Curtiss-Wright Corp (CW) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright third-quarter 2016 financial results conference call. (Operator Instructions) As a reminder, this call may be recorded.

I will now like to introduce your host for today's conference, Mr. Jim Ryan, Ryan, Senior Director Investor Relations. You may begin, sir.

Thank you, Rhonda, and good morning, everyone. Welcome to Curtiss-Wright's third-quarter 2016 earnings conference call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer, and Glenn Tynan, our Vice President and Chief Financial Officer.

Our call today is being webcast, and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our Company website at www.curtisswright.com. A replay of this call also can be found on the website.

Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC.

In addition, certain non-GAAP financial measures will be discussed on the call today. Reconciliation is available in the earnings release and at the end of this presentation. You will also find a chart showing sales by end market at the end of this presentation.

Finally, our discussions today of current and future results, except for cash flow, are on a continuing operations basis, which excludes all previously announced divestitures. For the sake of a proper comparison, when reviewing growth rates for 2016, we are comparing 2016 guidance to pro forma 2015 results, which exclude the one-time AP1000 fee from both sales and operating income within our power segment and Curtiss-Wright overall.

Now I would like to turn the call over to Dave to get things started. Dave?

Thanks, Jim. Good morning, everyone. Before we jump into our results, I wanted to reflect on some recent events. It was a pleasure seeing so many of you at our recent Investor Day event in Pittsburgh. We are pleased to provide an overview of our nuclear new build and aftermarket businesses, along with a facility tour to showcase our AP1000 reactor cooling pumps.

As you had witnessed on the tour, there was tremendous technological expertise involved in constructing our reactor coolant pumps. And, as luck would have it, we were able to watch the 12th China RCP leave the facility. This unit represented the 16th overall pump shift, and we have 16 more pumps to be delivered between now and the third quarter of 2017.

Adding further validation of our RCP technology, a recent World Nuclear News article affirmed that the first four pumps at high-end unit 1 were operated simultaneously at full speed for the first time. Earlier this year, the first four pumps at Sanmen unit 1 also successfully accomplished this critical milestone. It is certainly an exciting time for our employees involved with the facility and the rest of us watching from afar.

Thanks, again, to those of you who attended the Investor Day, as well as those on the webcast. We appreciate your continued support of Curtiss-Wright.

For our agenda today, I will begin with the key highlights of our third-quarter 2016 financial performance, followed by Glenn who will provide a more thorough review along with updates to our 2016 guidance. Then, I will return to wrap up our prepared remarks before we move on to Q&A. Third-quarter EPS of $1.02 exceeded our expectations. Operating income improved 20% overall, despite a 4% year-over-year decline in sales, while operating margins improved 300 basis points to 15.1%. Our results were led by strong profitability in the defense segment, a solid performance on the AP1000 program, and the benefits of our ongoing margin improvement initiatives.

In addition, we generated $100 million in free cash flow. That performance represented nearly 220% free cash flow conversion in the third quarter. We remain on track for another strong free cash flow performance in 2016, led by efficient working capital management.

For the full-year 2016, despite slightly lower sales, we expect our defense and power segments to drive improved profitability. As a result, we now expect our operating margin to reflect a 100 to 120 basis point improvement over pro forma 2015 and expect to conclude the year in the top quartiles of our peer group.

Finally, as we have communicated at our recent Investor Day, we are maintaining our full-year diluted EPS and free cash flow guidance with the potential for each to achieve double-digit growth in 2016.

Now I would like to turn the call over to Glenn to provide a more thorough review of our third-quarter performance and updates to our 2016 financial outlook. Glenn?

Thank you, Dave, and good morning, everyone. I will begin with a review of our third quarter end market sales.

Overall, we experienced a 2% increase in sales to our defense markets and a 7% decline in sales to our commercial markets. Starting with the defense markets, aerospace defense sales were down 5%, due primarily to timing of orders for our embedded computing products on several fighter jet and ISR programs.

In ground defense, our results reflect higher sales of ammunition handling systems to our international customers. In enabled naval defense, we experienced solid growth at 4%, due to the ramp-up and the development on the Ohio (technical difficulty) submarine program, partially offset by lower revenues on (technical difficulty) aircraft carrier programs as production nears completion.

Moving on to the commercial markets, commercial aerospace sales were flat compared to the prior year as higher sales of actuation systems were mainly offset by lower sales of surface treatment services.

