U.S. Markets closed

Edited Transcript of CW earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q2 2019 Curtiss-Wright Corp Earnings Call

PARSIPPANY Aug 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Curtiss-Wright Corp earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David C. Adams

Curtiss-Wright Corporation - Chairman & CEO

* Glenn E. Tynan

Curtiss-Wright Corporation - VP & CFO

* James M. Ryan

Curtiss-Wright Corporation - Senior Director of IR

================================================================================

Conference Call Participants

================================================================================

* George James Godfrey

CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst

* Kristine Tan Liwag

BofA Merrill Lynch, Research Division - VP

* Matthew Steven Mooney

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Michael Frank Ciarmoli

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Myles Alexander Walton

UBS Investment Bank, Research Division - Research Analyst

* Peter J. Arment

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Jim Ryan, Senior Director of Investor Relations. You may begin.

--------------------------------------------------------------------------------

James M. Ryan, Curtiss-Wright Corporation - Senior Director of IR [2]

--------------------------------------------------------------------------------

Thank you, Joanna, and good morning, everyone. Welcome to Curtiss-Wright's Second Quarter 2019 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer.

Our call today is being webcast and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this 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 detailed those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results and guidance, including adjusted non-GAAP view that excludes first year purchase accounting costs associated with acquisitions for current and prior year period. In addition, they exclude onetime transition and IT security costs associated with the relocation of the DRG business in the Power segment.

Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. In addition, any references to organic growth exclude the effects of foreign currency translation, acquisitions and divestitures unless otherwise noted.

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

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thank you, Jim. Good morning, everyone. I'll begin with a few highlights of our second quarter results and full year 2019 outlook. Then I'll turn it over to Glenn to provide a more detailed review of our second quarter along with updates to our full year guidance. Finally, I'll return to wrap up our prepared remarks before we move to Q&A.

Building on the momentum generated in the first quarter, we delivered solid second quarter results and exceeded our expectations for profitability and earnings per share. Our performance was led by strong double-digit sales growth in our defense markets, fueled by 10% organic growth as we capitalize on Curtiss-Wright's strong presence on key military platforms.

Adjusted operating margin was 16.8% driven by solid operational performances in the Commercial/Industrial and Power segments as well as the benefits of our ongoing margin improvement initiatives. In addition, our second quarter results included a significant ramp-up in R&D investments to support future organic growth and the onetime gain that was originally expected in the third quarter.

Adjusted diluted EPS of $1.90 increased 6% compared with the prior year results and reflects the benefits of our ongoing share repurchase activity.

Regarding our full year 2019 adjusted guidance, we're maintaining our outlook for all key metrics, including sales, operating income, operating margin, diluted EPS and free cash flow.

Now I'd like to turn the call over to Glenn to provide a more thorough review of our second quarter performance and financial outlook for 2019. Glenn?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [4]

--------------------------------------------------------------------------------

Thank you, Dave, and good morning, everyone. I will begin with a review of our second quarter end-market sales. Overall, we experienced an 11% increase in sales to our defense markets while sales to our commercial markets were down 3% year-over-year.

There are a few items I would like to highlight on the slide. First in naval defense, the solid growth of 13% reflects increased Virginia-class submarine CVN-80 aircraft carrier, service center and spares revenues. This resulted in a strong first half performance for naval defense with year-to-year growth of 19%, 11% of which was organic.

In power generation, our performance reflects timing on the CAP1000 program as well as lower domestic aftermarket and surface treatment revenues. And finally, in the general industrial market, sales were down year-over-year primarily as a result of reduced sales of industrial controls due mainly to an automotive contract completed last year for autonomous vehicles that did not recur.

Next, I'll discuss the key drivers of our second quarter operating performance, which, as a reminder, is presented on an adjusted basis.

In the Commercial/Industrial segment, our results benefited from a onetime gain on the sale of a building, which was part of our ongoing margin improvement initiatives. The building sale, which we had originally expected to close in the third quarter, provided a $4 million benefit to current quarter results. Mainly offsetting that improvement was $1 million for tariffs and the $2 million increase in R&D.

In the Defense segment, adjusted operating income and margin reflects unfavorable mix for our defense electronics products, $2 million in higher R&D investments and a difficult comp to the prior year due to a $4 million favorable contract adjustment that did not recur. Excluding both the R&D investment in 2019 and contract adjustment in 2018, Defense segment margins would have been fairly similar year-over-year. And in the Power segment, our results were principally driven by favorable absorption on strong naval defense sales, which grew 24% year-over-year.

