Curtiss-Wright Corp (CW) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright Fourth Quarter 2017 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Jim Ryan, Senior Director of Investor Relations. Sir, the podium is yours.

Thank you, Brian, and good morning, everyone. Welcome to Curtiss-Wright's Fourth Quarter and Full Year 2017 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 the 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. A reconciliation is available in the earnings release and at the end of this presentation. Please note, any references to organic growth exclude effects of foreign currency translation, acquisitions and divestitures unless otherwise noted.

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

Thanks, Jim. Good morning, everyone. For our agenda today, I'll begin with the key highlights for 2017, followed by Glenn, who will provide a review of our fourth quarter performance along with our initial 2018 guidance. Then I'll return to wrap up our prepared remarks before we move on to Q&A.

Overall, we were quite pleased with our full year 2017 results, which reflect a strong operational performance that exceeded our expectations. We experienced sales gains in all of our end markets, driving solid growth of 8%, 5% of which was organic. Total commercial sales increased 6%, principally led by a nice rebound in the General Industrial market. Defense sales were up 3% organically, or 2% overall including the contribution from our TTC acquisition in the Defense segment. We also generated excellent margin expansion in 2017, achieving an operating margin of 15%, which would have been 15.7% excluding the first year purchase accounting costs for TTC. This performance reflects our continual focus upon execution and the benefits of our ongoing margin improvement initiatives. As a result of this strong operational performance, we delivered EPS growth of 14% year-over-year. As Glenn will explain in a few minutes, the net impact from tax reform was minimal to our full year '17 results. However, it will provide a meaningful benefit to 2018 and future years' earnings per share, while also providing long-term flexibility to manage our balanced capital allocation strategy among other benefits.

We also generated robust free cash flow of $336 million and a free cash flow conversion of 156%, driven by a significant reduction in working capital. This performance, which far exceeded our expectations, moved Curtiss-Wright into the top quartile versus our peer group for the first time since we established this metric in 2013.

For 2018, we expect higher sales in all end markets, ongoing operating margin expansion and increased earnings per share along with continued strong free cash flow.

Next, I'd like to discuss some acquisition highlights beginning with TTC. As you're aware, it was just over 1 year ago that we acquired TTC. It has been, and will continue to be a great addition to our portfolio with its attractive positioning within a growing defense market as well as its robust profitability. More recently, this week, we announced an agreement to purchase the Dresser-Rand government business portfolio from Siemens, which fits right into our wheelhouse. The addition of this marquee brand to the Curtiss-Wright portfolio expands the breadth of our Naval business, which is especially significant during a period of rising naval defense budgets. We expect this business to boost our top line growth and expand our shipset content and footprint on navy vessels. Note that our guidance does not include the potential acquisition of the Dresser-Rand government business. We'll have more to share on this later in the call.

Now I'd like to turn the call over to Glenn to provide a more thorough review of our fourth quarter and 2017 performance and financial outlook for 2018. Glenn?

Thank you, Dave, good morning, everyone. I want to begin by spending a few minutes discussing the fourth quarter 2017 highlights.

We produced sales gains in most of our end markets, driving solid growth of 8%, 3% of which was organic. We saw a particular strength in the defense markets due to strong organic growth of 7% as well as a ramp-up in sales from TTC in the fourth quarter, which is seasonally their strongest quarter. We also produced solid organic growth of 7% in the General Industrial market, primarily due to improved demand for industrial vehicle products. Free cash flow is very strong, as we've generated $209 million in the fourth quarter and a free cash flow conversion in excess of 300%, both well exceeding our expectations.

Our results were driven by higher cash earnings and a substantial reduction in working capital. In 2017, we achieved a significant 220 basis point reduction in working capital to 18.8% of sales, reaching top quartile performance for the first time. In addition, our fourth quarter free cash flow benefited from a $25 million advance payment related to milestones in the China Direct AP1000 order that was originally scheduled for 2018, but was received early in December 2017.

Diluted earnings per share of $1.52 was also ahead of expectations, despite a higher effective tax rate in the fourth quarter, primarily resulting from the Tax Cuts and Jobs Act. I'll discuss the impacts of various tax and accounting changes in more detail beginning on Slide 7.

