CURTISS WRIGHT CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) begins with an overview of our company, followed by economic and industry-wide factors impacting our company and the markets we serve, a discussion of the overall results of operations, and finally a more detailed discussion of those results within each of our reportable operating segments. COMPANY ORGANIZATION Curtiss-Wright Corporation and its subsidiaries is a global, diversified manufacturing and service company that designs, manufactures, and overhauls precision components and provides highly engineered products and services to the defense, general industrial, commercial aerospace, and power generation markets. We report our operations through our Commercial/Industrial, Defense, and Power segments. We are positioned as a market leader across a diversified array of niche markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers. Our overall strategy is to be a balanced and diversified company, less vulnerable to cycles or downturns in any one market, with a focus on establishing and expanding strong technological breadth, market positions, and financial performance. Impacts of inflation, pricing, and volume We have not historically been and do not expect to be significantly impacted by inflation. Increases in payroll costs and any increases in raw material costs that we have encountered are generally offset through lean manufacturing activities or price increases, if our terms and conditions provide for such increases. We have consistently made annual investments in capital that deliver efficiencies and cost savings. The benefits of these efforts generally offset the margin impact of competitive pricing conditions in all of the markets we serve. Analytical Definitions 22 Throughout MD&A, the terms “incremental” and “organic” are used to explain changes from period to period. The term “incremental” is used to highlight the impact that acquisitions and divestitures had on the current year results. The results of operations for acquisitions are incremental for the first twelve months from the date of acquisition. Additionally, the results of operations of divested businesses are removed from the comparable prior year period for purposes of calculating “organic” and “incremental” results. The definition of “organic” excludes the effects of total restructuring charges and foreign currency translation. Market Analysis and Economic Factors Economic Factors Impacting Our Markets Curtiss-Wright Corporation 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. Many of Curtiss-Wright’s industrial businesses are driven in large part by global economic growth, primarily led by operations in the U.S., Canada, Europe, and China. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, which resulted in significant travel restrictions and disruption of the financial markets, as well as negatively impacted our supply chains and production levels. The pandemic has caused demand in the commercial aerospace and general industrial end markets to be negatively impacted for the foreseeable future, the extent of which is contingent upon future developments. These future developments, which are highly uncertain and unpredictable, include new information concerning the severity and duration of the outbreak as well as impacts to our supply chain, transportation networks, and customers. In the last decade, the U.S. economy, as measured by real gross domestic product (GDP), has slowly improved, aided by decreased levels of unemployment, improvements in the housing market, and a low interest rate environment. Initial expectations for 2020 implied a slight contraction from 2019’s U.S. GDP growth rate of 2.2%, primarily due to the impact of U.S./China trade tensions and ongoing concerns about global recessionary conditions. However, due to the impact of the COVID-19 pandemic, 2020 U.S. GDP is now expected to show a decline of 3.5%. Looking ahead to 2021, economists expect growth in the broader U.S. economy to rebound, with current estimates for U.S. GDP ranging from 4% to more than 6% growth. Meanwhile, the global environment, which is typically influenced by international trade, economic conditions, and geopolitical uncertainty, has been greatly impacted by the pandemic. According to the International Monetary Fund’s World Economic Outlook - 2020, global GDP in world economies, which was originally forecasted to grow approximately 3%, is now expected to decline 4.4% in 2020, but rebound and grow 5.2% in 2021. Looking ahead to the next few years, we remain cautiously optimistic that our economically-sensitive commercial and industrial markets will improve based upon a return to normalized global growth conditions. Defense We have a well-diversified portfolio of products and services that supply all branches of the U.S. military, with content on critical high-performance programs and platforms, as well as a growing international defense business. A significant portion of our defense business operations is attributed to the United States market, and characterized by long-term programs and contracts driven primarily by the Department of Defense (DoD) budgets and funding levels. The U.S. Defense budget serves as a leading indicator of our growth in the defense market. Following across-the-board sequestration mandated by the BCA, defense spending and related supplemental budgets bottomed in 2015. However, growth has stabilized in recent years. In early 2018, Congress signed a bill to provide relief against the spending caps associated with the BCA. In addition, the Fiscal Year 2019 Defense Appropriations Bill, signed in September 2018, was the first to be signed into law on time in over a decade. More recently, the two-year, Bipartisan Budget Act signed in August 2019 brought an improved sense of security to federal agencies, essentially cancelling the prior two years of the BCA and its sequestration caps, while setting solid topline spending figures for 2020 and 2021 in excess of $700 billion. In early 2021, the Fiscal Year 2021 budget was authorized at $696 billion, slightly ahead of the Fiscal Year 2020 budget. Looking ahead, in conjunction with the President’s budget request, the DoD submitted its plan, which is referred to as the Future Years Defense Program (FYDP). The FYDP reflects the DoD’s expectations about its programs and costs over the next five years, which presently indicates that total budget funding would be relatively flat. We derive revenue from the naval defense, aerospace defense, and ground defense markets. In the naval defense market, we expect continued solid funding for U.S. shipbuilding