Operator

Welcome to the Curtiss-Wright Fourth Quarter and Full Year 2025 Earnings Conference Call.

[Operator Instructions]

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

James Ryan
Vice President of Investor Relations

Thank you, Jamie, and good morning, everyone. Welcome to Curtiss-Wright's Fourth Quarter and Full Year 2025 Earnings Conference Call.

Joining me on the call today are Chair and Chief Executive Officer, Lynn Bamford; and Executive Vice President and Chief Financial Officer, Chris Farkas.

A copy of today's financial presentation and the press release are available for download through the Investor Relations section of our website at curtisswright.com. A replay of this webcast will also be available on the website. Our discussion today includes certain projections and forward-looking statements that 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 and guidance 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. GAAP to non-GAAP reconciliations are available in the earnings release and on our website.

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

Lynn Bamford
CEO & Chairman

Thank you, Jim, and good morning, everyone. As you saw in last night's results, the momentum continues to build at Curtiss-Wright. I would like to begin by acknowledging our 9,100 hard-working employees for driving another record year of financial performance. We continue to deliver on our pivot to growth strategy, which resulted in strong growth in sales, profitability, free cash flow and new orders in 2025. Our performance reflects the critical positioning of our technologies across our A&D and commercial markets, our ongoing pursuit of operational and commercial excellence and our commitment to delivering exceptional results for our shareholders.

I'll start with highlights of our fourth quarter 2025 results. Overall, sales of $947 million increased 15% year-over-year, highlighted by strong organic growth of 11% and a solid contribution from our I&C Solutions acquisition. We delivered 16% growth in our Aerospace & Defense markets, which exceeded our expectations, driven by an acceleration of ground and naval defense revenues into 2025. Of note, growth in our A&D markets reflected our continued strong alignment to U.S. military priorities and accelerated pace of growth in NATO and Allied funding, while Commercial Aerospace sales increased more than 20%.

Growth in our commercial markets was also impressive, up 13% year-over-year, primarily driven by higher revenues in the power and process market. Operating income increased 14% and included higher R&D investments to drive future organic growth, while operating margin was strong at 19.7%. We delivered diluted earnings per share growth of 16% year-over-year, slightly ahead of our expectations, which was primarily driven by higher A&D sales. Free cash flow was strong at $315 million, up 13%, which reflected a 224% conversion.

Regarding our order book, new orders increased 18% in the fourth quarter, reflecting nearly 1.2x book to bill and were driven by continued solid demands within our naval, defense and commercial nuclear markets. Next, I'll highlight our full year 2025 results.

We delivered another record financial performance with higher growth in revenue and operating income across all 3 segments, reflecting the underlying demand and the momentum that continues to build across our portfolio. We delivered exceptional margin expansion, up 110 basis points year-over-year to reach a new record of 18.6%. This performance reflected the strong growth in sales, the benefits of our operational excellence initiatives and the savings generated by our restructuring actions. Furthermore, we continue to accelerate investments in research and development across the portfolio to support future organic growth and reinforce our commitment to grow R&D faster than sales over time.

Diluted earnings per share increased 21% year-over-year, driven by improved operational performance as well as a lower share count. Adjusted free cash flow also reached a record at $554 million, which reflected strong conversion of 111% based on the growth in earnings and near record levels of working capital efficiency. We achieved these strong results despite a nearly 50% increase in capital expenditures in 2025 to support growth investments across all 3 segments.

Turning to our full year 2025 order book. Strong overall demand in our A&D and commercial markets yielded a new record of $4.1 billion, up 10% year-over-year and a book-to-bill of nearly 1.2x. Starting with our A&D markets. Continued strong demand for Nuclear Propulsion Equipment supporting submarine programs in Naval Defense was partly offset by lighter-than-anticipated demand within our aerospace and ground defense market due to delays resulting from the continuing resolution and government shutdown. This principally impacted timing of orders with some of our short-cycle Defense Electronic businesses, including tactical communications. As a result, we delivered a book-to-bill of 0.96x in Defense Electronics, initially leading us to take a more conservative 2026 guide in our overall ground defense market.

However, looking across the pipeline of opportunities for these businesses, our customers have expressed their confidence that this is timing. Our programs remain in good standing and our technologies closely align with the modernization priorities of the U.S. and our allies.

Wrapping up our A&D markets. In Commercial Aerospace, we remain aligned with the anticipated production ramps across the major OEM platforms, which continues to drive demand for our products. Within our commercial markets, we concluded the year with tremendous growth in Commercial Nuclear driven by strong demand for aftermarket equipment, supporting scheduled plant outages and restarts as well as continued advancement across leading SMR designs. Additionally, we continue to see stabilization across two of our consistent watch areas. Process and Industrial, each of which recognized solid order demand close to conclude the year.

Overall, the healthy growth in orders build on Curtiss-Wright's already strong backlog which increased 18% in 2025 to reach a new record of in excess of $4 billion and provides greater confidence in our future topline growth. Another important takeaway from this past year was our disciplined approach to capital allocation to ensure deployment towards the highest return opportunity in order to enhance shareholder value. We executed a record $465 million in total share repurchases in 2025, and we increased our annual dividend for the ninth straight year.

Now I would like to briefly introduce our full year 2026 guide. Overall, we are projecting organic sales of 6% to 8%, supported by growing momentum in our overall order book and our commitment to continued investment in the business. Operating income growth is once again anticipated to outpace sales growth and reflects 30 to 60 basis points in operating margin expansion this year to range from 18.9% to 19.2%. As a result, diluted EPS is expected to grow 11% to 15%. Furthermore, we anticipate another year of record free cash flow generation and continue to expect strong conversion in line with our long-term target.

