Q4 2020 Curtiss-Wright Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Curtiss Wright fourth quarter, 2000, and 'twenty financial results.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask the question. During the session you will need to press Star then one on your telephone please.

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I would now like to hand, the conference over to your speaker for today, Jim Ryan Senior Director of Investor Relations you may begin.

Thank you Tamara and good morning, everyone welcome to Curtiss Wright's fourth quarter 2020 earnings Conference call. Joining me on the call today are executive Chairman David Adams.

President and Chief Executive Officer, Lynn, Bamford, and Vice President and Chief Financial Officer, Chris Clark.

Our call today is being webcast and the press release as well as a copy of today's financial presentation is available for download through the Investor Relations section of our company website at Www Dot Curtiss Wright's Dot com a replay of this webcast and 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 90 95. 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 and our public filings with the SEC.

As a reminder, the company's results include and adjusted non-GAAP, new that excludes certain costs and order to provide greater transparency and the current spreads and ongoing operating and financial performance.

Reconciliations for current and prior year periods are available and the earnings release at the end of this presentation and on our website and.

Any references to organic growth exclude the effects of restructuring foreign currency translation acquisitions and divestitures unless otherwise noted now I would like to turn the call over to Dave to get things started David.

Thanks, Jim Good morning, everyone.

I'll begin today with an update on our leadership transition plan announced in early December and then.

And I will turn the call over to Lynn and Chris to take you through Curtiss Wright's financial results and guidance.

As I reflect upon my career Curtiss Wright and reminded of how fortunate I am have been a part of this iconic institution.

It has truly been a rewarding experience over the last 21 years from me.

As CEO for just over the past seven years I have witnessed firsthand the dedication of our employees who have continued to press forward with their unyielding commitment. So the one Curtiss Wright vision and our March to achieve top quartile financial performance.

To all our employees, who have helped us earn this lofty achievement.

My time spent with our investment community has also been extremely rewarding to me personally.

I'd like to thank each and every analyst shareholder and prospective shareholders for your confidence and our leadership team your.

And our encouragement over the years was meaningful and motivating I will surely miss the interaction.

Now I would like to congratulate land on her new role as Curtiss Wright's President and Chief Executive Officer, Lindsay appointment to CEO is incredibly well deserved since joining Curtiss Wright and 2004. She has established herself as a respected leader with a long standing track record of success.

This includes her progression through the organization from the leader of our defense electronics businesses to our most recent role as president of the defense and power segments. She has experienced and executing our strategic growth initiatives driving significant financial performance and integrating numerous defense acquisitions.

Lynn has been a catalyst and driving tremendous value for Curtiss Wright, and our shareholders, which in turn and solidified our reputation as the ideal choice to lead the company.

She has also been actively engaged with our analysts and investors over the past few years, many of whom are dialing in today and I am certain that you will all enjoy getting to know Lynn Moore and the years ahead.

<unk> appointment to CEO like Chris is appointment before Kurt and the COO transition announced yesterday is a reflection on our deeply and grain succession planning process I.

I would like to congratulate Kevin Rayment again, who many of you have met as the president of our commercial industrial segment on being named the next Chief operating Officer Ken.

Kevin is replacing Tom Quinlan, who will retire and April Thomas had a very successful tenure at Curtiss Wright, leading the Companys drive for operational excellence and discipline to achieve top quartile financial performance, particularly in terms of operating margin expansion, we wish Tom well and his retirement.

In summary, I'd like to thank you all for your continued interest and Curtis right over the years I am very excited for the opportunities that are ahead for this great organization and look forward to serving as executive chairman on behalf of the board I am confident that we are in great hands with Lynn and her management team, leading the way now.

Turn the call over to Lynn Glenn.

Thank you David and good morning, everyone. It is my distinct pleasure to be appointed to the role of President and CEO and I look forward to continuing to advance the one Curtiss Wright vision to date set out more than seven years ago and build upon the strong track record of top quartile performance I would like to thank Dave for his leadership and mentor.

All these years.

I would also like to congratulate Kevin and his appointment and CLO. This coming April. This is a clear reflection of his effective contribution to our strong operational execution I look forward to continuing to work closely with Kevin and his new role.

And it's being named CEO Ive spent considerable amount of time with the leadership team discussing the future of Curtiss Wright.

We have tremendous operational and financial leadership and continue to build upon the company's strong foundation and decades of engineering expertise and.

In recent years and team has done a fantastic job to enhance the operations and pushed boundaries of our financial performance beyond what we committed to and 2013 and.

And May we will host an investor day, where we will lay out our detailed strategic plan with new long range targets that will propel us forward and the next phase of our journey.

Today I am pleased to share some initial details of that strategy, including our pivot to growth.

