Curtiss-Wright Corp (CW) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Curtiss-Wright Third Quarter 2020 Financial Results Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker, Mr. Jim Ryan, Senior Director, Investor Relations. Please go ahead, sir.

Thank you, Sheri, and good morning, everyone. Welcome to Curtiss-Wright's Third Quarter 2020 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Chris Farkas, 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 is available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this webcast 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.

As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth exclude the effects of restructuring, 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 today with highlights from our third quarter results. Chris will then provide a more detailed review of our third quarter financial performance as well as updates to full year guidance. Finally, I'll return to wrap up our prepared remarks with a discussion on several strategic topics, including restructuring plans within our commercial aerospace business, executing our balanced capital allocation strategy; and lastly, why we remain confident in the defense as we enter a period of budget and election uncertainty. After that, we'll move to Q&A.

I remain pleased by our team's agility as we continue to navigate through this challenging period and ensure that Curtiss-Wright is well positioned for the future. We've maintained a steadfast focus on keeping our employees safe by following CDC guidelines and all of our manufacturing sites remain operational today. The team has proactively addressed the demand conditions in our commercial markets while remaining keenly focused on executing our restructuring plans and austerity measures.

This includes our decision to reduce our footprint in commercial aerospace while more than filling that sales gap with the PacStar acquisition announced in late September. Later in my remarks, I will expand upon the benefits of this acquisition and how we are implementing our plans to enable future profitable growth.

Turning to our third quarter 2020 adjusted results, where we exceeded our operating margin and diluted EPS expectations for the quarter. Sales declined 7% compared with the prior year but were sequentially higher than our second quarter results. We continued to experience strong growth in our defense markets, which increased 11%.

Within our commercial markets, orders and quoting activity have steadily improved from the lows experienced in the second quarter, which provides optimism as we look ahead to 2021.

Adjusted operating income was down 7%, principally due to the reduced demand in our commercial markets. However, adjusted operating margin was flat at 17.4% despite a $45 million reduction in sales as we benefited from the savings generated by our ongoing cost containment and restructuring initiatives.

Adjusted diluted EPS of $1.85 exceeded our expectations, partially due to the timing of defense sales, while also reflecting the accelerated benefits of our restructuring actions.

Turning to our adjusted free cash flow. While we had a challenging third quarter following our second quarter sales trough, we are up 12% year-to-date. We remain on track for a strong finish in 2020, led by our intense focus on working capital.

Now I'd like to turn the call over to Chris to provide a more thorough review of our third quarter performance and outlook for 2020. Chris?

Thank you, Dave, and good morning, everyone. I'll begin with a review of our third quarter end market sales. Overall, we experienced an 11% increase in sales to our defense markets, while sales to our commercial markets declined 22% year-over-year.

Looking a bit deeper into our defense markets within aerospace defense, we had strong growth of 10% due to increased demand on fighter jet and UAV programs.

Next, in naval defense, we experienced solid revenue growth due to the timing of production on both the Virginia and Columbia class submarine programs. Within our DRG business, we benefited from increased OEM production as we ramped up in our New South Carolina facility.

Turning to the commercial markets. In commercial aerospace, as anticipated, we experienced reduced sales on all major OEM platforms due to customer-driven production slowdowns. And finally, in the power generation market, domestic aftermarket sales continue to be impacted by social distancing-related delays, leading to reduced maintenance activity, while lower international sales have largely been driven by project delays.

Next, I'll discuss the key drivers of our third quarter operating performance. In the Commercial/Industrial segment, our results reflect unfavorable absorption on lower sales, partially offset by the benefits of our 2020 restructuring actions. These efforts significantly reduced the segment's decremental margin to approximately 20% of sales.

In the Defense segment, adjusted operating income increased 11% on a 12% increase in sales, while adjusted operating margin decreased 40 basis points to 25%. The strong growth in operating income reflects higher defense revenues, including a solid contribution from the 901D acquisition. The slight reduction in operating margin principally reflects unfavorable mix due to a higher percentage of lower-margin system sales.

In the Power segment, adjusted operating margin increased 70 basis points to 17.7% as the benefits of our cost containment initiatives and 2020 restructuring actions more than offset unfavorable absorption on lower nuclear aftermarket revenues.

Overall, despite the top line headwinds in our commercial markets and unfavorable mix within the Defense segment, Curtiss-Wright maintained flat year-over-year margin on a $45 million of lower revenue.

