Curtiss-Wright (CW) Q3 2019 Earnings Call Transcript

Curtiss-Wright (CW 1.99%)
Q3 2019 Earnings Call
Oct 31, 2019, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the Curtiss-Wright third-quarter 2019 financial results conference call. [Operator instructions] As a reminder, this conference call is being recorded for replay purposes. It is now my pleasure to turn the conference over to Jim Ryan, senior director, investor relations. Sir, you may begin.

Jim Ryan -- Senior Director, Investor Relations

Thank you, Brian, and good morning, everyone. Welcome to Curtiss-Wright's third-quarter 2019 earnings conference call. Joining me on the call today are Dave Adams, our chairman and chief executive officer; and Glenn Tynan, our vice president and chief financial officer. Our call today is being webcast and the press release as well as a copy of today's financial presentation are available for download through the Investor Relations section of our company website at www.curtisswright.com.

A replay of this webcast also can be found on the website. Please note, today's discussion will include certain projections and statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. We detailed those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC.

As a reminder, the company's results and guidance, including adjusted non-GAAP view that excludes first year purchase accounting costs associated with acquisitions for current and prior-year period. In addition, they exclude onetime transition and IT security costs associated with the relocation of the DRG business in the Power segment. Reconciliations for current and prior-year periods are available in the earnings release at the end of this presentation and on our website. In addition, any references to organic growth exclude the effects of foreign currency translation, acquisitions and divestitures unless otherwise noted.

Now I'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 with a few highlights of our third-quarter results and full-year 2019 guidance. Then I'll turn it over to Glenn to provide a more detailed review of our third quarter along with updates to our full-year guidance.

Finally, I'll return to wrap up our prepared remarks, including an update on the AP1000 program before we move on to Q&A. We delivered yet another strong quarterly performance. Our results were ahead of our expectations, led by higher sales and improved profitability in the commercial/industrial and defense segments. Strong growth in our defense markets was once again the main driver as we produced 17% sales growth, led by solid demand for our largest programs in aerospace and naval defense.

Adjusted operating income rose 9% on a 3% increase in sales, generating a 90 basis point improvement in adjusted operating margin to 17.4%. We accomplished these results despite increased R&D investments and tariffs. Adjusted diluted EPS of $1.95 increased 14% year-over-year, reflecting the strong operational performance and the benefits of our ongoing share repurchase activity. We also produced solid flow -- solid growth in adjusted free cash flow with a conversion rate of 130%.

Rounding out our third quarter results, new orders increased 26%, led by solid demand in naval defense and commercial aerospace, the latter of which followed the signing of our LTA with Boeing in July. Year to date, orders were up 10%, principally led by strong demand in naval defense. Next, to our updated guidance, where we increased our full year projections for adjusted operating margins, diluted EPS and free cash flow. As you can see, we narrowed the high end of our sales guidance range and now expect 4% to 5% overall growth.

However, we are maintaining our operating income guidance despite the lower sales. We also increased full year 2019 adjusted diluted EPS guidance to a new range of $7.15 to $7.25, representing year-over-year growth of 12% to 14%. Finally, we raised our free cash flow guidance by $10 million and are now expecting an adjusted free cash flow range of $340 million to $350 million. Now I'd like to turn the call over to Glenn to provide a more thorough review of our third-quarter performance and financial outlook for 2019.

Glenn?

Glenn Tynan -- Vice President and Chief Financial Officer

Thank you, Dave, and a good morning, everyone. I will begin with a review of our third-quarter end-market sales. Overall, we experienced a 16% organic increase in sales to our defense markets, while sales to our commercial markets declined 6% year over year. There are a few items I would like to highlight on this slide.

