Curtiss Wright Corp Q3 FY2023 Earnings Call

Welcome to the Curtiss-Wright Third Quarter 2023 Earnings Conference Call. All participants are currently in listen-only mode. After the presentation, there will be an opportunity for questions. I will now hand the call over to Jim Ryan, Vice President of Investor Relations.

Thank you, Lisa, and good morning, everyone. Welcome to Curtiss-Wright 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 a press release as well as a copy of today's financial presentation is available for download through the Investor Relations section of our company website at www.curtisswright.com. A replay of this webcast can also be found on the website. Please note that 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 guaranteed to future performance. We detail those risks and uncertainties associated with the 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 to provide greater transparency in 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 reconciliation for current and prior year periods is available in the earnings release and on our website. Now, I'd like to turn the call over to Lynn to get things started.

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 and 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 margins expanded by 30 basis points. Underscoring this performance was strong profitability in the 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 a 140% free cash flow conversion. We were also pleased with the continued growth in our order book, which was up 3% in the quarter and now up 8% year-to-date. Leading the way was our defense electronics segment, which achieved a record booking quarter exceeding the previous record set in 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, our book-to-bill ratio was 1.2 times in the third quarter, building upon our already strong backlog, which is now up 12% year-to-date and is in excess of $2.9 billion. Next, highlights of our full-year 2023 guidance are as follows: Our growing backlogs and strong performance to date, along with favorable trends across all our end markets, provide 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 three segments. Overall, strong profitability remains unchanged, with expectations for 10 to 30 basis points in year-over-year margin improvements reflecting the balance of the combined portfolio, whereby a reduction in the naval and power segment profitability was offset by a stronger outlook in defense electronics. As a result, diluted EPS is now expected to grow 11% to 13%, which keeps us on track to exceed our long-term targets. For the second consecutive quarter, we have 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.

Thank you, Lynn. On slide four, 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 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 an unfavorable mix in the timing of development contracts, principally for actuation products. Next, in defense electronics segment, sales increased by $55 million or 34%, reflecting continued supply chain recovery and the conversion of our strong order book, which showed increases in our aerospace and ground defense markets. Notably, approximately $10 million in tactical communications equipment sales were accelerated into the third quarter from the fourth quarter as we burned down some of our backlog at a faster pace. Elsewhere in aerospace and ground defense, we experienced increased sales with 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 by 54% while operating margin improved by 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 was 12%, which was essentially in line with our expectations and reflected growth in both our AMD 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 inflected 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 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 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 an unfavorable mix from the CAP1000 program. Additionally, if you look at the segment's profitability, our results reflect a small number of naval contract adjustments, reflecting the continued training and development in new hires to support our ramp and growth. To sum up the third quarter results, 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 five. I'll begin with our in-market sales outlook, where we now expect organic sales to grow 7% to 9%, with total sales growth of 8% to 10%, which is an increase of $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 range from 11% to 13% 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's shifted into Q3, we expect sales in the ground defense market to potentially decline in the fourth quarter. While we expect a solid 5% to 7% outlook for year-to-year growth in naval defense, we have slightly reduced the outlook 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 ongoing 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 contributions from 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. The notable drivers of this increased 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 the alignment of our technologies to domestic and foreign defense priorities, we continue to see this as an opportunity to address solid long-term revenue growth in this area. Turning to commercial aerospace, based on year-to-date performance, we are now increasing our expectations for sales to grow 14% to 16%, driven by strong OEM sales growth on both narrow-body and wide-body platforms. Outside of our aerospace and defense markets, we've raised our growth outlooks slightly for the power and process market based on the continued strong demand for both our commercial nuclear and industrial valve products. As a reminder, the outlook in this market includes the $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, along with a low double-digit growth rate in the process market, reflecting higher nuclear outages and process turnarounds, as well as a ramp in the 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 six, I'll begin in aerospace and industrial, where we increase 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 of 20% to 40% 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 on 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 is expected to range from 23.5% to 23.7%, reflecting a 110% to 130 basis point 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%. Lastly, in 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 from 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 adjust further in her closing remarks. Lastly, regarding the segment's margins, our outlook continues to reflect margin pressures associated with the timing and development contracts in the power and process market, as well as an unfavorable mix on lower CAP1000 revenues. With regards to 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. 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. 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 investor day commitments. Continuing with our financial outlook on slide seven, 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 for an increase of 11% to 13%. Lastly, in terms of free cash flow, we delivered a strong performance through the first nine 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 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 would like to turn the call back over to Lynn.