And this new and renewed focus on top line acceleration, we will build upon our core strengths and our position within key markets. We will advance those initiatives through continued internal investments and building upon top quartile performance for the purpose of driving solid growth and EPS and free cash.

Cash flow.

Before we move on to the review of our 2020 performance I did want to extend a thank you to our investors and analysts who participated in the recent perception study.

The feedback helped to confirm our plans and simplification of the segment and end market structure, which we will share with you. Today. This is the first of many steps that we will begin taking over the next year focused on simplifying the Curtiss Wright story, enhancing our communication and strengthening investors' understanding.

And of our long term value proposition, we look forward to sharing more details at our upcoming Investor day on May 26.

Turning to slide four since the onset of the pandemic our top priority has been protecting our employees' health and ensuring safe and productive working environment thankfully and through our diligence all of our manufacturing sites remain operational today, and we have been able to largely mitigate the impact.

Through our 8000 plus employees.

We committed to controlling our costs to perfect and <unk> profitability and free cash flow and as you can see on this slide we took many actions in 2020 to position ourselves for the future. We remain encouraged by the speed of the vaccine distribution and are hopeful that we will return to more normal operating <unk>.

<unk> is the vaccinations and become more broadly available on behalf of the entire leadership team I'd like to thank our employees for their unwavering dedication and commitment to Curtiss Wright's success through what has been and especially challenging year for all of us.

Next I would like to highlight some of the key drivers of our fourth quarter and full year 2020 results. We had a very strong finish to 2020, where we met or exceeded all of the full year guidance that we reestablished on the second quarter earnings call.

Starting with the fourth quarter 2020, adjusted results sales increased 2% year over year, and 17% sequentially relative to our third quarter result.

We exhibited strong growth and our defense market, which increased 15% organically or 27% overall, we achieved sequentially higher sales across all commercial markets based on improved demand and economic conditions in the fourth quarter, we produced an operating margin of nine.

<unk>, 8% up 100 basis points year over year due in large part to the savings generated by our cost containment and restructuring initiatives.

We also achieved record reported fourth quarter free cash flow. Despite the pandemic driven by our intense focus on collections and working capital.

Turning to the full year 2020 highlights we achieved strong 17% sales growth and our defense market, 10% of which was organic.

These gains nearly offset the challenges impacting our commercial market, resulting from the pandemic and subsequent reduction and manufacturing activity adjust.

Adjusted operating margin of 16, 3% with nearly flat with the prior year as we were able to mitigate the majority of the commercial market challenges through restructuring and cost containment actions.

We continued to strengthen our innovation pipeline through sustained steady investments in R&D, which increased 3% and 2020.

Adjusted diluted EPS of $6 87, and exceeded our expectations driven by the solid fourth quarter performance as well as the benefit from ongoing share repurchase activity.

We completed our second opportunistic share repurchase program of 2020, and the fourth quarter, which raised the full year buyback to $200 million.

And reduced our shares outstanding by two 5%.

This activity along with the acquisitions completed in 2020 are a reflection on both our strong free cash flow and commitment to our balanced capital allocation strategy.

We generated a record $394 million and adjusted free cash flow equating to 137% free cash flow conversion. This performance reflects our company's company wide efforts to reduce working capital and represents our eighth consecutive year of achieving more than 100.

Percent free cash flow conversion.

Overall book to Bill was a solid one time sales in 2020 with one one times and our defense market fueled by our strong orders enabled defense and.

Additionally, we experienced sequential improvement and commercial market orders as demand continues to recover from the second quarter load and we remain optimistic for our continued solid rebound in 2021 order activity.

Now I would like to turn the call over to Chris to provide a more thorough review of our fourth quarter performance the outlook for 2021, and the new segment and end market structure Chris.

Thank you Lynn and good morning, everyone.

I'll begin today with a review of our fourth quarter operating performance.

And the commercial industrial segment sales improved sequentially, but were lower year over year as anticipated based upon reduced demand and our commercial markets.

Despite unfavorable absorption on lower sales, we achieved a 230 basis point improvement and fourth quarter operating margin driven by the benefits from our restructuring actions.

And the defense segment, the strong 26% growth and revenues reflects the contribution from our acquisitions and a 5% increase and organic growth principally enabled defense.

Adjusted operating income increased 20%, while adjusted operating margin was very strong at 24, 2%.

The year over year reduction and margin principally reflects our investment and growth as we increased R&D spending and the fourth quarter.

And the power segment higher revenues driven by the timing of production on enabled defense programs and the benefits from our 2020 restructuring actions resulted in an operating margin increase of 70 basis points to 21, 1%.

