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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-24 · 172 added, 164 removed, 278 unchanged (55% of the section changed)

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COMPANY ORGANIZATION

Curtiss-Wright Corporation and its subsidiaries is a global integrated business that provides highly engineered products, solutions, and services mainly to aerospace & defense markets, as well as critical technologies in demanding commercial power, process, and industrial markets.

We report our operations through our Aerospace & Industrial, Defense Electronics, and Naval & Power segments.

We are positioned as a market leader, or hold a significant market share position, across a diversified array of niche markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers.

Curtiss-Wright Corporation along with its subsidiaries is a global integrated business that provides highly engineered products, solutions, and services mainly to aerospace & defense markets, as well as critical technologies in demanding commercial power, process, and industrial markets.

We hold competitive positions in a majority of our key defense and commercial end markets through engineering and technological leadership, precision manufacturing, and strong relationships with our customers.

We are also well positioned to build upon crossover applications for our defense and commercial market technologies that leverage the strength of our combined portfolio.

We manage and evaluate our operations based on the products and services we offer and the different markets we serve.

Based on this approach, we operate through three reportable segments:

Aerospace & Industrial, Defense Electronics, and Naval & Power.

Impacts of inflation, pricing, and volume

Historically, we have not been significantly impacted by inflation.

Increases in raw material costs or payroll costs have generally been offset through lean manufacturing activities or price increases.

A portion of our contracts contain terms and conditions that enable us to pass inflationary price increases to our customers.

Historically, we have not been significantly impacted by inflation, with increases in raw material costs or payroll costs generally offset through lean manufacturing activities or price increases.

During the current period, we have experienced significant increases in our costs of material, labor, and services consistent with the overall rates of inflation.

We have generally been able to offset these increases, as a portion of our contracts contain terms and conditions that enable us to pass inflationary price increases to our customers.

In those cases whereby inflationary increases are not contractually stipulated, we actively negotiate price increases.

We have consistently made annual investments in capital that

deliver efficiencies and cost savings.

While the historical benefits of these efforts have generally offset the margin impact of competitive pricing conditions in the markets that we serve, there are no assurances that higher prices can effectively be passed through to our customers or that we will be able to fully offset the effects of higher raw materials costs through price increases on a timely basis.

Analytical Definitions

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” also excludes the effects of total restructuring charges, impairment of assets held for sale, and foreign currency translation.

We have consistently made annual investments in capital that deliver efficiencies and cost savings.

We expect these inflationary pressures to continue to persist in 2023.

Market Analysis and Economic Factors

Economic Factors Impacting Our Markets

Curtiss-Wright Corporation is a global integrated business that provides highly engineered products, solutions, and services mainly to aerospace & defense markets, as well as critical technologies in demanding commercial power, process, and industrial markets .

Many of Curtiss-Wright’s commercial 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 the global outbreak of COVID-19 as a pandemic, which resulted in significant disruption to travel, transportation of goods and services, and financial markets globally, and caused adverse and residual impacts to both industry supply chains and production levels.

Though the onset of COVID-19 variants continues to cause supply-chain disruptions to global economies, including our business, as well as our customers and suppliers, U.S.

economic activity rebounded quite dramatically in 2021, due in part to the availability of vaccines and increased government support to rebuild the country’s infrastructure.

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.

GDP declined 3.4% from the prior year period, principally due to the impact of the COVID-19 pandemic.

However, U.S.

GDP rebounded sharply in 2021, up 5.7% and at the fastest pace since 1984, according to the most recent estimate, led by an acceleration in industrial activity.

In 2022, economists expect growth in the broader U.S.

economy to moderate due to concerns about continued supply chain disruptions and rising inflation, with current estimates for U.S.

GDP ranging from 3.5% to 4.0% growth.

Similarly, the global environment, which is typically influenced by international trade, economic conditions, and geopolitical uncertainty, had also been greatly impacted by the pandemic in 2020 before dramatically rebounding in 2021.

According to the International Monetary Fund’s World Economic Outlook - 2021, global GDP in world economies grew 5.9% 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.

Though the impact of COVID-19 variants continues to cause supply-chain disruptions to global economies, including our business, as well as our customers and suppliers, U.S.

economic activity has rebounded since 2021, due in part to the availability of vaccines, increased government support to rebuild the country’s infrastructure, and increased U.S.

consumer spending.

In 2020, U.S.

real gross domestic product (GDP) declined 3.4%, principally due to the impact of the COVID-19 pandemic, before it rebounded sharply in 2021, increasing 5.7% and at the fastest pace since 1984, led by an acceleration in industrial activity.

In 2022, U.S.

GDP is expected to grow approximately 2.0%, according to the most recent estimates, as strong U.S.

consumer spending continued to support GDP growth despite the dual headwinds of rising interest rates and high inflation.

In 2023, some economists expect growth in the broader U.S.

economy to moderate significantly due to concerns about a recession or recessionary-like conditions, continued supply chain disruptions, rising interest rates, and high yet steady inflation, with current estimates for U.S.

GDP ranging from flat to growth of approximately 1.5%.

