Curtiss Wright Corp Q1 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Curtiss-Wright First Quarter 2022 Financial Results Conference Call. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host today, Jim Ryan, Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and good morning, everyone. Welcome to Curtiss-Wright's First Quarter 2022 Earnings Conference Call. Joining me on the call today are President and Chief Executive Officer, Lynn Bamford; and Vice President and Chief Financial Officer, Chris Farkas. Our call today is being webcast, and the press release as well as a copy of today's financial presentation is available for download in the Investor Relations section of our company website at www.curtisswright.com. A replay of this webcast can also be found on the website. Please note, 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; they are not guarantees of future performance. We detail those risks and uncertainties associated with our forward-looking statements in our public filings with the SEC. As a reminder, the company's results include an adjusted non-GAAP view that excludes certain costs in order to provide greater transparency into Curtiss-Wright's ongoing operating and financial performance. Any references to organic growth are on an adjusted basis and exclude foreign currency translation, acquisitions and divestitures unless otherwise noted. GAAP to non-GAAP reconciliations for current and prior year periods are available in the earnings release and on our website. Now I would like to turn the call over to Lynn to get things started. Lynn?

Thank you, Jim, and good morning, everyone. I'll begin our remarks by covering the key highlights of our first quarter 2022 performance and some notable events that are influencing our business. Then I'll turn the call over to Chris to provide a detailed review of our financial results and our 2022 guidance. Finally, I'll wrap up our prepared remarks before we move to Q&A. Starting with our first quarter 2022 performance, our results were principally driven by the timing of revenues in our defense markets with overall sales below the prior year but in line with our expectations. This timing was influenced by the continued global supply chain disruption due to extended lead times and delays in the receipt of electronic components. Our first-quarter defense sales also reflected the impact of the continuing resolution and the delayed signing of the DoD budget. Outside of defense, we delivered a very strong performance, generating double-digit sales growth in our commercial aerospace nuclear aftermarket and process end markets, which reflects the merits and strength of our combined portfolio. Regarding our operational performance, the team has done a commendable job managing through the supply chain challenges along with the impact of rising inflation and other global events. First quarter operating margin exceeded our expectations, mainly driven by better-than-anticipated mix in Defense Electronics as lower-margin revenues were pushed out of the first quarter. Diluted earnings per share of $1.31 also exceeded our expectations due to better-than-expected profitability. New orders were strong in the first quarter, up 12% year-over-year, reflecting increases in naval defense and commercial aerospace within our A&D markets and strong demand across all our commercial markets. As a result, we achieved a book-to-bill of more than 1.1x in the first quarter, which builds on our already strong backlog. While we remain cautious due to ongoing supply chain constraints, this strong demand provides confidence in our sales outlook for the remainder of the year. Next, I would like to briefly touch upon the full year 2022 guidance. Although the year is off to a slow start, again mainly due to timing, our full year guidance remains intact, and we continue to expect a strong performance across the board. Chris will review in detail in a few minutes, but in terms of key highlights, we are maintaining our outlook for organic sales growth of 3% to 5%, driven by increases in all of our major end markets. Due to the ongoing supply chain challenges and delayed signing of the DoD budget, we continue to expect a greater-than-normal percentage of our total sales will be weighted to the back half of the year. While we are approaching the situation with tempered optimism, our ongoing discussions with critical suppliers indicate that delays in acquiring electronic components will begin easing in the third quarter, particularly regarding semiconductors. While this is encouraging, we are currently anticipating this disruption will continue throughout the remainder of '22 and likely into 2023. Turning to our operational performance, we expect continued operating margin expansion in 2022, aided by the benefits of our ongoing operational excellence initiatives and our efforts to mitigate challenges in the supply chain. We also remain on track to achieve double-digit growth in diluted EPS and generate strong free cash flow. Next, I wanted to provide a brief overview of some recent industry events influencing our defense markets. First, we were pleased to see Congress pass the FY '22 Defense Appropriations bill in March, following a prolonged continuing resolution that delayed funding on critical new start programs. The bill includes a strong 5.5% increase over the FY '21 enacted budget, which Curtiss-Wright is well positioned to benefit from. In addition, the Biden administration released the initial FY '23 budget on March 28, requesting $773 billion for the Defense Department or 4% growth over FY '22 enacted. This proposed budget includes increases across all services, with naval shipbuilding receiving the highest increase over 2022 aligned with the administration's focus on the Indo-Pacific region. Notably, this includes strong funding for two critical growth drivers for Curtiss-Wright, the Columbia Class submarine and Ford Class aircraft carrier programs. Both programs continue to drive strong demand for our nuclear propulsion equipment. The recently released 30-year shipbuilding plan provides further confidence in the Defense Department's commitment to build out the naval fleet and align our forces to be prepared to face the biggest global threat. In the ground defense market, the budget targeted the continued funding for the Army's top modernization priorities, while in aerospace defense, there was support for various helicopter and unmanned platforms. I'll also remind you that Curtiss-Wright has one of the broadest portfolios of defense electronics products. Our alignment to and technical leadership in the open standard aspects of MOSA enables us to help modernize military platforms rapidly and cost-effectively. Turning to the international front, the war in Ukraine has further increased the focus on defense spending around the world as well as energy independence for Ukraine and many neighboring countries in Europe. Since the conflict began, we have witnessed many NATO countries proposing or ramping up defense spending to 2% or greater of GDP. An overall increase in global defense spending provides Curtiss-Wright with improved visibility and support for our long-term growth outlook across our defense end markets. Now I would like to turn the call over to Chris to provide a more thorough review of our first quarter '22 performance and our outlook for the remainder of the year. Chris?

