Ladies and gentlemen, thank you for standing by and welcome to BWX Technology Inc.'s Fourth Quarter 2016 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will conduct a question-and-answer session, and instructions will be given at that time. 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, Daniel, and good morning everyone. We appreciate your joining us to discuss our 2016 fourth 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; Rex Geveden, 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, and 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 our website. BWXT 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 closing quarter of 2016 that included several exciting achievements. We delivered on our commitments, including our 2016 guidance which I'll discuss in a moment. We continued to produce strong operational performance in each of our segments this quarter and reported consolidated top line growth and earnings per share growth for both the quarter and the full year. In 2016, BWXT stock price rose 25% outpacing the S&P 500 by more than 1500 basis points. Last year was a great success by any measure. In addition to finishing the year strong we took a number of actions in the fourth quarter that prepare us for a solid 2017. We began to implement actionable items from our strategic plan, closed on the GEH-C acquisition and completed the CEO transition. We booked $866 million worth of contracts and finished the year with a record backlog of approximately $4 billion. We are understandably excited about the future and believe we're well positioned to begin capitalizing on significant growth opportunities as we enter 2017. Operationally we maintained our focus on execution and delivered improvement on our operating margins in 2016, with a GAAP operating margin of 15.4% and non-GAAP operating margin of 18%. This represents an improvement of 88 basis points and 120 basis points, respectively over our 2015 operating margins. We also delivered $1.76 EPS for the year in 2016, which was above our guidance and nearly 24% higher than our 2015 adjusted EPS results. In addition to our operational results, we demonstrated an ongoing commitment about [ph] our balanced capital allocation approach by taking a number of actions during the fourth quarter. First, we delivered on our promise to return capital to shareholders through both our announced quarterly dividend and our share repurchase…

Thanks, John. The Nuclear Operations segment’s fourth quarter 2016 revenues were $331 million compared to $300 million in the fourth quarter of 2015. Revenues for the segment came in higher than fourth quarter 2015 results due to increased component manufacturing activity. Fourth quarter 2016 operating income was $77 million compared to $66 million in the fourth quarter of 2015. Nuclear operations delivered a strong operating income margin of 23% during the quarter. For 2016, nuclear operations revenue was up $89 million and operating income up $11 million compared to 2015. For the year the effective increased manufacturing was partially offset by higher G&A expenses. At the end of 2016 this segment’s backlog was more than $1 billion higher than a year ago at a record level of $3.5 billion, excluding negotiated but unawarded options of approximately $900 million. For the fourth quarter of 2016, the Nuclear Energy segment increased revenue by 18.7% over the year -- prior year period reaching $49 million compared to $42 million in the fourth quarter of 2015. Revenue growth in this segment was primarily due to higher volume in the equipment business related to steam generator design and manufacturing work. Operating income in the segment was $3.6 million compared to $1.6 million for the corresponding period of 2015, driven by the increase in our nuclear equipment business. For the year, revenue increased $34 million to a total of $189 million. GAAP operating margin for this segment was 20.3%. Operating income for 2016 increased by $37 million from $1.7 million in 2015 due to the growth in the Canadian nuclear service and equipment business, lower selling and general administrative expenses, and a $16 million gain related to a favorable ruling in a legal matter. For the third consecutive year we booked more than $200 million of…

