NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Curtiss-Wright Corporation and its subsidiaries (the Corporation or the Company) is a global, diversified manufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered products and services to the aerospace, defense, general industrial, and power generation markets.
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
The financial statements of the Corporation have been prepared in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), which requires management to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, and expenses and disclosure of contingent assets and liabilities in the accompanying financial statements. The most significant of these estimates includes the estimate of costs to complete long-term contracts, the estimate of useful lives for property, plant, and equipment, cash flow estimates used for testing the recoverability of assets, pension plan and postretirement obligation assumptions, estimates for inventory obsolescence, estimates for the valuation and useful lives of intangible assets and legal reserves. Actual results may differ from these estimates.
Cash and Cash Equivalents
Cash equivalents consist of money market funds and commercial paper that are readily convertible into cash, all with original maturity dates of three months or less.
Inventory
Inventories are stated at lower of cost or net realizable value. Production costs are comprised of direct material and labor and applicable manufacturing overhead.
Progress Payments
Certain long-term contracts provide for interim billings as costs are incurred on the respective contracts. Pursuant to contract provisions, agencies of the U.S. Government and other customers obtain control of promised goods or services to the extent that progress payments are received. Accordingly, these receipts have been reported as a reduction of unbilled receivables as presented in Note 4 to the Consolidated Financial Statements. In the event that progress payments received exceed revenue recognized to date on a specific contract, a contract liability has been established with such amount reported in the "Deferred revenue" line within the Consolidated Balance Sheet.
The Corporation also receives progress payments on development contracts related to certain aerospace and defense programs. Progress payments received on partially funded development contracts have been reported as a reduction of inventories, as presented in Note 5 to the Consolidated Financial Statements.
Property, Plant, and Equipment
Property, plant, and equipment are carried at cost less accumulated depreciation. Major renewals and betterments are capitalized, while maintenance and repairs that do not improve or extend the life of the asset are expensed in the period that they are incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets.
Average useful lives for property, plant, and equipment are as follows:
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Buildings and improvements
|
5 to 40 years
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Machinery, equipment, and other
|
3 to 15 years
|
See Note 6 to the Consolidated Financial Statements for further information on property, plant, and equipment.
Intangible Assets
Intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, trademarks, and technology licenses. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 1 to 20 years. See Note 8 to the Consolidated Financial Statements for further information on other intangible assets.
Impairment of Long-Lived Assets
The Corporation reviews the recoverability of all long-lived assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset might not be recoverable. If required, the Corporation compares the estimated fair value determined by either the undiscounted future net cash flows or appraised value to the related asset’s carrying value to determine whether there has been an impairment. If an asset is considered impaired, the asset is written down to fair value in the period in which the impairment becomes known. The Corporation recognized no significant impairment charges on assets held in use during the years ended December 31, 2019, 2018, and 2017.
Goodwill
Goodwill results from business acquisitions. The Corporation accounts for business acquisitions by allocating the purchase price to the tangible and intangible assets acquired and liabilities assumed. Assets acquired and liabilities assumed are recorded at their fair values, and the excess of the purchase price over the amounts allocated is recorded as goodwill. The recoverability of goodwill is subject to an annual impairment test or whenever an event occurs or circumstances change that would more likely than not result in an impairment. The impairment test is based on the estimated fair value of the underlying businesses. The Corporation’s goodwill impairment test is performed annually in the fourth quarter of each year. See Note 7 to the Consolidated Financial Statements for further information on goodwill.
Fair Value of Financial Instruments
Accounting guidance requires certain disclosures regarding the fair value of financial instruments. Due to the short maturities of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, the net book value of these financial instruments is deemed to approximate fair value. See Notes 10 and 13 to the Consolidated Financial Statements for further information on the Corporation's financial instruments.
Research and Development
The Corporation funds research and development programs for commercial products and independent research and development and bid and proposal work related to government contracts. Development costs include engineering for new customer requirements. Corporation-sponsored research and development costs are expensed as incurred.
Research and development costs associated with customer-sponsored programs are capitalized to inventory and are recorded in cost of sales when products are delivered or services performed. Funds received under shared development contracts are a reduction of the total development expenditures under the shared contract and are shown net as research and development costs.
Accounting for Share-Based Payments
The Corporation follows the fair value based method of accounting for share-based employee compensation, which requires the Corporation to expense all share-based employee compensation. Share-based employee compensation is a non-cash expense since the Corporation settles these obligations by issuing the shares of Curtiss-Wright Corporation instead of settling such obligations with cash payments.
Compensation expense for non-qualified share options, performance shares, and time-based restricted stock is recognized over the requisite service period for the entire award based on the grant date fair value.
Income Taxes
The Corporation accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax laws is recognized in the results of operations in the period the new laws are enacted. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets unless it is more likely than not that such assets will be realized.
The Corporation records amounts related to uncertain income tax positions by 1) prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements and 2) the measurement of the income tax benefits recognized from such positions. The Corporation’s accounting policy is to classify uncertain income tax positions that are not expected to be resolved in one year as a non-current income tax liability and to classify interest and penalties as a component of interest expense and general and administrative expenses, respectively. See Note 12 to the Consolidated Financial Statements for further information.
Foreign Currency
For operations outside the United States of America that prepare financial statements in currencies other than the U.S. dollar, the Corporation translates assets and liabilities at period-end exchange rates and income statement amounts using weighted-average exchange rates for the period. The cumulative effect of translation adjustments is presented as a component of accumulated other comprehensive income (loss) within stockholders’ equity. This balance is primarily affected by foreign currency exchange rate fluctuations. (Gains) and losses from foreign currency transactions are included in General and administrative expenses in the Consolidated Statement of Earnings, which amounted to $7.2 million, $(4.5) million, and $5.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Derivatives
Forward Foreign Exchange and Currency Option Contracts
The Corporation uses financial instruments, such as forward exchange and currency option contracts, to hedge a portion of existing and anticipated foreign currency denominated transactions. The purpose of the Corporation’s foreign currency risk management program is to reduce volatility in earnings caused by exchange rate fluctuations. All of the derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments, with the gain or loss on these transactions recorded into earnings in the period in which they occur. These (gains) and losses are classified as General and administrative expenses in the Consolidated Statement of Earnings and amounted to ($2.1) million, $6.6 million, and ($0.3) million for the years ended December 31, 2019, 2018, and 2017, respectively. The Corporation does not use derivative financial instruments for trading or speculative purposes.
Interest Rate Risks and Related Strategies
The Corporation’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Corporation’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Corporation periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Corporation exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
Recently Issued Accounting Standards
Recent accounting standards adopted
ASU 2016-02 - Leases - On January 1, 2019, the Corporation adopted ASC 842, Leases, using the optional transition method of adoption which permits the entity to continue presenting all periods prior to January 1, 2019 under previous lease accounting guidance. In conjunction with the adoption, the Corporation elected the package of practical expedients which permits the entity to forgo reassessment of conclusions reached regarding lease existence and lease classification under previous guidance, as well as the practical expedient to not separate non-lease components. Further, the Corporation made an accounting policy election to
account for short-term leases in a manner consistent with the methodology applied under previous guidance. The adoption of this standard resulted in an increase of approximately $151 million in both total assets and total liabilities in the Corporation’s Consolidated Balance Sheet as of January 1, 2019.
ASU 2018-02 - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income - On January 1, 2019, the Corporation adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of tax effects stranded in accumulated other comprehensive income to retained earnings as a result of the 2017 Tax Cuts and Jobs Act (the Tax Act). The adoption of this standard resulted in a reclassification of $26 million from accumulated other comprehensive loss to retained earnings in the Corporation’s Consolidated Balance Sheet as of January 1, 2019.
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans - In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. Specifically, the amendment removes disclosure requirements for amounts classified in accumulated other comprehensive income expected to be recognized over the next year and the effects of a one-percentage-point change in the assumed health care cost trend rate on service cost, interest cost, and the benefit obligation for postretirement benefits. The amendment also requires additional disclosure around weighted-average interest crediting rates for cash balance plans, a narrative description of the reasons for significant gains and losses, and an explanation of any other significant changes in the benefit obligation or plan assets. The Corporation early adopted this standard as of December 31, 2019 and included revised disclosures within Note 16 of the Consolidated Financial Statements.
Recent accounting standards to be adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ASU adds a current expected credit loss impairment model to U.S. GAAP that is based on expected losses rather than incurred losses whereby a broader range of reasonable and supportable information is required to be utilized in order to derive credit loss estimates. The Corporation plans to adopt the ASU as of January 1, 2020 as the standard is effective for fiscal years beginning after December 15, 2019. The Corporation is currently evaluating the impact of adopting this standard, but does not expect the adoption to have a material impact on its Consolidated Financial Statements.
2. REVENUE
The Corporation accounts for revenues in accordance with ASC 606, Revenue from Contracts with Customers, which was adopted as of January 1, 2018 on a modified retrospective basis. Under ASC 606, revenue is recognized when control of a promised good and/or service is transferred to a customer at a transaction price that reflects the consideration that the Corporation expects to be entitled to in exchange for that good and/or service.
Performance Obligations
The Corporation identifies a performance obligation for each promise in a contract to transfer a distinct good or service to the customer. As part of its assessment, the Corporation considers all goods and/or services promised in the contract, regardless of whether they are explicitly stated or implied by customary business practices. The Corporation’s contracts may contain either a single performance obligation, including the promise to transfer individual goods or services that are not separately distinct within the context of the respective contracts, or multiple performance obligations. For contracts with multiple performance obligations, the Corporation allocates the overall transaction price to each performance obligation using standalone selling prices, where available, or utilizes estimates for each distinct good or service in the contract where standalone prices are not available. In certain instances, the transaction price may include estimated amounts of variable consideration including but not limited to incentives, awards, price escalations, liquidated damages, and penalties, only to the extent that it is probable that a significant reversal of cumulative revenue recognized to date around such variable consideration will not occur. The Corporation estimates variable consideration to be included in the transaction price using either the expected value method or most likely amount method, contingent upon the facts and circumstances of the specific arrangement. Variable consideration associated with the Corporation’s respective arrangements is not typically constrained.
The Corporation’s performance obligations are satisfied either at a point-in-time or on an over-time basis. Revenue recognized on an over-time basis for the year ended December 31, 2019 and 2018 accounted for approximately 49% and 46%, respectively, of total net sales. Typically, over-time revenue recognition is based on the utilization of an input measure used to measure progress, such as costs incurred to date relative to total estimated costs. Changes in total estimated costs are recognized using the cumulative catch-up method of accounting which recognizes the cumulative effect of the changes on current and prior periods in the current period. Accordingly, the effect of the changes on future periods of contract performance is recognized as
if the revised estimate had been the original estimate. A significant change in an estimate on one or more contracts could have a material effect on the Corporation's consolidated financial position, results or operations, or cash flows. However, there were no significant changes in estimated contract costs during 2019, 2018, or 2017.
If a performance obligation does not qualify for over-time revenue recognition, revenue is then recognized at the point-in-time in which control of the distinct good or service is transferred to the customer, typically based upon the terms of delivery. Revenue recognized at a point-in-time for the year ended December 31, 2019 and 2018 accounted for approximately 51% and 54%, respectively, of total net sales.
Contract backlog represents the remaining performance obligations that have not yet been recognized as revenue. Backlog includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Total backlog was approximately $2.2 billion as of December 31, 2019, of which the Corporation expects to recognize approximately 92% as net sales over the next 12-36 months. The remainder will be recognized thereafter.