Overall fourth quarter adjusted operating income increased 8% on a 2% increase and sales while adjusted operating margin increased 100 basis points to 19, 8%.

This performance included fourth quarter restructuring savings of $14 million, raising our full year 2020 benefit to $25 million in line with our expectations.

Our Swift actions following the onset of the pandemic helped us to protect our margins limiting our full year 2020, decremental margin to approximately 20%, which as a reminder, exceeded our initial estimates of 25% to 30%.

And as a result, we are well positioned heading into 2021.

Turning to slide seven.

As announced and our earnings release and in an effort to make Curtiss Wright's diversified portfolio less complex and easier to follow we've updated and simplified both our segment and end market structures.

I'll begin with the transition to our new segment structure, where we've realigned and renamed our three segments.

Starting from left to right there are two changes, which I'd like to highlight.

First and the division realignment column, we elected to shift all of our valves businesses from both the former commercial industrial and defense segments into a new naval and power segment.

This change establishes a consistent product alignment across our three segments.

The second change reflects our decision to exit certain non core operations and the fourth quarter. This.

This included our build to print actuation product lines supporting the Boeing 737, Max program as well as our German <unk> business, which was classified as held for sale and the fourth quarter.

And we acquired this business back in 2013, however, we've not been able to achieve expected synergies and leverage its full growth outside of the European market.

We are excluding these operations from our adjusted 2020 results and 2021 guidance to provide greater transparency into the growth rates and profitability within our continuing businesses.

After these changes the company will report under the following three segments Aerospace and industrial defense electronics and naval and power.

And I'd like to spend the next few minutes walking you through each of these new segments.

I'll begin with the transition to the new defense Electronics segment under the realignment, we will shift our valves business into the new naval and power segment, removing a portion of this segments enabled defense market exposure, while eliminating the power generation market exposure.

As the new named suggest this segment now represents 100% of our defense electronics capabilities, serving defense markets as well as the crossover similar technologies and to commercial aerospace.

Over the past few years, we have been consistently ask for a deeper dive into our defense electronics portfolio for comparison to other peers and the industry. This new segment provides and that clarity.

Please note that on the right hand side of the slide and subsequent two slides that we are providing key industry drivers and metrics that should help to clarify the growth vectors for each of our segments.

Next I'll review the transition to the new aerospace and industrial segments.

Similar to the prior slide we are moving this segment's valves business into the new naval and power segment and eliminating both the naval defense and power generation market exposure and the segment.

From a market perspective, and this segment now includes all of the aerospace products outside of the defense Electronics segment, serving both commercial and defense customers.

We have also reorganized and created a new general industrial market reduced to two major areas of focus industrial vehicles, and industrial automation and services.

And I will discuss this market change in greater detail on the following slides and.

And moving forward all of Curtiss Wright's general industrial market sales will be concentrated in this segment.

Yes.

Next I'll review the transition to the new naval and power segments.

This segment now includes all enabled defense products sold outside of the defense electronics segment and with the shift and valves concentrates all of our nuclear and naval propulsion equipment revenue into this segment.

It also reflects all of our nuclear and process related revenues from both our similarly, and largely focused on a steady aftermarket presence of severe service applications.

Through this realignment, we are also creating a new power and process market and all of those revenues will be concentrated into this segment.

Turning to our 2021 end market sales waterfall chart.

We've historically provided this information as a supplement to help you better understand our overall end market exposure.

Building on the segment updates we've also greatly simplified this end market structure.

Our waterfall now consists of two primary markets with two thirds of our revenue and aerospace and defense and one third and commercial we.

We feel this more accurately reflects our business and product portfolio as well as our A&D focus.

As you look across the new waterfall, we have made several changes to align the submarkets to the relevant growth sectors of our business for example, OEM versus aftermarket.

On the right hand side, you can see our new commercial market breakdown.

The new power and process market reflect sales of our valves pumps and monitoring and control solutions sold into nuclear power and process markets.

The new nuclear sub market includes all revenue to the aftermarket and new build reactors.

And the new process Submarket combines all oil and gas can petro Chem and natural gas sales into one larger market.

Again and to further aid and the alignment to our new structure, the new power and process revenues are concentrated within the new naval and power segment.

The new general industrial market has been consolidated to two major areas of focus.

Industrial vehicles focuses solely on the on and off highway commercial and specialty vehicle markets, all leveraging similar technologies and.

Industrial automation and services collectively reflects our most economically sensitive businesses aligned to global GDP and industrial production and once again, all general industrial sales are concentrated in the new aerospace and industrial segments.

Yes.

Next I'll review, our 2021 and market sales guidance, and then dive into our segment outlook.

Overall, we expect sales growth of 6% to 8% of which 2% to 4% is organic.

