Curtiss-Wright Corp (CW) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright fourth-quarter financial results conference call. (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 3.

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 exclude 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 begin with the key highlights for 2015, followed by Glenn, who will provide a more thorough review of our fourth-quarter and full-year 2015 financial performance, along with our initial 2016 guidance. Then I will 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 to produce 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 for 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 offering, as well as our focus on growth segments, with a high demand for our advanced technologies. However, like most companies with industrial exposure, we are not immune to the effects of weaker global economic growth and extremely low oil prices.

We've 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 in the call.

Before handing it 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 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 jump-started our discussions on the next order.

As you saw by our January 5 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 team in 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 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 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 to the heavy-duty Class 8 truck market, as the North America 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 valve 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 a $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 and 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 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 up 550 basis points to 13.5%.

As expected, our results reflect the strong improvement in operating income and margin 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 a 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 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 to 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 market.

Overall Curtiss-Wright operating income grew 10%, driving operating margin of 150 basis points to 14.1%. Our results reflect strong profitability in our defense and power segment, the benefits of our ongoing margin improvement initiatives, and the new RCP order. And despite a decline in commercial/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, where, on the heels of a very strong fourth quarter, we concluded 2015 with a solid free cash flow and 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 a 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 in 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 are expecting higher sales on fighter jet programs, most notably on the Joint Strike Fighter, while overall helicopter sales are expected be lower. In ground defense, domestically we anticipate renewed demand in the US, 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 to 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 on 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 in 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 to decline between 2% and 6% in 2016. Starting with industrial valves, sales for 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 8 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 approximately 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 to 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%.

In 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 to 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 the development and a production contract for 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 a 140 to 160 basis point 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 a 240 to 260 basis point increase in operating margin to a range of 12.9% to 13.1%. Aside from the higher margins associated with a new AP1000 order, we are realizing the benefits of moving past the extensive testing and design costs which 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 million 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 a year ago, with each quarter increasing sequentially and the fourth quarter being 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 or cash flow. As a reminder, and as a result of the voluntary pension contribution in 2015, we do not anticipate making cash contributions to the Curtiss-Wright Plan for the next four years. We have 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 the 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 the 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 we incur costs 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, principally concluding in 2020. Revenue will not be recognized on a linear basis.

As we have indicated on the slide, because we recognized order revenues and the one-time fee in 2015, AP1000 growth on this order will be essentially flat in 2016. This will be followed by 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 margins on 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 our 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 en route 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 US order, which was received in 2008. The 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 US 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 a 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, if able, the Chinese expect to produce and the other 16 RCPs 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 it will remain superior for years to come.

As far as the future is concerned, we look forward to continuing a 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.

Publicly available data on potential near-term reactor construction in China indicates a minimum of 22 AP1000 nuclear reactors to be built over the next 8 to 10 years. This equates to 88 Curtiss-Wright-designed RCPs. The quick run of the math with current RCP pricing says this market alone is worth approximately $2.5 billion. 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 the 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 the slide, you can see our progress from 9.3% at our 2013 Investor Day 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 are 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 are 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 are seeing the result of those actions, with strong segment margin expansion.

Finally, our 2016 and future years' results will also benefit from the actions we are taking to generate hard savings 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 to exceed 14% in 2016, ahead of our planned 2018 time frame. We will continue to focus on long-term opportunities to improve our margins and reduce our costs, particularly given the current economic and end market challenges. At this time our primary focus is on maintaining our status in 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 completed our $300 million buyback program, which reflected $200 million in steady share repurchases via a 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 million in stock 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 for 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 are being selective, especially in this market. We want to ensure that we find the correct strategic fit and growth, 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 to produce 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 power 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 remained excited for the future.

At this time, I'd like to open up today's conference call for questions.

(Operator Instructions). Myles Walton, Deutsche Bank.

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 the 3% to 10% you are showing in the slide, if you benefited from the tax deductibility of that pension contribution last year.

Yes, in actuality, 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 the 2014 return, and I think you see that flowing through in the fourth quarter. That's part of what came through in the fourth quarter. Basically, the impact was reducing -- giving us a higher manufacturing deduction.

