Ladies and gentlemen, thank you for standing by and welcome to BWX Technologies Inc.'s Third Quarter 2017 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. Please note this event is being recorded. I'd now like to turn the conference over to our host, Mr. Alan Nethery, BWXT's Vice President and Chief Investor Relations Officer. Please go ahead.

Thank you, Anetta, and good morning, everyone. We appreciate your joining us to discuss our 2017 third quarter results, which we reported yesterday afternoon. A copy of our press release is available on the Investor section of our Web site 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, such as adjusted earnings per share, that are reconciled in yesterday's earnings release and our company overview presentation, both of which are available on the investors section of our Web site. 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 periods and to assist them in understanding BWXT's ongoing operations. With that, I'll now turn the call over to John.

Thank you, Alan. BWXT has added to our streak of stellar financial performance delivering $0.46 of earnings in this third quarter period. This is a 17.9% increase over the same period last year. Growth in the top line combined with good cost discipline drove these outstanding results. Our business model is focused on servicing a very discerning customer base, keeping the stability of our outlook, while adding to our profitability and growth and this model continues to deliver. Our revenue for the quarter was $419 million, an increase of 10.5% over the same period of 2016. Operating income climbed to $73.7 million, an 18.1% increase over the third quarter of last year, while margins grew to 17.6% on a consolidated basis. Backlog grew from the prior period to $3.5 billion at the end of the quarter, and by any measure, this has been an excellent quarter. Furthermore, I’m happy to report that we continue to execute well on the ambitious plan that we announced for 2017. As you recall, in second quarter, we raised our EPS guidance by $0.12 and announced that we expected adjusted earnings to be between $1.97 and $2.07 per share. Today, we are narrowing our EPS guidance for the full-year 2017 to between $2.01 and $2.07 per share. BWXT participates in markets with potential for robust growth and high barriers to entry. The company's focus on operational expertise has earned its prolific brand name and best-in-class financial results. The company plans on leveraging its highly differentiated nuclear operations technology, services, component manufacturing, materials processing and waste management to further penetrate its existing markets and to enter new markets with cost disruptive and technology disruptive products and services. BWXT is executing a disciplined growth strategy from a position of financial strength and premium competitive positions. In July, BWXT NEC was awarded a 5-year CAD$34 million contract to supply seven very large motors for Bruce Power. In August, NASA awarded the company an $18.8 million contract to initiate conceptual designs for nuclear thermal propulsion reactor in support of a possible future manned mission to Mars. In September, a BWXT joint venture with APTIM, formerly known as CB&I Services, was awarded a 2-year extension on a naval reactors propulsion program decommissioning contract, which totaled $140 million. And separately, the company's joint venture between BWXT Technologies Group and AECOM was awarded a $928 million extension to the contract to run a waste isolation processing plant in New Mexico. In addition, we’re excited to announce that BWXT led team was awarded a 10-year $4.7 billion contract to provide liquid waste services to the Department of Energy at the Savannah River site. This is all on top of the tremendous momentum we’ve in our naval reactors business. So we are seeing exciting outcomes in each of our business segments and as we move forward as well. Now let me turn the call over to David, who will discuss third quarter results and other related financial matters.

Thanks, John, and good morning, everyone. The Nuclear Operations Group or NOG, achieved an all-time high revenue mark for a third quarter. In the third quarter of 2017, the segment generated $325 million, a 2.4% increase from the third quarter of 2016. The increase was primarily attributable to increased activity related to our naval nuclear fuel and down-blending operations. Year-to-date, the segment's revenue was up 2.6% compared to 2016 at $962 million and its operating income was up 14.6% to $220 million. Operating income for the quarter increased almost 15% from the third quarter of 2016 to $71.9 million. NOG continued to deliver solid operating income margins at 22.2%, a 242 basis point increase from Q3, 2016. This segment's backlog at the end of September was nearly $3 billion. Compared to Q3 2016's revenue of $36.1 million, the Nuclear Power Group or NPG, business grew 90% to $68.6 million. Q3 2017 marks a record Q3 for the Group's revenue and operating income reached its highest Q3 levels since the third quarter in 2012. Approximately 70% of the increase was attributed -- attributable to the acquisition of BWXT NEC, which produced $22.5 million in the quarter. Year-to-date, the segment increased its revenue $80.6 million, or 67%, to $209 million -- $200.9 million. Operating income for NPG in the third quarter was $9.3 million as compared to $5 million in the third quarter of 2016. Driving the increase was revenue from NEC and higher volume of activity associated with our legacy components business. Operating income margin for the third quarter of 2017 was 13.6%. The segment booked $116 million in the third quarter, a 425% increase from Q3 '16 and ended the quarter with a backlog of $528 million, 42% higher than the $371 million backlog a year-ago. We are on track…

