Ladies and gentlemen, welcome to BWX Technologies First Quarter Earnings Conference Call. 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. Mark Kratz, BWXT's director of investor relations. Please go ahead.

Thanks, Grant. Good morning, and thank you for joining BWXT's first-quarter 2020 earnings call. Joining me today are Rex Geveden, president and chief executive officer; and David Black, senior vice president and chief financial officer. On today's call, we will discuss certain matters that constitute forward-looking statements and involve risks and uncertainties, including those described in the safe harbor provision found in yesterday's earnings release and BWXT SEC filings. We will also provide non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials. Copies of these documents, along with today's earnings presentation are available on the Investors section of our website. And with that, I will turn the call over to Rex.

Thank you, Mark, and good morning. Yesterday, we reported exceptional first-quarter results despite a generally challenging business environment resulting from the COVID-19 health crisis. Consolidated revenues were up 30%, with all three segments growing. And earnings were $0.79 per share, both setting new quarterly records for BWXT. First-quarter outperformance was led by the Nuclear Operations Group, achieved through the Columbia Class product line ramp combined with solid operating performance and recognition of contract savings as well as accelerated long lead material production originally anticipated in the second quarter this year. While we are well pleased with the first quarter results, we remain acutely focused on protecting employee health and safety. That is our top priority as we navigate through the coronavirus crisis. In the first quarter, we created pandemic planning and response team to address the COVID-19 threat. We updated policies, procedures and practices required to respond to all aspects of the health crisis. Examples include temperature screenings at factory entry points, shift to staggering and teleworking where possible. Based on CDC guidance, we also provided employees with face coverings to where at work, and we continue to require social distancing where possible. It is worth noting that our employees have been remarkably resilient in adapting to very significant changes in how we do business. We have experienced a limited number of coronavirus cases at some BWXT sites. The protocol that we established for responding to these cases are quite thorough, and so far appears to be effective in minimizing the impact to other employees and the business. As the situation continues to evolve, we will evaluate, modify and update our practices frequently to maintain a high level of effectiveness across all BWXT locations. As you may know, the U.S. federal government and appropriate Canadian provincial governments have designated the…

Thanks, Rex, and good morning. Starting with total company results on Slide 5 of the earnings presentation. First-quarter revenues set a new high watermark at $542 million, up 30% on a consolidated basis, with all segments growing. First quarter non-GAAP EPS was also a record at $0.79. EPS was up 55% compared with the first quarter of 2019, of which the majority came from $0.27 of operational volume and contract improvements. Other favorable income and expenses were partially offset by a higher tax rate of 23.2%. A quarter-over-quarter bridge can be found on Slide 6 of the presentation. Moving to segment results on Slide 7. Nuclear operations group delivered a record quarter with revenue up 39% to $424 million. We continue to see higher volume from Columbia Class production and also some accelerated material purchases into the first quarter. NOG operating income was $90 million, resulting in a 21.3% operating margin. This was up significantly versus the first quarter of 2019 as a result of higher volume and favorable contract adjustments as we recognize savings and efficiencies. The nuclear power group produced $88 million of revenue in the first quarter, a 4% increase when compared with the first quarter last year, primarily driven by Laker Energy acquisition and higher component manufacturing, partially offset by lower field service activity. Without the acquisition, organic NPG revenues were down about 2%. NPG first quarter non-GAAP operating income was $8.6 million, resulting in a non-GAAP operating margin of 9.8%. Operating income and margin were down when compared to the first quarter 2019 due to an unfavorable shift in product line mix, including the absence of the China steam generator project. And lastly, the nuclear services group delivered operating income of $6.4 million in the first quarter, up $4.8 million versus the prior year period…