Okay. And the working capital metric as you finish the year, can you give us where it hits, and where you are thinking it's going to hit at the end of 2016?

Yes, I will say from 2014, we've come down about -- I'm sorry. From 2015 to 2016, we expect it to improve 180 basis 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, which right now is about -- approximately 20%. It fluctuates up and down a little bit, depending on which time we do the calculations. But continuing to make improvement and continuing our journey, and you are seeing it in our cash flow in 2016, and 2015 as well.

Okay. One other one on the cash: the CapEx of the business looks like you have moved from what was a 3.5% to 4% of sales was CapEx for the last 5 to 7 years, up until this past year. 2015 was pretty light. 2016, the guidance is 2.5% of sales, but it sounded like, Dave, you mentioned there's about $10 million of discretionary spend. Are you just in a business now that's a lot less cap-intensive going forward, or is this some sort of holiday?

Well, a couple of things. One, we said back in Investor Day this was 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 we divested were capital-intensive, so that's a fundamental change in our capital profile. 2015 was a little light, and it's really nothing other than timing that we know of; nothing major. And you see we have picked it back up again in 2016. And we do have -- I think it's $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 of your own stock across the industrial complex on a relative basis in 2015. And you've got $100 million built into the plan. It sounds like you are still looking for more bolt-on transactions, which I think, by your definition, are sub-$100 million.

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 higher on the list than not. Maybe you can just update us on the pipeline.

Yes, Myles, that -- with all the cash that we're generating, we're really excited about the opportunities that's going to give us from a balancing our capital allocation plan. And it's especially in the area of acquisitions. I've personally gone out and looked at a couple recently, things we've been finding, and they are still primarily sub-$100 million. Not that that is the key driver, but that's been 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, as 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 -- it has reduced our interest, my interest in particular. So, we do like defense side. We continue to like defense strategy and growth in that area. And we look at the several, and we have several that we are looking at right now, and particularly, as I've said before, the C4ISR kind of marketplace. And we think that that's going to continue to grow, and will be an exciting area for us.

Sensors, always -- I think that what we have found is that we have demonstrated our ability to acquire, integrate, consolidate, rationalize, and so forth; but build in, most importantly, almost a one plus one equals three approach, by taking the sensors and the technologies and product lines, or whatever that we will acquire, and putting those into our bigger themes -- for example, own the cabin. That's -- own the cab -- a strategy that's a larger offering to major manufacturers, OEMs. So, for example, large and medium-sized trucks.

So, we like those, so we're fairly specific about what sensor areas we go after. We're not after the commodity types. And as 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. The severe service type is what we produce, and we do very well in that regard, and 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.

Kevin Ciabattoni, KeyBanc Capital Markets.

Start off here with a couple on AP1000. Obviously saw a nice increase in pricing there, up to the $28 million per RCP. What's the outlook, going forward, for pricing as you go after new orders? And maybe talk a little bit about 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 it in our script -- and that was that we're looking at it over the next 8 to 10 years, the market opportunity in China alone is -- that has been described publicly as being on the order of 88 units. And if 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 10 years is not long-term to me. 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 a 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 a next order will be placed, for example, what sort of inflation escalation we might see, what sort of labor costs we might be seeing at that time and projected forward during a build cycle.

As I indicated, these things are 40-months-plus long in the build cycle, so we take that into consideration for what we think our 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 dependent -- that $28 million that we indicated was very dependent on quantity ordered. Had we received a larger order, they would have been less expensive. Had we received a smaller order, they would have been more expensive. And that's just the dynamic of quantity pricing like that.

But we're very pleased with that order, and I think that it's 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 deployed in this order on future orders.

Okay. That's helpful. And then 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 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 capabilities 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. We will help, as needed. And we're not -- we don't wish ill on anybody. We certainly do what we can. But like I said, we will 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, though lower revenue guidance for next year -- or for this year, rather.

Is there any opportunity for you guys to 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 as Glenn indicated, the 737 [up] is a little -- it's offset a little bit by the 47. 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 facilitize in a country like that, we decided to not do that program.

And so, we began at that time looking at fill-in business, in aerospace in particular, that we could backfill this business with. From one perspective, it was fortunate for us that it dragged from 2015 into 2016, so now we 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, or that division. And that division continues to do produce 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 aisle work that we were doing there. And 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 if the margins are good for us, and if it meets our expectations internally; and we just, like I said, in this case, it didn't. So were used to this sort of movement.

