Welcome to the Curtiss-Wright Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Jim Ryan, Vice President, Investor Relations. Jim, please proceed..

Thank you, Gretchen, and good morning, everyone. Welcome to Curtiss-Wright Third Quarter 2022 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 earnings release and financial presentation is 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 into Curtiss-Wright's ongoing operating and financial performance.

Any references to organic growth are on an adjusted basis and excludes 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?.

supply chain and foreign exchange. First, I'll discuss the global supply chain challenges, which continue to have a considerable impact on the timing of revenues in our Defense Electronics segment.

While our year-to-date order activity is really encouraging, the delays in deliveries of semiconductors continues to defer our conversion of bookings to revenue, which has typically been within 6 to 9 months.

We had expected this to ease up in the second half of this year and even more importantly, for supplier decommits on critical components to decline more significantly as we move through the balance of the year. Unfortunately, this was not the case, and we continue to experience greater volatility in these areas.

In addition, as we have mentioned over the past year, lead times on more complex devices have extended from a typical 10 to 12 weeks to 52 weeks or even greater in some cases and also remain quite volatile. As a result, we now expect approximately $45 million of Defense Electronics revenue to push out of 2022.

We have revised our 2022 guidance to reflect this more derisked scenario for the timing of revenues and the related impact on free cash flow. Despite the delays our Defense Electronics business remains fundamentally sound. We fully expect to recover these sales and related strong profitability as these conditions subside.

This remains a timing issue with a strong but extended tail of revenues and free cash flow. Aside from the supply chain, FX headwinds due to the strength of the U.S. dollar are beginning to have a more pronounced impact on our sales performance for the first time in years.

This resulted in a slightly greater than 1% impact on our third quarter sales or nearly $10 million, mainly within our Aerospace & Industrial segment. We expect these FX headwinds to continue into the fourth quarter and likely have a modest impact on our top line results in 2023.

We are closely monitoring this situation and the related impact on our business. Next to our updated full year 2022 adjusted guidance. Our sales guidance for both our A&I and Naval & Power segments remain unchanged with each reflecting mid- to high single-digit growth.

Regarding our Defense Electronics segment, as I shared earlier, we are now expect $45 million in segment revenues to push out of 2022. As a result, we have reduced our overall Curtiss-Wright sales growth outlook to a range of 2% to 4%. While total Curtiss-Wright operating income guidance has also been reduced.

We continue to expect strong year-over-year margin expansion based upon improved profitability within our A&I segment and our overall focus on operational excellence. As a result, we were able to maintain our prior guidance to reflect 10 to 30 basis points in margin expansion this year despite the top line reset.

We also remain on track to achieve double-digit growth in diluted EPS.

While Chris will discuss our free cash flow in more detail, we have revised our expectations lower based upon the timing of the defense revenues as well as the revised timing for receipt of a significant cash payment on the China AP1000 contract, which we now expect to collect in 2023.

To summarize our guidance update, we certainly had our challenges during the quarter and a year with the supply chain situation, but business fundamentals and underlying demand across our portfolio remains strong. Next, I'd like to provide a few updates on some recent events.

First, we were pleased to announce in September that we signed a preferred strategic supplier agreement with X-energy for the design and deployment of their advanced small modular reactor. We were selected to provide several critical systems for the reactor, which we expect to generate in excess of $100 million in revenue per plant.

We'll discuss this agreement in more detail later in our prepared remarks. We are also excited to share the recent news that Westinghouse was selected by Poland to build the country's first nuclear power plant, initially expected to include 3 AP1000 reactors with the potential for 6 total reactors.

As the reactor coolant pump or RCP provider for this reactor, this provides us an opportunity for new RCP orders from Westinghouse within the next 3 to 5 years to support these reactors in Poland, which are expected to begin producing electricity in 2033.

In summary, we are well positioned to capitalize on the tremendous secular growth trends across our end markets, including emerging technologies and nuclear power and an increasing global focus on defense, which will enable Curtiss-Wright to deliver long-term profitable growth.

Now I would like to turn the call over to Chris to provide a more thorough review of our third quarter 2022 performance and our outlook for the remainder of the year.

Chris?.

Thank you, Lynn, and good morning, everyone. I'll begin with the key drivers of our third quarter 2022 results by segment. In Aerospace & Industrial, we delivered another strong performance, generating 9% sales growth in the quarter were up 12% when excluding the impact of FX.

Within the segment's commercial aerospace market, our results reflected strong demand on both narrow-body and wide-body platforms. In the general industrial market, our results reflected double-digit sales growth in both industrial vehicle products and surface treatment services where we continue to experience strong demand.

In this segment's Ground Defense market, we benefited from a development contract for ground missile launcher EM actuation technology.