Moving on to our 2019 end-market sales guidance where we continue to expect sales growth in all of our end markets. We've made a few changes highlighted in blue on the slide to reallocate some revenues previously in the ground defense market to the aerospace defense market based on improved program visibility. As a result, we now expect aerospace defense sales growth of 9% to 11% and ground defense sales growth of 1% to 2%. The remainder of our end-market growth rates are unchanged, and we continue to expect overall Curtiss-Wright sales to grow between 4% and 6%. In the appendix of our presentation, you will find the 2019 end-market sales waterfall chart.

Continuing with our 2019 financial outlook where we are reaffirming our sales, operating income, operating margin and diluted EPS guidance. We expect adjusted operating income growth of 6% to 9% and adjusted operating margin growth of 40 to 50 basis points to a range of 16.2% to 16.3%.

In addition, I would like to share a few specific reminders about our segment guidance. Commercial/Industrial segment guidance includes a $4 million net impact from tariffs and a $3 million year-over-year increase in R&D.

Defense segment guidance includes a $5 million year-over-year increase in R&D. Excluding this R&D investment, Defense segment operating margin guidance would have reflected a 30 basis point increase compared with 2018 adjusted results. In Power segment, guidance includes a $2 million year-over-year increase in R&D.

Full year 2019 adjusted diluted earnings per share remains at a range of $7 to $7.15, up 10% to 12% over 2018 adjusted results.

And for your EPS modeling purposes, we anticipate the third quarter to be lower than the second quarter mostly due to the timing of the aforementioned building sale followed by a strong fourth quarter.

We are also maintaining our full year 2019 free cash flow guidance and remain on track for another strong performance where adjusted free cash flow is expected to range from $330 million to $340 million with an adjusted free cash flow conversion rate of approximately 110%.

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

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [5]

--------------------------------------------------------------------------------

Thank you, Glenn. At this point, I'd like to take a few minutes to address some external factors that have recently been on the mind of our investors, beginning with our commercial aerospace business. We're pleased to announce that we recently signed an extension to our long-term agreement with Boeing for our actuation equipment. As a result, we expect to receive orders for this business beginning in the third quarter.

Next turning to tariffs. Just to provide some clarification about the perceived impact of tariffs on our China AP1000 reactor coolant pumps. We have received all necessary export licenses to ship our RCPs to China, and as such, tariffs will not have any effect on this order. More broadly speaking on China tariffs, we continue to monitor the issue across our businesses and address cost increases with our supply chain council. As noted on our February conference call, we were able to mitigate approximately 50% of the expected tariff impact primarily through price increases. As a result, our full year guidance includes $4 million in tariffs in the Commercial/Industrial segment.

Finally, regarding the shutdown of the Sanmen 2 AP1000 plant in China. Consistent with our press release issued earlier this year, we're making good progress on the root cause analysis of our reactor coolant pump. We've continued to work very closely with our key customers, Westinghouse and the Chinese. As we do for any sizable and/or similar contracts, we maintain a multiyear warranty on these products. On the China AP1000 contract, our liability is limited to the cost to repair or replace damaged components.

Consistent with our previous communications and under the direction of our customers, we remain unable to provide any additional color on the matter until all parties have reviewed the root cause analysis results. As to timing, we expect to reach a conclusion in the second half of this year.

In summary, Curtiss-Wright is performing well, and we remain on track to deliver strong results in 2019. We expect to achieve sales growth across all end markets, led by strong increases in aerospace and naval defense, and generate 4% to 6% overall growth. Operating margin is expected to grow 40 to 50 basis points this year. This will be driven by higher sales and our ongoing margin improvement initiatives despite an additional $10 million in strategic R&D investments and a $4 million net impact from tariffs.

We remain on track to achieve double-digit growth in adjusted diluted EPS and our adjusted free cash flow remains strong with a conversion rate of approximately 110%. In addition, we have a strong and healthy balance sheet as exemplified by our Board of Directors' recent approval of a new $200 million share repurchase authorization.

Lastly, we expect 2019 to be another solid year of execution and strong financial performance. We will continue to deliver on our strategy and produce solid financial results, driving long-term value for our stockholders.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

--------------------------------------------------------------------------------

Dave and Glenn, nice quarter. Just -- so first maybe a clarification. On the Boeing LTA, can you describe at least how long that goes for?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [3]

--------------------------------------------------------------------------------

Yes. The agreement extends production of the 737 transmissions for us through the end of 2020. We expect orders to begin in Q3, revenues to ramp up in H2, mostly in Q4. And that is reflected in our guidance.

