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Curtiss-Wright Corp  (NYSE:CW)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Curtiss-Wright Fourth Quarter 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the call over to Jim Ryan, Senior Director, Investor Relations. Sir, please begin.

Jim Ryan -- Senior Director-Investor Relations

Thank you, Martin. Good morning, everyone. Welcome to Curtiss-Wright's Fourth Quarter 2018 Earnings Conference Call. Joining me on the call today are Dave Adams, our Chairman and Chief Executive Officer; and Glenn Tynan, our Vice President and Chief Financial Officer. Our call today is being webcast, and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this webcast also can be found on the website. Please note today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC.

As a reminder, the company's 2018 results include an adjusted non-GAAP view that excludes first year purchase accounting cost associated with this acquisition. Reconciliations for current and prior year periods are available in the earnings release, at the end of this presentation and on our website. Also please note any references to organic growth exclude the effects of foreign currency translation, acquisitions and divestitures unless otherwise noted.

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

Dave Adams -- Chairman and Chief Executive Officer

Thanks, Jim. Good morning, everyone. I'll begin our agenda with fourth quarter and full year 2018 highlights followed by a recap of our journey to achieving top quartile performance. Then I'll turn it over to Glenn to provide a detailed review of our 2019 guidance and updated China Direct CAP1000 financials.

Finally, I'll return to wrap up prepared remarks with a discussion on several strategic topics, including plans for capital investment in our DRG business, and update on our capital allocation strategy. And lastly, the establishment of new three year targets, supporting our drive for long-term profitable growth. After that, we'll move to Q&A.

Starting with the fourth quarter highlights. We delivered yet another solid quarterly performance with adjusted operating margin, diluted earnings per share and free cash flow, ahead of our expectations. The net sales increase was led by strong double-digit organic growth in the power generation market, due to higher CAP1000 and domestic nuclear aftermarket revenues. Our results also reflect the contribution from our DRG acquisition in the Power segment.

The increase in adjusted operating income was principally driven by strong profitability in the Power segment, while adjusted operating margin was essentially in line with last year's strong fourth quarter. This performance resulted in adjusted diluted EPS of $1.90, a 25% increase over the prior year, and includes the benefits of lower interest expense, driven by a $50 million debt repayment (technical difficulty) lower effective tax rate and continued share repurchase activity. We generated very strong free cash flow of $214 million in the fourth quarter (technical difficulty) in the fourth quarter, resulting in a free cash flow conversion of nearly 260%.

Turning to our full year 2018 highlights. We experienced sales increases in all of our end markets, driving sales up 6% overall and 3% organically. Total defense sales were up 10% overall including the DRG acquisition. Total commercial sales were up 4%, led by solid growth throughout the general industrial market. We generated a 110 basis point improvement in adjusted operating margin to 15.8%, the highest level of profitability produced by Curtiss-Wright in more than 20 years. This solid performance drove a 28% year-over-year increase and adjusted diluted EPS, which included a lower effective tax rate and continued share repurchase activity. We invested nearly $200 million through a combination of 10b5-1 plans and opportunistic repurchases in 2018.

New orders were up 6%, principally led by strong demand in naval defense. In addition, full year adjusted free cash flow was strong at $333 million, which drove a solid adjusted free cash flow conversion of 121%. This next chart reflects the results of the transformational journey we embarked upon in 2013 under our One Curtiss-Wright vision. For those less familiar with Curtiss-Wright, in December 2013, we established an aggressive five-year goal to achieve top-quartile performance versus our peer group. Our metrics were a mix of key performance indicators as listed on the slide. At that time, we were in the bottom quartile of our peer group for most of these metrics. Due to our team's unwavering focus upon execution over the past five years, I'm very pleased to report that we have achieved our -- or exceeded all of our the original targets and reached top-quartile for every metric illustrated.

Further, it's important to note that these targets were set without considering any benefit from sales growth. Over the past two years, solid top-line growth combined with our leaner operating structure has enhanced our operational performance and driven even stronger returns. It's been an exciting journey and I'm very proud of the entire team's accomplishments. We remain focused on driving margin improvement, leveraging the critical mass of one Curtiss-Wright across the enterprise and maintaining our position in the top-quartile of our peer group.

Two metrics that we're particularly proud of include, operating margin expansion and free cash flow generation. Starting with operating margin expansion. For those of you, who recall, we laid out a plan to reach margin expansion via a focus upon consolidations, portfolio rationalization, operational excellence, shared services, low-cost economies, and segment focus. The teams' ongoing successes across each and every one of these initiatives has led to our strong margin expansion of more than 600 basis points over the past five years. And we will relentlessly pursue continued improvement in all of these areas.