According to the International Monetary Fund’s World Economic Outlook, global GDP in world economies grew 6.0% in 2021 and is expected to grow 3.2% in 2022 and 2.7% in 2023, according to the most recent estimates.

Looking ahead to the next few years, we remain cautiously optimistic that our economically sensitive commercial and industrial markets will continue to improve based upon a return to normalized global growth conditions.

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 U.S.

Department of Defense (DoD) budgets and funding levels.

A significant portion of our defense business operations are characterized by long-term programs and contracts driven primarily by U.S.

DoD budgets and funding levels.

As such, the U.S.

Defense budget serves as a leading indicator of our growth in the defense market.

We derive revenue from the naval defense, aerospace defense, and ground defense markets, which collectively represent more than 50% of our total net sales.

We derive revenue from the naval defense, aerospace defense, and ground defense markets, which collectively represent more than 50% of our annual net sales.

In the naval defense market, we expect continued funding for U.S.

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We have a long legacy of providing products that support 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.

In addition, through our service centers, we are a 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, cyber, encryption, unmanned systems, and communications programs.

As a 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 designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems.

In the ground defense market, we are a supplier of advanced tactical communications solutions for battlefield network management, including COTS-based rugged, small form factor communications systems, and integrated network communications management software.

In the aerospace defense market, we expect to benefit from increased funding levels on Command, Control, Computers, Communications, Cyber, Intelligence, Surveillance, and Reconnaissance (C5ISR), electronic warfare, encryption, unmanned systems, and communications programs.

As a supplier of COTS and COTS+ solutions, we continue to demonstrate that defense 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 designer and manufacturer of high-technology data acquisition and comprehensive flight test instrumentation systems, as well as critical aircraft arresting systems equipment.

In the ground defense market, we are a supplier of advanced tactical communications solutions for battlefield network management, including

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 strong, particularly for our electronics stabilization systems.

In May 2021, the President’s FY22 budget request was released, calling for $715 billion in defense spending, which represented a 1.6% increase over the FY21 enacted level of $704 billion.

In December 2021, Congress passed the National Defense Authorization Act (NDAA) for FY22, which authorizes a $25 billion increase to the President’s defense budget proposal ($740 billion vs.

$715 billion) and represents a ~5% increase over FY21 enacted levels.

As of the date of filing, the DoD is currently operating under a Continuing Resolution until the FY22 budget is approved by Congress.

Looking ahead, in conjunction with the President’s FY23 budget request, the DoD is expected to submit the Future Years Defense Program (FYDP), which outlines expectations about its key programs over the next five years.

Based on industry research, the FYDP is expected to reflect modest increases in total defense budget funding.

Through continued innovation as well as incremental research and development investments, Curtiss-Wright remains aligned with high growth DoD priorities and emerging technological trends, including security, cyber, hypersonics, net-centric connected battlefield, soldier survivability, and Modular Open Systems Approach (MOSA) capabilities.

Through continued innovation as well as incremental research and development investments, Curtiss-Wright remains aligned with high growth DoD priorities, modernization efforts and emerging technological trends, including security, cyber, hypersonics, net-centric connected battlefield, soldier survivability, and MOSA capabilities.

In early 2022, the President’s FY23 budget request was released, calling for $773 billion in defense spending, which represented a 4% increase over the FY22 enacted funding level of $742 billion.

In December 2022, following a short Continuing Resolution, Congress passed the National Defense Authorization Act (NDAA) for FY23, which authorized an approximate $44 billion increase to the President’s defense budget proposal ($818 billion vs.

$773 billion) and represented a 10% increase over FY22 enacted levels, driven by increases in both Procurement and Research, Development, Test and Evaluation (RDT&E) investment spending.

Looking ahead, we expect the overall demand environment and global defense spending backdrop to remain favorable for the Corporation.

The President is expected to request continued U.S.

defense budget growth in FY24, while also submitting the Future Years Defense Program (FYDP), which outlines expectations about its key programs over the next five years.

Based on industry research, the FYDP is expected to reflect modest increases in total defense budget funding through FY27.

In addition, our growth in the international defense market is primarily driven by funding from North Atlantic Treaty Organization (NATO) countries, where its members have committed to spending at least 2.0% of annual GDP on defense budgets, driven in part by the Russia-Ukraine war, which is expected to drive significant growth in defense spending for the foreseeable future.

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.

Curtiss-Wright derives revenue from the global commercial aerospace market, principally to the commercial jet market, and to a lesser extent the regional jet, business 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, and aircraft structures.

In 2020, we exited 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.

We maintain a strong presence on the majority of the commercial aircraft programs, including both narrow-body and wide-body aircraft.

Currently, more than 50% of our sales in this market are linked to the narrow-body market.

We provide a combination of flight control, actuation, high-temperature and high accuracy sensors, and other sophisticated electronics, as well as shot and laser peening services utilized on highly stressed components of turbine engine fan blades 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.

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Additionally, sustained low oil prices contributed to declining fuel prices, which in turn led to cheaper airfares for consumers and increased passenger growth.

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 well into 2021.

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 onset of COVID variants and the availability and implementation of vaccines.