--------------------------------------------------------------------------------

Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

--------------------------------------------------------------------------------

Okay. That's helpful. And then just on ground defense, while it's only 4% of sales, I know that you had a nice quarter in terms of growth with Abrams this quarter, up 9% for the first 6 months of this year, but now your guidance is only for 1% to 2%. So you've got a pretty, I think, negative falloff here in the second half. What has really changed in terms of ground defense?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [5]

--------------------------------------------------------------------------------

Well, maybe I wasn't clear. Nothing's really changed other than we did get some reclass, I think we mentioned, into aerospace defense. And again, it's -- we get clarity on program -- visibility on programs may change. But nothing's really changed as far as I'm concerned with either Abrams or the Bradley, but we had some stuff in there that probably we reclass to aerospace defense. It's only a couple million dollars that made that change, by the way.

--------------------------------------------------------------------------------

Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

--------------------------------------------------------------------------------

Okay. And then just lastly, just on the -- maybe any updates on the DRG synergies and what you're seeing there regarding the CapEx spending profile.

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [7]

--------------------------------------------------------------------------------

Well, I'll talk to the CapEx, so Q2, we spent $4 million in incremental CapEx on the program. For the first half, it's about $9 million. We expect about $5 million to $6 million in each of Q3 and Q4 for a total of about $20 million. Do you want to talk about...

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [8]

--------------------------------------------------------------------------------

The integration is going well, Peter, and as expected, so no surprises there. We get postings weekly on how the building is going in Charleston. It's going fantastic. It's looking really great. It's going to be a fantastic place to put new equipment in and the employees that will build those products. So I think, from our perspective, everything is going as expected and very well.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question comes from the line of Michael Ciarmoli with SunTrust.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [10]

--------------------------------------------------------------------------------

Nice quarter. Glenn, bookings and backlog, can you just give us a little bit of clarity there? It looks like the order flow was a little bit weaker. And then I know you obviously held the end-market outlook across the board but even General Industrial. Maybe if you could give us some the real-time trends there, maybe what you're seeing from your customers changing order patterns. It sounds like you've got pretty good confidence and visibility there.

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [11]

--------------------------------------------------------------------------------

Yes. Let me talk to the orders, first. So when you look at Q2, obviously, year-over-year, the orders are down, but it's a difficult comp to the prior year. And this will happen from time to time. Q2 2018, orders were up 28%. It's mostly in the Power segment. We had over $120 million in Defense orders in that quarter. The book-to-bill was 1.47 in Defense, and Curtiss-Wright overall was 1.13. So -- however, if you look at year-to-date 2019, our orders are up 3%, our book-to-bill is 1.11, which is consistent with last year at 1.12. And as of the end of Q2, our backlog is up 10% from year-end.

As we said in Q1, where orders were up similarly to Q2 2018, we periodically receive large multiyear orders that provides good visibility and fills our backlog prior to the orders turning to shipments and billings. In the quarter the orders are received, book-to-bill is high, well north of 1. That was the first quarter of this year and the second quarter of last year. And subsequently lower as we ship and bill against the order, sometimes below 1. So the important thing is we expect to end the year modestly above 1x, very similar to 2018.

Now in terms of the General Industrial and specifically in the vehicles, we are holding our guidance. Vehicles -- you were asking specifically about the vehicle side. They -- modest increase, a couple of million dollars for the second half to hit their guidance. So it's not a big mountain to climb. So we're confident they're going to get there, and that's where we're holding our guidance.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

Got it. And anything you're seeing in the real short cycle metal treatment. I know you've got a lot of facilities in close proximity to your customers. Is that real short cycle business seeing any material changes one way or the other?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [13]

--------------------------------------------------------------------------------

Well, it's a mixed bag. So this quarter, they were down a little bit in the power generation market for industrial turbines and they were down a little bit in the general industrial due to automotive sales mostly in China, but they were up in both commercial aerospace and defense aerospace.

So pretty much it's kind of like a balancing, but we are keeping our eye on at least the general industrial market side because they are a bell weather. So -- and we're just going to keep our eye on it and see where that goes. But so far, they're holding the year up pretty well.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

Got it. And then last one for me, and I'll jump out of the way. You guys have done a pretty good job here recently with M&A with DRG and TCG. It sounds like as a result of the L3-Harris merger, they're going to be divesting some assets. I mean have you guys sort of looked at that portfolio or think there could be some opportunities for incremental additions that might tuck in nicely to your Defense business?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [15]

--------------------------------------------------------------------------------

Yes. We definitely look at those, Mike, and we've been in touch with them on several areas of interest. And that's routine thing for us. So we hope that something might come out of it for us. We'd be very interested in, like I said, particular ones.

I think just generally from the M&A side, our targets and the funnel that we have is looking great right now and surprisingly feel really good about all the opportunities. Now along with that and having said that, you know that the fallout rate during the targeting, search and the pursuit process, it might start big and then you just start culling them out because you just start finding some really nasty situations in some of these companies, too much inventory in order book and kind of strange things.

