The fluctuations were largely attributable to changes in the Canadian dollar exchange rates.
RESULTS BY BUSINESS SEGMENT
Commercial/Industrial
Sales in the Commercial/Industrial segment are primarily generated from the general industrial and commercial aerospace markets and, to a lesser extent, the defense and power generation markets.
The following tables summarize sales, operating income and margin, and new orders within the Commercial/Industrial segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | Percent Change |
| (In thousands, except percentages) | | 2019 | | 2018 | | | 2019 vs. 2018 | |
| | | | | | | |
| Sales | | $ | 1,239,881 | | | $ | 1,209,178 | | | | 3 | % |
| Operating income | | 196,455 | | | 182,669 | | | | 8 | % |
| Operating margin | | 15.8 | % | | 15.1 | % | | | 70 bps | |
| New orders | | $ | 1,312,579 | | | $ | 1,225,407 | | | | 7 | % |
| Backlog | | $ | 665,832 | | | $ | 596,468 | | | | 12 | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Percent Changes |
| (In thousands, except percentages) | | 2016 | | 2015 | | 2014 | | 2016 vs 2015 | | 2015 vs 2014 |
| | | | | | | | | | | |
| Sales | | $ | 1,118,768 |
| | $ | 1,184,791 |
| | $ | 1,228,097 |
| | (6 | %) | | (4 | %) |
| Operating income | | 156,550 |
| | 171,525 |
| | 178,684 |
| | (9 | %) | | (4 | %) |
| Operating margin | | 14.0 | % | | 14.5 | % | | 14.5 | % | | (50 bps | ) | | — |
|
| New orders | | $ | 1,173,563 |
| | $ | 1,138,581 |
| | $ | 1,215,029 |
| | 3 | % | | (6 | %) |
| Backlog | | $ | 504,482 |
| | $ | 456,481 |
| | $ | 513,067 |
| | 11 | % | | (11 | %) |
Components of sales and operating income growth (decrease):
| | | | | | | | | | | | | | |
| | 2019 vs. 2018 | | |
| | Sales | | Operating
Income |
| Organic | | 4 | % | | 8 | % |
| Acquisitions | | — | % | | — | % |
| Foreign currency | | (1) | % | | — | % |
| Total | | 3 | % | | 8 | % |
|
| | | | | | | | | | | | |
| | | 2016 vs 2015 | | 2015 vs 2014 |
| | | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | | (5 | %) | | (11 | %) | | (1 | %) | | (5 | %) |
| Acquisitions/divestitures | | — | % | | — | % | | — | % | | 1 | % |
| Foreign currency | | (1 | %) | | 2 | % | | (3 | %) | | — | % |
| Total | | (6 | %) | | (9 | %) | | (4 | %) | | (4 | %) |
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales decreased $66increased $31 million, or 6%3%, to $1,119$1,240 million, from the comparable prior year period.period, primarily due to higher sales in the aerospace defense, commercial aerospace, and naval defense markets. In the general industrialaerospace defense market, we experienced lower sales of severe-service valvesincreased $21 million primarily due to oil and gas markets of $47 million and a reductionhigher demand for actuation systems on the F-35 fighter jet program. Sales in sales for our industrial vehicle, medical mobility, and industrial automation products, of $7 million, $8 million, and $6 million, respectively. Within the commercial aerospace market increased $19 million primarily due to higher demand for sensors products. The naval defense market benefited from higher sales of actuation and sensors and control products of $19$9 million primarily due to Boeing,increased production on the Virginia-class submarine program. These increases were partially offset by lower general industrial sales of $14 million primarily due to lower demand for surface technology services of $15treatment services. Unfavorable foreign currency translation, which is reflected in the results above, reduced sales $12 million.
Operating income decreased $15 increased $14 million, or 9%8%, to $157$196 million, and operating margin decreased 50increased 70 basis points to 14.0%15.8%. The decreasesincreases in operating income and operating margin were primarily driven by lowerdue to favorable overhead absorption on higher sales volumesand gains recognized on the sales of a product line and building. Operating income and operating margin also benefited from our severe-service industrial valves and surface treatment services.ongoing margin improvement initiatives. These decreasesincreases were partially offset by the benefitimpact of our margin improvement and cost containment initiativestariffs.
New orders increased $87 million as well as favorable foreign currency translation of approximately $4 million.
New orders increased $35 millioncompared to $1,174 million from the prior year, period, primarily due to strong organic growth in our naval valvesdefense and commercial aerospace orders of $39$63 million and sensors and control products of $32$60 million, respectively. These increases were partially offset by lower demanda decline in new orders of $43 million for our industrial vehicle, products of $23 million.industrial controls, and industrial valve products.
Year ended December 31, 2015 compared to year ended December 31, 2014
Sales decreased $43 million, or 4%, to $1,185 million, from the comparable prior year period. In the general industrial market, lower valve sales serving the energy markets of $36 million were driven by the decline in the price of crude oil. Additionally, lower sales of our surface technologies services impacted the general industrial market $8 million, power generation market $7 million, and the commercial aerospace market $5 million. This was partially offset by higher valve sales in the naval defense market due to the timing of production of $15 million.
Operating income decreased $7 million, or 4%, to $172 million, and operating margin was flat at 14.5%. The decrease in operating income is primarily due to the unfavorable impact of lower sales volume discussed above. Lower selling expenses as result of the lower sales contributed to flat operating margin.
New orders decreased $76 million to $1,139 million from the prior year period, primarily due to lower new orders of our surface technology services of $29 million and lower valve new orders of $43 million.
Defense
Sales in the Defense segment are primarily to the defense markets and, to a lesser extent, the commercial aerospace and the general industrial markets.
The following tables summarize sales, operating income and margin, and new orders, within the Defense segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | Percent Change |
| (In thousands, except percentages) | | 2019 | | 2018 | | | 2019 vs. 2018 | |
| | | | | | | |
| Sales | | $ | 579,329 | | | $ | 554,374 | | | | 5 | % |
| Operating income | | 129,653 | | | 128,446 | | | | 1 | % |
| Operating margin | | 22.4 | % | | 23.2 | % | | | (80 bps) | |
| New orders | | $ | 590,452 | | | $ | 553,384 | | | | 7 | % |
| Backlog | | $ | 584,048 | | | $ | 522,994 | | | | 12 | % |
| | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Percent Changes |
| (In thousands, except percentages) | | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 |
| | | |
| Sales | | $ | 466,654 |
| | $ | 477,413 |
| | $ | 489,857 |
| | (2 | %) | | (3 | %) |
| Operating income | | 98,291 |
| | 98,895 |
| | 82,552 |
| | (1 | %) | | 20 | % |
| Operating margin | | 21.1 | % | | 20.7 | % | | 16.9 | % | | 40 | bps |
| 380 | bps |
| New orders | | $ | 445,230 |
| | $ | 502,948 |
| | $ | 621,012 |
| | (11 | %) | | (19 | %) |
| Backlog | | $ | 499,993 |
| | $ | 533,004 |
| | $ | 538,125 |
| | (6 | %) | | (1 | %) |
Components of sales and operating income growth (decrease):
| | | | | | | | | | | | | | |
| | 2019 vs. 2018 | | |
| | Sales | | Operating
Income |
| Organic | | 3 | % | | — | % |
| Acquisitions | | 2 | % | | — | % |
| Foreign currency | | — | % | | 1 | % |
| Total | | 5 | % | | 1 | % |
|
| | | | | | | | | | | | |
| | | 2016 vs. 2015 | | 2015 vs. 2014 |
| | | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | | (1 | %) | | (6 | %) | | — | % | | 6 | % |
| Acquisitions/divestitures | | — | % | | — | % | | — | % | | — | % |
| Foreign currency | | (1 | %) | | 5 | % | | (3 | %) | | 14 | % |
| Total | | (2 | %) | | (1 | %) | | (3 | %) | | 20 | % |
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales decreased $11 increased $25 million, or 2%5%, to $467$579 million, from the comparable prior year period, primarily due to lowerhigher sales in the aerospace defense and commercial aerospace markets of $7 million and $6 million, respectively. The decrease in sales innaval defense markets. In the aerospace defense market, wassales increased $19 million primarily due to lower foreign military sales.the
incremental impact from our TCG acquisition as well as higher demand for embedded computing equipment on various UAV and helicopter programs. Sales in the commercial aerospacenaval defense market decreasedincreased $16 million primarily due to higher production on the Virginia-class submarine and DDG-51 guided missile destroyer programs. These increases were partially offset by lower general industrial sales of avionics and electronics products.$8 million due to the timing of an automotive contract completed in the prior year period.
Operating income decreased $1 of $130 million or 1%, to $98 million,was essentially flat compared with the same period in 2015,2018, while operating margin increased 40decreased 80 basis points to 21.1%22.4%. The decrease in operating income was driven primarily by lower Higher sales volumes inand favorable overhead absorption on our commercial avionics and electronics businessnaval defense products as well as athe benefits of our ongoing margin improvement initiatives were essentially offset by an unfavorable shift in mix within our defense electronic products, higher research and development expenses, and favorable contract adjustments within our naval defense business in the prior year adjustment of $4 million related to the receipt of a TDSS production contract. This decrease was partially offset by the benefit of our margin improvement and cost containment initiatives as well as favorable foreign currency translation of approximately $5 million.period which did not recur.
New orders decreased $58 increased $37 million as compared to the prior year primarily due to a TDSS production contract of $44 million received during the second quarter of 2015 as well as the timing of government orders.
Year ended December 31, 2015 compared to year ended December 31, 2014
Sales decreased $12 million, or 3%, to $477 million, from the comparable prior year period. The impacts of foreign currency decreased sales by $14 million. Within thestrong organic growth in our naval defense market, ground defense sales increased $10which contributed $28 million primarily due to higher sales of TDSS products on international ground defense platforms. This performance was partially offset by lower sales of avionics and electronics equipment in the aerospace defense market across various programs totaling $12 million.new orders.
Operating income increased $16 million, or 20%, to $99 million, compared with the same period in 2014, while operating margin increased 380 basis points to 20.7%. The increase in operating income is primarily due to favorable foreign currency impacts of $11 million and a favorable estimate to completion adjustment on a TDSS contract.
New orders decreased $118 million, as compared to the prior year, primarily due to the receipt of a $91 million new order in 2014 for our TDSS product and a lower level of orders in our avionics business.
Power
Sales in the Power segment are primarily to the power generation and naval defense markets.
The following tables summarize sales, operating income and margin, and new orders, within the Power segment.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | | Percent Change |
| (In thousands, except percentages) | | 2019 | | 2018 | | | 2019 vs. 2018 | |
| | | | | | | |
| Sales | | $ | 668,751 | | | $ | 648,283 | | | | 3 | % |
| Operating income | | 112,954 | | | 98,858 | | | | 14 | % |
| Operating margin | | 16.9 | % | | 15.2 | % | | | 170 bps | |
| New orders | | $ | 676,586 | | | $ | 647,891 | | | | 4 | % |
| Backlog | | $ | 916,884 | | | $ | 912,989 | | | | — | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Percent Changes |
| (In thousands, except percentages) | | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 |
| | | | | | | | | | | |
| Sales | | $ | 523,509 |
| | $ | 543,479 |
| | $ | 525,172 |
| | (4 | %) | | 3 | % |
| Operating income | | 76,472 |
| | 74,987 |
| | 51,449 |
| | 2 | % | | 46 | % |
| Operating margin | | 14.6 | % | | 13.8 | % | | 9.8 | % | | 80 | bps | | 400 | bps |
| New orders | | $ | 530,398 |
| | $ | 943,509 |
| | $ | 549,025 |
| | (44 | %) | | 72 | % |
| Backlog | | $ | 946,275 |
| | $ | 939,242 |
| | $ | 620,290 |
| | 1 | % | | 51 | % |
Components of sales and operating income growth (decrease):
| | | | | | | | | | | | | | |
| | 2019 vs. 2018 | | |
| | Sales | | Operating
Income |
| Organic | | (1) | % | | 11 | % |
| Acquisitions | | 4 | % | | 3 | % |
| Foreign currency | | — | % | | — | % |
| Total | | 3 | % | | 14 | % |
|
| | | | | | | | | | | | |
| | | 2016 vs. 2015 | | 2015 vs. 2014 |
| | | Sales | | Operating Income | | Sales | | Operating Income |
| Organic | | (4 | %) | | 2 | % | | 3 | % | | 46 | % |
| Acquisitions/divestitures | | — | % | | — | % | | — | % | | — | % |
| Foreign currency | | — | % | | — | % | | — | % | | — | % |
| Total | | (4 | %) | | 2 | % | | 3 | % | | 46 | % |
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales decreased increased $20 million, or 4%3%, to $524$669 million, from the comparable prior year period, primarily due to lower sales in the power generation market. This decrease is primarily due to lower aftermarket sales of $26 million supporting domestic and international nuclear operating reactors. Sales related to the AP1000 program were essentially flat as higher production revenues on the domestic and China Direct programs of $19 million were mostly offset by a one-time license fee of $20 million on the prior year China Direct order.
The decreases in the power generation market were partially offset by higher sales of $5 million inperiod. In the naval defense market. This wasmarket, sales increased $57 million primarily due to higher production on the Virginia-class submarine and CVN-80 aircraft carrier programs, which benefited sales $20 million and $16 million, respectively. The naval defense market also benefited from higher spares and service center sales of pumps and generators of $16 million supporting the new Ohio-class replacement submarine program and higher production levels of $5 million on the Electromagnetic Aircraft Launching System (EMALS) program.$17 million. These increases were partially offset by lower sales of $18$38 million in the power generation market primarily due to the timing of CVN-79 pumps and valves as production is substantially complete.on the AP1000 China Direct program.
Operating income increased $1$14 million, or 2%14%, to $76$113 million and operating margin increased 80170 basis points to 14.6%16.9%. The increases in operating income and operating margin were primarily driven by higher operating income of $11 million due to increased production volumesfavorable overhead absorption on higher naval defense sales and the absence of first year purchase accounting costs from our DRG acquisition, partially offset by lower sales on the AP1000 program and an unfavorable contract adjustment of $11.5 million recorded during the prior year period. These increases were partially offset by a one-time license fee of $20 million recorded during the prior year period. Within our nuclear aftermarket businesses, we experienced lower operating income and operating margin driven primarily by the unfavorable impact of sales volumes supporting domestic and international nuclear operating reactors. These decreases were partially offset by cost containment initiatives during the current period.China Direct program.
New orders decreased $413 increased $29 million as compared to the prior year primarily due to the receipt of a $468 million orderstrong organic growth in the prior year period for AP1000 reactor coolant pumps and certain intellectual property rights. This decrease was partially offset by the timing of funding for pumps and generators with government customers of $40 million.
Year ended December 31, 2015 compared to year ended December 31, 2014
Sales increased $18 million, or 3%, to $543 million, from the comparable prior year period. The increase in sales is primarily due tonaval defense market, which contributed $33 million of higher sales to the power generation market as a result of the China Direct order. The contract included a non-recurring fee of $20 million related to the right to procure AP1000 technology outside of China and the right to incorporate our technology into future generation reactor designs. The Company had no further performance obligations with regards to the sale of these rights. Additionally, we recognized production revenues of $13 million on the China Direct order. This was partially offset by lower nuclear aftermarket sales to domestic nuclear operating reactors of $21 million as a result of ongoing deferred spending on maintenance and upgrades.in new orders.
Operating income increased $24 million, or 46%, to $75 million and operating margin increased 400 basis points to 13.8%. The increase in operating income and operating margin was primarily due to a non-recurring fee as a result of the sale of certain rights described above. In addition, we recorded an unfavorable contract adjustment of $11.5 million on our long-term AP1000 China contract with Westinghouse, due to production modifications as a result of engineering and endurance testing. The unfavorable contract adjustment was largely offset by a termination order received on a portion of our domestic AP1000 contract. Additionally, despite lower sales, operating income in our nuclear aftermarket businesses improved as result of favorable sales mix and lower costs of sales due to various lean initiatives.
New orders increased $394 million to $944 million, compared with the same period in 2014, primarily due to the new AP1000 order of $468 million discussed above. This was partially offset by the timing of funding on naval defense orders of $65 million.
SUPPLEMENTARY INFORMATION
The table below depicts sales by end market. End market sales help provide an enhanced understanding of our businesses and the markets in which we operate. The table has been included to supplement the discussion of our consolidated operating results.
Net Sales by End Market
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | Percent change |
| (In thousands, except percentages) | | 2019 | | 2018 | | 2019 vs. 2018 | |
| | | | | | |
| Defense markets: | | | | | | |
| Aerospace | | $ | 416,841 | | | $ | 376,951 | | | 11 | % |
| Ground | | 93,432 | | | 97,131 | | | (4) | % |
| Naval | | 568,776 | | | 486,476 | | | 17 | % |
| Total Defense | | $ | 1,079,049 | | | $ | 960,558 | | | 12 | % |
| | | | | | |
| Commercial markets: | | | | | | |
| Aerospace | | $ | 433,038 | | | $ | 414,422 | | | 4 | % |
| Power Generation | | 392,173 | | | 431,793 | | | (9) | % |
| General Industrial | | 583,701 | | | 605,062 | | | (4) | % |
| Total Commercial | | $ | 1,408,912 | | | $ | 1,451,277 | | | (3) | % |
| | | | | | |
| Total Curtiss-Wright | | $ | 2,487,961 | | | $ | 2,411,835 | | | 3 | % |
|
| | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | Percent changes |
| (In thousands, except percentages) | | 2016 | | 2015 | | 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 |
| | | | | | | | | | | |
| Defense markets: | | | | | | | | | | |
| Aerospace | | $ | 296,287 |
| | $ | 304,521 |
| | $ | 290,604 |
| | (3 | %) | | 5 | % |
| Ground | | 84,280 |
| | 85,722 |
| | 74,066 |
| | (2 | %) | | 16 | % |
| Naval | | 401,279 |
| | 388,686 |
| | 381,335 |
| | 3 | % | | 2 | % |
| Other | | 11,884 |
| | 8,340 |
| | 8,610 |
| | 42 | % | | (3 | %) |
| Total Defense | | $ | 793,730 |
| | $ | 787,269 |
| | $ | 754,615 |
| | 1 | % | | 4 | % |
| | | | | | | | | | | |
| Commercial markets: | | | | | | | | | | |
| Aerospace | | $ | 397,258 |
| | $ | 398,529 |
| | $ | 422,888 |
| | — | % | | (6 | %) |
| Power Generation | | 408,376 |
| | 436,396 |
| | 429,779 |
| | (6 | %) | | 2 | % |
| General Industrial | | 509,567 |
| | 583,489 |
| | 635,844 |
| | (13 | %) | | (8 | %) |
| Total Commercial | | $ | 1,315,201 |
| | $ | 1,418,414 |
| | $ | 1,488,511 |
| | (7 | %) | | (5 | %) |
| | | | | | | | | | | |
| Total Curtiss-Wright | | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
| | (4 | %) | | (2 | %) |
Note: Certain amounts in the prior year have been reclassed to conform to the current year presentation.
Year ended December 31, 2016 compared to year ended December 31, 2015
Defense sales increased $6$118 million, or 1%12%, to $794$1,079 million, as compared to the prior year period, primarily due to higher sales in the naval and aerospace defense market. Naval defense sales increased primarily due to the development on the Ohio replacement submarine program of $16 million, higher production levels of $5 million on the EMALS program, and higher sales of $5 million supporting naval close-in weapon systems. These increases were partially offset by lower production of $12 million on the Virginia-class submarine program and decreased aircraft carrier production of $8 million due to the wind-down of the CVN-79 program. Lowermarkets. Higher sales in the aerospacenaval defense market were primarily due to reduced foreign military sales.
Commercialincreased production on the Virginia-class submarine and CVN-80 aircraft carrier programs, which benefited sales decreased $103 million, or 7%, to $1,315 million, as compared to the prior year period, primarily due to lower sales in the general industrial and power generation markets of $74$41 million and $28$11 million, respectively. LowerThe naval defense market also benefited from higher spares and service center sales in the general industrial market were primarily due to $46 million of reduced sales for our severe-service industrial valves and lower sales for our industrial vehicle, medical mobility, and industrial automation products of $7 million, $8$19 million and $6 million, respectively. Lowerincreased production of helicopter handling systems on the DDG-51 guided missile destroyer program, which resulted in a sales in the power generation market were primarily driven by lower aftermarket salesincrease of $26 million supporting domestic and international nuclear operating reactors.
Year ended December 31, 2015 compared to year ended December 31, 2014
Defense sales increased $33 million, or 4%, to $787 million, as compared to the prior year period, primarily due to higher sales in the aerospace and ground defense markets. Ground defense sales increased primarily due to higher sales of our TDSS product of $12 million, while sales$8 million. Sales in the aerospace defense market increased due to the incremental impact from our TCG acquisition, which contributed $11 million in sales. We also experienced higher sales of ourdemand for actuation systems on the F-35 fighter jet program as well as embedded computing products on fighter jets.supporting various helicopter and UAV programs, which resulted in sales increases of $9 million, $11 million, and $10 million, respectively.
Commercial sales decreased $70$42 million, or 5%3%, to $1,418$1,409 million, as compared to the prior year period, primarily due to lower sales in the power generation and general industrial and commercial aerospace markets. LowerThe sales decrease in the power generation market was primarily due to the timing of production on the AP1000 China Direct program, which reduced sales $33 million. In the general internationalindustrial market, we experienced lower demand for our surface treatment services and were drivennegatively impacted by lowerthe timing of an automotive contract completed in the prior year period. These decreases were partially offset by sales of our industrial valves of $33 million, lower surface technology services of $8 million, and various other industrial product sales of $9 million. Lower salesincreases in the commercial aerospace market, were driven by lower sales of avionics flight equipment products of $14 million.primarily due to higher demand for sensors products.
Liquidity and Capital Resources
Sources and Uses of Cash
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. 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.
Consolidated Statement of Cash Flows
| | | | December 31, | | Year ended December 31, | |
| (In thousands) | 2016 | | 2015 | | 2014 | (In thousands) | 2019 | | 2018 |
| Net cash provided by (used in): | | | | | | Net cash provided by (used in): | | | |
| Operating activities | $ | 423,197 |
| | $ | 162,479 |
| | $ | 331,766 |
| Operating activities | $ | 421,404 | | | $ | 336,273 | |
| Investing activities | (42,934 | ) | | (15,576 | ) | | 53,448 |
| Investing activities | (240,040) | | | (255,516) | |
| Financing activities | (96,141 | ) | | (289,218 | ) | | (92,438 | ) | Financing activities | (68,145) | | | (263,639) | |
| Effect of exchange rates | (18,971 | ) | | (19,104 | ) | | (17,954 | ) | Effect of exchange rates | 1,748 | | | (16,172) | |
| Net increase (decrease) in cash and cash equivalents | $ | 265,151 |
| | $ | (161,419 | ) | | $ | 274,822 |
| Net increase (decrease) in cash and cash equivalents | $ | 114,967 | | | $ | (199,054) | |
Year ended December 31, 2016 compared to year ended December 31, 2015
Operating Activities
Cash provided by operating activities increased $261$85 million to $423$421 million duringfrom the year ended December 31, 2016, as compared to thecomparable prior year period. The increase in net cash provided by operating activities was primarily due to a prior year period voluntary pension contribution of $145 million and collections in 2016 related to the AP1000 China Direct program of $102$50 million. Increases in income tax payments, net of refunds, of $50 millionNet cash provided during the current period were more thanalso benefited from higher collections of accounts receivable and lower inventory receipts, partially offset by improved collections due to working capital initiatives and a one-time $20 million benefit as a result of the interest rate swap termination.higher disbursements.
Investing Activities
Capital Expenditures
Our capital expenditures were $47$70 million and $53 million for 2019 and 2018, respectively. The increase in 2016 as compared to $36 million in 2015. Capitalcapital expenditures were greater in 2016, as compared to 2015,was primarily due to increased capitaladditional investment in athe new DRG facility expansion in our Commercial/Industrial segment.South Carolina. For 2017,2020, we anticipate capital expenditures of approximately $45$65 million to $55$75 million.
Divestitures
No material divestitures took place during 2016. In 2015, we disposed of four businesses aggregating to cash proceeds of $31 million.2019 or 2018.
Acquisitions
No acquisitions took place during 2016. In 2015,2019, we acquired one business withtwo businesses for a total purchase price of $13$185 million. In 2018, we acquired one business for a total purchase price of $210 million.
Future acquisitions will depend, in part, on the availability of financial resources at a cost of capital that meet our stringent criteria. As such, future acquisitions, if any, may be funded through the use of our cash and cash equivalents, through additional financing available under the credit agreement, or through new financing alternatives.
Financing Activities
Debt Issuances
There were no debt issuances in 2019 or significant principal payments2018. In 2018, we made a discretionary $50 million prepayment on outstanding notes in 2016 or 2015.our 2013 Notes.
Revolving Credit Agreement
As of December 31, 2016,2019, the Corporation had no borrowings outstanding under the 2012 Senior Unsecured Revolving Credit Agreement (the Credit Agreement or credit facility) and $47$33 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement atas of December 31, 20162019 was $453$467 million, which could be borrowed in full without violating any of our debt covenants.
Repurchase of Common Stock
During 2016,2019, the Company repurchased approximately 1,300,000417,000 shares of its common stock for $105$51 million. In 2015,2018, the Company repurchased approximately 4,257,0001,700,000 shares of its common stock for $294$199 million.
Dividends
During 20162019 and 2015,2018, the companyCompany made dividend payments of approximately $23$28 million and $24$26 million, respectively.
Year ended December 31, 2015 compared to year ended December 31, 2014
Operating Activities
Cash provided by operating activities decreased $169 million to $162 million during the year ended December 31, 2015, as compared to the prior year period. The change in cash used for operating activities was primarily due to a voluntary pension contribution of $145 million made during the first quarter of 2015 and higher advanced payments in 2014. As a result of the voluntary pension contribution we do not anticipate making contributions to the CW plan for the next five years.
Investing Activities
Capital Expenditures
Our capital expenditures were $36 million in 2015 as compared to $67 million in 2014. Capital expenditures were lower in 2015, as compared to 2014, due to prior year capital investments in a new building in our naval defense business and lower levels of capital spend across the organization.
Divestitures
During 2014, we committed to a plan to dispose of certain businesses in order to enhance our operating efficiencies and focus on our core strengths. In 2015, we disposed of four businesses aggregating to cash proceeds of $31 million, while in 2014, we disposed of four businesses aggregating to cash proceeds of $153 million.
Acquisitions
During 2015, we acquired one business and expect to continue to seek acquisitions that are consistent with our long-term growth strategy. A combination of cash resources, including cash on hand, and funds available under our credit agreement, were utilized to fund the acquisition, which totaled $13 million. In 2014, we acquired three businesses with a total purchase price of $34 million.
Financing Activities
Debt Issuances
There were no debt issuances or significant principal payments on outstanding notes in 2015 or 2014.
Revolving Credit Agreement
As of December 31, 2015, the Corporation had no borrowings outstanding under the 2012 Senior Unsecured Revolving Credit Agreement (the Credit Agreement or credit facility) and $37 million in letters of credit supported by the credit facility. The
unused credit available under the Credit Agreement at December 31, 2015 was $463 million, which could be borrowed in full without violating any of our debt covenants.
Repurchase of Common Stock
During 2015, the Company repurchased approximately 4,257,000 shares of its common stock for $294 million. In 2014, the Company repurchased approximately 976,000 shares of its common stock for $65 million.
Dividends
During 2015 and 2014, the company made dividend payments of approximately $24 million and $25 million, respectively.
Capital Resources
Cash in Foreign Jurisdictions
| | | | | | | | | | | |
| As of December 31, | | |
| (In thousands) | 2019 | | 2018 |
| United States of America | $ | 220,782 | | | | $ | 127,600 | |
| United Kingdom | 50,761 | | | | 29,731 | |
| European Union | 41,779 | | | | 43,703 | |
| Canada | 34,026 | | | | 35,526 | |
| China | 26,278 | | | | 22,229 | |
| Other foreign countries | 17,407 | | | | 17,277 | |
| Total cash and cash equivalents | $ | 391,033 | | | | $ | 276,066 | |
Cash and cash equivalents atas of December 31, 2016 were $554 million, of which $198 million were held by foreign subsidiaries. Our British subsidiaries held a substantial portion of the Company’s cash2019 and cash equivalents, totaling approximately $98 million at December 31, 2016. Cash and cash equivalents at December 31, 20152018 were $289 million, of which $247 million were held by foreign subsidiaries. Our Canadian and British subsidiaries held a substantial portion of the Company’s cash and cash equivalents at December 31, 2015, totaling approximately $86$391 million and $85$276 million, respectively. The increase in cash held by U.SU.S. subsidiaries during 2016,2019 as compared to 2015,2018 was primarily due to less cash used forrepatriation of $86 million. The increase in cash held by foreign subsidiaries during 2019 as compared to 2018 was primarily due to increased net cash receipts in the 2016 share repurchase program and the Company’s 2015 discretionary pension payment of $145 million.current period. There are no legal or economic restrictions absent certain regulatory approvals in China, where approximately $15 million of our foreign cash resides, on the ability of any of our subsidiaries to transfer funds. The Company regularly assesses its cash needs and the available sources to fund these needs. Outsidefunds, absent certain regulatory approvals in China, where approximately $26 million of certain anticipated repatriations where we have provided for the related deferred taxes, we currently intend to permanently reinvest our undistributed earnings. Our current assessment does not indicate the need to repatriate foreign cash and cash equivalentsresides. Refer to fund U.S. operations; however, this is subjectNote 12 to change basedthe Consolidated Financial Statements for impacts on changes in global economic conditions, changes in global tax rates, and changes inour foreign undistributed earnings due to the global geopolitical environment.Tax Act.