Next, moving to free cash flow generation, where our results have been tremendous. Over the past five years, we've generated more than $1.5 billion and adjusted free cash flow, with an average adjusted free cash flow conversion of 155%. Our efforts here were led by strong operational performance, a significant reduction in working capital as a percentage of sales, the 2015 CAP1000 order and our focus on efficient capital spending. Robust free cash flow generation, combined with our strong balance sheet has enabled us to drive a healthy capital allocation strategy, with returns to shareholders, reinvestment back into the business and strategic acquisitions.

Now, I'd like to turn the call over to Glenn to provide a review of our financial outlook for 2019. Glenn?

Glenn Tynan -- Vice President and Chief Financial Officer

Thank you, Dave, and good morning everyone. Moving to our 2019 guidance, beginning with our end-market sales. Where we expect growth of 3% to 5% overall, with gains in all of our end-markets. In the defense markets, our overall sales growth reflects the continued benefit from the favorable trends in defense spending, including an additional quarter of sales per DRG and our first full year ownership.

In Aerospace defense, we expect sales growth to come from higher demand for embedded computing products supporting the ramp-up on the F-35 program, as well as higher sales on the Black Hawk and Apache helicopter programs. This growth also includes some system sales that we previously expected to recognize in 2018, as mentioned on our third quarter call.

In ground defense, sales growth is expected to be driven by higher sales on the Abrams Tank and Bradley Fighting Vehicle platforms, as we expect to benefit from the long-awaited monetization of these programs. And in Naval defense, we expect sales growth to be led by the ramp-up on the CVN-80 aircraft carrier program and higher Virginia-Class submarine revenues.

Moving on to the commercial markets. Commercial aerospace sales growth is projected to benefit from improved demand for actuation and sensors equipment and surface treatment services, primarily supporting narrow-body platforms. Included in this guidance is a $20 million offset from a combination of reduced revenues from previous FAA directives that continue to warrant and the delay in the signing of a new supply agreement with Boeing. Otherwise core OEM growth is expected to be 9%.

In power generation, we expect a modest increase in revenue growth on the CAP1000 program. As you will see in the updated revenue projection that will be discussed in a few minutes, we still expect 2019 to be the peak year on this program. Meanwhile, following sequential improvement in sales throughout 2018, domestic nuclear aftermarket-sales are expected to continue to improve modestly in 2019, particularly for higher sales of valves, partially offset by lower international nuclear market -- aftermarket sales.

And finally in the General Industrial market, industrial vehicle sales are expected to demonstrate load to mid single-digit growth led by solid off-highway demand in the agricultural market. Please note that within the waterfall charts, we have shifted our sub-sea pump revenues from the industrial controls category into a newly named industrial pumps and valves category to better represent our sales to the energy markets.

In industrial pumps and valves, we are expecting mid-single digit sales growth, principally led by higher sales in valves in the downstream oil and gas market and higher sales of pumps in the sub-sea market. Industrial control sales are expected to be down slightly (technical difficulty) of automotive contracts completed last year. And for our service tech services business, which tends to be more economically sensitive. Sales are expected to be essentially flat in 2019, due to global economic uncertainty.

And finally, in the appendix of our presentation, you will find detailed breakdowns of our full year 2018 sales by end market as well as our 2019 end market sales waterfall chart. Our financial guidance for 2019 reflects solid sales growth across all three segments while total Curtiss Wright operating income is expected to grow 4% to 6%. Operating margin is expected to range from 15.9% to 16%, reflecting a 10 basis point to 20 basis point increase compared with 2018 adjusted results, and includes the increased R&D and other growth investments as noted on the slide.

Continuing with our outlook by segment, starting with the commercial industrial segment, we expect sales group to be led by both our commercial aerospace and general industrial end markets. We are projecting segment operating income to grow 6% to 9% while operating margin is expected to increase 40 basis points to 50 basis points to range of 15.5% to 15.6%. Higher operating income will be driven by higher sales volume and the benefit of ongoing margin improvement initiatives, including restructuring actions taken in the fourth quarter of 2018. Partially offsetting that improvement is $4 million per tariffs and a $3 million increase in R&D. Excluding these two items, segment operating margin guidance would have reflected a 100 basis point to 110 basis point increase compared to 2018 results.

Next to the Defense segment, we expect sales growth to be led by improvements in the aerospace and ground defense markets, partially offset by lower growth in the naval defense and general industrial markets. We are projecting segment operating income to grow 0% to 2%, while operating margin is expected to decrease 50 basis points to 60 basis points to a range of 22.6% to 22.7%. This outlook primarily reflects unfavorable mix due to a higher percentage of lower margin system sales as well as a $5 million increase in R&D to support our higher tech embedded computing products, which will continue to drive organic growth. Excluding the increased R&D investment, segment operating margin guidance would have reflected a 30 basis point to 40 basis point increase compared to 2018 results.