Thank you, Chris, and turning to slide eight. 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 continue 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 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 ramp up our focus on new projects and opportunities that 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 ensure we develop the future generation of the Curtiss-Wright workforce. As I near the end of my third year as CEO of Curtiss-Wright and look out across our 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 strengths and alignment of our portfolio to the FY 2023 spending bill, which appropriated $817 billion, or a 10% year-over-year growth for the DOD budget. Although we're faced with the current continuing resolution and delayed signing of the FY 2024 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 2024. We see continued opportunities to support our efforts in naval shipbuilding, the expansion of our MOSA products 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 in the industry. In commercial aerospace, growth in 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. Furthermore, 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 to 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 two or three years after the first one. This exciting news follows Poland's earlier selection of the AP1000 reactor and their recent timing of an engineering service contract with Westinghouse for the construction of the first three of potentially six AP1000 reactors. Those initial reactors are expected to be operational in the early 2030s. Bulgaria's announcement provides yet another positive endorsement for AP1000 technology, while also reaffirming Curtiss-Wright's opportunity to secure multiple contracts for our reactor coolant pumps within the next two to four 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, employees, and customers. Based on our strong outlook in 2023, we continue to maintain line of sight to the three-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 three-year targets in February, followed by our May 2024 Investor Day in New York. Thank you. At this time, I would like to open up today's conference call for questions.

The floor is now open for questions. Thank you. Our first question comes from Peter Arment with Baird. Your line is open.

Yes, thanks. Good morning, everyone. Hey, 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. I know - how do you think about in terms of sizing the opportunity? It certainly seems like there's just a lot more going on and multiple opportunities, whether you look at the AP1000 or you look at SMRs. How are you framing it?

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 fronts. You know, there are multiple countries. We've talked about Bulgaria and Poland on the call here, but Ukraine, Romania, the Czech Republic, even in the UK, Slovenia, Slovakia, Finland, and Sweden are all making strides to move forward with building significant new nuclear power. Some of those are still in a competitive position, but Westinghouse clearly continues to begin - continues 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 a need for 50 to 100 RCPs, which equates to well over a billion dollars, and potentially north of $2 billion of business for Curtiss-Wright. The timeline appears consistent with expectations, as countries seem to be targeting to get these plants online in the very early 2030s. The significance of bringing some meaningful orders to Curtiss-Wright is similar to what we saw with the China Direct order, and even more is anticipated in the next two to four years. We're making sure we are prepared to be a great partner for Westinghouse and ready to ramp up production accordingly. This is going to be an amazing opportunity for Curtiss-Wright. The timeline we suggested at the beginning of 2022 was three to five years; now we're stating two to four years, and the momentum continues to positively shift.

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 everyone's kind of interested in what's going on in the Middle East. Are you guys seeing any impact in the order environment?

To be transparent, we're not heavily engaged in munitions and the type of material being urgently replenished. However, we do supply a lot of equipment that is essential and whether that's from tactical communications types of equipment, we're definitely seeing some positive order trends there. Many of the missile defense systems where we have substantial content are also showing growth. So, while it's not the rapid response things that are being requested, there’s a clear increase in demand. Additionally, our recent acquisition, ESCO, sees about 75% of their business being outside of the U.S., and they're having a standout year, primarily driven by countries across Europe seeking to assure their readiness and equipment.

Thanks. And just one quick last one, Chris. You guys continue to generate strong free cash flow. Are you still seeing opportunities with working capital? How do you think about your working capital profile going forward?

Yes. I'm pleased with our performance and accomplishments this year. Looking specifically at Q3, our free cash flow generated was stronger than most we've seen in the last five years. Year-over-year, we managed to reduce our working capital as a percentage of sales in the third quarter by about 300 basis points. This was attributed to increased sales and improvements in collections, although we still have substantial room for improvement. Our performance came more from lowering inventory levels, which indicates we are making good progress in that area. Moving forward, we aim to finish in that 24% range and we expect to see another 200 basis points in year-over-year improvement. Additionally, we plan to further burn off some of our inventory and contend with outstanding collection opportunities. While we don’t expect to be as aggressive as we've been regarding payables, we still envision opportunities as we cone toward 2024 to optimize our working capital and get it back in line with historical bests we achieved in 2019.

Thanks, Peter.

Our next question will come from Kristine Liwag with Morgan Stanley. Your line is open.

Hey, good morning, everyone.

Good morning, Kristine.

Lynn, could you go back to the timing for the AP1000 order? Bulgaria and Poland both want to have their power plants online in the early 2030s. Shouldn’t they be ordering the reactor coolant pumps right now? I want to understand better on timing and the progress of your discussions with them. Could this be a late 2023 or even 2024 order?

