Curtiss-Wright Corporation (CW) Q4 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Curtiss-Wright Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Jim Ryan, Director of Investor Relations. Mr. Ryan, you may begin.

Thank you, Andrea, and good morning everyone. Welcome to Curtiss-Wright's fourth quarter and full-year 2015 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer. Our call today is being webcast and the press release, as well as a copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this call also can be found on the website and will be available through March 03. Please note, today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. Forward-looking statements always involve risks and uncertainties, and we detail those risks and uncertainties in our public filings with the SEC. In addition, certain non-GAAP financial measures will be discussed on the call today. A reconciliation is available in the earnings release and at the end of this presentation and will be available on the company’s website. You also will find some additional charts on sales by end market at the end of this presentation. Finally, our discussions today of current and future results except for cash flow, are on a continuing operations basis, which excludes all previously announced divestitures. In addition, any references to organic growth, excludes the effects of foreign currency translation, acquisitions and divestitures unless otherwise noted. Now I'd like to turn the call over to Dave to get things started. Dave?

Thank you, Jim. Good morning everyone. For our agenda today, I’ll begin with the key highlights for 2015 followed by Glenn, who will provide a more thorough revenue of our fourth quarter and full-year 2015 financial performance along with our initial 2016 guidance. Then I’ll return to provide some additional commentary on the AP1000 margin expansion program and our capital allocation strategy before we move on to Q&A. Overall we were quite pleased with our 2015 results. The diversified nature of our business allowed us to mitigate several industrial headwinds and they produced strong margin expansion and free cash flow. Our operating margin at 14.1% was the highest level in more than a decade and we reached the top quartile of our peer group. This reflects the ongoing benefits of our One Curtiss-Wright initiatives. Without a doubt one of the most newsworthy items was the recent signing of the anticipated China AP1000 reactor coolant pump or RCP order worth more than $450 million. This represents the largest single order ever received by Curtiss-Wright. As you saw by our results, this provided an immediate boost to our power segment and was a strong contributor to driving Curtiss-Wright's full-year 2015 EPS above $4 per share. In fact, 2015 marked the first time in recent history that our EPS exceeded $4 led by the strong fourth quarter performance. We also experienced a strong year in our defense businesses where we are continuing to benefit from our wide breadth of product offerings as well as our focus on growth segments with a high demand for our advanced technologies. However, like most companies with industrial exposure, we're not immune to the effects of weaker global economic growth and extremely low oil prices. We experienced lower-than-expected sales in several areas in 2015, primarily those businesses directly and/or indirectly affected by low oil and natural gas prices. As a result we have tempered our industrial sales outlook for 2016. Later, I will discuss how we are mitigating top line pressures to position Curtiss-Wright for future margin expansion. We have made tremendous progress over the last two years improving Curtiss-Wright's overall operating margin by nearly 500 basis points enabling us to reach the top quartile in our peer group. We expect continued solid increases in our profitability and especially our free cash flow which is expected to exceed 2015 levels and approach $300 million in 2016. We also repurchased $300 million of our stock in 2015 which reflects our continued commitment to return capital to shareholders. I will touch more on this later on the call. Before handing over to Glenn, I wanted to cover a few highlights for Curtiss-Wright on the AP1000 program where we just completed a remarkable year. We've spent most of 2015 completing engineering and endurance testing and final modifications to our design. Following those efforts we were pleased to reach a major milestone last fall achieving a fully qualified RCP design. We began shipping RCPs to China in November which jumpstarted our discussions on the next order. As you saw by our January 05 press release, we secured an order for 16 RCPs for the next round of China AP1000 reactors. The order was received on December 31, 2015 and totaled $448 million or $28 million per pump. The receipt of this order and our continued efforts to advance our RCP technology would not have been possible without the tireless efforts of our Penn [ph] and Pittsburgh, so I wanted to publicly acknowledge their extensive contributions. Now I'd like to turn the call over to Glenn to provide a more thorough review of our 2015 performance and 2016 financial outlook.