So that will peak and ebb and flow. But right now, it's looking really good for us. We've got some large wins that are out there. And by large, I'm talking over $100 million. We've got some in the sub-$100 million. So with any luck, some of these are going to be hit -- we'll hit pay dirt on them, and we'll be able to execute in hopefully sooner than later. But we continue our process of trying to find more DRGs, TCGs, TTC and TPCs like we have recently, and they've been doing very well for us. So yes, great outlook, I think.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Nathan Jones with Stifel.

--------------------------------------------------------------------------------

Matthew Steven Mooney, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [17]

--------------------------------------------------------------------------------

This is Matt Mooney on for Nathan Jones. Starting off with the Commercial/Industrial segment, revenue growth was solid at a 3% organic with 2% organic growth in the first half. It looks like the segment needs to see some sort of acceleration of organic growth to reach the 4% to 5% guidance range. How confident are you guys in reaching this growth target? And what's kind of the cadence of that during the second half?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [18]

--------------------------------------------------------------------------------

Yes. I'll talk to the second half in total. Yes, they definitely have a ramp in the second half. But the biggest chunk of it comes in commercial aerospace, and that's due to the Boeing extension we mentioned previously that ramps up in the second half and particularly the fourth quarter, and it's for the actuation equipment. The second one is naval defense, which are balance of the CVN-80. That's the next biggest one. Those orders are in backlog. So very confident. The next small -- they're getting smaller as they go, but those are the 2 big ones. In power gen, we have some increased valve sales that were -- we feel pretty good about. And in General Industrial, it's the smallest piece. We do expect some increase have to happen in the vehicles business, but it's fairly small. It's both on and off-highway, but it's fairly small. That's the kind of the sequence from top to bottom.

--------------------------------------------------------------------------------

Matthew Steven Mooney, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [19]

--------------------------------------------------------------------------------

Okay. Got it. And then jumping to Power. The build cycle on the CVN-80 progressing as anticipated. And when does revenue start to peak in that area? Is it 2020? 2019? Or what's that looking like there?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [20]

--------------------------------------------------------------------------------

I think we still think that the peak is in 2020 on the CVN-80 for us.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

Our next question comes from the line of George Godfrey with CL King.

--------------------------------------------------------------------------------

George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [22]

--------------------------------------------------------------------------------

Can you remind me what the content Curtiss-Wright has the on the Boeing 737?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [23]

--------------------------------------------------------------------------------

Approximately 190,000 per shipset.

--------------------------------------------------------------------------------

George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [24]

--------------------------------------------------------------------------------

Per shipset. And right now Boeing's had 42 planes produced per month. Are you still shipping at 52 planes, the shipset, for your content?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [25]

--------------------------------------------------------------------------------

We are. We are. And I know some of the comments made recently makes it a little fuzzy. We're going to continue to produce at 52 a month unless we hear otherwise directly from Boeing.

--------------------------------------------------------------------------------

George James Godfrey, CL King & Associates, Inc., Research Division - Senior VP & Senior Research Analyst [26]

--------------------------------------------------------------------------------

Well, Glenn, you're very intuitive. How does that communication work between Boeing and yourselves and your decision on what you produce? Can you -- does that come in at the executive level, mid-manager level? And how do those changes on where the production is going to go up or down? How does that communication level work?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [27]

--------------------------------------------------------------------------------

I'll talk to that. It's pretty much through -- and first of all, it's through a portal that we utilize, all the vendors use a portal into the Boeing's required delivery list, and they'll tell us, okay, we need these. I think it extends out maybe 90 to 120 days. And so that gives us some visibility of what's expected. And then we started out with the ramping process and they would advise us. I would say, it's through their supply chain level people, and they deal directly with each of our divisions that produce the products for them. It could be from a sensor to an actuator, any type of component like that. And so each of our divisions have access to the portals. And that's the way we receive our marching orders.

And then sometimes -- we certainly have a lot of dialogue with them, let's say, on a more than a weekly basis by phone and so forth. So just a lot of communications back and forth as they have with all their supplies.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

We have a follow-up question from Michael Ciarmoli with SunTrust.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [29]

--------------------------------------------------------------------------------

Just I wanted to follow on actually to that 737 topic. So it sounds like that, that Boeing contract that that's going to help with the ramp. I mean confidence level into -- if we see a decline here, just trying to figure maybe what probabilities you'd put around that scenario. I know you just said you're going to hold 52 a month. But I guess just trying to frame your -- kind of the probabilities you guys have put on sustaining that rate. And if there's any slippage, does that kind of stress your ability to hit that guidance?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [30]

--------------------------------------------------------------------------------

It probably depends. I'll speak to the overall and then -- and Glenn can talk more narrowly. You have the number there 190,000 and 52 is what we're running at. And they -- it depends on how many they've shipped, how many airplanes, and then what's in the queue with all the other suppliers. And I would think that, okay, they go down to 42, which is they are producing. But if they dropped us to 42, then -- that's not a substantial drop. And it just really -- in terms of probability, don't know. I don't have any kind of magical wand or anything that I look into and say, yes, this is 50% that or the other.