First, in aerospace defense, our sales grew 18%, driven by solid revenue growth on fighter jets, primarily the Joint Strike Fighter and on helicopters, including Apache and Seahawk programs. Next, in navel defense, the strong growth of 23% reflects increased Virginia-class submarine, CVN-80 aircraft carrier and service center revenues. In power generation, our performance principally reflects reduced revenues due to timing on the CAP1000 program as well as slight decrease in domestic aftermarket revenues. And finally, in the general industrial market, our performance reflects reduced demand for some of our more GDP-sensitive businesses, most notably our surface treatment and Industrial Vehicles businesses.

Next, I will discuss the key drivers of our third-quarter operating performance, which, as a reminder, is presented on an adjusted basis. In the Commercial/Industrial segment, our results principally reflects solid absorption and higher sales in the aerospace and naval defense markets, partially offsetting that improvement was tariffs of $1 million and $1 million increase in R&D. In the defense segment, adjusted operating income increased 16%, while adjusted operating margin improved 150 basis points. This primarily reflects favorable mix on strong cost-embedded computing revenues, which experienced double-digit growth year-over-year, partially offsetting that improvement was $1 million increase in R&D.

In the Power segment, our results reflect favorable absorption on strong naval defense sales, which grew 25% year over year in addition to $1 million in restructuring savings generated by our margin improvement initiatives, more than offsetting that improvement was reduced power-generation sales and segment operating income due to the timing of CAP1000 program revenues. Moving on to our 2019 end-market sales guidance beginning in the defense markets. Improved outlook in the naval defense market primarily reflects our growing backlog, particularly for submarines and the CVN-80 aircraft carrier. As a result, we now expect naval defense sales growth of 14% to 16% on a $30 million increase in revenues, driving overall defense sales growth of 10% to 12%, the majority of which is organic.

We made a corresponding $30 million decrease for our power generation revenues, specifically for lower CAP1000 production. This is due to the shift of resources required to conclude the root-cause analysis and to support the growing naval defense backlog. As a result, we now expect power generation sales to be down 4% to 6%. In general industrial, we trend our outlook and now anticipate sales in this market to be flat to down 2%, primarily due to the third quarter performance, some timing with the fourth quarter and the ongoing U.S.

and China trade tensions. As a result of the changes, we now expect overall commercial market sales to be flat to down 2% and overall Curtiss-Wright sales to grow between 4% and 5%. In the appendix of our presentation, you will find the 2019 end-market sales waterfall chart. Continuing with our 2019 financial outlook, the aforementioned sales reduction in the general industrial market has led to a $10 million to $15 million reduction in Commercial/Industrial segment sales.

However, due to our cost mitigation actions, we are reaffirming our segment operating income guidance, resulting in a 10-basis-point improvement to segment operating margin, which is now expected to increase 60 to 70 basis points to a new range of 15.7% to 15.8%. In the power segment, despite the shift in CAP1000 revenues out of 2019, we have maintained our overall profitability expectations due to continued strong naval defense market activity, our better-than-expected performance from our DRG business and the benefit of restructuring initiatives. To sum up, we continue to expect overall Curtiss-Wright adjusted operating income growth of 6% to 9%, with overall adjusted operating margin growth of 50 to 60 basis points. This reflects an increase range of 16.3% to 16.4%, up 10 basis points from our previous guidance.

Turning to our full-year 2019 adjusted diluted earnings per share. We increased our guidance by $0.10 to $0.15 to a new range of $7.15 to $7.25, up 12% to 14% over 2018 adjusted results. The principal drivers of this improvement include our expectations for a lower full year tax rate and a lower share count stemming from our ongoing share repurchase program. And based upon our strong operational performance and continued efforts in working capital management, we raised our full-year 2019 free cash flow guidance by $10 million.

Adjusted free cash flow is now expected to range from $340 million to $350 million with an adjusted free cash flow conversion rate of approximately 111%. 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. In summary, Curtiss-Wright is performing well, and we remain on track to deliver strong profitable growth in 2019. We're benefiting from the favorable defense budget environment, which is providing strength to our defense markets and helping to offset some of the challenges in our commercial markets. Our improved guidance for operating margin, which we now expect to expand 50 to 60 basis points, reflects solid execution and our ongoing margin improvement initiatives.

