Curtiss-Wright Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Curtis 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 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. 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, Cherie, and good morning, everyone. Welcome to Curtis 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 Barkas, 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 presentations, It's available for download through the investor relations section of our company website at www.curtiswright.com. A replay of this webcast also can be found on the website. Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements and our public filings with the SEC. As a reminder, the company's results include an adjusted non-gap view that excludes certain costs in order to provide greater transparency into Curtis Wright's ongoing operating and financial performance. Reconciliations for current and prior year periods are available in the earnings release at the end of this presentation and on our website. Any references to organic growth exclude the effects of restructuring, foreign currency translation, acquisitions, and divestitures, unless otherwise noticed. Now I'd like to turn the call over to Dave to get things started. Dave? Thanks, Jim.

Good morning, everyone. I'll begin today with highlights from our third quarter results. Chris will then provide a more detailed review of our third quarter financial performance, as well as updates to full year guidance. Finally, I'll return to wrap up our prepared remarks with a discussion on several strategic topics, including... restructuring plans within our commercial aerospace business, executing our balanced capital allocation strategy, and lastly, why we remain confident in defense as we enter a period of budget and election uncertainty. After that, we'll move to Q&A. I remain pleased by our team's agility as we continue to navigate through this challenging period and ensure that Curtis 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 to date. The team has proactively addressed the demand conditions in our commercial markets, while remaining keenly focused on executing our restructuring plans and austerity measures. This includes our decision to reduce our footprint in commercial aerospace, while more than filling that sales gap with the PACSTAR acquisition announced in late September. Later in my remarks, I will expand upon the benefits of this acquisition and how we are implementing our plans to enable future profitable growth. Turning to our third quarter 2020 adjusted results, where we exceeded our operating margin and diluted EPS expectations for the quarter. Sales declined 7% compared with the prior year, but were sequentially higher than our second quarter results. We continued to experience strong growth in our defense markets, which increased 11%. Within our commercial markets, orders and quoting activity have steadily improved from the lows experienced in the second quarter, which provides optimism as we look ahead to 2021. Adjusted operating income was down 7%, principally due to the reduced demand in our commercial markets. However, adjusted operating margin was flat at 17.4%, despite a $45 million reduction in sales, as we benefited from the savings generated by our ongoing cost containment and restructuring initiatives. Adjusted diluted EPS of $1.85 exceeded our expectations, partially due to the timing of defense sales, while also reflecting the accelerated benefits of our restructuring actions. Turning to our adjusted free cash flow, while we had a challenging third quarter, Following our second quarter sales trough, we are up 12% year-to-date. We remain on track for a strong finish in 2020, led by our intense focus on working capital. Now I'd like to turn the call over to Chris to provide a more thorough review of our third quarter performance and outlook for 2020. Chris?