Thank you, Dave and good morning everyone. Overall our fourth quarter results included solid improvement in organic sales, operating income, operating margin and EPS, driven in large part by the receipt of the new China AP1000 order and our ongoing focus on execution. Aside from the AP1000 order we produced higher operating income and margin in the fourth quarter despite lower sales. I'd like to spend a few minutes discussing the key drivers of our fourth quarter performance. I'll start with Commercial/Industrial segment. The impacts of weaker global economic conditions and lower oil prices were greater than expected which precipitated a larger than expected decline in industrial sales. In industrial valves we've continued to experience weaker sales in the oil and gas and petrochemical markets primarily driven by the industry wide reductions in capital expenditures which have led to larger than expected declines in demand on large projects. As a result of the fourth quarter decline, full-year 2015 sales in these energy businesses were down more than 15%. For industrial vehicles we experienced lower sales of products sold of the heavy-duty Class A truck market as the North American market peaked in 2015 and we began to see reduced demand during the fourth quarter. Finally, across the remainder of our general industrial markets including surface treatment services sales were negatively impacted by the sharp drop in oil prices, unfavorable FX and overall weaker global demand. So as a result of lower segment sales, operating income declined 1% and fell short of our expectations. However, on a positive note, segment operating margin increased by 30 basis points to 14.7% principally due to improved profitability on industrial valves and vehicle products despite the aforementioned lower sales volumes due to our proactive cost reduction actions. In the Defense segment operating income was up 18% despite a 4% decline in sales while operating margin was up 450 basis points to 24.4%. Segment operating income included $3 million favorable impact of FX. On an organic basis operating income increased 5% despite a 1% decline in sales. Though our sales fell short of our expectations, we experienced continued solid growth in profitability within our COTS embedded computing business aided by our ongoing operational and margin improvement initiatives. Next in the Power segment operating income was up 262% and operating margin was up substantially to 23.5%. This performance reflects the impact of the new China RCP order including recognition of $13 million in revenue and $3 million dollars in operating income as expected as well as a $20 million one-time fee in the fourth quarter. Excluding the AP1000 fee, this segment still had an excellent quarter with operating income up 83% and operating margin of 550 basis points to 13.5%. As expected our results reflect a strong improvement in operating income and margins now that we have moved beyond the significant expenditures related to testing and design modifications for our AP1000 RCPs. We also generated higher profitability in our nuclear aftermarket business despite relatively flat sales due to ongoing margin improvement initiatives. Regarding the fee and as noted in our October 2015 earnings call, we had expectations for potential $4 million benefit in the fourth quarter. Negotiations continued throughout the fourth quarter and ultimately the fee grew to $20 million which was recorded as both revenue and operating income in the quarter. Following what was established in the 2007 technology contract the current fee primarily allows for procurement of components outside of China should the Chinese deem it necessary in their pursuit of self-reliance and for the use in the design and construction of RCPs in their current and future designs. In summary, overall fourth quarter operating income increased 45%, which led to a 530-basis point increase in margins of 18.4%. However, even if we exclude the AP1000 fee our fourth quarter results were still strong as operating income was up 18% while operating margin increased 250 basis points to 15.6%. This performance further illustrates the resilience of our business model, our enterprise-wide focus on execution and the benefits of our diversified end market strategy despite the continued challenges facing our industrial businesses. Moving to our full year results, we concluded 2015 with strong profitability despite a 2% decline in sales. Excluding FX 2015 organic sales were flat with 2014. Overall higher sales to our defense markets were offset by a decline in sales to our commercial markets. And while we're not going to address each market, on Page 17 of the appendix you will find a detailed breakdown of our full-year 2015 sales by end markets. Overall Curtiss-Wright operating income grew 10% driving operating margin up 150 basis points to 14.1%. Our results reflect strong profitability in our Defense and Power segments, the benefits of our ongoing margin improvement initiatives and the new RCP order. And despite a decline in commercial and industrial sales of approximately $90 million from our initial guidance, we were able to hold our operating margin on par with 2014. As a result Curtiss-Wright's full-year diluted earnings per share was $4.04 up 17% from the prior year period. Next to free cash flow, we are on the heels of a very strong fourth quarter. We concluded 2015 with solid free cash flow that exceeded our expectations, primarily due to lower capital expenditures partially offset by lower advance payments. Our 2015 free cash flow was $272 million adjusted to remove the $145 million pension contribution for free cash flow conversion rate of 141%. And finally, we generated a solid improvement in our return on invested capital which increased 110 basis points to 11.5% in 2015 due to our improved operating performance and stringent capital management. This reflects an improvement of 350 basis points over the past two years. Moving on to our 2016 end market sales guidance, for the sake of proper comparison when reviewing growth rates for 2016 we are comparing to pro forma 2015 results which excludes the one-time AP1000 fee. I'll begin with the Defense markets where 2016 sales are expected to grow between 2% and 4%. The favorable trends in 2015 are expected to continue in 2016 due to improved DoD spending and a higher base budget which we expect to drive improvements in all three of our key defense markets as noted on the chart. In aerospace defense we're expecting higher sales on fighter jet programs, most notably on the Joint Strike Fighter while overall helicopter sales are expected to be lower. In ground defense, domestically we anticipate renewed demand in the U.S. as modernization programs for the Bradley and Stryker vehicles are expected to gradually ramp up. International sales should also improve led by sales of our turret drive stabilization systems. And finally sales for the Naval Defense market will be essentially flat, based on reduced year-over-year production on the Virginia Class Submarine Program due to timing, while net sales in the Aircraft Carrier Programs are expected to be marginally higher. Moving on to the commercial markets where overall sales are expected to decline 1% to 3% from our pro forma 2015 results. I will start with commercial aerospace where sales are expected to decline between 2% and 4%. As we previously had told you, Airbus elected to ship wing forming on the A320 to a supplier in South Korea. However, this transition took longer than expected and shifted to 2016. As a result we expect to see a reduction in sales to Airbus in 2016. Meanwhile sales to Boeing are expected to remain flat as higher sales on the 737 program are expected to be offset by lower sales on the 747 program. In power generation we expect sales to increase 4% to 6% compared to pro forma 2015 results. Our performance will be driven by higher sales on the domestic AP1000 program as well as our non-RCP nuclear technologies. In fact those businesses expect to generate between $10 million and $15 million in non-RCP AP1000 