Cash Utilization
Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, and increased dividends to determine the most beneficial use of available capital resources. We believe that our cash and cash equivalents, cash flow from operations, available borrowings under the credit facility, and ability to raise additional capital through the credit markets are sufficient to meet both the short-term and long-term capital needs of the organization, including the return of capital to shareholders through dividends and share repurchases and growing our business through acquisitions.
Debt Compliance
As of December 31, 2016,2019, we were in compliance with all debt agreements and credit facility covenants, including our most restrictive covenant, which is our debt to capitalization ratio limit of 60%. As of December 31, 2016,2019, we had the ability to incur total additional indebtedness of $844 million$1.8 billion without violating our debt to capitalization covenant.
Future Commitments
Cash generated from operations should be adequate to meet our planned capital expenditures of approximately $45$65 million to $55$75 million and expected dividend payments of approximately $23$28 million in 2017.2020. There can be no assurance, however, that we will continue to generate cash from operations at the current level, or that these projections will remain constant throughout 2017.2020. If cash generated from operations is not sufficient to support these operating requirements and investing activities, we may be required to reduce capital expenditures, borrow from our existing credit line, refinance a portion of our existing debt, or obtain additional financing. While all companies are subject to economic risk, we believe that our cash and cash equivalents, cash flow from operations, and available borrowings are sufficient to meet both the short-term and long-term capital needs of the organization.
In 2015,January 2020 and February 2018, we made a discretionary pension contributioncontributions of $145$150 million and $50 million, respectively, to the Curtiss-Wright Pension Plan, and as a result do not anticipate making further contributions in the next five years.Plan. For more information on our pension and other postretirement benefits plans, see Note 1516 to the Consolidated Financial Statements.
The following table quantifies our significant future contractual obligations and commercial commitments as of December 31, 2016:2019:
| | | (In thousands) | | Total | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter | (In thousands) | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| Debt Principal Repayments | | $ | 950,668 |
| | $ | 150,668 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 100,000 |
| | $ | 700,000 |
| Debt Principal Repayments | | $ | 750,000 | | | $ | — | | | $ | 100,000 | | | $ | — | | | $ | 202,500 | | | $ | — | | | $ | 447,500 | |
| Interest Payment on Fixed Rate Debt | | 282,710 |
| | 39,206 |
| | 31,643 |
| | 31,643 |
| | 31,643 |
| | 31,397 |
| | 117,178 |
| |
| Operating Leases | | 169,446 |
| | 27,585 |
| | 23,587 |
| | 19,578 |
| | 16,202 |
| | 13,094 |
| | 69,400 |
| Operating Leases | | 205,479 | | | 32,528 | | | 29,729 | | | 23,432 | | | 21,168 | | | 18,640 | | | 79,982 | |
| Build-to-suit Lease | | 18,423 |
| | 1,374 |
| | 1,277 |
| | 1,309 |
| | 1,342 |
| | 1,375 |
| | 11,746 |
| |
| Interest Payments on Fixed Rate Debt | | Interest Payments on Fixed Rate Debt | | 168,821 | | | 29,710 | | | 29,465 | | | 25,870 | | | 23,248 | | | 18,378 | | | 42,150 | |
| Total | | $ | 1,421,247 |
| | $ | 218,833 |
| | $ | 56,507 |
| | $ | 52,530 |
| | $ | 49,187 |
| | $ | 145,866 |
| | $ | 898,324 |
| Total | | $ | 1,124,300 | | | $ | 62,238 | | | $ | 159,194 | | | $ | 49,302 | | | $ | 246,916 | | | $ | 37,018 | | | $ | 569,632 | |
We do not have material purchase obligations. Most of our raw material purchase commitments are made directly pursuant to specific contract requirements.
We enter into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to future performance on certain contracts to provide products and services and to secure advance payments we have received from certain international customers. AtAs of December 31, 2016,2019, we had contingent liabilities on outstanding letters of credit due as follows:
| | | (In thousands) | | Total | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Thereafter (1) | (In thousands) | | Total | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter |
| Letters of Credit | | $ | 47,245 |
| | $ | 36,899 |
| | $ | 5,345 |
| | $ | 2,094 |
| | $ | 1,994 |
| | $ | 612 |
| | $ | 301 |
| |
Letters of Credit (1) | | Letters of Credit (1) | | $ | 32,554 | | | $ | 26,582 | | | $ | 2,373 | | | $ | 542 | | | $ | 2,601 | | | $ | 456 | | | $ | — | |
(1)Amounts indicated as Thereafter are letters of credit that expire during the revolving credit agreement term but will automatically renew on the date of expiration. In addition, amounts exclude bank guarantees of approximately $12.8$10.8 million.
Critical Accounting Estimates and Policies
Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial 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. We believe that the following are some of the
more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations:
Revenue Recognition
We account for revenues in accordance with ASC 606, Revenue from Contracts with Customers, which was adopted as of January 1, 2018 on a modified retrospective basis. Under ASC 606, revenue is recognized when control of a promised good and/or service is transferred to a customer at a transaction price that reflects the consideration that we expect to be entitled to in exchange for that good and/or service. The realizationunit of account is a performance obligation whereby a contract's transaction price is allocated to each distinct performance obligation and recognized as revenue referswhen the respective performance obligation is satisfied. In certain instances, the transaction price may include estimated amounts of variable consideration including but not limited to incentives, awards, price escalations, liquidated damages, and penalties, only to the timingextent that it is probable that a significant reversal of its recognitioncumulative revenue recognized to date around such variable consideration will not occur. We estimate variable consideration to be included in our accountsthe transaction price using either the expected value method or most likely amount method, contingent upon the facts and is generally considered realized or realizable and earned when the earnings process is substantially complete and allcircumstances of the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) our price to our customer is fixed or determinable; and 4) collectability is reasonably assured.
We determine the appropriate method by which we recognize revenue by analyzing the terms and conditions of each contract or arrangement entered intospecific arrangement. Variable consideration associated with our customers. Revenuerespective arrangements is recognizednot typically constrained.
Performance obligations are satisfied either at a point-in-time or on certain product sales, which represents approximately 52% of our 2016 total net sales, as production unitsan over-time basis. Contracts that qualify for over-time revenue recognition are shipped and title and risk of loss have transferred. Revenue is recognized on service type contracts, which represents approximately 19% of our 2016 total net sales, as services are rendered. The majority of our service revenues are generated within our Commercial/Industrial segment. The significant estimates we make in recognizing revenue relate primarily to long-term contracts generally accounted for using the cost-to-cost method of percentage-of-completion accounting that are associated with the design, development, and manufacture of highly engineered industrial products used in commercial and defense applications.
Percentage-of-completion accounting
applications and generally span between 2-5 years in duration. Revenue recognized usingon an over-time basis for the cost-to-cost methodyear ended December 31, 2019 accounted for approximately 49% of percentage-of-completion accounting represented approximately 23% of our total net sales in 2016. The typical length of our contracts that utilize the cost-to-cost method of percentage-of-completion accountingsales. Typically, over-time revenue recognition is 2-5 years. This method recognizes revenue and profit as the contracts progress towards completion. Under the cost-to-cost method of percentage-of-completion accounting, sales and profits are recorded based on the ratioutilization of an input measure used to measure progress, such as costs incurred to an estimate of costs at completion.
date relative to total estimated costs. Application of the cost-to-costan over-time revenue recognition method of percentage-of-completion accounting requires the use of reasonable and dependable estimates of the future material, labor, and overhead costs that will be incurred andas well as a disciplined cost estimating system in which all functions of the business are integrally involved. These estimates are determined based uponon industry knowledge and experience of our engineers, project managers, and financial staff. These estimates are significant and reflect changesChanges in cost and operating performance throughout the contract and could have a significant impact on our operating performance. Adjustments to original estimates for contract revenue,total estimated costs at completion,are
recognized using the cumulative catch-up method of accounting which recognizes the cumulative effect of the changes on current and the estimated total profit are often required as work progresses throughout the contract and more information is obtained, even though the scope of work under the contract may not change. These changes are recorded on a cumulative basisprior periods in the period they are determined to be necessary.
Under the cost-to-cost method of percentage-of-completion accounting, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses are determined to be probable. However, costs may be deferred in anticipation of future contract sales if follow-on production orders are deemed probable. Amounts representing contract change orders are included in revenue only when they can be estimated reliably and their realization is reasonably assured.
In 2015, the Corporation recorded additional costs of $11.5 million related to its long-term contract with Westinghouse to deliver RCPs for the AP1000 nuclear power plants in China. The increase in costs was due to a change in estimate related to production modifications that are the result of engineering and endurance testing.current period. During the twelve months ended December 31, 2016, 2015,2019, 2018, and 2014,2017, there were no other individual significant changes in estimated contract costs.
Multiple-element arrangements
From time to time, we may enter into multiple-element arrangementsIf a performance obligation does not qualify for over-time revenue recognition, revenue is then recognized at the point-in-time in which control of the distinct good or service is transferred to the customer, typically based upon the terms of delivery. Revenue recognized at a customerpoint-in-time for the year ended December 31, 2019 accounted for approximately 51% of total net sales.
Timing of revenue recognition and cash collection may purchase a combinationresult in billed receivables, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Consolidated Balance Sheet. Contract assets primarily relate to our right to consideration for work completed but not billed as of goods, services, orthe reporting date. Contract assets are transferred to billed receivables when the rights to intellectual property. We followconsideration become unconditional. Contract liabilities primarily consist of customer advances received prior to revenue being earned. Contract assets and contract liabilities are reported in the multiple element accounting guidance"Receivables, net" and "Deferred revenue" lines, respectively, within the Consolidated Balance Sheet.
As we adopted ASC 605-25606 using a modified retrospective method, our Consolidated Financial Statements for such arrangements which require: (1) determining the separate units of accounting; (2) determining whetheryear ended December 31, 2017 were not retrospectively adjusted. For the separate units of accounting have stand-alone value; and (3) measuring and allocatingyear ended December 31, 2017, revenue was recognized when the arrangement consideration. We allocate the arrangement consideration in accordanceearnings process was considered substantially complete with the selling price hierarchy which requires: (1) the use of vendor-specific objective evidence (VSOE), if available; (2) if VSOE is not available, the use of third-party evidence (TPE); and, if TPE is not available, (3) our best-estimate of selling price (BESP). During 2016, the Corporation did not enter into any significant multiple-element arrangements. In 2015, approximately 1%all of the Company's net salesfollowing criteria met: 1) persuasive evidence of an arrangement existed; 2) delivery occurred or services were the result of the sale of certain intellectual property licensing rights within a multiple-element arrangement with China for AP1000 reactor coolant pumps (China Direct order). The Company had no further performance obligations with regardsrendered; 3) our price to the salecustomer was fixed or determinable; and 4) collectability was reasonably assured. We determined the appropriate revenue recognition method by analyzing the terms and conditions of these perpetual rights.
each contract. Revenue was recognized on product sales as production units were shipped and title and risk of loss was transferred. Revenue was recognized on service-type contracts as services were rendered. The remaindersignificant estimates made in recognizing revenue were primarily for long-term contracts, which were generally accounted for using the cost-to-cost method of percentage of completion accounting. Under the cost-to-cost method, profits were recorded pro-rata, based upon estimates of direct and indirect costs to complete such contracts. Any changes in estimates of contract related to the production of sixteen RCPs, is beingsales, costs, or profits were recognized using percentage-of-completion accounting through 2021.the cumulative catch-up method of accounting.
Inventory
Inventory costs include materials, direct labor, purchasing, and manufacturing overhead costs, which are stated at the lower of cost or market, where market is limited to the net realizable value. We estimate the net realizable value of our inventories and establish reserves to reduce the carrying amount of these inventories to net realizable value, as necessary. We continually evaluate the adequacy of the inventory reserves by reviewing historical scrap rates, on-hand quantities as compared with historical and projected usage levels, and other anticipated contractual requirements. We generally hold reserved inventory for extended periods before scrapping and disposing of the reserved inventory, which contributes to a higher level of reserved inventory relative to the level of annual inventory write-offs.
We purchase materials for the manufacture of components for sale. The decision to purchase a set quantity of a particular item is influenced by several factors including: current and projected price, future estimated availability, existing and projected contracts to produce certain items, and the estimated needs for our businesses.
For certain of our long-term contracts, we utilize progress billings, which represent amounts billed to customers prior to the delivery of goods and services and are recorded as a reduction to inventory and receivables. Amounts are first applied to unbilled receivables and any remainder is then applied to inventory. Progress billings are generally based on costs incurred, including direct costs, overhead, and general and administrative costs.
Pension and Other Postretirement Benefits
In consultation with our actuaries, we determine the appropriate assumptions for use in determining the liability for future pension and other postretirement benefits. The most significant of these assumptions include the discount rates used to determine plan obligations, the expected return on plan assets, and the number of employees who will receive benefits, their tenure, their salary levels, and their projected mortality. Changes in these assumptions, if significant in future years, may have an effect on our pension and postretirement expense, associated pension and postretirement assets and liabilities, and our annual cash requirements to fund these plans.
The discount rate used to determine the plan benefit obligations as of December 31, 2016,2019, and the annual periodic costs for 2017,2020, was decreased from 4.25%4.28% to 4.10%3.22% for the Curtiss-Wright Pension Plan, and from 4.25%4.19% to 3.93%3.10% for the nonqualified benefit plan, to reflect current economic conditions, and a change in estimate in determining discount rates based on the spot rate, or full yield curve, method.conditions. The rates reflect the hypothetical rates at which the projected benefit obligations could be effectively settled or paid out to participants on that date. We determine our discount rates for past service liabilities and service cost utilizing a select bond yield curve developed by our actuaries, by using the rates of return on high-quality, fixed-income corporate bonds available at the measurement date with maturities that match the plan’s expected cash outflows for benefit payments. Interest cost is determined by applying the spot rate from the full yield curve to each anticipated benefit payment. The discount rate changes contributed to an increase in the benefit obligation of $12$110 million in the CW plans.
The rate of compensation increase for base pay in the pension plans was unchanged at a weighted average of 3.4%3.5% based upon a graded scale of 5.0%4.9% to 3.0%2.9% that decrements as pay increases, which reflects the experience over past years and the Company’s expectation of future salary increases. We also utilizedupdated our mortality assumptions to utilize the RP-2014 mortalityPri-2012 tables published by the Society of Actuaries in October 2019, and updated the projected mortality scale to MP-2016,MP-2019, which reflects a slower rate of future mortality improvements than the previous MP-2015MP-2018 table utilized. This changeThese changes contributed to a decrease in the benefit obligation of $8 million.$3 million in all U.S. plans.
The overall expected return on assets assumption is based primarily on the 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 provided by our investment consultants. Based on a review of market trends, actual returns on plan assets, and other factors, the Company’s expected long-term rate of return on plan assets was loweredreduced to 8.00% at7.50% as of December 31, 2016,2019, which will be utilized for determining 20172020 pension cost. An expected long-term rate of return of 8.25%8.00% was used for determining 2016 expense, with 8.5% used for determining 20152019, 2018 and 20142017 pension expense.
The timing and amount of future pension income or expense to be recognized each year is dependent on the demographics and expected compensation of the plan participants, the expected interest rates in effect in future years, inflation, and the actual and expected investment returns of the assets in the pension trust.
The funded status of the Curtiss-Wright Pension Plan decreased by $2.3$24 million in 2016,2019, primarily driven by a decrease in market interest rates as of December 31, 2016.2019. This decrease was partially offset by favorable changes to assumed mortality and favorable liability and asset experience during 2016.due to strong market performance in 2019.
The following table reflects the impact of changes in selected assumptions used to determine the funded status of the Company’s U.S. qualified and nonqualified pension plans as of December 31, 20162019 (in thousands, except for percentage point change):
| | | | | | | | | | | | | | | | | | | | |
| Assumption | | Percentage
Point Change | | Increase in
Benefit
Obligation | | Increase in
Expense |
| Discount rate | | (0.25) | % | | $25,800 | | | $2,600 | |
| Rate of compensation increase | | 0.25 | % | | $2,500 | | | $500 | |
| Expected return on assets | | (0.25) | % | | — | | | $2,100 | |
|
| | | | | | | | | | | |
| Assumption | | Percentage Point Change | | Increase in Benefit Obligation | | Increase in Expense |
| Discount rate | | (0.25 | )% | |
| $19,000 |
| |
| $2,000 |
|
| Rate of compensation increase | | 0.25 | % | |
| $3,000 |
| |
| $600 |
|
| Expected return on assets | | (0.25 | )% | | — |
| |
| $1,600 |
|
See Note 1516 to the Consolidated Financial Statements for further information on our pension and postretirement plans.
Purchase Accounting
We apply the purchase method of accounting to our acquisitions. Under this method, we allocate the cost of business acquisitions to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition, commonly referred to as the purchase price allocation. As part of the purchase price allocations for our business acquisitions, identifiable intangible assets are recognized as assets apart from goodwill if they arise from contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented, or exchanged. The purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with any excess recorded as goodwill. We determine the fair values of such assets and liabilities, generally in consultation with third-party valuation advisors. Such fair value assessments require significant judgments and estimates such as projected cash flows, discount rates, royalty rates, and remaining useful lives that can differ materially from actual results. The analysis, while substantially complete, is finalized no later than twelve months from the date of acquisition. There were no acquisitions in 2016.
Goodwill
We have $1.0$1.2 billion in goodwill as of December 31, 2016.2019. Generally, the largest separately identifiable asset from the businesses that we acquire is the value of their assembled workforces, which includes the additional benefit received from management, administrative, marketing, business development, engineering, and technical employees of the acquired businesses. The success of our acquisitions, including the ability to retain existing business and to successfully compete for and win new business, is based on the additional benefit received from management, administrative, marketing, and business development, scientific, engineering, and technical skills and knowledge of our employees rather than on productive capital (plant and equipment, technology, and intellectual property). Therefore, since intangible assets for assembled workforces are part of goodwill, the substantial majority of the intangible assets for our acquired business acquisitions are recognized as goodwill.
We test for goodwill impairment annually, at the reporting unit level, in the fourth quarter, which coincides with the preparation of our strategic operating plan. Additionally, goodwill is tested for impairment when an event occurs or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company performsWe perform either a quantitative or qualitative assessment to assess if the fair value of itsthe respective reporting unitsunit exceeds its carrying value. The qualitative goodwill impairment assessment requires evaluating factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. As part of our goodwill qualitative assessment process for each reporting unit, when utilized, we evaluate various factors that are specific to the reporting unit as well as industry and macroeconomic factors in order to determine whether it is reasonably likely to have a material impact on the fair value of our reporting units. Examples of the factors that are considered include the results of the most recent impairment test, current and long-range forecasts, and changes in the strategic outlook or organizational structure of the
reporting units. The long-range financial forecasts of the reporting units are compared to the forecasts used in the prior year analysis to determine if management expectations for the business have changed.
Actual results may differ from those estimates. When performing the quantitative assessment to calculate the fair value of a reporting unit, we consider both comparative market multiples as well as estimated discounted cash flows for the reporting unit. The significant estimates and assumptions include, but are not limited to, revenue growth rates, operating margins, and future economic and market conditions. The discount rates are based upon the reporting unit’s weighted average cost of capital. As a supplement, we conduct additional sensitivity analysis to assess the risk for potential impairment based upon changes in the key assumptions such as the discount rate, expected long-term growth rate, and cash flow projections. If an impairment is identified, the second step is to measure the impairment loss by comparing the implied fair value of goodwill with the carrying value of the goodwill on the reporting unit. Based upon the completion of our annual test, which included qualitative and quantitative assessments, we determined that there was no impairment of valuegoodwill and that all reporting units’ estimated fair values were substantially in excess of their carrying amounts. Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions that we believe are reasonable but inherently uncertain. Therefore, it is not reasonably likely that significant changes in these estimates would occur that would result in an impairment charge.
Other Intangible Assets
Other intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, and trademarks. Intangible assets are recorded at their fair values as determined through purchase accounting, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from follow onfollow-on sales. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which generally range from 1 to 20 years. Customer-related intangibles primarily consist of customer relationships, which reflect the value of the benefit derived from the incremental revenue and related cash flows as a direct result of the customer relationship. We review the recoverability of all intangible assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. We would record any impairment in the reporting period in which it has been identified.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to certain market risks from changes in interest rates and foreign currency exchange rates as a result of our global operating and financing activities. We seek to minimize any material risks from foreign currency exchange rate fluctuations through our normal operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We used forward foreign currency contracts to manage our currency rate exposures during the year ended December 31, 2016,2019, and, in order to manage our interest rate risk, we may, from time to time, enter into interest rate swaps to balance the ratio of fixed to floating rate debt. We do not use such instruments for trading or other speculative purposes. Information regarding our accounting policy on financial instruments is contained in Note 1 to the Consolidated Financial Statements.
Interest Rates
The market risk for a change in interest rates relates primarily to our debt obligations. Our fixed rate interest exposure without consideration of our interest rate swap agreements, was 100% foras of December 31, 20162019 and December 31, 2015. In order to manage our interest rate exposure, from time to time, we enter into interest rate swap agreements to manage our mix of fixed-rate and variable-rate debt. In 2016, we terminated our previous interest rate swap agreements and did not enter into any interest rate swap agreements.2018. As of December 31, 2016,2019, a change in interest rates of 1% would not have a material impact on the consolidated interest expense. In 2015, we had interest rate swap agreements in place. As of December 31, 2015, with the interest rate swap agreements that were in place, our fixed rate interest exposure was 58%. Information regarding our Senior Notes and Revolving Credit Agreement is contained in Note 1213 to the Consolidated Financial Statements.
Foreign Currency Exchange Rates
Although the majority of our business is transacted in U.S. dollars, we do have market risk exposure to changes in foreign currency exchange rates, primarily as it relates to the value of the U.S. dollar versus the British Pound, Canadian dollar, the British Pound, the Euro, and the Swiss franc.Euro. Any significant change against the U.S. dollar in the value of the currencies of those countries in which we do business could have an effect on our business, financial condition, and results of operations. If foreign exchange rates were to collectively weaken or strengthen against the U.S. dollar by 10%, net earnings would have been reduceddecreased or increased, respectively, by approximately $14$6 million as it relates exclusively to foreign currency exchange rate exposures.
Financial instruments expose us to counter-party credit risk for non-performance and to market risk for changes in interest and foreign currency rates. We manage exposure to counter-party credit risk through specific minimum credit standards,
diversification of counter-parties, and procedures to monitor concentrations of credit risk. We monitor the impact of market risk on the fair value and cash flows of our investments by investing primarily in investment grade interest-bearing securities, which have short-term maturities. We attempt to minimize possible changes in interest and currency exchange rates to amounts that are not material to our consolidated results of operations and cash flows.
Item 8. Financial Statements and Supplementary Data.