According to industry reports, air travel demand based on passenger growth is expected to continue to modestly recover in 2022, with domestic travel recovering faster than international travel, and fully recover by 2025.

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 on both the current fleet and the next-generation of single aisle programs and engines, as well as more fuel efficient and all-electric aircraft.

In 2020, the onset of the COVID-19 pandemic abruptly halted the industry’s growth as fewer passengers traveled, and business operations were disrupted globally, stunting the production of new aircraft as well as the maintenance of existing aircraft well into 2021.

The industry experienced a strong rebound in global passenger growth in 2022, benefiting from the propensity for the general public to travel by air, decisions by most governments to lift COVID-19 travel restrictions, and the continued availability and implementation of vaccines.

According to industry reports, global travel demand is not expected to fully recover to pre-pandemic levels until at least 2024.

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 (e.g., Boeing 737 and 787, Airbus A320 and A350), the timing of our order placement, and continued partnering with aerospace OEMs on both the current fleet and the next-generation of single aisle programs and engines, as well as emerging opportunities to support more fuel efficient and all-electric aircraft.

Power & Process

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We provide equipment and services to both the aftermarket and new build markets, and have content on every reactor operating in the U.S.

According to the Nuclear Regulatory Commission (NRC), nuclear power comprises approximately 20% of all electric power produced in the United States, with 93 reactors operating across 55 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.

One of the industry’s most significant challenges is electricity market competitiveness, primarily driven by sustained low natural gas prices.

In addition, in 2016, the industry was tasked with reassessing operating practices, improving efficiency, and reducing costs to help keep nuclear power competitive in a changing electricity market, which was collectively referred to as "Delivering the Nuclear Promise." U.S.

reactor operators were also faced with increased security measures and post-Fukushima regulatory requirements over most of the past decade.

All of those factors contributed to plant operators diverting and deferring their typical plant capital expenditure budgets significantly away from planned maintenance.

However, since 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 have experienced and continue to expect increased opportunities for our vast portfolio of advanced nuclear technologies to aid safety, extend the reliability and ensure the ongoing viability of nuclear plants.

Longer term, global commercial nuclear power demand will be driven by the ongoing need for increased capacity especially in developing countries with growing populations but limited power supply, as well as the clean energy transition.

Based upon the global drive

f or clean energy usage, n uclear is expected to play a critical role in meeting rising future energy demand and carbon-free emissions goals.

According to the Nuclear Regulatory Commission (NRC), nuclear power comprises approximately 20% of all electric power produced in the United States today, with 92 reactors operating across 54 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 via subsequent license renewals), 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.

One of the industry’s most significant challenges is maintaining electricity market competitiveness.

Throughout the past decade, U.S.

reactor operators have faced increased security measures and post-Fukushima regulatory requirements, and were also tasked with reassessing operating practices, improving efficiency, and reducing plant costs to compete with sustained low natural gas prices.

All of those factors contributed to plant operators diverting and deferring their typical plant capital expenditure budgets significantly away from normalized maintenance schedules, while also leading to numerous plant closures (down from 104 reactors in 2012).

However, in 2022, the U.S.

market experienced strong bipartisan support for nuclear power, with significant investments through the Civil Nuclear Credit Program (part of the Infrastructure Bill) and nuclear power production tax credits (provided by the Inflation Reduction Act) focused on helping to preserve the existing U.S.

reactor fleet.

nuclear plants.

Outside of the U.S., we have seen sentiment shift dramatically towards nuclear power, as many countries have begun or are starting to recommit to advanced technologies, while realizing the strategic importance of energy independence.

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 new orders remains uncertain.

We 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.

Similar to the U.S., as international plants age, we foresee opportunities to support plant safety and technology upgrades, plant life extensions, and upgrades of computer systems.

We play an important role in the new build market for the Generation III+ Westinghouse AP1000 reactor design, for which we are a supplier of reactor coolant pumps, as well as a variety of ancillary plant products and services.

On a global basis, nuclear plant construction remains active.

Currently, there are 57 new reactors under construction across 19 countries, with 97 planned and 325 proposed over the next several decades according to the World Nuclear Organization.

We continue to expect to play a role in new build nuclear plant construction, with our largest opportunities in China, India and throughout eastern Europe, including Ukraine, Poland, Romania, Bulgaria and the Czech Republic.

We are also well positioned to take advantage of market opportunities to support the ongoing design and development, and future construction, of next-generation advanced and small modular reactors, driven by support from the U.S.

Department of Energy as well as internationally.

According to the World Nuclear Organization, there are currently 58 new reactors under construction across 18 countries, with 104 planned and 341 proposed over the next several decades.

We continue to expect to play a role in new build nuclear plant construction, where we are aligned with Westinghouse to support the growing need for carbon-free emissions and energy independence in eastern Europe, including Poland, Ukraine, Romania, Bulgaria, and the Czech Republic, while also seeking opportunities in China and India.

We are also well positioned to take advantage of market opportunities to support the ongoing design and development as well as future construction of Generation IV advanced and small modular reactors, driven by strong support from the U.S.