revenues in 2016. However, those gains are expected to be partially offset by reduced demand in the nuclear aftermarket business due to fewer planned outages in 2016. And finally in the general industrial market we expect sales decline between 2% and 6% in 2016. Starting with industrial valves sales to the oil and gas market are expected to decline 10% to 15%, while sales to the chemical and petrochemical markets are expected to be down slightly. And while the duration of the oil and gas downturn is uncertain, the energy markets represent only 7% of total Curtiss-Wright 2016 sales with 5% of these sales to the oil and gas market and the balance to the chemical and petrochemical markets. Moving to industrial vehicles, while on-highway sales will be impacted by the expected declines facing the heavy-duty Class A truck market which peaked in 2015, those reductions are expected to be partially offset by higher sales to the medium-duty truck market which now accounts for a higher percentage of our industrial vehicle sales than the heavy-duty trucks. As a result, our overall on-highway sales will only be down approximately 5% in 2016. Moving on, off-highway sales are expected to increase approximate 5% as overall construction equipment sales are expected to more than offset weaker conditions in the global agricultural market. And finally, our medical mobility sales are expected to improve slightly due to continued market share gains, while the remainder of our general industrial businesses that are more economically sensitive are expected to be relatively flat with 2015. To sum up, we are forecasting overall Curtiss-Wright 2016 sales to range from up 1% to down 1% compared to 2015. In the appendix you will find the final 2015 end market sales waterfall and the end market sales pie charts for each of our three segments as well as the 2016 end market sales waterfall based on our guidance. Continuing with our financial outlook and as a reminder we are comparing 2016 guidance to pro forma 2015 results which excludes the one-time AP1000 fee from both sales and operating income within our Power segment and Curtiss-Wright overall. In 2016 we expect full year sales to be approximately $2.2 billion. Total operating income is expected to grow 5% to 8% while operating margin is expected to expand another 70 to 90 basis points to a range of 14% to 14.2%. And the Commercial/Industrial segment sales are expected to decrease between 1% and 3% primarily led by reduced demand in the general industrial market. While we are continuing to navigate through the challenging industrial market environment and despite facility consolidation costs in 2016 we are projecting a slight improvement in operating margin to a range of 14.6% to 14.8% due to our cost mitigation actions. Next is the Defense segment where sales are expected to grow 3% to 5% led by growth in the aerospace and ground defense markets. Regarding our profitability in this segment I'd like to highlight several key drivers. As a reminder, our second quarter 2015 results included a one-time benefit for the transition between our development and our production contract our turret drive stabilization systems. This resulted in a $4 million benefit to our contract margin in sales which will not recur in 2016. We also expect to be negatively impacted by a less favorable sales mix in 2016 as we expect a decrease in our higher margin COTS sales and an increase in our lower margin system solutions. Furthermore 2016 includes increased investments in R&D to support our high-tech embedded computing products as well as restructuring costs. As a result, we are projecting lower operating income and 140 to 160 basis points reduction in operating margin to a range of 19.1% to 19.3%. Next to the Power segment where sales are expected to grow 2% to 5% primarily led by growth on the AP1000 program. We are projecting significant improvement in operating income compared to our pro forma 2015 results driving at 240 to 260 basis points increase in operating margin to a range of 12.9% to 13.1%. Aside from the higher margins associated with the new AP1000 order we are realizing the benefits of moving past the expense of testing and design costs which have previously impacted the AP1000 program. Continuing with our 2016 outlook we expect reduced pension expense to drive lower corporate costs as we move past the impact of the pension payout to our former chairman and also begin to experience the benefits of our $145 cash contribution made to our pension plan in 2015. In addition, we are forecasting diluted shares outstanding to be 46 million reflecting our previous share repurchase activity and our expectations for 2016 share repurchases to more than offset the dilution from stock issuances. Our 2016 guidance for diluted earnings per share is a range of $4 to $4.15 which represents EPS growth of 7% to 11% over pro forma 2015 results. The weighting of our 2016 quarterly EPS expectations will be a bit of an anomaly. We expect our first quarter to be lower than the year ago with each quarter increasing sequentially and the fourth quarter to be our strongest as we have done historically. As a result we expect approximately 35% of our full-year EPS to be in the first half of the year and to be more heavily weighted to the second half than in prior years. We expect first quarter 2016 EPS to be driven by several factors, including reduced year-over-year sales and operating income in the Commercial/Industrial segment as well as a few million dollars in 2016 restructuring costs. Further, the prior year period included the one-time Progress Energy termination benefit of $7 million or $0.10 per share in the Power segment which will not recur in 2016. Given the number of moving pieces and to aid in your modeling, we expect first quarter earnings per share to range from approximately $0.60 to $0.70. And despite the lower first quarter expectations we remain confident in achieving our full-year EPS guidance. Next to our cash flow, as a reminder and as a result of the voluntary pension contribution in 2015, we do not anticipate making cash contributions for the Curtiss-Wright plan for the next four years. We have the expectations for strong free cash flow in 2016. Our free cash flow is expected to range from $280 million to $300 million, up 3% to 10% compared with 2015 with an expected conversion rate of 152% to 157%. The improvement in cash flow will be driven by the receipt of advanced cash payments related to the new AP1000 order and a reduction in working capital, partially offset by an anticipated increase in 2016 capital expenditures due to the planned facility consolidations and other restructuring activities. And finally we expect our free cash flow per share to range from $6.10 to $6.50 a 6% to 14% increase over 2015. Next I'd like to provide some specific details on the new AP1000 RCP order. We expect a duration of the order to range from 2015 to 2021 with initial deliveries beginning in 2019. Revenue recognition on this order will be based on percent of completion or POC accounting where we will recognize revenue as the incurred cost towards completion of the order. Over the production cycle we expect revenue to be recognized like a bell curve as we have stated with prior AP1000 orders beginning in 2015 and principally including 2020. Revenue will not be recognized a linear basis. As we have indicated on the slide because we recognize order revenues and the one-time fee in 2015 AP1000 growth in this order will be essentially flat in 2016. This will be followed by a progressive ramp in 2017 through 2019 which is expected to be the peak year before dropping off sharply in 2020 and tailing off for the remainder of the order. Consistent with the margin profile we provided in 2015 we expect margin in this order to be in the low 20% range. Finally, we expect to receive approximately $60 million in advanced cash payments in 2016 related to this order as is typical with these types of orders. Now I'd like to turn the call back over to Dave to provide some additional color on the AP1000 program. Dave?