programs, particularly as it relates to production on the Ford class aircraft carrier, as well as Columbia class and Virginia class submarines. We have a long legacy of providing products that support 23 nuclear propulsion systems on naval vessels. In addition, through our service centers, we are a critical provider of ship repair and maintenance for the U.S. Navy’s Atlantic and Pacific fleets. In the aerospace defense market, we expect to benefit from increased funding levels on Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR), electronic warfare, unmanned systems, and communications programs. As a leading supplier of COTS and COTS+ solutions, we continue to demonstrate that electronics technology will enhance our ability to design and develop future generations of advanced systems and products for high performance applications, while also meeting the military’s Size, Weight, and Power considerations. We are also a leading designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems. In the ground defense market, we are a leading supplier of advanced tactical communications solutions for battlefield network management, including commercial off-the-shelf (COTS)-based rugged, small form factor communications systems, and integrated network communications management software. The modernization of the existing U.S. ground vehicle fleet is expected to recover slowly, while international demand should remain solid, particularly for our electronics stabilization systems. While we monitor the budget process as it relates to programs in which we participate, we cannot predict the ultimate impact of future DoD budgets, which tend to fluctuate year-by-year and program-by-program. Commercial Aerospace Curtiss-Wright derives revenue from the global commercial aerospace market, principally to the commercial jet market, and to a lesser extent the regional jet and commercial helicopter markets. Our primary focus in this market is OEM products and services for commercial jets, which is highly dependent on new aircraft production from our primary customers, Boeing and Airbus. We provide a combination of flight control and utility actuation systems, sensors, and other sophisticated electronics, as well as shot and laser peening services utilized on highly stressed components of turbine engine fan blades, landing gear, and aircraft structures. Passenger travel and freight logistics, along with the demand for and delivery of new aircraft, are the key drivers in the commercial aerospace market. Over the past decade, there was an extended production up-cycle for the commercial aerospace market, which was driven by increases in production by Boeing and Airbus on both legacy and new aircraft, particularly narrow-body aircraft. Additionally, sustained low oil prices contributed to increased passenger growth, as declining fuel prices led to cheaper airfares for consumers. In 2020, the onset of the COVID-19 pandemic abruptly halted the industry’s growth as fewer and fewer passengers traveled, and business operations were disrupted globally, stunting the production of new aircraft as well as the maintenance of existing aircraft. Current travel restrictions, as well as changes in the propensity for the general public to travel by air as a result of the COVID-19 pandemic, will likely be driven by the availability and implementation of vaccines. According to the International Air Transport Association, air travel demand based on passenger growth fell sharply in 2020, well below typical growth rates, but is expected to recover in 2021 and 2022, assuming vaccinations proceed at current projections. Longer term, the IATA projects an average annual growth rate of passenger travel of 3.7% over the next 20 years. While we closely monitor these industry metrics, our success and future growth in the commercial aerospace market is primarily tied to the growth in aircraft production rates, the timing of our order placement, and continued partnering with aerospace original equipment manufacturers. In 2020, we enacted certain restructuring actions by exiting the build-to-print actuation product line supporting the Boeing 737 MAX program to ensure our long-term positioning and profitability as it applies to the Company’s commercial aerospace exposure. Power Generation We derive revenue from the commercial nuclear power generation market, where we supply a variety of highly engineered products and services, including reactor coolant pumps, control rod drive mechanisms, valves, motors, spent fuel management, containment doors, bolting solutions, enterprise resource planning, plant process controls, and coating services. We provide equipment and services to both the aftermarket and new build markets and have content on every reactor operating in the U.S. today. According to the Nuclear Regulatory Commission (NRC), nuclear power comprises approximately 20% of all electric power produced in the United States, with 94 reactors operating across 56 nuclear power plants in 28 states. Our growth opportunities for aftermarket products and services are driven by plant aging, plant closures, requirements for planned outages, plant life extensions (from the end of their original 40-year operating lives to 60-year and now 80-year lives), the levying of regulatory requirements, suppliers abandoning the commercial nuclear market, and plants seeking technology and innovation advances, such as digitalization, that further enable plant modernization. 24 One of the industry’s most significant challenges is electricity market competitiveness, primarily driven by sustained low natural gas prices. As a result, the industry has been tasked with reassessing operating practices, improving efficiency, and reducing costs to help keep nuclear power competitive in a changing electricity market, which are collectively referred to as "Delivering the Nuclear Promise." Additionally, U.S. reactor operators were faced with increased security and post-Fukushima regulatory requirements over most of the past decade. All of these factors contributed to plant operators diverting and deferring their typical plant capital expenditure budgets significantly away from planned maintenance. However, in late 2017, as those necessary requirements abated and plant operators resumed a more normalized maintenance schedule, the industry began to turn the corner. As a result, we expect increased opportunities for our vast portfolio of advanced nuclear technologies moving forward. Longer term, there are several factors driving global commercial nuclear power demand, especially in developing countries with growing populations but limited