Ladies and gentlemen, thank you for standing by and welcome to BWX Technologies Incorporated Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to our host, Mr. Alan Nethery, BWXT's Vice President, Investor Relations and Corporate Procurement. Please go ahead.

Thank you, Andrew, and good morning everyone. We appreciate your joining us to discuss our 2016 second-quarter results which we reported yesterday afternoon. A copy of our press release is available on the investor relations section of our website at BWXT.com. Joining me this morning are John Fees, BWXT's Executive Chairman, Sandy Baker, President and Chief Executive Officer and David Black, Senior Vice President and Chief Financial Officer. As always, please understand that certain matters discussed on today's call constitute forward-looking statements under federal securities laws. Forward-looking statements involve risks and uncertainties, including those described in the Safe Harbor provision at the end of yesterday's press release and the risk factors section of our most recent 10-K and 10-Q filings. These risks and uncertainties may cause actual company results to differ materially. We undertake no obligation to update these forward-looking statements, except where required by law. On today's call, we may also provide non-GAAP financial measures that are reconciled in yesterday's earnings release and our company overview presentation, both of which are available on the investor relations section of BWXT.com. BWX Technologies believes the non-GAAP measures provide meaningful insight into the company's operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior periods, and to assist them in understanding BWXT's ongoing operations. And with that, I will now turn the call over to John.

Thank you, Alan. Good morning, everyone. We had an outstanding second quarter. We reported impressive growth on both the top and the bottom line, while finishing the quarter with a record amount of backlog. We booked over $1.6 billion worth of work, the highest quarterly bookings in the history of the business. Furthermore, we remain committed to returning capital to our shareholders which I'll discuss later on the call. Heading into the second half of 2016, BWXT is well-positioned to deliver on our commitment to a balanced capital allocation approach and our forecasted operating performance, which leads us to increasing guidance for the year. For the quarter, the company achieved 13% consolidated revenue growth, and a 32% non-GAAP operating income growth. Consolidated revenues for the quarter were $402 million compared to $357 million in the second quarter of 2015. Consolidated GAAP operating income was $88 million compared to GAAP operating income of $12 million in the second quarter of 2015, and non-GAAP operating income was $72 million compared to non-GAAP operating income of $55 million in the second quarter of 2015. Our Nuclear Energy business continue to deliver impressive revenue and operating income growth in the second quarter due to an increase in outage work and our Nuclear Operations business achieved the higher second quarter revenue in three years, leading to solid operating income growth. In April, we announced we were awarded a new pricing agreement with the U.S. Navy Nuclear component in fuel work, as well as the new downblending contract. Additionally, we are excited to continue our long history of supplying steam generators to Bruce Power with the $130 million Canadian -- $130 million Canadian dollar steam generator design and build contract we announced in early July. These awards led to the company posting a record amount of quarterly bookings and backlog at the end of June. Our consolidated backlog stands at $3.7 billion compared to $3 billion at the end of the second quarter 2015. Before we get to the details of the operations and segment opportunities, which Sandy will present, let me turn it over to David who will discuss the second segment -- second quarter results and other financial matters.

Thanks, John. The Nuclear Operations’ segment second quarter 2016 revenues were $326 million compared to $292 million in the second quarter of 2015. Revenues for the segment came in higher than second quarter 2015 results due to favorable timing and long lead material, as well as increased volume. Second quarter operating income was $64 million, up from $61 million in the prior year period due to revenue growth from long lead material timing. Safety performance in our Technical Services business improved during the second quarter of 2016 compared to the prior year period. However, total segment operating income was down $1 million compared to the corresponding period of 2015 due to timing of our proposal activities, leading to an increase in business development costs. For the second quarter of 2016, the Nuclear Energy segment achieved revenue growth of 19% over the prior year period, reaching $54 million compared to $45 million in the second quarter of 2015. Revenue growth in this segment was primarily due to an increase in outage and inspection work, as well as higher volume in the equipment business related to the execution of various steam generator projects. GAAP operating income increased from $2 million in the second quarter of 2015 to $26 million in the second quarter of 2016. Nuclear Energy GAAP operating income includes a $16 million benefit related to a favorable litigation ruling, which we have adjusted out of non-GAAP operating income. The litigation relates to a lawsuit involving of royalty dispute in which we received an unfavorable ruling in December of 2014. We subsequently appealed and received a favorable ruling from the Virginia Supreme Court during the second quarter of 2016. We have eliminated the $16 million loss contingency we booked in the fourth quarter of 2014. The non-GAAP operating income growth was…