Thanks Glenn. I'll begin with the orders received prior to 2015. Regarding our original 2007 China order, based on the current schedule provided by a customer, we are making preparations to complete shipment of all 16 RCPs by year end. In fact, all four of the RCPs for Sanmen 1 which is expected to be the first AP1000 reactor in operation in the world have been installed in the plant. All four of the RCPs for Haiyang 1 are enroute to the site. So thus far we have shipped eight of the 16 RCPs to China. Note the revenue recognition on this 2007 China order will be essentially complete by the end of 2016. Next to our U.S. order which was received in 2008. Our production of those RCPs is progressing well and we expect to begin shipments this year concluding in 2017. Recall that our domestic customer requested us to commence shipments related to this order after we completed the first eight RCPs under the original China order. Revenues and margin on the U.S. order will be realized through the end of 2017. Now let me turn our attention to the new China order and the exciting news this brings to Curtiss-Wright. After several years of design iterations we were able to successfully complete all tests and as promised our Chinese customer placed the first new production order with us. Under the new order received in late December, Curtiss-Wright will be producing 16 RCPs across the total of four plant sites or four RCPs for each site. As anticipated, based on the 2007 RCP technology transfer agreement and consistent with China's local build strategy the Chinese customer placed a parallel order with a Chinese national entity. We had always expected to share in the production of RCPs and this April [ph] the Chinese expect to produce the other 16 RCP in-country bringing the total number of RCPs to 32 across the four plant sites. I will reiterate Curtiss-Wright's RCP status. We have the only fully qualified, tested and delivered AP1000 reactor coolant pump in the world. We have passed all the technical gates and are in full rate production of our RCPs which is no small undertaking. Accordingly we have a great comfort level with our technology offering and positioning in the market and believe we will remain superior for years to come. As far as the future is concerned, we look forward to continuing our close working relationship with both our Chinese and domestic customers in their need for the highest quality and safest reactor coolant pump design in the world. As you are aware, China has vast long term plans to triple the amount of energy provided by nuclear power plants, including the potential construction of well over 100 reactors. This presents a tremendous long term opportunity as the need for nuclear reactors goes well beyond the current capabilities of the Chinese indigenous supply chain. Probably available data on potential near term reactor construction in China indicates a minimum of 22 AP1000 nuclear reactors to be built over the next eight to 10 years. This equates to 88 Curtiss-Wright designed RCPs. A quite run of the map with current RCP pricing says this market alone is worth approximately $2.5 billion dollars. As India and other countries continue to move further down the path with their nuclear construction goals we anticipate more opportunities for our nuclear power generation business. Public data notes 60 potential reactors in India and the AP1000 is likely to play a significant role. Aside from RCPs our remaining nuclear businesses have the potential to contribute additional products and services to the AP1000 as well as several other reactor designs which typically occurs much later in a plant construction cycle. Overall, it is clear that the long term nuclear opportunity available to Curtiss-Wright is significant and we will continue to pursue our share in the best interests of our company and shareholders. Next a review of our strategic margin drivers. As a reminder, one of our key objectives is expanding our operating margin in order to reach and maintain top quartile status compared to our peers. On this slide you can see our progress from 9.3% at our 2013 best to date up to 14.1% for 2015. I'm obviously very proud of our team's success in driving margin expansion as the pace of our transformation demonstrates our focus on improving shareholder value by leveraging our competencies. We will not let our foot off the gas in this regard as we continue to advance our best-in-class manufacturing and operating methodologies. In 2016 one of the key drivers will be facility consolidations, a component of our original long-term margin improvement initiatives. Given the state of the overall economy and the proactive nature of our culture within Curtiss-Wright, we're taking steps to ensure that we first preserve and then continue our margin expansion in 2016 and beyond. For example, in our Commercial/Industrial segment we're in the process of reducing our manufacturing footprint overseas by combining eight industrial facilities into one. We are also planning additional facility consolidations and restructuring activities in other areas of the company. In total we expect to incur $5 million to $6 million in upfront costs in 2016 to support all of these initiatives along with $12 million in CapEx. This should help to generate approximately $10 million in future annualized savings. As a point of reference we have had some relevant experience with facility consolidations. A few years ago we proactively accomplished several consolidations within our Defense segment in response to the expected slowdown in the defense market and as a function of sequestration. Fast-forward to today and you're seeing the results of those actions was strong segment margin expansion. Finally, our 2016 in future years results will also benefit from the actions we are taking to generate hard saving through our lean and supply chain initiatives. Our goal is to generate a few million dollars in savings across each of our six divisions between 2016 and 2018 as part of our previously communicated operating margin initiatives. We have good line of sight to achieve these expected savings. As a result of these and other initiatives Curtiss-Wright's operating margin is expected exceed 14% in 2016 ahead of our planned 2018 timeframe. We will continue to focus on long-term opportunities to improve our margins and reduce our cost, particularly given the current economic and end market challenges. At this time our primary focus is on maintaining our status on the top quartile rather than setting new long-range targets. Next to capital allocation, Curtiss-Wright is focused on continuing to generate free cash flow as evidenced by our strong 2015 results and 2016 expectations. We remain committed to maintaining a balanced capital allocation strategy between operational requirements, returning capital to our shareholders and strategic bolt-on acquisitions. During 2015 this was principally weighted to returning capital to shareholders and satisfying operational requirements. We've completed our $300 million buyback program which reflected $200 million in steady share repurchases via our 10b5-1 plan along with $100 million in opportunistic buying. For 2016 we have begun buying back shares under the repurchase program that was authorized by our Board of Directors last year with expectations to repurchase at least $100 in spot this year. For reference we indicated that this $100 million would be executed via a 10b5-1 plan. We are also maintaining a steady dividend payout as a further sign of our commitment to returning capital to shareholders. In 2016 our use of capital or operational needs includes ongoing CapEx requirements and increased internal investments to aid the company's long-term growth. I want to reiterate our commitment to growing the top line. We intend to accomplish this by prudently reinvesting in the business, increasing R&D spending and focusing on future organic growth in addition to supplement this internal growth which we expect to ramp up beginning in 2017 with strategic acquisitions. Our acquisition efforts have increased as we look to offset some of the top line strain the industry is experiencing as a result of oil and gas weakness. Having said that, we're being selective, especially in this market. We want to ensure that we find the correct strategic fit and grow along with a fair price and acceptable operational metrics. We would prefer to execute a deal that will immediately contribute to our long-term profitability expectations and will not be dilutive to our financial metrics. We believe this long-term focus will continue to reward our shareholders. In summary, 2015 certainly had its share of challenges and bright spots with none brighter than the receipt of a new AP1000 order. In 2016 we will continue to experience some headwinds in our industrial businesses based on continued low oil prices and the uncertain economic environment. Despite some lingering top line challenges and as noted on the chart we expect a pretty solid margin expansion and strong free cash flow generation. Based on Curtiss-Wright's diversification across a wide variety of end markets and geographies we hope to mitigate most of those declines with solid growth in our defense and our end markets. As Glenn noted, we expect 70 to 90 basis points in operating margin expansion in 2016 up to a range of 14% to 14.2%. This reflects our team's continued strong execution and focus on driving synergies and producing significant cost savings all supporting the One Curtiss-Wright vision. As a reminder, we are aiming to reach and then maintain our position in the top quartile of our peer group for all of our long-term financial metrics. We are also maintaining our continued commitment to return capital to shareholders through steady share repurchases. All of these factors play a role in our long-term strategy focused on delivering solid financial results to drive value for our stockholders and we remain excited for the future. At this time, I'd like to open up today's conference call for questions.