Yes. Thank you, and good morning, everyone. I'll begin with the key drivers of our first quarter 2022 adjusted results by segment. Starting in Aerospace & Industrial, where we delivered another strong performance as sales and operating income increased 8% and 34%, respectively, while operating margin increased 260 basis points. Looking deeper into the segment sales growth within its commercial aerospace market, we experienced double-digit growth in sales, primarily on narrow-body platforms, including the 737 and A320. Within the industrial markets, our results principally reflected increased sales of industrial vehicle products, most notably serving off-highway platforms. I also wanted to highlight the segment's aerospace defense market sales, which while flat overall, included increased sales of our surface treatment services to help extend the life expectancy of the F-35 fighter jet platform. This aligns with our recent press release, which highlights the use of our technology to support the military's premier fighter jet program and represents one of the many unique commercial defense crossover technologies within Curtiss-Wright's portfolio. Turning to the segment's operating performance, our results reflected favorable absorption on strong sales and the benefits of our operational excellence initiatives. Next, in Defense Electronics, our performance principally reflected the timing of defense revenues due to the continued challenges within the global supply chain as well as the delayed signing of the FY '22 defense budget. As a result, we experienced reduced sales of our embedded computing and tactical communications equipment as certain revenue shifted out of the first quarter. Turning to the segment's operating performance, while we experienced under absorption on lower sales and negative product mix, operating margin of 16.3% was actually better than anticipated as a portion of lower-margin system sales shifted out of the first quarter. This in turn allowed us to exceed the first quarter operating margin target of 14% that we provided in February. Next, in the Naval & Power segment, our results reflected lower naval defense revenues, mainly due to the timing of production on the Ford Class aircraft carrier and the wind-down of production on the CAP1000 program. However, those impacts were nearly offset by double-digit sales growth in both nuclear aftermarket and process as these markets continue to strengthen with the tailwind from the economic recovery. It's particularly encouraging to see the uplift within the nuclear aftermarket growth rates, which are also being helped by the U.S. government's renewed support to maintain the existing fleet of operating reactors. Turning to the segment's profitability, our results reflected under absorption on lower sales as well as a shift in mix on the lower CAP1000 program revenues. To sum up the first quarter results, overall, operating margin was 12.7%, which was slightly above expectations and mainly due to the timing of revenues. We expect the first quarter to be the low point in the year, followed by solid sequential improvement in profitability throughout the remainder of 2022. Turning to our full year 2022 guidance. I'll begin with our end market sales outlook. We continue to expect total Curtiss-Wright organic sales growth of 3% to 5%, unchanged from our initial guide provided in February with contributions from all of our end markets. Within this guide, we expect our A&D markets will grow 2% to 4% and represent two-thirds of our full year 2022 company sales. In addition, due to the timing and availability of electronic components, we expect a greater-than-normal percentage of our defense end market sales to be weighted to the second half of the year, with the most pronounced shifts to take place within aerospace and ground defense. Elsewhere, we continue to expect that commercial aerospace will be our fastest-growing end market in 2022, with 9% to 11% sales growth driven by strong growth in OEM sales as this market continues its recovery to prior peak levels. We remain encouraged by the continued recovery in passenger traffic activity, along with the expectations for steady increases in narrow-body production rates both in 2022 and over the next few years. Outside of our A&D markets, our commercial market sales growth remains unchanged at 4% to 6%. These markets continue to benefit from a healthy and growing order book, most recently illustrated by the strong 1.2x book-to-bill recorded in the first quarter. Continuing with our outlook by segment, I'll begin in Aerospace & Industrial, where our top line guidance of 4% to 6% sales growth remains unchanged. We continue to project solid growth in operating income and margin driven by strong growth in both commercial aerospace and general industrial market sales while also reflecting the benefits of our operational excellence initiatives. Next, in the Defense Electronics segment, we continue to expect sales to grow 2% to 4% led by modest growth in aerospace and ground defense. And as stated on our prior earnings call, while sales and profitability for our Defense Electronics businesses are typically weighted to the second half, we do expect a more pronounced shift in sales to the back half of 2022. Lastly, in the Naval & Power segment, we expect sales to grow 2% to 3%, driven by solid growth in naval defense, most notably on the CVN-81 aircraft carrier and Columbia-class submarine programs. We also anticipate mid-single-digit growth in both the nuclear aftermarket and process market. We continue to expect that operating margin will be essentially flat but strong, ranging from 18.1% to 18.3% as we overcome the significant headwind associated with the wind down of the CAP1000 program. So to summarize our outlook, we expect total Curtiss-Wright operating income to grow 3% to 6% overall on a 3% to 5% increase in sales. Operating margin is expected to improve 10 to 30 basis points, ranging from 17.1% to 17.3%, including an $8 million increase in R&D investments and the aforementioned CAP1000 headwinds. To aid in your quarterly modeling, based on the shift in sales to the back half of the year, we now expect second quarter 2022 sales and operating margin to be in line with our second quarter 2021 adjusted results, followed by a strong second half performance. Continuing with our financial outlook, while we're maintaining our full year 2022 diluted EPS guidance, we did make a couple of minor offsetting changes in the components below operating income. First, we increased interest expense by $1 million. We also updated our share count, making a slight reduction to reflect the latest estimates on the full year. As a result, we continue to expect double-digit growth in our full year 2022 adjusted diluted EPS ranging from $8.05 to $8.25, reflecting both the contributions from our growth in operating income and our ongoing share repurchase activity. Again, for your quarterly modeling, we expect the first quarter EPS to be our lightest, followed by sequential quarterly improvement, with the fourth quarter being our strongest with a higher-than-normal weighting to the second half. Turning to our full year free cash flow outlook, our guidance remains unchanged at a range of $345 million to $365 million. During the first quarter, while we typically experience an outflow of cash, these levels were slightly elevated due to lower net earnings driven by the timing of defense revenues and higher inventory levels in response to the supply chain. Our reported results also reflect the Westinghouse legal settlement payment of $15 million, which we have excluded from our adjusted results. Looking out to the remainder of 2022, we expect to ramp up as the year progresses, in line with our historically strong second half performance. Finally, we expect to deliver on our long-term adjusted free cash flow conversion target of 110% again in 2022. Now I'd like to turn the call back over to Lynn to continue with our prepared remarks. Lynn?