In summary, Curtiss-Wright is poised to deliver an outstanding performance in 2026. And as we'll discuss later in our remarks, we have line of sight to exceed the 3-year financial targets that we issued at our 2024 Investor Day. Now I would like to turn the call over to Chris to provide a more in-depth review of our financials.

K. Farkas
VP & CFO

Thank you, Lynn. Turning to Slide 4, I'll begin by reviewing the key drivers of our fourth quarter 2025 performance. I'll start with the Aerospace & Industrial segment, where overall sales increased 5% and was in line with our expectations. In the segment's Commercial Aerospace market, our results reflected solid OEM sales growth supporting increased production on both narrow-body and wide-body platforms. Within the segment's Defense markets, we experienced increased demand for EM actuation equipment supporting ground-based mobile launcher systems. And in the general industrial market, sales were essentially flat overall, but outpaced the global macro conditions affecting industrial vehicle markets.

Turning to the segment's fourth quarter operating performance. We delivered a strong operating margin of 20.1% and benefited from favorable absorption on higher A&D sales, the overall profitability was tempered by a less favorable mix of business, mainly due to higher customer-funded R&D.

Next within Defense Electronics segment, sales growth of 17% exceeded our expectations, mainly due to timing within ground defense's embedded computing revenues accelerated into the fourth quarter. We also experienced solid year-over-year growth in sales of tactical communications equipment as well as increased Turret Drive Stabilization Systems supporting international customers.

Within the segment's Aerospace Defense market, higher direct foreign military sales of embedded computing and flight test instrumentation was offset by the timing of domestic fighter jet and UAV programs. In this segment's Commercial Aerospace market, our results reflected solid growth in flight data recorder sales as well as higher avionics equipment supporting various helicopter programs. Regarding the segment's operating performance, we delivered a strong 25.9% operating margin, up 160 basis points and in line with our expectations, reflecting favorable absorption on higher revenues and the benefits of our ongoing operational excellence initiatives. Those increases were partially offset by higher investments in research and development.

Turning to the Naval & Power segment. Overall sales increased 21% and were well ahead of our expectations. This performance was once again driven by strong revenue growth in naval defense following continued improvements in the supply chain and an acceleration of production on Submarine programs. We also experienced an increase in aftermarket revenue supporting naval shipyards through fleet services work. Within the segment's Aerospace Defense market, and as expected, we experienced a strong sequential and year-over-year increase in revenues for our resting systems products, principally supporting international programs.

In the Power and Process market, our results reflected a strong contribution from our I&C Solutions acquisition, which contributed to higher sales in both our commercial nuclear and process markets. On an organic basis, growth in commercial nuclear sales reflected the continued ramp-up in development across several SMR designs as well as higher government nuclear revenues.

Additionally, strong growth in the process market was driven by higher MRO valve sales where demand continued to improve throughout 2025, providing us with increased optimism for growth in 2026. Regarding the segment's operating performance. Operating income grew 13%, while operating margin was solid at 17.9%. Our results reflected favorable absorption on higher sales, which was more than offset by unfavorable mix, including higher research and development, supporting next-generation SMR designs.

To sum up Curtiss-Wright's fourth quarter results, we delivered mid-teens growth in sales and operating income, which resulted in an overall strong operating margin of 19.7%. Building on our strong performance in 2025, I'd like to take the next few minutes to review our full year 2026 guidance.

I'll begin on Slide 5 of our end-market sales outlook where we anticipate total sales to grow 6% to 8%, driven by continued strong organic growth in our A&D and commercial markets. In Aerospace Defense, our outlook for 9% to 11% growth mainly reflects the alignment of our technologies to the FY '26 U.S. defense budget, including key military priorities such as aircraft modernization and Golden Dome. This, in turn, is driving increased demand for secure embedded computing solutions across numerous applications from communications and radar to various mission packages supporting both existing and next-generation platforms.

Within ground defense, we anticipate sales to decline 4% to 6%. As a reminder, this follows a strong pace of mid-teens sales growth in both 2024 and 2025. Based on the acceleration of embedded computing revenues into 2025 and the delays in the orders for tactical communications equipment that Lynn referenced in her opening remarks, we're beginning the year with a more conservative outlook in this market.

Aside from those timing delays, we expect continued growth in embedded computing towards radar and strategic missile defense applications across a wide number of programs. In addition, we expect increased EM actuation sales supporting the U.S. Army's ISPC program and higher sales of Turret Drive Stabilization Systems supporting international ground vehicles through our relationship with Rheinmetall.

In Naval Defense and building upon our strong performance this past year, growth of 5% to 7% mainly reflects higher revenues on the CVN-81 aircraft carrier and Virginia-Class submarine programs. Looking more broadly across all three defense markets based on our strong backlog across key platforms globally and the alignment of our technologies to support NATO and Allied countries, we expect direct foreign military sales to remain a key contributor to our overall defense growth in 2026.