Moving to our 2020 end market sales outlook. We've narrowed our overall guidance by raising the bottom end of our range. We now expect sales to decline 4% to 5% compared with our prior guidance of a 4% to 6% decline. In the defense markets, we now expect revenue growth of 11% to 13% overall. This is an increase of nearly 300 basis points or $35 million from our prior guidance.

In aerospace defense, our updated guidance reflects increased demand for actuation equipment on fighter jets as well as embedded computing equipment on various C4ISR programs. In naval defense, we've increased our outlook due to higher Virginia class submarine revenues and continue to expect strong sales growth on the CVN-80 and -81 aircraft carrier programs.

Moving to the commercial markets. In commercial aerospace, although we're expecting a modest sequential improvement in the fourth quarter, our overall pace of sales will be slower than expected, and we've reduced our outlook accordingly.

Next, in power generation, we're projecting a $20 million pushout of CAP1000 program revenues, principally due to pandemic-related delays, which has stretched out the customer schedule. As a result, 2020 CAP1000 revenues will be essentially flat with 2019. But on a positive note, as we wind down on the contract, next year's decline will be less than previously anticipated.

In general industrial, our guidance remains unchanged, and we continue to expect solid sequential growth of more than 10% in the fourth quarter.

Continuing with our adjusted financial guidance for 2020. Similar to our sales, we're raising the bottom end of our range for overall operating income, which is now expected to decline 5% to 7%. Operating margin of 16.1% to 16.3% is now expected to be down only 20 to 40 basis points compared to 2019 and reflects a 10 basis point increase from our prior guidance.

Although we remain on track to achieve $40 million in annualized savings from our restructuring initiatives, our updated 2020 guidance now reflects an acceleration of approximately $5 million in savings from 2021. As a result, we now expect $25 million in savings this year, followed by another $15 million next year.

Continuing with our outlook. In the Commercial/Industrial segment, we have increased the low end of the sales guidance range and also increased our operating income and margin guidance as we continue to mitigate the impact of reduced commercial sales. In the Defense segment, we expect higher growth in aerospace and naval defense to more than offset reduced commercial aerospace demand and now project sales to increase 10% to 12%.

Full year segment operating income is now projected to grow 14% to 16% while operating margin remains strong at 23.1% to 23.2%, reflecting an increase of 80 to 90 basis points compared with 2019.

In the Power segment, we've increased our overall profitability expectations due to continued strong naval defense sales and an acceleration of restructuring savings from 2021, which more than offsets the pushout of CAP1000 revenues.

Full year segment operating margin of 17.3% to 17.4%, represents a 20 basis point increase from our prior guide. And these margins are nearly in line with 2019 performance.

Next to our full year diluted EPS outlook, where we've narrowed the overall guidance and raised the bottom end of our range by $0.10. We now project diluted EPS of $6.70 to $6.85, which includes a strong contribution from restructuring savings in the fourth quarter.

Turning to our full year adjusted free cash flow outlook. We continue to project a very strong free cash flow level, ranging from $350 million to $380 million with an expected conversion rate of approximately 130%.

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

Thanks, Chris. Since 2013, we've discussed numerous initiatives in support of our relentless pursuit of top quartile performance. We've demonstrated an intense focus upon our cost structure and a continuous rationalization of our product and businesses' unit portfolios to drive derive margin improvement. We have been proactive in these pursuits and remain committed to achieving our most recent goal of 17% operating margin, albeit delayed slightly due to the impact of the pandemic.

More recently, we've been discussing the balance between sustaining profitable growth for Curtiss-Wright and satisfying customer needs. This included the acceleration of restructuring actions within commercial aerospace, particularly in light of the expected volume declines facing this industry over the next several years.

In yesterday's press release, we highlighted a strategic decision by our management team to discontinue a portion of our commercial aerospace actuation business at the end of 2020. These actions include restructuring our operations that support the Boeing 737 MAX program, including a reduction in our manufacturing footprint in Mexico.

To put a little color on the subject, our 737 actuation contracts with Boeing have seen continued margin erosion over the last decade. Prior to the last round of negotiations over our current contract, margins had slipped to a dilutive position to the overall enterprise. This was largely due to the build-to-print nature of the work.

If you recall, as we entered 2019, we experienced some delays in negotiations on our current contract. After several months of dialogue, we signed a contract at a substantially higher contract margin and established a benchmark with regard to the future profit expectations on this product line.