Next to new orders which surged 17% in the fourth quarter, led by widespread demand across our commercial and defense markets. In particular, we experienced improved demand from embedded computing products serving defense markets, sensors and controls products for the commercial aerospace market and industrial vehicle products serving the on- and off-highway markets. In summary, we concluded 2017 with a solid fourth quarter performance.

Before we move on from 2017, I want to reflect on our historical working capital and free cash flow performance. Looking back to 2013, and as indicated on the slide, our working capital as a percent of sales was 32%. We set aggressive goals to reduce working capital in order to reach top quartile performance versus our peer group. Through our dedicated company-wide focus on working capital, we significantly reduced this metric by 1,320 basis points since 2013. As a result, we achieved top quartile status and beat our target in 2017, a year ahead of expectations. This is an exciting achievement for the team and a testament to their tenacity in enabling us to reach top quartile performance.

Turning to the next slide. Those working capital improvements contributed strongly to the company's robust free cash flow generation and free cash flow conversion rates that we are very proud of. Since 2013, we have generated average free cash flow north of $300 million, and an average free cash flow conversion of 163%, the latter of which is well within the top quartile of our peer group.

Before we move on to 2018 guidance, I wanted to spend a few minutes discussing the impacts of tax reform and the various accounting changes influencing our 2017 results and 2018 projections.

I'll begin with the impact of tax reform on our 2017 results. In the fourth quarter of 2017, tax reform had 2 impacts on our effective tax rate: first is a $22 million charge for the one-time mandatory transition tax on the deemed repatriation of foreign earnings. Second is a $12 million benefit from the revaluation of our net deferred tax liabilities due to the reduction in the U.S. corporate tax rate from 35% to 21%. These 2 items resulted in a net charge of $10 million or $0.23 decrease to EPS in the quarter. Next, the impact from employee share-based compensation accounting change, which has benefited our quarterly results throughout 2017. In the fourth quarter, the impact of this tax benefit was $2.4 million or $0.05 increase to EPS. On a full year basis, the impact was $7.8 million or $0.17 increase in earnings per share, that offset most of the net charge related to the new tax legislation.

As a result, netting these 2 items resulted in an $0.18 and $0.06 negative impact on our fourth quarter and full year 2017 EPS respectively.

Moving on to 2018. Curtiss-Wright will certainly benefit from the reduction in the U.S. corporate tax rate. And as a result, we are guiding to a 24% overall effective tax rate. Next, to the new accounting rules that require the non-service cost components of pension expense to be reclassified from operating income to other income and expense. This accounting change is effective in 2018, but will require the restatement of our 2017 reported results. The net effect is a reclassification of $14 million to $15 million of operating income to other income and expense below the line, resulting in a 60 to 70 basis point reduction to our operating margin. This accounting change will not impact earnings per share or cash flows. I will provide more detail on this change in a few minutes when we review of our 2018 guidance. And regarding the new revenue recognition adoption, we've completed a thorough analysis and I'm pleased to report that the impacts are projected to be immaterial to overall Curtiss-Wright results.

Now moving on to our 2018 guidance beginning with our end-market sales where we expect our 2018 sales to improve 3% to 5% overall, and in both the defense and commercial markets. In the defense markets, we expect to continue to benefit from the favorable trends in defense spending and increasing defense budgets. In Aerospace Defense, we're expecting sales to grow 8% to 10%, driven by higher demand from embedded computing products and actuation systems, primarily for the F-35, and higher sales of flight test instrumentation products, primarily for the F-22. In Ground Defense, sales are expected to be up slightly, driven by higher sales in our Turret Drive stabilization systems to international customers. In Naval Defense, sales were expected to be up slightly in 2018 as increased revenues related to the ramp-up on the CVN-80 aircraft carrier program will be mostly offset by reduced Columbia-class and Virginia-class submarine revenues due to timing. We have substantially completed our development on the Columbia-class program, and are currently in the lull before production revenues begin to ramp up in 2019.

Moving on to the commercial markets. Commercial aerospace sales are projected to be up slightly, led by improved demand for sensors and actuation systems, primarily supporting narrow body platforms. In power generation, we expect sales to grow between 6% and 8%, driven by strong revenue growth on the China Direct AP1000 program and increased demand in the nuclear aftermarket business.