Thank you, Chris. In summary, we remain confident in our outlook to generate 3% to 5% sales growth this year, driven by increases in all A&D and commercial markets and to deliver strong operational excellence. The Curtiss-Wright team continues to do a great job managing through the ongoing supply chain disruption. We expect continued operating margin expansion, including our investments in R&D and the CAP1000 headwinds, and remain firmly on track with our expectation for double-digit EPS growth, which, as a reminder, is in line with our long-term guidance. We expect our free cash flow to remain strong, and we are on track to achieve our tenth consecutive year of greater than 100% free cash flow conversion. We remain committed to a disciplined capital allocation strategy, prioritizing acquisitions as a strategic accelerator under our pivot to growth strategy, supplemented by continued share repurchase and operational investments. Earlier this year, we announced the acquisition of Safran's arresting systems business, which positions Curtiss-Wright to become a leading global supplier in aircraft recovery systems. As previously stated, the business generated about $70 million in revenue in 2021 and has demonstrated a solid pace of revenue growth over the past few years. We expect this business to align with our long-term organic sales growth rate of 3% to 5%. This transaction is presently on track to close by the end of the second quarter. As a reminder, we are not including its financials within our guidance at this time. In closing, I remain confident that we are well positioned to deliver strong profitable growth in 2022, advance the One Curtiss-Wright vision, and deliver on our pivot to growth strategy to drive long-term value for our shareholders. Before we turn to Q&A, I want to take a moment and express our heartfelt concern and sympathy for the Ukrainian people. We hope for a swift and peaceful resolution to this tragic conflict with Russia. As you would expect, we have ceased all business activities in Russia and are in full support of all global sanctions. We will continue to focus our efforts on supporting Ukraine's defense and energy independence through our domestic partners and NATO allies. We and our employees across Curtiss-Wright understand the critical importance of our products. At this time, I would like to open up today's conference call for questions.