And next to the Power segment, we expect sales growth to be led by higher revenues in the naval defense market. We are projecting segment operating income to grow 1% to 4%, primarily driven by the higher sales volume, while operating margin is expected to decline 50 basis points to 60 basis points to a range of 16% to 16.1%. Partially offsetting that improvement will be $6 million per transition in IT security costs related to the relocation of our DRG business as well as a $2 million increase in R&D. Excluding these investments, segment operating margin guidance would have reflected a 60 basis point to 70 basis point increase compared with 2018 adjusted results.

Continuing with our 2019 financial outlook, we expect full year 2019 diluted EPS guidance to range from $6.80 to $6.95, up 7% to 9% over 2018 adjusted results. We expect our 2019 diluted earnings per share to follow a very similar cadence to our 2018 quarterly performance where first quarter EPS should be slightly above last year's first quarter, followed by sequential quarterly improvement with the fourth quarter being a strongest as we have done historically.

Next, the free cash flow for 2019. We expect to generate north of $300 million of free cash flow for the fourth consecutive year, while capital expenditures are expected to rise to range of $75 million to $85 million. The CapEx guidance includes a $20 million capital investment for new machinery and equipment for our DRG business, which Dave will discuss in more detail in a few minutes. Excluding this capital investment, we expect adjusted 2019 free cash flow to range from $320 million to $330 million, while adjusted free cash flow conversion is expected to be approximately 110%.

Next on our product(ph)updates on the CAP1000 program revenue and free cash flow projections, which were reported in the Power segment. Beginning with the updated revenue forecast, you can see the initial projections from October 2016 in gray and the current forecast in blue. As a reminder, we expect to generate $448 million in total production revenue, covering 16 reactor coolant pumps at $28 million a piece. We continue to experience favorable cost performance and strong profitability on this program generating a healthy 23% plus operating margin. This new 81,000 forecast, not only reduces some of the year-to-year volatility, but will also lead to a $30 million in the increased revenue and higher profit over the 2019 through 2021 period compared to our original projection.

Based on the current pace of production revenue is still expected to peak in 2019, slightly up from 2018. And as we look ahead to 2020, we initially expect the drop in revenue of approximately $100 million, which has been at the forefront of investor concerns has been significantly reduced by 70%. We now expect to generate much higher AP1000 production revenue in 2020 compared to our original production with the more manageable drop of only $30 million from the 2019 peak.

As you can see on this next slide, we are confident that we will be able to cover this much more manageable GAAP and the AP1000 revenue with increased defense revenues over the next few years. Based on expectations for higher fighter jet, submarine and peak CVN-80 aircraft carrier revenues to name a few. In summary, we expect to generate both higher revenue and operating income over the remaining years of this contract compared to our original projections.

Next, turning to our updated CAP1000 free cash flow forecast. Once again you can see the initial projections in gray and the new forecast in blue. Our performance over the past few years has been better than expected, led by strong execution and a higher profitability along with the benefit of a lower corporate tax rate. As a result, we now expect a much higher cumulative free cash flow total of $110 million, well above the prior expectations of $65 million and also much less of a drop-off from the peak cash flow levels in this new forecast.

So to wrap-up our remarks on the AP1000, we continue to execute very well on this contract. We expect 2019 to be another year of strong profitability and free cash flow generation with the revenue gap in 2020 becoming much more manageable and less of an issue. Looking ahead, despite the solid demand from China, India and other countries, I'll reiterate that we are not going to speculate on the specific timing of future AP1000 RCP orders.

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

Dave Adams -- Chairman and Chief Executive Officer

Thanks, Glenn. Next, an update on the integration of our DRG business, which is going quite well. We continue to integrate DRG into our HR, finance, and ERP systems and are on track as planned. Given the sophisticated and critical nature of Curtiss Wright's technology and intellectual property, we are investing $3 million in 2019 to support DRGs IT security infrastructure. To continue to grow this business, we are investing the necessary capital and resources to position us to deliver long-term growth and margin expansion.

Accordingly, we have broken ground on a new state-of-the-art naval facility in Charleston, South Carolina, which we expect to be operational in 2020. This timing aligns with the conclusion of our two-year supply agreement with Siemens. The new facility will enable us to optimize capabilities and improve our cost structure by establishing more efficient production processes. In addition, we are investing $20 million for new capital equipment that will provide long overdue upgrades to critical steam turbine machinery and equipment. This new location will also provide future cost saving opportunities to our customers based on its proximity to deepwater ports in South Carolina.

Combining Curtiss Wright's existing naval defense capabilities with DRGs mission critical equipment and service centers, yields a formidable force for our end customer. This capability enhancement along with increasing naval defense budgets, signal a very bright outlook for Curtiss Wright's naval defense business.

Next, an update on our capital allocation strategy. Since 2013, I'm proud to say that we've accomplished the following, returned nearly $850 million to shareholders through share repurchases and dividends, share count has been reduced by 8.7 million shares, we've completed two significant acquisitions for nearly $500 million and we spent $500 million on operational investments, including CapEx, voluntary pension contributions and debt prepayments.