We expect to achieve those results despite an additional $10 million in strategic R&D investments anticipated to facilitate future organic growth and a $4 million net impact from tariffs, which remain unchanged from our prior guidance. We remain on track to achieve double-digit growth in adjusted diluted EPS and nearly $350 million in adjusted free cash flow. We also continue to maintain a strong and healthy balance sheet and remain committed to deploying a disciplined and balanced capital allocation strategy. Overall, our year-to-date performance and solid outlook for the remainder of the year keep us on a path to achieve our 2021 objectives and continue to generate solid financial results for our shareholders.

Before we shift to Q&A, I wanted to provide a few updates on the AP1000 program. Regarding our Sanmen 2 AP1000 nuclear power plant shutdown in China, we work very closely with our customers, Westinghouse and the Chinese, and I'm pleased to announce that we have concluded the root-cause analysis of the reactor coolant pump matter. The issue was determined to be isolated to a single part within a single pump and is not deemed to be a fleetwide concern. The three remaining Sanmen 2 RCPs have been inspected, and it was determined that they do not have this problem.

Further, I'm pleased to report that the remaining 12 reactor coolant pumps operating at the Sanmen 1, Haiyang 1 and Haiyang 2 AP1000 plants have continued to operate successfully. They've amassed approximately 150,000 accumulative hours of operation without incident. We believe this is a testament to the viability of the AP1000 plant design as well as our reactor coolant pumps. Consistent with our previous communications, our liability on the China AP1000 contract was limited to the lesser of the cost to repair or replace the pump.

Based on the outcome of the root-cause analysis, the net impact of this issue to Curtiss-Wright's full-year 2019 operating performance is immaterial. We are pleased to put this issue behind us and remain supportive of our customers' efforts to restart the Sanmen 2 reactor as soon as possible. We continue to believe that China's long-term demand for the AP1000 reactor as well as Curtiss-Wright's opportunities to supply our reactor coolant pumps remains strong. At this time, I'd like to open up today's conference call for questions.

Questions & Answers:

Operator

[Operator instructions] And our first question will come from the line of Michael Ciarmoli with SunTrust.

Jorge Pica -- SunTrust Robinson Humphrey -- Analyst

This is Jorge Pica on for Mike. Good results. Congratulations on the quarter. I was wondering if you could please kind of go around the world and give us a summary of the end-market conditions that you're seeing.

I know in the past that you've talked about the surface treatment business, and how you look at that business as kind of a leading indicator in the broader industrial marketplace. Now that you're seeing a little bit of softness there, how would you characterize to broad market, in general?

Dave Adams -- Chairman and Chief Executive Officer

I'd say, looking at -- we have talked about service tech as being our bellwether business for long time. And I've been personally speaking with the leadership of that organization. It's -- it is a very closely tied to GDP across the globe, and it first started out of Europe as we've seen a number of times, automotive out of Europe has been slow. So it's slowed a slowing, and my most recent discussions with leadership of that group give indication that the third quarter was -- looked as though a little light, particularly coming out of Europe, but that is mostly attributable to what we see as a recurring vacations, holidays that they take over there.

And so we sort of take that out of the mix. Now we look into the fourth quarter, which we generally have little bit of a surge in that business, in particular. And it looks as though right now, our first glance, mid-month of this quarter from October, it looked pretty good. So we're waiting with bated breath to see how that goes toward the end of the year, but it is something that we watch very closely, and we'll continue to monitor as we progress through the end of the year and then as outlook picks up the next year.

It is a short-cycle business. So these parts can come in this morning, and they might have to go out the door this afternoon. So it gives indication pretty quickly but at a point in time. So it's more difficult to measure a long-term outlook then with other areas of our business in the U.S., but around the globe from a market perspective.

If you look at the defense side, looking great. It's up. It's been looking super on the shipbuilding side as well. So we don't see any problems there.