Our first question comes from Peter Arment with Baird.

Lynn and Chris, maybe could you talk about just the chip shortages and overall supply chain. We've heard from other companies that they're resulting in carrying more working capital, higher inventories, obviously, reflected a little bit of that in the first quarter. But just your thoughts on that going forward.

Yes, it's definitely something that's top of mind, and we were anticipating talking about this this morning. So thank you for the question and joining us. Yes. I mean, as you heard us say, it definitely impacted our Q1, pushing some revenues out. One thing that we've really come to dial in with our supply chain over the past couple of quarters that we've been discussing for 3, 4 quarters is the need to get ahead of our purchasing and placing much longer lead time on orders than we traditionally would have. Starting even in Q2 of last year, we saw lead times push out to 26-plus weeks. In the past several months, we've seen some of those lead times extend to almost a year and even greater in some cases. So with that and all the orders we've placed, we're anticipating a real increase in deliveries beginning in the back half of Q2 and early Q3 to support that ramp-up of revenues in the back half of the year that Chris talked about. We're sitting on a lot of pent-up demand, and we're ensuring that, as those supplies begin arriving more rapidly, we're poised to ramp up our production and get those products out the door. I think the team has done a good job of that. One important realization as this was new to us is that it was also new to our suppliers. Their ability to be clear and firm in those commitments has increased over the past few months. So we feel a greater level of confidence in the commitments we have and in the deliveries expected later this quarter and early Q3, and we feel good about that. I know Chris mentioned briefly the working capital impacts in Q1. Perhaps I could turn it over to Chris to share any other comments he might have on working capital.

Yes, typically we start the year with higher working capital than what we have at the end of the year. There are often payment holds and other factors that occur at year-end, and we usually reinvest that cash back into our supply base and inventory in the first quarter as we prepare for growth later in the year. We are accustomed to a normal outflow in Q1. This year, our free cash flow decreased by about $77 million year-over-year. Last year during Q1, we had an unusually high cash flow of around $20 million due to the timing of certain advances. Currently, we are holding some extra inventory to position ourselves for the semiconductors and other essential components expected at the end of Q2 and Q3, ensuring we can deliver effectively. We are very focused on managing working capital and free cash flow, starting off a bit slow this year, but we anticipate improvements as products begin to move out.

Appreciate that. And just as a follow-up, when you mentioned in your overview about the recent DoD budgets that were enacted. And obviously, we've seen what the fiscal '23 and the fit-up looks like. How do you view that when you compare to your long-term targets that you established thinking about how Curtiss-Wright is positioned? It seems like there would be potentially an upward bias to your long-term growth targets.

