Q3 2020 Curtiss-Wright Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Curtiss Wright third quarter 2020 financial results Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero 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 Shirley 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 Spark is 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.
It's available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright Dot 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.
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 of the Companys results include an adjusted non-GAAP you exclude certain costs in order to provide greater transparency into current spreads 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 excludes the effects of restructuring foreign currency translation acquisitions and divestitures unless otherwise noted.
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 defense as we enter a period of budget and election uncertainty.
After that we'll move to Q1 <unk>.
I remain pleased by our team's agility as we continue to navigate through this challenging period and ensure the 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 address the demand conditions and our commercial markets, while remaining keenly focused on executing our restructuring plans and austerity measures.
This includes our decision to reduce our footprint and commercial aerospace while more than filling the sales gap with the Texstar 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 improve 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 restrict.
Shrink 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 new HIV programs.
Next enabled 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 reduce the segment's decremental margin to approximately 20% of sales.
In the defense segment, adjusted operating income increased 11% and 12% increase in sales, while adjusted operating margin decreased 40 basis points to 25% Mr.
The strong growth in operating income reflects higher defense revenues, including a solid contribution from the nine one d. 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% the benefits of our cost containment initiatives in 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 were $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 C is our 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 and commercial aerospace, although we are 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 are projecting a $20 million push out of cap 1000 program revenues, principally due to pandemic related delays, which has stretched out the customer schedule.
As a result, 2020 cap 1000 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 are raising the bottom end of our range for overall operating income, which is now expected to decline 5% to 7%.
Operating margin was 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 enabled the sense to more than offset reduced commercial aerospace demand and now project sales to increased 10% to 12%.
Full year segment operating income is now projected to grow 14% to 16% while operating margin remained strong at 23.1% to 23.2%, reflecting an increase of 80 to 90 basis points compared with 2019.
And 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 push out of cap 1000 revenues.
Full year segment operating margin of 17.3% to 17.4% represents a 20 basis point increase from our prior guidance 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 10 cents. We now project diluted EPS of $6 to 70 cents 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.
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 the growth 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 have 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 there.
Next several years.
In yesterday's press release, we highlighted the 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 manufacture.
During 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. So 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 track 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 contended 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.
Upsets per month, rather than put ourselves in a difficult position with regard to under absorption for the next two 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 30 cents and 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 pack start covers both of those bases and then some.
Baxter is a leading supplier of secure tactical communications solution for battlefield network Mamet management.
Their proprietary software facilitates rapid deployment of assured communications in the battlefield.
Nexstars rugged communications system are similar to Curtiss Wright's secure Cox 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 war fighter theaters, particularly timely as it supports the US military modernization efforts in the war fighting theater.
Similar to our previous acquisitions, we're very excited about the strategic fit of this business. We paid approximately 12 times. The 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, Texstar 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 topline growth within our most profitable business segment.
Texstar supports our long term acquisition criteria and our financial objectives of topline growth margin expansion and free cash flow generation we.
We expect this transaction that closed in the near future and therefore are not include impacts start within our guidance at this time.
Our management team remains focused on accelerating topline 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.
Dollars to our shareholders through share repurchases and dividends also despite the fact that we just announced the acquisition of tax start 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 dollar increase in our total share repurchase authorization and our intent to buyback 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.
For.
Finally, we will 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 3rd election.
Curtiss Wright as a critical supplier to the defense industry with long term visibility on key defense platforms for the past 20 years us 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 R&D any growth regardless of who has been in office over the past three 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 deities top investment priorities through a combination of organic growth and strategic acquisitions. The DRD is expected to remain focused on these top investment priorities, whether or not the overall budget is flat or declining as a risk.
Well, 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 enabled defense for the majority of our work, particularly for nuclear power 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 three largest play.
Forms 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 three platforms, we have strong capabilities and numerous applications to support the Navy's desire to grow it's non nuclear platforms. As a result, we anticipate that our available funding is fairly secure and should receive strong bipartisan support, particularly for the D. odious Endo Pacific strategy.
Turning to the right highlights 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 of position and secure cots embedded computing technology.
Our investments in research and development are aligned with the highest density priorities such as encryption cyber security 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 deal with the 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 uncertainties.
As I wrap up our prepared remarks, I would like to emphasize that Curtiss Wright is an agile 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 are benefiting from our stable positions on our defense markets, which are helping to offset some of the challenges and our commercial markets. We are 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 maintained 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.
Of course as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound. Please stand by while we compile the Q and a roster.
Our first question comes from Peter Arment with Baird. Please go ahead.
