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, 20172023
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)
| | | | | | | | |
Delaware | | 13-0612970 |
| | |
Delaware | | 13-0612970 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | | | | |
130 Harbour Place Drive, Suite 300 | | |
Davidson, | North Carolina | | 28036 |
incorporation or organization) | | |
| | |
13925 Ballantyne Corporate Place, Suite 400, Charlotte, North Carolina | | 28277 |
(Address of principal executive offices) | | (Zip Code) |
| | |
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”filer,”
“smaller reporting company,” and “smaller reporting company”"emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filerx | ☒ | | Accelerated filero | ☐ |
Non-accelerated filero | (Do not check if a smaller reporting company)☐ | | Smaller reporting companyo | ☐ |
| | | Emerging growth companyo
| ☐ |
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.o | ☐ |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | ☒ |
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. | ☒ |
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). | ☒ |
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, 20172023 was approximately $3.6 billion.$6.2 billion.
The number of shares outstanding of the Registrant’s Common stock as of January 31, 2018:
2024: | | | | | | | | |
| | |
Class | | Number of shares |
| | |
Common stock, par value $1 per share | | 44,154,67738,213,391 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of the Registrant with respect to the 20182024 Annual Meeting of Stockholders to be held on May 10, 20182, 2024 are incorporated by reference into Part III of this Form 10-K.10-K, except for Item 402(w) of Regulation S-K that is included in Part III, Item 11 herein.
INDEX TO FORM 10-K
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| PART I | | | |
| PART I | | |
Item 1. | | | |
Item 1A. | | | |
Item 1B. | | | |
Item 2.1C. | | | |
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. | | | |
Item 9C. | | | |
| PART III | | |
| PART III | | |
Item 10. | | | |
Item 11. | | | |
Item 12. | | | |
Item 13. | | | |
Item 14. | | | |
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| PART IV | | |
Item 15. | | | |
Item 16. | | | |
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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 and potential impacts from global supply chain disruptions, the inflationary environment, higher interest rates or deflation, labor shortages, and measures taken by governments and private industry in response, (d)statements of future economic performance and potential impacts due to the war between Russia and Ukraine as well as the Israel and Hamas war, and the related sanctions, (e) the effect of laws, rules, regulations, tax reform, new accounting pronouncements, and outstanding litigation on our business and future performance, and (e)(f) 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.
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 andalong with its subsidiaries (we, the Corporation, or the Company) is a global diversified manufacturing and service companyintegrated business that designs, manufactures, and overhauls precision components and provides highly engineered products, solutions, and services mainly to the aerospace, defense, generalAerospace & Defense (A&D) markets, as well as critical technologies in demanding commercial power, process, and industrial and power generation markets. We were formed in 1929 by the merger of companies founded by the Wright brothers and Glenn Curtiss, both aviation pioneers. We are incorporated under the laws of the State of Delaware and headquartered in Charlotte, North Carolina. We list our common stock on the New York Stock Exchange (NYSE) and trade under the symbol CW.
We expect that the diversification and breadth of our portfolio should improve our competitive positions in our core markets, mitigate the impact of business cyclecycles or economic volatility, and allow us to drive growth in new products and markets. We believe we are well positioned in the markets in which we operate as we seek to leverage and build upon our critical mass to expand our global manufacturing capabilities, sales channels and customer relationships. We striveThrough One Curtiss-Wright, we also have inherent synergies with significant potential to build upon crossover applications for consistent organic sales growth, operating margin expansion,our defense and free cash flow generation, while maintainingcommercial technologies that leverage our teams’ collaborative efforts and the strength of our combined portfolio.
Curtiss-Wright maintains a disciplined and balanced capital deployment strategy in order to drive long-term shareholder value.
We are well positionedunique presence on high-performance platforms and critical applications that require our technical sophistication, and we benefit from decades of engineering expertise. expertise and knowledge transfer. Curtiss-Wright has been involved in a number of “firsts” in industry, and since the origin of many of our markets, including commercial aerospace (our history dates back to the Wright Brothers and their historical first manned flight), naval nuclear power (presence on the first nuclear naval vessel) and commercial power (Curtiss-Wright’s products were in the first commercial nuclear power plant). We have built upon those long-standing customer relationships and are deeply embedded in our customers workflows today. We hold competitive positions in the majority of our key defense and commercial end markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers. As a result, Curtiss-Wright is well positioned to take advantage of industry growth dynamics and secular trends that align with our strengths in attractive end markets.
Our portfolio of highly competitive technologies areis relied upon to improve safety, operating efficiency, and reliability, while meeting performance requirements in the most demanding performance requirements.environments. Our ability to provide high-performance, advanced technologiesmission critical, niche products and services on a cost-effective basis is fundamental to our strategy to drive increased value to our customers.customers, which include
defense prime contractors, commercial aerospace original equipment manufacturers (OEMs), and numerous energy and manufacturing companies. We compete globally, primarily based on technology and pricing.
Our Strategy
Curtiss-Wright's Pivot to Growth strategy focuses on maximizing revenue, operating income, and free cash flow growth for our shareholders. It is built upon a strong foundation of operational and financial excellence where we strive for consistent growth in sales, operating margin, diluted earnings per share, and free cash flow. Curtiss-Wright is differentiated because we have strength in the combined portfolio benefiting from long-term stability in our defense businesses and agility in our commercial businesses.
Our strategy is centered on a renewed drive for top-line acceleration through both organic and inorganic sales growth, building on the strengths across our A&D and commercial markets, while deepening and expanding our customer relationships by driving One Curtiss-Wright to our customers. Our Operational Growth Platform accelerates the Pivot to Growth strategy by driving continued opportunities for margin expansion and savings across the portfolio which allows us to maintain steady investments in research and development (R&D) to fuel both innovation and organic growth. We also utilize a strong and healthy balance sheet to implement a disciplined capital allocation strategy consisting of acquisitions as well as returns to shareholders through share repurchases and dividends, which will collectively drive long-term shareholder value.
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 reportable segments: Commercial/Aerospace & Industrial, Defense Electronics, and Naval & Power.
Our principal domestic manufacturing facilities are located in Arizona, California, New York, North Carolina, Ohio, Pennsylvania, and Pennsylvania,South Carolina, and internationally in Canada, Mexico, and the United Kingdom.
Commercial /Aerospace & Industrial
Sales in the Commercial/Aerospace & Industrial segment are primarily togenerated from 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: (i.) industrial and specialty vehicle products, such as electronic throttlepower management electronics, traction inverters, transmission shifters, and control devices, joysticks and transmission shifters;systems, (ii.) sensors, controls, and electro-mechanical actuation components and utility systems used on commercial aircraft; valves to both the industrial and naval defense markets;military aircraft, and (iii.) surface technology services, such as shot peening, laser peening, and engineered coatings utilized in both commercial and advanced analytical testing. Thedefense end market applications. In the general industrial market, we have long-standing customer relationships and maintain a broad portfolio of products and services promoting efficiency, safety, reduced emissions, and longevity. Certain industrial businesses within our Commercial/Aerospace & 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 services primarily support global industrial, commercial aerospace, oil and gas, commercial vehicles, medical, and transportation industries. AsThe commercial industrial businesses,aerospace business is primarily impacted by OEM production rates of new aircraft as well as emerging platforms such as all-electric aircraft, while the defense business is primarily impacted by government funding and spending on new programs, primarily driven by the U.S. Government. The 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.
Defense Electronics
Sales in the Defense Electronics segment are primarily to the defense markets and, to a lesser extent, to the commercial aerospace market. The defense businesses in this segment provide a diversified offering of products including: Commercial Off-the-Shelfincluding commercial off-the-shelf (COTS)embedded computing board levelboard-level modules integrated subsystems,and processing equipment, data acquisition and flight test instrumentation equipment, integrated subsystems, instrumentation and control systems, turret aimingtactical communications solutions for battlefield network management, and electronic stabilization products, and weapons handling systems.products. The defense businesses within our Defense Electronics segment are impacted primarily by government funding and spending, driven primarily by the U.S. Government. OurGovernment, and supplemented by foreign defense spending (e.g. NATO countries). As a supplier of Modular Open Systems Approach (MOSA) based solutions, our products typically support government entities in the aerospace defense, ground defense, and naval defense industries. As a result, we have varying degrees of platform-level content on fighter jets, helicopters, unmanned aerial vehicles (UAVs), ground combat equipment, tactical vehicles, and nuclear and non-nuclear surface ships and submarines, including a presence on more
than 325 platforms and more than 3,000 programs over the past 10 years. 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 compared to our commercial businesses and have more stringent specifications and performance requirements.requirements based on their support of key Department of Defense (DoD) priorities such as cyber, security and the net-centric connected battlefield. The businesses in this segment typically market and distribute products through regulated government contracting channels.
Naval & Power
Sales in the Naval & Power segment are primarily to the nuclearnaval defense and power generation market& process markets and, to a lesser extent, tothe aerospace defense market. For the naval defense market.market, we provide naval propulsion and auxiliary 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 naval defense businesses in this segment are primarily impacted by government funding and spending on shipbuilding programs, primarily driven by the U.S. Government, and supplemented by foreign defense spending. For the aerospace defense market, we provide aircraft arresting systems equipment including energy absorbers, retractable hook cable systems, net-stanchion systems and mobile systems to support fixed land-based arresting systems. For the power & process 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 supporting the continued performance, safety and fluid sealing technologies.modernization of operating reactors worldwide, though the majority of our products today support the maintenance of U.S. nuclear reactors. 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 Generation III+ Westinghouse AP1000 reactor design. The power generation businesses within our Power segment are impacted by pricingdesign, as well as various nuclear reactor technologies supporting the design and demand for various formsdeployment of energy (e.g. coal, natural gas,numerous advanced Small Modular Reactors (SMRs). In addition, we furnish specialized and innovative severe-service valve technologies and services, heat exchanger repair, and piping test and isolation products to the oil and nuclear).gas, chemical, petrochemical and industrial markets worldwide. The businesses in this segment are typically dependent upon the need for new construction as well asongoing maintenance, repair and overhaul by nuclear energy providers. The businesses are subject to changes in regulation which may impact demand, consumption,of existing power plants, as well as the construction of new power plants globally, and underlying supply. The production processes are primarily material modifications, machining, assembly,typically market 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. Our products within the Power segment also support the naval defense market, where we specifically provide naval propulsion and auxiliary equipment, including main coolant pumps, power-dense compact motors, generators, and secondary propulsion systems, primarily to the U.S. Navy. The defense businesses in this segment are impacted byregulated or government funding and spending, primarily driven by the U.S. Government.contracting channels.
OTHER INFORMATION
Certain Financial Information
For information regarding sales by geographic region, see Note 1718 to the Consolidated Financial Statements contained in Part II, Item 8, of this Annual Report on Form 10-K.
In 2017, 2016,2023, 2022, and 2015,2021, our foreign operations as a percentage of pre-tax earnings were 40%35%, 42% 39%, and 51%28%, respectively.respectively, adjusted for the loss on sale of our industrial valves business in Germany in 2022, along with an impairment on assets held for sale related to the German industrial valves business in 2021.
Government Sales
Our sales to the U.S. Government and foreign government end use represented 39%56%, 38%54%, and 36%55% of total net sales during 2017, 2016,2023, 2022, and 2015,2021, 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 typically recoups a portion of the underrun based upon a formula in which the customer’s portion increases as the underrun exceeds certain established levels.an agreed-upon formula.
Generally, long-term contracts with the U.S. Government require us to invest in and carry significant levels of inventory. However, where allowable,allowed, we utilize progress payments and other interim billing practices, on nearly all of these contracts, thus reducingto reduce working capital requirements. It is our policy to seek customary progress payments on certain 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, 4,5, and 56 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 that we serve. No commercial customer accounted for more than 10% of our total net sales during 2017, 2016,2023, 2022, or 2015.2021.
Approximately 33%46% of our total net sales for 2017, 32%2023, 47% for 2016,2022, and 30%50% for 20152021 were derived from contracts with agencies of, and prime contractors to, the U.S. Government. Information on our sales to the U.S. Government, including both direct sales as a prime contractor and indirect sales as a subcontractor, is as follows:
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| | Year Ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Aerospace & Industrial | | $ | 146,205 | | | $ | 151,528 | | | $ | 155,276 | |
Defense Electronics | | 638,597 | | | 548,878 | | | 600,085 | |
Naval & Power | | 529,968 | | | 509,002 | | | 494,316 | |
Total U.S. Government sales | | $ | 1,314,770 | | | $ | 1,209,408 | | | $ | 1,249,677 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Commercial/Industrial | | $ | 178,202 |
| | $ | 187,498 |
| | $ | 177,827 |
|
Defense | | 369,977 |
| | 305,459 |
| | 300,462 |
|
Power | | 191,733 |
| | 181,851 |
| | 176,737 |
|
Total U.S. Government sales | | $ | 739,912 |
| | $ | 674,808 |
| | $ | 655,026 |
|
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 to 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
Company-sponsored research and development costs are expensed when incurred. Total research and development expenses amounted to $60 million, $59 million, and $61 million in 2017, 2016, and 2015, respectively.
Executive Officers
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Name | | Current Position | | Business Experience | | Age | | Executive Officer Since |
Lynn M. Bamford | | Chair and Chief Executive Officer | | Chair of the Board of Directors since May 5, 2022 and Chief Executive Officer of the Corporation since January 1, 2021. She also formerly held the title of President of the Corporation from January 1, 2021 to May 5, 2022. Prior to this, she served as President of the former Defense and Power segments of the Corporation from January 2020. She also served as Senior Vice President and General Manager of the Company’s Defense Solutions and Nuclear divisions from 2018, and Senior Vice President and General Manager of the Defense Solutions division from 2013. She has held various leadership positions in the Corporation since 2004. She has been a Director of the Corporation since January 1, 2021. | | 60 | | 2021 |
K. Christopher Farkas | | Vice President and Chief Financial Officer | | Vice President and Chief Financial Officer of the Corporation since May 2020. Prior to this, he served as Vice President of Finance from December 2017 and served as Vice President and Corporate Controller of the Corporation from September 2014. He also served as Assistant Corporate Controller of the Corporation from May 2009. | | 55 | | 2014 |
Kevin M. Rayment | | Vice President and Chief Operating Officer | | Vice President and Chief Operating Officer of the Corporation since April 1, 2021. Prior to this, he served as President of the Aerospace & Industrial segment (f/k/a Commercial/Industrial) of the Corporation from January 2020. He has held various leadership positions in the Corporation since 2004. | | 54 | | 2021 |
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 of 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. | | 56 | | 2011 |
Robert F. Freda | | Vice President and Treasurer | | Vice President and Treasurer of the Corporation since January 2021. Prior to this, he served as Assistant Corporate Controller of the Corporation from June 2017 and also served as Director of Finance from September 2006. | | 56 | | 2021 |
Gary A. Ogilby | | Vice President and Corporate Controller | | Vice President and Corporate Controller of the Corporation since May 2020. Prior to this, he served as Vice President of Finance and Administration of the Company’s Surface Technologies division from November 2016. He also served as Assistant Corporate Controller of the Corporation from 2014. | | 42 | | 2020 |
John C. Watts | | Vice President of Strategy and Corporate Development | | Vice President of Strategy and Corporate Development of the Corporation since May 2022. Prior to this, he served as Vice President of Strategy and Communications of the Corporation from April 2015, and as Director and Vice President of Business Development for the Corporation’s former Controls division from 2006.
| | 54 | | 2022 |
|
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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. | | 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.
| | 59 | | 2010 |
Glenn E. Tynan | | Vice President and Chief Financial Officer | | Vice President and Chief Financial Officer of the Corporation since June 2002. | | 59 | | 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. | | 50 | | 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.
| | 49 | | 2014 |
Harry S. Jakubowitz | | Vice President and Treasurer | | Vice President of the Corporation since May 2007 and Treasurer of the Corporation since September 2005. | | 65 | | 2007 |
Employees
At the end of 2017, we had approximately 8,600 employees, 8% 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 sitewebsite at www.curtisswright.com as soon as reasonably practicable after we electronically file.
Human Capital
At the end of 2023, we had approximately 8,600 employees in more than 20 countries, 6% of which are represented by labor unions and covered by collective bargaining agreements.
Set forth below are some of the key aspects of Curtiss-Wright’s human capital strategy:
Compensation Programs and Employee Benefits
Our success as an organization is ultimately dependent upon the success of our employees. As a result, we have made significant investments in order to attract, develop, and retain talented personnel, inclusive of competitive pay, equity-based compensation, benefits, training, and professional development opportunities. Notable programs offered include the following:
•Employer 401(k) matching contributions;
•Employee Stock Purchase Plan;
•Employer-sponsored health insurance;
•Tuition reimbursement program;
•Training and professional development; and
•Annual and local incentive compensation plans
In addition to the above, we also offer equity-based incentive compensation plans to certain employees through the issuance of performance share units, restricted stock units, and cash-based performance units. Our equity-based incentive compensation plans ultimately act as a key lever for rewarding and retaining key employees, while also aligning the interests of our key employees and shareholders. See Note 16 to the Consolidated Financial Statements for more information regarding our equity-based incentive compensation plans.
Culture
We believe that our culture at Curtiss-Wright is just as essential as our products and services. Our culture impacts the quality of the employees we hire, the way we communicate and interact with our customers and each other, and our performance standards. Our culture is the cornerstone representing our values, our behaviors, our way of working, and how we approach our business, which is based on strong relationships and a dedication to taking care of one another and our customers. We operate according to Curtiss-Wright’s Code of Conduct (the Code), which mandates full compliance with applicable laws and regulations and helps to preserve the integrity of our Company. The Code is available within the Corporate Governance section of the Company’s website at https://curtisswright.com/investor-relations/governance/default.aspx.
Talent Management
Curtiss-Wright’s talent strategy is designed to maximize the full potential of our people and our business. We are focused on providing an end-to-end experience from pre-hire to retirement. This includes creating inclusive, employee-centric experiences, cultivating leadership, offering multiple development pathways, and expanding the talent pipeline into and through the company.
We hold regular succession and career development reviews to ensure line of sight to talent at various levels of the organization. Succession plans are refreshed and reviewed to ensure a robust, diverse pipeline of talent and business continuity with a tight linkage to development.
We focus on accelerating learning and development of our leaders by providing a combination of experiences and education. Our New Business Leaders Program offers developmental paths for new and experienced managers seeking to refresh or build their leadership capabilities. Hundreds of leaders have honed their skills leveraging various learning modalities, including virtual and in-person instructor-led, web-based training and micro-courses to support our managers. Our employee development programs are designed to strengthen employee skills that align to our current and future business needs, encourage knowledge sharing and support career progression and growth. We utilize our Learning Management System to provide our employees online career-specific tools, training, and resources, and we also support development opportunities through educational institutions with our Tuition Assistance Program. Our early-in-career rotation program for new business leaders develops talent pipelines with both depth of skills and breadth of experiences that are critical to the company’s future talent needs. Our
Technical Fellows program and our Innovation Council program is uniquely designed to cultivate technical, domain expertise and collaborative thought leadership for early through advanced career levels.
As our Company continues to grow, we rely on an integrated talent acquisition approach. The Company strategically attracts, identifies, and onboards candidates in support of business needs and priorities. In order to accomplish our goals, we seek talent with unique perspectives, skills, and experiences; maintain strategic relationships with colleges; offer a robust employee referral program; and partner with numerous diversity organizations, military organizations, and trusted external partners, with a commitment to growing and supporting a diverse talent pipeline. Amidst the evolving and, at times, challenging hiring environment, we apply agile recruiting methods as we work to adapt to the changing labor marketplace and to ensure employees and candidates have an exceptional experience.
Diversity and Inclusion
Curtiss-Wright believes in a diverse and inclusive workforce, where diverse backgrounds are represented, engaged, and empowered to inspire and innovate. Discrimination is not tolerated at Curtiss-Wright. We are committed to high ethical standards and equal employment opportunities in all personnel actions, without regard to race, color, religion, gender, national origin, citizenship status, age, marital status, gender identity or expression, sexual orientation, physical or mental disability, or veteran status. We maintain a Code of Conduct, an anti-harassment policy, and an equal employment opportunity policy, and provide training on these policies annually. We do business in more than 20 countries, and our employees operate across multiple cultures, functions, languages, and time zones to solve the technical and logistical challenges presented by its worldwide customer base. To foster a more diverse and inclusive culture, Curtiss-Wright is focused on (1) promoting a culture of diversity and inclusion that leverages the talents of all employees, and (2) implementing practices that attract, recruit, and retain diverse top talent. Our succession plans are geared at retaining and promoting our existing employees to provide equal opportunity and access to promotion within the organization.
Environmental, Health, and Safety
The health, safety, and well-being of our employees, together with protection of the environment in the communities in which we operate, is a top priority for Curtiss-Wright. We take steps to ensure that we comply with applicable legal, regulatory, and other requirements in all material respects related to preventing pollution, injury, and ill health, and employ industry-leading, technologically sound, and economically feasible control mechanisms, procedures, and processes that improve our efforts. In addition, we provide training, education, safety monitoring and auditing, and health-awareness programs in our offices and factories. We also provide several channels for all employees to speak up, ask for guidance, and report concerns related to ethics or safety violations, and we address those concerns and take appropriate actions. We track total recordable rate (TRR) and days away, restriction, and transfer rate (DART) for all sites worldwide. Senior executives provide monthly reporting to the Chief Executive Officer (CEO) and Chief Operating Officer (COO) on their safety statistics, and are accountable and compensated based on their safety record. For the year ended December 31, 2023, our TRR and DART rates were 1.32 and 0.86, respectively. For the year ended December 31, 2022, our TRR and DART rates were 1.69 and 1.04, respectively.
Ethics and Integrity
Curtiss-Wright is deeply committed to ensuring that all of its employees conduct business with the highest levels of ethics and integrity and to complying with all laws and regulations applicable to Curtiss-Wright’s businesses. To support and articulate our commitment and responsibility in this regard, Curtiss-Wright maintains a Code of Conduct. The Code addresses several topics, including conflicts of interest, safeguarding assets, financial reporting, the protection of confidential information, insider trading, and general adherence to laws and regulations. All employees, including executive officers, must comply with the Code. In order to enhance understanding of and compliance with the Code, all employees are required to complete a training program annually which details ethical business practices, an inclusive workforce, and respectful treatment of our employees, and certify to their commitment to comply with the Code. The Corporation also requires employees to complete annual training programs covering such topics as data privacy management, anti-bribery/trade compliance (including the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act), fraud, harassment, and cybersecurity. In addition, the Corporation maintains an ethics-related global, multi-lingual hotline that is available at all times through which employees can report anonymously any issues of concern. The hotline also facilitates the anonymous or direct communication of ethical, financial, discrimination, and health and safety concerns to the Office of General Counsel and serves as the vehicle through which employees and third parties may send communications to the Audit Committee of the Board of Directors confidentially and anonymously regarding any accounting, internal controls, or auditing concerns.
Employee Wellness
We are committed to the physical and mental health and wellness of our employees. We provide our employees and their families with access to a variety of health and wellness programs. We provide free annual biometric screening and health assessments at work or offsite, annual free flu shot clinics, a tobacco cessation program, weight management programs, and an employee assistance program, which offers advice on mental health, legal, and financial issues.
Item 1A. Risk Factors.
We have summarized the known, material risks to our 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 and cash flows.flows, and require significant management time and attention. 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.
RISKS RELATED TO OUR 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. As a result, we are increasingly dependent upon our information systems to operate our business. Our ability to effectively manage our business depends on the security, reliability, and adequacy of our information systems. In addition, various privacy and cybersecurity laws and regulations, both in the U.S. and globally, 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. Additionally, we have incurred, and expect to continue to incur, additional costs to comply with increased cybersecurity protections for our customers, including the U.S. government. Despite our implementation of firewalls, switchgear, and other network security measures, our servers, databases, and other systems may be vulnerable to various cyber and other security threats, including those caused by computer hackers, physical or electronic break-ins, sabotage, computer viruses, malware, worms, and similar disruptions from unauthorized access and tampering with our computer systems.systems, including through social engineering such as phishing attacks, coordinated denial-of-service attacks, and similar incidents. The occurrence of some of these risks may be increased due to the work-from-home arrangements that we have implemented for many of our office-based employees. We continue to review and enhance our computer systems as well as provide training to tryour employees in an attempt to prevent unauthorized and unlawful intrusions, but in the futureintrusions. However, 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, including intellectual property, or cause disruptions in our services. We mightWhile 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.
A substantial portion of our revenues and earnings depends upon the continued willingness of the U.S. Government and other customers in the defense industry to buy our products and services.
In 2017, approximately 33% of our total 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. In August 2011, Congress enacted the Budget Control Act of 2011, 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 2017. However, future budgets beyond 2017 are uncertain with respect to overall levels of defense spending. In addition, competing demands for federal funds can put pressure on all areas of discretionary spending, which could ultimately impact the defense budget. 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. In the event one or more of our programs are reduced, delayed, or terminated for which we provide products and services 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 and cash flows.
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, 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 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.
Our 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.
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 fact that government contract wins can be contested by other 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 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. 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.
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 Canada. 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. U.S. international trade policy is uncertain under the Trump administration, including, for example, the government’s decision to renegotiate the NAFTA. This could cause an increase in customs duties which in turn could adversely affect intercompany transactions among our operating subsidiaries in Canada, Mexico, and the U.S., and increase transaction costs with third party suppliers and customers. In addition, President Trump has made comments suggesting that he supports significantly increasing tariffs on goods imported into the United States from certain countries such as Mexico. At this time, it remains unclear what actions, if any, President Trump will take with respect to 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. This in turn could have a material adverse effect on our business, financial condition, and results of operations.
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. In addition, audits by income tax authorities could result in unanticipated increases in our income tax expense.
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, which 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 these conditions had not previously 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.
Political and economic changes in foreign countries and markets, including foreign currency fluctuations, may have a material effect on our operating results.
During 2017, 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.
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.
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 isand not covered by insurance could have a material adverse effect on our business, financial condition, and results of operations.
In addition, the failure of a product that we have sold could also result in a recall of, or safety alert relating to, such product which could ultimately result, in certain cases, in the removal of such product from the marketplace and claims regarding costs associated therewith.
Furthermore, 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.
A downturn
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. While we maintain insurance coverage with respect to certain liability claims, that insurance coverage may not be adequate to cover all claims that may arise, or we may not be able to maintain adequate insurance coverage in the aircraft marketfuture at an acceptable cost. Material product warranty obligations not covered by insurance or that exceed our established reserves could adversely affect our business.
Our sales to large commercial aircraft manufacturers are cyclical in nature and can be adversely affected byhave a number of factors, including current and future 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 affectmaterial adverse effect on our business, financial condition, and results of operations.
IfOur 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 failprovide to satisfy our customers. Our supply chain has been and may continue to be impacted by a wide variety of factors, including labor and material shortages as well as geopolitical events, such as China’s relationship with the United States and Taiwan. Because we strive to limit the volume of raw materials and component parts on hand, our business could be adversely affected if we were unable to obtain these raw materials and components from our suppliers in the quantities that we require. We also depend on subcontractors and suppliers to meet their contractual obligations in full compliance with customer requirements. Nonperformance or underperformance by subcontractors and suppliers 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 mayand 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 is delayed or should cease or otherwise be terminated and unable to deliver such components, we may incurnot be able to produce the related product in a timely manner or in sufficient quantities, if at all, which could adversely affect our operating results. A sole-source supplier of a key component could also potentially exert significant costsbargaining power over price, quality, warranty claims, or liabilities, including liquidated damages and penalties.
In general, our contracts may be terminated for our failureother terms relating 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,these materials, which could have a material adverse effect on our financial position, results of operations, or cash flows. As of December 31, 2017, 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 ourcondition, results of operations, and financial position.
Our future growthcash flows. In addition, supply chain constraints and continued success is dependent uponimproving economic conditions have resulted in sustained increases in the prices we pay for many of the components and raw materials used in our key personnel.
Our success is dependent upon the efforts of our senior managementproducts. Furthermore, we are experiencing higher labor costs due to increased competition for personnel in many regions in which we operate as well as general inflationary conditions, including higher shipping costs, labor shortages, and ourrising energy prices. Our ability to attractperform our obligations as a prime contractor may be adversely affected if one or more of these suppliers is unable to provide the agreed-upon supplies or perform the agreed-upon services in a timely and retain other highly qualified management and technical personnel. We face competition for management and qualified technical personnel from other companies and organizations. Therefore,cost-effective manner. While we may nothave 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 retainfully offset the effects of higher raw materials costs through price 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 existing managementemployees. Moreover, the competitive nature of our businesses requires us to continuously implement process changes intended to achieve product improvements and technical personnel or fill new management or technical positions or vacancies created by expansion or turnovermanufacturing efficiencies. These process changes may at times result in production delays, quality concerns, and increased costs. Any disruption of operations 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 effortfacilities due 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 personnelequipment failures or process interruptions could have a material adverse effect on our business.
We use estimates when accounting for long-term contracts. Changes in estimatesRISKS RELATED TO OUR STRATEGY
Implementing our acquisition strategy involves risks, and our failure to successfully implement this strategy 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 uponon our business.
As part of our capital allocation strategy, we aim to grow our business by selectively pursuing acquisitions and technologies that 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 periodthrough acquisitions for several 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;
•We may experience increased capital requirements;
•There could be insufficient internal controls over financial activities or financial reporting at an acquired company that could impact us on a consolidated basis; and
•We may encounter difficulties in entering new markets in which we may have little or no experience.
While we conduct financial and performance. See “Critical Accounting Estimatesother due diligence in connection with our acquisitions and Policies”generally seek some form of protection, such as indemnification from the seller, insurance coverage, and sometimes placing a portion of the purchase price in Part II, Item 7escrow or a cash holdback to cover potential liabilities, such acquired companies may have weaknesses or liabilities that are not accurately assessed or brought to our attention at the time of this Form 10-K.the acquisition. Further, indemnities, insurance or escrow/holdback arrangements may not fully cover such matters and acquisitions of public companies typically do not include post-closing indemnities or escrows.
Our backlog is subjectFailure to reduction and cancellation, whichsuccessfully implement our acquisition strategy, including successfully integrating acquired businesses, could negatively impacthave a material adverse effect on our revenuesbusiness, financial condition, and results of operations.
Backlog representsOur future success will depend, in part, on our ability to develop new technologies.
Virtually all 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. In addition, product and program needs of our government and commercial customers change and evolve regularly. Accordingly, to remain competitive in the future, we will need to continue to invest financial resources, including through internal research and development, acquisitions, or other teaming arrangements, to: (a) identify emerging technological trends in our current and target markets; (b) develop and manufacture competitive products, systems, and services; (c) enhance our offerings by adding technological innovations that differentiate our products, systems, and services from those of our competitors; and (d) develop, manufacture, and bring those products, systems, and service to market quickly at cost-effective prices. These expenditures could divert our attention and resources from other projects, and we cannot be sure that these expenditures will ultimately lead to the timely development of new offerings and technologies or identification of and expansion into new markets. Due to the design complexity of our products, we may, in the future, experience delays in completing the development and introduction of new products. Any delays could result in increased costs of development or deflect resources from other projects. In addition, there can be no assurance that the market for our products will develop or continue to expand or that we will be successful in newly identified markets as we currently anticipate.
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, including competition for hiring and retaining skilled labor. We compete against companies that often have higher sales volumes and greater financial, technological, research and development, human, and marketing resources than we have. These companies may also price their products and services below our selling prices, which could exert downward pressure on our product pricing and margins. 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, thatall of which could significantly reduce our customers have contractually committed to purchase from us. Total backlog includes both funded (unfilled orders for which funding is authorized, appropriated,revenues. Furthermore, we are facing increased international competition 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). We are a subcontractor to prime contractors for the vast majoritycross-border consolidation of competition. If consolidation of our government business; as such, substantially all amountscompetition continues to occur, we would expect the competitive pressures we face to increase. Our management believes that the principal points of competition in backlogour markets are funded. Backlog excludes unexercised contract optionstechnology, price, product quality, product performance, sufficient supply of necessary components, technical expertise, timeliness of delivery, superior customer service and potential orderssupport, and continued certification under ordering type contracts (e.g. Indefinite Delivery / Indefinite Quantity). Backlog is adjusted for changescustomer quality requirements and assurance programs. If we are unable to compete successfully with existing or new competitors in foreign exchange rates and is reduced for contract cancellations and terminations in the period in which they occur. Backlog as of December 31, 2017 was $2.0 billion. Backlog is subject to fluctuations and is not necessarily indicative of future sales. The U.S. Governmentthese areas, we may unilaterally modify or cancel its contracts. In addition, under certain ofexperience a material adverse effect on 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 revenuesbusiness, 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.RISKS RELATED TO MARKET CONDITIONS
AsA substantial portion of December 31, 2017, we had goodwillour revenues and earnings depends upon the continued willingness of the U.S. Government and other intangible assets, net of accumulated amortization, ofcustomers in the defense industry to buy our products and services.
In 2023, approximately $1,426 million, which represented approximately 44%46% of our total assets. Our goodwill is subjectnet sales were derived from or related to an impairment test on an annual basisU.S. defense programs. U.S. defense spending has historically been cyclical, and is also tested whenever events and circumstances indicate that goodwill may be impaired. Intangible assets (other than goodwill) are generally amortizeddefense budgets tend to rise when perceived threats to national security increase the level of concern over the useful lifecountry’s safety. At other times, spending by the military can decrease. In August 2011, Congress enacted the Budget Control Act of such assets.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, the Bipartisan Budget Act of 2019 (BBA) was signed into law, which raised the BCA budget caps for both defense and non-defense discretionary spending in 2020 and 2021 and extended the mandatory BCA spending reductions through 2029. Absent additional legislative or other remedial action, the sequestration could require reduced U.S. federal government spending 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. In addition, from time to time,the event that one or more of our programs are reduced, delayed, or terminated for which we provide products and services, we may acquire or make an investmentexperience a reduction in a business that will require us to record goodwill based on the purchase priceour revenues 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 assetsearnings 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 impacteffect on our business, financial condition, and results of operations.
U.S. lawmakers on several occasions have passed legislation to raise the federal debt ceiling, including the most recent suspension to the federal debt ceiling in June 2023, which is expected to allow the U.S. government to cover its debt obligations until at least January 1, 2025. Failure by Congress to further suspend or increase the debt ceiling could delay or result in the loss of contracts for the procurement of our products and services, and we may be asked or required to continue to perform for some period of time on certain of our U.S. government contracts, even if the U.S. government is unable to make timely payments.
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 debt, and debt wefuture passenger traffic levels, increasing fuel and labor costs, environmental concerns (inclusive of climate change), intense price competition, the retirement of older aircraft, regulatory changes, outbreak of infectious disease such as COVID-19, terrorist attacks, geopolitical events, conflicts and wars (including the Russia-Ukraine war and the Hamas-Israel war), general economic conditions (including cost inflation), worldwide airline profits, and backlog levels, all of which can be unpredictable and are outside our control. For example, the COVID-19 pandemic drastically reduced air traffic as travel restrictions and social distancing measures were implemented to help control the spread of the virus. The reduced air traffic applied financial pressures on airlines, who, in order to preserve cash and liquidity, dramatically reduced flight hours and delayed the purchases of new aircraft. Furthermore, as companies and employees become accustomed to working remotely, there is a risk that business travel and the associated flight hours may incurnot fully reach pre-pandemic levels. Any decrease in demand resulting from a downturn in the future,aerospace market could adversely affect our business, financial condition, and financial position.results of operations.
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 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). We 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, 2017, we had $814 million2023 was $2.9 billion. Backlog is subject to fluctuations and is not necessarily indicative of debt outstanding. Our levelfuture sales. The timing 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, making us vulnerable to economic downturns and increases in interest rates, limiting us from obtaining additional debt, and impacting our ability to pay dividends.
A percentagebacklog may be impacted by project delays. The U.S. Government may unilaterally modify or cancel its contracts. In addition, under certain of our workforce is employed under collective bargaining agreements.