During 2020, pricing discussions continued with regard to future production against our strategic profitability interest. At the same time, and as you are aware, Boeing has been accumulating inventory, and we estimate that they have between 18 and 24 months of inventory based on our continued output of 52 ship sets per month. Rather than put ourselves in a difficult position with regard to under absorption for the next 2 years and except to significantly dilutive contract when production resumes, we have elected to exit this business.

Further, the removal of this build-to-print content helps to strengthen Curtiss-Wright's IP portfolio and aligns with our strategy to continue to perform at best-in-class financial levels amongst our peer group. For 2020, this business will represent approximately $70 million in sales and $0.30 in diluted EPS. We intend to adjust our financials to remove this product line from our Commercial/Industrial segment when we provide restated 2020 results and 2021 guidance in February.

Over the past few months, we have been very vocal about our plans to cover the potential sales gap. This has included driving continued growth in defense revenues as well as potentially pursuing growth via acquisition. Our recently announced acquisition of PacStar covers both of those bases and then some.

PacStar is a leading supplier of secure tactical communication solution for battlefield network management. Their proprietary software facilitates rapid deployment of assured communications in the battlefield. PacStar's rugged communications systems are similar to Curtiss-Wright's secure, cost-based processing, data management and communications technologies. This combination provides a unique opportunity to deliver best-in-class platform network integration and tactical data link network management to the warfighter. It is particularly timely as it supports the U.S. military modernization efforts in the war fighting theater.

Similar to our previous acquisitions, we are very excited about the strategic fit of this business. We paid approximately 12x next 12 months EBITDA, slightly above what we've historically paid, but in line with our stated willingness to pay slightly more for high IP or software businesses.

In 2020, PacStar is expected to generate more than $120 million in revenue and maintain its high single-digit pace of revenue growth for the foreseeable future. While we expect the deal to be dilutive to overall Curtiss-Wright operating margin in the first year of ownership, we believe this is an exceptional financial and strategic fit, providing strong top line growth within our most profitable business segment.

PacStar supports our long-term acquisition criteria and our financial objectives of top line growth, margin expansion and free cash flow generation. We expect this transaction to close in the near future and therefore are not including PacStar within our guidance at this time.

Our management team remains focused on accelerating top line growth through investments and acquisitions and is committed to providing a consistent return to shareholders.

The graphs on this slide display our capital allocation since 2013. Since that time, we have returned more than $1.1 billion to our shareholders through share repurchases and dividends. Also, despite the fact that we just announced the acquisition of PacStar, the largest transaction in the company's recent history, the Board and I are confident in our ability to drive strong free cash flow generation.

As a result, we are pleased to announce a $200 million increase in our total share repurchase authorization and our intent to buy back at least $50 million opportunistically in the fourth quarter. Our balance sheet remains strong with sufficient capacity and low leverage to support our healthy acquisition pipeline.

Finally, we'll maintain our focus on prudent operational investments, including increased R&D and capital investments to deliver improved organic growth.

Next, I'd like to spend a few minutes reviewing some of the strengths of our defense businesses and why we remain confident as we approach the November 3 election. Curtiss-Wright is a critical supplier to the defense industry with long-term visibility on key defense platforms.

For the past 20 years, U.S. defense budgets have grown at a 5% CAGR. A point that often gets overlooked is that Curtiss-Wright has a proven track record of growing at or above the base budget growth. In fact, we have outpaced the RDT&E growth regardless of who's been in office over the past 3 presidential terms and also through a period of reduced budget growth at sequestration.

Further, we have consistently demonstrated our ability to proactively align with the DoD's top investment priorities through a combination of organic growth and strategic acquisitions. The deal is expected to remain focused on these top investment priorities, whether or not the overall budget is flat or declining. As a result, we believe Curtiss-Wright will continue to benefit. Let me explain why.

As outlined on the left-hand side of the slide, we maintain a strong and stable outlook in naval defense. For the majority of our work, particularly for nuclear propulsion equipment, such as reactor coolant pumps and valves, we are the premier supplier of the content. We enjoy strong sole source positions on the 3 largest platforms, Ford-class aircraft carrier, Virginia-class submarine and Columbia-class submarine, which we expect to provide consistent revenue and free cash flow well beyond this decade.

