Curtiss-Wright Corp (CW) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright's Fourth Quarter 2018 Financial Results Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Jim Ryan, Senior Director of Investor Relations. Sir, please begin.

Thank you, Mark, and good morning, everyone. Welcome to Curtiss-Wright's Fourth Quarter 2018 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 webcast can 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 detailed those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC.

As a reminder, the company's 2018 results include an adjusted non-GAAP view that excludes first year purchase accounting cost associated with this acquisition. Reconciliations for current and prior year periods are available in the earnings release, at the end of this presentation and on our website. Also, please note, any references to organic growth exclude the 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. I'll begin our agenda with fourth quarter and full year 2018 highlights, followed by a recap of our journey to achieving top quartile performance. Then I'll turn it over to Glenn to provide a detailed review of our 2019 guidance and updated China Direct CAP 1000 financials (sic) [China Direct AP 1000 financials].

Finally, I'll return to wrap up prepared remarks with a discussion on several strategic topics, including plans for capital investment in our DRG business and update on our capital allocation strategy and lastly the establishment of new 3-year targets supporting our drive for long-term profitable growth. After that, we will move to Q&A.

Starting with the fourth quarter highlights. We delivered yet another solid quarterly performance, with adjusted operating margin, diluted earnings per share and free cash flow ahead of our expectations. The net sales increase was led by strong double-digit organic growth in the power generation market due to higher AP 1000 and domestic nuclear aftermarket revenues. Our results also reflect the contribution from our DRG acquisition in the Power segment.

The increase in adjusted operating income was principally driven by strong profitability in the Power segment, while adjusted operating margin was essentially in line with last year's strong fourth quarter.

This performance resulted in adjusted diluted EPS of a $1.90, a 25% increase over the prior year and includes the benefits of lower interest expense driven by a $50 million debt repayment made in October, a lower effective tax rate and continued share repurchase activity. We generated very strong free cash flow of $214 million in the fourth quarter, resulting in a free cash flow conversion of nearly 260%.

Turning to our full year 2018 highlights. We experienced sales increases in all of our end markets, driving sales up 6% overall and 3% organically. Total Defense sales were up 10% overall, including the DRG acquisition. Total Commercial sales were up 4%, led by solid growth throughout the general industrial market.

We generated a 110 basis point improvement in adjusted operating margin to 15.8%, the highest level of profitability produced by Curtiss-Wright in more than 20 years. This solid performance drove a 28% year-over-year increase and adjusted diluted EPS, which included a lower effective tax rate and continued share repurchase activity.

We invested nearly $200 million through a combination of 10b5-1 plans and opportunistic repurchases in 2018. New orders were up 6%, principally led by strong demand in Naval Defense. In addition, full year adjusted free cash flow was strong at $333 million, which drove a solid adjusted free cash flow conversion of 121%.

This next chart reflects the results of the transformational journey we embarked upon in 2013 under our One Curtiss-Wright vision. For those less familiar with Curtiss-Wright, in December of 2013, we established an aggressive 5-year goal to achieve top quartile performance versus our peer group. Our metrics were a mix of key performance indicators as listed on this slide. At that time, we were in the bottom quartile of our peer group for most of these metrics. Due to our team's unwavering focus upon execution over the past 5 years, I'm very pleased to report that we have achieved or exceeded all of the original targets and reached top quartile for every metric illustrated. Further, it's important to note that these targets were set without considering any benefit from sales growth.

Over the past 2 years, solid top line growth, combined with our leaner operating structure, has enhanced our operational performance and driven even stronger returns. It's been an exciting journey, and I'm very proud of the entire team's accomplishments.

We remain focused on driving margin improvement, leveraging the critical mass of One Curtiss-Wright across the enterprise and maintaining our position in the top quartile of our peer group.

Two metrics that we are particularly proud of include operating margin expansion and free cash flow generation. Starting with operating margin expansion. For those of you who recall, we laid out a plan to reach margin expansion via a focus upon consolidations, portfolio rationalization, operational excellence, shared services, low-cost economies and segment focus. The team's ongoing successes across each and every one of these initiatives has led to our strong margin expansion of more than 600 basis points over the past 5 years. And we will relentlessly pursue continued improvement in all of these areas.