Approximately 8%commercial contracts, our customers may unilaterally modify or terminate their orders at any time for their convenience. Accordingly, certain portions of our workforce is employed under collective bargaining agreements, which from timebacklog can be cancelled or reduced at the option of the U.S. Government and commercial customers. Our failure 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 costreplace cancelled or reduced backlog could negatively impact our results of labor, or thatoperations.
As 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, we may experience an adverse impact on our operating results ifU.S. Government contractor, we are subject to labor actions.numerous procurement rules and regulations.
Our earningsWe must comply with and margins dependare 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 partsome instances, impose added costs on subcontractor performance,our business. These regulations and other requirements regularly evolve, and new laws, regulations or procurement requirements or changes to current ones could significantly increase our costs and risks and reduce our profitability. For example, changes to the FAR requirements for federal contractors proposed in November 2022 would require companies to make disclosure of annual greenhouse gas emissions and other disclosures to be deemed a responsible bidder on future government contracts. Such additional requirements could result in additional expense. A violation of specific laws and regulations could also result in the imposition of fines and penalties, the termination of our contracts, or debarment from bidding on contracts. These fines and penalties could be imposed for example, by 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, reviews, 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 raw materialfor 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 component availability and pricing.
Our businesses dependan 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 for raw materialssubcontractors. The amount of the fee recovered, if any, is related to the portion of the work accomplished prior to termination and components. At times subcontractors perform services that we provide tois determined by negotiation.
A termination arising out of our customers. We dependdefault could have a material adverse effect 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, 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 supply networks can sometimes experience price fluctuations. Our ability to perform our obligationsservices as a prime contractor may be adversely affected ifsubcontractor.
Our U.S. Government contracts typically span one or more of these suppliersbase 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.
Furthermore, we are unablesubject to provide other risks in connection with government contracts, including without limitation:
•the agreed-upon supplies or performfrequent need to bid on programs prior to completing 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 fully offset the effects of higher raw materials costs through price 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 equipmentnecessary 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 delays, revenue loss,phase of contracts if program requirements are not met in the development phase; and significant repair costs. In addition, equipment failures
•the fact that government contract wins can be contested by other 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 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), sanctions programs implemented by the Office of Foreign Assets Control of the U.S. Department of Treasury, 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 injuries to our employees. Moreover,administrative, civil, or criminal liabilities and could, in the competitive natureextreme case, result in suspension or debarment from government contracts or suspension 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 interruptionsexport 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 Corporationwe as well as the products that we manufacture must also be certified by our individual original equipment manufacturers (OEM)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 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.
We are subject to liability under environmental and health and safety laws and regulations.
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 used in the manufacturing of certain of our products or providing certain of our services, and we are subject to potentially significant fines or penalties,
including criminal sanctions, as well as facility shutdowns to address violations, and may require the installation of costly pollution control equipment or operational changes to limit emissions or discharges. We may also be subject to increasingly stringent environmental standards in the future, particularly as greenhouse gas emissions and climate change regulations and initiatives increase. Regulatory bodies may decide in the future to limit or ban certain materials we use in our manufacturing process due to potentially significant health and safety risks to people or the environment.Such limitations or bansmay in the future require us to consider, the use of alternative raw materials or changes to our method of operations.Such alternatives often require customer approval and may result in additional costs, including higher raw material expenses, changes in operational methods, and additional customer qualifications. The formulation changes could also impact the utility of our 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 are also subject to federal, state, local, and foreign laws and regulations governing worker health and safety requirements. Failing to comply with these laws and regulations could have an adverse effect on our operating results.
We may be subject to periodic litigation and regulatory proceedings, which may adversely affect our business and financial performance.
From time to time, we are involved in lawsuits and regulatory actions brought or threatened against us in the ordinary course of business. These actions and proceedings may involve claims for, among other things, compensation for alleged personal injury, workers’ compensation, employment discrimination, or breach of contract. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such actions or proceedings. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify, as plaintiffs may seek recovery of very large or indeterminate amounts in these types of lawsuits, and the magnitude of the potential loss may remain unknown for substantial periods of time. In addition, plaintiffs in many types of actions may seek punitive damages, civil penalties, consequential damages or other losses, or injunctive or declaratory relief. These proceedings could result in substantial cost and may require us to devote substantial resources to defend ourselves and distract our management from the operation of our business. Moreover, any insurance or indemnification rights that we may have may be insufficient or unavailable to protect us against such losses. The ultimate resolution of these matters through settlement, mediation, or court judgment could have a material impact on our financial condition, results of operations, and cash flows.
Our future successbusiness, financial condition, and results of operations could be materially adversely affected by climate change regulations.
Climate change regulations at the federal, state, or local level or in international jurisdictions could require us to limit 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 restrict our 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.
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 corporate responsibility, specifically related to the environmental, social, and governance (ESG) or sustainability practices of companies, including climate change, over the past few years, and expectations in this area are rapidly evolving. The criteria used to evaluate ESG practices may continue to evolve, which could result in greater expectations and may cause us to undertake costly initiatives to satisfy new
criteria and abide by any new disclosure requirements. Some investors have used, and may continue to use, ESG criteria to guide their investment strategies, and may not invest in us, or divest their holdings of us, if they believe our policies relating to ESG matters are inadequate. Our customers may also require us to implement environmental, social, or governance responsibility procedures or standards before they continue to do business with us. Additionally, we may face reputational challenges if our ESG procedures or standards do not meet the standards set by certain constituencies, which are often inconsistent in approach. Furthermore, from time to time, we may communicate certain initiatives or goals regarding ESG matters. Although we intend to meet these commitments, we may be required to expend significant resources to do so, which could increase our operational costs. Further, there can be no assurance of the extent to which any of our commitments will depend,be achieved, if at all. In addition, we could be criticized for the scope of such initiatives or goals or perceived as not acting responsibly in part,connection with these matters. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition, and results of operations.
RISKS RELATED TO FINANCIAL MATTERS
Political and economic changes in foreign countries and markets, including foreign currency fluctuations, may have a material effect on our operating results.
During 2023, approximately 28% 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: (a) political and economic instability and potential for social unrest; (b) the uncertainty of the ability of non-U.S. customers to finance purchases; (c) restrictions on the repatriation of funds; (d) restrictive trade policies; (e) tariff regulations; (f) difficulties in obtaining export and import licenses; (g) government financed competition; (h) changes in the local labor-relations climate; (i) economic conditions in local markets, including changes in inflation; (j) health concerns (including COVID-19 or any of its variants); (k) complying with foreign regulatory and tax requirements that are subject to change; and (l) limitations on our ability to developenforce legal rights and remedies. For example, in response to Russia’s invasion of Ukraine, the United States, along with the European Union, have imposed restrictive sanctions on Russia, Russian entities, and Russian citizens. We are subject to these governmental sanctions and export controls, which may subject us to liability if we are not in full compliance with applicable laws. Further, implementation of new technologies.tariff schemes by various governments, such as those implemented by the United States and China in recent years, could potentially increase the costs of our materials, increase our cost of production, and ultimately increase the landed cost of our products sold from one country into another country. 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.
Virtually allThere has been, and may continue to be, significant volatility in global stock markets and foreign currency exchange rates that could result in the strengthening 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 marketsU.S. dollar against foreign currencies in which we conduct business. 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.
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 both 2021 and 2022, the Biden administration announced, and in certain cases has enacted, several tax proposals to fund new government investments in infrastructure, healthcare, and education, among others. Certain of these proposals involve an increase in the domestic corporate tax rate, which if implemented could have a material impact on our future results of operations and cash flows. On August 16, 2022, the Inflation Reduction Act of 2022 (IRA) was signed into law, with tax provisions primarily focused on implementing a 15% minimum tax on global adjusted financial statement income and a 1% excise tax on share repurchases. Certain provisions of the IRA became effective in the beginning of fiscal 2023.We have evaluated the impact of the IRA on our business and deem it to be immaterial. Further, changes in the tax laws of foreign jurisdictions where we operate could arise as a result of the base erosion and profit shifting project undertaken by the Organization for Economic Co-operation and Development (OECD). In December 2022, the European Union (EU) member states reached an agreement to implement the minimum tax component (Pillar Two) of the OECD’s tax reform initiative with certain aspects effective January 1, 2024, and other aspects effective January 1, 2025. While it is uncertain whether the U.S. will enact legislation to adopt Pillar Two, legislative changes to address Pillar Two are characterizedbeing adopted by rapidly changing technologies. The producttaxing authorities in
other countries where we do business. Based on the Corporation’s preliminary assessments, it does not expect Pillar Two to have a material impact on its effective tax rate nor on its consolidated results of operation, financial position, and program needscash flows.
Furthermore, 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 governmentprovision 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 commercial customers changefinancial condition could be materially and evolve regularly. Accordingly,adversely affected.
We use estimates when accounting for contracts that apply over-time revenue recognition. Changes in estimates could affect our profitability and overall financial position.
Accounting for contracts that apply over-time revenue recognition requires judgment relative to assessing risks, estimating contract net sales 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 net sales and costs at completion is complicated and subject to many variables. For example, assumptions must be made regarding the length of time to complete the contract, as costs also include expected increases in wages and prices for materials and allocated fixed costs. Similarly, assumptions must be made regarding the future impact of efficiency initiatives and cost reduction efforts. Incentives, awards, price escalations, liquidated damages, or penalties related to performance dependson contracts are considered in estimating revenue and profit rates using either the expected value method or most likely amount method. 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 future financial results could be adversely impacted by asset impairment charges.
As of December 31, 2023, we had goodwill and other intangible assets, net of accumulated amortization, of approximately $2.1 billion, which represented approximately 46% of our total assets. Our goodwill is subject to an impairment test on an annual basis, or more frequently, whenever events and circumstances indicate that goodwill may be impaired. 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 difference between the purchase price and the fair 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. For example, if the financial performance of such business was to decline significantly, we could incur a material non-cash charge to our income statement for the impairment of goodwill and other intangible assets. 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 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, 2023, we had approximately $1.0 billion of debt outstanding. Our level of debt and debt servicing costs associated with that indebtedness, in part because of increases in interest rates on variable rate indebtedness under our revolving credit facility, could have significant consequences for our business. For example, our indebtedness could require us to use a substantial portion of our cash flows from operations to pay the principal and interest on our ability to: identify emerging technological trendsdebt, thereby reducing funds available for working capital, acquisitions, dividends, capital expenditures, and other investments in our currentbusiness, including investments in technology and target markets, developresearch and manufacturedevelopment; make us vulnerable to economic downturns and increases in interest rates; limit us from obtaining additional debt; limit our flexibility in planning for, or reacting to, changes in the industries in which we compete; and place us at a competitive products, systems,disadvantage compared to our competitors, some of whom have lower debt service obligations and services, enhance our offerings by adding technological innovations that differentiate our products, systems, and services from thosegreater financial resource than we do. In addition, most of our competitors,debt arrangements require us to maintain certain debt and develop, manufacture,interest coverage ratios and bringlimit our ability to incur debt, make investments or undertake certain other business activities. These requirements could limit our ability to obtain future financing and may prevent us from taking advantage of attractive business opportunities. Our ability to meet the financial covenants or requirements in our debt arrangements may be affected by events beyond our control, and we cannot assure you that we will satisfy such covenants and requirements. A breach of these covenants or our inability to comply with the restrictions could result in an event of default under our debt arrangements which, in turn, could result in an event of default under the terms of our other indebtedness. Upon the occurrence of an event of default under our debt arrangements, after the expiration of any grace periods, our lenders could elect to declare
all amounts outstanding under our debt arrangements, together with accrued interest, to be immediately due and payable. If this were to happen, we cannot ensure that our assets would be sufficient to repay in full the payments due under those products, systems, and servicearrangements or our other indebtedness or that we could find alternative financing to market quickly at cost-effective prices.replace that indebtedness.
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 we 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.
Implementing
GENERAL RISKS
Our future growth and continued success are dependent upon our acquisitionkey personnel.
Our success in driving business performance and executing our growth strategy involves risks,is dependent upon the efforts of our senior management personnel and our failureability to successfully implement this strategyattract and retain other highly qualified management and technical personnel. Because of the complex nature of many of our products and services, and our focus on technological and product innovations, we are generally dependent on an educated and highly skilled workforce, including our engineering talent and our sales professionals.We strive to attract and hire talented employees, as well as support their growth, development, and engagement. However, we face competition for management and qualified technical personnel from other companies and organizations, which has intensified for a variety of reasons, including wage inflation, sustained labor shortages, and a shift toward remote work. 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.
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 ourOur business, financial condition, and results of operations.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 United States-Mexico-Canada Trade Agreement (USMCA) and relies on
various U.S. corporate tax provisions related to international commerce as we build, market, and sell our products globally. Although there are no immediate effects on our operations with respect to USMCA, we cannot predict future developments in the political climate involving the United States, Mexico and Canada, and thus, these may have an adverse and material impact on our operations and financial growth.
The United States and other countries have levied tariffs and taxes on certain goods (such as those implemented by the United States and China in recent years). Some of our products are included in these tariffs. All of this could lead to increased costs and diminished sales opportunities in the U.S. and abroad. Media and political reactions in the affected countries could potentially exacerbate the impact on our operations in those countries. The imposition of new or increased tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries. The tariffs may in the future increase our cost of materials and may cause us to increase prices to our customers which we believe may reduce demand for our products. Our price increases may not be sufficient to fully offset the impact of the tariffs and result in lowering our margin on products sold. If the U.S. government increases or implements additional tariffs, or if additional tariffs or trade restrictions are implemented by other countries, the resulting trade barriers could have a significant adverse impact on our suppliers, our customers and on our business. We are not able to predict future trade policy of the U.S. or of any foreign countries in which we operate or purchase goods, or the terms of any renegotiated trade agreements, or their impact on our business.
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, the ongoing trade disputes between the United States and China, the United Kingdom’s withdrawal from the European Union, armed conflicts around the world, such as those in Ukraine and Israel, and any conflict or threatened conflict between China and Taiwan (including the imposition of related sanctions by the United States and other countries as well as measures taken in response to such sanctions), inflationary pressures, rising interest rates, labor shortages, global supply chain disruptions, 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.
A percentage of our workforce is employed under collective bargaining agreements.
Approximately 6% 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, including healthcare, pensions, or other benefits, or that a breakdown in such negotiations will not result in the disruption of our operations, including by way of strikes or work stoppages. Although we have generally enjoyed good relations with both our unionized and non-unionized employees, we may experience an adverse impact on our operating results if we are subject to labor actions.
Future terror attacks, war (including the Russia-Ukraine war and Israel-Hamas war), natural disasters, climate change-related events, pandemic diseases (such as COVID-19), 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 through insurance or other risk transfer mechanisms, such as our business continuity planning and disaster recovery plans, we could be adversely impacted by terror attacks, war (including the Russia-Ukraine war and Israel-Hamas war), natural disasters such as earthquakes, hurricanes, floods, tornadoes, ice storms, climate change-related events, pandemic diseases such as COVID-19, or other events such as strikes by the workforce of a significant customer or supplier. Several of our facilities, because of their locations, could be subject to catastrophic loss caused by the aforementioned natural disasters. Global climate change may aggravate natural disasters and increase severe weather events that affect our business operations. These risks could negatively 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 facilitiesThe insurance we maintain may be insufficient to cover our losses, and any incidents may result in areasloss of, or increased costs of, such insurance. In addition, while our existing disaster recovery and business continuity plans, including those relating to our information technology systems are well designed, they may not be fully responsive to, or minimize losses associated with, catastrophic events. As a result, any business disruption could negatively affect our business, operating results, or financial condition.
The COVID-19 pandemic adversely impacted, and may in the world that are exposed to natural disasters. Financial difficultiesfuture adversely impact, our business, operations, and financial results.
The COVID-19 pandemic disrupted the global economy and adversely impacted certain elements of our customers, delays bybusiness, including our supply chain, transportation networks, and production levels. Although the World Health Organization and the U.S. federal government declared an end to COVID-19 as a global and national health emergency in May 2023, any future resurgence or development of new strains or variants of COVID-19, together with preventative measures taken to contain or mitigate such crises, could impact our business, operations and financial condition in a variety of ways, such as: (i) impact our customers in production of their products, high fuel prices,such that the concern of another major terrorist attack, and the overall decreased demand for our products and services could adversely affectchange; (ii) disrupt our operating resultssupply chain and impact the ability of our suppliers to provide products or services as required; (iii) disrupt our ability to sell and provide our products and services and otherwise operate effectively; (iv) increase incremental costs resulting from the adoption of preventative measures and compliance with regulatory requirements; (v) create financial condition.hardship on customers, including by creating restrictions on their ability to pay for our products and services; and (vi) result in closures of our facilities or the facilities of our customers or suppliers.
Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity
Our Board is actively engaged in the oversight of the Company’s cybersecurity, information security, data protection, and technology programs (“cybersecurity”) . The Audit Committee of the Board, acting through its written charter, serves as the principal agent of the Board in fulfilling its oversight and review of the Company’s policies and procedures with respect to cybersecurity risk assessment and risk management. The Company’s Chief Information Officer (CIO) leads the Company’s cybersecurity risk assessment and risk management program. Our CIO, with over 25 years of experience leading cybersecurity oversight, brings a wealth of expertise and in-depth knowledge that is instrumental in developing and executing our cybersecurity program.
Our cybersecurity program is fully integrated into the Company’s overall enterprise risk management program. Our Vice President, Risk and Compliance (VP of Risk) facilitates the enterprise risk management program, and helps ensure that risk management is integrated into our strategic and operating planning process. The VP of Risk works closely with the CIO and his information technology security team to continuously evaluate and address cybersecurity risks in alignment with our business objectives and operational needs. This integration ensures that cybersecurity considerations are an integral part of our decision-making processes at every level.
The CIO continually assesses industry best practices, frameworks, and standards, and leverages them to advance our cybersecurity program. This ongoing knowledge acquisition is crucial for the effective prevention, detection, mitigation, and remediation of cybersecurity incidents. Our cybersecurity risk management program includes the deployment of tools and activities designed to prevent, detect, and analyze current and emerging cybersecurity threats, and plans and strategies to address threats and incidents. Program highlights include:
a.Employing a multi-layer strategy of defense designed to ensure the safety, security, and responsible use of information and data.
b.Monitoring of all IT assets, resources, and data 24-hours per day, 7-days per week, 365-days per year by security operations center (SOC).
c.Performing annual testing of the Company’s incident response plan and cybersecurity posture by a third party.
d.Incorporating external expertise to manage the SOC, perform penetration tests, cyber-attack simulation exercises, and log management to review anomalies indicating a possible breach.
e.Maintaining a business continuity program and cyber insurance.
f.Performing periodic employee simulated phishing campaigns.
g.Conducting annual cybersecurity and insider threat training for all employees.
In addition to assessing our own cybersecurity preparedness, we also consider and evaluate cybersecurity risks associated with use of third-party service providers. Our Internal Audit team conducts an annual review of third-party hosted applications with a specific focus on any sensitive data shared with third parties. The internal business owners of the hosted applications are required to provide a System and Organization Controls (SOC) 1 or SOC 2 report. If a third-party vendor is not able to provide a SOC 1 or SOC 2 report, we take additional steps to assess their cybersecurity preparedness and assess our relationship on that basis.
The CIO plays a pivotal role in informing the Audit Committee, as well as our CEO and other members of our senior management team, including our Chief Financial Officer (CFO), COO, and General Counsel, on cybersecurity risks. The CIO provides comprehensive briefings to the Audit Committee on a periodic basis, which the CEO and other members of our senior management team attend. This report includes discussions of rapidly evolving cybersecurity threats, cybersecurity incidents, cybersecurity technologies and solutions deployed, major cybersecurity risk areas, and policies and procedures to address those risks and cybersecurity incidents. The report also includes third-party assessments of our cybersecurity program, which are conducted regularly. The CIO also informs the CEO and other members of our senior management team on a more informal basis of all aspects related to cybersecurity risks and incidents. This ensures that the highest levels of management are kept abreast of the cybersecurity posture and potential risks facing us. Any significant cybersecurity matters and strategic risk management decisions related thereto are escalated to the Board of Directors, ensuring that they have comprehensive oversight and can provide guidance on significant cybersecurity issues.
In 2023, the Company achieved its primary cybersecurity risk management objective of no material cybersecurity incidents.
As of the date of this report, the Company is not aware of any material risks from cybersecurity threats, including those resulting from previous cybersecurity incidents, that have materially affected or are reasonably likely to materially affect the Company, including our business strategy, results of operations, or financial condition. For more information about the cybersecurity risks we face, see the risk factor entitled “Intrusion on our systems could damage our business” in Item 1A “Risk Factors” of this Form 10-K.
Item 2. Properties.
Our corporate headquarters is located at a leased facility in Charlotte,Davidson, North Carolina. As of December 31, 2017,2023, we had 174147 facilities worldwide, includingconsisting of 143 facilities associated with our reportable segments as well as 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 | Owned Facilities Location | | Aerospace & Industrial | | Defense Electronics | | Naval & Power | | Total |
North America | | 15 | | 1 | | 3 | | 19 | North America | | 7 | | 1 | | 4 | | 12 |
Europe | | 14 | | 1 | | — | | 15 | Europe | | 9 | | — | | 9 |
Total | | 29 | | 2 | | 3 | | 34 | Total | | 16 | | 1 | | 4 | | 21 |
| | Leased Facilities Location | | Commercial/ Industrial | | Defense | | Power | | Total | Leased Facilities Location | | Aerospace & Industrial | | Defense Electronics | | Naval & Power | | Total |
North America | | 54 | | 12 | | 22 | | 88 | North America | | 42 | | 16 | | 27 | | 85 |
Europe | | 28 | | 4 | | — | | 32 | Europe | | 15 | | 5 | | 6 | | 26 |
Asia | | 16 | | — | | — | | 16 | Asia | | 9 | | 1 | | 11 |
Total | | 98 | | 16 | | 22 | | 136 | Total | | 66 | | 22 | | 34 | | 122 |
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.
InFrom time to time, we are involved in legal proceedings that are incidental to the ordinary courseoperation of business,our business. Some of these proceedings allege damages relating to asbestos and environmental exposures, intellectual property matters, copyright infringement, personal injury claims, employment and employee benefit matters, government contract issues, commercial or contractual disputes, and acquisitions or divestitures. We continue to defend vigorously against all claims. Although the Corporationultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including assessment of the merits of the particular claim, as well as current accruals and its subsidiaries are subject to various pending claims, lawsuits, and contingent liabilities. Weinsurance coverage, 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 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), which was 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. We maintain various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance may not be adequate to cover the costs associated with a judgment against us. In October 2017, all parties agreed in principle to participate in a formal mediation in late 2018 with the intention of settling this claim. In an effort to induce the parties to participate in the formal mediation, CNRL agreed to reduce its claim to approximately $400 million, which reflects the monetary amount of property damage incurred as result of the fire and explosion. We are currently unable to estimate an amount, or range of potential losses, if any, from this matter. We believe that we have adequate legal defenses and intend to defend this matter vigorously. Our 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 make 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.
On March 29, 2017, WEC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York, Case No. 17-10751. The Bankruptcy Court overseeing the Bankruptcy Case approved, on an interim basis, an $800 million Debtor-in-Possession Financing Facility to help WEC finance its business operations during the reorganization process. On January 4, 2018, WEC announced that it had agreed to be acquired by Brookfield Business Partners L.P. for approximately $4.6 billion, with the acquisition expected to close in the third quarter of 2018. The acquisition is not expected to have a material impact on our financial condition or results of operations as WEC plans to continue operating in the ordinary course of business under existing senior management.
We have approximately $4.9 million in pre-petition billings outstanding with WEC as of December 31, 2017. On January 29, 2018, we received notice that WEC filed its Plan of Reorganization. Under the Plan, we are expected to recover substantially all of our general unsecured claims, including pre-petition billings. The Plan of Reorganization is subject to approval, with voting tentatively scheduled for March 15, 2018. As it relates to our post-petition work, we will continue to honor our executory contracts and expect to collect all amounts due. We will continue to monitor and evaluate the status of the WEC bankruptcy and Plan of Reorganization for potential impacts on our business.
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.
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| | | | | | | | | | | | | | | | |
Stock Price Range | | 2017 | | 2016 |
| | High | | Low | | High | | Low |
Common Stock | | | | | | | | |
First Quarter | | $ | 100.74 |
| | $ | 89.00 |
| | $ | 75.93 |
| | $ | 62.57 |
|
Second Quarter | | 95.21 |
| | 82.77 |
| | 87.76 |
| | 73.95 |
|
Third Quarter | | 106.63 |
| | 91.18 |
| | 91.65 |
| | 81.52 |
|
Fourth Quarter | | 125.00 |
| | 104.12 |
| | 107.61 |
| | 83.48 |
|
As of January 1, 2018,2024, we had approximately 3,5322,493 registered shareholders of our common stock, $1.00 par value.
DIVIDENDS
During 20172023 and 2016,2022, the Company paid quarterly dividends as follows: | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Common Stock | | | | |
First Quarter | | $ | 0.19 | | | $ | 0.18 | |
Second Quarter | | 0.20 | | | 0.19 | |
Third Quarter | | 0.20 | | | 0.19 | |
Fourth Quarter | | 0.20 | | | 0.19 | |
|
| | | | | | | | |
| | 2017 | | 2016 |
Common Stock | | |
| | |
|
First Quarter | | $ | 0.13 |
| | $ | 0.13 |
|
Second Quarter | | 0.13 |
| | 0.13 |
|
Third Quarter | | 0.15 |
| | 0.13 |
|
Fourth Quarter | | 0.15 |
| | 0.13 |
|
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information regarding our equity compensation plans as of December 31, 2017,2023, the end of our most recently completed fiscal year: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan category | | Number of securities to be issued under equity compensation plans | | | Weighted-average fair value of outstanding equity-based awards | | 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 | | 356,766 | (a) | | $139.36 | | 1,613,185 | (b) |
Equity compensation plans not approved by security holders | | None | | | Not applicable | | Not applicable | |
(a)Consists of 319,828 shares issuable upon 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 36,938 shares issuable under the Employee Stock Purchase Plan. |
| | | | | | | | |
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 | | 670,503 | (a) | | $54.17 | | 2,095,542 | (b) |
Equity compensation plans not approved by security holders | | None | | | Not applicable | | Not applicable | |
| |
(a) | Consists of 628,780 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, 41,723 shares issuable under the Employee Stock Purchase Plans. |
| |
(b) | Consists of 1,797,887 shares available for future option grants under the 2014 Omnibus Incentive Plan, 297,655 shares remaining available for issuance under the Employee Stock Purchase Plan. |
(b)Consists of 1,100,366 shares available for share-based awards under the 2014 Omnibus Incentive Plan, and 512,819 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, 2017.2023. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 (in thousands) |
October 1 – October 31 | | 21,978 | | $200.13 | | 231,447 | | $158,375 |
November 1 – November 30 | | 20,024 | | $209.66 | | 251,471 | | 154,177 |
December 1 – December 31 | | 18,440 | | $218.93 | | 269,911 | | 150,140 |
For the quarter ended December 31 | | 60,442 | | $209.02 | | 269,911 | | $150,140 |
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| | | | | | | | |
| | 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 | | 39,723 | | $110.73 | | 453,486 | | $158,179,901 |
November 1 – November 30 | | 35,198 | | 119.29 | | 488,684 | | 153,981,300 |
December 1 – December 31 | | 37,410 | | 122.69 | | 526,094 | | 149,391,468 |
For the quarter ended December 31 | | 112,331 | | $117.39 | | 526,094 | | $149,391,468 |
On December 7, 2016,In November 2023, the Corporation announced the authorizationadopted two written trading plans under Rule 10b5-1 of an additional $100 million to the share repurchase program. The Company initiated the program in January 2017 and repurchased over $50 million of shares in 2017. On November 30, 2017, the Corporation authorized $50 million of share repurchases in 2018. The Company has approximately $149 million remaining under the current share repurchase authorization as of December 31, 2017, $50 million of which will be allocated to the 10b5-1 program mentioned above. The remaining portion will be available to repurchase additional shares opportunistically through a supplemental program in 2018. Under 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. The Corporation implemented these written trading plans in connection with its previously authorized share repurchase program, of which approximately $150 million of the previously authorized up to $550 million remains available for repurchase. The first trading plan includes share repurchases of $50 million, to be executed equally throughout the 2024 calendar year. The second trading plan includes opportunistic share repurchases up to $100 million during 2024 to be executed through a 10b5-1 program. The terms of these trading plans can be found in the Corporation’s Form 8-K filed with U.S. Securities and Exchange Commission on November 28, 2023.
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
The following graph compares the annual change in the cumulative total return on our common 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:
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| |
AAR Corp | Moog Inc. |
Crane Co. | Orbital ATK, Inc. |
Cubic Corp | Rockwell Collins Inc. |
EnPro Industries Inc. | Spirit Aerosystems Holdings Inc. |
Esterline Technologies Corp | Teledyne Technologies Inc. |
Hexcel Corp | TransDigm Group Inc. |
IDEX Corporation | Triumph Group Inc. |
ITT Corp | Woodward Inc. |
Kaman Corp | |
the S&P Aerospace & Defense Select Industry Index. The graph assumes an investment of $100 on December 31, 20122018 and the reinvestment of all dividends paid during the following five fiscal years.
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| | | | | | | | | | | | | | | | | | |
Company / Index | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
Curtiss-Wright Corp | | 100 |
| | 191.35 |
| | 218.76 |
| | 213.87 |
| | 308.93 |
| | 384.81 |
|
S&P MidCap 400 Index | | 100 |
| | 133.50 |
| | 146.54 |
| | 143.35 |
| | 173.08 |
| | 201.20 |
|
Russell 2000 | | 100 |
| | 138.82 |
| | 145.62 |
| | 139.19 |
| | 168.85 |
| | 193.58 |
|
Peer group | | 100 |
| | 144.83 |
| | 159.86 |
| | 165.10 |
| | 189.78 |
| | 253.28 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Company / Index | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 |
Curtiss-Wright Corp | | 100 | | | 138.70 | | | 115.36 | | | 138.27 | | | 167.35 | | | 224.21 | |
S&P MidCap 400 Index | | 100 | | | 126.20 | | | 143.44 | | | 178.95 | | | 155.58 | | | 181.15 | |
S&P A&D Select Industry Index | | 100 | | | 139.79 | | | 148.81 | | | 152.86 | | | 145.61 | | | 180.68 | |
Item 6. Selected Financial Data.[Reserved]
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) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | | | | | | | | | |
Net sales | | $ | 2,271,026 |
| | $ | 2,108,931 |
| | $ | 2,205,683 |
| | $ | 2,243,126 |
| | $ | 2,118,081 |
|
Earnings from continuing operations | | 214,891 |
| | 189,382 |
| | 192,248 |
| | 169,949 |
| | 139,404 |
|
Total assets | | 3,236,321 |
| | 3,037,781 |
| | 2,989,611 |
| | 3,382,448 |
| | 3,458,274 |
|
Total debt, net | | 814,139 |
| | 966,298 |
| | 953,205 |
| | 954,348 |
| | 959,938 |
|
Earnings per share from continuing operations: | | | | | | | | | | |
Basic | | $ | 4.86 |
| | $ | 4.27 |
| | $ | 4.12 |
| | $ | 3.54 |
| | $ | 2.97 |
|
Diluted | | $ | 4.80 |
| | $ | 4.20 |
| | $ | 4.04 |
| | $ | 3.46 |
| | $ | 2.91 |
|
Cash dividends per share | | $ | 0.56 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.52 |
| | $ | 0.39 |
|
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 continuing operations, and finally a more detailed discussion of those results within each of our reportable operating segments.
COMPANY ORGANIZATION
Curtiss-Wright Corporation andalong with its subsidiaries is a global diversified, industrial provider ofintegrated business that provides highly engineered technologically advanced, products, solutions, and services mainly to aerospace & defense markets, as well as critical technologies in demanding commercial power, process, and industrial markets. We hold competitive positions in a broad rangemajority of industries which are reported through our Commercial/Industrial, Defense,key A&D and Power segments. We are positioned as a market leader across a diversified array of nichecommercial end markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers. Through One Curtiss-Wright, we are also well positioned to build upon crossover applications for our defense and commercial market technologies that leverage our teams’ collaborative efforts and the strength of our combined portfolio.
We providemanage and evaluate our operations based on the products and services to a number of globalwe offer and the different markets including the commercial aerospace, defense, general industrial,we serve. Based on this approach, we operate through three reportable segments: Aerospace & Industrial, Defense Electronics, and power generation 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 expanding strong technological breadth, market positions, and financial performance.Naval & Power.
Impacts of inflation, pricing, and volume
Historically, we have not historically been and do not expect to be significantly impacted by inflation. Increases in payroll costs and anyinflation, with increases in raw material costs that we have encountered areor payroll costs generally able to be offset through lean manufacturing activities.activities or pricing initiatives. However, in recent history, we have experienced heightened pressures in our costs of material, labor, and services consistent with the overall rates of inflation in the wake of the COVID-19 pandemic. We have consistently focused on mitigating inflation through pricing and operational excellence initiatives, and generally have been able to offset these cost increases, as a portion of our contracts contain terms and conditions that enable us to pass inflationary price increases to our customers. In those cases whereby inflationary increases are not contractually stipulated, we actively negotiate price increases. We have consistently made annual investments in capital that deliver efficiencies and cost savings. Thesavings, while continuing to focus on negotiating better contract terms, especially on long-term agreements. While the historical benefits of these efforts have generally offset the margin impact of competitive pricing conditions in all of the markets that we serve.serve, there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to fully offset the effects of higher costs through price increases on a timely basis.
Analytical Definitions
Throughout management’s discussion and analysis of financial condition and results of operations, the terms “incremental” and “organic” are used to explain changes from period to period. The term “incremental” is used to highlight the impact acquisitions had on the current year results for which there was no comparable prior-year period. Therefore, the results of operations for acquisitions are incremental for the first twelve months from the date of acquisition. The remaining businesses are referred to as the “organic”. 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 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 markets. Many of Curtiss-Wright’s industrialcommercial businesses are driven in large part by global economic growth, primarily led by operations in the U.S., Canada, Europe, and China.
The In March 2020, the World Health Organization characterized the global outbreak of COVID-19 as a pandemic, which resulted in significant disruption to travel, transportation of goods and services, and financial markets globally, and caused adverse and residual impacts to both industry supply chains and production levels. Though to a lesser degree today, the impact of COVID-19 variants continues to cause supply-chain disruptions to global economies, including our business, as well as our customers and suppliers. U.S. economy, as measured byeconomic activity has rebounded since 2021, due in part to the availability of vaccines, increased government support to rebuild the country’s infrastructure, increased U.S. consumer spending and continued low levels of unemployment, though the pace of year-over-year real gross domestic product (GDP), growth has slowly improved since 2009, aided by decreased levels of unemployment, improvements in the housing market and a low interest rate environment. slowed.
In 2017,2020, U.S. GDP showed modest growthdeclined 3.4%, principally due to the impact of 2.3%the COVID-19 pandemic, before it rebounded sharply in 2021, increasing 5.8% and at the fastest pace since 1984, led by an acceleration in industrial activity. U.S. GDP grew 1.9% in 2022. In 2023, U.S. GDP is expected to grow approximately 2.5%, according to the most recent estimate, led by an accelerationestimates, as strong U.S. consumer spending and easing of prior supply chain disruptions continued to support GDP growth despite the dual headwinds of rising interest rates and high inflation. In 2024, economists expect a combination of a steady easing in headline and core inflation to prompt the U.S. Federal Reserve to start cutting interest rates, though growth beginning in the second quarter of 2017, while U.S. GDP grew 1.5% in 2016 and 2.6% in 2015. Looking ahead to 2018, economists have mixed views on the broader U.S. economy withis only expected to be moderate, based upon current estimates for U.S. real GDP growth indicating a rate of growth between 2% and 3%, despite the new administration’s goalranging from approximately 1.5% to raise the pace of expansion to 4% per year through increased fiscal stimulus.2.5%.