Beyond the big 3 platforms, we have strong capabilities and numerous applications to support the Navy's desire to grow its non-nuclear platforms. As a result, we anticipate that our naval funding is fairly secure and should receive strong bipartisan support, particularly for the DoD's Indo-Pacific strategy.

Turning to the right-hand of the slide. We are a leading supplier of defense electronics equipment to the primes, while also generating industry-leading profitability in our embedded computing business. Overall, defense electronics represent approximately 80% of our Defense segment revenues, which, as a reminder, generates well north of 20% operating margin.

One of our key strengths within defense electronics is our extensive knowledge and position in secure COTS-embedded computing technology. Our investments in research and development are aligned with the highest DoD priorities such as encryption, cybersecurity and anti-tamper technologies that help secure the battlefield.

Together, our industry position and focused investments, ensure that we win strategic positions on numerous high priority programs. We also benefit from consistent industry outsourcing from the primes and DoD program managers, which tends to increase during periods of challenging budget environments. Overall, Curtiss-Wright is well positioned to deliver solid growth in our defense markets despite election and budgetary uncertainty.

As I wrap up our prepared remarks, I would like to emphasize that Curtiss-Wright is an agile and flexible business. We remain well positioned to weather this challenging environment, led by our diversified business mix, aggressive drive to improve profitability and our strong free cash flow generation.

We're benefiting from our stable positions in our defense markets, which are helping to offset some of the challenges in our commercial markets. We're driving solid execution in light of the current environment and are leveraging the benefits of our ongoing margin improvement initiatives.

As we've demonstrated today, we also maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth. In summary, we remain keenly focused on delivering long-term value for our shareholders. At this time, I'd like to open up today's conference call for questions.

(Operator Instructions) Our first question comes from Peter Arment with Baird.

Chris, hey, just a clarification, Chris. I guess when you mentioned the -- on power gen, the push out of the AP1000 revenues, do you recapture all of that in 2021?

Yes. We haven't really -- we need to do a little bit more sharpening in the pencil on that. Right now, it was $20 million of push out. We are still expecting a steep sequential ramp revenues between Q3 and Q4, but we expect '20 to be essentially flat year-over-year with 2019 levels, approximately $70 million. And we'll have $80 million of remaining revenues in 2021 and beyond. But we'll provide more guidance on 2021 as we get into February and providing next year's guidance.

And then just maybe just a little more color on the aftermarket sales within Power. How should we expect that to kind of trend? I get the impact that we've had from facility closures, things of that nature. What are you seeing there?

Yes. So in Q3, we had -- the domestic aftermarket was slightly down due to the pandemic-related delays. We are expecting a strong sequential ramp on the domestic side in Q4 versus Q3. For the full year, domestic would be flat to slightly down versus the prior year. And international aftermarket business, which is mainly composed of large projects, will take a little bit longer to recover. So not a lot has changed, few delays are in Q3, but most of that moving out into Q4.

Okay. And just last, if I could squeeze one more. And just, Dave, you mentioned -- thanks for all the color on defense and how you're positioned. While ground defense is not really a huge contributor, it has been negative in terms of growth for this year. How are you thinking about how that's positioned going forward? Is that still going to be a drag when we compare to the overall defense business?

No, I think ground defense will pick up with the modernization outlook. There is still a strong need for that. Also, you'll see PacStar coming into play next year. And that really is more -- it's an Army services side. So it will be right there with the ground defense side. So I think with the synergies that we'll derive from our acquisition of PacStar and then some of the anticipated monetization that we'll start picking that up a little bit.

As you are aware, the -- our international ground business is fairly lumpy. It comes in big and it lasts for a year or 2, and then it drops for a little bit, it comes back again. So that remains sort of the same position. And when it does come back, like I said, it's usually pretty good. And we do have a lot of activity over there, but nothing that we can see that's huge on the horizon. But I think that ground defense will start picking up somewhat.

Our next question will come from Myles Walton with UBS.

You can offer a by segment, maybe the orders in backlog, just so we get a sense of within your different end markets. How does the orders come in and how do you expect them to sort of finish the year? And maybe in particular, the shorter cycle businesses as well?

Yes. So I'll start at the top level. Myles, for Q3, we had a 1x book-to-bill. We showed some strength in defense at 1.1x, and we were about 0.8% in commercial. The backlog is up 1% year-over-year for Curtiss-Wright. And I think it's important to note that defense backlog is up 10% year-to-date. So as we look to closing out the year and where we're headed for this next year, we're in a very strong position.

