Ladies and gentlemen, thank you for standing by and welcome to BWX Technology Inc.’s First Quarter 2017 Earnings Conference Call. At this time, all participants are in 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. Please note this event is being recorded. I would now like to turn the call over to our host, Mr. Alan Nethery, BWXT’s Vice President of Investor Relations and Corporate Procurement. Please go ahead.

Thank you, Keith, and good morning, everyone. We appreciate your joining us to discuss our 2017 first quarter results, which we reported yesterday afternoon. A copy of our press release is available on the Investor 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 section of our website. BWXT believes the non-GAAP measures provide greater insight and transparency into the Company’s operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior period, and to assist them in understanding BWXT’s ongoing operations. With that, I will now turn the call over to John.

Thank you, Alan, and good morning, everyone. 2017 is off to a very good start, and we continue to exhibit strong overall operational performance this quarter. Since the spinoff of our former Power Generation business in the second quarter of 2015, we have increased our trailing 12 months GAAP EPS from $0.11 per share to $1.84 per share and by more than 40% on an adjusted basis, from $1.31 to $1.85, delivering 21% compounded annual growth rate. Our discipline approach towards executing our long-term strategy drive stability, profitability and growth that will continue to shape our future performance. The first quarter of 2017, the company achieved 17% consolidated revenue growth compared to the first quarter of 2016. Consolidated operating income in the quarter was $83.2 million, much higher than our prior year period of $42.6 million on a GAAP basis and a 14.6% increase compared to the prior year period non-GAAP operating income of $72.6 million. Compared to Q1 last year, GAAP EPS and adjusted EPS grew by 17% and 22%, respectively. Backlog continues to be strong, totaling $3.9 billion at the end of the quarter. This strong financial performance is the result of our disciplined operational execution and management of our costs. Despite an excellent 2016, which exceeded our internal forecast and produced an adjusted EPS growth of nearly 24% from 2015, I’ll remind you that we approach 2017 with an ambitious plan. Further, the outstanding first quarter results caused us to debate raising our 2017 guidance. We believe that our full-year guidance remains appropriate as our experience of quarterly fluctuations year-over-year dictates caution. There are a number of growth areas that I’m very excited about. The first of which is our Naval Nuclear Propulsion business. Our relationship with the customer has been built over decades and we continue…

Thanks, John. Beginning this quarter, we are reporting our results in 3 realigned business segments. Nuclear Operations Group referred to as NOG is unchanged from prior reporting period. The Nuclear Services Group referred to as NSG comprises our previous technical services segment and portions of our Nuclear Energy business, which includes our U.S. Nuclear business, service business and our portfolio work in advanced reactors for both terrestrial and space power applications. Finally, the Nuclear Power Group, referred to as NPG, includes our legacy BWXT Canadian nuclear business and our recently acquired BWXT NEC. In yesterday’s evening’s earnings release, we provided new segment historical results for the full year 2015 and for all 4 quarters of 2016 and the segment tables. NOG’s record first quarter 2017 revenues grew 10% to $325 million compared to $295 million in the first quarter of 2016. Revenues for the segment came in higher than first quarter 2016 results due to timing of increased component manufacturing activity as well as our naval nuclear fuel and downblending operations. Operating income was the first quarter record of $73 million, 12.8% higher than the $65 million in the first quarter of 2016. NOG delivered a strong operating income margin of over 22% during the quarter. Additionally, we booked $245 million of work for NOG this quarter, including the $141.7 million award for Nuclear Fuel Services that we announced last week. This segment’s backlog at the end of March was $3.4 billion, an increase $1.3 million from a year ago. For the first quarter of 2017, NPG more than doubled the revenue over the prior year period, reaching $78 million compared to $36 million in the first quarter of 2016. Revenue growth in the segment was primarily due to the acquisition of BWXT NEC. Operating income in this segment was…