And the aerospace and defense markets, we expect growth of 6% to 8% overall and to once again grow our defense revenues faster than the base Dod budget.

And aerospace defense, we expect sales growth to be driven by higher demand for embedded computing equipment on various SEC five ISR and helicopter programs, partially offset by the timing of production on Uavs.

And ground defense and strong growth will be principally driven by the contribution from the <unk> acquisition.

And naval Defense, we expect the ramp up on the CV and 81 aircraft carrier program to be mainly offset by the timing of Virginia class submarine revenues.

As a reminder, this fall as our exceptionally strong 22% growth rate in 2020, which far exceeded typical naval defense growth rates across our industry and our customers being efforts to stabilize their supply chains and production flow.

Overall, our long term trend and outlook for growth and this market remains strong.

And commercial aerospace, we expect sales to stabilize as improving demand and narrow body jets, including the 737 and <unk> hundred 20, as well as higher demand from electronics equipment will be offset by lower sales on wide body jets, notably the 767 and 787.

While the short term outlook for the commercial aerospace industry remains tenuous, we are hopeful that the global deployment of vaccines will begin to accelerate the long term growth outlook for this industry.

Moving to the commercial markets, where we expect growth of 6% to 8% overall.

And power and process, we are expecting 3% to 5% growth mainly due to higher value sales to process markets. This outlook is based on both the recovery of previously postponed 2020 maintenance activity as well as and increased capex spending tied to improving cap.

<unk> capital markets.

And the nuclear sub market, we expect from recovery and domestic aftermarket revenues as well as higher sales to the department of energy, which will be partially offset by reduced revenues on the cap 1000 program as we wind down and complete production on this contract.

And the general industrial market, which we expect to grow 9% to 11%, we anticipate solid growth across all of our industrial markets based upon improved economic activity and a widespread rebound and manufacturing demand.

Continuing with our outlook by segment on Slide 13.

I'll begin and the aerospace and industrial segment, where we expect sales to grow 1% to 3% we.

We expect to growth and this segment to be led by higher general industrial sales, which will be partially offset by the timing of aerospace and defense sales that were accelerated into 2020.

Full year segment operating income is projected to grow 14% to 18% while operating margin is expected to grow 170 to 190 basis points, mainly reflecting the benefits of our prior year restructuring initiatives.

Segment profitability is projected to be above 2019 levels, despite $140 million and lower revenues and a $3 million increase and R&D investments this year.

Next in the defense Electronics segment, we're expecting strong sales growth of 21% to 24% driven by a combination of 3% to 6% organic growth, principally and aerospace defense and the contribution from <unk>.

We continue to expect the tax star will be dilutive to overall Curtiss Wright margins in year, one but that it will also deliver high single digit sales growth this year for its tactical battlefield communications equipment.

Full year segment operating income is projected to grow 9% to 12% while operating margin is projected to range from 21, 2% to 21, 4%.

The year over year margin impact aside from taxpayers due to two factors first a $6 million increase and R&D investments as we continue to position this business for long term success via organic growth and.

And second unfavorable mix due to a ramp up and lower margin systems outsourcing from our customers, which typically increases during periods of challenging budget environment.

Sales and profitability for this segment will be weighted to the second half of the year, which is typical for our defense electronics businesses.

And the new Naval and power segment, we're expecting sales and operating income to grow modestly in 2021 led by higher sales to the power and process markets.

As previously noted naval defense sales volumes will be relatively stable year over year due to the acceleration of defense revenues into 2020.

Full year segment operating margin is projected to improve to a range of 18 to 18, 1% as the benefit of our prior year restructuring actions will more than offset the impact of unfavorable mix on lower cap 1000 revenues.

Also note as a supplement to this slide we have provided two years of quarterly historical segment financials, and the new segment structure and the earnings press release and on our website.

So summarizing our full year 2021 financial outlook, we expect adjusted operating income to grow 7% to 10% overall on a 6% to 8% increase and sales.

Operating margin is expected to improve 20 to 30 basis points to 16, 5% to 16, 6%. Despite a $10 million increase and R&D as we continue to drive strategic investments to support our long term organic growth.

And I would like to emphasize that we remain committed to achieving our 17% operating margin target in 2022.

Continuing with our 2021 adjusted financial outlook.

We expect full year 2021, adjusted diluted EPS guidance to range from $7 to $7 20 up 6% to 9%.

We expect to achieve these results despite the increase in R&D, which equates to <unk> 18 per share.

We expect our 2021 quarterly EPS to follow a similar cadence to prior years with the first quarter expected to be our lightest and slightly below Q1 and 2020.