And commercial aerospace are pretty steady Eddie. But I'd say, just generally and then the power, we talked about that a little bit and we'll talk more about it, that we had this reasons for being up and down in certain areas. But general Industrial, watchful eye is a word on it. We're watching a lot of other folks with their reports coming in just to see what they're seeing.

But right now, the surface tech of the one, and again, in the general Industrial, not necessarily in their aerospace and defense side. They're actually doing quite well in that area.

Jorge Pica -- SunTrust Robinson Humphrey -- Analyst

I guess just following up with one follow-up on that. It seems on the defense side, we're entering a period where -- this is kind of a once in a generation shift, where we're seeing a pivot to new technologies, old weapon systems are being retired, and you're seeing this very strong growth on the defense side. And there is this opinion in the industry that this is only the beginning as we see fleetwide conversions happening across the services. Can you give us a little bit of your perspective on that and how you feel this fleet transformation will evolve?

Dave Adams -- Chairman and Chief Executive Officer

Yes. I would characterize it in a couple of ways. First, I would look at from a shipboard prospective, that fleet, that particular platform is pretty steady Eddie with regards to the products and placement on those that we provide and have provided for decades, likely. And so I don't see a big technological shifts there.

We see smaller technological shifts. It tends to be in the nuclear Navy side, we really don't like to change things too much from what has been working extremely well for decades. And so that one, you don't see as much change now built into some of the other surface ship combatants and so forth. You will see some technological upgrades and improvements in certain technologies, and we will benefit from that.

I'd say that like F-35 is another example of an aerospace side, where we will see some shifts that will help us in a big way with regard to our flight test instrumentation and what comes out of that. Every time they make any kind of a change, we reinstrument parts and/or all of the aircraft. So that turns into a very nice recurring business for us that we picked up when we acquired TTC a number of years ago and then out of our ACRA facility over in Dublin, Ireland. And then on the ground side, we have upgrades there that are in the works and are going -- right now ongoing in terms of smaller, lighter, faster, less power consumption, more bandwidth capability.

So we're seeing those on Bradley's, Abrams. And we see that as just beginning, and it's been a long time in waiting, by the way. We've been waiting for this for a number of long years and we -- but we do see some resurgence there then that be domestic primarily, but there's some overseas activity as well. And then, I'd say -- did I miss anything, Glenn?

Glenn Tynan -- Vice President and Chief Financial Officer

No. I'd say any technological upgrade in defense would impact mostly in aerospace and ground in our embedded computing business. That's what they do. So that would be great.

Dave Adams -- Chairman and Chief Executive Officer

I might add, you just brought to a point, Glenn, that's on the embedded computing side. We are at, what I view and our leadership in that organization views, as let's say, crossroads where we've had some of our older programs have been sort of going away and/or been left for technology upgrades, as you mentioned, Jorge. And we see picking up in the next 12, 18 months or so resurgence of new opportunities in the electronic side of that. And so that would fit exactly within the framing of what you described as your question came with regard to what sort of resurgence might we see there.

We do see some new programs coming on board that have been in the -- let's say, the gestation phase and those will be livening up here, like I said, in next 12 to 18 months. So we feel very positive about the outlook there.

Operator

And our next question will come from the line of Peter Arment with Baird.

Asher Carey -- Robert W. Baird and Company -- Analyst

This is Asher Carey on line for Peter. I just have a question on Power. Would you mind talking a little bit about the China direct and the order environment there, the whole landscape, if it's changed at all, now the Sanmen 2 issues resolved? I know your three-year targets do not include another order, but there's also been some indication that after Sanmen, some discussions would resume. Now that overhang removed, do you have any more clarity on the time line of the next order or any puts and takes with the Chinese economy slowing down also would be interesting.

Dave Adams -- Chairman and Chief Executive Officer

Yes. I would characterize it as obviously a very, very good event for us. The outcome is what we would have wished for in the beginning and that's what happened. So we feel very comfortable with how that came about, what's happened, and obviously, we didn't care for what happened.