Now, there's a fact that this happened with a fairly large piece, then we had to react. I think we're doing a really good job of that. So I think you'll see over the next several years us a building back to what we had lost in that case, and specifically, but with good products, with good margins.

Okay. Thanks, Dave.

Kristine Liwag, Bank of America Merrill Lynch.

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?

Yes, we could easily support that quantity. The run rate currently is about 24 units that we can handle on an annual basis. That's pretty much driven by our test loop. And that's a constraint that any manufacturer would have to contend with. And if we all fell into 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 to the Chinese's credit, China's 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 and on and 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 we visited our test loop just a couple of weeks ago, up in Pittsburgh, and we're up and running.

And what we're 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?

No, Kristine. The cash flow is going to be a little bit trickier, and we don't have that projection nailed down yet. They are still going through all the analysis of milestone timings and all that kind of stuff, so I can't really -- I can't tell you one way or the other right now.

Sure. And one last question for 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 presenting you from closing deals today? Is it lack of available options? Is it valuation? Can you provide a little bit more color there?

Sure. Kristine, I think valuations, certainly, or valuation of the properties that we look at plays a significant factor. As I said in my remarks, and 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 -- and 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, 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 a fourth leg of the stool from a perspective of inventing something new for this Company. We feel very comfortable in the breadth of markets that we reach today with our product lines. And an 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 have talked in the past on valves, anything that is not associated right now with the oil and gas area. We don't need any more of that, and we are pleased with our severe service valves we had 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.

Pipeline-wise, we do look at -- every month, we look at new opportunities. I visited a few, 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 had toward the oil and gas sector, with an uncertain future.

And it's hard to put a valuation on a company like that. You can give them a price, but it's going to be an embarrassingly low price because there's no real solid outlook in a 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.

Ryan Cassil, Seaport Global.

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 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 be proven out. If I am the customer's shoes, if I'm in China and I'm saying, look, I want to feel really comfortable about -- I'm talking nuclear reactors at large; I'm not talking about an 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 along 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 have 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 sometime 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, whether you think that has stabilized? And then also whether you have 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 -- well, let's say mid- to late last year. And we started to see competitors trying to drive into different areas than 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 severe 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. We're talking some really serious stuff that goes on here. So, we feel pretty comfortable in some of the areas that we have found that sort of competition. In other words, I'm saying it's extremely hard to second source this stuff. But I think for the most part, yes, there has been a little bit. When do we see that changing? I'm not sure when that's 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 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?

Well, yes. We have a lot of different things going on, as we have for the past three years, and you see how we have progressed. I couldn't say it's not possible. But I would say is one thing we're pretty sure we started doing again this year is reinvesting back into the Company, and specifically R&D and some of our technologies to foster organic growth. And will our margins improve? Yes. We are still committed to it, as Dave said. But we're also not trying necessarily to be in the top decile or to be at the top of our peer group, unless we can continue to afford to invest back in the Company. And that's going to be part of our strategy going forward, as well. So you've got to balance the two.

One aspect of it that is really critical to understanding, recall if you've have followed us, if you watched what we do -- and I referenced it in my prepared remarks -- it was what we did in the defense side. We were very proactive in the cost takeouts and other areas that we started getting the feeling very early on, prior to the 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 our verbalizing what we're 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 -- they will be more effect to us from a margin, operational, and profitability in the years to come. But you are seeing that now in this year, as we are going to spend -- I was talking about that $5 million to $6 million, and there may be a $10 million plus yield on that. That's just though 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 wanted to mention, that I failed to do so on the last question you had, in 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 that we have out of some of our other divisions.

Okay. Great. Thanks, guys.

Steve Levenson, Stifel.

Just a question on the certification of the reactor coolant pumps, and I know there are 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 are 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 NNSA. So they regulate and they do all the certifications, and so forth. So, at the plant level, then they will obviously be doing that. I would believe at the manufacturer level, the companies 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's 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. I'm not showing any further questions at this time.

I would now like to turn the call back over to David 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's earning 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.