Meanwhile,Similarly, the global environment, continueswhich is typically influenced by international trade, economic conditions, and geopolitical uncertainty, had also been greatly impacted by the pandemic in 2020 before it rebounded in 2021 and 2022. According to experience a rebound in activity that began in the second half of 2016 and gained further momentum in 2017. As a result, 2018International Monetary Fund’s World Economic Outlook, global GDP growth in world economies is expected to grow 3.1% in 2023 followed by growth of approximately 3.9%, up from 3.7%3.0% in 2017,2024, according to the International Monetary Fund. This outlook is expected to be driven by broad based improvement in U.S. and European economies, as well as an improved outlook for emerging market and developing economies. most recent estimates.
Looking ahead to the next few years, we remain cautiously optimistic that our economically-sensitiveeconomically sensitive commercial and industrial markets will continue to improve based onupon a return to normalized global conditions.growth conditions, continued easing of supply chain conditions, and lower interest rates.
Defense
We have a well-diversified portfolio of products and services that supply all branches of the U.S. military, with content on many high performancecritical 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 bycomprised of long-term programs and contracts driven primarily by the Department of Defense (DoD)U.S. DoD budgets and funding levels. Approximately 38% of our 2018 revenues are expected to be generated from defense-related markets.
TheAs such, the U.S. Defense budget serves as a leading indicator of our growth in the defense market. Following across-the-board sequestration mandated by the Budget Control Act of 2011 (Budget Control Act), defense spending and related supplemental budgets declined through 2015. However, growth has stabilized in recent years. The FY2018 Defense budget request, which began in October 2017, was $574.5 billion (base) or $639.1 billion (including base plus overseas contingency operations), showing growth of 8% compared to the prior year period. Congress initially passed a Continuing Resolution in December 2017, and after a brief government shutdown in early January 2018, it initiated a second Continuing Resolution to avert a Government shutdown. As a result, the DoD began the year by essentially maintaining funding at the previous year’s levels. However, on February 9, 2018, the President signed a bill which is expected to provide relief on the spending caps associated with the Budget Control Act. This newly enacted legislation is expected to increase domestic defense spending by $165 billion over two years. As a result, the proposed FY2019 Defense budget, which begins in October 2018, is expected to provide the DoD with additional stability and flexibility to enter into multi-year contracts without the impact of sequestration.
We derive revenue from the naval defense, aerospace defense, and ground defense markets.markets, which collectively represent more than 55% of our annual net sales. 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 Columbia class and Virginia class submarine programs.submarines, which have received strong bipartisan support from Congress. 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 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, Computers, Communications, Computers,Cyber, Intelligence, Surveillance, and Reconnaissance (C5ISR), electronic warfare, encryption, unmanned systems, and communications programs. As a leading supplier of COTS and COTS+ solutions, we continue to demonstrate that defense 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 considerations. We are also a leading designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems.systems, as well as critical aircraft arresting systems equipment. In the ground defense market, thewe are a supplier of advanced tactical communications solutions for battlefield network management, including COTS-based rugged, small form factor communications systems, and integrated network communications management software. The modernization of the existing U.S. ground vehicle fleet is expected to recover slowly, while international demand should remain solid,strong, particularly for our turret driveelectronics stabilization systems (TDSS).systems. Through continued innovation as well as incremental research and development investments, Curtiss-Wright remains aligned with high growth DoD priorities, modernization efforts and emerging technological trends, including security, cyber, hypersonics, net-centric connected battlefield, soldier survivability, and MOSA capabilities.
WhileIn December 2022, the DoD approved and enacted a FY’23 defense budget of $817 billion, reflecting an approximate $75 billion increase from FY’22. In early 2023, the President’s FY24 budget request was released, calling for a 3.2% increase in defense spending. Key priorities in the President’s initial request included naval shipbuilding, tactical battlefield communications, vehicle modernization, missiles, munitions, space, and cyber capabilities, many of which provide opportunities for Curtiss-Wright. House and Senate mark-ups have been favorable thus far, and Congress has reached a tentative agreement establishing the topline appropriations for FY24 at $886 billion, including supplementals. However, the U.S. government began its October 1 fiscal year under yet another continuing resolution (CR), which has yet to be resolved. As such, the potential remains for a shutdown at the expiration of the CR, or implementation of a sequester if not passed by April 30th, which would mandate a 1% cut to defense spending.
Looking ahead, the President’s Future Years Defense Program (FYDP), which covers longer-term spending priorities aimed at improving the defense industrial base and U.S national security, is expected to reflect modest increases in total defense budget funding through FY28. Beyond the U.S., we monitorhave seen a renewed, global focus on defense spending in light of Russia’s invasion of Ukraine. International markets represent a growing portion of overall sales for defense prime contractors, creating additional growth opportunities for Curtiss-Wright over the budget processplanning period as it relatesNorth Atlantic Treaty Organization (NATO) countries throughout Europe ramp up their spending to programs in which we participate, we cannot predict the ultimate impactor above 2.0% of future DoD budgets, which tend to fluctuate year-by-year and program-by-program.annual GDP. As a result, there may be budget reductions and program cancellations that would negatively impact programs in which we participate.including recent acquisitions, Curtiss-Wright’s total direct foreign military sales represent approximately 9% of the Corporation's total net sales.
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, business jet, and commercial helicopter markets. Our primary focus in this market is OEM products and services for commercial jets, which represents more than 80% of our sales in this market, and is highly dependent on new aircraft production.production from our primary customers, Boeing and Airbus. We have significant content on the majority of the commercial aircraft programs, including both narrow-body and wide-body aircraft. Currently, more than 50% of our sales in this market are linked to the narrow-body market. We provide a combination of critical equipment, including flight controlcontrols, actuation, high-temperature and utility actuation systems,high accuracy 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. We are also focused on expanding our content, where for example, we were selected by Airbus to provide custom electric actuation technology for the main deck cargo door on the Airbus A350F freighter aircraft.
Steady growth in airlinePassenger travel and freight logistics, along with the demand for and delivery of new aircraft, to replace an aging fleet, continue to beare the key drivers in the commercial aerospace market. Fiscal 2011 markedOver the beginning of a multi-yearprior decade, there was an extended production up-cycle for the commercial aerospace market. This up-cycle is expected to continue through the end of the decade based on plannedmarket, which was driven by increases in production by Boeing and Airbus on both legacy and new aircraft, and is further supported by their strong backlogs.particularly narrow-body aircraft. Additionally, the steady decline insustained low oil prices during the past few years has been a key contributorcontributed to increased passenger growth, as declining fuel prices, havewhich in turn led to cheaper airfares for consumers.consumers and increased passenger growth.
In 2020, the onset of the COVID-19 pandemic abruptly halted the industry’s growth as fewer passengers traveled, and business operations were disrupted globally, stunting the production of new aircraft as well as the maintenance of existing aircraft well into 2021. Beginning in 2022, the industry experienced a strong rebound in global passenger growth, benefiting from the propensity for the general public to travel by air, decisions by most governments to lift COVID-19 travel restrictions, and the continued availability and implementation of vaccines. According to industry reports, global travel demand is expected to fully recover and exceed pre-pandemic levels in 2024, though rising inflation and higher oil prices all remain watch items for the International Air Transport Association, air travel continues to be strong and is likely to display growth of approximately 6.0% in 2018, which is growing faster than the 20-year trend. Industry data supports a continued, steady increase in commercial aircraft deliveries to meet this growing demand.aero industry going forward.
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 (e.g., Boeing 737 and 787, Airbus A320 and A350), the timing of our
order placement, and continued partnering with aerospace original equipment manufacturers.OEMs on both the current fleet and the next-generation of single aisle programs and engines, as well as emerging opportunities to support more fuel efficient and all-electric aircraft.
Power Generation& Process
In the power market, Curtiss-Wright is a global supplier of nuclear reactor technologies. We derive revenuesales from the commercial nuclear power generation market, wherewhereby 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. We provide equipment and services to both the aftermarket and new build markets, and have content on every reactor operating in the U.S. today. Additionally, we are executing initiatives to leverage our capabilities into the broader conventional power generation market, including next-generation advanced Small Modular Reactor (SMR) designs. Nuclear is expected to play a critical role in meeting rising future energy demand, driving energy independence and supporting global clean energy and carbon-free emissions goals, and Curtiss-Wright remains well positioned to support these objectives.
According to the Nuclear Regulatory Commission (NRC), nuclear power comprises approximately 20% of all the electric power produced in the United States,U.S. today, with 9993 reactors (includes the recently started Vogtle 3 reactor) operating across 5954 nuclear power plants in 3028 states. Our growth opportunities for aftermarket products and services are driven by plant aging, plant closures, requirements for planned outages, 20-year plant life extensions (as they reach(from the end of their original 40-year operating lives)lives to 60-year and now 80-year lives via subsequent license renewals), the levying of regulatory requirements, suppliers abandoning the commercial nuclear market, and plants seeking technology and innovation advances. Longer term,advances, such as digitalization, that further enable plant modernization.
One of the NRC is considering the extension of operating licenses beyond 60 years, potentially out to 80 years.
The industry’s most significant challengechallenges is maintaining electricity market competitiveness, primarily driven by sustained low natural gas prices. As a result,competitiveness. Throughout the industry has beenpast decade, U.S. reactor operators faced increased security measures and post-Fukushima regulatory requirements, and were also tasked with reassessing operating practices, improving efficiency, and reducing plant costs to help keep nuclear power competitive in a changing electricity market, which are collectively referred to as Delivering the Nuclear Promise. Additionally, U.S. reactor operators were facedcompete with increased security and post-Fukushima regulatory requirements over the past few years.sustained low natural gas prices. All of thesethose factors contributed to plant operators diverting and deferring their typical plant capital expenditure budgets significantly away from planned maintenance. However, in late 2017, as those necessary requirements abated and plant operators resumed a more normalized maintenance schedule, the industry beganschedules, while also leading to turn the corner. As a result,numerous plant closures (down from 104 reactors in 2012). In recent years, we expect increased opportunities for our vast portfolio of advanced nuclear technologies beginning in 2018.
Longer term, there are several factors that are expected to drive global commercialhave seen sentiment shift dramatically towards nuclear power, demand. The Energy Information Administration forecasts that worldwide totalas many countries have begun or are starting to recommit to advanced technologies, while realizing the strategic importance of energy consumption is expected to increase at an average annual rate of 1.0% through 2050. Continued growth in global demand for electricity, especially in developing countries with limited supply such as China and India, will require increased capacity.independence. 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.
In 2023, the U.S. market experienced strong bipartisan support for nuclear power, with significant investments through the Civil Nuclear Credit Program (part of the Infrastructure Bill) and nuclear power production tax credits (provided by the Inflation Reduction Act) focused on helping to preserve the existing U.S. reactor fleet. As a result, we have experienced and continue to expect growthincreased opportunities in this market both domesticallyfor our vast portfolio of advanced nuclear technologies to aid safety, extend the reliability and internationally, althoughensure the timingongoing viability of orders remains uncertain.U.S. nuclear plants. Similar to the U.S., as international plants age, we foresee opportunities to help solve operators’ needs to prevent obsolescence through plant safety and technology upgrades, plant life extensions, and upgrades of computer systems, and we continue to build upon our relationships throughout Canada, Europe, and South Korea, among others.
We also play an important role in the new build market for the Generation III+ Westinghouse AP1000 reactor design, for which we are a supplier of RCPs and also expect to supplyreactor coolant pumps, as well as a variety of ancillary plant products and services. Domestically, two new build reactors remain under construction in Georgia utilizing the AP1000 design. On a global basis, nuclear plant construction is
remains active. Currently,According to the World Nuclear Organization, there are approximately 57currently 60 new reactors under construction across 1517 countries, with approximately 158111 planned and 351more than 300 proposed over the next several decades. In particular, China intends to expand its nuclear power capabilities significantly through the construction of new nuclear power plants, including 2 AP1000 plants (4 reactors) currently in the final stages of construction, that are expected to be the first Generation III design in operation, with several more new plant builds on the horizon. We continue to expect to play a role in China’s growingnew build nuclear plant construction, where we are aligned with Westinghouse to support future construction in central and eastern Europe, including Poland, Ukraine, Bulgaria, and the Czech Republic, among others, with the potential to see approximately 25 plants begin construction in the next 5 to 10 years. We also continue to seek additional opportunities in China and India.
Backed by strong funding and legislative support, the U.S. Department of Energy has allocated $3.2 billion for advanced nuclear through its Advanced Reactor Demonstration Program (ARDP) to accelerate the development and demonstration of SMRs and advanced reactors through cost-shared partnerships with U.S. industry. We continue to grow our exposure in this market, and are actively engaged with all the major reactor designers to develop partnerships and secure content for the design and development of critical systems and equipment expected to be deployed globally. According to a 2022 Nuclear Energy Institute (NEI) survey, its member utilities see a role for more than 90 gigawatts of nuclear power programin support of their
decarbonization goals, which translates to the potential for 300 new SMRs by 2050, and represents only a fraction of the potential global demand for these technologies.
In the process market, we service the oil and gas, chemical, and petrochemical industries through severe-service pump and valve products, and surface treatment services, in which the fourth quartermajority of 2015 were awardedour sales are to the downstream markets. We maintain a $468 million contractglobal maintenance, repair, and overhaul (MRO) business for 16 RCPsour pressure-relief valve technologies as refineries opportunistically service or upgrade equipment that has been operating at or near full capacity. We produce severe service, operation-critical valves for the power and process industries. We are also advancing several subsea pumping development initiatives to meet the growing demand for more reliable pumping systems in deep sea drilling and off-shore production facilities. Sales in these industries are driven by global supply and demand, crude oil prices, industry regulations, and the salenatural gas market, with growth rates in this market closely linked to global GDP. Over the long run, we believe improved economic conditions and continued global expansion will be key drivers for future growth of certain non-recurring rights (China Direct order).our severe service and operation-critical valves serving the process industry.
As a result, we are positioned for strong expected 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 derivedWe derive revenue from our widely diversified offering to the general industrial market, which primarily consists of industrialelectronic sensors and control systems, critical-function valveselectro-mechanical actuation, and valve systems, as well as surface treatment services. We supply our products and services to numerous OEMs and aftermarket industrial customers, including the transportation, commercial trucking, off-road equipment, agriculture, construction, and automotive chemical, and oil and gas industries.industries, which lowers the risk associated with any specific headwinds or economic cycles across the various markets in which we compete. Our performancegrowth in these markets is typically sensitive toaligned with 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.
We have developed long-standing relationships with our customers, and provide technologies that promote efficiency, safety, reduced emissions, and longevity. One of the key drivers within our general industrial market is our focus on electronification and electrification, where our electronic sensors and controls systems products most notably forserve the on-and-off highway, medical mobility, and specialty vehicles markets. Notable products include electronic throttle controls, shift controls, joysticks, power management systems and power electronics, charge switching units and traction inverter systems, driving our ability to provide a full suite of in-cab operator control systems serving on-and-off highway, medical mobility and specialty vehicles markets.to our customers. 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 (HMI) 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 interfaceHMI components towards a more integrated vehicle interface architecture. Growth opportunities also exist with a range of intelligent actuators for industrial automation and robotics which help our customers quickly leverage data and utilize analytics within the Internet of Things environment. Meanwhile, our surface treatment services, includingwhich include shot and laser peening, engineered coatings, and analytical testing services whichacross an extensive global network, 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 expectationsIn the long term, the global drive towards electrification and electronification, push for steadily improving global economic conditions, these businesses are likely to experience continued modest growth based on higher sales volumeszero or low-emissions vehicles, investments in green technology, advancements in robotics and automation, and new international emissionsgovernment regulations affecting several industries in which we participate.will provide steady growth opportunities for Curtiss-Wright’s technologies serving this market.
We also service the oil and gas, chemical, and petrochemical industries through numerous industrial valve products, where 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. We also produce severe service, operation-critical valves for the power and process industries. Earlier in the decade through mid-2014, the industry had experienced solid performance driven by new exploration 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 in crude oil prices throughout 2014 and 2015, as well as reducing capital expenditures. Though oil prices rebounded in late 2016 and throughout 2017 to drive some fresh optimism, they remain well below the recent 2014 peak. 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. 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 operation-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, 2023, as compared to the year ended December 31, 2022. Discussion and analysis of our financial condition and results of operations for the year ended December 31, 2022, as compared to the year ended December 31, 2021, is contained in our 2022 Annual Report on Form 10-K, filed with the SEC on February 22, 2023.
Analytical Definitions
Throughout 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. The results of operations for acquisitions are incremental for the first twelve months from the date of acquisition, after which they are reported
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent changes |
(In thousands, except percentages) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | | | | | | | | | |
Sales: | | | | | | | | | | |
Commercial/Industrial | | $ | 1,162,689 |
| | $ | 1,118,768 |
| | $ | 1,184,791 |
| | 4 | % | | (6 | %) |
Defense | | 555,479 |
| | 466,654 |
| | 477,413 |
| | 19 | % | | (2 | %) |
Power | | 552,858 |
| | 523,509 |
| | 543,479 |
| | 6 | % | | (4 | %) |
Total sales | | $ | 2,271,026 |
| | $ | 2,108,931 |
| | $ | 2,205,683 |
| | 8 | % | | (4 | %) |
| | | | | | | | | | |
Operating income: | | | | | | | | | | |
Commercial/Industrial | | $ | 168,328 |
| | $ | 156,550 |
| | $ | 171,525 |
| | 8 | % | | (9 | %) |
Defense | | 109,355 |
| | 98,291 |
| | 98,895 |
| | 11 | % | | (1 | %) |
Power | | 85,260 |
| | 76,472 |
| | 74,987 |
| | 11 | % | | 2 | % |
Corporate and eliminations | | (23,200 | ) | | (23,215 | ) | | (34,790 | ) | | — | % | | 33 | % |
Total operating income | | $ | 339,743 |
| | $ | 308,098 |
| | $ | 310,617 |
| | 10 | % | | (1 | %) |
| | | | | | | | | | |
Interest expense | | 41,471 |
| | 41,248 |
| | 36,038 |
| | 1 | % | | 14 | % |
Other income, net | | 1,347 |
| | 1,111 |
| | 615 |
| | NM |
| | NM |
|
| | | | | | | | | | |
Earnings before income taxes | | 299,619 |
| | 267,961 |
| | 275,194 |
| | 12 | % | | (3 | %) |
Provision for income taxes | | (84,728 | ) | | (78,579 | ) | | (82,946 | ) | | 8 | % | | (5 | %) |
Earnings from continuing operations | | $ | 214,891 |
| | $ | 189,382 |
| | $ | 192,248 |
| | 13 | % | | (1 | %) |
| | | | | | | | | | |
New orders | | $ | 2,290,155 |
| | $ | 2,149,191 |
| | $ | 2,585,038 |
| | | | |
Backlog | | $ | 2,011,092 |
| | $ | 1,950,750 |
| | $ | 1,928,727 |
| | | | |
as organic. The definition of “organic” excludes costs associated with the sale of our industrial valves business in Germany as well as the effects of foreign currency translation. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent change |
(In thousands, except percentages) | | 2023 | | 2022 | | 2023 vs. 2022 |
| | | | | | |
Sales: | | | | | | |
Aerospace & Industrial | | $ | 887,228 | | | $ | 836,035 | | | 6 | % |
Defense Electronics | | 815,912 | | | 690,262 | | | 18 | % |
Naval & Power | | 1,142,233 | | | 1,030,728 | | | 11 | % |
Total sales | | $ | 2,845,373 | | | $ | 2,557,025 | | | 11 | % |
| | | | | | |
Operating income: | | | | | | |
Aerospace & Industrial | | $ | 145,278 | | | $ | 136,996 | | | 6 | % |
Defense Electronics | | 191,775 | | | 154,568 | | | 24 | % |
Naval & Power | | 189,227 | | | 177,582 | | | 7 | % |
Corporate and eliminations | | (41,678) | | | (45,703) | | | 9 | % |
Total operating income | | $ | 484,602 | | | $ | 423,443 | | | 14 | % |
| | | | | | |
Interest expense | | 51,393 | | | 46,980 | | | (9) | % |
Other income, net | | 29,861 | | | 12,732 | | | 135 | % |
| | | | | | |
Earnings before income taxes | | 463,070 | | | 389,195 | | | 19 | % |
Provision for income taxes | | (108,561) | | | (94,847) | | | (14) | % |
Net earnings | | $ | 354,509 | | | $ | 294,348 | | | 20 | % |
| | | | | | |
New orders | | $ | 3,090,029 | | | $ | 2,942,550 | | | 5 | % |
Backlog | | $ | 2,873,243 | | | $ | 2,622,731 | | | 10 | % |
NM - not meaningful
Components of sales and operating income growth (decrease): | | | | | | | | | | | | | | |
| | 2023 vs. 2022 |
| | Sales | | Operating Income |
Organic | | 10 | % | | 12 | % |
Acquisitions | | 2 | % | | — | % |
Divestiture-related costs | | — | % | | 1 | % |
Foreign currency | | (1) | % | | 1 | % |
Total | | 11 | % | | 14 | % |
|
| | | | | | | | | | | | |
| | 2017 vs. 2016 | | 2016 vs. 2015 |
| | Sales | | Operating Income | | Sales | | Operating Income |
Organic | | 5 | % | | 7 | % | | (4 | %) | | (4 | %) |
Acquisitions/divestitures | | 3 | % | | 3 | % | | — | % | | — | % |
Foreign currency | | — | % | | — | % | | — | % | | 3 | % |
Total | | 8 | % | | 10 | % | | (4 | %) | | (1 | %) |
Year ended December 31, 2017 compared to year ended December 31, 2016
Sales for the year increased $162$288 million, or 8%11%, to $2,271$2,845 million, compared with the prior year period. On a segment basis, sales from the Commercial/Aerospace & Industrial, Defense Electronics, and Naval & Power segments increased $44$51 million, $89$126 million, and $29$111 million, respectively. Changes in sales by segment are discussed in further detail in the results by business segment section below.
Operating income for the year increased $32$61 million, or 10%14%, to $340$485 million, and operating margin increased 40 basis points compared with 2016. Increases2022. In the Defense Electronics segment, increases in operating income and operating margin were primarily attributabledue to favorable overhead absorption on higher production levels onsales, partially offset by higher investments in research and development. Operating income in the AP1000 China Direct program in ourNaval & Power segment higher volumebenefited from the absence of a prior year loss on industrial vehicle products in the Commercial/Industrial segment, and the benefitssale of our ongoing margin improvement initiatives.industrial valves business in Germany as well as favorable overhead absorption on higher organic sales. These increases in operating
income and operating margin were partially offset by first
unfavorable product mix, unfavorable naval contract adjustments, and higher intangible amortization related to our arresting systems acquisition. In the Aerospace & Industrial segment, favorable overhead absorption on higher sales was partially offset by unfavorable mix in actuation products.
Non-segment operating expense for the year purchase accountingdecreased $4 million, or 9%, to $42 million, primarily due to lower pension costs from our TTC acquisition and an unfavorable shift in mix within our defense electronic products in the Defense segment.current period.
Non-segment operatingInterest expense of $23for the year increased $4 million, and interest expense of $41or 9%, to $51 million, were essentially flat compared to the respective prior year period.
The effective tax rates from continuing operationsfor 2017 and 2016 were 28.3% and 29.3%, respectively. The decrease in the effective tax rate in 2017, as compared to 2016, was primarily due to the adoptionissuance of ASU 2016-09 Improvements to Employee Share-Based Payment Accounting and$300 million Senior Notes in October 2022, as well as higher research and development credits. interest rates under our Credit Agreement in the current period. This decreaseincrease was partially offset by the impactrepayment of our 2013 Notes in February 2023.
Other income, net for the 2017 Tax Cuts and Jobs Act (the Tax Act)year increased $17 million, or 135%, which increased the current year provision for income taxes by approximately $10 million. Refer to Note 11 to the Consolidated Financial Statements for more information.
New orders increased $141$30 million, to $2,290 million as of December 31, 2017, primarily due to lower overall pension costs against the TTC acquisitioncomparable prior year period.
The effective tax rate of23.4% for the year ended December 31, 2023, decreased as compared to an effective tax rate of 24.4% in the prior year period, primarily due to a favorable change in the valuation allowance on foreign branch tax credit versus an unfavorable change in the prior year.
New orders increased $147 million, or 5%, from the prior year period to $3,090 million, primarily due to an increase in orders for tactical communications as well as embedded computing products in the Defense Electronics segment. In the Naval & Power segment, which contributed $70 millionan increase in orders for commercial nuclear aftermarket products was partially offset by the timing of new orders, and higher demand of $56 million for our industrial vehicle products in the Commercial/Industrial segment.naval defense orders. New orders in the DefenseAerospace & Industrial segment also benefited from higher demandan increase in orders for our defense electronics products and naval defense products of $18 million and $13 million, respectively. Growth in both our actuation and sensors and controls products to the aerospace defense and naval defensewithin our A&D markets increased new orders $30 million in the Commercial/Industrial segment. These increases wereas well as surface treatment services within our commercial markets, partially offset by a decrease in new orders of $44 million in the Power segment and a decrease in naval new orders of $37 million in the Commercial/Industrial segment due to the timing of funding. Changes in new orders by segment are discussed in further detail in the results by business segment section below.for industrial vehicles.
Comprehensive income (loss)
Pension and postretirement adjustmentswithin comprehensive income during the year ended December 31, 2017,2023 were a $3$8 million lossgain, compared withto a $1$7 million loss for the prior year period. The changes were primarily due to a higher discount rate loss in 2017 versus the loss for the same assumption in the prior period. The discount rate loss was partially offset by higher asset returnsgain in the current period versuswas primarily attributed to higher asset returns, partially offset by decreases in the discount rate. The loss in the prior period and higher loss amortizationwas primarily attributed to lower asset returns, partially offset by increases in 2017 compared to the prior period.discount rate.
Foreign currency translation adjustmentsduring the year ended December 31, 20172023 resulted in a $78comprehensive gain of $38 million, gain, compared to a foreign currency translationcomprehensive loss of $65$61 million in the comparable prior period. The comprehensive gain duringin the current period was primarily attributed to increases in the British Pound, Canadian dollar, and Euro withwhile the prior period comprehensive loss primarily impacted by a decrease in the British Pound.
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales for the year decreased $97 million, or 4%, to $2,109 million, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial, Defense, and Power segments decreased $66 million, $11 million, and $20 million, respectively. Changes in sales by segment are discussed in further detail below in the results from segment operations.
Operating income for the year decreased $3 million, or 1%, to $308 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 prior year period pension settlement charge of $7 million related 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 million, primarily due to lower pension expense as a result of a one-time pension settlement charge during the prior year period related to the retirement of the company's former Chairman.
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 2016 and 2015 were 29.3% and 30.1%, respectively. The decrease in the effective tax rate in 2016, as compared to 2015, was primarily due to a reduction of unrecognized 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 in the Power segment in the prior year period and a decrease in new orders of $58 million in the Defense segment. These decreases were partially offset by an increase in new orders of $35 million 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 by business segment section below.
Comprehensive income (loss)
Pension and postretirement adjustmentswithin comprehensive income during the year ended December 31, 2016, were a $1 million loss compared with a $10 million loss for the prior year period. The changes were primarily due to plan asset and salary gains in 2016 versus losses for the same assumptions in the prior period. These gains were offset by discount rate losses in the current period versus gains in the prior period, and lower loss amortization due to the prior period settlement charge related to the retirement of the company's former Chairman.
Foreign currency translation adjustmentsduring the year ended December 31, 2016, were a $65 million loss compared with foreign currency translation losses of $88 million in the comparable prior period. The comprehensive loss during the current period was primarily attributed to decreases in the British Pound with the prior year period impacted by decreases in theand Canadian dollar.Dollar.
RESULTS BY BUSINESS SEGMENT
Commercial/Aerospace & Industrial
Sales in the Commercial/Aerospace & Industrial segment are primarily generated from the commercial aerospace and 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, and backlog within the Commercial/Aerospace & Industrial segment. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Change |
(In thousands, except percentages) | | 2023 | | 2022 | | 2023 vs. 2022 |
| | | | | | |
Sales | | $ | 887,228 | | | $ | 836,035 | | | 6 | % |
Operating income | | 145,278 | | | 136,996 | | | 6 | % |
Operating margin | | 16.4 | % | | 16.4 | % | | — | bps |
New orders | | $ | 895,332 | | | $ | 883,838 | | | 1 | % |
Backlog | | $ | 387,248 | | | $ | 371,305 | | | 4 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Changes |
(In thousands, except percentages) | | 2017 | | 2016 | | 2015 | | 2017 vs 2016 | | 2016 vs 2015 |
| | | | | | | | | | |
Sales | | $ | 1,162,689 |
| | $ | 1,118,768 |
| | $ | 1,184,791 |
| | 4 | % | | (6 | %) |
Operating income | | 168,328 |
| | 156,550 |
| | 171,525 |
| | 8 | % | | (9 | %) |
Operating margin | | 14.5 | % | | 14.0 | % | | 14.5 | % | | 50 | bps | | (50 | bps) |
New orders | | $ | 1,234,698 |
| | $ | 1,173,563 |
| | $ | 1,138,581 |
| | 5 | % | | 3 | % |
Backlog | | $ | 585,556 |
| | $ | 504,482 |
| | $ | 456,481 |
| | 16 | % | | 11 | % |
Components of sales and operating income growth (decrease): | | | | | | | | | | | | | | |
| | 2023 vs. 2022 |
| | Sales | | Operating Income |
Organic | | 6 | % | | 6 | % |
Acquisitions | | — | % | | — | % |
Foreign currency | | — | % | | — | % |
Total | | 6 | % | | 6 | % |
|
| | | | | | | | | | | | |
| | 2017 vs 2016 | | 2016 vs 2015 |
| | Sales | | Operating Income | | Sales | | Operating Income |
Organic | | 4 | % | | 7 | % | | (5 | %) | | (11 | %) |
Acquisitions/divestitures | | — | % | | — | % | | — | % | | — | % |
Foreign currency | | — | % | | 1 | % | | (1 | %) | | 2 | % |
Total | | 4 | % | | 8 | % | | (6 | %) | | (9 | %) |
Year ended December 31, 2017 compared to year ended December 31, 2016
Sales increased $44$51 million, or 4%6%, to $1,163$887 million, from the comparable prior year period.period primarily due to higher sales in the commercial aerospace and general industrial markets. In the general industrialcommercial aerospace market, we experienced higher sales of $47increased $37 million primarily due to increasedhigher demand for oursensors products and surface treatment services on various narrow-body and wide-body platforms. The general industrial vehicle products. The commercial aerospace market benefited from sales increases of $13 million primarily due to higher demand for industrial automation products as well as higher sales of surface treatment services and actuation system products. These increases were partially offset by lower sales of $16 million in the naval defense market, primarily due to the timing of production on the Virginia-class submarine program.services.
Operating income increased $12$8 million, or 8%6%, to $168$145 million, and operating margin increased 50 basis points to 14.5%. The increases in operating income and operating margin were primarily driven by ongoing margin improvement initiatives andof 16.4% was flat against the comparable prior year period, as favorable overhead absorption on higher sales volumes of our industrial vehicle products and surface treatment services.was partially offset by unfavorable mix in actuation products.
New orders increased $61$11 million as compared to the prior year, primarily due to growthan increase in our industrial vehicle products of $56 million and higher demand of $30 millionorders for both our actuation and sensors and controls products to the aerospace defense and naval defense markets. This increase was partially offset by a decline in naval valve new orders of $37 million due to the timing of funding.
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales decreased $66 million, or 6%, to $1,119 million, from the comparable prior year period. In the general industrial market, we experienced lower sales of severe-service valves to oil and gaswithin our A&D markets of $47 million and a reduction 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, higher sales of actuation and sensors and control products of $19 million, primarily to Boeing, were partially offset by lower sales of surface technology services of $15 million.
Operating income decreased $15 million, or 9%, to $157 million, and operating margin decreased 50 basis points to 14.0%. The decreases in operating income and operating margin were primarily driven by lower sales volumes of our severe-service industrial valves andas well as surface treatment services.services within our commercial markets. These decreasesincreases were partially offset by the benefittiming of our margin improvement and cost containment initiatives as well as favorable foreign currency translation of approximately $4 million.new orders for industrial vehicles.
New orders increased $35 million to $1,174 million from the prior year period, primarily due to growth in our naval valves of $39 million and sensors and control products of $32 million, partially offset by lower demand for our industrial vehicle products of $23 million.
Defense Electronics
Sales in the Defense Electronics segment are primarily to the defense markets and, to a lesser extent, the commercial aerospace and the general industrial markets.market.
The following tables summarize sales, operating income and margin, and new orders, and backlog within the Defense Electronics segment. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | Percent Change |
(In thousands, except percentages) | | 2023 | | 2022 | | 2023 vs. 2022 |
| | | | | | |
Sales | | $ | 815,912 | | | $ | 690,262 | | | 18 | % |
Operating income | | 191,775 | | | 154,568 | | | 24 | % |
Operating margin | | 23.5 | % | | 22.4 | % | | 110 | bps |
New orders | | $ | 936,329 | | | $ | 836,660 | | | 12 | % |
Backlog | | $ | 886,317 | | | $ | 786,026 | | | 13 | % |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Changes |
(In thousands, except percentages) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | |
Sales | | $ | 555,479 |
| | $ | 466,654 |
| | $ | 477,413 |
| | 19 | % | | (2 | %) |
Operating income | | 109,355 |
| | 98,291 |
| | 98,895 |
| | 11 | % | | (1 | %) |
Operating margin | | 19.7 | % | | 21.1 | % | | 20.7 | % | | (140 | ) bps |
| 40 | bps |
New orders | | $ | 569,360 |
| | $ | 445,230 |
| | $ | 502,948 |
| | 28 | % | | (11 | %) |
Backlog | | $ | 547,273 |
| | $ | 499,993 |
| | $ | 533,004 |
| | 9 | % | | (6 | %) |
Components of sales and operating income growth (decrease): | | | | | | | | | | | | | | |
| | 2023 vs. 2022 |
| | Sales | | Operating Income |
Organic | | 18 | % | | 21 | % |
Acquisitions | | — | % | | — | % |
Foreign currency | | — | % | | 3 | % |
Total | | 18 | % | | 24 | % |
|
| | | | | | | | | | | | |
| | 2017 vs. 2016 | | 2016 vs. 2015 |
| | Sales | | Operating Income | | Sales | | Operating Income |
Organic | | 5 | % | | 4 | % | | (1 | %) | | (6 | %) |
Acquisitions/divestitures | | 14 | % | | 8 | % | | — | % | | — | % |
Foreign currency | | — | % | | (1 | %) | | (1 | %) | | 5 | % |
Total | | 19 | % | | 11 | % | | (2 | %) | | (1 | %) |
Year ended December 31, 2017 compared to year ended December 31, 2016
Sales increased $89$126 million, or 19%18%, to $555$816 million, from the comparable prior year period,period. In the ground defense market, sales increased $92 million primarily due to higher demand for tactical battlefield communications equipment. Sales in the incremental impactaerospace defense market increased $16 million primarily due to higher demand for embedded computing and flight test instrumentation equipment on various domestic and international programs. Sales increases of our TTC acquisition, which contributed $65$12 million in sales. Excluding the impact of TTC, sales to the aerospace
defense, ground defense, and naval defense markets increased $7 million, $6 million, and $9 million, respectively, while sales to the commercial aerospace market were essentially flat. The increase in sales to the aerospace defense market was primarily due to increased unmanned aerial vehicle (UAV) productionhigher demand for avionics and higher foreign military sales, partially offset by declines in helicopter production. The ground defense market benefited primarily from higher TDSS demandflight test equipment on various domestic and
international ground defense platforms. Sales toIn the naval defense market, sales increased $6 million primarily due to higher submarine production.demand for our embedded computing equipment supporting various programs.
Operating incomeincreased $11$37 million, or 11%24%, to $109$192 million compared with the same period in 2016, while2022, and operating margin decreased 140increased 110 basis points to 19.7%. The increase in operating income was driven23.5%, primarily by the incremental impact of our TTC acquisition, which contributed operating income of $7 million. Operating income also benefited from improved profitability in our avionics business,due to favorable overhead absorption on higher sales, volumespartially offset by higher investments in our defense electronics business,research and ongoing margin improvement initiatives. Both operating income and operating margin were negatively impacted by first year purchase accounting costs from our TTC acquisition and an unfavorable shift in mix within our defense electronic products.development.