Disaggregation of Revenue
The following table presents the Corporation’s total net sales disaggregated by end market and customer type:
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Total Net Sales by End Market and Customer Type
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Year Ended December 31,
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(In thousands)
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2019
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2018
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|
2017
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Defense
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|
|
|
|
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Aerospace
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$
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416,841
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|
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$
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376,951
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|
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$
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372,678
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Ground
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93,432
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97,131
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96,042
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Naval
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568,776
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486,476
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|
|
408,221
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Total Defense Customers
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$
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1,079,049
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$
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960,558
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|
$
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876,941
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Commercial
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Aerospace
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$
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433,038
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$
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414,422
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$
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409,384
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Power Generation
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392,173
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431,793
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423,747
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General Industrial
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583,701
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605,062
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560,954
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Total Commercial Customers
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$
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1,408,912
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$
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1,451,277
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$
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1,394,085
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Total
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$
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2,487,961
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|
|
$
|
2,411,835
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|
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$
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2,271,026
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Contract Balances
Timing of revenue recognition and cash collection may result in billed receivables, unbilled receivables (contract assets), and deferred revenue (contract liabilities) on the Consolidated Balance Sheet. The Corporation’s contract assets primarily relate to its rights to consideration for work completed but not billed as of the reporting date. Contract assets are transferred to billed receivables when the rights to consideration become unconditional. This is typical in situations where amounts are billed as work progresses in accordance with agreed-upon contractual terms or upon achievement of contractual milestones. The Corporation’s contract liabilities primarily consist of customer advances received prior to revenue being earned. Revenues recognized for the years ended December 31, 2019 and 2018 included in the contract liabilities balance at the beginning of the respective years were approximately $198 million and $164 million, respectively. Changes in contract assets and contract liabilities as of December 31, 2019 were not materially impacted by any other factors. Contract assets and contract liabilities are reported in the "Receivables, net" and "Deferred revenue" lines, respectively, within the Consolidated Balance Sheet.
Pre-adoption of ASC 606
As the Corporation adopted ASC 606 using the modified retrospective method, the Consolidated Financial Statements for the year ended December 31, 2017 were not retrospectively adjusted. For the year ended December 31, 2017, revenue was recognized when the earnings process was considered substantially complete with all of the following criteria met: 1) persuasive evidence of an arrangement existed; 2) delivery occurred or services were rendered; 3) the Corporation's price to its customer was fixed or determinable; and 4) collectability was reasonably assured. The Corporation determined the appropriate revenue recognition method by analyzing the terms and conditions of each contract. Revenue was recognized on product sales
as production units were shipped and title and risk of loss was transferred. Revenue was recognized on service-type contracts as services were rendered. The significant estimates made in recognizing revenue were primarily for long-term contracts, which were generally accounted for using the cost-to-cost method of percentage of completion accounting. Under the cost-to-cost method, profits were recorded pro-rata, based upon estimates of direct and indirect costs to complete such contracts. Any changes in estimates of contract sales, costs, or profits were recognized using the cumulative catch-up method of accounting.
3. ACQUISITIONS
The Corporation continually evaluates potential acquisitions that either strategically fit within the Corporation’s existing portfolio or expand the Corporation’s portfolio into new product lines or adjacent markets. The Corporation has completed a number of acquisitions that have been accounted for as business combinations and have resulted in the recognition of goodwill in the Corporation's financial statements. This goodwill arises because the purchase prices for these businesses reflect the future earnings and cash flow potential in excess of the earnings and cash flows attributable to the current product and customer set at the time of acquisition. Thus, goodwill inherently includes the know-how of the assembled workforce, the ability of the workforce to further improve the technology and product offerings, and the expected cash flows resulting from these efforts. Goodwill may also include expected synergies resulting from the complementary strategic fit these businesses bring to existing operations.
The Corporation allocates the purchase price at the date of acquisition based upon its understanding of the fair value of the acquired assets and assumed liabilities. Only items identified as of the acquisition date are considered for subsequent adjustment. The Corporation will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
During the twelve months ended December 31, 2019, the Corporation acquired two businesses for an aggregate purchase price of $185 million, net of cash acquired. During the twelve months ended December 31, 2018, the Corporation acquired one business for an aggregate purchase price of $210 million, net of cash acquired. These acquisitions are described in more detail below.
For the year ended December 31, 2019 and 2018, included within the Consolidated Statement of Earnings, the Corporation's acquisitions contributed $11 million and $64 million of total net sales, respectively, and immaterial net earnings in both periods.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition for all acquisitions consummated during 2019 and 2018:
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(In thousands)
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2019
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2018
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Accounts receivable
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$
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16,551
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$
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24,385
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Inventory
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|
7,608
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|
31,875
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Property, plant, and equipment
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|
1,117
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|
3,206
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Intangible assets
|
|
94,400
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|
146,100
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|
Operating lease right-of-use assets, net
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|
4,605
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|
—
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Other current and non-current assets
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|
888
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|
47
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Current and non-current liabilities
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|
(11,604)
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|
(5,374)
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Net tangible and intangible assets
|
|
113,565
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|
200,239
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Purchase price
|
|
185,209
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|
210,167
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Goodwill
|
|
$
|
71,644
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|
$
|
9,928
|
|
|
|
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|
Goodwill deductible for tax purposes
|
|
$
|
72,777
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|
$
|
9,928
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2019 Acquisitions
901D Holdings, LLC (901D)
On December 31, 2019, the Corporation acquired 100% of the membership interests of 901D for $135.1 million, net of cash acquired. The Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price deposited in escrow as security for potential indemnification claims against the seller. 901D is a designer and manufacturer of mission-critical integrated electronic systems,
subsystems, and ruggedized shipboard enclosure solutions supporting every major U.S. Navy shipbuilding program. The acquired business will operate within the Defense segment. The acquisition is subject to post-closing adjustments with the purchase price allocation not yet complete.
Tactical Communications Group (TCG)
On March 15, 2019, the Corporation acquired 100% of the membership interests of TCG for $50.1 million, net of cash acquired. The Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type, including a portion of the purchase price deposited in escrow as security for potential indemnification claims against the seller. TCG is a designer and manufacturer of tactical data link software solutions for critical military communications systems. The acquired business operates within the Defense segment.
2018 Acquisitions
Dresser-Rand Government Business (DRG)
On April 2, 2018, the Corporation acquired certain assets and assumed certain liabilities of DRG for $210.2 million in cash. The Asset Purchase Agreement contains a purchase price adjustment mechanism and representations and warranties customary for a transaction of this type. DRG is a designer and manufacturer of mission-critical, high-speed rotating equipment solutions and also acts as the sole supplier of steam turbines and main engine guard valves on all aircraft carrier programs. The acquired business operates within the Power segment.
4. RECEIVABLES
Receivables include current notes, amounts billed to customers, claims, other receivables, and unbilled revenue on long-term contracts, which consists of amounts recognized as sales but not billed. Substantially all amounts of unbilled receivables are expected to be billed and collected in the subsequent year. An immaterial amount of unbilled receivables are subject to retainage provisions. The amount of claims and unapproved change orders within our receivables balances are immaterial.
Credit risk is diversified due to the large number of entities comprising the Corporation’s customer base and their geographic dispersion. The Corporation is either a prime contractor or subcontractor to various agencies of the U.S. Government. Revenues derived directly and indirectly from government sources (primarily the U.S. Government) were 43% and 40% of total net sales in 2019 and 2018, respectively. Total receivables due from government sources (primarily the U.S Government) were $343.5 million and $329.1 million as of December 31, 2019 and 2018, respectively. Government (primarily the U.S. Government) unbilled receivables, net of progress payments, were $195.7 million and $180.0 million as of December 31, 2019 and 2018, respectively.
The composition of receivables as of December 31 is as follows:
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(In thousands)
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|
2019
|
|
2018
|
Billed receivables:
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|
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|
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Trade and other receivables
|
|
$
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418,968
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|
|
$
|
390,306
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Less: Allowance for doubtful accounts
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|
(8,733)
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|
|
(7,436)
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|
Net billed receivables
|
|
410,235
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|
|
382,870
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Unbilled receivables:
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|
|
|
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Recoverable costs and estimated earnings not billed
|
|
231,067
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|
|
225,810
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Less: Progress payments applied
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|
(9,108)
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|
|
(14,925)
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|
Net unbilled receivables
|
|
221,959
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|
|
210,885
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|
Receivables, net
|
|
$
|
632,194
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|
|
$
|
593,755
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|
5. INVENTORIES
Inventoried costs contain amounts relating to long-term contracts and programs with long production cycles, a portion of which will not be realized within one year. The caption "Inventoried costs related to U.S. Government and other long-term contracts" includes an immaterial amount of claims or other similar items subject to uncertainty concerning their determination or realization. Inventories are valued at the lower of cost or net realizable value.
The composition of inventories as of December 31 is as follows:
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|
|
|
|
|
|
|
|
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(In thousands)
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|
2019
|
|
2018
|
Raw material
|
|
$
|
183,576
|
|
|
$
|
214,442
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|
Work-in-process
|
|
105,874
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|
|
74,536
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|
Finished goods
|
|
131,124
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|
|
143,016
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|
Inventoried costs related to U.S. Government and other long-term contracts (1)
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|
70,998
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|
|
54,195
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|
Gross inventories
|
|
491,572
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|
|
486,189
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|
Less: Inventory reserves
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|
(58,594)
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|
|
(55,776)
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|
Progress payments applied
|
|
(8,143)
|
|
|
(6,987)
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Inventories, net
|
|
$
|
424,835
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|
|
$
|
423,426
|
|
(1) As of December 31, 2019 and 2018, this caption also includes capitalized development costs of $39.1 million and $44.4 million, respectively, related to certain aerospace and defense programs. These capitalized costs will be liquidated as units are produced under contract. As of December 31, 2019 and 2018, capitalized development costs of $23.7 million and $24.1 million, respectively, are not currently supported by existing firm orders.
6. PROPERTY, PLANT, AND EQUIPMENT
The composition of property, plant, and equipment as of December 31 is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Land
|
|
$
|
18,632
|
|
|
$
|
18,548
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|
Buildings and improvements
|
|
234,112
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|
|
226,743
|
|
Machinery, equipment, and other
|
|
849,527
|
|
|
801,169
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|
Property, plant, and equipment, at cost
|
|
1,102,271
|
|
|
1,046,460
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|
Less: Accumulated depreciation
|
|
(716,678)
|
|
|
(671,800)
|
|
Property, plant, and equipment, net
|
|
$
|
385,593
|
|
|
$
|
374,660
|
|
Depreciation expense for the years ended December 31, 2019, 2018, and 2017 was $57.4 million, $59.4 million, and $61.6 million, respectively.
7. GOODWILL
The changes in the carrying amount of goodwill for 2019 and 2018 are as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(In thousands)
|
|
Commercial/Industrial
|
|
Defense
|
|
Power
|
|
Consolidated
|
December 31, 2017
|
|
$
|
448,531
|
|
|
$
|
460,332
|
|
|
$
|
187,466
|
|
|
$
|
1,096,329
|
|
Acquisitions
|
|
—
|
|
|
—
|
|
|
9,928
|
|
|
9,928
|
|
Divestitures
|
|
(111)
|
|
|
(1,594)
|
|
|
—
|
|
|
(1,705)
|
|
Foreign currency translation adjustment
|
|
(6,405)
|
|
|
(9,867)
|
|
|
(248)
|
|
|
(16,520)
|
|
December 31, 2018
|
|
$
|
442,015
|
|
|
$
|
448,871
|
|
|
$
|
197,146
|
|
|
$
|
1,088,032
|
|
Acquisitions
|
|
—
|
|
|
71,644
|
|
|
—
|
|
|
71,644
|
|
Adjustments
|
|
—
|
|
|
(208)
|
|
|
—
|
|
|
(208)
|
|
Foreign currency translation adjustment
|
|
2,099
|
|
|
4,962
|
|
|
151
|
|
|
7,212
|
|
December 31, 2019
|
|
$
|
444,114
|
|
|
$
|
525,269
|
|
|
$
|
197,297
|
|
|
$
|
1,166,680
|
|
The purchase price allocations relating to the businesses acquired are initially based on estimates. The Corporation adjusts these estimates based upon final analysis, including input from third party appraisals when deemed appropriate. The determination of fair value is finalized no later than twelve months from acquisition. Goodwill adjustments represent subsequent adjustments to the purchase price allocation for acquisitions.
The Corporation completed its annual goodwill impairment testing as of October 31, 2019, 2018, and 2017 and concluded that there was no impairment of goodwill.