Thank you, David, and good morning. John and David have already summarized our accomplishments so far this year, and I'll now provide some additional operating details. As discussed, we reported robust revenue and operating margins in the third quarter, primarily driven by strong results in the nuclear operations and nuclear power segments. Perhaps equally important, we’re now experiencing a resurgence in the Nuclear Services Group backlog with a cluster of important contract awards and contract extensions throughout this fiscal year, which will lead to impressive earnings growth in the coming years. The Canadian market continues to drive growth for NPG, both in our legacy business and the BWXT NEC business. We remain well pleased with this acquisition and continue to see significant cost synergies materialize. We also expect to see significant revenue synergies come to fruition in future quarters. This positive sentiment is underscored by NPG segment operating margins, inclusive of intangible amortization of nearly 13.6% in the third quarter. We expect this business to maintain 12% margins going forward. Nuclear operations delivered operating margins that are 240 basis points above Q3 of 2016. As a reminder, upon adoption of the pension accounting change in 2018 that David mentioned, we do expect margins in nuclear operations to drop by 150 to 250 basis points -- 200 basis points. However, we anticipate that NOG will continue to have a fast cash conversion pension benefit of 200 to 300 basis points for several more years. Operationally, we remain confident in the execution of our current contracts and future awards in the pipeline. We continue to see the missile tube market as a strong area of growth and I’m pleased to report that we’ve successfully completed the first two Common Missile Compartment, or CMC missile tubes. We have contracts to manufacture about half…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Rob Spingarn with Credit Suisse. Please go ahead.

Everyone, this is Joe on for Rob.

Good morning, Joe.

Good morning. I wanted to probe a little bit on the long-term 3 to 5-year outlook and the expectation for the double-digit earnings CAGR. I recognize that you haven't given guidance for 2018, but if you could just comment on the expected slope for that earnings CAGR? Is it possible or even likely that 2018 earnings growth is less than double digits, and then '19 and '20 are firmly in the double digits once you start work on Columbia and especially given your comments that R&D is likely to -- is ramping up and likely to stay elevated for at least another year? So, I just want to make sure that near-term expectations are appropriately calibrated.

Joe, hi. What I will say about say about that is our guidance has not changed. We continue to anticipate 3 to 5-year adjusted earnings per share CAGR in low double-digit range beyond 2017. But to be perfectly clear, we’ve never said or implied that we'd achieve low double-digit earnings per share every year in that period. So there is obviously going to be some variability, but we are very -- we are extremely confident about the long-term growth prospects in that period. We haven't, at this point, given any guidance on '18 or '19.

Okay. And at this point in the fiscal year, what are the drivers or uncertainties that could get you to the high-end versus the low-end of your updated earnings range? Is it primarily just contract performance and risk retirements?

So, number of things that are variable. Obviously, we need to see what the Congress does with appropriations for the Navy and for additional submarines. We’ve things that are working through our mergers and acquisition pipeline and various other things like that. And we will have more information on all those before we offer guidance.

I meant for the 2017 earnings range.

Oh, the 2017, I’m sorry, go ahead.

Yes, for 2017, obviously, operations is a large impact of where we end up by the end of the year. So we are just looking at what improvements we can get into the contracts and get closed out for the year.

Understood. Thank you, gentlemen.

The next question comes from Peter Skibitski with Drexel Hamilton. Please go ahead.

Yes, and just on your revenue guidance, guys, $1.6 billion to $1.7 billion you kept that, but you did say NPG is coming in higher. Is it -- would you go as far to say your revenue is likely to come in towards the top end of that range?

We haven't changed the revenue guidance, but yes, we are going to be improving the guidance on the NPG, which would give you an indication that it's probably going to be coming closer to the upper end.

Okay, okay. And then the revenue headwind at services in the quarter, services revenue was down year-over-year. Can you give us a sense how much of that was the loss in the DU -- I think it was DU6 program, versus how much was just kind of normal seasonality?