CONSOLIDATED STATEMENTS OF EARNINGS
| | | | | For the years ended December 31, | | For the years ended December 31, | |
| (In thousands, except per share data) | | 2016 | | 2015 | | 2014 | (In thousands, except per share data) | | 2019 | | 2018 | | 2017 |
| | | | | | | | | | | | | |
| Net sales | |
|
| |
|
| |
|
| Net sales | |
| Product sales | | $ | 1,714,358 |
| | $ | 1,796,802 |
| | $ | 1,815,028 |
| Product sales | | $ | 2,073,530 | | | $ | 1,993,249 | | | $ | 1,854,216 | |
| Service sales | | 394,573 |
| | 408,881 |
| | 428,098 |
| Service sales | | 414,431 | | | 418,586 | | | 416,810 | |
| Total net sales | | 2,108,931 |
| | 2,205,683 |
| | 2,243,126 |
| Total net sales | | 2,487,961 | | | 2,411,835 | | | 2,271,026 | |
| | | | | | | | | | | | | |
| Cost of sales | |
|
| |
|
| |
|
| Cost of sales | |
| Cost of product sales | | 1,100,287 |
| | 1,156,596 |
| | 1,190,714 |
| Cost of product sales | | 1,329,761 | | | 1,272,599 | | | 1,198,881 | |
| Cost of service sales | | 258,161 |
| | 265,832 |
| | 275,896 |
| Cost of service sales | | 259,455 | | | 267,975 | | | 271,360 | |
| Total cost of sales | | 1,358,448 |
| | 1,422,428 |
| | 1,466,610 |
| Total cost of sales | | 1,589,216 | | | 1,540,574 | | | 1,470,241 | |
| Gross profit | | 750,483 |
| | 783,255 |
| | 776,516 |
| Gross profit | | 898,745 | | | 871,261 | | | 800,785 | |
| | | | | | | | |
| Research and development expenses | | 58,592 |
| | 60,837 |
| | 67,842 |
| Research and development expenses | | 72,520 | | | 64,525 | | | 61,393 | |
| Selling expenses | | 111,228 |
| | 121,482 |
| | 128,005 |
| Selling expenses | | 120,861 | | | 126,641 | | | 121,873 | |
| General and administrative expenses | | 272,565 |
| | 290,319 |
| | 298,296 |
| General and administrative expenses | | 301,411 | | | 306,469 | | | 292,399 | |
| Operating income | | 308,098 |
| | 310,617 |
| | 282,373 |
| Operating income | | 403,953 | | | 373,626 | | | 325,120 | |
| Interest expense | | 41,248 |
| | 36,038 |
| | 35,794 |
| Interest expense | | 31,347 | | | 33,983 | | | 41,471 | |
| Other income, net | | 1,111 |
| | 615 |
| | 365 |
| Other income, net | | 23,856 | | | 16,596 | | | 15,970 | |
| Earnings before income taxes | | 267,961 |
| | 275,194 |
| | 246,944 |
| Earnings before income taxes | | 396,462 | | | 356,239 | | | 299,619 | |
| Provision for income taxes | | (78,579 | ) | | (82,946 | ) | | (76,995 | ) | Provision for income taxes | | (88,879) | | | (80,490) | | | (84,728) | |
| Earnings from continuing operations | | 189,382 |
| | 192,248 |
| | 169,949 |
| |
| Loss from discontinued operations, net of taxes | | (2,053 | ) | | (46,787 | ) | | (56,611 | ) | |
| Net earnings | | $ | 187,329 |
| | $ | 145,461 |
| | $ | 113,338 |
| Net earnings | | $ | 307,583 | | | $ | 275,749 | | | $ | 214,891 | |
| | | | | | | | | | | | | |
| Basic earnings per share: | | |
| | |
| | |
| |
| Earnings from continuing operations | | $ | 4.27 |
| | $ | 4.12 |
| | $ | 3.54 |
| |
| Loss from discontinued operations | | (0.05 | ) | | (1.00 | ) | | (1.18 | ) | |
| Total | | $ | 4.22 |
| | $ | 3.12 |
| | $ | 2.36 |
| |
| Basic earnings per share | | Basic earnings per share | | $ | 7.20 | | | $ | 6.28 | | | $ | 4.86 | |
| Diluted earnings per share: | | |
| | |
| | |
| Diluted earnings per share: | | $ | 7.15 | | | $ | 6.22 | | | $ | 4.80 | |
| Earnings from continuing operations | | $ | 4.20 |
| | $ | 4.04 |
| | $ | 3.46 |
| |
| Loss from discontinued operations | | (0.05 | ) | | (0.99 | ) | | (1.15 | ) | |
| Total | | $ | 4.15 |
| | $ | 3.05 |
| | $ | 2.31 |
| |
| | Dividends per share | | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
| Dividends per share | | $ | 0.66 | | | $ | 0.60 | | | $ | 0.56 | |
| | Weighted average shares outstanding: | | | | | | | Weighted average shares outstanding: | |
| Basic | | 44,389 |
| | 46,624 |
| | 48,019 |
| Basic | | 42,739 | | | 43,892 | | | 44,182 | |
| Diluted | | 45,045 |
| | 47,616 |
| | 49,075 |
| Diluted | | 43,016 | | | 44,316 | | | 44,761 | |
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| | | | | | |
| Net earnings | | $ | 307,583 | | | $ | 275,749 | | | $ | 214,891 | |
| Other comprehensive income | | | | | | |
Foreign currency translation, net of tax (1) | | 18,447 | | | (52,440) | | | 77,942 | |
Pension and postretirement adjustments, net of tax (2) | | (29,017) | | | (19,167) | | | (3,026) | |
| Other comprehensive income (loss), net of tax | | (10,570) | | | (71,607) | | | 74,916 | |
| Comprehensive income | | $ | 297,013 | | | $ | 204,142 | | | $ | 289,807 | |
|
| | | | | | | | | | | | |
| | | For the years ended December 31, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| | | | | | | |
| Net earnings | | $ | 187,329 |
| | $ | 145,461 |
| | $ | 113,338 |
|
| Other comprehensive income (loss) | | |
| | |
| | |
|
Foreign currency translation, net of tax (1) | | (64,840 | ) | | (87,527 | ) | | (79,386 | ) |
Pension and postretirement adjustments, net of tax (2) | | (988 | ) | | (9,990 | ) | | (74,284 | ) |
| Other comprehensive loss, net of tax | | (65,828 | ) | | (97,517 | ) | | (153,670 | ) |
| Comprehensive income (loss) | | $ | 121,501 |
| | $ | 47,944 |
| | $ | (40,332 | ) |
| |
(1)
| The tax benefit included in other comprehensive income (loss) for foreign currency translation adjustments for 2016, 2015, and 2014 were $1.7 million, $2.7 million, and $2.1 million, respectively. |
| |
(2)
| The tax benefit (expense) included in other comprehensive income (loss) for pension and postretirement adjustments for 2016, 2015, and 2014 were ($1.7) million, $9.5 million, and $41.3 million, respectively. |
See notes to consolidated financial statements(1)The tax benefit (expense) included in other comprehensive income for foreign currency translation adjustments for 2019, 2018, and 2017 were ($0.1) million, $0.8 million, and ($1.9) million, respectively.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | | |
| | | At December 31, |
| (In thousands, except share data) | | 2016 | | 2015 |
| | | | | |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 553,848 |
| | $ | 288,697 |
|
| Receivables, net | | 463,062 |
| | 566,289 |
|
| Inventories, net | | 366,974 |
| | 379,591 |
|
| Other current assets | | 30,927 |
| | 40,306 |
|
| Total current assets | | 1,414,811 |
| | 1,274,883 |
|
| Property, plant, and equipment, net | | 388,903 |
| | 413,644 |
|
| Goodwill | | 951,057 |
| | 972,606 |
|
| Other intangible assets, net | | 271,461 |
| | 310,763 |
|
| Other assets | | 11,549 |
| | 17,715 |
|
| Total assets | | $ | 3,037,781 |
| | $ | 2,989,611 |
|
| LIABILITIES | | | | |
| Current liabilities: | | | | |
| Current portion of long-term and short-term debt | | $ | 150,668 |
| | $ | 1,259 |
|
| Accounts payable | | 177,911 |
| | 163,286 |
|
| Accrued expenses | | 130,239 |
| | 131,863 |
|
| Income taxes payable | | 18,274 |
| | 7,956 |
|
| Deferred revenue | | 170,143 |
| | 181,671 |
|
| Other current liabilities | | 28,027 |
| | 37,190 |
|
| Total current liabilities | | 675,262 |
| | 523,225 |
|
| Long-term debt | | 815,630 |
| | 951,946 |
|
| Deferred tax liabilities, net | | 49,722 |
| | 54,447 |
|
| Accrued pension and other postretirement benefit costs | | 107,151 |
| | 103,723 |
|
| Long-term portion of environmental reserves | | 14,024 |
| | 14,017 |
|
| Other liabilities | | 84,801 |
| | 86,830 |
|
| Total liabilities | | 1,746,590 |
| | 1,734,188 |
|
| Contingencies and Commitments (Notes 12, 16 and 18) | |
|
| |
|
|
| STOCKHOLDERS’ EQUITY | | | | |
| Common stock, $1 par value,100,000,000 shares authorized at December 31, 2016 and 2015; 49,187,378 shares issued at December 31, 2016 and 49,189,702 at December 31, 2015; outstanding shares were 44,181,050 at December 31, 2016 and 44,621,348 at December 31, 2015. | | 49,187 |
| | 49,190 |
|
| Additional paid in capital | | 129,483 |
| | 144,923 |
|
| Retained earnings | | 1,754,907 |
| | 1,590,645 |
|
| Accumulated other comprehensive loss | | (291,756 | ) | | (225,928 | ) |
| Common treasury stock, at cost (5,006,328 shares at December 31, 2016 and 4,568,354 shares at December 31, 2015) | | (350,630 | ) | | (303,407 | ) |
| Total stockholders' equity | | 1,291,191 |
| | 1,255,423 |
|
| Total liabilities and stockholders’ equity | | $ | 3,037,781 |
| | $ | 2,989,611 |
|
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
| | | | | | | | | | | | | | |
| | As of December 31, | | |
| (In thousands, except share data) | | 2019 | | 2018 |
| | | | |
| ASSETS | | | | |
| Current assets: | | | | |
| Cash and cash equivalents | | $ | 391,033 | | | $ | 276,066 | |
| Receivables, net | | 632,194 | | | 593,755 | |
| Inventories, net | | 424,835 | | | 423,426 | |
| Other current assets | | 81,729 | | | 50,719 | |
| Total current assets | | 1,529,791 | | | 1,343,966 | |
| Property, plant, and equipment, net | | 385,593 | | | 374,660 | |
| Goodwill | | 1,166,680 | | | 1,088,032 | |
| Other intangible assets, net | | 479,907 | | | 429,567 | |
| Operating lease right-of-use assets, net | | 165,490 | | | — | |
| Other assets | | 36,800 | | | 19,160 | |
| Total assets | | $ | 3,764,261 | | | $ | 3,255,385 | |
| LIABILITIES | | | | |
| Current liabilities: | | | | |
| Current portion of long-term and short-term debt | | $ | — | | | $ | 243 | |
| Accounts payable | | 222,000 | | | 232,983 | |
| Accrued expenses | | 164,744 | | | 166,954 | |
| Income taxes payable | | 7,670 | | | 5,811 | |
| Deferred revenue | | 276,115 | | | 236,508 | |
| Other current liabilities | | 74,202 | | | 44,829 | |
| Total current liabilities | | 744,731 | | | 687,328 | |
| Long-term debt | | 760,639 | | | 762,313 | |
| Deferred tax liabilities | | 80,159 | | | 47,121 | |
| Accrued pension and other postretirement benefit costs | | 138,635 | | | 101,227 | |
| Long-term operating lease liability | | 145,124 | | | — | |
| Long-term portion of environmental reserves | | 15,026 | | | 15,777 | |
| Other liabilities | | 105,575 | | | 110,838 | |
| Total liabilities | | 1,989,889 | | | 1,724,604 | |
| Contingencies and Commitments (Notes 9, 13, and 18) | | | | |
| STOCKHOLDERS’ EQUITY | | | | |
| Common stock, $1 par value,100,000,000 shares authorized as of December 31, 2019 and December 31, 2018; 49,187,378 shares issued as of December 31, 2019 and December 31, 2018; outstanding shares were 42,680,215 as of December 31, 2019 and 42,772,417 as of December 31, 2018 | | 49,187 | | | 49,187 | |
| Additional paid in capital | | 116,070 | | | 118,234 | |
| Retained earnings | | 2,497,111 | | | 2,191,471 | |
| Accumulated other comprehensive loss | | (325,274) | | | (288,447) | |
| Common treasury stock, at cost (6,507,163 shares as of December 31, 2019 and 6,414,961 shares as of December 31, 2018) | | (562,722) | | | (539,664) | |
| Total stockholders' equity | | 1,774,372 | | | 1,530,781 | |
| Total liabilities and stockholders’ equity | | $ | 3,764,261 | | | $ | 3,255,385 | |
|
| | | | | | | | | | | | |
| | | For the years ended December 31, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Cash flows from operating activities: | | | | | | |
| Net earnings | | $ | 187,329 |
| | $ | 145,461 |
| | $ | 113,338 |
|
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 96,008 |
| | 100,810 |
| | 118,931 |
|
| (Gain) loss on sale of businesses | | (845 | ) | | 16,991 |
| | 29,184 |
|
| (Gain) loss on fixed asset disposals | | (2,069 | ) | | (945 | ) | | 632 |
|
| Deferred income taxes | | 1,224 |
| | 63,535 |
| | (27,241 | ) |
| Share-based compensation | | 9,478 |
| | 9,473 |
| | 8,500 |
|
| Impairment of assets | | — |
| | — |
| | 3,202 |
|
| Impairment of assets held for sale | | — |
| | 40,813 |
| | 41,369 |
|
| Changes in operating assets and liabilities, net of businesses acquired and disposed of: | | | | | | |
| Receivables, net | | 91,692 |
| | (77,106 | ) | | 12,845 |
|
| Inventories, net | | 4,391 |
| | (4,039 | ) | | (19,375 | ) |
| Progress payments | | 2,583 |
| | 3,680 |
| | (6,971 | ) |
| Accounts payable and accrued expenses | | 4,125 |
| | (447 | ) | | 16,147 |
|
| Deferred revenue | | (11,084 | ) | | 4,839 |
| | 24,471 |
|
| Income taxes | | 11,797 |
| | (7,436 | ) | | 38,946 |
|
| Net pension and postretirement liabilities | | 3,405 |
| | (139,610 | ) | | (26,431 | ) |
| Termination of interest rate swap | | 20,405 |
| | — |
| | — |
|
| Other | | 4,758 |
| | 6,460 |
| | 4,219 |
|
| Net cash provided by operating activities | | 423,197 |
| | 162,479 |
| | 331,766 |
|
| Cash flows from investing activities: | | | | | | |
| Proceeds from sales and disposals of long-lived assets | | 3,674 |
| | 2,277 |
| | 594 |
|
| Proceeds from divestitures | | 1,027 |
| | 31,344 |
| | 152,965 |
|
| Proceeds from insurance | | — |
| | — |
| | 2,357 |
|
| Additions to property, plant, and equipment | | (46,776 | ) | | (35,512 | ) | | (67,115 | ) |
| Acquisition of businesses, net of cash acquired | | (295 | ) | | (13,228 | ) | | (34,364 | ) |
| Additional consideration paid on prior year acquisitions | | (564 | ) | | (457 | ) | | (989 | ) |
| Net cash provided by (used for) investing activities | | (42,934 | ) | | (15,576 | ) | | 53,448 |
|
| Cash flows from financing activities: | | | | | | |
| Borrowings under revolving credit facilities | | 7,839 |
| | 70,324 |
| | 364,557 |
|
| Payment of revolving credit facilities | | (8,430 | ) | | (70,134 | ) | | (414,770 | ) |
| Principal payments on debt | | — |
| | (8,400 | ) | | (80 | ) |
| Repurchases of company stock | | (105,249 | ) | | (294,130 | ) | | (65,220 | ) |
| Proceeds from share-based compensation plans | | 22,300 |
| | 28,706 |
| | 38,182 |
|
| Dividends paid | | (23,067 | ) | | (24,122 | ) | | (25,013 | ) |
| Other | | (635 | ) | | (581 | ) | | 296 |
|
| Excess tax benefits from share-based compensation | | 11,101 |
| | 9,119 |
| | 9,610 |
|
| Net cash used for financing activities | | (96,141 | ) | | (289,218 | ) | | (92,438 | ) |
| Effect of exchange-rate changes on cash | | (18,971 | ) | | (19,104 | ) | | (17,954 | ) |
| Net increase (decrease) in cash and cash equivalents | | 265,151 |
| | (161,419 | ) | | 274,822 |
|
| Cash and cash equivalents at beginning of year | | 288,697 |
| | 450,116 |
| | 175,294 |
|
| Cash and cash equivalents at end of year | | $ | 553,848 |
| | $ | 288,697 |
| | $ | 450,116 |
|
| Supplemental disclosure of non-cash activities: | | | | | | |
| Capital expenditures incurred but not yet paid | | 2,512 |
| | 2,108 |
| | 2,891 |
|
| Property and equipment under build to suit transaction | | — |
| | — |
| | 14,735 |
|
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | |
| Net earnings | | $ | 307,583 | | | $ | 275,749 | | | $ | 214,891 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 102,412 | | | 102,949 | | | 99,995 | |
| (Gain) loss on sale of businesses | | — | | | (1,735) | | | (875) | |
| (Gain) loss on sale/disposal of long-lived assets | | (11,054) | | | (1,120) | | | 29 | |
| Deferred income taxes | | 40,787 | | | 8,562 | | | (5,782) | |
| Share-based compensation | | 13,669 | | | 14,094 | | | 11,572 | |
| Changes in operating assets and liabilities, net of businesses acquired and disposed of: | | | | | | |
| Receivables, net | | (12,613) | | | (57,492) | | | (16,388) | |
| Inventories, net | | (3,485) | | | (41,197) | | | 19,711 | |
| Progress payments | | (4,834) | | | (11,121) | | | (774) | |
| Accounts payable and accrued expenses | | (18,629) | | | 48,930 | | | 4,323 | |
| Deferred revenue | | 36,134 | | | 23,082 | | | 36,898 | |
| Income taxes | | (15,625) | | | (8,847) | | | (5,479) | |
| Pension and postretirement, net | | (1,310) | | | (43,759) | | | 3,481 | |
| Other | | (11,631) | | | 28,178 | | | 27,110 | |
| Net cash provided by operating activities | | 421,404 | | | 336,273 | | | 388,712 | |
| Cash flows from investing activities: | | | | | | |
| Proceeds from sales and disposals of long-lived assets | | 15,093 | | | 9,117 | | | 6,769 | |
| Additions to property, plant, and equipment | | (69,752) | | | (53,417) | | | (52,705) | |
| Acquisition of businesses, net of cash acquired | | (185,209) | | | (210,167) | | | (232,630) | |
| Other | | (172) | | | (1,049) | | | 6,238 | |
| Net cash used for investing activities | | (240,040) | | | (255,516) | | | (272,328) | |
| Cash flows from financing activities: | | | | | | |
| Borrowings under revolving credit facilities | | 37,692 | | | 372,980 | | | 7,658 | |
| Payment of revolving credit facilities | | (37,934) | | | (372,887) | | | (8,176) | |
| Principal payments on debt | | — | | | (50,000) | | | (150,000) | |
| Repurchases of company stock | | (50,661) | | | (198,592) | | | (52,127) | |
| Proceeds from share-based compensation plans | | 11,770 | | | 11,940 | | | 14,179 | |
| Dividends paid | | (28,200) | | | (26,328) | | | (24,740) | |
| Other | | (812) | | | (752) | | | (692) | |
| Net cash used for financing activities | | (68,145) | | | (263,639) | | | (213,898) | |
| Effect of exchange-rate changes on cash | | 1,748 | | | (16,172) | | | 18,786 | |
| Net increase (decrease) in cash and cash equivalents | | 114,967 | | | (199,054) | | | (78,728) | |
| Cash and cash equivalents at beginning of year | | 276,066 | | | 475,120 | | | 553,848 | |
| Cash and cash equivalents at end of year | | $ | 391,033 | | | $ | 276,066 | | | $ | 475,120 | |
| Supplemental disclosure of non-cash activities: | | | | | | |
| Capital expenditures incurred but not yet paid | | 2,015 | | | 2,193 | | | 976 | |
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | Common Stock | | Additional
Paid
in Capital | | Retained
Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock |
| | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Treasury Stock | |
| January 1, 2014 | | $ | 49,190 |
| | $ | 150,618 |
| | $ | 1,380,981 |
| | $ | 25,259 |
| | $ | (53,343 | ) | |
| January 1, 2017 | | January 1, 2017 | | $ | 49,187 | | | $ | 129,483 | | | $ | 1,754,907 | | | $ | (291,756) | | | $ | (350,630) | |
| Net earnings | | Net earnings | | — | | | — | | | 214,891 | | | — | | | — | |
| Other comprehensive income, net of tax | | Other comprehensive income, net of tax | | — | | | — | | | — | | | 74,916 | | | — | |
| Dividends paid | | Dividends paid | | — | | | — | | | (24,740) | | | — | | | — | |
| Restricted stock | | Restricted stock | | — | | | (12,104) | | | — | | | — | | | 12,105 | |
| Stock options exercised | | Stock options exercised | | — | | | (5,724) | | | — | | | — | | | 19,902 | |
| Other | | Other | | — | | | (2,237) | | | (734) | | | — | | | 889 | |
| Share-based compensation | | Share-based compensation | | — | | | 11,191 | | | — | | | — | | | 381 | |
| Repurchase of common stock | | Repurchase of common stock | | — | | | — | | | — | | | — | | | (52,127) | |
| December 31, 2017 | | December 31, 2017 | | $ | 49,187 | | | $ | 120,609 | | | $ | 1,944,324 | | | $ | (216,840) | | | $ | (369,480) | |
| Cumulative effect from adoption of ASC 606 | | Cumulative effect from adoption of ASC 606 | | — | | | — | | | (2,274) | | | — | | | — | |
| Net earnings | | — |
| | — |
| | 113,338 |
| | — |
| | — |
| Net earnings | | — | | | — | | | 275,749 | | | — | | | — | |
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (153,670 | ) | | — |
| Other comprehensive loss, net of tax | | — | | | — | | | — | | | (71,607) | | | — | |
| Dividends paid | | — |
| | — |
| | (25,013 | ) | | — |
| | — |
| Dividends paid | | — | | | — | | | (26,328) | | | — | | | — | |
| Restricted stock, net of tax | | — |
| | (722 | ) | | — |
| | — |
| | 3,155 |
| |
| Stock options exercised, net of tax | | — |
| | 311 |
| | — |
| | — |
| | 45,049 |
| |
| Restricted stock | | Restricted stock | | — | | | (13,134) | | | — | | | — | | | 13,134 | |
| Stock options exercised | | Stock options exercised | | — | | | (2,355) | | | — | | | — | | | 14,294 | |
| Other | | — |
| | (430 | ) | | — |
| | — |
| | 430 |
| Other | | — | | | (752) | | | — | | | — | | | 752 | |
| Share-based compensation | | — |
| | 8,266 |
| | — |
| | — |
| | 234 |
| Share-based compensation | | — | | | 13,866 | | | — | | | — | | | 228 | |
| Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | (65,220 | ) | Repurchase of common stock
| | — | | | — | | | — | | | — | | | (198,592) | |
| December 31, 2014 | | $ | 49,190 |
| | $ | 158,043 |
| | $ | 1,469,306 |
| | $ | (128,411 | ) | | $ | (69,695 | ) | |
| December 31, 2018 | | December 31, 2018 | | $ | 49,187 | | | $ | 118,234 | | | $ | 2,191,471 | | | $ | (288,447) | | | $ | (539,664) | |
| Cumulative effect from adoption of ASU 2018-02 | | Cumulative effect from adoption of ASU 2018-02 | | — | | | — | | | 26,257 | | | (26,257) | | | — | |
| Net earnings | | — |
| | — |
| | 145,461 |
| | — |
| | — |
| Net earnings | | — | | | — | | | 307,583 | | | — | | | — | |
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (97,517 | ) | | — |
| Other comprehensive loss, net of tax | | — | | | — | | | — | | | (10,570) | | | — | |
| Dividends paid | | — |
| | — |
| | (24,122 | ) | | — |
| | — |
| Dividends paid | | — | | | — | | | (28,200) | | | — | | | — | |
| Restricted stock, net of tax | | — |
| | (10,303 | ) | | — |
| | — |
| | 13,734 |
| |
| Stock options exercised, net of tax | | — |
| | (11,349 | ) | | — |
| | — |
| | 45,743 |
| |
| Restricted stock | | Restricted stock | | — | | | (10,483) | | | — | | | — | | | 10,483 | |
| Stock options exercised | | Stock options exercised | | — | | | (4,226) | | | — | | | — | | | 15,996 | |
| Other | | — |
| | (647 | ) | | — |
| | — |
| | 647 |
| Other | | — | | | (719) | | | — | | | — | | | 719 | |
| Share-based compensation | | — |
| | 9,179 |
| | — |
| | — |
| | 294 |
| Share-based compensation | | — | | | 13,264 | | | — | | | — | | | 405 | |
Repurchase of common stock
| | | | | | | | | | (294,130 | ) | Repurchase of common stock | | — | | | — | | | — | | | — | | | (50,661) | |
| December 31, 2015 | | $ | 49,190 |
| | $ | 144,923 |
| | $ | 1,590,645 |
| | $ | (225,928 | ) | | $ | (303,407 | ) | |
| Net earnings | | — |
| | — |
| | 187,329 |
| | — |
| | — |
| |
| Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (65,828 | ) | | — |
| |
| Dividends paid | | — |
| | — |
| | (23,067 | ) | | — |
| | — |
| |
| Restricted stock, net of tax | | — |
| | (12,086 | ) | | — |
| | — |
| | 17,275 |
| |
| Stock options exercised, net of tax | | — |
| | (11,271 | ) | | — |
| | — |
| | 39,483 |
| |
| Other | | (3 | ) | | (1,104 | ) | | — |
| | — |
| | 811 |
| |
| Share-based compensation | | — |
| | 9,021 |
| | — |
| | — |
| | 457 |
| |
| Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | (105,249 | ) | |
| December 31, 2016 | | $ | 49,187 |
| | $ | 129,483 |
| | $ | 1,754,907 |
| | $ | (291,756 | ) | | $ | (350,630 | ) | |
| December 31, 2019 | | December 31, 2019 | | $ | 49,187 | | | $ | 116,070 | | | $ | 2,497,111 | | | $ | (325,274) | | | $ | (562,722) | |
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Curtiss-Wright Corporation and its subsidiaries (the Corporation or the Company) is a global, diversified multinational manufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered products and services to the aerospace, defense, general industrial, and power generation and general industrial markets.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated.
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 (U.S. GAAP), 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 and legal reserves. Actual results may differ from these estimates.
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.
We determine the appropriate method by which we recognize revenue by analyzing the terms and conditions of each contract or arrangement entered into with our customers. Revenue is recognized on product sales as production units are shipped and title and risk of loss have transferred. Revenue is recognized on service type contracts as services are rendered. The significant estimates we make in recognizing revenue are primarily for long-term contracts generally accounted for using the cost-to-cost method of percentage of completion accounting that are associated with the design, development and manufacture of highly engineered industrial products used in commercial and defense applications. Under the cost-to-cost percentage-of-completion method of accounting, profits are recorded pro rata, based upon current estimates of direct and indirect costs to complete such contracts. Changes in estimates of contract sales, costs, and profits are recognized using the cumulative catch-up method of accounting. This method recognizes in the current period the cumulative effect of the changes on current and prior periods. The effect of the changes on future periods of contract performance is recognized as if the revised estimate had been the original estimate. A significant change in an estimate on one or more contracts could have a material effect on the Corporation’s consolidated financial position, results of operations, or cash flows. In 2015, the Corporation recorded additional costs of $11.5 million related to its long-term contract with Westinghouse to deliver reactor coolant pumps (RCPs) for the AP1000 nuclear power plants in China. The increase in costs is due to a change in estimate related to production modifications that are the result of engineering and endurance testing. There were no other individual significant changes in estimated contract costs at completion during 2016, 2015, or 2014.
Losses on contracts are provided for in the period in which the losses become determinable and the excess of billings over cost and estimated earnings on long-term contracts is included in deferred revenue.
From time to time, we may enter into multiple-element arrangements in which a customer may purchase a combination of goods, services, or rights to intellectual property. We follow the multiple element accounting guidance within ASC 605-25 for such arrangements which require: (1) determining the separate units of accounting; (2) determining whether the separate units of accounting have stand-alone value; and (3) measuring and allocating the arrangement consideration. We allocate the
arrangement consideration in accordance with the selling price hierarchy which requires: (1) the use of vendor-specific objective evidence (VSOE), if available (2) if VSOE is not available, the use of third-party evidence (TPE), and if TPE is not available (3) our best-estimate of selling price (BESP). Approximately 1% of the Company's 2015 net sales were the result of the sale of certain intellectual property licensing rights within a multiple-element arrangement with China for AP1000 reactor coolant pumps (China Direct order). The Company had no further performance obligations with regards to the sale of these perpetual rights. The remainder of the contract, related to the production of sixteen RCPs, is being recognized using percentage-of-completion accounting through 2021.
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.
Inventory
Inventories are stated at lower of cost or market.net realizable value. Production costs are comprised of direct material and labor and applicable manufacturing overhead.
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 titleobtain control of promised goods or a secured interest for materials and work-in-process included in inventoryservices to the extent that progress payments are received. Accordingly, these receipts have been reported as a reduction of unbilled receivables as presented in Note 4 to the Consolidated Financial Statements. In the event that progress payments received exceed revenue recognized to date on a specific contract, a contract liability has been established with such amount reported in the "Deferred revenue" line within the Consolidated Balance Sheet.
The Corporation also receives progress payments on development contracts related to certain aerospace and defense programs. Progress payments received on partially funded development contracts have been reported as a reduction of inventories, as presented in Notes 4 andNote 5 to the Consolidated Financial Statements.
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 that they are incurred. Depreciation is computed using the straight-line method based over 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 |
See Note 6 to the Consolidated Financial Statements for further information on property, plant, and equipment.
Intangible Assets
Intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, trademarks, and technology licenses. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 1 to 20 years. See Note 8 to the Consolidated Financial Statements for further information on other intangible assets.
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 in the period in which the impairment becomes known. The Corporation recognized no significant impairment charges on assets held in use during the years ended December 31, 2016, 2015,2019, 2018, and 2014. For impairment charges on assets held for sale, see Note 2 to the Consolidated Financial Statements.2017.
Goodwill
Goodwill results from business acquisitions. The Corporation accounts for business acquisitions by allocating the purchase price to the tangible and intangible assets acquired and liabilities assumed. 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. The Corporation’s goodwill impairment test is performed annually in the fourth quarter of each year. See Note 7 to the Consolidated Financial Statements for further information on goodwill.
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 910 and 1213 to the Consolidated Financial Statements for further information on the Corporation's financial instruments.
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.
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 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 non-qualified share options, performance shares, and time-based restricted stock is recognized over the requisite service period for the entire award based on the grant date fair value.
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 Interestinterest expense and Generalgeneral and administrative expenses, respectively. See Note 1112 to the Consolidated Financial Statements for further information.
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 (loss) within stockholders’ equity. This balance is primarily affected by foreign currency exchange rate fluctuationsfluctuations. (Gains) and by the acquisition of foreign entities. Gainslosses from foreign currency transactions are included in General and administrative expenses withinin the resultsConsolidated Statement of operations,Earnings, which amounted to $8.9$7.2 million, $8.3$(4.5) million, and $2.9$5.4 million for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively.
Derivatives
Forward Foreign Exchange and Currency Option Contracts
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) and losses are classified as General and administrative expenses in the Consolidated StatementsStatement of Earnings and amounted to $11.5($2.1) million,, $11.0 $6.6 million,, and $6.9($0.3) million for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively. The Corporation does not use derivative financial instruments for trading or speculative purposes.
Interest Rate Risks and Related Strategies
The Corporation’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Corporation’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Corporation periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Corporation exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
Recently Issued Accounting Standards
Recent accounting pronouncementsstandards adopted
Accounting pronouncement
ASU 2015-172016-02 - Leases - On January 1, 2019, the Corporation adopted ASC 842, Leases, using the optional transition method of adoption which permits the entity to continue presenting all periods prior to January 1, 2019 under previous lease accounting guidance. In conjunction with the adoption, the Corporation elected the package of practical expedients which permits the entity to forgo reassessment of conclusions reached regarding lease existence and lease classification under previous guidance, as well as the practical expedient to not separate non-lease components. Further, the Corporation made an accounting policy election to
account for short-term leases in a manner consistent with the methodology applied under previous guidance. The adoption of this standard resulted in an increase of approximately $151 million in both total assets and total liabilities in the Corporation’s Consolidated Balance Sheet Classificationas of Deferred Taxes wasJanuary 1, 2019.
ASU 2018-02 - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income - On January 1, 2019, the Corporation adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of tax effects stranded in accumulated other comprehensive income to retained earnings as a result of the 2017 Tax Cuts and Jobs Act (the Tax Act). The adoption of this standard resulted in a reclassification of $26 million from accumulated other comprehensive loss to retained earnings in the Corporation’s Consolidated Balance Sheet as of January 1, 2019.
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans - In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. Specifically, the amendment removes disclosure requirements for amounts classified in accumulated other comprehensive income expected to be recognized over the next year and the effects of a one-percentage-point change in the assumed health care cost trend rate on service cost, interest cost, and the benefit obligation for postretirement benefits. The amendment also requires additional disclosure around weighted-average interest crediting rates for cash balance plans, a narrative description of the reasons for significant gains and losses, and an explanation of any other significant changes in the benefit obligation or plan assets. The Corporation early adopted effective January 1, 2016 and accounting pronouncement ASU 2015-03 - Simplifying the Presentation of Debt Issuance Costs was adopted effective January 1, 2016. Both pronouncements were retrospectively adopted and, accordingly, certain amounts reported in the previous periods have been reclassified to conform to the current year presentation.
A summary of the impact of the reclassificationsthis standard as of December 31, 20152019 and included revised disclosures within Note 16 of the Consolidated Financial Statements.
Recent accounting standards to be adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU adds a current expected credit loss impairment model to U.S. GAAP that is shownbased on expected losses rather than incurred losses whereby a broader range of reasonable and supportable information is required to be utilized in order to derive credit loss estimates. The Corporation plans to adopt the below table.ASU as of January 1, 2020 as the standard is effective for fiscal years beginning after December 15, 2019. The Corporation is currently evaluating the impact of adopting this standard, but does not expect the adoption to have a material impact on its Consolidated Financial Statements.
|
| | | | | | | | | | | | | | | |
| | | | Reclassifications | | |
| | December 31, 2015 as reported | | Deferred Taxes | | Debt Issuance Costs | | December 31, 2015 as reclassified |
| Deferred tax assets. net | $ | 41,737 |
| | $ | (41,737 | ) | | $ | — |
| | $ | — |
|
| Total current assets | $ | 1,316,620 |
| | $ | (41,737 | ) | | $ | — |
| | $ | 1,274,883 |
|
| Other assets | $ | 15,745 |
| | $ | 3,107 |
| | $ | (1,137 | ) | | $ | 17,715 |
|
| Total assets | $ | 3,029,378 |
| | $ | (38,630 | ) | | $ | (1,137 | ) | | $ | 2,989,611 |
|
| Other current liabilities | $ | 39,152 |
| | $ | (1,962 | ) | | $ | — |
| | $ | 37,190 |
|
| Total current liabilities | $ | 525,187 |
| | $ | (1,962 | ) | | $ | — |
| | $ | 523,225 |
|
| Long-term debt | $ | 953,083 |
| | $ | — |
| | $ | (1,137 | ) | | $ | 951,946 |
|
| Deferred tax liabilities, net | $ | 91,115 |
| | $ | (36,668 | ) | | $ | — |
| | $ | 54,447 |
|
| Total liabilities | $ | 1,773,955 |
| | $ | (38,630 | ) | | $ | (1,137 | ) | | $ | 1,734,188 |
|
| Total liabilities and stockholders' equity | $ | 3,029,378 |
| | $ | (38,630 | ) | | $ | (1,137 | ) | | $ | 2,989,611 |
|
Standards Issued Not Yet Adopted
|
| | |
Standard | Description | Effect on the financial statements |
ASU 2014-09 Revenue from Contracts with Customers | In May 2014, the FASB issued a comprehensive new revenue recognition standard which will supersede previous existing revenue recognition guidance. The standard creates a five-step model for revenue recognition that requires companies to exercise judgment when considering contract terms and relevant facts and circumstances. The five-step model includes (1) identifying the contract, (2) identifying the separate performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations and (5) recognizing revenue when each performance obligation has been satisfied. The standard also requires expanded disclosures surrounding revenue recognition. The standard is effective for fiscal periods beginning after December 15, 2017 and allows for either full retrospective or modified retrospective adoption. | The Corporation is currently evaluating the impact of the adoption of this standard on its Consolidated Financial Statements, including the method of adoption as of January 1, 2018. Based on a preliminary review of our customer contracts, we do not believe that the standard will have a material impact on our Consolidated Financial Statements. Our assessment is still ongoing and not complete. While we anticipate some changes to revenue recognition, we do not currently believe that the standard will have a material impact on our Consolidated Financial Statements. The FASB, however, has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change.
|
Date of adoption: January 1, 2018 |
ASU 2016-02 Leases | In February 2016, the FASB issued final guidance that will require lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to today’s accounting. The guidance requires the use of a modified retrospective approach. | The Corporation is currently evaluating the impact of the adoption of this standard on its Consolidated Financial Statements. |
Date of adoption: January 1, 2019 |
ASU 2016-09 Improvements to Employee Share-Based Payment Accounting | In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. | Upon adoption in 2017, the Corporation expects to record a tax benefit which is contingent on the number of stock options, restricted share units, and performance share units exercised or vested during the period as well as the price of the Corporation’s common stock. |
Date of adoption: January 1, 2017 |
ASU 2017-04 Simplifying the Test for Goodwill Impairment | In January 2017, the FASB issued ASU 2017-04, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard is effective for fiscal periods beginning after December 15, 2019. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017.
| The Corporation plans to early adopt this standard effective January 1, 2017. The standard would only impact the Corporation in the event of a goodwill impairment. Accordingly, we do not expect the adoption to have an impact on our Consolidated Financial Statements. |
Date of adoption: January 1, 2017 |
2. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALEREVENUE
The Corporation accounts for revenues in accordance with ASC 606, Revenue from Contracts with Customers, which was adopted as of January 1, 2018 on a modified retrospective basis. Under ASC 606, revenue is recognized when control of a promised good and/or service is transferred to a customer at a transaction price that reflects the consideration that the Corporation expects to be entitled to in exchange for that good and/or service.