New orders increased $124$100 million as compared to the prior year, primarily due to the acquisition of TTC, which contributed $70 millionan increase in new orders. New orders also benefited from higher demand for our defense electronics products and naval defense products of $18 million and $13 million, respectively.
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales decreased $11 million, or 2%, to $467 million, from the comparable prior year period, primarily due to lower sales in the aerospace defense and commercial aerospace markets of $7 million and $6 million, respectively. The decrease in sales in the aerospace defense market was primarily due to lower foreign military sales. Sales in the commercial aerospace market decreased primarily due to lower sales of avionics and electronics products.
Operating income decreased $1 million, or 1%, to $98 million, compared with the same period in 2015, while operating margin increased 40 basis points to 21.1%. The decrease in operating income was driven primarily by lower sales volumes in our commercial avionics and electronics businesstactical communications as well as a favorable 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.embedded computing products.
New orders decreased $58 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.
Naval & Power
Sales in the Naval & Power segment are primarily to the power generation and naval defense markets.and power & process markets, and, to a lesser extent, the aerospace defense market.
The following tables summarize sales, operating income and margin, and new orders, and backlog within the Naval & Power segment. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | Percent Change |
(In thousands, except percentages) | | 2023 | | 2022 | | 2023 vs. 2022 |
| | | | | | |
Sales | | $ | 1,142,233 | | | $ | 1,030,728 | | | 11 | % |
Operating income | | 189,227 | | | 177,582 | | | 7 | % |
Operating margin | | 16.6 | % | | 17.2 | % | | (60 | bps) |
New orders | | $ | 1,258,368 | | | $ | 1,222,052 | | | 3 | % |
Backlog | | $ | 1,599,678 | | | $ | 1,465,400 | | | 9 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent Changes |
(In thousands, except percentages) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | | | | | | | | | |
Sales | | $ | 552,858 |
| | $ | 523,509 |
| | $ | 543,479 |
| | 6 | % | | (4 | %) |
Operating income | | 85,260 |
| | 76,472 |
| | 74,987 |
| | 11 | % | | 2 | % |
Operating margin | | 15.4 | % | | 14.6 | % | | 13.8 | % | | 80 | bps | | 80 | bps |
New orders | | $ | 486,097 |
| | $ | 530,398 |
| | $ | 943,509 |
| | (8 | %) | | (44 | %) |
Backlog | | $ | 878,263 |
| | $ | 946,275 |
| | $ | 939,242 |
| | (7 | %) | | 1 | % |
Components of sales and operating income growth (decrease): | | | | | | | | | | | | | | |
| | 2023 vs. 2022 |
| | Sales | | Operating Income |
Organic | | 7 | % | | 5 | % |
Acquisitions | | 4 | % | | — | % |
Divestiture-related costs | | — | % | | 2 | % |
Foreign currency | | — | % | | — | % |
Total | | 11 | % | | 7 | % |
|
| | | | | | | | | | | | |
| | 2017 vs. 2016 | | 2016 vs. 2015 |
| | Sales | | Operating Income | | Sales | | Operating Income |
Organic | | 6 | % | | 11 | % | | (4 | %) | | 2 | % |
Acquisitions/divestitures | | — | % | | — | % | | — | % | | — | % |
Foreign currency | | — | % | | — | % | | — | % | | — | % |
Total | | 6 | % | | 11 | % | | (4 | %) | | 2 | % |
Year ended December 31, 2017 compared to year ended December 31, 2016
Sales increased $29$111 million, or 6%11%, to $553$1,142 million, from the comparable prior year period, primarily due to higher production revenues of $52sales across our aerospace defense, naval defense, and power & process markets. In the aerospace defense market, sales increased $59 million onprimarily due to the AP1000 China Direct program. This increase was partially offset by lower aftermarket sales of $20 million supporting domestic nuclear operating reactors and lower total production revenues of $13 million on the AP1000 U.S. and China programs. Withinincremental impact from our arresting systems acquisition. Sales in the naval defense market sales increased $12benefited $16 million primarily due to higher production levels on CVN-80 pumps and increased developmentsales on the Columbia classColumbia-class and Virginia-class submarine program.
Operating income increased $9 million, or 11%, to $85 million and operating margin increased 80 basis points to 15.4%. The increases in operating income and operating margin were primarily drivenprograms, partially offset by higher production levels on the AP1000 China Direct program and the benefits of our ongoing margin improvement initiatives.
New orders decreased $44 million, as compared to the prior year, as new orders to the commercial and defense markets decreased $34 million and $10 million, respectively. These decreases were primarily due to the timing of commercial orders received as well as the timing of customer funding.
Year ended December 31, 2016 compared to year ended December 31, 2015
Sales decreased $20 million, or 4% to $524 million, from the comparable prior year period, primarily due to lower sales inon various aircraft carrier programs. In the power generation market. This decrease is primarily due to lower aftermarket& process market, sales of $26increased $35 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 in the naval defense market. This was primarily due to higher sales of pumpsdemand for industrial valves in the process market and generators of $16 millionhigher demand supporting the new Ohio-class replacement submarine program and higher production levelsmaintenance of $5 millionexisting operating reactors as well as increased development on advanced small modular reactors in the Electromagnetic Aircraft Launching System (EMALS) program.commercial nuclear market. These increases were partially offset by lower sales of $18 million of CVN-79 pumps and valves as production is substantially complete.the wind-down on the China Direct AP1000 program.
Operating income increased $1$12 million, or 2%7%, to $76$189 million, andwhile operating margin increased 80decreased 60 basis points to 14.6%16.6%. The increases in operatingOperating income and operating margin were primarily driven by higher operating incomebenefited from the absence of $11 million due to increased production volumes on the AP1000 program and an unfavorable contract adjustment of $11.5 million recorded during thea prior year period.loss on sale of our industrial valves business in Germany as well as favorable overhead absorption on higher organic sales. These increases were partially offset by a one-time license fee of $20 million recorded during the prior year period. Withinunfavorable product mix, unfavorable naval contract adjustments, and higher intangible amortization related to 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.arresting systems acquisition.
New orders decreased $413 increased $36 million as compared to the prior year, primarily due to the receipt of a $468 million orderan increase in the prior year periodorders for AP1000 reactor coolant pumpscommercial nuclear aftermarket and certain intellectual property rights. This decrease wassubsea pumping products. These increases were partially offset by the timing of funding for pumps and generators with government customers of $40 million.naval defense orders.
SUPPLEMENTARY INFORMATION
The table below depicts sales by end market. End market sales helpand customer type, as it helps 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 and Customer Type | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent change |
(In thousands, except percentages) | | 2023 | | 2022 | | 2023 vs. 2022 |
| | | | | | |
Aerospace & Defense markets: | | | | | | |
Aerospace Defense | | $ | 551,622 | | | $ | 479,743 | | | 15 | % |
Ground Defense | | 308,008 | | | 219,739 | | | 40 | % |
Naval Defense | | 720,013 | | | 694,015 | | | 4 | % |
Commercial Aerospace | | $ | 324,949 | | | $ | 276,519 | | | 18 | % |
Total Aerospace & Defense | | $ | 1,904,592 | | | $ | 1,670,016 | | | 14 | % |
| | | | | | |
Commercial markets: | | | | | | |
Power & Process | | 509,998 | | | 472,300 | | | 8 | % |
General Industrial | | 430,783 | | | 414,709 | | | 4 | % |
Total Commercial | | $ | 940,781 | | | $ | 887,009 | | | 6 | % |
| | | | | | |
Total Curtiss-Wright | | $ | 2,845,373 | | | $ | 2,557,025 | | | 11 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percent changes |
(In thousands, except percentages) | | 2017 | | 2016 | | 2015 | | 2017 vs. 2016 | | 2016 vs. 2015 |
| | | | | | | | | | |
Defense markets: | | | | | | | | | | |
Aerospace | | $ | 355,483 |
| | $ | 296,314 |
| | $ | 304,521 |
| | 20 | % | | (3 | %) |
Ground | | 94,216 |
| | 84,288 |
| | 85,722 |
| | 12 | % | | (2 | %) |
Naval | | 405,836 |
| | 401,281 |
| | 388,686 |
| | 1 | % | | 3 | % |
Other | | 21,321 |
| | 11,721 |
| | 8,340 |
| | 82 | % | | 41 | % |
Total Defense | | $ | 876,856 |
| | $ | 793,604 |
| | $ | 787,269 |
| | 10 | % | | 1 | % |
| | | | | | | | | | |
Commercial markets: | | | | | | | | | | |
Aerospace | | $ | 412,369 |
| | $ | 397,327 |
| | $ | 398,529 |
| | 4 | % | | — | % |
Power Generation | | 423,981 |
| | 408,509 |
| | 436,396 |
| | 4 | % | | (6 | %) |
General Industrial | | 557,820 |
| | 509,491 |
| | 583,489 |
| | 9 | % | | (13 | %) |
Total Commercial | | $ | 1,394,170 |
| | $ | 1,315,327 |
| | $ | 1,418,414 |
| | 6 | % | | (7 | %) |
| | | | | | | | | | |
Total Curtiss-Wright | | $ | 2,271,026 |
| | $ | 2,108,931 |
| | $ | 2,205,683 |
| | 8 | % | | (4 | %) |
Aerospace & Defense Markets
Note: Certain amounts in the prior year have been reclassed to conform to the current year presentation.
Year ended December 31, 2017 compared to year ended December 31, 2016
Defense salesSales increased $83$235 million, or 10%14%, to $877$1,905 million, as compared to the prior year period, primarily due to higher sales in the aerospace defense, ground defense, and other defenseacross all markets. The sales increase inIn the aerospace defense market, was primarily due tosales benefited from the incremental impact offrom our TTCarresting systems acquisition which contributed $47 million of sales. The aerospace defense market also benefited from increasedas well as higher demand of $7 million for UAVsembedded computing and higher production of $8 millionflight test instrumentation equipment on the F-16 program, partially offset by declines in helicopter sales of $5 million.various domestic and international programs. Sales in the ground defense market increased primarily due to higher demand of $8 million for our TDSS products on international groundtactical battlefield communications equipment. Sales increases in the naval defense platforms. Other defense sales increasedmarket were primarily due to higher sales on the incremental impactColumbia-class and Virginia-class submarine programs, partially offset by lower sales on various aircraft carrier programs. Sales in the commercial aerospace market primarily benefited from our TTC acquisition, which contributed $7 million of sales.higher demand for actuation and sensors products as well as surface treatment services on narrow-body and wide-body platforms, in addition to higher demand for avionics and flight test equipment on various domestic and international platforms.
Commercial Markets
Commercial sales increased $79$54 million, or 6%, to $1,394 million, as compared to the prior year period, due to higher sales across all markets.$941 million. In the commercial aerospacepower & process market, our TTC acquisition contributed $8 million of incremental sales. Sales alsosales benefited from increased demand for both our actuation and sensors and controls products. Within the power generation market, we generated higher production revenues of $52 million on the AP1000 China Direct program, partially offset by lower aftermarket sales of $24 million supporting domestic nuclear operating reactors and lower total production revenues of $13 million on the AP1000 U.S. and China programs. In the general industrial market, we experienced higher demand for our industrial vehicle products which resulted in a sales increase of $41 million.
Year ended December 31, 2016 compared to year ended December 31, 2015
Defense sales increased $6 million, or 1%, to $794 million, as compared to the prior year period, primarily due to higher salesvalves in the naval defense market. Naval defense salesprocess market and higher demand supporting the maintenance of existing operating reactors as well as increased primarily due to the development on advanced small modular reactors in 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.commercial nuclear market. These increases were partially offset by lower production of $12 millionthe wind-down on the Virginia-class submarine program and decreased aircraft carrier production of $8 million due to the wind-down of the CVN-79China Direct AP1000 program. Lower sales in the aerospace defense market were primarily due to reduced foreign military sales.
Commercial 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 million and $28 million, respectively. Lower salesSales in the general industrial market wereincreased primarily due to $46 million of reduced saleshigher demand for our severe-service industrial valves and lower sales for our industrial vehicle, medical mobility, and industrial automation products of $7 million, $8 million, and $6 million, respectively. Lower sales in the power generation market were primarily driven by lower aftermarketas well as higher sales of $26 million supporting domestic and international nuclear operating reactors.surface treatment services.
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 | | | | | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | | 2022 |
Net cash provided by (used in): | | | |
Operating activities | $ | 448,089 | | | $ | 294,776 | |
Investing activities | (35,519) | | | (325,867) | |
Financing activities | (273,403) | | | 129,428 | |
Effect of exchange rates | 10,726 | | | (12,367) | |
Net increase in cash and cash equivalents | $ | 149,893 | | | $ | 85,970 | |
|
| | | | | | | | | | | |
| December 31, |
(In thousands) | 2017 | | 2016 | | 2015 |
Net cash provided by (used in): | | | | | |
Operating activities | $ | 388,712 |
| | $ | 423,197 |
| | $ | 162,479 |
|
Investing activities | (272,328 | ) | | (42,934 | ) | | (15,576 | ) |
Financing activities | (213,898 | ) | | (96,141 | ) | | (289,218 | ) |
Effect of exchange rates | 18,786 |
| | (18,971 | ) | | (19,104 | ) |
Net increase (decrease) in cash and cash equivalents | $ | (78,728 | ) | | $ | 265,151 |
| | $ | (161,419 | ) |
Year ended December 31, 2017 compared to year ended December 31, 2016
Operating Activities
Cash provided by operating activities decreased $34increased $153 million to $389$448 million duringfrom the year ended December 31, 2017, as compared to thecomparable prior year period. The decrease in cash provided by operating activities wasperiod, primarily due to prior year collections related to the AP1000 China Direct program of $102higher net earnings and improved working capital.
Investing Activities
Capital Expenditures
Our capital expenditures were $45 million and a one-time $20$38 million benefitfor 2023 and 2022, respectively, primarily due to higher capital spending in the prior year as a result of the interest rate swap termination. This was partially offset by the timing of advanced collections of $48 million and higher cash earnings of $36 millionNaval & Power segment during the current period.
Investing Activities
Capital Expenditures
Our capital expenditures were $53 million in 2017 as compared to $47 million in 2016. This increase was primarily due to increased capital investment in our Defense and Power segments. For 2018, we anticipate capital expenditures of approximately $50 to $60 million.
Divestitures
No material divestitures took place during 2017 or 2016.2023. In January 2022, the Corporation completed the sale of its industrial valve business in Germany, for gross cash proceeds of $3 million.
Acquisitions
In 2017,2023, we did not complete any acquisitions. In 2022, we acquired two businesses for a total purchase price of $233$282 million. No acquisitions took place in 2016.
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 and Repayments
There were no debt issuancesIn February 2023, we repaid $203 million of the 2013 Notes that matured on outstanding notes in 2017 or 2016. In 2017,February 26, 2023.
On October 27, 2022, we fully repaid the $150issued $300 million 2005 Senior Notes, consisting of $200 million 4.49% notes that had matured. No principal paymentsmature on outstandingOctober 27, 2032 and $100 million 4.64% notes took place in 2016.that mature on October 27, 2034.
Revolving Credit Agreement
As of December 31, 2017, the Corporation2023, we had no borrowings outstanding under the 2012 Senior Unsecured Revolving Credit Agreement (the Credit Agreement or credit facility) and $21$20 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement as of December 31, 20172023 was $479$730 million, which could be borrowed in full without violating any of our debt covenants. As of December 31, 2022, we had no borrowings outstanding under the Credit Agreement.
Repurchase of Common Stock
During 2017,2023, the Company repurchased approximately 526,0000.3 million shares of its common stock for $52$50 million. In 2016,2022, the Company repurchased approximately 1,300,0000.4 million shares of its common stock for $105$57 million.
Dividends
During 2017 and 2016, theThe Company made dividend payments of approximately $25$30 million and $23 million, respectively.
Year ended December 31, 2016 compared to year ended December 31, 2015
Operating Activities
Cash provided by operating activities increased $261 million to $423 million during the year ended December 31, 2016, as compared to the prior year period. The increase in cash provided by operating activities was primarily due to a prior period voluntary pension contribution of $145 million and collections in 2016 related to the AP1000 China Direct program of $102 million. Increases in income tax payments, net of refunds, of $50 million during the current period were more than 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.
Investing Activities
Capital Expenditures
Our capital expenditures were $47$29 million in 2016 as compared to $36 million in 2015. Capital expenditures were greater in 2016, as compared to 2015, primarily due to increased capital investment in a facility expansion in our Commercial/Industrial segment.
Divestitures
No material divestitures took place during 2016. In 2015, we disposed of four businesses aggregating to cash proceeds of $31 million.
Acquisitions
No acquisitions took place during 2016. In 2015, we acquired one business with a total purchase price of $13 million.
Financing Activities
Debt Issuances
There were no debt issuances or significant principal payments on outstanding notes in 2016 or 2015.
Revolving Credit Agreement
As of December 31, 2016, the Corporation had no borrowings outstanding under the 2012 Senior Unsecured Revolving Credit Agreement (the Credit Agreement or credit facility)2023 and $47 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement at December 31, 2016 was $453 million, which could be borrowed in full without violating any of our debt covenants.
Repurchase of Common Stock
During 2016, the Corporation repurchased approximately 1,300,000 shares of its common stock for $105 million. In 2015, the Corporation repurchased approximately 4,257,000 shares of its common stock for $294 million.
Dividends
During 2016 and 2015, the Corporation made dividend payments of approximately $23 million and $24 million,2022, respectively.
Capital Resources
Cash in U.S. and Foreign Jurisdictions
| | | | | | | | | | | |
| As of December 31, |
(In thousands) | 2023 | | 2022 |
United States of America | $ | 230,298 | | | $ | 147,851 | |
United Kingdom | 72,342 | | | 48,203 | |
Canada | 35,736 | | | 33,268 | |
European Union | 22,950 | | | 8,721 | |
China | 18,967 | | | 7,889 | |
Other foreign countries | 26,574 | | | 11,042 | |
Total cash and cash equivalents | $ | 406,867 | | | $ | 256,974 | |
Cash
Cash and cash equivalents as of December 31, 2017 were $475 million, of which $293 million were held by foreign subsidiaries. Our British subsidiaries held a substantial portion of the Company’s cash2023 and cash equivalents, totaling approximately $122 million as of December 31, 2017. Cash2022 were $407 million and cash equivalents as of December 31, 2016 were $554$257 million, of which $198 million were held by foreign subsidiaries. Our British subsidiaries held a substantial portion of the Company’s cash and cash equivalents, totaling approximately $98 million as of December 31, 2016.respectively. The decreaseincrease in cash held by U.S. subsidiaries during 20172023 as compared to 20162022 was primarily due to higher cash from operations in the current period as well as no acquisition of two businessesactivity during the current period, partially offsetperiod. The increase in cash held by foreign subsidiaries during 2023 as compared to 2022 was primarily due to lower share repurchases.foreign cash repatriation during the current period. There are no legal or economic restrictions on the ability of any of our subsidiaries to transfer funds, absent certain regulatory approvals in China, wherewhere approximately $25$19 million of our foreign cash resides. Refer to Note 11 to the Consolidated Financial Statements for impacts on our foreign undistributed earnings due to the Tax Act.
Cash Utilization
Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, and increased dividends, capital expenditures, and repaying debt 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, 2017,2023, 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, 2017,2023, we had the ability to incur total additional indebtedness of $1.4$2.3 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 $50$55 million to $60$65 million and expected dividend payments of approximately $26$30 million in 2018.2024. 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 2018.2024. 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 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.organization, including the return of capital to shareholders through dividends and share repurchases and growing our business through acquisitions.
In February 2018 and January 2015, we made discretionary pension contributions of $50 million and $145 million, respectively, to the Curtiss-Wright Pension Plan. For more information on our pension and other postretirement benefits plans, see Note 15 to the Consolidated Financial Statements.
In February 2018, we entered into an agreement to acquire the assets of the Dresser-Rand Government Business for $212.5 million in cash. Refer to Note 21 to the Consolidated Financial Statements for more information.
The following table quantifies our significant future contractual obligations and commercial commitments as of December 31, 2017:
2023:
| | (In thousands) | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | (In thousands) | | Total | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter |
Debt Principal Repayments | | $ | 800,150 |
| | $ | 150 |
| | $ | — |
| | $ | — |
| | $ | 100,000 |
| | $ | — |
| | $ | 700,000 |
|
Operating Leases | |
Interest Payments on Fixed Rate Debt | | 243,504 |
| | 31,643 |
| | 31,643 |
| | 31,643 |
| | 31,397 |
| | 27,803 |
| | 89,375 |
|
Operating Leases | | 180,095 |
| | 28,284 |
| | 24,378 |
| | 21,733 |
| | 17,577 |
| | 14,253 |
| | 73,870 |
|
Tax Act - Transition Tax Payments (1) | | 23,700 |
| | 1,896 |
| | 1,896 |
| | 1,896 |
| | 1,896 |
| | 1,896 |
| | 14,220 |
|
Build-to-suit Lease | | 17,049 |
| | 1,277 |
| | 1,309 |
| | 1,342 |
| | 1,375 |
| | 1,409 |
| | 10,337 |
|
Total | | $ | 1,264,498 |
| | $ | 63,250 |
| | $ | 59,226 |
| | $ | 56,614 |
| | $ | 152,245 |
| | $ | 45,361 |
| | $ | 887,802 |
|
(1) Refer to Note 11 to the Consolidated Financial Statements for more information.
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. As of December 31, 2017,2023, we had contingent liabilities on outstanding letters of credit due as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Total | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter |
Letters of Credit (1) | | $ | 19,866 | | | $ | 15,013 | | | $ | 4,504 | | | $ | 197 | | | $ | 152 | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter (1) |
Letters of Credit | | $ | 21,342 |
| | $ | 12,992 |
| | $ | 4,116 |
| | $ | 2,518 |
| | $ | 1,047 |
| | $ | 375 |
| | $ | 294 |
|
(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 $14.6$16.0 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. 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 accounts and is generally considered realizedthe transaction price using either the expected value method 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) 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 intomost likely amount method. 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 57% of our 2017 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 18% of our 2017 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, which are generally accounted for using the cost-to-cost method of percentage-of-completion accounting and 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 percentage-of-completion accounting representedyear ended December 31, 2023 accounted for approximately 25%47% of our total net sales in 2017. The typical length of our contracts, which predominantly utilize the cost-to-cost method of percentage-of-completion accounting,sales. Typically, over-time revenue recognition is 2-5 years. The cost-to-cost method recognizes revenue and profit as the contracts progress towards completion. Under the cost-to-cost method, 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 WEC 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 monthsyears ended December 31, 2017, 2016,2023, 2022, and 2015,2021, 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, 2023 accounted for approximately 53% 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 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). During 2017 and 2016, the Corporation did not enter into any significant multiple-element arrangements. In 2015, approximately 1% of the Company's 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.Consolidated Balance Sheet.
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, 2017,2023, and the annual periodic costs for 2018,2024, was decreased from 4.10%5.04% to 3.63%4.86% for the Curtiss-Wright Pension Plan, and from 3.93%4.99% to 3.55%4.79% for the nonqualified benefit plan, to reflect current economic 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 by utilizing a select bond yield curve developed by our actuaries, by usingwhich is based on 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 obligationobligation of $44$12 million in the CW plans.
The rate of compensation increase for base pay in the pension plans wasremained unchanged at a weighted average of 3.4% for the current period, based upon a graded scale of 4.9%4.1% to 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 utilizedretained our mortality assumptions from prior year for the RP-2014 mortalityCW Pension plan by adopting a 50/50 blend of the Pri-2012 Aggregate and White Collar tables published by the Society of Actuaries and updatedin October 2019, while retaining the White Collar table for the nonqualified plan. We also retained the MP-2021 projected mortality scale to MP-2017, which reflects a slower rate of future mortality improvements than the previous MP-2016 table utilized. This change contributed to a decreasepublished in the benefit obligation of $4 million.October 2021, with no pandemic adjustments.
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 remained at 8.00%was increased to 6.75% as of December 31, 2017,2023, which will be utilized for determining 20182024 pension cost. ExpectedAn expected long-term ratesrate of return of 8.00%, 8.25%, and 8.50% were6.50%% was used for determining 2017, 2016 and 20152023 expense, with 5.75% used for 2022 pension expense respectively.and 6.50% used for 2021 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 decreasedincreased by $5$34 million in 2017,2023, primarily driven by a decreasefavorable asset returns in market interest rates as of December 31, 2017. This was2023, partially offset by favorable asset experiencea higher benefit obligation due to strong market performance in 2017.a lower discount rate.
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, 20172023 (in thousands, except for percentage point change):
| | | | | | | | | | | | | | | | | | | | |
Assumption | | Percentage Point Change | | Increase in Benefit Obligation | | Increase/(Decrease) in Expense |
Discount rate | | (0.25) | % | | $17,163 | | | ($256) | |
Expected return on assets | | (0.25) | % | | — | | | $2,255 | |
|
| | | | | | | | | | | |
Assumption | | Percentage Point Change | | Increase in Benefit Obligation | | Increase in Expense |
Discount rate | | (0.25 | )% | |
| $24,000 |
| |
| $2,500 |
|
Rate of compensation increase | | 0.25 | % | |
| $2,000 |
| |
| $500 |
|
Expected return on assets | | (0.25 | )% | | — |
| |
| $1,600 |
|
See Note 1517 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.
Goodwill
We have $1.1$1.6 billion in goodwill as of December 31, 2017.2023. 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.
We perform either a quantitative or qualitative assessment to assess if the fair value of the respective reporting unit 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. Based upon the completion of our annual test which included qualitative assessments,as of October 31, 2023, we determined that there was no impairment of goodwill and that all reporting units’ estimated fair values were substantially in excess of their carrying amounts.
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-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, 2017,2023, 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% as of December 31, 20172023 and December 31, 2016. 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.2022. As of December 31, 2017,2023, a change in interest rates of 1% would not have a material impact on the consolidated interest expense. In 2016, we terminated our previous interest rate swap agreements and did not enter into any interest rate swap agreements. Information regarding our Senior Notes and Revolving Credit Agreement is contained in Note 1214 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, and 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 $12$13 million as it relates exclusively to foreign currency exchange rate exposures.
Financial instruments expose us to counter-partycounterparty credit risk for non-performance and to market risk for changes in interest and foreign currency rates. We manage exposure to counter-partycounterparty credit risk through specific minimum credit standards, diversification of counter-parties,counterparties, 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, |
(In thousands, except per share data) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Net sales | |
|
| |
|
| |
|
|
Product sales | | $ | 1,854,216 |
| | $ | 1,714,358 |
| | $ | 1,796,802 |
|
Service sales | | 416,810 |
| | 394,573 |
| | 408,881 |
|
Total net sales | | 2,271,026 |
| | 2,108,931 |
| | 2,205,683 |
|
| | | | | | |
Cost of sales | |
|
| |
|
| |
|
|
Cost of product sales | | 1,184,358 |
| | 1,100,287 |
| | 1,156,596 |
|
Cost of service sales | | 268,073 |
| | 258,161 |
| | 265,832 |
|
Total cost of sales | | 1,452,431 |
| | 1,358,448 |
| | 1,422,428 |
|
Gross profit | | 818,595 |
| | 750,483 |
| | 783,255 |
|
| | | | | | |
Research and development expenses | | 60,308 |
| | 58,592 |
| | 60,837 |
|
Selling expenses | | 120,002 |
| | 111,228 |
| | 121,482 |
|
General and administrative expenses | | 298,542 |
| | 272,565 |
| | 290,319 |
|
Operating income | | 339,743 |
| | 308,098 |
| | 310,617 |
|
Interest expense | | 41,471 |
| | 41,248 |
| | 36,038 |
|
Other income, net | | 1,347 |
| | 1,111 |
| | 615 |
|
Earnings before income taxes | | 299,619 |
| | 267,961 |
| | 275,194 |
|
Provision for income taxes | | (84,728 | ) | | (78,579 | ) | | (82,946 | ) |
Earnings from continuing operations | | 214,891 |
| | 189,382 |
| | 192,248 |
|
Loss from discontinued operations, net of taxes | | — |
| | (2,053 | ) | | (46,787 | ) |
Net earnings | | $ | 214,891 |
| | $ | 187,329 |
| | $ | 145,461 |
|
| | | | | | |
Basic earnings per share: | | |
| | |
| | |
|
Earnings from continuing operations | | $ | 4.86 |
| | $ | 4.27 |
| | $ | 4.12 |
|
Loss from discontinued operations | | — |
| | (0.05 | ) | | (1.00 | ) |
Total | | $ | 4.86 |
| | $ | 4.22 |
| | $ | 3.12 |
|
Diluted earnings per share: | | |
| | |
| | |
|
Earnings from continuing operations | | $ | 4.80 |
| | $ | 4.20 |
| | $ | 4.04 |
|
Loss from discontinued operations | | — |
| | (0.05 | ) | | (0.99 | ) |
Total | | $ | 4.80 |
| | $ | 4.15 |
| | $ | 3.05 |
|
Dividends per share | | $ | 0.56 |
| | $ | 0.52 |
| | $ | 0.52 |
|
Weighted average shares outstanding: | | | | | | |
Basic | | 44,182 |
| | 44,389 |
| | 46,624 |
|
Diluted | | 44,761 |
| | 45,045 |
| | 47,616 |
|
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
(In thousands, except per share data) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Net sales | | | | | | |
Product sales | | $ | 2,389,711 | | | $ | 2,135,882 | | | $ | 2,104,447 | |
Service sales | | 455,662 | | | 421,143 | | | 396,314 | |
Total net sales | | 2,845,373 | | | 2,557,025 | | | 2,500,761 | |
| | | | | | |
Cost of sales | | | | | | |
Cost of product sales | | 1,507,480 | | | 1,348,569 | | | 1,330,575 | |
Cost of service sales | | 270,715 | | | 253,847 | | | 242,384 | |
Total cost of sales | | 1,778,195 | | | 1,602,416 | | | 1,572,959 | |
Gross profit | | 1,067,178 | | | 954,609 | | | 927,802 | |
| | | | | | |
Research and development expenses | | 85,764 | | | 80,836 | | | 88,489 | |
Selling expenses | | 137,088 | | | 121,586 | | | 116,956 | |
General and administrative expenses | | 359,724 | | | 324,093 | | | 326,140 | |
Loss on divestiture | | — | | | 4,651 | | | — | |
Impairment of assets held for sale | | — | | | — | | | 19,088 | |
Operating income | | 484,602 | | | 423,443 | | | 377,129 | |
Interest expense | | 51,393 | | | 46,980 | | | 40,240 | |
Other income, net | | 29,861 | | | 12,732 | | | 12,067 | |
Earnings before income taxes | | 463,070 | | | 389,195 | | | 348,956 | |
Provision for income taxes | | (108,561) | | | (94,847) | | | (86,127) | |
Net earnings | | $ | 354,509 | | | $ | 294,348 | | | $ | 262,829 | |
| | | | | | |
Basic earnings per share | | $ | 9.26 | | | $ | 7.67 | | | $ | 6.50 | |
Diluted earnings per share | | $ | 9.20 | | | $ | 7.62 | | | $ | 6.47 | |
| | | | | | |
Dividends per share | | $ | 0.79 | | | $ | 0.75 | | | $ | 0.71 | |
| | | | | | |
Weighted average shares outstanding: | | | | | | |
Basic | | 38,283 | | | 38,386 | | | 40,417 | |
Diluted | | 38,529 | | | 38,649 | | | 40,602 | |
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
| | | | | | |
Net earnings | | $ | 354,509 | | | $ | 294,348 | | | $ | 262,829 | |
Other comprehensive income | | | | | | |
Foreign currency translation, net of tax (1) | | 37,519 | | | (61,241) | | | (10,829) | |
Pension and postretirement adjustments, net of tax (2) | | 8,174 | | | (7,210) | | | 131,220 | |
Other comprehensive income (loss), net of tax | | 45,693 | | | (68,451) | | | 120,391 | |
Comprehensive income | | $ | 400,202 | | | $ | 225,897 | | | $ | 383,220 | |
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
| | | | | | |
Net earnings | | $ | 214,891 |
| | $ | 187,329 |
| | $ | 145,461 |
|
Other comprehensive income | | |
| | |
| | |
|
Foreign currency translation, net of tax (1) | | 77,942 |
| | (64,840 | ) | | (87,527 | ) |
Pension and postretirement adjustments, net of tax (2) | | (3,026 | ) | | (988 | ) | | (9,990 | ) |
Other comprehensive income (loss), net of tax | | 74,916 |
| | (65,828 | ) | | (97,517 | ) |
Comprehensive income | | $ | 289,807 |
| | $ | 121,501 |
| | $ | 47,944 |
|
(1)The tax benefit (expense) included in other comprehensive income for foreign currency translation adjustments for 2023, 2022, and 2021 was immaterial.
