We achieved solid operational performance in 2016, led by continued margin expansion and very strong free cash flow generation, despite lower sales driven by continued headwinds in our industrial markets. We generated a 6% increase in operating income and a 130 basis point increase in operating margin compared with pro forma 2015 results (which exclude the one-time China AP1000 fee of $20 million recognized in the fourth quarter of 2015), driving an operating margin of 14.6%. This performance demonstrates the benefits of our ongoing margin improvement initiatives, including our consolidation activities, as well as strong profitability associated with the AP1000® program. As a result of our excellent performance, we achieved our objective of reaching the top quartile of our peer group for operating margin in 2016. Our diluted earnings per share of $4.20 improved 12% compared with pro forma 2015 results.
In addition, we significantly exceeded expectations with $376 million in free cash flow in 2016, one of the strongest performances in the Company’s history. This equated to 199% free cash flow conversion, as we significantly reduced our working capital. Further, our balance sheet remains healthy and provides a solid base of financial flexibility to continue pursuing our growth strategies.
As a sign of our continued financial success, Curtiss-Wright was added to the S&P MidCap 400 stock market index in 2016. In addition, we experienced solid share price performance this year, as the stock price exceeded $100 and our market cap eclipsed $4 Billion, both firsts in the history of our Company. We are very proud of these achievements.
FOCUS ON RENEWED GROWTH
Looking forward, we remain focused on exceeding the expectations of our customers, fostering solid long-term customer relationships and enhancing value for our shareholders.
While our operational performance has been stellar, we have faced several economic and end market challenges in recent years, particularly in the industrial markets. However, as we look to the future, we believe we are well positioned for renewed top line growth across our broad and highly diversified technology portfolio of products and services to the commercial aerospace, defense, general industrial and power generation markets.
Within the commercial markets, Curtiss-Wright stands to benefit from the increased focus on human-machine interface applications, hybrid and electric commercial vehicles, powered wheelchairs, the continued production ramp up in commercial aerospace and ongoing support for operating and new build reactors in the commercial nuclear power industry. In the defense markets, we expect to benefit from increased military spending for our nuclear naval propulsion and COTS embedded computing products on leading submarine, aircraft carrier and fighter jet programs.
DISCIPLINED CAPITAL ALLOCATION STRATEGY
Curtiss-Wright remains committed to a disciplined and balanced capital allocation strategy that consists of reinvesting in our business (including increased R&D in 2017), complementing our organic growth with disciplined acquisitions and providing steady distributions to our shareholders in the form of share repurchases and dividends in order to maximize shareholder value.
Our strong cash performance allowed us to maintain an active share repurchase program, as we repurchased $100 million in shares in 2016, as well as a steady annual dividend payout of $0.52 per share. We expect to repurchase at least $50 million in shares in 2017.
To supplement our expectations for renewed growth, we will also seek strategic acquisitions that further expand our portfolio and support our long-term financial objectives. We did just that with our recent acquisition of Teletronics Technology Corporation (TTC), a leading designer and manufacturer of high-technology, comprehensive data acquisition and flight test instrumentation systems for the aerospace and defense markets.
These collective actions reflect the Board of Directors’ continued confidence in our ability to deliver solid, profitable growth and strong free cash flow.
It is with sincere best wishes that we announce the retirement of our colleague John R. Myers from our Board of Directors. For 20 years, John has been an integral member of our Board, serving as a member and Chairman of the Executive Compensation Committee, the Committee on Directors and Governance and, from 2014-2015, as Lead Independent Director of the Board. I would like to personally thank John for his enduring dedication and many years of service to Curtiss-Wright and wish him well in his future endeavors.
As always, I would like to thank our 8,000 global employees for their steady drive and commitment to ensuring the Company’s future success.
In summary, our team remains confident and focused on enhancing Curtiss-Wright’s long-term shareholder value through continued organic investment supplemented with acquisitions, operating margin expansion, significant free cash flow generation and steady distributions to our shareholders. We will continue to deliver on the One Curtiss-Wright vision and look forward to continued successes in 2017.
David C. Adams
Chairman and Chief Executive Officer