Thank you, David. Let me finish my prepared remarks with a brief update on our commercial moly 99 efforts and some traction we are gaining with micro reactors. As I said on the last call, we were dealing with schedule issues on the moly program within the radioisotope business line, leading us to a rebase line of the program. In addition to those challenges, we have since suffered some component delays from European and Canadian suppliers and sub-suppliers due to COVID-19. We have now completed a comprehensive rebaseline of the program considering the foregoing factors and other risks that could manifest, and we now project to reach commercial readiness in midyear 2022. Despite the delays challenges, we remain very enthusiastic about the new product line, the business case and our competitive position in the market. Finally, we received several awards over the past couple of months related to micro reactors and TRISO fuel. In March, we were awarded a DOE contract for TRISO fuel to support the transformational challenge reactor at Oak Ridge National Laboratory. In addition to TRISO, BWXT was also awarded a $14 million micro-reactor design contract from the DOD strategic capabilities office. These awards and others pending underscore increasing government interest in compact reactors and accident tolerant TRISO fuel to solve some of the most challenging national security, power and propulsion problems, and we remain well positioned to lead the market in these new technologies and programs. And with that, I'll ask the operator to open the line for questions.

[Operator instructions]Our first question will come from Peter Arment with Baird. Please go ahead.

Yes sir. Thanks sir. Good morning Rex. David are you there? Thanks for the details on the kind of your comments on the second Virginia Class. But maybe you could just give us your thoughts around if there is a continuing resolution in the fall, what that would do, and given the long lead nature of your contracts?

Well, in a continuing solutions scenario, normally, the funding is year-over-year funding and content are similar. So I think that would actually be a favorable situation for us, Peter.

So you wouldn't expect that in terms of any slip. And then just on the...

I would just speculate, we'd stay on the two Virginia tempo in a CR.

That's helpful. And then maybe just on the supply chain impact from moly 99. Could you give us a little more color exactly what you're seeing there, and why we see such a push out from just the latest impact from COVID?

Right. So most of that push out in the start date for the moly program is related to programmatic challenges that we outlined earlier. Peter, about one-fourth of impact, let's call it from the COVID effects, and it has to do with most of our key suppliers for the hot sale equipment are in Europe. We have two Italian suppliers. We have a German supplier. And some of those factories slowed down or shut down during the peak of the pandemic crisis. They are more or less back to normal now. But we factored those delays into the product launch date.

Our next question will come from Pete Skibitski with Alembic Global.

Good morning guys. Nice quarter. Just a couple of top-level questions. Rex, can you guys name a chief strategy officer, I think was the title. Can you just talk about that, your thoughts there? And then I have one quick follow-up.

Sure. So we hired Robb LeMasters, who, as you would know, came from Blue Harbor. Blue Harbor had a heavy position in BWXT at the time of the spin and had been an investor in Babcock & Wilcox prior. But Robb came on to our board about five years ago, and he went with BWXT during the spin into that board and has been active there for over that period of time in our history as a public company. He stayed on the board after Blue Harbor sold down its position, and the board was very happy to keep him, so was the executive team. He's always been a useful and sort of a bright star on that board. He was going through a career transition and was interested in doing something with a public company. So we took an opportunity to make an offer to Robb as chief strategy officer. So his portfolio will have strategy, he will have investor relations and also the corporate development piece, mergers and acquisitions and have oversight of those positions. The team members will stay the same, but Robb will have the oversight of that. So he will bring a very interesting perspective. He understands, I think, how investors react to the business. He understands the down and end aspects of the business, and he works well with all members of our executive team. So it was a great add. He's very talented. And I think it will be good for our business in terms of what he brings and also to expand our executive depth.

Great. Thanks for that color. And just last question for me is, your thoughts on the White House, I think, looking to revitalize the domestic uranium industry. Does that impact you guy anyway? I was just curious.

Yes. Not so much, Pete. We haven't been haven't been in mining or enrichment any time in the past. I mean, if the nation starts to need high assay, low enriched uranium in that 5% to 20% enrichment category or above that into highly enriched uranium. There's a role we could play because we supported USEC back in the days on the American Centrifuge program. So there are roles that we could play there, including priming an effort like that. But generally speaking, we're not too active in that part of the value chain right now.

Our next question will come from Bob Labick with CJS Securities. Please go ahead.

I wanted to start with the long-term guidance. You reiterated your long-term guidance, the 2022 guidance. And obviously, the isotope contribution has shifted out, since now you're starting expecting revenues and contribution to start in mid-2022. Can you just give us a sense of some of the puts and takes to maintain the longer term guidance? And perhaps how much isotope contribution is built into that. If there's any other cushions in that guidance?

