Curtiss-Wright Corp

NYSE:CW

Earnings Call Analysis

Curtiss-Wright Raises Full-Year EPS Guidance

Curtiss-Wright, amid a solid fiscal year, has upgraded its adjusted diluted EPS (Earnings Per Share) forecast to a range of $9 to $9.20, suggesting a notable increase of 11% to 13%. Complementing this positive revision, the company's adjusted free cash flow outlook is now set at $380 to $400 million, reflecting a robust growth of 29% to 36%. This updated financial picture points to the firm's strong performance and is bolstered by an expected free cash flow conversion rate surpassing 110%.

Impressive Revenue and Organic Growth

The company has reported a robust 15% increase in sales to $724 million, with an organic growth of 14%. This remarkable uplift is attributed to broad-based year-over-year sales growth across all end markets. Notably, the Aerospace & Defense (A&D) markets grew by 18%, propelled by a recovering supply chain and solid performance in defense electronics, which contributed to substantial increases in both aerospace and ground defense segments.

Earnings and Cash Flow Soaring

Earnings too have taken flight, with diluted earnings per share (EPS) soaring 23% to $2.54. The company's adjusted free cash flow surged 59%, demonstrating efficient capital management and a highly profitable business model. This financial strength was underscored by a free cash flow conversion rate exceeding 110%, indicative of the company's ability to translate its earnings into cash effectively.

Defense Electronics: A Record-Breaking Segment

The defense electronics segment led with a record booking quarter, surpassing the previous milestone set in the last year's third quarter. This success was fueled by ongoing robust demand for embedded computing and tactical communications equipment. The naval and power segment also displayed vigorous demand for products supporting maintenance, modernization, and advanced reactor designs.

Optimistic Sales Outlook Across Segments

Encouraged by growing backlogs and today's strong performance, coupled with positive trends across all end markets, the company has raised its sales outlook. It now aims to deliver 8-10% top line growth, with sales growth projected in all three business segments. This is a testament to the company's confidence in its continued market momentum.

Profitability and EPS on the Rise

The company maintains a strong profitability forecast, anticipating margin improvements of 10 to 30 basis points year-over-year. Consequently, diluted EPS expectations have been adjusted upward, now expected to grow by 11-13%, signaling a favorable shift in the company's earnings trajectory.

Commercial Aerospace and Defense Electronics Thriving

Commercial aerospace experienced robust double-digit growth, thanks to a supportive market environment. The defense electronics segment saw an outstanding 34% increase in sales, amounting to $55 million, which is a reflection of an easing supply chain and the robust order book's conversion into notable sales performance.

Guidance Upgrades Signify Continued Growth

In light of the recent performance, the company has upgraded its full-year financial outlook. Organic sales are now expected to grow by 7-9%, with total sales growth forecasted at 8-10%. Specifically, for the aerospace defense market, full-year sales growth expectations have been elevated to 11-13%. Equally impressive, anticipated sales growth in the ground defense market has been adjusted to forecast an even more favorable range of 23-25%, all driven by strong, sustained demand.

Enhanced Free Cash Flow Expectations Solidify Financial Stability

By raising the lower end of the free cash flow guidance by $10 million, the company has underscored its enhanced liquidity position and financial stability. The updated free cash flow forecast now spans from $380 to $400 million, representing significant growth of 29-36%. This shift further cements the company's commitment to robust working capital management and optimizing its financial outlook.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Curtiss-Wright Third Quarter 2023 Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations.

[James Ryan, executive]

Thank you, Risa, and good morning, everyone. Welcome to Curtiss-Wright's Third Quarter 2023 Earnings Conference Call. Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas.

Our call today is being webcast and the press release as well as a copy of today's financial presentation 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 results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency in the Curtiss-Wright's ongoing operating and financial performance. Any references to organic growth are on an adjusted basis and exclude foreign currency translation, acquisitions and divestitures, unless otherwise noted.

GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website.

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

[Lynn Bamford, executive]

Thank you, Jim, and good morning, everyone. I will begin by covering the highlights of our third quarter 2023 performance and a brief update on our full year financial outlook, which we are updating to reflect stronger expectations for revenue, earnings and free cash flow generation. Then I'll turn the call over to Chris to provide a more in-depth review of our financial results and updates to our 2023 guidance. Finally, I'll wrap up our prepared remarks before we move to Q&A.

Starting with our third quarter 2023 highlights. Sales increased 15% overall to $724 million and improved 14% organically as we demonstrated higher year-over-year sales growth in all our end markets. Our A&D markets grew 18% year-over-year as we benefited from the continued easing of the supply chain in defense electronics which drove strong increases in both aerospace and ground defense as well as mid-teens growth in commercial aerospace.

We also experienced widespread growth in our commercial nuclear process and industrial markets, which Chris will cover in more detail shortly.

Operating income grew 17% year-over-year and exceeded our strong sales growth, while operating margin expanded 30 basis points. Underscored within this performance with strong profitability in Defense Electronics segment as we continue to overcome the dramatic impact of last year's supply chain challenges. We continue to benefit from steady improvements in lead times and component availability within Defense Electronics providing further confidence in achieving our full year outlook.

Diluted earnings per share of $2.54 increased 23% year-over-year, while adjusted free cash flow was up 59%, resulting in 140% in free cash flow conversion.