| |
(1)
| The tax benefit (expense) included in other comprehensive income for foreign currency translation adjustments for 2017, 2016, and 2015 were ($1.9) million, $1.7 million, and $2.7 million, respectively. |
| |
(2)
| The tax benefit (expense) included in other comprehensive income for pension and postretirement adjustments for 2017, 2016, and 2015 were $2.8 million, ($1.7) million, and $9.5 million, respectively. |
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | | |
| | As of December 31, |
(In thousands, except share data) | | 2017 | | 2016 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 475,120 |
| | $ | 553,848 |
|
Receivables, net | | 494,923 |
| | 463,062 |
|
Inventories, net | | 378,866 |
| | 366,974 |
|
Other current assets | | 52,951 |
| | 30,927 |
|
Total current assets | | 1,401,860 |
| | 1,414,811 |
|
Property, plant, and equipment, net | | 390,235 |
| | 388,903 |
|
Goodwill | | 1,096,329 |
| | 951,057 |
|
Other intangible assets, net | | 329,668 |
| | 271,461 |
|
Other assets | | 18,229 |
| | 11,549 |
|
Total assets | | $ | 3,236,321 |
| | $ | 3,037,781 |
|
LIABILITIES | | | | |
Current liabilities: | | | | |
Current portion of long-term and short-term debt | | $ | 150 |
| | $ | 150,668 |
|
Accounts payable | | 185,176 |
| | 177,911 |
|
Accrued expenses | | 150,406 |
| | 130,239 |
|
Income taxes payable | | 4,564 |
| | 18,274 |
|
Deferred revenue | | 214,891 |
| | 170,143 |
|
Other current liabilities | | 35,810 |
| | 28,027 |
|
Total current liabilities | | 590,997 |
| | 675,262 |
|
Long-term debt | | 813,989 |
| | 815,630 |
|
Deferred tax liabilities, net | | 49,360 |
| | 49,722 |
|
Accrued pension and other postretirement benefit costs | | 121,043 |
| | 107,151 |
|
Long-term portion of environmental reserves | | 14,546 |
| | 14,024 |
|
Other liabilities | | 118,586 |
| | 84,801 |
|
Total liabilities | | 1,708,521 |
| | 1,746,590 |
|
Contingencies and Commitments (Notes 12, 16 and 18) | |
|
| |
|
|
STOCKHOLDERS’ EQUITY | | | | |
Common stock, $1 par value,100,000,000 shares authorized as of December 31, 2017 and December 31, 2016; 49,187,378 shares issued as of December 31, 2017 and December 31, 2016; outstanding shares were 44,123,519 as of December 31, 2017 and 44,181,050 as of December 31, 2016 | | 49,187 |
| | 49,187 |
|
Additional paid in capital | | 120,609 |
| | 129,483 |
|
Retained earnings | | 1,944,324 |
| | 1,754,907 |
|
Accumulated other comprehensive loss | | (216,840 | ) | | (291,756 | ) |
Common treasury stock, at cost (5,063,859 shares as of December 31, 2017 and 5,006,328 shares as of December 31, 2016) | | (369,480 | ) | | (350,630 | ) |
Total stockholders' equity | | 1,527,800 |
| | 1,291,191 |
|
Total liabilities and stockholders’ equity | | $ | 3,236,321 |
| | $ | 3,037,781 |
|
(2)The tax benefit (expense) included in other comprehensive income for pension and postretirement adjustments for 2023, 2022, and 2021 was ($3.0) million, $3.1 million, and ($42.3) million, respectively.See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | | |
| | For the years ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Cash flows from operating activities: | | | | | | |
Net earnings | | $ | 214,891 |
| | $ | 187,329 |
| | $ | 145,461 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 99,995 |
| | 96,008 |
| | 100,810 |
|
(Gain) loss on sale of businesses | | (875 | ) | | (845 | ) | | 16,991 |
|
(Gain) loss on fixed asset disposals | | 29 |
| | (2,069 | ) | | (945 | ) |
Deferred income taxes | | (5,782 | ) | | 1,224 |
| | 63,535 |
|
Share-based compensation | | 11,572 |
| | 9,478 |
| | 9,473 |
|
Impairment of assets held for sale | | — |
| | — |
| | 40,813 |
|
Changes in operating assets and liabilities, net of businesses acquired and disposed of: | | | | | | |
Receivables, net | | (16,388 | ) | | 91,692 |
| | (77,106 | ) |
Inventories, net | | 19,711 |
| | 4,391 |
| | (4,039 | ) |
Progress payments | | (774 | ) | | 2,583 |
| | 3,680 |
|
Accounts payable and accrued expenses | | 4,323 |
| | 4,125 |
| | (447 | ) |
Deferred revenue | | 36,898 |
| | (11,084 | ) | | 4,839 |
|
Income taxes | | (5,479 | ) | | 11,797 |
| | (7,436 | ) |
Net pension and postretirement liabilities | | 3,481 |
| | 3,405 |
| | (139,610 | ) |
Termination of interest rate swap | | — |
| | 20,405 |
| | — |
|
Other liabilities | | 25,686 |
| | 11,474 |
| | (5,410 | ) |
Other | | 1,424 |
| | (6,716 | ) | | 11,870 |
|
Net cash provided by operating activities | | 388,712 |
| | 423,197 |
| | 162,479 |
|
Cash flows from investing activities: | | | | | | |
Proceeds from sales and disposals of long-lived assets | | 6,769 |
| | 3,674 |
| | 2,277 |
|
Proceeds from divestitures | | 6,973 |
| | 1,027 |
| | 31,344 |
|
Additions to property, plant, and equipment | | (52,705 | ) | | (46,776 | ) | | (35,512 | ) |
Acquisition of businesses, net of cash acquired | | (232,630 | ) | | (295 | ) | | (13,228 | ) |
Additional consideration paid on prior year acquisitions | | (735 | ) | | (564 | ) | | (457 | ) |
Net cash used for investing activities | | (272,328 | ) | | (42,934 | ) | | (15,576 | ) |
Cash flows from financing activities: | | | | | | |
Borrowings under revolving credit facilities | | 7,658 |
| | 7,839 |
| | 70,324 |
|
Payment of revolving credit facilities | | (8,176 | ) | | (8,430 | ) | | (70,134 | ) |
Principal payments on debt | | (150,000 | ) | | — |
| | (8,400 | ) |
Repurchases of company stock | | (52,127 | ) | | (105,249 | ) | | (294,130 | ) |
Proceeds from share-based compensation plans | | 14,179 |
| | 22,300 |
| | 28,706 |
|
Dividends paid | | (24,740 | ) | | (23,067 | ) | | (24,122 | ) |
Other | | (692 | ) | | (635 | ) | | (581 | ) |
Excess tax benefits from share-based compensation | | — |
| | 11,101 |
| | 9,119 |
|
Net cash used for financing activities | | (213,898 | ) | | (96,141 | ) | | (289,218 | ) |
Effect of exchange-rate changes on cash | | 18,786 |
| | (18,971 | ) | | (19,104 | ) |
Net increase (decrease) in cash and cash equivalents | | (78,728 | ) | | 265,151 |
| | (161,419 | ) |
Cash and cash equivalents at beginning of year | | 553,848 |
| | 288,697 |
| | 450,116 |
|
Cash and cash equivalents at end of year | | $ | 475,120 |
| | $ | 553,848 |
| | $ | 288,697 |
|
Supplemental disclosure of non-cash activities: | | | | | | |
Capital expenditures incurred but not yet paid | | 976 |
| | 2,512 |
| | 2,108 |
|
CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | | | | |
| | As of December 31, |
(In thousands, except share data) | | 2023 | | 2022 |
| | | | |
ASSETS | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 406,867 | | | $ | 256,974 | |
Receivables, net | | 732,678 | | | 723,304 | |
Inventories, net | | 510,033 | | | 483,113 | |
Other current assets | | 67,502 | | | 52,623 | |
Total current assets | | 1,717,080 | | | 1,516,014 | |
Property, plant, and equipment, net | | 332,796 | | | 342,708 | |
Goodwill | | 1,558,826 | | | 1,544,635 | |
Other intangible assets, net | | 557,612 | | | 620,897 | |
Operating lease right-of-use assets, net | | 141,435 | | | 153,855 | |
Prepaid pension asset | | 261,869 | | | 222,627 | |
Other assets | | 51,351 | | | 47,567 | |
Total assets | | $ | 4,620,969 | | | $ | 4,448,303 | |
LIABILITIES | | | | |
Current liabilities: | | | | |
Current portion of long-term and short-term debt | | $ | — | | | $ | 202,500 | |
Accounts payable | | 243,833 | | | 266,525 | |
Accrued expenses | | 188,039 | | | 174,440 | |
Deferred revenue | | 303,872 | | | 254,801 | |
Other current liabilities | | 70,800 | | | 82,779 | |
Total current liabilities | | 806,544 | | | 981,045 | |
Long-term debt | | 1,050,362 | | | 1,051,900 | |
Deferred tax liabilities | | 132,319 | | | 123,001 | |
Accrued pension and other postretirement benefit costs | | 66,875 | | | 58,348 | |
Long-term operating lease liability | | 118,611 | | | 132,275 | |
Long-term portion of environmental reserves | | 12,784 | | | 12,547 | |
Other liabilities | | 105,061 | | | 107,973 | |
Total liabilities | | 2,292,556 | | | 2,467,089 | |
Contingencies and Commitments (Notes 10, 14, and 19) | | | | |
STOCKHOLDERS’ EQUITY | | | | |
Common stock, $1 par value, 100,000,000 shares authorized as of December 31, 2023 and December 31, 2022; 49,187,378 shares issued as of December 31, 2023 and December 31, 2022; outstanding shares were 38,202,754 as of December 31, 2023 and 38,259,722 as of December 31, 2022 | | 49,187 | | | 49,187 | |
Additional paid in capital | | 140,182 | | | 134,553 | |
Retained earnings | | 3,487,751 | | | 3,163,491 | |
Accumulated other comprehensive loss | | (213,223) | | | (258,916) | |
Common treasury stock, at cost (10,984,624 shares as of December 31, 2023 and 10,927,656 shares as of December 31, 2022) | | (1,135,484) | | | (1,107,101) | |
Total stockholders' equity | | 2,328,413 | | | 1,981,214 | |
Total liabilities and stockholders’ equity | | $ | 4,620,969 | | | $ | 4,448,303 | |
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS | | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Cash flows from operating activities: | | | | | | |
Net earnings | | $ | 354,509 | | | $ | 294,348 | | | $ | 262,829 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 116,172 | | | 112,027 | | | 114,384 | |
Loss on divestiture | | — | | | 4,651 | | | — | |
Impairment of assets held for sale | | — | | | — | | | 19,088 | |
(Gain) on sale/disposal of long-lived assets | | (2,883) | | | (4,671) | | | (568) | |
Deferred income taxes | | 2,908 | | | (23,635) | | | (10,200) | |
Share-based compensation | | 16,803 | | | 15,384 | | | 13,450 | |
Changes in operating assets and liabilities, net of businesses acquired and disposed of: | | | | | | |
Receivables, net | | (2,394) | | | (75,955) | | | (61,172) | |
Inventories, net | | (21,568) | | | (62,562) | | | 13,554 | |
Accounts payable and accrued expenses | | 11,571 | | | 42,493 | | | 17,713 | |
Deferred revenue | | 47,914 | | | (17,646) | | | 14,649 | |
Income taxes | | (27,350) | | | 55,847 | | | (14,212) | |
Pension and postretirement, net | | (18,307) | | | (15,049) | | | (1,236) | |
Other | | (29,286) | | | (30,456) | | | 19,389 | |
Net cash provided by operating activities | | 448,089 | | | 294,776 | | | 387,668 | |
Cash flows from investing activities: | | | | | | |
Proceeds from sales and disposals of long-lived assets | | 9,147 | | | 9,841 | | | 4,045 | |
Purchases of investments | | — | | | (10,000) | | | — | |
Additions to property, plant, and equipment | | (44,666) | | | (38,217) | | | (41,108) | |
Acquisition of businesses, net of cash acquired | | — | | | (282,429) | | | — | |
Additional consideration paid on prior year acquisitions | | — | | | (5,062) | | | (5,340) | |
Net cash used for investing activities | | (35,519) | | | (325,867) | | | (42,403) | |
Cash flows from financing activities: | | | | | | |
Borrowings under revolving credit facilities | | 638,116 | | | 1,697,647 | | | 455,950 | |
Payment of revolving credit facilities | | (638,116) | | | (1,791,547) | | | (362,050) | |
Borrowings of debt | | — | | | 300,000 | | | — | |
Principal payments on debt | | (202,500) | | | — | | | (100,000) | |
Repurchases of company stock | | (50,141) | | | (56,870) | | | (343,129) | |
Proceeds from share-based compensation plans | | 10,584 | | | 9,997 | | | 9,705 | |
Dividends paid | | (30,249) | | | (28,779) | | | (28,660) | |
Other | | (1,097) | | | (1,020) | | | (945) | |
Net cash provided by (used for) financing activities | | (273,403) | | | 129,428 | | | (369,129) | |
Effect of exchange-rate changes on cash | | 10,726 | | | (12,367) | | | (3,380) | |
Net increase (decrease) in cash and cash equivalents | | 149,893 | | | 85,970 | | | (27,244) | |
Cash and cash equivalents at beginning of year | | 256,974 | | | 171,004 | | | 198,248 | |
Cash and cash equivalents at end of year | | 406,867 | | | 256,974 | | | 171,004 | |
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock |
January 1, 2015 | | $ | 49,190 |
| | $ | 158,043 |
| | $ | 1,469,306 |
| | $ | (128,411 | ) | | $ | (69,695 | ) |
Net earnings | | — |
| | — |
| | 145,461 |
| | — |
| | — |
|
Other comprehensive loss, net of tax | | — |
| | — |
| | — |
| | (97,517 | ) | | — |
|
Dividends paid | | — |
| | — |
| | (24,122 | ) | | — |
| | — |
|
Restricted stock, net of tax | | — |
| | (10,303 | ) | | — |
| | — |
| | 13,734 |
|
Stock options exercised, net of tax | | — |
| | (11,349 | ) | | — |
| | — |
| | 45,743 |
|
Other | | — |
| | (647 | ) | | — |
| | — |
| | 647 |
|
Share-based compensation | | — |
| | 9,179 |
| | — |
| | — |
| | 294 |
|
Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | (294,130 | ) |
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 | ) |
Net earnings | | — |
| | — |
| | 214,891 |
| | — |
| | — |
|
Other comprehensive income, net of tax | | — |
| | — |
| | — |
| | 74,916 |
| | — |
|
Dividends paid | | — |
| | — |
| | (24,740 | ) | | — |
| | — |
|
Restricted stock, net of tax | | — |
| | (12,104 | ) | | — |
| | — |
| | 12,105 |
|
Stock options exercised, net of tax | | — |
| | (5,724 | ) | | — |
| | — |
| | 19,902 |
|
Other | | — |
| | (2,237 | ) | | (734 | ) | | — |
| | 889 |
|
Share-based compensation | | — |
| | 11,191 |
| | — |
| | — |
| | 381 |
|
Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | (52,127 | ) |
December 31, 2017 | | $ | 49,187 |
| | $ | 120,609 |
| | $ | 1,944,324 |
| | $ | (216,840 | ) | | $ | (369,480 | ) |
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 |
January 1, 2021 (as previously reported) | | $ | 49,187 | | | $ | 122,535 | | | $ | 2,670,328 | | | $ | (310,856) | | | $ | (743,620) | |
Correction of prior period error (Note 2) | | — | | | — | | | (6,575) | | | — | | | — | |
January 1, 2021 (as revised) | | 49,187 | | | 122,535 | | | 2,663,753 | | | (310,856) | | | (743,620) | |
Net earnings | | — | | | — | | | 262,829 | | | — | | | — | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | 120,391 | | | — | |
Dividends paid | | — | | | — | | | (28,660) | | | — | | | — | |
Restricted stock | | — | | | (9,007) | | | — | | | — | | | 9,007 | |
Employee stock purchase plan | | — | | | 877 | | | — | | | — | | | 8,828 | |
Share-based compensation | | — | | | 13,296 | | | — | | | — | | | 154 | |
Repurchase of common stock (1) | | — | | | — | | | — | | | — | | | (343,129) | |
Other | | — | | | (597) | | | — | | | — | | | 597 | |
December 31, 2021 | | $ | 49,187 | | | $ | 127,104 | | | $ | 2,897,922 | | | $ | (190,465) | | | $ | (1,068,163) | |
Net earnings | | — | | | — | | | 294,348 | | | — | | | — | |
Other comprehensive loss, net of tax | | — | | | — | | | — | | | (68,451) | | | — | |
Dividends paid | | — | | | — | | | (28,779) | | | — | | | — | |
Restricted stock | | — | | | (8,523) | | | — | | | — | | | 8,523 | |
Employee stock purchase plan | | — | | | 1,273 | | | — | | | — | | | 8,724 | |
Share-based compensation | | — | | | 15,205 | | | — | | | — | | | 179 | |
Repurchase of common stock (1) | | — | | | — | | | — | | | — | | | (56,870) | |
Other | | — | | | (506) | | | — | | | — | | | 506 | |
December 31, 2022 | | $ | 49,187 | | | $ | 134,553 | | | $ | 3,163,491 | | | $ | (258,916) | | | $ | (1,107,101) | |
Net earnings | | — | | | — | | | 354,509 | | | — | | | — | |
Other comprehensive income, net of tax | | — | | | — | | | — | | | 45,693 | | | — | |
Dividends paid | | — | | | — | | | (30,249) | | | — | | | — | |
Restricted stock | | — | | | (13,878) | | | — | | | — | | | 13,878 | |
Employee stock purchase plan | | — | | | 3,312 | | | — | | | — | | | 7,272 | |
Share-based compensation | | — | | | 16,456 | | | — | | | — | | | 347 | |
Repurchase of common stock (1) | | — | | | — | | | — | | | — | | | (50,141) | |
Other | | — | | | (261) | | | — | | | — | | | 261 | |
December 31, 2023 | | $ | 49,187 | | | $ | 140,182 | | | $ | 3,487,751 | | | $ | (213,223) | | | $ | (1,135,484) | |
(1) For the years ended December 31, 2023, 2022, and 2021, the Corporation repurchased approximately 0.3 million, 0.4 million, and 2.7 million shares of its common stock, respectively.
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 manufacturing and service companyintegrated business that designs, manufactures, and overhauls precision components and provides highly engineered products, solutions, and services mainly to the aerospace & defense generalmarkets, as well as critical technologies in demanding commercial power, process, and industrial and power generation 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-termon certain contracts underusing the percentage-of-completionover-time revenue recognition accounting methods, the estimate of useful lives for property, plant, and equipment,method, cash flow estimates used for testing the recoverability of assets, pension plan and postretirement obligation assumptions, estimates for inventory obsolescence, fair value estimates around assets and assumed liabilities from acquisitions, estimates for the valuation and useful lives of intangible assets, legal reserves, and legal reserves.the estimate of future environmental costs. 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.
The Corporation determines the appropriate method by which it recognizes revenue by analyzing the terms and conditions of each contract or arrangement entered into with its 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 made 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 Electric Company (WEC) 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 2017, 2016, or 2015.
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, the Corporation may enter into multiple-element arrangements in which a customer may purchase a combination of goods, services, or rights to intellectual property. The Corporation follows 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. Arrangement consideration is allocated 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 and inventories, as presented in Notes 4 andNote 5 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 Note 6 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 7 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 89 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, 2017, 2016,2023, 2022, and 2015. For impairment charges on assets held for sale, see Note 2 to the Consolidated Financial Statements.2021.
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 78 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 911 and 1214 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 1113 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 affected by foreign currency exchange rate fluctuations and by the acquisition of foreign entities. (Gains) and losses from foreign currency transactions are included in General and administrative expenses in the Consolidated Statements of Earnings, which amounted to $5.4 million, $(8.9) million, and ($8.3) million for the years ended December 31, 2017, 2016, and 2015, 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 Statements of Earnings and amounted to ($0.3) million, $11.5 million, and $11.0 million for the years ended December 31, 2017, 2016, and 2015, 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
RecentRecently issued accounting pronouncements adopted
|
| | |
Standard | Description | Effect on the consolidated financial statements |
ASU 2017-04 Simplifying the Test for Goodwill Impairment | In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the measurement of goodwill impairment testing by removing step two. This guidance was early adopted effective January 1, 2017 and will be applied prospectively.
| The adoption of this standard did not have a financial impact on the Consolidated Financial Statements. |
Date of adoption: January 1, 2017 |
ASU 2016-09 Improvements to Employee Share-Based Payment Accounting | In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, 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 and forfeitures. Excess tax benefits previously reported as cash flows from financing activities in the Consolidated Financial Statements are now required to be reported as operating activities. The Company adopted this guidance effective January 1, 2017. | The Corporation recorded an income tax benefit of approximately $8 million within the provision for income taxes for the year ended December 31, 2017, related to the excess tax benefit on stock options and performance share units. Prior to adoption, this amount would have been recorded as an increase to additional paid-in capital.
The Corporation elected to account for forfeitures as they occur, which did not have a material impact on its Consolidated Financial Statements.
|
Date of adoption: January 1, 2017 |
Recent accounting pronouncementsstandards to be adopted
|
| | |
Standard | Description | Effect on the consolidated 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 will apply the modified retrospective approach upon adoption as of January 1, 2018. The Corporation has completed its assessment and has identified certain contracts, primarily in the Defense and Power segments, which will be required to transition from a "point in time" model to an “over-time” model as they meet one or more of the mandatory criteria established under the new standard. The transition adjustment as of January 1, 2018 will primarily include the following: a) U.S. Government and commercial contracts where promised goods do not have alternative use and the Corporation has an enforceable right to payment for performance completed to date; b) repair and overhaul services performed on customer-owned goods; and c) Defense-related contracts where the Corporation uses customer-owned materials in production. The cumulative effect expected to be recognized upon adoption is a reduction to retained earnings of approximately $2 million, net of tax, with a corresponding increase in unbilled receivables of $18 million and decrease in inventory of $24 million.In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-09, Income Taxes (Topic 740), Improvement to Income Tax Disclosures, which requires enhanced income tax disclosures, including disaggregation of information in the rate reconciliation table and disaggregated information related to income taxes paid. The ASU is effective for annual reporting periods beginning with the year ending December 31, 2025. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its Consolidated Financial Statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280), Improvement to Reportable Segment Disclosures. This ASU enhances disclosures required for reportable segments in both annual and interim consolidated financial statements. The ASU, which requires retrospective application, is effective for annual reporting periods beginning with the year ending December 31, 2024, and interim periods beginning with the three months ending March 31, 2025. Early adoption is permitted. The Company is currently evaluating the impact of adopting this standard on its Consolidated Financial Statements.
|
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 Corporation is currently evaluating the impact of the adoption of this standard on its Consolidated Financial Statements. |
Date of adoption: January 1, 2019 |
ASU 2017-01
Clarifying the Definition of a Business
| In January 2017, the FASB issued ASU 2017-01, which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output. The standard is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.
| The Corporation does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements. |
Date of adoption: January 1, 2018 |
ASU 2017-07
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
| In March 2017, the FASB issued final guidance that requires the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same Consolidated Statement of Earnings captions as other compensation costs arising from services rendered by the covered employees during the period. The other components of net benefit cost will be presented in the Statement of Earnings separately from service costs. This standard is effective for fiscal years beginning after December 15, 2017. Following adoption, only service costs will be eligible for capitalization into manufactured inventories. The amendments of this standard should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs.
| The Corporation does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements. Any decrease in operating income due to presentation of interest cost, expected return on plan assets, amortization of prior service cost, and net actuarial gain/loss components of net periodic benefit costs outside of operating income will be offset by a corresponding increase in Other income, net, in the Consolidated Statements of Earnings. Refer to Note 15 to the Consolidated Financial Statements for the components impacting net period benefit cost for the year ended December 31, 2017.
|
Date of adoption: January 1, 2018 |
2. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALECORRECTION OF PRIOR PERIOD ERROR
As partDuring the third quarter of a strategic portfolio review conducted in 2014,2023, the Corporation identified an error related to a single long-term contract within a subsidiary of its Naval & Power segment. The error primarily impacts 2020 and 2021, whereby certain businessesevents occurring during the pandemic, including constructive changes to the contract as well as labor inefficiencies and hiring delays due to a facility relocation, were not reflected in the contract’s estimated costs of completion.
In accordance with Staff Accounting Bulletin (SAB) Nos. 99 and 108, the Corporation evaluated this error and, based on an analysis of quantitative and qualitative factors, determined that it considered non-core.was not material to any one of the prior reporting periods affected and, therefore, amendment of previously filed reports with the Securities and Exchange Commission is not required. However, the Corporation concluded that the cumulative misstatement could not be corrected in the three and nine months ended September 30, 2023, without materially misstating those respective periods. Therefore, the Corporation revised the accompanying prior period financial statements and related notes hereto included within this filing, as summarized below.
The net impact of the error resulted in an overstatement of previously reported total net sales and net earnings of approximately $5 million and $4 million, respectively, for the year ended December 31, 2021 and an overstatement of previously reported total net sales and net earnings of approximately $8 million and $7 million, respectively, for the year ended December 31, 2020. The net impact of the error for the year ended December 31, 2020 of approximately $7 million has been corrected as an adjustment to the beginning balance as of January 1, 2021 in the accompanying consolidated statement of stockholders’ equity for the year ended December 31, 2021. The error did not impact previously reported total net sales or net earnings for the year ended December 31, 2022.
The Corporation considers businesses non-core when their products or services do not complement existing businesses and wherefollowing tables summarize the long-term growth and profitability prospects are belownet impact of the Corporation’s expectations. As part of this initiative,error in the Corporation divested all five businesses during 2015 that were classified as held for saleaccompanying consolidated financial statements:
Consolidated Balance Sheet as of December 31, 2014. 2022:
| | | | | | | | | | | | | | | | | |
(In thousands) | As previously reported | | Corrections | | As revised |
Receivables, net | $ | 724,603 | | | $ | (1,299) | | | $ | 723,304 | |
Total current assets | 1,517,313 | | | (1,299) | | | 1,516,014 | |
Total assets | 4,449,602 | | | (1,299) | | | 4,448,303 | |
Accrued expenses | 177,536 | | | (3,096) | | | 174,440 | |
Deferred revenue | 242,483 | | | 12,318 | | | 254,801 | |
Other current liabilities | 82,395 | | | 384 | | | 82,779 | |
Total current liabilities | 971,439 | | | 9,606 | | | 981,045 | |
Total liabilities | 2,457,483 | | | 9,606 | | | 2,467,089 | |
Retained earnings | 3,174,396 | | | (10,905) | | | 3,163,491 | |
Total stockholders' equity | 1,992,119 | | | (10,905) | | | 1,981,214 | |
Total liabilities and stockholders' equity | 4,449,602 | | | (1,299) | | | 4,448,303 | |
Consolidated Statement of Earnings for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
(In thousands) | As previously reported | | Corrections | | As revised |
Product sales | $ | 2,109,617 | | | $ | (5,170) | | | $ | 2,104,447 | |
Total net sales | 2,505,931 | | | (5,170) | | | 2,500,761 | |
Cost of product sales | 1,330,191 | | | 384 | | | 1,330,575 | |
Total cost of sales | 1,572,575 | | | 384 | | | 1,572,959 | |
Gross profit | 933,356 | | | (5,554) | | | 927,802 | |
Operating income | 382,683 | | | (5,554) | | | 377,129 | |
Earnings before income taxes | 354,510 | | | (5,554) | | | 348,956 | |
Provision for income taxes | (87,351) | | | 1,224 | | | (86,127) | |
Net earnings | 267,159 | | | (4,330) | | | 262,829 | |
| | | | | |
Basic earnings per share | $ | 6.61 | | | $ | (0.11) | | | $ | 6.50 | |
Diluted earnings per share | $ | 6.58 | | | $ | (0.11) | | | $ | 6.47 | |
Consolidated Statement of Comprehensive Income for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
(In thousands) | As previously reported | | Corrections | | As revised |
Net earnings | $ | 267,159 | | | $ | (4,330) | | | $ | 262,829 | |
Comprehensive income | 387,550 | | | (4,330) | | | 383,220 | |
Consolidated Statement of Cash Flows for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | |
(In thousands) | As previously reported | | Corrections | | As revised |
Net earnings | $ | 267,159 | | | $ | (4,330) | | | $ | 262,829 | |
Receivables, net | (61,277) | | | 105 | | | (61,172) | |
Deferred revenue | 9,584 | | | 5,065 | | | 14,649 | |
Income taxes | (12,988) | | | (1,224) | | | (14,212) | |
Other | 19,005 | | | 384 | | | 19,389 | |
Net cash provided by operating activities | 387,668 | | | — | | | 387,668 | |
3. REVENUE
The resultsCorporation accounts for revenues in accordance with ASC 606, Revenue from Contracts with Customers. Under ASC 606, revenue is recognized when control of operations of these businesses are reported as discontinued operations within our Consolidated Statements of Earnings.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 aggregateCorporation identifies a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of its assessment, the Corporation considers 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 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 extent that it 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’s performance obligations are satisfied either at a point-in-time or on an over-time basis. 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. There were no significant changes in estimated contract costs during 2023, 2022, or 2021. If a performance obligation does not qualify for over-time revenue recognition, revenue is then recognized at the point-in-time in which control of all discontinued operationsthe distinct good or service is transferred to the customer, typically based upon the terms of delivery.
The following table illustrates the approximate percentage of revenue recognized for performance obligations satisfied over-time versus at a point-in-time for the years ended December 31, were2023, 2022, and 2021:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, |
| 2023 | | 2022 | | 2021 |
Over-time | 47 | % | | 51 | % | | 50 | % |
Point-in-time | 53 | % | | 49 | % | | 50 | % |
Contract backlog represents the remaining performance obligations that have not yet been recognized as follows:revenue. Backlog includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Total backlog was approximately $2.9 billion as of December 31, 2023, of which the Corporation expects to recognize approximately 90% as net sales over the next 36 months. The remainder will be recognized thereafter.
Disaggregation of Revenue
|
| | | | | | | | | | | |
(In thousands) | | 2017 | 2016 | | 2015 |
Net sales | | $ | — |
| $ | — |
| | $ | 57,992 |
|
Loss from discontinued operations before income taxes (1) | | — |
| — |
| | (40,984 | ) |
Income tax benefit / (expense) | | — |
| (2,053 | ) | (3) | 7,926 |
|
Loss on sale of businesses (2) | | — |
| — |
| | (13,729 | ) |
Loss from discontinued operations | | $ | — |
| $ | (2,053 | ) | | $ | (46,787 | ) |
The following table presents the Corporation’s total net sales disaggregated by end market and customer type:
(1) Loss from discontinued operations before income taxes includes approximately $40.8 million | | | | | | | | | | | | | | | | | | | | |
Total Net Sales by End Market and Customer Type | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Aerospace & Defense | | | | | | |
Aerospace Defense | | $ | 551,622 | | | $ | 479,743 | | | $ | 452,661 | |
Ground Defense | | 308,008 | | | 219,739 | | | 220,290 | |
Naval Defense | | 720,013 | | | 694,015 | | | 705,518 | |
Commercial Aerospace | | 324,949 | | | 276,519 | | | 267,722 | |
Total Aerospace & Defense Customers | | $ | 1,904,592 | | | $ | 1,670,016 | | | $ | 1,646,191 | |
| | | | | | |
Commercial | | | | | | |
Power & Process | | $ | 509,998 | | | $ | 472,300 | | | $ | 473,489 | |
General Industrial | | 430,783 | | | 414,709 | | | 381,081 | |
Total Commercial Customers | | $ | 940,781 | | | $ | 887,009 | | | $ | 854,570 | |
| | | | | | |
Total | | $ | 2,845,373 | | | $ | 2,557,025 | | | $ | 2,500,761 | |
Contract Balances
Timing of heldrevenue 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 sale impairment expensework 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 yearyears ended December 31, 2015.
(2) In2023, 2022, and 2021 included in the year endedcontract liabilities balance at the beginning of the respective years were approximately $195 million, $219 million, and $210 million, respectively. Changes in contract assets and contract liabilities as of December 31, 2015, the Corporation recognized aggregate after tax losses of $13.7 million on the sale of the Aviation Ground, Downstream Oil & Gas, Engineered Packaging and two surface technology businesses.
(3) Amount represents finalization of the income tax provision related to discontinued operations for the year ended December 31, 2015.
2015 Divestitures
Surface Technologies - Domestic
In October 2015 and July 2015, the Corporation sold the2023 were not materially impacted by any other factors. Contract assets and contract liabilities of two surface technology treatment facilities for less than $1 million. The businesses were previously classified within assets held for saleare reported in the "Receivables, net" and reported"Deferred revenue" lines, respectively, within the Commercial/Industrial segment.Consolidated Balance Sheet.
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 business was previously classified within assets held for sale. During 2015, the Corporation recognized a pre-tax loss on divestiture, including impairment charges, of $59.5 million.
Aviation Ground
In January 2015, the Corporation sold the assets of its Aviation Ground support business for £3 million ($4 million). The business was previously classified within assets held for sale and reported within the Defense segment.
3.4. 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 ofnumerous 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.
DuringFor the twelve monthsyear ended December 31, 2017,2023, the Corporation did not complete any acquisitions.
For the year ended December 31, 2022, the Corporation acquired two businesses for an aggregate purchase price of $233$282 million, net of cash acquired, which is described in more detail below. During the twelve months ended December 31, 2016, noacquired. Such acquisitions were made.
The Consolidated Statement of Earnings for the twelve months ended December 31, 2017 includes $71contributed $45 million of total net sales and $5$1 million of net earnings fromlosses for the Corporation's 2017 acquisitions.year ended December 31, 2022 which are included in the Consolidated Statement of Earnings. Also, the Corporation paid $5
million during the year ended December 31, 2022 for the final portion of the purchase price on the acquisition of Dyna-Flo Control Valve Services Ltd. (Dyna-Flo), which was initially held back as security for potential indemnification claims against the seller in accordance with the terms of the Purchase Agreement.
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 2017:consummated:
| | | | | | | | |
(In thousands) | | 2022 |
Accounts receivable | | $ | 10,567 | |
Inventory | | 24,088 | |
Property, plant, and equipment | | 4,190 | |
Intangible assets | | 147,074 | |
Operating lease right-of-use assets, net | | 5,103 | |
Other current and non-current assets | | 2,078 | |
Current and non-current liabilities | | (17,264) | |
Net tangible and intangible assets | | 175,836 | |
Goodwill | | 106,593 | |
Total Purchase price | | $ | 282,429 | |
| | |
Goodwill deductible for tax purposes | | $ | 106,593 | |
|
| | | | |
(In thousands) | | 2017 |
Accounts receivable | | $ | 4,994 |
|
Inventory | | 22,702 |
|
Property, plant, and equipment | | 4,598 |
|
Intangible assets | | 88,900 |
|
Other current and non-current assets | | 2,816 |
|
Current and non-current liabilities | | (6,730 | ) |
Due to seller | | (804 | ) |
Net tangible and intangible assets | | 116,476 |
|
Purchase price | | 232,630 |
|
Goodwill | | $ | 116,154 |
|
| | |
Goodwill deductible for tax purposes | | $ | 115,532 |
|
2017 Acquisitions
Teletronics Technology Corporation (TTC)
On January 3, 2017, the Corporation acquired 100% of the issued and outstanding capital stock of TTC for $226.0 million, net of cash acquired. The Share 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. TTC is a designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems for critical aerospace and defense applications. For the year ended December 31, 2016, TTC generated sales of $64 million.The acquired business operates within the Defense segment.
Para Tech Coating, Inc. (Para Tech)
On February 8, 2017, the Corporation acquired certain assets and assumed certain liabilities of Para Tech for $6.6 million in cash. 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 back as security for potential indemnification claims against the seller. Para Tech is a provider of parylene conformal coating services for aerospace &
defense electronic components as well as critical medical devices. The acquired business operates within the Commercial/Industrial segment.
4.5. 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 unbilledbilled receivables are subject to retainage provisions. The amount of claims and unapproved change orders within our receivables balances areis 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 39%56% and 38%54% of total net sales in 20172023 and 2016,2022, respectively. Total receivables due primarily from government sources (primarily the U.S GovernmentGovernment) were $208.4$482.5 million and $183.6$473.2 million as of December 31, 20172023 and 2016,2022, respectively. Government (primarily the U.S. Government) unbilled receivables, net of progress payments, were $89.3$266.9 million and $83.2$279.3 million as of December 31, 20172023 and 2016,2022, respectively.
The composition of receivables as of December 31 is as follows: | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 |
Billed receivables: | | | | |
Trade and other receivables | | $ | 427,830 | | | $ | 412,682 | |
Unbilled receivables: | | | | |
Recoverable costs and estimated earnings not billed | | 309,561 | | | 315,383 | |
Less: Progress payments applied | | (687) | | | (67) | |
Net unbilled receivables | | 308,874 | | | 315,316 | |
Less: Allowance for doubtful accounts | | (4,026) | | | (4,694) | |
Receivables, net | | $ | 732,678 | | | $ | 723,304 | |
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Billed receivables: | | | | |
Trade and other receivables | | $ | 363,234 |
| | $ | 340,091 |
|
Less: Allowance for doubtful accounts | | (7,486 | ) | | (4,832 | ) |
Net billed receivables | | 355,748 |
| | 335,259 |
|
Unbilled receivables: | | | | |
Recoverable costs and estimated earnings not billed | | 160,727 |
| | 149,847 |
|
Less: Progress payments applied | | (21,552 | ) | | (22,044 | ) |
Net unbilled receivables | | 139,175 |
| | 127,803 |
|
Receivables, net | | $ | 494,923 |
| | $ | 463,062 |
|
5.6. 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) | | 2023 | | 2022 |
Raw materials | | $ | 239,313 | | | $ | 242,116 | |
Work-in-process | | 103,750 | | | 76,328 | |
Finished goods | | 126,174 | | | 128,090 | |
Inventoried costs related to U.S. Government and other long-term contracts(1) | | 43,255 | | | 39,685 | |
Inventories, net of reserves | | 512,492 | | | 486,219 | |
Less: Progress payments applied | | (2,459) | | | (3,106) | |
Inventories, net | | $ | 510,033 | | | $ | 483,113 | |
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Raw material | | $ | 191,855 |
| | $ | 189,228 |
|
Work-in-process | | 73,937 |
| | 73,843 |
|
Finished goods | | 114,307 |
| | 112,478 |
|
Inventoried costs related to U.S. Government and other long-term contracts | | 65,150 |
| | 57,516 |
|
Gross inventories | | 445,249 |
| | 433,065 |
|
Less: Inventory reserves | | (54,638 | ) | | (54,988 | ) |
Progress payments applied, principally related to long-term contracts | | (11,745 | ) | | (11,103 | ) |
Inventories, net | | $ | 378,866 |
| | $ | 366,974 |
|
(1)As of December 31, 2017 and 2016, inventory2023, this caption also includes capitalized contract development costs of $35.0$13.8 million and $28.8 million, respectively, related to certain aerospace and defense programs. These capitalized costs will be liquidated as production units are delivered to the customer.produced and sold under contract. As of December 31, 2017 and 2016, $5.42023, capitalized development costs of $8.8 million and $3.9 million, respectively, are scheduled to be liquidated undernot currently supported by existing firm orders.