Thanks, David. Good morning, everyone. Our Nuclear Operations segment continued its solid performance, achieving strong second quarter revenue and operating income growth. Delivery of these results was again provided by smart execution in our shops. As John mentioned, we achieved both record bookings and as a result, record backlog during the quarter due to awards announced in April for Navy nuclear components and fuel, as well as highly enriched uranium downblending. We continued to perform well on the initial missile tube work and have submitted proposals for additional work related to both at Virginia-class and Ohio replacement class submarines. We expect the total market opportunity for missile tube work split between the Virginia and Ohio replacement classes to be $1.5 billion over the next 15 years. We expect we are in a significant position of this work. In this place, the contract from the Virginia class missile tubes to be awarded within the month and the contract on the Ohio replacement class missile tubes to be awarded in the fall. So, this award will be pushed to the beginning of next year depending on timing of the funding approval. On the shipbuilding front, once the Ohio class replacement program starts, the Navy’s current bill schedule is set to transition from two Virginia class submarines per year to one Virginia Class and one Ohio replacement annually by the middle of the next decade. However, the Navy continues to assess the viability of producing additional Virginia class submarines once the Ohio replacement program begins in order to support the Navy’s needs. While any additional submarine production is subject to congressional funding, we would need to begin initial capital improvements related to this work in 2017 in order to meet the additional demand. If this materializes, it represents an excellent organic growth opportunity…

Thanks, Sandy. In the earnings announcement we released yesterday evening, we provided updated guidance for 2016. Due to our impressive first half results and the strength of our operations, we are increasing our non-GAAP EPS guidance range by $0.07 per share to be between $1.57 and $1.67 for the full year of 2016. The increase is primarily driven by higher than expected operating income in the Nuclear Operations business due to favorable timing of long lead material as well as contract improvements. As a result, we are increasing our consolidated revenue guidance range by $50 million and now expect $1.45 billion to $1.5 billion of revenue for the year. We expect our Nuclear Operations’ revenues to be at the higher end of the levels we recorded over the prior three years. We are maintaining our operating margin guidance for the Nuclear Operations business to remain in the high teens with some potential for upside. As Sandy mentioned in his discussions in the Nuclear Energy and Technical Services business, we do not expect to match the impressive first half results from these businesses during the second half of the year. Nuclear Energy -- for Nuclear Energy, the second half will be lower due to significantly lower planned outage work going into fall. However, we still expect to meet our 10% adjusted operating margin target for the year and this represents a more normalized operating margin for the business going forward. For Technical Services, the first half results were driven by favorable fees associated with the transition of the Advanced Mixed Waste Treatment Project and the second half results are expected to be driven lower by higher business development costs. As a result, we are reaffirming our previously provided guidance for both of these businesses. All other previously provided guidance remains the…

[Operator Instructions] We will be taking our first question from the line of Chase Jacobson from William Blair. Your line is open.

Hi, guys. Good morning. Nice quarter.

Good morning, Chase.

I don't think first question is too surprising, but John I was hoping you could maybe expand, provide a little bit more color on your comments about looking at options to accelerate the share repurchase rate. Does that mean just to hit the full authorization by the beginning of 2018, or is that -- looking at options to get it done sooner than that?

We are not really providing any further color on that at this particular point in time. It’s only to say that, that the pace that we started earlier this year, we were a little bit behind that pace this quarter. We wanted to make sure there was really strong indication today that we are committed to complete the authorization. We have no limitations in terms of doing that from a capital standpoint if you take a look at the forward. Even if you consider all the forward needs of capital that we need for a potential expansion of Naval Reactors business, if you take a look at the dividend, if take a look at this particular issue which is completing this authorization as well as continuing a dividend somewhere in around the level that we have, we have really no limitations there and still keeping within a reasonable level, leverage on our balance sheet. So, we just wanted to make sure everybody understood that this is important to us and that we intend on accelerating the pace to assure ourselves that we continue on this track to complete that authorization. So that's as far as we are saying today.