We were also pleased with the continued growth in our order book, up 3% in the quarter and now up 8% year-to-date. Leading the way with our Defense Electronics segment, which achieved a record bookings quarter exceeding the previous record set in the last year's third quarter. This activity was driven by continued strong demand for embedded computing and tactical communications equipment.

In addition, in our Naval and Power segment, we continue to experience strong demand for commercial nuclear products to support maintenance, modernization and plant life extensions as well as advanced small modular reactor designs.

Overall, book-to-bill was 1.2x in the third quarter, building upon our already strong backlog, which is now up 12% year-to-date and in excess of $2.9 billion.

Next, to some highlights of our full year 2023 guidance. Our growing backlog and strong performance to date, along with favorable trends across all our end markets provides us with confidence to raise our sales outlook again. This positions us to deliver 8% to 10% top line growth with increased sales projected in all 3 segments.

Overall, strong profitability remains unchanged with expectations for 10 to 30 basis points in year-over-year margin improvement, reflecting the balance of the combined portfolio, whereby a reduction in the Naval and Power segment's profitability was offset by a stronger outlook in defense electronics.

As a result, diluted EPS is now expected to grow 11% to 13%, which, as a reminder, keeps us on track to exceed our long-term targets. In addition, for the second consecutive quarter, we increased the bottom end of our already strong free cash flow guide to reflect the year-to-date performance and higher confidence in the full year outlook.

In summary, Curtiss-Wright remains well positioned to deliver another strong performance in 2023.

Now I would like to turn the call over to Chris to continue with our prepared remarks.

[K. Farkas, executive]

Thank you, Lynn. On Slide 4, we have the key drivers of our third quarter 2023 performance by segment. I'll begin in Aerospace and Industrial, where overall sales growth of 3% was in line with our expectations. Within the segment's commercial aerospace market, we experienced double-digit growth in OEM sales supporting the ramp-up in production on Boeing and Airbus platforms, most notably on the Airbus A320 and A350 programs. .

We also experienced higher sales in the general industrial market, driven by solid growth in EM actuation products and surface treatment services. Partially offsetting those increases was a decline in actuation sales within the segment's aerospace and ground defense markets due to the timing of production on various programs.

Turning to the segment's profitability. Favorable absorption on higher sales was offset by unfavorable mix in the timing of development contracts, principally for actuation products.

Next, in the Defense Electronics segment. Sales increased $55 million or 34% reflecting continued supply chain recovery and the conversion of our strong order book, which drove increases in our aerospace and ground defense markets. Of note and included within that strong performance, approximately $10 million in Tactical Communications Equipment sales were accelerated into the third quarter from the fourth quarter as we burn down some of our backlog at a faster pace.

Elsewhere in Ground Defense, we experienced increased sales of embedded computing equipment, most notably on the Stryker platform, which is another example of the strong demand from our customers for our MOSA compliant solutions.

Within aerospace defense, we experienced strong sales growth for embedded computing equipment on various domestic and foreign military programs as well as flight test instrumentation on the F-35 program.

Regarding the segment's operating performance. Operating income increased 54%, while operating margin improved 330 basis points, principally due to favorable absorption on the strong sales growth. Also included within those results was a year-over-year increase of $4 million in strategic IR&D investments to enable our future organic growth.

Turning to the Naval and Power segment. Overall sales growth of 12% was essentially in line with our expectations and reflected growth in both our A&D and commercial end markets. Within the segment's aerospace defense market, our Arresting Systems business continues to perform extremely well based upon the strong global demand for our products.

In the naval defense market, our results reflected higher revenues supporting the ramp-up on the Columbia Class submarine and solid growth on the Virginia-class subs, partially offset by the timing of production on the CVN-81 aircraft carrier program.

In the power and process market, sales increased approximately 10% overall and reflected mid-teens sales growth when excluding the revenue headwind from the wind down of CAP1000 production. These results reflected continued strong demand in our commercial nuclear market supporting the operation and maintenance of existing reactors as well as higher development revenues mainly supporting the X-energy Advanced Reactor design.

We also experienced strong sales growth in the process market driven by increased refinery and maintenance and turnaround activity as well as higher subsea pump development revenues.

Turning to the segment's operating performance, favorable absorption on solid sales growth was partially offset by unfavorable mix from the CAP1000 program.

In addition, as you look at the segment's profitability, our results reflect a small number of naval contract adjustments reflecting the continued training and development of new hires to support our ramp in growth.

To sum up the third quarter results, overall, strong growth in operating income once again exceeded growth in sales and resulted in 30 basis points in year-over-year operating margin expansion.

Next, turning to our full year 2023 guidance on Slide 5. I'll begin with our end-market sales outlook where we now expect organic sales to grow 7% to 9% with total sales growth of 8% to 10%, up $30 million or 1% compared with our prior guidance.

Across the entirety of our aerospace and defense markets, we now expect total sales to increase 10% to 12%. Taking a closer look at the aerospace defense market, we've increased our expectations for full year sales growth to a range of 11% to 13% and based on strong demand for arresting systems equipment and higher embedded computing revenues in defense electronics.

Next in Ground Defense, we now expect an even more favorable full year sales growth of 23% to 25%, driven by the continued strong demand for our tactical communications equipment and easing in the supply chain. Of note, based on the accelerated receipt of materials and timing of revenue that shifted into Q3, we expect sales in the ground defense market to decline sequentially in the fourth quarter.

Next, in Naval Defense, while we expect a solid 5% to 7% outlook for year-over-year growth, we reduced our outlook slightly mainly due to the timing of production on the CVN-81 aircraft carrier program as we now expect some revenues to shift out of 2023.