And regarding the segment's profitability, we delivered 260 basis points in year-over-year margin expansion, which reflected favorable absorption on strong sales and the benefits of our operational excellence and pricing initiatives as we continue to outpace any supply chain or inflationary pressures on margin.

Next in Defense Electronics, our performance again reflected the timing of defense revenues.

Overall, we would have expected approximately $20 million in higher revenues in the quarter as changes in supplier schedules resulted in lower embedded computing revenues in aerospace and defense as well as reduced sales of tactical communications equipment and Ground Defense. Turning to the segment's operating performance.

Our third quarter results principally reflected under absorption on lower A&D revenues. Next, in the Naval & Power segment, sales growth of 9% principally reflected the contribution from our new arresting systems business and its sales to the aerospace defense market.

Naval defense revenues were essentially flat in the quarter, reflecting the timing of production on both the major aircraft carrier and submarine programs.

In the power & process market, our results reflected solid demand in the Nuclear Aftermarket supporting existing reactors along with double-digit sales growth in process where we continue to experience very strong demand. These increases more than offset the wind down of production on the CAP1000 program.

And regarding the segment's profitability, our results reflect favorable absorption on higher organic sales as well as the benefits of our operational excellence initiatives.

To sum up the third quarter results overall, Curtiss-Wright's operating margin of 18.2% was slightly above expectations, up 70 basis points year-over-year and up more than 200 basis points sequentially. Next, turning to our full year 2022 guidance. I'll begin on Slide 5 with our end market sales outlook.

Based upon the macro impacts that Lynn mentioned earlier, we now expect total Curtiss-Wright sales growth of 2% to 4%, which includes the contribution from the arresting systems acquisition, offset by a 1% headwind from FX. As a result, we now expect organic sales to grow 2% to 4%.

I'll begin in our A&D markets where we reduced our growth outlook to a new range of 1% to 3%. This primarily reflects the timing of revenues within our aerospace and Ground Defense markets due to supply chain delays, which we expect to slowly recover in 2023. We also reduced our naval defense outlook slightly based on the timing of program revenues.

Wrapping up our A&D sales. Our guidance remains unchanged in commercial aerospace, where we continue to experience very strong order activity in support of our current and long-term outlook. And turning now to our commercial markets, where we have raised our overall sales growth guidance to a new range of 6% to 8%.

This reflects a more favorable outlook for the power & process market, which we raised to a new range of 5% to 7%. This increase is based on the strong year-to-date performance and increased sales within our nuclear business supporting Gen 4 advanced small modular reactors, most notably tied to our recent agreement with X-energy.

In addition, we continue to expect strong general industrial market sales growth of 6% to 8%. As we've experienced historically, we expect the fourth quarter to be our strongest in 2022 and will reflect year-over-year sales increases across all of our A&D and commercial markets. Continuing with our outlook by segment on Slide 6.

I'll begin in Aerospace & Industrial, where we continue to project strong growth in both commercial aerospace and general industrial market sales.

Our top line guidance remains unchanged, reflecting growth of 6% to 8%, though we now expect more favorable operating income growth of 12% to 16% and operating margin to increase 90 to 110 basis points based upon the continued benefits of our operational excellence and pricing initiatives.

Next, in Defense Electronics, we have revised our current year sales and operating income growth expectations, which we believe fully derisks our full year outlook. Again, this very much remains a timing issue as the ongoing challenges in the supply chain are delaying the recognition of our strong order book.

Despite those impacts, we maintained our operating margin guidance range of 22.2% to 22.4% for this segment. And lastly, in the Naval & Power segment, our top line guidance remains unchanged, reflecting overall growth of 7% to 8%, of which, 3% to 4% is organic driven mainly by an increase in the power & process market.

Our outlook also includes the contribution from the arresting systems business, which delivered solid third quarter results and remains on track to contribute $40 million in revenue this year. For this segment, we continue to expect operating income to grow 6% to 8%, while operating margin remained strong, ranging from 18% to 18.2%.

Next, I wanted to share a few comments about our research and development activities.

Though we are experiencing some moderate delays from a staffing and engineering resource perspective, particularly in Defense Electronics, total Curtiss-Wright's combined spending on internal and customer-funded R&D still expected to increase year-over-year by approximately $12 million.

It's important to note that we're constantly seeking customer funding for our growth investments and that we are directing our resources to the highest and best use.

If you recall, this activity began in the second quarter with a modest change to our guidance and shipped to development contracts as we were able to secure an increase in customer-funded programs.

This shift is now taking place more broadly across the portfolio to support numerous projects, including electromechanical actuation technologies to support aerospace and Ground Defense and in the A&I segment, avionics and instrumentation as well as advanced naval cost technologies within our Defense Electronics segment and support for the new X-energy small modular reactor as well as subsea pumping initiatives in Naval & Power.