8. OTHER INTANGIBLE ASSETS, NET
Intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, and trademarks. Intangible assets are amortized over useful lives that generally range between 1 and 20 years.
The following tables present the cumulative composition of the Corporation’s intangible assets as of December 31, 2019 and December 31, 2018, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
(In thousands)
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Technology
|
|
$
|
257,676
|
|
|
$
|
(140,390)
|
|
|
$
|
117,286
|
|
|
$
|
238,212
|
|
|
$
|
(123,156)
|
|
|
$
|
115,056
|
|
Customer related intangibles
|
|
434,492
|
|
|
(215,855)
|
|
|
218,637
|
|
|
358,832
|
|
|
(193,455)
|
|
|
165,377
|
|
Programs (1)
|
|
144,000
|
|
|
(12,600)
|
|
|
131,400
|
|
|
144,000
|
|
|
(5,400)
|
|
|
138,600
|
|
Other intangible assets
|
|
43,729
|
|
|
(31,145)
|
|
|
12,584
|
|
|
40,340
|
|
|
(29,806)
|
|
|
10,534
|
|
Total
|
|
$
|
879,897
|
|
|
$
|
(399,990)
|
|
|
$
|
479,907
|
|
|
$
|
781,384
|
|
|
$
|
(351,817)
|
|
|
$
|
429,567
|
|
(1) Programs include values assigned to major programs of acquired businesses and represent the aggregate value associated with the customer relationships, contracts, technology, and trademarks underlying the associated program.
During the year ended December 31, 2019, the Corporation acquired intangible assets of $94.4 million which included Customer-related intangibles of $73.3 million, Technology of $17.7 million, and Other intangible assets of $3.4 million. The weighted average amortization periods for these aforementioned intangible assets are 14.1 years, 15.0 years, and 8.0 years, respectively.
Amortization expense for the years ended December 31, 2019, 2018, and 2017 was $45.0 million, $43.6 million, and $38.4 million, respectively. The estimated future amortization expense of intangible assets over the next five years is as follows:
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
2020
|
|
$
|
55,360
|
|
2021
|
|
45,692
|
|
2022
|
|
43,149
|
|
2023
|
|
39,398
|
|
2024
|
|
36,010
|
|
9. LEASES
The Corporation conducts a portion of its operations from leased facilities, which include manufacturing and service facilities, administrative offices, and warehouses. In addition, the Corporation leases vehicles, machinery, and office equipment under operating leases. Our leases have remaining lease terms of 1 year to 25 years, some of which include options for renewals, escalations, or terminations. Rental expenses for all operating leases amounted to $37.2 million, $38.4 million, and $37.1 million in 2019, 2018, and 2017, respectively.
Generally, the Corporation's lease contracts do not provide a readily determinable interest rate. Accordingly, the Corporation determines the incremental borrowing rate as of the lease commencement date in order to calculate the present value of its lease payments. The incremental borrowing rate is determined based on information available at the lease commencement date, including the lease term, market rates for the Corporation’s outstanding debt, as well as market rates for debt of companies with similar credit ratings.
The components of lease expense were as follows:
|
|
|
|
|
|
|
Year Ended
|
(In thousands)
|
December 31, 2019
|
Operating lease cost
|
$
|
37,229
|
|
|
|
Finance lease cost:
|
|
Depreciation of finance leases
|
$
|
812
|
|
Interest on lease liabilities
|
498
|
|
Total finance lease cost
|
$
|
1,310
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
|
Year Ended
|
(In thousands)
|
December 31, 2019
|
Cash used for operating activities:
|
|
Operating cash flows used for operating leases
|
$
|
(30,665)
|
|
Operating cash flows used for finance leases
|
(498)
|
|
Non-cash activity:
|
|
Right-of-use assets obtained in exchange for operating lease obligations
|
$
|
36,033
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
|
(In thousands, except lease term and discount rate)
|
As of December 31, 2019
|
Operating Leases
|
|
Operating lease right-of-use assets, net
|
$
|
165,490
|
|
|
|
Other current liabilities
|
$
|
26,773
|
|
Long-term operating lease liability
|
145,124
|
|
Total operating lease liabilities
|
$
|
171,897
|
|
|
|
Finance Leases
|
|
Property, plant, and equipment
|
$
|
15,561
|
|
Accumulated depreciation
|
(5,533)
|
|
Property, plant, and equipment, net
|
$
|
10,028
|
|
|
|
Other current liabilities
|
$
|
807
|
|
Other liabilities
|
10,982
|
|
Total finance lease liabilities
|
$
|
11,789
|
|
|
|
Weighted average remaining lease term
|
|
Operating leases
|
9.2 years
|
Finance leases
|
9.7 years
|
Weighted average discount rate
|
|
Operating leases
|
3.75
|
%
|
Finance leases
|
4.05
|
%
|
Maturities of lease liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
(In thousands)
|
Operating Leases
|
Finance Leases
|
2020
|
$
|
32,528
|
|
$
|
1,342
|
|
2021
|
29,729
|
|
1,375
|
|
2022
|
23,432
|
|
1,410
|
|
2023
|
21,168
|
|
1,445
|
|
2024
|
18,640
|
|
1,481
|
|
Thereafter
|
79,982
|
|
7,411
|
|
Total lease payments
|
205,479
|
|
14,464
|
|
Less: imputed interest
|
(33,582)
|
|
(2,675)
|
|
Total
|
$
|
171,897
|
|
$
|
11,789
|
|
As of December 31, 2018, the approximate future minimum rental commitments under operating leases that had initial or remaining non-cancelable lease terms in excess of one year were as follows:
|
|
|
|
|
|
(In thousands)
|
Rental Commitments
|
2019
|
$
|
29,562
|
|
2020
|
28,514
|
|
2021
|
24,501
|
|
2022
|
19,996
|
|
2023
|
19,778
|
|
Thereafter
|
93,974
|
|
Total
|
$
|
216,325
|
|
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Forward Foreign Exchange and Currency Option Contracts
The Corporation has foreign currency exposure, primarily in the United Kingdom, Canada, and Europe. The Corporation uses financial instruments, such as forward and option contracts, to hedge a portion of existing and anticipated foreign currency denominated transactions. The purpose of the Corporation’s foreign currency risk management program is to reduce volatility in earnings caused by exchange rate fluctuations. Guidance on accounting for derivative instruments and hedging activities requires companies to recognize all of the derivative financial instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets.
Interest Rate Risks and Related Strategies
The Corporation’s primary interest rate exposure results from changes in U.S. dollar interest rates. The Corporation’s policy is to manage interest cost using a mix of fixed and variable rate debt. The Corporation periodically uses interest rate swaps to manage such exposures. Under these interest rate swaps, the Corporation exchanges, at specified intervals, the difference between fixed and floating interest amounts calculated by reference to an agreed-upon notional principal amount. The Corporation’s foreign exchange contracts and interest rate swaps are considered Level 2 instruments which are based on market based inputs or unobservable inputs and corroborated by market data such as quoted prices, interest rates, or yield curves.
For interest rate swaps designated as fair value hedges (i.e., hedges against the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), changes in the fair value of the interest rate swaps offset changes in the fair value of the fixed rate debt due to changes in market interest rates.
As of December 31, 2019 and December 31, 2018, the Corporation did not have any active interest rate swaps.
Effects on Consolidated Balance Sheet
As of December 31, 2019 and December 31, 2018, the fair values of the asset and liability derivative instruments were immaterial.
Effects on Consolidated Statement of Earnings
Undesignated hedges
The location and amount of (gains) and losses recognized in income on forward exchange derivative contracts not designated for hedge accounting for the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Forward exchange contracts:
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
(2,072)
|
|
|
$
|
6,643
|
|
|
$
|
(346)
|
|
Debt
The estimated fair value amounts were determined by the Corporation using available market information, which is primarily based on quoted market prices for the same or similar issues as of December 31, 2019. The fair values of our debt instruments are characterized as Level 2 measurements which are based on market-based inputs or unobservable inputs and corroborated by market data such as quoted prices, interest rates, or yield curves. The estimated fair values of the Corporation’s fixed rate debt instruments as of December 31, 2019, net of debt issuance costs, totaled $783 million compared to a carrying value, net of debt issuance costs, of $749 million. The estimated fair values of the Corporation’s fixed rate debt instruments as of December 31, 2018, net of debt issuance costs, totaled $750 million compared to a carrying value, net of debt issuance costs, of $749 million.
The fair values described above may not be indicative of net realizable value or reflective of future fair values. Furthermore, the use of different methodologies to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
11. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Accrued compensation
|
|
$
|
119,293
|
|
|
$
|
118,479
|
|
Accrued commissions
|
|
6,678
|
|
|
7,769
|
|
Accrued interest
|
|
8,982
|
|
|
8,944
|
|
Accrued insurance
|
|
7,550
|
|
|
6,951
|
|
|
|
|
|
|
Other
|
|
22,241
|
|
|
24,811
|
|
Total accrued expenses
|
|
$
|
164,744
|
|
|
$
|
166,954
|
|
Other current liabilities consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Short-term lease liabilities
|
|
$
|
26,773
|
|
|
$
|
—
|
|
Warranty reserves
|
|
$
|
17,512
|
|
|
$
|
17,293
|
|
Pension and other postretirement liabilities
|
|
6,690
|
|
|
6,528
|
|
Other
|
|
23,227
|
|
|
21,008
|
|
Total other current liabilities
|
|
$
|
74,202
|
|
|
$
|
44,829
|
|
12. INCOME TAXES
2017 Tax Cuts and Jobs Act
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the Tax Act) was enacted into law. The new legislation contained several key tax provisions, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the U.S. corporate income tax rate to 21%. The Corporation will also generally be eligible for a 100% dividends received exemption on its foreign earnings. The Tax Act subjects a U.S. shareholder to tax on global intangible low-taxed income (“GILTI”) earned by certain foreign subsidiaries. The Corporation has applied an accounting policy election to provide for the tax expense related to GILTI in the year in which the tax is incurred.
The Corporation has summarized the most significant impacts from the Tax Act below:
Reduction of the U.S. Corporate Income Tax Rate
The Corporation measures deferred tax assets and liabilities using enacted tax rates that are applicable in the years in which the temporary differences are expected to be recovered or paid. Accordingly, the Corporation’s deferred tax assets and liabilities were remeasured to reflect the reduction of the U.S. corporate income tax rate from 35 percent to 21 percent, resulting in a provisional $13.4 million decrease in income tax expense for the year ended December 31, 2017.
Transition Tax on Foreign Earnings
The Corporation recorded provisional income tax expense of $18.2 million for the year ended December 31, 2017 related to the one-time transition tax on certain foreign earnings. The finalized transition tax of $23.6 million was to be paid over eight years pursuant to the Tax Act, with $1.9 million paid in 2018. An additional $12.7 million carryforward from the 2017 income tax return further reduced the transition tax liability to $9.0 million as of December 31, 2018. The liability of $9.0 million, which is expected to be paid in 2024 and 2025, remained unchanged as of December 31, 2019.
Given that foreign undistributed earnings are no longer considered permanently reinvested, the Corporation also recorded provisional income tax expense of $3.8 million for the year ended December 31, 2017 for withholding taxes that would arise upon distribution of the Corporation’s foreign undistributed earnings.
During the year ended December 31, 2018, the Corporation recorded additional tax expense of $9.3 million for foreign withholding taxes associated with the Tax Act, $6.5 million of which related to the prior period.
During the year ended December 31, 2019, the Corporation recorded tax expense of $4.4 million for foreign withholding taxes. The Corporation is considered permanently reinvested to the extent of any outside basis differences in its foreign subsidiaries in excess of the amount of undistributed earnings.