Next, moving to free cash flow generation, where our results have been tremendous. Over the past 5 years, we've generated more than $1.5 billion in adjusted free cash flow with an average adjusted free cash flow conversion of 155%.

Our efforts here were led by strong operational performance, a significant reduction in working capital as a percentage of sales, the 2015 AP 1000 order and our focus on efficient capital spending.

Robust free cash flow generation, combined with our strong balance sheet, has enabled us to drive a healthy capital allocation strategy with returns to shareholders, reinvestments back into the business and strategic acquisitions.

Now I'd like to turn the call over to Glenn to provide a review of our financial outlook for 2019. Glenn?

Thank you, Dave, and good morning, everyone. Moving to our 2019 guidance, beginning with our end-market sales, where we expect growth of 3% to 5% overall with gains in all of our end markets.

In the Defense markets, our overall sales growth reflects the continued benefit from the favorable trends in Defense spending, including an additional quarter of sales for DRG in our first full year of ownership. In Aerospace Defense, we expect sales growth to come from higher demand from better computing products supporting the ramp-up on the F-35 program as well as higher sales on the Blackhawk and Apache helicopter programs. This growth also includes some system sales that we previously expected to recognize in 2018 as mentioned on our third quarter call.

In Ground Defense, sales growth is expected to be driven by higher sales on the Abrams tank and Bradley Fighting Vehicle platforms as we expect to benefit from the long-awaited monetization of these programs. In the Naval Defense, we expect sales growth to be led by the ramp-up on the CVN-80 aircraft carrier program and higher Virginia-class submarine revenues.

Moving onto the commercial markets. Commercial aerospace sales growth is projected to benefit from improved demand for actuation and sensors equipment and surface treatment services, primarily supporting narrow-body platforms. Included in this guidance is a $20 million offset from a combination of reduced revenues from previous FAA directives that continued to wind down and the delay in signing of a new supply agreement with Boeing. Otherwise, core OEM growth is expected to be 9%.

In Power Generation, we expect a modest increase in revenue growth on the AP 1000 program. As you will see in the updated revenue projection that will be discussed in a few minutes, we still expect 2019 to be the peak year on this program. Meanwhile, following sequential improvements in sales throughout 2018, domestic nuclear aftermarket sales are expected to continue to improve modestly in 2019, particularly for higher sales of valves, partially offset by lower international nuclear market -- aftermarket sales.

And finally, in the General Industrial market, industrial vehicle sales are expected to demonstrate low- to mid-single-digit growth, led by solid off-highway demand in the agricultural market. Please note that within the waterfall charts, we have shifted our subsea pump revenues from the industrial controls category into a newly named industrial pumps and valves category to better represent our sales in the energy markets.

In industrial pumps and valves, we are expecting mid-single-digit sales growth, principally led by higher sales of valves in the downstream oil and gas market and higher sales of pumps in the subsea market. Industrial control sales are expected to be down slightly

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timing of automotive contracts completed last year. And for our Surface Tech services business, which tends to be more economically sensitive, sales are expected to be essentially flat in 2019 due to global economic uncertainty.

And finally, in the appendix of our presentation, you will find detailed breakdowns of our full year 2018 sales by end market as well as our 2019 end market sales waterfall chart.

Our financial guidance for 2019 reflects solid sales growth across all 3 segments, while total Curtiss-Wright operating income is expected to grow 4% to 6%.

Operating margin is expected to range from 15.9% to 16%, reflecting a 10 to 20 basis point increase compared with 2018 adjusted results and includes increased R&D and other growth investments as noted on the slide.

Continuing with our outlook by segment. Starting with the Commercial/Industrial segment, we expect sales growth to be led by both our Commercial Aerospace and General Industrial end markets. We are projecting segment operating income to grow 6% to 9%, while operating margin is expected to increase 40 to 50 basis points to a range of 15.5% to 15.6%. Higher operating income will be driven by higher sales volume and the benefit of ongoing margin improvement initiatives, including restructuring actions taken in the fourth quarter of 2018.

Partially offsetting that improvement is $4 million for tariffs and a $3 million increase in R&D. Excluding these 2 items, segment operating margin guidance would have reflected a 100 to 110 basis point increase compared with 2018 results.