Thank you, Dave, and good morning, everyone. I'll begin with a review of our third quarter end market sales. Overall, we experienced an 11% increase in sales to our defense markets, while sales to our commercial markets declined 22% year over year. Looking a bit deeper into our defense markets within aerospace defense, we had strong growth of 10% due to increased demand on fighter jet and UAV programs. Next, in naval defense, we experienced solid revenue growth due to the timing of production on both the Virginia and Columbia class submarine programs. Within our DRG business, we benefited from increased OEM production as we ramped up on our new South Carolina facility. Turning to the commercial markets and commercial aerospace, as anticipated, we experienced reduced sales on all major OEM platforms due to customer-driven production slowdowns. And finally, in the power generation market, domestic aftermarket sales continue to be impacted by social distancing-related delays, leading to reduced maintenance activity while lower international sales have largely been driven by project delays. Next, I'll discuss the key drivers of our third quarter operating performance. In the commercial industrial segment, our results reflect unfavorable absorption on lower sales, partially offset by the benefits of our 2020 restructuring actions. These efforts significantly reduced the segment's decremental margin to approximately 20% of sales. In the defense segment, adjusted operating income increased 11%, on 12% increase in sales, while adjusted operating margin decreased 40 basis points to 25%. The strong growth in operating income reflects higher defense revenues, including a solid contribution from the 901D acquisition. The slight reduction in operating margin principally reflects unfavorable mix due to a higher percentage of lower margin system sales. In the power segment, adjusted operating margin increased 70 basis points to 17.7%, is the benefits of our cost containment initiatives and 2020 restructuring actions more than offset unfavorable absorption on lower nuclear aftermarket revenues. Overall, despite the top-line headwinds in our commercial markets and unfavorable mix within the defense segment, Curtis Wright maintained flat year-over-year margin on a $45 million of lower revenue. Moving to our 2020 end-market sales outlook, we've narrowed our overall guidance by raising the bottom end of our range, We now expect sales to decline 4% to 5% compared with our prior guidance of a 4% to 6% decline. In the defense markets, we now expect revenue growth of 11% to 13% overall. This is an increase of nearly 300 basis points or $35 million from our prior guidance. In aerospace defense, our updated guidance reflects increased demand for actuation equipment on fighter jets as well as embedded computing equipment on various C4ISR programs. In naval defense, we've increased our outlook due to higher Virginia-class submarine revenues and continue to expect strong sales growth on the CVN-80 and 81 aircraft carrier programs. Moving to the commercial markets 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're projecting a $20 million push-out 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're raising the bottom end of our range for overall operating income, which is now expected to decline 5% to 7%. Operating margin of 16.1% to 16.3% is now expected to be down only 20 to 40 basis points compared to 2019 and reflects a 10 basis point increase from our prior guidance. Although we remain on track to achieve $40 million in annualized savings from our restructuring initiatives, our updated 2020 guidance now reflects an acceleration of approximately $5 million in savings from 2021. As a result, we now expect $25 million in savings this year, followed by another $15 million next year. Continuing with our outlook. In the commercial industrial segment, we have increased the low end of the sales guidance range and also increased our operating income and margin guidance as we continue to mitigate the impact of reduced commercial sales. In the defense segment, we expect higher growth in aerospace-enabled defense to more than offset reduced commercial aerospace demand and now project sales to increase 10% to 12%. Full-year segment operating income is now projected to grow 14% to 16%, while operating margin remains strong at 23.1% to 23.2%, reflecting an increase of 80 to 90 basis points compared with 2019. In the power segment, we've increased our overall profitability expectations due to continued strong naval defense sales and an acceleration of restructuring savings from 2021, which more than offsets the pushout of cap 1,000 revenues. Full-year segment operating margin of 17.3% to 17.4% represents a 20 basis point increase from our prior guide, and these margins are nearly in line with 2019 performance. Next, to our full-year diluted EPS outlook, where we've narrowed the overall guidance and raised the bottom end of our range by 10 cents. We now project diluted EPS of $6.70 to $6.85, which includes a strong contribution from restructuring savings in the fourth quarter. Turning to our full-year adjusted free cash flow outlook, we continue to project a very strong free cash flow level ranging from $350 to $380 million with an expected conversion rate of approximately 130%. Now I'd like to turn the call back over to Dave to continue with our prepared remarks.