Before we wrap up our defense markets, I wanted to highlight an area where we've received a number of questions over the past year since the start of the Ukrainian conflict and commitment by NATO countries to increase defense spending as a percentage of GDP. As anticipated, we've steadily seen an increase in strong contribution in direct foreign military sales as we progress through the year. Collectively, across Curtiss-Wright, we now expect these sales to grow approximately 15% year-over-year, and the notable drivers of the spending include higher sales of avionics, flight test equipment and arresting systems in aerospace defense, Turret Drive Stabilization Systems on ground defense platforms and aircraft handling systems on naval vessels.

Given the rising threat environment and alignment of our technologies to domestic and foreign defense priorities, we continue to see this as an opportunity to drive solid long-term revenue growth in this area.

Turning to commercial aerospace. Based upon the year-to-date performance, we are now increasing our expectations of sales to grow 14% to 16% driven by strong OEM sales growth on both narrow-body and wide-body platforms.

Outside of our A&D markets, we raised our growth outlook slightly for the power and process market based on the continued strong demand for both our commercial nuclear and industrial valve products. And as a reminder, the outlook in this market includes a $20 million year-over-year revenue headwind from the wind down of the CAP1000 program as we substantially completed this contract in the first quarter.

Excluding that impact, we expect a high single-digit full year growth rate in our commercial nuclear market as well as a low double-digit growth rate in the process market, reflecting higher nuclear outages and process turnarounds, as well as a ramp in development of advanced SMRs.

Overall, across our total commercial markets, we continue to expect full year sales growth of 3% to 5%. Continuing with our full year outlook by segment on Slide 6.

I'll begin in Aerospace and Industrial, where we increased our range of sales slightly to reflect the strong demand in commercial aerospace and continue to expect solid sales growth of 4% to 6%. Regarding the segment's profitability, we maintained our full year outlook, reflecting strong growth in operating income and 20 to 40 basis points in operating margin expansion. We continue to expect the segment to deliver a strong fourth quarter and finish to 2023.

Next, in Defense Electronics, we raised our revenue forecast again and now expect sales to grow 12% to 14% based upon the strong year-to-date performance, continued improvement in the supply chain and record-level order activity. Regarding the segment's profitability, we now expect operating income to grow 18% to 21% and full year operating margin to range from 23.5% to 23.7% reflecting 110 to 130 basis points in year-over-year expansion, which is 50 basis points above our prior expectations.

As noted earlier, based on the segment's stronger-than-expected third quarter results, we expect sales to decrease sequentially in Q4, but still demonstrate strong profitability with an operating margin of approximately 30%.

And lastly, Naval and Power, we increased our range of sales slightly to reflect the aforementioned changes in end markets and continue to expect strong sales growth of 8% to 10%. Regarding the segment's profitability. While we anticipate favorable absorption on the overall increase in sales, we reduced our operating income guidance to now reflect flat to 3% growth and trimmed our prior margin outlook by 40 basis points primarily due to the timing and efficiency on a small number of naval contracts.

While the impact of the contract adjustment is immaterial to overall Curtiss-Wright guidance, we see this as an opportunity going forward, which Lynn will address further in her closing remarks.

And lastly, in regard to the segment's margins, our outlook continues to reflect margin pressures associated with the timing of development contracts in the power and process market and unfavorable mix on lower CAP1000 revenues.

Regarding the increase in non-segment or corporate expenses, our updated guidance reflects an increase in assumptions related to higher-than-anticipated foreign exchange transactional losses in 2023 which we now expect to fully offset lower year-over-year pension costs.

So to summarize our outlook, we continue to expect total Curtiss-Wright operating income to grow 8% to 11% overall in 2023 in excess of sales growth. And as a reminder, this outlook includes a year-over-year increase of more than $20 million in our total engineering spend on both internal and customer-funded programs and remains in line with our initial guidance provided earlier this year.

Despite that offset, we expect to drive 10 to 30 basis points in full year operating margin expansion as we continue to deliver on our 2021 day -- Investor Day commitments.

Continuing with our financial outlook on Slide 7 and building upon our solid year-to-date performance and expectations for a strong finish to the year. We have increased our full year adjusted diluted EPS guidance to a new range of $9 to $9.20 or up 11% to 13%.

And lastly, turning to free cash flow. We delivered a strong performance through the first 9 months of 2023 that puts us back in line with our more historical cadence. As a result, we raised the bottom end of our range by $10 million to reflect improved confidence following increases to our full year financial outlook and our intense focus on working capital management.

Our adjusted free cash flow outlook now ranges from $380 million to $400 million, reflecting strong growth of 29% to 36% and is also within striking distance of our record of nearly $400 million achieved in 2020. Our updated guidance continues to imply a free cash flow conversion rate in excess of 110%.

Now I'd like to turn the call back over to Lynn.

[Lynn Bamford, executive]

Thank you, Chris. And turning to Slide 8. As we have discussed today, we achieved strong third quarter results and remain on track to deliver another outstanding year for our shareholders. It's worth reiterating that we expect to deliver these strong results while maintaining our commitment to incremental investments in R&D, which further strengthens our ability to sustain organic growth well into the future.

