BWX Technologies' (BWXT) CEO Rex Geveden on Q4 2016 Results - Earnings Call Transcript

| About: BWX Technologies, (BWXT)

BWX Technologies Inc (NYSE:BWXT)

Q4 2016 Earnings Conference Call

February 28, 2017 08:30 AM ET


Alan Nethery - VP, IR and Corporate Procurement

John Fees - Executive Chairman

Rex Geveden - President and CEO

David Black - SVP and CFO


Bob Labick - CJS Securities

Peter Skibitski - Drexel Hamilton

Tate Sullivan - Sidoti & Company

Kristine Liwag - Bank of America Merrill Lynch

Les Sulewski - SunTrust


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.

Alan Nethery

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 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.

John Fees

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 activities, which included 293 million of share repurchases in 2016. As I mentioned earlier, we also closed on the strategic GE-Hitachi Nuclear Energy Canada acquisition as we planned for the fourth quarter.

For the year the company achieved 9.5% consolidated revenue growth. Consolidated revenues for the quarter increased 11% to $404 million compared to $364 million in the fourth quarter of 2015. Consolidated operating income in the quarter was $46 million compared to the prior year period of $9.6 million.

We completed a smooth and seamless transition as Sandy Baker announced his intention to retire and passed the rein to Rex Geveden. I’d like to congratulate Sandy for an outstanding career with BWXT that spanned over 45 years, for guiding BWXT through the spin transition and for strongly positioning the company which -- positioned the companies in today and for his support of Rex during this transition.

Rex spearheaded last year's strategic planning process and he moved quickly to implement key initiatives that were developed. The board is excited about growth opportunities that the process captured in increasing the likelihood of additional demand for our products from the United States lately. Our future continues to look bright and our growth opportunities are expanding.

Before Rex provides more detail on our operations and our 2017 outlook, let me turn the call over to David who would discuss the segments’ fourth quarter and full year results and other financial matters. David?

David Black

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 work for this segment and ended the year with backlog of nearly $500 million.

Our technical services business contributed operating income of $2 million in the fourth quarter and $16.5 million for the full year, in line with our guidance. Operating income for this segment was lower in the fourth quarter compared to the prior year period since the segment transitioned off in Idaho joint venture project in May 2016, and we increased business development costs related to the timing of our proposal activities.

As John mentioned earlier, we finished the year with consolidated backlog of $4 billion which does not include the additional $900 million in negotiated options. These options are primarily related to the awards we announced in April for our nuclear operations segment and represent the value of unexercised options which are expected to be exercised periodically through 2018 subject to annual congressional appropriations.

For the year the GAAP effective tax rate was 28.6%, lower than our 2016 guidance of 34% to 36% primarily due to a change in our assertion regarding the undistributed earnings of our foreign operations as well as the non-taxable gain related to the deconsolidation of our mPower joint venture earlier in the year.

The company's cash and investments position, net of restricted cash, as of December 31 2016 was $149.2 million, an increase of $81.9 million compared to $67.3 million at the end of the third quarter of 2016. Fourth quarter cash flow from operating activities was approximately $147.4 million.

Year-to-date cash flow generated from operating activities totaled $239.9 million compared to $335.2 million in the prior year to date period. It is important to note that the prior year to date period includes cash flow from our former power generation business as well as $95 million of proceeds received from a legal judgment in the third quarter of 2015. BWXT’s cash flow is typically highest in the fourth quarter due to receipts of contract retention payments.

The company's capital expenditures were $22 million in the fourth quarter and $53 million for the year, just below our guidance. Depreciation and amortization were $13 million and $51 million for the fourth quarter and the full year respectively.

On September 2, 2016 we entered into an amendment to our existing credit facility to add a new U.S. dollar term loan of up to $112.5 million and Canadian dollar term loan equivalent to US$ 137.5 million for a total amount of $250 million. As of December 31, 2016 we had $285 million borrowing under our original term loan, $246 million under our new term loans made available under the September amendment, $0 drawn on a revolving line of credit and letters of credit totaling $155 million. As a result, the company had $245 million of remaining availability under our credit facility, excluding the additional $250 million accordion provision.

Now I hand the call over to Rex for a discussion of the operations and the outlook for 2017. Rex?

Rex Geveden

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 some additional color. As we have discussed in the past, the Navy's current submarine build schedule is set to transition to one Virginia class and one Columbia class annually by the middle of the next decade. The Columbia class submarine program remains on schedule and recently passed a Milestone B decision signifying that it moved from the research and development phase into the detailed design phase. The Columbia class is a larger submarine than a Virginia class and will require additional capital investments in 2017 to realize this growth starting in 2019.