And finally, in the General Industrial market, we expect sales to increase between 3% and 5%. Industrial Vehicles sales are expected to be up slightly, principally for on- and off-highway vehicles serving the Class 8 trucking and agricultural markets, respectively. In industrial valves, we're expecting mid-single-digit sales growth as industry trends continue to improve in the oil and gas market. The remainder of our general industrial businesses which tend to be more economically sensitive, are expected to be up slightly.

And finally, starting on Slide 17, in the appendix of our presentation, you will find detailed breakdowns on our full year 2017 sales by end market as well as our 2018 end-market sales waterfall chart.

Our financial guidance for 2018 is led by solid sales growth across all 3 segments and expectations for total Curtiss-Wright operating income growth of 9% to 12%. On an unadjusted basis using the middle column and as highlighted in green, operating margin is expected to be 15.8% to 16%, up 80 to 100 basis points compared to 2017 reported results. This strong performance reflects our continued execution and the benefits of our ongoing margin improvement initiatives. In the next column, we show the 2018 impact from the new pension accounting rules which reduces our operating income by $14 million. As a result, our 2018 operating margin is reduced by 60 basis points to a new range of 15.2% to 15.4%. And because 2017 reported results were also impacted by the accounting change, our 2018 guidance reflects operating margin expansion of 90 to 110 basis points. Continuing with our outlook by segment where I'll focus specifically on the column to the right adjusted for the pension classification -- reclassification. In the Commercial/Industrial segment, we expect sales to be up 2% to 3%, primarily based on our outlook for growth in the General Industrial and Aerospace/Defense markets. Higher operating income will be driven by higher sales volume and the benefit of restructuring initiatives implemented in 2017. Partially offsetting that improvement is net restructuring charges of approximately $4 million in 2018 as well as a $3 million increase in R&D primarily for our industrial products. As a result, we expect a slight improvement in operating margin to range from 14.7% to 14.9%.

Next to the Defense segment where sales are expected to grow 2% to 4% led by growth in the Aerospace/Defense market. We are projecting segment operating income to grow 10% to 13%, and operating margin to increase 160 to 180 basis points to a range of 21.3% to 21.5%. This outlook primarily reflects increased profitability now that we've moved beyond the first year purchase accounting costs associated with TTC as well as favorable absorption from increased sales. That improvement will be partially offset by a $5 million increase in R&D to support our high-tech embedded computing products which will continue to drive organic growth.

Next to the Power segment where sales are expected to grow between 6% and 8%, primarily due to higher revenues in the power generation market, along with a modest increase in the naval defense market. We are projecting solid increases in operating income and margin for 2018, driven by increased profitability on the AP1000 program as well as improved nuclear aftermarket sales; partially offsetting that improvement is a $2 million increase in R&D.

Overall, we are projecting segment operating income to grow 16% to 19% and segment operating margin to increase 130 to 150 basis points to a range of 16% to 16.2%.

Continuing with our 2018 outlook, I would like to highlight the pension reclassification from operating income to other income and expense for the 2017 and 2018 periods as shown in orange. Note that this accounting change does not have any impact on cash flows or earnings per share. Interest expense is forecasted to come down a few million dollars due to lower expected debt levels. And as noted earlier, we expect our effective tax rate to be 24% in 2018. In addition, we are forecasting $44.7 million in diluted shares, a slight decrease from 2017, which includes our expectations for $50 million in share repurchases to offset dilution from stock issuances. As a result, our guidance for diluted earnings per share is a range of $5.65 to $5.80, which represents EPS growth of 18% to 21% over 2017 results. Please note that our guidance does not include any contribution from Dresser-Rand. Further, as is typical with our acquisitions, we expect the business to be dilutive to EPS in year 1, based on the step-ups that amortized in the first year, typically in the first 2 quarters. After year 1, we expect the business to be accretive to EPS. For your EPS modeling purposes, please note that we expect approximately 40% of our full year 2000 (sic) [2018] EPS to be in the first half of the year and 60% in the second half. We expect first quarter earnings per share to be slightly above last year's first quarter, anticipating each quarter to increase sequentially with the fourth quarter being our strongest as we've done historically.