As I reflect upon the challenges that we and many defense companies are facing today, ranging from supply chain to staffing, I'm incredibly proud of the accomplishments of the team, our ability to pivot to deliver strong growth and the effort we put forth to accomplish our 2021 Investor Day commitments. When leading in a growth environment amidst a dynamic global market, there are always challenges to be faced. For example, the events of the pandemic led to the unfortunate turnover of nearly 15% of our workforce. Within these types of challenges, we have consistently found opportunity to advance both financial and operational excellence with the goal of improving Curtiss-Wright's overall efficiency and resilience.

We've continued to focus on enhancing our processes, programs and systems to ensure that the team is fully engaged and supported as we've reshaped the workforce, we have done so with increased efficiency while driving record high sales. As we prepare to meet the strong demand ahead of us, we've added back about half of those jobs lost during the pandemic many of which are engineers.

We continue to see encouraging trends in employee hiring, retention and turnover, and this remains critical as we continue to ramp up our focus on new projects and opportunities, which will drive our growth well into the end of this decade.

Further, we are committed to continuing to refine our processes as we onboard employees and implement new training programs to assure we develop the future generation of Curtis Wright's workforce.

As I near the end of my third year as CEO of Curtiss-Wright and look out across the portfolio to our future, it is clear that we are well positioned to continue to capitalize on the tremendous secular growth trends driving our A&D and commercial end markets.

Before we wrap up, I'll highlight a few of those avenues for growth. In defense, an increasing global focus on security and our position as a trusted proven supplier provides confidence in our ability to deliver strong long-term growth across our defense businesses. As you can see by our performance this year, we're certainly benefiting from the strength and alignment of our portfolio to the FY '23 spending bill which appropriated $817 billion or 10% year-over-year growth for the DoD budget.

Although we're faced with the current continuing resolution and delayed signing of the FY '24 spending bill, we remain in an elevated U.S. defense budget environment, with the proposed legislation calling for at least 3% top line growth in FY '24. We see continued opportunities to support our efforts in naval shipbuilding, the expansion of our MOSA product offering in Defense Electronics as well as ground modernization, to name just a few.

The trends driving global defense spending, most notably by the U.S. and its NATO allies are expected to remain a strong tailwind for Curtiss-Wright and the industry.

In commercial aerospace, growth in the global passenger travel, the need to replace the aging commercial fleet and our drive to expand our capabilities on existing and new platforms is expected to provide continued growth for years to come.

Further, the emergence of electrification in aerospace and defense provides yet another opportunity to expand Curtiss-Wright's technological reach. Building upon our relationships and new product introductions addressing the electrification of vehicles in the general industrial market.

As I look to commercial nuclear, emerging technologies in nuclear power and the tremendous efforts that exist worldwide to truly impact global decarbonization and energy security provide a long runway of opportunities for Curtiss-Wright. This includes opportunities to support large-scale AP1000 reactors in Europe as well as the large volume of advanced small modular reactors expected to be built to supplement the existing nuclear reactors or replace existing coal plants. All of which will be needed to meet the tremendous global demand for energy. The level of activity for commercial nuclear continues to advance at a relatively rapid pace and we remain aligned as a strategic supplier to support our customers' needs.

Finally, I'm pleased to share that just this week, Bulgaria's government announced that they have approved the construction of their first AP1000 reactor, which is anticipated to be operational by 2033, followed by a potential second reactor expected to go online 2 or 3 years after the first one.

This is exciting -- this exciting news follows Poland's earlier selection of the AP1000 reactor and the recent signing of an engineering service contract with Westinghouse for the construction of the first 3 of potentially 6 AP1000 reactors. Those initial reactors are expected to be operational in the early 2030s.

Bulgaria's news provides yet another positive endorsement for the AP1000 technology, while also reaffirming Curtiss-Wright's opportunity to secure multiple contracts for our reactor coolant pumps within the next 2 to 4 years.

In closing, I'm pleased with our continued momentum and the healthy outlook for the near and long-term prospects for Curtiss-Wright and the markets we serve. Across every avenue, we are diligently investing in our employees and in critical technologies today to support our future, which will enable Curtiss-Wright to deliver long-term profitable growth and tremendous value for our shareholders, our employees and our customers.

Based on our strong outlook in 2023, we continue to maintain line of sight to the 3-year Investor Day commitments established in 2021, providing confidence that our pivot to growth strategy is working. We look forward to providing a recap of our results and performance against our 3-year targets in February, followed by our May 2024 Investor Day in New York.

Thank you. And at this time, I would like to open up today's conference call for questions.

[Operator]

[Operator Instructions] Our first question comes from Peter Arment with Baird.

[Peter Arment, analyst]

Congrats on the nice results. Lynn, when you think about the nuclear business, just thinking back to the days when we had the big China direct order and you look at the kind of outlook over the next several years. How do you think about in terms of sizing the opportunity. It certainly seems like there's just a lot more going on, a lot more opportunities, whether you look at the AP1000 or you look at SMRs, how are you framing it?

[Lynn Bamford, executive]

So the potential is actually very significant, and we're very encouraged to see the steady drumbeat of this wide group of opportunities for RCP pumps to keep across all the fronts. There's multiple countries. We talked about Bulgaria and Poland on the call here, but Ukraine, Romania, the Czech Republic, even in the U.K., Slovenia, Slovakia, Finland and Sweden are all -- you can find press on all of them that they are taking steps to move forward with building significant new nuclear power. Some of those are still in a competitive position, but Westinghouse clearly continues to begin -- continue to win across that market, given the track record and the great safety profile of the AP1000 nuclear power plant.