We are very pleased with the outcomes of the '22 budget and the initial '23 budget, as they align well with our strong positions across various platforms. The Navy received the largest increase in the '23 proposed budget, and there is anticipation for additional funding in the future. The budget prioritizes high-tech warfare enhancements, particularly in C5ISR and electronic warfare, which is beneficial for us. While there were some cuts in vehicle programs that affect us, it's encouraging that the Army remains committed to funding network modernization and soldier lethality as top priorities, ensuring continued focus on these programs. Overall, we maintain our 2023 guidance but believe there is potential for upside. We are optimistic about growth opportunities through 2023 and beyond, especially with developments in the commercial nuclear market due to AUKUS, which presents a significant opportunity for us. Recently, we hosted a visit from the Royal Australian Navy at one of our major plants to explore our products for nuclear submarines, and the visit was very positive. I am increasingly confident that these industry trends will drive strong growth for Curtiss-Wright.

And our next question comes from the line of Nathan Jones with Stifel.

It may feel uncomfortable to discuss, considering the suffering involved, but we need to focus on the business implications. There are likely several positive effects from the Russia-Ukraine conflict for Curtiss-Wright's operations. I would like to hear your thoughts on this. Firstly, in the short term, there is an increase in weaponry being sent to Ukraine, and I believe Curtiss-Wright is involved in some of that. In the medium term, as you noted, there could be a significant rise in defense budgets in Europe and possibly globally as a result. Lastly, there is the consideration of reducing reliance on Russian oil and gas, which might lead to an uptick in nuclear power capacity worldwide. We are already hearing discussions in some Western European countries about reassessing their stance on nuclear energy. I’d appreciate your insights on how these factors might influence the business in the short, medium, and long term.

It is indeed a sad situation, and not to talk about it only from a business viewpoint is important. I tend to like to focus on the significance of our business in ensuring the safety of our world, which comes from both defense products and energy independence products. You are correct to touch on the weaponry being rapidly shipped there. However, that is not business for Curtiss-Wright. It’s not an area where we have any products. In the immediate short term, we're not seeing impact there. The increased spending in Europe, however, is certainly something that will drive business for Curtiss-Wright. That will come both directly from sales in Europe to major vehicle manufacturers as well as other systems directly into those businesses and then military sales through U.S. suppliers. A highlight has been the F-35, with many countries expressing intentions to buy F-35s, along with other products including Seahawk helicopters, F-16s, and UAVs. One significant area for us is in ground defense vehicles, where we provide high-power stabilization equipment and various electronic subsystems and displays. This business was sluggish for a couple of years, but we are now seeing a positive shift. We recently issued a press release about a partnership with Rheinmetall BAE joint venture and some future business we anticipate, which underscores our growing relationship with Rheinmetall that we hope to elaborate on over the next 6 to 12 months. Lastly, regarding the nuclear side, we spoke during our Q1 earnings results about a potential commitment across Eastern Europe for nuclear power buildup; this was ironically stated on February 24, the day of the Russian invasion. It is essential to break dependence on Russia, and nuclear power will be a part of that. AP1000 orders and the occurrence of small modular reactors will likely present opportunities, albeit slowly. However, we feel an increased urgency among stakeholders since the need for energy independence is now more palpable.

Just one follow-up on the nuclear side of it and specifically thinking about Western Europe and maybe then reconsidering their position on nuclear power. If you're starting from zero in the U.K., what's the kind of planning time and construction time? And if you started today from zero, how long would it be until Curtiss-Wright was realizing revenue from something like that?

We've provided an example of what Poland has stated, which is a timeline set before February 24. They aim for the first plant to be online in 2033, meaning they'll need to start concrete planning in 2028, which necessitates that orders for key component suppliers, including Curtiss-Wright, be placed in 2024. When we provided our guidance in February, we said timelines are usually around 3 to 5 years for operational nuclear plants. However, if there is a time for quick progress, it may be now. A 10-year timeline can seem long, but considering the urgency brought on by the geopolitical situation, I believe that there will be accelerated efforts. We’re prepared to support this need. While the pace of these developments might not yield immediate revenues in 2022, engagement with stakeholders is increasing, and we intend to be part of the solution for reducing dependence on Russia.