Chris.
Good morning could you clarify clarification, Chris I guess, when you mentioned the on power Gen. The push out of the 1000 revenues do you recapture all of that in 2021.
Yeah, we haven't we haven't really.
We need to do a little bit more sharpening the pencil on that right now.
It's $20 million or push out.
We are still expecting a steep sequential ramp revenues in between Q3 and Q4, but we expect 20 to be essentially flat year over year with 2019 levels approximately $70 million and will have $80 million remaining revenues.
In 2021 and beyond but we'll provide more guidance on 2021, as we get into into February and providing expense 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 and so I get the.
Impact that we've had from facility closures things of that nature, what 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 and Q4 versus Q3 and for the full year domestic wood.
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 not a lot of change few few delays here in Q3, but most of that moving on into Q4.
Okay, and just slow if I could squeeze one more in 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 say ground defense will pick up with the modernization outlook. There is still a strong need for that also you will see pack start 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 will derive from.
Our acquisition of packs Star and then some of the anticipated monetization that will 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 two and then it drops for a little bit as it comes back again, so yes that that remains a sort of the same position and when it does come back like I said, it's usually pretty good.
We do have a lot of activity over there, but nothing that we can see that huge on the horizon, but I think the ground defense will start picking up somewhat.
Appreciate the detail thanks.
Thank you. Our next question will come from Myles Walton with EPS. Please go ahead.
Thanks, Good morning.
What im asking.
You can offer offer up by segment may be the orders and backlog just so you get a sense of within within your different end markets.
How do you expect them to sort of finish the year and maybe in particular the shorter cycle the.
The shorter cycle businesses as well.
Yes, so started at the top level miles for Q3, we had a a one times book to Bill.
We showed some strength in defense at 1.1 times and we are 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 CDAI, We had about a 0.9 book to bill for the quarter within defense.
We were at about <unk> 0.9, and within power we were at about 1.2 so okay.
I think over overall, roughly one and the strength came out of our defense markets.
What about some of the commercial industrial I know.
Placing a little bit deeper, but obviously that's been a tougher one for you guys to to put a finger on in terms of.
Where that might trend on basically.
Kind of curious if the orders there have stabilized and you're seeing.
More recovery in your general industrial markets.
Q2 is you know is a pretty rough quarter for us.
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.
Yes, 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 at a faster recovery and vehicle orders and we're seeing some good signs here with.
Improvements.
In on highway class eight.
And not aligned Stacy.
Research. So I think we're seeing some signs of optimism here and too early really to comment on 2021 at this point, but.
Things are picking up okay.
Okay, and Dave I know, you said that the 17% it slid out a little bit is it is it fair to at this point to say you can hit it in 22 given.
Given what you see and given the cost moves you've made the decision not to re up.
Racing contract and acquiring.
This new acquisition it seems at least as good if not accretive to margins maybe not yet.
Yes, Myles I think that we were sorely disappointed that we were going to hit it. This year and then we said that we would hit in 21, a couple of years ago.
And from what I can see trajectory wise with how we've been performing and how we did it obviously in Q3 and then over the next several quarters. We've got the wherewithal to to March our way towards 17, I would hope that its before 22.
And I would feel optimistic that we could possibly do that we havent put a timeline on it but we we always somebody like you know us well, we under promise and over deliver and we're going to continue like I said in my narrative that relentless pursuit of that margin add so let's story remains in the forefront.
You are absolutely right pack starz going to be a fantastic acquisition for us and especially as we start to derive those synergies, we talked about and and as we replace that business that we are putting aside with the actuation products and so we think its a.
Absolutely phenomenal swap given the IP related aspect of it but probably the most important and so all things all things being said.
I'm very optimistic about the answer to your question.
All right fair enough I'll leave it there thanks.
Thank you. Our next question will come from Nathan Jones with Stifel. Please go ahead.
Hi, This is Matt on for Nathan Jones This morning.
Hi, good morning.
Good morning.
Quick question regarding.
Orders on the defense side, you cited I think in the press release embedded computing and valve products.
More more were more than offset by reduced demand across commercial markets, but last.
Last quarter I think you guys noted that naval defense orders offset the reduced demand in commercial markets can you give.
A little color on what led to the lower defense orders in the quarter was it timing related.
Yes.
Our was 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.
Yes. 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 multi.
Multiyear defense orders and about $170 million of that fell into.
Q2 so.
As we look at where we are.
Year over year year to date immune defense orders are up I think 3% to 4%.