I mean, once again, inside of Nuclear Services we don’t spend a lot of time looking at the revenue because what we’ve there mainly that’s going through there is our wholly owned decommission -- work that we do on some decommissioning, and so we put the hours through there and its wholly owned and it just has some variability quarter-to-quarter. Most everything else comes in through equity income. So there was DUF6 and we did end that. So that was part of it, but you are still going to have some variability in the hours there, and we don’t concentrate a lot on the hours.

Okay. I was just curious because the EBIT was pretty low too and I guess you are saying that, that was -- it less DU6 and maybe more just lower hours booked on outage work, I guess?

Well, you have two things. One, when you look at EBITDA here, when your equity income is going to be variable during the year and it's a lot of times more year-end loaded because of the ward fees we get from the different sites around the U.S. [indiscernible]. So that variability and then you have variability in revenue, it's going to cause bounces in your EBIT.

Okay. Okay, fair enough. Thanks, guys.

The next question comes from Michael Ciarmoli with SunTrust. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Not to harp on it, but I just wanted to go back to Joe's line of questioning on the 3 to 5-year outlook. I know you kind of put in there that '20 to '22 timeframe, and I get it, it sounds like the CAGR is not going to be even over that 5-year period. But, I guess, coupled with the R&D, you are coming off a strong base. I mean, should we sort of calibrate expectations for something below that double-digit EPS growth rate next year and maybe even '19, given that the language now kind of more strongly says 2020 to 2022?

I think, as Rex had stated just a minute ago, that from '20 to '22 we are very strongly standing behind the growth that’s out there, at the low double digits. In '18 and '19, we’ve never said that it would be double-digit growth every year. In '18 and '19, we did say just a little while ago, that the expenditures on R&D and capital at the higher level that's happening this year will continue into '18 and '19. But we’ve not provided, at this point in time, guidance for '18 and '19 to give you exactly where we’re going to be, but we’ve said that it will not -- it does not mean that it's double-digit growth all the way through 5 years.

Got it.

It doesn’t mean that it won't be either. I mean, we are just …

Yes.

… trying to [technical difficulty] we really don’t have guidance at this point.

Okay. Okay, that's fair. What about on the -- I don’t believe you changed the nuclear power segment margin for the full-year, I mean, that implies the lowest potential operating margin quarterly run rate probably in more than 2 years for the NPG group. I mean, and I know there's seasonality there and lumpiness, but correct me if I’m wrong, but I think you are still guiding to that 12% full-year operating margin in NPG?

Yes, so we are still guiding to the full-year 12% operating margin, which means that the operating margin in Q4 would have to be below 10% in order to meet that.

Right. And it sounds like, I guess, you’ve pretty good visibility on that based on what’s in the backlog timing and outages. So that seems to be, I guess, trying to flush out what’s conservative -- conservatism and if there is any room for upside on that margin in the quarter?

Once again, from a long-term perspective on this business, we feel that 12% margins are reasonable for this business. So right now we are not changing the long-term guidance there. We will see how we do in the fourth quarter.

Okay. Last one I have, more of a, I guess, on the services side, the ground based strategic deterrent program recapitalizing all of the Minuteman Missiles. I mean, it's been quite some time since the U.S. has developed a new nuclear warhead. Any implications that you guys see on the services side? I mean, is that -- could that have -- based on conversations, it seems like there could be about $20 billion of spend just to develop the new warhead. I mean, is that something you guys see as a potential tailwind over the coming years in that services group through the various facilities that your JV is on?

So Michael, we -- so there's kind of two sides to that, right. They’re the prime contract awards that will go to the developers of the delivery system, and then there is the weapons work that goes on the weapons complex itself. We tended to be involved in the weapons complex side through our activities at Los Alamos, Livermore and related, Pantex, Y-12 and so on. So that’s where we see the action. I think that will be steady and consistent business for us in the future, certainly provides a long sort of a backlog view of that business. I wouldn’t necessarily describe it as a tailwind on that side of it.

Okay, perfect. Thanks a lot guys. I will turn back in the queue.

[Operator Instructions] The next question comes from Bob Labick with CJS Securities. Please go ahead.

Good morning. Thanks for taking my question.

Good morning, Bob.