In power generation, sales were up 3% where higher revenues on the AP1000 programs were partially offset by reduced demand in the nuclear aftermarket business.

And, finally, in general industrial, our performance primarily reflects lower sales with severe service industrial valves, principally to the oil and gas market. These sales did not recover in the third quarter as anticipated, based on lower orders, a stronger US dollar, and the continued impact of distribution channel destocking. We expect these headwinds to continue into the fourth quarter.

Next, I will discuss the key drivers of our strong third-quarter operating income and margin performance. Overall, Curtiss-Wright operating income increased 20%, which led to a strong 300 basis point operating margin improvement to 15.1%, and we achieved sequential improvement in operating margin for the third consecutive quarter.

Shifting to our segments, I will begin with the commercial -- in commercial industrial where operating margin improved 40 basis points compared with the prior year.

Operating income was negatively impacted by lower sales in our industrial valves and surface treatment businesses. However, operating margin was favorably impacted by improved profitability on our industrial vehicle products, despite lower sales. This was driven by our ongoing margin improvement initiatives, including the initial benefits of our facility consolidations.

Next to the defense segments, which produced stronger than expected operating income and margin for the quarter, the solid performance was driven by favorable mix, as well as several one-time events benefiting the current quarter results. These included the sales of a small product line in software IP, contributing about $2 million to operating income in the current quarter.

In addition, the $2 million in restructuring costs that were originally planned for the third quarter has shifted to the fourth quarter.

Next, in the power segment, operating income and margins were up modestly compared with the prior year. Improved profitability on the AP1000 program was partially offset by reduced sales in profitability and our nuclear aftermarket business, which continues to be impacted by deferred spending in the industry.

And finally, non-segment expenses decreased 65% as the prior year included a one-time pension settlement charge for approximately $7 million.

Moving on to our full-year 2016 financial outlook, beginning with our sales guidance by end market, I will start with the defense markets. Guidance for our aerospace and ground defense markets remain unchanged. However, we have increased our full-year naval defense guidance to a new range of 6% to 8%. This increase is based on an improved outlook for Virginia Class Submarine revenues and higher sales of our embedded computing products. As a result, we expect overall defense market sales to grow between 1% and 3%.

Moving on to the commercial markets, our guidance in the commercial aerospace market remains unchanged. In the power generation market, we have lowered our outlook based on reduced demand in the nuclear aftermarket business. As a result, we now expect this end market to be down 1% to 3% for the full year.

Next, to the general industrial market, as third-quarter energy-related sales we can do more than expected and the oil and gas market remains challenged, we have lowered our general industrial guidance to be down 10% to 12%. As a result of the reductions to our power generation and general industrial market sales, we have lowered overall commercial market sales guidance to be down 4% to 6%.

And, lastly, despite the end market adjustments, overall Curtiss-Wright 2016 sales guidance remains unchanged at down 1% to 3%.

Continuing with our 2016 financial guidance by segment and our commercial industrial segment, we have reduced our sales guidance by $10 million to reflect the changes within our end markets just discussed. This includes a $20 million decrease in the general industrial market, primarily within the industrial valves and surface treatment businesses, partially offset by a $10 million improvement in naval defense. Despite the revisions, our segment sales guidance remains unchanged for a year-over-year decline of 3% to 5%.

However, we reduced our segment operating income guidance by $7 million. This reduction is based on the lower sales outlook, unfavorable overhead absorption and mix as the sales reduction is primarily related to our higher-margin products.

As a result, we have reduced our operating margin guidance for this segment by 50 basis points to 14.1% to 14.3%.

Turning to the defense segment, we have increased our guidance for operating income by $4 million and operating margin to a range of 20.3% to 20.5%, reflecting an 80 basis point improvement over our previous guidance. This improvement is principally driven by a better sales mix, as well as the previously discussed one-time events that benefited third-quarter results.

Further, the consolidation activity originally planned for the third quarter has shifted to the fourth quarter. Therefore, we will begin to realize the bulk of related savings in 2017.

In the power segment, our sales growth guidance remains unchanged as an improved outlook in the naval defense market is expected to be offset by continued order delays in the nuclear aftermarket business. However, based on improved performance on the AP1000 program and ongoing cost containment actions, we increased our operating income guidance by $2 million.