Today, we think there's potentially room for 50 to 100 RCPs, and this is well into over $1 billion and potentially north of $2 billion of business for Curtiss-Wright. And it's a pretty consistent time line, the country seem to be targeting on getting these plants online in the very early 2030s.

So the significance of bringing some meaningful orders to Curtiss-Wright similar to what we saw with the China direct order or even more is coming in the next 2 to 4 years, and we're making sure we're prepared to be a great partner to Westinghouse and ready to ramp up and to do that.

So it's fairly dramatic when it comes. It's going to be an amazing flash point for Curtiss-Wright. And the time line, we said 3 to 5 years at the beginning of '22, we're now saying 2 to 4 years, and things consistently are just moving forward than it's not as if a year past is and the time line still remains 3% to 5%, we feel good that this is moving in a very meaningful direction.

[Peter Arment, analyst]

Appreciate that. And just on your overall defense business, are you seeing any kind of replenishment activity. I know there's a lot of activity that we're sending over to Ukraine and given everyone's kind of interest on what's going on in the Middle East. Are you guys seeing any impact in your order environment?

[Lynn Bamford, executive]

We're -- not heavily to be transparent. We're not in munitions and the type of stuff that is being very much replenished. However, we are in a lot of the equipment that is very much needed and whether that's from tactical communications types of equipment, definitely seeing some order trends there. To many of the missile defense systems, where we have significant content.

So it's a little -- it's not the quick reaction stuff that is being asked for. But definitely, Chris spoke to the increased trends. And one of the other areas outside of Defense Electronics deal that we tend to think about. But clearly, our new ESCO acquisition is -- 75% of their business is outside of the U.S., they're having an absolutely knocked the doors off kind of a year, and a lot of that is countries throughout Europe trying to assure their position for readiness and their equipment is essential for that. So clearly, that is -- the position there has been driving orders into our ESCO business.

[Peter Arment, analyst]

And just one quick last one, Chris. You guys continue to generate obviously very strong free cash flow. Are you still seeing opportunities kind of whether it's working capital days? Or how should we think about just working capital profile going forward?

[K. Farkas, executive]

Yes. I'm pretty pleased with the performance and what we've been able to accomplish year-to-date. I mean just even looking at Q3 in that high free cash flow that we generated, which I think back over the past 5 years is stronger than most. But year-over-year, we were able to reduce our working capital as a percentage of sales in the third quarter by approximately 300 basis points. And with the increase in sales and what's happening across the organization to support the ramp in growth, it really didn't come through collections. Collections is certainly an opportunity for us on a throughput basis. But we've got a lot to close out here at year-end. It really came through lower inventory.

So I think we're starting to make some progress. You're going to see that in the throughput of the product. And as we get to year-end here, we're expecting to finish in that 24% range, showing 200 basis points of year-over-year improvement. A lot of that will be burning off this great collections opportunity that we have in front of us now and inventory burn down. I don't know that we'll be quite as aggressive as we have been in the past with payable stretching. We're pretty tough with our suppliers this last year. And I think given our situation here it's good to maybe not be quite so aggressive.

But yes, there is opportunity ahead of us. I mean I think we still have more opportunities as we head into '24 to burn down inventory and to get this working capital as a percentage of sales back in line with some of those historical bests that we were hitting back in that 2019 time frame. So more to come.

[Operator]

Our next question will come from Kristine Liwag with Morgan Stamps.

[Kristine Liwag, analyst]

So Lynn, I just want to go back in terms of the timing for the AP1000 order. If Bulgaria and Poland both want to have the power plant online in the early 2030s. I mean it seems like they should have to order the reactor cooling pump like now. So I just want to understand a little bit more on timing and regarding the progress of your discussion with them. Could this be a late '23 or even a 2024 order?

[Lynn Bamford, executive]

So we have a great relationship with Westinghouse. We have regular market update meetings with them and work very transparently on to know what they're seeing, what they're bidding, et cetera. And so the -- I think as the orders -- they begin to have more security in the number of opportunities they're going to have -- that they're trying to build plants in that early 2030 time frame. I think it does put pressure for us to make sure we can build the number of reactor coolant pumps to be in line with them to date. What we've shared, the 2 to 4 years is still the discussion we're having with Westinghouse. So this isn't really -- this is a very clear discussion with Westinghouse and what they indicate. But I know we feel, as we see the potential for orders and the number of plants being desired to build and know what that means for reactor coolant pumps. .

We know that the order back in 2015 was for 16 RCPs, between Poland and the first Bulgaria plant, that's 16 RCPs. So that's an order of that same magnitude. And it took us -- that was initially anticipated to be a 5-year bell curve of delivery. So that has us putting pumps out over a 5-year plan turned into 7 years, but -- so I mean we're -- everybody is very aware of this. And really just at this point, we don't want to speculate on it being earlier, but it clearly as the world evolves and there's more commitment to AP1000 plants. I would say it does put pressure on them trying to hold off. And they're obviously -- these are very costly pumps. And they're trying to control cash flow and all the things every company does. But at some point, that trade-off will move to getting us started earlier, but that is still a TBD.

[Kristine Liwag, analyst]

And then if I recall right, the RCP for the AP1000 in the same facility where you guys built the RCPs for submarine. With the 2 Virginias plus you've got Columbia class as well, which is incremental capacity. Can you remind us what the capacity is for an annual build? I mean you've also had your Romania and a few other countries who have put in interest in AP1000. I mean sometimes, right, when it rains it pours, should all these orders come through, what's your ultimate capacity that you could build if these orders all come in and they all want to have a plant opening in 2030?