If you recall back in 2013, when we revealed our balanced capital allocation strategy, we implemented a self-imposed hiatus on acquisitions. We stated that we needed to improve our operating metrics in order to earn the right to acquire again. Based upon our strong operational performance, as discussed in my opening remarks, we felt we earn the right to acquire again. So we reopened the door to acquisitions, which led us down a path to acquire TTC and DRG both excellent additions.

As you can see on the slide, we are now amending our capital allocation strategy slightly. We will increase our focus on accelerating top line growth via two critical areas, internal growth investments and acquisitions. We believe that it is now prudent to moderately increase our investments in CapEx and R&D as both remain critical to driving long-term organic growth.

Regarding capital investments, the aforementioned $20 million investment in the DRG business is a perfect example of our commitment to driving improved operating efficiencies and long-term margin expansion. We have included a $10 million increase in internal R&D spending in 2019. We have had considerable success with our R&D investments in recent years, leading to significant awards and long-term sustainable growth for Curtiss Wright.

I'll remind you that despite these growth investments, we're still projecting operating margin expansion in 2019. We also intend to increase our allocation of capital to high-quality, profitable acquisitions that meet our strategic and financial criteria. And as I've often indicated, we're not looking to revert back to the days, when we were a serial acquirer. We have a strong balance sheet of $500 million untapped revolving credit agreement with a $200 million accordion and ample capacity to spend up to $1.5 billion in meaningful acquisitions.

In addition, we will continue to focus on returns to shareholders through steady buybacks and dividends, at a minimum we repurchased sufficient shares to cover annual dilution from stock compensation. Shared acquisitions not materialize as expected, then we will consider additional share repurchase activity, as we've done in the past few years.

The final topic, I'd like to discuss today as our new targets covering the three year period ending in 2021. Having completed the previous five-year cycle, we are ready to discuss the next phase of our evolution and the changes that are taking place to drive those efforts. As you've heard throughout our prepared remarks, we're shifting our focus to deliver more top line growth. We expect to accomplish this organically aided by our growth investments and through acquisitions by utilizing our strong balance sheet. As a result, we are targeting 5% to 7% total sales CAGR, which is an acceleration of our prior long-term range of 3% to 5%.

Of note, the sales growth target does not include any AP1000 orders. We also expect to be a leaner and much more efficient business by the end of 2021. We are targeting an operating margin of 17% and are committed to continuing to grow Curtiss Wright for the long-term. We remain focused on driving long-term profitability and remaining in the top quartile of our peer group.

In addition, we are targeting double-digit adjusted diluted EPS growth. We concluded 2018 was $6.37 in adjusted diluted EPS and are confident that we can reach $8.50 by the end of 2021. Regarding free cash flow, we expect to generate more than $1 billion in cumulative free cash flow over the next three years. We are raising our minimal annual free cash flow target base from $250 million to at least $300 million. Improved operational performance will help us reach this goal.

Combining organic and acquisitive growth with our leaner and much more efficient operating structure, our constituents will further benefit from Curtiss Wright's solid growth in earnings per share and free cash flow for years to come. In summary, we look forward to continuing to deliver on our long-term strategy and generating solid financial results for our stockholders.

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

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Peter Arment of Baird. Your line is now open.

Peter Arment -- Baird -- Analyst

Thanks. Good morning, Dave, Glenn.

Dave Adams -- Chairman and Chief Executive Officer

Hi, Peter.

Glenn Tynan -- Vice President and Chief Financial Officer

Good morning, Peter.

Peter Arment -- Baird -- Analyst

Hey. I guess, thanks for all the targets and the updated information on the China Direct. I guess I just wanted to talk -- guess about the new long-term targets initially. When we think about just your sales outlook in the kind of the 17% adjusted margin target. Is there any way to give us a little color, how you think that plays out with the individual segments?

Dave Adams -- Chairman and Chief Executive Officer

Well, Peter, I'll talk to the models we prepared. We prepared several scenarios to get to that, these targets have not broken down specifically by segment. But we've done several models with EBITDA exemptions and say 12 axis(ph)one scenario we did and if we did that we have to spend probably $210 million to $375 million on acquisitions over the next three years, each year or between $600,000 and $1.1 billion in total over the three-year period. We would expect to utilize our revolver and again use to pay our strong cash flow to pay it down.

From a debt to cap, we would go from 36% down to 30%. In that scenario over the three-year period, so we feel we have plenty of room from a leverage standpoint to do what we need to do, but I don't really have that broken down by segment. Getting to our 70% margin does include our continued margin improvement initiatives that we, again, also hope get to that 17%. But I'm sorry I don't have it by margin -- by segment.

Peter Arment -- Baird -- Analyst

Okay. And then just as another follow-up. I guess specifically on the quarter, organic growth was down again in kind of, in defense and it was down again in Q3 and I think you're expecting, I'm talking about specifically the Defense segment. Is it just -- do we just view this as timing associated with the projects that you're working on with the naval business? Or maybe just some additional color there?