Thank you, David and good morning. John and David have already discussed our accomplishments to start the new year and I now will provide some additional operating details from the first quarter. First, as we discussed we had impressive revenue and operating margins in the first quarter. These improvements are due principally to strong results in our Nuclear Operations and Nuclear Power Groups. We are beginning to see a positive manifestation of our growth strategy in Canada organically and in the acquired business. As anticipated, we are realizing very good cost synergies from the acquisition of the BWXT NEC business, and we expect to see significant revenue synergies in the future. This is underscored by NPG segment operating margins inclusive of amortization of intangibles of nearly 18% in the first in the first quarter. Nuclear Operations delivered strong operating margins of over 22% upon adoption of the pension accounting change in 2018 that David mentioned earlier, we anticipate that we will continue to have 200 basis points to 300 basis points of pension benefit for several years in that segment. NOG also realized a revenue increase of about 10% as compared to the first quarter of 2016, which was our lowest revenue quarter last year. We continue to perform well on our Missile Tube contracts and as we announced last week, we were awarded a $76 million Block II contract in the first quarter to build additional Common Missile Compartment or CMC missile tube assemblies. The CMC missile tubes, which weigh over 50 tons each will be used on both the U.S. Columbia Class and the UK Dreadnought Class strategic nuclear submarines. To date BWXT has been awarded approximately half of the available missile tube work and we continue to project the market share up 60% as we move toward…

Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Pete Skibitski with Drexel Hamilton.

Hey, good morning guys.

Good morning, Pete.

I guess, I’ll start off just – I want to make sure I understand this $30 million cash payment to Bechtel. Does that fully end – did you say, I think, you mentioned David, does that fully end the mPower agreement or is that just part of kind of change over to the lower kind of R&D framework going forward.

Okay, remember that we did framework agreement last year and took the financials for it. And this $30 million payment now completes that framework agreement with Bechtel. The IP is now ours. We go forward with that IP, so it’s done.

Okay, okay. And the R&D profile will remain the way it’s been the last few quarters?

Yes. So Pete, this is Rex. We will be winding down the mPower program in an orderly fashion. We do have an R&D program funded at a low level continuing into the future.

I see. Okay. That’s helpful. I guess I’ll ask you, there has been a lot of color out there on aircraft carrier acceleration and Virginia work and stuff like that. There’s also a lot of articles out there in terms of the need to repair the fleet – the naval fleet and increases in O&M budget and that sort of stuff. Just wonder if you guys clarify for us your exposure to the O&M budget? I mentioned it’s minority of your work, but to what extent do you – the thing that you do can the U.S. Navy require your repair work, spare parts-type work. I don’t know if you have any exposure to aircraft carrier reco-type work. Could you just give us some color on that?

Yes. So Peter, yes, our exposure to the O&M budget is pretty limited. We’re generally delivering new components, cores, pressurizers, steam generators and such. So we don’t generally do much sustaining, engineering or parts replacement for the operating fleet.

Okay, okay. I will then ask just one more and I’ll get to the – back the queue. One thing I’m trying to figure out is the extent to which you are going to have R&D work on the Columbia Class versus production work? And then I’m just trying to figure out the timing of each maybe how if you do have R&D, how long that would last? And then on the production work, when that may start, when that might end? I know GD sort of a scheduled to begin production I think around 2020, 2021. I don’t know if is you’re production work done by them or half done by them. Could you just give us a little more fidelity in terms of the timing of your work on the Columbia?

Sure, Pete. So if you look at the shipbuilding schedule, it shows that first Columbia holding order in 2021. As we often say, you need to think of that as advancing two years in terms of the long-lead for us in components that we provide. So the clock starts for us about two years prior to that, which means we would be in development production. Sorry, we would be in production in 2019. We have been funded for Columbia production developmental work over the past couple of years at low level. So we’re preparing for production right now, but we’ll go fully into production in 2019.

Okay. And then would you finish up by 2021? Or would you go to may be a year or 2 before GD – I think GD finished just…

Yes. No, that production work for a particular ships that goes on for many years. And then the other work in the future layers up on top of that. So think of it as being multiple years once the orders has given and we will deliver several years after that.

Got it, okay. It’s very helpful. Thanks, guys.

Thank you. And the next question comes from Tate Sullivan with Sidoti.

Hi, hi. Thank you, good morning. A couple from me. Just can you point to I mean we have all read increased cadence of aircraft carriers and more submarines. But I have always discounted the comments about building more aircraft carriers, but what – between your last earnings call and this earnings call, what I think its incrementally your confers eight year discussion about aircraft carrier a higher cadence. So what did you see just or talking about more this quarter?