As a result, operating margin is now expected to range from 13.6% to 13.8%, reflecting a 40 basis point improvement over our previous guidance and an increase of 310 to 330 basis points compared to pro forma 2015 results.

As a result of these revisions, overall Curtiss-Wright operating income guidance remains unchanged, but we are increasing our operating margin guidance to 14.3% to 14.5%, and expansion of 100 to 120 basis points year over year and a 10 basis point improvement compared to the prior guidance.

In summary, despite all of the aforementioned changes to our guidance, we continue to expect full-year diluted earnings per share of $4 and $4.15, which represents growth of 7% to 11% over pro forma 2015 results.

Next to our free cash flow where I will cover our performance through the end of the third quarter and review our guidance for the year, year to date we have generated approximately $240 million in free cash flow. One of the strongest starts in our history and more than double the same period in 2015.

Our third quarter and year-to-date performance were primarily driven by increased cash earnings, higher advanced payments related to the 2015 China direct AP1000 in the quarter and a significant reduction in our working capital.

As we have discussed at our recent Investor Day, we expect our working capital as a percent of sales to decline 240 basis points in 2016, down to 23% by year-end. We remain on track to meet this year's goal, and we continue to march towards top quartile performance.

Meanwhile, third-quarter capital expenditures of $10 million was slightly higher than the prior year, and we anticipate a ramp-up in the fourth quarter driven by our planned facility consolidations.

Also, we are lowering our full-year depreciation and amortization guidance by $10 million to a new range of $90 million to $100 million, based on our continued commitment to stringent capital expenditure management. Overall, we are reiterating our full-year free cash flow guidance of $300 million to $320 million, up 10% to 18% compared with 2015 and expect the free cash flow conversion to range from 166% to 170%.

Now I would like to turn the call back over to Dave to conclude our prepared remarks. Dave?

Thanks, Glenn. Overall, Curtiss-Wright remains on track to deliver another strong performance in 2016. We are pleased with the strength in our defense markets, as well as the AP1000 program, which will offset some of the challenges impacting our commercial markets.

Additionally, we are positioned to deliver strong operating margin expansion in 2016. With solid execution and cost control, we continue to expect to reach the top quartile of our peer group this year, ahead of our initial expectations issued back in 2013. And, as we have discussed, we expected to achieve this margin improvement irrespective of sales growth. Though this will be a tremendous achievement for our team, we will continue to focus on long-term opportunities to further improve our margins.

I also wanted to reiterate some key points presented at our Investor Day event. As our overall sales volume increases, it will now flow through a leaner and more profitable machine. Further, we are anticipating increased R&D investments throughout our organization in 2017 in an effort to boost product development and drive long-term organic sales growth. We are very excited to be see what the fruits of our labor can produce in an improved commercial market environment. We are taking the necessary steps now to ensure long-term margin expansion and EPS growth for our business.

In addition, our strong free cash flow performance remains a key enabler of our capital allocation strategy as we continue to review strategic acquisitions, balanced with steady returns to shareholders. At this time, we remain committed to $100 million in share repurchase activity in 2016 as a result of our balanced approach.

Finally, we look forward to delivering on our long-term strategy and generating solid financial results to drive value for our stockholders.

At this time, I would like to open up today's conference call for questions.

(Operator Instructions) Kristine Liwag, Bank of America.

Can you just provide a little bit more color on the incremental downtick in general industrial in the quarter? Are these book and ship type businesses that didn't materialize as you had expected, or are these long lead items?

They are mostly leadtime items, book and bills. It is really based on the incoming order rate at this point, which has been our nemesis all year, but, no, it is not long lead time materials. It is short-term orders.

Okay. (technical difficulty) the way through Q4. Right? We are pretty much at the end of October. How are order rates comparing now versus Q3, and do you think that there is downside risk to your provided guidance?

No, I think we have appropriately de-risked in this last round, Kristine.

And, at this point, would you say is Q3, Q4 pretty much the bottom in industrial sales, and how you are starting to think about this business in 2017? And what are your -- I mean, I know 2017 is a little early to provide guidance there, but any information you can provide would be really helpful.