[Lynn Bamford, executive]

So we do have a lot of capacity to ramp up in our [indiscernible] plant with adding shifts and adding staff to the current shifts running 2 full shifts and even potentially a third shift. So we are well positioned with the capital equipment we have to flex up. I mean, obviously, every -- that always has a limit. One of the things we are very much in the process of evaluating is, as broadly our content across the various SMR platforms, we very notably talked about all our content with X-Energy as their line of sight on their customers continues to grow and be positive whether we would need to do some footprint expansions later in this decade.

And so that work is ongoing to consider that, that is going to be needed. We're not there yet. But it's definitely something we're considering whether just like we built the plant in Summerville, Curtiss-Wright is not afraid to make capital investment when you can see line of sight on important meaningful business, and this clearly is for us. So we're not worried about what we can produce out of the facility in Cheswick as of now, but there might be some expansion in the back half of this decade.

[K. Farkas, executive]

And I would just also add to that, that those contracts are typically front loaded with cash, right? So I think if there is any type of CapEx spike at this point, we wouldn't expect it to be significant, but we would expect the cash flows on those contracts to fully help us ramp up in those circumstances. And obviously, it's a very profitable business. So we think people will be really happy with anything that we do in that area.

[Operator]

We'll take our next question from Nathan Jones with Stifel.

[Nathan Jones, analyst]

I'd just like to start off with digging a bit more into the margin profile and the overall margin expansion in 2023, up 20 basis points on 8% organic growth is not huge operating leverage. And I know there's a number of puts and takes. So I'd like to dig into those a little bit more. So maybe you could comment specifically on some of the headwinds like CAP1000 winding down. I know you talked about additional R&D investments.

So maybe unpack that first a little bit more and then talk about what may or may not repeat in 2024 as we're thinking about the margin profile out there.

[K. Farkas, executive]

Yes. I think when you look at Curtiss-Wright from an overall level, when you look at the absorption that we're getting on the sales this year, it's fairly in line with what we've said -- we experienced historically, which is in that 25% to 30% range. I think at the midpoint of our guide right now, we would say about 27% of incremental margin.

But as we've talked about a number of times throughout the year, we have so many great opportunities to invest not only through IR&D, but also contract R&D to continue this great growth trajectory that we're on. So when you look at just the incremental IR&D year-over-year, that's $5 million. And as we look at the total R&D, which includes contract R&D, and we've talked a little bit about things like advanced naval costs and subsea pumps and the various development contracts that are going on with the A&I segment across the actuation division. I mean we're going to be spending in excess of $20 million of R&D this year, and that puts a little bit of pressure on margins.

So I think as we go to capture these great growth vectors that we're on and push ourselves in our growth for the future. It's important to maintain that investment. And then beyond that, we have had a reduction in AP1000 year-over-year. We've talked about the profitability of that contract. I won't get into the numbers again on that. But that's a $20 million year-over-year headwind that we're facing within the Naval and Power segment.

So I think 10 to 30 basis points year-over-year, if you pull back some of these items, there's a lot going on in the organization not only from a pricing perspective and a commercial -- to push forward commercial excellence, but also operational excellence to support that investment that we're doing for the future.

[Nathan Jones, analyst]

So if we stripped out all of the kind of discrete things that are going on, your position is that you're still in that kind of 25% to 30% core absorption, core incremental margins on growth?

[K. Farkas, executive]

Yes.

[Nathan Jones, analyst]

And I mean, the CAP1000 headwind is going to decline year-over-year going into 2024, just because the contract is running out of revenue to decline off of. You guys have made a commitment to continuing to invest in growth. Should we expect further headwinds to the margin line? Obviously, I understand those are getting paid back in growth, in 2024 from increased investment there. Just how should we think about the puts and takes there as we go into '24?

[K. Farkas, executive]

Yes. We are certainly still on the journey and what we've set out to accomplish on Investor Day. I mean there's a lot that goes into answering the question as to where you're going to be in 2024, we're still actively engaged in our strategic planning process and evaluating some of these investment opportunities that stand in front of us this next year. But I mean, specifically, as you brought it up, I mean, as you look at naval and power margins going forward. I think the positives here that we've got a real solid naval defense outlook, including a ramp on the Columbia Class submarine.

We've got this new business integration with our resting systems business that is going very well. We're seeing FMS sales growing -- we have -- we should have no AP1000 headwind this next year. I mean, it would be nice if something happened a little bit sooner on those orders. We're still forecasting 2 to 4 years, but we know that will be an accelerant when it hits.

And we'll have a tailwind and a benefit from this small naval contract adjustment that we had here in the third quarter. So we'll get through this strategic planning process here in the fourth quarter. We're going to look at these R&D investment opportunities that are in front of us in advanced SMR, subsea, advanced enabled tech-type technologies. And absent investments in R&D or other factors, I mean, we'll get to that incremental 25% to 30% as we have in the past. So that's how I would look at that.

[Operator]

Our next question comes from Pete Osterland with Truist.

[Peter Osterland, analyst]

I'm on for Mike Ciarmoli this morning. First I just wanted to ask on the book-to-bill for the quarter. I was wondering if you could provide some more detail on what that looked like by segment or by end markets. Just trying to get a sense for how strong orders were in defense electronics and if there are any markets you would call out where order trends are showing any signs of relative weakness .