power supply such as China and India, which will require increased capacity. In addition, the continued supply constraints and environmental concerns attributed to the current dependence on fossil fuels have led to a greater appreciation of the value of nuclear technology as the most efficient and environmentally friendly source of energy available today. As a result, we expect growth opportunities in this market both domestically and internationally, although the timing of orders remains uncertain. We also play an important role in the new build market for the Generation III+ Westinghouse AP1000 reactor design, for which we are a supplier of RCPs and also expect to supply a variety of ancillary plant products and services. Domestically, two new build reactors remain under construction in Georgia utilizing the AP1000 design. On a global basis, nuclear plant construction is active. Cu rrently, there are approximately 53 new reactors under construction across 19 countries, with approximately 98 planned and 326 proposed over the next several decades according to the World Nuclear Organization. In particular, China intends to expand its nuclear power capabilities significantly through the construction of new nuclear power plant s over the next few decades, led by the successful start-up and operation of the first two AP1000 plants (four reactors) in late 2018 and early 2019, which are the first Generation III+ reactors in operation worldwide. We continue to expect to play a role in new build nuclear plant construction with our largest opportunities for large scale reactors in China and India, and worldwide through future construction of advanced and small modular reactors. Our future success in this industry will be led by new order activity for our vast array of nuclear technologies due to ongoing maintenance and upgrade requirements on operating nuclear plants, a renewed interest in products to aid safety and extend the reliability of existing reactors, and the continued emphasis on global nuclear power construction. General Industrial Revenue derived from our widely diversified offering to the general industrial market consists of electronic sensors and control systems, critical-function valves and valve systems, and surface treatment services. We supply our products and services to OEMs and aftermarket industrial customers, including the transportation, commercial trucking, off-road equipment, agriculture, construction, automotive, chemical, and oil and gas industries. Our performance in these markets is typically sensitive to the performance of the U.S. and global economies, with changes in global GDP rates and industrial production driving our sales, particularly for our surface treatment services. One of the key drivers within our general industrial market is our electronic sensors and controls systems products serving the on-and-off highway, medical mobility, and specialty vehicles markets. Notable products include electronic throttle controls, shift controls, joysticks, power management systems, and traction control systems. Increased industry demand for electronic control systems and sensors has been driven by the need for improved operational efficiency, safety, repeatability, reduced emissions, enhanced functionality, and greater fuel efficiencies to customers worldwide. Key to our future growth is expanding the human-machine interface (HMI) technology portfolio and providing a complete system solution to our customers. Existing and emerging trends in commercial vehicle safety, emissions control, and improved driver efficiency, as well as electrification and the industrial Internet of Things, are propelling commercial vehicle OEMs toward higher performance subsystems. These trends are accelerating the evolution from discrete HMI components towards a more integrated vehicle interface architecture. Meanwhile, our surface treatment services, which include shot and laser peening, engineered coatings, and analytical testing services, are used to increase the safety, reliability, and longevity of components operating in harsh environments. Sales are primarily driven by global demand from general industrial customers. We also service the oil and gas, chemical, and petrochemical industries through numerous industrial valve products, in which nearly all of our industrial valve sales are to the downstream markets. We maintain a global maintenance, repair, and overhaul (MRO) business for our pressure-relief valve technologies as refineries opportunistically service or upgrade equipment that has been operating at or near full capacity. We also produce severe service, operation-critical valves for the power and process 25 industries. Sales in these industries are driven by global supply and demand, crude oil prices, industry regulations, and the natural gas market. Over the long run, we believe improved economic conditions and continued global expansion will be key drivers for future growth of our severe service and operation-critical valves serving the process industry. RESULTS OF OPERATIONS The following MD&A is intended to help the reader understand the results of operations and financial condition of the Corporation for the year ended December 31, 2020, as compared to the year ended December 31, 2019. Discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019, as compared to the year ended December 31, 2018, is contained in our 2019 Annual Report on Form 10-K, filed with the SEC on February 27, 2020. Year Ended December 31, Percent change (In thousands, except percentages) 2020 2019 2020 vs. 2019 Sales: Commercial/Industrial $ 949,762 $ 1,137,818 (17) % Defense 733,856 625,940 17 % Power 707,718 724,203 (2) % Total sales $ 2,391,336 $ 2,487,961 (4) % Operating income: Commercial/Industrial $ 81,581 $ 179,637 (55) % Defense 140,406 137,286 2 % Power 104,626 122,139 (14) % Corporate and eliminations (37,765) (35,109) (8) % Total operating income $ 288,848 $ 403,953 (28) % Interest expense 35,545 31,347 13 % Other income, net 9,748 23,856 (59) % Earnings before income taxes 263,051 396,462 (34) % Provision for income taxes (61,659) (88,879) (31) % Net earnings $ 201,392 $ 307,583 (35) % Impairment of assets held for sale $ 33,043 $ — NM Total restructuring charges $ 42,725 $ — NM New orders $ 2,321,481 $ 2,579,617 (10) % Backlog $ 2,163,750 $ 2,166,764 — % NM - Not meaningful Components of sales and operating income growth (decrease): 26 2020 vs. 2019 Sales Operating Income Organic (8) % (10) % Acquisitions 4 % (1) % Impairment of assets held for sale — % (8) % Restructuring — % (9) % Foreign currency — % — % Total (4) % (28) % Sales for the year