Next to our free cash flow outlook for 2018, where I will begin with an update on our pension plans since it is affecting our free cash flow guidance. Earlier this month, we elected to make a $50 million voluntary contribution to our corporate-defined benefit pension plan, returning the pension plan to fully funded status, similar to what we did in early 2015. This voluntary contribution is expected to reduce our projected pension expense and eliminate the need for further cash contributions over the next 5 years. Excluding this pension contribution, 2018 adjusted free cash flow is expected to range from $280 million to $300 million with an expected conversion rate of 111% to 116%. We are maintaining a very solid free cash flow level similar to our strong 2017 results, led by our continued focus on working capital management. Further, if not for the earlier-than-expected advance payment on the AP1000 program and the voluntary pension contribution, our free cash flow conversion would have otherwise been 125% and consistent with the prior target. As a result of the reduced U.S. corporate tax rate, which is favorable to net income, we are revising our free cash flow conversion target to an average of at least 110%. However, we are maintaining our target to achieve an annual base free cash flow of at least $250 million. Our 2018 guidance for capital expenditures and depreciation and amortization are expected to remain consistent with 2017.

And finally, we're in the process of evaluating the benefits of the new tax laws, specifically the potential repatriation of foreign cash and its impact to our balanced capital allocation strategy.

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

Thanks, Glenn. I'll continue with a discussion on the rationale and benefits of acquiring the Dresser-Rand government business. Strategically, it builds upon our strong position within the naval defense market. We expect to leverage a very similar customer base and expand our long-term relationships with new products and new services. Dresser-Rand is the preferred supplier of steam turbines and main engine guard valves on aircraft carriers and has significant content on submarines and other surface ships as well. The business manufactures rotating machinery products, an area that is core to Curtiss-Wright's competencies. The majority of their work is conducted via sole-source OEM contracts. The business also maintains service centers at 3 of the largest U.S. naval bases, primarily focused on overhauls of Dresser-Rand legacy equipment, emergent navy shipyard repair needs and global service work. This provides us an established presence at navy shipyards and will enable the leveraging of new opportunities for growth. Financially, we expect this acquisition to benefit the top and bottom line. As noted in the press release, we expect Dresser-Rand's fiscal 2018 sales to be approximately $95 million. For reference, the majority of Dresser-Rand sales are to the naval defense market with the remainder to the power generation market. Further, we expect this acquisition to generate future margin expansion opportunities through our proven integration practices. It will also be accretive to our 2018 earnings per share, excluding the typical first year purchase accounting costs. Further, beyond year 1, we expect this transaction to support our long-term financial objectives of organic growth, margin expansion and free cash flow generation. We look forward to this business contributing to our future growth. Please note that consistent with our prior practice, we will not be discussing any specific financials regarding the Dresser-Rand business until after we close the transaction. Once we close on the acquisition, which is anticipated to be in the second quarter, we will update our guidance to include their prorated financials accordingly.

As we conclude our prepared remarks, I wanted to briefly discuss the image in the upper-right hand corner of the slide, which is from our October 2016 Investor Day. Reflecting on that time frame, the economy was only beginning its upturn, and while several of our key markets were experiencing notable headwinds, there was light at the end of the tunnel.

As we proclaimed that day, our continued efforts to improve our operational efficiency would greatly benefit our results once the top line growth reemerged as our operations would then flow through a leaner and more profitable machine.

Our performance in 2017 and the outlook for 2018 reflect the opportunities discussed that day, positioning Curtiss-Wright to continue to deliver very strong results. As we grow organically and through acquisitions such as TTC and Dresser-Rand, we will continue our relentless focus on operational efficiency, margin improvement and working capital management. This, in turn, will help drive our metrics to new heights and provide increased opportunities to improve shareholder value. We are now positioned to deliver synchronized growth in all markets in 2018, driving continued margin expansion of 90 to 110 basis points. We also expect to deliver strong double-digit growth and earnings per share of 18% to 21%. Further, our free cash flow, adjusted to exclude the voluntary pension contribution, is consistent with prior years and well above our target. We also remain committed to deploying a balance capital allocation strategy where our goal is to maintain a fair balance between operational investments, including R&D, returns to shareholders and strategic acquisitions. In summary, we look forward to continuing to deliver on our long-term strategy and generating solid financial results for our stockholders.