Performance Obligations
The Corporation identifies a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of a strategic portfolio review conducted in 2014,its assessment, the Corporation identifiedconsiders all goods and/or services promised in the contract, regardless of whether they are explicitly stated or implied by customary business practices. The Corporation’s contracts may contain either a single performance obligation, including the promise to transfer individual goods or services that are not separately distinct within the context of the respective contracts, or multiple performance obligations. For contracts with multiple performance obligations, the Corporation allocates the overall transaction price to each performance obligation using standalone selling prices, where available, or utilizes estimates for each distinct good or service in the contract where standalone prices are not available. In certain businessesinstances, the transaction price may include estimated amounts of variable consideration including but not limited to incentives, awards, price escalations, liquidated damages, and penalties, only to the extent that it considered non-core.is probable that a significant reversal of cumulative revenue recognized to date around such variable consideration will not occur. The Corporation estimates variable consideration to be included in the transaction price using either the expected value method or most likely amount method, contingent upon the facts and circumstances of the specific arrangement. Variable consideration associated with the Corporation’s respective arrangements is not typically constrained.
The Corporation considers businesses non-core when their productsCorporation’s performance obligations are satisfied either at a point-in-time or services doon an over-time basis. Revenue recognized on an over-time basis for the year ended December 31, 2019 and 2018 accounted for approximately 49% and 46%, respectively, of total net sales. Typically, over-time revenue recognition is based on the utilization of an input measure used to measure progress, such as costs incurred to date relative to total estimated costs. Changes in total estimated costs are recognized using the cumulative catch-up method of accounting which recognizes the cumulative effect of the changes on current and prior periods in the current period. Accordingly, the effect of the changes on future periods of contract performance is recognized as
if the revised estimate had been the original estimate. A significant change in an estimate on one or more contracts could have a material effect on the Corporation's consolidated financial position, results or operations, or cash flows. However, there were no significant changes in estimated contract costs during 2019, 2018, or 2017.
If a performance obligation does not complement existing businessesqualify for over-time revenue recognition, revenue is then recognized at the point-in-time in which control of the distinct good or service is transferred to the customer, typically based upon the terms of delivery. Revenue recognized at a point-in-time for the year ended December 31, 2019 and where2018 accounted for approximately 51% and 54%, respectively, of total net sales.
Contract backlog represents the long-term growthremaining performance obligations that have not yet been recognized as revenue. Backlog includes deferred revenue and profitability prospects are below the Corporation’s expectations. As part of this initiative, during 2015, the Corporation divested all five businessesamounts that were classifiedwill be invoiced and recognized as held for salerevenue in future periods. Total backlog was approximately $2.2 billion as of December 31, 2014.2019, of which the Corporation expects to recognize approximately 92% as net sales over the next 12-36 months. The resultsremainder will be recognized thereafter.
Disaggregation of operations of these businesses are reported as discontinued operations within our Consolidated Statements of Earnings.Revenue
The aggregate financial resultsfollowing table presents the Corporation’s total net sales disaggregated by end market and customer type:
| | | | | | | | | | | | | | | | | | | | |
| Total Net Sales by End Market and Customer Type | | Year Ended December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Defense | | | | | | |
| Aerospace | | $ | 416,841 | | | $ | 376,951 | | | $ | 372,678 | |
| Ground | | 93,432 | | | 97,131 | | | 96,042 | |
| Naval | | 568,776 | | | 486,476 | | | 408,221 | |
| Total Defense Customers | | $ | 1,079,049 | | | $ | 960,558 | | | $ | 876,941 | |
| | | | | | |
| Commercial | | | | | | |
| Aerospace | | $ | 433,038 | | | $ | 414,422 | | | $ | 409,384 | |
| Power Generation | | 392,173 | | | 431,793 | | | 423,747 | |
| General Industrial | | 583,701 | | | 605,062 | | | 560,954 | |
| Total Commercial Customers | | $ | 1,408,912 | | | $ | 1,451,277 | | | $ | 1,394,085 | |
| | | | | | |
| Total | | $ | 2,487,961 | | | $ | 2,411,835 | | | $ | 2,271,026 | |
Contract Balances
Timing of all discontinued operationsrevenue recognition and cash collection may result in billed receivables, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Consolidated Balance Sheet. The Corporation’s contract assets primarily relate to its rights to consideration for work completed but not billed as of the reporting date. Contract assets are transferred to billed receivables when the rights to consideration become unconditional. This is typical in situations where amounts are billed as work progresses in accordance with agreed-upon contractual terms or upon achievement of contractual milestones. The Corporation’s contract liabilities primarily consist of customer advances received prior to revenue being earned. Revenues recognized for the years ended December 31, 2019 and 2018 included in the contract liabilities balance at the beginning of the respective years were as follows:
|
| | | | | | | | | | | | |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Net sales | | $ | — |
| | $ | 57,992 |
| | $ | 363,869 |
|
Loss from discontinued operations before income taxes (1) | | — |
| | (40,984 | ) | | (48,519 | ) |
| Income tax benefit / (expense) | | (2,053 | ) | (3) | 7,926 |
| | 14,268 |
|
Loss on sale of businesses (2) | | — |
| | (13,729 | ) | | (22,360 | ) |
| Loss from discontinued operations | | $ | (2,053 | ) | | $ | (46,787 | ) | | $ | (56,611 | ) |
(1) Loss from discontinued operations before income taxes includes approximately $40.8$198 million and $41.4$164 million, respectively. Changes in contract assets and contract liabilities as of held for sale impairment expenseDecember 31, 2019 were not materially impacted by any other factors. Contract assets and contract liabilities are reported in the year ended December 31, 2015"Receivables, net" and December 31, 2014, respectively."Deferred revenue" lines, respectively, within the Consolidated Balance Sheet.
(2) In the year ended December 31, 2015,Pre-adoption of ASC 606
As the Corporation recognized aggregate after tax losses of $13.7 million onadopted ASC 606 using the sale ofmodified retrospective method, the Aviation Ground, Downstream Oil & Gas, Engineered Packaging and two surface technology businesses. In 2014, the Corporation recognized aggregate after tax losses of $22.4 million on the sale of the Benshaw, 3D, Upstream Oil & Gas and Vessels business.
(3) Amount represents finalization of income tax provision related to discontinued operationsConsolidated Financial Statements for the year ended December 31, 2015.
2015 Divestitures
Surface Technologies - Domestic
In October 2015 and July 2015,2017 were not retrospectively adjusted. For the Corporation soldyear ended December 31, 2017, revenue was recognized when the assets and liabilities of two surface technology treatment facilities for an immaterial amount. The businesses were previously classified within assets held for sale and reported within the Commercial/Industrial segment.
Engineered Packaging
In July 2015, the Corporation sold the assets and liabilities of its Engineered Packaging business for approximately $14 million
and recognized a pre-tax gain of $2.3 million. The businesses were previously classified as assets held for sale and reported within the Defense segment.
Downstream
In May 2015, the Corporation completed the divestiture of its Downstream oil and gas business for $19 million, net of
transaction costs. During the fourth quarter of 2015, the Company paid a $4.8 million working capital adjustment. The businessearnings process was previously classified within assets held for sale and was formerly reported in the Company's former Energy segment. During 2015, the Corporation recognized a pre-tax loss on divestiture, including impairment charges, of $59.5 million. During 2014, including impairment charges, the Corporation recognized a $33.1 million pre-tax loss on divestiture. The impairment charges were a resultconsidered substantially complete with all of the decliningfollowing criteria met: 1) persuasive evidence of an arrangement existed; 2) delivery occurred or services were rendered; 3) the Corporation's price to its customer was fixed or determinable; and volatile oil market.
Aviation Ground
In January 2015, the Corporation sold the assets of its Aviation Ground support business for £3 million ($4 million). The business4) collectability was previously classified within assets held for sale and reported within the Defense segment.
2014 Divestitures and facility closures
Surface Technologies - International
During the fourth quarter of 2014, the Corporation closed certain of its international surface technology manufacturing facilities located in Canada, Italy, and Austria. As a result of the facility closures, the Company incurred $5.3 million of pre-tax closure costs, including a $3.2 million impairment on fixed assets. The businesses were previously reported within the Commercial/Industrial segment.
Benshaw
On June 30, 2014, the Corporation sold the assets of its Benshaw business, to Regal-Beloit Corporation for $49.7 million in cash, net of cash sold, and final working capital adjustments.reasonably assured. The Corporation determined the appropriate revenue recognition method by analyzing the terms and conditions of each contract. Revenue was recognized a pre-taxon product sales
as production units were shipped and title and risk of loss was transferred. Revenue was recognized on divestitureservice-type contracts as services were rendered. The significant estimates made in recognizing revenue were primarily for long-term contracts, which were generally accounted for using the cost-to-cost method of $7.3 million. The Corporationpercentage of completion accounting. Under the cost-to-cost method, profits were recorded pro-rata, based upon estimates of direct and indirect costs to complete such contracts. Any changes in estimates of contract sales, costs, or profits were recognized a tax benefitusing the cumulative catch-up method of $2.9 million in connection with the sale. The business was previously reported within the Defense segment.accounting.
3D Radar
On April 30, 2014, the Corporation sold the assets of the 3D Radar business, to Chemring Group PLC for $2.4 million in cash, net of final working capital adjustments. The disposal resulted in a $0.6 million pre-tax gain. The business was previously reported within the Defense segment.
Upstream
On December 17, 2014, the Corporation completed the sale of its upstream oil and gas business, for $98 million in cash, net of cash sold, and final working capital adjustments. The Corporation recognized a pre-tax loss on divestiture of $13.7 million. The Corporation recognized a tax benefit of $0.6 million in connection with the sale. The business was previously reported within the former Energy segment.
Vessels
During the third quarter of 2014, the Corporation completed the sale of its Vessels business, for $2 million in cash, net of transaction costs. The Corporation recognized a pre-tax loss on divestiture of $8.6 million. The Corporation recognized a tax benefit of $3.2 million in connection with the sale. The business was previously reported within the former Energy segment.
3. ACQUISITIONS
The Corporation continually evaluates potential acquisitions that either strategically fit within the Corporation’s existing portfolio or expand the Corporation’s portfolio into new product lines or adjacent markets. The Corporation has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Corporation's financial statements. This goodwill arises because the purchase prices for these businesses reflect the future earnings and cash flow potential in excess of the earnings and cash flows attributable to the current product and customer set at the time of acquisition. Thus, goodwill inherently includes the know-how of the assembled workforce, the ability of the workforce to further improve the technology and product offerings, and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations.
The Corporation allocates the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. In the months after closing, as the Corporation obtains additional information about these assets and liabilities, including through tangible and intangible asset appraisals, and as the Corporation learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Only items identified as of the acquisition date are considered for subsequent adjustment. The Corporation will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
During 2016, no acquisitions were made. In 2015,the twelve months ended December 31, 2019, the Corporation acquired one2 businesses for an aggregate purchase price of $185 million, net of cash acquired. During the twelve months ended December 31, 2018, the Corporation acquired 1 business for an aggregate purchase price of $13.2$210 million, net of cash acquired, which isacquired. These acquisitions are described in more detail below.
For the year ended December 31, 2019 and 2018, included within the Consolidated Statement of Earnings, the Corporation's acquisitions contributed $11 million and $64 million of total net sales, respectively, and immaterial net earnings in both periods.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during 2015:2019 and 2018:
| | | | | | | | | | | |
| (In thousands) | | 2019 | 2018 |
| Accounts receivable | | $ | 16,551 | | $ | 24,385 | |
| Inventory | | 7,608 | | 31,875 | |
| Property, plant, and equipment | | 1,117 | | 3,206 | |
| Intangible assets | | 94,400 | | 146,100 | |
| Operating lease right-of-use assets, net | | 4,605 | | — | |
| Other current and non-current assets | | 888 | | 47 | |
| Current and non-current liabilities | | (11,604) | | (5,374) | |
| Net tangible and intangible assets | | 113,565 | | 200,239 | |
| Purchase price | | 185,209 | | 210,167 | |
| Goodwill | | $ | 71,644 | | $ | 9,928 | |
| | | |
| Goodwill deductible for tax purposes | | $ | 72,777 | | $ | 9,928 | |
|
| | | | | | | | |
| (In thousands) | | 2016 | | 2015 |
| Accounts receivable | | $ | — |
| | $ | 996 |
|
| Inventory | | — |
| | 152 |
|
| Property, plant, and equipment | | — |
| | 1,463 |
|
| Other current assets | | — |
| | 155 |
|
| Intangible assets | | — |
| | 7,700 |
|
| Current and non-current liabilities | | — |
| | (6 | ) |
| Due to seller | | — |
| | (1,470 | ) |
| Net tangible and intangible assets | | — |
| | 8,990 |
|
| Purchase price | | — |
| | 13,228 |
|
| Goodwill | | $ | — |
| | $ | 4,238 |
|
20152019 Acquisitions
COMMERCIAL/INDUSTRIAL901D Holdings, LLC (901D)
Bolt’s Metallizing, Inc.
On March 16, 2015,December 31, 2019, the Corporation acquired certain assets and assumed certain liabilities100% of Bolt’s Metallizing, Inc.the membership interests of 901D for $13.2$135.1 million, in cash.net of cash acquired. The Asset Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price held backdeposited in escrow as security for potential indemnification claims against the seller. Bolt’s Metallizing901D is a providerdesigner and manufacturer of thermal spray coatingsmission-critical integrated electronic systems,
subsystems, and ruggedized shipboard enclosure solutions supporting every major U.S. Navy shipbuilding program. The acquired business will operate within the Defense segment. The acquisition is subject to post-closing adjustments with the purchase price allocation not yet complete.
Tactical Communications Group (TCG)
On March 15, 2019, the Corporation acquired 100% of the membership interests of TCG for $50.1 million, net of cash acquired. The Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price deposited in escrow as security for potential indemnification claims against the seller. TCG is a designer and manufacturer of tactical data link software solutions for critical aerospace applications, including high velocity oxygen fuel (HVOF)military communications systems. The acquired business operates within the Defense segment.
2018 Acquisitions
Dresser-Rand Government Business (DRG)
On April 2, 2018, the Corporation acquired certain assets and plasma spray coating capabilities. assumed certain liabilities of DRG for $210.2 million in cash. The Asset Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type. DRG is a designer and manufacturer of mission-critical, high-speed rotating equipment solutions and also acts as the sole supplier of steam turbines and main engine guard valves on all aircraft carrier programs. The acquired business operates within the Power segment.
4. RECEIVABLES
Receivables include current notes, amounts billed to customers, claims, other receivables, and unbilled revenue on long-term contracts, which consists of amounts recognized as sales but not billed. Substantially all amounts of unbilled receivables are expected to be billed and collected in the subsequent year. An immaterial amount of unbilled receivables are subject to retainage provisions. The amount of claims and unapproved change orders within our receivables balances are immaterial.
Credit risk is diversified due to the large number of entities comprising the Corporation’s customer base and their geographic dispersion. The Corporation is either a prime contractor or subcontractor to various agencies of the U.S. Government. Revenues derived directly and indirectly from government sources (primarily the U.S. Government) were 38%43% and 36%40% of consolidated revenuestotal net sales in 20162019 and 2015,2018, respectively. Total receivables due primarily from government sources (primarily the U.S GovernmentGovernment) were $183.6$343.5 million and $165.6$329.1 million atas of December 31, 20162019 and 2015,2018, respectively. Government (primarily the U.S. Government) unbilled receivables, net of progress payments, were $83.2$195.7 million and $70.6$180.0 million atas of December 31, 20162019 and 2015,2018, respectively.
The composition of receivables as of December 31 is as follows: | | | (In thousands) | | 2016 | | 2015 | (In thousands) | | 2019 | | 2018 |
| Billed receivables: | | | | | Billed receivables: | |
| Trade and other receivables | | $ | 340,091 |
| | $ | 435,172 |
| Trade and other receivables | | $ | 418,968 | | | $ | 390,306 | |
| Less: Allowance for doubtful accounts | | (4,832 | ) | | (5,664 | ) | Less: Allowance for doubtful accounts | | (8,733) | | | (7,436) | |
| Net billed receivables | | 335,259 |
| | 429,508 |
| Net billed receivables | | 410,235 | | | 382,870 | |
| Unbilled receivables: | | | | | Unbilled receivables: | |
| Recoverable costs and estimated earnings not billed | | 149,847 |
| | 153,045 |
| Recoverable costs and estimated earnings not billed | | 231,067 | | | 225,810 | |
| Less: Progress payments applied | | (22,044 | ) | | (16,264 | ) | Less: Progress payments applied | | (9,108) | | | (14,925) | |
| Net unbilled receivables | | 127,803 |
| | 136,781 |
| Net unbilled receivables | | 221,959 | | | 210,885 | |
| Receivables, net | | $ | 463,062 |
| | $ | 566,289 |
| Receivables, net | | $ | 632,194 | | | $ | 593,755 | |
5. INVENTORIES
Inventoried costs contain amounts relating to long-term contracts and programs with long production cycles, a portion of which will not be realized within one year. Long term contract inventoryThe caption "Inventoried costs related to U.S. Government and other long-term contracts" includes an immaterial amount of claims or other similar items subject to uncertainty concerning their determination or realization. Inventories are valued at the lower of cost or market.net realizable value.
The composition of inventories as of December 31 is as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 |
| Raw material | | $ | 183,576 | | | $ | 214,442 | |
| Work-in-process | | 105,874 | | | 74,536 | |
| Finished goods | | 131,124 | | | 143,016 | |
Inventoried costs related to U.S. Government and other long-term contracts (1) | | 70,998 | | | 54,195 | |
| Gross inventories | | 491,572 | | | 486,189 | |
| Less: Inventory reserves | | (58,594) | | | (55,776) | |
| Progress payments applied | | (8,143) | | | (6,987) | |
| Inventories, net | | $ | 424,835 | | | $ | 423,426 | |
|
| | | | | | | | |
| (In thousands) | | 2016 | | 2015 |
| Raw material | | $ | 189,228 |
| | $ | 196,684 |
|
| Work-in-process | | 73,843 |
| | 79,406 |
|
| Finished goods | | 112,478 |
| | 114,931 |
|
| Inventoried costs related to U.S. Government and other long-term contracts | | 57,516 |
| | 51,774 |
|
| Gross inventories | | 433,065 |
| | 442,795 |
|
| Less: Inventory reserves | | (54,988 | ) | | (48,904 | ) |
| Progress payments applied, principally related to long-term contracts | | (11,103 | ) | | (14,300 | ) |
| Inventories, net | | $ | 366,974 |
| | $ | 379,591 |
|
(1)As of December 31, 20162019 and 2015, inventory2018, this caption also includes capitalized contract development costs of $28.8$39.1 million and $29.7$44.4 million, respectively, related to certain aerospace and defense programs. These capitalized costs will be liquidated as production units are delivered to the customer.produced under contract. As of December 31, 20162019 and 2015, $3.92018, capitalized development costs of $23.7 million and $2.5$24.1 million, respectively, are scheduled to be liquidated undernot currently supported by existing firm orders.
6. PROPERTY, PLANT, AND EQUIPMENT
The composition of property, plant, and equipment as of December 31 is as follows:
| | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 |
| Land | | $ | 18,632 | | | $ | 18,548 | |
| Buildings and improvements | | 234,112 | | | 226,743 | |
| Machinery, equipment, and other | | 849,527 | | | 801,169 | |
| Property, plant, and equipment, at cost | | 1,102,271 | | | 1,046,460 | |
| Less: Accumulated depreciation | | (716,678) | | | (671,800) | |
| Property, plant, and equipment, net | | $ | 385,593 | | | $ | 374,660 | |
|
| | | | | | | | |
| (In thousands) | | 2016 | | 2015 |
| Land | | $ | 19,511 |
| | $ | 19,933 |
|
| Buildings and improvements | | 215,221 |
| | 218,016 |
|
| Machinery, equipment, and other | | 752,356 |
| | 739,965 |
|
| Property, plant, and equipment, at cost | | 987,088 |
| | 977,914 |
|
| Less: Accumulated depreciation | | (598,185 | ) | | (564,270 | ) |
| Property, plant, and equipment, net | | $ | 388,903 |
| | $ | 413,644 |
|
Depreciation expense from continuing operations for the years ended December 31, 2016, 2015,2019, 2018, and 20142017 was $62.6$57.4 million, $64.7$59.4 million, and $66.6$61.6 million, respectively.
7. GOODWILL
The changes in the carrying amount of goodwill for 20162019 and 20152018 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Commercial/Industrial | | Defense | | Power | | Consolidated |
| December 31, 2017 | | $ | 448,531 | | | $ | 460,332 | | | $ | 187,466 | | | $ | 1,096,329 | |
| Acquisitions | | — | | | — | | | 9,928 | | | 9,928 | |
| Divestitures | | (111) | | | (1,594) | | | — | | | (1,705) | |
| Foreign currency translation adjustment | | (6,405) | | | (9,867) | | | (248) | | | (16,520) | |
| December 31, 2018 | | $ | 442,015 | | | $ | 448,871 | | | $ | 197,146 | | | $ | 1,088,032 | |
| Acquisitions | | — | | | 71,644 | | | — | | | 71,644 | |
| Adjustments | | — | | | (208) | | | — | | | (208) | |
| Foreign currency translation adjustment | | 2,099 | | | 4,962 | | | 151 | | | 7,212 | |
| December 31, 2019 | | $ | 444,114 | | | $ | 525,269 | | | $ | 197,297 | | | $ | 1,166,680 | |
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Commercial/Industrial | | Defense | | Power | | Assets Held for Sale | | Consolidated |
| December 31, 2014 | | $ | 454,092 |
| | $ | 356,689 |
| | $ | 187,725 |
| | $ | 42,395 |
| | $ | 1,040,901 |
|
| Acquisitions | | 4,238 |
| | — |
| | — |
| | — |
| | 4,238 |
|
| Divestitures | | — |
| | — |
| | — |
| | (41,264 | ) | | (41,264 | ) |
| Goodwill adjustments | | 21 |
| | 1,131 |
| | — |
| | (1,131 | ) | | 21 |
|
| Foreign currency translation adjustment | | (10,523 | ) | | (20,217 | ) | | (550 | ) | | — |
| | (31,290 | ) |
| December 31, 2015 | | $ | 447,828 |
| | $ | 337,603 |
| | $ | 187,175 |
| | $ | — |
| | $ | 972,606 |
|
| Divestitures | | — |
| | (452 | ) | | — |
| | — |
| | (452 | ) |
| Foreign currency translation adjustment | | (11,687 | ) | | (9,496 | ) | | 86 |
| | — |
| | (21,097 | ) |
| December 31, 2016 | | $ | 436,141 |
| | $ | 327,655 |
| | $ | 187,261 |
| | $ | — |
| | $ | 951,057 |
|
The purchase price allocations relating to the businesses acquired are initially based on estimates. The Corporation adjusts these estimates based upon final analysis, including input from third party appraisals when deemed appropriate. The determination of fair value is finalized no later than twelve months from acquisition. Goodwill adjustments represent subsequent adjustments to the purchase price allocation for acquisitions.
The Corporation completed its annual goodwill impairment testing as of October 31, 2016, 2015,2019, 2018, and 20142017 and concluded that there was no impairment of value. The estimated fair value of the reporting units substantially exceeded the recorded book value.goodwill.
8. OTHER INTANGIBLE ASSETS, NET
Intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, and trademarks. Intangible assets are amortized over useful lives that generally range between 1 and 20 years.
The following tables present the cumulative composition of the Corporation’s intangible assets as of December 31, 20162019 and December 31, 2015,2018, respectively. | | | | | 2016 | | 2015 | | 2019 | | | 2018 | |
| (In thousands) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated
Amortization | | Net | (In thousands) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
| Technology | | $ | 166,859 |
| | $ | (98,266 | ) | | $ | 68,593 |
| | $ | 171,382 |
| | $ | (91,430 | ) | | $ | 79,952 |
| Technology | | $ | 257,676 | | | $ | (140,390) | | | $ | 117,286 | | | $ | 238,212 | | | $ | (123,156) | | | $ | 115,056 | |
| Customer related intangibles | | 349,742 |
| | (157,154 | ) | | 192,588 |
| | 357,538 |
| | (140,816 | ) | | 216,722 |
| Customer related intangibles | | 434,492 | | | (215,855) | | | 218,637 | | | 358,832 | | | (193,455) | | | 165,377 | |
Programs (1) | | Programs (1) | | 144,000 | | | (12,600) | | | 131,400 | | | 144,000 | | | (5,400) | | | 138,600 | |
| Other intangible assets | | 36,709 |
| | (26,429 | ) | | 10,280 |
| | 37,200 |
| | (23,111 | ) | | 14,089 |
| Other intangible assets | | 43,729 | | | (31,145) | | | 12,584 | | | 40,340 | | | (29,806) | | | 10,534 | |
| Total | | $ | 553,310 |
| | $ | (281,849 | ) | | $ | 271,461 |
| | $ | 566,120 |
| | $ | (255,357 | ) | | $ | 310,763 |
| Total | | $ | 879,897 | | | $ | (399,990) | | | $ | 479,907 | | | $ | 781,384 | | | $ | (351,817) | | | $ | 429,567 | |
(1) Programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology, and trademarks underlying the associated program.
During the year ended December 31, 2019, the Corporation acquired intangible assets of $94.4 million which included Customer-related intangibles of $73.3 million, Technology of $17.7 million, and Other intangible assets of $3.4 million. The weighted average amortization periods for these aforementioned intangible assets are 14.1 years, 15.0 years, and 8.0 years, respectively.
Amortization expense from continuing operations for the years ended December 31, 2016, 2015,2019, 2018, and 20142017 was $33.4$45.0 million, $34.8$43.6 million, and $38.3$38.4 million, respectively. The estimated future amortization expense of intangible assets over the next five years is as follows:
| | | | | | | | |
| (In thousands) | | |
| 2020 | | $ | 55,360 | |
| 2021 | | 45,692 | |
| 2022 | | 43,149 | |
| 2023 | | 39,398 | |
| 2024 | | 36,010 | |
9. 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. Our leases have remaining lease terms of 1 year to 25 years, some of which include options for renewals, escalations, or terminations. Rental expenses for all operating leases amounted to $37.2 million, $38.4 million, and $37.1 million in 2019, 2018, and 2017, respectively.
Generally, the Corporation's lease contracts do not provide a readily determinable interest rate. Accordingly, the Corporation determines the incremental borrowing rate as of the lease commencement date in order to calculate the present value of its lease payments. The incremental borrowing rate is determined based on information available at the lease commencement date, including the lease term, market rates for the Corporation’s outstanding debt, as well as market rates for debt of companies with similar credit ratings.