Next to the Defense segment. We expect sales growth to be led by improvements in the Aerospace and Ground Defense markets, partially offset by lower growth in the Naval Defense and General Industrial markets. We are projecting segment operating income to grow 0 to 2%, while operating margin is expected to decrease 50 to 60 basis points to a range of 22.6% to 22.7%.

This outlook primarily reflects unfavorable mix due to a higher percentage of lower-margin system sales as well as a $5 million increase in R&D to support our higher tech embedded computing products, which will continue to drive organic growth. Excluding the increased R&D investments, segment operating margin guidance would have reflected a 30 to 40 basis point increase compared to 2018 results.

And next to the Power segment, we expect sales growth to be led by higher revenues in the Naval Defense market. We are projecting segment operating income to grow 1% to 4%, primarily driven by the higher sales volume, while operating margin is expected to decline 50 to 60 basis points to a range of 16% to 16.1%. Partially offsetting that improvement will be $6 million for transition and the IT security costs related to the relocation of our DRG business as well as a $2 million increase in R&D. Excluding these investments, segment operating margin guidance would have reflected a 60 to 70 basis point increase compared with 2018 adjusted results.

Continuing with our 2019 financial outlook. We expect full year 2019 diluted EPS guidance to range from $6.80 to $6.95, up 7% to 9% over 2018 adjusted results. We expect our 2019 diluted earnings per share to follow a very similar cadence to our 2018 quarterly performance, where first quarter EPS should to be slightly above last year's first quarter followed by sequential quarterly improvement with the fourth quarter being our strongest as we have done historically.

Next to free cash flow. For 2019, we expect to generate north of $300 million of free cash flow for the fourth consecutive year, while capital expenditures are expected to rise to a range of $75 million to $85 million. The CapEx guidance includes a $20 million capital investment for new machinery and equipment for our DRG business, which Dave will discuss in more detail in a few minutes. Excluding this capital investment, we expect adjusted 2019 free cash flow to range from $320 million to $330 million, while adjusted free cash flow conversion is expected to be approximately 110%.

Next, we want to provide updates on the AP 1000 program revenue and free cash flow projections, which are reported in the Power segment. Beginning with the updated revenue forecast, you can see the initial projections from October 2016 in gray and the current forecast in blue. As a reminder, we expect to generate $448 million in total production revenue, covering 16 reactor coolant pumps at $28 million a piece. We continue to experience favorable cost performance and strong profitability on this program, generating a healthy 23%-plus operating margin. This new AP 1000 forecast not only reduces some of the year-to-year volatility, but it will also lead to a $30 million and the increased revenue and higher profit over the 2019 through 2021 period compared to our original projections.

Based on the current pace of production, revenue is still expected to peak in 2019, slightly up from 2018. And as we look ahead to 2020, the initially expected drop in revenue of approximately a $100 million, which has been at the forefront of investor concerns, has been significantly reduced by 70%.

We now expect to generate much higher AP 1000 production revenue in 2020 compared to our original production, with the more manageable drop of only $30 million from the 2019 peak.

As you can see in this next slide, we are confident that we will be able to cover this much more manageable gap in the AP 1000 revenue with increased defense revenues over the next few years based on the expectations for higher fighter jet, submarine and peak CVN-80 aircraft carrier revenues to name a few.

In summary, we expect to generate both higher revenue and operating income over the remaining years of this contract compared to our original projections.

Next, turning to our updated AP 1000 free cash flow forecast. Once again, you can see the initial projections in gray and the new forecast in blue. Our performance over the past few years has been better than expected led by strong execution and a higher profitability, along with the benefit of a lower corporate tax rate.

As a result, we now expect a much higher cumulative free cash flow total of $110 million, well above the prior expectations of $65 million and also much less of a drop off from the peak cash flow levels in this new forecast.

So to wrap up our remarks on the AP 1000, we continue to execute very well on this contract. We expect 2019 to be another year of strong profitability and free cash flow generation with the revenue gap in 2020 becoming much more manageable and less of an issue.

Looking ahead, despite the solid demand from China, India and other countries, I reiterate that we are not going to speculate on the specific timing of future AP 1000 RCP orders.

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

Thanks, Glenn. Next, an update on the integration of our DRG business, which is going quite well. We've continued to integrate DRG into our HR, Finance and ERP systems and are on track as planned. Given the sophisticated and critical nature of Curtiss-Wright's technology and intellectual property, we are investing $3 million in 2019 to support DRG's IT security infrastructure.