We have a great relationship with Westinghouse and conduct regular market update meetings with them, maintaining transparency about what they are seeing and what they’re bidding, etc. With our insight, there is a growing number of opportunities on the table that they are pursuing, which aligns with their early 2030 timelines. Our discussions indicate that understanding the number of orders puts the pressure to ensure timely deliveries of reactor coolant pumps. We are still expecting the two to four years for orders, and while everyone is cognizant of the significance of the orders, Westinghouse is indeed considering cash flow management whilst balancing the need for costly pumps. We feel optimistic about the ongoing commitment from these countries regarding potential RCP needs.

If I recall correctly, the RCP for the AP1000 is built at the same facility where you guys built the RCPs for submarines. With the two Virginias plus Columbia-class, what is your annual build capacity? There are also countries like Romania interested in AP1000. When it rains, it pours sometimes, right? If all these orders come through, what’s your ultimate capacity in production if everything has plants scheduled to open in 2030?

We do have significant capacity for ramping production with our current facilities. We are well-positioned to flex our operations, which includes adding shifts and acquiring more staff to accommodate increased demand. We continue to work closely with X-Energy and evaluating our capital footprint through ongoing assessments to ensure we're prepared. Currently, we believe our facility in Cheswick can meet the expected needs, but we are reviewing the necessity of potential expansions later this decade based on market demands and client commitments.

Additionally, contracts are often structured to be front-loaded with cash, providing needed financing for any necessary CapEx increases. If any spike in CapEx occurs, we expect cash flow from contracts to be sufficient to accommodate ramping up production. Given the profitability of this segment, our expectations are high for the outlook it presents.

Great, thank you. I'll keep it at two.

Thanks, Kristine.

We'll take our next question from Nathan Jones with Stifel. Your line is open.

Good morning, everyone.

Hi, Nathan.

Good morning.

I'd like to start off by digging a bit more into the margin profile and the overall margin expansion in 2023, which is up 20 basis points on 8% organic growth. I know you've noted several dynamics impacting margins. Could you provide more detail on some of the headwinds like CAP1000 winding down? Could you unpack that for us a little more and also talk about what may or may not repeat in 2024 while considering the upcoming margin profile?

When you look at Curtiss-Wright's overall absorption this year, it's fairly in line with our historical rates, which are typically in the 25% to 30% range. At the midpoint of our guidance, we estimate about 27% of incremental margin. However, we have numerous opportunities to invest in both internal R&D and contract R&D to continue our growth trajectory. The incremental IR&D year-over-year was approximately $5 million. Overall, we are planning to spend over $20 million in R&D this year, which may pressure our margins somewhat, but it's crucial to maintain these investments. Additionally, the reduction in profitability from CAP1000 accounts for about a $20 million headwind year-over-year within the naval and power segment. So, if we factor out these influences, we can achieve incremental margins generally between 25% to 30% as we have historically done.

Should we expect further pressure on margin lines due to your commitment to continual growth investments in 2024? Could you clarify the future puts and takes as we plan our expectations?

We are still actively engaged in our strategic planning process and evaluating investment opportunities for the upcoming year. Looking at naval and power margins going forward, there are several positives, including a solid naval defense outlook, the success of our arresting systems business, and increased foreign military sales. The absence of AP1000 headwinds in the following year will also be beneficial. However, we've stated we expect to maintain an incremental margin similar to our previous performance around 25% to 30%. That being said, plans are still being finalized in this planning process, and we will evaluate R&D investments closely to ensure they align with our growth strategy.

Thank you. It’s vital for our understanding of the future margin standpoint.

Thank you, Nathan.

Yes, thank you.

Our next question comes from Peter Osterland with Truist. Your line is open.

Hey, good morning. I'm on for Mike Ciarmoli this morning. Thanks for taking our questions. The first thing I 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 market. I'm trying to get a sense of the strength of orders in defense electronics and whether there are any markets showing signs of relative weakness.

At the total purchase rate level, we were approximately 1.2 times book-to-bill, and that's on very strong sales growth of 15%. As you look across the three segments, aerospace and industrial was about a one times book-to-bill. The defense electronics segment achieved 1.3 times book-to-bill, marking the third consecutive quarter of strong performance in this area, with 1.2 times in Q2 and 1.4 times in Q1. Over the last 12 months, total orders amounted to $983 million, highlighting excellent momentum. The naval and power segment also performed well at about 1.2 times. Commercial aero is in balance and remains solid, although we have seen some slack in customer inventory. However, we anticipate the positive trajectory to persist in the future.

Perfect. Thanks for that detail. And then just one follow-up on naval defense. Have you seen any signs of increased activity or conversations surrounding AUKUS? Do you have any updates regarding expectations for when that might be additive to your business?