The components of lease expense were as follows:
|
| | | | |
| (In thousands) | | |
| 2017 | | $ | 32,178 |
|
| 2018 | | 31,100 |
|
| 2019 | | 29,340 |
|
| 2020 | | 27,470 |
|
| 2021 | | 25,759 |
|
| | | | | |
| Year Ended |
| (In thousands) | December 31, 2019 |
| Operating lease cost | $ | 37,229 | |
| |
| Finance lease cost: | |
| Depreciation of finance leases | $ | 812 | |
| Interest on lease liabilities | 498 | |
| Total finance lease cost | $ | 1,310 | |
Supplemental cash flow information related to leases was as follows: 9. | | | | | |
| Year Ended |
| (In thousands) | December 31, 2019 |
| Cash used for operating activities: | |
| Operating cash flows used for operating leases | $ | (30,665) | |
| Operating cash flows used for finance leases | (498) | |
| Non-cash activity: | |
| Right-of-use assets obtained in exchange for operating lease obligations | $ | 36,033 | |
Supplemental balance sheet information related to leases was as follows:
| | | | | |
| (In thousands, except lease term and discount rate) | As of December 31, 2019 |
| Operating Leases | |
| Operating lease right-of-use assets, net | $ | 165,490 | |
| |
| Other current liabilities | $ | 26,773 | |
| Long-term operating lease liability | 145,124 | |
| Total operating lease liabilities | $ | 171,897 | |
| |
| Finance Leases | |
| Property, plant, and equipment | $ | 15,561 | |
| Accumulated depreciation | (5,533) | |
| Property, plant, and equipment, net | $ | 10,028 | |
| |
| Other current liabilities | $ | 807 | |
| Other liabilities | 10,982 | |
| Total finance lease liabilities | $ | 11,789 | |
| |
| Weighted average remaining lease term | |
| Operating leases | 9.2 years |
| Finance leases | 9.7 years |
| Weighted average discount rate | |
| Operating leases | 3.75 | % |
| Finance leases | 4.05 | % |
Maturities of lease liabilities were as follows:
| | | | | | | | |
| As of December 31, 2019 | |
| (In thousands) | Operating Leases | Finance Leases |
| 2020 | $ | 32,528 | | $ | 1,342 | |
| 2021 | 29,729 | | 1,375 | |
| 2022 | 23,432 | | 1,410 | |
| 2023 | 21,168 | | 1,445 | |
| 2024 | 18,640 | | 1,481 | |
| Thereafter | 79,982 | | 7,411 | |
| Total lease payments | 205,479 | | 14,464 | |
| Less: imputed interest | (33,582) | | (2,675) | |
| Total | $ | 171,897 | | $ | 11,789 | |
As of December 31, 2018, the approximate future minimum rental commitments under operating leases that had initial or remaining non-cancelable lease terms in excess of one year were as follows:
| | | | | |
| (In thousands) | Rental Commitments |
| 2019 | $ | 29,562 | |
| 2020 | 28,514 | |
| 2021 | 24,501 | |
| 2022 | 19,996 | |
| 2023 | 19,778 | |
| Thereafter | 93,974 | |
| Total | $ | 216,325 | |
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Forward Foreign Exchange and Currency Option Contracts
The Corporation has foreign currency exposure, primarily in the United Kingdom, Europe,Canada, and Canada.Europe. The Corporation uses financial instruments, such as forward and 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. Guidance on accounting for derivative instruments and hedging activities requires companies to recognize all of the derivative financial instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets.
Interest Rate Risks and Related Strategies
The Corporation’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Corporation’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Corporation periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Corporation exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Corporation’s foreign exchange contracts and interest rate swaps are considered Level 2 instruments which are based on market based inputs or unobservable inputs and corroborated by market data such as quoted prices, interest rates, or yield curves.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
In March 2013,As of December 31, 2019 and December 31, 2018, the Corporation entered into fixed-to-floatingdid not have any active interest rate swap agreements to convert the interest payments of (i) the $100 million, 3.85% notes, due February 26, 2025, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 1.77% spread, and (ii) the $75 million, 4.05% notes, due February 26, 2028, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 1.73% spread.
In January 2012, the Corporation entered into fixed-to-floating interest rate swap agreements to convert the interest payments of (i) the $200 million, 4.24% notes, due December 1, 2026, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 2.02% spread, and (ii) $25 million of the $100 million, 3.84% notes, due December 1, 2021, from a fixed rate to a floating interest rate based on 1-Month LIBOR plus a 1.90% spread.
On February 5, 2016, the Corporation terminated its March 2013 and January 2012 interest rate swap agreements. As a result of the termination, the Corporation received a cash payment of $20.4 million, representing the fair value of the interest rate swaps on the date of termination. In connection with the termination, the Corporation and the counterparties released each other from all obligations under the interest rate swaps agreement, including, without limitation, the obligation to make periodic payments under such agreements. The gain on termination is reflected as a bond premium to our notes' carrying value and will be amortized into interest expense over the remaining terms of the Senior Notes.
The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates, and yield curves.
Level 3: Inputs are unobservable data points that are not corroborated by market data.
Based upon the fair value hierarchy, all of the forward foreign exchange contracts and interest rate swaps are based on Level 2 inputs.swaps.
Effects on Consolidated Balance SheetsSheet
The locationAs of December 31, 2019 and amounts of derivative instrumentDecember 31, 2018, the fair values inof the consolidated balance sheet are below.
asset and liability derivative instruments were immaterial.
|
| | | | | | | | |
| | | December 31, |
| (In thousands) | | 2016 | | 2015 |
| Assets | | | | |
| Designated for hedge accounting | | | | |
| Interest rate swaps | | $ | — |
| | $ | 3,083 |
|
| Undesignated for hedge accounting | | | | |
| Forward exchange contracts | | $ | 142 |
| | $ | 223 |
|
Total asset derivatives (1) | | $ | 142 |
| | $ | 3,306 |
|
| Liabilities | | | | |
| Undesignated for hedge accounting | | | | |
| Forward exchange contracts | | $ | 419 |
| | $ | 673 |
|
Total liability derivatives (2) | | $ | 419 |
| | $ | 673 |
|
(1) Forward exchange derivatives are included in Other current assets and interest rate swap assets are included in Other assets.
(2) Forward exchange derivatives are included in Other current liabilities.
Effects on Consolidated StatementsStatement of Earnings
Fair value hedge
The location and amount of gains or (losses) on the hedged fixed rate debt attributable to changes in the market interest rates and the offsetting gain (loss) on the related interest rate swaps for the years ended December 31, were as follows:
|
| | | | | | | | | | | | |
| | | Gain/(Loss) on Swap |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Other income, net | | | | | | |
| Interest rate swaps | | $ | — |
| | $ | 8,204 |
| | $ | 44,724 |
|
| Hedged fixed rate debt | | $ | — |
| | $ | (8,204 | ) | | $ | (44,724 | ) |
| Total | | $ | — |
| | $ | — |
| | $ | — |
|
Undesignated hedges
The location and amount of (gains) and losses recognized in income on forward exchange derivative contracts not designated for hedge accounting for the years ended December 31, were as follows:
| | | (In thousands) | | 2016 | | 2015 | | 2014 | (In thousands) | | 2019 | | 2018 | | 2017 |
| Forward exchange contracts: | | | | | | | Forward exchange contracts: | |
| General and administrative expenses | | $ | 11,510 |
| | $ | 11,042 |
| | $ | 6,880 |
| General and administrative expenses | | $ | (2,072) | | | $ | 6,643 | | | $ | (346) | |
Debt
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 as of December 31, 2016.2019. The fair valuevalues of our debt instruments are characterized as a Level 2 measurement in accordance with the fair value hierarchy.measurements which are based on market-based inputs or unobservable inputs and corroborated by market data such as quoted prices, interest rates, or yield curves. The estimated fair values of the Corporation’s fixed rate debt instruments atas of December 31, 2016,2019, net of debt issuance costs, aggregated $961totaled $783 million compared to a carrying value, net of debt issuance costs, of $949$749 million. The estimated fair values of the Corporation’s fixed rate debt instruments atas of December 31, 2015,2018, net of debt issuance costs, aggregated $959totaled $750 million compared to a carrying value, net of debt issuance costs, of $952$749 million.
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.
Nonrecurring measurements
As discussed in Note 2 to the Consolidated Financial Statements, the Corporation classified certain businesses as held for sale during 2014. In accordance with the provisions of the Impairment or Disposal of Long-Lived Assets guidance of FASB Codification Subtopic 360–10, the carrying amounts of the disposal groups were written down to their estimated fair value, less costs to sell, resulting in an impairment charge of $40.8 million, which was included in the loss from discontinued operations before income taxes for the year ended December 31, 2015. For the year ended December 31, 2014, an impairment charge of $41.4 million was recorded in the loss from discontinued operations before income taxes. The fair value of the disposal groups were determined primarily by using non-binding quotes. In accordance with the fair value hierarchy, the impairment charge is classified as a Level 3 measurement as it is based on significant other unobservable inputs.
10.11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following as of December 31:
| | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 |
| Accrued compensation | | $ | 119,293 | | | $ | 118,479 | |
| Accrued commissions | | 6,678 | | | 7,769 | |
| Accrued interest | | 8,982 | | | 8,944 | |
| Accrued insurance | | 7,550 | | | 6,951 | |
| | | | |
| Other | | 22,241 | | | 24,811 | |
| Total accrued expenses | | $ | 164,744 | | | $ | 166,954 | |
|
| | | | | | | | |
| (In thousands) | | 2016 | | 2015 |
| Accrued compensation | | $ | 85,970 |
| | $ | 86,497 |
|
| Accrued commissions | | 5,189 |
| | 7,250 |
|
| Accrued interest | | 9,817 |
| | 9,900 |
|
| Accrued insurance | | 7,521 |
| | 5,261 |
|
| Other | | 21,742 |
| | 22,955 |
|
| Total accrued expenses | | $ | 130,239 |
| | $ | 131,863 |
|
Other current liabilities consist of the following as of December 31:
| | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 |
| Short-term lease liabilities | | $ | 26,773 | | | $ | — | |
| Warranty reserves | | $ | 17,512 | | | $ | 17,293 | |
| Pension and other postretirement liabilities | | 6,690 | | | 6,528 | |
| Other | | 23,227 | | | 21,008 | |
| Total other current liabilities | | $ | 74,202 | | | $ | 44,829 | |
12. INCOME TAXES
2017 Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law. The new legislation contained several key tax provisions, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate to 21%. The Corporation will also generally be eligible for a 100% dividends received exemption on its foreign earnings. The Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Corporation has applied an accounting policy election to provide for the tax expense related to GILTI in the year in which the tax is incurred.
|
| | | | | | | | |
| (In thousands) | | 2016 | | 2015 |
| Warranty reserves | | $ | 11,768 |
| | $ | 15,053 |
|
| Additional amounts due to sellers on acquisitions | | 1,985 |
| | 2,883 |
|
| Reserves on loss contracts | | 1,662 |
| | 2,711 |
|
| Pension and other postretirement liabilities | | 5,331 |
| | 4,560 |
|
| Other | | 7,281 |
| | 11,983 |
|
| Total other current liabilities | | $ | 28,027 |
| | $ | 37,190 |
|
Reduction of the U.S. Corporate Income Tax Rate 11. INCOME TAXES
The Corporation measures deferred tax assets and liabilities using enacted tax rates that are applicable in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Corporation’s deferred tax assets and liabilities were remeasured to reflect the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a provisional $13.4 million decrease in income tax expense for the year ended December 31, 2017.
Transition Tax on Foreign Earnings
The Corporation recorded provisional income tax expense of $18.2 million for the year ended December 31, 2017 related to the one-time transition tax on certain foreign earnings. The finalized transition tax of $23.6 million was to be paid over 8 years pursuant to the Tax Act, with $1.9 million paid in 2018. An additional $12.7 million carryforward from the 2017 income tax return further reduced the transition tax liability to $9.0 million as of December 31, 2018. The liability of $9.0 million, which is expected to be paid in 2024 and 2025, remained unchanged as of December 31, 2019.
Given that foreign undistributed earnings are no longer considered permanently reinvested, the Corporation also recorded provisional income tax expense of $3.8 million for the year ended December 31, 2017 for withholding taxes that would arise upon distribution of the Corporation’s foreign undistributed earnings.
During the year ended December 31, 2018, the Corporation recorded additional tax expense of $9.3 million for foreign withholding taxes associated with the Tax Act, $6.5 million of which related to the prior period.
During the year ended December 31, 2019, the Corporation recorded tax expense of $4.4 million for foreign withholding taxes. The Corporation is considered permanently reinvested to the extent of any outside basis differences in its foreign subsidiaries in excess of the amount of undistributed earnings.
Earnings before income taxes for the years ended December 31 consist of:
| | | (In thousands) | | 2016 | | 2015 | | 2014 | (In thousands) | | 2019 | | 2018 | | 2017 |
| Domestic | | $ | 154,571 |
| | $ | 135,112 |
| | $ | 120,563 |
| Domestic | | $ | 273,036 | | | $ | 217,374 | | | $ | 179,006 | |
| Foreign | | 113,390 |
| | 140,082 |
| | 126,381 |
| Foreign | | 123,426 | | | 138,865 | | | 120,613 | |
| | | $ | 267,961 |
| | $ | 275,194 |
| | $ | 246,944 |
| | $ | 396,462 | | | $ | 356,239 | | | $ | 299,619 | |
The provision for income taxes for the years ended December 31 consists of:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Current: | | | | | | |
| Federal | | $ | 14,195 | | | $ | 37,648 | | | $ | 54,963 | |
| State | | 3,766 | | | 9,228 | | | 2,648 | |
| Foreign | | 24,816 | | | 25,285 | | | 23,162 | |
| Total current | | 42,777 | | | 72,161 | | | 80,773 | |
| | | | | | |
| Deferred: | | | | | | |
| Federal | | 38,647 | | | 8,518 | | | 2,595 | |
| State | | 6,632 | | | (1,047) | | | 4,282 | |
| Foreign | | 823 | | | 858 | | | (2,922) | |
| Total deferred | | 46,102 | | | 8,329 | | | 3,955 | |
| Provision for income taxes | | $ | 88,879 | | | $ | 80,490 | | | $ | 84,728 | |
|
| | | | | | | | | | | | |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Current: | | | | | | |
| Federal | | $ | 45,523 |
| | $ | (6,741 | ) | | $ | 70,609 |
|
| State | | 8,002 |
| | 6,175 |
| | 9,065 |
|
| Foreign | | 20,861 |
| | 27,134 |
| | 33,401 |
|
| Total current | | 74,386 |
| | 26,568 |
| | 113,075 |
|
| | | | | | | |
| Deferred: | | | | | | |
| Federal | | 4,267 |
| | 49,060 |
| | (29,683 | ) |
| State | | 73 |
| | 7,390 |
| | (1,247 | ) |
| Foreign | | (147 | ) | | (72 | ) | | (5,150 | ) |
| Total deferred | | 4,193 |
| | 56,378 |
| | (36,080 | ) |
| Provision for income taxes | | $ | 78,579 |
| | $ | 82,946 |
| | $ | 76,995 |
|
The effective tax rate varies from the U.S. federal statutory tax rate for the years ended December 31, principally:
| | | | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| U.S. federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % | U.S. federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| Add (deduct): | | | | | | | Add (deduct): | |
| State and local taxes, net of federal benefit | | 1.1 |
| | 4.3 |
| | 2.4 |
| State and local taxes, net of federal benefit | | 2.4 | | | 2.2 | | | 1.8 | |
| R&D tax credits | | (0.9 | ) | | (1.3 | ) | | (1.3 | ) | R&D tax credits | | (1.2) | | | (1.0) | | | (1.3) | |
Foreign earnings (1) | | (5.8 | ) | | (6.2 | ) | | (4.4 | ) | Foreign earnings (1) | | 1.4 | | | 0.9 | | | (6.0) | |
| Stock compensation - excess tax benefits | | Stock compensation - excess tax benefits | | (0.8) | | | (1.3) | | | (2.6) | |
| Impacts related to the Tax Act | | Impacts related to the Tax Act | | — | | | 1.8 | | | 3.4 | |
| Foreign-derived intangible income | | Foreign-derived intangible income | | (1.3) | | | (0.8) | | | — | |
| All other, net | | (0.1 | ) | | (1.7 | ) | | (0.5 | ) | All other, net | | 0.9 | | | (0.2) | | | (2.0) | |
| Effective tax rate | | 29.3 | % | | 30.1 | % | | 31.2 | % | Effective tax rate | | 22.4 | % | | 22.6 | % | | 28.3 | % |
(1) Foreign earnings primarily include the net impact of differences between local statutory rates and the U.S. Federal statutory rate, the cost of repatriating foreign earnings, and the impact of changes to foreign valuation allowances.
The components of the Corporation’s deferred tax assets and liabilities atas of December 31 are as follows:
| | | (In thousands) | | 2016 | | 2015 | (In thousands) | | 2019 | | 2018 |
| Deferred tax assets: | | | | | Deferred tax assets: | |
| Pension plans | | $ | 45,568 |
| | $ | 40,102 |
| |
| Operating lease liabilities | | Operating lease liabilities | | $ | 35,299 | | | $ | — | |
| Inventories, net | | Inventories, net | | 15,220 | | | 14,154 | |
| Net operating loss | | Net operating loss | | 8,328 | | | 9,868 | |
| Environmental reserves | | 9,871 |
| | 9,561 |
| Environmental reserves | | 8,239 | | | 8,613 | |
| Inventories | | 21,758 |
| | 20,041 |
| |
| Postretirement/postemployment benefits | | 13,542 |
| | 13,272 |
| |
| Incentive compensation | | 9,425 |
| | 12,369 |
| Incentive compensation | | 8,130 | | | 8,472 | |
| Net operating loss | | 10,345 |
| | 9,043 |
| |
| Pension and other postretirement liabilities | | Pension and other postretirement liabilities | | 5,029 | | | 35,656 | |
| Capital loss carryover | | 11,352 |
| | 10,141 |
| Capital loss carryover | | 955 | | | 6,972 | |
| Other | | 39,977 |
| | 38,226 |
| Other | | 33,002 | | | 27,795 | |
| Total deferred tax assets | | 161,838 |
| | 152,755 |
| Total deferred tax assets | | 114,202 | | | 111,530 | |
| Deferred tax liabilities: | | | | | Deferred tax liabilities: | |
| Goodwill amortization | | Goodwill amortization | | 77,620 | | | 70,850 | |
| Operating lease right-of-use assets, net | | Operating lease right-of-use assets, net | | 33,915 | | | — | |
| Other intangible amortization | | Other intangible amortization | | 30,954 | | | 33,600 | |
| Depreciation | | 25,963 |
| | 29,771 |
| Depreciation | | 25,562 | | | 24,983 | |
| Goodwill amortization | | 97,667 |
| | 89,276 |
| |
| Other intangible amortization | | 51,712 |
| | 54,017 |
| |
| Withholding taxes | | Withholding taxes | | 13,097 | | | 10,300 | |
| Other | | 16,225 |
| | 12,280 |
| Other | | 7,524 | | | 5,345 | |
| Total deferred tax liabilities | | 191,567 |
| | 185,344 |
| Total deferred tax liabilities | | 188,672 | | | 145,078 | |
| Valuation allowance | | 17,776 |
| | 17,895 |
| Valuation allowance | | 3,386 | | | 11,646 | |
| Net deferred tax liabilities | | $ | 47,505 |
| | $ | 50,484 |
| Net deferred tax liabilities | | $ | 77,856 | | | $ | 45,194 | |
Deferred tax assets and liabilities are reflected on the Corporation’s consolidated balance sheet atas of December 31 as follows:
| | | (In thousands) | | 2016 | | 2015 | (In thousands) | | 2019 | | 2018 |
| Net noncurrent deferred tax assets | | 2,217 |
| | 3,963 |
| Net noncurrent deferred tax assets | | 2,303 | | | 1,927 | |
| Net noncurrent deferred tax liabilities | | 49,722 |
| | 54,447 |
| Net noncurrent deferred tax liabilities | | 80,159 | | | 47,121 | |
| Net deferred tax liabilities | | $ | 47,505 |
| | $ | 50,484 |
| Net deferred tax liabilities | | $ | 77,856 | | | $ | 45,194 | |
The Corporation has income tax net operating loss carryforwards related to international operations of approximately $24.0$15.4 million, of which $13.0 million have an indefinite life and $11.0$2.4 million which expire through 2023.2026. The Corporation has federal and state income tax net loss carryforwards of approximately $97.6$67.3 million, of which $66.5$63.4 million are net operating losses which expire through 20362038 and $31.1$3.9 million are capital loss carryforwards which expire inthrough 2020. The Corporation has recorded a deferred tax asset of $21.7$9.3 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, 20162019 in certain 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 decreased its valuation allowance by $0.1$8.3 million to $17.8$3.4 million, as of December 31, 2016,2019, 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, net of refunds, of $54.5$63.9 million, $4.9$79.1 million, and $35.0$92.1 million were made in 2016, 2015,2019, 2018, and 2014,2017, respectively.
The amount of undistributed foreign subsidiaries earnings considered to be permanently reinvested for which no provision has been made for U.S. federal or foreign taxes at December 31, 2016 was $283.5 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, foreign tax credits may partiality offset any tax liability.
The Corporation has recognizedrecorded a liability in Other liabilities for interest of $1.8$3.3 million and penalties of $1.4$1.6 million as of December 31, 2016.2019.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| | | (In thousands) | | 2016 | | 2015 | | 2014 | (In thousands) | | 2019 | | 2018 | | 2017 |
| Balance at January 1, | | $ | 12,414 |
| | $ | 11,560 |
| | $ | 10,623 |
| |
| Balance as of January 1, | | Balance as of January 1, | | $ | 13,563 | | | $ | 13,174 | | | $ | 11,454 | |
| Additions for tax positions of prior periods | | 32 |
| | 359 |
| | 1,421 |
| Additions for tax positions of prior periods | | 581 | | | 88 | | | 1,069 | |
| Reductions for tax positions of prior periods | | (1,679 | ) | | — |
| | — |
| Reductions for tax positions of prior periods | | (2,184) | | | (290) | | | (194) | |
| Additions for tax positions related to the current year | | 789 |
| | 2,026 |
| | 1,738 |
| Additions for tax positions related to the current year | | 936 | | | 1,036 | | | 1,273 | |
| Settlements | | (102 | ) | | (1,414 | ) | | (2,039 | ) | Settlements | | (220) | | | (445) | | | (428) | |
| Lapses of statute of limitations | | — |
| | — |
| | (41 | ) | |
| Foreign currency translation | | — |
| | (117 | ) | | (142 | ) | |
| Balance at December 31, | | $ | 11,454 |
| | $ | 12,414 |
| | $ | 11,560 |
| |
| Balance as of December 31, | | Balance as of December 31, | | $ | 12,676 | | | $ | 13,563 | | | $ | 13,174 | |
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, 2016:
|
| | | | | | | | | | |
| United States (Federal) | 20132016 | - | present |
| United States (Various states) | 20052008 | - | present |
| United Kingdom | 20092012 | - | present |
| Canada | 20102013 | - | present |
The Corporation does not expect any significant changes to the estimated amount of liability associated with its uncertain tax positions through the next twelve months. Included in the total unrecognized tax benefits atas of December 31, 2016, 2015,2019, 2018, and
2014 2017 is $7.7$10.2 million, $8.3$11.0 million, and $8.0$10.1 million, respectively, which if recognized, would favorably affectimpact the effective income tax rate.
12.13. DEBT
Debt consists of the following as of December 31:
| | | (In thousands) | | 2016 | | 2016 | | 2015 | | 2015 | (In thousands) | | 2019 | | 2019 | | 2018 | | 2018 |
| | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
| 5.51% Senior notes due 2017 | | 150,000 | | 154,509 | | 150,000 | | 158,024 | |
| 3.84% Senior notes due 2021 | | 100,000 | | 102,463 | | 100,307 | | 100,307 | 3.84% Senior notes due 2021 | | 100,000 | | | 102,079 | | | 100,000 | | | 100,359 | |
| 3.70% Senior notes due 2023 | | 225,000 | | 226,946 | | 225,000 | | 224,322 | 3.70% Senior notes due 2023 | | 202,500 | | | 207,882 | | | 202,500 | | | 201,813 | |
| 3.85% Senior notes due 2025 | | 100,000 | | 100,338 | | 100,450 | | 100,450 | 3.85% Senior notes due 2025 | | 90,000 | | | 93,838 | | | 90,000 | | | 89,711 | |
| 4.24% Senior notes due 2026 | | 200,000 | | 203,592 | | 201,422 | | 201,422 | 4.24% Senior notes due 2026 | | 200,000 | | | 213,126 | | | 200,000 | | | 202,288 | |
| 4.05% Senior notes due 2028 | | 75,000 | | 74,630 | | 75,904 | | 75,904 | 4.05% Senior notes due 2028 | | 67,500 | | | 71,260 | | | 67,500 | | | 66,942 | |
| 4.11% Senior notes due 2028 | | 100,000 | | 99,876 | | 100,000 | | 99,720 | 4.11% Senior notes due 2028 | | 90,000 | | | 95,607 | | | 90,000 | | | 89,647 | |
| Other debt | | 668 | | 668 | | 1,259 | | 1,259 | Other debt | | — | | | — | | | 243 | | | 243 | |
| Total debt | | 950,668 | | 963,022 | | 954,342 | | 961,408 | Total debt | | 750,000 | | | 783,792 | | | 750,243 | | | 751,003 | |
| Debt issuance costs, net | | (984) | | (984) | | (1,137) | | (1,137) | Debt issuance costs, net | | (594) | | | (594) | | | (714) | | | (714) | |
| Unamortized interest rate swap proceeds | | 16,614 | | 16,614 | | — | | — | |
Unamortized interest rate swap proceeds (1) | | Unamortized interest rate swap proceeds (1) | | 11,233 | | | 11,233 | | | 13,027 | | | 13,027 | |
| Total debt, net | | 966,298 | | 978,652 | | 953,205 | | 960,271 | Total debt, net | | 760,639 | | | 794,431 | | | 762,556 | | | 763,316 | |
| Less: current portion of long-term debt and short-term debt | | 150,668 | | 150,668 | | 1,259 | | 1,259 | Less: current portion of long-term debt and short-term debt | | — | | | — | | | 243 | | | 243 | |
| Total long-term debt | | $815,630 | | $827,984 | | $951,946 | | $959,012 | Total long-term debt | | $ | 760,639 | | | $ | 794,431 | | | $ | 762,313 | | | $ | 763,073 | |
The Corporation did not have any borrowings against
(1) Represents the Revolving Credit Agreementgain from termination of the Corporation's interest rate swap agreements on its 3.85% and 4.24% Senior Notes in 2016. February 2016, which will be amortized into interest expense over the remaining terms of the respective notes.
The weighted-average interest rate of the Corporation’sCorporation's Revolving Credit Agreement in 2019 and 2018 was 3.3% and 3.2% in 2015., respectively.
The Corporation's total debt outstanding had fixeda weighted-average interest rate of 3.7% in both 2019 and variable interest rates averaging 3.9% and 3.3% in 2016 and 2015,2018, respectively.
Aggregate maturities of debt are as follows:
| | | (In thousands) | | (In thousands) | |
| 2017 | $ | 150,668 |
| |
| 2018 | — |
| |
| 2019 | — |
| |
| 2020 | — |
| 2020 | $ | — | |
| 2021 | 100,000 |
| 2021 | 100,000 | |
| 2022 | | 2022 | — | |
| 2023 | | 2023 | 202,500 | |
| 2024 | | 2024 | — | |
| Thereafter | 700,000 |
| Thereafter | 447,500 | |
| Total | $ | 950,668 |
| Total | $ | 750,000 | |
Interest payments of $38$30 million, $33$32 million, and $33$39 million were made in 2016, 2015,2019, 2018, and 2014,2017, respectively.
Revolving Credit Agreement
In August 2012,October 2018, the Corporation refinancedamended the terms of its existing credit facility by entering into a Third Amended and Restated Credit Agreement (Credit Agreement) with a syndicate of financial institutions, led by Bank of America N.A., Wells Fargo, N.A,N.A., and JP Morgan Chase Bank, N.A.N.A.. The amended agreement, which provides the Corporation with a borrowing capacity of $500 million, extended the maturity date from November 2019 to October 2023 and expanded the accordion feature from $100 million to $200 million. 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. Under the terms of the Credit Agreement, the Corporation has borrowing capacity of $500 million. In addition, the Credit Agreement provides an accordion feature which allows the Corporation to borrow an additional $100 million. As of December 31, 2016,2019, the Corporation had $47$33 million in letters of credit supported by the credit facility and no borrowings outstanding under the credit facility. The unused credit available under the credit facility atas of December 31, 20162019 was $453$467 million, which wethe Corporation had the ability to borrow in full without violating ourits debt to capitalization covenant.
In December 2014, the Corporation amended its existing credit facility by entering into a Second Amendment to the Third Amended and Restated Credit Agreement (Credit Agreement) with a syndicate of financial institutions, led by Bank of America N.A., Wells Fargo, N.A, and JP Morgan Chase Bank, N.A. The amendment extends the maturity date of the agreement to November 2019. No other material modifications were made to the 2012 Credit Agreement.
The Credit Agreement contains covenants that the Corporation considers usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated debt to capitalization ratio of 60%. The Credit Agreement has customary events of default, such as non-payment of principal when due; nonpayment of interest, fees, or other amounts; cross-payment default and cross-acceleration.
Borrowings under the credit agreement will accrue interest based on (i) Libor or (ii) a base rate of the highest of (a) the federal funds rate plus 0.5%, (b) BofA’s announced prime rate, or (c) the Eurocurrency rate plus 1%, plus a margin. The interest rate and level of facility fees are dependent on certain financial ratios, as defined in the Credit Agreement. The Credit Agreement also provides customary fees, including administrative agent and commitment fees. In connection with the Credit Agreement, wethe Corporation paid customary transaction fees that have been deferred and are being amortized over the term of the Credit Agreement.
Senior Notes
On February 26, 2013, the Corporation issued $500 million of Senior Notes (the “2013 Notes”). The 2013 Notes consistconsisted of $225 million of 3.70% Senior Notes that mature on February 26, 2023, $100 million of 3.85% Senior Notes that mature on February 26, 2025, and $75 million of 4.05% Senior Notes that mature on February 26, 2028. $100 million of additional 4.11% Senior Notes were deferred and subsequently issued on September 26, 2013 that mature on September 26, 2028. On October 15, 2018, the Corporation made a discretionary $50 million prepayment on the $500 million 2013 Notes. The 2013 Notes are senior unsecured obligations, 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 2013 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with the issuance of the 2013 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of the 2013 Notes. Under the terms of the Note Purchase Agreement, the Corporation is required to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. The debt to capitalization ratio (as defined per the Notes Purchase Agreement and Credit Agreement) is calculated using the same formula for all of the Corporation’s debt agreements and is a measure of the Corporation’s indebtedness to capitalization, where capitalization equals debt plus equity. As of December 31, 2016,2019, the Corporation had the ability to borrow additional debt of $0.8$1.8 billion without violating our debt to capitalization covenant. The 2013 Notes also contain a cross default provision with respect to the Corporation’s other senior indebtedness.