Dave Adams -- Chairman and Chief Executive Officer

Yeah, I mean I talked to the person who heads up that. I mean, we haven't watched any programs. It is a good portion of their business is book-to-bill and you can try to predict when you think you're going to get the orders, but the customer controls that. So you've seen some shifts in the 2019 and our Aero Defense is up in 2019 by 10%. So you are seeing that flow into 2019, but it is timing issue.

Peter Arment -- Baird -- Analyst

Okay. And then just one last one. Just related to filling the revenue GAAP with the -- from China Direct you mentioned that you're going to do it through a increased Defense revenues. Just -- do you have line of sight on those revenues? Or just based on what the projects that you have in backlog or at least on the programs of record? Thanks.

Dave Adams -- Chairman and Chief Executive Officer

No. We have line of sight. I mean, it comes from our strategic plan. I mean that the CVN-80 peaks, I believe in 2020. The JSF is going to continue. We have line -- those are long-term defense programs that we have good line of sight on.

Peter Arment -- Baird -- Analyst

Okay. I appreciate the color. Thanks, Dave. Thanks, Glenn.

Dave Adams -- Chairman and Chief Executive Officer

Thanks.

Operator

And our next question comes from the line of Michael Ciarmoli of SunTrust. Your line is now open.

Michael Ciarmoli -- SunTrust -- Analyst

Hey, good morning, guys. Thanks for taking the question and I love seeing the new target out there. Glenn, maybe just a follow-up. Just a clarity. I don't think I heard you in that first comment. How much M&A, did you say would be needed to accomplish the 5% to 7% CAGR? Did you say a $1 billion?

Glenn Tynan -- Vice President and Chief Financial Officer

I said between $601.1 billion over the three-year period.

Michael Ciarmoli -- SunTrust -- Analyst

Got it, got it. Okay. And just on that target. I mean the margin getting up to 17%, presumably you said you don't have any more AP1000 orders in there. You've got not only, do you have that little bit of a revenue GAAP, which you guys have managed, but presumably you're going to have a downtick of some of those higher margin revenues. So I know you didn't give us any color by segment, but can we sort of assume that maybe the profitability profile in power might have a little bit more pressure on it, and you kind of see maybe some margin expansion in the other two segments. Just given that the, the $81,000 at 23% sort of rolls off here. Is that a fair way to look at that?

Glenn Tynan -- Vice President and Chief Financial Officer

That is absolutely a fair way to look at that.

Michael Ciarmoli -- SunTrust -- Analyst

Okay. And then just a maybe a couple of housekeeping items. I think you've mentioned in the prepared remarks, a delay in your agreement with Boeing. Can you just elaborate on that? And if there's any potential margin pressure, you might see as we sort of, know what Boeing is trying to do it with suppliers. Maybe just give us a little more color there.

Dave Adams -- Chairman and Chief Executive Officer

Yes. We go -- Mike, this is Dave. We go through this contract negotiation every two years to five years and we're basically in the same point that we've been at every several years. And it's been a little bit of a delay in the negotiations on it. And if anything, it would mean a uptick in margins going forward, we've talked a lot in the past about the business that we have. The main stay of Curtiss-Wright is high IP proprietary type business and products niche oriented and so forth. And so we look with a similar some of the more, let's say common parts that we might do like built to print, and so forth. So that's part of the negotiations, and like I said, I think that going forward, you'll see an uptick as a result of this kind of a delay and anything else that might be associated with it.

Michael Ciarmoli -- SunTrust -- Analyst

Okay, that's helpful. And then just back to the AP1000. Maybe just two items. I know you didn't include any potential future orders. But maybe, Dave, can you give us sort of the state of the union on what the marketplace looks like? I know, Saudi Arabia has launched a pretty broad infrastructure spending plan. And then Glenn, just on the GAAP. You talked about back filling that gap with defense. But I'm just thinking about the overhead side, while a lot of those potential revenues be able to flow through the Cheswick facility, where you have excess capacity there. And it sounds like you should be able to utilize that capacity, but how should we think about that? I'll jump back in the queue, guys.

Glenn Tynan -- Vice President and Chief Financial Officer

No, you're right. I mean a good chunk of it is obviously on the Navy side is going to flow through Cheswick. And we've been modelling that for several years now as you know and the gap obviously become a lot more manageable as well. But yeah, a good chunk of it will come through Cheswick. But you will also going to have fighter jets and things that come from other parts of the business as well.

Dave Adams -- Chairman and Chief Executive Officer

And let me get Mike's other half and that is on relative to stated union on AP1000. Beyond what we said in prepared remarks, everything is going good. We got commercial operation and all the sites that's been declared so far. And a lot of interest in Saudi Arabia, and they've got several different countries basically quoting for their next iteration of power and where it's going to come from. And certainly the AP1000 is one of those. India is still very strong and that's still, I mean, looking at a couple of years out at least, it's just going to take them a while and we are still working this indemnification stuff.