But things like that do happen on occasion. And then you just hope that they are as minimal as possible, which this one was. And so we've also been saying personally that if I was a customer, I would want a way to find out what the root cause was of any kind of failure before I would march forward with anything. So our customers obviously in that mode.

And I think too early to tell what happens after this. We can only surmise that our opinions are that it's -- everybody is happy with the results. We're happy we contained it, and the problem has resolved. Now we start Sanmen 2, get that back operational to add along with 150,000 hours we have in the other 12 units.

So I think that it's with full steam ahead from our perspective. We don't have any good visibility with regard to next order. I do know that our customer and our people that work in this business continue to talk with each other between Westinghouse and the Chinese and ourselves and with regard to future opportunities be there, either with China, which is, as we've talked, largest single most opportunity we have and/or with India, the follow-on, let's say, a second one and then with Saudi Arabia and another one-offs after that. So we're very optimistic, and we feel strong that we have a long-term opportunity here, and it's going to be extremely meaningful for the company for years to come.

So now it's just up to get this thing back rolling again and get the -- it's a Chinese economy, as you mentioned, let's say, moving a little bit more swiftly. I think that has got to have some bearing on what their order placement would be like. You can only imagine in what they might perceive as, I don't know if that would be coming down from double-digit growth to single digit would be perceived as a recession for them, but it's certainly a big hit to their economy and that's slowing with everything that's going on in the world and the trade war and all that stuff has some impact on it. So like I said, it just clouds up the water with regard to our visibility for next orders.

But like I said, we feel very confident in the future of the AP1000 and the AP1000 reactor coolant pumps that we provide.

Asher Carey -- Robert W. Baird and Company -- Analyst

Great. And just one quick follow-up, if I may, on the order book for the overall company. Are you able to break out components of the orders? Curious how much defense exactly is in there?

Dave Adams -- Chairman and Chief Executive Officer

Well, I'll give you the major headline for $30 million order for the F-35 that's for LRIP 12 through 14. Naval defense, we had $70 million of orders, $56 million of it was for the carrier, $14 million for the subs. And then we have our $60 million order on commercial aerospace that's the Boeing LTA. Those are the big three ticket items in the third quarter.

Operator

And our next question will come from the line of Nathan Jones with Stifel.

Matt Mooney -- Stifel Financial Corp. -- Analyst

This is Matt Mooney on for Nathan Jones. I just wanted to follow up on the defense market revenues look pretty strong, 8% and 6% organically, primarily due to embedded computing sales, and that's typically a higher-margin market. I'm just wondering, what kind of the mix outlook going forward? Is that expected to continue or kind of get worse or better as we look into 2020?

Dave Adams -- Chairman and Chief Executive Officer

Well, the big driver of the margins in the defense in the third quarter was mix, and it's our higher sales of COTS versus systems. You hear this quarter-to-quarter from us. We wish that would continue forever, but it doesn't work that way. But -- so you see that, that influence there.

It was the opposite in the first half of the year. If you notice, the margins were a little bit lower in the first half of the year. We're seeing a better mix in the second half of the year, so the third quarter was good. We also had strong performance from of our TCG acquisition.

We also had strong performance on the DDG-51 program, and we had about $1 million reversal of bad debt reserve. We finally received payment from a South African customer. So that's kind of a little bit of one-off, but all of that led to pretty high margin in the quarter, very high margin in the quarter.

Matt Mooney -- Stifel Financial Corp. -- Analyst

Yes. That's helpful. And I jumping topics to R&D, is it still fair to think of the $10 million split as $3 million is coming from Commercial/Industrial, $5 million from defense and $2 million in Power? And when do we expect to see benefit from this? And how should we judge kind of the success of these investments?

Dave Adams -- Chairman and Chief Executive Officer

Well, a couple of things. One is that those numbers still apply. So we're still on target for achieving our $10 million increase for the year. In terms of the benefits are obviously in the future, I don't have it by year, but it's really governed.