We do have a planning session -- strategy planning sessions on what happens if. And so we're all over the map on those with the entire enterprise, and we watch that very carefully, but hard to say. Glenn, do you have anything else?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [31]

--------------------------------------------------------------------------------

I wouldn't -- I don't have a wand either, so I wouldn't speculate. Based on the variety of commentary, the narrative they put out there, it's hard to tell what's going to happen. So we're just going to have to wait until they make up their mind. I wouldn't speculate.

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [32]

--------------------------------------------------------------------------------

I'll say one thing that they are saying, and we are -- we obviously see it and you do as well. Backlog for their platform is fantastic. The desire to keep that thing operational is there. And I feel strongly that they'll do that, they'll get this thing fixed. And that's Boeing. And unfortunately, these things do happen from time to time. So I think that it's a wonderful platform to be on, and we look to be there for a very long time as they do. So outlook is great. Is there a speed bump? Yes, probably, certainly for a lot of suppliers. How big of one? We don't know yet.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [33]

--------------------------------------------------------------------------------

Got it. Yes. But even if they cut, I guess, if it's another cut down -- cut you guys 15 a month fourth quarter, I mean it sounds like you've got that wiggle room in your guidance range. If it's only a $9 million to $10 million impact, it seems like it would be manageable and nothing catastrophic on your end?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [34]

--------------------------------------------------------------------------------

Agreed.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [35]

--------------------------------------------------------------------------------

Okay. Last question I had. You talked about the R&D spending for the year, I think, $5 million in Defense. Anything you're seeing -- I mean there's certainly a lot of modernization happening across the defense industry. I mean do you think it's going to be a trend that you've got to start stepping up your R&D to participate in some of these newer, next-gen modernization programs? I mean should we just kind of calibrate our expectations that more R&D might be the new norm in the defense sector?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [36]

--------------------------------------------------------------------------------

Well, especially in our Defense segment, that's where the big -- I'll just talk to the segment part. That's where the big increase was for this year, and it's $5 million of the $10 million that we said we were doing an increase on. And it is for latest technologies like anti-tamper, encryption, cybersecurity and whatnot. But they're the highest R&D business we have. It's pretty high. So this is incremental to what I believe was pretty high level of R&D to begin with. And if the circumstances warrant, I don't think we'd be afraid to continue to increase their R&D.

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [37]

--------------------------------------------------------------------------------

I'll add a little bit. I think that when you look at -- and Glenn mentioned the big ones right now, particularly out of that $5 million, anti-tamper encryption, cybersecurity, those are -- there are others that are in addition to that. And not necessarily looking at buying contracts. You get an opportunity and you buy in with some R&D spend, not looking at that as much as looking at working with the customers, which we're doing. And that's how we got into the interest level of the $5 million on those 3 areas in particular and others. There are others that go along with those 3.

But by working with the customers to ascertain what their architecture is like, what do they need on that platform and then addressing it with iterations of our product base, which then entices them to put that into their platform and bid that, they bid that to their end user of whatever service it is, and we benefit when they win. So that's the way we run this stuff.

And across the board, we've got the Power side, the Commercial/Industrial be it lower, but certainly along the same lines. And our folks take very strong measure internally with each of the business units in terms of what's that ROI, what are we gaining from this R&D. So we look at the payback. We'll even report that in this November's Board meeting. And we have a big Board meeting in November where we go through and talk specifically about what do we target and what's our hit rate and what's the payback on it. So a lot of eyes on it, a lot of focus. And like Glenn said, if it pays off more, then we'll put more in.

--------------------------------------------------------------------------------

Michael Frank Ciarmoli, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Got it. And then just housekeeping. I don't know if you have this handy, but you mentioned encryption anti-tampering. You've got some of your peers out there in the embedded computing world that trade at a very high multiple. Can you give us your total revenue exposure? I know you break out the defense market by sort of end-market categories. But what's your total embedded computing revenues run rate on an annual basis right now?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [39]

--------------------------------------------------------------------------------

I don't have that at my fingertips, Mike, sorry.

--------------------------------------------------------------------------------

Operator [40]

--------------------------------------------------------------------------------

Our next question comes from the line of Myles Walton with UBS.