Turning to Commercial Aerospace. Our outlook for 10% to 12% sales growth reflects the high teens growth in our order book this past year and the anticipated ramp-up in OEM production on narrow-body and wide-body aircraft. To wrap up our Aerospace & Defense outlook, we project total sales in these markets to increase 5% to 7%. Moving on to our commercial markets. In Power and Process, our outlook for 12% to 14% sales growth reflects mid-teens growth in our commercial nuclear market along with low double-digit growth in process. Our outlook in commercial nuclear reflects continued strong U.S. demand driven by a step-up in year-over-year outages as well as higher revenue supporting both plant life extensions and restarts of existing plants.

In addition, we anticipate higher international aftermarket sales, mainly from Canada and South Korea. Our guidance also reflects strong growth in SMR revenues as we begin to transition from development to the initial prototype stage for critical systems on the X-Energy Advanced Reactor, including both the helium circulator and reactivity control and shutdown systems. Please note that our initial guidance does not include an AP1000 order that we continue to anticipate that we will receive an order for reactor coolant pumps in 2026, and in the process market, our outlook is mainly driven by improving demand for our severe service valves as well as higher sales of instrumentation solutions from our I&C business.

Lastly, in the general industrial market, while we anticipate sales to be flat once again in 2026, we saw signs of improvement in our Q4 '25 order book and entered 2026 with a solid backlog. Looking deeper, we expect modest growth in medium duty industrial vehicle sales this year as well as a small benefit from international growth. We remain cautiously optimistic that conditions within our overall industrial vehicle business will improve through the year and into 2027.

Wrapping up our total commercial markets, we're targeting strong full year sales growth of 7% to 9%. Moving on to our full year 2026 financial outlook by segment on Slide 6, I'll begin in Aerospace & Industrial, where we expect sales to grow 5% to 7% overall, reflecting strong growth in Commercial Aerospace and Ground Defense as well as flat sales in General Industrial.

Regarding the segment's profitability, we project operating income growth of 11% to 14% and operating margin expansion of 90 to 110 basis points ranging from 18.3% to 18.5%. This outlook reflects our expectations for higher sales, the benefits of our operational excellence initiatives and the savings generated by our restructuring actions, while we continue to accelerate investments in R&D.

Next in Defense Electronics, we expect sales to grow 4% to 6%, mainly driven by strong growth in Aerospace Defense, partially offset by the timing of orders in Ground Defense. Regarding the segment's profitability, we expect operating income growth of 4% to 6% and operating margin to be flat to up 20 basis points to a new all-time high range of 27.3% to 27.5%. Of note, this outlook reflects our expectations for higher sales and the savings generated by our restructuring actions as well as $4 million in incremental investments in internally funded R&D.

And in Naval & Power, we expect sales to grow 8% to 9%, reflecting the strength of our orders and backlog in both our naval defense and commercial nuclear markets. Regarding the segment's profitability, we expect operating income growth of 10% to 13% and operating margin expansion of 30 to 50 basis points. This outlook reflects our expectations for strong revenue growth and the savings generated by our restructuring actions, while we continue to support investments in both internal and customer funded development programs.

To summarize our 2026 outlook, overall, we anticipate total Curtiss-Wright operating income to grow 8% to 11% and expect operating margin to range from 18.9% to 19.2%, up 30 to 60 basis points. Next, to aid in your quarterly modeling, we expect first quarter 2026 sales to grow by high single digits relative to the first quarter of 2025 and we are targeting low double-digit growth in operating income with solid year-over-year operating margin improvement across all 3 segments.

Continuing with our financial outlook on Slide 7, I wanted to provide some color on a few nonoperational items. I'll start with other income, which we expect to increase by approximately $3 million to $4 million this year based upon our strong free cash flow generation and the resulting impact on interest income.

Looking ahead to December, we'll pay down $200 million in senior notes coming due, which will have a minor benefit and lower interest expense. Regarding our 2026 tax rate, we're targeting a slight reduction to 21.5%, which reflects our ongoing success in reducing our effective tax rate. Turning to our EPS guidance. We expect full year 2026 diluted EPS to range from $14.70 to $15.15, up 11% to 15%, reflecting strong profitable growth within our operations and a reduction in our share count following record share repurchases in 2025.

For 2026, to start the year, we anticipate $60 million in standard share repurchases as we continue to offset dilution. To aid in your quarterly modeling, we expect first quarter EPS to reflect high teens growth relative to the first quarter of 2025, mainly driven by a strong operational performance with a supplemental benefit of $0.10 from a lower year-over-year first quarter tax rate.

And similar to last year, we expect sequential quarterly EPS improvement with the fourth quarter being our strongest. And lastly, we're projecting a record full year free cash flow of $575 million to $595 million, reflecting our expectations for strong growth in earnings and our continued focus on working capital management, more than offsetting increased growth investments in capital expenditures. As Lynn mentioned earlier, we delivered near record levels of working capital in 2025, reaching 19.2% of sales. And for 2026, we expect to further improve upon that metric and to reach a new record level of performance.

Beyond that, our outlook for $110 million to $120 million in capital expenditures represents an increase of more than 25% year-over-year, which follows last year's nearly 50% increase and reflects our ongoing investments to support future growth. Overall, as we accelerate investments across our operations this year, we continue to expect free cash flow in excess of earnings in a healthy free cash flow conversion rate of approximately 105%.

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

Lynn Bamford
CEO & Chairman

Thank you, Chris. And turning to Slide 8, where I'll wrap up today's prepared remarks. Curtiss-Wright has demonstrated strong growth and financial performance over the past 2 years since our May 2024 Investor Day event, and we are well positioned to continue that momentum by delivering strong profitable growth again in 2026. I'll spend the next few minutes providing a few insights into the increasingly favorable industry tailwinds for two of our largest end markets, Defense and Commercial Nuclear, which are benefiting from positive market forces and provide us with increased confidence as we look into the future. I'll also provide some additional color on a few of our targeted growth initiatives across the portfolio. Then I'll conclude today's presentation by reviewing our progress against the major 2024 investor day financial targets shown at the bottom of the slide.