decreased $97 million, or 4%, to $2,391 million, compared with the prior year period. On a segment basis, sales from the Commercial/Industrial and Power segments decreased $188 million and $17 million, respectively, with sales from the Defense segment increasing $108 million. Changes in sales by segment are discussed in further detail in the "Results by Business Segment" section below. Operating income for the year decreased $115 million, or 28%, to $289 million, and operating margin decreased 410 basis points compared with 2019. The decreases in operating income and operating margin were primarily due to unfavorable overhead absorption on lower sales in the Commercial/Industrial segment, an impairment loss of $33 million in the Commercial/Industrial segment due to our industrial valve business in Germany being classified as held for sale during the current period, as well as restructuring costs of $41 million recognized across all segments. Non-segment operating expense for the year increased $3 million, or 8%, to $38 million, primarily due to higher post-retirement costs and foreign exchange losses. Interest expense for the year increased $4 million, or 13% , to $36 million, primarily due to the issuance of $300 million Senior Notes in August 2020 as well as the impact of borrowings under our revolving credit facility. Other income, net for the year decreased $14 million, or 59% , to $10 million, primarily due to the recognition of accumulated foreign currency translation losses of $10 million related to the substantial liquidation of our Norwegian subsidiary. The effective tax rate of 23.4% for the year ended December 31, 2020, increased as compared to an effective tax rate of 22.4% in the prior year period. This increase was primarily driven by the recognition of accumulated foreign currency translation losses related to the substantial liquidation of our Norwegian subsidiary, which are not deductible for tax purposes, as well as additional tax expense associated with the impairment of goodwill and establishment of a valuation allowance against certain deferred tax assets related to foreign assets that were classified as held for sale during the current period. New orders decreased $258 million, or 10% , from the prior year period to $2,321 million, primarily due to a pandemic-driven decline in new orders for sensors and controls equipment, industrial vehicle and industrial valve products, and surface treatment services in the Commercial/Industrial segment. In the Power segment, new orders were negatively impacted by lower commercial orders in the power generation market. These decreases were partially offset by the timing of aerospace defense and naval defense orders in the Defense segment. Changes in new orders by segment are discussed in further detail in the "Results by Business Segment" section below. Comprehensive income (loss) Pension and postretirement adjustments within comprehensive income during the year ended December 31, 2020 were a $27 million loss, compared to a $29 million loss for the pr ior year period. The losses in both periods were primarily due to increases in the discount rate, partially offset by higher asset returns. Foreign currency translation adjustments during the year ended December 31, 2020 resulted in a comprehensive gain of $41 million, compared to a comprehensive gain of $18 million in the comparable prior period. The comprehensive gain during the current period was primarily attributed to increases in the Euro and British Pound, with the prior period comprehensive gain primarily attributed to increases in the British Pound and Canadian dollar. RESULTS BY BUSINESS SEGMENT Commercial/Industrial 27 Sales in the Commercial/Industrial segment are primarily generated from the general industrial and commercial aerospace markets and, to a lesser extent, the defense and power generation markets. The following tables summarize sales, operating income and margin, total restructuring charges, and new orders within the Commercial/Industrial segment. Year Ended December 31, Percent Change (In thousands, except percentages) 2020 2019 2020 vs. 2019 Sales $ 949,762 $ 1,137,818 (17) % Operating income 81,581 179,637 (55) % Operating margin 8.6 % 15.8 % (720 bps) Total restructuring charges (1) $ 22,286 $ — NM New orders $ 794,314 $ 1,165,381 (32) % Backlog $ 318,554 $ 466,279 (32) % (1) For the year ended December 31, 2020, such amount includes approximately $1.8 million of non-operating restructuring charges, which have been recorded within other income, net in our Consolidated Statement of Earnings. Components of sales and operating income growth (decrease): 2020 vs. 2019 Sales Operating Income Organic (18) % (25) % Acquisitions 1 % (1) % Impairment of assets held for sale — % (18) % Restructuring — % (11) % Foreign currency — % — % Total (17) % (55) % Sales decreased $188 million, or 17%, to $950 million, from the comparable prior year period, primarily due to the ongoing impact of the COVID-19 pandemic on the commercial aerospace and general industrial markets. In the commercial aerospace market, sales decreased $96 million, primarily due to lower sales of actuation and sensors equipment as well as surface treatment services. Sales in the general industrial market decreased $109 million, primarily due to lower demand for industrial vehicle and industrial valve products, as well as surface treatment services. These decreases were partially offset by higher sales of $14 million in the aerospace defense market, primarily due to higher demand for actuation systems on the F-35 fighter jet program. Operating income decreased $98 million, or 55%, to $82 million, and operating margin decreased 720 basis points to 8.6%. The decreases in operating income and operating margin were primarily due to unfavorable overhead absorption on lower sales in the general industrial and commercial aerospace markets, an impairment loss of $33 million due to our industrial valve business in Germany being classified as held for sale during the current period, as well as costs associated with our restructuring activities. New orders decreased $371 million as compared to the prior year, primarily due to a pandemic-driven decline in new orders for sensors and controls equipment, industrial vehicle and industrial valve products, and surface treatment services. Defense Sales in the Defense segment are primarily to the defense markets and, to a lesser extent, the commercial aerospace and the general industrial markets. The following tables summarize sales, operating income and margin, total restructuring charges, and new orders, within the 28 Defense segment. Year