There’s definitely a lot of activity surrounding AUKUS as they continue to consider how those submarines will be built and replaced. The plans were earlier unclear, but they are becoming clearer. We are aware that this will serve as a strong tailwind for Curtiss-Wright's prospects, but due to the sensitive nature of the discussions, we can't provide detailed insights at this moment.

Understood. I'll leave it there. Thanks for taking the question.

Thank you.

We’ll take our next question from Myles Walton with Wolf Research. Your line is open.

Hi, good morning. This is Greg Dahlberg on for Myles Walton. I'd like to ask a brief follow-up on SMR. I've seen discussions regarding X-energy, some commentary in regards to Hitachi and Rolls Royce. Can you provide any updates concerning those discussions and expectations for design revenues into 2024 and beyond?

We have been clear that we're expecting substantial content opportunities with X-energy, over $100 million for the four-unit plant. We have continuously worked with them to explore further technology solutions. There was a recent press release that we won regarding a major control system with TerraPower, which illustrates our ongoing commitment to the SMR space. We're seeing steady activity across all the major SMR reactors, and we aim to provide clearer insights into where we stand with various reactors by our Investor Day in May.

Okay, great. And one more follow-up. Any color you can share on M&A expectations towards year-end? What are you currently observing?

We indeed have a healthy pipeline of properties under consideration. While it’s possible something could emerge by year-end, we feel optimistic about making a solid announcement regarding an acquisition in 2024 that aligns with our strategic and financial frameworks. This year, we’ve assessed numerous properties, from smaller ones to substantial ones. However, given the current cost of capital, it’s essential for us to ensure a solid fit and favorable forecast before proceeding. We have some promising prospects we are actively monitoring.

Just to add, in June 2020, we completed the EAS acquisition, and since then, we've actively managed our balance sheet. Based on our strong free cash flow generation year-to-date, we've ended the third quarter off the revolver, and with rates around 6%, we’re positioned to pursue opportunities while enhancing our liquidity.

Great. Thank you.

Thank you.

We will take our next question from Louie DiPalma with William Blair. Your line is open.

Lynn, Chris, and Jim, good morning.

Good morning.

Good morning.

Congress and Newport News and Electric Boat have referenced how the submarine industrial base remains very fragile, especially concerning the Virginia-class. Has this affected you at all? Regarding how the contractors are ordering long lead time materials, is there a chance your Navy business expansion correlates with the Virginia-class production?

We continue to be a strong supplier across the submarine program and have a reputable standing among our customers on our ability to meet their demands. We want to expand our participation as it is anticipated some suppliers may struggle. We are having proactive discussions regarding needs, especially as investments in defense budgets are being matched with submarine programs - this includes discussions about the opportunities around AUKUS. We remain optimistic regarding our proactive positioning and prospects as we head into these developments.

Thanks, Lynn. Additionally, across your industrial and defense segments, are you still experiencing supply chain headwinds? I know several of your competitors have mentioned a new reality in terms of the supply chain on the defense side, but it looks like you've managed better than most. If the supply chain improves, will that lead to better output and higher margins?

The supply chain is not near the point it was in 2019, and there remains no clear timeline for its full recovery. Currently, it's largely stabilized, and I'm proud of how we adjusted to keep pace with challenges through new systems and tools to manage operations effectively. The hardest hit area was defense electronics, as evidenced by our strong growth projections. While we've seen stability in lead times for long-lead parts, some continue to remain lengthy. Nonetheless, we remain confident in our ability to navigate through this dynamic environment and ensure we can deliver our critical mission effectively.

On margins, I'd like to add that our operating margin for this year is set at about 23.5% to 23.7%. Historically, we have maintained and are committed to incremental margin expansion. Our operational excellence strategies remain steadfast and effective.

That's good. Thanks for all the detail. Greatly appreciated. And just one last one, it appears that IIJA infrastructure bill funding is hopefully set to increase next year. At least that's what some companies have indicated on their third-quarter earnings calls. Can you remind investors of your exposure on your industrial side related to IIJA?

While we are not directly involved in construction, we radiate the impact through substantial exposure across construction vehicles and other priorities. Growth in the infrastructure will have a tangible impact on demands for the products we supply. Additionally, funds allocated to civil nuclear fleet enhancements impact operation maintenance across existing reactors where we’ve seen strong aftermarket performance. We expect to benefit significantly from this bill given its provision for support in electric vehicles, particularly large trucks and buses.

Great. Thanks, Lynn, and thanks everyone.

Thank you.

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

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.

Thank you. This concludes today's Curtiss-Wright third quarter 2023 earnings conference call. Please disconnect your line at this time and have a wonderful day.