Sure. Thanks, Bob, for the question. Some pressure on that long-term guidance, obviously, with isotope delays and concerns over DOE award timing and such but we still feel confident about that. Those are some of the takes. In terms of the puts that you asked about, we do have the gathering momentum in micro reactors and fuel, and we will see where that takes us and how quickly that can become a major component of the business. One of the things in our tool kit, is we have such significant backlog in our nuclear operations business that we can pull on that backlog by working additional hours by requiring mandatory overtime and sort of burning the backlog. So there's some levers that we have in the business. There is certainly admitted pressure on that long-term guidance, but we remain committed to it.

Got it. Great. And then maybe, I mean, the pressure seemingly is, again, timing, right? As things are pushed out a little bit as opposed to existing businesses. Maybe just talk about, if we start thinking about just the end of 2022, a five-year kind of growth drivers and outlook as well. We've talked in the past about space. You just brought up microreactors again and maybe given market disruptions in your steady business, any potential M&A? Can you think about or help us think about the next five years and growth aspirations and opportunities?

Sure. Sure, Bob. So certainly, the space and defense reactors are a very interesting future component of growth. Our core business, the franchise platform does have, obviously, the Columbia Class submarines coming in and assuming we maintain the Virginia tempo and the slight acceleration of the Ford, there's very good prospects for that business, so we like all that. We certainly like the isotope business. That's a growing business and sort of a bit of a bright spot in the isotope picture right now is that pulmonary imaging, which is done with moly 99 is exploding in light of COVID-19. And so that's been driven by cardiology procedures in the past. And I think you will see, there's a whole class of people out there that may have permanent lung damage from COVID-19, and we will need periodic assessment through imaging, so there's interesting growth prospects around even that. And then we certainly have balance sheet capacity, and we can drive earnings through share repurchases, but also through acquisitions. And so we have some interesting opportunities in our pipeline and balance sheet capacity for those. And so I think you put it perfectly, right? Despite the sort of artificial window around '20 to 2022, the long-term growth prospects for this business are quite strong.

And I'll reiterate, Bob, that if you look on Page 14 of the investor briefing, that's where we show the NOG business and the power unit production ramp. If we look five years out on the Columbia, we've got four Colombians going through the shop, where today we have one. So that gives you an indication, we won't quantify that, but that gives you an indication of the growth between now and then.

[Operator instructions] Our next question will come from Michael Ciarmoli with SunTrust. Please go ahead.

Hey good morning guys. Thanks for taking the question. Nice quarter. Rex or David, maybe on NOG, the cadence of revenues for the remainder of the year looks fairly flat. You, obviously, pulled in some work there on the long lead time. But can you give us a sense just as we think about the Virginia Class? Does the decision have to be made before you guys would start to maybe see or feel some of that headwind, if the boat isn't added back into the budget?

Hey Michael, good morning. Well, we said on a prior call that it would start to impact the business potentially in Q4 of this year. And obviously, we continue over the duration of the life of that project, which is about six years altogether. And you know the story on the incremental effects on our business. There are, give or take, at any one point in time, about 12 Virginia Class ship sets going through our factories at various stages of maturity from just starting on the verge of delivery. On top of that, you have the single Columbia going through. And generally speaking, there are two to four Ford ship sets based on the acquisition tempo and then the delivery schedule for those. So give or take, 15, 16, 17 systems shipsets moving through our factories at any one point in time. And by shipset, I mean, of course, fuel cores, core barrels, reactor vessels, control rod drive mechanisms, steam generators, pressurizers, that whole thing at the various factories. So it would have that kind of incremental effect on the business starting in Q4 2020. As Peter questioned earlier, what would happen in a CR scenario, I think with the CR scenario, we probably just carry on as normal, doing two Virginia ship sets a year. So I certainly doubt we will have a full appropriation done by the beginning of government fiscal year '20. So I think that, that decision will be hanging out there for some time.

But if this drags out, if they finally make a decision in November on funding that Virginia Class? Would you think there would be any impact at that point? I mean, if we kind of stay in this purgatory environment where we see bipartisan support, but a firm decision isn't made. I mean, I guess I'm trying to figure out at what point does it become a headwind? In other words, do you need to see the funding or that decision made now? Or can it be made as late as September, October without impact to your current year?