And our next question comes from the line of Michael Ciarmoli with Truist Securities.

I think you called out that the margins were in line with your expectations. I don't think you've had a defense margin this low for several years. Even the defense organic declines were pretty low as far as I can go back. So, you talked about the margins benefiting from some low mix slip out. Is there anything else you're kind of seeing there? Can you provide more color? We've obviously got some substantial cost headwinds as you guys are going to try and ramp these margins.

These are indeed unusual times, Mike. We were discussing this earlier, recalling how when the pandemic hit in 2020, many companies stopped providing guidance while we tried to reinitiate as soon as possible. The supply chain issue everyone is facing, particularly in Defense Electronics, is extremely dynamic. We have been offering further insights to help the market understand our quarterly performance. Last quarter, we explained that we expected sales to be down in this segment and, as it turned out, those revenues were fairly in line with our expectations, maybe plus or minus a couple million. We expected segments to be down approximately 14%, and again, our margins are indeed relatively low. While we anticipated lower sales, particularly in Defense Electronics, we projected a shift of lower-margin system sales into the first quarter. Consequently, we did exceed our first-quarter operating margin target by achieving 16.3%, but remain clear that this was a result of timing. Regarding Naval & Power, there was a minor favorable contract adjustment last year, and we anticipated that with the timing of the CAP1000 program, our margins would be lower this quarter. So we want to provide as much clarity as possible considering the dynamics at play across volume and absorption.

Can you give us more color on the cost equation and inflation? Are you seeing some pricing pressure on longer-duration firm fixed contracts that you're having to absorb? Are you having discussions with customers? Just broadly, what risk is in your contracting portfolio to pass through price increases?

As you stated, the situation is varied due to our diverse business model. We have contracts for revenue over time, units of delivery, and LTAs spanning several years. Monitoring our cost structure has become a priority, and we've enhanced our planning tools to anticipate cost increases. We've seen the greatest success with this across the A&I segment, where the team has been agile and cooperative with customers, who generally understand why price adjustments are necessary. We've encountered situations where LTAs lacked flexible indices, but customers have been willing to re-evaluate those indices to accommodate inflation. However, it's essential to understand that price adjustments are realized gradually as we work through our backlog. We don’t aim to alter pricing for existing contracts, but we are strategically preparing for price increases regarding the contracts we can influence. Additionally, labor costs are also a pressing factor that we're observing closely.

What about firm fixed prices, such as with the Columbia or Virginia-class? Do you need to wait for your next task order to make adjustments, or is there flexibility in the short term?

It's important to note that our businesses are proactively working on improving pricing. Making changes to longer-term naval contracts is indeed complicated and requires longer timelines compared to our commercial arrangements. Nonetheless, discussions and negotiations with customers are constant and ongoing. When opportunities arise, whether it's through an escalation provision in the contract or given the unique inflationary circumstances, we strive for flexibility wherever possible. I agree that the team has done a commendable job in navigating this situation.

Our next question comes from Myles Walton with UBS.

I was wondering if I could just touch on the sales cadence for the rest of the year. I think, Chris, you mentioned similar sales in Q2 to last year, which would imply a 9% sequential move. If that occurs, it would largely have to be driven by Defense Electronics. Would you agree that the backdrop will be improving from a supply chain perspective?

At the risk of delving further into these soft guidelines here, Defense Electronics is indeed expected to be heavily weighted to the back half of the year. In February, we stated we might see $40 million to $50 million of sales shift from the first half to the second half, with the majority found in defense markets and Defense Electronics. As we consider what we anticipate for Q1 to Q2, we envision sequential growth within Defense Electronics at a high single-digit percentage, along with moderate improvement in operating income. As those critical components start to be delivered, we expect to see more robust growth. For the full year, there will be steady improvement in sales and operating income.

I would like to add that Chris and I aim to manage the company as a corporation as a whole. We intend to deliver expected financial results by closely overseeing our diversified portfolio and addressing the unique pressures faced by each segment.