For the remainder of 2021, we expect sequential quarterly improvement with the fourth quarter being our strongest and further we expect approximately 40% of our full year diluted EPS and the first half of the year.

Turning to our strong full year free cash flow outlook, where project, where we are projecting a range of $330 million to $360 million with an expected conversion rate of nearly 120%.

Several factors are expected to impact our year over year performance, including higher capital expenditures as we return to more normal operating conditions. The timing of advanced payments received late in 2020 related to the accelerated defense revenues and approximately $20 million associated with non core operations and we exited in Q4.

Despite those impacts we expect to exceed our long term free cash flow conversion target of 110% again in 2021, which would also represent our ninth consecutive year exceeding 100% conversion.

Now I'd like to turn the call back over to Lynn for some closing remarks Glenn thank.

Thank you Chris.

As we've demonstrated today, our organization is well positioned for profitable growth and 2021 and beyond we are driving solid execution and leveraging the benefits of our 2020 restructuring actions, while continuing to invest and our future through increased R&D funding, we continue to outperform and our defense market.

Driven by our position as a critical supplier to the defense industry with long term visibility on key platforms. We also expect to benefit from improved conditions and several of our commercial facing businesses, especially in the industrial markets. We have line of sight to achieve our goal of 17% operating margin.

Albeit delayed slightly due to the impact of Covid.

Following a year and which we closed on the largest transaction and our history M&A remains a core to our capital allocation strategy and we continue to have an active acquisition pipeline, we remain committed to providing a consistent return to shareholders and a plan to repurchase at least 50.

Of stock this year against our $200 million Board authorization, we continue to maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth.

Regarding our May Investor day, we look forward to communicating our new vision and strategy, while reinforcing Curtiss Wright's focus on delivering long term value for shareholders. Please be on the look out for more details in the coming weeks and we hope that you can participate.

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

Thank you.

Ladies and gentlemen, as a reminder to ask the question you will need to press Star then one on your telephone.

To withdraw your question press the pound key.

And Thats Star one to ask a question please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line and Michael Tamale mature Securities. Your line is open.

Hey, good morning, guys. Thanks for taking the questions Nice results, Dave Congrats been with you the whole way here since I think the stock was maybe below 40 and Lynn Likewise, congrats looking forward to it.

It's Michael.

Maybe maybe Glenn you've obviously been here for quite some time and.

And given you grew up and defense whats sort of your view on net.

Now.

The new segment realignment positions you guys I know, we're still waiting for the new administration, but you've seen and managed through a budget downturn.

<unk> got some timing pressures this year on defense, but what's the general view on sort of defense environment. How you guys are positioned you, obviously have a little bit more ground exposure now, which I know might raise from yellow flags for investors, but what are the general thoughts.

Well I'd say first we remain very optimistic about our defense future revenues growth.

I think it's important to reflect on the fact that we've demonstrated a very successful track record and growing our defense markets over the past 20 years through multiple administrations and has continued to be able to grow even and years Linda defense budget was down and a lot of what we do we stay very focused on.

And making sure our investments are well aligned with the priorities of that are.

And the various branches of the military and that really has protected us during periods of up and down.

I think it's also important to know that we are well positioned with several very high priority.

<unk> hedges CDN 80, 81, and onward, the Columbia class and the Virginia class and the F 35, and these programs do have pretty strong bipartisan support so.

We feel that our core base businesses is in a very good spot.

As I just mentioned, we really do watch where.

The priorities of.

And the various branches of the army R and R.

The defense Department, and really assure that we make our investments lines with those.

If I speak to just some priorities and the electronics portion of our new defense Electronics segment, and we've invested and things such as operating and GPS denied environment Hypersonic security things such as commercial systems for classified cyber.

Net centric connected battlefield, you mentioned <unk> is one of the top six priorities of the army and.

Their businesses and the beginning of a 10 year.

Multiyear build out of there.

And our capabilities and is very clearly we think has a very clear line of sight of funding and some other things and the electronics, we've always been a leader and you've heard us talk about it and the past or may even specifically about participating and open standards, which drives outsourcing we're right at the forefront of kind of the next generation of this which is.

Called modular open systems architecture or Moshe.

And we've invested heavily and spend a lot of our R&D dollars over the past couple of years to really be well positioned with the products that are required and it.

And even outside of the R&D investments, we've set ourselves up to be able to service. The defense defense acquisition policy regarding the other transactions authorities are otas, which has a lot of money is being driven through and we have set ourselves up as a business to be able to participate and that that type of business.

And by flipped from the.

Electric side, just one other comment on variable.

We really do see this as our lowest.

<unk> business and our defense and.