I'll start with Defense. Curtiss-Wright is primed to benefit from the tremendous acceleration in global defense spending driven by a record U.S. budget of approximately $1 trillion, including reconciliation funding and the increased commitments from NATO and Allies, starting enabled defense where we continue to benefit from strong demand and the call for accelerated production across the U.S. Navy's most critical platforms. As a key supplier of nuclear propulsion equipment, our decade-long relationships, along with capacity to take on additional business uniquely positions Curtiss-Wright to secure new content across existing and future platforms.

In Defense Electronics, we stand to benefit from the administration's focus on commercial solutions and agile contracting and also through our strong alignment to the DOW's top strategic priorities. These include areas such as next-generation fighters, Golden Dome and aircraft modernization just to name a few. Our broad offering of embedded computing products are used in a wide number of ARC and ground-based systems and are an integral part of mission-critical applications such as comms, networking, threat detection, jamming, targeting and fire control.

Curtiss-Wright continues to make purposeful and focused investments in research and development to advance our technology portfolio. To name a few significant examples, we are designing and building ruggedized computing solutions with NVIDEA's GPUs ranging from the high-end Blackwell to the swap optimized store tailoring them to match the compute needs of those different applications.

Additionally, our Fabric100 family of products provides industry-leading 100-gigabitt connectivity, enabling the highest performance in deployable computing systems today. Also, we recently announced our ruggedized servers are now validated as part of Microsoft Azure ecosystem, bringing the enterprise class computing to the tactical edge. These solutions and others uniquely position Curtiss-Wright as a leader in defense technology, supporting next-generation applications while ensuring our alignment to the U.S. government's most standard and highest priorities. Overall, this is but a sample of our ongoing investments in and development of new technologies to help ensure Curtiss-Wright maintains a strong position on leading defense programs today and well into the future.

On the international front, there is a clear recognition of the need and movement by our NATO allies to strengthen their defense capabilities. This year, NATO committed to boost defense spending from 2% of GDP per year to upwards of 5% by 2035. Similar to our market position in the U.S., we have a very broad reach across a large number of platforms. As a result, over the past few years, we have recognized mid-teens plus growth in our direct FMS revenues, and we continue to solidify our positions with technologies that support operational readiness such as embedded tactical computing, ground-based arresting systems and Navy aircraft handling systems.

In addition, we remain well aligned with Rheinmetall where the expected growth in ground vehicle platforms, affords us the opportunities to supply our Turret Drive Stabilization Systems technology to thousands of new vehicles over the coming decade. These represent just a few of the many ways the Curtiss-Wright stands to benefit from the continued acceleration of global defense spending. Turning to commercial nuclear. During the last 2 years, the momentum and pace of activity has accelerated globally, broadening the near and long-term scope of opportunities for Curtiss-Wright in the industry.

Here in the U.S. the President's executive orders issued last May are providing tremendous uplift by advancing support for the industry at large and in keeping with the focus on U.S. nuclear energy dominance. These directives are already advancing the speed at which approvals for reactor licensing are being completed, particularly for plant life extensions of U.S. reactors. This, in turn, is creating a pathway for a broad acceleration across our customers' business models, while further supporting the administration's goal to quadruple U.S. nuclear generation capacity to 400 gigawatts by 2050.

Additionally, and perhaps the largest potential boost for Curtiss-Wright is the Administration's $80 billion commitment to support the construction of 10 new Westinghouse AP1000 reactors. This expanded scope across the U.S. builds upon the existing AP1000 opportunities in Europe, particularly in Poland and Bulgaria, which continued to demonstrate steady progress.

Overall, we remain aligned in these pursuits and continue to expect our net order this year. Meanwhile, the SMR development continues to evolve in the U.S. and globally, including Canada, the U.K. and Europe, and we expect to benefit as these efforts transition from ongoing design activity, stability and prototypes before shifting to production later in the decade.

Of note, we have maintained a steady pace of investment to support Curtiss-Wright's growth as we work to enhance our relationships and expand our content across the leading 300-megawatt plus SMR developers. Overall, Curtiss-Wright is extremely well positioned to capitalize on the expected surge in demand and future growth in this industry, providing us with increased confidence in our ability to deliver on our growth targets in commercial nuclear.

Next, I'll review our progress against our 3-year Investor Day targets. Starting with sales, we are currently on track to deliver an organic revenue CAGR of approximately 8.5% well ahead of our target of 5% and clear acceleration relative to our historical topline growth rate. In addition, we are consistently delivering operating income growth in excess of revenue growth, which is a foundational premise under the Pivot to Growth strategy that opens funding for reinvestment back into the company.

Since 2023, we have grown R&D at a faster pace than sales and at the same time, are driving towards operating margin expansion of 170 basis points over the 3-years plan. This year, we expect to reach a new milestone with the potential to deliver an operating margin of 19%, which firmly entrenches our position as a top quartile margin performer relative to our peers.