To continue to grow this business, we are investing the necessary capital and resources to position us to deliver long-term growth and margin expansion. Accordingly, we have broken ground on a new state-of-the-art naval facility in Charleston, South Carolina, which we expect to be operational in 2020.

This timing alliance with the conclusion of our 2-year supply agreement with Siemens. The new facility will enable us to optimize capabilities and improve our cost structure by establishing more efficient production processes. In addition, we are investing $20 million for new capital equipment that will provide long overdue upgrades to critical steam turbine machinery and equipment. This new location will also provide future cost-saving opportunities to our customers based on its proximity to deepwater ports in South Carolina.

Combining Curtiss-Wright's existing Naval Defense capabilities with DRG's mission-critical equipment and service centers yields a formidable force for our end customer. This capability enhancement, along with increasing Naval Defense budgets, signal a very bright outlook for Curtiss-Wright's Naval Defense business.

Next, an update on our capital allocation strategy. Since 2013, I'm proud to say that we've accomplished the following: returned nearly $850 million to shareholders through share repurchases and dividends, share count has been reduced by 8.7 million shares, we've completed 2 significant acquisitions for nearly $500 million and we spent $500 million on operational investments, including CapEx, voluntary pension contributions and debt prepayments. If you recall back in 2013, when we revealed our balanced capital allocation strategy, we implemented a self-imposed hiatus on acquisitions. We stated that we needed to improve our operating metrics in order to earn the right to acquire again.

Based upon our strong operational performance, as discussed in my opening remarks, we felt we earned the right to acquire again. So we reopened the door to acquisitions, which led us down a path to acquire TTC and DRG, both excellent additions.

As you can see on this slide, we are now amending our capital allocation strategy slightly. We will increase our focus on accelerating top line growth via 2 critical areas: internal growth investments and acquisitions.

We believe that it is now prudent to moderately increase our investments in CapEx and R&D as both remain critical to driving long-term organic growth. Regarding capital investments, the aforementioned $20 million investment in the DRG business is a perfect example of our commitment to driving improved operating efficiencies and long-term margin expansion.

We have included a $10 million increase in internal R&D spending in 2019. We've had considerable success with our R&D investments in recent years, leading to significant awards and long-term sustainable growth for Curtiss-Wright. I'll remind you that despite these growth investments, we're still projecting operating margin expansion in 2019.

We also intend to increase our allocation of capital to high-quality, profitable acquisitions that meet our strategic and financial criteria. And as I've often indicated, we're not looking to revert back to the days when we were a serial acquirer. We have a strong balance sheet of $500 million untapped revolving credit agreement with a $200 million of accordion and ample capacity to spend up to $1.5 billion in meaningful acquisitions.

In addition, we will continue to focus on returns to shareholders through steady buybacks and dividends. At a minimum, we will repurchase sufficient shares to cover annual dilution from stock compensation. Should acquisitions not materialize as expected, then we will consider additional share repurchase activity as we've done in the past few years.

The final topic I'd like to discuss today is our new targets covering the 3-year period ending in 2021. Having completed the previous 5-year cycle, we're ready to discuss the next phase of our evolution and the changes that are taking place to drive those efforts.

As you heard throughout our prepared remarks, we're shifting our focus to deliver more top line growth. We expect to accomplish this organically, aided by our growth investments and through acquisitions by utilizing our strong balance sheet. As a result, we are targeting 5% to 7% total sales CAGR, which is an acceleration of our prior long-term range of 3% to 5%. Of note, this sales growth target does not include any AP 1000 orders.

We also expect to be a leaner and much more efficient business by the end of 2021. We are targeting an operating margin of 17% and are committed to continuing to grow Curtiss-Wright for the long term. We remain focused on driving long-term profitability and remaining in the top quartile of our peer group. In addition, we are targeting double-digit adjusted diluted EPS growth. We concluded 2018 with $6.37 in adjusted diluted EPS and are confident that we can reach $8.50 by the end of 2021.

Regarding free cash flow, we expect to generate more than $1 billion in cumulative free cash flow in the next 3 years. We are raising our minimal annual free cash flow target base from $250 million to at least $300 million. The improved operational performance will help us reach this goal.