Department of Energy which has allocated $3.2 billion for advanced nuclear through its Advanced Reactor Demonstration Program.

We are actively engaged and continue to pursue a foothold on numerous designs, both in the U.S.

as well as internationally.

In the process market, we service the oil and gas, chemical, and petrochemical industries through numerous industrial valve products, in which the majority 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 industries.

We also have the opportunity to support the oil exploration industry’s need and desire for more reliable subsea pumping systems.

We produce severe service, operation-critical valves for the power and process industries.

We are also developing advanced pump technology to support the oil exploration industry’s need and desire for more reliable subsea pumping systems.

Sales in these industries are driven by global supply and demand, crude oil prices, industry regulations, and the natural gas market.

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General Industrial

Revenue derived from our widely diversified offering to the general industrial market primarily consists of electronic sensors and control systems, electro-mechanical actuation, 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, and automotive industries.

Our performance in these markets is typically aligned with the performance of the U.S.

We derive revenue from our widely diversified offering to the general industrial market, which primarily consists of electronic sensors and control systems, electro-mechanical actuation, and surface treatment services.

We supply our products and services to numerous OEMs and aftermarket industrial customers, including the transportation, commercial trucking, off-road equipment, agriculture, construction, and automotive industries, which lowers the risk associated with any specific headwinds or economic cycles across the various markets in which we compete.

Our growth in these markets is typically aligned with 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.

We have developed long-standing relationships with our customers, and provide technologies that promote efficiency, safety, reduced emissions, and longevity.

One of the key drivers within our general industrial market is our focus on electronification and electrification, where our electronic sensors and controls systems products serve 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 inverter systems, driving our ability to provide a full suite of in-cab operator control systems to our customers.

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.

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.

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Sales are primarily driven by global demand from general industrial customers.

In the long term, the global drive towards electrification and electronification, push for zero or low-emissions vehicles, investments in green technology, advancements in robotics and automation, and new government regulations, will provide steady growth opportunities for Curtiss-Wright’s technologies serving this market.

RESULTS OF OPERATIONS

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Discussion and analysis of our financial condition and results of operations for the year ended December 31, 2021, as compared to the year ended December 31, 2020, is contained in our 2021 Annual Report on Form 10-K, filed with the SEC on February 24, 2022.

Analytical Definitions

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, after which they are reported as organic.

Additionally, the results of operations of divested businesses or product lines are removed from the comparable prior year period for purposes of calculating “organic” and “incremental” results.

The definition of “organic” also excludes the impairment of assets held for sale and corresponding loss from sale of our industrial valves business in Germany, as well as the effects of foreign currency translation.

Year Ended December 31, Percent

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Net earnings $ 294,348 $ 267,159 10 %

Impairment of assets held for sale $ 19,088 $ 33,043 NM

Total restructuring charges $ — $ 42,725 NM

Loss on divestiture/impairment of assets held for sale $ 4,651 $ 19,088 NM

New orders $ 2,942,550 $ 2,590,534 14 %

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Organic 3 % 6 %

Acquisitions 5 % 5 %

Impairment of assets held for sale — % 5 %

Restructuring — % 14 %

Acquisitions/divestiture — % — %

Loss on divestiture/impairment of assets held for sale — % 4 %

Foreign currency (1) % 1 %

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Sales for the year increased $51 million, or 2%, to $2,557 million, compared with the prior year period.

On a segment basis, sales from the Defense Electronics and Naval & Power segments increased $116 million and $18 million, respectively, with sales from the Aerospace & Industrial segment decreasing $19 million.

On a segment basis, sales from the Aerospace & Industrial and Naval & Power segments increased $50 million and $35 million, respectively, with sales from the Defense Electronics segment decreasing $34 million.

Changes in sales by segment are discussed in further detail in the "Results by Business Segment" section below.

Operating income for the year increased $41 million, or 11%, to $423 million, and operating margin increased 130 basis points compared with 2021.

In the Aerospace & Industrial segment, increases in operating income and operating margin were primarily due to current year savings recognized as a result of our prior year restructuring initiatives, as well as favorable overhead absorption on higher general industrial sales.

Operating income in the Defense Electronics segment increased primarily due to the benefits from our ongoing operational excellence initiatives, the incremental impact of our PacStar acquisition, as well as the absence of first year purchase accounting costs from our 901D acquisition.

These increases were partially offset by higher research and development costs and unfavorable foreign currency translation.

Operating margin in the Defense Electronics segment was negatively impacted by first year purchase accounting costs from our PacStar acquisition .

In the Naval & Power segment, increases in operating income and operating margin were primarily due to current year savings recognized as a result of our prior year restructuring initiatives, as well as lower current period impairment losses on assets held for sale in our German industrial valves business compared to the prior year period.

Non-segment operating expense for the year increased $2 million, or 6%, to $40 million, primarily due to higher environmental costs.

Interest expense for the year increased $5 million, or 13% , to $40 million, primarily due to the issuance of $300 million Senior Notes in August 2020.

Other income, net for the year increased $2 million, or 24% , to $12 million, primarily due to the prior year recognition of accumulated foreign currency translation losses of $10 million related to the substantial liquidation of our Norwegian subsidiary.