You know, I will answer that, Kristine. We continue to look at it, obviously, from a bottoms up perspective and across all our operations globally. And it is interesting that we are not calling the trough -- so we are not going to stand out in front of anybody else and do that just yet, but we continue to hope for some glimmer and signs of things picking up. It is still running pretty much true what it has been in the industrial sector for a while. And in terms of outlook for 2017, too soon to tell, and obviously we don't really want to talk about that yet. But we are hopeful, like everybody else, and eventually some of these things have to pick up. And as soon as we see that, then we will be the first to be talking about it.

Great. That's helpful. And maybe switching gears to defense, you guys highlighted some weakness in embedded computing products for various fighter jet programs and ISR platforms. I was wondering, for the fighter jet programs, are these tied to specific fighter jet programs? Are these F-15s and F-18s that are declining in rates, or are there other maybe moving pieces? Are these aftermarket-embedded computing products, or is it a market share issue? Can you just give a little bit more guidance there?

Yes. Kristine, it is really timing. First of all, it is across all the fighter jet programs. But, F-16, F-22, F-18, F-35, you name it, we are on it. But it is really timing because it is going to be up in the fourth quarter. It is one of the increases we have in the fourth quarter. It is really timing when the quarters come in. As you know, defense quarters can be lumpy, and so nothing to be alarmed about. We know market share is strictly timing of quarter receipt.

That's helpful. Thank you very much.

Chase Jacobson, William Blair.

So, just wanted to understand a little bit in the guidance, the 3Q to 4Q ramp, specifically as it relates to the margin in commercial industrial and the revenue in defense. I know they are totally separate issues, but both have a pretty meaningful increase. So I was hoping you could give some color on that.

Well, let me start with the bigger increases, as you noted, was in defense, which 86% of the fourth-quarter sales were in backlog at f the end of September. And in the power segment, 87% was the other big increase of the fourth-quarter sales were in backlog. And (inaudible) in power, it is really about the AP1000 program, and we actually have a little uptick in the nuclear aftermarket business built into the fourth quarter for orders they received in the third quarter. So that is the bulk of the power segment increase.

And then, in defense, of course, it is across embedded computing. So it is across a number of programs periods, but again, 86% is in the guidance. The bulk of which seems -- so just as we look at this, but we are starting to -- you're going to see the favorable absorption of significantly higher sales in the fourth quarter. You are going to see some of the benefits of the consolidation actions we took in the first half come through in the fourth quarter. The bulk of the new China AP 1000 revenues is in the fourth quarter and, of course, the normal ramp in defense, which you will see in our defense segment. So a lot of good things, but that backlog and some of these actions we took are in place, I think we are pretty good -- in pretty good shape.

Okay. I think, though, in commercial industrial, if my math is correct, at least, it implies a pretty big improvement in margin there as well. There is some sequential improvement in revenue, but you talked about unfavorable mix there. So is that accurate that there is a big margin improvement in the fourth quarter?

There is. Besides with the margin on the sales volumes and favorable absorption, they have $2 million of margin improvement and initiatives flowing through. It is not surprising, and they are going to have $1 million in restructuring benefit, and they also are going to have some favorable mix in some of their MRO and sensors versus some of their project type business. So there is a couple of things going on besides just the sales.

Okay. And then, you guys -- maybe on the Navy side of the business, you guys have been talking about the Ohio class for a while. Any incremental color as to when you can get a larger firm order for that? And also, if there is any improved visibility to some of these other opportunities with the Navy such as the potential for an incremental Virginia in the out years if they keep it at two or as it relates to the CVN-80 or -81?

Well, at least on the ORP, I think the plan, putting the boat in the water is 2019. So what we are seeing now is the ramp-up in the development. It is starting to get -- as we are getting closer to that. So we will probably be talking about development revenues up through at least 2019, if, in fact, that happens in that year. But it is around that 2019/2020 timeframe.

As far as the extra ship, I mean our shipbuilding schedule that we have, it goes out 30 years, does not -- it has two ships a year, whether it is two Virginias or one Virginia, one ORP, or two ORPs, whatever it is, it is still two per ship. But we do have more content -- 50% more content on the ORP. So those years will be incrementally higher whenever you have an ORP versus two Virginias. I mean, that is what we have heard, some rumors about maybe doing three modes in one year, but we have not seen or heard anything more about that, other than a rumor, I guess I would say.

All right. Thank you.

Miles Walton, Deutsche Bank.

Good morning, gentlemen. This is Lou Raffetto on for Miles. Glenn, I will start with you real quick. Just you said the working capital as a percent of sales is still on track for 23%. Do you know what was in the third quarter?