Thank you. [Operator Instructions] our first question comes from the line of Myles Walton with Deutsche Bank.

Good morning, thanks.

Good morning Myles.

Thanks. Good morning. Thanks for the level of detail. I'm not sure you left any stone unturned here, but I'm going to try anyway. So in 2015 the pension contribution you made, I imagine you benefited on the tax side of the ledger or is the tax deductibility benefit coming through in 2016? The reason I ask is it would seem to me the sequential improvement in cash flow is more significant than 3% to 10% you are showing in the slide if you benefited from the tax deductibility of the pension contribution last year.

Yes, actually we elected to take the contribution on the prior year return. So it did flow through when we filed the return in 2015 we took it on 2014 return and I think you see that flowing through in the fourth quarter as part of that came through in the fourth quarter. And basically the impact was reducing, giving us a higher manufacturing deduction.

And the working capital metric as you finished the year, can you give us what - where it hits and then kind of where you are thinking it is going to hit at the end of 2016?

Yes, I would say from 2014 we've come down about, I'm sorry, from 2015 to 2016 we expect it to improve 180 points. We ended up 2015 at 25.4% and we're projecting 2016 to be at 23.6% and again that's part of our journey towards top quartile. Right now it is about approximately 20%. It fluctuates up and down a little bit and at which time we do the calculation. But continuing to make improvements and continuing our journey and you're seeing it in our cash flow in 2016 and 2015 as well.

One on cash, the CapEx of the business looks like you've kind of moved from where it was at 3.5% to 4% of sales was CapEx the last five to seven years up until this past year 2015 was pretty light. 2016 the guidance is 2.5% of sales, but it sounds like Dave you mentioned there is about $10 million of discretionary. Are you just in a business now that's a lot less cap intensive going forward or is there some sort of holiday?

Well, a couple of things, one you know we've said back on investor day, this is another metric we were going to try to achieve top quartile which is around 2%, so part of it is that. And then a lot of the companies were divested for capital investments. So that's a fundamental change in our capital profile. 2015 was good and it is really nothing other than timing that we know of nothing major and you see we picked it back up again in 2016 and we do have, I think it is $12 million of incremental CapEx for facility consolidations in our 2016 number.