We are also well positioned to expand our EPS growth target by more than 700 basis points and are on track to deliver a 17% EPS CAGR over the 3-year period. Through a combination of strong operational performance and our dedication to a balanced capital allocation strategy, we are compounding earnings at a mid-teens pace over time. And finally, we're driving record levels of free cash flow across our business. We are tracking well ahead of our expectations, while more than offsetting increased growth investments in CapEx and expect to generate 10% average free cash flow conversion over the 3-year period. Our strong free cash flow generation helps to fuel organic and inorganic investments across the business that drive efficiency, expand capacity and help enhance our overall customer offering, along with our commitment to returning capital to shareholders.

In closing, we look forward to the year ahead and achieving another record financial performance in 2026. Looking on this year, I am very excited about the medium and long-term prospects for Curtiss-Wright that will continue to provide momentum under our Pivot to Growth strategy and drive long-term value for our shareholders.

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

Operator

[Operator Instructions]

First question will come from Kristine Liwag with Morgan Stanley.

Kristine Liwag
Morgan Stanley, Research Division

Good morning, everyone, and Lynn, thank you for the details you provided on the different growth vectors in defense. I wanted to dive a little bit deeper on missiles. We've seen multiyear agreements that increased volume by 300% to 600% on certain programs at Lockheed and at Raytheon. I was wondering, can you provide more color regarding your exposure to this? Is it in your radar or sensors business or Defense Electronics. How do you think about the potential opportunity of this specific growth vector and what's your exposure?

Lynn Bamford
CEO & Chairman

Thank you for that question, Kristine. So we have some content directly on the missiles, but it's relatively minor. Its telemetry and flight test instrumentation type of content, which could be meaningful revenue but maybe not deployed across every single missile that's produced. So just to level set that focus in our portfolio.

However, as the demand and the belief that we need to restock pile is all connected to the Golden Dome and very many things that are related to the defense of our country where we have fantastic exposure. So we've talked about in Golden Dome there's kind of you think of it in three technology buckets, the sensors, the networking of those sensors and then the effectors to combat any incoming threats. And across all three of those areas, we are very well positioned that have very many active developments. I mean that -- the system will be built up of existing capabilities that our long history has us well positioned on. We're very well positioned in the networking with the various standards that are going to be used for the command and control across it.

And on top of the existing platforms, we are engaged in quite a few exciting new developments across industry to provide some upgrades into those systems and deliver new capabilities. So -- just broadly speaking, the overall growth of defense, I'd say we are very well positioned not just here in the U.S. but across Europe.

Kristine Liwag
Morgan Stanley, Research Division

Great. Super helpful. And if I could do a follow-up question on no surprise, the AP1000. So you guys mentioned that you are expecting an order in 2026, but it's not in the financial outlook. So I wanted to clarify, one, which customer do you expect this to come from, is this Poland, Bulgaria, or U.S. customer?

And the second question to that is how many are you expecting in this order for 2026? And the third one would be, if you do get this order and you noted that it's not in your 2026 guidance, how do we think about potential moving pieces to your outlook for the full year? Sorry, I know that's three questions into one, but basically, it's an AP1000 question.

Lynn Bamford
CEO & Chairman

So it's a topic we definitely anticipated being asked about. And so really, I mean, the first orders could come from either a European customer, Poland or Bulgaria or from the U.S. How this $80 billion that the government has committed to jump start the build-out of AP1000 reactors in the U.S. is going to flow is still something I think everybody is coming to understand. And for us, our customer's Westinghouse. We work very hard to stay aligned with Westinghouse.

We are definitely communicating with them on different scenarios production ramp and are just committed to being a great supplier to Westinghouse and working with them. So I don't think at this time, we can give any color on the size of the first order. It could be of different quantities. And really until Westinghouse decides how they want to do that, I don't think we would get ahead of what that would mean for Curtiss-Wright.

K. Farkas
VP & CFO

I was just going to add, you had asked about the financial impact. And I think as you think about the timing of the order and when that hits us during the year, there's going to obviously be some labor that we're going to incur upfront in the contract. But we mentioned the bell curve and that taking place over a 5-year period. So there'll be a little bit of a start-up, and then as we're able to place orders for material and start to see that material come in the door, which I would expect a greater portion of that material will start coming in this next year, we'll see some uplift in the revenues. That's when we'll really start to accelerate within the bell curve.

And then just from a cash perspective, I mean, we're in negotiations with Westinghouse. We're here to ensure that they're successful in the deployment of the AP1000, but I think you can see from our focus on working capital and what we've demonstrated in free cash flow that the team is dedicated to ensuring that we continue to improve upon that. So I think that there'll hopefully be some good news of that in that area as we progress through the year.

Operator

We'll move now to Myles Walton with Wolfe Research.

Gregory Dahlberg
Wolfe Research, LLC

This is Greg Dahlberg on for Myles. I wanted to start on the free cash flow guidance, just because you've seen big step up in CapEx in '25 and you're calling for it again in '26 with minimal impact to free cash flow conversion. And Chris, I know you mentioned the working capital performance in your prepared remarks. So I was curious if you could just kind of put a finer point on what's actually happening with the working capital to enable this? Like are you getting better advantages from your customer? Kind of can you just talk through the dynamics there?

K. Farkas
VP & CFO

Sure. So I mentioned on the call that we were at 19.2% working capital as a percentage of sales in 2025. And if you take a look at our financial statements, you're going to see that our deferred income has been increasing gradually over the past several years. A lot of that has to do with the team's focus on commercial excellence and success that they've had in negotiating contracts, and kind of supports the way that our sales are growing, a lot enabled defense work, a lot of strong commercial nuclear growth ahead of us. So the team has been doing a good job in that regard.