And I believe that we will get over it, but that market is very big, India is. And then China remains the world's largest, we're still looking at a total of $4 billion market for the reactor coolant pumps. And then I've said in the past, if we got only half of those, we'd be happy with that. But we went in and gave you the bold statement here that, we were not putting orders in for the next three-year period. We're not forecasting that. And that's pretty much the staple of our diet here at Curtiss-Wright, as you've grown to know us and that is underpromise and overdeliver. And if the order comes in, wonderful. If it doesn't, then, OK, we didn't plan on it, and it's not that we're not planning on it, it's that we're just being (inaudible).

Michael Ciarmoli -- SunTrust -- Analyst

Hold on. Hold on this call, Dave, hold on.

Dave Adams -- Chairman and Chief Executive Officer

It's not that --

Michael Ciarmoli -- SunTrust -- Analyst

Sorry guys.

Dave Adams -- Chairman and Chief Executive Officer

Yeah. It's not that we're -- not intending for it to come. And eventually, we're just being very conservative in our approach on this one. So the outlook still remains really strong for the nuclear side, especially in the commercial side.

Michael Ciarmoli -- SunTrust -- Analyst

Got it. Thanks a lot guys. I'll jump back in the queue.

Dave Adams -- Chairman and Chief Executive Officer

Thanks, Mike.

Operator

(Operator Instructions) Our next question comes from the line of Myles Walton of UBS. Your line is now open.

Myles Walton -- UBS -- Analyst

Good morning.

Dave Adams -- Chairman and Chief Executive Officer

Hi, Myles.

Glenn Tynan -- Vice President and Chief Financial Officer

Good morning, Myles.

Myles Walton -- UBS -- Analyst

Dave, I was hoping you talk a bit about the pivot on the capital deployment and any constraints that you're putting on that pivot as it relates to ROIC or hurdles -- hurdle rates and how those are similar or different to what you've had kind of over the last few years since you turn the spigot back on for M&A?

Dave Adams -- Chairman and Chief Executive Officer

No, we actually haven't changed the ROIC on our targets, 10% year three, 12% by year five. And hurdle rates, we're still looking at from a multiple. We like the last two that we bought, and until what we feel exceptionally good about those, one of them has been accretive from the get-go. The other one with the changes that we're implementing, and this new $20 million investment, that's going to bring them up to exactly where we expected them to be.

So, if you like the last two, then you should love the next ones that we look for, and hope to find. And so, that's just really -- again the staple of our diet is more of the same and it's proven us right that we can do it. We earned the right to do, we're not going to throw away that right that we earned. So I expect it to keep going, we got from -- jumping a little more specifically into what we're more interested in is from a targeting perspective. We've got to be proprietary, high barriers to entry, we love customer diversification. Although I know it gives you guys some headaches in terms of -- I'm trying to figure this out. But the diversification gives us a lot of anti-cyclical sort of problematic issues like recessions and stuff, solid operating margins, so it's not dilutive.

And then in areas, embedded computing for example the military side and some of the industrial side. So we like to see for ISR. We're going to continue to focus there, and a lot of opportunities. And then on the industrial on-off highway, we have this on the CAB(ph)project that continues to grow and ramp up with a lot of interest from our customers. Same industrial valves, we like those. Chemical water markets, great. We just not interested in a peer-play, oil and gas. We'll avoid that, as we've stated in the past. And then, I guess you've got some sensors in there that, that we continue to look for. But that's once again a very niche oriented play. So we've got -- our peers(ph)out there on a lot of opportunities and are more to come. But we do expect that we will be able to achieve that.

Myles Walton -- UBS -- Analyst

And maybe I missed it, the 5% to 7% total sales CAGR, the implied organic is it about half that or so? Is that what's kind of online --?

Dave Adams -- Chairman and Chief Executive Officer

You know, it's roughly three to five. And then let's say, some acquisitive maybe in the range of three-ish.

Adam Farley -- Stifel -- Analyst

Okay. Okay. Got it. And then just maybe one last one. When you look back at the target for sales since 2013, obviously, that didn't hit the mark. Was that -- and you turned up the dial on R&D here, I guess it's a 30 basis point headwind or so for 2019. Would that have helped you, do you think looking back to be turning up their dial on R&D? Did you know, where to invest? And then, is that what you think is going to kind of move you from what's been a 1% or 2% organic growth to 3% to 5% organic growth?

Dave Adams -- Chairman and Chief Executive Officer

Yeah. I think the turn up the dial probably three years ago on R&D is, this really a turning point. It's -- I'd say, A, because it's one of several that will move that organic side that we -- also started a significant focus on the organic side, meaning we -- as I just indicated on, for example, some of our commercial aerospace stuff. If it doesn't meet the criteria that we have built in for hurdle rates relative to margin so forth, then we're not going to pursue that, but when it -- so we really drove a very specific approach to it.