Thank you, David and good morning. John and David have already discussed our accomplishments for both the quarter and the full year and I will now provide some operating details from 2016 before we turn our full attention to 2017 and the exciting growth we see beyond 2017. First, we reported impressive consolidated margins for both the quarter and the year. These improvements are due principally to the realization of margin improvement initiatives in the Nuclear Energy segment and additional overhead absorption due to higher volumes. The Nuclear Energy segment outpaced our 10% margin guidance for the full year by 180 basis points finishing the year with an adjusted operating profit margin of 11.8%. We also posted impressive year-over-year revenue growth of 22% driven mostly by our Canadian nuclear power business. Margin improvements were also attributable to the nuclear operations segment which continues to execute well and achieved operating profit margins around 21% for the year, our new record volume. This segment’s revenue increased more than 10% versus Q4 of 2015 and full year revenue was up 7.6% or $89 million compared to 2015, in addition with over $2.75 billion of new orders in 2016 of which $2.4 billion came from the nuclear operations segment. As John mentioned earlier we ended the year with a record level consolidated backlog of nearly $4 billion. The bookings and backlog levels reinforce our view that this is the beginning of a significant growth cycle for us, one that will provide a higher level of organic growth than we previously included in our plans. These are solid opportunities that both justify and require significant investments. To provide the best possible return to our long term shareholders we will allocate a greater percentage of capital in 2017 toward these new growth opportunities. Let me provide…

[Operator Instructions] And our first question comes from Bob Labick with CJS Securities.

Good morning and congratulations on a nice year. I just wanted to start with -- you touched on this before, the $100 million CapEx guidance for the year includes some capital for a second Virginia class. So obviously you must be at least optimistic that that's going to happen. When we find out if that is kind of -- going forward when will we all find that out? And then could you remind us also how much additional capital will be needed beyond this year to be invested, if indeed there is going to be a second Virginia class going.

So Bob, this is Rex Geveden speaking. We’ve asked our customer to signal by about the middle of this year whether or not we need to begin making additional capital investments for the additional Virginia build. We -- for us the additional -- the first additional Virginia would begin on the shipbuilding schedule in 2021, the components that we provide are long lead items and so our work for that would begin in 2019. And we've said consistently we would need to start capitalizing for that additional production capacity starting about the middle of this year. So we're hoping to get indications from our customer on that. And with an indication we will begin to make that investment. We've said in the past that it would take about $100 million in additional capital to set up for that production capacity and we expect that investment to occur over two, three year period. The 2017 investment is a fraction of that.

And then obviously encouraging that you increased your expected EPS CAGR going forward to low double digits. Could you talk a little bit about how much of that is effectively in hand now or how much you anticipate you will go and acquire, or you know it's not exactly currently in your portfolio?

So I would say the growth story was built really on the back of what we see our organic growth opportunities to be, and that's what really came out of our strategic plan and resonated with the board and the management team was, if you look at what's out there before us, opportunities to capture lots of business in missile tubes, our Canadian growth opportunity is well documented, and obviously the increased demand, potential demand for the products that we deliver to Naval reactors in the Navy. That organic growth picture looks very attractive to us and there are some other components to it that we haven't disclosed yet, some growth opportunities we're investing in internally. And so that organic growth picture looks very robust to us, some things have to go right for that to be fully realized but it's a very good picture for us. Now on top of that we've got balance sheet capacity, on top of that we have a good pipeline of acquisition targets that are very attractive to us that would have the right kind of strategic fitness. And so I think we've got some options to be able to make those more aggressive numbers but it's fundamentally built on the back of our organic growth scenario.

Great. One last quick one and I'll get back in queue. When you bring up the Canadian operations now, can you talk a little bit -- and you have highlighted a little bit but can you just expand on the opportunity over time and what's the meaningful growth rate of the now 250 to 260 in revenues from this year?

Yes, so what we like about the Canadian market, we've been there and we have some reputation in brand in that market around component manufacturing and nuclear services. With the GE-Hitachi acquisition which we now call BWXT NEC, what we got in that business was a fuel manufacturing capability for about half the Canadian reactor fleet and also the fuel robotic handling equipment for De-fueling and refueling and then fuel channel diagnostics; that's what came with that business. And so when you bundle those two things together our business is outage services, component manufacturing and then projects related to all that refurbishment activity. And I would point out that we've got sort of have an increasingly interesting stream of recurring revenues there around waste containers for spent fuel and waste containers for the refurbishment projects, the fuel as I already mentioned and then maintenance for automated fuel handling. So we're building our recurring revenue streams there. So the business -- the native business, the organic business would be interesting in and of itself because that market is a good market for us and we've been growing -- we've been increasing our strength there. But what makes it really interesting is that ten of the nineteen reactors in Canada are undergoing refurbishment projects over the next fifteen, twenty years. As I said in my remarks that opportunity is $26 billion Canadian, about US $20 billion obviously. And so think of that market as having sort of a $2 billion incremental revenue bump per year over fifteen or twenty years. So that's what we like about sorry -- billion a year over twenty years, so that's what we like about that market is the steady state business was good, the reactor outage in component manufacturing business was good but now that market sort of doubles with these reactor refurbishment opportunities, and we’re well positioned especially with the acquisition to go after lot of those refurbishment projects. We haven't disclosed a future growth rate for that business but we'll be providing more detail in the future on that.