This increase was partially offset by higher pension costs, including one-time pension settlement charges recognized in the current year period related to the retirement of former executives.

The effective tax rate of 24.6% for the year ended December 31, 2021, increased as compared to an effective tax rate of 23.4% in the prior year period.

This increase was primarily due to h igher current period non-deductible impairment losses related to our held for sale industrial valve business in Germany, as impairment losses recorded during the prior year period were partially offset against deferred tax liabilities.

New orders increased $258 million, or 11% , from the prior year period to $2,580 million, primarily due to an increase in new orders for industrial vehicles and sensors and actuation equipment in the Aerospace & Industrial segment, as well as the incremental impact of our PacStar acquisition in the Defense Electronics segment.

In the Naval & Power segment, higher demand for industrial valve products was partially offset by the timing of naval defense orders.

Changes in new orders by segment are discussed in further detail in the "Results by Business Segment" section below.

In the Aerospace & Industrial segment, increases in operating income and operating margin were primarily due to favorable absorption on higher sales in the general industrial and commercial aerospace markets, as well as the

benefits of our ongoing operational excellence initiatives.

Both operating income and operating margin in the Naval & Power segment benefited from lower current period losses associated with our industrial valves business in Germany, which was sold in the current period, as well as the absence of charges associated with the WEC legal settlement recorded in the prior year period.

These increases were partially offset by lower operating income in the Defense Electronics segment primarily due to lower sales volumes from supply chain headwinds.

Operating margin in the Defense Electronics segment benefited from our ongoing operational excellence initiatives.

Non-segment operating expense for the year increased $6 million, or 15%, to $46 million, primarily due to costs associated with shareholder activism in the current period.

Interest expense for the year increased $7 million, or 17% , to $47 million, primarily due to higher current period borrowings under our Credit Agreement as well as the issuance of $300 million Senior Notes in October 2022.

Other income, net for the year increased $1 million, or 6% , to $13 million, primarily due to lower overall pension costs against the comparable prior year period.

The effective tax rate of 24.4% for the year ended December 31, 2022, decreased as compared to an effective tax rate of 24.6% in the prior year period, primarily due to lower non-deductible losses related to our former industrial valve business in Germany.

This decrease was partially offset by a higher proportion of foreign income in the current period, which is taxed at a higher rate than the U.S.

New orders increased $352 million, or 14% , from the prior year period to $2,943 million, primarily due to the timing of naval defense orders and the incremental impact from our arresting systems acquisition in the Naval & Power segment, as well as an increase in new orders for ground defense and aerospace defense equipment in the Defense Electronics segment.

The Aerospace & Industrial segment benefited from an increase in new orders for commercial aerospace equipment.

Comprehensive income (loss)

Pension and postretirement adjustments within comprehensive income during the year ended December 31, 2021 were a $131 million gain, compared to a $27 million loss for the prior year period.

The gain in the current period was primarily attributed to higher asset returns and increases in the discount rate.

The loss in the prior period was primarily due to decreases in the discount rate, partially offset by higher asset returns.

Foreign currency translation adjustments during the year ended December 31, 2021 resulted in a comprehensive loss of $11 million, compared to a comprehensive gain of $41 million in the comparable prior period.

The comprehensive loss during the current period was primarily attributed to decreases in the British Pound and Canadian Dollar, with the prior period comprehensive gain primarily attributed to increases in the Euro and British Pound.

Pension and postretirement adjustments within comprehensive income during the year ended December 31, 2022 were a $7 million loss, compared to a $131 million gain for the prior year period.

The loss in the current period was primarily attributed to lower asset returns, partially offset by increases in the discount rate.

The gain in the prior period was primarily due to higher asset returns and increases in the discount rate.

Foreign currency translation adjustments during the year ended December 31, 2022 resulted in a comprehensive loss of $61 million, compared to a comprehensive loss of $11 million in the comparable prior period.

Comprehensive losses during both the current period and prior year period were primarily attributed to decreases in the British Pound and Canadian Dollar.

RESULTS BY BUSINESS SEGMENT

Aerospace & Industrial

Sales in the Aerospace & Industrial segment are primarily generated from the commercial aerospace and general industrial markets and, to a lesser extent, the defense and power & process markets.

The following tables summarize sales, operating income and margin, total restructuring charges, and new orders within the Aerospace & Industrial segment.

Sales in the Aerospace & Industrial segment are primarily generated from the commercial aerospace and general industrial markets and, to a lesser extent, the defense markets.

The following tables summarize sales, operating income and margin, and new orders within the Aerospace & Industrial segment.

Year Ended December 31, Percent Change

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Operating margin 16.4 % 15.5 % 90 bps

Total restructuring charges $ — $ 16,186 NM

New orders $ 883,838 $ 853,077 4 %

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Organic 10 % 14 %

Restructuring — % 14 %

Acquisitions (1) % (1) %

Foreign currency (3) % (1) %

Total 6 % 12 %

Sales decreased $19 million, or 2%, to $786 million, from the comparable prior year period, as lower sales in the commercial aerospace market were partially offset by sales increases in the general industrial market.