On December 8, 2011, the Corporation issued $300$300 million of Senior Notes (the “2011 Notes”). The 2011 Notes consist of $100 million of 3.84% Senior Notes that mature on December 1, 2021 and $200 million of 4.24% Senior Series Notes that mature on December 1, 2026. The 2011 Notes are senior unsecured obligations, equal in right of payment to our existing senior indebtedness. The Corporation, at its option, can prepay at any time all or any part of our 2011 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with our 2011 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of our 2011 Notes. Under the Note Purchase Agreement, the Corporation is required to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. The 2011 Notes also contain a cross default provision with our other senior indebtedness.
On December 1, 2005, the Corporation issued $150 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 are being 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%. The 2005 Notes also contain a cross default provision with the Corporation’s other senior indebtedness.
13.14. 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.
As of December 31, 2016, 2015,2019, 2018, and 2014,2017, there were no options outstanding that were considered anti-dilutive.
Earnings per share calculations for the years ended December 31, 2016, 2015,2019, 2018, and 2014, are2017, were as follows:
|
| | | | | | | | | | | |
| (In thousands, except per share data) | | Earnings from continuing operations | | Weighted- Average Shares Outstanding | | Earnings per share from continuing operations |
| 2016 | | | | | | |
| Basic earnings per share from continuing operations | | $ | 189,382 |
| | 44,389 |
| | $ | 4.27 |
|
| Dilutive effect of stock options and deferred stock compensation | | | | 656 |
| | |
| Diluted earnings per share from continuing operations | | $ | 189,382 |
| | 45,045 |
| | $ | 4.20 |
|
| 2015 | | | | | | |
| Basic earnings per share from continuing operations | | $ | 192,248 |
| | 46,624 |
| | $ | 4.12 |
|
| Dilutive effect of stock options and deferred stock compensation | | | | 992 |
| | |
| Diluted earnings per share from continuing operations | | $ | 192,248 |
| | 47,616 |
| | $ | 4.04 |
|
| 2014 | | | | | | |
| Basic earnings per share from continuing operations | | $ | 169,949 |
| | 48,019 |
| | $ | 3.54 |
|
| Dilutive effect of stock options and deferred stock compensation | | | | 1,056 |
| | |
| Diluted earnings per share from continuing operations | | $ | 169,949 |
| | 49,075 |
| | $ | 3.46 |
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | Net Earnings | | Weighted-
Average Shares
Outstanding | | Earnings per Share |
| 2019 | | | | | | |
| Basic earnings per share | | $ | 307,583 | | | 42,739 | | | $ | 7.20 | |
| Dilutive effect of stock options and deferred stock compensation | | | | 277 | | | |
| Diluted earnings per share | | $ | 307,583 | | | 43,016 | | | $ | 7.15 | |
| 2018 | | | | | | |
| Basic earnings per share | | $ | 275,749 | | | 43,892 | | | $ | 6.28 | |
| Dilutive effect of stock options and deferred stock compensation | | | | 424 | | | |
| Diluted earnings per share | | $ | 275,749 | | | 44,316 | | | $ | 6.22 | |
| 2017 | | | | | | |
| Basic earnings per share | | $ | 214,891 | | | 44,182 | | | $ | 4.86 | |
| Dilutive effect of stock options and deferred stock compensation | | | | 579 | | | |
| Diluted earnings per share | | $ | 214,891 | | | 44,761 | | | $ | 4.80 | |
14.15. SHARE-BASED COMPENSATION PLANS
In May 2014, the Corporation adopted the Curtiss WrightCurtiss-Wright 2014 Omnibus Incentive Plan (the “2014 Omnibus Plan”). The plan replaced the Corporation's existing 2005 Long Term Incentive Plan and the 2005 Stock Plan for Non-Employee Directors (collectively the “2005 Stock Plans”). Beginning in May 2014, all awards were granted under the 2014 Omnibus Plan. The maximum aggregate number of shares of common stock that may be issued under the 2014 Omnibus Plan will beare 2,400,000 less one share of common stock for every one share of common stock granted under any Prior Planprior plan after December 31, 2013 and prior to the effective date of the 2014 Omnibus Plan. In addition, any awards that were previously granted under any Prior Planprior plan that terminate without issuance of shares shall be eligible for issuance under the 2014 Omnibus Plan. Awards under the 2014 Omnibus Plan may be in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (RSU), other stock-based awards, and performance share units (PSU), or cash basedcash-based performance units (PU).
During 2016,2019, the Corporation granted share-based awards in the form of RSUs, PSUs, PUs, and restricted stock. Previous grants under the 2005 Stock Plans included non-qualified stock options. Under our employee benefit program, the Corporation also provides an Employee Stock Purchase Plan (ESPP) available to most active employees. Certain awards provide for accelerated vesting if there is a change in control.
The compensation cost for employee and non-employee director share-based compensation programs during 2016, 2015,2019, 2018, and 20142017 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Employee Stock Purchase Plan | | 1,585 | | | 1,435 | | | 1,207 | |
| Performance Share Units | | 4,853 | | | 4,746 | | | 4,340 | |
| Restricted Share Units | | 6,061 | | | 7,026 | | | 4,931 | |
| Other share-based payments | | 1,170 | | | 887 | | | 1,094 | |
| Total share-based compensation expense before income taxes | | $ | 13,669 | | | $ | 14,094 | | | $ | 11,572 | |
|
| | | | | | | | | | | | |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Employee Stock Purchase Plan | | 1,184 |
| | 1,279 |
| | 1,350 |
|
| Performance Share Units | | 3,910 |
| | 4,349 |
| | 3,728 |
|
| Restricted Share Units | | 3,426 |
| | 3,015 |
| | 2,655 |
|
| Other share-based payments | | 958 |
| | 830 |
| | 767 |
|
| Total share-based compensation expense before income taxes | | $ | 9,478 |
| | $ | 9,473 |
| | $ | 8,500 |
|
Other share-based grants include service basedservice-based restricted stock awards to non-employee directors, who are treated as employees as prescribed by the accounting guidance on share-based payments. The compensation cost recognized follows the cost of the employee, which is primarily reflected as Generalgeneral and administrative expensesexpense in the Consolidated StatementsStatement of Earnings. No share-based compensation costs were capitalized during 2016, 2015,2019, 2018, or 2014.2017.
The following table summarizes the cash received from share-based awards and the Corporation's tax benefit recognized on share-based compensation:
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Cash received from share-based awards | | $ | 11,770 | | | $ | 11,940 | | | $ | 14,179 | |
|
| | | | | | | | | | | | |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Cash received from share-based awards | | $ | 22,300 |
| | $ | 28,706 |
| | $ | 38,183 |
|
| Recognized tax benefit on awards | | $ | 11,101 |
| | $ | 9,119 |
| | $ | 9,610 |
|
A summary of employee stock option activity is as follows:
|
| | | | | | | | | | | | | |
| | | Shares (000’s) | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contractual Term in Years | | Aggregate Intrinsic Value (000’s) |
| Outstanding at December 31, 2015 | | 852 |
| | $ | 33.54 |
| | | | |
| Exercised | | (408 | ) | | 35.30 |
| | | | |
| Forfeited | | (1 | ) | | 36.73 |
| | | | |
| Outstanding at December 31, 2016 | 443 |
| | $ | 31.91 |
| | 2.9 | | $ | 29,421 |
|
| Exercisable at December 31, 2016 | 443 |
| | $ | 31.91 |
| | 2.9 | | $ | 29,421 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares
(000’s) | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term in
Years | | Aggregate
Intrinsic
Value
(000’s) |
| Outstanding as of December 31, 2018 | | 158 | | | $ | 30.34 | | | | | |
| Exercised | | (91) | | | 30.64 | | | | | |
| Forfeited | | (1) | | | 30.90 | | | | | |
| Outstanding as of December 31, 2019 | | 66 | | | $ | 29.93 | | | 0.9 | | $ | 7,396 | |
| Exercisable as of December 31, 2019 | | 66 | | | $ | 29.93 | | | 0.9 | | $ | 7,396 | |
The total intrinsic value of stock options exercised during 2016, 2015,2019, 2018, and 20142017 was $43.2$8.7 million,, $36.8 $10.1 million,, and $28.3$12.7 million,, respectively.
Performance Share Units
The Corporation has granted performance share units to certain employees, whose three yearthree-year cliff vesting is contingent upon how the Corporation's total shareholder return over the three-year term of the awards comparescompared to that of a self-constructed peer group. The non-vested shares are subject to forfeiture if established performance goals are not met or employment is terminated other than due to death, disability, or retirement. Share plans are denominated in share-based units based on the fair market value of the Corporation’s Commoncommon stock on the date of grant. The performance share unit’s compensation cost is amortized to expense on a straight-line basis over the three-year requisite service period. As forfeiture assumptions change, compensation cost will be adjusted on a cumulative basis in the period of the assumption change.
Restricted Share Units
Restricted share units cliff vest at the end of the awards’ vesting period. The restricted share units are service basedservice-based and thus compensation cost is amortized to expense on a straight-line basis over the requisite service period, which is typically three years. The non-vested restricted units are subject to forfeiture if employment is terminated other than due to death, disability, or retirement.
A summary of the Corporation’s 20162019 activity related to performance share units and restricted share units are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Performance Share Units (PSUs) | | | | Restricted Share Units (RSUs) | | |
| | Shares/Units
(000’s) | | Weighted-
Average
Fair Value | | Shares/Units
(000’s) | | Weighted-
Average
Fair Value |
| Nonvested as of December 31, 2018 | | 117 | | | $ | 101.70 | | | 137 | | | $ | 54.66 | |
| Granted | | 50 | | | 121.15 | | | 76 | | | 114.98 | |
| Vested | | (68) | | | 86.43 | | | (58) | | | 98.61 | |
| Forfeited | | (2) | | | 155.91 | | | (6) | | | 117.48 | |
| Nonvested as of December 31, 2019 | | 97 | | | $ | 149.99 | | | 149 | | | $ | 105.42 | |
| Expected to vest as of December 31, 2019 | | 97 | | | $ | 149.99 | | | 149 | | | $ | 105.42 | |
|
| | | | | | | | | | | | | | |
| | | Performance Share Units (PSUs) | | Restricted Share Units (RSUs) |
| | | Shares/Units (000’s) | | Weighted- Average Fair Value | | Shares/Units (000’s) | | Weighted- Average Fair Value |
| Nonvested at December 31, 2015 | 286 |
| | $ | 52.70 |
| | 245 |
| | $ | 55.98 |
|
| Granted | | 38 |
| | 124.83 |
| | 63 |
| | 98.64 |
|
| Vested | | (108 | ) | | 40.30 |
| | (93 | ) | | 43.42 |
|
| Forfeited | | (12 | ) | | 77.27 |
| | (11 | ) | | 66.48 |
|
| Nonvested at December 31, 2016 | 204 |
| | $ | 71.28 |
| | 204 |
| | $ | 74.38 |
|
| Expected to vest at December 31, 2016 | 204 |
| | $ | 71.28 |
| | 204 |
| | $ | 74.38 |
|
Nonvested PSUs had an intrinsic value of $20.0$13.7 million and unrecognized compensation costs of $8.9$4.8 million as of December 31, 2016.2019. Nonvested RSUs had an intrinsic value of $20.0$20.9 million and unrecognized compensation costs of $10.6$8.7 million as of December 31, 2016.2019. Unrecognized compensation costs related to PSUs and RSUs are expected to be recognized over periods of 2.4-2.5 years.1.6 years and 2.3 years, respectively.
Employee Stock Purchase Plan
The Corporation’s ESPP enables eligible employees to purchase the Corporation’s common stock at a price per share equal to 85% of the fair market value at the end of each offering period. Each offering period of the ESPP lasts six months, commencing on January 1st and July 1st of each year. Compensation cost is recognized on a straight-line basis over the six-month vesting period during which employees perform related services.
16. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation maintains ten10 separate and distinct pension and other post-retirement defined benefit plans, consisting of three3 domestic plans and seven7 separate foreign pension plans. Effective May 1, 2016, the Corporation completed the merger of three frozen UK defined benefit pension schemes by merging the Metal Improvement Company Salaried Staff Pension Scheme and the Mechetronics Limited Retirement Benefits Scheme into the Curtiss-Wright Penny & Giles Pension Plan. The Penny & Giles Plan was then renamed the Curtiss-Wright UK Pension Plan.
Effective December 31, 2014, the Corporation executed the following plan mergers: the two Williams Controls defined benefit pensiondomestic plans were merged with the CW Pension Plan, resulting in one surviving domestic qualified plan, and the three domestic post-retirement health-benefits plans (CW, EMD, and Williams Controls) were merged into one. Post-merger, the Corporation maintains the following domestic plans:include a qualified pension plan, a non-qualified pension plan, and a postretirement health-benefits plan. The foreign plans consist of one1 defined benefit pension plan each in the United Kingdom, Canada, and Switzerland, two2 in Germany, and two2 in Mexico.
Domestic Plans
Qualified Pension Plan
The Corporation maintains a defined benefit pension plan (the “CW Pension Plan”) covering certain employee populations under six benefit formulas: a non-contributory non-union and union formula for certain Curtiss-Wright (CW) employees, a contributory union and non-union benefit formula for employees at the EMD business unit, and two benefit formulas providing annuity benefits for participants in the former Williams Controls salaried and union plans.
CW non-union employees hired prior to February 1, 2010 receive a “traditional” benefit based on years of credited service, using the five highest consecutive years’ compensation during the last ten years of service. These employees became participants under the CW Pension Plan after one year of service and were vested after three years of service. CW non-union employees hired on or after the effective date were eligible for a cash balance benefit through December 31, 2013, and were transitioned to the new defined contribution plan, further described below. 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.
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. On December 31, 2012, the Corporation amended the CW Pension Plan to close the benefit to EMD employees hired after January 1, 2014.
Participants of the former Williams Controls Retirement Income Plan for salaried employees are either deferred vested participants or currently receiving benefits, as benefit accruals under the plan were frozen to future accruals effective January 1, 2003. Benefits in the salaried plan are based on average compensation and years of service.
Participants of the former Williams Controls UAW Local 492 Plan for union employees are entitled to a benefit based on years of service multiplied by a monthly pension rate, and may be eligible for supplemental benefits based upon attainment of certain age and service requirements.
In May 2013, the Company’s Board of Directors approved an amendment to the CW Pension Plan. Effective January 1, 2014, all active non-union employees participating in the final and career average pay formulas in the defined benefit plan will cease accruals 15 years from the effective date of the amendment. In addition to the sunset provision, the “cash balance”cash balance benefit accruals for non-union participants ceased as of January 1, 2014. Non-UnionNon-union employees who arewere not currently receiving final or career average pay benefits became eligible to participate in a new defined contribution plan which provides both employer match and non-elective contribution components, upcomponents. Subsequent to a maximum employer contribution of 6%. Thethe original amendment, does not affect CWthe Corporation successfully negotiated the sunset provision into the bargaining agreements for all represented employees that are subject to collective bargaining agreements.received benefits through this plan.
AtAs of December 31, 20162019 and 2015,2018, the Corporation had a noncurrent pension liability of $40.4$50.2 million and $38.1$26.6 million,, respectively. This increase was primarily driven by a decrease in market interest ratesthe discount rate as of December 31, 2016,2019, partially offset by favorable changes to assumed mortality and favorable liability and asset experience due to strong market returns during 2016.2019.
DueOn January 8, 2020, the Corporation made a voluntary contribution of $150 million to the large cash contribution in January 2015, theplan. The Corporation does not expect to make any furtherrequired contributions through 2021, but expects to make annual contributions to the defined contribution plan, as further described below.2024.
Nonqualified Pension Plan
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 $40.4$59.6 million and $39.4$52.8 million as of December 31, 20162019 and 2015,2018, respectively. The Corporation’s contributions to the CW Restoration Plan are expected to be $3.2$4.8 million in 2017.2020.
Other Post-Employment Benefits (OPEB) Plan
Under the plan merger effective December 31, 2014, the
The Corporation provides post-employment benefits consisting of retiree health and life insurance to three distinct groups of employees/retirees: the CW Grandfathered plan, and plans assumed in the acquisitions of EMD and Williams Controls.
In 2002, the Corporation restructured the postemployment medical benefits for then-active CW employees, effectively freezing the plan. The plan continues to be maintained for certain retired CW employees.
The Corporation also provides retiree health and life insurance benefits for substantially all of the Curtiss-Wright EMD employees. The plan provides basic health and welfare coverage for pre-65 participants 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)(RRAs) to participants in lieu of the traditional benefit delivery. Participant accounts are funded a set amount annually that can be used to purchase supplemental coverage on the open market, effectively capping the benefit.
The plan also provides retiree health and life insurance benefits for certain retirees of the Williams Controls salaried and union pension plans. Benefits are available to those employees who retired prior to December 31, 1993 in the salaried plan, and prior to October 1, 2003 in the union plan. Effective August 31, 2013, the Corporation modified the benefit design for post-65 retirees by introducing Retiree Reimbursement Accounts (RRA’s)RRAs to align with the EMD delivery model.
The Corporation had an accrued postretirement benefit liability atas of December 31, 20162019 and 20152018 of $24.4$23.6 million and $22.0$22.0 million,, respectively. Pursuant to the EMD purchase agreement, the Corporation has a discounted receivable from Washington Group International to reimburse the Corporation for a portion of these post-retirement benefit costs. At December 31, 2016 and 2015, the discounted receivable included in other assets was $0.4 million and $1.0 million, respectively. The Corporation expects to contribute $1.8$1.5 million to the plan during 2017.2020.
Foreign Plans
The foreign plans consist of one defined benefit pension plan each in the United Kingdom, Canada, and Switzerland, two in Germany, and two in Mexico. As of December 31, 20162019 and 2015,2018, the total projected benefit obligation related to all foreign plans is $91.0was $102.7 million and $87.8$83.5 million,, respectively. As of December 31, 20162019 and 2015,2018, the Corporation had a net accrued pension liability(liability)/asset of $3.3$(0.2) million and $5.1$2.7 million,, respectively. The Corporation's contributions to the foreign plans are expected to be $2.6$2.3 million in 2017.2020.
Components of net periodic benefit expense
The net pension and net postretirement benefit costs (income) consisted of the following:
| | | | | Pension Benefits | | Postretirement Benefits | | Pension Benefits | | | Postretirement Benefits | |
| (In thousands) | | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | (In thousands) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 |
| Service cost | | $ | 25,100 |
| | $ | 26,873 |
| | $ | 25,262 |
| | $ | 338 |
| | $ | 286 |
| | $ | 246 |
| Service cost | | $ | 23,664 | | | $ | 27,116 | | | $ | 25,093 | | | $ | 432 | | | $ | 490 | | | $ | 435 | |
| Interest cost | | 30,495 |
| | 30,050 |
| | 30,403 |
| | 996 |
| | 842 |
| | 877 |
| Interest cost | | 29,019 | | | 26,149 | | | 25,895 | | | 796 | | | 719 | | | 762 | |
| Expected return on plan assets | | (54,101 | ) | | (54,629 | ) | | (41,746 | ) | | — |
| | — |
| | — |
| Expected return on plan assets | | (59,153) | | | (58,641) | | | (53,552) | | | — | | | — | | | — | |
| Amortization of prior service cost | | (46 | ) | | 618 |
| | 662 |
| | (657 | ) | | (657 | ) | | (657 | ) | Amortization of prior service cost | | (283) | | | (252) | | | (100) | | | (656) | | | (656) | | | (656) | |
| Recognized net actuarial loss/(gain) | | 12,029 |
| | 16,890 |
| | 6,827 |
| | (296 | ) | | (551 | ) | | (811 | ) | Recognized net actuarial loss/(gain) | | 9,310 | | | 16,867 | | | 12,925 | | | (198) | | | (131) | | | (223) | |
| Cost of settlements/curtailments | | — |
| | 7,461 |
| | 377 |
| | — |
| | — |
| | — |
| Cost of settlements/curtailments | | — | | | 337 | | | 327 | | | — | | | — | | | — | |
| Net periodic benefit cost (income) | | $ | 13,477 |
| | $ | 27,263 |
| | $ | 21,785 |
| | $ | 381 |
| | $ | (80 | ) | | $ | (345 | ) | Net periodic benefit cost (income) | | $ | 2,557 | | | $ | 11,576 | | | $ | 10,588 | | | $ | 374 | | | $ | 422 | | | $ | 318 | |
The cost of settlements/curtailments indicated above represents events that are accounted for under guidance on employers’ accounting for settlements and curtailments of defined benefit pension plans. In 2015, the2018, a settlement charge is primarilywas incurred in connection with a result ofrestructuring in Switzerland. In 2017, there were settlement charges incurred in both the retirement of the Corporation’s former ChairmanU.K. and his election to receive the nonqualified portion of his pension benefit as a single lump sum payout. In 2014, the charge was due to a settlement in the CWAT plan in Switzerland.
The following table outlines the Corporation's consolidated disclosure of the pension benefits and postretirement benefits information described previously. The Corporation had no foreign postretirement plans. All plans were valued using a December 31, 20162019 measurement date. |
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Postretirement Benefits |
| (In thousands) | | 2016 | | 2015 | | 2016 | | 2015 |
| Change in benefit obligation: | | | | | | | | |
| Beginning of year | | $ | 774,710 |
| | $ | 797,360 |
| | $ | 21,980 |
| | $ | 23,250 |
|
| Service cost | | 25,100 |
| | 26,873 |
| | 338 |
| | 286 |
|
| Interest cost | | 30,495 |
| | 30,050 |
| | 996 |
| | 842 |
|
| Plan participants’ contributions | | 1,897 |
| | 1,825 |
| | 266 |
| | 345 |
|
| Amendments | | — |
| | (2,951 | ) | | — |
| | — |
|
| Actuarial loss (gain) | | 19,640 |
| | (10,803 | ) | | 3,372 |
| | (1,133 | ) |
| Benefits paid | | (41,115 | ) | | (60,662 | ) | | (2,516 | ) | | (1,610 | ) |
| Actual expenses | | (1,206 | ) | | (1,787 | ) | | — |
| | — |
|
| Currency translation adjustments | | (10,916 | ) | | (5,195 | ) | | — |
| | — |
|
| End of year | | $ | 798,605 |
| | $ | 774,710 |
| | $ | 24,436 |
| | $ | 21,980 |
|
|
| | | | | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | |
| Beginning of year | | $ | 692,074 |
| | $ | 595,829 |
| | $ | — |
| | $ | — |
|
| Actual return on plan assets | | 65,872 |
| | (4,092 | ) | | — |
| | — |
|
| Employer contribution | | 8,210 |
| | 165,575 |
| | 2,250 |
| | 1,265 |
|
| Plan participants’ contributions | | 1,897 |
| | 1,825 |
| | 266 |
| | 345 |
|
| Benefits paid | | (41,115 | ) | | (60,662 | ) | | (2,516 | ) | | (1,610 | ) |
| Actual Expenses | | (1,206 | ) | | (1,787 | ) | | — |
| | — |
|
| Currency translation adjustments | | (11,124 | ) | | (4,614 | ) | | — |
| | — |
|
| End of year | | $ | 714,608 |
| | $ | 692,074 |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| Funded status | | $ | (83,997 | ) | | $ | (82,636 | ) | | $ | (24,436 | ) | | $ | (21,980 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | Postretirement Benefits | | |
| (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Change in benefit obligation: | | | | | | | | |
| Beginning of year | | $ | 814,894 | | | $ | 868,887 | | | $ | 22,060 | | | $ | 25,035 | |
| Service cost | | 23,664 | | | 27,116 | | | 432 | | | 490 | |
| Interest cost | | 29,019 | | | 26,149 | | | 796 | | | 719 | |
| Plan participants’ contributions | | 1,276 | | | 1,402 | | | 346 | | | 319 | |
| Actuarial (gain) loss | | 118,893 | | | (58,913) | | | 2,124 | | | (1,982) | |
| Benefits paid | | (43,736) | | | (41,962) | | | (2,192) | | | (2,521) | |
| Actual expenses | | (1,846) | | | (1,371) | | | — | | | — | |
| Settlements | | — | | | (2,228) | | | — | | | — | |
| Currency translation adjustments | | 3,023 | | | (4,186) | | | — | | | — | |
| End of year | | $ | 945,187 | | | $ | 814,894 | | | $ | 23,566 | | | $ | 22,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in plan assets: | | | | | | | | |
| Beginning of year | | $ | 738,296 | | | $ | 776,482 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | 133,896 | | | (44,876) | | | — | | | — | |
| Employer contribution | | 3,867 | | | 55,311 | | | 1,846 | | | 2,203 | |
| Plan participants’ contributions | | 1,276 | | | 1,402 | | | 346 | | | 319 | |
| | | | | | | | |
| Benefits paid | | (43,736) | | | (44,190) | | | (2,192) | | | (2,522) | |
| Actual Expenses | | (1,846) | | | (1,371) | | | — | | | — | |
| Currency translation adjustments | | 3,386 | | | (4,462) | | | — | | | — | |
| End of year | | $ | 835,139 | | | $ | 738,296 | | | $ | — | | | $ | — | |
| | | | | | | | |
| Funded status | | $ | (110,048) | | | $ | (76,598) | | | $ | (23,566) | | | $ | (22,060) | |
|
| | | | | | | | | | | | | | | | |
| | | Pension Benefits | | Postretirement Benefits |
| (In thousands) | | 2016 | | 2015 | | 2016 | | 2015 |
| Amounts recognized on the balance sheet | | | | | | | | |
| Noncurrent assets | | $ | 4,049 |
| | $ | 3,667 |
| | $ | — |
| | $ | — |
|
| Current liabilities | | (3,498 | ) | | (2,998 | ) | | (1,833 | ) | | (1,562 | ) |
| Noncurrent liabilities | | (84,548 | ) | | (83,305 | ) | | (22,603 | ) | | (20,418 | ) |
| Total | | $ | (83,997 | ) | | $ | (82,636 | ) | | $ | (24,436 | ) | | $ | (21,980 | ) |
| Amounts recognized in accumulated other comprehensive income (AOCI) | | | | | | | | |
| Net actuarial loss (gain) | | $ | 198,630 |
| | $ | 203,729 |
| | $ | (5,178 | ) | | $ | (8,846 | ) |
| Prior service cost | | (1,580 | ) | | (1,635 | ) | | (3,373 | ) | | (4,030 | ) |
| Total | | $ | 197,050 |
| | $ | 202,094 |
| | $ | (8,551 | ) | | $ | (12,876 | ) |
| Amounts in AOCI expected to be recognized in net periodic cost in the coming year: | | | | | | | | |
| Loss (gain) recognition | | $ | 11,793 |
| | $ | 12,373 |
| | $ | (203 | ) | | $ | (571 | ) |
| Prior service cost recognition | | $ | (105 | ) | | $ | (50 | ) | | $ | (657 | ) | | $ | (657 | ) |
| Accumulated benefit obligation | | $ | 767,461 |
| | $ | 736,688 |
| | N/A |
| | N/A |
|
| Information for pension plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | | |
| Projected benefit obligation | | $ | 733,426 |
| | $ | 721,626 |
| | N/A |
| | N/A |
|
| Accumulated benefit obligation | | 702,282 |
| | 683,605 |
| | N/A |
| | N/A |
|
| Fair value of plan assets | | 645,380 |
| | 635,323 |
| | N/A |
| | N/A |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | Postretirement Benefits | | |
| (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Amounts recognized on the balance sheet | | | | | | | | |
| Noncurrent assets | | $ | 11,711 | | | $ | 9,098 | | | $ | — | | | $ | — | |
| Current liabilities | | (5,143) | | | (4,905) | | | (1,547) | | | (1,623) | |
| Noncurrent liabilities | | (116,616) | | | (80,791) | | | (22,019) | | | (20,437) | |
| Total | | $ | (110,048) | | | $ | (76,598) | | | $ | (23,566) | | | $ | (22,060) | |
| Amounts recognized in accumulated other comprehensive income (AOCI) | | | | | | | | |
| Net actuarial loss (gain) | | $ | 263,660 | | | $ | 228,430 | | | $ | (2,429) | | | $ | (4,751) | |
| Prior service cost | | (934) | | | (1,225) | | | (1,404) | | | (2,060) | |
| Total | | $ | 262,726 | | | $ | 227,205 | | | $ | (3,833) | | | $ | (6,811) | |
| Information for pension plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | | |
| Projected benefit obligation | | $ | 881,731 | | | $ | 743,632 | | | N/A | | N/A |
| Accumulated benefit obligation | | 848,309 | | | 714,146 | | | N/A | | N/A |
| Fair value of plan assets | | 759,972 | | | 658,327 | | | N/A | | N/A |
Plan Assumptions
| | | | | Pension Benefits | | Postretirement Benefits | | Pension Benefits | | | Postretirement Benefits | |
| | | 2016 | | 2015 | | 2016 | | 2015 | | 2019 | | 2018 | | 2019 | | 2018 |
| Weighted-average assumptions in determination of benefit obligation: | | | | | | | | | Weighted-average assumptions in determination of benefit obligation: | |
| Discount rate | | 3.88 | % | | 4.11 | % | | 4.00 | % | | 4.25 | % | Discount rate | | 3.05 | % | | 4.09 | % | | 3.15 | % | | 4.20 | % |
| Rate of compensation increase | | 3.35 | % | | 3.36 | % | | N/A |
| | N/A |
| Rate of compensation increase | | 3.46 | % | | 3.50 | % | | N/A | | N/A |
| Health care cost trends: | | | | | | | | | Health care cost trends: | |
| Rate assumed for subsequent year | | N/A |
| | N/A |
| | 8.25 | % | | 5.70 | % | Rate assumed for subsequent year | | N/A | | N/A | | 7.50 | % | | 7.85 | % |
| Ultimate rate reached in 2026 | | N/A |
| | N/A |
| | 4.50 | % | | 5.40 | % | Ultimate rate reached in 2026 | | N/A | | N/A | | 4.50 | % | | 4.50 | % |
| Weighted-average assumptions in determination of net periodic benefit cost: | | | | | | | | | Weighted-average assumptions in determination of net periodic benefit cost: | |
| Discount rate | | 4.12 | % | | 3.88 | % | | 4.25 | % | | 3.75 | % | Discount rate | | 4.09 | % | | 3.46 | % | | 4.20 | % | | 3.54 | % |
| Expected return on plan assets | | 7.81 | % | | 7.93 | % | | N/A |
| | N/A |
| Expected return on plan assets | | 7.59 | % | | 7.47 | % | | N/A | | N/A |
| Rate of compensation increase | | 3.35 | % | | 3.37 | % | | N/A |
| | N/A |
| Rate of compensation increase | | 3.50 | % | | 3.50 | % | | N/A | | N/A |
| Health care cost trends: | | | | | | | | | Health care cost trends: | |
| Rate assumed for subsequent year | | N/A |
| | N/A |
| | 8.75 | % | | 5.50 | % | Rate assumed for subsequent year | | N/A | | N/A | | 7.85 | % | | 8.30 | % |
| Ultimate rate reached in 2026 | | N/A |
| | N/A |
| | 4.50 | % | | 4.59 | % | Ultimate rate reached in 2026 | | N/A | | N/A | | 4.50 | % | | 4.50 | % |
Effective December 31, 2016, the Corporation has adopted the spot rate, or full yield curve, approach for developing discount rates. The discount rate for each plan's past service liabilities and service cost 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 these components. Interest cost is determined by applying the spot rate from the full yield curve to each anticipated benefit payment, based on the anticipated optional form elections.