Our next question comes from Pete Skibitski with Drexel Hamilton

Just unclear on the incremental CapEx spend, the portion obviously for the missile tube work for Colombia but on the Virginia portion, is that just the four staying at two Virginias a year or going to three per year.

You know that capital, Pete, was for going to two Virginias per year, we haven't -- we've evaluated scenarios where you go to the eighteen additional Virginias which would require you to build three in some years but we haven't built any CapEx planning around that in detail.

Okay, just because you are already at two per year but I guess some of your facilities will ship to Colombia I guess, is the thought.

Well the other thing there, Pete, is if you -- yes we're doing two Virginias per year and I think you know the plan was to go to in certain years to one Columbia and one Virginia. Another scenario that we're working towards and that we're optimistic about is the scenario in which even in the year that Columbia is built the Virginia production remains to two year.

And I just had on kind of the tide if you guys are on Columbia, if you GD starts construction in 2021, I imagine that goes a least five, six, seven years. I think you guys have said you’d start work in 2019. If you start work in 2019 on Columbia when would you stop, would you go all the way -- revenue recognition wise, would you go all the way to the end of that first ship or would you stop your construction on the first reactor kind of years ahead of the end of the boat itself?

Pete, we don't -- we don't give you exact parameters by which how long it takes us. I mean we will start in 2019, I mean the amount of time on the Colombia it's five to seven year period. And then for each Columbia we start it's going to be a period of time POC and over that rough time period to get us to completion.

Fair enough, I'll sneak one last one in, maybe for Dave, again. On your sales guidance 1.60 to 1.70, I think you got to close to 100 million in GE-Hitachi revenue. So if I just read out, it kind of implies declining organic sales at the low end. Is that just -- is there some area of weakness there or if you just kind of build ahead in the NOG unit in 2016, can you give me some thought there?

There's a couple of things. One for our the nuclear power generation group, there's less outages, so there's going to be some fluctuation this year versus last year because of the amount of outages for NPG. And then once again when you look at NOG over time I mean you've got an inflationary growth there but as we build in savings that takes away from revenues. So it depends on how the timing of all of that, as it flows through the year.

Our next question comes from Tate Sullivan with Sidoti.

Hi thank you. You mentioned your strategic plan a couple times and then you mentioned I think you’re planning an analyst day for October; is your strategic plan just for TSG, or is that something that you've been ongoing for the last year and will you announce results from that plan, did you say?

Tate, Rex Geveden in here. No, the strategic plan was comprehensive. It was for all business segments and in fact, it was for the BWXT business writ large including other considerations, we started that planning in about -- about this time last year in February last year and reported out to our board of directors in September of last year and continue to improve upon that plan .And in fact, it's an ongoing activity where we’re cycling again this year. But we haven't disclosed some of the competitively sensitive parts of the plan, we have disclosed some other aspects of plan such as growth of missile tubes and other things. But we will have more to say about that in the future, including at the analyst day in October.

Thank you and yes, I had got a lot of questions so far in the 2000 -- you indicated starting the work and starting the UPS, I assume, starting to have UPS from the Columbia class program in ’19. I mean will you have more revenue from Columbia submarines based on them being about, being almost two times as long as Virginia class subs?