In the commercial aerospace market, sales decreased $72 million primarily due to the exit of our build-to-print product line in the fourth quarter of 2020.

These decreases were partially offset by sales increases of $50 million in the general industrial market, primarily due to higher demand for industrial vehicle products and surface treatment services.

Sales increased $50 million, or 6%, to $836 million, from the comparable prior year period primarily due to higher sales in the general industrial and commercial aerospace markets.

Sales in the general industrial market increased $31 million primarily due to higher demand for industrial vehicle products.

In the commercial aerospace market, sales increased $20 million primarily due to higher demand for sensors products and surface treatment services.

These increases were partially offset by lower sales in the aerospace defense market primarily due to lower sales of sensors products on various programs.

Operating income increased $15 million, or 12%, to $137 million, and operating margin increased 90 basis points to 16.4%.

The increases in operating income and operating margin were primarily due to current year savings recognized as a result of our prior year restructuring initiatives, as well as favorable overhead absorption on higher sales in the general industrial market.

New orders increased $202 million as compared to the prior year, primarily due to an increase in new orders for industrial vehicles as well as higher demand for sensors and actuation equipment.

The increase in operating income and operating margin were primarily due to favorable absorption on higher organic sales in the general industrial and commercial aerospace markets, as well as the benefits of our ongoing operational excellence initiatives.

New orders increased $31 million as compared to the prior year, as an increase in new orders for commercial aerospace equipment was partially offset by the timing of new orders for industrial vehicles.

Defense Electronics

Sales in the Defense Electronics segment are primarily to the defense markets and, to a lesser extent, the commercial aerospace market.

The following tables summarize sales, operating income and margin, total restructuring charges, and new orders, within the Defense Electronics segment.

The following tables summarize sales, operating income and margin, and new orders within the Defense Electronics segment.

Year Ended December 31, Percent Change

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Operating margin 22.4 % 22.0 % 40 bps

Total restructuring charges $ — $ 3,190 NM

New orders $ 836,660 $ 753,852 11 %

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Acquisitions — % — %

Restructuring — % 3 %

Foreign currency (1) % 3 %

Total (5) % (3) %

Sales increased $116 million, or 19%, to $724 million, from the comparable prior year period, primarily due to the incremental impact of our PacStar acquisition in the ground defense market, which contributed incremental sales of $115 million.

Higher sales of avionics and test equipment in the commercial aerospace market were more than offset by the timing of sales on embedded computing equipment on various programs in the aerospace defense market.

Operating income increased $40 million, or 34%, to $159 million compared with the same period in 2020, while operating margin increased 250 basis points to 22.0%.

The increase in operating income was primarily due to the benefits from our ongoing operational excellence initiatives as well as the incremental impact of our PacStar acquisition.

Operating income also benefited from the absence of first year purchase accounting costs from our 901D acquisition as well as our prior year restructuring initiatives, partially offset by higher research and development costs and unfavorable foreign currency translation.

The increase in operating margin was primarily due to our ongoing operational excellence initiatives as well as the absence of first year purchase accounting costs from our 901D acquisition, partially offset by first year purchase accounting costs from our PacStar acquisition.

New orders increased $38 million as compared to the prior year, primarily due to the incremental impact of our PacStar acquisition.

This increase was partially offset by the timing of naval defense and aerospace defense orders.

Sales decreased $34 million, or 5%, to $690 million, from the comparable prior year period.

In the commercial aerospace market, sales decreased $11 million primarily due to lower sales of electronic systems on domestic platforms.

Sales in the aerospace defense market decreased $8 million primarily due to ongoing supply chain headwinds, which contributed to lower sales of embedded computing equipment.

The ground defense market was also negatively impacted by ongoing supply chain headwinds, which resulted in lower sales of $9 million, primarily on embedded computing and tactical communications

Sales in the naval defense market were negatively impacted by the timing of orders on various submarine and surface combat ship programs.

Operating income decreased $5 million , or 3% , to $155 million compared with the same period in 2021, while operating margin increased 40 basis points to 22.4%.

Operating income was negatively impacted by lower sales volumes due to supply chain headwinds, while operating margin benefited from our ongoing operational excellence initiatives.

New orders increased $83 million as compared to the prior year, primarily due to an increase in new orders for ground defense and aerospace defense equipment.

Naval & Power

Sales in the Naval & Power segment are primarily to the naval defense and power & process markets.

The following tables summarize sales, operating income and margin, impairment of assets held for sale, total restructuring charges, and new orders, within the Naval & Power segment.

Sales in the Naval & Power segment are primarily to the naval defense and power & process markets, and, to a lesser extent, the aerospace defense market.

The following tables summarize sales, operating income and margin, loss on divestiture/impairment of assets held for sale, and new orders within the Naval & Power segment.