And all of our defense business and there is a return to a major competition and even the Biden and administration has confirmed that they see China as the pacing threat as they go forward and you're right. We don't know, yes, hopefully and the next month or two we'll have the first glance at where their defense priorities are but we think the initial signals.

Pointing to China as this pacing threat should indicate strong support for the naval build out plan.

Great.

And there are optimistic sorry, Mike.

No.

That's helpful. What about you mentioned the pivot to growth you've obviously done some acquisitions here if I look at the new simplified 21 waterfall.

Are there.

Needs are you looking at certain end markets, we've obviously seen new.

And make some moves and defense.

Thinking about continuing with margin expansion or certain areas more attractive do you look at something like commercial aerospace, where the aftermarket might be underexposed any any color you and you kind of mentioned.

Just on the M&A front and the pipeline there, but any any color you can give around maybe where youre looking to expand on that.

Certain end markets.

But I think I would open by saying that our rigor and discipline that we apply before we acquire will not change and we do hope to pivot more of our.

Capital dollars towards M&A, but that won't be at the expense of <unk>.

The properties that we target.

As always we prefer non auctions and we have a solid track record of being.

<unk> to cultivate and encourage companies to join Curtiss Wright as being a great place to work and our track record of making acquisitions successful is known and established and the industry and.

And anything we bring and will have and we will have a line of sight to for the long term that it will be margin accretion. We are right now I would say defense is the primary focus right now.

And with various areas of interest.

We will continue to look for things that can enhance our embedded computing capabilities both.

<unk> and software as we've made several moves in that area recently major enable safety and power and propulsion systems is also a focus and were keenly watching any properties that might be divested due to some of the.

Prime consolidations, but there is non defense areas that we are interested in and looking for.

And we've talked about owning the cap for quite some time and specialized and that industrial sensors and electronic systems.

Our and area of interest as well as power electronics for electrification for on and off highway vehicles that we see that as a very interesting area as we see the electrification new.

Moving into not just the current kind of on and off highway vehicles that being extended into aviation and moving into our defense market and then we're always open to industrial balance that serves the chemical and LNG processing market, but not oil and gas completely oriented, but some of the more specialty market.

Got it helpful last one from me and then I'll jump off here you mentioned on the defense electronics more systems.

Seeing more outsourcing during periods of a flattening budget is that expected to be.

Multi year margin headwind do you expect that mix to continue to shift over time here and.

Any any kind of plans to offset some of that mix.

Yes, I'll take that and Mike I mean, as we kind of look forward.

2021, and there will be some mix as a result mix issues as a result of the system's outsourcing.

We also have a very.

Very very.

Strong growth across the defense electronics business, so that sales volume and absorption will help to kind of offset a lot of what we're seeing there.

As you look at defense Electronics, and 2021, I mean, it's really a combination of two things right. It's tax star, which we said would be dilutive to curtis rate in year one.

As we integrate that business into the Kurdish right way.

And bring it up to two are our minimum expectations and then and also for this next year, we're investing about $6 million more and research and development and that segment. So as you look at the <unk>.

Margin projection for 2021, which is still a very strong 21% mix is part of the story, but not something that.

And we think as detracting from the overall overall business.

Got it thanks, a lot guys.

Thanks, Mike Thank you.

Our next question comes from the line of Nathan Jones with Stifel. Your line is open.

Good morning, everyone.

Good morning, good morning.

Maybe you could just give us a little more commentary on the re segmenting.

And maybe talk about what are the primary things you want to highlight to investors out of these re segmenting and does this in any way change the structure of the business the way you're managing the business or is it just the changing the way you're reporting it out to.

Investors.

So I'll start off and then let Chris.

Chris maybe add some color to what I'd say is first with the creation of the A&D market focus.

As much as it may feel like a change it's really not a change it is the path that we've been on for several years is that if you think of our acquisitions. Since 2017 four of the five acquisitions have been A&D focus between TTC DRG TCG and tax are and if that's not an alphabet soup I don't know what is.

Yes.

This is this has been and where we've been building the business and we allow we believe this new structure.

<unk> is a better representation of our product portfolio.

Also aligning commercial aero under the A&D barela highlight some product synergies.

Across our defense and commercial aerospace markets things such as the high temperature sensors different.

Different types of actuation and flight test instrument and the avionics, where we do see common products being leveraged into boats and markets and.

So that's something that we're intending to accentuate going forward and I don't know if you would've happened to see the press release that we received are 25 hour ASUR and hence FAA certification on our quarter and that we developed in partnership with Honeywell. So.

One of the things with.

And obviously prior to this change Kevin was the president of the commercial and industrial segment and I was the president of the defense and power segment with Kevin returning to being the CLO and having all of the segments report into him and he really has a broad hand with a mandate for growth to really make sure we're maximizing.