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 Other Post-Employment Benefits plan 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 | | $ | 30 |
| | $ | (24 | ) |
| Postretirement benefit obligation | | $ | 444 |
| | $ | (371 | ) |
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 asset assumptions 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 Finance Committee of the Corporation’s Board of Directors 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 that is diversified across investment classes and among investment managers to achieve an optimal balance between risk and return. As a part of its diversification strategy, the Corporation has established target allocations for each of the following assets classes: 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 88% of consolidated assets:
| | | | | As of December 31, | | Target | | Expected | | As of December 31, | | | Target | | Expected |
| | | 2016 | | 2015 | | Exposure | | Range | | 2019 | | 2018 | | Exposure | | Range |
| Asset class | | Asset class | |
| Domestic equities | | 54% | | 51% | | 50% | | 40%-60% | Domestic equities | | 51% | | | 48% | | | 50% | | | 40%-60% |
| International equities | | 13% | | 14% | | 15% | | 10%-20% | International equities | | 15% | | | 15% | | | 15% | | | 10%-20% |
| Total equity | | 67% | | 65% | | 65% | | 55%-75% | Total equity | | 66% | | | 63% | | | 65% | | | 55%-75% |
| Fixed income | | 33% | | 35% | | 35% | | 25%-45% | Fixed income | | 34% | | | 37% | | | 35% | | | 25%-45% |
As of December 31, 20162019 and 2015,2018, cash funds in the CW Pension Plan represented approximately 3% and 6% of portfolio assets.assets, respectively.
Foreign plan assets represent 12% of consolidated plan assets, with the majority of the assets supporting the U.K. plans.plan. Generally, the foreign plans follow a similar asset allocation strategy and are more heavily weighted in fixed income resulting in a weighted expected return on assets assumption of 3.70%4.3% for all foreign plans.
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.
Fair Value Measurements
The following table presents consolidated plan assets (in thousands) as of December 31, 20162019 using the fair value hierarchy, as described in Note 910 to the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Asset Category | | Total | | Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) | | Significant
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Cash and cash equivalents | | $ | 42,261 | | | $ | 20,034 | | | $ | 22,227 | | | $ | — | |
Equity securities- Mutual funds (1) | | 446,434 | | | 404,509 | | | 41,925 | | | — | |
Bond funds (2) | | 238,880 | | | 177,731 | | | 61,149 | | | — | |
Insurance Contracts (3) | | 8,408 | | | — | | | — | | | 8,408 | |
Other (4) | | 2,313 | | | — | | | — | | | 2,313 | |
| December 31, 2018 | | $ | 738,296 | | | $ | 602,274 | | | $ | 125,301 | | | $ | 10,721 | |
| Cash and cash equivalents | | $ | 22,457 | | | $ | 2,010 | | | $ | 20,447 | | | $ | — | |
Equity securities- Mutual funds (1) | | 534,479 | | | 427,391 | | | 107,088 | | | — | |
Bond funds (2) | | 273,979 | | | 211,372 | | | 62,607 | | | — | |
Insurance Contracts (3) | | — | | | — | | | — | | | — | |
Other (4) | | 4,224 | | | — | | | — | | | 4,224 | |
| December 31, 2019 | | $ | 835,139 | | | $ | 640,773 | | | $ | 190,142 | | | $ | 4,224 | |
|
| | | | | | | | | | | | | | | | |
| Asset Category | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Cash and cash equivalents | | $ | 26,251 |
| | $ | 253 |
| | $ | 25,998 |
| | $ | — |
|
Equity securities- Mutual funds (1) | | 435,931 |
| | 395,549 |
| | 40,382 |
| | — |
|
Bond funds (2) | | 219,417 |
| | 162,470 |
| | 56,947 |
| | — |
|
Insurance Contracts (3) | | 9,720 |
| | — |
| | — |
| | 9,720 |
|
Other (4) | | 755 |
| | — |
| | — |
| | 755 |
|
| December 31, 2015 | | $ | 692,074 |
| | $ | 558,272 |
| | $ | 123,327 |
| | $ | 10,475 |
|
| Cash and cash equivalents | | $ | 23,979 |
| | $ | 4,893 |
| | $ | 19,086 |
| | $ | — |
|
Equity securities- Mutual funds (1) | | 459,002 |
| | 418,390 |
| | 40,612 |
| | — |
|
Bond funds (2) | | 219,249 |
| | 155,120 |
| | 64,129 |
| | — |
|
Insurance Contracts (3) | | 10,760 |
| | — |
| | — |
| | 10,760 |
|
Other (4) | | 1,618 |
| | — |
| | — |
| | 1,618 |
|
| December 31, 2016 | | $ | 714,608 |
| | $ | 578,403 |
| | $ | 123,827 |
| | $ | 12,378 |
|
(1)This category consists of domestic and international equity securities. It is comprised of U.S. securities benchmarked against the S&P 500 index and Russell 2000 index, international mutual funds benchmarked against the MSCI EAFE index, global equity index mutual funds associated with our U.K. based pension plans and balanced funds associated with the U.K. and Canadian based pension plans.
(2)This category consists of domestic and international bonds. The domestic fixed income securities are benchmarked against the Bloomberg Barclays Capital Aggregate Bond index, actively-managed bond mutual funds comprised of domestic investment grade debt, fixed income derivatives, and below investment-grade issues, U.S. mortgage backed securities, asset backed securities, municipal bonds, and convertible debt. International bonds consist of bond mutual funds for institutional investors associated with the CW Pension Plan, Switzerland, and U.K. based pension plans.
(3)This category consistshad consisted of a guaranteed investment contract (GIC) in Switzerland. Amounts contributed toEffective January 2019, the Corporation replaced the collective foundation administering the plan are guaranteed by a foundation for occupational benefits that in turn entered into a group insurance contract and the foundation pays a guaranteed rate of interest that is reset annually.GIC was not an available offering in the new plan.
(4)This category consists primarily of real estate investment trusts in Switzerland.
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 yearyears ended December 31, 20162019 and 2015:2018:
| | | (In thousands) | | Insurance Contracts | | Other | | Total | (In thousands) | | Insurance
Contracts | | Other | | Total |
| December 31, 2014 | | $ | 8,169 |
| | $ | 771 |
| | $ | 8,940 |
| |
| Actual return on plan assets: | | | | | | | |
| Relating to assets still held at the reporting date | | 127 |
| | 37 |
| | 164 |
| |
| Relating to assets sold during the period | | — |
| | 2 |
| | 2 |
| |
| Purchases, sales, and settlements | | 1,554 |
| | (49 | ) | | 1,505 |
| |
| Foreign currency translation adjustment | | (130 | ) | | (6 | ) | | (136 | ) | |
| December 31, 2015 | | $ | 9,720 |
| | $ | 755 |
| | $ | 10,475 |
| |
| December 31, 2017 | | December 31, 2017 | | $ | 10,912 | | | $ | 2,191 | | | $ | 13,103 | |
| Actual return on plan assets: | | | | | | | Actual return on plan assets: | |
| Relating to assets still held at the reporting date | | 148 |
| | 35 |
| | 183 |
| Relating to assets still held at the reporting date | | 163 | | | (13) | | | 150 | |
| Purchases, sales, and settlements | | 1,095 |
| | 871 |
| | 1,966 |
| Purchases, sales, and settlements | | (2,595) | | | 152 | | | (2,443) | |
| Foreign currency translation adjustment | | (203 | ) | | (43 | ) | | (246 | ) | Foreign currency translation adjustment | | (72) | | | (17) | | | (89) | |
| December 31, 2016 | | $ | 10,760 |
| | $ | 1,618 |
| | $ | 12,378 |
| |
| December 31, 2018 | | December 31, 2018 | | $ | 8,408 | | | $ | 2,313 | | | $ | 10,721 | |
| Actual return on plan assets: | | Actual return on plan assets: | | | | | | |
| Relating to assets still held at the reporting date | | Relating to assets still held at the reporting date | | — | | | 115 | | | 115 | |
| Purchases, sales, and settlements | | Purchases, sales, and settlements | | (8,408) | | | 1,715 | | | (6,693) | |
| Foreign currency translation adjustment | | Foreign currency translation adjustment | | — | | | 81 | | | 81 | |
| December 31, 2019 | | December 31, 2019 | | $ | — | | | $ | 4,224 | | | $ | 4,224 | |
Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from the plans:
|
| | | | | | | | | | | | |
| (In thousands) | | Pension Plans | | Postretirement Plans | | Total |
| 2017 | | $ | 49,513 |
| | $ | 1,833 |
| | $ | 51,346 |
|
| 2018 | | 50,665 |
| | 1,762 |
| | 52,427 |
|
| 2019 | | 54,154 |
| | 1,733 |
| | 55,887 |
|
| 2020 | | 53,516 |
| | 1,720 |
| | 55,236 |
|
| 2021 | | 52,950 |
| | 1,711 |
| | 54,661 |
|
| 2022 — 2026 | | 273,753 |
| | 8,211 |
| | 281,964 |
|
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | Pension
Plans | | Postretirement
Plans | | Total |
| 2020 | | $ | 49,446 | | | $ | 1,547 | | | $ | 50,993 | |
| 2021 | | 51,481 | | | 1,594 | | | 53,075 | |
| 2022 | | 52,608 | | | 1,589 | | | 54,197 | |
| 2023 | | 53,597 | | | 1,592 | | | 55,189 | |
| 2024 | | 57,406 | | | 1,566 | | | 58,972 | |
| 2025 — 2029 | | 282,548 | | | 7,306 | | | 289,854 | |
Defined Contribution Retirement 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.
Effective January 1, 2014, all non-union employees who were not currently receiving final or career average pay benefits became eligible to receive employer contributions in the Corporation's sponsored 401(k) plan. The employer contributions includeplan, including both employer match and non-elective contribution components, upcomponents. Effective January 1, 2019, the employer contribution was increased to a maximum employer contribution of 6%7% of eligible compensation.compensation from 6% previously. During the year ended December 31, 2016,2019, the expense relating to the plan was $11.3$17.8 million, consisting of $4.8$9.1 million in matching contributions to the plan in 2016,2019, and $6.5$8.7 million in non-elective contributions paid in January 2017.2020. Cumulative contributions of approximately $64.0$97 million are expected to be made from 20172020 through 2021.2024.
In addition, the Corporation had foreign pension costs under various defined contribution plans of $5.3 million, $5.3 million, and $4.2 million $4.8 million,in 2019, 2018, and $5.7 million in 2016, 2015, and 2014, respectively.
16. 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 $35.3 million, $37.0 million, and $38.0 million in 2016, 2015, and 2014,2017, respectively.
At December 31, 2016, 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:
|
| | | |
| (In thousands) | Rental Commitments |
| 2017 | $ | 27,585 |
|
| 2018 | 23,587 |
|
| 2019 | 19,578 |
|
| 2020 | 16,202 |
|
| 2021 | 13,094 |
|
| Thereafter | 69,400 |
|
| Total | $ | 169,446 |
|
17. SEGMENT INFORMATION
The Corporation’s segments are composed of similar product groupings that serve the same or similar end markets. Based on this approach, the Corporation has three reportable segments: Commercial/Industrial, Defense, and Power, as described below in further detail.
The Commercial/Industrial reportable segment is comprised of businesses that provide a diversified offering of highly engineered products and services supporting critical applications primarily across the commercial aerospace and general industrial markets. The products offered include electronic throttle control devices and transmission shifters, electro-mechanical actuation control components, valves, and surface technology services such as shot peening, laser peening, coatings, and advanced testing.
The Defense reportable segment is comprised of businesses that primarily provide products to the defense markets and to a lesser extent the commercial aerospace market. The products offered include commercial off-the-shelf (COTS) embedded computing board level modules, integrated subsystems, turret aiming and stabilization products, weapons handling systems, avionics and electronics, flight test equipment, and aircraft data management solutions.
The Power segment is comprised of businesses that primarily provide products to the power generation markets and to a lesser extent the naval defense market. The products offered include main coolant pumps, power-dense compact motors, generators, secondary propulsion systems, pumps, pump seals, control rod drive mechanisms, fastening systems, specialized containment doors, airlock hatches, spent fuel management products, and fluid sealing products.
The Corporation’ sCorporation’s measure of segment profit or loss is operating income. Interest expense and income taxes are not reported on an operating segment basis as they are not considered in the segments’ performance evaluation by the Corporation’s chief operating decision-maker, its Chief Executive Officer.
Net sales and operating income by reportable segment are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Net sales | | | | | | |
| Commercial/Industrial | | $ | 1,240,697 | | | $ | 1,209,943 | | | $ | 1,163,510 | |
| Defense | | 580,845 | | | 559,058 | | | 557,954 | |
| Power | | 670,950 | | | 649,754 | | | 554,048 | |
| Less: Intersegment Revenues | | (4,531) | | | (6,920) | | | (4,486) | |
| Total Consolidated | | $ | 2,487,961 | | | $ | 2,411,835 | | | $ | 2,271,026 | |
| | | | | | | | | | | | | | | | | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Operating income (expense) | | | | | | |
| Commercial/Industrial | | $ | 196,455 | | | $ | 182,669 | | | $ | 168,146 | |
| Defense | | 129,653 | | | 128,446 | | | 109,338 | |
| Power | | 112,954 | | | 98,858 | | | 81,119 | |
Corporate and Eliminations (1) | | (35,109) | | | (36,347) | | | (33,483) | |
| Total Consolidated | | $ | 403,953 | | | $ | 373,626 | | | $ | 325,120 | |
| | | | | December 31, | |
| (In thousands) | | 2016 | | 2015 | | 2014 | |
| Net sales | | | | | | | |
| Depreciation and amortization expense | | Depreciation and amortization expense | |
| Commercial/Industrial | | $ | 1,120,326 |
| | $ | 1,189,120 |
| | $ | 1,232,696 |
| Commercial/Industrial | | $ | 48,227 | | | $ | 50,690 | | | $ | 53,180 | |
| Defense | | 469,796 |
| | 479,528 |
| | 492,094 |
| Defense | | 21,495 | | | 20,578 | | | 20,702 | |
| Power | | 524,967 |
| | 545,013 |
| | 527,034 |
| Power | | 28,589 | | | 27,737 | | | 22,019 | |
| Less: Intersegment Revenues | | (6,158 | ) | | (7,978 | ) | | (8,698 | ) | |
| Corporate | | Corporate | | 4,101 | | | 3,944 | | | 4,094 | |
| Total Consolidated | | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
| Total Consolidated | | $ | 102,412 | | | $ | 102,949 | | | $ | 99,995 | |
| | | | | | | | | | | | | | | | | | | | |
| Segment assets | | | | | | |
| Commercial/Industrial | | $ | 1,470,477 | | | $ | 1,398,601 | | | $ | 1,444,097 | |
| Defense | | 1,184,116 | | | 961,298 | | | 1,044,776 | |
| Power | | 804,432 | | | 720,073 | | | 482,753 | |
| Corporate | | 305,236 | | | 175,413 | | | 264,695 | |
| Total Consolidated | | $ | 3,764,261 | | | $ | 3,255,385 | | | $ | 3,236,321 | |
| | | (In thousands) | | 2016 | | 2015 | | 2014 | |
| Operating income (expense) | | | | | | | |
| Capital expenditures | | Capital expenditures | |
| Commercial/Industrial | | $ | 156,550 |
| | $ | 171,525 |
| | $ | 178,684 |
| Commercial/Industrial | | $ | 34,077 | | | $ | 30,411 | | | $ | 29,028 | |
| Defense | | 98,291 |
| | 98,895 |
| | 82,552 |
| Defense | | 4,034 | | | 5,793 | | | 9,276 | |
| Power | | 76,472 |
| | 74,987 |
| | 51,449 |
| Power | | 28,051 | | | 11,350 | | | 10,039 | |
Corporate and Eliminations (1) | | (23,215 | ) | | (34,790 | ) | | (30,312 | ) | |
| Corporate | | Corporate | | 3,590 | | | 5,863 | | | 4,362 | |
| Total Consolidated | | $ | 308,098 |
| | $ | 310,617 |
| | $ | 282,373 |
| Total Consolidated | | $ | 69,752 | | | $ | 53,417 | | | $ | 52,705 | |
|
| | | | | | | | | | | | |
| Depreciation and amortization expense | | | | | | |
| Commercial/Industrial | | $ | 53,970 |
| | $ | 55,799 |
| | $ | 58,276 |
|
| Defense | | 14,488 |
| | 15,965 |
| | 19,530 |
|
| Power | | 23,032 |
| | 23,419 |
| | 23,060 |
|
| Corporate | | 4,518 |
| | 4,292 |
| | 4,059 |
|
| Total Consolidated | | $ | 96,008 |
| | $ | 99,475 |
| | $ | 104,925 |
|
|
| | | | | | | | | | | | |
| Segment assets | | | | | | |
| Commercial/Industrial | | $ | 1,391,040 |
| | $ | 1,480,052 |
| | $ | 1,543,795 |
|
| Defense | | 751,859 |
| | 800,613 |
| | 845,193 |
|
| Power | | 516,321 |
| | 629,612 |
| | 579,736 |
|
| Corporate | | 378,561 |
| | 79,334 |
| | 266,377 |
|
| Assets held for sale | | — |
| | — |
| | 147,347 |
|
| Total Consolidated | | $ | 3,037,781 |
| | $ | 2,989,611 |
| | $ | 3,382,448 |
|
|
| | | | | | | | | | | | |
| Capital expenditures | | | | | | |
| Commercial/Industrial | | $ | 30,145 |
| | $ | 21,990 |
| | $ | 37,329 |
|
| Defense | | 5,870 |
| | 3,834 |
| | 5,175 |
|
| Power | | 6,653 |
| | 6,163 |
| | 16,057 |
|
| Corporate | | 4,108 |
| | 3,525 |
| | 8,554 |
|
Total Consolidated (2) | | $ | 46,776 |
| | $ | 35,512 |
| | $ | 67,115 |
|
(1) Corporate and Eliminations includes pension expense, environmental remediation and administrative expenses, legal, foreign currency transactional gains and losses, and other expenses.
(2) Total capital expenditures included $0.2 million and $4.9 million of expenditures related to discontinued operations for the years ended 2015 and 2014, respectively.
Reconciliations
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Earnings before taxes: | | | | | | |
| Total segment operating income | | $ | 439,062 | | | $ | 409,973 | | | $ | 358,603 | |
| Corporate and Eliminations | | (35,109) | | | (36,347) | | | (33,483) | |
| Interest expense | | 31,347 | | | 33,983 | | | 41,471 | |
| Other income, net | | 23,856 | | | 16,596 | | | 15,970 | |
| Total consolidated earnings before tax | | $ | 396,462 | | | $ | 356,239 | | | $ | 299,619 | |
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Assets: | | | | | | |
| Total assets for reportable segments | | $ | 3,459,025 | | | $ | 3,079,972 | | | $ | 2,971,626 | |
| Non-segment cash | | 235,260 | | | 138,053 | | | 204,664 | |
| Other assets | | 69,976 | | | 37,360 | | | 60,031 | |
| Total consolidated assets | | $ | 3,764,261 | | | $ | 3,255,385 | | | $ | 3,236,321 | |
Geographic Information
|
| | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Earnings before taxes: | | | | | | |
| Total segment operating income | | $ | 331,313 |
| | $ | 345,407 |
| | $ | 312,685 |
|
| Corporate and administrative | | (23,215 | ) | | (34,790 | ) | | (30,312 | ) |
| Interest expense | | 41,248 |
| | 36,038 |
| | 35,794 |
|
| Other income, net | | 1,111 |
| | 615 |
| | 365 |
|
| Total consolidated earnings before tax | | $ | 267,961 |
| | $ | 275,194 |
| | $ | 246,944 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Revenues | | | | | | |
| United States of America | | $ | 1,710,371 | | | $ | 1,623,511 | | | $ | 1,562,180 | |
| United Kingdom | | 120,297 | | | 126,439 | | | 118,350 | |
| Other foreign countries | | 657,293 | | | 661,885 | | | 590,496 | |
| Consolidated total | | $ | 2,487,961 | | | $ | 2,411,835 | | | $ | 2,271,026 | |
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | | |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Long-Lived Assets - Property, plant, and equipment, net | | | | | | |
| United States of America | | $ | 271,609 | | | $ | 258,504 | | | $ | 264,829 | |
| United Kingdom | | 34,228 | | | 34,649 | | | 41,100 | |
| Other foreign countries | | 79,756 | | | 81,507 | | | 84,306 | |
| Consolidated total | | $ | 385,593 | | | $ | 374,660 | | | $ | 390,235 | |
|
| | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Assets: | | | | | | |
| Total assets for reportable segments | | $ | 2,659,220 |
| | $ | 2,910,277 |
| | $ | 2,968,724 |
|
| Assets held for sale | | — |
| | — |
| | 147,347 |
|
| Non-segment cash | | 357,021 |
| | 42,164 |
| | 247,249 |
|
| Other assets | | 21,540 |
| | 37,170 |
| | 19,128 |
|
| Total consolidated assets | | $ | 3,037,781 |
| | $ | 2,989,611 |
| | $ | 3,382,448 |
|
Geographic Information |
| | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Revenues | | | | | | |
| United States of America | | $ | 1,472,241 |
| | $ | 1,502,363 |
| | $ | 1,521,034 |
|
| United Kingdom | | 114,752 |
| | 135,673 |
| | 145,092 |
|
| Other foreign countries | | 521,938 |
| | 567,647 |
| | 577,000 |
|
| Consolidated total | | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
|
|
| | | | | | | | | | | | |
| | | December 31, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Long-Lived Assets | | | | | | |
| United States of America | | $ | 272,826 |
| | $ | 293,612 |
| | $ | 323,937 |
|
| United Kingdom | | 39,014 |
| | 36,061 |
| | 45,625 |
|
| Other foreign countries | | 77,063 |
| | 83,971 |
| | 89,357 |
|
| Consolidated total | | $ | 388,903 |
| | $ | 413,644 |
| | $ | 458,919 |
|
Net sales by product line | | | | | December 31, | | Year Ended December 31, | |
| (In thousands) | | 2016 | | 2015 | | 2014 | (In thousands) | | 2019 | | 2018 | | 2017 |
| Net sales | | | | | | | Net sales | |
| Flow Control | | $ | 883,735 |
| | $ | 949,657 |
| | $ | 959,907 |
| Flow Control | | $ | 1,051,821 | | | $ | 1,008,262 | | | $ | 899,705 | |
| Motion Control | | 940,162 |
| | 947,758 |
| | 953,667 |
| Motion Control | | 1,130,593 | | | 1,090,703 | | | 1,075,218 | |
| Surface Technologies | | 285,034 |
| | 308,268 |
| | 329,552 |
| Surface Technologies | | 305,547 | | | 312,870 | | | 296,103 | |
| Consolidated total | | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
| Consolidated total | | $ | 2,487,961 | | | $ | 2,411,835 | | | $ | 2,271,026 | |
The Flow Control products include valves, pumps, motors, generators, and instrumentation that manage the flow of liquids and gases, generate power, and monitor or provide critical functions. Motion Control's products include turret aiming and stabilization products, embedded computing board level modules, electronic throttle control devices, transmission shifters, and electro-mechanical actuation control components. Surface Technologies include shot peening, laser peening, and coatings services that enhance the durability, extend the life, and prevent premature fatigue and failure on customer-supplied metal components.
18. CONTINGENCIES AND COMMITMENTS
Legal Proceedings
The Corporation has been named in a number of lawsuits that allege injury from exposure to asbestos. To date, the Corporation has not been found liable for or paid any material sum of money in settlement in any asbestos-related case. The Corporation believes its minimal use of asbestos in its past operations and the relatively non-friable condition of asbestos in its products makesmake it unlikely that it will face material liability in any asbestos litigation, whether individually or in the aggregate. The Corporation
maintains insurance coverage for these potential liabilities and believes adequate coverage exists to cover any unanticipated asbestos liability.
In December 2013, the Corporation, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) filed in the Court of Queen's Bench of Alberta, Judicial District of Calgary. The claim pertains to a January 2011 fire and explosion at a delayed coker unit at its Fort McMurray refinery that resulted in the injury of five CNRL employees, damage to property and equipment, and various forms of consequential loss such as loss of profit, lost opportunities, and business interruption. The fire and explosion occurred when a CNRL employee bypassed certain safety controls and opened an operating coker unit. In November 2019, all parties participated in a formal mediation and agreed to settle the claim for approximately $38 million. The total quantumCorporation’s portion of alleged damages arising from the incident has not been finalized, but is estimated to meet or exceed $1 billion.settlement amount was $6 million, which was fully paid in
2020 by the Corporation's primary and excess insurance coverage. No admission of liability was made by the Corporation as part of the settlement agreement. The Corporation maintains various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance maydoes not be adequateexpect to cover the costs associated with a judgment against us. The Corporation is currently unableincur any additional liabilities related to estimate an amount or range of potential losses, if any, from this matter. The Corporation believes it has adequate legal defenses and intends to defend this matter vigorously. The Corporation's financial condition, results of operations, and cash flows, could be materially affected during a future fiscal quarter or fiscal year by unfavorable developments or outcome regarding this claim.
The Corporation is party to a number of other legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material effect on the Corporation’s results of operations or financial position.
Letters of Credit and Other Arrangements
The Corporation enters into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to guarantees of repayment, future performance on certain contracts to provide products and services, and to secure advance payments from certain international customers. AtAs of December 31, 20162019 and 2015,2018, there were $47.2$32.6 million and $37.3$21.7 million of stand-by letters of credit outstanding, respectively, and $12.8$10.8 million and $14.7$11.7 million of bank guarantees outstanding, respectively.
The Corporation, through its Electro-Mechanical Division (EMD) business unit, has three Pennsylvania Department of Environmental Protection (PADEP) radioactive materials licenses that are utilized in the continued operation of the EMD business. In connection with these licenses, the Corporation has known conditional asset retirement obligations related to asset decommissioning activities to be performed in the future, when the Corporation terminates these licenses. For two of the three licenses, the Corporation has recorded an asset retirement obligation of approximately $7.1$7.5 million. For its third license, the Corporation has not recorded an asset retirement obligation as it is not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, this obligation has not been recorded in the Consolidated Financial Statements. A liability for this obligation will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value. The Corporation is required to provide the Nuclear Regulatory Commission financial assurance demonstrating its ability to cover the cost of decommissioning its Cheswick, Pennsylvania facility upon closure, though the Corporation does not intend to close this facility. The Corporation has provided this financial assurance in the form of a $56.0$45.6 million surety bond.
AP1000 Program
Within the Corporation’s Power segment, our Electro-Mechanical DivisionEMD is the RCP supplier for the WestinghouseWEC AP1000 nuclear power plants under construction in China and the United States. The terms of the AP1000 China and United StatesU.S. contracts include liquidated damage provisions for failure to meet contractual delivery dates if the Corporation caused the delay and the delay was not excusable. The Corporation would be liable for liquidated damages if the Corporation was deemed responsible for not meeting the delivery dates. On October 10, 2013, the Corporation received a letter from WestinghouseWEC stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract from WestinghouseWEC of approximately $25 million. As of December 31, 2016,2019, the Corporation has not met certain contractual delivery dates under its AP1000 domesticU.S. and China contracts; however, there are significant counterclaims and uncertainties as to which parties are responsible for the delays. The Corporation believes it has adequate legal defenses and intends to vigorously defend this matter. Given the uncertainties surrounding the parties responsibleresponsibility for the delays, no accrual has been made for this matter.matter as of December 31, 2019. As of December 31, 2016,2019, the range of possible loss is $0 million to $31 million for liquidated damages isthe AP1000 U.S. contract, for a total range of possible loss of $0 to $55.5 million.