Earnings before income taxes for the years ended December 31 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Domestic
|
|
$
|
273,036
|
|
|
$
|
217,374
|
|
|
$
|
179,006
|
|
Foreign
|
|
123,426
|
|
|
138,865
|
|
|
120,613
|
|
|
|
$
|
396,462
|
|
|
$
|
356,239
|
|
|
$
|
299,619
|
|
The provision for income taxes for the years ended December 31 consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
14,195
|
|
|
$
|
37,648
|
|
|
$
|
54,963
|
|
State
|
|
3,766
|
|
|
9,228
|
|
|
2,648
|
|
Foreign
|
|
24,816
|
|
|
25,285
|
|
|
23,162
|
|
Total current
|
|
42,777
|
|
|
72,161
|
|
|
80,773
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
38,647
|
|
|
8,518
|
|
|
2,595
|
|
State
|
|
6,632
|
|
|
(1,047)
|
|
|
4,282
|
|
Foreign
|
|
823
|
|
|
858
|
|
|
(2,922)
|
|
Total deferred
|
|
46,102
|
|
|
8,329
|
|
|
3,955
|
|
Provision for income taxes
|
|
$
|
88,879
|
|
|
$
|
80,490
|
|
|
$
|
84,728
|
|
The effective tax rate varies from the U.S. federal statutory tax rate for the years ended December 31, principally:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S. federal statutory tax rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
Add (deduct):
|
|
|
|
|
|
|
State and local taxes, net of federal benefit
|
|
2.4
|
|
|
2.2
|
|
|
1.8
|
|
R&D tax credits
|
|
(1.2)
|
|
|
(1.0)
|
|
|
(1.3)
|
|
Foreign earnings (1)
|
|
1.4
|
|
|
0.9
|
|
|
(6.0)
|
|
Stock compensation - excess tax benefits
|
|
(0.8)
|
|
|
(1.3)
|
|
|
(2.6)
|
|
Impacts related to the Tax Act
|
|
—
|
|
|
1.8
|
|
|
3.4
|
|
Foreign-derived intangible income
|
|
(1.3)
|
|
|
(0.8)
|
|
|
—
|
|
All other, net
|
|
0.9
|
|
|
(0.2)
|
|
|
(2.0)
|
|
Effective tax rate
|
|
22.4
|
%
|
|
22.6
|
%
|
|
28.3
|
%
|
(1) Foreign earnings primarily include the net impact of differences between local statutory rates and the U.S. Federal statutory rate, the cost of repatriating foreign earnings, and the impact of changes to foreign valuation allowances.
The components of the Corporation’s deferred tax assets and liabilities as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Operating lease liabilities
|
|
$
|
35,299
|
|
|
$
|
—
|
|
Inventories, net
|
|
15,220
|
|
|
14,154
|
|
Net operating loss
|
|
8,328
|
|
|
9,868
|
|
Environmental reserves
|
|
8,239
|
|
|
8,613
|
|
Incentive compensation
|
|
8,130
|
|
|
8,472
|
|
Pension and other postretirement liabilities
|
|
5,029
|
|
|
35,656
|
|
Capital loss carryover
|
|
955
|
|
|
6,972
|
|
Other
|
|
33,002
|
|
|
27,795
|
|
Total deferred tax assets
|
|
114,202
|
|
|
111,530
|
|
Deferred tax liabilities:
|
|
|
|
|
Goodwill amortization
|
|
77,620
|
|
|
70,850
|
|
Operating lease right-of-use assets, net
|
|
33,915
|
|
|
—
|
|
Other intangible amortization
|
|
30,954
|
|
|
33,600
|
|
Depreciation
|
|
25,562
|
|
|
24,983
|
|
Withholding taxes
|
|
13,097
|
|
|
10,300
|
|
Other
|
|
7,524
|
|
|
5,345
|
|
Total deferred tax liabilities
|
|
188,672
|
|
|
145,078
|
|
Valuation allowance
|
|
3,386
|
|
|
11,646
|
|
Net deferred tax liabilities
|
|
$
|
77,856
|
|
|
$
|
45,194
|
|
Deferred tax assets and liabilities are reflected on the Corporation’s consolidated balance sheet as of December 31 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
Net noncurrent deferred tax assets
|
|
2,303
|
|
|
1,927
|
|
Net noncurrent deferred tax liabilities
|
|
80,159
|
|
|
47,121
|
|
Net deferred tax liabilities
|
|
$
|
77,856
|
|
|
$
|
45,194
|
|
The Corporation has income tax net operating loss carryforwards related to international operations of $15.4 million, of which $13.0 million have an indefinite life and $2.4 million which expire through 2026. The Corporation has federal and state income tax net loss carryforwards of $67.3 million, of which $63.4 million are net operating losses which expire through 2038 and $3.9 million are capital loss carryforwards which expire through 2020. The Corporation has recorded a deferred tax asset of $9.3 million, reflecting the benefit of the loss carryforwards.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the
cumulative loss incurred over the three-year period ended December 31, 2019 in certain of the Corporation’s foreign locations. Such objective evidence limits the ability to consider other subjective evidence such as projections for future growth. The Corporation decreased its valuation allowance by $8.3 million to $3.4 million, as of December 31, 2019, in order to measure only the portion of the deferred tax asset that more likely than not will be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as projections for growth.
Income tax payments, net of refunds, of $63.9 million, $79.1 million, and $92.1 million were made in 2019, 2018, and 2017, respectively.
The Corporation has recorded a liability in Other liabilities for interest of $3.3 million and penalties of $1.6 million as of December 31, 2019.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Balance as of January 1,
|
|
$
|
13,563
|
|
|
$
|
13,174
|
|
|
$
|
11,454
|
|
Additions for tax positions of prior periods
|
|
581
|
|
|
88
|
|
|
1,069
|
|
Reductions for tax positions of prior periods
|
|
(2,184)
|
|
|
(290)
|
|
|
(194)
|
|
Additions for tax positions related to the current year
|
|
936
|
|
|
1,036
|
|
|
1,273
|
|
Settlements
|
|
(220)
|
|
|
(445)
|
|
|
(428)
|
|
Balance as of December 31,
|
|
$
|
12,676
|
|
|
$
|
13,563
|
|
|
$
|
13,174
|
|
In many cases, the Corporation’s uncertain tax positions are related to tax years that remain subject to examination by tax authorities.
The following describes the open tax years, by major tax jurisdiction, as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
United States (Federal)
|
2016
|
-
|
present
|
United States (Various states)
|
2008
|
-
|
present
|
United Kingdom
|
2012
|
-
|
present
|
Canada
|
2013
|
-
|
present
|
The Corporation does not expect any significant changes to the estimated amount of liability associated with its uncertain tax positions through the next twelve months. Included in total unrecognized tax benefits as of December 31, 2019, 2018, and 2017 is $10.2 million, $11.0 million, and $10.1 million, respectively, which if recognized, would favorably impact the effective income tax rate.
13. DEBT
Debt consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2019
|
|
2018
|
|
2018
|
|
|
Carrying Value
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
Estimated Fair Value
|
3.84% Senior notes due 2021
|
|
100,000
|
|
|
102,079
|
|
|
100,000
|
|
|
100,359
|
|
3.70% Senior notes due 2023
|
|
202,500
|
|
|
207,882
|
|
|
202,500
|
|
|
201,813
|
|
3.85% Senior notes due 2025
|
|
90,000
|
|
|
93,838
|
|
|
90,000
|
|
|
89,711
|
|
4.24% Senior notes due 2026
|
|
200,000
|
|
|
213,126
|
|
|
200,000
|
|
|
202,288
|
|
4.05% Senior notes due 2028
|
|
67,500
|
|
|
71,260
|
|
|
67,500
|
|
|
66,942
|
|
4.11% Senior notes due 2028
|
|
90,000
|
|
|
95,607
|
|
|
90,000
|
|
|
89,647
|
|
Other debt
|
|
—
|
|
|
—
|
|
|
243
|
|
|
243
|
|
Total debt
|
|
750,000
|
|
|
783,792
|
|
|
750,243
|
|
|
751,003
|
|
Debt issuance costs, net
|
|
(594)
|
|
|
(594)
|
|
|
(714)
|
|
|
(714)
|
|
Unamortized interest rate swap proceeds (1)
|
|
11,233
|
|
|
11,233
|
|
|
13,027
|
|
|
13,027
|
|
Total debt, net
|
|
760,639
|
|
|
794,431
|
|
|
762,556
|
|
|
763,316
|
|
Less: current portion of long-term debt and short-term debt
|
|
—
|
|
|
—
|
|
|
243
|
|
|
243
|
|
Total long-term debt
|
|
$
|
760,639
|
|
|
$
|
794,431
|
|
|
$
|
762,313
|
|
|
$
|
763,073
|
|
(1) Represents the gain from termination of the Corporation's interest rate swap agreements on its 3.85% and 4.24% Senior Notes in February 2016, which will be amortized into interest expense over the remaining terms of the respective notes.
The weighted-average interest rate of the Corporation's Revolving Credit Agreement in 2019 and 2018 was 3.3% and 3.2%, respectively.
The Corporation's total debt outstanding had a weighted-average interest rate of 3.7% in both 2019 and 2018, respectively.
Aggregate maturities of debt are as follows:
|
|
|
|
|
|
(In thousands)
|
|
2020
|
$
|
—
|
|
2021
|
100,000
|
|
2022
|
—
|
|
2023
|
202,500
|
|
2024
|
—
|
|
Thereafter
|
447,500
|
|
Total
|
$
|
750,000
|
|
Interest payments of $30 million, $32 million, and $39 million were made in 2019, 2018, and 2017, respectively.
Revolving Credit Agreement
In October 2018, the Corporation amended the terms of its existing Credit Agreement (Credit Agreement) with a syndicate of financial institutions, led by Bank of America N.A., Wells Fargo, N.A., and JP Morgan Chase Bank, N.A.. The amended agreement, which provides the Corporation with a borrowing capacity of $500 million, extended the maturity date from November 2019 to October 2023 and expanded the accordion feature from $100 million to $200 million. The proceeds available under the Credit Agreement are to be used for working capital, internal growth initiatives, funding of future acquisitions, and general corporate purposes. As of December 31, 2019, the Corporation had $33 million in letters of credit supported by the credit facility and no borrowings outstanding under the credit facility. The unused credit available under the credit facility as of December 31, 2019 was $467 million, which the Corporation had the ability to borrow in full without violating its debt to capitalization covenant.
The Credit Agreement contains covenants that the Corporation considers usual and customary for an agreement of this type for comparable commercial borrowers, including a maximum consolidated debt to capitalization ratio of 60%. The Credit Agreement has customary events of default, such as non-payment of principal when due; nonpayment of interest, fees, or other amounts; cross-payment default and cross-acceleration.
Borrowings under the credit agreement accrue interest based on (i) Libor or (ii) a base rate of the highest of (a) the federal funds rate plus 0.5%, (b) BofA’s announced prime rate, or (c) the Eurocurrency rate plus 1%, plus a margin. The interest rate and level of facility fees are dependent on certain financial ratios, as defined in the Credit Agreement. The Credit Agreement also provides customary fees, including administrative agent and commitment fees. In connection with the Credit Agreement, the Corporation paid customary transaction fees that have been deferred and are being amortized over the term of the Credit Agreement.
Senior Notes
On February 26, 2013, the Corporation issued $500 million of Senior Notes (the “2013 Notes”). The 2013 Notes consisted of $225 million of 3.70% Senior Notes that mature on February 26, 2023, $100 million of 3.85% Senior Notes that mature on February 26, 2025, and $75 million of 4.05% Senior Notes that mature on February 26, 2028. $100 million of additional 4.11% Senior Notes were deferred and subsequently issued on September 26, 2013 that mature on September 26, 2028. On October 15, 2018, the Corporation made a discretionary $50 million prepayment on the $500 million 2013 Notes. The 2013 Notes are senior unsecured obligations, equal in right of payment to the Corporation’s existing senior indebtedness. The Corporation, at its option, can prepay at any time all or any part of the 2013 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with the issuance of the 2013 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of the 2013 Notes. Under the terms of the Note Purchase Agreement, the Corporation is required to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. The debt to capitalization ratio (as defined per the Notes Purchase Agreement and Credit Agreement) is calculated using the same formula for all of the Corporation’s debt agreements and is a measure of the Corporation’s indebtedness to capitalization, where capitalization equals debt plus equity. As of December 31, 2019, the Corporation had the ability to borrow additional debt of $1.8 billion without violating our debt to capitalization covenant. The 2013 Notes also contain a cross default provision with respect to the Corporation’s other senior indebtedness.