We have an innovation council, this kind of actually fairly new, but where we brought together people from all across the company, and this is exactly what they're doing, they're evaluating and making sure we get the ROI on the projects that are the major projects, obviously, not every single one, but then we get the ROI that we require. So I don't really have any more detail than that right now at this point.

Operator

And our next question will come from the line of Myles Walton with UBS.

Myles Walton -- UBS -- Analyst

May be on the CAP1000. So it sounds like it's a little bit of push out of revenue, does that help with the implied sales headwind you would otherwise had to absorb in 2020? Or is the whole curve kind of slid to the right?

Glenn Tynan -- Vice President and Chief Financial Officer

Well, the curve's going to slide to the right. I mean, we're already returning which -- the Power segment and the power market have a big fourth quarter coming up because we are going to be returning back to normal production on the CAP1000. The nuclear aftermarket is going to be up in the fourth quarter pretty good because of the outage season. So we move forward.

So they will revise the chart and we will update -- probably not a new chart, but we'll update you with the projections in February, beginning with our 2020 guidance, but...

Myles Walton -- UBS -- Analyst

And just, Glenn, I would guess that it would -- the headwind would get better or base minimum that wouldn't get any more significant than the $30 million you had implied previously?

Glenn Tynan -- Vice President and Chief Financial Officer

Yes. It will get better. I think that's [inaudible] just don't know how much at this point.

Myles Walton -- UBS -- Analyst

OK. No, that makes sense. And then, Dave, on the M&A outlook, so what is the current pipeline looking like where are you seeing kind of most activity, interest availability, maybe just give us that picture?

Dave Adams -- Chairman and Chief Executive Officer

Yes, pipeline is really looking good still. We talked about this last couple of calls, and you know where we are at this point toward the end of the year. We started looking at that balance capital allocation strategy, and how we deploy some of those assets, and M&A is still strong. We've got several opportunities that are looking very good for us.

And as long as those things keep on moving the way they're moving, I feel very confident that we'll be in a good position to meet our objectives. And if we don't, for some reason, obviously, we look back, I mean in terms of the M&A side, we look back at the share repurchase activities and decide what we're going to do, where we're going to put those little buckets of money. But I am feeling very confident that we're going to find some opportunity here within the little nuggets that have come our way. And then it looks great in terms of outlook for some because some within the list of M&A opportunities that we're looking at, some are shorter term, I mean nearer term in terms of opportunity for conclusion and certainty of the deal.

And then how outward looking into 2020, we got some that are percolating that show equally as much good process or potential as the ones in the near term. So in a word, it's great.

Myles Walton -- UBS -- Analyst

OK. Is it more on the A&D side? Or is it more in the industrial side? I imagine, it's maybe more availability in the industrial, but maybe more interest on the A&D side?

Dave Adams -- Chairman and Chief Executive Officer

Yes. You hit a pretty right on the head there, Myles. I mean, we do have opportunities in the industrial. And when we do look at those, and we've got some that we are studying right now.

There could be good positions for us. The price has got to be right on these, given the circumstances. But on the A&D side, some really nice ones out there, juicy and just right up our alley. But yes, we look on both sides of the fence, and our stick is don't overpay to the extent that we can.

Myles Walton -- UBS -- Analyst

And one last one. Glenn, so at start the start of the year, I think you were looking for naval to be up, I don't know, 6% to 8%, now it's up 14% to 16%. And kind of the two-pronged question. One is, you don't have to get into the exact drivers of it, but in a broad context, it is bookings that came in earlier or customers that wanted their products sooner or your ability to execute better? And don't say all of the above.

And then what does that mean for 2020 in terms of lapping a 15% comp given the backlog you have?

Glenn Tynan -- Vice President and Chief Financial Officer

Yes. I mean, the raise in the guidance was primarily driven by the orders and the size and timing of the orders in the Navy. A lot of it, mostly submarine actually for this year. And to some degree, shifting the resources for the -- ship them early at the customers' request, but it's mostly due to the level of the audits.