Okay, Dave one question for you on the capital deployment side, obviously you were one of the biggest buyers on stock across the industrial complex on a relative basis in 2015 and you've got a $100 million built into the plan. It sounds like you're still looking for more bolt-on transactions which I think by your definition are several hundred million dollars. Can you give us an update on the pipeline of the types of deals. I think the last time we spoke it was valves and sensors that were kind of higher on a list than not. Maybe you could just update us on the pipeline?

Yes Myles, with all the cash that we're generating we're really excited about the opportunity that is going to give us from balancing – location plant and especially in the area of acquisitions, I have personally gone out and looked at a couple recently and things we've been finding and they are still primarily some $100 million that is the key driver, but that's been sort of what we've been looking at. And more recently what we have found are the links or ties to some of the oil and gas debacle is taking place and with the sort of outlook that we have in the industry at large is to not knowing when this is going to end necessarily that’s in the case of those that have a link to that particular marketplace and this reduced our interest, my interest in particular. So we do like defense side, we continue to like defense strategy and growth in that areas. We looked at several and we have several that we are looking at right now and particularly as I have said before the C4ISR kind of marketplace. And we think that that's going to continue to grow and it will be an exciting area for our sensors. Always I think that what we have found is that we have demonstrated our ability to acquire, integrate, consolidate, rationalize and so forth the build in most importantly almost a one plus one equals three approach by taking the sensors and the technologies and product lines and whatever that we will acquire and putting those into our bigger themes. For example, own the cabin there that's own the cab, a strategy that's a larger offering to major manufacturers, OEMs for example large and medium sized trucks. So we like those, so we're fairly specific about what sensors we go after, we're not after the commodity types. And you mentioned valves, I have talked about that many times. I like valves, I just don’t like oil and gas related valves right now, you know the severe service type is what we produce and we do very well in that regard. We continue to look at those as they come up. So I would say the pipeline has got plenty in it to look at. We weed out those that are tied to some of the more negative aspects of some of the business constraints that we all see out there right now.

Okay. All right, thanks guys.

Thanks, Myles.

Thank you. Our next question comes from the line of Kevin Ciabattoni with KeyBanc Capital Markets. Your line is open.

Hi, thanks good morning.

Hi, Kevin.

Good morning Kevin.

Start off here with a couple on AP1000 I guess, obviously saw a nice increase in pricing there, up to the $28 million per RCP. What's kind of the outlook going forward, for pricing as you go after new orders? And maybe talk a little bit about kind of what the pipeline looks like, at this point?

Yes, the pipeline I'll start with that, we’re tremendously excited about what that opportunity is and so excited I wanted to put in our script and that was that, we’re looking at over the next 8 to 10 years that market opportunity in China alone is there, has been described publically has being on the order of 88 units. And you do the math like I did in my script that’s $2.5 billion and so we believe that the market opportunity is absolutely fantastic. And in the ten years is not long term to me, I mean that’s right around the corner in terms of the period of time it takes to place an order, build these things and ship them out. So, that’s really great news for us. I think in terms of the pricing strategy and so forth, while I wouldn’t be able to talk about it specifically even if I had a lot of detail here, but what we will go through is, will be based largely upon when the next order will be placed. For example, what sort of inflation, escalation we might see, what sort of labor cost we might be seeing at that time and projected forward during the build cycle. As indicated these things are 40 months plus long in the build cycle, so we'd take that into consideration what we think labor rates and commodity rates and pricing and so forth will be, the metals and so forth that are used in these products and then the quantity. So it was very dependant $28 million we indicated was very dependent on quantity order. Had we received a larger order they would have been less expensive and receive smaller order they would have been more expensive and that’s just a dynamic of quantity pricing like that. But we’re very pleased with that order and I think that it is going to bode us well, it will bode our shareholders very well. And so, I don’t think that we will be deviating in any way from the pricing strategy that we that deployed in this order on future orders.

Okay. That's helpful. And then I guess along those same lines, you mentioned on the new order there was the assumption of a parallel order placed with a domestic Chinese producer. Could there be potential opportunities longer-term if the Chinese are unable to kind of keep up with production, or if they run into roadblocks, et cetera, for you guys to step in there?

We have a very strong working relationship with our Chinese customer and our domestic customer and I will say this, it has taken Curtiss-Wright over 50 years to get to the capability that we presently have to build reactor coolant pumps. And this is the largest of its kind in the world and most complex in the world and everybody on this call and everybody listening knows the grief that we went through in getting these out the door and finally having been able to say that we have a fully qualified unit that will last 60 years without interruption. So yes, I think Kevin suffice it to say it was very difficult, very tenuous all the way along. And we do stand ready to help in any possible way that we can and we will help as needed and we're not we don’t wish ill on anybody. We certainly do what we can, like I said we'll be there and we do look forward to much more business for many, many years to come.

Okay, thanks. And then last one for me, just shifting to the commercial aerospace side. And I apologize; I jumped on a little late, so if you covered this. It sounded like Airbus, with the wings moving, it was probably the biggest piece in the guidance, the lower revenue guidance for next year or for this year, rather. Is there any opportunity for you guys to kind of backfill that in terms of business in Europe? And are there any other significant - it sounds like Boeing is going to be flat - any other significant declines in commercial aero that we should be looking at?