Okay. All right. That’s helpful. And that’s actually kind of answering part of my next question but also just -- I wanted to ask about the confidence level, or how far along these talks are further potential incremental Virginia class sub, because I know in Sandy's remarks I think he said that that the consolidation or the acceleration of the aircraft carrier schedule is not nearly as far along as the Virginia. So, I don’t know if that means the Virginia class talks are actually pretty well advanced or not, but any color you can give there?

Well, the thing that we are trying to provide is there has been a lot of talk in industry. There has been a lot of talk out on the street about the potential for this to occur. We are trying and we've been receiving a lot of questions. We are trying to give the correct color on really where the stance is. And really where the stances that we've had some very good discussions about where this could potentially go, but we want to make sure everybody understands that none of that is solidified at this point. I think that our government customer is evaluating options. I think there's positive momentum, is the way that I would characterize it. But I am not at a point where I would book it. We still have a way to go including our discussions that we potential could have with the government, Congress authorizing it and the reality of it coming true. But I think it's a nice positive outcome that we are supportive of and I think we can support. I think one the most important things is that we can support. We feel we can support the needs of our customers in this particular area and we want to make sure we can do that.

Okay. And just one clarification, the $1.6 billion of backlog that’s not yet funded that is not in the reported number, correct?

Right. That’s only in the notes. It’s not in our backlog. This is the amount that we said. I said in the future that we always -- we negotiated $3.1 million at spring in only one point. Four of that went into backlog. So, this is the remainder of that that we will keep a tally on so that the street will know that there is still negotiated but unfunded backlog out there that's not a part of our backlog.

Okay. That’s great. Thank you, guys.

Yes.

Thank you. Our next question comes from the line of Tate Sullivan from Sidoti. Your line is open.

Hi. Thank you. Good morning. Yes, it's great to see the continued great performance in Nuclear Ops but your other smaller businesses continue to show progress. I mean, starting with Nuclear Energy, I think -- were NAV -- was any of the work you did in the most recent quarter in the U.S., is there any change in the market in the U.S., and is part of being breakeven for the rest of the year and that business just continue to enable the business to take advantage of future opportunities too?

Well, the change in the market -- this is Sandy. Change in the market in the U.S. is just as we highlighted, both in the U.S. and Canada is our fairest work on the outages are fewer, much fewer than what we saw in the first half. But I think that’s just the nature of the business. We had previously reported to you guys that the second half of the year was going to be lumpy and lumpy and that’s the way we still see it. But there is work in the backlog. Unfortunately, it is not -- we are not going to see that. A lot of that happened in the second half of the year. It spills over into 2017 so. But the work that was done in the first quarter to provide us the returns that we got is going to make us hope of the -- as we predicted for the year on that business of 10% margin.

Can you do the work that you do out of your manufacturing facility in Canada for U.S. projects?

You can, yes. We have no replacement steam generators for the U.S. market in our Canadian facility.

Okay. And are you done with the China boiler work?

No. In fact that work is in its infancy. The material is ordered but not received. So, we haven’t really started that effort in Canada yet.

Well. Okay. And then my last one is can you just go into more detail on what the favorable timing of long lead material? I mean what is that?

Lot of the material that we used are large heavy forkings [ph] and some fairly unique material types. And you place the order and the long lead -- the lead times for that material can be as much as a year and also some of the forkings [ph] that can be 18 months. So, you place the order you don’t see the material for a year, year and a half to start the actual clarification work.

Okay. Thank you very much.

Yes.

Thank you. Our next question comes from the line of Nick Chen from Alembic Global Advisors. Your line is open.

Good morning. Congrats on a great quarter. In terms of capital allocations, you guys already gave a few more details but is the pace of the share repurchase baked into the guidance right now, or can the guidance prove conservative if you guys accelerate the program?

I mean, there is some guidance. There are some share repurchase in the guidance. So, obviously until we complete the quarter we don't know what’s there either so. But we did not provided what is inside of the guidance as far as share repurchases. But as John says that as we look at the rest of the remaining available on the authorization, we are going to look at options to try to complete that authorization within that timeframe and we have the capacity to do that.

Okay. Great. And then just finally, obviously it was a great quarter for bookings in the Nuclear Operations segment. How should we think about the burn rate going forward? Does anything change there or does it remain steady, obviously just with the bigger backlog?