The collaboration and technology sharing customer context of types of things across the segments and so theres no immediate shifts and how we're reporting but we do think.

The focus on these end markets and Kevin taking on the role as COO will enhance our ability to accelerate growth.

Yeah, and I would just add on.

On top of that I mean, as you take a look at the new and market waterfall that we've provided I mean, it really does have a closer alignment of the way that we run the business internally.

So we thought that that was an advantage really just and ensuring a consistent communication and thought process to you guys as we talked about about the business.

And.

As you look at it and I'll just pick out. One example, here may be in the process markets.

There are synergies that we will be able to leverage between products and customers and over the past several years, we've really been cultivating kind of increasing our focus on technology and innovation and sharing.

Those technologies across businesses.

And trying to kind of maximize what we do and various markets. So just.

And just within power and process as you look at maybe product synergies and nuclear division, which has monitoring technologies.

And two nuclear power plants, we can take some of that we can bundle it with dollars and motors that are ultimately sold to process markets and similarly, when we look at valves and dollars that are being sold into various energy or process markets, taking that that same technology, and then bringing it back over to the customers.

And that may be the nuclear divisions is interacting with so I think that there are certain synergies in technology sharing and then also customers sharing that we can leverage across each of these end markets.

So does that imply that youre changing some of how you manage the business to generate those kinds of synergies is this dci, allowing that's going on here in order for you to better optimize.

The synergies that you can get across these businesses.

So each.

And they started with US on this journey to one Curtiss Wright.

And seven years ago and.

I very much have seen the benefits of that and and tend to continue to extend it and.

The first wave of this was a lot of maybe you would call. It more back office types of capabilities that allowed us to drive the op margin achievement that we had over the past seven years.

This pivot to growth a lot of the one Curtiss Wright movement will be towards things that accelerate growth and.

So things that we've done recently is we launched our innovation operating system last year to give better visibility across the entire corp, two innovative projects and ideas that.

It could be visible to all the employees and people can kind of and the game application manner comment on and have visibility to what's going across the organization. These are some of the things we'll be talking about more and the may investor day, but there is definitely things, we're doing that are new and different within Curtiss Wright to try and to build on our goal of accelerating.

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That's helpful color. Thanks for taking my questions and I'll pass it on thank.

Thank you.

You.

Our next question comes from the line of Peter Arment with Baird. Your line is open.

Thank you very much good morning, everyone. Congratulations Glenn.

Hey, Chris I wanted to start with you.

Just a question on the if I look at incremental margins on your 'twenty, one guidance, we're getting around 20% at least based on the math, but I thought it would be higher but maybe is that just a function of the acquisition and the higher R&D spending maybe you could just help me there.

Yes, I mean, as you look out into 2021 and it really is a function of.

We've got sales volume and absorption.

There's going to be about $17 million of restructuring savings that that carryover into the year.

And then you do have $10 million of higher research and development. So we're still a healthy 30 basis points improvement year over year, but we're going to continue to invest so that we can grow the topline more lower margin to 17%.

Okay. That's helpful and Chris and then also on the you.

You mentioned kind of just the timing around the lower sub revenues.

With Naval Defense can you remind us kind of what your lead time is and kind of when thinking about subs. Just just because obviously, we know that Columbia is going to continue to ramp and layer in.

Yes, I mean, its pretty typical as you look across whether it's the aircraft carriers and whether you're looking at the Columbia class submarine program and we usually begin our production 18 to 24 months ahead of the ship construction start.

And the same is true for the Virginia class submarine, but we've been building those for so long that it kind of hits a point of.

Stabilization for us, but yes, we are we do receive our long lead materials and content and advance of and.

And advance of ship construction start.

Okay, and then just quickly on.

You've talked a lot about M&A and M&A priorities when I look at the new kind of re segmentation and the waterfall one area that still jumps out of me Thats just not as what I consider the high tech that that you've been focused on for so long as the surface treatment oriented businesses. How do you think about those businesses going forward is that is that something that is part of the <unk>.

<unk> for Curtiss Wright.

It's very good stable financial business.

It's subject to some of the GDP.

Pressure that we had in 2020 and we're hoping for a rebound.

It really does provide customer access and solid cash generation and so from that standpoint.

It is and accretive good solid part of our business. So there is no no thoughts of a change in that area right now.

Okay. That's helpful I'll pass it along thanks, so much.

Thank you.

Thank you.

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

Thanks, and good morning, Congrats Dave and Glenn.

Yeah, Thank you and towards the analyst day and me.

Maybe touch on the R&D, so youre, putting it $10 million to work about 15.

13% growth or so on your total R&D spend is this a one year.