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

(Operator Instructions) And our first question comes from the line of Sam Pearlstein from Wells Fargo.

Glenn, I wanted to follow up on a couple of tax questions. Just one is, can you talk at all about what the cash impact of the lower rates are in terms of whether there's any cash savings? And you mentioned the repatriation, how large is your cash balance overseas? And what's the opportunity there?

Yes. The cash savings on the tax rate, we are estimating to be about $15 million right now. And the amount of cash we have available potentially to repatriate is between $150 million and $175 million. We're still looking at it. But that's -- it's going to be in that ballpark.

Okay. And what does it take to actually pull it back?

It's different by country. So we've estimated -- part of it we can probably pull back in a month, it's a lot of paperwork. It depends on how [it's returns of capital] and all kind of different things. And some we can get back in 6 months and some that may take 9 months, so.

And then when you think about Dresser (sic) [Dresser-Rand] and the acquisition and what you're saying about the accretion, what are you assuming in terms of how you pay for that since you still have a fairly sizable cash balance. And then when talking about some of the repatriation, is there a presumption that you're going to borrow for that? Or is it all coming out of the cash balance?

Most of it's coming out of the cash balance. There is a small amount that we probably use the revolver for. But it pays back -- pays back in a month, I think, it rolls out. So it's temporary borrowing, yes.

Okay. And then just we've talked over the course of 2017 about the nuclear aftermarket. And would you say that, that has bottomed and now grown? Because you have said every end market is growing in '18. And is it simply the easy comp? Or is it actually starting to turn up?

We are expecting growth in the nuclear aftermarket in 2018. And I think we've mentioned in the previous calls, we're getting -- starting to see the order pick up supporting that with longer term kind of orders that will start to see sales in 2018 and we expect that to -- we still think 2018 is the rebound year. And every -- all the indications we have is that's going to happen.

And our next question comes from the line of Peter Arment from Baird.

Just -- first if I could just start on maybe the outlook on the navy. You mentioned timing on Columbia with the development and that's going to be -- step-up in terms of 2019. How do we think about Virginia for you? Are you waiting for the new block? And how does -- how do we think about that?

Well, it's not -- we're not predicting it to obviously happen in 2018. But I would imagine that it would be -- we'll probably get an order in 2018. We'll begin to see sales in 2019 on that.

Okay. No, that's helpful. And just related to just kind of following up on Dresser-Rand. Can you clarify just in terms of how you view the OEM or aftermarket mix on this acquisition, Dave?

I will tell you -- what I can tell you is that it's about -- right now -- it fluctuates year-over-year. But it's about 50% OEM, 50% service centers. And we expect -- so the mix -- I think the service centers will probably move in higher margin. Not really clear on all that right now, exactly. But it's going to -- so it depends on the mix each year. If OEM is higher or the service center is higher. I mean, we can at least hope to say that. But again, we're not really -- we're ready to give -- talk about too much detail on that right now.

No, understood. And just lastly on the orders, very strong in Q4. Can you talk about what you're seeing in industrials? I guess you mentioned the strength in Industrial Vehicles, commercial aerospace. How do you see that as we look at 2018 kind of the sustainability on the industrial side, and which, I think, has been strengthening throughout 2017?

Yes. The orders are all on big-ticket programs. In commercial aerospace, it's a long-term agreement with Boeing. It's an actuation order on narrow bodies primarily. On on- and off-highway, it's really orders from 2 very sizable program wins from 2017. So those are big single orders in the Commercial/Industrial and Defense, it's -- well, TTC is obviously additive because it wasn't in the prior year. They added a good chunk and then there would be other piece of that. The bigger piece is the F-35, which is the ramp-up that we expect in 2018. So those are the drivers of the orders, the bigger ticket items.