Well. This is John. We’ve continued to get information from – emanating from Congress with the need to increase the cadence of aircraft carriers. I think there is a – that there is a concern that it has been existing. It’s been a bipartisan concern going back to the Obama administration about submarines. And I think world events as they exist have continued to drive the thought into aircraft carriers as well. I think there is a general feeling that we’re a little bit under shipped right now in many of these areas and I believe that there’s got to be some increases on the horizon beyond some of the things that we are currently assumed on our forecast. That being said, we’ve got to get – Congress needs to get itself together. They have to figure out what they’re going to fund and how they’re going to fund it. But I think there’s broad-based general support to do more. We’re just going to have to see what that turns into and aircraft carriers are firmly in that conversation right now.

Okay. You listed and it’s everyone, thank you. Is on you listed yourfive areas of growth and if you compare, I mean what’s more meaningful to you, do you look at relative, I mean the missile tube growth opportunity versus the commercial regular work you can do out of Canada?

Yes. So I mean – yes, its – we have got tailwinds in just about every market we’re participating in, Tate. Naval reactor work that we do, obviously lots of momentum there. We really like with our position in Canada. We’re well positioned on missile tubes. I’m repeating a little bit, but our organic R&D opportunities are going to become interesting. So we’re happy to be participating in all those robust markets right now.

Okay, thank you. I’ll get back in queue. Thanks.

Thank you. And the next question comes from Bob Labick with CJS.

Hi, good morning. It’s Pete Lucas for Bob. Just a question, when you guys gave guidance in February, you expected NOG guidance to be flat. Looking at the 10-Q, it appears an increase in 2017 revenue there. Just wondering if that was related to anything specific that you can talk on?

Our NOG business, we more or less, there is some growth in there. The revenues because of the savings we get in the contract. There is adjustments. How that goes into the revenues and as we get savings, the revenues are be booked, if bookings are to be booked that we get less revenue. So on a ongoing basis, there’s not a lot of growth even though there’ is some savings build and then we will continue to say at this point in time, that of the $1.6 billion to $1.7 billion that we are projecting that NOG’s portion of that will be reasonable to what it’s been in the past. Even though timely on the quarters, there could be some variation to make you think that it’s climbing.

Helpful, thanks. And last one from me. In terms of the missile tubes, given your most recent award, how long does it take for this work to run and about when would you expect to hear about the next awards, in terms economic?

Yes. So we build these missile tubes over a period of 2 years to 3 years. And what we expect to see happen in the future, Pete, is to see the customer go to 100 probably on the order of 100 tube block buys in 3 separate blocks. And we will start to see some request information on that this year. We are seeing it in fact and we anticipate a contract award sometime in 2018 for that first block of about 100 missile tubes.

Helpful. That’s it for me. Thanks.

Thank you. And the next question comes from Nicholas Chen with Alembic.

Hi guys, congrats on the great quarter and thanks for taking our questions this morning.

Okay.

It seems like the Nuclear Energy Canada acquisition is off to a solid start. So can you just provide some additional details around the integration of that business and whether there has been any surprises to the upside versus downside from your initial expectations?

Yes. So far the integration is going very smoothly. We’ve got a fully integrated organization. And we – our strategy on that business was obviously to go after the cost synergies that we could get straightaway. And so that’s where we’ve been focused on in this first year and we’re starting to see some of the benefits of that right now. So the cost synergies are going well. There are strategic synergies around that business. Frankly, we wouldn’t have acquired that business if there weren’t significant strategic synergies or revenue synergies, and those are related to the refurbishment activities that are going on at both the Bruce Power site and at the Ontario Power Generation, Darlington site. So with the acquisition of that business, we have opportunities to do work in detube and retube feeder replacements and things like that that might have been less available to us before. And so that’s where we see some of the future year growth, but as of right now the business is operating very well. We’re taking cost synergies into fully integrated from an organizational perspective, and I think frankly exceeding our expectations a bit up to this point.

Okay, great. And then just finally, it seems like every quarter we’re seeing more NASA work in the press releases. Can you just give us an idea of what type of work you’re doing there? And the sort of opportunity you think that might extend into over the next several years?