No. I mean there should be no change there. I mean it’s the same division we had. We had a lot of bookings and a lot of improvement in our bookings at this point.

That’s great. Thanks so much.

Yes.

Thank you. Our next question comes from the line of Michael Ciarmoli from KeyBanc Capital Markets. Your line is open.

Hi. Good morning. This is actually Kevin on for Mike. Thanks for taking my question.

Hey Kevin. Sure. Thanks.

Keeping on the topic of NOG, I was hoping you guys could talk a little bit about pension sensitivity and maybe what a 25 basis point change to the discount rate would mean in terms of what's flowing through that segment and do you guys still see it as a tailwind in ’16? And then also tied into that, I mean margins were at a multi-year low during the quarter, maybe just talk a little bit about the puts and takes there.

So, as far as pensions, what we have provided at this point and we have provided inside of our documents the difference between CAS and FAS each year as in the past. We talk about pension funding in the future. More or less pension funding is $20 million this year and the portion of that’s Canadian. We anticipate that funding to be going up in the future, but we haven’t provided sensitivity analysis to the pension and what that's going to do to the rates for the future. Obviously as everyone knows, pensions driven a lot by market return on assets and driven by the discount rate that that we utilize. So there's a lot of changing numbers inside the pension. But for right now for the next handful of years, we anticipate the CAS/FAS differential to be what it is today because with the outlook over the next handful years it will stay the same.

Just on the margin side, I mean volumes were up in the quarter. You talked about the long lead time items been favorable but margins were still down. Could you just kind of quantify what was going on there?

Once again it's -- what we will find, as we do a percentage of completion accounting as we go through NOG that there is going to be some volatility on flux inside of both volume and margin as we go through that. So, they're not going to match over time as evenly as we’d like to see them and be able to explain it. So there is -- there will be some of that volatility as we go through time. We continue to project that we are going to earn in the high-teens margin for the ability for some upside there and we came in this quarter in the teens, the high teens still at 19 plus percent. So, we anticipate that to continue.

Okay. That makes sense. Thanks. And then just turning quick to Nuclear Energy, I mean you talk about the follow-up in the second half here. You mentioned I think four played outages. Are those fairly steady over -- in terms of cadence over 3Q and 4Q, or should we expect one quarter to the notably stronger than another?

Once again we don't provide the cadence. What we provide is an outlook for the year and we know we can make our 10% margin for the year. We know the four outages are coming in the fall. Obviously, you don't have the revenue and the margins in the fall that means to offset what we had in the spring of 12 outages. So, you fixed costs aren’t going to be covered as well as you would have in the spring. We anticipate for the year that we will meet our 10% guidance in that division segment.

Okay. And then last one for me. Maybe if you can just talk a little bit about the missile tube programs in Ohio class and kind of where those are running relative to expectations? I know you mentioned there's some more opportunity out there on those and kind of what you're seeing in terms of organic growth from those?

Yes. This is Sandy. The missile tube business is quite good. We are close to completing our first tranche of missile tubes that we were awarded. We are in negotiations with our customer on the second tranche. And so, I can’t talk a lot of that but the Ohio class replacement and the Virginia class programs are both going to need those missile tubes over the next 14 years, 15 years. So there's a fairly sizeable [indiscernible] in the neighborhood of 332 tubes that got to be manufactured and BWXT's positioned very well to manufacture the largest quantify of those. So it provides a great opportunity from an organic standpoint for the company and we are pursuing that very hard with our customer and expect that to continue because both of those programs are in need of them so.

Okay. Thanks, guys.

Sure.

Thanks.

Thank you. Our next question comes from the line of Bob Labick from CJS Securities. Your line is open.

Good morning.

Good morning, Bob.

Can hear me?

Yes.

Great. Great. The follow-up on that last question, assuming you do win the awards for the missile tubes, when would that start to hit the P&L?

It will be 2017.

Okay. And is that the full, or is that just the Virginia at 17, and then Ohio is later than that or how?

It’s both.

It’s both. Okay. Great. And obviously, great quarter and you raised your guidance but still pretty big range given only two quarters left. What’s the biggest drivers between the high end and the low end of the range and obviously if you came in at the low end your earnings will be down a fair amount year-over-year? What will be the drivers for declines given the strength in the business and the outlook and everything else that we’ve seen that’s been so positive?