This last year, we had higher DPO. We did some good things with the supply chain ensured that they were protected at the same time participating in our cash flow goals. But as we head into this next year, we're going to continue to improve upon collections. We've got opportunity across the board, whether it's DSO, inventory turns, DPO, and we'll be targeting a working capital percentage of sales of approximately 18%, that will be record.

I think if you step back to the years when we had the last AP1000 contract, we were somewhere in that high 18s rate, and we're expecting to beat that this year. The team outside of commercial excellence and negotiating with contracts has done a lot of good systems work. We talked about that at Investor Day. We have new levels of information at our disposal regarding daily billings and progress on cash flow across the corporation, that scales all the way from Lynn and myself down to the business unit level. So we've done some good things there to improve the systems that help to enable improved cash flow management.

Gregory Dahlberg
Wolfe Research, LLC

Got it. And then just quickly on the C-17 order you guys announced earlier this week. Was that order booked for you in 4Q just because I think that's when Boeing got the order? Is that a 1Q order? And if not, we expect a relatively quick snapback in Defense Electronics bookings, just given what seems to be a timing issue.

Lynn Bamford
CEO & Chairman

Yes. So it is -- we definitely saw delayed bookings and we mentioned in the script, the 0.96 book-to-bill in Defense Electronics, and that was very much affected by the delay. So to be clear, it was a Q1 order for us, and it's a very exciting new platform for us, but it's also very indicative of the bookings we clearly saw that we believed would come in 2025 that were delayed partly due to the shutdown, partly due to the CR, some structure changes within the government. And so it's a very meaningful example of one of those and a platform we're pretty excited about.

Operator

We'll turn now to John Godyn with Citi.

Bradley Eyster

This is Bradley Eyster on for John Godyn. Just want to dial a little bit on the Aerospace & Industrial and -- sorry, Naval & Power headwinds that you called out for fourth quarter, particularly on mix. Is this something that's more of a seasonality item here? Or is it more structural? And how should we think about that going into '26 of the guide that you have?

K. Farkas
VP & CFO

Yes. So as we enter into 2026, we're going to continue to see a heavy ramp-up in, not only in Naval Defense. And as I mentioned on the script, that will be work in performance to accelerate where we are in the CVN-81 but also the Virginia-Class submarine program. But we're also accelerating in commercial nuclear and our process markets. The process markets, I'll start there first.

We saw a healthy order book and continued growth in the order book here later in the year in 2025, and that's positioning us really well in 2026, for MRO growth. And there's some accompanying margin benefits to a higher concentration of MRO valves. But we also had mentioned in the script that commercial nuclear is going to accelerate quite a bit here in 2026. The fourth quarter order growth in commercial nuclear alone was up 50% year-over-year. A lot of orders coming in relative to SMRs and work that's beginning to transition from development to prototype, which is happening this year in 2026. So that work does represent a little bit more of a challenge for us from a margin perspective.

As you would imagine, it's not production work. Eventually, it will transition there, and that will convert into stronger margins. But we're also underpinned by a strong increasing footprint and global aftermarket content, and that will help us as we move through the year as well. So thematically, I think, process and maybe the transition into prototyping are probably the two things that you can think about as we go into 2026.

Operator

We'll turn now to Nathan Jones with Stifel.

Unknown Analyst

This is [indiscernible] on for Nathan Jones. I wanted to talk a little bit about operational and commercial excellence although, it was a big part of driving margin expansion over the last 3 years. How should we think about these initiatives moving forward? And what was the contribution for the last 3 years?

Lynn Bamford
CEO & Chairman

So maybe I'll start off and talk about some of the efforts and such, and I'll let Chris speak to what he can about the contribution, but when you run a complex business, there's a lot of things that go into how you expand margins and you can't always completely bucketize them from one thing to the next. But our operational growth platform has really become a fundamental part of the company and how the teams evaluate themselves.

And it has a robust set of focus areas with everything from the commercial excellence and which includes pricing and making sure we can analyze that aspect with -- as there's been inflation in the world, and such that making sure we're really understanding how we're pricing our products is very critical, and we've become much more sophisticated in how we can do that.

So people don't always think about that as part of operational excellence, but it's very much how we manage the company. But we continue to do things in our supply chain. We've added commodity managers at a corporate-wide level is just one example that are helping making sure we maximize the buying power across the organization and achieving the best results there to ever ongoing activity on integrating robotics into our operations, so I'll just pull those out as some examples. So it's very widespread. And the team has made great successes over the past 3 years. But we have a clear list of things that are still in our windshield that we're going to go after and in no way shape or form does this end. So it's definitely still an ongoing focus and something that's part of our DNA at this point.

K. Farkas
VP & CFO

Yes. And maybe I won't go all the way back to 2024 at this point in time. But if I just kind of start with what happened here in 2025 as a base. We had close to $12 million of commercial and operational excellence roll through our P&L this last year. The operational growth platform is affecting all entities. And the greater portion of that was really operational excellence, but still some pricing successes this last year.

Additionally, we have been conducting restructuring programs, restructuring for growth in many areas of the business, but also efficiency, and you saw some of that benefit come through in 2025. Now as we enter into 2026, we're going to continue to see some of that restructuring benefit from the programs that we started in prior year continue to roll through our P&L. You'll see some uplift from that and operational excellence and pricing initiatives. Again, not quite at the same pace. But as Lynn had mentioned, there's plenty of opportunity in front of us, and we'll continue to kind of drive towards that opportunity.