6.7. PROPERTY, PLANT, AND EQUIPMENT
The composition of property, plant, and equipment as of December 31 is as follows:
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Land | | $ | 19,947 |
| | $ | 19,511 |
|
Buildings and improvements | | 234,539 |
| | 215,221 |
|
Machinery, equipment, and other | | 783,430 |
| | 752,356 |
|
Property, plant, and equipment, at cost | | 1,037,916 |
| | 987,088 |
|
Less: Accumulated depreciation | | (647,681 | ) | | (598,185 | ) |
Property, plant, and equipment, net | | $ | 390,235 |
| | $ | 388,903 |
|
| | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 |
Land | | $ | 16,173 | | | $ | 16,880 | |
Buildings and improvements | | 253,408 | | | 252,713 | |
Machinery, equipment, and other | | 905,409 | | | 866,761 | |
Property, plant, and equipment, at cost | | 1,174,990 | | | 1,136,354 | |
Less: Accumulated depreciation | | (842,194) | | | (793,646) | |
Property, plant, and equipment, net | | $ | 332,796 | | | $ | 342,708 | |
Depreciation expense from continuing operations for the years ended December 31, 2017, 2016,2023, 2022, and 20152021 was $61.6$51 million, $62.6$51 million, and $64.7$55 million, respectively.
7.8. GOODWILL
The changes in the carrying amount of goodwill for 20172023 and 20162022 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Aerospace & Industrial | | Defense Electronics | | Naval & Power | | Consolidated |
December 31, 2021 | | $ | 316,147 | | | $ | 714,014 | | | $ | 432,865 | | | $ | 1,463,026 | |
Acquisitions | | 12,445 | | | — | | | 94,148 | | | 106,593 | |
Adjustments | | — | | | 967 | | | — | | | 967 | |
Foreign currency translation adjustment | | (7,042) | | | (12,195) | | | (6,714) | | | (25,951) | |
December 31, 2022 | | $ | 321,550 | | | $ | 702,786 | | | $ | 520,299 | | | $ | 1,544,635 | |
Foreign currency translation adjustment | | 3,581 | | | 7,592 | | | 3,018 | | | 14,191 | |
December 31, 2023 | | $ | 325,131 | | | $ | 710,378 | | | $ | 523,317 | | | $ | 1,558,826 | |
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Commercial/Industrial | | Defense | | Power | | Consolidated |
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 |
|
Acquisitions | | 2,677 |
| | 113,477 |
| | | | 116,154 |
|
Divestitures | | (1,168 | ) | | (647 | ) | |
|
| | (1,815 | ) |
Foreign currency translation adjustment | | 10,881 |
| | 19,847 |
| | 205 |
| | 30,933 |
|
December 31, 2017 | | $ | 448,531 |
| | $ | 460,332 |
| | $ | 187,466 |
| | $ | 1,096,329 |
|
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, 2017, 2016,2023, 2022, and 20152021 and concluded that there was no impairment of goodwill. The estimated fair value of each respective reporting unit substantially exceeded its recorded book value.
8.9. 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, 20172023 and December 31, 2016,2022, respectively. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 |
(In thousands) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Technology | | $ | 308,256 | | | $ | (195,446) | | | $ | 112,810 | | | $ | 306,160 | | | $ | (176,675) | | | $ | 129,485 | |
Customer-related intangibles | | 670,966 | | | (339,325) | | | 331,641 | | | 666,638 | | | (298,160) | | | 368,478 | |
Programs (1) | | 144,000 | | | (41,400) | | | 102,600 | | | 144,000 | | | (34,200) | | | 109,800 | |
Other intangible assets | | 54,227 | | | (43,666) | | | 10,561 | | | 53,879 | | | (40,745) | | | 13,134 | |
Total | | $ | 1,177,449 | | | $ | (619,837) | | | $ | 557,612 | | | $ | 1,170,677 | | | $ | (549,780) | | | $ | 620,897 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 |
(In thousands) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Technology | | $ | 243,440 |
| | $ | (114,036 | ) | | $ | 129,404 |
| | $ | 166,859 |
| | $ | (98,266 | ) | | $ | 68,593 |
|
Customer related intangibles | | 367,230 |
| | (180,580 | ) | | 186,650 |
| | 349,742 |
| | (157,154 | ) | | 192,588 |
|
Other intangible assets | | 40,640 |
| | (27,026 | ) | | 13,614 |
| | 36,709 |
| | (26,429 | ) | | 10,280 |
|
Total | | $ | 651,310 |
| | $ | (321,642 | ) | | $ | 329,668 |
| | $ | 553,310 |
| | $ | (281,849 | ) | | $ | 271,461 |
|
(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, 2017,2023, the Corporation did not acquire any intangible assets. During the year ended December 31, 2022, the Corporation acquired intangible assets of $88.9$147 million as a result of the Corporation's Keronite and arresting systems acquisitions, which included Technology of $73.0 million, Customer-related intangibles of $12.9$106 million, Technology of $36 million, and Other intangible assets of $3.0$5 million. The weighted average amortization periods for these aforementioned intangible assets are 15.0 years, 16.3 years,upon acquisition were 16.1, 14.9, and 7.010.0 years, respectively.
Amortization expense from continuing operations for the years ended December 31, 2017, 2016,2023, 2022, and 20152021 was $38.4$65 million, $33.4$61 million, and $34.8$60 million, respectively. The estimated future amortization expense of intangible assets over the next five years is as follows:
| | | | | | | | |
(In millions) | | |
2024 | | $ | 56 | |
2025 | | $ | 54 | |
2026 | | $ | 53 | |
2027 | | $ | 50 | |
2028 | | $ | 44 | |
10. 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 machinery and office equipment under operating leases. Our leases have remaining lease terms ranging from approximately 1 year to 15 years, some of which include options for renewals, escalations, or terminations. Rental expenses for all operating leases amounted to $44 million, $42 million, and $42 million for the years ended December 31, 2023, 2022, and 2021, 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.
|
| | | | |
(In thousands) | | |
2018 | | $ | 38,159 |
|
2019 | | 36,405 |
|
2020 | | 34,440 |
|
2021 | | 32,644 |
|
2022 | | 30,085 |
|
The components of lease expense were as follows: | | | | | | | | | | | |
| Year Ended |
(In thousands) | December 31, 2023 | | December 31, 2022 |
Operating lease cost | $ | 44,322 | | | $ | 42,125 | |
| | | |
Finance lease cost: | | | |
Depreciation of finance leases | $ | 1,037 | | | $ | 1,037 | |
Interest on lease liabilities | 347 | | | 390 | |
Total finance lease cost | $ | 1,384 | | | $ | 1,427 | |
9.Supplemental cash flow information related to leases was as follows: | | | | | | | | | | | |
| Year Ended |
(In thousands) | December 31, 2023 | | December 31, 2022 |
Cash used for operating activities: | | | |
Operating cash flows used for operating leases | $ | (36,294) | | | $ | (34,186) | |
Operating cash flows used for finance leases | (347) | | | (390) | |
Non-cash activity: | | | |
Right-of-use assets obtained in exchange for operating lease obligations | $ | 14,361 | | | $ | 17,740 | |
Supplemental balance sheet information related to leases was as follows: | | | | | | | | | | | |
| As of December 31, |
(In thousands, except lease term and discount rate) | 2023 | | 2022 |
Operating Leases | | | |
Operating lease right-of-use assets, net | $ | 141,435 | | | $ | 153,855 | |
| | | |
Other current liabilities | $ | 30,629 | | | $ | 29,910 | |
Long-term operating lease liability | 118,611 | | | 132,275 | |
Total operating lease liabilities | $ | 149,240 | | | $ | 162,185 | |
| | | |
Finance Leases | | | |
Property, plant, and equipment | $ | 15,561 | | | $ | 15,561 | |
Accumulated depreciation | (9,682) | | | (8,645) | |
Property, plant, and equipment, net | $ | 5,879 | | | $ | 6,916 | |
| | | |
Other current liabilities | $ | 1,181 | | | $ | 1,098 | |
Other liabilities | 6,742 | | | 7,924 | |
Total finance lease liabilities | $ | 7,923 | | | $ | 9,022 | |
| | | |
Weighted average remaining lease term | | | |
Operating leases | 7.2 years | | 7.5 years |
Finance leases | 5.7 years | | 6.7 years |
Weighted average discount rate | | | |
Operating leases | 3.99 | % | | 3.80 | % |
Finance leases | 4.05 | % | | 4.05 | % |
Maturities of lease liabilities were as follows: | | | | | | | | |
| As of December 31, 2023 |
(In thousands) | Operating Leases | Finance Leases |
2024 | $ | 35,623 | | $ | 1,481 | |
2025 | 29,043 | | 1,518 | |
2026 | 24,115 | | 1,556 | |
2027 | 18,438 | | 1,595 | |
2028 | 15,429 | | 1,635 | |
Thereafter | 49,883 | | 1,107 | |
Total lease payments | 172,531 | | 8,892 | |
Less: imputed interest | (23,291) | | (969) | |
Total | $ | 149,240 | | $ | 7,923 | |
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Forward Foreign Exchange and Currency Option Contracts
The Corporation has foreign currency exposure primarily in the United Kingdom, Canada, and 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, the Corporation entered into fixed-to-floating 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.
Effects on Consolidated Balance Sheets
As of December 31, 2017 and December 31, 2016, the fair values of the asset and liability derivative instruments are immaterial.
Effects on Consolidated Statements of Earnings
Fair value hedge
The location and amount of losses on the hedged fixed rate debt attributable to changes in the market interest rates and the offsetting gains on the related interest rate swaps for the years ended December 31, were as follows:
|
| | | | | | | | | | | | |
| | Gain/(Loss) on Swap |
(In thousands) | | 2017 | | 2016 | | 2015 |
Other income, net | | | | | | |
Interest rate swaps | | $ | — |
| | $ | — |
| | $ | 8,204 |
|
Hedged fixed rate debt | | $ | — |
| | $ | — |
| | $ | (8,204 | ) |
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) | | 2017 | | 2016 | | 2015 |
Forward exchange contracts: | | | | | | |
General and administrative expenses | | $ | (346 | ) | | $ | 11,510 |
| | $ | 11,042 |
|
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, 2017.2023. The fair valuevalues of our debt instruments are characterized as a Level 2 measurementmeasurements which are based on market basedmarket-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 as of December 31, 2017,2023, net of debt issuance costs, totaled $822$973 million compared to a carrying value, net of debt issuance costs, of $799$1,046 million. The estimated fair values of the Corporation’s fixed rate debt instruments as of December 31, 2016,2022, net of debt issuance costs, totaled $961$1,151 million compared to a carrying value, net of debt issuance costs, of $949$1,248 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.
10.12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following as of December 31: | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 |
Accrued compensation | | $ | 130,471 | | | $ | 87,835 | |
Accrued interest | | 13,150 | | | 16,412 | |
Accrued commissions | | 8,421 | | | 6,807 | |
Accrued insurance | | 5,988 | | | 6,418 | |
| | | | |
Income taxes payable | | 10,352 | | | 35,091 | |
Other | | 19,657 | | | 21,877 | |
Total accrued expenses | | $ | 188,039 | | | $ | 174,440 | |
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Accrued compensation | | $ | 108,268 |
| | $ | 85,970 |
|
Accrued commissions | | 6,296 |
| | 5,189 |
|
Accrued interest | | 9,894 |
| | 9,817 |
|
Accrued insurance | | 7,015 |
| | 7,521 |
|
Other | | 18,933 |
| | 21,742 |
|
Total accrued expenses | | $ | 150,406 |
| | $ | 130,239 |
|
Other current liabilities consist of the following as of December 31: | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 |
Short-term operating lease liabilities | | $ | 30,629 | | | $ | 29,910 | |
Warranty reserves | | 15,207 | | | 18,147 | |
WEC legal reserve | | — | | | 10,000 | |
Pension and other postretirement liabilities | | 4,981 | | | 5,013 | |
Other | | 19,983 | | | 19,709 | |
Total other current liabilities | | $ | 70,800 | | | $ | 82,779 | |
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Warranty reserves | | $ | 14,212 |
| | $ | 11,768 |
|
Additional amounts due to sellers on acquisitions | | 1,941 |
| | 1,985 |
|
Reserves on loss contracts | | 1,418 |
| | 1,662 |
|
Pension and other postretirement liabilities | | 5,060 |
| | 5,331 |
|
Other | | 13,179 |
| | 7,281 |
|
Total other current liabilities | | $ | 35,810 |
| | $ | 28,027 |
|
11.13. INCOME TAXES
2017 Tax Cuts and Jobs ActAct
On December 22, 2017,In conjunction with the enactment of the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law. The new legislation contains 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% effective January 1, 2018. The Corporation will generally be eligible for a 100% dividends received exemption on its foreign earnings starting in fiscal year 2018. However, it may also be subject to the Base Erosion Anti-Abuse Tax and Global Intangible Low Taxed Income (GILTI), both of which do not impact the Corporation until fiscal year 2018. The Corporation has not yet adopted an accounting policy related to the provision of deferred taxes for inside asset basis differences that could produce additional income subject to GILTI in the future. The Corporation anticipates that future issuance of U.S. Treasury department regulations and notices will clarify significant issues dealing with the application and computation of taxes due under the GILTI provisions.
In accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, the Corporation recognized the income tax effects of the Tax Act in its consolidated financial statements for the year ended December 31, 2017, resulting in a net increase in its provision for income taxes of approximately $10 million. The Corporation expects to finalize any provisional amounts associated with the Tax Act over the next 12 months based on an ongoing assessment of its tax positions and other relevant data.
The Corporation has summarized the most significant impacts from the Tax Act below:
Reduction of the U.S. Corporate Income Tax Rate
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 and a corresponding $13.4 million decrease in net deferred tax liabilities as of December 31, 2017. The Corporation is still analyzing certain aspects of the Tax Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
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. PriorThe finalized transition tax of $23.6 million was to assessing the impact ofbe paid over 8 years pursuant to the Tax Act, the Corporation had a deferredAct. The transition tax liability, which is expected to be paid in 2024 and 2025, was $7.8 million and $7.4 million as of $5.5 million for certain foreign subsidiaries whose earnings were not considered permanently reinvested. December 31, 2023 and December 31, 2022, respectively.
As of December 31, 2017,2023, the Corporation’s provisional income tax liability related to the transition tax was $23.7 million. The
transition tax will be paid over eight years, as permitted by the Tax Act, with the current balance of $1.9 million recorded in current income tax payable as of December 31, 2017. The determination of the transition tax requires further analysis regarding the amount and composition of the Corporation’s historical foreign earnings and tax pools. Given that all ofCorporation reassessed its assertion around whether foreign undistributed earnings areshould continue to no longer be considered permanently reinvested,reinvested. Consistent with the prior year findings, the Corporation alsoremained no longer permanently reinvested with the exception of one foreign subsidiary. The Corporation has recorded provisional income tax expense of $3.8 million for the year ended December 31, 2017a liability for withholding taxes that would arise upon ultimate distribution of all the Corporation’s foreign undistributed earnings. The
Except as noted above, the Corporation is consideredremains permanently reinvested to the extent of any outside basis differences in its foreign subsidiaries in excess of the amount of undistributed earnings.earnings, as it is not practicable to determine the provision impact, if any, due to the complexities associated with this calculation.
Earnings before income taxes for the years ended December 31 consist of: | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 | | 2021 |
Domestic | | $ | 300,200 | | | $ | 239,356 | | | $ | 266,140 | |
Foreign(1) | | 162,870 | | | 149,839 | | | 82,816 | |
| | $ | 463,070 | | | $ | 389,195 | | | $ | 348,956 | |
(1)The Corporation recognized a pre-tax loss of $5 million during the first quarter of 2022 pertaining to the sale of its industrial valve business in Germany, as well as pre-tax impairment losses of $19 million in 2021. |
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Domestic | | $ | 179,006 |
| | $ | 154,571 |
| | $ | 135,112 |
|
Foreign | | 120,613 |
| | 113,390 |
| | 140,082 |
|
| | $ | 299,619 |
| | $ | 267,961 |
| | $ | 275,194 |
|
The provision for income taxes for the years ended December 31 consists of: | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 | | 2021 |
Current: | | | | | | |
Federal | | $ | 58,629 | | | $ | 65,047 | | | $ | 56,804 | |
State | | 13,098 | | | 12,717 | | | 15,359 | |
Foreign | | 36,791 | | | 34,520 | | | 22,034 | |
Total current | | 108,518 | | | 112,284 | | | 94,197 | |
| | | | | | |
Deferred: | | | | | | |
Federal | | (180) | | | (11,413) | | | (7,167) | |
State | | 507 | | | (4,442) | | | (477) | |
Foreign | | (284) | | | (1,582) | | | (426) | |
Total deferred | | 43 | | | (17,437) | | | (8,070) | |
Provision for income taxes | | $ | 108,561 | | | $ | 94,847 | | | $ | 86,127 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Current: | | | | | | |
Federal | | $ | 54,963 |
| | $ | 45,523 |
| | $ | (6,741 | ) |
State | | 2,648 |
| | 8,002 |
| | 6,175 |
|
Foreign | | 23,162 |
| | 20,861 |
| | 27,134 |
|
Total current | | 80,773 |
| | 74,386 |
| | 26,568 |
|
| | | | | | |
Deferred: | | | | | | |
Federal | | 2,595 |
| | 4,267 |
| | 49,060 |
|
State | | 4,282 |
| | 73 |
| | 7,390 |
|
Foreign | | (2,922 | ) | | (147 | ) | | (72 | ) |
Total deferred | | 3,955 |
| | 4,193 |
| | 56,378 |
|
Provision for income taxes | | $ | 84,728 |
| | $ | 78,579 |
| | $ | 82,946 |
|
The effective tax rate varies from the U.S. federal statutory tax rate for the years ended December 31, principally: | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2022 | | 2021 |
U.S. federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Add (deduct): | | | | | | |
State and local taxes, net of federal benefit | | 2.3 | | | 1.7 | | | 3.7 | |
Foreign earnings(1) | | 1.3 | | | 0.7 | | | 0.2 | |
Foreign loss on sale | | — | | | 0.2 | | | — | |
Foreign asset impairment (held for sale) | | — | | | — | | | 1.6 | |
Valuation allowance for foreign assets held for sale | | — | | | — | | | 0.2 | |
R&D tax credits | | (1.1) | | | (1.1) | | | (1.3) | |
Foreign-derived intangible income | | (1.2) | | | (1.2) | | | (1.4) | |
All other, net | | 1.1 | | | 3.1 | | | 0.7 | |
Effective tax rate | | 23.4 | % | | 24.4 | % | | 24.7 | % |
|
| | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
U.S. federal statutory tax rate | | 35.0 | % | | 35.0 | % | | 35.0 | % |
Add (deduct): | | | | | | |
State and local taxes, net of federal benefit | | 1.8 |
| | 1.1 |
| | 4.3 |
|
R&D tax credits | | (1.3 | ) | | (0.9 | ) | | (1.3 | ) |
Foreign earnings (1) | | (6.0 | ) | | (5.8 | ) | | (6.2 | ) |
Stock compensation - excess tax benefits | | (2.6 | ) | | — |
| | — |
|
Impacts related to the Tax Act | | 3.4 |
| | — |
| | — |
|
All other, net | | (2.0 | ) | | (0.1 | ) | | (1.7 | ) |
Effective tax rate | | 28.3 | % | | 29.3 | % | | 30.1 | % |
(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.allowances, excluding items related to foreign assets that were classified as held for sale in 2021.
The components of the Corporation’s deferred tax assets and liabilities as of December 31 are as follows: | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 |
Deferred tax assets: | | | | |
Capitalized R&D expenses | | $ | 39,463 | | | $ | 23,785 | |
Operating lease liabilities | | 32,041 | | | 34,977 | |
Inventories, net | | 24,282 | | | 21,992 | |
Incentive compensation | | 9,314 | | | 8,531 | |
Environmental reserves | | 8,949 | | | 8,677 | |
Net operating loss | | 8,348 | | | 9,096 | |
Legal reserves | | 287 | | | 2,864 | |
Other | | 30,130 | | | 40,965 | |
Total deferred tax assets | | 152,814 | | | 150,887 | |
Deferred tax liabilities: | | | | |
Goodwill amortization | | 110,543 | | | 103,174 | |
Other intangible amortization | | 53,551 | | | 59,966 | |
Pension and other postretirement assets | | 37,870 | | | 29,053 | |
Operating lease right-of-use assets, net | | 30,327 | | | 32,651 | |
Withholding taxes | | 16,120 | | | 13,200 | |
Depreciation | | 15,339 | | | 15,433 | |
Other | | 8,160 | | | 7,256 | |
Total deferred tax liabilities | | 271,910 | | | 260,733 | |
Valuation allowance | | 4,892 | | | 5,664 | |
Net deferred tax liabilities | | $ | 123,988 | | | $ | 115,510 | |
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Deferred tax assets: | | | | |
Pension plans | | $ | 18,903 |
| | $ | 45,568 |
|
Environmental reserves | | 7,109 |
| | 9,871 |
|
Inventories | | 15,116 |
| | 21,758 |
|
Postretirement/postemployment benefits | | 8,241 |
| | 13,542 |
|
Incentive compensation | | 7,721 |
| | 9,425 |
|
Net operating loss | | 10,908 |
| | 10,345 |
|
Capital loss carryover | | 7,047 |
| | 11,352 |
|
Other | | 28,775 |
| | 39,977 |
|
Total deferred tax assets | | 103,820 |
| | 161,838 |
|
Deferred tax liabilities: | | | | |
Depreciation | | 19,586 |
| | 25,963 |
|
Goodwill amortization | | 67,779 |
| | 97,667 |
|
Other intangible amortization | | 38,252 |
| | 51,712 |
|
Other | | 12,636 |
| | 16,225 |
|
Total deferred tax liabilities | | 138,253 |
| | 191,567 |
|
Valuation allowance | | 12,322 |
| | 17,776 |
|
Net deferred tax liabilities | | $ | 46,755 |
| | $ | 47,505 |
|
Deferred tax assets and liabilities are reflected on the Corporation’s consolidated balance sheetConsolidated Balance Sheets as of December 31 as follows: | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 |
Net noncurrent deferred tax assets(1) | | $ | 8,331 | | | $ | 7,491 | |
Net noncurrent deferred tax liabilities | | 132,319 | | | 123,001 | |
Net deferred tax liabilities | | $ | 123,988 | | | $ | 115,510 | |
(1)Amount is classified within the "Other Assets" caption in the Corporation's Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022, respectively.
|
| | | | | | | | |
(In thousands) | | 2017 | | 2016 |
Net noncurrent deferred tax assets | | 2,605 |
| | 2,217 |
|
Net noncurrent deferred tax liabilities | | 49,360 |
| | 49,722 |
|
Net deferred tax liabilities | | $ | 46,755 |
| | $ | 47,505 |
|
The Corporation has income tax net operating loss carryforwards related to international operations of $24.0$20.1 million, of which $17.9$18.4 million have an indefinite life and $6.1$1.7 million which expire through 2023.2029. The Corporation has federal and state income tax net loss carryforwards of $104.1$47.9 million, all of which $73.0 million are net operating losses whichthat expire through 2037 and $31.1 million are capital loss carryforwards which expire through 2020.2041. The Corporation has recorded a deferred tax asset of $18$8.3 million, reflecting the benefit of the loss carryforwards.carryforwards related to international and domestic operations.
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 pieceAs of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2017 in certain of2023 the Corporation’s foreign locations. Such objective evidence limits the ability to consider other subjective evidence such as projections for future growth. The Corporation provisionally decreased its valuation allowance by $5.5$0.8 million to $12.3$4.9 million, as of December 31, 2017, in order to measure only the portion of the deferred tax assetassets that more likely than not will be realized. OfAs of December 31, 2023, $2.0 million of the $5.5total valuation allowance relates to foreign tax credits arising from branch operations that the Corporation believes it will be unable to utilize. The Corporation recorded a tax benefit of $1.4 million decrease in the current year as compared to a provision of $2.7 million in prior year related to the valuation allowance $4.3 million was due to the reduction of the U.S. corporate incomeon branch foreign tax rate from 35 percent to 21 percent.credits. 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 $92.1$136.4 million, $54.5$61.1 million, and $4.9$107.1 million were made in 2017, 2016,2023, 2022, and 2015,2021, respectively.
The Corporation has recognizedrecorded a liability in Other liabilities for interest of $2.6$4.2 million and penalties of $1.6$2.5 million as of December 31, 2017.2023.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Balance as of January 1, | | $ | 11,454 |
| | $ | 12,414 |
| | $ | 11,560 |
|
Additions for tax positions of prior periods | | 1,069 |
| | 32 |
| | 359 |
|
Reductions for tax positions of prior periods | | (194 | ) | | (1,679 | ) | | — |
|
Additions for tax positions related to the current year | | 1,273 |
| | 789 |
| | 2,026 |
|
Settlements | | (428 | ) | | (102 | ) | | (1,414 | ) |
Foreign currency translation | | — |
| | — |
| | (117 | ) |
Balance as of December 31, | | $ | 13,174 |
| | $ | 11,454 |
| | $ | 12,414 |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 | | 2021 |
Balance as of January 1, | | $ | 17,371 | | | $ | 17,018 | | | $ | 15,585 | |
Additions for tax positions of prior periods | | 2,387 | | | 3,004 | | | 2,877 | |
Reductions for tax positions of prior periods | | (2,419) | | | (1,732) | | | (1,861) | |
Additions for tax positions related to the current year | | 1,744 | | | 1,068 | | | 655 | |
Settlements | | (1,195) | | | (1,987) | | | (238) | |
Balance as of December 31, | | $ | 17,888 | | | $ | 17,371 | | | $ | 17,018 | |
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, 2017:
2023: | | | | | | | | | | | |
| | | |
United States (Federal) | 20142020 | - | present |
United States (Various states) | 20062012 | - | present |
United Kingdom | 20102022 | - | present |
Canada | 20112020 | - | 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 as of December 31, 2017, 2016,2023, 2022, and 20152021 is $10.1$15.3 million, $7.7$15.1 million, and $8.3$14.1 million, respectively, which if recognized, would favorably affectimpact the effective income tax rate.
12.14. DEBT
Debt consists of the following as of December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2023 | | 2022 | | 2022 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
3.70% Senior notes due 2023 | | $ | — | | | $ | — | | | $ | 202,500 | | | $ | 202,082 | |
3.85% Senior notes due 2025 | | 90,000 | | | 88,243 | | | 90,000 | | | 87,298 | |
4.24% Senior notes due 2026 | | 200,000 | | | 195,556 | | | 200,000 | | | 191,760 | |
4.05% Senior notes due 2028 | | 67,500 | | | 64,801 | | | 67,500 | | | 63,300 | |
4.11% Senior notes due 2028 | | 90,000 | | | 85,999 | | | 90,000 | | | 83,955 | |
3.10% Senior notes due 2030 | | 150,000 | | | 131,942 | | | 150,000 | | | 127,429 | |
3.20% Senior notes due 2032 | | 150,000 | | | 127,649 | | | 150,000 | | | 123,656 | |
4.49% Senior notes due 2032 | | 200,000 | | | 187,584 | | | 200,000 | | | 183,007 | |
4.64% Senior notes due 2034 | | 100,000 | | | 92,961 | | | 100,000 | | | 90,341 | |
Total debt | | 1,047,500 | | | 974,735 | | | 1,250,000 | | | 1,152,828 | |
Debt issuance costs, net | | (1,541) | | | (1,541) | | | (1,631) | | | (1,631) | |
Unamortized interest rate swap proceeds (1) | | 4,403 | | | 4,403 | | | 6,031 | | | 6,031 | |
Total debt, net | | 1,050,362 | | | 977,597 | | | 1,254,400 | | | 1,157,228 | |
Less: current portion of long-term debt | | — | | | — | | | 202,500 | | | 202,082 | |
Total long-term debt | | $ | 1,050,362 | | | $ | 977,597 | | | $ | 1,051,900 | | | $ | 955,146 | |
(1) Represents the gain from termination of the Corporation's interest rate swap agreements on its 3.85% and 4.24% Senior Notes in February 2016, which will be amortized into interest expense over the remaining terms of the respective notes. |
| | | | | | | | |
(In thousands) | | 2017 | | 2017 | | 2016 | | 2016 |
| | Carrying Value | | Estimated Fair Value | | Carrying Value | | Estimated Fair Value |
5.51% Senior notes due 2017 | | — | | — | | 150,000 | | 154,509 |
3.84% Senior notes due 2021 | | 100,000 | | 102,472 | | 100,000 | | 102,463 |
3.70% Senior notes due 2023 | | 225,000 | | 228,783 | | 225,000 | | 226,946 |
3.85% Senior notes due 2025 | | 100,000 | | 102,164 | | 100,000 | | 100,338 |
4.24% Senior notes due 2026 | | 200,000 | | 208,873 | | 200,000 | | 203,592 |
4.05% Senior notes due 2028 | | 75,000 | | 76,997 | | 75,000 | | 74,630 |
4.11% Senior notes due 2028 | | 100,000 | | 103,226 | | 100,000 | | 99,876 |
Other debt | | 150 | | 150 | | 668 | | 668 |
Total debt | | 800,150 | | 822,665 | | 950,668 | | 963,022 |
Debt issuance costs, net | | (831) | | (831) | | (984) | | (984) |
Unamortized interest rate swap proceeds | | 14,820 | | 14,820 | | 16,614 | | 16,614 |
Total debt, net | | 814,139 | | 836,654 | | 966,298 | | 978,652 |
Less: current portion of long-term debt and short-term debt | | 150 | | 150 | | 150,668 | | 150,668 |
Total long-term debt | | $813,989 | | $836,504 | | $815,630 | | $827,984 |
The Corporation did not have any borrowings against the Revolving Credit Agreement in 2017 and 2016, respectively.
TheCorporation's total debt outstanding had fixed and variablea weighted-average interest rates averagingrate of 3.9% in both 20172023 and 2016, respectively.3.4% in 2022.
Aggregate maturities of debt are as follows:
|
| | | |
(In thousands) | |
2018 | $ | 150 |
|
2019 | — |
|
2020 | — |
|
2021 | 100,000 |
|
2022 | — |
|
Thereafter | 700,000 |
|
Total | $ | 800,150 |
|
| | | | | |
(In thousands) | |
2024 | $ | — | |
2025 | 90,000 | |
2026 | 200,000 | |
2027 | — | |
2028 | 157,500 | |
Thereafter | 600,000 | |
Total | $ | 1,047,500 | |
Interest payments of $39$52 million, $38$42 million, and $33$40 million were made in 2017, 2016,2023, 2022, and 2015,2021, respectively.
Revolving Credit Agreement
In August 2012,May 2022, the Corporation refinancedterminated its existing credit facility by enteringagreement, which was set to expire in October 2023, and entered into a Third Amended and Restated Credit Agreementnew credit agreement (Credit Agreement) with a syndicate of financial institutions, led by Bankinstitutions. The Credit Agreement, which is set to expire in May 2027, increased the size of America N.A., Wells Fargo, N.A,the Corporation’s revolving credit facility to $750 million, and JP Morgan Chase Bank, N.A.expanded the accordion feature to $250 million. The proceeds available underCorporation plans to use the Credit Agreement are to be used for working capital,general corporate purposes, which may include the funding of possible future acquisitions or supporting 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.initiatives. As of December 31, 2017,2023, the Corporation had $21$20 million in letters of credit supported by the credit facilityCredit Agreement and no outstanding borrowings outstanding under the credit facility.Credit Agreement. The unused credit available under the credit facilityCredit Agreement as of December 31, 20172023 was $479$730 million, which the Corporation had the ability to borrow in full without violating its 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% (65% for four consecutive quarters following an acquisition greater than $100 million). 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) Liborthe Secured Overnight Financing Rate (SOFR) or (ii) a base rate of the highest of (a) the federal funds ratePrime Rate in effect on such day, (b) the NYFRB Rate in effect on such day plus 0.5%, (b) BofA’s announced prime rate, or½ of 1% and (c) the Eurocurrency rate plus 1%, plus a margin.Adjusted Daily Term SOFR Rate. 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, the Corporation paid customary transaction fees that have been deferred and are being amortized over the term of the Credit Agreement.
Senior Notes
On October 27, 2022, the Corporation issued $300 million of Senior Notes (the 2022 Notes), consisting of $200 million of 4.49% notes that mature on October 27, 2032 and $100 million of 4.64% notes that mature on October 27, 2034. The 2022 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 2022 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with the issuance of the 2022 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of the 2022 Notes. Under the terms of the Note Purchase Agreements, the Corporation is required to maintain certain financial ratios, the most restrictive of which are a debt to capitalization limit of 60% (65% for four consecutive quarters following an acquisition greater than $100 million) and an interest coverage ratio not to be less than 3 to 1. 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. The 2022 Notes also contain a cross default provision with respect to the Corporation’s other senior indebtedness.
On August 13, 2020, the Corporation issued $300 million of Senior Notes (the 2020 Notes), consisting of $150 million of 3.10% Senior Notes that mature on August 13, 2030 and $150 million of 3.20% Senior Notes that mature on August 13, 2032. The 2020 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 2020 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with the issuance of the 2020 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of the 2020 Notes. Under the terms of the Note Purchase Agreements, as amended, the Corporation is required to maintain certain financial ratios, the most restrictive of which are a debt to capitalization limit of 60% (65% for four consecutive quarters following an acquisition greater than $100 million) and an interest coverage ratio not to be less than 3 to 1. 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. The 2020 Notes also contain a cross default provision with respect to the Corporation’s other senior indebtedness.
On February 26, 2013, the Corporation issued $500 million of Senior Notes (the “2013 Notes”)2013 Notes). The 2013 Notes consistconsisted of $225 million of 3.70% Senior Notes that maturematured 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, as amended, the Corporation is required to maintain certain financial ratios, the most restrictive of which isare a debt to capitalization limit of 60%. (65% for four consecutive quarters following an acquisition greater than $100 million) and an interest coverage ratio of less than 3 to 1. 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, 2017, the Corporation had the ability to borrow additional debt of $1.4 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”)2011 Notes). The 2011 Notes consist of $100 million of 3.84% Senior Notes that maturematured 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 ourthe 2011 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of ourthe 2011 Notes. Under the terms of the Note Purchase Agreement, as amended, the Corporation is required to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. (65% for four consecutive quarters following an acquisition greater than $100
million) and an interest coverage ratio of less than 3 to 1. 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. The 2011 Notes also contain a cross default provision with our other senior indebtedness.
On
As of December 1, 2005,31, 2023, the Corporation issued $150 millionhad the ability to borrow additional debt of 5.51% Senior Notes (the “2005 Notes”). The 2005 Notes, which matured on December 1, 2017 and were repaid in full, were senior unsecured obligations and equal in right of payment$2.3 billion without violating our debt to the Corporation’s existing senior indebtedness. In connection with the Notes, the Corporation paid customary fees that were deferred and amortized over the terms of the Notes.capitalization covenant.
13.15. 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, 2017, 2016,2023, 2022 and 2015,2021, there were no options outstanding that were considered anti-dilutive.anti-dilutive equity-based awards excluded from the calculation of diluted earnings per share.