I mean this is David and Tate, we haven't -- all we ever say about the Virginia class versus the Columbia is the Columbia is bigger. So based on the fact that it's bigger we will have additional revenues in the year 2019 as we start production or Columbia.

[Operator Instructions] Our next question comes from Ron Epstein with Bank of America Merrill Lynch.

Hi good morning guys. It’s Kristine Liwag calling in for Ron. How should we think about the contract structure of the Columbia class? I mean since this is the first -- this is a lead ship, is it generally cost plus and how does that compare to your overall margins?

So Kristine, this is Rex. The Columbia class submarine will get negotiated into the same kind of contract structure that we have historically with Naval reactors, so that will include Virginia, Ford and Columbia all together, they get negotiated in these market baskets that we often talk about. So it should have similar profitability, similar structure to the other work.

Kristine, this is David Black. As we go into the Columbia class we've done a lot of work on pre-design with the government. So I think that as we get into the contract in 2019 our lessons learned, we've gone through that the lessons learned with the government and so we don't feel that there's going to be a large impact to our margins there. We feel that we can roll right along into our current contract structure.

Just to clarify, does that mean that -- it sounds like you're using similar technology for the Columbia class that you are using in the Virginia class, only that the Columbia class maybe has 1.6 times more displacement than Virginia; is that a way to think about your technology risk there?

I would say we really don't comment on technology on our platforms that we do for the Navy. I would just say that it's just within the framework of our capability and there's not a new approach that has to be used to be able to deliver those but we really never comment on technology related matters. I would couch it in saying that there's no significant technology risk related with Columbia.

Maybe a clarification on the Virginia class sub CapEx for this year. Do you need to get an order from the U.S. Navy before you spend the CapEx at the end of 2017 to meet the possible second Virginia class or will you do it ahead of them without receiving an order?

Kristine, this is Dave. And we will negotiate and get an order from the government before we will spend our capital dollars. So we want to make sure that the plan is going forward or at least a recovery of anything we spend.

Our next question comes from Les Sulewski with SunTrust.

Good morning guys. This is actually Les in for Mike. I just want to start off if you could you provide a little more color on the overall pricing environment on ongoing negotiations with the Navy and also if tax reform is implemented, would that have some savings that would be implemented or passed on to the customer?

Les, this is David. I mean all of our structures with the Navy, once again we talk about that fixed price incentive structure, we get a 15% fees on average on all the contracts and there's, which creates to a 13% margin. So we anticipate that every time we go -- there's a negotiation but overall we feel that we're comfortable there and that will continue now. Now what was the second part of the question?

The tax reform --

The tax, yes, just like every other company we're watching and waiting but if there is a tax reform and there's lower tax rates, then all that cost would be going through all of our contracts. So there will be savings overall to our contracts with that lower tax rate if that's what so happens.

Thanks. On the assumption for the three to five year low double digit EPS growth rates, can you just kind of talk about what you're factoring into that, is that the Navy fleet size increasing in the sub-build rates, organic M&A, share repurchase, various other factors that get absorbed into this outlook?

Yes. Les, this is Rex Geveden. Yes it does include the assumption that we'll continue to do well competitively in the missile tube market. It includes the assumption that we would get to this two Virginia class build rate even in the year in which Columbia's built. We have some modest assumptions about acquisitions, we didn't in our strategic planning factor in share repurchases in that organic growth analysis. It does include the probability that we’d do well in some of our Canadian refurbishment projects, capture some of that work.

Recognize that what we're talking about is really what we consider -- this is John Fees speaking -- what we're talking about is really our base expectation for what we're going to do with the business. So we factor everything together out of the strategic plans, we look at the things that we can readily put our hands on, things that we think we can accomplish and we say this is what we think we're going to achieve with the business. Recognize that we have scenarios that go beyond that depending on how things go. So it's not really what I would call our stretch plan, it's really our baseline expectation for the business that’s in that guidance.