But then on the R&D side, I'll throw out a couple of things that we have worked on it and spent money on, and with long-term values of they are anywhere between $3 million and $10 million. The tilt sensors that we have developed, these are for primarily work platforms and off-highway vehicles. And that's some -- something that's somewhat associated with the (inaudible), but there is an example of the next generation flight test for the classic flight test. And then now a more growing demand that we found in the last three years and certainly after we acquired TTC.

And then have been growing aircraft is for more of a permanent fit for flight test information and Big Data kind of stuff. And when you get a permanent fit? You know that for us, that really is meat on the bone, because flight test now goes up in a plane and it's a bunch of planes, but it doesn't go up in all the planes. So now with the next-gen with a permanent fit, well that would go up in every planes. So there is an example of the one plus one would equal three or four, trusted card(ph), cyber security, anti-tamper technology. Again something that we started ramping up a few years ago. The LEAP engine ramp on some of our services businesses that, that's going to generate some nice incremental sales. That was a minimal R&D investment, but by doing some of our laser stuff and then some of our more automated, the shot-peening activities, that's a bump for us.

So what we look for in all of these R&D kinds of opportunities are areas where either we haven't been before over there and we can see a exponential leapfrog and that really play a small -- a large portion of that three to five growth. You know, then in the last one we just announced, you saw the other day was the Curtiss-Wright Honeywell teaming on crash record technology. The Europeans are looking for a longer cycle of peening and they're also looking for greater bandwidth and other information coming out of those with real time data and here for the market has not had it and we are leaders in that arena. So that's why, we teamed with Honeywell and we're spending R&D dollars there. So it's, some things like that. And I've got a whole list. I got two pages worth here, Mike going to continue all of them, but those are the kinds of things Myles that you're going to see from us.

Myles Walton -- UBS -- Analyst

Okay. Well, thanks for the color. Thanks, guys.

Dave Adams -- Chairman and Chief Executive Officer

Thanks, Myles.

Operator

And our next question comes from the line of Nathan Jones of Stifel. Your line is now open.

Adam Farley -- Stifel -- Analyst

Hey, good morning. This is Adam Farley on for Nathan.

Dave Adams -- Chairman and Chief Executive Officer

Hi, Adam. Good morning.

Glenn Tynan -- Vice President and Chief Financial Officer

How are you?

Adam Farley -- Stifel -- Analyst

I kind of just shifting subjects, general industrial market sales growth was driven by solid demand for industrial valves. So maybe get some color on that? Are you seeing any pickup in MRO spending? Is there any projects spending downstream? And I think your 2019 guidance also called strength there. So, any color there would be great.

Glenn Tynan -- Vice President and Chief Financial Officer

Yeah, it's both. Projects and MRO, little bit higher internationally than domestic, but it also includes subsea pump in that particular category and new industrial pumps and valves category but it's again both projects and MRO mostly internationally is higher than domestic and includes subsea pumping being up as well.

Adam Farley -- Stifel -- Analyst

It's helpful. And then just price cost in tariffs, you guys have managed pretty well there. Maybe some raw materials are coming down a bit, maybe just talk about price cost and then also in supply chain, if there's any discrete items out there, that we not really thinking about they are harder to source maybe electronic components, something like that. Thanks.

Glenn Tynan -- Vice President and Chief Financial Officer

Yeah. I mean, we continue to monitor that whole global tariff situation and have been addressing any cost issues with our supply chain, including alternative sourcing or raising our prices, if necessary. So based on the tariffs in active data(ph)and what we have done, we had a $2 million net impact in the fourth, primarily in the fourth quarter of 2018 in the Commercial/Industrial segment. For 2019, we are expecting $4 million incremental impact through the commercial industrial segment. The gross amount was originally $8 million, so we've been able to essentially mitigate 50% of the impact.

Most of the wave one and two, the tariff mostly impacted our industrial valves in the C&I segment. And the third way, but mostly impacted the electronic components and accessories for motorized vehicles again also on the commercial, it's on commercial/Industrial segment.

From a cost standpoint, the only thing we really experience, I think we've said it before and we are not hearing the preponderance or input costs are going up, but we have seems shortages in some of the electronic components that are in our defense. These are capacitors and things where just supply is just greater than -- way greater than demand. So that's caused . the little bit of disruption in some increased cost to expedite parts and things like that. But other than that, we haven't really heard a widespread cost increase in our inputs.

Adam Farley -- Stifel -- Analyst

It's great. Thank you, guys.

Glenn Tynan -- Vice President and Chief Financial Officer

Thank you.

Operator

(Operator Instructions) Our next question comes from the line of Kristine Liwag of Bank of America Merrill Lynch. Your line is now open.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Good morning, guys.

Dave Adams -- Chairman and Chief Executive Officer

Good morning, Kristine.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

For your 2019 to 2021 target, what are you assuming for the AP1000 in that 5% to 7% total sales CAGR? And what are you assuming in terms of deals in that number and that 850 adjusted diluted EPS by the end of '21?