Combining organic and acquisitive growth with our leaner and much more efficient operating structure are constituents will further benefit from Curtiss-Wright's solid growth in earnings per share and free cash flow for years to come. In summary, we look forward to continuing to deliver on our long-term strategy in generating solid financial results for our stockholders.

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

(Operator Instructions) Our first question comes from the line of Peter Arment of Baird.

I guess, thanks for all the targets and the updated information on the China Direct. I guess, I just want to talk about the new long-term targets initially. When we think about just your sales outlook in the kind of the 17% adjusted margin target, is there any way to give us a little color how you think that plays out with the individual segments?

Well, Peter, I'll talk to the models we prepare. We prepared several scenarios to get to that. These targets have not broken down specifically by segment. But we've done several models with EBITDA assumptions exemptions at, say, 12x, one scenario we did. If we have did that we have to spend probably $210 million to $375 million on acquisitions over the next 3 years each year or between $600,000 and $1.1 billion in total over the 3-year period. We'd expect to utilize our revolver and again use to pay -- our strong cash flow to pay it down. From a debt to cap, we built from 36% down to 30% in that scenario over the 3-year period. So we feel we have plenty of room from a leverage standpoint to do what we need to do, but I don't really have that broken down by segment. Getting to our 17% margin does include our continued margin improvement initiatives that we, again, also hope us get to that 17%. But I'm sorry, we don't have it by margin -- by segment.

Okay. And then just as another follow-up. I guess specifically on the quarter, organic growth was down again in Defense and it was down again in Q3. And I think you're expecting -- I'm talking about specifically the Defense segment. Is it just -- do we just view this as timing associated with the projects that you're working on with the Naval business or maybe just some additional color there?

Yes. I mean, I talked to the person who heads up that business. I mean, we haven't lost any programs. It is -- a good portion of their business is book-to-bill. And you can try to predict when you think you're going to get the orders, but the customer controls that. So you've seen some shifts in 2019 and our Aero Defense is up in 2019 by 10%. So you are seeing that flow into 2019, but it is a timing issue.

Okay. And then just one last one. Just related to filling the revenue gap from China Direct, you mentioned that you're going to do it through increased Defense revenues. Just -- do you have a line of sight on those revenues? Or it's just based on what the projects that you have in Blackhawk or at least on the programs on record?

No, we have line of sight. I mean, it comes from our strategic plan. I mean, the CVN-80 peaks, I believe, in 2020. The JSF is going to continue. I mean, we have line as well with long-term defense programs that we have good line of sight on.

And our next question comes from the line of Michael Ciarmoli of SunTrust.

Glenn, maybe just a follow-up, just a clarity, I don't think I heard you in that first comment. How much M&A did you say would be needed to accomplish the 5% to 7% CAGR? Did you say $1 billion?

I said between $600,000 and $1.1 billion over the 3-year period.

Got it, got it. Okay. And just on that target, I mean, the margin getting up to 17%. Presumably, you said you don't have any more AP 1000 orders in there. You got -- not only you have that a little bit of a revenue gap which you guys have managed, but presumably you're going to have a down tick of some of those higher-margin revenues. So I know you didn't give us any color by segment, but can we sort of assume that maybe the profitability profile in power might have a little bit more pressure on it? And you kind of see maybe some margin expansion in the other 2 segments, just given that the AP 1000 at 23% sort of rolls off here. Is that a fair way to look at that?

That is absolutely a fair way to look at that.

Okay. And then just maybe a couple of housekeeping items. I think you mentioned in the prepared remarks a delay in your agreement with Boeing. Can you just elaborate on that? And if there's any potential margin pressure you might see as we sort to know what Boeing is trying to do with its suppliers? Maybe just give us a little more color there.

Yes, we go -- Mike, this is Dave. We go through this contract negotiation every 2 to 5 years. And we are basically in the same point that we've been at every several years. And it's been a little bit of a delay in the negotiations on it. And if anything it would mean an uptick in margins going forward. We've talked a lot in the past about the business that we have. The main stay of Curtiss-Wright is high IP proprietary-type business and products niche-oriented and so forth. And so we look with a similar of a jaundiced eye at some of the more, let's say, common cards that we might do like build a print and so forth. So that's part of the negotiations in -- like I said I think that going forward you'd see an uptick as a result of this kind of a delay and anything else that might be associated with it.