Additionally in December the U.S. Navy released its new four-structure assessment which calls for achieving and maintaining a fleet of 355 ships from the previous planned level of 308 ships, including increasing the number of attack submarines by 18 from 48 to 66 and for increasing the number of aircraft carriers from 11 to 12.

BWXT has established numerous build-schedule scenarios around this potential beginning as early as 2019 and will be capable and ready for this increased scope. While timing and availability of congressional funding for fabrication have not been established we need to begin capital improvements related to the increased Virginia-class submarine portion of this plan in late 2017 in order to meet the added demand which we anticipate will start for us in 2019. We included these investment requirements as part of our capital planning guidance and are preparing to support our customers’ plans and capture the significant organic growth opportunities.

Missile tube manufacturing provides another avenue for organic growth in the nuclear operations business. We anticipate that at least 320 tubes will be built split between the Virginia and Columbia classes for a total market value potentially exceeding $1.5 billion over the next fifteen to twenty years. We continue to perform well on our initial missile tube contracts. We received Virginia payload module or VPM development and fabrication awards in 2016 and anticipate a BLOT 2 [ph] common missile compartment or CMC award this quarter. We remain well positioned to capture at least 50% or 60% of the total CMC and VPM missile tube awards.

We continue to invest in manufacturing facilities to support this additional work, including a dedicated production facility in our Mount Vernon, Indiana plant. Our nuclear energy business delivered another strong quarter with revenue up nearly 20% and operating income more than doubling from Q4 2015.

We had solid growth in our equipment business related to the Bruce Power steam generator project and waste container manufacturing for spent fuel and refurbishment waste. And we continue to expand the Canadian reactor services business in which we experienced solid sales and income growth.

The prospects in the Canadian nuclear market remain strong and we are planning for success in this market with a particular focus on the reactor plant life extension projects planned over the next fifteen years at Bruce Power and Ontario power generation or OPG valued at $26 billion Canadian. The steam generator replacement project for Bruce Power awarded last year at $130 million Canadian is on track and the units are expected to ship in 2020.

We have supplied all the steam generators for the Bruce Nuclear Generating Station since its construction and are well positioned to continue this long term relationship. As the plant life extension projects continue we will pursue additional equipment, service and project work for both Bruce Power and OPG including supply of waste containers, feeder tubes and various other refurbishment projects.

The acquisition of GE-Hitachi Canada which we closed in the fourth quarter and now called BWXT Nuclear Energy Canada or BWXT NEC improves both our competitive range and our brand in that market. The business has a solid market reputation and strong relationships with both OPG and Bruce Power. BWXT NEC has over sixty years of experience operating in the CANDU nuclear products and services industry and is especially strong in nuclear fuel and fuel handling systems. The nuclear fuel segment of this business provides CANDU fuel bundles and components while the nuclear services segment provides engineering and specialized tooling services as well as parts for the CANDU nuclear power plant.

We plan to leverage BWXT NEC’s capabilities to open up new growth opportunities within the current refurbishment space. Including the amortization of intangibles, we expect this acquisition to be accretive to BWXT earnings in 2017. Margins in this segment will be modestly impacted by the amortization of intangibles which we estimate to be approximately $7.9 million annually over the next two years and diminishing after that as we identified in our 10-K.

The technical services segment performed well on its contracts during the final quarter of 2016 and remains very active in the DOE laboratory national security and environmental management areas with several near term opportunities. Results for technical services were largely unchanged from the fourth quarter of 2015 and within our guidance for the full year. We continue to invest in a robust pipeline of opportunities in order to return the segment to historical levels of profitability over the next few years.

We are making good progress as we began implementing high leverage opportunities within our strategic plan. While we aren’t ready to disclose specific details of the plan at this time, we continue to invest in certain technologies and markets that will augment our existing capabilities and produce new growth in areas such as nuclear materials processing and critical national defense components supply. We understand these markets have channels to them and generally have the people and corporate knowledge to capitalize on them.

As we look to 2017 we expect revenues to grow to the range of $1.6 billion to $1.7 billion and for adjusted earnings to be between $1.85 and $1.95 per share, including the amortization impact of the BWXT NEC acquisition and excluding any mark-to-market adjustments for pension and post retirement benefits.