Ended December 31, Percent Change (In thousands, except percentages) 2020 2019 2020 vs. 2019 Sales $ 733,856 $ 625,940 17 % Operating income 140,406 137,286 2 % Operating margin 19.1 % 21.9 % (280 bps) Total restructuring charges $ 3,190 $ — NM New orders $ 861,506 $ 682,648 26 % Backlog $ 883,921 $ 699,788 26 % Components of sales and operating income growth (decrease): 2020 vs. 2019 Sales Operating Income Organic 5 % 6 % Acquisitions 12 % (2) % Restructuring — % (3) % Foreign currency — % 1 % Total 17 % 2 % Sales increased $108 million, or 17%, to $734 million, from the comparable prior year period, primarily due to higher sales in the naval defense and aerospace defense markets. Sales in the naval defense market increased $87 million, primarily due to the incremental impact of our 901D acquisition, which contributed sales of $46 million. Excluding the impact of 901D, the naval defense market benefited from higher demand for valves and embedded computing equipment on the Virginia-class submarine platform, which resulted in higher sales of $32 million. In the aerospace defense market, sales increased $33 million, primarily due to higher demand for embedded computing equipment on various fighter jet and UAV platforms as well as higher foreign military sales. Additionally, sales in the ground defense market increased $12 million, primarily due to the incremental impact of our PacStar acquisition. These increases were partially offset by lower sales of $11 million in the commercial aerospace market, primarily due to lower demand for flight test instrumentation equipment. Operating income increased $3 million, or 2%, to $140 million compared with the same period in 2019, while operating margin decreased 280 basis points to 19.1%. Favorable overhead absorption on higher sales as well as the benefits of our ongoing margin improvement initiatives were partially offset by costs associated with our restructuring activities as well as first year purchase accounting costs from our acquisitions of 901D and PacStar. New orders increased $179 million as compared to the prior year, primarily due to the timing of aerospace defense and naval defense orders. Power Sales in the Power segment are primarily to the naval defense and power generation markets. The following tables summarize sales, operating income and margin, total restructuring charges, and new orders, within the Power segment. 29 Year Ended December 31, Percent Change (In thousands, except percentages) 2020 2019 2020 vs. 2019 Sales $ 707,718 $ 724,203 (2) % Operating income 104,626 122,139 (14) % Operating margin 14.8 % 16.9 % (210 bps) Total restructuring charges $ 17,249 $ — NM New orders $ 665,661 $ 731,588 (9) % Backlog $ 961,275 $ 1,000,697 (4) % Components of sales and operating income growth (decrease): 2020 vs. 2019 Sales Operating Income Organic (2) % — % Acquisitions — % — % Restructuring — % (14) % Foreign currency — % — % Total (2) % (14) % Sales decreased $17 million, or 2%, to $708 million, from the comparable prior year period. In the power generation market, sales decreased $46 million, primarily due to COVID-related impacts on domestic and international aftermarket sales, as well as lower AP1000 program revenues. This decrease was partially offset by higher sales of $32 million in the naval defense market, primarily due to the timing of production on the Columbia class submarine and CVN-81 aircraft carrier programs. Operating income decreased $18 million, or 14%, to $105 million and operating margin decreased 210 basis points to 14.8%. The decreases in operating income and operating margin were primarily due to lower sales volume as well as costs associated with our restructuring activities. New orders decreased $66 million as compared to the prior year, primarily due to lower commercial orders in the power generation market. SUPPLEMENTARY INFORMATION The table below depicts sales by end market and customer type, as it helps provide an enhanced understanding of our businesses and the markets in which we operate. The table has been included to supplement the discussion of our consolidated operating results. Net Sales by End Market and Customer Type 30 Year Ended December 31, Percent change (In thousands, except percentages) 2020 2019 2020 vs. 2019 Defense markets: Aerospace $ 463,835 $ 416,841 11 % Ground 107,287 93,432 15 % Naval 692,168 568,776 22 % Total Defense $ 1,263,290 $ 1,079,049 17 % Commercial markets: Aerospace $ 325,518 $ 433,038 (25) % Power Generation 331,983 392,173 (15) % General Industrial 470,545 583,701 (19) % Total Commercial $ 1,128,046 $ 1,408,912 (20) % Total Curtiss-Wright $ 2,391,336 $ 2,487,961 (4) % Defense sales increased $184 million, or 17%, to $1,263 million, as compared to the prior year period, primarily due to higher sales in the naval defense and aerospace defense markets. The naval defense market benefited from higher sales of $56 million on the Virginia-class and Columbia-class submarine programs, as well as the impact of our 901D acquisition, which contributed incremental sales of $46 million. Sales in the aerospace defense market increased primarily due to higher foreign military sales of $14 million as well as higher sales of $14 million on the F-35 fighter jet program. Commercial sales decreased $281 million, or 20%, to $1,128 million, primarily due to the ongoing impact from the COVID-19 pandemic, which resulted in lower sales across all markets. In the commercial aerospace market, we experienced lower demand for actuation and sensors equipment as well as surface treatment services, which resulted in sales decreases of $67 million and $29 million, respectively. Sales in the power generation market decreased primarily due to lower domestic and international aftermarket sales of $37 million. Lower demand in the general industrial market for industrial vehicle, industrial valve, and industrial control products resulted in sales decreases of $41 million, $36 million, and $16 million, respectively. Sales in the general industrial market were also negatively impacted by lower demand for surface treatment services, which resulted in a sales decrease of $17 million. Liquidity and Capital Resources Sources and Uses of Cash We derive the majority of our operating cash inflow from receipts on the sale of goods and services and cash outflow for the procurement of materials and labor; cash flow is therefore subject to market fluctuations and conditions. Most of our long-term contracts allow for several billing points (progress or milestone) that provide us with cash receipts as costs are incurred throughout the project rather than upon contract