Dave? Thanks, Chris. Since 2013, we've discussed numerous initiatives in support of our relentless pursuit of top quartile performance. We've demonstrated an intense focus upon our cost structure and a continuous rationalization of our product and business unit portfolios to derive margin improvement. We have been proactive in these pursuits and remain committed to achieving our most recent goal of 17% operating margin albeit delayed slightly due to the impact of the pandemic. More recently, we've been discussing the balance between sustaining profitable growth for Curtis Wright and satisfying customer needs. This included the acceleration of restructuring actions within commercial aerospace, particularly in light of the expected volume declines facing this industry over the next several years. In yesterday's press release, we highlighted a strategic decision by our management team to discontinue a portion of our commercial aerospace actuation business at the end of 2020. These actions include restructuring our operations that support the Boeing 737 MAX program, including a reduction in our manufacturing footprint in Mexico. To put a little color on the subject, our 737 actuation contracts with Boeing have seen continued margin erosion over the last decade. Prior to the last round of negotiations over our current contract, margins had slipped to a dilutive position to the overall enterprise. This was largely due to the build-to-print nature of the work. If you recall, as we entered 2019, we experienced some delays in negotiations on our current contract. After several months of dialogue, we signed a contract at a substantially higher contract margin and established a benchmark with regard to the future profit expectations on this product line. During 2020, pricing discussions continued with regard to future production against our strategic profitability interests. 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 shipsets per month. Rather than put ourselves in a difficult position with regard to under-absorption for the next two years and accept a significantly dilutive contract when production resumes, we have elected to exit this business. Further, the removal of this bill-to-print content helps to strengthen Curtis Wright's IP portfolio and aligns with our strategy to continue to perform at best-in-class financial levels amongst our peer group. For 2020, this business will represent approximately $70 million in sales and $0.30 in diluted EPS. We intend to adjust our financials to remove this product line from our commercial industrial segment when we provide restated 2020 results and 2021 guidance in February. Over the past few months, we have been very vocal about our plans to cover the potential sales gap. This has included driving continued growth in defense revenues as well as potentially pursuing growth via acquisition. Our recently announced acquisition of PACSTAR covers both of those bases and then some. PACSTAR is a leading supplier of secure tactical communication solution for battlefield network management. Their proprietary software facilitates rapid deployment of assured communications in the battlefield. TACSTAR's rugged communication systems are similar to Curtis Wright's secure COTS-based processing, data management, and communications technologies. This combination provides a unique opportunity to deliver best-in-class platform network integration and tactical data link network management to the warfighter. It is particularly timely as it supports the U.S. military modernization efforts in the warfighting theater. Similar to our previous acquisitions, we are very excited about the strategic fit of this business. We paid approximately 12 times next 12 months EBITDA, slightly above what we've historically paid, but in line with our stated willingness to pay slightly more for high IP or software businesses. In 2020, PacStar is expected to generate more than $120 million in revenue and maintain its high single-digit pace of revenue growth for the foreseeable future. While we expect the deal to be diluted to overall Kurdish rate operating margin in the first year of ownership, we believe this is an exceptional financial and strategic fit, providing strong top-line growth within our most profitable business segment. PACSTAR supports our long-term acquisition criteria and our financial objectives of top-line growth, margin expansion, and free cash flow generation. We expect this transaction to close in the near future and therefore are not including PACSTAR within our guidance at this time. Our management team remains focused on accelerating top-line growth through investments and acquisitions and is committed to providing a consistent return to shareholders. The graphs on this slide display our capital allocation since 2013. Since that time, we have returned more than $1.1 billion to our shareholders through share repurchases and dividends. Also, despite the fact that we just announced the acquisition of PacStart, the largest transaction in the company's recent history, the Board and I are confident in our ability to drive strong free cash flow generation. As a result, we are pleased to announce a $200 million increase in our total share repurchase authorization and our intent to buy back at least $50 million opportunistically in the fourth quarter. Our balance sheet remains strong with sufficient capacity and low leverage to support our healthy acquisition pipeline. Finally, we'll maintain our focus on prudent operational investments, including increased R&D and capital investments to deliver improved organic growth. Next, I'd like to spend a few minutes reviewing some of the strengths of our defense businesses and why we remain confident as we approach the November 3rd elections. Curtis Wright is a critical supplier to the defense industry with long-term visibility on key defense platforms. For the past 20 years, U.S. defense budgets have grown at a 5% CAGR. A point that often gets overlooked is that Curtis Wright has a proven track record of growing at or above the base budget growth. In fact, we have outpaced the RDT&E growth regardless of who's been in office over the past three presidential terms and also through a period of reduced budget growth and sequestration. Further, we have consistently demonstrated our ability to proactively align with the DoD's top investment priorities through a combination of organic growth and strategic acquisitions. The DoD is expected to remain focused on these top investment priorities, whether or not the overall budget is flat or declining. As a result, we believe Curtis Wright will continue to benefit. Let me explain why. As outlined on the left-hand side of the slide, we maintain a strong and stable outlook in naval defense. For the majority of our work, particularly for nuclear propulsion equipment, such as reactor coolant pumps and valves, we are the premier supplier of the content. We enjoy strong sole source positions on the three largest platforms, Ford-class aircraft carrier, Virginia-class submarine, and Columbia-class submarine. which we expect to provide consistent revenue and free cash flow well beyond this decade. Beyond the big three platforms, we have strong capabilities and numerous applications to support the Navy's desire to grow its non-nuclear platforms. As a result, we anticipate that our naval funding is fairly secure and should receive strong bipartisan support, particularly for the DoD's Indo-Pacific strategy. Turning to the right-hand of the slide, We are a leading supplier of defense electronics equipment to the primes, while also generating industry-leading profitability in our embedded computing business. Overall, defense electronics represent approximately 80% of our defense segment revenues, which, as a reminder, generates well north of 20% operating margin. One of our key strengths within defense electronics is our extensive knowledge and position in secure COTS embedded computing technology. Our investments in research and development are aligned with the highest DoD priorities, such as encryption, cybersecurity, and anti-tamper technologies that help secure the battlefield. Together, our industry position and focused investments ensure that we win strategic positions on numerous high-priority programs. We also benefit from consistent industry outsourcing from the PRIMES and DOD program managers, which tends to increase during periods of challenging budget environments. Overall, Curtis Wright is well positioned to deliver solid growth in our defense markets despite election and budgetary uncertainty. As I wrap up our prepared remarks, I would like to emphasize that Curtis Wright is an agile and flexible business. We remain well positioned to weather this challenging environment led by our diversified business mix, aggressive drive to improve profitability, and our strong free cash flow generation. We're benefiting from our stable positions in our defense markets, which are helping to offset some of the challenges in our commercial markets. We're driving solid execution in light of the current environment and are leveraging the benefits of our ongoing margin improvement initiatives. As we've demonstrated today, we also maintain a healthy and balanced capital allocation strategy to support our top and bottom line growth. In summary, we remain keenly focused on delivering long-term value for our shareholders. At this time, I'd like to open up today's conference call for questions.