Okay. That's helpful. And then just back to the AP 1000, maybe just 2 items. I know you didn't include any potential future orders, but maybe Dave, can you give us sort of the state of the union on what the marketplace looks like? I know Saudi Arabia has launched a pretty broad infrastructure spending plan. And then, Glenn, just on the gap, you talked about backfilling that gap with Defense, but I'm just thinking about the overhead side. Will a lot of those potential revenues be able to flow through the Cheswick facility, where you have excess capacity there? It sounds like you should be able to utilize that capacity, but how should we think about that? And I'll jump back in the queue here, guys.

No, you're right. I mean, a good chunk of it is, obviously, on the Navy side is going to flow through Cheswick. And we've been modeling that for several years now as you know, and the gap should, obviously, become a lot more manageable as well. But yes, a good chunk of it will come through Cheswick. But you also are going to have the fighter jets and things that come from other parts of the business as well.

And let me get to Mike's other half and that is on relative to the state of the union on AP 1000. Beyond what we've said in prepared remarks, everything is going good. We got commercial operation in all those sites that's been declared so far, and the -- there's a lot of interest in Saudi Arabia. They've got several different countries basically quoting for their next iteration of power and where it's going to come from and certainly the AP 1000 is one of those. India is still very strong and that is still -- I'm looking at a couple years out at least. It's just going to take them a while, and we're still working on the indemnification stuff. And I believe that we will get over it, but that market is very big, India is. And then China remains the world's largest. We're still looking at a total of $4 billion market for the reactors coolant pumps. And I've said in the past if we got only half of those, we would be happy with that. But we went in and gave you the full statement here that we're not putting orders in for the next 3-year period. We're not forecasting that. And that's pretty much the staple of our diet here at Curtiss-Wright as you've grown to know us and that is underpromise and overdeliver. And if the order comes in, wonderful. If it doesn't, then okay we didn't plan on it and it's not that we're not planning on it, it's that we're just being...

Hold on, hold on. I'm on this call, Dad, hold on. Sorry, guys.

Yes, it's not that we are not intending for it to come in eventually. We're just being very conservative in our approach on this one. So the outlook still remains really strong for the nuclear side, especially in the commercial side.

(Operator Instructions) Our next question comes from the line of Myles Walton of UBS.

Dave, I was hoping you talk a bit about the pivot on the capital deployment and any constraints that you're putting on that pivot as it relates to ROIC or hurdles -- hurdle rates and how those are similar or different to what you had kind of over the last few years since you turned the spigot back on for M&A?

No, we actually haven't changed the ROIC targets, 10% year 3, 12% by year 5. And the hurdle rates, we're still looking at from a multiple -- we like the last 2 that we bought and I tell what we feel exceptionally good about those. They've -- one of them has been accretive from the get go. The other one with the changes that we're implementing and this new $20 million investment, that's going to bring them up to exactly where we expected them to be. So if you like the last 2, then you should love the next ones that we look for and hope to find. And so that's just really, again, the staple of our diet is more of the same and it's proven us right that we can do it. We earned the right to do. We're not going to throw away that right that we earned. So I expect it to keep going. We got from a little -- we're dwelling a little more specifically and what we're more interested in is from a targeting perspective, it's got to be proprietary, high barriers to entry. We love customer diversification, although I know it gives you guys some headaches in terms of trying to figure us out. But that diversification gives us a lot of anti-cyclical sort of problematic issues like recessions and stuff, solid operating margin, so it's not dilutive. And then in areas embedded computing, for example, the military side and some of the industrial side. So we like C4ISR. We're going to continue to focus there and a lot of opportunities. And then on the industrial on off-highway, we have this Own the Cab project that continues to grow and ramp up with a lot of interest from our customers, same industrial valves. We like those chemical water markets grade. We're just not interested in a pure play oil and gas. We'll avoid that as we've stated in the past. And then, I guess, you've got some sensors in there that we continue to look for, but that's once again very niche-oriented play. So we've got our feelers out there on a lot of opportunities and more to come, but we do expect that we will be able to achieve that.

And maybe I missed it, the 5% to 7% total sales CAGR, the implied organic, is it about half that or so? Is that what's kind of in line...

It's roughly 3% to 5%. And then, let's say, some acquisitive maybe in the range of 3-ish.