completion, thereby reducing working capital requirements. Consolidated Statement of Cash Flows Year ended December 31, (In thousands) 2020 2019 Net cash provided by (used in): Operating activities $ 261,180 $ 421,404 Investing activities (532,530) (240,040) Financing activities 82,081 (68,145) Effect of exchange rates (3,516) 1,748 Net increase (decrease) in cash and cash equivalents $ (192,785) $ 114,967 31 Operating Activities Cash provided by operating activities decreased $160 million to $261 million from the comparable prior year period, primarily due to a voluntary pension contribution of $150 million as well as the timing of advanced cash receipts in the current period. These decreases were partially offset by a reduction in receivables during the current period. Investing Activities Capital Expenditures Our capital expenditures were $47 million and $70 million for 2020 and 2019, respectively. The decrease is capital expenditures was primarily due to lower capital spending during the current period as well as lower current period investment related to the new DRG facility. For 2021, we anticipate capital expenditures of approximately $50 million to $60 million. Divestitures No material divestitures took place during 2020 or 2019. Acquisitions In 2020, we acquired three businesses for a total purchase price of $496 million, inclusive of $488 million cash paid plus a holdback of $8 million for potential indemnification claims against the seller. In 2019, we acquired two businesses for a total purchase price of $185 million. Future acquisitions will depend, in part, on the availability of financial resources at a cost of capital that meet our stringent criteria. As such, future acquisitions, if any, may be funded through the use of our cash and cash equivalents, through additional financing available under the credit agreement, or through new financing alternatives. Financing Activities Debt Issuances On August 13, 2020, the Corporation issued $300 million of Senior Notes (the “2020 Notes”), consisting of $150 million of 3.10% Senior Notes that mature on August 13, 2030 and $150 million of 3.20% Senior Notes that mature on August 13, 2032. There were no debt issuances in 2019. Revolving Credit Agreement As of December 31, 2020, the Corporation had no borrowings outstanding under the Revolving Credit Agreement (the Credit Agreement or credit facility) and $21 million in letters of credit supported by the credit facility. The unused credit available under the Credit Agreement as of December 31, 2020 was $479 million, which could be borrowed in full without violating any of our debt covenants. Repurchase of Common Stock During 2020, the Company repurchased approximately 2.0 million shares of its common stock for $200 million. In 2019, the Company repurchased approximately 0.4 million shares of its common stock for $51 million. Dividends The Company made dividend payments of approximately $28 million during both 2020 and 2019. Capital Resources Cash in Foreign Jurisdictions 32 As of December 31, (In thousands) 2020 2019 United States of America $ 55,391 $ 220,782 United Kingdom 49,258 50,761 European Union 21,156 41,779 Canada 34,795 34,026 China 20,692 26,278 Other foreign countries 16,956 17,407 Total cash and cash equivalents $ 198,248 $ 391,033 Cash and cash equivalents as of December 31, 2020 and December 31, 2019 were $198 million and $391 million, respectively. The decrease in cash held by U.S. subsidiaries during 2020 as compared to 2019 was primarily due to current year acquisitions, higher current period share repurchase activity, and pay down of outstanding borrowings on our credit facility, partially offset by higher foreign cash repatriation during the current period. The decrease in cash held by foreign subsidiaries during 2020 as compared to 2019 was primarily due to higher cash repatriation to the U.S. during the current period, partially offset by net cash receipts. There are no legal or economic restrictions on the ability of any of our subsidiaries to transfer funds, absent certain regulatory approvals in China, where approximately $21 million of our foreign cash resides. Refer to Note 13 to the Consolidated Financial Statements for impacts on our foreign undistributed earnings due to the Tax Act. Cash Utilization Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, and increased dividends to determine the most beneficial use of available capital resources. We believe that our cash and cash equivalents, cash flow from operations, available borrowings under the credit facility, and ability to raise additional capital through the credit markets are sufficient to meet both the short-term and long-term capital needs of the organization, including the return of capital to shareholders through dividends and share repurchases and growing our business through acquisitions. Debt Compliance As of December 31, 2020, we were in compliance with all debt agreements and credit facility covenants, including our most restrictive covenant, which is our debt to capitalization ratio limit of 60%. As of December 31, 2020, we had the ability to incur total additional indebtedness of $1.5 billion without violating our debt to capitalization covenant. Future Commitments Cash generated from operations should be adequate to meet our planned capital expenditures of approximately $50 million to $60 million and expected dividend payments of approximately $28 million in 2021. There can be no assurance, however, that we will continue to generate cash from operations at the current level, or that these projections will remain constant throughout 2021. If cash generated from operations is not sufficient to support these operating requirements and investing activities, we may be required to reduce capital expenditures, borrow from our existing credit line, refinance a portion of our existing debt, or obtain additional financing. While all companies are subject to economic risk, we believe that our cash and cash equivalents, cash flow from operations, and available borrowings are sufficient to meet both the short-term and long-term capital needs of the organization. In January 2020, the Corporation made a discretionary pension contribution of $150 million to the Curtiss-Wright Pension Plan. For more information on our pension and other postretirement benefits plans, see Note 17 to the Consolidated Financial Statements. The following table quantifies our significant future contractual obligations and commercial commitments as of December 31, 2020: 33 (In thousands) Total 2021 2022 2023 2024 2025 Thereafter Debt Principal Repayments $ 1,050,000 $ 100,000 $ — $ 202,500 $ — $ 90,000 $ 657,500 Operating Leases 190,578 33,630 27,451 24,532 21,515 15,075 68,375 Interest Payments on Fixed Rate Debt 239,536 38,915 35,320 32,698 27,828 26,615 78,160 Total $ 1,480,114 $ 172,545 $ 62,771 $ 259,730 $ 49,343 $ 131,690 $ 804,035 We do not have material purchase obligations. Most of our raw material purchase commitments are made directly pursuant to specific contract requirements. We enter into standby letters of credit agreements and guarantees with financial institutions and customers primarily relating to future performance on certain contracts to provide products and services and to secure advance payments we have received from certain international customers. As of December 31, 2020, we had contingent liabilities on outstanding letters of credit due as follows: (In thousands) Total 2021 2022 2023 2024 2025 Thereafter Letters of Credit (1) $ 21,113 $ 13,355 $ 2,899 $ 3,223 $ 1,636 $ — $ — (1) Amounts exclude bank guarantees of approximately $5.6 million. Critical Accounting Estimates and Policies Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. These estimates and assumptions are affected by the application of our accounting policies. Critical accounting policies are those that require application of management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. We believe that the following are some of the more critical judgment areas in the application of our accounting policies that affect our financial condition and results of operations: Revenue Recognition We account 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 we expect to be entitled to in exchange for that good and/or service. The unit of account is a performance obligation whereby a contract's transaction price is allocated to each distinct performance obligation and recognized as revenue when the respective performance obligation is satisfied. 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. We estimate 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 our respective arrangements is not typically constrained. Performance obligations are satisfied either at a point-in-time or on an over-time basis. Contracts that qualify for over-time revenue recognition are generally associated with the design, development, and manufacture of highly engineered industrial products used in commercial and defense applications and generally span between 2-5 years in duration. Revenue recognized on an over-time basis for the year ended December 31, 2020 accounted for approximately 52% 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. Application of an over-time revenue recognition method requires the use of reasonable and dependable estimates of future material, labor, and overhead costs that will be incurred as well as a disciplined cost estimating system in which all functions of the business are integrally involved. These estimates are determined based on industry knowledge and experience of our engineers, project managers, and financial staff. Changes in total estimated costs are recognized using the cumulative catch-up method of accounting which recognizes the cumulative effect of the changes on 34 current and prior periods in the current period. During the years ended December 31, 2020, 2019, and 2018, there were no significant changes in estimated contract costs. 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, 2020 accounted for approximately 48% of total net sales. 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. Contract assets primarily relate to our right 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. Contract liabilities primarily consist of customer advances received prior to revenue being earned. Contract assets and contract liabilities are reported in the "Receivables, net" and "Deferred revenue" lines, respectively, within the Consolidated Balance Sheet. Inventory Inventory costs include materials, direct labor, purchasing, and manufacturing overhead costs, which are stated at the lower of cost or net realizable value. We estimate the net realizable value of our inventories and establish reserves to reduce the carrying amount of these inventories to net realizable value, as necessary. We continually evaluate the adequacy of the inventory reserves by reviewing historical scrap rates, on-hand quantities as compared with historical and projected usage levels, and other anticipated contractual requirements. We generally hold reserved inventory for extended periods before scrapping and disposing of the reserved inventory, which contributes to a higher level of reserved inventory relative to the level of annual inventory write-offs. We purchase materials for the manufacture of components for sale. The decision to purchase a set quantity of a particular item is influenced by several factors including: current and projected price, future estimated availability, existing and projected contracts to produce certain items, and the estimated needs for our businesses. Pension and Other Postretirement Benefits In consultation with our actuaries, we determine the appropriate assumptions for use in determining the liability for future pension and other postretirement benefits. The most significant of these assumptions include the discount rates used to determine plan obligations, the expected return on plan assets, and the number of employees who will receive benefits, their tenure, their salary levels, and their projected mortality. Changes in these assumptions, if significant in future years, may have an effect on our pension and postretirement expense, associated pension and postretirement assets and liabilities, and our annual cash requirements to fund these plans. The discount rate used to determine the plan benefit obligations as of December 31, 2020, and the annual periodic costs for 2021, was decreased from 3.22% to 2.53% for the Curtiss-Wright Pension Plan, and from 3.10% to 2.30% for the nonqualified benefit plan, to reflect current economic conditions. The rates reflect the hypothetical rates at which the projected benefit obligations could be effectively settled or paid out to participants on that date. We determine our discount rates for past service liabilities and service cost by utilizing a select bond yield curve developed by our actuaries, which is based on the rates of return on high-quality, fixed-income corporate bonds available at the measurement date with maturities that match the plan’s expected cash outflows for benefit payments. Interest cost is determined by applying the spot rate from the full yield curve to each anticipated benefit payment. The discount rate changes contributed to an increase in the benefit