Collectively, we expect these investments in total engineering spending, which are increasing year-over-year to enable future organic growth and also support our pivot to growth strategy.

So to summarize our outlook, we now expect total Curtiss-Wright operating income to grow 3% to 6% overall, still in excess of sales growth and continue to expect operating margin to improve 10 to 30 basis points, ranging from 17.1% to 17.3%, including the headwind of the CAP1000 wind-down and first year margin dilution on the new arresting systems acquisition.

Continuing with our financial outlook on Slide 7. I'll begin with an update of our recent financing actions. If you recall in July, we took the opportunity to further strengthen our balance sheet. And last week, we closed on $300 million in new senior notes, which as a reminder, at a blended rate of 4.54% on 10- and 12-year notes.

We intend to utilize these proceeds to pay down our revolver, which was used to fund our recent acquisition. Of note, the continued increase in yields on 10-year treasuries and the timing of cash flows due to the supply chain is driving higher interest expense. And as a result, we increased our interest expense guidance by $2 million.

Based on this increase and the impact from lower defense revenues, our updated full year 2022 adjusted diluted EPS guidance reflects a new range of $8.05 to $8.20, which continues to represent double-digit growth this year. Turning to our full year free cash flow outlook.

Our revised guidance reflects a new range of $275 million to $315 million, and I wanted to provide some color on the 2 main drivers.

First, the timing of defense revenues due to supply chain challenges and our related ability to collect on those revenues as well as higher inventory levels have resulted in a lower-than-expected year-to-date free cash flow performance.

Given the expectations for timing of fourth quarter revenues, we see a related impact with collections pushing into 2023. Second, if you recall from our August update, we noted that we were expecting a significant cash payment upon final delivery of our CAP1000 reactor coolant pumps to China.

And at this time and an alignment with the customers' project schedule, they're not ready to take delivery of these pumps, which would have substantially marked the completion of our contract. We are working with the customer and are confident in a successful resolution that this payment will not likely occur until 2023.

As a result, we now expect to recognize approximately $40 million for the final cash receipt next year. The management team remains very focused on free cash flow generation and working capital, especially as we conclude this year and planned for 2023.

It's important to note that excluding the delayed receipt of the CAP1000 payment, our adjusted free cash flow conversion would have exceeded 100%, a target that we've consistently achieved for the past decade. And now I'd like to turn the call back over to Lynn to continue with our prepared remarks.

Lynn?.

Thank you, Chris. Before we move to Q&A, I'd like to take a few minutes to share some more exciting news in our commercial nuclear power business, which represents a significant long-term opportunity for Curtiss-Wright and our shareholders.

In September, we signed an agreement with X-energy to advance the design and deployment of their Xe-100 advanced small modular reactor, the first of which is expected to begin commercial operation in 2028. Under the contract, we will be providing 3 of the most critical systems for this reactor.

We would not have been in this position without the tremendous collaboration of our various nuclear businesses, leveraging their long-standing industry expertise to secure this important agreement for Curtiss-Wright. We estimate that our content will be in excess of $100 million in revenue per 4 unit X-energy plant.

As a frame of reference, a typical build-out to replace an expiring coal plant would likely include a pair of X-energy plant and provide Curtiss-Wright in excess of $200 million in revenue.

We are also working closely with other major reactor designers to develop similar partnerships including, but not limited to, expanding our existing relationship with NuScale and developing new content with TerraPower, GE Hitachi and Rolls-Royce.

We are recognizing initial design and development revenue in 2022 related to Generation 4 technology, which we expect to continue for the next several years as the demonstration projects are completed and anticipate that we would recognize production revenue in the middle to later part of this decade.

We're also excited to see the continued drumbeat of U.S. government support for this technology and a steadily rising pro nuclear sentiment, which should provide long-term benefits to Curtiss-Wright.

We've seen several pieces of important legislation released in the past few quarters, including the Infrastructure Bill, the Inflation Reduction Act and even the CHIPS Act all of which support the exciting existing nuclear infrastructure and the deployment of advanced reactors.

This legislation will provide billions of dollars of investment and production tax credits dedicated to preserve the operation of the existing nuclear fleet and also helps fund the build-out of next-generation reactors.

To help frame the potential of the advanced reactor market, we point you to a recent NEI survey of its membership, which includes utilities generating approximately half of the total electricity production in the U.S. today.

They identified the need for more than 90 gigawatts of new nuclear power generation equating to more than 300 SMR plants being required over the next 25 years many of which will be targeted to replace retiring coal plants. This represents a significant opportunity for Curtiss-Wright.

Beyond the U.S., there is rapidly growing interest in advanced reactor technology in Canada, the U.K. and Eastern Europe. In addition to power generation, substantial opportunities exist for industrial and high-temperature process heat applications that greatly broaden the use of the potential end user base.