Of course. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Peter Arment with Baird. Please go ahead.

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

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

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

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

Okay, and just if I could squeeze one more. 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 it to the overall defense business?

No, I think ground defense will pick up with the modernization outlook. There's still a strong need for that. Also, you'll see PACSTAR coming into play next year, and that really is more it's an Army services side, so it'll be right there with the ground defense side. So I think with the synergies that we'll derive from our acquisition of PACSTAR and then some of the anticipated modernization, that we'll start picking that up a little bit. You know, as you are aware, 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, and it comes back again. So, you know, that remains sort of the same position. And when it does come back, like I said, it's usually pretty good. And we do have a lot of activity over there, but nothing that we can see that's huge on the horizon. But I think the ground defense will start picking up somewhat. Appreciate the details. Thanks.

Thank you. Our next question will come from Miles Walton with UBS. Please go ahead.

Thanks. Good morning. Good morning, Miles. I was wondering if you can offer up by segment maybe the orders in backlog, just so you get a sense of within your different end markets, how do you expect them to sort of finish the year, and maybe in particular the shorter cycle? the shorter cycle businesses as well.

Yeah, so I'll start at the top level. Miles, for Q3, we had a one times book the bill. We showed some strength in defense at 1.1 times, and we were about 0.8 in commercial. The backlog is up 1% year over year for Curtis Wright, and I think it's important to note that defense backlog is up 10% year to date. So as we look to closing out the year and where we're headed for this next year, we're in a very strong position. If we break it down by segment, within CI, we had about a 0.9 book-to-bill for the quarter. Within defense, we were at about 0.9, and within power, we were at about 1.2. So I think overall, roughly one, and the strength came out of our defense markets.

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

Yeah, Q2, as you know, is a pretty rough quarter for us, but, you know, 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. You know, we've had, you know, some modest improvements in aerospace here in Q3 and continuing into October, some signs of positivity within valves, and we're continuing to kind of watch that closely, but a A faster recovery in vehicle orders. You know, we're seeing some good signs here with improvements on highway class 8, and that aligns with ACT research. So I think, you know, 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.

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

Yeah, you know, Miles, I think that we were sorely disappointed that, We weren't going to hit it this year, and then we said that we'd hit it in 21 a couple 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 march our way towards 17. I would hope that it's before 22. And I would feel optimistic that we could possibly do that. We haven't put a timeline on it, but we always, like you know as 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. And so that story remains in the forefront. You're absolutely right. PacStar is going to be a fantastic acquisition for us, and especially as we start to to derive those synergies we talked about, and as we replace that business that we're putting aside with the actuation products. And so we think it's an absolutely phenomenal swap, given the IP-related aspect of it, probably the most important. And so all things being said, I'm very optimistic about the answer to your questions.

Okay. All right. That's 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, Matt. Good morning. A quick question regarding orders on the defense side. You cited, I think, in the press release, embedded computing and valve products, more were more than offset by reduced demand across commercial markets. But last quarter, I think you guys noted that ABLE defense orders offset the reduced demand in commercial markets. Can you give kind of a little color on what led to the lower defense orders in the quarter? Was it timing related?

Yeah, you know, our defense orders are a little bit lumpy. I think if you go back to 2019 as an example, our biggest quarter was in Q1. This year, it just so happens to be that that was in Q2. We issued a press release back in July that we had assigned $220 million in new naval multi-year 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, I mean, defense orders are up, I think, 3% to 4%. So we're on a strong trajectory. As I said earlier, our defense backlog is up 10% year-to-date, and it's really more about timing than anything else. Got it.

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

Yeah, so, I mean, as I mentioned to Miles, I mean, we are seeing orders pick up across the board, you know, faster recovery in vehicle orders. You know, VALS, we're kind of watching carefully, aerospace, slow but steady. You know, without being specific, you're just kind of diving down into general industrial because commercial aero is going to be a long road to recovery. The ACT research is indicating a strong recovery in on-highway and Class 8, while we think off-highway and ag in construction will see more of a modest recovery. Valve slowly rebounding too early to tell. Industrial controls, we expect to see some improvement there as conditions improve in industrial manufacturing, and we do have some optimism with surface tech. is we're expecting U.S. and global GDP rates to grow about 4% next year. So I think from a GI standpoint, I think things are looking positive. And with our position here in defense and where our backlog is at this point in time of the year heading into next year, I think we're pretty well positioned.