I mean we are six months into the year. So, we wanted to take up the guidance. So, we feel comfortable with the $0.10 guidance, $1.57 to $1.67.

We look at a little bit the other way. We feel like we've cut the bottom end off further. So, we think we've got good strength in the business. We felt that the bottom end was -- that we had forced too low when we thought the high end was not high enough and that’s the reason we ended up moving in the range. We did -- we decided to keep the variants about the same at this point in time. I think we will know more again in the third quarter.

You are doing fantastic, so keep it up. Thank you.

Certainly.

Thank you. [Operator Instructions] Our next question comes from the line of Pete Skibitski from Drexel Hamilton. Your line is open.

Yes. Good morning, guys. Nice quarter.

Thanks Pete.

Thank you.

I guess on the NOG guidance it looks like you are slightly more positive on the guidance. I think I missed what you said about that. Is that more or two were coming in, or a long lead or something else that I’m missing? Can you talk about why the boost to the guidance there?

I mean, I think we just talked about the -- the missile tube work will come in 2017. So, we just say improvement in the NOG contracts, in the cost of the contracts and just performance overall. Some of the companies in the long lead material and then the rest of the company just the performance we feel that allowed us to raise the guidance at this point in time.

Okay. And then can you help talk about why -- I guess it almost still seems conservative specifically on that, on the NOG segment revenue because it sort of implies -- even if you are at $1.2 billion for the year you would be down sequentially from the second quarter. But is there a specific reason for that?

Once again I think quarter-to-quarter it’s very difficult. I mean just because of the percentage of completion, the way the cost savings works through the contracts, you're not going to get an even split of revenue over the period. We look at these things a year at a time because we can get our hands around it but quarter-to-quarter there are going to be changes so we feel comfortable.

And recognize it on a short-term basis. We have a mix of various things that run through our shop and we need constantly trying to optimize that mix. And if we get good workflow, we certainly have enough for it if we can try to get a little bit better in certain periods. And in doing that we further absorb our costs, further reduced the costs on our contracts which is really what we are really trying to accomplish to the maximum extent possible. And so it's a very real-time thing that occurs but being able to take advantage of those opportunities sometimes is difficult to really see until you’ve actually done it. So that's how we operationally focus on the business and that leads to some of the upside that we've seen in quarters and things like that along the way is the opportunity to take advantage of those optimizations as we proceed in the future.

Okay. Understood. You just kind of crush my revenue projections, so I just want to get a little more color there. That’s very helpful.

Sure.

Just a couple more. I guess specifically on the Ohio replacement reactor sales, are you guys already doing kind of R&D work on that right now and I know production at GD doesn't start I think until 2021 or so? So is Ohio replacement pretty kind of steady state for you for a while, or will kind of [indiscernible] stuff start to ramp up the volumes in ’17, ’18 and I’m just wondering how to think about the ramp on the Ohio reactor for you?

Yes. The components for the Ohio class replacement submarines, some work has already started in their Barberton shop, particularly in the steam generator side. So that’s moving along nicely through the shop. Elsewhere, it has not started yet. We have supported our customer in both design and development phases for the reactor compartment components and that’s all worked well. So, we'll see that pickup probably in the late 2017, 2018 timeframe.

Okay. Got it. And then maybe probably this one for David on cash taxes. Cash taxes in the first half this year was -- it was down quite a bit from the first half of 2015. I think if you annualize you are running around $65 million or so. So is that the right level to think about for the full year 2016, or is it closer to the $115 million of 2015?

Once again, I think just because of the different spinoff last year versus this year. Once again we are anticipating to be more or less a cash taxpayer because we don't have a lot of foreign business where we have lower tax. So, we are saying 34% to 36%. So, we are anticipating other than those items that could affect that being the litigation and other things that could change if we are taking in out of it for a non-GAAP number, we anticipate still being the 34% to 36%.

Okay. Thanks very much, guys.

Thank you. Ladies and gentlemen that now concludes today's question-and-answer session. I’d like to turn the call back over to Alan Nethery for closing remarks.

Thank you for joining us this morning. That concludes our conference call. A replay of this call will be posted on our website later today and will be available for a limited time. If you have further questions, please call me at 980-365-4300. Thanks.

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may all disconnect at this time. Everyone have a great day.