In the third quarter, I do. Give me a second. It was 23%.

All right.

We were 23.1%. Yes.

All right. So we are there. Along those lines, you guys tend to Have a ramp in cash in the fourth quarter. Obviously, within your guidance it seems like probably not going to happen this year or there is still potential but just sort of being conservative, I guess, as we go into the fourth quarter?

This is a little different, but as I said in the prepared remarks, it is like a record for us in terms of, at this time, in the year, twice as much free cash flow as this time last year. So normally, fourth quarter is our biggest quarter. But, this year, I think if you look at our guidance, you will see sequentially we will be down in the fourth quarter a little bit. But even that was really because we received an advanced payment on the new China direct order a quarter early. So it was about a $14 million, $15 million seed to -- if we move that from one quarter to the other, we would be the same third quarter in the fourth quarter. They would be about the same. But, yes. But it is a little bit different than in the past for us. Yes.

All right. And then, Dave, just an update on -- obviously, you talked about still (inaudible) on the M&A. So just anything -- any additional color or insights for us?

Yes, I don't speculate when we might do something. I will say that, as indicated at Investor Day, we are still very active in our pursuit on various strategic partners and acquisitions. And I am really happy to see some of the things that have come in, and I am excited about a few that I think hold some real potential for us. And so we are going to continue to go the route that we set out to do, and that was paused and then now, like I indicated about a year ago, open up the doors for the real opportunities that add that -- let's say, the rib sticking sort of meat that -- and muscle tissue that we want to have from a long-term perspective.

So I view that as I did in the last -- in the Investor Day as something that I look for in more than share repo, although that does have its place. It is a balanced capital allocation strategy, and that includes the strategic acquisitions. But, like I said, those tend to be longer-term for us and they tend to be more beneficial over the decades and especially in our hands versus someone else's. So just wrapping it up, we are real excited about the things that we are looking at.

Great. Thank you, guys.

(Operator Instructions) Ryan Cassil, Seaport Global.

I wanted to just touch on commercial industrial first. The 7% decrementals in this environment are fairly good, and I understand that there are some puts and takes there. But clearly the cost action benefits are starting to flow through. Could you help just quantify what is left there, if you can? Do you think some of these still continue to be recognized in 2017?

Well, yes, if you go back to -- we said right at the get go we were going to incur about $7 million of costs to generate the $12 million annualized savings. We said we would see half of that in the latter half of 2016 and the rest in the first half, probably, of 2017. And one of the bigger pieces -- segments in there is the commercial industrial side. So yes, the answer is yes. They will see continued savings in the first half, in 2017, for sure.

Okay. And then still significant amount of that savings yet to be realized, I guess, (multiple speakers).

About half. We said half and half. It could be a little bit different in each segment, but generally speaking, overall, about half -- we are seeing some already in third quarter and in the fourth quarter, and you will see some in 2017 as well.

Okay. And then, sorry if I missed this. I heard your comments on general industrial. The expectation remains weak. You have got vehicles in there, valves, and some other stuff. But, specifically, on the severe service valves, if you look at order rates or where we are in October, is there anything that gives you confidence that we are bottoming in that area of the business? Are there any signs of anything to be positive about at this point?

You know, we have adjusted that business down to reflect the current order intake. It is so hard to speculate at this point because every quarter it seems to change. I know they were having some fairly steady orders until September, so I wouldn't say that gave us a rosie feeling, but it certainly wasn't terrible and we won't know what October is right now. So it is hard to answer at this point.

Okay. Thanks. And then, on the M&A front, maybe this is a crazy thought, but multiples in the industrial space seem to be fairly high in some of the markets you guys have talked about. And in the nuclear market, specifically, the aftermarket is going through some challenges right now, and there could be a chance for some consolidations since suppliers are in trouble. I mean, is that an opportunity for you guys while you guys are committed to staying in the space and it is going through some challenges that you could get some potentially distressed assets? Is that something you are looking at or a possibility?

Generally, what I characterize as a target of opportunity, when I am asked that question, I will bring up nuclear aftermarket as a target of interest to us. And from a perspective of distressed target, if it is a fixer-upper, no. Not interested. But if it is distressed due to market conditions, then there's certainly interest there. We do look at those.