[K. Farkas, executive]

Yes. So there's a lot to unpack in that question. So let me start off and say the total Curtiss-Wright level, we were approximately at 1.2x book-to-bill. And that's on very strong sales growth of 15%. As you look across the 3 segments, Aerospace and Industrial was about a 1x book-to-bill, the defense electronics was 1.3x book-to-bill, and that's really the third consecutive quarter for that segment, with very strong book-to-bill.

I mean they were 1.2x in Q2, 1.4x back in Q1. And last 12 months of orders, $983 million. So some very strong things happening there on top of very solid sales growth. And in the Naval and Power segment, about 1.2x. The book-to-bill is a little bit stronger in the defense markets. We're still at about 1.1x in commercial aero. The commercial markets are really kind of a balance, right? And we're seeing some very strong growth that's taking place in orders up 15% in our nuclear submarket. We're seeing mid-single-digit growth here in Q3 in the process markets, but high above that on a year-to-date basis.

We've talked a little bit about the industrial market and what we're seeing there in the past. I think the positive is, is that while we've been in a fairly steady decline on a very strong order book since the highs of 2021. Here in Q3, we flattened out a little bit as we had projected. We're dealing with a little bit of slack in our customers' inventory. That seems to be balancing out. We've got some new product introductions, I think, that are going to help that going forward.

And Commercial Aero continues to be very, very strong. So no concerns in that regard, continue to produce and expect to produce an alignment with the trajectories that Boeing and Airbus have laid out for their critical platforms.

[Peter Osterland, analyst]

And then just one follow-up on Naval Defense. Have you seen any signs of increased activity or conversations around AUKUS? And do you have any updated expectations around timing for when that could potentially be additive to that business?

[Lynn Bamford, executive]

There's definitely a lot of activity happening in the background around AUKUS and figuring out how those submarines are going to be built and replaced. A lot of it were not really at a free hand to speak to. But it's -- we've said kind of over the past year that the plan for AUKUS is not very clear. Well, it is becoming more clear. I can say that, for sure, that -- and we continue to know it's going to be a very good tailwind for Curtiss-Wright in our business, but really the timing and the details is not something we can freely speak to.

[Operator]

[Operator Instructions] We'll take our next question from Myles Walton with Wolfe Research.

[Gregory Dahlberg, analyst]

This is Greg Dahlberg on for Myles Walton. I just had a quick cleanup on SMR. I think previously, you mentioned content on X-Energy, commented you're in discussions with Hitachi and Rolls-Royce. So I don't know, maybe any updates on those discussions and maybe expectations for design revenues into '24 and beyond.

[Lynn Bamford, executive]

So we've been very public on -- we're over $100 million of content on the 4 unit plant for X-Energy. We continue to work with them and explore other systems that we can build. I would say -- I don't know if you saw a press release we put out maybe a month or so ago for a major control system that we've won with TerraPower, so that was something we could go out, go ahead and put out into the public. And so those are the things that we're okay to talk about at this point in time. But the activity is very steady across the board on all the major SMR reactors and we're really hoping that as we move to our Investor Day next May, our goal is -- obviously, we have to comply with what our customers want. But hopefully, a lot of this will have become a little bit clearer and we'll be able to really talk about some of -- where we sit across the reactors by that Investor Day. So that's your tease to try and make you really want to come to our Investor Day.

[Gregory Dahlberg, analyst]

Great. And then one more quick one. Anything on M&A, just broad color on expectations in the year-end, what you're seeing right now.

[Lynn Bamford, executive]

So we have quite a few very interesting properties in the pipeline. I wouldn't see there -- No, I guess -- there's a chance it could be something yet coming by year-end. But our pipeline is very healthy, and I feel optimistic that in '24, we'll be able to have at least one announcement of a really good, solid property that matches both those strategic and financial filters that I had talked about. I will say that as we've said years in the past, we surely have evaluated a lot of properties this year, small to some very large ones, but considering the cost of capital right now, it's a pretty high bar to want to make sure the fit is really good. The forecast, all those things are really solid, and we passed on quite a few properties this year, but we have something we're very optimistic about.

[K. Farkas, executive]

Yes. And then just to that point, I mean, just relative to financing, I mean, back in June of '22, we completed that EAS acquisition, and then we paid down $200 million of notes in Q1. And I'm really pleased to report that based upon that strong free cash flow generation that we've shown year-to-date, we exited the third quarter off the revolver. So those borrowing rates are approximately 6%. So with a strong fourth quarter finish, we'll be putting some cash on to the balance sheet here, not too much, but certainly preparing ourselves for any of these opportunities that present themselves as we move into 2024.

[Operator]

[Operator Instructions] We'll take our next question from Louis DiPalma with William Blair.

[Louie Dipalma, analyst]

Congress Newport News and Electric Boat have referenced how the submarine industrial base remains very fragile, specific with the Virginia class. Has this impacted you at all? And in the context of how the contractors are ordering long lead time materials, is there a potential that your Navy business expands as Virginia class production expands.

[Lynn Bamford, executive]

The one thing we talked about back in our Investor Day back in '21 and continues to be true is we're a very solid supplier across the submarine programs. And have a great reputation within the customer base or our ability to deliver on the submarine programs. And so we're always making it clear that we're interested in expanding our content across those programs as potentially other suppliers fail, and we have instances of that over during the period and continue to have very proactive discussions with those customers that you referenced around that topic -- it's something that, again, I guess, twice on this call say something we're not really that free to speak about the specific subs.

