Dear Shareholders:
The theme of this year’s business overview highlights a core competency of Curtiss-Wright: Technologies that Matter.
With a history of dedication to engineering and innovation, we have continually shown the ability to adapt and evolve with the ever-changing environments in which we participate. At the root of this flexibility is our technological expertise. We have compiled an extensive product offering of critical technologies, tactically building the Company through solid organic growth and strategic acquisitions. Most importantly, our technologies provide increased safety, reliability, and performance in the most demanding environments, serving numerous customers across a multitude of industries.
As a result of our dedication to technological leadership, I am pleased to report solid growth in sales and profitability in 2011 which should position us well for future years.
In fact, Curtiss-Wright produced a 9% increase in sales, along with double-digit growth in operating income and earnings per share in 2011. An essential part of this performance has been management’s steadfast commitment to cost reduction and restructuring to continually improve our profitability. As world economies slowed late last decade and finally began to show signs of recovery in 2011, our management team has remained intensely focused on opportunities to help fuel increased operating efficiency for Curtiss-Wright by making strategic investments, consolidating existing facilities, expanding into more cost-efficient locations, and shifting production to low-cost economies.
With operations across six continents, our global presence provides both opportunity and stability to our financial and operational performance, while the diversification of our business model remains a key component to our long-term success.
Technologies that Matter Do Not Just Happen
The pace of technological innovation continues to accelerate. Capturing opportunities in rapidly changing global markets also requires a combination of attributes and skills that few other companies can match. At Curtiss-Wright, we continually sharpen the five specific differences that distinguish us from our competition.
Unique technologies effectively deployed.
Curtiss-Wright has an impressive 82-year record for enhancing the safety, reliability, and performance of its customers’ end market applications. The aforementioned topics of nuclear power, surface technologies, oil and gas, and defense electronics are but a few noteworthy examples of the type of critical, high-value technologies that Curtiss-Wright provides to its customers.
Expert program execution.
Curtiss-Wright employees have worked diligently to compile an exemplary record of project and program execution, which is reflected in our frequent selection as a key supplier to commercial projects and contributor to many of the nation’s most important defense programs.
Flexible, entrepreneurial operating structure.
A vital part of our success is an operating structure that relentlessly focuses on business results. We enable success by allowing talented managers sufficient latitude for action within an acceptable risk framework. We are not blinded by our own technologies as evidenced by our success at integrating acquisitions. We maintain a flat corporate structure that enforces strict standards for operating results.
Lowered program risk through diversity.
Like few others in our defense markets, Curtiss-Wright enjoys a base of business in the most critical technologies such as electronic sensors and embedded computing that spans hundreds of programs covering both new development and equipment replacement programs. This also resonates throughout our commercial markets where, for example, we provide a significant number of high-technology products for the power generation industry, as well as a diverse array of metal treatment services for various commercial applications. As a result, we offer one of the most diversified technology portfolios in the industry.
Long-running customer relationships.
Curtiss-Wright has enjoyed well-established customer relationships with many of the world’s premier manufacturers, some of which date back to the founding of the present Company in 1929. These relationships have been strengthened over the years by our outstanding record of adaptability, reliability, and performance.
Financial and Operational Strength
Our financial performance in 2011 showed solid sales and stronger profitability as our cost reduction and restructuring initiatives clearly took hold and positively impacted our results.
Net sales of $2.1 billion represented a 9% increase from the prior year, driven by robust demand for our unique and highly engineered products and services, particularly in our Metal Treatment segment. We achieved this solid performance through a combination of steady organic growth and the addition of seven new companies to our vast portfolio of products and services.
Operating income increased 14% to $205 million and our net earnings rose 22% to $130 million, or $2.77 per fully diluted share. Meanwhile, we continued our efforts to improve operating efficiency as we succeeded in growing our operating margin to 10.0% in 2011, primarily led by a strong turnaround in our Metal Treatment segment as worldwide economic improvement drove higher volumes. In our Motion Control segment, higher demand for our sensor and control products and the continual benefits generated by our business restructuring and cost reduction efforts were offset by the negative impact of acquisitions and unfavorable foreign currency translation. Meanwhile, our Flow Control segment experienced a decrease in operating income primarily due to weaker international project sales in its oil and gas business.
During 2011, we booked new orders of $2.1 billion, an increase of 8% over the prior year, resulting in a strong year-end backlog of approximately $1.7 billion. The growth in new orders was driven by our key position as a premier supplier of products and services supporting safety-related upgrades on operating commercial nuclear power plants, strong demand coming from the commercial aerospace market, and solid demand for Maintenance, Repair and Overhaul (MRO) products from the oil and gas industry — all of which, we believe, should fuel solid future growth in each market.
Our free cash flow, defined as cash flow from operations less capital expenditures, was $118 million for the year, equating to a 90% cash conversion.