Earnings per share calculations for the years ended December 31, 2017, 2016,2023, 2022, and 2015, are2021, were as follows: | | | | | | | | | | | | | | | | | | | | |
(In thousands, except per share data) | | Net Earnings | | Weighted- Average Shares Outstanding | | Earnings per Share |
2023 | | | | | | |
Basic earnings per share | | $ | 354,509 | | | 38,283 | | | $ | 9.26 | |
Dilutive effect of deferred stock compensation | | | | 246 | | | |
Diluted earnings per share | | $ | 354,509 | | | 38,529 | | | $ | 9.20 | |
2022 | | | | | | |
Basic earnings per share | | $ | 294,348 | | | 38,386 | | | $ | 7.67 | |
Dilutive effect of deferred stock compensation | | | | 263 | | | |
Diluted earnings per share | | $ | 294,348 | | | 38,649 | | | $ | 7.62 | |
2021 | | | | | | |
Basic earnings per share | | $ | 262,829 | | | 40,417 | | | $ | 6.50 | |
Dilutive effect of deferred stock compensation | | | | 185 | | | |
Diluted earnings per share | | $ | 262,829 | | | 40,602 | | | $ | 6.47 | |
|
| | | | | | | | | | | |
(In thousands, except per share data) | | Earnings from continuing operations | | Weighted- Average Shares Outstanding | | Earnings per share from continuing operations |
2017 | | | | | | |
Basic earnings per share from continuing operations | | $ | 214,891 |
| | 44,182 |
| | $ | 4.86 |
|
Dilutive effect of stock options and deferred stock compensation | | | | 579 |
| | |
Diluted earnings per share from continuing operations | | $ | 214,891 |
| | 44,761 |
| | $ | 4.80 |
|
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 |
|
14.16. SHARE-BASED COMPENSATION PLANS
In May 2014, the Corporation adopted the Curtiss WrightCurtiss-Wright 2014 Omnibus Incentive Plan (the “20142014 Omnibus Plan”)Plan). The plan replaced the Corporation's existing 2005 Long Term Incentive Plan and the 2005 Stock Plan for Non-Employee Directors (collectively the “20052005 Stock Plans”)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 are 2,400,000 less one share of common stock for every one share of common stock granted under any prior 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 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, performance share units (PSU), or cash basedcash-based performance units (PU).
During 2017,2023, the Corporation granted share-based awards in the form of RSUs PSUs, and restricted stock.PSUs. 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 2017, 2016,2023, 2022, and 20152021 is as follows: | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 | | 2021 |
Employee Stock Purchase Plan | | $ | 1,869 | | | $ | 1,764 | | | $ | 1,710 | |
Performance Share Units | | 5,109 | | | 5,069 | | | 4,850 | |
Restricted Share Units | | 8,032 | | | 6,725 | | | 5,661 | |
Other share-based payments | | 1,793 | | | 1,826 | | | 1,229 | |
Total share-based compensation expense before income taxes | | $ | 16,803 | | | $ | 15,384 | | | $ | 13,450 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Employee Stock Purchase Plan | | 1,207 |
| | 1,184 |
| | 1,279 |
|
Performance Share Units | | 4,340 |
| | 3,910 |
| | 4,349 |
|
Restricted Share Units | | 4,931 |
| | 3,426 |
| | 3,015 |
|
Other share-based payments | | 1,094 |
| | 958 |
| | 830 |
|
Total share-based compensation expense before income taxes | | $ | 11,572 |
| | $ | 9,478 |
| | $ | 9,473 |
|
Other share-based grants include service-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 2017, 2016,2023, 2022, or 2015.2021.
The following table summarizes the cash received from share-based awards on share-based compensation: | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | 2023 | | 2022 | | 2021 |
Cash received from share-based awards | | $ | 10,584 | | | $ | 9,997 | | | $ | 9,705 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Cash received from share-based awards | | $ | 14,179 |
| | $ | 22,300 |
| | $ | 28,706 |
|
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 as of December 31, 2016 | | 443 |
| | $ | 31.91 |
| | | | |
Exercised | | (179 | ) | | 34.24 |
| | | | |
Outstanding as of December 31, 2017 | 264 |
| | $ | 30.30 |
| | 2.2 | | $ | 24,093 |
|
Exercisable as of December 31, 2017 | 264 |
| | $ | 30.30 |
| | 2.2 | | $ | 24,093 |
|
The total intrinsic value of stock options exercised during 2017, 2016, and 2015 was $30.2 million, $43.2 million, and $36.8 million, respectively.
Performance Share Units
The Corporation has granted performance share units to certain employees, whose three year cliff vesting is contingent upon the Corporation's total shareholder return over the three-year term beginning at the start of the awards comparedfiscal year following the date of grant. Performance is measured by determining the percentile rank of the total shareholder return of the Corporation's common stock in relation to the total shareholder return of a self-constructed peer group.group (for awards granted in 2022 and 2023) or compared to the S&P Midcap 400 Index (for awards granted in 2021). 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 common 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.
Restricted Share Units
Restricted share units cliff vest at the end of the awards’ vesting period. The restricted share units are service-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 20172023 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, 2022 | 105 | | | $ | 143.69 | | | 212 | | | $ | 114.15 | |
Granted | | 36 | | | 172.89 | | | 58 | | | 174.33 | |
Vested | | (57) | | | 103.86 | | | (78) | | | 83.43 | |
Forfeited | | — | | | — | | | (6) | | | 146.84 | |
Nonvested as of December 31, 2023 | 84 | | | $ | 183.09 | | | 186 | | | $ | 144.59 | |
Expected to vest as of December 31, 2023 | 84 | | | $ | 183.09 | | | 186 | | | $ | 144.59 | |
|
| | | | | | | | | | | | | | |
| | 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, 2016 | 204 |
| | $ | 71.28 |
| | 204 |
| | $ | 74.38 |
|
Granted | | 68 |
| | 62.91 |
| | 1 |
| | 98.34 |
|
Vested | | (137 | ) | | 62.91 |
| | (34 | ) | | 70.36 |
|
Forfeited | | — |
| | — |
| | (2 | ) | | 85.47 |
|
Nonvested as of December 31, 2017 | 135 |
| | $ | 75.51 |
| | 169 |
| | $ | 75.19 |
|
Expected to vest as of December 31, 2017 | 135 |
| | $ | 75.51 |
| | 169 |
| | $ | 75.19 |
|
Nonvested PSUs had an intrinsic value of $16.5$18.7 million and unrecognized compensation costs of $4.7$5.1 million as of December 31, 2017.2023. Nonvested RSUs had an intrinsic value of $20.6$41.4 million and unrecognized compensation costs of $5.9$12.1 million as of December 31, 2017.2023. Unrecognized compensation costs related to PSUs and RSUs are both expected to be recognized over a period of 1.7 years.years and 2.1 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.
15.17. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation maintainsten separate and distinct pension and other post-retirement defined benefit plans, consisting of three domestic plans and sevensix 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 one defined benefit pension plan each in the United Kingdom, France, Canada, and Switzerland, two in Germany, and two in Mexico.
Domestic Plans
Qualified Pension Plan
The Corporation maintains a defined benefit pension plan (the “CWCW Pension Plan”)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”final average pay 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 is based on a career average pay benefit and 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.
As of December 31, 20172023, and 2016,2022, the Corporation had a noncurrent pension liabilityasset of $45.1$244.1 million and $40.4$209.9 million,, respectively. This increaseThe change in balance was primarily driven bydue to a decrease in the discount rate as of December 31, 2017, partially offset by favorable asset experiencehigher return on plan assets during 2017.
Due to discretionary pension contributions of $50 million and $145 million to the Curtiss-Wright Pension Plan in February 2018 and January 2015, respectively, the Corporation does not expect to make any required contributions through 2022.2023.
Nonqualified Pension Plan
The Corporation also maintains a non-qualified restoration plan (the “CWCW Restoration Plan”)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 $48.7$44.8 million and $40.4$40.4 million as of December 31, 20172023 and 2016,2022, respectively. The Corporation’s contributions to the CW Restoration Plan are expected to be $3.0$3.2 million in 2018.2024.
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 $20.0 million as of both December 31, 20172023 and 2016 of $25.0 million and $24.4 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. As of December 31, 2017 and 2016, the discounted receivable included in other assets was $0.1 million and $0.4 million,2022, respectively. The Corporation expects to contribute $1.7$1.7 million to the plan during 2018.2024. Activity associated with the postretirement benefit liability for the years ended December 31, 2023 and 2022 was immaterial.
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, 20172023 and 2016,2022, the total projected benefit obligation related to all foreign plans was $97.4$80.8 million and $91.0$69.6 million,, respectively. As of December 31, 20172023 and 2016,December 31, 2022, the Corporation had a net pension asset of $1.5$10.7 million and an accrued pension liability of $3.3$9.8 million,, respectively. The Corporation's contributions to the foreign plans are expected to be $2.3$1.2 million in 2018.2024.
Components of net periodic benefit expense
The net pension and net postretirement benefit costs (income) consisted of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
(In thousands) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 |
Service cost | | $ | 25,093 |
| | $ | 25,100 |
| | $ | 26,873 |
| | $ | 435 |
| | $ | 338 |
| | $ | 286 |
|
Interest cost | | 25,895 |
| | 30,495 |
| | 30,050 |
| | 762 |
| | 996 |
| | 842 |
|
Expected return on plan assets | | (53,552 | ) | | (54,101 | ) | | (54,629 | ) | | — |
| | — |
| | — |
|
Amortization of prior service cost | | (100 | ) | | (46 | ) | | 618 |
| | (656 | ) | | (657 | ) | | (657 | ) |
Recognized net actuarial loss/(gain) | | 12,925 |
| | 12,029 |
| | 16,890 |
| | (223 | ) | | (296 | ) | | (551 | ) |
Cost of settlements/curtailments | | 327 |
| | — |
| | 7,461 |
| | — |
| | — |
| | — |
|
Net periodic benefit cost (income) | | $ | 10,588 |
| | $ | 13,477 |
| | $ | 27,263 |
| | $ | 318 |
| | $ | 381 |
| | $ | (80 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits |
(In thousands) | | 2023 | | 2022 | | 2021 |
Service cost | | $ | 16,224 | | | $ | 23,217 | | | $ | 26,735 | |
Interest cost | | 34,085 | | | 20,923 | | | 17,419 | |
Expected return on plan assets | | (63,013) | | | (54,855) | | | (60,286) | |
Amortization of prior service cost | | (106) | | | (318) | | | (251) | |
Recognized net actuarial loss | | 139 | | | 17,198 | | | 28,905 | |
Cost of settlements/curtailments | | — | | | 4,499 | | | 3,310 | |
Special termination benefits | | — | | | — | | | 52 | |
Net periodic benefit cost | | $ | (12,671) | | | $ | 10,664 | | | $ | 15,884 | |
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 2017, there were2022 and 2021, the Company recognized settlement charges in both the U.K. and Switzerland. In 2015, the settlement charge was primarily a result ofrelated to the retirement of the Corporation’s former Chairman and his election to receive the nonqualified portion of his pension benefit as a single lump sum payout.executives.
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, 20172023 measurement date. |
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Change in benefit obligation: | | | | | | | | |
Beginning of year | | $ | 798,605 |
| | $ | 774,710 |
| | $ | 24,436 |
| | $ | 21,980 |
|
Service cost | | 25,093 |
| | 25,100 |
| | 435 |
| | 338 |
|
Interest cost | | 25,895 |
| | 30,495 |
| | 762 |
| | 996 |
|
Plan participants’ contributions | | 1,655 |
| | 1,897 |
| | 253 |
| | 266 |
|
Amendments | | — |
| | — |
| | — |
| | — |
|
Actuarial loss | | 56,727 |
| | 19,640 |
| | 2,056 |
| | 3,372 |
|
Benefits paid | | (45,384 | ) | | (41,115 | ) | | (2,907 | ) | | (2,516 | ) |
Actual expenses | | (1,301 | ) | | (1,206 | ) | | — |
| | — |
|
Currency translation adjustments | | 7,597 |
| | (10,916 | ) | | — |
| | — |
|
End of year | | $ | 868,887 |
| | $ | 798,605 |
| | $ | 25,035 |
| | $ | 24,436 |
|
| | | | | | | | | | | | | | |
| | Pension Benefits |
(In thousands) | | 2023 | | 2022 |
Change in benefit obligation: | | | | |
Beginning of year | | $ | 733,434 | | | $ | 979,070 | |
Service cost | | 16,224 | | | 23,217 | |
Interest cost | | 34,085 | | | 20,923 | |
Plan participants’ contributions | | 1,200 | | | 1,229 | |
Actuarial (gain) loss | | 17,312 | | | (201,592) | |
Benefits paid | | (52,228) | | | (75,770) | |
Actual expenses | | (1,997) | | | (1,681) | |
Acquisitions | | — | | | 496 | |
Divestitures | | — | | | (4,341) | |
Currency translation adjustments | | 5,340 | | | (8,117) | |
End of year | | $ | 753,370 | | | $ | 733,434 | |
| | Change in plan assets: | | | | | | | | |
Beginning of year | |
Beginning of year | |
Beginning of year | | $ | 714,608 |
| | $ | 692,074 |
| | $ | — |
| | $ | — |
|
Actual return on plan assets | | 94,960 |
| | 65,872 |
| | — |
| | — |
|
Employer contribution | | 4,561 |
| | 8,210 |
| | 2,654 |
| | 2,250 |
|
Plan participants’ contributions | | 1,655 |
| | 1,897 |
| | 253 |
| | 266 |
|
Benefits paid | | (45,384 | ) | | (41,115 | ) | | (2,907 | ) | | (2,516 | ) |
Actual Expenses | | (1,301 | ) | | (1,206 | ) | | — |
| | — |
|
Actual expenses | |
Currency translation adjustments | | 7,383 |
| | (11,124 | ) | | — |
| | — |
|
End of year | | $ | 776,482 |
| | $ | 714,608 |
| | $ | — |
| | $ | — |
|
| | | | | | | | |
Funded status | | $ | (92,405 | ) | | $ | (83,997 | ) | | $ | (25,035 | ) | | $ | (24,436 | ) |
Funded status | |
Funded status | |
| | | | | | | | | | | | | | |
| | Pension Benefits |
(In thousands) | | 2023 | | 2022 |
Amounts recognized on the balance sheet | | | | |
Noncurrent assets | | $ | 261,869 | | | $ | 222,627 | |
Current liabilities | | (3,280) | | | (3,272) | |
Noncurrent liabilities | | (48,595) | | | (40,087) | |
Total | | $ | 209,994 | | | $ | 179,268 | |
Amounts recognized in accumulated other comprehensive income (AOCI) | | | | |
Net actuarial loss | | $ | 121,557 | | | $ | 133,813 | |
Prior service cost | | (163) | | | (239) | |
Total | | $ | 121,394 | | | $ | 133,574 | |
Information for plans with an accumulated benefit obligation in excess of plan assets: | | | | |
Projected benefit obligation | | $ | 77,189 | | | $ | 64,669 | |
Accumulated benefit obligation | | 68,257 | | | 61,368 | |
Fair value of plan assets | | 25,314 | | | 21,311 | |
|
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Amounts recognized on the balance sheet | | | | | | | | |
Noncurrent assets | | $ | 8,663 |
| | $ | 4,049 |
| | $ | — |
| | $ | — |
|
Current liabilities | | (3,374 | ) | | (3,498 | ) | | (1,686 | ) | | (1,833 | ) |
Noncurrent liabilities | | (97,694 | ) | | (84,548 | ) | | (23,349 | ) | | (22,603 | ) |
Total | | $ | (92,405 | ) | | $ | (83,997 | ) | | $ | (25,035 | ) | | $ | (24,436 | ) |
Amounts recognized in accumulated other comprehensive income (AOCI) | | | | | | | | |
Net actuarial loss (gain) | | $ | 201,390 |
| | $ | 198,630 |
| | $ | (2,899 | ) | | $ | (5,178 | ) |
Prior service cost | | (1,461 | ) | | (1,580 | ) | | (2,718 | ) | | (3,373 | ) |
Total | | $ | 199,929 |
| | $ | 197,050 |
| | $ | (5,617 | ) | | $ | (8,551 | ) |
Amounts in AOCI expected to be recognized in net periodic cost in the coming year: | | | | | | | | |
Loss (gain) recognition | | $ | 15,615 |
| | $ | 11,793 |
| | $ | (29 | ) | | $ | (203 | ) |
Prior service cost recognition | | $ | (250 | ) | | $ | (105 | ) | | $ | (657 | ) | | $ | (657 | ) |
Accumulated benefit obligation | | $ | 834,745 |
| | $ | 767,461 |
| | N/A |
| | N/A |
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | | |
Projected benefit obligation | | $ | 785,039 |
| | $ | 733,426 |
| | N/A |
| | N/A |
|
Accumulated benefit obligation | | 752,371 |
| | 702,282 |
| | N/A |
| | N/A |
|
Fair value of plan assets | | 684,756 |
| | 645,380 |
| | N/A |
| | N/A |
|
Plan Assumptions | | | | | | | | | | | | | | |
| | Pension Benefits |
| | 2023 | | 2022 |
Weighted-average assumptions in determination of benefit obligation: | | | | |
Discount rate | | 4.71 | % | | 4.95 | % |
Rate of compensation increase | | 3.33 | % | | 3.34 | % |
Health care cost trends: | | | | |
Rate assumed for subsequent year | | N/A | | N/A |
Ultimate rate reached in 2032 | | N/A | | N/A |
Weighted-average assumptions in determination of net periodic benefit cost: | | | | |
Discount rate | | 4.95 | % | | 2.72 | % |
Expected return on plan assets | | 6.41 | % | | 5.47 | % |
Rate of compensation increase | | 3.34 | % | | 3.40 | % |
Health care cost trends: | | | | |
Rate assumed for subsequent year | | N/A | | N/A |
Ultimate rate reached in 2032 | | N/A | | N/A |
|
| | | | | | | | | | | | |
| | Pension Benefits | | Postretirement Benefits |
| | 2017 | | 2016 | | 2017 | | 2016 |
Weighted-average assumptions in determination of benefit obligation: | | | | | | | | |
Discount rate | | 3.46 | % | | 3.88 | % | | 3.54 | % | | 4.00 | % |
Rate of compensation increase | | 3.55 | % | | 3.35 | % | | N/A |
| | N/A |
|
Health care cost trends: | | | | | | | | |
Rate assumed for subsequent year | | N/A |
| | N/A |
| | 8.30 | % | | 8.25 | % |
Ultimate rate reached in 2026 | | N/A |
| | N/A |
| | 4.50 | % | | 4.50 | % |
Weighted-average assumptions in determination of net periodic benefit cost: | | | | | | | | |
Discount rate | | 3.93 | % | | 4.12 | % | | 4.02 | % | | 4.25 | % |
Expected return on plan assets | | 7.47 | % | | 7.81 | % | | N/A |
| | N/A |
|
Rate of compensation increase | | 3.54 | % | | 3.35 | % | | N/A |
| | N/A |
|
Health care cost trends: | | | | | | | | |
Rate assumed for subsequent year | | N/A |
| | N/A |
| | 8.25 | % | | 8.75 | % |
Ultimate rate reached in 2026 | | N/A |
| | N/A |
| | 4.50 | % | | 4.50 | % |
Effective December 31, 2016, theThe Corporation adoptedapplies 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 | | $ | 28 |
| | $ | (23 | ) |
Postretirement benefit obligation | | $ | 502 |
| | $ | (414 | ) |
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 plansplan 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,plan, 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. In the first quarter of 2022, the Corporation implemented an asset de-risking strategy in recognition of the strong funded status of the plan and a desire to reduce volatility as the plan approaches the cessation of accruals in 2028. As a part of its diversification strategy shift, the Corporation hastransitioned to an Outsourced Chief Investment Officer model that introduces asset allocation constraints that increase the fixed income allocation over time and with changes in the funded status. Accordingly, our established target allocations for each of the following assetsasset classes: domestic equity securities, international equity securities, and debt securities.securities have changed. Below are the Corporation’s actual and establishedcurrent target allocations for the CW Pension Plan, representing 87%90% of consolidated assets:
| | | | As of December 31, | | Target | | Expected |
| | 2017 | | 2016 | | Exposure | | Range |
| | As of December 31, | | | | As of December 31, | | Target | | Expected |
| | 2023 | | | | 2023 | | 2022 | | Exposure | | Range |
Asset class | |
Domestic equities | |
Domestic equities | |
Domestic equities | | 52% | | 54% | | 50% | | 40%-60% | | 29% | | 33% | | 29% | | 24%-34% |
International equities | | 15% | | 13% | | 15% | | 10%-20% | International equities | | 10% | | 11% | | 7%-15% |
Total equity | | 67% | | 67% | | 65% | | 55%-75% | Total equity | | 39% | | 44% | | 40% | | 30%-50% |
Fixed income | | 33% | | 33% | | 35% | | 25%-45% | Fixed income | | 61% | | 56% | | 60% | | 50%-70% |
As of December 31, 20172023 and 2016,2022, cash funds in the CW Pension Plan represented approximately 6%2% and 3%4% of portfolio assets, respectively.
Foreign plan assets represent 13%10% of consolidated plan assets, with the majoritymost of the assets supporting the U.K. 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 3.90%5% 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, 2017 using the fair value hierarchy as described in Note 9 to the Consolidated Financial Statements.of December 31, 2023. | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | $ | 33,272 | | | $ | 730 | | | $ | 32,542 | | | $ | — | |
Equity securities (1) | | 388,343 | | | 370,028 | | | 18,315 | | | — | |
Fixed Income (2) | | 481,169 | | | 373,963 | | | 107,206 | | | — | |
Other (3) | | 9,918 | | | 4,167 | | | — | | | 5,751 | |
December 31, 2022 | | $ | 912,702 | | | $ | 748,888 | | | $ | 158,063 | | | $ | 5,751 | |
Cash and cash equivalents | | $ | 16,105 | | | $ | 16,105 | | | $ | — | | | $ | — | |
Equity securities (1) | | 358,082 | | | 341,575 | | | 16,507 | | | — | |
Fixed Income (2) | | 578,797 | | | 9,316 | | | 569,481 | | | — | |
Other (3) | | 10,380 | | | 3,672 | | | — | | | 6,708 | |
December 31, 2023 | | $ | 963,364 | | | $ | 370,668 | | | $ | 585,988 | | | $ | 6,708 | |
|
| | | | | | | | | | | | | | | | |
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 | | $ | 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 |
|
Cash and cash equivalents | | $ | 42,374 |
| | $ | 12,551 |
| | $ | 29,823 |
| | $ | — |
|
Equity securities- Mutual funds (1) | | 504,633 |
| | 455,175 |
| | 49,458 |
| | — |
|
Bond funds (2) | | 216,372 |
| | 150,265 |
| | 66,107 |
| | — |
|
Insurance Contracts (3) | | 10,912 |
| | — |
| | — |
| | 10,912 |
|
Other (4) | | 2,191 |
| | — |
| | — |
| | 2,191 |
|
December 31, 2017 | | $ | 776,482 |
| | $ | 617,991 |
| | $ | 145,388 |
| | $ | 13,103 |
|
(1)This category consists of domestic and international equity securities. It is comprised of individual U.S. securities and exchange-traded funds benchmarked against the S&P 500 index and Russell Mid Cap and Russell 2000 index,indices, international mutualsecurities and exchange-traded funds benchmarked against the MSCI EAFE index,and EM indices, global equity index mutual funds associated with our U.K. based pension plans, and a balanced fundsfund associated with the U.K. and Canadian based pension plans.plan.
(2)This category consists of domestic and international bonds. The domestic fixed income securities are benchmarked against the Barclays Capital Aggregate Bond index, actively-managed bond mutual funds comprisedconsist of domestica portfolio of investment grade corporate debt, fixed income derivatives, and below investment-grade issues, fixed income exchange traded funds, and U.S. mortgage backedTreasury securities asset backed securities, municipal bonds,of intermediate and convertible debt.long-term duration for liability matching fixed income. 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 consists of a guaranteed investment contract (GIC) in Switzerland. Amounts contributed to the plan are guaranteed by a foundation for occupational benefits that in turn entered into a group insurance contractdomestic real estate exchange-traded fund and the foundation pays a guaranteed rate of interest that is reset annually.
(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 fundmoney market funds and classified as a Level 21 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 ofActivity associated with Level 3 assets held during the years ended December 31, 20172023 and 2016:
|
| | | | | | | | | | | | |
(In thousands) | | Insurance Contracts | | Other | | Total |
December 31, 2015 | | $ | 9,720 |
| | $ | 755 |
| | $ | 10,475 |
|
Actual return on plan assets: | | | | | | |
Relating to assets still held at the reporting date | | 148 |
| | 35 |
| | 183 |
|
Purchases, sales, and settlements | | 1,095 |
| | 871 |
| | 1,966 |
|
Foreign currency translation adjustment | | (203 | ) | | (43 | ) | | (246 | ) |
December 31, 2016 | | $ | 10,760 |
| | $ | 1,618 |
| | $ | 12,378 |
|
Actual return on plan assets: | | | | | | |
Relating to assets still held at the reporting date | | 167 |
| | 58 |
| | 226 |
|
Purchases, sales, and settlements | | (503 | ) | | 436 |
| | (68 | ) |
Foreign currency translation adjustment | | 488 |
| | 79 |
| | 567 |
|
December 31, 2017 | | $ | 10,912 |
| | $ | 2,191 |
| | $ | 13,103 |
|
2022 was immaterial.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 |
2018 | | $ | 45,604 |
| | $ | 1,686 |
| | $ | 47,290 |
|
2019 | | 48,937 |
| | 1,693 |
| | 50,630 |
|
2020 | | 49,859 |
| | 1,694 |
| | 51,553 |
|
2021 | | 51,058 |
| | 1,689 |
| | 52,747 |
|
2022 | | 50,361 |
| | 1,678 |
| | 52,039 |
|
2023 — 2027 | | 266,582 |
| | 8,030 |
| | 274,612 |
|
| | | | | | | | |
(In thousands) | | Pension Plans |
2024 | | $ | 50,025 | |
2025 | | 52,823 | |
2026 | | 54,281 | |
2027 | | 55,157 | |
2028 | | 57,403 | |
2029 - 2033 | | 274,696 | |
Defined Contribution Retirement Plans
The Corporation offers all of its full-time 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 include both employer match and non-elective contribution components, up to a maximum employer contribution of 6%7% of eligible compensation. During the year ended December 31, 2017,2023, the expense relating to the plan was $12.9$23.5 million, consisting of $5.8$12.2 million in matching contributions to the plan in 2017,2023, and $7.1$11.3 million in non-elective contributions, primarily paid in January 2018.2024. Cumulative contributions of approximately $69$123 million are expected to be made from 20182024 through 2022.2028.
In addition, the Corporation had foreign pension costs under various defined contribution plans of $4.2 million, $4.2 million, and $4.8 million in 2017, 2016, and 2015, 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 $37.1 million, $35.3 million, and $37.0 million in 2017, 2016, and 2015, respectively.
As of December 31, 2017, 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 |
2018 | $ | 28,284 |
|
2019 | 24,378 |
|
2020 | 21,733 |
|
2021 | 17,577 |
|
2022 | 14,253 |
|
Thereafter | 73,870 |
|
Total | $ | 180,095 |
|
17.18. 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/Aerospace & Industrial, Defense Electronics, and Naval & Power, as described below in further detail.
The Commercial/Aerospace & 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, joysticks, power management electronics, traction inverters and transmission shifters, electro-mechanical actuation control components, valves, and surface technology services such as shot peening, laser peening, coatings, and advanced testing.engineered coatings.
The Defense Electronics 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, tactical communications solutions for battlefield network management, weapons handling systems, avionics and electronics, flight test equipment, and aircraft data management solutions.
The Naval & Power reportable segment is comprised of businesses that primarily provide products to the power generation marketsnaval defense market and to a lesser extent the navalpower & process and aerospace defense market.markets. The products offered include main coolant pumps, power-dense compact motors, generators, secondary propulsion systems, pumps, pump seals, valves, control rod drive mechanisms, fastening systems, specialized containment doors, airlock hatches, spent fuel management products, and fluid sealing products.products, and arresting systems.
The Corporation’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 incomeOperating results by reportable segment are as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Net sales | | | | | | |
Aerospace & Industrial | | $ | 889,744 | | | $ | 838,885 | | | $ | 789,054 | |
Defense Electronics | | 818,547 | | | 693,709 | | | 727,828 | |
Naval & Power | | 1,142,590 | | | 1,030,918 | | | 990,339 | |
Less: Intersegment Revenues | | (5,508) | | | (6,487) | | | (6,460) | |
Total Consolidated | | $ | 2,845,373 | | | $ | 2,557,025 | | | $ | 2,500,761 | |
| | | | | | | | | | | | | | | | | | | | |
Operating income (expense) | | | | | | |
Aerospace & Industrial | | $ | 145,278 | | | $ | 136,996 | | | $ | 121,817 | |
Defense Electronics | | 191,775 | | | 154,568 | | | 159,089 | |
Naval & Power | | 189,227 | | | 177,582 | | | 136,106 | |
Corporate and Eliminations (1) | | (41,678) | | | (45,703) | | | (39,883) | |
Total Consolidated | | $ | 484,602 | | | $ | 423,443 | | | $ | 377,129 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Net sales | | | | | | |
Commercial/Industrial | | $ | 1,163,510 |
| | $ | 1,120,326 |
| | $ | 1,189,120 |
|
Defense | | 557,954 |
| | 469,796 |
| | 479,528 |
|
Power | | 554,048 |
| | 524,967 |
| | 545,013 |
|
Less: Intersegment Revenues | | (4,486 | ) | | (6,158 | ) | | (7,978 | ) |
Total Consolidated | | $ | 2,271,026 |
| | $ | 2,108,931 |
| | $ | 2,205,683 |
|
| | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | |
Aerospace & Industrial | | $ | 33,994 | | | $ | 34,336 | | | $ | 36,999 | |
Defense Electronics | | 33,347 | | | 35,120 | | | 38,136 | |
Naval & Power | | 46,165 | | | 39,712 | | | 35,937 | |
Corporate | | 2,666 | | | 2,859 | | | 3,312 | |
Total Consolidated | | $ | 116,172 | | | $ | 112,027 | | | $ | 114,384 | |
| | | | | | | | | | | | | | | | | | | | |
Capital expenditures | | | | | | |
Aerospace & Industrial | | $ | 17,067 | | | $ | 18,554 | | | $ | 16,799 | |
Defense Electronics | | 5,573 | | | 3,504 | | | 3,922 | |
Naval & Power | | 18,112 | | | 13,652 | | | 18,106 | |
Corporate | | 3,914 | | | 2,507 | | | 2,281 | |
Total Consolidated | | $ | 44,666 | | | $ | 38,217 | | | $ | 41,108 | |
|
| | | | | | | | | | | | |
(In thousands) | | 2017 | | 2016 | | 2015 |
Operating income (expense) | | | | | | |
Commercial/Industrial | | $ | 168,328 |
| | $ | 156,550 |
| | $ | 171,525 |
|
Defense | | 109,355 |
| | 98,291 |
| | 98,895 |
|
Power | | 85,260 |
| | 76,472 |
| | 74,987 |
|
Corporate and Eliminations (1) | | (23,200 | ) | | (23,215 | ) | | (34,790 | ) |
Total Consolidated | | $ | 339,743 |
| | $ | 308,098 |
| | $ | 310,617 |
|
|
| | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | |
Commercial/Industrial | | $ | 53,180 |
| | $ | 53,970 |
| | $ | 55,799 |
|
Defense | | 20,702 |
| | 14,488 |
| | 15,965 |
|
Power | | 22,019 |
| | 23,032 |
| | 23,419 |
|
Corporate | | 4,094 |
| | 4,518 |
| | 4,292 |
|
Total Consolidated | | $ | 99,995 |
| | $ | 96,008 |
| | $ | 99,475 |
|
|
| | | | | | | | | | | | |
Segment assets | | | | | | |
Commercial/Industrial | | $ | 1,444,097 |
| | $ | 1,391,040 |
| | $ | 1,480,052 |
|
Defense | | 1,044,776 |
| | 751,859 |
| | 800,613 |
|
Power | | 482,753 |
| | 516,321 |
| | 629,612 |
|
Corporate | | 264,695 |
| | 378,561 |
| | 79,334 |
|
Total Consolidated | | $ | 3,236,321 |
| | $ | 3,037,781 |
| | $ | 2,989,611 |
|
|
| | | | | | | | | | | | |
Capital expenditures | | | | | | |
Commercial/Industrial | | $ | 29,028 |
| | $ | 30,145 |
| | $ | 21,990 |
|
Defense | | 9,276 |
| | 5,870 |
| | 3,834 |
|
Power | | 10,039 |
| | 6,653 |
| | 6,163 |
|
Corporate | | 4,362 |
| | 4,108 |
| | 3,525 |
|
Total Consolidated (2) | | $ | 52,705 |
| | $ | 46,776 |
| | $ | 35,512 |
|
(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 of expenditures related to discontinued operations for the year ended 2015.
Reconciliations
| | | | | | | | | | | | | | | | | |
| | As of December 31, | |
(In thousands) | | 2023 | | 2022 | |
Segment assets | | | | | |
Aerospace & Industrial | | $ | 1,077,808 | | | $ | 1,041,562 | | |
Defense Electronics | | 1,517,877 | | | 1,546,331 | | |
Naval & Power | | 1,496,063 | | | 1,487,568 | | |
Corporate | | 529,221 | | | 372,842 | | |
Total Consolidated | | $ | 4,620,969 | | | $ | 4,448,303 | | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Earnings before taxes: | | | | | | |
Total segment operating income | | $ | 362,943 |
| | $ | 331,313 |
| | $ | 345,407 |
|
Corporate and Eliminations | | (23,200 | ) | | (23,215 | ) | | (34,790 | ) |
Interest expense | | 41,471 |
| | 41,248 |
| | 36,038 |
|
Other income, net | | 1,347 |
| | 1,111 |
| | 615 |
|
Total consolidated earnings before tax | | $ | 299,619 |
| | $ | 267,961 |
| | $ | 275,194 |
|
Reconciliations | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Earnings before taxes: | | | | | | |
Total reportable segment operating income | | $ | 526,280 | | | $ | 469,146 | | | $ | 417,012 | |
Corporate and Eliminations | | (41,678) | | | (45,703) | | | (39,883) | |
Interest expense | | 51,393 | | | 46,980 | | | 40,240 | |
Other income, net | | 29,861 | | | 12,732 | | | 12,067 | |
Earnings before income taxes | | $ | 463,070 | | | $ | 389,195 | | | $ | 348,956 | |
| | | | | | | | | | | | | | |
| | As of December 31, |
(In thousands) | | 2023 | | 2022 |
Assets: | | | | |
Total assets for reportable segments | | $ | 4,091,748 | | | $ | 4,075,461 | |
Non-segment cash | | 228,930 | | | 122,198 | |
Other assets | | 300,291 | | | 250,644 | |
Total consolidated assets | | $ | 4,620,969 | | | $ | 4,448,303 | |
|
| | | | | | | | | | | | |
| | As of December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Assets: | | | | | | |
Total assets for reportable segments | | $ | 2,971,626 |
| | $ | 2,659,220 |
| | $ | 2,910,277 |
|
Non-segment cash | | 204,664 |
| | 357,021 |
| | 42,164 |
|
Other assets | | 60,031 |
| | 21,540 |
| | 37,170 |
|
Total consolidated assets | | $ | 3,236,321 |
| | $ | 3,037,781 |
| | $ | 2,989,611 |
|
Geographic Information |
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Revenues | | | | | | |
United States of America | | $ | 1,562,180 |
| | $ | 1,472,241 |
| | $ | 1,502,363 |
|
United Kingdom | | 118,350 |
| | 114,752 |
| | 135,673 |
|
Other foreign countries | | 590,496 |
| | 521,938 |
| | 567,647 |
|
Consolidated total | | $ | 2,271,026 |
| | $ | 2,108,931 |
| | $ | 2,205,683 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Revenues | | | | | | |
United States of America | | $ | 2,060,986 | | | $ | 1,879,001 | | | $ | 1,851,827 | |
United Kingdom | | 115,078 | | | 102,965 | | | 93,154 | |
Other foreign countries | | 669,309 | | | 575,059 | | | 555,780 | |
Consolidated total | | $ | 2,845,373 | | | $ | 2,557,025 | | | $ | 2,500,761 | |
| | | | As of December 31, |
| | As of December 31, | | | | As of December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 | (In thousands) | | 2023 | | 2022 |
Long-Lived Assets | | | | | | |
Long-Lived Assets - Property, plant, and equipment, net | |
United States of America | |
United States of America | |
United States of America | | $ | 264,829 |
| | $ | 272,826 |
| | $ | 293,612 |
|
United Kingdom | | 41,100 |
| | 39,014 |
| | 36,061 |
|
Other foreign countries | | 84,306 |
| | 77,063 |
| | 83,971 |
|
Consolidated total | | $ | 390,235 |
| | $ | 388,903 |
| | $ | 413,644 |
|
Net sales by product line
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(In thousands) | | 2017 | | 2016 | | 2015 |
Net sales | | | | | | |
Flow Control | | $ | 899,705 |
| | $ | 883,735 |
| | $ | 949,657 |
|
Motion Control | | 1,075,218 |
| | 940,162 |
| | 947,758 |
|
Surface Technologies | | 296,103 |
| | 285,034 |
| | 308,268 |
|
Consolidated total | | $ | 2,271,026 |
| | $ | 2,108,931 |
| | $ | 2,205,683 |
|
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.