Myles Walton -- UBS -- Analyst

OK. And then the comp issue for next year, do you have enough backlog to see that is being still a good growth?

Glenn Tynan -- Vice President and Chief Financial Officer

Yes, it is.

Operator

[Operator instructions] And of our next question will come from the line of Kristine Liwag with Bank of America.

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

I just wanted to follow up on the AP1000. For the single piece and single pump that you highlighted as the root cause for the Sanmen 2 reactor coolant pumps issue, can you provide more details on how that happened? Is this a manufacturing issue, quality inspection or insulation? And what are you doing in your process to prevent this from happening again?

Dave Adams -- Chairman and Chief Executive Officer

Yes. Kristine, we've -- we're in agreement with our customer that we can't talk about the specifics of the incident what occurred. But I can tell you that it's something that is fairly controllable for us, and we will moderate or do whatever we have to in terms of process, procedure and so forth to ensure that this kind of thing doesn't reoccur to the extent possible. So I think suffice it to say, it wasn't a major situation.

I mean it was obviously enough to stop a machine of that size from operating. But I think we have extremely well contained from both an engineering, technical and manufacturing and quality perspective. So they're not concerned about that on a recurrence basis.

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

Does this issue with the RCP for the AP1000 have any read across for your U.S. Navy business?

Dave Adams -- Chairman and Chief Executive Officer

No. Not that I know of.

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

OK. That's helpful. And also in switching gears to Commercial/Industrial. How much of the margin expansion in that end market is from better mix versus better execution?

Dave Adams -- Chairman and Chief Executive Officer

Well, in the Commercial/Industrial segment, it did have some favorably in mix in the third quarter, basically with our aerospace, both defense and commercial, primarily sensors. But they also benefited, in the quarter, from the restructuring initiatives that we took in the -- restructuring initiatives we did in the first quarter. So yes, those two items flowing through in the quarter.

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

Sure. And then for the Surface Technologies weakness that you highlighted, is there a way for you to quantify for us where you are in that cycle, like how much lower or softer could that end market be? And also in terms of margin mix going forward, if that business continues to deteriorate, do you expect to see a similar upside to margins that you saw in this quarter, but going forward?

Glenn Tynan -- Vice President and Chief Financial Officer

Well, I will say, we lowered our guidance. I think we derisked 2019 with our guidance lowering, and then most of that is surface tax. So we think we're in pretty good shape. I think Dave alluded to that they're having a pretty good October.

So we'll see what happens with that. But in the meantime, we call it, a recession playbook, as it seems to be going right now, but in preparation for if things were to get worse. But we don't really have anything to talk about for 2020 yet, but I think we're adequately derisked in 2019, and they are preparing for what could happen.

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

Great. And lastly for me. From some of our meetings with people in D.C. and the U.S.

Navy, it seems like they are, again, reevaluating the force structure and possibly evaluating if they want to move away from large aircraft carrier type structures in order to diversify forces. What does that mean for you? If we end up going from large carriers to smaller carriers, is that an incremental opportunity for you? Or would you end up seeing maybe competitors come into your space? Can you just give us some color on how you're thinking about that?

Dave Adams -- Chairman and Chief Executive Officer

I'll give you very general opinion that I don't know a lot about the conversations that are going on with regard to the force structure modifications. I know that they do that periodically and have done it for eons. And so from the big-ship perspective and the view from our over the horizon, it's good for probably five, 10 years out. So any force structure change like this that they would contemplate would be generational and would be a long ways out in front of us.

And so these things, as I said, I answered another question, the nuclear Navy does not change very rapidly because it is still tried-and-true and it does what it's got to do and that's force projection so forth in the certain battlefields or spaces. And so I think that if anything off the top of my hand from an opinion, if all of a sudden came in with more, let's say, smaller ships. I would presume that they might likely go with nuclear power because that is the easiest from the standpoint of refueling and longevity out in the field, then I would think we would have a fantastic opportunity with what we provide currently on a small Virginia class, larger Columbia class and then these huge CVNs that they provide pumps, valves and all that stuff on. So I would think it would open up the door us.