More material step up should we expect it to continue to some sort of targeted percent of sales basis and also maybe just touch on where it's specifically going and what the payback that youre looking for from us.

Yes, I mean, I can just touch upon it from a financial perspective, and then I think Glenn can comment a little bit more about the strategic priorities I mean is.

As we continue that drive to 17% and we've been emphatic that we need to grow the business. So as we're looking at this investment and research and development and which is about 10 basis points on sales we have.

It's a $10 million investment and roughly 40 basis points to overall Curtis rate with the majority of that is really focused on defense electronics. So we've got about $6 million of the 10, that's in our defense electronics segment, and it's really focused on things like encryption and GPS protection and cyber.

And then the next greatest increase is going to be in the aerospace and industrial segment, we're increasing our investments and electrification and the internet of things and HMA technologies, and then to a lesser extent naval and power as we continue subsea pump development and.

We're also starting to see some some interesting opportunities come out of it. So we're going to be focused on increasing our R&D investment and supporting really the pivot to growth going forward and and I know if you want to add anything yes, thanks for that Chris and some of the detail I guess I would definitely go on and at first I would.

Like to say that we're not committing to any specific annual increase.

Yes.

You really need to spend your R&D as opportunities present themselves and not just for speed and <unk>.

Pacific number and we are continually evaluating R&D investments relative to the potential growth opportunities both in technology and program.

And we will continue with that just like to comment on two other things that we've done and it really coupled with this increase in R&D and I mentioned, our launch of the <unk>.

Innovation operating system to really make sure that we can we can gain visibility to the best ideas that could propel us forward and the future across the organization and being the very diverse and many business unit organization that we are I think a very important part of us assuring that we're funding the best ideas and the Oregon.

<unk> and also we updated our incentive composition compensation programs and 2019 to focus more on growth both in revenue and EPS and.

And we talk about the R&D and.

And without <unk>.

Very big buckets, and I just thought it might be interesting to just mention a few things that we've done over the past couple of years and what they are.

Available for us as we see our growth and the future I mentioned to actually just a few minutes ago, the Honeywell <unk> per quarter.

And that has received approval and we think that investment which was.

Very low compared to $100 million lifetime value, it's got growth going forward and we will fund.

Are there other types of recorder activities, where we have a great capability, it's really world class.

And the subsea pump investments that we've made and we're working with two major oil customers and the first one alone has the potential of over $100 million of business and.

And then speaking across the aerospace and industrial group, we've invested and proximity sensors that will replace.

Wow and coil devices, and also has a lifetime value of over $100 million and recently more on the industrial side.

Developed arm rest for a lead customer and it has a lifetime value of $24 million. So.

We are a diverse company, we invest and a lot of different technologies and I think it's something that we really have honed our ability to evaluate opportunities to ensure we're spending those R&D dollars.

And the best places to.

Propel our growth.

Okay got it and just to clarify and I think you mentioned incentives tied to growth that is organic growth right and there's no. There's no incentives that are simply sales growth metric is that is that fair.

Its overall growth so and we continue to believe that our growth will come through a balance of organic and acquisitions and we liked and boat.

Yes, I mean, just from a little bit more color on that miles back in 19 and with the board. The long term plans for modified to double down on growth and that was really sales growth and EPS. So.

As we're looking at that I mean, thats going to thats going to come from both organic and <unk> and.

And acquisition growth. So I think we're targeting both of those areas aggressively.

Okay, and the last one within the power and process I think you're looking for 3% to 5%.

Organic or 3% to 5% growth and there I think that's all organic but also could you just specify within there the nuclear bucket I think may have been down mid teens and 2020, what does that look like and 21.

Yes, I mean as you look out into 2021, I mean, we will see overall, a positive ramp and the domestic aftermarket will also see some improvements or increases in revenues to the dose.

And Im sure Youre up to speed on the new strategic.

Plan that they issued here in January and and some of the opportunities that are presenting itself over the next three to 10 years. So we will see some some increased activity there.

And then we're expecting that that will be offset by lower cap 1000 revenues.

So domestic aftermarket.

Aftermarket.

As we look at that.

Sort of what we're seeing this next year is related to deferred maintenance work.

Really being pushed out of 2020 into 2021 and the next cycle.

International aftermarket as we look at it it's really more flat or stabilizing some of the work that got pushed out here in Q4.

And that could take a little bit more time to kind of come back. It's really all just driven based upon the customers and schedules.

Okay alright, thank you.

Yes.

Thank you.

I'm showing no further questions and the queue I will now turn the call back over to Lynn Bamford, President and Chief Executive Officer for closing remarks.

Thank you for joining us today, we look forward to speaking with you again during our first quarter 2021 earnings calls have a great day.

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

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