--------------------------------------------------------------------------------

Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [41]

--------------------------------------------------------------------------------

I was actually going to follow up on Mike's question right there on the embedded computers market. I think in the past it was around a few hundred million. Is that [red box-wise] about the right size that you have in that area?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [42]

--------------------------------------------------------------------------------

It's more than a couple hundred million, I know that. I would guess it's north of $300 million, I would guess. That's my guess...

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [43]

--------------------------------------------------------------------------------

We're the biggest one out there...

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [44]

--------------------------------------------------------------------------------

We are the biggest one out there. I just don't have-- I'm speculating a little bit because I just -- I don't have that in my fingertips.

--------------------------------------------------------------------------------

Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [45]

--------------------------------------------------------------------------------

And then as it relates to the lower volumes you're seeing in that in the quarter, how much of that is a trend? Or is this just a comps issue? And also, is it fair to think that, that is one of your higher-margin pieces of the business?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [46]

--------------------------------------------------------------------------------

It is. It is. And it's only down a couple of million dollars. I mean I know the sales were flat in the quarter. But part of it -- TCG added to it and then the embedded was off a little bit. But they have a very strong second half. They got 70% of their second half sales in backlog. So you'd see quite a change around, and it's mostly in aerospace defense. So I'd call that a timing blip.

--------------------------------------------------------------------------------

Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [47]

--------------------------------------------------------------------------------

Okay. I mean that business has historically been seasonally back-end loaded. I guess was it more last year, for some reason there was a little bit more flow in the second quarter?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [48]

--------------------------------------------------------------------------------

Well, for instance, last year, just as example, another difficult comp. They had a contract adjustment on a naval contract that didn't recur this year, that $4 million. That $4 million was sales and OI. So that alone was -- made it a difficult comp. We would have been up a little bit with TCG if we didn't have that. But that's the only anomaly I can state right now.

--------------------------------------------------------------------------------

Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [49]

--------------------------------------------------------------------------------

Okay. And then, Dave, I know in the presentation you talked about -- you laid out the various external factors along the AP1000 still out there on Sanmen 2. What is -- kind of what kind of update do you expect? Do you expect them to have a full investigative report with conclusions and advice? Or like what's the level of visibility you think you'll gain over the next quarter?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [50]

--------------------------------------------------------------------------------

We will -- internally, between Westinghouse, the Chinese customer and ourselves, we'll have a very thoroughly documented paper, if you will, on cause and corrective action, root cause and failure analysis. And so that will be discussed, and parts of that are ongoing as we speak. As I said in the prepared remarks, we made a lot of progress there. And so we're headed in a direction, which I think everybody is comfortable with so far. And it remains to be seen until the last paper is filled out.

But that will be internal, and then we'll have some prepared remarks that likely will come out to The Street and tell you all what's going on with it. And it's -- like I said, it will be done by the second half of this year. I think it's sooner than later because, like I said, we're doing pretty well in terms of getting there. And so we'll have a lot of clarity within our own internal ranks. And we haven't yet put together anything for external exposure, but in that, of course, have to be agreed to with our customers.

So -- that's the way I see it progressing. Glenn, anything different?

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [51]

--------------------------------------------------------------------------------

No. No.

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [52]

--------------------------------------------------------------------------------

I've never been through one of these like this at this level. That's obviously garnered a lot of attention, as it should. And -- but like I said, we feel pretty good about where we're headed on it.

--------------------------------------------------------------------------------

Myles Alexander Walton, UBS Investment Bank, Research Division - Research Analyst [53]

--------------------------------------------------------------------------------

And just to remind me, the other installs of similar design, there's been no change to their operating procedures?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [54]

--------------------------------------------------------------------------------

No. I mean we understand that they've built a prototype on the, let's say, the Chinese version of the AP1000. And as far as the testing goes, I don't have any updates on it. As far as I know, it hasn't been qualified. But they're running tests. And we did that, too. So I mean that's good news for the program, I think, because it gives some viability certainly to the design, and everybody feels comfortable about that.

And we have -- well, right now, we have over 128,000 cumulative hours on the 3 plants that are in operation. And so that's all super, feeling great about that as well. And only the one plant is down. And so again, once we get this one figured out, then we can get that back to operational. But I think it's in the best interest of everybody to have a national side being able to supply these, be the Chinese direct and the externals because that would give more, in my mind anyway, would give more interest as a country in China to know that, okay, this is a great product. We can do this stuff. We'll split the orders between the 2 like they did on the last China orders with us. And the future of it is still there. And I feel good about the way the program is going. Certainly, the speed bump didn't help matters. If anything, it kind of slowed us down a little bit. But I mean from production standpoint, we're still moving along and I think we're in pretty good stead.