For example, Dow Incorporated recently announced their intent to deploy an X-energy plant at their Gulf Coast operations to provide carbon-free process heat and power that is expected to be operational in 2030.

The global drive for climate change, clean energy and carbon free emission goals and the strategic importance of energy independence are all generating strong support for this industry.

Overall, we see a tremendous global market opportunity for Curtiss-Wright to be part of every leading SMR and advanced reactor with the potential to drive above-average long-term growth in this market.

As I wrap up our prepared remarks today, I want to emphasize that although we expect the challenging near-term market conditions to continue into 2023, I remain ever confident in our strong business fundamentals and the exciting opportunities that lie ahead for Curtiss-Wright.

As evidenced by our growing order book, Curtiss-Wright remains extremely well positioned for long-term profitable growth, and we expect to enter into this next year with a very strong backlog across the portfolio. This, in turn, will provide a significant opportunity to deliver value to our shareholders. With the increasing U.S.

defense budget environment and the emerging growth trends driving global defense spending as clear tailwinds to Curtiss-Wright, we are confident in our ability to demonstrate strong long-term growth across our defense businesses.

Across our commercial markets, we remain well aligned with the leading long-term secular growth trends such as electrification and commercial aerospace, general industrial and perhaps even in military, and in nuclear to help sustain the 20 -- 90-plus operating reactors in the U.S.

and hundreds more worldwide as well as the opportunities at our doorstep to participate in the development and eventual production of advanced reactors. We remain focused on executing our pivot to growth strategy to maximize revenue and operating income growth.

Despite fairly significant top line headwinds this year, we remain well positioned to deliver solid operational performance in 2022 and beyond. Curtiss-Wright also maintains a healthy and balanced capital allocation strategy, and we are focused on investing our capital for the best possible returns.

In closing, the prospects for Curtiss-Wright in the markets we serve remain very healthy, and we remain committed to driving solid execution and delivering long-term value for our shareholders. At this time, I would like to open up today's conference call for questions..

[Operator Instructions]. Our first question is coming from Michael Ciarmoli from Truist..

Lynn, you mentioned a lot about the X-energy and the opportunity there. What -- I guess you took an equity stake, and you kind of talked about some other potential similar relationships.

Can you just give maybe some more of the details on the equity stake? And will we see additional positions taken with some of these other companies?.

Yes. Curtiss-Wright -- this is a great opportunity. We believe X-energy is really well positioned to bring very unique and safe technology into a very growing market area. So we chose to make this investment in a technology that we believe in.

We believe in the role the advanced reactors that are going to play in a safe and healthy growing energy market for the U.S. and beyond. So it's fairly unique in that sense, not necessarily forecasting investments in other providers, but we're proud to be able to make this investment with X-energy. So our partnership with them is very strong.

And I think it's important to note that they very much wanted to have an announced relationship with Curtiss-Wright's, given our reputation as one of the premier providers of the equipment that goes into nuclear power plants and our reputation and our capabilities and expertise give credibility to them.

And so it's really been a very great partnership. We absolutely are working across the industry as commented in my notes to really make ourselves part of every advanced reactor that is being developed. And I couldn't be more pleased with the collaboration within Curtiss-Wright.

I think you've heard us talk for 1.5 years now about becoming a more integrated company in how we pursue business and market facing. And this is just absolutely a premier example of how the teams are doing that, and it's really energized the teams across our company at the opportunities that are before us..

Got it. Got it. That's helpful. And just shifting to the other nuclear opportunity with Poland. Can you give any more color. And I think you said 3 reactors.

Is that 3 reactors or 3 plants? Is it 12 pumps or 24 pumps? And then any sense on -- I know you kind of talked about timing, but you guys have to start preparing from a resource standpoint? Do you have all the staffing in place, depending on when that order comes to fruition?.

Yes. So super exciting news, late breaking last week, and we really are early days with translating that with Westinghouse into exact timing. We have been saying 3 to 5 years, this surely is very solid drumbeat to shore up that timing, potentially sooner, but we don't have any line of sight on that. It is 3 plants.

So the agreement is -- with Poland is -- their intent is to build 6 plants, the initial contracting, which is -- it's been announced that I don't think it's contracted yet, will be for 3 plants.

And I'm sure our timing as Westinghouse shores up that relationship, we are working very closely to be right there hand-in-hand to make them successful to move through these first 3 and secure the second 3 in Poland.

And again, as we said, they are very actively pursuing a variety of opportunities throughout Eastern Europe, and we are committed to making them successful and pleased to be their partner. So it's exciting. There'll probably be more news on that over the coming months as they nail down their contract and we see how that translates to us..

Got it. And then just the last one for me on the defense supply chain. It sounded like things didn't really get too much worse. So I guess it was -- you guys were just anticipating some easing. I mean, we had heard for a while about these significantly long lead times. But I mean you kind of talked about recovery into '23.

Should we think about this more of a second half '23 recovery? Or how are you guys thinking about it in terms of getting access to chips and other products you need? Just maybe more color there..

Sure. And I guess before commenting anything, it's a really difficult guide for myself and the team to be calling down the Defense Electronics full guidance as we have. We feel it was the prudent thing to do.

We value transparency as a company and felt that this is what we feel is a derisked vantage point of what we can achieve in the business and wanted to go ahead and present that. But we're working hard to overcome these forces and go forward.

And to just maybe give a little bit of color on outside -- maybe your specific question, but to kind of frame what we see going on across this teams. To put it in perspective, during the course of the year, we will source roughly 30 million electrical components within the segment.

I think -- give 1 specific example of something we spoke to Q3 of last year about us really looking much further ahead and placing component orders with an anticipation of 52-plus week lead times in Q3 of last year. Those -- 1 specific example was 6,000 components that's tied to $45 million of revenue in this calendar year.

And those 6,000 components were supposed to start delivering the end of Q4 and then through the first half of this year into Q3 of this year. Through the first half of this year, we really had seen very few of those components.

And that delay was over half of the call down that we did in Q2, where we dropped the revenue of Defense Electronics at the end of Q2, $28 million. And that 1 component drove that. Those -- we had word at the time that they would rapidly increase those into Q3 and into Q4.

We saw at the beginning of Q3, shipments begin to come in at a good pace that made us feel that the guide at that time we would be able to achieve. And then late in Q3, we received the unfortunate news that we would not get any more of those components during the year.

And again, that delay of that 1 component drove about 1/3 of the $45 million call down. And so it's just such a volatile situation, and that's what we thought the decommits is really -- we've been doing a lot of great work to get ahead of our buying practices.

And it's hard to work with these extended lead times that we've been working on, but the decommits are just hard to manage around. And I think one of the other things you heard me talk about is the team has done a great job of really building up executive relationships and working at a senior level and the suppliers.

The supplier, which, of course, I wouldn't name is a very solid company that has a great track record, but they were let down by part of their supply chain and really had an unexpected delay in -- so it wasn't a lack of commitment from them to deliver the parts that they had said, but they were surprised.

And so it's just very layered as to what's going on. We do feel though in spite of what we're seeing in the call down there's definitely a lot of predictions that the demand is going down across the industry. Supply is beginning to come up, and there's a lot of predictions that demands going down into next year.

And so we do expect to see the stabilization in 2023, surely by the back half of 2023.

And we think that the things we've been doing over the course of this year, even the end of last year, but then refining and improving over the course of this year, really should put us in a different place in 2023 than we are now, but we're monitoring this closely and just staying very close to our suppliers and working with them very closely..

Our next question comes from Nathan Jones from Stifel..

Just one follow-up on the SMR opportunity. Just figuring out these numbers here, 300 SMRs in the U.S. by 2050 and that's from half the utilities in the U.S. So if we double that and say it's 600 and the revenue opportunity for you is $100 million per 4 of those.

Is it reasonable to size that market opportunity, not necessarily the amount that you're going to get, but that market opportunity would then work out to something like $15 billion through 2050, is that the kind of number that you're thinking about as the opportunity just in the U.S.

from these SMRs?.

So let me make one -- like add one clarifying comment to that. So that you're 100% right in the framing of 300 is from half of the utilities. It would be reasonable to assume the other half would want a similar amount. There's nothing unique about the half that is members of NEI. So that is a reasonable assumption.

Those will not necessarily all be X-energy plants. I mean I think it's reasonable to assume that there's a variety of companies that we mentioned, we're working hard to have content with that will win various portions of that SMR build-out. We expect to have significant content, tens and tens of millions of dollars, maybe not a fully $100 million.

We don't know yet with some of those. So it's too early to say. I'm not signaling we won't. It's just -- some of them were further along in our partnership with X-energy than we are with others. But significant content. So -- but yes, I mean you can do the multiplication like that and its a pretty astounding number.

I mean we're trying to stay focused on what we need to do right now, and we need to work really hard with these guys to make them successful in getting their reactors designed in a sound manner that is cost effective that they can get online and making them successful. But yes, I mean, the future is just -- it's pretty outstanding.

I mean that's the U.S., then you take Eastern Europe, the U.K., Canada and then you add this process market, which I think is still a bit unfolding how significant it can be, and it's driving some fund planning exercises within Curtiss-Wright, I will say, to think about how we will prepare for this..

Yes. And I would just add on to this, not that we need icing on the cake, I think, at this point. But I would say that, that's just electricity generation that we're really talking about.

I mean there's applications, particularly for the X-energy reactor and due to its high temperatures and process heat and other industrial applications, hydrogen production, et cetera. So there's more beyond that market..

Sure, it's giving you all some funding spreadsheets in planning that stuff out. Lynn, you talked about the strong dollar having an impact on some of the international businesses. Was that comment just around the translation impact? Or -- I mean, typically, you say that a very strong dollar have negative activity impacts especially in emerging markets.

So are you starting to see that actually have an impact on demand? Or were you just purely talking about translation?.

I'll let Chris take that..

Yes. No, we're not seeing an impact on demand. I think it's natural to assume that some of the order book is being influenced by that because certainly that's what translates into sales, but it's a headwind for us. In the third quarter alone, it was nearly $9 million in sales. I mean, year-over-year, we've seen the U.S.

dollar move fairly dramatically against the Euro, GBP and CAD, which are really the top 3 foreign currencies that we work within. And Q2 was pretty strong as well. I would say roughly half, if not more, in some cases, of that change occurred during the most recent quarter since Q2.

So it's something that we're monitoring, and we expect at this point, it's going to be about a 1% headwind to revenues this year, fairly immaterial to operating income, and we expect that to continue into this next year.

I would say that the group that's probably most affected by this, as you look across the 3 segments, is really the A&I group based upon what they're doing in the general industrial space and the location of some of their facilities, but it's also affecting the Defense Electronics team as well..

And just a final one. There was some -- you guys gave some color on most of the end market trends, order trends. I don't think I'd call it anything on general industrial order trends.

Can you just maybe comment a little bit on the order trends in general industrial markets?.

Yes, sure. The business continues to do well, and revenue for the Q3 was up $13 million or 14% year-over-year. We saw 17% growth in vehicles that was mainly on-highway Class 8 and specialty vehicles. But industrial automation and services is also up 6%. And we continue to expect that, that market is going to be 6% to 8% on the full year.

In Q2 and Q3, we saw industrial vehicle product orders returned back to what I would characterize as strong 2019 levels. They were down from last year, but last year, we had achieved those historic highs, backlog nearly doubled. For this year, the order activity on a year-to-date basis is still up 10% versus fiscal year 2019.

So we've got very strong backlog. The key for this business is really managing the supply chain. I mean they've had their own challenges.

It's more about transportation for them than it has been -- the semiconductors issue in Defense Electronics, but they're doing an excellent job, continue to watch that order book cautiously and they look like they're going to be well positioned entering into '23..

Our next question comes from Myles Walton from Wolfe Research..

I was hoping to drill in a little bit on the Defense Electronics segment and in particular, recovery plan when you sort of have this level of demand signal, but you can't obviously accomplish it with supply, trying to get the pig through the python can be -- can take longer depending on the business and it might be shorter depending on others.

And so I wonder I think one of your since points is thermal cycling and you also have a seasonal business.

So I'm wondering, does this, in any way, afford you a little bit more of an opportunity to smooth out the year by maybe doing a bit more in the front end of '23 versus the typical seasonal 4Q hockey stick?.

Yes, it's a good observation. You've obviously been watching us for a while. So it is true. We talked at the beginning of this year that we've always historically have a stronger like heavily -- more heavily revenue driven in the back half of the year than the front half.

And we went into this year, anticipating that slope to even be a bit steeper than normal. The team has done a lot of things to prepare for that. I mean, even with the call down, we still have a big ramp in Q4. I think the team is ready for it.

I mean this has been a very challenging time, but it's a great team that is very committed to supplying to our customers on their needs and prepared for the ramp that we need to accomplish in Q4.

And so yes, and it is reasonable to say the exact timing of the revenues that we're pushing out of this year, how they flow into 2023 is not fully settled yet, but I would think it is reasonable to think it is going to smooth the revenues across 2023 to have a less of a ramp than maybe we've historically had over past years.

But yes, it's a good point to make..

Okay. All right. And then the other question I had was on Nuclear Aftermarket in particular. So obviously, there's a lot of positive things going on and the potential for new builds in the future and SMRs.

But on the aftermarket side, there was pretty positive legislation that was , as you mentioned, signaling to the current reactors, extended lives for many years to come. I'm just curious if the order activity for life extensions has now blossomed considerably and what your outlook is for the growth rate there.

I think you had a low single-digit CAGR previously at the Investor Day for Nuclear Aftermarket.

And I'm just curious if there's an update to that?.

Maybe I'll speak broadly and then let Chris talk about the order. So it's interesting. We talk with -- orders are going well in the group, and we talked very much about our ability to say which order is normal aftermarket work and which orders are now plant life extension.

And it's not always crystal clear because they're all doing maintenance type of works in the plant. But our team definitely thinks it's early days, but we are seeing some of the order increase is due to plant life extensions, but we're really just at the beginning of that.

So I think that is just going to continue to be a good tailwind for that team over the next many years as different plants enter their life extensions at different times. So the very beginning of that. But yes, we definitely feel some of what we've seen in '22 is tied to plant life extension.

And maybe, Chris, do you want to give some numbers?.

Sure. Yes, I can do that. you know from watching us for a while, Myles, that the aftermarket business can be somewhat seasonal. Sometimes it's weighted to the first half versus the second half. And yes, this year is kind of no different. There's movement. In Q3, the orders for this business were up 4%. But year-to-date, they are up 13% year-over-year.

So we expect and you have to kind of pull the AP1000 out of the power & process markets to really look at what's happening in nuclear and within process. But that the aftermarket this year is going to grow at a high single-digit rate. There's a solid aftermarket ramp in revenue. In Q3, we were up 8% for that market.

And really, the headwind there is the CAP1000 wind down. So we continue to expect that there's going to be higher maintenance and license renewals, both in the U.S. and Canada. You mentioned SMR development. We are seeing some of that activity coming through our sales as we're working on these development contracts and with X-energy and NuScale.

And as we look at -- out into Q4, our expectations of the revenues are going to be up 7% year-over-year, and we'll finish the year strong. So we're well positioned for this next year based upon the strength of our order book and are looking forward to 2023..

Our next question comes from Peter Arment from Baird..

Lynn, back on the supply chain kind of discussions, how are you thinking about in terms of just from a strategic standpoint, maybe carrying more inventory to, I know you're highly focused on free cash flow as a company.

But the -- just as having an additional buffer stock? And maybe, Chris, you just want to comment on just working capital, just thinking about that going forward from a strategic standpoint?.

Sure..

So it's definitely a spot-on question.

And I think as we -- one of our competitive advantages is lead times to our competitors, our customers and keeping those in line with what they need to support their schedules does definitely require us to think differently than we have in the past where even the most complex components, typically we're 10 to 12 weeks.

And so we could have much more of a just-in-time type of inventory management system. So we're really -- this year have really been thinking through this isn't a short term -- this isn't just solved the problem and get some advanced material on order.

I don't think anyone sees the lead times going back down to those types of levels in '23 for sure, maybe in '24, but that's really speculation. And so for sure, us really thinking through how we parse our long lead items and get in advance of those is something that is going to be a shift in the business. Now I would say, Chris can add color to this.

But when you think of all the parts that go into the 30 million components that I referenced earlier. A lot of those have -- the lead times have come down. It's really the complex, the processor, some of the advanced memory chips, the GPGPU, the FPGA type parts that are just still having these very long lead times.

And so you're not talking a dramatic amount of money to have those things pipelined for the business. And there's ways we work with our supply chain to have them pipeline inventory at their cost for us.

And so it's not a simple answer as to what the impact is going to be, but it's definitely something that new approaches we've started taking this year to give us a greater confidence in 2023 being a more stable year..

And I think you said it well, I'm not sure how much more I can really add to that from a financial standpoint. But I would just say that as we look at managing working capital in particular inventory where we are, we are carrying excess inventory right now. And we typically build up our inventory.

Q4 is our strongest output quarter historically, and it will be again here for Curtiss-Wright. So we'll burn down through a substantial portion of that inventory here in the fourth quarter. But we'll continue to be at slightly elevated levels over the prior year.

And to Lynn's point, as we sharpen our focus and we adjust to the lead times, the lead times for these parts settle down. I think it will be easier for us to really manage that balance in inventory.

But it's going to be something that we're going to have to work on more as the supply chain situation subsides here and in the first half of this year and hopefully into the second half of this next year. So we're really just trying to manage our working capital using every component that we have at our disposal.

And this quarter, we've reallocated resources to our cash collection efforts. We've enhanced our focus on receivables that are prior to and past terms. So we're trying to get ahead of customers to make sure that the cash is coming in.

And we're taking advantage of accelerating receipts through customer financing portals where it makes sense, right, and cost the borrowing is similar or better to what Curtiss-Wright has on its revolver.

We'll put greater scrutiny into risk orders, buffer stock and the teams did some creative things and they're working with industry partners on trade-offs, right? We're all facing the situation together. So maybe there's something that we have that you need and vice versa. So we are those opportunities. And we're approaching AP with a lot of caution.

We're stretching vendors. We started earlier this year, but be careful what you do, right? So we're being very, very cautious on where that is taking place in order to maximize cash flow. And then we'll do things like evaluate taxes in our positions and payment elections and anything else that we can here to improve the circumstance.

So it's -- a lot of changes going on right now, and we're trying to react the best we can to deliver on our commitments..