On December 8, 2011, the Corporation issued $300 million of Senior Notes (the “2011 Notes”). The 2011 Notes consist of $100 million of 3.84% Senior Notes that mature on December 1, 2021 and $200 million of 4.24% Senior Series Notes that mature on December 1, 2026. The 2011 Notes are senior unsecured obligations, equal in right of payment to our existing senior indebtedness. The Corporation, at its option, can prepay at any time all or any part of our 2011 Notes, subject to a make-whole payment in accordance with the terms of the Note Purchase Agreement. In connection with our 2011 Notes, the Corporation paid customary fees that have been deferred and are being amortized over the term of our 2011 Notes. Under the Note Purchase Agreement, the Corporation is required to maintain certain financial ratios, the most restrictive of which is a debt to capitalization limit of 60%. The 2011 Notes also contain a cross default provision with our other senior indebtedness.
14. EARNINGS PER SHARE
The Corporation is required to report both basic earnings per share (EPS), based on the weighted-average number of common shares outstanding, and diluted earnings per share, based on the basic EPS adjusted for all potentially dilutive shares issuable.
As of December 31, 2019, 2018, and 2017, there were no options outstanding that were considered anti-dilutive.
Earnings per share calculations for the years ended December 31, 2019, 2018, and 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share data)
|
|
Net Earnings
|
|
Weighted-
Average Shares
Outstanding
|
|
Earnings per Share
|
2019
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
307,583
|
|
|
42,739
|
|
|
$
|
7.20
|
|
Dilutive effect of stock options and deferred stock compensation
|
|
|
|
277
|
|
|
|
Diluted earnings per share
|
|
$
|
307,583
|
|
|
43,016
|
|
|
$
|
7.15
|
|
2018
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
275,749
|
|
|
43,892
|
|
|
$
|
6.28
|
|
Dilutive effect of stock options and deferred stock compensation
|
|
|
|
424
|
|
|
|
Diluted earnings per share
|
|
$
|
275,749
|
|
|
44,316
|
|
|
$
|
6.22
|
|
2017
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
214,891
|
|
|
44,182
|
|
|
$
|
4.86
|
|
Dilutive effect of stock options and deferred stock compensation
|
|
|
|
579
|
|
|
|
Diluted earnings per share
|
|
$
|
214,891
|
|
|
44,761
|
|
|
$
|
4.80
|
|
15. SHARE-BASED COMPENSATION PLANS
In May 2014, the Corporation adopted the Curtiss-Wright 2014 Omnibus Incentive Plan (the “2014 Omnibus Plan”). The plan replaced the Corporation's existing 2005 Long Term Incentive Plan and the 2005 Stock Plan for Non-Employee Directors (collectively the “2005 Stock Plans”). Beginning in May 2014, all awards were granted under the 2014 Omnibus Plan. The maximum aggregate number of shares of common stock that may be issued under the 2014 Omnibus Plan are 2,400,000 less one share of common stock for every one share of common stock granted under any prior plan after December 31, 2013 and prior to the effective date of the 2014 Omnibus Plan. In addition, any awards that were previously granted under any prior plan that terminate without issuance of shares shall be eligible for issuance under the 2014 Omnibus Plan. Awards under the 2014 Omnibus Plan may be in the form of stock options, stock appreciation rights, restricted stock, restricted stock units (RSU), other stock-based awards, performance share units (PSU), or cash-based performance units (PU).
During 2019, the Corporation granted share-based awards in the form of RSUs, PSUs, and restricted stock. Previous grants under the 2005 Stock Plans included non-qualified stock options. Under our employee benefit program, the Corporation also provides an Employee Stock Purchase Plan (ESPP) to most active employees. Certain awards provide for accelerated vesting if there is a change in control.
The compensation cost for employee and non-employee director share-based compensation programs during 2019, 2018, and 2017 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Employee Stock Purchase Plan
|
|
1,585
|
|
|
1,435
|
|
|
1,207
|
|
Performance Share Units
|
|
4,853
|
|
|
4,746
|
|
|
4,340
|
|
Restricted Share Units
|
|
6,061
|
|
|
7,026
|
|
|
4,931
|
|
Other share-based payments
|
|
1,170
|
|
|
887
|
|
|
1,094
|
|
Total share-based compensation expense before income taxes
|
|
$
|
13,669
|
|
|
$
|
14,094
|
|
|
$
|
11,572
|
|
Other share-based grants include service-based restricted stock awards to non-employee directors, who are treated as employees as prescribed by the accounting guidance on share-based payments. The compensation cost recognized follows the cost of the employee, which is primarily reflected as general and administrative expense in the Consolidated Statement of Earnings. No share-based compensation costs were capitalized during 2019, 2018, or 2017.
The following table summarizes the cash received from share-based awards on share-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Cash received from share-based awards
|
|
$
|
11,770
|
|
|
$
|
11,940
|
|
|
$
|
14,179
|
|
A summary of employee stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(000’s)
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term in
Years
|
|
Aggregate
Intrinsic
Value
(000’s)
|
Outstanding as of December 31, 2018
|
|
158
|
|
|
$
|
30.34
|
|
|
|
|
|
Exercised
|
|
(91)
|
|
|
30.64
|
|
|
|
|
|
Forfeited
|
|
(1)
|
|
|
30.90
|
|
|
|
|
|
Outstanding as of December 31, 2019
|
|
66
|
|
|
$
|
29.93
|
|
|
0.9
|
|
$
|
7,396
|
|
Exercisable as of December 31, 2019
|
|
66
|
|
|
$
|
29.93
|
|
|
0.9
|
|
$
|
7,396
|
|
The total intrinsic value of stock options exercised during 2019, 2018, and 2017 was $8.7 million, $10.1 million, and $12.7 million, respectively.
Performance Share Units
The Corporation has granted performance share units to certain employees, whose three-year cliff vesting is contingent upon the Corporation's total shareholder return over the three-year term of the awards compared to a self-constructed peer group. The non-vested shares are subject to forfeiture if established performance goals are not met or employment is terminated other than due to death, disability, or retirement. Share plans are denominated in share-based units based on the fair market value of the Corporation’s common stock on the date of grant. The performance share unit’s compensation cost is amortized to expense on a straight-line basis over the three-year requisite service period.
Restricted Share Units
Restricted share units cliff vest at the end of the awards’ vesting period. The restricted share units are service-based and thus compensation cost is amortized to expense on a straight-line basis over the requisite service period, which is typically three years. The non-vested restricted units are subject to forfeiture if employment is terminated other than due to death, disability, or retirement.
A summary of the Corporation’s 2019 activity related to performance share units and restricted share units are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Share Units (PSUs)
|
|
|
|
Restricted Share Units (RSUs)
|
|
|
|
|
Shares/Units
(000’s)
|
|
Weighted-
Average
Fair Value
|
|
Shares/Units
(000’s)
|
|
Weighted-
Average
Fair Value
|
Nonvested as of December 31, 2018
|
|
117
|
|
|
$
|
101.70
|
|
|
137
|
|
|
$
|
54.66
|
|
Granted
|
|
50
|
|
|
121.15
|
|
|
76
|
|
|
114.98
|
|
Vested
|
|
(68)
|
|
|
86.43
|
|
|
(58)
|
|
|
98.61
|
|
Forfeited
|
|
(2)
|
|
|
155.91
|
|
|
(6)
|
|
|
117.48
|
|
Nonvested as of December 31, 2019
|
|
97
|
|
|
$
|
149.99
|
|
|
149
|
|
|
$
|
105.42
|
|
Expected to vest as of December 31, 2019
|
|
97
|
|
|
$
|
149.99
|
|
|
149
|
|
|
$
|
105.42
|
|
Nonvested PSUs had an intrinsic value of $13.7 million and unrecognized compensation costs of $4.8 million as of December 31, 2019. Nonvested RSUs had an intrinsic value of $20.9 million and unrecognized compensation costs of $8.7 million as of December 31, 2019. Unrecognized compensation costs related to PSUs and RSUs are expected to be recognized over 1.6 years and 2.3 years, respectively.
Employee Stock Purchase Plan
The Corporation’s ESPP enables eligible employees to purchase the Corporation’s common stock at a price per share equal to 85% of the fair market value at the end of each offering period. Each offering period of the ESPP lasts six months, commencing on January 1st and July 1st of each year. Compensation cost is recognized on a straight-line basis over the six-month vesting period during which employees perform related services.
16. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Corporation maintains ten separate and distinct pension and other post-retirement defined benefit plans, consisting of three domestic plans and seven separate foreign pension plans. The domestic plans include a qualified pension plan, a non-qualified pension plan, and a postretirement health-benefits plan. The foreign plans consist of one defined benefit pension plan each in the United Kingdom, Canada, and Switzerland, two in Germany, and two in Mexico.
Domestic Plans
Qualified Pension Plan
The Corporation maintains a defined benefit pension plan (the “CW Pension Plan”) covering certain employee populations under six benefit formulas: a non-contributory non-union and union formula for certain Curtiss-Wright (CW) employees, a contributory union and non-union benefit formula for employees at the EMD business unit, and two benefit formulas providing annuity benefits for participants in the former Williams Controls salaried and union plans.
CW non-union employees hired prior to February 1, 2010 receive a “traditional” benefit based on years of credited service, using the five highest consecutive years’ compensation during the last ten years of service. These employees became participants under the CW Pension Plan after one year of service and were vested after three years of service. CW non-union employees hired on or after the effective date were eligible for a cash balance benefit through December 31, 2013, and were transitioned to the new defined contribution plan, further described below. CW union employees who have negotiated a benefit under the CW Pension Plan are entitled to a benefit based on years of service multiplied by a monthly pension rate.
The formula for EMD employees covers both union and non-union employees and is designed to satisfy the requirements of relevant collective bargaining agreements. Employee contributions are withheld each pay period and are equal to 1.5% of salary. The benefits for the EMD employees are based on years of service and compensation. On December 31, 2012, the Corporation amended the CW Pension Plan to close the benefit to EMD employees hired after January 1, 2014.
Participants of the former Williams Controls Retirement Income Plan for salaried employees are either deferred vested participants or currently receiving benefits, as benefit accruals under the plan were frozen to future accruals effective January 1, 2003. Benefits in the salaried plan are based on average compensation and years of service.
Participants of the former Williams Controls UAW Local 492 Plan for union employees are entitled to a benefit based on years of service multiplied by a monthly pension rate, and may be eligible for supplemental benefits based upon attainment of certain age and service requirements.
Effective January 1, 2014, all active non-union employees participating in the final and career average pay formulas in the defined benefit plan will cease accruals 15 years from the effective date of the amendment. In addition to the sunset provision, cash balance benefit accruals for non-union participants ceased as of January 1, 2014. Non-union employees who were not currently receiving final or career average pay benefits became eligible to participate in a new defined contribution plan which provides both employer match and non-elective contribution components. Subsequent to the original amendment, the Corporation successfully negotiated the sunset provision into the bargaining agreements for all represented employees that received benefits through this plan.
As of December 31, 2019 and 2018, the Corporation had a noncurrent pension liability of $50.2 million and $26.6 million, respectively. This increase was driven by a decrease in the discount rate as of December 31, 2019, partially offset by favorable asset experience due to strong market returns during 2019.
On January 8, 2020, the Corporation made a voluntary contribution of $150 million to the plan. The Corporation does not expect to make any required contributions through 2024.
Nonqualified Pension Plan
The Corporation also maintains a non-qualified restoration plan (the “CW Restoration Plan”) covering those employees of CW and EMD whose compensation or benefits exceed the IRS limitation for pension benefits. Benefits under the CW Restoration Plan are not funded, and, as such, the Corporation had an accrued pension liability of $59.6 million and $52.8 million as of December 31, 2019 and 2018, respectively. The Corporation’s contributions to the CW Restoration Plan are expected to be $4.8 million in 2020.
Other Post-Employment Benefits (OPEB) Plan
The Corporation provides post-employment benefits consisting of retiree health and life insurance to three distinct groups of employees/retirees: the CW Grandfathered plan, and plans assumed in the acquisitions of EMD and Williams Controls.