Year Ended December 31, Percent Change

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Operating margin 17.2 % 14.2 % 300 bps

Impairment of assets held for sale 19,088 33,043 NM

Total restructuring charges $ — $ 23,349 NM

Loss on divestiture/impairment of assets held for sale 4,651 19,088 NM

New orders $ 1,222,052 $ 983,605 24 %

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Organic 3 % 15 %

Impairment of assets held for sale — % 13 %

Restructuring — % 22 %

Acquisitions/divestiture 1 % — %

Loss on divestiture/impairment of assets held for sale — % 10 %

Foreign currency — % — %

Total 4 % 25 %

Sales increased $18 million, or 2%, to $995 million, from the comparable prior year period.

In the naval defense market, sales increased $20 million primarily due to increased production on the CVN-81 aircraft carrier program, as well as higher foreign military and service center sales.

Sales in the power & process market were essentially flat, as higher demand for industrial valve products was more than offset by the timing of production on the China Direct AP1000 program.

Operating income increased $34 million, or 31%, to $142 million and operating margin increased 310 basis points to 14.2%.

The increases in operating income and operating margin were primarily due to current year savings recognized as a result of our prior year restructuring initiatives, as well as lower current period impairment losses on assets held for sale in our German industrial valves business compared to the prior year period.

New orders increased $18 million as compared to the prior year, as higher demand for industrial valve products was partially offset by the timing of naval defense orders.

Sales increased $35 million, or 4%, to $1,031 million, from the comparable prior year period, primarily due to the impact of our arresting systems acquisition, which contributed incremental sales of $44 million.

This increase was partially offset by lower sales in the in the power & process market, as higher nuclear aftermarket sales were more than offset by the wind-down on the China Direct AP1000 program and the sale of our industrial valve business in Germany in the current period.

In the naval defense market, higher demand on the Columbia-class submarine and CVN-81 aircraft carrier programs was more than offset by the timing of sales on the CVN-80 aircraft carrier and Virginia-class submarine programs.

Operating income increased $36 million, or 25%, to $178 million and operating margin increased 300 basis points to 17.2%, primarily due to lower current period losses associated with our industrial valves business in Germany, which was sold in the current period, as well as the absence of charges associated with the WEC legal settlement recorded in the prior year period.

These increases were partially offset by first year purchase accounting costs from our arresting systems acquisition.

New orders increased $238 million as compared to the prior year, primarily due to the timing of naval defense orders, the incremental impact from our arresting systems acquisition, as well as an increase in orders within our nuclear aftermarket and process markets.

SUPPLEMENTARY INFORMATION

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Aerospace & Defense Markets

Sales increased $63 million, or 4%, to $1,651 million, as compared to the prior year period, primarily due to higher sales in the ground defense and naval defense markets.

The ground defense market benefited from the impact of our PacStar acquisition, which contributed incremental sales of $115 million.

Sales in the naval defense market increased primarily due to higher sales of $27 million on the CVN-81 aircraft carrier program.

These increases were partially offset by lower sales in the commercial aerospace market, primarily due to the exit of our build-to-print product line in the fourth quarter of 2020.

Sales increased $19 million, or 1%, to $1,670 million, as compared to the prior year period, primarily due to higher sales in the aerospace defense and commercial aerospace markets.

Sales in the aerospace defense market increased primarily due to the incremental impact from our arresting systems acquisition, partially offset by lower sales of embedded computing equipment due to ongoing supply chain headwinds as well as lower sales of sensors products on various programs.

In the commercial aerospace market, higher dema nd for sensors products and surface treatment services was partially offset by lower sales of electronic systems on domestic platforms.

Sales decreases in the naval defense market were primarily due to the timing of sales on the CVN-80 aircraft carrier and Virginia-class submarine programs, as well as the timing of orders on various submarine and surface combat ship programs.

These decreases were partially offset by production ramps on the Columbia-class submarine and CVN-81 aircraft carrier programs.

Commercial Markets

Commercial sales increased $52 million, or 6%, to $855 million, primarily due to increased demand for our industrial vehicle products in the general industrial market, which contributed higher sales of $50 million.

Sales in the power & process market were essentially flat, as higher demand for our industrial valve products was more than offset by the timing of production on the China Direct AP1000 program.

Commercial sales increased $32 million, or 4%, to $887 million, primarily due to higher demand for our industrial vehicle products in the general industrial market.

In the power & process market, higher nuclear aftermarket sales were essentially offset by the wind-down on the China Direct AP1000 program and the sale of our industrial valve business in Germany in the current period.

Liquidity and Capital Resources

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Operating Activities

Cash provided by operating activities increased $126 million to $388 million from the comparable prior year period, primarily due to a prior year voluntary pension contribution of $150 million as well as the timing of advanced cash receipts and lower disbursements in the current period.

These increases were partially offset by higher outstanding receivables during the current period.

Cash provided by operating activities decreased $93 million to $295 million from the comparable prior year period , primarily due to higher inventory purchases, lower advanced cash receipts, and a legal settlement payment made to WEC during the current period.

Investing Activities

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Our capital expenditures were $38 million and $41 million for 2022 and 2021, respectively.

The decrease in 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 2022, we anticipate capital expenditures of approximately $50 million to $60 million.

No material divestitures took place during 2021 or 2020.

The decrease in capital expenditures was primarily due to lower capital spending during the current period.