In the sort of -- let's say, there is the good and the bad of that side of the business, and the good is, in one respect, they are -- they tend to be smaller. So they are not $100 million, $50 million even. They are usually sub-$25 millions. And so it is not like it is a huge bet on some of them. We have a great position in our aftermarket position right now. We have the majority of nuclear in stamps and well-known, great reputation. And so we can capitalize upon that when those opportunities come along.

So I guess the shorter version of the answer is, yes, we do look at that, and if something does come up, we looked at a few in the past -- recent past, then we tend to stick with those as indicated that are not fixer uppers, but maybe have a little bit of market perturbation. Maybe the current owners are tired of it. They sort of want to get out. They can't stand the long haul side of it, which we do. We look at this as a long haul sort of element that we want to participate in.

Thanks for the color. I will jump back in.

George Godfrey, CLK.

Very impressive margin performance in the quarter, especially on the gross margin line. Well done. As I look at 2017 -- and I know you provided initial sales guidance of the investor day, roughly flat, and I am thinking about the goals for CapEx and working capital and the very nice margins.

My question is around free cash flow for next year relative to this year. If we assume that the sales are flat and the margin of working capital keeps trending, would you expect that free cash flows as a baseline is flat next year with this year?

Not on the baseline. I think as I showed at Investor Day, this is our biggest cash flow year from the new China AP1000 contract. So typically, as you do, you get the cash upfront, and then you start spending it towards the backend and it goes down.

So I wouldn't necessarily -- plus, we had this year, we have got a $20 million benefit from the unwinding of our swaps that wouldn't recur. So I wouldn't necessarily call this year a base year. I think we are comfortable with something lower than that as a base year, and what really usually swings the volatility from year to year is the advanced payments in our deferred income. That is going to be our swing.

But, certainly, we are controlling our CapEx. We are in going to continue to reduce our working capital, all good things. Our earnings will go up. So -- but the big swing is going to be those advance payments. So we have not ran through that yet. All I can refer to is what I showed you at the Investor Day at this point.

But the goal on working capital is still to take another 3 percentage points right down to 20% -- out of the 23%?

Yes, it is. That is still the goal. Yes.

Okay. Thank you very much.

Jim Foung, Gabelli & Co.

Good quarter, guys. I just have got kind of some clarifications from your comments at the end, David. Now that you say you are a much leaner organization, what kind of incremental margins do you think you would have now as you go into 2017 and, again, you kind of raised that over time?

We talked about that a little bit, Jimmy, over at the investor conference. And the question was asked and my answer was that we want to achieve our position in the top quartile performer against our peers. And as indicated, just now in our prepared remarks, we obviously anticipate that we are going to hit that and, by the way, two years early. As I said, we are going to do that by 2018. So we are extremely happy over that.

And then, as Glenn indicated, we continue -- even though we are at that top quartile, we continue to exercise our business unit leadership and all the employees to be as efficient as possible. So we will see continued margin improvement. And, as we recognize, it is likely that our peer group will be changing as well. So that top quartile is going to be moving and likely upward, and we are going to move along with it.

But I am not really intending to go to the top decile. A lot of reasons behind that. R&D, notwithstanding, is one of the biggest ones we don't want to take away and start our opportunities for strategic growth. And so we don't have new margin targets that are set in public. We do work the targets internally, and we will continue to do so. But that is on -- like I said, on the basis of improved performance. That is the culture of this corporation, and it will remain so. But we are not guiding to any new targets like we did in 2013 by stating that we are going to hit the 2014, et cetera. As you can see, we are doing extremely well in that regard, and like I said, we are really happy with those results.

Okay. Fair enough. And then, just lastly, on the higher research and development spending 2017, could you just indicate how much higher it would be relative to 2016?

Yes. It is about $5 million (multiple speakers) $5 million incremental from 2016. It is across all three segments with the most of being in the defense segment and then followed by the power and the commercial industrial.

And where do you think you'll end up 2016 in R&D spending?

In total?

Yes.

I couldn't tell you that right now.

All right. Okay.

$5 million more than this year.

Right. Okay. Great. Thank you very much.

I am not showing any further questions at this time. I would now like to turn the call back to Dave Adams for any further remarks.

Thanks, Rhonda, and thank you all for joining us today. We look forward to speaking with you again during our fourth-quarter 2016 earnings call. Have a great day. Bye-bye.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a wonderful day.