If we break it down by segment. Within CI, we had about a 0.9 book-to-bill for the quarter; within Defense, we were at about 0.9; and within Power, we were at about 1.2. So I think overall, roughly 1 and the strength came out of our defense markets.

And what about some of the commercial, industrial -- I know I'm slicing a little bit deeper, but obviously, that's been a tougher one for you guys to put a finger on in terms of where that might trend. Basically, I'm just kind of curious if the orders there have stabilized and you're seeing more of a recovery in your general industrial markets.

Yes. Q2, as you know, is a pretty rough quarter for us. But overall, at the CW level, we increased in our commercial orders by about 13% in Q3, and we're expecting a steeper sequential improvement in Q4.

We've had some modest improvements in aerospace here in Q3 and continuing into October. Some signs of positivity within valves, and we're continuing to kind of watch that closely, but a faster recovery in vehicle orders. We're seeing some good signs here with the improvements in -- on highway, Class 8, and that aligns ACT research. So I think we're seeing some signs of optimism here. Too early really to comment on 2021 at this point. But things are picking up.

Okay. And Dave, I know you said that the 17%, it slid out a little bit. Is it fair at this point to say you can hit it in '22, given what you see and given the cost moves you've made and the decision not to re-up the actuation contract and acquiring this new acquisition, which seems at least as good, if not accretive to margins, maybe in that year?

Yes. Myles, I think that we were sorely disappointed that we weren't going to hit it this year, and then we said that we'd hit it in '21 a couple of years ago. And from what I can see trajectory-wise with how we've been performing and we did it, obviously, in Q3 and then over the next several quarters, we've got the wherewithal to march our way towards 17%.

I would hope that it's before '22 and I would feel optimistic that we could possibly do that. We haven't put a time line on it, but we always -- I mean like you know us well, we under promised and over delivered. And we're going to continue, like I said in my narrative, that relentless pursuit of that margin. And so that story remains in the forefront.

You're absolutely right, PacStar is going to be a fantastic acquisition for us. And especially as we start to derive those synergies we talked about and as we replace that business that we're putting aside with the actuation products, and so we think it's an absolutely phenomenal swap given the IP-related aspect of it, probably the most important. And so all things being said, I'm very optimistic about the answer to your question.

Our next question will come from Nathan Jones with Stifel.

This is Matt on for Nathan Jones this morning. Quick question regarding orders on the defense side. You cited I think in the press release, embedded computing and valve products were more than offset by reduced demand across commercial markets. But last quarter, I think you guys noted that naval defense orders offset the reduced demand in commercial markets. Can you give kind of a little color on what led to the lower defense orders in the quarter? Was it timing related?

Yes. Our defense orders are a little bit lumpy. I think if you go back to 2019, as an example, our biggest quarter was in Q1. This year, it just so happens to be that, that was in Q2. We issued a press release back in July that we had signed $220 million in new naval multiyear defense orders and about $170 million of that fell into Q2.

And so as we look at where we are year-over-year -- year-to-date, I mean, defense orders are up, I think, 3% to 4%. So we're on a strong trajectory. As I said earlier, our defense backlog is up 10% year-to-date. And it's really more about timing than anything else.

Got it. And then how should we think about kind of orders and order rates going into 2021, if you're willing to provide any color there?

Yes. So I mean, as I mentioned to Myles, I mean, we are seeing orders pick up across the board, faster recovery in vehicle orders. Valves, we're kind of watching carefully. Aerospace, slow but steady. Without being specific, just kind of diving down into general industrial because commercial aero is going to be a long road to recovery.

The ACT Research is indicating a strong recovery in on-highway and Class 8, while we think off-highway and ag and construction will see more of a modest recovery. Valve, slowly rebounding, too early to tell. Industrial controls, we expect to see some improvement there as conditions improve in industrial manufacturing. And we do have some optimism with surface tech as we're expecting U.S. and global GDP rates to grow about 4% next year.

So I think from a GI standpoint, I think things are looking positive. And with our position here in defense and where our backlog is at this point in time of the year heading into next year, I think we're pretty well positioned.

And our next question will come from Michael Ciarmoli with Truist.

Maybe, Dave, just maybe a bigger picture portfolio kind of shaping question. You've obviously exited the MAX built-to-print. Just given where aero is, you're probably looking at maybe $250 million or so. Do you think about potentially exiting more of the commercial aerospace? Or are you comfortable with the remaining content and the profit profile of the different product lines you have?