In January 2022, the Corporation completed the sale of its industrial valve business in Germany, for gross cash proceeds of $3 million.

No material divestitures took place during 2021.

In 2022, we acquired two businesses for $282 million.

In 2021, we did not complete any acquisitions.

In 2020, we acquired three businesses for $488 million in cash paid.

Future acquisitions will depend, in part, on the availability of financial resources at a cost of capital that meet our stringent criteria.

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Debt Issuances and Repayments

There were no debt issuances in 2021.

On October 27, 2022, we issued $300 million Senior Notes, consisting of $200 million 4.49% notes that mature on October 27, 2032 and $100 million 4.64% notes that mature on October 27, 2034.

In the fourth quarter of 2021, we repaid $100 million of the 2011 Notes that matured on December 1, 2021.

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.

Revolving Credit Agreement

As of December 31, 2021, the Corporation had $94 million of 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.

In May 2022, we terminated our existing credit agreement, which was set to expire in October 2023, and entered into a new Credit Agreement ("Credit Agreement") with a syndicate of financial institutions.

The Credit Agreement, which is set to expire in May 2027, increases the size of our revolving credit facility to $750 million, and expands the accordion feature to $250 million.

As of December 31, 2022, we had no borrowings outstanding under the Credit Agreement and $17 million in letters of credit supported by the credit facility.

The unused credit available under the Credit Agreement as of December 31, 2022 was $733 million, which could be borrowed in full without violating any of our debt covenants.

As of December 31, 2020, the Corporation had no borrowings outstanding under the Credit Agreement.

As of December 31, 2021, we had $94 million of borrowings outstanding under our prior Credit Agreement.

Repurchase of Common Stock

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In 2021, the Company repurchased approximately 2.7 million shares of its common stock for $343 million.

The Company made dividend payments of approximately $29 million and $28 million during 2021 and 2020, respectively.

The Company made dividend payments of approximately $29 million in both 2022 and 2021.

Capital Resources

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United Kingdom 48,203 69,732

European Union 12,154 21,156

Canada 33,268 24,019

European Union 8,721 12,154

China 7,889 13,403

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Cash and cash equivalents as of December 31, 2022 and December 31, 2021 were $257 million and $171 million, respectively.

The decrease in cash held by U.S.

subsidiaries during 2021 as compared to 2020 was primarily due to higher current period share repurchase activity, the principal payment of $100 million on the 2011 Notes that matured in December 2021, and lower foreign cash repatriation, partially offset by higher net borrowings on our credit facility during the current period.

The decrease in cash held by foreign subsidiaries during 2021 as compared to 2020 was primarily due to lower net cash receipts during the current period.

The increase in cash held by U.S.

subsidiaries during 2022 as compared to 2021 was primarily due to lower share repurchase activity and higher foreign cash repatriation during the current period.

The decrease in cash held by foreign subsidiaries during 2022 as compared to 2021 was primarily due to higher aforementioned foreign cash repatriation and lower net cash receipts during the current period.

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 $8 million of our foreign cash resides.

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.

Management continually evaluates cash utilization alternatives, including share repurchases, acquisitions, increased dividends, capital expenditures, and repaying debt 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.

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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.

While all companies are subject to economic risk, 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.

The following table quantifies our significant future contractual obligations and commercial commitments as of December 31, 2022:

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Total $ 1,749,693 $ 284,506 $ 74,278 $ 155,963 $ 258,466 $ 45,290 $ 931,190

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.

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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.

We estimate variable consideration to be included in the transaction price using either the expected value method or most likely amount method.

Variable consideration associated with our respective arrangements is not typically constrained.

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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 a decrease in the benefit obligation of $37 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 MP-2020 projected mortality scale published in October 2020.

The discount rate changes contributed to a decrease in the benefit obliga tion of $181 million in the CW plans.

The rate of compensation increase for base pay in the pension plans decreased to a weighted average of 3.4% for the current period, based upon a graded scale of 4.1% 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 updated our mortality assumptions from prior year for the CW Pension plan by adopting a 50/50 blend of the Pri-2012 Aggregate and White Collar tables published by the Society of Actuaries in October 2019, while retaining the White Collar table for the nonqualified plan.

We also adopted the MP-2021 projected mortality scale published in October 2021, with no pandemic adjustments.

The overall expected return on assets assumption is based primarily on the expectations of future performance.

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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 was reduced to 5.8% as of December 31, 2021, which will be utilized for determining 2022 pension cost.

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 was increased to 6.50% as of December 31, 2022, which will be utilized for determining 2023 pension cost.

An expected long-term rate of return of 5.75% was used for determining 2022 expense, with 6.50% used for 2021 pension expense and 7.50% used for 2020 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 $153 million in 2021, primarily driven by favorable asset experience due to strong market performance in 2021.

The funded status of the Curtiss-Wright Pension Plan decreased by $24 million in 2022, primarily driven by unfavorable asset experience due to weak market performance in 2022, partially offset by a lower benefit obligation due to higher interest rates.

The following table reflects the impact of changes in selected assumptions used to determine the funded status of the Company’s U.S.

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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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis