Curtiss-Wright - Q1 2023

Transcript

Operator (participant)

Welcome to the Curtiss-Wright first quarter 2023 earnings conference call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. Others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jim Ryan, Vice President of Investor Relations. Please go ahead.

Jim Ryan (VP of Investor Relations)

Thank you, Angela. Good morning, everyone. Welcome to Curtiss-Wright's first 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. The 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 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 those 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 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. I'd now like to turn the call over to Lynn to get things started. Lynn?

Lynn Bamford (President and CEO)

Thank you, Jim. Good morning, everyone. I will begin by covering the highlights of our first quarter 2023 performance and a brief update on our full-year financial outlook. I'll turn the call over to Chris to provide a more in-depth review of our financials. Finally, I'll wrap up our prepared remarks before we move to Q&A. Starting with our first quarter 2023 highlights, we are off to a great start. Sales increased 13% overall to $631 million and improved 11% organically. Our overall results reflected strong conversion on our backlog and higher year-over-year sales in all aerospace and defense and commercial markets. Starting with our A&D markets, we were encouraged to see some stability in the electronic component supply chain, which played a strong role in driving 13% growth in A&D sales in the first quarter.

Those results also reflected the contribution from the Arresting Systems acquisition completed last June. As you have seen in some of our recent press releases, this business continues to secure new orders for its military aircraft Arresting Systems equipment and its integration into Curtiss-Wright is going very well. Rounding out A&D, we achieved mid-teens growth in our commercial aerospace, reflecting strong OEM demand. Turning to our commercial markets, which increased 12% year-over-year, we delivered strong sales growth across our commercial nuclear process and general industrial end markets. Growth in our operating income, up 15% year-over-year, exceeded our strong sales growth, and we delivered 20 basis points in overall operating margin expansion in the quarter. This performance reflected favorable absorption on higher sales and our continued dedication to driving commercial excellence and improved supply chain management.

Although we did face some unfavorable mix on operating margin. Diluted earnings per share of $1.53 increased 17% year-over-year and exceeded our expectations, primarily due to higher sales. Adjusted free cash flow reflected a strong year-over-year increase of 18% despite the typical first quarter outflow. Of note, I'm pleased to report that this included the second and final cash payment tied to the delivery of our AP1000 reactor coolant pumps to China. As noted during our February earnings call, we expected to achieve this key milestone prior to shipping the final four pumps as we wind down on this contract in 2023. Chris will provide some additional color on the key drivers of our first quarter free cash flow later in our prepared remarks.

New orders were also strong in the first quarter, up 13% year-over-year, reflecting increases in defense electronics and commercial aerospace within our A&D markets and strong demand across the majority of our commercial markets, particularly for industrial valve and commercial nuclear products. As a result, we achieved a book to bill of more than 1.1 times in the first quarter, which builds on our already strong backlog, now at $2.7 billion, and provides great visibility and confidence in achieving our 2023 sales outlook. Next, I would like to touch upon our full-year 2023 guidance. While we are encouraged by the strong start to the year, we have elected to maintain our overall guidance at this time and continue to project mid-single-digit sales growth driven by increases in nearly all of our major end markets.

I'd like to briefly highlight some considerations in two of those markets. First, in defense, which represents more than 55% of Curtiss-Wright's total 2023 sales. We are closely tracking the major metrics correlated with the ongoing recovery in our defense electronic supply chain, such as lead times and customer decommits, we remain cautiously optimistic for steady improvement throughout the year. Next, in general industrial, while conditions appear to be a bit more favorable for Curtiss-Wright following a strong first quarter, we continue to remain cautious in our guide to the full year given the current economic environment. Despite those dynamics, I feel confident in our outlook for the full-year sales growth of 4%-6% and expect continued operating margin expansion in 2023.

It is important to note we will expand our margins while increasing both internally and externally funded research and development as we balance our current commitments and continue to invest in Curtiss-Wright's long-term profitable growth. We also remain on track to deliver solid growth in diluted EPS and generate strong free cash flow. In summary, Curtiss-Wright remains well positioned for continued success in 2023, driven by the strength of our combined portfolio and our execution of the Pivot to Growth strategy. I would like to turn the call over to Chris to continue with our prepared remarks. Chris?

Chris Farkas (EVP and CFO)

Thank you, Lynn. I'll begin with the key drivers of our first quarter 2023 results by segment. In aerospace and industrial, sales increased 6% overall and grew 8% on an organic basis when excluding the impact of FX. Within the segment's commercial aerospace market, we experienced double-digit sales growth driven by strong OEM demand, most notably on Airbus narrow body and wide body platforms. In the general industrial market, our results reflected high single-digit growth driven by increased sales of surface treatment services, as well as industrial vehicle products serving on-highway platforms. As expected, those gains were partially offset by reduced sales in this segment's aerospace defense market due to the timing of production on various fighter jet programs, including the F-35.

Turning to the segment's first quarter profitability, our results mainly reflected favorable absorption on higher sales and the benefits of our commercial excellence initiatives, which continue to help offset inflationary pressures persisting in early 2023. Next, in the defense electronics segment, overall sales growth of 13% principally reflected the conversion of our strong order book, which showed higher sales of tactical communications equipment to the ground defense market. That increase was partially offset by lower first quarter revenues for embedded computing equipment on various helicopter and UAV programs in aerospace defense. Regarding the segment's operating performance, operating income was flat despite higher sales, principally due to the timing and availability of electronic components and the resulting impact on mix, as well as a year-over-year increase in R&D investments.

Despite the impacts of timing and mix, and as I'll review in more detail later in our prepared remarks, we remain confident in achieving the segment's full-year sales and strong profitability. Next, in the naval and power segment, overall sales growth of 18% was driven by low double-digit organic growth, as well as a solid contribution from our Arresting Systems business. As a reminder, the sales from that acquisition are mainly reflected in the aerospace defense market. Elsewhere, in the naval defense market, higher revenues principally reflected the ramp-up on the Columbia-class submarine and CVN-81 aircraft carrier programs. In the power and process market, our results reflected mid-single-digit growth in commercial nuclear aftermarket, supporting the operation and maintenance of existing reactors and strong MRO valve sales in process. Turning to the segment's profitability, our results again principally reflected the strong sales growth and resulting favorable absorption.

To sum up the first quarter results, overall, we generated strong double-digit growth in both sales and operating income, which resulted in a 20 basis points in year-over-year operating margin expansion, highlighting the strength of our combined portfolio and continued focus on commercial and operational excellence. Turning to our full year 2023 guidance on slide 5. I'll begin with our end market sales outlook, where we continue to expect organic sales to grow 3%-5% in line with our long-term guidance and unchanged from our initial guide provided in February. Overall, we're projecting total sales growth of 4%-6%, which includes the contribution from the Arresting Systems acquisition, partially offset by a small headwind from FX. I'll start with a few comments regarding our aerospace and defense markets, where we expect sales to increase 6%-8%.

Of note, despite the slow start to the year, we continue to expect that aerospace defense will be our fastest growing end market in 2023, with 9%-11% sales growth. This reflects the contribution from our Arresting Systems business, as well as a mid-single-digit organic growth for defense electronics based upon the expected gradual recovery in the supply chain. In ground defense, while we were pleased with the strong first quarter performance for our tactical communications equipment, we continue to project full year growth of 4%-6% as we proceed with some conservatism in light of the supply chain environment. In naval defense and commercial aerospace, our estimates remain unchanged, and we are confident in the long-term visibility that these markets provide to our portfolio.

Outside of our A&D markets, our commercial market sales growth also remains unchanged at flat to up 2%. As a reminder, in the power and process market, while we are expecting flat growth overall, this outlook includes a revenue headwind from the wind down on the AP1000 program of approximately $20 million. Excluding that impact, we expect mid-single-digit growth in both the commercial nuclear and process markets. We anticipate those sales will be weighted to the first half of the year in 2023 due to the timing of outages and turnarounds. Finally, as we look at the combined total commercial market, it's important to note that excluding the $20 million AP1000 headwind, overall commercial sales growth would be up 3%-5%.

Continuing with our full-year outlook by segment on slide six, I'll begin in aerospace and industrial, where our top-line guidance remains unchanged and reflects 1%-3% sales growth, including a $10 million or 1% headwind from FX. Looking at the segment's profitability, we continue to project solid growth in operating income and margin, reflecting favorable absorption on sales and the benefits of our ongoing commercial excellence initiatives. In defense electronics, we continue to expect sales to grow 5%-9%, and we now expect revenue to be less back-end loaded than what we experienced in 2022 and more in line with our historical cadence as we look forward with increased confidence following the solid first quarter performance.

We remain on track to our full-year outlook for operating margin expansion of 30 to 50 basis points, supported by our strong and healthy backlog and expectations for supply chain improvement as we move through the balance of the year. In naval and power, our guidance of 5% to 7% sales growth remains unchanged. Despite favorable absorption on higher sales, profitability in this segment will be impacted by both negative mix on lower AP1000 revenues and a shift to lower-margin development contracts in the power and process market. However, excluding those items, operating margin in the segment will be nearly flat year-over-year.

To summarize our outlook, we expect total Curtiss-Wright operating income to grow 5%-8% overall in excess of sales growth and expect operating margin to improve 10-30 basis points ranging from 17.4%-17.6%. Continuing with our financial outlook on slide 7. We've maintained our full-year adjusted diluted EPS guidance ranging from $8.65-$8.90, or up 6%-10%, principally reflecting our strong outlook for operational growth. Building upon our solid first quarter performance, we expect sequential quarterly improvement throughout 2023, and we project approximately 40% of our full-year adjusted earnings per share to be recognized in the first half and expect the fourth quarter will be our strongest.

Lastly, turning to our full-year free cash flow outlook, our guidance remains unchanged with a range of $360 million-$400 million, up 22%-36%. As Lynn shared earlier, in Q1, despite the typical outflow of cash, we experienced a solid year-over-year improvement in adjusted free cash flow, in part due to the collection of the final AP1000 payment. Also during the quarter, while we saw healthy collection levels beyond the AP1000 payment, these were largely mitigated by cash outflows due to the timing of year-end payables and higher first quarter tax payments. As we look forward across the balance of the year, our greatest challenge and opportunity remains in inventory reduction as supply chain conditions begin to ease and we execute on our very healthy order book.

Given our first quarter performance and continued focus on working capital management, we remain confident in achieving our full-year free cash flow guidance, which as a reminder, yields a free cash flow conversion rate in excess of 110%. I'd like to turn the call back over to Lynn to continue with our prepared remarks. Lynn?

Lynn Bamford (President and CEO)

Thank you, Chris. As we have discussed today, Curtiss-Wright is well positioned to deliver strong results in 2023. Our A&D and commercial markets each generated a book to bill in excess of 1.1 times in the first quarter, adding to our growing backlog while providing visibility and confidence to achieve our 2023 financial guidance. Looking beyond this year's strong top-line growth of 4%-6%, the long-term prospects for Curtiss-Wright and the markets we serve remain very healthy. I'd like to review a few of those areas which we expect to positively influence our near and long-term sales outlook. First, Curtiss-Wright is well aligned to benefit from the multi-year growth in defense markets driven by the strong bipartisan support for the U.S. defense budget.

Following the signing of the FY23 DoD budget in December, which reflected 10% year-over-year growth, we have continued to generate a very strong and healthy order book. The President's FY24 DoD budget request of $842 billion reflected an increase of approximately 3% over the FY23 enacted amount. Within this legislation, we are well aligned to benefit from the strong support for growth in U.S. Aircraft and Navy platforms, as well as the modernization of U.S. Army and Marine Corps fighting vehicles. Initial indications suggest that the final appropriated budget will likely grow to a higher level to minimally cover inflation while addressing the continued rise in global threats.

However, we understand the likelihood that we could be faced with another potentially lengthy continuing resolution before the FY24 budget is enacted. Should that occur, Curtiss-Wright is well positioned to deliver on a growing order book and healthy backlog. When combined with our expectations for further stabilization in the defense electronic supply chain, it should provide some insulation from any temporary funding delays. Regarding the AUKUS joint submarine program, while the decision to supply up to 5 Virginia-class submarines to Australia was lower than initial expectations, the resulting increase in funding, combined with emerging ramp in Columbia submarine production, is expected to drive sustained naval defense revenue growth for Curtiss-Wright well into the next decade. Beyond that, the expectation for an overall increase in global defense spending from our NATO allies supports our long-term growth outlook across our defense end markets.

Next, in commercial aerospace, we continue to remain aligned with our customers, and the expected production rate increases from Boeing and Airbus over the next several years should drive steady growth for Curtiss-Wright. We are also well-positioned for long-term growth in our commercial nuclear businesses, supporting the drive for carbon-free energy and energy independence. This includes nuclear innovation and safety within the existing nuclear infrastructure and the build-out of next-generation advanced reactors, which continue to receive strong development funding. In addition, we remain enthusiastic about the growing list of potential new Westinghouse AP1000 power plants expected to be built in Eastern Europe. Regarding our industrial markets, we maintain strong alignment to the favorable long-term secular growth trends, including the push for commercial vehicle electrification.

Along those lines, we recently secured a large contract with a leading truck OEM to provide power management and electronics that will support safe and efficient electrical vehicle performance. This represents another great example of our commitment to provide customized solutions for on and off highway commercial EV and hybrid vehicles. Turning to our profitability, we expect growth in operating income to once again exceed sales growth this year, which is in line with our long-term guidance reflecting the continued execution of our Pivot to Growth strategy. We continue to drive our commercial excellence programs throughout the organization with expectations that these efforts will contribute at least 10 basis points in margin expansion in 2023 and support our overall increase of 10 to 30 basis points.

Also, as mentioned previously, our 2023 outlook includes a year-over-year increase of approximately $20 million in total research and development investments, including both contract and internally funded R&D programs. Curtiss-Wright continues to deliver overall operating margin expansion while making these strategic investments to fuel future organic growth. Turning to our healthy balance sheet, our adjusted free cash flow remains strong as we expect to generate north of 110% free cash flow conversion in 2023. While the high interest rate environment has made capital allocation and the pursuit of high-quality acquisitions more challenging, the team remains disciplined and focused on allocating our funds to the highest and best use, including organic growth and operational investments. In closing, we continue to have line of sight to the 3-year investor day commitments issued in 2021.

We remain solidly on track to achieve total revenue CAGR in excess of 5% over the 3-year period, operating growth in excess of total revenue growth, implying solid margin expansion, double-digit EPS growth. We are also tracking close to our average free cash flow conversion target. At the midpoint of our current guide yields 3-year average of conversion rate just shy of the 110%. I can assure you the team is working diligently to mitigate the ongoing supply chain pressures on our free cash flow in an effort to achieve each and every one of the targets we established. Overall, I remain confident that Curtiss-Wright is well positioned to demonstrate strong, profitable growth in 2023 and deliver on our Pivot to Growth strategy to drive long-term value for our stakeholders. At this time, I would like to open up today's call for questions.

Operator (participant)

The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question is coming from Kristine Liwag with Morgan Stanley. Please go ahead.

Kristine Liwag (Executive Director and Head of Aerospace & Defense Equity Research)

Hey, good morning, everyone.

Lynn Bamford (President and CEO)

Good morning, Kristine.

Kristine Liwag (Executive Director and Head of Aerospace & Defense Equity Research)

Good morning.

Hey, just following up on Poland and nuclear reactors, there were some reports last month that suggest that the US may be gearing up to lend Poland $4 billion for 20 small nuclear power reactors. How does this embrace of small nuclear power reactors affect the outlook for AP1000 sales to Poland? Is this complementary? Is this competing? Then also, you know, Poland previously indicated its deal with Westinghouse could cost $20 billion. Do you see any risk around financing for this project? Can you give us an update on how you view this opportunity?

Lynn Bamford (President and CEO)

I started out really talking about, you know, very strongly the perspective is that the build-out of SMRs is completely complementary to the build-out of the AP1000s, and it's not a It's not an either/or. You know, the power outputs are, you know, fairly different. Where an AP1000 is needed, it's a much better and a more economical fit than, you know, the multiple SMRs. We don't see them as competing in any way. We see them as very complementary. That was from, you know, what I understand of the announcement you're referring to of the SMR build-out. In Poland, it was always framed as in complement to the, you know, the plan for 6 large reactors that they stated, you know, over a year ago. That's good.

I think, you know, the funding of these, you know, we're seeing initial indications from the IMF that they are working to make funding available, you know, across Eastern Europe. I think there are still things to be worked out with that, things to be worked out with the regulatory agencies in Poland. I think, you know, we continue to see, you know, pieces of progress with legislation out of our government for ways for the U.S. to be very ready to you know, help these countries accomplish their goals and reach energy independence.

Kristine Liwag (Executive Director and Head of Aerospace & Defense Equity Research)

Thanks for the color. If I could ask a second question on supply chain. Can you provide more details or metrics regarding, where we are, how the problem has evolved, and, what we need to see, for inventory pressures to alleviate?

Lynn Bamford (President and CEO)

Yes. You know, the area which really has remained the most problematic through 2022 is obviously the defense electronics segment and the complex components in there, that we use electronic components elsewhere across the organization, but largely those teams have mitigated, you know, the pressures from the supply chain, you know, and continue with redesigns on components that are more available, and that's just not an option that's available in the complex electronics going into defense platform. That remains, you know, the focus of our efforts as we analyze the supply chain. It's not to say there aren't other pressures with raw materials in some cases and other things, but things, you know, I'm very proud the teams are managing their way through those.

Some of the things we're seeing in the electronics, you know, we monitor, you know, when you've heard us talking about essentially the middle of last year, you know, component lead times, supplier on time delivery, our ability to pull in or push out, you know, vendor commitments and, you know, number of parts on allocation, et cetera, just a variety of things. Across the board, I don't wanna say it was dramatic in Q1, but we absolutely saw the trending in the right direction across those various measurements. Much stronger commitment out of, you know, key suppliers that have had these lead times that have gone up to 52 weeks in excess is really being way more specific about when they're gonna start bringing those down, you know, say to 26 weeks.

Still not to 2019 levels where, you know, 10 to 14 or 16 would have been, like, the longest we would have seen, but, you know, to a much more manageable rate and begin to, you know, just beginning to see the quoting and the acknowledgments with those kind of lead times. Something that's less measurable, but from talking to the teams just last week is when we're calling up suppliers and asking them, you know, that we're missing 1 part to build a board, you know, could we get some, you know, some component pulled in several weeks? The tone from 2022 was, "Look, we have nothing to work with. We can't accommodate this," to starting to have a much more engaged conversations and them being able to work with us and accomplish the specific needs.

We can really feel it beginning to change, you know, in our engagements with the supply base. You know, cautiously optimistic. You know, we feel our guide in the defense electronic segment, you know, a little bit wider than normal, $725 million-$750 million, accounts for some of the variability that, you know, is still out there. It's not like every part comes in on time. We feel really strong that that's a good guide and that, you know, we'll be able to achieve it in the year. That's really, I guess, I don't know, Chris, you got anything you'd add on the supply chain or?

Chris Farkas (EVP and CFO)

Well, I mean, just, you know, specifically Kristine on the, you know, we're targeting a $50 million reduction in inventory by year-end. You know, we have specific inventory burn down plans for the businesses that are most impacted by the supply chain headwinds, we're, you know, closely monitoring those plans on a monthly basis. It really requires enhanced focus on our forecasting, planning, and purchasing processes, really, to make that type of shift. We've invested in supply chain analytical tools that provide us with more real-time visibility and recommendations for, you know, managing and adjusting inventory levels. Where we don't have new tools, we're improving our focus to align material deliveries with our new orders and shipment demand more closely.

You know, at, you know, at a higher level, I mean, across our entire business, I think, you know, our strong order book is really just gonna provide us with a lot of opportunities to burn down that inventory at a faster pace. We feel good, you know, about what we can do there and its contribution to cash flow.

Kristine Liwag (Executive Director and Head of Aerospace & Defense Equity Research)

Great. Thanks for the color, guys.

Lynn Bamford (President and CEO)

Thank you.

Operator (participant)

The next question comes from Peter Arment with Baird. Please go ahead.

Peter Arment (Senior Research Analyst and Managing Director)

Good morning, Lynn, Chris, Jim. Hey, Chris, on the defense electronics, the margin guidance after the first quarter print kind of implies, you know, a kind of a mid-twenties operating margin for the kind of the rest of the year. Big step up, but obviously, you guys have had that kind of performance before. Maybe you could talk a little bit or walk us through some of the factors that give you confidence in that guide. Thanks.

Chris Farkas (EVP and CFO)

Yeah, sure. I mean, you know, first, it's really important to know what happened here in Q1. You know, as we've talked about on past calls, it's really the, you know, the changes in sales lines on a quarterly basis can have a disproportionate effect, you know, on the quarterly margins versus the full year margins. Across the full year, you know, the overall incremental margins are typically 25%-30%, and that's absent increases in R&D investment mix or other items. In the first quarter, we faced some pretty significant changes in mix based upon the availability of electronic components. We saw some improvements in some areas of the business, and I think you can see that impact in ground defense.

You know, last year, as we were talking about on these calls, it only takes a small fraction of components to basically hold up a fairly decent chunk of revenue. In general, I would say higher margin COTS revenues decreased and lower margin systems revenues increased. I mean, there were, you know, while the revenues were up in total, we had a few businesses that both faced lower component-related output, which also created some pockets of underabsorption. Beyond that, in Q1, you know, we increased our R&D, you know, $1 million year-over-year. You know, for 2023, I mean, we expect Q1 in our typical cadence will be our lowest revenue quarter for defense electronics.

As that revenue improves as we get deeper into the year, you know, the absorption will improve, and we expect the full year incremental margins to be within our typical range. A lot of that's related to the supply chain, you know, diving deep and understanding the material that we have and the commitments that we have, you know, understanding vendor stability and promises and commitments. We feel pretty good about that right now.

Peter Arment (Senior Research Analyst and Managing Director)

Yeah, that's very helpful color. Just switching over, hey, Lynn, Nuclear Aftermarket's up nicely. Can you maybe talk about some of the trends you're seeing in the plant life extensions and how that's kind of impacting your business, and then kind of really how sustainable you see this growth? Thanks.

Lynn Bamford (President and CEO)

I mean, that is exactly what it is. You know, it's, you know, it's commented before that our teams don't always have exact line of sight whether something is just traditional maintenance work or it's additional maintenance work because they're starting the work associated with the plant life extension. It sort of blends together. We're definitely having dialogue with our customers that, you know, the commitments to extend these reactors from the 60 to 80 years is driving that growth. Honestly, I think it's sustainable well into the next decade and even the back end of next decade.

It's really early days. You know, there's only about a third of the 90 plants in the U.S. have already, you know, achieved their licensing extensions, and more will keep going into that through the middle and the back end of this decade as they reach, you know, their license periods. Really early days. I think that trend is very sustainable.

Peter Arment (Senior Research Analyst and Managing Director)

Thanks. Thanks, Lynn.

Lynn Bamford (President and CEO)

Thank you, Peter.

Operator (participant)

The next question comes from Myles Walton with Wolfe Research. Please go ahead.

Myles Walton (Managing Director)

Thanks. Good morning. I was hoping.

Lynn Bamford (President and CEO)

Good morning.

Myles Walton (Managing Director)

... just go back to defense electronics for one second for clarification.

Lynn Bamford (President and CEO)

Sure.

Myles Walton (Managing Director)

Is it right to read that FX was actually a benefit to margins in the quarter, so the year-over-year decline is closer to 300 basis points? I understand mix can be super volatile here, but I also think it's a little bit of a volume-based business in some of your embedded computers markets. Is that not where the growth came from and therefore we didn't see the benefit?

Chris Farkas (EVP and CFO)

No, FX really wasn't a big impact on the quarter. I mean, we basically, you know, we did see some impact very slight on the sales in Q1. I mean, it was less than a $1 million. You know, within operating income, the impact was fairly insignificant as well. Nothing really of note that's, you know, going on that way. I mean, it really all boils down to just the timing of availability of components and how that affected different businesses. I mean, our higher margin COTS revenues decreased and our lower margin systems revenues increased.

You know, there were a few other businesses that just didn't get the output that they needed to kind of, you know, you know, make their absorption and that will improve as we get deeper into the year.

Myles Walton (Managing Director)

Okay. It was just an exhibit in your press release that showed a, you know, an FX impact to operating income, but I can circle around with Jim. Then, Lynn, on the industrial business, any signs? It sounds like you had good order flow sort of across the board. Can you give us any more sort of under the covers look at what the industrial order pipeline looked like and any signs of slowdown or customer behavior that shows some hesitation?

Lynn Bamford (President and CEO)

You know, broadly, we still feel confident about what we're seeing in our industrial order pipeline. You know, very much so this is a watch item for us and something we're trying to stay very close with our customers. I will say that in our vehicle end markets, you know, the orders have slowed a bit since last year, which were, you know, still very strong, but they're still above 2021 levels, so, you know, good. I think what we're understanding in some of those order trends is that as we're being able to lower our lead times, people are, you know, our customers are adjusting their order patterns a bit to, you know, burn down, you know, some inventory and do that.

Nothing concerning, maybe, you know, a little bit of Q2 sluggishness and then back to the levels we've been seeing in Q3 and Q4.

Chris Farkas (EVP and CFO)

You know, if I take another major area in our decimal order patterns is around, you know, our surface technologies business. They're continuing very strongly. You know, it's definitely a watch item. It's part of our cautionary thinking in, you know, maintaining our guidance for the year is what is to come in that area. Today, we still feel really solid with, you know, with the forecast we have out there for the full year.

Michael Ciarmoli (Managing Director and Senior Equity Research Analyst)

Okay. All right. Thank you.

Chris Farkas (EVP and CFO)

Thank you.

Operator (participant)

Once again, if you do have a question, you may press star one on your telephone keypad at this time. The next question comes from Michael Ciarmoli with Truist Securities. Please go ahead.

Michael Ciarmoli (Managing Director and Senior Equity Research Analyst)

Hey, good morning, guys. Thanks for taking the questions. Lynn or Chris, maybe, just back to supply chain, can you maybe parse out? I think you said you were optimistic on the Aero defense portion of supply chain, but, you know, the caution, you know, around growth and ground defense was also based on supply chain. Can you just maybe reconcile that, or is it totally different products that you're pulling through and you've got better line of sight? What's the dynamic there?

Chris Farkas (EVP and CFO)

Yeah, they are slightly different products, Mike, that, you know, that, you know, support those different markets. You know, ground defense, there's, you know, it's not like a semiconductor. You know, you're dealing with more routers and switches and things along those lines. In that regard, you know, good volume coming in, inventory here that, and we were ready to convert on that strong backlog for the business. I think within the aerospace side of the business, I mean, you know, you're seeing that's really where you have your, you know, some higher margin cost revenues. There's a greater alignment there. I mean, also system, right? I don't want to get too detailed into the mix, you know, there were some component availability issues.

You know, based upon what we're seeing coming in the door, you know, the ramp that we have planned here for the year, the increased confidence that we're getting out of the supply chain, I think we feel confident that that's gonna pick up as we get deeper into the year, and then that'll also help with that, you know, that margin mix.

Michael Ciarmoli (Managing Director and Senior Equity Research Analyst)

Okay. That's fair. Lynn, you mentioned AUKUS and the five subs. Have you guys seen any funding there yet? I was kind of under the impression the Navy's trying to get back to two per year. I know Australia's throwing out some total cost estimates with some big contingency funding, but I haven't seen any progression there. Can you maybe give us a little bit more as to what you're seeing on AUKUS and if and when you think, you know, some of that would convert into revenues for you guys?

Chris Farkas (EVP and CFO)

The information flow has been a bit slow, and even though, you know, the announcements were made in March, they left a lot of head scratching, to be frank, as to how this was gonna play out. No, we've not seen any funding flowing from that yet. We're just beginning to have engagements. I mean, the interesting thing when the AUKUS announcement was made, you know, it was, you know, for 3 with optionality of 2 on Virginia-class subs. I mean, we're pretty steadily producing at the 2 Virginia-class subs a year. So that's good and steady for us. They also put forth a reasonable amount of money in that bill for strengthening the supply base.

That money will probably be some of the first money that's spent, and we're still waiting to have some meaningful engagements on that to understand the color of that. You know, maybe 2024, 2025, but, I mean, this whole thing, the current talking is it's moving pretty slowly, to be frank. I think they're still figuring out some things underneath the scenes and, you know, one day it may show up and be more near term than it seems, but no funding flowing yet for us.

Michael Ciarmoli (Managing Director and Senior Equity Research Analyst)

Okay, okay. Just the last one for me. Strong growth in commercial aero in the quarter. I think you called out the Airbus platforms. Based on the kind of full year outlook, you know, looks like we're gonna see, I guess, some growth deceleration there, even though we've got, you know, obviously, there's still supply chain risk there, but Boeing ramping up, even Airbus. Anything kind of just conservatism in there? Anything you're seeing? Was there any pull forward to kind of satisfy some of this increased demand or any color on commercial aero?

Chris Farkas (EVP and CFO)

No, I mean, we had a really good start in commercial aero, you know, in the first quarter. I mean, again, the order book is up 24%, for the year. You know, strong orders both in our short cycle and long cycle businesses. We've got a lot of confidence in the, in the current outlook. Sales in Q1 were up 16%. I mean, it was mainly strong growth across aerospace and industrial to a lesser extent. We have some contributions in D with avionics and FTE. You know, we continue to ramp with Airbus and Boeing.

you know, as we look across the, the full year, we do have some conservatism, Mike, to your point, you know, for the supply chain, really just understanding what, you know, trying to think about what the customer could do, right, in managing their supply chains and how that affects us. you know, we're forecasting a growth of 5%-7%, and it's 7%-9% when excluding FX. It's really a good OEM growth rate, high single digits, low double digits excluding FX. you know, the aftermarket for us is really, you know, not a traditional aftermarket, and that business is gonna be relatively flat year-over-year.

Michael Ciarmoli (Managing Director and Senior Equity Research Analyst)

Okay. Okay, that's helpful. Perfect. Thanks, guys. I'll jump back in the queue.

Lynn Bamford (President and CEO)

Thanks. Bye.

Operator (participant)

The next question comes from Tony Bancroft with Gabelli Funds. Please go ahead.

Tony Bancroft (Research Analyst)

Everyone, thanks for taking my question. I just had a question about the it seems like you had a pretty good performance with the Arresting Gear acquisition. Anything else is sort of maybe outside your maybe core sort of what you guys do core-wise, but it seemed like it's done very well and it made a lot of sense. Are there other acquisitions like that out there? Just maybe sort of give us a review of the pipeline, sellers expectations. I mean, maybe go over that. Thank you.

Lynn Bamford (President and CEO)

Thank you for that question. Yeah, honestly, we are really pleased with what we're seeing out of our Arresting Systems business. You know, we've been making a pretty steady drumbeat of announcements of, you know, really, you know, double-digit millions of multi-year wins these guys are securing, you know, across the globe that is, you know, really driving healthy growth in the business. Their 2022 revenues for them were around $75 million, and we're definitely anticipating, you know, mid-single digits, you know, minimally for their year-over-year growth. You really, you know, pleased.

They're, you know, they really are the type of acquisition that is, you know, really a sweet spot for Curtiss-Wright, that it can really take advantages of being part of Curtiss-Wright through our supply chain, through our lean initiatives, but also our, you know, our sales channel and our business development reach. They can bring things to us, we bring things to them, and they grow stronger, you know, as part of Curtiss-Wright. That is the type of acquisition that, you know, you know, we obviously added Keronite, which was a much smaller business, but, you know, it brought a key technology to us. You know, it's not like it's this very narrow filter that we'll take acquisitions through. You know, we definitely started seeing the pipeline of acquisitions pick up this year.

We've probably already passed on five to eight acquisitions this year because as we've reviewed them, they don't meet our strategic and our financial filters. We just wouldn't see that we could get them to a financial spot. You know, mostly has been the issue, to be accretive to, you know, the types of performance that we demand out of our businesses in Curtiss-Wright. That doesn't mean we won't find them. You know, we're always, you know, something you may have heard us talk about in the past that, you know, we're back very active in the banking community. As books come along that might be relevant to us, we're, you know, seen as a steady acquirer and, you know, those books reach our desk for consideration.

We equally even, you know, to a greater extent, work with our teams to target private companies that are, you know, family held with a PE and really try and convince the ownership to, you know, go into a more exclusive process with Curtiss-Wright. There's, you know, a good number of properties, you know, out there like that that we're working on. I feel confident we'll be able to maintain kind of our steady drumbeat of acquisitions going forward.

Tony Bancroft (Research Analyst)

Very helpful. Thank you. Great quarter. Lynn, Chris, and Jim, appreciate it.

Lynn Bamford (President and CEO)

Thank you.

Operator (participant)

The next question comes from Nathan Jones with Stifel. Please go ahead.

Adam Farley (Associate Analyst)

Good morning. This is Adam Farley on for Nathan.

Chris Farkas (EVP and CFO)

Yeah.

Adam Farley (Associate Analyst)

Hey, good morning. I wanted to follow up on the strength in new orders. You've already provided some pretty good color here, you know, are there any end markets that are showing, you know, relative acceleration or deceleration that you could call out? You know, through April, has order growth continued at kind of a similar rate as the previous quarter? Thanks.

Chris Farkas (EVP and CFO)

Yeah, I'll take that one. The book to bill in Q1 was pretty solid. It was just above 1.1 times sales. You know, just as a reminder, our Q1 sales were up 13%, so you know, the order book it exceeded that sales conversion. Our orders were up $85 million in total. You know, the backlog is up 3%, you know, year to date. You know, we continue to see positive order trends in aerospace and defense, in particular aerospace and ground and higher commercial markets as well in both process and nuclear. I think, you know, as you think about sustainment and what we've seen, you know, consistently commercial aerospace orders, you know, the growth rates are high.

As you look at, you know, what we've been seeing within, you know, the process in nuclear markets, I mean, those order books are growing in the teens. I think there are some good things are happening there. You know, we talked a lot last year about the defense electronics business and, you know, between the continuing resolution and the slow start to the outlays. You know, we hit that record order book last year in Q3, and Q4 was just slightly off of that. You know, as we enter into the year here, for defense electronics, our order book is up 47% year-over-year, and that business continues to sustain those order levels that were near those Q3, Q4 record highs. I think, you know, a lot of positivity.

I mean, when it mentioned that, you know, when you step back and you take a look at what's happening within, you know, the industrial vehicle markets and you take a look at the GI markets, our economic bill, whether it continues to send, you know, good signals. I mean, that surface tech business order growth rates across all the markets that it served were at high single digits, low double digits for Q1. That's a big confidence booster.

you know, I think, you know, that business, you know, the other thing that's important to note is just the backlog is so strong from that order book in 2021 and 2022 that, you know, even with a little bit of order degradation here in Q1, you know, back down to 2019 pre-pandemic levels, we feel like we're in a good space for that business as we look out in the year. you know, when you look out even further, you know, and I'm not gonna provide a guide for 2024 at this time, but, you know, we are doing some things like new product introductions in the product, the power management space, and that's supporting, you know, trends in vehicle electrification.

Some of those product launches have LTVs in excess of $100 million over the next five years. There's some exciting stuff that we're working on, you know, from a development perspective. Then, you know, beyond that, we just continue to listen to many of our industrial companies, the customers who've had similar strong starts to the year. They largely remain cautiously optimistic, and some are even beginning to see signs of the Infrastructure Bill funding have a slight boost on demand. Feel pretty good about the order book and looking all around it.

Adam Farley (Associate Analyst)

That's great. Thank you for taking my questions.

Lynn Bamford (President and CEO)

Thank you.

Operator (participant)

The next question comes from Myles Walton with Wolfe Research. Please go ahead.

Myles Walton (Managing Director)

Thanks for taking the follow-up. I apologize if you did say this, but I think you alluded to 40% was the composition of EPS in the first half on the last quarter call. Obviously, you'd also guided the first quarter to be up just mid-single digits in your mid-teens. Is it purely a pull forward from the second quarter that you're sort of seeing in the course of the year? Also within the first quarter, if you can point in particular to the areas of upside versus your plan. Thanks.

Chris Farkas (EVP and CFO)

I think you should take a look at the first quarter and the results did come in a little bit better than expected, Myles Walton. I mean, we've been trying to take a more cautious approach to what's been happening here, you know, given the availability of the electronic components. You know, it was a very strong year-over-year performance for the defense electronics group.I mean, we're pleasantly surprised with, you know, the overall results and what we had there. I think, you know, with where we are right now from an order book perspective and what we're seeing within defense electronics, we're certainly feeling more confident on the year, right? Given how radically things can change in that business based upon the availability, we're just taking a conservative position.

I think when you go back and you take a look at, you know, this last year and how things kind of shook out from an EPS perspective, and you look at the half to half splits, I mean, we were, you know, more in the range of, you know, from an EPS perspective of like, you know, 30%, you know, 39%, 60%, 40%, 60% at the end of the day. You know, right now, you know, we're saying 40%, 60%. We feel pretty good about that and, you know, certainly have, you know, some confidence. I think it's just we have to approach things cautiously at this point. You know, that's why you're seeing that in the, in the numbers.

Myles Walton (Managing Director)

Yeah. All right. Thank you.

Operator (participant)

There are no further questions at this time. I will now turn the floor over to Lynn Bamford, Chair and Chief Executive Officer for additional closing remarks. Please go ahead.

Lynn Bamford (President and CEO)

Thank you, all of us, for joining us today. We look forward to speaking with you again during our second quarter 2023 earnings conference call. Have a great day.

Operator (participant)

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