The Corporation also provides retiree health and life insurance benefits for substantially all of the Curtiss-Wright EMD employees. The plan provides basic health and welfare coverage for pre-65 participants based on years of service and are subject to certain caps. Effective January 1, 2011, the Corporation modified the benefit design for post-65 retirees by introducing Retiree Reimbursement Accounts (RRAs) to participants in lieu of the traditional benefit delivery. Participant accounts are funded a set amount annually that can be used to purchase supplemental coverage on the open market, effectively capping the benefit.
The plan also provides retiree health and life insurance benefits for certain retirees of the Williams Controls salaried and union pension plans. Effective August 31, 2013, the Corporation modified the benefit design for post-65 retirees by introducing RRAs to align with the EMD delivery model.
The Corporation had an accrued postretirement benefit liability as of December 31, 2019 and 2018 of $23.6 million and $22.0 million, respectively. The Corporation expects to contribute $1.5 million to the plan during 2020.
Foreign Plans
As of December 31, 2019 and 2018, the total projected benefit obligation related to all foreign plans was $102.7 million and $83.5 million, respectively. As of December 31, 2019 and 2018, the Corporation had a net pension (liability)/asset of $(0.2) million and $2.7 million, respectively. The Corporation's contributions to the foreign plans are expected to be $2.3 million in 2020.
Components of net periodic benefit expense
The net pension and net postretirement benefit costs (income) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
|
|
Postretirement Benefits
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
23,664
|
|
|
$
|
27,116
|
|
|
$
|
25,093
|
|
|
$
|
432
|
|
|
$
|
490
|
|
|
$
|
435
|
|
Interest cost
|
|
29,019
|
|
|
26,149
|
|
|
25,895
|
|
|
796
|
|
|
719
|
|
|
762
|
|
Expected return on plan assets
|
|
(59,153)
|
|
|
(58,641)
|
|
|
(53,552)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service cost
|
|
(283)
|
|
|
(252)
|
|
|
(100)
|
|
|
(656)
|
|
|
(656)
|
|
|
(656)
|
|
Recognized net actuarial loss/(gain)
|
|
9,310
|
|
|
16,867
|
|
|
12,925
|
|
|
(198)
|
|
|
(131)
|
|
|
(223)
|
|
Cost of settlements/curtailments
|
|
—
|
|
|
337
|
|
|
327
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost (income)
|
|
$
|
2,557
|
|
|
$
|
11,576
|
|
|
$
|
10,588
|
|
|
$
|
374
|
|
|
$
|
422
|
|
|
$
|
318
|
|
The cost of settlements/curtailments indicated above represents events that are accounted for under guidance on employers’ accounting for settlements and curtailments of defined benefit pension plans. In 2018, a settlement charge was incurred in connection with a restructuring in Switzerland. In 2017, there were settlement charges incurred in both the U.K. and Switzerland.
The following table outlines the Corporation's consolidated disclosure of the pension benefits and postretirement benefits information described previously. The Corporation had no foreign postretirement plans. All plans were valued using a December 31, 2019 measurement date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Postretirement Benefits
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
814,894
|
|
|
$
|
868,887
|
|
|
$
|
22,060
|
|
|
$
|
25,035
|
|
Service cost
|
|
23,664
|
|
|
27,116
|
|
|
432
|
|
|
490
|
|
Interest cost
|
|
29,019
|
|
|
26,149
|
|
|
796
|
|
|
719
|
|
Plan participants’ contributions
|
|
1,276
|
|
|
1,402
|
|
|
346
|
|
|
319
|
|
Actuarial (gain) loss
|
|
118,893
|
|
|
(58,913)
|
|
|
2,124
|
|
|
(1,982)
|
|
Benefits paid
|
|
(43,736)
|
|
|
(41,962)
|
|
|
(2,192)
|
|
|
(2,521)
|
|
Actual expenses
|
|
(1,846)
|
|
|
(1,371)
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
(2,228)
|
|
|
—
|
|
|
—
|
|
Currency translation adjustments
|
|
3,023
|
|
|
(4,186)
|
|
|
—
|
|
|
—
|
|
End of year
|
|
$
|
945,187
|
|
|
$
|
814,894
|
|
|
$
|
23,566
|
|
|
$
|
22,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
738,296
|
|
|
$
|
776,482
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
|
133,896
|
|
|
(44,876)
|
|
|
—
|
|
|
—
|
|
Employer contribution
|
|
3,867
|
|
|
55,311
|
|
|
1,846
|
|
|
2,203
|
|
Plan participants’ contributions
|
|
1,276
|
|
|
1,402
|
|
|
346
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
(43,736)
|
|
|
(44,190)
|
|
|
(2,192)
|
|
|
(2,522)
|
|
Actual Expenses
|
|
(1,846)
|
|
|
(1,371)
|
|
|
—
|
|
|
—
|
|
Currency translation adjustments
|
|
3,386
|
|
|
(4,462)
|
|
|
—
|
|
|
—
|
|
End of year
|
|
$
|
835,139
|
|
|
$
|
738,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(110,048)
|
|
|
$
|
(76,598)
|
|
|
$
|
(23,566)
|
|
|
$
|
(22,060)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Postretirement Benefits
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amounts recognized on the balance sheet
|
|
|
|
|
|
|
|
|
Noncurrent assets
|
|
$
|
11,711
|
|
|
$
|
9,098
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
|
(5,143)
|
|
|
(4,905)
|
|
|
(1,547)
|
|
|
(1,623)
|
|
Noncurrent liabilities
|
|
(116,616)
|
|
|
(80,791)
|
|
|
(22,019)
|
|
|
(20,437)
|
|
Total
|
|
$
|
(110,048)
|
|
|
$
|
(76,598)
|
|
|
$
|
(23,566)
|
|
|
$
|
(22,060)
|
|
Amounts recognized in accumulated other comprehensive income (AOCI)
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
263,660
|
|
|
$
|
228,430
|
|
|
$
|
(2,429)
|
|
|
$
|
(4,751)
|
|
Prior service cost
|
|
(934)
|
|
|
(1,225)
|
|
|
(1,404)
|
|
|
(2,060)
|
|
Total
|
|
$
|
262,726
|
|
|
$
|
227,205
|
|
|
$
|
(3,833)
|
|
|
$
|
(6,811)
|
|
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
881,731
|
|
|
$
|
743,632
|
|
|
N/A
|
|
N/A
|
Accumulated benefit obligation
|
|
848,309
|
|
|
714,146
|
|
|
N/A
|
|
N/A
|
Fair value of plan assets
|
|
759,972
|
|
|
658,327
|
|
|
N/A
|
|
N/A
|
Plan Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
Postretirement Benefits
|
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted-average assumptions in determination of benefit obligation:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.05
|
%
|
|
4.09
|
%
|
|
3.15
|
%
|
|
4.20
|
%
|
Rate of compensation increase
|
|
3.46
|
%
|
|
3.50
|
%
|
|
N/A
|
|
N/A
|
Health care cost trends:
|
|
|
|
|
|
|
|
|
Rate assumed for subsequent year
|
|
N/A
|
|
N/A
|
|
7.50
|
%
|
|
7.85
|
%
|
Ultimate rate reached in 2026
|
|
N/A
|
|
N/A
|
|
4.50
|
%
|
|
4.50
|
%
|
Weighted-average assumptions in determination of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.09
|
%
|
|
3.46
|
%
|
|
4.20
|
%
|
|
3.54
|
%
|
Expected return on plan assets
|
|
7.59
|
%
|
|
7.47
|
%
|
|
N/A
|
|
N/A
|
Rate of compensation increase
|
|
3.50
|
%
|
|
3.50
|
%
|
|
N/A
|
|
N/A
|
Health care cost trends:
|
|
|
|
|
|
|
|
|
Rate assumed for subsequent year
|
|
N/A
|
|
N/A
|
|
7.85
|
%
|
|
8.30
|
%
|
Ultimate rate reached in 2026
|
|
N/A
|
|
N/A
|
|
4.50
|
%
|
|
4.50
|
%
|
Effective December 31, 2016, the Corporation adopted the spot rate, or full yield curve, approach for developing discount rates. The discount rate for each plan's past service liabilities and service cost is determined by discounting the plan’s expected future benefit payments using a yield curve developed from high quality bonds that are rated Aa or better by Moody’s as of the measurement date. The yield curve calculation matches the notional cash inflows of the hypothetical bond portfolio with the expected benefit payments to arrive at one effective rate for these components. Interest cost is determined by applying the spot rate from the full yield curve to each anticipated benefit payment, based on the anticipated optional form elections.
The overall expected return on assets assumption is based on a combination of historical performance of the pension fund and expectations of future performance. Expected future performance is determined by weighting the expected returns for each asset class by the plan’s asset allocation. The expected returns are based on long-term capital market assumptions utilizing a ten-year time horizon through consultation with investment advisors. While consideration is given to recent performance and historical returns, the assumption represents a long-term prospective return.
Pension Plan Assets
The overall objective for plan assets is to earn a rate of return over time to meet anticipated benefit payments in accordance with plan provisions. The long-term investment objective of the domestic retirement plans is to achieve a total rate of return, net of fees, which exceeds the actuarial overall expected return on asset assumptions used for funding purposes and which provides an appropriate premium over inflation. The intermediate-term objective of the domestic retirement plans, defined as three to five years, is to outperform each of the capital markets in which assets are invested, net of fees. During periods of extreme market volatility, preservation of capital takes a higher precedence than outperforming the capital markets.
The Finance Committee of the Corporation’s Board of Directors is responsible for formulating investment policies, developing investment manager guidelines and objectives, and approving and managing qualified advisors and investment managers. The guidelines established define permitted investments within each asset class and apply certain restrictions such as limits on concentrated holdings, and prohibits selling securities short, buying on margin, and the purchase of any securities issued by the Corporation.
The Corporation maintains the funds of the CW Pension Plan under a trust that is diversified across investment classes and among investment managers to achieve an optimal balance between risk and return. As a part of its diversification strategy, the Corporation has established target allocations for each of the following assets classes: domestic equity securities, international equity securities, and debt securities. Below are the Corporation’s actual and established target allocations for the CW Pension Plan, representing 88% of consolidated assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Target
|
|
Expected
|
|
|
2019
|
|
2018
|
|
Exposure
|
|
Range
|
Asset class
|
|
|
|
|
|
|
|
|
Domestic equities
|
|
51%
|
|
|
48%
|
|
|
50%
|
|
|
40%-60%
|
International equities
|
|
15%
|
|
|
15%
|
|
|
15%
|
|
|
10%-20%
|
Total equity
|
|
66%
|
|
|
63%
|
|
|
65%
|
|
|
55%-75%
|
Fixed income
|
|
34%
|
|
|
37%
|
|
|
35%
|
|
|
25%-45%
|
As of December 31, 2019 and 2018, cash funds in the CW Pension Plan represented approximately 3% and 6% of portfolio assets, respectively.
Foreign plan assets represent 12% of consolidated plan assets, with the majority of the assets supporting the U.K. plan. Generally, the foreign plans follow a similar asset allocation strategy and are more heavily weighted in fixed income resulting in a weighted expected return on assets assumption of 4.3% for all foreign plans.
The Corporation may from time to time require the reallocation of assets in order to bring the retirement plans into conformity with these ranges. The Corporation may also authorize alterations or deviations from these ranges where appropriate for achieving the objectives of the retirement plans.