18.19. CONTINGENCIES AND COMMITMENTS
From time to time, the Corporation and its subsidiaries are involved in legal proceedings that are incidental to the operation of our business. Some of these proceedings allege damages relating to asbestos and environmental exposures, intellectual property matters, copyright infringement, personal injury claims, employment and employee benefit matters, government contract issues, commercial or contractual disputes, and acquisitions or divestitures. The Corporation continues to defend vigorously against all claims. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including assessment of the merits of the particular claim, as well as current accruals and insurance coverage, the Corporation does not believe that the disposition of any of these matters, individually or in the aggregate, will have a material adverse effect on its consolidated financial condition, results of operations, and cash flows.
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
make 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. The total quantum of alleged damages arising from the incident has not been finalized, but is estimated to meet or exceed $1 billion. The Corporation maintains various forms of commercial, property and casualty, product liability, and other forms of insurance; however, such insurance may not be adequate to cover the costs associated with a judgment against us. In October 2017, all parties agreed in principle to participate in a formal mediation in late 2018 with the intention of settling this claim. In an effort to induce the parties to participate in the formal mediation, CNRL agreed to reduce its claim to approximately $400 million, which reflects the monetary amount of property damage incurred as a result of the fire and explosion. The Corporation is currently unable to estimate an amount, or range of potential losses, if any, from this matter. The Corporation believes that 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.
WEC Bankruptcy
On March 29, 2017, WEC filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court for the Southern District of New York, Case No. 17-10751. The Bankruptcy Court overseeing the Bankruptcy Case has approved, on an interim basis, an $800 million Debtor-in-Possession Financing Facility to help WEC finance its business operations during the reorganization process. On January 4, 2018, WEC announced that it had agreed to be acquired by Brookfield Business Partners L.P for approximately $4.6 billion with the acquisition expected to close in the third quarter of 2018. The acquisition is not expected to have a material impact on the Corporation’s financial condition or results of operations as WEC plans to continue operating in the ordinary course of business under existing senior management.
The Corporation had approximately $4.9 million in pre-petition billings outstanding with WEC as of December 31, 2017. On January 29, 2018, the Corporation received notice that WEC filed its Plan of Reorganization. Under the Plan, the Corporation is expected to recover substantially all of its general unsecured claims, including pre-petition billings. The Plan of Reorganization is subject to approval, with voting tentatively scheduled for March 15, 2018. As it relates to post-petition work, the Corporation will continue to honor its executory contracts and expects to collect all amounts due. The Corporation will continue to monitor and evaluate the status of the WEC bankruptcy and Plan of Reorganization for potential impacts on its business.
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. As of December 31, 20172023 and 2016,2022, there were $21.3$20 million and $47.2$17 million of stand-by letters of credit outstanding, respectively, and $14.6$16 million and $12.8$3 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 twoAs of the three licenses,December 31, 2023, the Corporation has recorded an asset retirement obligation of approximately $7.4 million.$8 million for two of the three licenses. 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$35 million surety bond.
AP1000 Program
Within the Corporation’s Power segment, the Electro-Mechanical Division is the RCP supplier for the WEC AP1000 nuclear power plants under construction in China and the United States. The terms of the AP1000 China and U.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 WEC stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract from WEC of approximately $25 million. As of December 31, 2017, the Corporation has not met certain contractual delivery dates under its AP1000 U.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 responsibility for the delays, no accrual has been made for this matter as of December 31, 2017. As of December 31, 2017, the range of possible loss is $0 million to $31 million for the AP1000 U.S. contract, for a total range of possible loss of $0 to $55.5 million.
19.20. 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) |
December 31, 2021 | | $ | (99,566) | | | $ | (90,899) | | | $ | (190,465) | |
Other comprehensive loss before reclassifications (1) | | (61,241) | | | (23,447) | | | (84,688) | |
Amounts reclassified from accumulated other comprehensive income (1) | | — | | | 16,237 | | | 16,237 | |
Net current period other comprehensive loss | | (61,241) | | | (7,210) | | | (68,451) | |
December 31, 2022 | | $ | (160,807) | | | $ | (98,109) | | | $ | (258,916) | |
Other comprehensive loss before reclassifications (1) | | 37,519 | | | 8,218 | | | 45,737 | |
Amounts reclassified from accumulated other comprehensive income (1) | | — | | | (44) | | | (44) | |
Net current period other comprehensive income | | 37,519 | | | 8,174 | | | 45,693 | |
December 31, 2023 | | $ | (123,288) | | | $ | (89,935) | | | $ | (213,223) | |
(1)All amounts are after tax.
|
| | | | | | | | | | | | |
(In thousands) | | Foreign currency translation adjustments, net | | Total pension and postretirement adjustments, net | | Accumulated other comprehensive income (loss) |
December 31, 2015 | | $ | (107,810 | ) | | $ | (118,118 | ) | | $ | (225,928 | ) |
Other comprehensive loss before reclassifications (1) | | (64,840 | ) | | (7,892 | ) | | (72,732 | ) |
Amounts reclassified from accumulated other comprehensive income (1) | | — |
| | 6,904 |
| | 6,904 |
|
Net current period other comprehensive loss | | (64,840 | ) | | (988 | ) | | (65,828 | ) |
December 31, 2016 | | $ | (172,650 | ) | | $ | (119,106 | ) | | $ | (291,756 | ) |
Other comprehensive loss before reclassifications (1) | | 77,942 |
| | (10,831 | ) | | 67,111 |
|
Amounts reclassified from accumulated other comprehensive income (1) | | — |
| | 7,805 |
| | 7,805 |
|
Net current period other comprehensive income (loss) | | 77,942 |
| | (3,026 | ) | | 74,916 |
|
December 31, 2017 | | $ | (94,708 | ) | | $ | (122,132 | ) | | $ | (216,840 | ) |
| |
(1)
| 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 Consolidated Statement of Earnings |
(In thousands) | | 2023 | | 2022 | | |
Defined benefit pension and postretirement plans | | | | | | |
Amortization of prior service costs | | $ | 133 | | | $ | 345 | | | Other income, net |
Recognized net actuarial losses | | (85) | | | (17,198) | | | Other income, net |
Settlements | | — | | | (4,499) | | | Other income, net |
| | 48 | | | (21,352) | | | Earnings before income taxes |
| | (4) | | | 5,115 | | | Provision for income taxes |
Total reclassifications | | $ | 44 | | | $ | (16,237) | | | Net earnings |
|
| | | | | | | | | | |
| | Amount reclassified from Accumulated other comprehensive income (loss) | | Affected line item in the statement where net earnings is presented |
(In thousands) | | 2017 | | 2016 | | |
Defined benefit pension and postretirement plans | | | | | | |
Amortization of prior service costs | | 756 |
| | 703 |
| | (1) |
Amortization of net actuarial losses | | (12,702 | ) | | (11,733 | ) | | (1) |
Settlements | | (327 | ) | | — |
| | (1) |
| | (12,273 | ) | | (11,030 | ) | | Total before tax |
| | 4,468 |
| | 4,126 |
| | Income tax effect |
Total reclassifications | | $ | (7,805 | ) | | $ | (6,904 | ) | | 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. |
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, 2017 and 2016.
|
| | | | | | | | | | | | | | | | |
(In thousands, except per share data) | | First | | Second | | Third | | Fourth |
2017 | | | | | | | | |
Net sales | | $ | 523,591 |
| | $ | 567,653 |
| | $ | 567,901 |
| | $ | 611,881 |
|
Gross profit | | 170,775 |
| | 198,770 |
| | 210,783 |
| | 238,267 |
|
Earnings from continuing operations | | 32,547 |
| | 50,650 |
| | 63,944 |
| | 67,750 |
|
Loss from discontinued operations | | — |
| | — |
| | — |
| | — |
|
Net earnings | | 32,547 |
| | 50,650 |
| | 63,944 |
| | 67,750 |
|
Basic earnings per share | | | | | | | | |
Earnings from continuing operations | | $ | 0.74 |
| | $ | 1.15 |
| | $ | 1.45 |
| | $ | 1.54 |
|
Loss from discontinued operations | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total | | $ | 0.74 |
| | $ | 1.15 |
| | $ | 1.45 |
| | $ | 1.54 |
|
Diluted earnings per share | | | | | | | | |
Earnings from continuing operations | | $ | 0.73 |
| | $ | 1.13 |
| | $ | 1.43 |
| | $ | 1.52 |
|
Loss from discontinued operations | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total | | $ | 0.73 |
| | $ | 1.13 |
| | $ | 1.43 |
| | $ | 1.52 |
|
| | | | | | | | |
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 |
|
Note: Certain amounts may not add due to rounding.
21. SUBSEQUENT EVENTS
On February 13, 2018, the Corporation made a voluntary $50 million contribution to the CW Pension Plan.
On February 20, 2018, the Corporation announced that it entered into an agreement to acquire the assets of the Dresser-Rand Government Business (Dresser-Rand) for $212.5 million in cash. Dresser-Rand operates as a business unit of Siemens Government Technologies, which is a wholly-owned U.S. subsidiary of Siemens AG in Germany. Dresser-Rand is a leading 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 will operate within the Corporation's Power segment.
* * * * * *
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, 2017.2023. 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, 2017.2023.
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
Report of Independent Registered Public Accounting Firm
To the Shareholdersstockholders and the Board of Directors of
Curtiss-Wright Corporation
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, 20172023 and 2016, and2022, the related consolidated statements of earnings, comprehensive income, stockholders’stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2017,2023, 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, 20172023 and 2016,2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2023, in conformity with accounting principles generally accepted in the United States of America.
We have 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, 2017,2023, 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 22, 2018,20, 2024, 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, 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 regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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 our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, 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 3 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 at a transaction price that reflects the consideration that the Company expects to be entitled to in exchange for that good and/or service. The Company identifies a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. Revenue recognized on an over-time basis for the year ended December 31, 2023, accounted for approximately 47% of total net sales. Contracts that qualify for over-time revenue recognition are generally associated with the design, development, and manufacture of highly engineered industrial products used in commercial and defense applications and generally span between 2-5 years in duration. 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.
Included within revenue recognized on an over-time basis are certain contracts that require the use of reasonable and dependable estimates of future costs that will be incurred to complete production of goods or provision of services as well as a
disciplined cost estimating system in which all functions of the business are integrally involved. These estimates are determined based on industry knowledge and experience of engineers, project managers, and financial staff. Specific to these contracts, auditing over-time revenue required extensive audit effort due to a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to auditing over-time revenue specific to these contracts (as described above) included the following, among others:
◦At select business units, we tested the effectiveness of controls over the recognition of over-time basis revenue, including those over costs incurred to date and estimates of future costs related to the performance obligation.
◦Obtained the population of active contracts during 2023 and assessed (1) contract year-to-date revenue in relation to inception-to-date margin and (2) contract value in relation to inception-to-date margin to identify potential outliers in the portfolio of active contracts that may contain characteristics of audit interest.
◦For those contracts identified that contained characteristics of audit interest, performed further audit procedures tailored to address the specific characteristics of audit interest identified. Procedures performed, among others, included:
▪Read the relevant portions of contracts including any recent contract modifications to understand contract terms, including incentives, fee arrangement, scope of work, and any unusual contract terms.
▪Evaluated the estimates of total costs and profits for these selected contracts by:
•Evaluating management’s ability to achieve the estimated cost and profit by 1) performing inquiries with the business managers and corroborating the information gained from these inquiries with other parties who have detailed knowledge of the contract’s progress, issues being encountered, and overall production status, 2) considering management’s historical performance against estimates, and 3) considering any contradictory information.
•Comparing management’s estimates for selected contracts to costs and profits of similar related contracts, when applicable.
◦We developed independent estimates of revenue based on historical profit margins and current year costs incurred to date. We compared those estimates to revenue recognized by the Company.
◦Tested the accuracy and completeness of the costs incurred to date.
/s/ Deloitte & Touche LLP
Parsippany,Morristown, New Jersey
February 22, 201820, 2024
We have served as the Company's auditor since 2003.
Report of Independent Registered Public Accounting Firm
To the Shareholdersstockholders and the Board of Directors of
Curtiss-Wright Corporation
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, 2017,2023, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2023, 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, 2017,2023, of the Company and our report dated February 22, 2018,20, 2024, 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 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 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Parsippany,
Morristown, New Jersey
February 22, 2018
20, 2024
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of December 31, 2017,2023, 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”)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, 20172023 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, 2017.2023. In making this assessment, the Corporation’s management used the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on management’s assessment, management believes that as of December 31, 2017,2023, 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, 20172023 have been audited by Deloitte & Touche LLP (PCAOB ID No. 34), 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
During the year ended December 31, 2017, we modified existing internal controls as well as implemented new controls as part of our efforts to adopt the new revenue recognition standard which becomes effective on January 1, 2018. Those efforts resulted in the enhancement of our risk assessment process whereby we designed new controls and modified existing controls to address risks associated with the five-step model for recognizing revenue under the new standard. There have not been any otherwere no changes in our internal control over financial reporting during the quarter ended or year ended December 31, 20172023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
(a) None.
(b) Insider Adoption or Termination of Trading Arrangements During the three-months ended December 31, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, modified, or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K, except as described in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
Name | Title | Action | Character of Trading Arrangement(1) | Adoption Date | Earliest Sale Date | Expiration Date(2) | Aggregate # of securities to be purchased or sold(3) |
K. Christopher Farkas | Vice President and Chief Financial Officer | Adoption | Rule 10b5-1 Trading Arrangement | December 14, 2023 | March 14, 2024 | September 14, 2024 | (4) |
Paul J. Ferdenzi | Vice President, General Counsel, and Corporate Secretary | Adoption | Rule 10b5-1 Trading Arrangement | December 13, 2023 | March 12, 2024 | December 31, 2024 | Up to 5000 shares to be sold |
1.Except as indicated by footnote, each trading arrangement marked as a “Rule 10b5-1 Trading Arrangement” is intended to satisfy the affirmative defense of Rule 10b5-1(c), as amended.
2.The Rule 10b5-1 trading arrangements permits transactions through and including the earlier to occur of (a) the completion of all purchases or sales, (b) the date listed in the table, or (c) such date the trading arrangement is otherwise terminated according to its terms. The trading arrangements also provide for automatic expiration in the event of death, dissolution, bankruptcy, or insolvency of the adopting person.
3.The volume of sales is based on pricing triggers outlined in the Rule 10b5-1 Trading Arrangement.
4.The aggregate number of shares of common stock to be sold pursuant to Mr. Farkas's Rule 10b5-1 Trading Arrangement include: (a) 100% of the net after-tax shares received upon the vesting of 1,805 time-based restricted stock units on March 18, 2024; and (b) 100% of the net after-tax shares of common stock received upon the vesting of 2,371 performance-based restricted stock units (PSUs), which were granted March 18, 2021. The number of shares granted is at target and the number of shares that will be earned will depend on Company total shareholder return relative to its peer group for the 2021 – 2023 performance period. PSUs may be earned up to 200% of grant. PSUs will be earned as common stock in early 2024. For more information, see the “Compensation Discussion and Analysis” section in our most recent proxy statement, which was filed with the SEC on March 24, 2023. In addition, the actual number of shares that will be released to Mr. Farkas in connection with the PSUs and sold under the Rule 10b5-1 Trading Arrangement will be net of the number of shares withheld to satisfy tax withholding obligations arising from the vesting of such shares and is not yet determinable.
Each of the 10b5-1 Trading Arrangements in the above table included a representation from the officer to the broker administering the plan that such individual (i) was not in possession of any material nonpublic information regarding the Company or the securities subject to the plan and (ii) the plan was entered into good faith and not as part of a plan or scheme to evade securities law. A similar representation was made to the Company in connection with the adoption of the plan. Those representations were made as of the date of adoption of the 10b5-1 plan and speak only as of that date. In making those representations, there is no assurance with respect to any material nonpublic information of which the officer was unaware, or with respect to any material nonpublic information acquired by the officer or the Company after the date of the representation. Actual sale transactions will be disclosed publicly through Form 144 and Form 4 filings with the SEC, as required.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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 10, 20182, 2024 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”"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"Securities Authorized For Issuance Under Equity Compensation Plans."
Item 11. Executive Compensation
RECOVERY ANALYSIS OF INCENTIVE-BASED COMPENSATION UNDER THE COMPANY’S DODD-FRANK CLAWBACK POLICY
The Company’s general employee incentive compensation recoupment, or “clawback” policy provides that in the event the amount of any incentive compensation award is based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria, or if a participant is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002 and has committed an offense subject to forfeiture under such statute, the participant must reimburse the Company that portion of the incentive compensation award that was based on the inaccurate data or as provided for in such statute.
In September 2023, the Executive Compensation Committee of the Board of Directors of the Company (the “Committee”) adopted a separate executive incentive compensation clawback policy to comply with the requirements of the Dodd-Frank Walls Street Reform and Consumer Protection Act of 2010, as implemented by New York Stock Exchange listing standards and the SEC’s rules and regulation, which applies to current and certain former Section 16 executive officers (the “Dodd-Frank Clawback Policy”). The Dodd-Frank Clawback Policy requires the Company to recover certain cash or equity-based incentive compensation payments or awards made or granted to such executive officers in the event the Company is required to prepare an accounting restatement due to the Company’s material noncompliance with any financial reporting requirement under the securities laws, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (an “Accounting Restatement”). The Dodd-Frank Clawback Policy covers cash or equity-based compensation that is granted, earned, or vested based wholly or in part upon the attainment of a Company financial reporting measure (including stock price or total shareholder return). Recovery under the Dodd-Frank Clawback Policy applies to incentive compensation subject to the policy that is received (i) on or after December 1, 2023, (ii) by a person after such individual became an executive officer, and (iii) during the three completed fiscal years immediately preceding the date on which the Company is required to prepare the Accounting Restatement. The incentive compensation to be recovered is the amount in excess of what would have been paid based on the restated results. Recovery will be required on a “no fault” basis, without regard to whether any misconduct occurred and without regard to whether an executive officer was responsible for the erroneous financial statements. Furthermore, under the Dodd-Frank Clawback Policy, the Company is prohibited from indemnifying any executive officer or former executive officer against the loss of erroneously awarded incentive-based compensation.
During the third quarter of 2023, the Company identified an error related to a single long-term contract within a subsidiary of its Naval & Power segment. The error primarily impacted 2020 and 2021, whereby certain events occurring during the pandemic, including constructive changes to the contract as well as labor inefficiencies and hiring delays due to a facility relocation, were not reflected in the contract’s estimated costs of completion.
In accordance with Staff Accounting Bulletin ("SAB") Nos. 99 and 108, the Company evaluated this error and, based on an analysis of quantitative and qualitative factors, determined that it was not material to any one of the prior reporting periods affected and, therefore, amendment of previously filed reports with the Securities and Exchange Commission was not required. However, if the adjustment to correct the cumulative effect of the aforementioned error had been recorded in the three and nine months ended September 30, 2023, the impact would have been qualitatively material to the Condensed Consolidated Statements of Earnings of the Company for those respective periods.
Therefore, in accordance with SAB 108, the Company revised the applicable prior period financial statements included within its quarterly report on Form 10-Q for the third quarter ended September 30, 2023, as summarized below. The net impact of the error resulted in an overstatement of previously reported total net sales and net earnings of approximately $5 million and $4 million, respectively, for the year ended December 31, 2021, and an overstatement of previously reported total net sales and net earnings of approximately $8 million and $7 million, respectively, for the year ended December 31, 2020. The impact of the error on previously reported total net sales and net earnings was inconsequential for the year ended December 31, 2022. The Company revised its consolidated financial statements as of December 31, 2022 and for the year ended December 31, 2021 in this Form 10-K.
The Committee, the Company’s outside legal counsel, and the Committee’s independent compensation consultant Frederic W. Cook & Co., Inc. (“FW Cook”) performed an analysis of the impact that the immaterial restatement discussed immediately above (the “Immaterial Restatement”) had on the Company’s past and future payouts under its incentive compensation plans, and whether recovery of such incentive compensation payouts is required under its Dodd-Frank Clawback Policy. Because the Dodd-Frank Clawback Policy only applied to incentive compensation payments received after December 1, 2023, any incentive
compensation received prior to such date would not be subject to recoupment under the policy. Accordingly, only annual and long-term incentive compensation received in early 2024 under the Company’s incentive compensation plan (ICP) and long-term incentive compensation plan (LTIP) for financial performance of the Company against pre-established financial performance measures for the 2023 performance period (ICP) and 2021 – 2023 performance period (LTIP), would be subject to the policy. As noted above, the Committee determined that since the Immaterial Restatement did not impact the 2023 performance period (only impacting prior year periods 2020 through 2022), the receipt of annual incentive compensation under the ICP in early 2024 was not required to be recovered under the Dodd-Frank Clawback Policy. With respect to the receipt of LTIP, the payment of cash-based performance units (PUPs) in early 2024 was based on Company performance against pre-established financial performance measures for the 2021 – 2023 performance period. Based on Company financial performance resulting from the Immaterial Restatement against its performance targets during such performance period, it was determined that Company performance would have resulted in a maximum payout against target with or without the Immaterial Restatement. Therefore, because payment of PUPs was at maximum with giving effect to the Immaterial Restatement, no excess incentive compensation was received by the Section 16 executive officers based on the Immaterial Restatement, and therefore, no recovery was required under the Dodd-Frank Clawback Policy.
The receipt of performance share units (PSUs) under the LTIP in early 2024 was based on Company total shareholder return (TSR) relative to its peer group for the 2021 – 2023 performance period. The Company performed an analysis assessing the impact of the Immaterial Restatement on its TSR and the payouts associated with its TSR. After reviewing the relatively minor financial impacts to 2021 and 2022 performance the Committee reasonably estimated that the Immaterial Restatement was immaterial to the overall financial results of the Company during this period, and reasonably concluded that the restated financials resulting from the Immaterial Restatement would not have impacted the Company’s TSR and PSU payouts. Additionally, the Committee, after advice from the Company’s outside legal counsel and FW Cook, determined that the payouts would have been 200% of target regardless due to the high levels of Company financial performance even as restated. Therefore, because payment of PSUs was 200% of target without giving effect to the Immaterial Restatement, no excess PSUs were received by the Section 16 executive officers based on the Immaterial Restatement, and therefore, no recovery was required under the Dodd-Frank Clawback Policy.
Finally, a recovery analysis was also performed under the Company’s general employee incentive compensation recoupment policy discussed above, which has a one-year look back period. Because the general policy only mandates a clawback in the event of a full restatement of financials and the overall Company financial performance was nominally impacted for the 2022 performance period under the ICP and 2020 – 2022 performance period under the LTIP, the Committee determined that no excess incentive compensation was received by the Section 16 executive officers in early 2023 based on the Immaterial Restatement, and therefore no recovery was required under the Company’s general employee incentive compensation recoupment policy.
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 2, 2024 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 Schedule.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) | | | | | | | | | | |
(a) | Financial Statements and Footnotes | | Page | |
| 1. | | 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. | | 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 | |
| Exhibit No. | | Exhibit Description | | Form | | Form | Filing Date | | Herewith | |
| | | | | | | | | | |
| 2.1 | | 2.1 | | | 8-K | | 8-K | February 3, 2005 | | | |
| 3.1 | | 3.1 | | | 8-A12B/A | | 8-A/A | May 24, 2005 | | | |
| 3.2 | | 3.2 | | | 8-K | | 8-K | May 18, 2015 | | | |
| 4.1 | | 4.1 | | | 8-A12B/A | | 8-A/A | May 24, 2005 | | | |
| 4.2 | | 10.1 | | | DEF 14A | | 14AApril 5, 2005 | | | March 19, 2010 | | |
| 10.1 | | 10.2 | | | 10-K | | 10-K | March 7, 2006 | | | |
| 10.2 | | 10.3 | | | 10-K | | 10-QFebruary 25, 2021 | | | August 15, 2001 | | |
| 10.3 | | 10.4 | | | 10-K | | 10-K | February 25, 2011 | | | |
| 10.4 | | 10.5 | | | 10-K | | 10-K | February 24, 2012 | | | |
|
| 10.5 | | | | | | | | | | |
| 10.6 | | | | 10-K | | 10-K | February 19, 2015 | | | |
| 10.6 | | 10.7 | | | 10-K | | 10-K | February 19, 2015 | | | |
| 10.7 | | 10.8 | | | 10-K | | 10-K | February 25, 2016 | | | |
| 10.8 | | 10.9 | | | 10-K | | 10-KFebruary 24, 2022 | | | February 25, 2016 | | |
| 10.9 | | 10.10 | | | 10-K | | 10-KFebruary 24, 2022 | | | February 21, 2017 | | |
| 10.1 | | 10.11 | | | 10-Q | | 10-KAugust 3, 2023 | | | February 21, 2017 | | |
| 10.11 | | 10.12 | | | | | | | X | |
| 10.13 | | | | | | | | X | |
| 10.14 | | | | 10-K | | 10-K | February 25, 2016 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.12 | | 10.15 | | | 10-K | | 10-K | February 25, 2016 | | | |
| 10.13 | | 10.16 | | | 10-K | | 10-K | February 21, 2017 | | | |
| 10.14 | | 10.17 | | | 10-K | | 10-K | February 21, 2017 | | | |
| 10.15 | | 10.18 | | | 10-K | | 10-K | February 21, 2017 | | | |
| 10.16 | | 10.19 | | | 10-K | | February 22, 2018 | | | | X | |
| 10.17 | | 10.20 | | | 10-K | | February 22, 2018 | | | | X | |
| 10.18 | | 10.21 | | 10-K | | February 27, 2019 | | |
| 10.19 | | | | 10-K | | February 27, 2019 | | |
| 10.20 | | | | 10-K | | February 27, 2019 | | |
| 10.21 | | | | 10-Q | | August 1, 2019 | | |
| 10.22 | | | | 10-Q | | August 1, 2019 | | |
| 10.23 | | | | 10-K | | February 27, 2020 | | |
| 10.24 | | | | 10-K | | February 25, 2021 | | |
| 10.25 | | | | 10-K | | February 24, 2022 | | |
| 10.26 | | | | 10-K | | February 24, 2022 | | |
| 10.27 | | | | 10-K | | February 22, 2023 | | |
| 10.28 | | | | 10-Q | | August 3, 2023 | | |
| 10.29 | | | | 14A | | 14A | March 21, 2014 | | | |
| 10.30 | | 10.22 | | | 10-K | | 10-K | February 19, 2015 | | | |
| 10.31 | | 10.23 | | | 10-K | | 10-K | February 25, 2016 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.32 | | 10.24 | | | 10-Q | | 10-Q | May 7, 2012 | | | |
| 10.33 | | 10.25 | | | 10-K | | 10-K | February 25, 2011 | | | |
| 10.34 | | 10.26 | | | 10-K | | 10-K | February 24, 2012 | | | |
|
| 10.35 | | | | | | | | | | |
| 10.27 | | | | 10-K | | 10-K | February 21, 2013 | | | |
| 10.36 | | 10.28 | | | 10-K | | 10-K | February 21, 2013 | | | |
| 10.37 | | 10.29 | | | 10-K | | 10-K | February 21, 2014 | | | |
| 10.38 | | 10.30 | | | 14A | | 14A | April 5, 2005 | | | |
| 10.39 | | 10.31 | | | 10-K | | 10-K | February 27, 2007 | | | |
| 10.40 | | 10.32 | | | 10-K | | 10-K | February 24, 2012 | | | |
| 10.41 | | 10.33 | | | 10-K | | 10-K | February 19, 2015 | | | |
| 10.42 | | 10.34 | | | 10-K | | 10-K | February 25, 2016 | | | |
| 10.43 | | 10.35 | | | 10-K | | 10-QFebruary 25, 2021 | | | November 15, 2001 | | |
| 10.44 | | 10.36 | | | 14A | | 14AMarch 23, 2018 | | | March 24, 2011 | | |
| 10.45 | | 10.37 | | | 14A | | 14A | March 24, 20112023 | | | |
| 10.46 | | 10.38 | | | 10-K | | 10-QFebruary 24, 2022 | | | May 2, 2013 | | |
| 10.47 | | 10.39 | | 10-K | | February 24, 2022 | | |
| 10.48 | | | | 10-K | | February 24, 2022 | | |
| 10.49 | | | | 10-K | | February 24, 2022 | | |
| 10.50 | | | | 10-Q | | 10-Q | May 13, 1998 | | | |
| 10.51 | | 10.40 | | | 8-K | | 8-K | December 13, 2011 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 10.52 | | 10.41 | | | 8-K | | 8-K | December 13, 2011 | | | |
| 10.53 | | 10.42 | | 8-K | | December 21, 2022 | | |
| 10.54 | | | | 8-K | | December 21, 2022 | | |
| 10.55 | | | | 8-K | | 8-K | February 27, 2013 | | | |
| 10.56 | | 10.43 | | | 8-K | | 8-K | February 27, 2013 | | | |
| 10.57 | | 10.44 | | 8-K | | December 21, 2022 | | |
| 10.58 | | | | 8-K | | December 21, 2022 | | |
| 10.59 | | Fourth Amended and Restated Credit Agreement dated as of August 9, 2012October May 17, 2022 among the Registrant,Company and Certain Subsidiaries of the Company as Borrowers; the Lenders partiesparty thereto; J.P. Morgan Chase Bank, N.A., as Administrative Agent, Swing Line Lender, and L/C Issuer; J.P. Morgan Chase Bank, N.A., BOFA Securities, Inc., and Wells Fargo Securities, LLC, as 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; Bank of America , N.A. and Wells Fargo, National Association, as Syndication Agents; and JPMorgan Chase Bank, N.A., and Wells Fargo, N.A., as Syndication Agents; and RBS Citizens Bank, N.A., as Documentation AgentAgents | | 8-K | | 8-KMay 18, 2022 | | | August 13, 2012 | | |
|
| 10.60 | | | | | | | | | | |
| 10.45 | | First Amendment dated July 28, 2014 to Third Amended and Restated CreditNote Purchase Agreement dated as of August 9, 2012 amongbetween 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 Agentcertain Institutional Investors, dated August 13, 2020 | | 8-K | | 10-KAugust 19, 2020 | | | February 19, 2015 | | |
| 10.61 | | 10.46 | Second Amendment dated December 12, 2014Restrictive Legends on Notes subject to Third Amended and Restated CreditNote Purchase Agreement dated as of August 9, 2012 amongbetween 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 Agentcertain Institutional Investors, dated August 13, 2020 | | 8-K | | 10-KAugust 19, 2020 | | | February 19, 2015 | | |
| 10.62 | | 10.47 | | | 8-K | | December 21, 2022 | | |
| 10.63 | | | | 10-K | | February 22, 2023 | | |
| 10.64 | | | | 10-K | | 8-KFebruary 22, 2023 | | |
| 19.10 | | June 18, 2015 | | | | | | X |
| 21.00 | | 21.00 | | | | | | | X | |
| 23.00 | | 23.00 | | | | | | | X | |
| 31.10 | | 31.10 | | | | | | | X |
| | | | | X | | | | | | | | | | | | | | | | | | | | | | | | |
| 31.20 | | 31.20 | | | | | | | X | |
| 32.00 | | 32.00 | | | | | | | X | |
| 97.10 | | * | | | | | | X |
| | | | | | | | | |
| * | | Indicates contract or compensatory plan or arrangement | |
| | | | | | | | | | |
| 101.INS | | 101.INS | XBRL Instance Document | | | | | | | |
| 101.SCH | | 101.SCH | XBRL Taxonomy Extension Schema Document | | | | | | | |
| 101.CAL | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | |
| 101.DEF | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | |
| 101.LAB | | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | |
| 101.PRE | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | |
Item 16. Form 10-K Summary
None.
CURTISS-WRIGHT CORPORATION and SUBSIDIARIES
SCHEDULE II – VALUATION and QUALIFYING ACCOUNTS
for the years ended December 31, 2017, 2016,2023, 2022, and 20152021
(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, 2023 | | | | | | | | | | | | | | |
Tax valuation allowance | | 5,664 | | | 1,471 | | | 63 | | | (1) | | 2,306 | | | | | 4,892 | |
Total | | $ | 5,664 | | | $ | 1,471 | | | $ | 63 | | | | | $ | 2,306 | | | | | $ | 4,892 | |
December 31, 2022 | | | | | | | | | | | | | | |
Tax valuation allowance | | 2,625 | | | 3,920 | | | 1 | | | (1) | | 882 | | | | | 5,664 | |
Total | | $ | 2,625 | | | $ | 3,920 | | | $ | 1 | | | | | $ | 882 | | | | | $ | 5,664 | |
December 31, 2021 | | | | | | | | | | | | | | |
Tax valuation allowance | | 1,240 | | | 1,864 | | | (22) | | | (1) | | 457 | | | | | 2,625 | |
Total | | $ | 1,240 | | | $ | 1,864 | | | $ | (22) | | | | | $ | 457 | | | | | $ | 2,625 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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, 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 |
|
December 31, 2016 | | | | | | | | | | | | | | |
Tax valuation allowance | | 17,895 |
| | 1,951 |
| | (181 | ) | | (1) | | 1,889 |
| | (2) | | 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 |
| | | | 17,895 |
|
Total | | $ | 23,478 |
| | $ | 2,605 |
| | $ | (299 | ) | | | | $ | 7,889 |
| | | | $ | 17,895 |
|
(1) Primarily foreign currency translation adjustments.
(2) Capital loss on sale of upstream 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 22, 2018 15, 2024 By: /s/ David C. AdamsLynn M. Bamford
David C. AdamsLynn M. Bamford
ChairmanChair 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 22, 2018 15, 2024 By: /s/ Glenn E. TynanK. Christopher Farkas
Glenn E. TynanK. Christopher Farkas
Vice President and Chief Financial Officer
Date: February 22, 2018 15, 2024 By: /s/ K. Christopher FarkasGary A. Ogilby
K. Christopher FarkasGary A. Ogilby
Vice President of Financeand Corporate Controller
Date: February 22, 2018 By: /s/ David C. Adams
David C. Adams
Director
Date: February 22, 2018 15, 2024 By: /s/ Dean M. Flatt
Dean M. Flatt
Director
Date: February 22, 2018 15, 2024 By: /s/ S. Marce Fuller
S. Marce Fuller
Director
Date: February 22, 2018 By: /s/ Rita J. Heise
Rita J. Heise
Director
Date: February 22, 2018 15, 2024 By: /s/ Bruce D. Hoechner
Bruce D. Hoechner
Director
Date: February 22, 2018 15, 2024 By: /s/ Allen A. KozinskiGlenda J. Minor
Allen A. KozinskiGlenda J. Minor
Director
Date: February 22, 2018 15, 2024 By: /s/ John B. NathmanAnthony J. Moraco
John B. NathmanAnthony J. Moraco
Director
Date: February 22, 2018 15, 2024 By: /s/ William F. Moran
William F. Moran
Director
Date: February 15, 2024 By: /s/ Robert J. Rivet
Robert J. Rivet
Director
Date: February 22, 2018 By: /s/ Albert E. Smith
Albert E. Smith
Director
Date: February 22, 2018 15, 2024 By: /s/ Peter C. Wallace
Peter C. Wallace
Director
Date: February 15, 2024 By: /s/ Larry D. Wyche
Larry D. Wyche
Director