Appreciate all that color. And just one quick follow-up, just, Lynn, on just the Poland discussion, it sounds like they've always talked about 2033, and you've always kind of mentioned you kind of have to have like that industry standard of the concrete 5 years prior.

So your orders, how it relates to that concrete? You mentioned 3 to 5 years, but I always seem like -- it seemed like it had to be sooner than that.

Maybe you could just give us a little background on that?.

Yes. I mean I -- we made a comment that, that time line was laid out, I don't want to say ironically because there's nothing funny about it, but quite sadly, for our call on February 24, which was the day of the invasion. And that was the time line that Poland has been speaking to.

So again, the 3 to 5, we don't have any evidence to say that will be different. Kind of if you back it up, in normal course of order, it really implied an order in 2024. We pushed that to 3 to 5 years because things tend to typically take longer. I do think it's reasonable to say the sense of urgency is going to change that dynamic, which is the norm.

Whether it pulls it forward, we just don't have any evidence of that yet. But I mean, there is no doubt that the fact of -- the deals, the things, the situation that Westinghouse is set up with having EPCs and localization partners and now this announcement from Poland and moving towards a contractual commitment.

I mean, this is a fantastic pace to see them working at and clearly gives us room for optimism that things are going to pull to the left, but we're waiting to see evidence of that before we get out of our skis, so to speak..

[Operator Instructions]. Our next question comes from Kristine Liwag from Morgan Stanley..

Guys, for your full year guide, you're still assuming a pretty steep ramp for Defense Electronics. So when you look at the fourth quarter, it implies about a 40% Q-over-Q growth. Can you talk about -- you talked about how you're derisking your outlook for the full year.

But for this guide, have you secured the parts that you need to be able to deliver? Or are you still waiting on a portion of those components? And is there risk to that outlook?.

So thank you for that question, Kristine. We -- when we picked -- it's very difficult, as I said, for myself, for the leadership team, for the team within Defense Electronics to put forward this call down. And we really analyze our approach from a variety of different angles and went through a variety of scenarios.

We still have some component deliveries that we're counting on in the fourth quarter. It's not like we have every component on hand.

But we very much know the nature of our varied supply chain and who has been delivering predictably, who we have good commitments from and has been steadily making those commitments deliver and who we've seen more volatility in and have really dialed in our forecast around material that we feel is very reliably will be received as we progress through the Q4.

So there is still deliveries needed, but we feel that we have looked at this from multiple angles and picked a level of forecast that we can deliver on. And again, mentioned earlier, we've been anticipating a pretty steep ramp in the back half of the year, specifically Q4. And so we've been preparing for it.

We've added staff, added testing equipment are lined up with multiple shifts. I mean, just the various things we would do. And in some -- in the cases pre-doing work before Q4, even in Q3 where we could get ahead of some of the builds of cards and systems and various things. So it's not like all the work has to take place in Q4.

So the team feels we very carefully picked this level of forecast and believe we will deliver on it..

And maybe taking a step back on supply chain. I mean, part shortages are an issue for you to deliver on products. And this is in context of still a relatively stable geopolitical environment.

So if you look at the lessons learned about the difficulty with managing a supply chain and if geopolitical risks get worse, are there changes in how you look at your supply chain strategy so that you could be prepared in a, let's say, a worsening geopolitical environment scenario, so you could still fulfill national security needs in that event?.

Yes. It's -- that's an important question. And we've definitely put a -- we've really changed our practices and approaches over the course of the year to always continue looking for dual sourcing. We've mentioned a couple of times, we've done that across the A&I segment. That's obviously not tied to the national security focus as you are.

But we are absolutely working that across the Defense Electronics segment, where we can. Obviously, there are some very specialized high-performance chips that there is not an option for us to dual source as they're unique in the industry.

And those cases it's more working -- I think the suppliers of those chips are working very hard to derisk the geopolitical risk to them being able to supply those chips. But we're doing the work on our part where we can to really enhance the tools that we have.

We've put some new tools on in the back half of this year to help with inventory visibility, management, allowing us to have tools to do scenario planning and more efficient prioritization of inventory risk to be able to achieve our tools.

So we're continuing to just evolve how we work with our customers, how we work with our suppliers, our attitude towards long lead materials and to do the best we can in this environment. But it's not something we can completely say is solved..

And it appears we have no further questions. I will now turn the floor over to Lynn Bamford, Chair and Chief Executive Officer for additional or closing remarks..

So thank you, everybody, for joining us today, and we look forward to speaking with you again during our fourth quarter 2022 earnings call. Have a good day..

Thank you. This concludes today's Curtiss-Wright Third Quarter 2022 Earnings Conference Call. Please disconnect your line at this time, and have a wonderful day..