Fair Value Measurements
The following table presents consolidated plan assets (in thousands) as of December 31, 2019 using the fair value hierarchy, as described in Note 10 to the Consolidated Financial Statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
|
|
Significant
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Cash and cash equivalents
|
|
$
|
42,261
|
|
|
$
|
20,034
|
|
|
$
|
22,227
|
|
|
$
|
—
|
|
Equity securities- Mutual funds (1)
|
|
446,434
|
|
|
404,509
|
|
|
41,925
|
|
|
—
|
|
Bond funds (2)
|
|
238,880
|
|
|
177,731
|
|
|
61,149
|
|
|
—
|
|
Insurance Contracts (3)
|
|
8,408
|
|
|
—
|
|
|
—
|
|
|
8,408
|
|
Other (4)
|
|
2,313
|
|
|
—
|
|
|
—
|
|
|
2,313
|
|
December 31, 2018
|
|
$
|
738,296
|
|
|
$
|
602,274
|
|
|
$
|
125,301
|
|
|
$
|
10,721
|
|
Cash and cash equivalents
|
|
$
|
22,457
|
|
|
$
|
2,010
|
|
|
$
|
20,447
|
|
|
$
|
—
|
|
Equity securities- Mutual funds (1)
|
|
534,479
|
|
|
427,391
|
|
|
107,088
|
|
|
—
|
|
Bond funds (2)
|
|
273,979
|
|
|
211,372
|
|
|
62,607
|
|
|
—
|
|
Insurance Contracts (3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other (4)
|
|
4,224
|
|
|
—
|
|
|
—
|
|
|
4,224
|
|
December 31, 2019
|
|
$
|
835,139
|
|
|
$
|
640,773
|
|
|
$
|
190,142
|
|
|
$
|
4,224
|
|
(1)This category consists of domestic and international equity securities. It is comprised of U.S. securities benchmarked against the S&P 500 index and Russell 2000 index, international mutual funds benchmarked against the MSCI EAFE index, global equity index mutual funds associated with our U.K. based pension plans and balanced funds associated with the U.K. and Canadian based pension plans.
(2)This category consists of domestic and international bonds. The domestic fixed income securities are benchmarked against the Bloomberg Barclays Capital Aggregate Bond index, actively-managed bond mutual funds comprised of domestic investment grade debt, fixed income derivatives, and below investment-grade issues, U.S. mortgage backed securities, asset backed securities, municipal bonds, and convertible debt. International bonds consist of bond mutual funds for institutional investors associated with the CW Pension Plan, Switzerland, and U.K. based pension plans.
(3)This category had consisted of a guaranteed investment contract (GIC) in Switzerland. Effective January 2019, the Corporation replaced the collective foundation administering the plan and the GIC was not an available offering in the new plan.
(4)This category consists primarily of real estate investment trusts in Switzerland.
Valuation
Equity securities and exchange-traded equity and bond mutual funds are valued using a market approach based on the quoted market prices of identical instruments. Pooled institutional funds are valued at their net asset values and are calculated by the sponsor of the fund.
Fixed income securities are primarily valued using a market approach utilizing various underlying pricing sources and methodologies. Real estate investment trusts are priced at net asset value based on valuations of the underlying real estate holdings using inputs such as discounted cash flows, independent appraisals, and market-based comparable data.
Cash balances in the United States are held in a pooled fund and classified as a Level 2 asset. Non-U.S. cash is valued using a market approach based on quoted market prices of identical instruments.
The following table presents a reconciliation of Level 3 assets held during the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Insurance
Contracts
|
|
Other
|
|
Total
|
December 31, 2017
|
|
$
|
10,912
|
|
|
$
|
2,191
|
|
|
$
|
13,103
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
|
163
|
|
|
(13)
|
|
|
150
|
|
Purchases, sales, and settlements
|
|
(2,595)
|
|
|
152
|
|
|
(2,443)
|
|
Foreign currency translation adjustment
|
|
(72)
|
|
|
(17)
|
|
|
(89)
|
|
December 31, 2018
|
|
$
|
8,408
|
|
|
$
|
2,313
|
|
|
$
|
10,721
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
Relating to assets still held at the reporting date
|
|
—
|
|
|
115
|
|
|
115
|
|
Purchases, sales, and settlements
|
|
(8,408)
|
|
|
1,715
|
|
|
(6,693)
|
|
Foreign currency translation adjustment
|
|
—
|
|
|
81
|
|
|
81
|
|
December 31, 2019
|
|
$
|
—
|
|
|
$
|
4,224
|
|
|
$
|
4,224
|
|
Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid from the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Pension
Plans
|
|
Postretirement
Plans
|
|
Total
|
2020
|
|
$
|
49,446
|
|
|
$
|
1,547
|
|
|
$
|
50,993
|
|
2021
|
|
51,481
|
|
|
1,594
|
|
|
53,075
|
|
2022
|
|
52,608
|
|
|
1,589
|
|
|
54,197
|
|
2023
|
|
53,597
|
|
|
1,592
|
|
|
55,189
|
|
2024
|
|
57,406
|
|
|
1,566
|
|
|
58,972
|
|
2025 — 2029
|
|
282,548
|
|
|
7,306
|
|
|
289,854
|
|
Defined Contribution Retirement Plans
The Corporation offers all of its domestic employees the opportunity to participate in a defined contribution plan. Costs incurred by the Corporation in the administration and record keeping of the defined contribution plan are paid for by the Corporation and are not considered material.
Effective January 1, 2014, all non-union employees who were not currently receiving final or career average pay benefits became eligible to receive employer contributions in the Corporation's sponsored 401(k) plan, including both employer match and non-elective contribution components. Effective January 1, 2019, the employer contribution was increased to a maximum of 7% of eligible compensation from 6% previously. During the year ended December 31, 2019, the expense relating to the plan was $17.8 million, consisting of $9.1 million in matching contributions to the plan in 2019, and $8.7 million in non-elective contributions paid in January 2020. Cumulative contributions of approximately $97 million are expected to be made from 2020 through 2024.
In addition, the Corporation had foreign pension costs under various defined contribution plans of $5.3 million, $5.3 million, and $4.2 million in 2019, 2018, and 2017, respectively.
17. SEGMENT INFORMATION
The Corporation’s segments are composed of similar product groupings that serve the same or similar end markets. Based on this approach, the Corporation has three reportable segments: Commercial/Industrial, Defense, and Power, as described below in further detail.
The Commercial/Industrial reportable segment is comprised of businesses that provide a diversified offering of highly engineered products and services supporting critical applications primarily across the commercial aerospace and general industrial markets. The products offered include electronic throttle control devices and transmission shifters, electro-mechanical actuation control components, valves, and surface technology services such as shot peening, laser peening, coatings, and advanced testing.
The Defense reportable segment is comprised of businesses that primarily provide products to the defense markets and to a lesser extent the commercial aerospace market. The products offered include commercial off-the-shelf (COTS) embedded computing board level modules, integrated subsystems, turret aiming and stabilization products, weapons handling systems, avionics and electronics, flight test equipment, and aircraft data management solutions.
The Power segment is comprised of businesses that primarily provide products to the power generation markets and to a lesser extent the naval defense market. The products offered include main coolant pumps, power-dense compact motors, generators, secondary propulsion systems, pumps, pump seals, control rod drive mechanisms, fastening systems, specialized containment doors, airlock hatches, spent fuel management products, and fluid sealing products.
The Corporation’s measure of segment profit or loss is operating income. Interest expense and income taxes are not reported on an operating segment basis as they are not considered in the segments’ performance evaluation by the Corporation’s chief operating decision-maker, its Chief Executive Officer.
Net sales and operating income by reportable segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
|
Commercial/Industrial
|
|
$
|
1,240,697
|
|
|
$
|
1,209,943
|
|
|
$
|
1,163,510
|
|
Defense
|
|
580,845
|
|
|
559,058
|
|
|
557,954
|
|
Power
|
|
670,950
|
|
|
649,754
|
|
|
554,048
|
|
Less: Intersegment Revenues
|
|
(4,531)
|
|
|
(6,920)
|
|
|
(4,486)
|
|
Total Consolidated
|
|
$
|
2,487,961
|
|
|
$
|
2,411,835
|
|
|
$
|
2,271,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Operating income (expense)
|
|
|
|
|
|
|
Commercial/Industrial
|
|
$
|
196,455
|
|
|
$
|
182,669
|
|
|
$
|
168,146
|
|
Defense
|
|
129,653
|
|
|
128,446
|
|
|
109,338
|
|
Power
|
|
112,954
|
|
|
98,858
|
|
|
81,119
|
|
Corporate and Eliminations (1)
|
|
(35,109)
|
|
|
(36,347)
|
|
|
(33,483)
|
|
Total Consolidated
|
|
$
|
403,953
|
|
|
$
|
373,626
|
|
|
$
|
325,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
Commercial/Industrial
|
|
$
|
48,227
|
|
|
$
|
50,690
|
|
|
$
|
53,180
|
|
Defense
|
|
21,495
|
|
|
20,578
|
|
|
20,702
|
|
Power
|
|
28,589
|
|
|
27,737
|
|
|
22,019
|
|
Corporate
|
|
4,101
|
|
|
3,944
|
|
|
4,094
|
|
Total Consolidated
|
|
$
|
102,412
|
|
|
$
|
102,949
|
|
|
$
|
99,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
Commercial/Industrial
|
|
$
|
1,470,477
|
|
|
$
|
1,398,601
|
|
|
$
|
1,444,097
|
|
Defense
|
|
1,184,116
|
|
|
961,298
|
|
|
1,044,776
|
|
Power
|
|
804,432
|
|
|
720,073
|
|
|
482,753
|
|
Corporate
|
|
305,236
|
|
|
175,413
|
|
|
264,695
|
|
Total Consolidated
|
|
$
|
3,764,261
|
|
|
$
|
3,255,385
|
|
|
$
|
3,236,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
Commercial/Industrial
|
|
$
|
34,077
|
|
|
$
|
30,411
|
|
|
$
|
29,028
|
|
Defense
|
|
4,034
|
|
|
5,793
|
|
|
9,276
|
|
Power
|
|
28,051
|
|
|
11,350
|
|
|
10,039
|
|
Corporate
|
|
3,590
|
|
|
5,863
|
|
|
4,362
|
|
Total Consolidated
|
|
$
|
69,752
|
|
|
$
|
53,417
|
|
|
$
|
52,705
|
|
(1) Corporate and Eliminations includes pension expense, environmental remediation and administrative expenses, legal, foreign currency transactional gains and losses, and other expenses.
Reconciliations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Earnings before taxes:
|
|
|
|
|
|
|
Total segment operating income
|
|
$
|
439,062
|
|
|
$
|
409,973
|
|
|
$
|
358,603
|
|
Corporate and Eliminations
|
|
(35,109)
|
|
|
(36,347)
|
|
|
(33,483)
|
|
Interest expense
|
|
31,347
|
|
|
33,983
|
|
|
41,471
|
|
Other income, net
|
|
23,856
|
|
|
16,596
|
|
|
15,970
|
|
Total consolidated earnings before tax
|
|
$
|
396,462
|
|
|
$
|
356,239
|
|
|
$
|
299,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Assets:
|
|
|
|
|
|
|
Total assets for reportable segments
|
|
$
|
3,459,025
|
|
|
$
|
3,079,972
|
|
|
$
|
2,971,626
|
|
Non-segment cash
|
|
235,260
|
|
|
138,053
|
|
|
204,664
|
|
Other assets
|
|
69,976
|
|
|
37,360
|
|
|
60,031
|
|
Total consolidated assets
|
|
$
|
3,764,261
|
|
|
$
|
3,255,385
|
|
|
$
|
3,236,321
|
|
Geographic Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
|
|
United States of America
|
|
$
|
1,710,371
|
|
|
$
|
1,623,511
|
|
|
$
|
1,562,180
|
|
United Kingdom
|
|
120,297
|
|
|
126,439
|
|
|
118,350
|
|
Other foreign countries
|
|
657,293
|
|
|
661,885
|
|
|
590,496
|
|
Consolidated total
|
|
$
|
2,487,961
|
|
|
$
|
2,411,835
|
|
|
$
|
2,271,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Long-Lived Assets - Property, plant, and equipment, net
|
|
|
|
|
|
|
United States of America
|
|
$
|
271,609
|
|
|
$
|
258,504
|
|
|
$
|
264,829
|
|
United Kingdom
|
|
34,228
|
|
|
34,649
|
|
|
41,100
|
|
Other foreign countries
|
|
79,756
|
|
|
81,507
|
|
|
84,306
|
|
Consolidated total
|
|
$
|
385,593
|
|
|
$
|
374,660
|
|
|
$
|
390,235
|
|
Net sales by product line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
(In thousands)
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
|
|
|
|
|
Flow Control
|
|
$
|
1,051,821
|
|
|
$
|
1,008,262
|
|
|
$
|
899,705
|
|
Motion Control
|
|
1,130,593
|
|
|
1,090,703
|
|
|
1,075,218
|
|
Surface Technologies
|
|
305,547
|
|
|
312,870
|
|
|
296,103
|
|
Consolidated total
|
|
$
|
2,487,961
|
|
|
$
|
2,411,835
|
|
|
$
|
2,271,026
|
|
The Flow Control products include valves, pumps, motors, generators, and instrumentation that manage the flow of liquids and gases, generate power, and monitor or provide critical functions. Motion Control's products include turret aiming and stabilization products, embedded computing board level modules, electronic throttle control devices, transmission shifters, and electro-mechanical actuation control components. Surface Technologies include shot peening, laser peening, and coatings services that enhance the durability, extend the life, and prevent premature fatigue and failure on customer-supplied metal components.