Sure. So we’re exposed to NASA in two parts of our portfolio. One is in our Nuclear Services Group. We have a management and operations contract with NASA that’s called SACOM. And basically that’s to run the sites that NASA has rocket engine testing facility in Stennis, Mississippi and also the large manufacturing facility in Michoud, Louisiana. So that’s kind of like our Department of Energy management and operations contract where we do. We do all kinds of things on behalf of the client. They are running their site. And those are both pretty interesting and pretty exciting sites with some growth in them. It’s not a big income driver for us, but it’s strategically kind of interesting. The other part of it is, is NASA, is working now on its architectural options for a manned mission to Mars, which would occur sometime in the current timetables late in the 2030s. But, of course, the systems development actually will begin sometime in early 2020s. And so NASA is going through these trade studies right now to look at what kind of propulsion architecture, what kind of vehicles to build, and so forth. And one of the options is to power the spacecraft with the in-space propulsion system with nuclear thermal propulsion it’s called and there are other options available too. So NASA is looking pretty hard at that. It’s a very efficient form of propulsion, a very high energy density and very many advantages in terms of how quickly to get to Mars and back. So we’re right in the middle of doing the Nuclear Thermal Propulsion work with NASA. We’re doing field design and core design. It’s not a significant part of our portfolio at this time, but we could see it growing into a significant program for us should it continue with its current momentum. I’ll mention that the omnibus appropriation bill that just got passed has $35 million for NTP, Nuclear Thermal Propulsion. We should see a fair chunk of that funding as it dribbles down through the system. The President’s request was $7 million by the way. So that’s a quite an upper. So that’s a pretty encouraging sign for us and maybe to start of a substantial program.

That’s great. Thank you so much guys.

Thank you. And the next question comes from Ron Epstein with Bank of America Merrill Lynch.

Hey, good morning, guys. It’s Kristine Liwag calling in for Ron.

Good morning.

For the CMC missile tube business, I was wondering can you provide a little bit more color on the differences between the Columbia class program and the UK Dreadnought Class program. Is there a difference in the procurement process, and also the competitive environment?

So, yes, this is Rex. I’ll comment on that. We are selling to a single client. The government is procuring that stuff through GD Electric Boat. So you can kind of look at their press releases to see what happens in that market. But we don’t – that interface is not visible to us because obviously the Dreadnought stuff is going through a foreign military sales mechanism. So it’s – from our perspective, that’s kind of a generic – that’s a generic set of customers. We build the missile tubes and then get delivered.

I guess, to clarify for that, would Babcock also be able to bid for the Columbia class?

Yes.

Great. And on the $142 million contract you received last week. Is that fully reflected into your 2017 outlook, and also, for you to raise your full year 2017 outlook. Are there specific contracts that we should watch?

So the $142 million contract was funding for a contract that had been negotiated in prior year. So we anticipated that it fits our growth profile and fits clearly into the guidance that we provided at the beginning of the year and just reiterating.

And the second part of the question on the full year outlook.

There really are – we’re really not opportunity driven in our forecast right now. The majority of the work that drives our forecast is in backlog at this particular point in time. Certainly, we have some things that we’re looking forward to and that will factor into with our operational performance, how we see guidance evolving during the year. But right now, I would say that we’re not opportunity driven in our guidance at this point.

Great, thank you.

Thank you. And the next question comes from Michael Ciarmoli with SunTrust.

Hey, good morning guys. Nice quarter, thanks for taking my questions. Just two on this – on the Nuclear Services unit. Correct me if I’m wrong, I think when you acquired the GE-Hitachi, it might have been a $90 million run rate per the 10-Q. It looks like you’ve got $26.6 million. Is it performing better than expected? I mean, I know you are talking about cost synergies, but revenue run rate seems to be up. Are you – just if you can comment on sort of the business as a whole, how it’s performing on a revenue side?

Yes. So, I think there weren’t any real surprises on the revenue side. That business has got some steady revenues related to the fuel deliveries that we do. About half of that business is fuel. About half of that business is fuel deliveries, robotic systems and fuel channel diagnostic robotic systems. And so, there is some nice recurring revenue streams in that business. It’s fairly predictable, and that’s one of the reasons that we like it. So I don’t think we had any surprises in Q1 on the revenue side now. On the bottom line, as I said earlier, I think that business is performing a bit better than we expected. Our cost synergies have been – we’ve been realizing very good cost synergies. And so it looks good from that perspective.