I guess, just a follow up and the last one for me. On the other opportunities to participate in shipbuilding growth outside of carriers, submarines, missile tubes, can you perhaps secure other content and other surface vessels?

Well, we possibly could, that's been an interesting -- that's been an interesting idea for us in the past. We’ve evaluated whether we might be able to find content on carriers and submarines that kind of relates to our business in the strategic sense of high consequence manufacturing, maybe single source kind of things. And we’ve looked at those, hard to get obviously but our organic growth ideas that are new ideas from the strategic plan are in some slightly different areas having to do with materials processing and component supply.

We now have a follow up question from Tate Sullivan with Sidoti.

Hi thank you. I should have asked earlier, on the unchanged dividend and the ASR terms. Is the term that you have to keep the dividend unchanged within your revised credit agreement or is it just attached to the accelerated share repurchase agreement?

Hey Tate, this is David. That's all part of the accelerated share repurchase and what the bank put in the agreement there. So we have to keep the dividend unchanged during the period of that and we said that, that would -- the ASR would close in the first quarter so.

And I don't know if this is new language or I mean I'm just wondering you have a language on possible increases in the build rates of Virginia class submarines, and you’d talked a lot about it before. But I'm wondering if just on the public side what we'll hear from the military spending from budget wise, if they'll speed up the construction of the Virginia class subs that are already approved for funding, in other words, a long term procurement plan for forty, could it be that type of expansion faster pace of builds versus additional builds to that mix?

I think there still -- it remains to be seen here. What we have is we have -- as we talked about in the remarks, we have this force projection number that people were talking about up into the ‘60s for fast attack submarines. And then there's the reality of the budgeting process and what we're going to go through, the expectation is -- the baseline expectation that we're professing today is that in years where Columbia will be built, we will continue to build at a rate of two Virginias a year. That does not get us to 66, that gets us in the 40s still and it marginally puts us there, so there's still some additional dialogue that has to happen within government to try to decide: are we going to continue at a rate that's going to put us in those 40s or are we really going to step up into the 50s or 60s and how much money do we have what we can afford. We think a responsible scenario to be thinking about right now and again we have to work out the details with our customer at this particular point in time but a responsible scenario to think about is just continuing Virginia for the foreseeable future to independent of Columbia coming online and we think that's a good place to land at this five seconds. Again it's going to change, and it couldn’t change more positively if the government leans more towards this higher force level, but we're not professing that at this point.

And if I may throw one more in for Rex, is in the segment op changes what have you done for in terms of space -- advanced reactor for space historically at BWXT and what are the opportunities, I see that sentence in your press release to further your new NSG group?

For the space nuclear power, was that the question?

Yes.

We're working with NASA on a pretty exciting project now called nuclear thermal propulsion and the idea is you could have an in-space propulsion stage to ferry cargo or astronauts from low Earth orbit to Mars and back and we're doing -- in that project we're doing fuel design, we’re doing reactor core design and working with some traditional propulsion and systems engineering companies and a coalition to do that work. NASA hasn't chosen its engine architecture for that mission yet, the options really are chemical -- traditional chemical rockets and nuclear thermal, that the great advantage of nuclear thermal is that it's a very high thrust to weight ratio engine, it would get to Mars maybe in three months when Mars is at closest approach to Earth compared to six months with more conventional means. And so it's very attractive option I think to a lot of people who are studying it and we're involved in some very very early work on it, it's not a large business for us at this point. But we have some unique qualifications around that project related to our nuclear reactor work, historical nuclear reactor work and we've done one form or another we've done space nuclear projects for probably thirty years. We were involved in SNTP, we were involved Prometheus JIMO, the Jupiter icy moons orbiter program historically. So this is probably the third or fourth major space nuclear program that's been in the BWXT portfolio over the years. And I came from the space community, so I'm pretty excited about this one and investing some personal energy into its success. End of Q&A

As there are no further questions, this concludes our question and answer session. I would like to now turn the conference back over to Mr. 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, will be available for a limited time. If you have further questions please call me at 980-365-4300. Thanks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.