Okay. Since we have time, I’d like to pose a couple of questions regarding the M&A landscape. The Safran deal is closing shortly, but I wondered if you could share the current pipeline for medium-term acquisitions. It seems robust.

Several interesting properties are indeed making their way through the pipeline. We have been consistent in our approach, reiterating that we have evaluated a double-digit number of properties last year that we chose not to engage with and are maintaining that approach early this year. However, I remain optimistic about pursuing our acquisition strategy. As we find strategically and financially viable fits, we do not intend to force any deal.

Our next question comes from Kristine Liwag with Morgan Stanley.

Lynn, following up on Peter's earlier question, we've seen meaningful increases in defense spending levels in both the '22 spending bill and the '23 request. When you first established your 5% growth target last year through 2023, the defense outlook was much dimmer and less clear. Given the opportunity from the highlighted programs, could this growth now look more like high single digits? And what must firm up for you to feel confident in changing your outlook?

We are thrilled with the spending increases we're witnessing, and they bode well for our business. While we have strong positions in naval segments that are confirmed funding, there hasn’t been any radical changes to our growth outlook yet. This encompasses our sectors, and confidence in PacStar spending could indeed increase with time. However, we wish to see clear evidence of order flows from these budget increases before making any commitments to altering our optimism.

Of course, we are hopeful that the '23 budget gets passed on time this year. If that happens in September, it will provide greater clarity.

Indeed. We sincerely hope there's no return to a long continuing resolution. But as previously mentioned, we have many reasons to be optimistic about Curtiss-Wright's trajectory in the coming years.

Great. That's really helpful. And perhaps, one more on the nuclear theme, pivoting back to the U.S. It appears the U.S. nuclear renaissance, which didn’t take shape some years ago, is starting to gain traction. Lynn, you mentioned the life extension of that nuclear corner in California. Can you quantify the domestic aftermarket opportunity? What’s embedded in your outlook? These plants are what, 50-60 years old? If they're extending their lifespans, how large could this opportunity be, and how quickly could we realize this?

The growth potential within the nuclear aftermarket is significant. While we've been trying to quantify the revenue per reactor, it truly varies based on maintenance schedules and the level of modernization undertaken. It can range from single to double-digit millions. Some reactors will choose the minimal upgrades necessary for life extension, while others might pursue opportunities for modernization and efficiency, leading to richer chances for us as they progress. This is currently a discussion point, and quantifying it precisely remains a challenge. However, we are optimistic. About one-third of U.S. nuclear power plants are either in the process of submitting paperwork or have started the life extension process. There’s a strong belief that this trend will extend across the majority of remaining plants. While there's potential for growth, exact numbers remain challenging to pin down, but we are seeing encouraging signs.

Many of you have been tracking us for quite a while. The nuclear aftermarket has typically seen low single-digit growth, but we are encouraged by recent developments. Last year marked a solid increase in orders, up 10% year-over-year. In Q1, we’ve already seen a 7% increase, supporting those stronger mid-single-digit growth rates we anticipate for 2022. It's not just in nuclear, but also an increase in funding from the DOE to support a strategic plan and investment in Gen 4 technologies, which is promising.

And our next question comes from the line of Christopher Rieger with Berenberg.

Just real quickly, getting back to the topic of M&A. Has the recent increase in interest rates had any effect on the leverage you may be willing to take on to finance potential acquisitions?

No, we like where we are and how our balance sheet is holding up. Our balance sheet remains robust. Our primary focus remains finding the right properties to invest in. As Lynn mentioned earlier, that is our top priority. However, as we look ahead, we are also considering how to effectively return capital to shareholders while maintaining the right balance. It’s indeed a fascinating time with rising interest rates, prompting us to review our current financing approach and overall strategy. We're evaluating our revolver, which expires at the end of 2023, to consider seizing any opportunities to expand our capacity or possibly tapping into the bond market.

And I'm showing no further questions at this time. I'd like to hand the conference back to Lynn Bamford for any further remarks.

Thank you for all the thoughtful questions and for joining us today. We look forward to speaking to you again in another three months.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.