Yes. We feel pretty good about it, Mike. I think that once we do exit this and we rightsize our facilities and our operations that are all associated with the commercial aerospace -- and by the way, I'll just toss in there, relative to the rightsizing, we are able to migrate some defense folks on -- that were on the commercial side now back on to defense. So as we win that -- those particular areas off of the commercial side, we can backfill with some of the defense side work that we have. So that gives us something positive, gives us a lot of absorption opportunities.

And so I think as we rightsize, restructure and do our consolidations, which we do every year and this year is no exception, then we will be in a position that the remnant of that business of the aerospace side, like you've talked about a couple of hundred million, will contribute to the overall margin, the targets that we've set forth, and they're good.

I mean they're good products, and it's not that the product that, that we just -- that we're exiting is not good. It's been a great business for us. It's just a remnant of past that was filled with build-to-print type work. And intellectual property is really where it's at for us. And so I think going forward, we're going to be in pretty good shape.

In terms of adding to that space, I don't really see it -- I always had the opinion -- well, at least in the 7 years I've been CEO, that the pricing of any properties within that space has been pretty high. And now COVID raised its ugly head and the MAX had its own issues, that sort of put a damper on things, as you're well aware, and we focused in other areas.

But let's say, we'll have a very small piece in our business, our portfolio associated with commercial aerospace. The strength lies in the defense side and then the balance of our niche orientation in our other product areas. So I think we're not going to go out and actively search for acquisition opportunities, put it that way.

Got it. And then just on defense. Maybe to play devil's advocate a bit on PacStar. I mean you paid 12x. Just trying to get your comfort level there. I know you've talked -- you mentioned a couple of times on modernization, they are more tactically exposed, there is more ground exposure there. It seems like the Army doesn't really have a seat at the table and the future conflicts with China and Russia.

How confident are you in the visibility at PacStar if some of these potential programs get delayed or curtailed? Did that go into the thinking there? I mean you kind of said you paid a 12x forward multiple, which was a bit higher. But as you're sort of trying to calibrate the risk there, how do you get comfortable with PacStar?

Yes. As we alluded to it in our discussion, the narrative we had going earlier on, we did spend a considerable amount of time internally and externally reviewing this through consultancies, think tanks and so forth to see really how PacStar is positioned for the future. And also while at the same time, how are our other technologies and products built up for the future? What would they withstand? And we really looked at the high priority, Army investment areas. And we look for the top 6 priorities and specifically in the Army side.

And you're right, typically, traditionally Army doesn't get really the best seat in the table. If anything, they're back against the wall. But in this -- in the characterization that I talked about it with the war fighting theater, this, in particular, PacStar participates in network modernization, which is among the Army's top 6 priorities, and it's well among those. So it's like in the middle of the top 6. And it's the -- the DoD modernization strategy is really driving the creation of a more expeditionary mobile force structure, which is independent of the size of the force.

So while the Army usually gets hit with personnel cutback, this is not tied to the actual soldier out in the field. It's more tied to the infrastructure. And that's where PacStar is really a shining light in that. By every account, the people we've talked to on the Army side and other think tank areas, the battlefield network operations are -- and the inter-platform connectivity has been a fantastic area of potential growth. And PacStar just has a commanding hold on it in terms of IP-related tactical networks.

And so now, we add that to TCG, we add it to some of the other products that we provide on the embedded computing side, and we look at it really to be a 1 plus 1. We think it's going to be more than 2. So I hear what you're saying, and we vetted that in so many different ways, I can't even over explain that.

So the priority areas that we looked at, the operating and the GPS-denied environments where we are; the hypersonics, flight test equipment, where we're active; the security side and this is commercial systems for classified areas, we're heavy in that; open systems for government industry-led compliant products, we're very heavy on that; and lastly, the defense acquisition policy regarding other transactional authority. We've researched that tremendously to make certain that we're going to be situated in a good spot. So those are all the reasons we feel pretty secure.

Ladies and gentlemen, that concludes today's question-and-answer session. I would now like to turn the call back over to Chairman and CEO, Mr. Dave Adams, for any further remarks.

Thanks, everybody, for joining us today. We look forward to speaking to you again during our fourth quarter 2020 earnings call. Have a great day. Stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.