But the other area associated with that is -- there's been money made available in the defense budgets and then there's money in the current plus up that's being debated in Congress to support Israel and Ukraine. There's actually money in that there for the submarine supplier base that we're considering how it might apply to us that -- is to make sure we are doing those things as things like AUKUS come and Colombia ramps to about a year, and they want to potentially ramp up Virginia that we're really prepared to do that. So we're very proactive about considering how we can pursue those funds to be a really solid portion of that supply base into those important submarine programs.

[Louie Dipalma, analyst]

And across your industrial and defense segments. Are you still seeing any supply chain headwinds? I know that several of your competitors have referenced a new reality in terms of the supply chain on the defense side. But it seems you've been able to manage better than most. But if the supply chain improves like should that lead to like better output and potentially higher margins?

[Lynn Bamford, executive]

So there is -- the supply chain is -- and it's interesting, I was talking to some of the team members just to get their latest perspective on it earlier this week. And the supply chain is nowhere near at the -- at the point it was in 2019. And that really is, as you just kind of referenced, there's no clear line of sight on when the supply chain would perform at that level again. It is largely stabilized. I'm very proud of how we have responded, the teams that are right in the middle of this have responded. And implemented new systems, new tools, new approaches, to be successful with the supply chain the way it is in its current state.

And so I think we are being successful and it isn't just that the supply chain is completely back to normal with how we've responded as a business. And I mean you can see that where we were hit the hardest was in defense electronics, and you can see that with the 12% to 14% growth we're now projecting in that segment this year.

But just to put a little color on it. We -- broadly, when we think statistically of what's going on in the supply chain, we look at a lot of different metrics across it. And in the -- in what's considered our long lead parts, which we consider anything over 40 weeks, there's pretty much stability in the lead times and some improvement on the on-time delivery of those parks. But there are still components that are out there at 52 weeks and some even greater of lead time. And there was nothing that long. 26 weeks would have been just the longest we would have seen prior to the pandemic. So there's still that.

And I will say that recently within the lead times on components that are less than that 40 weeks, some under 20, some in the 20 to 40 kind of category. We've seen some volatility in the lead times in those components and some of those going back up from how they had come down prior. So it's still a dynamic environment that the team is having to deal with. The areas where we see some of the lead times creeping back up is really around some of the older legacy processors and memory components, for example, that are -- were brought to the market many, many years ago. That dynamic is true in our industrial businesses also is where they have largely seen their lead times come back from the 52 weeks down to 10 to 14, but they still have some issues with -- where they have legacy parts.

And part of our value proposition, [indiscernible] Defense and Electronics team is it's a combination of we bring state-of-the-art product to the market with the latest technologies across processors, GPUs, FPGAs, all the various ways you can do computing. But we also work with our customers to keep producing the same products that they've built systems on for many, many years, 10 to 15, even up to 20 in some cases, years. And so we have a lot -- we're very dependent on some of those legacy processors and are working very hard to do that.

So it's -- the team is managing it. I'm not foreshadowing any kind of change or problems going forward. I think we've got systems to manage it, but we're still dealing with a situation that isn't the way it used to be.

[K. Farkas, executive]

Yes. And I'll just comment really quickly on the margins there, Louis. I mean I think as you look at 23.5% to 23.7% on the margins. I mean, we've been here before, you can back up and see it in 2020 and 2019. A lot of what I had said earlier on the call regarding our forward outlook in '24, it's really going to depend on where those investment opportunities are in defense electronics and -- but we will manage as we have historically, the entire portfolio to continue to provide that incremental margin expansion.

[Louie Dipalma, analyst]

That's good. Thanks for all the detail. Greatly appreciate it. And I guess one final one. It appears that IIJA infrastructure bill funding is hopefully set to increase next year, at least that's what some of the companies have been saying on their third quarter earnings calls. Can you remind investors, do you have any significant exposure on your industrial side and even a little on your federal side as it relates to the IIJA?

[Lynn Bamford, executive]

So we do -- not directly, we're not out building bridges and things, but we do have tentacles that a lot of that funding is a good tailwind from Curtiss-Wright. And whether that's -- we have a significant footprint across construction vehicles. And so as there is building of the various infrastructures that it's directly funding, that's driving increases in those areas that will come through the Curtiss-Wright with our content across those types of customers. Inside of the builds, there are also investments for the civil nuclear fleet that is very much helping a lot of these plants go from their 60- to 80-year life extensions.

And Chris talks about what we're seeing in our aftermarket sales, very strong performance out of that team. And there's no doubt that some of that is clearly being driven by the money that's available in the infrastructure bill. And then broadly, there's support for various types of electric vehicles. Now we don't obviously do -- we're not focused on automobiles or anything along those lines. But large trucks, buses, school buses, that type of equipment where there's funding for that is another place that we'll see the tailwinds from that. So we do -- it is supportive of Curtiss-Wright's business broadly.

[Operator]

There are no further questions in the queue. I will turn the floor over to Lynn Bamford, Chair and Chief Executive Officer, for any additional or closing remarks.

[Lynn Bamford, executive]

I'd just like to say thank you to all of you for joining us today. We look forward to speaking with you again during our fourth quarter 2023 earnings call in 2024. So have a great day.

[Operator]

Thank you. This concludes today's Curtiss-Wright Third Quarter 2023 Earnings Conference Call. Please disconnect your lines at this time, and have a wonderful day.