18. CONTINGENCIES AND COMMITMENTS
Legal Proceedings
The Corporation has been named in a number of lawsuits that allege injury from exposure to asbestos. To date, the Corporation has not been found liable for or paid any material sum of money in settlement in any asbestos-related case. The Corporation believes its minimal use of asbestos in its past operations and the relatively non-friable condition of asbestos in its products make it unlikely that it will face material liability in any asbestos litigation, whether individually or in the aggregate. The Corporation maintains insurance coverage for these potential liabilities and believes adequate coverage exists to cover any unanticipated asbestos liability.
In December 2013, the Corporation, along with other unaffiliated parties, received a claim from Canadian Natural Resources Limited (CNRL) filed in the Court of Queen's Bench of Alberta, Judicial District of Calgary. The claim pertains to a January 2011 fire and explosion at a delayed coker unit at its Fort McMurray refinery that resulted in the injury of five CNRL employees, damage to property and equipment, and various forms of consequential loss such as loss of profit, lost opportunities, and business interruption. The fire and explosion occurred when a CNRL employee bypassed certain safety controls and opened an operating coker unit. In November 2019, all parties participated in a formal mediation and agreed to settle the claim for approximately $38 million. The Corporation’s portion of the settlement amount was $6 million, which was fully paid in
2020 by the Corporation's primary and excess insurance coverage. No admission of liability was made by the Corporation as part of the settlement agreement. The Corporation does not expect to incur any additional liabilities related to this claim.
The Corporation is party to a number of other legal actions and claims, none of which individually or in the aggregate, in the opinion of management, are expected to have a material effect on the Corporation’s results of operations or financial position.
Letters of Credit and Other Arrangements
The Corporation enters into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to guarantees of repayment, future performance on certain contracts to provide products and services, and to secure advance payments from certain international customers. As of December 31, 2019 and 2018, there were $32.6 million and $21.7 million of stand-by letters of credit outstanding, respectively, and $10.8 million and $11.7 million of bank guarantees outstanding, respectively.
The Corporation, through its Electro-Mechanical Division (EMD) business unit, has three Pennsylvania Department of Environmental Protection (PADEP) radioactive materials licenses that are utilized in the continued operation of the EMD business. In connection with these licenses, the Corporation has known conditional asset retirement obligations related to asset decommissioning activities to be performed in the future, when the Corporation terminates these licenses. For two of the three licenses, the Corporation has recorded an asset retirement obligation of approximately $7.5 million. For its third license, the Corporation has not recorded an asset retirement obligation as it is not reasonably estimable due to insufficient information about the timing and method of settlement of the obligation. Accordingly, this obligation has not been recorded in the Consolidated Financial Statements. A liability for this obligation will be recorded in the period when sufficient information regarding timing and method of settlement becomes available to make a reasonable estimate of the liability’s fair value. The Corporation is required to provide the Nuclear Regulatory Commission financial assurance demonstrating its ability to cover the cost of decommissioning its Cheswick, Pennsylvania facility upon closure, though the Corporation does not intend to close this facility. The Corporation has provided this financial assurance in the form of a $45.6 million surety bond.
AP1000 Program
Within the Corporation’s Power segment, EMD is the RCP supplier for the WEC AP1000 nuclear power plants under construction in China and the United States. The terms of the AP1000 China and U.S. contracts include liquidated damage provisions for failure to meet contractual delivery dates if the Corporation caused the delay and the delay was not excusable. The Corporation would be liable for liquidated damages if the Corporation was deemed responsible for not meeting the delivery dates. On October 10, 2013, the Corporation received a letter from WEC stating entitlements to the maximum amount of liquidated damages allowable under the AP1000 China contract from WEC of approximately $25 million. As of December 31, 2019, the Corporation has not met certain contractual delivery dates under its AP1000 U.S. and China contracts; however, there are significant counterclaims and uncertainties as to which parties are responsible for the delays. The Corporation believes it has adequate legal defenses and intends to vigorously defend this matter. Given the uncertainties surrounding the responsibility for the delays, no accrual has been made for this matter as of December 31, 2019. As of December 31, 2019, the range of possible loss is $0 million to $31 million for the AP1000 U.S. contract, for a total range of possible loss of $0 to $55.5 million.
19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The total cumulative balance of each component of accumulated other comprehensive income (loss), net of tax, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Foreign currency translation adjustments, net
|
|
Total pension and postretirement adjustments, net
|
|
Accumulated other comprehensive income (loss)
|
December 31, 2017
|
|
$
|
(94,708)
|
|
|
$
|
(122,132)
|
|
|
$
|
(216,840)
|
|
Other comprehensive loss before reclassifications (1)
|
|
(52,440)
|
|
|
(31,380)
|
|
|
(83,820)
|
|
Amounts reclassified from accumulated other comprehensive income (1)
|
|
—
|
|
|
12,213
|
|
|
12,213
|
|
Net current period other comprehensive loss
|
|
(52,440)
|
|
|
(19,167)
|
|
|
(71,607)
|
|
December 31, 2018
|
|
$
|
(147,148)
|
|
|
$
|
(141,299)
|
|
|
$
|
(288,447)
|
|
Other comprehensive loss before reclassifications (1)
|
|
18,447
|
|
|
(35,212)
|
|
|
(16,765)
|
|
Amounts reclassified from accumulated other comprehensive income (1)
|
|
—
|
|
|
6,195
|
|
|
6,195
|
|
Net current period other comprehensive income (loss)
|
|
18,447
|
|
|
(29,017)
|
|
|
(10,570)
|
|
Cumulative effect from adoption of ASU 2018-02 (2)
|
|
$
|
(1,318)
|
|
|
$
|
(24,939)
|
|
|
$
|
(26,257)
|
|
December 31, 2019
|
|
$
|
(130,019)
|
|
|
$
|
(195,255)
|
|
|
$
|
(325,274)
|
|
(1)All amounts are after tax.
(2)Reclassification to retained earnings due to adoption of ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 1 for additional information.
Details of amounts reclassified from accumulated other comprehensive income (loss) are below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount reclassified from Accumulated other comprehensive income (loss)
|
|
|
|
Affected line item in the statement where net earnings is presented
|
(In thousands)
|
|
2019
|
|
2018
|
|
|
Defined benefit pension and postretirement plans
|
|
|
|
|
|
|
Amortization of prior service costs
|
|
939
|
|
|
908
|
|
|
(1)
|
Amortization of net actuarial losses
|
|
(9,112)
|
|
|
(16,736)
|
|
|
(1)
|
Settlements
|
|
—
|
|
|
(337)
|
|
|
(1)
|
|
|
(8,173)
|
|
|
(16,165)
|
|
|
Total before tax
|
|
|
1,978
|
|
|
3,952
|
|
|
Income tax effect
|
Total reclassifications
|
|
$
|
(6,195)
|
|
|
$
|
(12,213)
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|
|
Net of tax
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(1)These items are included in the computation of net periodic pension cost. See Note 16, Pension and Other Postretirement Benefit Plans.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth selected unaudited quarterly Consolidated Statements of Earnings information for the fiscal years ended December 31, 2019 and 2018.
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(In thousands, except per share data)
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First
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Second
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Third
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Fourth
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2019
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|
|
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|
|
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|
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Net sales
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$
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578,314
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|
|
$
|
638,996
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|
|
$
|
614,880
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|
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$
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655,771
|
|
Gross profit
|
|
196,873
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|
|
230,044
|
|
|
226,076
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|
|
245,752
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Net earnings
|
|
55,593
|
|
|
80,072
|
|
|
82,510
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|
|
89,408
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|
|
|
|
|
|
|
|
|
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Net earnings per share
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|
|
|
|
|
|
|
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Basic earnings per share
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|
$
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1.30
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|
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$
|
1.87
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|
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$
|
1.93
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|
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$
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2.09
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Diluted earnings per share
|
|
$
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1.29
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|
|
$
|
1.86
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|
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$
|
1.92
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|
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$
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2.08
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2018
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|
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|
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Net sales
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$
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547,522
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|
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$
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620,298
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|
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$
|
595,393
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|
|
$
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648,622
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Gross profit
|
|
181,191
|
|
|
226,500
|
|
|
222,518
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|
|
241,052
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Net earnings
|
|
43,643
|
|
|
74,788
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|
|
74,483
|
|
|
82,835
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|
|
|
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|
|
|
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Net earnings per share
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|
|
|
|
|
|
|
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Basic earnings per share
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$
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0.99
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|
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$
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1.69
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|
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$
|
1.70
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|
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$
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1.91
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Diluted earnings per share
|
|
$
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0.98
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|
|
$
|
1.68
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|
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$
|
1.68
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|
|
$
|
1.89
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|
Note: Certain amounts may not add due to rounding.
21. SUBSEQUENT EVENTS
On January 8, 2020, the Corporation made a voluntary $150 million contribution to the CW Pension Plan
On February 26, 2020, the Corporation signed a definitive agreement to acquire Dyna-Flo Control Valve Services Ltd. (Dyna-Flo) for CAD$81 million (approximately $61 million). Dyna-Flo, which specializes in control valves, actuators, and control systems for the chemical, petrochemical, and oil and gas markets, generated sales of approximately $25 million for the year ended December 31, 2019. The acquired business will operate within the Commercial/Industrial segment.
Report of the Corporation
The Consolidated Financial Statements appearing in Item 8 of this Annual Report on Form 10-K have been prepared by the Corporation in conformity with accounting principles generally accepted in the United States of America. The financial statements necessarily include some amounts that are based on the best estimates and judgments of the Corporation. Other financial information in this Annual Report on Form 10-K is consistent with that in the Consolidated Financial Statements.
The Corporation maintains accounting systems, procedures, and internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with the appropriate corporate authorization and are properly recorded. The accounting systems and internal accounting controls are augmented by written policies and procedures, organizational structure providing for a division of responsibilities, selection and training of qualified personnel, and an internal audit program. The design, monitoring, and revision of internal accounting control systems involve, among other things, management’s judgment with respect to the relative cost and expected benefits of specific control measures. Management of the Corporation has completed an assessment of the Corporation’s internal controls over financial reporting and has included “Management’s Annual Report on Internal Control Over Financial Reporting” in Item 9A of this Annual Report on Form 10-K.
Deloitte & Touche LLP, our independent registered public accounting firm, performed an integrated audit of the Corporation’s Consolidated Financial Statements that also included forming an opinion on the internal controls over financial reporting of the Corporation for the year ended December 31, 2019. An audit includes examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. The objective of their audit is the expression of an opinion on the Corporation’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, in all material respects, and on the internal controls over financial reporting as of December 31, 2019.
The Audit Committee of the Board of Directors, composed entirely of directors who are independent of the Corporation, appoints the independent registered public accounting firm for ratification by stockholders and, among other things, considers the scope of the independent registered public accounting firm’s examination, the audit results, and the adequacy of internal accounting controls of the Corporation. The independent registered public accounting firm and the internal auditor have direct access to the Audit Committee, and they meet with the committee from time to time, with and without management present, to discuss accounting, auditing, non-audit consulting services, internal control, and financial reporting matters.