Growing Our Strategic Markets
Our defense markets grew 4%, led by increased demand in aerospace defense for embedded computing and sensor and control products, supporting Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) applications, as well as the F-35 Joint Strike Fighter and various helicopter programs. Sales to the U.S. Navy were mixed, as increased sales related to the expansion of its fleet of submarines and the ramp up in production on the new CVN-79 aircraft carrier were more than offset by the winding down of the CVN-78 carrier and Electromagnetic Aircraft Launching System programs. Meanwhile, the geographic diversity of our business led to strong sales into the international ground defense market for turret drive aiming and stabilization systems as we await the next phase of modernization efforts or new development initiatives in the U.S. Lastly, despite the current uncertainty facing future defense spending, along with the potential for ongoing headline pressure as we enter an election year, we remain confident that our presence on C4ISR and unmanned platforms will provide significant opportunities for Curtiss-Wright to upgrade current program technology and lead future development of new technological advances for our armed forces.
In our commercial markets, we experienced strong 12% growth as we benefitted from the ongoing ramp up in commercial aircraft production rates at Boeing and Airbus, as well as generally improved global economic conditions. A key beneficiary of the ongoing economic improvements was our general industrial market, which experienced solid growth over the prior year led by strong sales to the automotive and HVAC industries. Once again, our energy markets remained mixed, as strong sales related to maintenance and upgrades on various nuclear power plant projects were somewhat offset by lower capital spending worldwide on larger projects in the oil and gas industry. It is worth noting that a significant portion of our power generation sales came from solid organic growth supporting operating nuclear plants worldwide due to the renewed interest in products to aid safety and extend the reliability of existing reactors.
Overall, we remain well positioned within our core markets, presenting us with a balanced portfolio that offers solid future growth in sales and profitability.
Disciplined Capital Deployment
We remain committed to a disciplined capital deployment strategy that consists of reinvesting in our business and growing through acquisitions, combined with our continued commitment to increasing shareholder value through solid earnings per share growth, dividends, and share repurchases. As such, late in 2011, we increased the authorization of our stock repurchase program by an additional three million shares and opportunistically began purchasing shares for the first time in nearly a decade. We also maintained our annual dividend in 2011, reflecting the Board’s continued confidence in our ability to deliver strong revenue and profitability growth, along with solid free cash flow generation. We later announced the successful completion of a $300 million debt offering, allowing us to more closely align our capital structure with our overall corporate growth strategies.
Meanwhile, our balance sheet remains strong with a net debt-to-book capitalization of 24%, including $575 million in senior notes. The strength of our balance sheet should not be underestimated, as it provides a tremendous amount of financial flexibility to continue the pursuit of our strategic goals to grow both organically and through niche acquisitions.
In Recognition
We expanded our Board of Directors with the additions of Robert J. Rivet and Dean M. Flatt.
Mr. Rivet has an in-depth understanding of the preparation and analysis of financial statements based upon his 35 years of financial experience. He most recently served as Executive Vice President, Chief Operations and Administrative Officer of Advanced Micro Devices and previously spent nine years as its Chief Financial Officer. In addition, he led numerous acquisition and divestiture activities while at Advanced Micro Devices and Motorola Corporation. His extensive financial knowledge will be an invaluable asset to the Board in its oversight of the integrity of the Company’s financial statements and the financial reporting process. He is currently a member of the Finance and Audit Committees of the Board of Directors.
Mr. Flatt possesses a deep knowledge of the aerospace industry and private equity investing, which will aid us in exploring new opportunities for aerospace products and services, and strengthen our ability to evaluate strategic acquisitions. He most recently served as President and Chief Operating Officer of Honeywell International’s Defense and Space Business. He also is a member of the Operating Executive Board of JF Lehman & Company, a private equity firm that focuses on acquiring companies and technologies in the defense, aerospace, and maritime industries. He is currently a member of the Audit Committee and the Committee on Directors and Governance of the Board of Directors.
We welcome their seasoned financial and operational perspectives and look forward to their contributions to Curtiss-Wright.
Finally, I would like to thank the untiring efforts and hard work of our approximately 8,900 employees, whose ongoing dedication and commitment will ensure our continued success. One of the key driving forces behind every one of our employees at Curtiss-Wright is to increase long-term shareholder value.
Despite the significant world political and economic turmoil in recent years, Curtiss-Wright has maintained the course of its strategic plan. We continue to grow our global footprint, significantly expanding the geographic diversity and competitiveness of our business into key markets throughout Asia, Europe, and South America. As a result, our international exposure now represents approximately 30% of our total sales, and we will continue to look for opportunities to expand our suite of products and services into existing and new markets, where appropriate.
Lastly, we remain relentlessly focused on growing our Company through strategic acquisitions and solid organic growth, improving our operating margins, and increasing the overall competitiveness of our businesses.
Curtiss-Wright is an innovative leader, supplying unique technologies that matter. As such, we remain well positioned for above-average growth and improved operating efficiency in 2012 and beyond.
Martin R. Benante
Chairman and Chief Executive Officer