Dave Adams -- Chairman and Chief Executive Officer

Yeah. We are assuming no new orders on the AP1000 suggest our CAP1,000 order right now in the target. And we said for the inorganic growth, we got to spend between $600,000 and $1.1 billion for over the three-year period to achieve our goals.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

That was helpful. And on the Navy, we're starting to see some operational risks in the Navy supply chain. In the past few months, we've seen issues with missile tubes and even issues on the Virginia-class submarine, which has been in serial production for some time. It seems like experienced labor is pretty tight and may be contributing to some of these issues with your now higher Navy content with Dresser-Rand. How do you think about managing operating risk in your Navy business and also if there is a two-carrier by that is approved and funded, is there upside to your Navy growth in 2019?

Dave Adams -- Chairman and Chief Executive Officer

From the operational side, Kristine, we're not seeing any real hurdles in terms of manpower, operationally to or in Cheswick and Bethlehem and Wellsville and across the different Navy sites, New York, Long Island, we haven't found that to be a problem. And as matter of fact, if anything, we've probably got excess capacity in terms of labor and because we were becoming so efficient. So that has not been a hurdle for us. We demonstrated to the Navy on more than one occasion and in each of the sites that we're absolutely capable to handle what it is that they'e given us and going forward.

And then relative to the additional block by nothing in '19, it wouldn't benefit '19. It would basically does and from my perspective, Glenn might want to add to this, but what it basically does, it gives you certainly long-term visibility of 10-year build cycle with the five and five for building a carrier. And so I will be delighted to have that happen. We think you probably get some purchase side, purchase pickup there on PPM, PPD for some parts, but that assumes that orders are all delivered down at the same time and which they're are not yet, but in any case, it certainly cements a longer-term visibility profile for us, which we would love.

Glenn Tynan -- Vice President and Chief Financial Officer

I mean, it's definitely going to be positive to us. We did see the Huntington Ingalls order back in January, which is a good design, good start. But an abatement indicated should enable them to build these carriers, to built every three years to four years. So with our $380 million content is used to be over POC of five years. Obviously, if we move that up and layered on top of what we're doing now it's going to be positive for us. But until we know that procurement pattern of the plan, we can't really tell. We don't have anything in our guidance for that either as well, so that would be upside to us whenever we get the information.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

That's helpful and switching gears on power. When I look at the midpoint of your 2019 revenue outlook of $6.85 million and I look at your 2018 reported revenue of $6.48 million, that's a difference of $37 million. But if I take out your $9 million expected growth for AP1000, that's only giving you $28 million revenue growth for the rest of the segment. I guess I would have thought that, that should have been higher with the timing of Dresser-Rand since that closed mid-year last year. Is there anything that I'm missing?

Glenn Tynan -- Vice President and Chief Financial Officer

No, no, I don't think so. And it is -- there is incremental sales obviously on CVN-80 and the Virginia subs are up. There's probably some offsets in there to that not thinking up but you also -- you do have another quarter of DRG in here as well. So you, I think you got little pieces. Yeah.

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

Great. Thanks, guys.

Glenn Tynan -- Vice President and Chief Financial Officer

Guys, thank you.

Operator

And our next question is a follow-up from the line of Peter Arment of Baird. Your line is now open.

Peter Arment -- Baird -- Analyst

Yeah. Thanks. Just a quick one in the exciting subject to pension, Glenn. Any kind of commentary that you can give us on update on the pension? Or any contributions that you may have to make in your -- when you're thinking about your 2019 to 2021 targets? Thanks.

Glenn Tynan -- Vice President and Chief Financial Officer

Yeah. No we not, no major changes in our assumptions, but we did make that voluntary pension contribution in the first quarter of last year, the $50 million contribution and since then, we don't project any further contributions for the next months, four years, five years, probably, including last year. So, no, no contributions on the horizon as of today.

Peter Arment -- Baird -- Analyst

Great. Thanks, Glenn.

Glenn Tynan -- Vice President and Chief Financial Officer

Thank you.

Operator

And I'm not showing any further questions at this time. I would now like to turn the call back to David Adams, Chairman and Chief Executive Officer.

Dave Adams -- Chairman and Chief Executive Officer

Thank you everyone for joining us today. We look forward to speaking with you, again, during our first quarter 2019 earnings call. Have a great day. Bye-bye.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 51 minutes

Call participants:

Jim Ryan -- Senior Director-Investor Relations

Dave Adams -- Chairman and Chief Executive Officer

Glenn Tynan -- Vice President and Chief Financial Officer

Peter Arment -- Baird -- Analyst

Michael Ciarmoli -- SunTrust -- Analyst

Myles Walton -- UBS -- Analyst

Adam Farley -- Stifel -- Analyst

Kristine Liwag -- Bank of America Merrill Lynch -- Analyst

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