And then relative to competition, but we've seen competition come and go. And like I said, I don't want to belabor it. The point is that you just don't change things out for pennies or a price tag on big, complex machines as we have on carrier, subs and other ships because the fact that they work. It's like the aerospace, you know that pretty well, Christine.

I mean, they don't change much out there very quickly. It takes a long, long time. So it's not likely, at least, I don't see it in my lifetime that this kind of major shift would occur, in Curtiss-Wright's lifetime. We'll have shift here and there, but I think it'll be beneficial to us, frankly, and certainly adopt new electronics.

And we've got a boatload of those literally. And so we continue to refresh that technology. So I think it's a real opportunistic deal us. Thanks for bringing that up.

Operator

And our next question will come from the line of George Godfrey with CL King.

George Godfrey -- C.L. King & Associates -- Analyst

Dave, just one big-picture question related to acquisitions. The Curtiss -- the prior regime was very aggressive on the acquisition front. You had a much more disciplined approach, and the margins or free cash flow reflected that. I'm just curious, have you thought about adding another leg on the stool, maybe exploring a higher-growth area outside the three core areas where you dead set on keeping within those three tracks?

Dave Adams -- Chairman and Chief Executive Officer

Yes. Good question, and dead set is not where we're at on or pretty much anything. I mean all options are always on the table. I'd like to listen to all options and weigh the options just to see the suitability and applicability to what we, Curtiss-Wright, do as a company.

And we have to be agile in our perspective of where we take the company and then how market shifts might drive us in a certain director. If we would, all of a sudden, see a particular market and/or technology that we believe would prevail in five years, 10 years, 20 years whatever, we might enter into that. I take one, electrification and digitalization. We talk about that a lot as being the strategy going forward.

And we are in the process of our technologist within our company are addressing those new but longer-term sorts of issues that will face the company in years to come, and we are addressing them with R&D and so forth. But we also look at it from a standpoint of M&A. And while I'm not really crazy about going after a completely different stool on the leg or on the -- leg on the stool as it were, only because we did that once and that was called oil and gas, and in that stool, we removed that leg quick because that one was just not our forte. We didn't have the bench strength to handle it.

We couldn't manage what we did have, and it did have some great attributes to it. But if you're focused and diligent in what you do best and then rely upon what sort of technologies might change the direction of the ship, as it were, then I think you're going to be highly successful or, let's say, much more successful than to jump into something you know nothing about. So all that to say with a watchful eye, we guide this company down a path that will have a little bit of, let's say, minor moderation or turning in certain areas as we see technology changing. But it's not our intent to go out and actively source a new approach.

It doesn't mean we wouldn't take one if we saw one that was extremely valuable in our minds for the long term.

Operator

And I'm showing no further questions in the queue at this time. So now, it is my pleasure to hand the conference back over to Mr. Dave Adams, chairman and chief executive officer, for any closing comments or remarks.

Dave Adams -- Chairman and Chief Executive Officer

Thanks, Brian, and thank all of you for joining us today. We look forward to speaking with you again during our fourth-quarter 2019 earnings call. Have a great Halloween.

Glenn Tynan -- Vice President and Chief Financial Officer

So long.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Jim Ryan -- Senior Director, Investor Relations

Dave Adams -- Chairman and Chief Executive Officer

Glenn Tynan -- Vice President and Chief Financial Officer

Jorge Pica -- SunTrust Robinson Humphrey -- Analyst

Asher Carey -- Robert W. Baird and Company -- Analyst

Matt Mooney -- Stifel Financial Corp. -- Analyst

Myles Walton -- UBS -- Analyst

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

George Godfrey -- C.L. King & Associates -- Analyst

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