With the high level of Navy nuclear propulsion work backlog, we expect revenues from nuclear operations to be near the record level achieved in 2016. At the end of last year our backlog contained more than $1.4 billion of expected 2017 revenue. We are nearly at capacity at all of our sites and are effectively utilizing our facilities. We expect operating margins in nuclear operations to be in the high teens with upside potential.

As mentioned in our press release, we are increasing longer term guidance to better reflect our robust organic growth opportunities and balance sheet capacity. Driven by strong operating income growth we anticipate our earnings per share compounded annual growth rate to be in the low double digits for the three to five year period following 2017.

To support the numerous growth areas previously identified, we are increasing our 2017 CapEx forecast to near $100 million. The bulk of this spending will be in the nuclear operations segment and is recoverable in our future rates. For your reference a full list of our 2017 guidance is detailed in our company overview deck available in the investors section of our website.

Starting with the quarter ending March 31, 2017 we will report results in three realigned business segments. The nuclear operations segment will be reported as the Nuclear Operations Group but remains unchanged from our current nuclear operations segment. The Nuclear Services Group will comprise the technical services group and our U.S. commercial nuclear service business which includes a portfolio of work in advanced reactors for terrestrial and space power applications.

NSG, Nuclear Service Group operating income is expected to be between $15 million and $20 million in 2017. The Nuclear Power Group will include our legacy BWXT Canadian business and the recently acquired BWXT NEC business. For 2017 we expect NPG revenue to be between $250 million and $260 million with operating margins of 10%, inclusive of the amortization of intangibles. We will provide more details about the Nuclear Services Group and the Nuclear Power Group when we report first quarter results in a couple of months.

We remain committed to a balanced capital allocation approach which we demonstrated in 2016 but we see the future allocation shifting more toward investments that will smartly grow the business with less emphasis on share repurchases. We are confident in our numerous organic growth prospects and will invest a higher level of capital to support these opportunities. We are also actively working our M&A pipeline and see multiple opportunities that may be actionable.

To make sure we are maximizing value for our shareholders, the returns on these growth-focused investments will continue to be evaluated against share repurchases and other capital investment options. To maintain optionality and to support opportunistic repurchases, the Board of Directors has approved an additional share repurchase authorization of $150 million that can be used over the next three years, leaving us with a total share repurchase authorization of $193 million when our existing accelerated share repurchase or ASR program completes by the end of this quarter.

At this time last year our board increased the quarterly dividend to $0.09 per share. However the ASR limitations require that BWXT maintain constant dividend payments throughout the life of the ASR. Accordingly our board approved a quarterly dividend of $0.09 per share for the first quarter of 2-17.

To wrap up, we had a solid fourth quarter that allowed us to deliver on our guidance for 2016. Beyond 2017 the strategic plan that we developed will guide us toward additional growth opportunities that fit our strengths and increase our options to participate more fully in the markets we are currently serving.

Our Nuclear Operations Group prospects look brighter than ever. In addition we believe our Nuclear Power Group is well situated to capture additional business in the Canadian nuclear power market and our Nuclear Services Group remains on the path for long term operating income growth.

I have enjoyed meeting several of you at various conferences over the last few months and I look forward to meeting more of you at our investor and analyst day which we anticipate occurring in the first half of October this year. That concludes our prepared remarks. I will now turn the call back over to the operator who will assist us in taking your questions. Operator?

Question-and-Answer Session


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

Bob Labick

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.

Rex Geveden

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.

Bob Labick

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?

Rex Geveden

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.

Bob Labick

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?

Rex Geveden

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

Peter Skibitski

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.

Rex Geveden

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.

Peter Skibitski

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.

Rex Geveden

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.

Peter Skibitski

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?

John Fees

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.

Peter Skibitski

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?

David Black

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.

Tate Sullivan

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?

Rex Geveden

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.

Tate Sullivan

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?

David Black

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.

Kristine Liwag

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?

Rex Geveden

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.

David Black

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.

Kristine Liwag

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?

David Black

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.

Kristine Liwag

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?

David Black

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.

Les Sulewski

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?

David Black

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?

Les Sulewski

The tax reform --

David Black

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.

Les Sulewski

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?

Rex Geveden

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.

John Fees

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.

Les Sulewski

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?

Rex Geveden

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.

Tate Sullivan

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?

David Black

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.

Tate Sullivan

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?

David Black

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.

Tate Sullivan

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?

Rex Geveden

For the space nuclear power, was that the question?

Tate Sullivan


Rex Geveden

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.

Alan Nethery

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.

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