We don’t really look at any other foreseeable major declines, 747 we know where that’s going and is indicated, the 737 up is a little, it is offset a little bit by the 747. We do work internally by the way when we started negotiating with Airbus on this Korean delivery as I indicated on prior calls we were asked if we were interested in that and because of the low margin that we would have expected and the tremendously large capital requirement to even ramp up and facilitate in a country like that that we decided to not do that program and so we began at that time looking at fill in business in aerospace in particular there we could backfill this business with. From a one perspective it was fortunate for us that it dragged from 2015 into 2016, so now we'll deal with it in 2016 but that gave us a little more time to pick up other good acquisitions that we had placed into our Surface Technologies segment and other division, and that division is producing continuously producing a great margin and so we continue to look for other opportunities there to acquire and place into that as well as of course organic opportunities. We continue to bid many different platforms and we will always do that, but it's hard to find a direct replacement fill in for that single order work that we were doing there. This happens very frequently by the way that we will find a customer will move from one site across the country to another or around the world, we normally will follow them if the margins are good for us and if it meets our expectations internally and we just like, this case it didn’t. So we're used to this sort of movement, rather than the fact that this happened was a fairly large piece then, and we do had to react and I think we’re doing a really good job of that. So, I think you will see over the next several years us building back to what we had lost in that case and specifically, but with good products with good margins.

Okay, thanks.

Thanks Kevin.

Thank you. Our next question comes from the line of Kristine Liwag with BofA Merrill Lynch.

Hey, guys good morning

Good morning Kristine.

Good morning.

Dave, in your prepared remarks you highlighted the 22 AP1000 reactors over the next 8 to 10 years. Can you discuss your capacity to build these RCPs and what's the run rate of production you can support without adding more CapEx?

We could easily support that quantity. The run rate currently is about 24 units that we can handle on annual basis that's pretty much driven by our test loop and that’s a constraint that any manufacture would have to contend with and if we all fell under this wonderful world of AP1000s all over the place, I think that it would even more so highlight the fact that the ability for facilities to be able to manufacture to the level of need would be I’d say very dependent on multiple sources. And I think that’s true in China, Chinese credit in terms of establishing another because I think that once we get into this full rate production and once Sanmen 1 and 2 get turned on I believe others 3 and 4 on an on will start to see the benefit and that will hopefully, in our parlance, unleash some additional orders that will drive that but right now we’re at 24 before having to do anything else. And in our, we visited our test loop just a couple of weeks ago, it is up in Pittsburgh, and we're up and running and what we were putting through that facility right now just really is a very key indicator to our ability to handle 24 and potentially more, so it’s a smooth running machine up there right now.

Great. And you've discussed the cadence of revenue related to the program. Should we think about cash flow to fall in line to that revenue recognition curve?

Kristine, the cash flow is going to a little bit trickier and we don’t have that projection nailed down yet. They are still going through all analysis of milestone timings and all that kind of stuff though I can’t really, I can’t tell you one way or the other right now.

Sure. And one last question from me, regarding your balance sheet. You guys are now investment-grade. You are generating a lot of cash next year. And then also even with the share repurchase you have earmarked for 2016, that's still a lot of cash that you are generating. Can you talk about the M&A pipeline and then what you are looking for and maybe what’s preventing you from closing deals today if its lack of available options is it evaluation can you provide a little bit more color there?

Sure, Kristine I think the evaluations certainly, evaluation of the properties that we look at plays a significant factor. As I said in my remarks, we look for – we don’t look for deals, we look for deals that reflect some operational metrics that we have internally. Op margin for example, we don’t want dilution when accretive first year and so forth, size sub $100 million has been the course that we’ve been running for the last several years, we continue in that vein. We do look at larger ones as they come up and so sub $100 million isn't cast in stone. But any property has to complement what we’re doing in a very strong way and I’m not looking for fourth leg of the stool from a perspective of and winning something new for this company. We feel very comfortable in the breadth of markets that we reached today with our product lines and extra sensor company that might place into and complement some of these sensors that we provide today. From a system perspective would be tremendous for us. I’ve talked in the past on valves, anything that is not associated right now with the oil and gas area that we don’t need any more of that and we’re pleased with our civil service valves we have today, but they have been interrupted somewhat by the markets at large. So I would continue to look at that valve area but very specifically. In a pipeline wise, we do look at every month, we look at new opportunities, I visited a few of them, as I indicated a few minutes ago on the call, I visited a few companies and we backed out of one more recently as a result of the tie in or the link that that particular business head towards the oil and gas sector and it was an uncertain future. And it’s hard to put a valuation on a company like that, but you can give them a price, but it’s going to be an embarrassingly low price because there is no real solid outlook in the company like that. So we watch that sort of thing. But our eyes are wide open, we do receive inputs, we are out there searching for new opportunities all the time.

Great. Thank you very much.

Thanks Kristine.

Thanks Kristine.

Thank you. Our next question comes from the line of Ryan Cassil with Seaport Global. Your line is open.

Hey good morning.

Good morning, Ryan.

Good morning, Ryan.

So, on the AP1000, if things ramp up as you say, in terms of the market opportunity that's out there and China's expectations to grow their nuclear program, could we expect orders - additional orders to come here in 2016?