Okay, okay. Got it. And then just maybe one last one. When you look back at the target for sales since 2013, obviously, that didn't hit the mark. Was that -- and you turned up the dial on R&D here. I guess, it's a 30 basis point headwind or so for 2019. Would that have helped you do you think looking back to be turning up the dial on R&D? Did you know where to invest? And then is that what you think is going to kind of move you from what's been a 1% or 2% organic growth to 3% to 5% organic growth?

Yes, I think the turn up the dial probably 3 years ago on R&D is really a turning point. It's -- I'd say, a, because it's one of several that will move that organic side that we also started a significant focus on the organic side. Meaning, we -- as I just indicated on, for example, some of our Commercial Aerospace stuff, if it doesn't meet the criteria that we have built in for hurdle rates relative to margin so forth, then we're not going to pursue that. But when it -- so if we really drove a very specific approach to it. But then on the R&D side, I'll throw out a couple of things that we have worked on it, spent money on and with long-term values of -- they are anywhere between $3 million and $10 million that tilt sensors that we have developed. These are for primarily work platforms and our off-highway vehicles. And that's something -- that's somewhat associated with the Own the Cab. But there's an example, the next-generation flight test for the classic flight test and then now a more growing demand that we found in the last 3 years. And certainly, after we acquired TTC and then have been growing aircraft, it's for more of a permanent fit for flight test information and Big Data kind of stuff. And when you get a permanent fit, that for us that really is meat on the bone because flight test now it goes up in a plane and it's a bunch of planes, but it doesn't go up in all of the planes. So now with the next gen, with the permanent fit, well, that would go up in every plane. So there is an example of 1 plus 1 would equal 3 or 4. Trusted card, cyber security, anti-tamper technology, again, something that we started ramping up a few years ago. LEAP engine ramp on some of our services, businesses that's going to generate some nice incremental sales. That was a minimal R&D investment. But by doing some of our laser stuff and then some of our more automated sharpening activities, that's a bump for us. So what we look for in all of these R&D kinds of opportunities are areas where either we haven't been before or we're there and we can see an exponential leapfrog in -- and really play of a large portion of that 3% to 5% growth. And then the last one, we just announced, you saw that the other day was the Curtiss-Wright-Honeywell teaming on crash record technology. The Europeans are looking for a longer cycle of pinning and they're looking also for greater bandwidth and other information coming out of those with real-time data. And heretofore, that market has not had it and we're leaders in that arena. So that's why we teamed with Honeywell and we're spending R&D dollars there. So it's -- some things like that and I've got a whole list, I got 2 pages worth here. I'm not going to continue on with them, but those are the kinds of things, Myles, that you're going to see from us.

And our next question comes from the line of Nathan Jones of Stifel.

This is Adam Farley on for Nathan. Kind of shifting subjects, general industrial market sales growth was driven by a solid demand for industrial valves. So maybe can you give some color on that? Are you seeing any pickup in MRO spending? Is there any project spending downstream? And I think the 2019 guide, it's also called strength there. So any color there would be great.

Yes, it's both, projects and MRO, a little bit higher internationally than domestic. But it also includes subsea pump in that particular category, our new industrial pumps and valves category. But it's, again, both project and MRO, mostly -- or international is higher than domestic and includes subsea pumping being up as well.

That's helpful. And then just price costs and tariffs. You guys have managed pretty well there. Maybe some raw materials are coming down a bit, maybe just talk about price cost and then also in supply chain if there is any discrete items out there that we're not really thinking about, they're harder to source, maybe electronic components and something like that?

Yes, I mean, we continue to monitor that whole global tariff situation and have been addressing any cost issues with our supply chain, including alternative sourcing or raising our prices if necessary. So based on the tariffs and actually the data and what we have done, we had a $2 million net impact primarily in the fourth quarter of 2018 in the Commercial/Industrial segment. For 2019, we're expecting $4 million incremental impact to the Commercial/Industrial segment. The gross amount was originally $8 million, so we've been able to essentially mitigate 50% of the impact. Most of the -- waves 1 and 2 of the tariff mostly impacted our industrial valves in the C&I segment. And the third wave mostly impacted the electronic components and accessories for motorized vehicles. Again, also on the -- it's all on the Commercial/Industrial segment. From a cost standpoint, the only thing we've really experienced, I think we said it before and we're not hearing a preponderance of all our input costs are going up, but we have seen shortages in some of the electronic components that are in our defense -- these are like capacitors and things where just supply is just greater than -- way greater than demand. So that's caused a little bit of disruption and some increased cost to expedite parts and things like that. But other than that, we haven't really heard of a widespread cost increase in our inputs.