obligation of $78 million in the CW plans. The rate of compensation increase for base pay in the pension plans was unchanged at a weighted average of 3.5% based upon a graded scale of 4.9% to 2.9% that decrements as pay increases, which reflects the experience over past years and the Company’s expectation of future salary increases. We also retained our mortality assumptions from prior year utilizing the Pri-2012 tables published by the Society of Actuaries in October 2019, and the projected mortality scale to MP-2019, which reflects a slower rate of future mortality improvements than the previous MP-2018 table utilized. The overall expected return on assets assumption is based primarily on the 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 provided by our investment consultants. Based on a review of market trends, actual returns on plan assets, and other factors, the Company’s expected long-term rate of return on plan assets 35 was reduced to 6.5% as of December 31, 2020, which will be utilized for determining 2021 pension cost. An expected long-term rate of return of 7.5% was used for determining 2020 expense, with 8.0% used for 2019 and 2018 pension expense. The timing and amount of future pension income or expense to be recognized each year is dependent on the demographics and expected compensation of the plan participants, the expected interest rates in effect in future years, inflation, and the actual and expected investment returns of the assets in the pension trust. The funded status of the Curtiss-Wright Pension Plan increased by $131 million in 2020, primarily driven by $150 million cash contribution to the plan and favorable asset experience due to strong market performance in 2020. This was partially offset by a decrease in market interest rates as of December 31, 2020. The following table reflects the impact of changes in selected assumptions used to determine the funded status of the Company’s U.S. qualified and nonqualified pension plans as of December 31, 2020 (in thousands, except for percentage point change): Assumption Percentage Point Change Increase in Benefit Obligation Increase in Expense Discount rate (0.25) % $28,100 $2,800 Rate of compensation increase 0.25 % $2,700 $600 Expected return on assets (0.25) % — $2,200 See Note 17 to the Consolidated Financial Statements for further information on our pension and postretirement plans. Goodwill We have $1.5 billion in goodwill as of December 31, 2020. Generally, the largest separately identifiable asset from the businesses that we acquire is the value of their assembled workforces, which includes the additional benefit received from management, administrative, marketing, business development, engineering, and technical employees of the acquired businesses. The success of our acquisitions, including the ability to retain existing business and to successfully compete for and win new business, is based on the additional benefit received from management, administrative, marketing, and business development, scientific, engineering, and technical skills and knowledge of our employees rather than on productive capital (plant and equipment, technology, and intellectual property). Therefore, since intangible assets for assembled workforces are part of goodwill, the substantial majority of the intangible assets for our acquired business acquisitions are recognized as goodwill. We test for goodwill impairment annually, at the reporting unit level, in the fourth quarter, which coincides with the preparation of our strategic operating plan. Additionally, goodwill is tested for impairment when an event occurs or if circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We perform either a quantitative or qualitative assessment to assess if the fair value of the respective reporting unit exceeds its carrying value. The qualitative goodwill impairment assessment requires evaluating factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. As part of our goodwill qualitative assessment process for each reporting unit, when utilized, we evaluate various factors that are specific to the reporting unit as well as industry and macroeconomic factors in order to determine whether it is reasonably likely to have a material impact on the fair value of our reporting units. Examples of the factors that are considered include the results of the most recent impairment test, current and long-range forecasts, and changes in the strategic outlook or organizational structure of the reporting units. The long-range financial forecasts of the reporting units are compared to the forecasts used in the prior year analysis to determine if management expectations for the business have changed. Actual results may differ from those estimates. When performing the quantitative assessment to calculate the fair value of a reporting unit, we consider both comparative market multiples as well as estimated discounted cash flows for the reporting unit. The significant estimates and assumptions include, but are not limited to, revenue growth rates, operating margins, and future economic and market conditions. The discount rates are based upon the reporting unit’s weighted average cost of capital. As a supplement, we conduct additional sensitivity analysis to assess the risk for potential impairment based upon changes in the key assumptions such as the discount rate, expected long-term growth rate, and cash flow projections. Based upon the completion of our annual test as of October 31, 2020, we determined that there was no impairment of goodwill and that all reporting units’ estimated fair values were substantially in excess of their carrying amounts. 36 Other Intangible Assets Other intangible assets are generally the result of acquisitions and consist primarily of purchased technology, customer related intangibles, and trademarks. Intangible assets are recorded at their fair values as determined through purchase accounting, based on estimates and judgments regarding expectations for the estimated future after-tax earnings and cash flows arising from follow-on sales. Definite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, which generally range from 1 to 20 years. Customer-related intangibles primarily consist of customer relationships, which reflect the value of the benefit derived from the incremental revenue and related cash flows as a direct result of the customer relationship. We review the recoverability of all intangible assets, including the related useful lives, whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. We would record any impairment in the reporting period in which it has been identified.