And just generally, I might add to that, Peter, that what we're seeing as across the board, this is a real exciting year for us as compared to the last couple of years whereas we've been in somewhat of an industrial bathtub that it looks like we're firing on all cylinders relative to the market and global expansion, market expansion. So it feels good. The only thing in our portfolio that we expect maybe a little bit of headwind would be the medical mobility, but that's not a whole lot of the business. And it's been great in the past, it might just come through, even [the air force] again, it did in '17. But everything else is firing very nicely. Even ag and mining, you look at those. Again, you take our customer set, Caterpillar, John Deere and all these. They're looking up. So we're hoping to be pleasantly surprised as this year rolls on.

Our next question comes from the line of George Godfrey from CLK.

I want to start in the Power segment. Can you give us an update on where we are with Sanmen 1 and Sanmen 2? My understanding is those should be at or near to be [hot-fired].

Yes. I'll give you the latest that we have. And we get these basically, weekly updates. Chinese have been on -- somewhere in their Chinese New Year this -- over the last week or so. And I'm not sure of the length of time, but I think it's a fairly protracted session and they're just coming out of it this week and we expect that -- as a matter of fact, that any day now, that I will get a phone call from our folks who [are resident] in China indicating to me that they are actually installing the fuel rods and powering up. So it's -- we're on the cusp of that. We know that the regulatory bodies have licensed -- ran the licensing and so forth in Sanmen 1. And then Haiyang 1 will be the next one. So it's any day, and we'll keep saying that until it happens. But everything in due course. And so -- we're excited about it and we know they are as well. Once I think it's up and running, as we've indicated in the past, it will generate a lot more excitement and we expect further from that result.

And customers or potential deals in the pipeline, I imagine, are really focused on this as well. The data points that they would need to see if, let's say, the plant fires up tomorrow and starts running. How long does it need to be visibly operational to new potential deals to make them feel comfortable about the process? Is it a month, 3 months, 6 months? What do you think?

It's a $64,000 question. I had said last year, I had said that in my one-on-ones and I think I may have said it on a call that I'm thinking anywhere within the next couple of years, we could expect to see an order, not sure when that happens, but we would expect, first of all, to see the generation of a lot of excitement as I indicated just with the start-up. And then after that, then the energy producers and energy providers would go back to the government or regulatory agencies in China and start pushing for their permits to start lifting, removing dirt to make a plant. And I think that's still the case. If this -- for this time frame, I'll tell you, George, it's anybody's guess. I don't know. Things move very slowly over there. And as they do here, with regards to starting new operations. But I know that the excitement is there. The need is definitely there. The plans and the money are all in place to do it. So it's just a matter of getting these operational. I can speculate and I have many times, and that is pretty much based on what I just said. And that is that thing will be operational. And then after that, then they will go through the hoops of getting the environmental regulatory side of it cleared and then go. But we do continue to say it's not a matter of if, but it's just when this really occurs. So I'm sorry, I just can't give you a more clear date than that. But it's out there somewhere and we'll be excited once it happens.

Understood. And then on defense spending -- or excuse me, defense revenue organic growth this year, 5% and the guidance next year, 2% to 4%, so the midpoint 3%. Is that slowdown there just a timing issue as opposed to a slowdown in business momentum, given that defense budgets are likely increasing substantially over the next couple of years?

I think it's just timing. I don't know it's anything structural.

Okay. And then lastly, Glenn. You may have said this and perhaps I missed the -- or analysts weren't paying attention. G&A, $80.9 million this year versus $62.2 million in Q4. What was that $18 million increase?

I don't know by the dollar, but the big chunk of that are comp accruals, which I think, we've mentioned in the press release and our scripted remarks. But I'm just trying to think. We also have TTC, which wasn't in there last year. I don't think probably have a pretty good number in there. Those are the 2 biggest items in there. But in there is probably a bunch of little things too.

Okay. So just any -- relatively tough compare a year ago, and then as it went down sequentially...

Yes.

(Operator Instructions) Our next question comes from the line of Michael Ciarmoli from SunTrust.