But overall, looking at Curtiss-Wright margins for this next year, we're going to have a good strong incremental contribution margin on sales of roughly 25%. And we'll benefit from all those initiatives that are helping us in the P&L, and that's going to more than offset what's happening in our increase in IR&D and CRAD this next year. So I'm pleased to be able to come on out of the gate with a guide of 30 to 60 basis points of expansion.

Unknown Analyst

Also just a quick one here. With the 4Q power and process benefiting from strong growth in industrial valve sales, called that out earlier. Are you seeing any improvements in the underlying process markets, maybe an update there?

K. Farkas
VP & CFO

Yes. I think we are seeing some improvement in the underlying process markets. I mean, as you look forward in 2026, North America MRO is really projected to grow in that low single-digit to mid-single-digit range. We're seeing some good benefits across North America related to CapEx. I think the -- and that's particularly in the oil and gas side of things. When you look at the petrochem the global growth is going to be a little bit below GDP. North America will probably be in line with GDP.

But I think one of the things that's important to point out and really just kind of credit back to the team is that they've done an exceptional job really focusing on customer satisfaction, being able to tighten lead times get product in the hands of the customer sooner, heavy focus on quality and at the same time, kind of expanding some of those sales channels globally so that they could take advantage and gain some market share in the process. So they're really doing some good things, and I think that's going to help us kind of beat the overall industry market growth rates as we head into 2026.

Operator

We'll move now to Michael Ciarmoli with Truist Securities.

Michael Ciarmoli
Truist Securities, Inc., Research Division

Lynn or Chris, I think I know the answer to this, but I figured I'd ask it anyway. You mentioned some of the timing in defense, but you've got pretty big deceleration in just your pure defense revenue growth. I think you've averaged 13% over the past 3 years. The guide points to 6%. I think Naval growth is down 2%. And again, tough comps. I understand what you're lapping, you did talk about the strong direct foreign military sale. But anything else going on besides timing and just kind of what's been a strong kind of prior trajectory? I know you talked about the bookings in Defense Electronics being below 1, but any other color there?

Lynn Bamford
CEO & Chairman

So we feel very strongly optimistic about our ability to continue to grow the Defense -- our Defense business at a pace that matches or beats what the U.S. DOW is doing. And that does -- foreign military sales are part of that, but we are very well aligned here in the U.S. And there can be just some timing issues. And having a multi, multi-month CR and then the shutdown definitely had an impact. So we've taken a bit of a conservative stance, as Chris mentioned in our ground guide that we think now that we have a budget, we expect the normal order flow would begin in 60 to 90 days. But we're watching that.

We thought it was a great sign to see the C-17 order come in so quickly after the appropriation. Broadly speaking, across Defense Electronics specifically, we can clearly have line of sight over $100 million of orders, we fully expected to get in '25 that have been pushed into '26 and that C-17 is one of the first ones that has landed. And again, we're very close contact with our customers. There's nothing going on that is disruptive to the long term.

We're very well positioned with our technologies. And I think of things that the team is doing and whether it's the Fabric100, we bought over 20 -- 20 MOSA, SOSA, CMOS compliant products up to market in 2025. We will exceed that number in 2026. Our relationship with NVIDIA is just at its beginning for being a growth vector. The Microsoft Azure is also just at the beginning. And those are things we made public in 2025, and the team continues to do things that will provide other differentiated capabilities that are unique to Curtiss-Wright and bring those to market.

And so whether it's that portion our alignment with the systems around Golden Dome and we are aligned in our shipbuilding. And I think regardless of the shipbuilding to your comment there, the fact that at our Investor Day, we had $15 million of maritime industrial-based funding, and that is up to $55 million. Now that is a clear indication that of how the Navy sees Curtiss-Wright as a critical supplier and they want to assure we're ready for the growth that is coming our way. And so that's a tangible thing we can point to, tied to the Navy. So there's no concerns looking out to '27 and potentially having a $1.5 trillion budget is very exciting, and we're doing the things to make sure we're ready for the growth that our customers are signaling to us.

Michael Ciarmoli
Truist Securities, Inc., Research Division

Okay. Perfect. That's really helpful. And then maybe just totally shifting gears back to nuclear. You've given us sort of the end market waterfall detail for '25 and '26. So we can probably back into what looks to be maybe $60 million of OE revenue on new nuclear builds this year growing close to 40% over last year. Is anything else, you mentioned X-Energy transitioning into the prototype build? Are there any other SMR reactors that are expected to transition to drive that growth? Or can you point to other specific platforms or partnerships that are kind of driving that sort of SMR growth this year?

Lynn Bamford
CEO & Chairman

So we've made some announcements on our partnership with Rolls-Royce. We continue to build out the capabilities of what we're going to do with Rolls-Royce, and some of those will turn into early prototyping types of revenue in 2026. We're well positioned with TerraPower. We really work across the gamut, and everyone is maturing in their designs and working hard to be bringing plants online in the 2030s. So without getting ahead of our customers, I don't think I would say anything else.

But the revenues from these three restarts to trying to build out and complete some of the reactors that were installed. All in all, these things are all very active, very real, and our teams doing real work and gaining real business opportunities across the industry. And so the thing I like is it is very widespread. It's not one thing. And as we said, the AP1000 work is still in our future. The order we believe strongly is coming in 2026, and that will be pretty dramatic when it comes in a very, very good way.