Realistically, I don't know, but I will tell you that my guess would be like I indicated that Sanmen 1 and 2 need to get online and for that plant to proven out if I’m in the customer shoes, if I’m in China and I’m saying look I want to feel really comfortable about I'm talking about nuclear reactors at large, I’m not talking about AP1000 because we know that works. I'm talking about the plant itself. If I were an energy company in China, I would say look I'd like to see this thing up and running before I really commit some extra monies and or at least in a long a certain path to success that I can feel comfortable enough to put my money down on because these are long lead items, our pumps alone. To build a nuclear reactor, you can only imagine how long lead those are. So I believe that until and unless they start to see, which they are beginning to see now that we placed pumps in the ground until and unless they start to see some proof of the pudding, then I would think that they would want to wait a little bit. So when does that happen, well probably my suspicion would be next year some time that unit will be turned on and that unit being the plants. So Sanmen 1 and 2 and then once those are, I think people are going to feel pretty darn good about what's going on. Is it going to be turned on before that? I don’t know, I just don’t have that sort of visibility.

Okay. Okay, great thanks. And then just looking at the industrial valves business, could you talk a little bit about pricing, whether that's been under further pressure, or whether you think that has stabilized? And then also whether you’ve seen any change in downstream activity in 2016, given that utilization rates have come in a little bit.

Yes, we've seen a little bit of pricing pressure. It started to raise its ugly head, let’s say mid to late last year and we started to see competitors trying to drive into different areas and they were not prior into. That's just a natural result of everybody trying to eat the remaining pieces of the pie. Fortunately, we do civil service valves, which are – they are very niche oriented and they require qualifications and all sorts of certifications for their operational characteristics, because if one of these things fail, then a plant can blow up. I mean we are talking some really serious stuff that goes on here. So we feel pretty comfortable in some of the areas that we found that sort of competition. In another words I’m saying it’s extremely hard to second source this stuff, but I think for the most part, yes there has been little bit when we see that kind of changing, I’m not sure when that is going to happen. It’s all really largely dependent upon this oil and gas situation.

Okay. Okay, great. Last one for me, just thinking a little bit bigger-picture. I know you don't want to give exact, long-term margin targets at this point. But just kind of putting the pieces together, I think you talked about $10 million in annualized savings from some restructuring you're doing in commercial/industrial. You expect a couple million across each segment, over time, and from lean initiatives. And then you are going to be layering in what sounds like 20%-plus margin business here in the nuclear side. Do you think it's possible that down the road we could see margins close to the high teens, consolidated?

I mean we have a lot of different things going on as we have for the past three years, so and you see how we have progressed. I mean, I couldn't say it's not possible, but I would say it is one thing we are pretty sure we started doing again this year is reinvesting back into the company and specifically R&D and some other technologies to foster organic growth. And will our margins improve? Yes we were still committed to it as Dave said, but we’re also not trying to lean under server to be in the top docile, I wanted t be top of our peer group unless we can continue to look forward to invest back in the company and that is going to be part of our strategy going forward as well. So we got balance to do.

You know one aspect of it that is really critical to understand and recall if you have followed us, and if you watched what we do and I have referenced in my prepared remarks it was what we did in the defense side, we were very proactive in the cost take outs and other areas that we started getting the feeling very early on prior to sequestration debacle that came about, and we started making moves to really improve the margin in that area and we have done the same thing here where you’ve seen now o verbalizing what we are doing in 2016 with regard to consolidation. These were plans that now we're working and we will effect those in 2016 and they will have – there will be more effect to us from our margin operational profitability in the years to come, but you’re seeing that now in this year as we’re going to spend like I was talking about $5 million or $6 million and maybe $10 million plus a yield on that. That’s just the way the culture is here at this company, and I'm proud of it. We've done an excellent job with that and one other thing I just want to mention that I fail to do so on the last question you had on with regard to margin on valves, what we see there with that let’s say the competitive pricing, it’s not a material number. So it’s not nearly as large as you might think, it is present, but we are able to offset that by some of the other goodness we have out of similar other divisions.

Okay. Great, thanks, guys.

Thanks Ryan.

Thank you. And we have one last question from the line of Steve Levenson with Stifel. Your line is open.

Thanks, good morning everybody.

Hey, good morning Steve.

Just a question on the certification of the reactor coolant pumps, and I know there were some obstacles to it. For the Chinese in-country producer of the pumps, what is the certifying entity and what sort of timetable – and I don't know if you can estimate what sort of timetable they have, but maybe you can relate it to how long it took you to get everything certified? Thanks.

Well, it took us several years from certified you’re talking about qualified RCP right?

Right.

Yes, they have their – the Chinese have their own version of our nuclear regulatory committee in China…

NNSA.

I think it’s is NNSA and they will regulate, they do all certifications and so forth. So at the point level they will obviously be doing that, we believe at the manufacturer level the company that will attempt to manufacture an RCP will attempt to qualify it and that will be qualified I’m assuming much the same as what we did and that was, via our customer who watched and witnessed and recorded and so forth and so that takes a period of time. I don’t know what their timeline is on it. I just don't have any idea. We do know that the general – the power companies that are acquiring these pumps want them as quickly as they can get them. And we intend to get them to them as quickly as we can, so there is a great demand over there for this product and we are in a super opportunity to really do a super job and we intend to do so.

Got it, thanks, very much.

Thank you.

Thank you, Steve.

Thank you. I’m not showing any further questions at this time. I would now like to turn the call back over to Dave and Adams for any further remarks.

Thanks Andrea and thank you all for joining us today. We look forward to speaking with you again during our first quarter 2016 earnings call. Have a great day. Bye-bye now.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may now disconnect. Everyone have a great day.