19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The total cumulative balance of each component of accumulated other comprehensive income (loss), net of tax, is as follows:
| | | (In thousands) | | Foreign currency translation adjustments, net | | Total pension and postretirement adjustments, net | | Accumulated other comprehensive income (loss) | (In thousands) | | Foreign currency translation adjustments, net | | Total pension and postretirement adjustments, net | | Accumulated other comprehensive income (loss) |
| December 31, 2014 | | $ | (20,283 | ) | | $ | (108,128 | ) | | $ | (128,411 | ) | |
| December 31, 2017 | | December 31, 2017 | | $ | (94,708) | | | $ | (122,132) | | | $ | (216,840) | |
Other comprehensive loss before reclassifications (1) | | (87,527 | ) | | (24,823 | ) | | (112,350 | ) | Other comprehensive loss before reclassifications (1) | | (52,440) | | | (31,380) | | | (83,820) | |
Amounts reclassified from accumulated other comprehensive income (1) | | — |
| | 14,833 |
| | 14,833 |
| Amounts reclassified from accumulated other comprehensive income (1) | | — | | | 12,213 | | | 12,213 | |
| Net current period other comprehensive loss | | (87,527 | ) | | (9,990 | ) | | (97,517 | ) | Net current period other comprehensive loss | | (52,440) | | | (19,167) | | | (71,607) | |
| December 31, 2015 | | $ | (107,810 | ) | | $ | (118,118 | ) | | $ | (225,928 | ) | |
| December 31, 2018 | | December 31, 2018 | | $ | (147,148) | | | $ | (141,299) | | | $ | (288,447) | |
Other comprehensive loss before reclassifications (1) | | (64,840 | ) | | (7,892 | ) | | (72,732 | ) | Other comprehensive loss before reclassifications (1) | | 18,447 | | | (35,212) | | | (16,765) | |
Amounts reclassified from accumulated other comprehensive income (1) | | — |
| | 6,904 |
| | 6,904 |
| Amounts reclassified from accumulated other comprehensive income (1) | | — | | | 6,195 | | | 6,195 | |
| Net current period other comprehensive loss | | (64,840 | ) | | (988 | ) | | (65,828 | ) | |
| December 31, 2016 | | $ | (172,650 | ) | | $ | (119,106 | ) | | $ | (291,756 | ) | |
| Net current period other comprehensive income (loss) | | Net current period other comprehensive income (loss) | | 18,447 | | | (29,017) | | | (10,570) | |
Cumulative effect from adoption of ASU 2018-02 (2) | | Cumulative effect from adoption of ASU 2018-02 (2) | | $ | (1,318) | | | $ | (24,939) | | | $ | (26,257) | |
| December 31, 2019 | | December 31, 2019 | | $ | (130,019) | | | $ | (195,255) | | | $ | (325,274) | |
| |
(1)(1)All amounts are after tax. (2)Reclassification to retained earnings due to adoption of ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 1 for additional information. | All amounts are after tax. |
Details of amounts reclassified from accumulated other comprehensive income (loss) are below:
| | | | | | | | | | | | | | | | | | | | |
| | Amount reclassified from Accumulated other comprehensive income (loss) | | | | Affected line item in the statement where net earnings is presented |
| (In thousands) | | 2019 | | 2018 | | |
| Defined benefit pension and postretirement plans | | | | | | |
| Amortization of prior service costs | | 939 | | | 908 | | | (1) |
| Amortization of net actuarial losses | | (9,112) | | | (16,736) | | | (1) |
| Settlements | | — | | | (337) | | | (1) |
| | (8,173) | | | (16,165) | | | Total before tax |
| | 1,978 | | | 3,952 | | | Income tax effect |
| Total reclassifications | | $ | (6,195) | | | $ | (12,213) | | | Net of tax |
|
| | | | | | | | | | |
| | | Amount reclassified from Accumulated other comprehensive income (loss) | | Affected line item in the statement where net earnings is presented |
| (In thousands) | | 2016 | | 2015 | | |
| Defined benefit pension and postretirement plans | | | | | | |
| Amortization of prior service costs | | 703 |
| | 39 |
| | (1) |
| Amortization of net actuarial losses | | (11,733 | ) | | (16,339 | ) | | (1) |
| Settlements | | — |
| | (7,461 | ) | | (1) |
| | | (11,030 | ) | | (23,761 | ) | | Total before tax |
| | | 4,126 |
| | 8,928 |
| | Income tax effect |
| Total reclassifications | | $ | (6,904 | ) | | $ | (14,833 | ) | | Net of tax |
| |
(1)
| These items are included in the computation of net periodic pension cost. See Note 15, Pension and Other Postretirement Benefit Plans. |
(1)These items are included in the computation of net periodic pension cost. See Note 16, Pension and Other Postretirement Benefit Plans.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth selected unaudited quarterly Consolidated Statements of Earnings information for the fiscal years ended December 31, 20162019 and 2015.
2018.
|
| | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | First | | Second | | Third | | Fourth |
| 2016 | | | | | | | | |
| Net sales | | $ | 503,507 |
| | $ | 532,766 |
| | $ | 507,092 |
| | $ | 565,566 |
|
| Gross profit | | 171,903 |
| | 185,379 |
| | 184,476 |
| | 208,725 |
|
| Earnings from continuing operations | | 32,819 |
| | 39,963 |
| | 45,932 |
| | 70,668 |
|
| Loss from discontinued operations | | — |
| | — |
| | — |
| | (2,053 | ) |
| Net earnings | | 32,819 |
| | 39,963 |
| | 45,932 |
| | 68,615 |
|
| Basic earnings per share | | | | | | | | |
| Earnings from continuing operations | | $ | 0.74 |
| | $ | 0.90 |
| | $ | 1.04 |
| | $ | 1.60 |
|
| Loss from discontinued operations | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.05 | ) |
| Total | | $ | 0.74 |
| | $ | 0.90 |
| | $ | 1.04 |
| | $ | 1.55 |
|
| Diluted earnings per share | | | | | | | | |
| Earnings from continuing operations | | $ | 0.73 |
| | $ | 0.88 |
| | $ | 1.02 |
| | $ | 1.58 |
|
| Loss from discontinued operations | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.05 | ) |
| Total | | $ | 0.73 |
| | $ | 0.88 |
| | $ | 1.02 |
| | $ | 1.53 |
|
| | | | | | | | | |
| 2015 | | | | | | | | |
| Net sales | | $ | 546,199 |
| | $ | 545,194 |
| | $ | 525,535 |
| | $ | 588,755 |
|
| Gross profit | | 191,096 |
| | 182,351 |
| | 185,494 |
| | 224,314 |
|
| Earnings from continuing operations | | 43,223 |
| | 40,121 |
| | 38,142 |
| | 70,762 |
|
| Loss from discontinued operations | | (27,232 | ) | | (14,384 | ) | | (4,258 | ) | | (913 | ) |
| Net earnings | | 15,991 |
| | 25,737 |
| | 33,884 |
| | 69,849 |
|
| Basic earnings per share | | | | | | | | |
| Earnings from continuing operations | | $ | 0.91 |
| | $ | 0.85 |
| | $ | 0.82 |
| | $ | 1.56 |
|
| Loss from discontinued operations | | (0.57 | ) | | (0.31 | ) | | (0.09 | ) | | (0.02 | ) |
| Total | | $ | 0.34 |
| | $ | 0.54 |
| | $ | 0.73 |
| | $ | 1.54 |
|
| Diluted earnings per share | | | | | | | | |
| Earnings from continuing operations | | $ | 0.89 |
| | $ | 0.83 |
| | $ | 0.80 |
| | $ | 1.53 |
|
| Loss from discontinued operations | | (0.56 | ) | | (0.30 | ) | | (0.09 | ) | | (0.02 | ) |
| Total | | $ | 0.33 |
| | $ | 0.53 |
| | $ | 0.71 |
| | $ | 1.51 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands, except per share data) | | First | | Second | | Third | | Fourth |
| 2019 | | | | | | | | |
| Net sales | | $ | 578,314 | | | $ | 638,996 | | | $ | 614,880 | | | $ | 655,771 | |
| Gross profit | | 196,873 | | | 230,044 | | | 226,076 | | | 245,752 | |
| Net earnings | | 55,593 | | | 80,072 | | | 82,510 | | | 89,408 | |
| | | | | | | | |
| Net earnings per share | | | | | | | | |
| Basic earnings per share | | $ | 1.30 | | | $ | 1.87 | | | $ | 1.93 | | | $ | 2.09 | |
| Diluted earnings per share | | $ | 1.29 | | | $ | 1.86 | | | $ | 1.92 | | | $ | 2.08 | |
| | | | | | | | |
| 2018 | | | | | | | | |
| Net sales | | $ | 547,522 | | | $ | 620,298 | | | $ | 595,393 | | | $ | 648,622 | |
| Gross profit | | 181,191 | | | 226,500 | | | 222,518 | | | 241,052 | |
| Net earnings | | 43,643 | | | 74,788 | | | 74,483 | | | 82,835 | |
| | | | | | | | |
| Net earnings per share | | | | | | | | |
| Basic earnings per share | | $ | 0.99 | | | $ | 1.69 | | | $ | 1.70 | | | $ | 1.91 | |
| Diluted earnings per share | | $ | 0.98 | | | $ | 1.68 | | | $ | 1.68 | | | $ | 1.89 | |
Note: Certain amounts may not add due to rounding.
21. SUBSEQUENT EVENTS
On January 4, 2017,8, 2020, the Corporation completedmade a voluntary $150 million contribution to the acquisition of Teletronics TechnologyCW Pension Plan
On February 26, 2020, the Corporation (TTC)signed a definitive agreement to acquire Dyna-Flo Control Valve Services Ltd. (Dyna-Flo) for $233CAD$81 million (approximately $61 million). Dyna-Flo, which specializes in cash. TTC is a leading designercontrol valves, actuators, and manufacturer of high-technology data acquisition and comprehensive flight test instrumentationcontrol systems for critical aerospacethe chemical, petrochemical, and defense applications. Foroil and gas markets, generated sales of approximately $25 million for the year ended December 31, 2015, TTC generated sales of $58 million.2019. The acquired business will operate within the DefenseCommercial/Industrial segment. The acquisition is subject to post-closing adjustments as the valuation is not yet complete.
* * * * * *
Report of the Corporation
The Consolidated Financial Statements appearing in Item 8 of this Annual Report on Form 10-K have been prepared by the Corporation in conformity with accounting principles generally accepted in the United States of America. The financial statements necessarily include some amounts that are based on the best estimates and judgments of the Corporation. Other financial information in this Annual Report on Form 10-K is consistent with that in the Consolidated Financial Statements.
The Corporation maintains accounting systems, procedures, and internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with the appropriate corporate authorization and are properly recorded. The accounting systems and internal accounting controls are augmented by written policies and procedures, organizational structure providing for a division of responsibilities, selection and training of qualified
personnel, and an internal audit program. The design, monitoring, and revision of internal accounting control systems involve, among other things, management’s judgment with respect to the relative cost and expected benefits of specific control measures. Management of the Corporation has completed an assessment of the Corporation’s internal controls over financial reporting and has included “Management’s Annual Report on Internal Control Over Financial Reporting” in Item 9A of this Annual Report on Form 10-K.
Deloitte & Touche LLP, our independent registered public accounting firm, performed an integrated audit of the Corporation’s Consolidated Financial Statements that also included forming an opinion on the internal controls over financial reporting of the Corporation for the year ended December 31, 2016.2019. An audit includes examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The objective of their audit is the expression of an opinion on the fairness of the Corporation’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, in all material respects, and on the internal controls over financial reporting as of December 31, 2016.2019.
The Audit Committee of the Board of Directors, composed entirely of directors who are independent of the Corporation, appoints the independent registered public accounting firm for ratification by stockholders and, among other things, considers the scope of the independent registered public accounting firm’s examination, the audit results, and the adequacy of internal accounting controls of the Corporation. The independent registered public accounting firm and the internal auditor have direct access to the Audit Committee, and they meet with the committee from time to time, with and without management present, to discuss accounting, auditing, non-audit consulting services, internal control, and financial reporting matters.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders of
Curtiss-Wright Corporation
Charlotte, North Carolina
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Curtiss-Wright Corporation and subsidiaries (the “Company”"Company") as of December 31, 20162019 and 2015, and2018, the related consolidated statements of earnings, comprehensive income, (loss), stockholders’cash flows, and stockholders' equity, for each of the three years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed2019, in conformity with accounting principles generally accepted in the Index at Item 15. These financial statements and financial statement schedule are the responsibilityUnited States of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.America.
We conducted our auditshave also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States). (PCAOB), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion such consolidated financial statements present fairly, in all material respects,on the financial position of the Company at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements, taken as a whole, presents fairly,and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue –Over-Time Basis – Refer to Note 2 to the financial statements
Critical Audit Matter Description
The Company recognizes revenue when control of a promised good and/or service is transferred to a customer. The Company identifies a performance obligation for each promise in all material respects,a contract to transfer a distinct good or service to the information set forth therein.
We have also audited, in accordancecustomer. Contracts that qualify for over-time revenue recognition are generally associated with the standardsdesign, development, and manufacture of highly engineered industrial products used in commercial and defense applications and generally span between 2-5 years in duration. The Company uses over-time revenue recognition based on the Public Company Accounting Oversight Board (United States),utilization of an input measure used to measure progress of performance obligations, such as costs incurred to date relative to total estimated costs.
Application of an over-time revenue recognition method requires the Company’s internal control over financial reporting asuse of reasonable and dependable estimates of costs that will be incurred to complete production of goods or provision of services. As of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework(2013) issued by the Committee2019, revenue was $2.488 billion, of Sponsoring Organizationswhich 49% relates to over-time revenue.
Certain of the Treadway CommissionCompany’s contracts have limited amount of historical data available requiring the Company to make judgments to estimate future costs that will be incurred for these contracts. Related to these contracts, auditing these estimates required
both extensive audit effort due to a high degree of auditor judgment, especially given the limited historical data for certain contracts, when performing audit procedures and our report dated February 21, 2017 expressed an unqualified opinion onevaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s estimates of total costs that will be incurred for certain of the contracts (as discussed above) included the following:
•We tested the effectiveness of controls over the long-term contract revenue, including those over the estimates of total costs for the performance obligation.
•We performed the following:
◦Evaluated the appropriateness and consistency of the methods and assumptions used by management to develop the estimates of future costs that will be incurred for contracts with limited historical experience.
◦Evaluated management’s ability to achieve the estimates of costs that will be incurred by performing corroborating inquiries with the Company’s internal control over financial reporting.project managers and engineers, and comparing the estimates to management’s work plans, engineering specifications, and supplier contracts.
◦Tested the accuracy and completeness of the costs incurred to date.
◦Compared the actual costs incurred to date to management’s estimated costs to be incurred to date.
◦Due to the limited historical data available for certain contracts, we tested changes in management’s total cost estimates.
◦Tested the mathematical accuracy of management’s estimates of future costs to be incurred.
◦Tested the mathematical accuracy of management’s calculation of revenue for the contract.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 21, 201727, 2020
We have served as the Company's auditor since 2003.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors and Stockholders of
Curtiss-Wright Corporation
Charlotte, North Carolina
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Curtiss-Wright Corporation and subsidiaries (the “Company”) as of December 31, 2016,2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 27, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of theits inherent limitations, of internal control over financial reporting including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be preventedprevent or detected on a timely basis.detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2016 of the Company and our report dated February 21, 2017 expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
February 21, 2017
27, 2020
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls Andand Procedures.
Disclosure Controls and Procedures
As of December 31, 2016,2019, 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 as of December 31, 20162019 insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and they include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Management’s Annual Report On Internal Control Over Financial Reporting
The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of the future effectiveness of controls currently deemed effective are subject to the risk that controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with the policies or procedures.
The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2016.2019. In making this assessment, the Corporation’s management used the criteria established in Internal Control - Integrated Framework (2013) issued by the 2013 Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.Commission.
Based on management’s assessment, management believes that as of December 31, 2016,2019, the Corporation’s internal control over financial reporting is effective based on the established criteria.
The Corporation’s internal controls over financial reporting as of December 31, 20162019 have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, and their report thereon is included in Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in the Corporation’sour internal control over financial reporting during the most recently completed fiscal quarter ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
PART III
The information required by Items 10, 11, 12, 13, and 14 of Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held on May 11, 20177, 2020 which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates. Information required by Item 401(b) of Regulation S-K is included in Part I of this report under the caption “Executive Officers” and information required by Item 201(d) of Regulation S-K is included in Part II of this report under the caption “Securities Authorized For Issuance Under Equity Compensation Plans."
PART IV
Item 15. Exhibits, Financial Statement Schedules.Schedule.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (a) | Financial Statements and Footnotes | | Page | | | | | | Page | | |
| 1. | | The following are documents filed as part of this report in Part II, Item 8: | | | | | | | | |
| | | Consolidated Statements of Earnings | | | | | | | | |
| | | Consolidated Statements of Comprehensive Income | | | | | | | | |
| | | Consolidated Balance Sheets | | | | | | | | |
| | | Consolidated Statements of Cash Flows | | | | | | | | |
| | | Consolidated Statements of Stockholders' Equity | | | | | | | | |
| | | Notes to Consolidated Financial Statements | | | | | | | | |
| 2. | | Financial Statement Schedule | | | | | | | | |
| | | Schedule II-Valuation and Qualifying Accounts | | | | | | | | |
| | | All other financial statement schedules have been omitted because they are either not required, not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. | | | | | | | | |
(b) | Exhibits | | | | | | | | | | |
| (b) | Exhibits | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | Incorporated by Reference | | Filed | | Filed | | |
| Exhibit No. | | Exhibit Description | | Form | | Filing Date | | Herewith | | |
| | | | | | | | | | | |
| 2.1 | | | | | 8-K | | February 3, 2005 | | | | |
| 3.1 | | | | | 8-A/8-A12B/A | | May 24, 2005 | | | | |
| 3.2 | | | | | 8-K | | May 18, 2015 | | | | |
| 3.34.1 | | | | | 8-K8-A12B/A | | November 17, 2008May 24, 2005 | | | | |
| 4.14.2 | | Agreement to furnish to the Commission upon request a copy | | | 10-KDEF 14A | | December 31, 1985May 24, 2005 | | | | |
| 10.1 | | | | | 14A | | March 19, 2010 | | | | |
| 10.2 | | | | | 10-K | | March 7, 2006 | | | | |
| 10.3 | | | | | 10-Q | | August 15, 2001 | | | | |
| 10.4 | | | | | 10-K | | February 25, 2011 | | | |
|
| | | | | | | | | | |
| 10.5 | | | | | 10-K | | February 24, 2012 | | | | |
| 10.6 | | | | | 10-K | | February 19, 2015 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.7 | | | | | 10-K | | February 19, 2015 | | | | |
| 10.8 | | | | | 10-K | | February 25, 2016 | | | | |
| 10.9 | | | | | 10-K | | February 25, 2016 | | | | |
| 10.10 | | | | | 10-K | | February 21, 2017 | | X | | |
| 10.11 | | | | | 10-K | | February 21, 2017 | | | | |
| 10.12 | | | | | 10-K | | February 22, 2018 | | X | | |
| 10.1210.13 | | | | | 10-K | | February 22, 2018 | | | | |
| 10.14 | | | | | 10-K | | February 27, 2019 | | | | |
| 10.15 | | | | | 10-K | | February 27, 2019 | | | | |
| 10.16 | | | | | | | | | X | | |
| 10.17 | | | | | 10-K | | February 25, 2016 | | | | |
| 10.1310.18 | | | | | 10-K | | February 25, 2016 | | | | |
| 10.1410.19 | | | | | 10-K | | February 21, 2017 | | X | | |
| 10.1510.20 | | | | | 10-K | | February 21, 2017 | | X | | |
| 10.1610.21 | | | | | 10-K | | February 21, 2017 | | X | | |
| 10.1710.22 | | | | | 10-K | | February 22, 2018 | | | | |
| 10.23 | | | | | 10-K | | February 22, 2018 | | | | |
| 10.24 | | | | | 10-K | | February 27, 2019 | | | | |
| 10.25 | | | | | 10-K | | February 27, 2019 | | | | |
| 10.26 | | | | | 10-K | | February 27, 2019 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.27 | | | | | 10-Q | | August 1, 2019 | | | | |
| 10.28 | | | | | 10-Q | | August 1, 2019 | | | | |
| 10.29 | | | | | | | | | X | | |
| 10.30 | | | | | 14A | | March 21, 2014 | | | | |
| 10.1810.31 | | | | | 10-K | | February 19, 2015 | | | | |
| 10.1910.32 | | | | | 10-K | | February 25, 2016 | | | | |
| 10.2010.33 | | | | | 10-Q | | May 7, 2012 | | | | |
| 10.2110.34 | | | | | 10-K | | February 25, 2011 | | | | |
| 10.2210.35 | | | | | 10-K | | February 24, 2012 | | | | |
| 10.2310.36 | | | | | 10-K | | February 21, 2013 | | | | |
| 10.2410.37 | | | | | 10-K | | February 21, 2013 | | | |
|
| | | | | | | | | | |
| 10.2510.38 | | | | | 10-K | | February 21, 2014 | | | | |
| 10.2610.39 | | | | | 14A | | April 5, 2005 | | | | |
| 10.2710.40 | | | | | 10-K | | February 27, 2007 | | | | |
| 10.2810.41 | | | | | 10-K | | February 24, 2012 | | | | |
| 10.2910.42 | | | | | 10-K | | February 19, 2015 | | | | |
| 10.3010.43 | | | | | 10-K | | February 25, 2016 | | | | |
| 10.3110.44 | | | | | 10-Q | | November 15, 2001 | | | | |
| 10.3210.45 | | | | | 14A | | March 23, 2018 | | | | |
| 10.46 | | | | | 14A | | March 24, 2011 | | | | |
| 10.47 | | | | | 10-Q | | May 2, 2013 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.48 | | | | | 10-Q | | May 13, 1998 | | | | |
| 10.3310.49 | | Curtiss-Wright Corporation Employee Stock Purchase Plan* | | 14A | | March 24, 2011 | | | |
| 10.34 | | Note Purchase Agreement between the Registrant and certain Institutional Investors, dated December 1, 2005 | | 8-K | | December 5, 2005 | | | |
| 10.35 | | Restrictive Legends on Notes subject to Note Purchase Agreement between the Registrant and certain Institutional Investors, dated December 1, 2005 | | 8-K | | December 5, 2005 | | | |
| 10.36 | | | | 8-K | | December 13, 2011 | | | | |
| 10.3710.50 | | | | | 8-K | | December 13, 2011 | | | | |
| 10.3810.51 | | | | | 8-K | | February 27, 2013 | | | | |
| 10.3910.52 | | | | | 8-K | | February 27, 2013 | | | | |
| 10.4010.53 | | Incentive Compensation Plan, as amended November 15, 2010 * | | 14A | | March 24, 2011 | | | |
| 10.41 | | Restricted Stock Unit Agreement, dated April 1, 2013, by and between the Registrant and Thomas Quinly * | | 10-Q | | May 2, 2013 | | | |
| 10.42 | | ThirdFourth Amended and Restated Credit Agreement dated as of August 9, 2012October 17, 2018 among the Registrant,Company and Certain Subsidiaries as Borrowers; the Lenders partiesparty thereto; Bank of America N.A., as Administrative Agent;Agent, Swingline Lender, and L/C Issuer; J.P. MorganMerrill Lynch, Pierce, Fenner & Smith Incorporated, JPMorgan Chase Bank, N.A., and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners; JPMorgan Chase Bank, N.A., and Wells Fargo, N.A., as Syndication Agents; and RBS Citizens Bank, N.A., as Documentation AgentAgents | | 8-K | | August 13, 2012October 17, 2018 | | | |
|
| 21.00 | | | | | | | | | | | X | | |
| 10.4323.00 | | First Amendment dated July 28, 2014 to Third Amended and Restated Credit Agreement dated as of August 9, 2012 among the Registrant, and Certain Subsidiaries as Borrowers; the Lenders parties thereto; Bank of America, N.A., as Administrative Agent; Swingline Lender, and L/C Issuer; J.P. Morgan Chase Bank, N.A., and Wells Fargo, N.A., as Syndication Agents; and RBS Citizens, N.A., as Documentation Agent | | 10-K | | February 19, 2015 | | | |
| 10.44 | | Second Amendment dated December 12, 2014 to Third Amended and Restated Credit Agreement dated as of August 9, 2012 among the Registrant, and Certain Subsidiaries as Borrowers; the Lenders parties thereto; Bank of America, N.A., as Administrative Agent; Swingline Lender, and L/C Issuer; J.P. Morgan Chase Bank, N.A., and Wells Fargo, N.A., as Syndication Agents; and RBS Citizens, N.A., as Documentation Agent | | 10-K | | February 19, 2015 | | | |
| 10.45 | | Third Amendment dated June 16, 2015 to Third Amended and Restated Credit Agreement dated as of August 9, 2012 among the Registrant, and Certain Subsidiaries as Borrowers; the Lenders parties thereto; Bank of America, N.A., as Administrative Agent; Swingline Lender, and L/C Issuer; J.P. Morgan Chase Bank, N.A., and Wells Fargo, N.A., as Syndication Agents; and RBS Citizens, N.A., as Documentation Agent | | 8-K | | June 18, 2015 | | | |
| 21.00 | | Subsidiaries of the Registrant | | | | | | X | |
| 23.00 | | | | | | | | X | | |
| 31.10 | | | | | | | | | X | | |
| 31.20 | | | | | | | | | X | | |
| 32.00 | | | | | | | | | X | | |
| * | | | | | | | | | | |
| * | | Indicates contract or compensatory plan or arrangement | | | | | | | | |
| | | | | | | | | | | |
| 101.INS | | XBRL Instance Document | | | | | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
SCHEDULE II – VALUATION and QUALIFYING ACCOUNTS
for the years ended December 31, 2016, 2015,2019, 2018, and 20142017
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | | | | | |
| Description | | Balance at
Beginning of
Period | | Charged to
Costs and
Expenses | | Charged to Other
Accounts | | | | Deductions | | | | Balance at
End of Period |
| | | | | | | | | | | | | | |
| Deducted from assets to which they apply: | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | | | | | |
| Tax valuation allowance | | 11,646 | | | 1,305 | | | (22) | | | (1) | | 9,543 | | | (2) | | 3,386 | |
| Total | | $ | 11,646 | | | $ | 1,305 | | | $ | (22) | | | | | $ | 9,543 | | | | | $ | 3,386 | |
| December 31, 2018 | | | | | | | | | | | | | | |
| Tax valuation allowance | | 12,322 | | | 108 | | | 17 | | | (1) | | 801 | | | | | 11,646 | |
| Total | | $ | 12,322 | | | $ | 108 | | | $ | 17 | | | | | $ | 801 | | | | | $ | 11,646 | |
| December 31, 2017 | | | | | | | | | | | | | | |
| Tax valuation allowance | | 17,776 | | | 1,471 | | | 125 | | | (1) | | 7,050 | | | (3) | | 12,322 | |
| Total | | $ | 17,776 | | | $ | 1,471 | | | $ | 125 | | | | | $ | 7,050 | | | | | $ | 12,322 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additions | | | | | | | | |
| Description | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Charged to Other Accounts | | | | Deductions | | | | Balance at End of Period |
| | | | | | | | | | | | | | | |
| Deducted from assets to which they apply: | | | | | | | | | | | | |
| December 31, 2016 | | | | | | | | | | | | | | |
| Tax valuation allowance | | 17,895 |
| | 1,951 |
| | (181 | ) | | (1) | | 1,889 |
| | | | 17,776 |
|
| Total | | $ | 17,895 |
| | $ | 1,951 |
| | $ | (181 | ) | | | | $ | 1,889 |
| | | | $ | 17,776 |
|
| December 31, 2015 | | | | | | | | | | | | | | |
| Tax valuation allowance | | 23,478 |
| | 2,605 |
| | (299 | ) | | (1) | | 7,889 |
| | (2) | | 17,895 |
|
| Total | | $ | 23,478 |
| | $ | 2,605 |
| | $ | (299 | ) | | | | $ | 7,889 |
| | | | $ | 17,895 |
|
| December 31, 2014 | | | | | | | | | | | | | | |
| Tax valuation allowance | | 6,321 |
| | 18,535 |
| | (263 | ) | | (1) | | 1,115 |
| | | | 23,478 |
|
| Total | | $ | 6,321 |
| | $ | 18,535 |
| | $ | (263 | ) | | | | $ | 1,115 |
| | | | $ | 23,478 |
|
(1) Primarily foreign currency translation adjustments.
(2) Capital $5.7 million relates to the capital loss oncarryforward expiration from the sale of upstreamthe Downstream oil and gas business.
(3) $4.3 million relates to the reduction of the U.S. corporate income tax rate due to the Tax Act.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CURTISS-WRIGHT CORPORATION
(Registrant)
Date: February 21, 2017 27, 2020 By: /s/ David C. Adams
David C. Adams
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: February 21, 2017 27, 2020 By: /s/ Glenn E. Tynan
Glenn E. Tynan
Vice President of Finance and Chief Financial Officer
Date: February 21, 2017 27, 2020 By: /s/ K. Christopher Farkas
K. Christopher Farkas
Vice President of Finance and Corporate Controller
Date: February 21, 2017 27, 2020 By: /s/ David C. Adams
David C. Adams
Director
Date: February 21, 2017 27, 2020 By: /s/ Dean M. Flatt
Dean M. Flatt
Director
Date: February 21, 2017 27, 2020 By: /s/ S. Marce Fuller
S. Marce Fuller
Director
Date: February 21, 2017 27, 2020 By: /s/ Rita J. HeiseBruce D. Hoechner
Rita J. HeiseBruce D. Hoechner
Director
Date: February 21, 2017 27, 2020 By: /s/ Allen A. KozinskiGlenda J. Minor
Allen A. KozinskiGlenda J. Minor
Director
Date: February 21, 2017 By: /s/ John R. Myers
John R. Myers
Director
Date: February 21, 2017 27, 2020 By: /s/ John B. Nathman
John B. Nathman
Director
Date: February 21, 2017 27, 2020 By: /s/ Robert J. Rivet
Robert J. Rivet
Director
Date: February 21, 2017 27, 2020 By: /s/ Albert E. Smith
Albert E. Smith
Director
Date: February 21, 2017 27, 2020 By: /s/ Peter C. Wallace
Peter C. Wallace
Director