K. Farkas
VP & CFO

And Mike, I would just add one other kind of interesting data point as you think about this because we get a lot of questions about new builds and the AP1000 and SMRs, but we also have content on other reactors. As you look at the APR1400 out of South Korea, and we talked about $10 million to $20 million of content per new build there. Now those are multiyear projects, but we did have some order activity here in the fourth quarter for new build in South Korea. So I'll have some content there as it's affecting the new build splits as well.

Operator

[Operator Instructions]

We'll turn now to Louie DiPalma with William Blair.

Louie Dipalma
William Blair & Company L.L.C., Research Division

In December, the Secretary of the Navy, John Phelan announced the implementation of the shipbuilding operating system powered by Palantir to use AI to achieve supply chain efficiencies for submarine construction. And Phelan indicated that 30 key suppliers were on the platform. Has this software platform had any impact on Curtiss-Wright in terms of volumes and the impressive margin expansion that you're seeing?

Lynn Bamford
CEO & Chairman

So very much in tuned with what's going on and have had discussions with Palantir around that topic. I'd say to date, it's definitely still in the forming stage. And so no, I wouldn't say there's any impact to date, but it is something that is an initiative by the Navy and Curtiss-Wright will participate as is appropriate for us as a business. And those discussions have begun.

Louie Dipalma
William Blair & Company L.L.C., Research Division

Makes sense. And is there the potential -- another topic that's been in the news, is there a potential for Curtiss-Wright to be involved in the development for a lunar nuclear reactor? The Secretary of NASA discussed the need for like nuclear propulsion in space and a nuclear reactor to provide consistent power generation. Do you view these opportunities as viable over the long term? Or is it just something that's just too early to provide a specific opinion on?

Lynn Bamford
CEO & Chairman

So there's different ways that we potentially will have an impact. And we -- when we talk about our nuclear footprint, we tend to talk and focus and we have as a company on the 300-megawatt and larger reactors. But we do work with a variety of the more micro reactors. And there's a few names that are more in the press, and we have content with a lot of those. It's not something that's ever going to -- it appears today anyways, be as significant to Curtiss-Wright revenue-wise as say, what's going on with AP1000. But we do work with them. Our capability and quality as you put something into space and wanting to assure you're going to have that generations of reliability. That fits into Curtiss-Wright's sweet spot. So we will see on top of electronics capabilities in that space. So nothing specific to mention yet, but there could be relevance.

Louie Dipalma
William Blair & Company L.L.C., Research Division

Great. And as it relates to your the last question and answer. Do you expect to announce more SMR content agreement similar to what you announced with Rolls Royce and X-Energy and TerraPower?

Lynn Bamford
CEO & Chairman

Yes. I do -- I mean, we are continuing to develop and expand our content across some of the providers and -- or most of the providers and believe we'll have more announcements in 2026 of new systems that we've reached a level of confidence with our customer that they're okay with us talking about it publicly. And again, we really work very hard to be a great supplier into our customers and not get ahead of them with things that we're announcing. But there's a lot more activity going on, and there will definitely be more announcements.

Operator

We'll move now to Tony Bancroft with Gabelli Funds.

George Bancroft
Gabelli Funds, LLC

Congratulations, Lynn and Chris and team on all your accomplishments very well done. There's been a lot of discussion, you heard major OEM, commercial OEM talking about supply chain improvements. And on the other side, you've seen maybe some countervailing commentary that there's still a lot of need especially further down the supply chain, just difficulties in getting those up to speed. What are you seeing maybe in your supply chains? And is there any opportunities to -- for M&A, where would it make sense to be accretive for you to have that and being internalized and obviously, other opportunities there with that? Any thoughts on that Lynn?

Lynn Bamford
CEO & Chairman

Yes. I think broadly speaking, our supply chain remained fairly stable in 2025, and there wasn't a lot of disruption. But that's not to say we don't have watch items. One of the things that's very much in the news is memory -- high-bandwidth memories and storage parts as tie as there are common things used in this AI infrastructure build-out. And then there's some raw materials in rare earths that are watch items for us. But really what I -- for Curtiss-Wright, we have learned a lot as a company, and it started in -- during COVID, we've implemented many, many new tools that we use across the organization in all 3 segments, and have added these centralized resources that I mentioned a moment ago to really assure we're driving the best performance we can broadly across where we're leveraging the supply chain.

We do things like we look for getting dual sources. We very much leverage our government high-priority ratings, which is very often that we're able to do with a lot of our Naval work and even some of our Defense Electronics work. And so that keeps us at the front. And we spend a lot of time in with our supply chain, working with them. So the team does a great job and is really staying on top of it. It's something you have to continuously be in tune to and work.

From an acquisition standpoint, it's not something that's currently a high priority for us. It does not -- our strategic priorities -- but it's not to say I would never say never to a lot of things that if there was an opportunity, it could be something we would consider if we were looking for global diversification to be able to be better aligned to end markets where they want localization would be an example where it really opened up the ability for you to have a good active business in an end market. And so I wouldn't say never, but the team does a great job managing it.

Operator

And ladies and gentlemen, in the interest of time, that will conclude today's Q&A session. I would like to turn the floor back over to Lynn Bamford, Chair and Chief Executive Officer, for any additional or closing remarks.

Lynn Bamford
CEO & Chairman

Thank you, everybody, for joining us today, and we look forward to speaking to you either on the road or when we release our first quarter results. Have a good day.

Operator

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