So we're on a strong trajectory as I said earlier and 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, it is as I mentioned to miles I mean, we are seeing orders pick up.
Across the board faster recovery in and vehicle orders.
The sales were kind of watching carefully aerospace a slow but steady.
Without being specific he had just kind of diving down into general industrial because commercial aero is going to be a long road to recovery.
The HCT research and is indicating a strong recovery in non highway in class eight while we think off highway in AG and construction, we'll see more of a modest recovery.
Now slowly rebounding too early to tell industrial controls, we expect to see some improvement there.
As conditions improve and industrial manufacturing and we do have some optimism with surface tech.
As we are expecting us and global GDP rates to grow about 4% next year. So I think from the CCI standpoint, I think things are looking positive and with our physician hearing 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.
Good to hear I. Appreciate you taking my questions I want to turn back in queue. Okay.
Okay.
Thank you and our next question will come from Michael CRM only with Twous. Please go ahead.
Hey, Mike Good morning, Bob.
Morning, maybe Dave just maybe a bigger picture portfolio kind of shaping question, you've obviously exited.
The Max built to print just given where arrow is you're probably looking at maybe 250 million or so do you think about potentially exiting more of the commercial aerospace 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 once we do exit this and we right size our facilities and our operations. All that are that are all associated with the commercial aerospace and by the way I'll just toss in there were relative to the Rightsizing, we are able to mine.
Great. So on the fence folks on that were on the commercial side now back on to defense. So as we win that that approach.
Those particular areas off of the 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 the exception there.
And we will be in a position that the remnant of that business of the aerospace side like you you've talked about a couple of hundred million that will contribute to the overall margin targets that we set forth and they are good I mean, there are good products and it's not that the product.
But that we just that we're exiting is not good it's been 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 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 always had the opinion well at least in the seven years I've been CEO that the pricing of any properties within that space has been pretty high and now the cobot raise its ugly head and the Max edits bone issues.
Just to sort of put a damper on things as you're well aware and we focused in other areas, but let's say, we will have a very small piece in our business our portfolio associated with commercial aerospace. The the strength lies on 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 actively search for acquisition opportunities put it that way.
Got it.
And then just on the sense, maybe to play Devil's advocate a bid on on Pac Star I mean, you paid 12 times just trying to get your your comfort level. There I know you've talked to you mentioned a couple of times on modernization. They are more tactically exposed there is more ground exposure there. It seems like you know the army.
Doesn't really have a seat at the table in the future conflicts with China and.
Russia.
How confident are you in the visibility AF Pak star if some of these potential programs get delayed or curtail this tobacco into the thinking there I mean can you kind of said you paid a 12 times forward multiple which was a bit higher but you.
As you are sort of.
Trying to calibrate the risks there how did you get comfortable with with Baxter.
Yes, you know 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 consultancy think tanks and so forth to see really how pack star is positioned for the future and all.
So upset while at the same time, how our other technologies and products.
Built up for the future, we know how what would they withstand and we really looked at the high priority.
Army investment areas and we look for the top six priorities.
In specifically in the the army side and you're right typically a traditionally army doesn't get really the best seat at the table if anything they're back against the wall, but in this character in the characterization that as I've talked about it with the war fighting theater. This in.
Their pets are participate in network modernization, which is among the army's top six priorities and and it's well among those so it's like in the middle of the top six.
It's the the deal the modernization strategy is really driving the creation of a more expeditionary while mobile force structure, which is independent of the size of the force. So while the army usually gets hit with personnel cutbacks. This is not tied to the actual soldier out in the field.
It's more tied to the infrastructure and Thats, where packs are is really a shining light in that bid by every account.
Well, we've talked to on the army side and and other think tank areas. The the better battlefield network operations are at an inner platform can the activity has been a fantastic area of potential growth and pack start just has a.
Managing a hold on it in terms of IP related tactical networks, and so now we add that to PCG, we added to some of the other products that we provide on the embedded computing side and we look at we look at it really there'd be a one plus one we think is going to be more than than too. So.
So.
I hear what you're saying and we've added that in so many different ways.
I can't even though over explained that so the priority areas that we looked at the operating on the GPS denied environments, where we are the Hypersonics flight test equipment, where we are active the security side and this is commercial systems were classified areas were heavy in that open system.
James for government industry led compliant products were very heavily and then lastly, the the defense acquisition policy regarding other transactional authority, where weve research that tremendously to make certain that we are going to be situated in a good spot. So those are all the reasons, we feel pretty secure.
Got it very helpful I'll jump back in the queue. Thanks.
Thanks, Mike.
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 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.
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