Yes. That’s a good segment. And the next question, I think you put up 17.8% margin. It sounds like with the amortization, they were probably up over 20%. But I think, you are still guiding to 10% margins. I mean, how should we think about the margin profile on that business going forward? It would seem like if you’re getting the cost synergies and the predictability of this business, there would be some room for some maybe meaningful upside in margins there?

I mean, I think as we look at the margins, we were – as we look that the acquisitions, pre-acquisition we are talking about impacted, we are always aware of the – amortization of the intangibles. So I think, we’re showing that the business has been a great acquisition. We are doing well with the synergies in the business coming out with the beginning of the year guidance, saying, we are including all of that inside of what we’re now saying at 10% margins. Obviously, the business as we continue to refine it and continue to transition over time. We know, there’s opportunities in there, but that’s part of our outlook for the future as we go forward. So we hopefully can increase those.

Got it. But, I mean, would there be as we move into the sequential quarter. I mean, it’s sounds like you are forecasting the business based on backlog. I mean, is there any lower-margin work that you see in the remaining quarters or any different mix profile that would skew the margin from where it was in the first quarter?

Just like the old BWXT Canada there is mix and the mix has different margins. There’s outages up there just as we have inside of any NSG work here. So that can vary during the year. So yes, in the margin mix could be different.

Recognize where we are, we’re at quarter end. And can we continue to do more with this business. We believe so. That’s why we bought it. Would we include that in the guidance at this particular point in time, I don’t think so. So just recognize that we’re still at an early stage on this and continuing to develop our long-term thinking relative to what we will do with the business. Obviously, we think we can do that stabilizes.

Yes. That’s totally fair. And then just last one I’ll get out of the way here. I think I heard two numbers on the pension accounting that the operating margin would have been down 150 basis points to 200 basis points, once you adopt the new guidance. Was that for 2018? And then I also heard 200 basis points to 300 basis points of pension benefit going forward, just if you can kind of clarify that.

So, we got out of the pension business more or less in 2015 at the end. So last year, because the service cost went down, we were able to recognize operating income for pension. Now the government has said that we are going to take the elements of the – the return on the assets and the liability, the interest expense, I’m going to take that out of operating margin and we’re going to put that into other. So the 150 basis points to 200 basis points is more or less that income coming out, the pension income coming out and it’s going to not change our EPS or net income, but it’s going to come out causing the operating margins to go down in NOG. But then we said what’s still remaining inside of the NOG is the 200 basis points to 300 basis points of FAS/CAS differential, is the other pension benefit that we’re still carrying. And that’s coming from the fact that we have been overfunding the pension plan early on. We’re not funding it over now, we are just doing aggressive funding, but we are funding it over. So this is the catch up of the government that’s adding to those margins in the side of NOG. That will continue to happen for the 200 basis points to 300 basis points for the next few years.

Got it, that’s help. All right, I’ll jump back in the queue. Thanks, guys.

Thanks.

Thank you. And the next question is a follow-up from Tate Sullivan with Sidoti.

Hi, thank you for taking my follow-up. An another follow-up on Nuclear Power Group. I mean, I could see in your queue, acquisition related revenues $26.6 million. So you have been backing that out. You had good year-over-year growth in your Nuclear Power business. Was there any – I remember, maybe it was two years ago or last year you talked about the China Boiler project. Was there any large project within the income this quarter?

No, I don’t think there was any specific project. It’s just – I think there’s synergy, it’s somewhat how could you taken now the acquisition, you put it in BWXT Canada and it’s somehow – somewhat hard take it and separate the two out again, because of the synergies and how you are recording things. So I think it’s just overall improvement in BWXT Canada along with the acquisition doing great.

Okay. Thank you. And then the last one for me, I think you said earlier that the Mount Vernon facility will be now a dedicated facility to missile tubes. Is that correct? And what change from what it was doing before?

No, that’s not correct.

Okay.

The Mount Vernon facility mix, the historical purpose was to make large components for our naval reactors program. And it’s certainly will continue to do that. What we have done is, we were making missile tubes in part of that facility and we’re completely refurbishing a separate building on that site, which will be dedicated to missile tube production. So the traditional work continues and missile tubes get added.

Okay, wonderful. Great, thank you. Have a great rest of the day.

Thank you.

Thank you, Tate.

Thank you. This concludes our question-and-answer session. I’d like to 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. Thank you.

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.