Maybe just to stay on George's question on defense with the deceleration. I guess specifically, maybe the ground vehicles. You've got a lot of momentum right now within the army. They seem to be a big beneficiary there. And that market seemingly surprised to the upside, I think, throughout '17. So is that -- just trying to get a sense there. There's some new programs out there. It would seem -- I don't know if it's timing, but that market was very strong last year. Should there be any reason for deceleration within the ground vehicle market, especially given maybe your shorter cycle embedded computing that could go into those platforms?

Well, I know what we've seen at least in the 2019 budget that there is definitely funding for Abrams and Bradley, which I don't think we've seen that in years. But we're not going to see -- if we're lucky, we'll see some orders maybe in the fourth quarter if it all goes according to plan. But for us, it's probably a '19 issue in the U.S. for sure. Our international business works off on long-term contracts around the rest of the world. So they will be lumpy, but they're up this year. They're kind of Steady Eddy. So yes, they could be first time in a long time that we see some material increase in ground defense. But I think it's out-of-ways for us.

Got it. And then just in the quarter, you guys cited some margin pressure, I think, in the Commercial/Industrial segment on mix issues. Was that sort of one-time with certain product lines? Should we expect that to continue? Just maybe a little bit more color there.

Yes. There's a couple of things. They had some mix issues within the Vehicles business that negatively impacted. They had some underabsorption in navy valves because they had lower sales in the quarter. They also had an FX impact that impacted their margin with -- I think it was sales, favorable $4 million with [no OI]. And not -- and then last but not least, it's the comp accruals. It was a couple of million dollars for them in that category as well.

Okay. And then just looking at the forecast for '18. I think I heard all the numbers right, but it seems like it's about a $10 million R&D increase which -- that's probably one of the bigger spikes we've seen from you guys, I think, it might be 17% or so. What's all of a sudden driving the broad increases in R&D? I think you've -- give or take, you've been running sort of around a $60 million level. So just trying to get a little bit more color there what you're seeing to drive that spending.

It's across the board as you could tell. We always said this is a big year for R&D. And in particular -- in power, it's really developing a 50-Hertz AP1000 pump. That's a big, big deal for them. In the General/Industrial, I guess there's new products for these 2 large program wins they made in 2017. So they're going to be developing some products in support of those programs. And in the Defense segment, it's only embedded computing. At this point, I think they have a -- they want to [make a] significant dent against our competition and to upgrade some of their technologies.

I'll tell you my perspective, Mike, on it from a high-level view is that when I hear my Vice President asking for more R&D against a future deliverable -- and by the way, I'll caveat that and preface it with the statement that we're very stingy with these kind of expenditures. Because as you know, we're doing the balanced capital allocation strategy and it has worked very well for us. And we don't like science projects and they know that. And I'm a stickler to that, that credo. And when they start coming to me and say and look, they've got some areas that they could spend some money on and really yields some results, I listen. And they've got some really nice ones out there. When you look across the board, like Glenn just said, in the Commercial/Industrial sector, they've got some opportunities there. And the 50-Hertz machine is something that really could pay off in years to come as the next step or leapfrogging technology that we could put into place. On the defense side, you've got the new product release means new sales. And with this uptick in defense spending, they're going to come out with some platforms that we haven't seen for a while and/or refreshes. And that's where some of that's going to go. And then you get into the tower side and there are just some real opportunities there as well. So -- this, to me, is a real exciting thing to see. And we haven't had that for a few years and we have a pretty nice spend rate. But when I -- like I said, when I hear them coming up knocking on the door and asking for money. And they know, they have a long way to crawl to get to that opportunity, then I feel really good about it. So you all should, too. I think it will pay dividends in the future.

Got it. No, that makes a lot of sense. Just a last one and I'll get out of the way here for housekeeping. Glenn, on the $50 million pension contribution, was there any thought to do that in '17 to take advantage of maybe the higher tax rate for deductibility purposes? Just color there.

That is a great observation and that is exactly what we're doing. So that -- that's one of the main reasons we did it is we will be taking it as a 2017 event. It is going to be in the 2017 return. And yes. You're right.

And I am showing no further questions. I would now like to turn the call back to Dave Adams, Chairman and Chief Executive Officer, for any further remarks.

Thanks, Brian. Thank you all for joining us today. We look forward to speaking with you again during our first quarter 2018 earnings call. Have a great day.

So long.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.