Yes. I think we are in normal operational tempo right now. So it's not really impacting how we think or how we would plan. I would just say that if it occurred, the impact would be in Q4, if the appropriation got done by the beginning of the government fiscal year. It's a modest impact to begin with. And obviously, the later the lesser the impact. So I don't think it's a thing I'm particularly concerned about right now for our fiscal year '20, Michael.

Got it. And then just on the NPG, the some of the delays you've seen related to Canada, the outages, refurbs. Have you guys nor received any updated or new sort of baseline schedules? Or is this kind of still fluid depending on how COVID impacts social distancing. Just trying to get a sense of do you have a refreshed time line there or is it still sort of in flux?

It's still in flux. So we do have some indications from our clients about when things will happen. Those outages that were in the second quarter got pushed into the fourth quarter. But I think it's a little bit of a wait and see. The challenge for the utilities, of course, is they don't want 300 people crawling around the face of a reactor at the same time, when they're going through major component replacement. They will certainly try to maintain tempo because they are, as much as possible because their business cases rely on timely completion. So I think there's certainly a lot of pressure to keep those projects going as quickly as possible, but I think it's a bit of a wait and see from our perspective.

Our next question will come from Tate Sullivan with Maxim Group. Please go ahead.

Hi. Thank you. A follow-up, Rex earlier on moly 99. You said some supply component delays. Was that for core kits or reactor access equipment? If you can specify, please.

Hey Tate. Good morning. As I said before, there are three major components in the system. One is called the target delivery system. That's the equipment that goes on to the reactor to put the moly into the reactor to have it radiated to get it hot, so that we can then subsequently process it in our factory down in Kanata. In the factory in Kanata, there is the radiochemical system, which is to do the initial processing on that irradiated material. And then there's a radiopharmaceutical system, which packages it and sterilizes it and does all that's a fully automated robotic system. So the suppliers I was referring to in that delay are supplying hot cells and various internal equipment for that hot cells like autoclaves and the like. So a number of different complex components coming from Continental Europe. And ultimately destined for our plant in Kanata. If I could take, maybe add a little more color to this, that's part of what has driven our schedule, and we have accounted for that in this rebaseline. I would want to point out to all the listeners on the call that we have had some schedule challenges. This is the second significant schedule challenge we have identified on this program. And so the rebaseline to mid-2022 has a number of, let me call it, components of conservatism in it. We have, for example, some months of unencumbered schedule reserve in there. We have extended the regulatory approval timeline from about six months to about nine months. So we can completely envelope what we perceive as any uncertainty in that timeline. We have also accounted for and costed from a schedule and dollar perspective, any technical risk that relates to the conversion of design and into manufacturing and ultimately, integration into our factories. And so we've laid out, for ourselves, a pretty conservative timeline here, and I think appropriately so because we certainly need to have this one right as we rebaselined the program for our investors and for our board and for our team. So I feel quite positive about where we are with that schedule.

And then I feel as if you've had multiple releases on fuel manufacturing. It seems a bit more consistent in the previous years. But the economics behind fuel manufacturing, should I look at it as similar to manufacturing the nuclear units in terms of the five state year production schedule. Can you share anything on what drives the economics in fuel manufacturing versus the unit schedules, please?

You mean the fuel manufacturing and the nuclear operations business, Tate?

Yes, please. Yes, specifically.

Yes. So that's a very steady business. We, of course, manufacture the fuel for all three classes of nuclear vessels, the Virginia, the Columbia and the Ford Class carriers. And generally, the timing of those pricing agreements is somewhat similar to what we do in all the major component agreements. They are separate contracts, but generally, it follows the tempo and the scale of the rest of the business. And so there's sort of no important distinction there in terms of volume and timing.

Thank you.

This concludes our question-and-answer session. I would like to turn the call back to Mark Kratz for any closing remarks.

Thank you for joining us this morning. That concludes our first quarter 2020 conference call. If you have further questions, please call me at (980) 365-4300. Thank you.

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