(Operator Instructions) Our next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch.

For year 2019 to 2021 target, what are you assuming for the AP 1000 in that 5% to 7% total sales CAGR? And what are you assuming in terms of deals in that number, in that $8.50 adjusted diluted EPS by the end of '21?

Yes, we are assuming no new orders on the AP 1000. It's just our AP 1000 order right now in the target. And we said for the inorganic growth, we got to spend between $600,000 and $1.1 billion for over the 3-year period to achieve our goals.

That's helpful. And on the Navy, we're starting to see some operational risks in the Navy supply chain. In the past few months, we've seen issues with missile tubes and even issues on the Virginia-class submarine, which has been in serial production for some time. It seems like experienced labor is pretty tight and maybe contributing to some of these issues. With your now higher Navy content with Dresser-Rand, how do you think about managing operating risk in your Navy business? And also, if there is a 2-carrier buy that is approved and funded, is there upsides to your Navy growth in 2019?

From the operational side, Kristine, we're not seeing any real hurdles in terms of manpower operationally to -- in Cheswick, at Bethlehem, in Wellsville and across the different Navy sites, New York, Long Island. We haven't found that to be a problem. And as a matter of fact, if anything we've probably got excess capacity in terms of labor and because we're becoming so efficient. So that has not been a hurdle for us. We demonstrated to the Navy on more than one occasion and in each of the sites that we're absolutely capable to handle what it is that they've given us and going forward. And then relative to the additional block by -- nothing in '19 -- it wouldn't benefit '19. It -- what it basically does from my perspective, Glenn might want to add to this, but what it basically does it gives you certainly long-term visibility of 10-year build cycle with the 5 and 5 for building a carrier. And so I would be delighted to have that happen. We think it probably gives some purchase size -- purchase pickup there on ppm, ppb for some parts, but that assumes that orders are all delivered down on at the same thing and which they're not yet. But in any case, it certainly cements a longer-term visibility profile for us which we love.

I mean, it's definitely going to be positive to us. We did see the Huntington Ingalls order back in January, which is a good sign, good start. But -- and then they even indicated, it should enable them to build -- these carriers to built every 3 to 4 years. So with our $380 million content, it is used to be over POC of 5 years. Obviously, if we move that up and layered on top of what we're doing now, it's going to be positive for us, but until we know the procurement pattern or the plan, we can't really tell. We don't have anything in our guidance for that either as well. So that would be upside to us whenever we get the information.

That's helpful. And switching gears on Power. When I look at the midpoint of your 2019 revenue outlook of $685 million and I look at your 2018 reported revenue of $648 million, that's a difference of $37 million. But if I take out your $9 million expected growth for AP 1000, that's only giving you $28 million revenue growth for the rest of the segment. I guess, I would have thought that, that should have been higher with the timing of Dresser-Rand since that closed mid-year last year. Is there anything that I'm missing?

No, no, I don't think so. It is -- the incremental sales, obviously, on CVN-80 and the Virginia subs are up. There's probably some offsets in there too that I'm not thinking of. But you also -- you do have another quarter of DRG in here as well. So I think, you got a little pieces. Yes.

And our next question is a follow-up from the line of Peter Arment of Baird.

Just a quick one in the exciting subject of pension, Glenn. Any kind of commentary that you can give us on updates on the pension or any contributions that you may have to make in your -- when you're thinking about your 2019 to 2021 targets?

Yes. No, no major changes in our assumptions, but we did make that voluntary pension contribution in the first quarter of last year, $50 million contribution. And since then, we don't project any further contributions for the next 4 years -- 5 years broadly, including last year. So no contributions on the horizon as of today.

And I'm not showing any further questions at this time. I would now like to turn the call back to David Adams, Chairman and Chief Executive Officer.

Thank you, everyone, for joining us today. We look forward to speaking with you, again, during our first quarter 2019 earnings call. Have a great day.

Bye-bye.

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.