--------------------------------------------------------------------------------

Operator [55]

--------------------------------------------------------------------------------

Our next question comes from the line of Kristine Liwag with Bank of America.

--------------------------------------------------------------------------------

Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [56]

--------------------------------------------------------------------------------

So following up on the embedded computing line of questions. I mean it seems like there's a lot of excitement in that area. You've got a public player who is seeing -- outsourcing from large defense primes, and that company is seeing double-digit organic growth with acceleration through the year. So what I wanted to understand first is, are you benefiting from the same trend in the industry? And if not, how is your trend different? And then also as a follow-up on that would be, can you help me understand how your business would be different from other players in the market? Because I would have thought that if that trend were to be industry-wide, you should see a much higher growth in that embedded computing business?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [57]

--------------------------------------------------------------------------------

Generally -- I'll answer from a high level side. You look at the scale, first of all. And our growth in our size of business, again, it's certainly different scale than a growth in some of those other peers that are out there. And so I think that has some play in it. We are seeing great opportunities in this market and even better now with the visibility of going into the budgets cycle with the -- all the nuances of that, that it provides. I mean we see a tremendous amount of benefit not only in embedded computing, but from our big naval platform businesses like we have up in Pittsburgh and on the CVN equipment.

So I think that, overall, we're probably playing in somewhat of the same sandbox. Now they have a little bit more vertically integrated approach, our peers, let's say, and -- some of them. And so we might not necessarily participate at a component level that they might have seen some advanced growth in. And we might be of a few layers above that. And so maybe some of the disparities there.

But I would say reasonable to say that design win-wise, we're winning a lot of designs. Our peers are still -- they're participating on the same sandbox, as indicated, and winning new designs. Our acquisition strategy is obviously slightly different. So we're opening up different doors and window of opportunities than some others that are out there. And are our focus is not -- it's not divergent. I mean it's fairly close, but I think it's far enough separated that we would see a little bump where some others might not and vice versa. Glenn, I don't know if you have anything to add.

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [58]

--------------------------------------------------------------------------------

I would add, the embedded computing, it is probably -- it is the majority of our Defense segment. And the major markets that they participate in is in the aerospace defense, and our guidance for aerospace defense is 9% to 11%. And the other -- next piece is the navy defense, and our guide there is 8% to 10%. So we're in that double-digit range with that business to begin with.

If I were to tell you what I think is the biggest difference from my viewpoint is -- between the 2 is that our EBIT percentage is higher than their EBITDA percentage. That's a big difference to me.

--------------------------------------------------------------------------------

Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [59]

--------------------------------------------------------------------------------

That's helpful. And switching gears to the AP1000. When you look at the timing of revenue recognition for your China contract, I think next year is when you start seeing revenue drop off, and it happens for a few years. Can you discuss what you can do today to offset some of that volume, how you see that playing out and then also when you would expect a new China order to come through?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [60]

--------------------------------------------------------------------------------

Yes. We've looked at that for a number of years. We did make that move over to the right by rejiggering some of those costs in our revenue recognition. So that helped from the perspective of the view of the bathtub, and we certainly filled that in quite nicely. And then we've got now with the Block buys, the CVNs and the subs and all those stuff coming online, that's helping to fill in some of that void for us. And that's the way we run our business.

So we're still hoping that we'd get some orders here. And I've said -- over the last 2 years I've said and over the next few years. So we're still in that boat. Don't know when we'll get the next order. And certainly, the Sanmen issue has probably slowed things down from that perspective a little bit. But as I indicated to -- on the last discussion I had on it was the interest level is still extremely high there.

And so it's not gone and forgotten. It's coming around. It's just a matter of when. So I think you just fill in the bathtub with some of this defense work that we have. And that's looking better all the time, with new budgets and so forth. So that's my take on it.

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [61]

--------------------------------------------------------------------------------

Yes. I think we said it's only a $30 million gap in 2020, and I think we said back in February when we gave our revised graphs guidance that we intended to fill it with navy work. And if you go back, we've got -- again, to reiterate, we had over $120 million of defense orders back in the second quarter of last year and over $100 million of defense orders in the first quarter this year. And so that works in backlog. So we're pretty confident that we can overcome that gap.

--------------------------------------------------------------------------------

Kristine Tan Liwag, BofA Merrill Lynch, Research Division - VP [62]

--------------------------------------------------------------------------------

When you say when in terms of order, can you quantify or at least give a range, are you talking about maybe an order in a year, in 2 years? And then ultimately, if China's economy does indeed slow down and it's a multiyear slowdown and you don't get an order for another AP1000 for another 2, 3 years, what's the outlook for that business? Because, presumably, you'll be in a run rate for submarines already and for naval volume, but there wouldn't really be significantly higher volume than that. So what happens to that AP1000 business if you don't get an order in the next 2 years or something?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [63]

--------------------------------------------------------------------------------

Yes. On your first part of the question, what is the definition of when, I really wish I knew the definition of when. So I made the mistake a long time ago after -- when I came in here at this job, and you know how that went. We were talking about when the next order was coming. And I kept saying well soon. Soon turned out to be several years. So I'm not going to make that mistake again. But we anticipate it will come, the next order will. I'm not sure when.