Good to hear. I appreciate you taking my questions. I'll return back to you. Okay. Okay.

Thank you. And our next question will come from Michael Ciaramoli with Truist. Please go ahead.

Hey, Mike. Good morning. morning maybe um dave just maybe a bigger picture portfolio kind of shaping question you've obviously exited um you know the max built to print you know just given where arrow is you know you're probably looking at you know maybe 250 million or so you know do you think about you know potentially exiting more of the commercial aerospace are you comfortable with the the remaining content and the profit profile of the the different product lines you have

Yeah, we feel pretty good about it, Mike. I think that once we do exit this and we right-size our facilities and our operations that are all associated with the commercial aerospace, and by the way, I'll just toss in there, relative to the right-sizing, we are able to migrate some defense folks that were on the commercial side now back onto defense. So as we wean that that those particular areas off of the commercial side, we can backfill with some of the defense side work that we have. So that gives us something positive, gives us a lot of absorption opportunities. And so I think as we right-size, restructure, and do our consolidations, which we do every year, and this year is no exception, then we will be in a position that the remnant of that business the aerospace side, like you've talked about, a couple hundred million, will contribute to the overall margin, the targets that we've set forth, and they're good. I mean, they're good products, and it's not that the product that we're exiting is not good. It's been great business for us. It's just a remnant of a past that was filled with build-to-print type work and You know, intellectual property is really where it's at for us. And so I think going forward we're going to be in pretty good shape. In terms of adding to that space, I don't really see it. I've 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, you know, COVID raised its ugly head and the Macs had its phone issues. That sort of put a damper on things, as you're well aware. and we focused in other areas. But let's say we'll have a very small piece in our business or portfolio associated with commercial aerospace. The strength lies in the defense side and then the balance of our niche orientation in our other product areas. So, you know, I think we're not going to go out and actively search for acquisition opportunities, put it that way.

Got it. And then just on defense, you know, maybe to play devil's advocate a bit on on tax star, I mean, you paid 12 times, you know, just trying to get your, your comfort level there. I know you've talked to you mentioned a couple times on modernization, you know, they are more tactically exposed, you know, there is more ground exposure there, it seems like, you know, the army doesn't really have a seat at the table and the future conflicts with China and Russia, you know, how confident are you in the visibility at PacStar if, you know, some of these potential programs get, you know, delayed or curtailed? Did that go into the thinking there? I mean, you kind of said you paid a 12 times forward multiple, which was a bit higher. But, you know, as you're sort of, you know, trying to calibrate the risk there, you know, how did you get comfortable with PacStar?

Yeah, as we alluded to it in our discussion, the narrative we had going earlier on, We did spend a considerable amount of time internally and externally reviewing this through consultancies, think tanks, and so forth to see really how PacStar is positioned for the future. And also, while at the same time, how are our other technologies and products built up for the future? What would they withstand? And we really looked at the high-priority Army investment areas and we look for the top six priorities specifically in the Army side. And you're right. Typically, traditionally, the Army doesn't get really the best seat in the table. If anything, they're back against the wall. But in the characterization that I talked about with the warfighting theater, this in particular, PACSTAR participates, in network modernization, which is among the Army's top six priorities, and it's well among those. So it's like in the middle of the top six. And the DOD modernization strategy is really driving the creation of a more expeditionary mobile force structure, which is independent of the size of the force. So while the Army usually gets hit with personnel cutbacks, This is not tied to the actual soldier out in the field. It's more tied to the infrastructure. And that's where PACSTAR is really a shining light in that. By every account, the people we've talked to on the Army side and in other think tank areas, the battlefield network operations and interplatform connectivity has been a fantastic area of potential growth. And PACSTAR just has a commanding hold on it in terms of IP-related tactical networks. And so now we add that to TCG. We add it to some of the other products that we provide on the embedded computing side. And we look at it really to be a one-plus-one. We think it's going to be more than two. So I hear what you're saying, and we vetted that. in so many different ways, I can't even over-explain that. So the priority areas that we looked at, the operating on the GPS denied environments where we are, the hypersonics, flight test equipment where we're active, the security side, and this is commercial systems for classified areas, we're heavy in that. Open systems for government industry-led compliant products, we're very heavy in that. And lastly, the defense acquisition policy regarding other transactional authority. We've researched that tremendously to make certain that we're going to be situated in a good spot. So those are all the reasons we feel pretty secure.

Got it. Very helpful. I'll jump back in the queue. Thanks, guys. Thanks, Mike. 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 to you again during our fourth quarter 2020 earnings call. Have a great day. Stay safe.

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