And then we also have the Indian order that is still out there, Saudi Arabia and some others that are looking very anxiously at this as well. Anxious from the standpoint of they really like what they see. So that looks very positive for us longer term. And India has been a little bit longer term.

But I really wish I had an answer on the timing to give you all in terms of narrowing it down somewhat, but I can't, just don't have it. And I know it's effectively being marketed by Westinghouse, the AP1000 program at large. But then what happens to the business if we don't get anything here? That's a scenario planning kind of deal. I mean you look at it in many different ways. You say, okay, I'm going to fill it with defense work, I'll fill it with some other. In General Industrial, commercial aerospace looks good. It didn't hurt us at all to get that Boeing extension, that helps fill in some bathtub kind of work.

And then you look at acquiring companies like DRG and TCG and TTC and then others, getting up to little bit larger acquisitions to start filling some of that, and then you add your cost -- the cost reduction kind of initiatives that we've been extremely good at doing. We maintain margins. And so we've got a lot of what-if-scenario planning that is underway and has been underway for a while. Because when you get something that has that kind of concentration, albeit not at all insurmountable, then you do plan for that. We've got some of the offshoot kind of business that we have going with the Pittsburgh folks up there. Not only do they have the defense work that they have in plan, but the [side plan] with the pump, the subsea pumping. That is great. We have 2 good customers online on that. That would fill in a lot of the bathtub with work.

And that was started a couple of years ago. You've got some other things, small modular reactor. A lot of things come up there that start filling that in. List is too long to go through, but we feel fairly decent about what the future looks like for us. And I think for the next 5 to 10 years, Curtiss-Wright is going to thrive. We're going to continue to do great. And hopefully, the AP1000 is along for the ride. If not, then I think absent that, we're still going to do great.

--------------------------------------------------------------------------------

Glenn E. Tynan, Curtiss-Wright Corporation - VP & CFO [64]

--------------------------------------------------------------------------------

I would just add as a reminder that our new 3-year targets do not include any new orders on the AP1000 program.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

We have a follow-up question from the line of Peter Arment with Baird.

--------------------------------------------------------------------------------

Peter J. Arment, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [66]

--------------------------------------------------------------------------------

Dave, just following up to that. I was going to ask a question on -- you just kind of answered it a little bit about filling things in. But I guess thinking about -- you are pursuing a lot of M&A. But when you think about your buyback, $25 million year-to-date, it's below the pace of last year. But obviously, last year in the fourth quarter, you were very tactical and bought back quite a bit. So maybe just update your thoughts on how you're weighing the buyback versus some of the M&A opportunities that are in front of you?

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [67]

--------------------------------------------------------------------------------

So it's a great question and very timely because we've been talking about that. We go to our September Board meeting with that in mind, and we talk at length with our Board about the progress that we've made or otherwise. And so we will have that discussion. And just like we did last year and the year before and -- like I said before and I'm not bashful about saying, I really want to make that discussion more, but we've got some super targets we're going after. And we would rather buy a strategic opportunity at the right price, big caveat there, and grow the company to do exactly what I just said we were going to do over the next 5 to 10 years rather than share repurchase. But we don't shy away from share repurchase.

And I think relative to the cadence, we're still on for doing at least 50 million diluted to cover the dilution this year, and we'll do that every year. And then if we do not have something that is formidable or we don't have a path to achieve what we still consider a balanced approach then -- to our capital allocation strategy, then we will relook the purchase -- share repo. And I still think it's a good price, then we can certainly buy back without any hesitation and feel good about it.

So you heard about the $200 million authorization that the Board gave us, and we're still sitting on that. So opportunistically, I think we have many chances to do it. But great question and perfect timing for that.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

At this time, I'm showing no further questions. I will now like to turn the call back over to Dave Adams, Chairman and Chief Executive Officer, for closing remarks.

--------------------------------------------------------------------------------

David C. Adams, Curtiss-Wright Corporation - Chairman & CEO [69]

--------------------------------------------------------------------------------

Thanks very much. Thanks, everybody, for joining us today. We look forward to speaking with you again during our third quarter 2019 earnings call. Have a great day. So long.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

Ladies and gentlemen, that concludes today's call. Thank you for participating, you may now disconnect. Everyone, have a wonderful day.