Hi. So you discussed the medical isotope opportunity a bit at the Analyst Day and alluded to it obviously in your prepared remarks as well. I was just hoping you could expand on maybe even when you will discuss it more, the opportunity and if you could clarify one thing as well are you entering an existing market with a superior solution or are you creating a new market? Any color around it and timing would be helpful.

Yes, I think we'd be reluctant to say when we're going to disclose a lot more detail about that one, Bob. But we will say it is we are -- we'd be selling into an existing market. There are medical radioisotope markets in imaging and in therapeutics that are very interesting to us. Our technology applies to both of those areas and that total opportunity is in the $2 billion, $3 billion as we articulated at the Investor Day. We are negotiating some agreements on both ends of our product that we can talk about at some point in the future, but we are not prepared to say all that yet.

Got it. Okay, fair enough. And then related on the drive in this morning, I heard, I guess, President Trump in South Korea, they were discussing potentially South Korea buying nuclear subs from the U.S. Do you guys even have capacity to be able to ramp that up, or how would that impact you going forward?

We haven't factored that into any of our thinking yet, obviously, that’s breaking news. So we will just have to follow that one and see.

Was that a tweet or was that a press release?

It was -- I saw it on a news article and I heard it on Bloomberg this morning. So I think it was a discussion, but anyway …

I think it's kind of new to us. We haven't caught up to that yet. So we will have to catch up to that and see what that is.

Okay, great. Well, thank you for your time. Thanks.

Thanks, Bob.

The next question comes from Peter Arment with Baird. Please go ahead.

Yes, thanks. Good morning, everyone.

Good morning.

David, I guess, maybe on the R&D expenses kind of calibrating directionally, sounds like it's going to be ramping up, but is there a level in terms of percentage of revenues of where you see this kind of peaking out or at least running to? I mean you are still running well below 1% of sales right now.

Yes, I mean, it's going to stay at less than 1% of sales, but I think the only indication we’ve given you at this point in time is the fact that R&D for the fourth quarter is going to double what it was in the third quarter and we are going to sustain those levels into '18, early '19.

Got it. That’s helpful. And then just a clarification, you mentioned at the Investor Day that you had delivered your kind of first missile tube at the end of August and you were slated to do another one here in November. Is that still on track?

Yes. The second missile tube has been delivered.

It has been delivered?

Yes.

Okay, great. That’s all for me. Thank you.

Thank you.

The next question comes from Tate Sullivan with Sidoti. Please go ahead.

Hi. Thank you. Good morning. On NPG with the higher revenue guidance for this year, can you give more -- and it looks like the timeline for the Ontario refurbishments is unchanged from your Analyst Day too. I mean, can we infer that’s related to Canadian Unit 2 work or does it imply a higher market share of the work in Canada?

Tate, I will comment on that. There's a little bit of both going on here. John talked about it in his remarks, this motor awards contract that we received from Bruce Power for the large motors. That’s some strategic, some revenue synergy that’s related to that acquisition of the GE assets. So we are seeing and -- we are seeing good organic growth in that market with our legacy business, and we are also seeing more cost synergy and more strategic synergy than we had planned for with the acquired business. So it's sort of good news all around in that business.

Okay. And a follow-up on the refurbishment time lines, I mean, how far ahead of the actual refurbishments per unit will you start to get orders before the units shut down?

Well, it's very much dependent on what component you are referring to, but in the case of, for example, the refurbishment that’s going on in the Bruce sites, we received an order for a steam generator probably 1.5 years ago or somewhere in that timeframe, and that -- for Bruce Unit number 6, which is not slated for shutdown for another couple of years. So some of those components that are long lead like that can really be ordered a number of years in advance and we are seeing some of that.

Wow, okay. Thank you. And then on missile tubes, I think you said you completed your first CMC tube. I mean, can you update any -- the next potential events in terms of missile tubes and order -- and award time lines?

Yes. So we haven't disclosed the delivery schedule or anything like that, but we’re getting into a regular delivery tempo, I will say that, and you could expect that for years to come.

Okay. Okay. Well in terms of the delivery tempo, but in terms of the next order -- when the next orders may be awarded, in terms of updates on your market share, nothing, no updates on that?

Yes, I don’t think we’ve projected that yet.

Okay. And David, last from me too, I think R&D, you say in your guidance it's mostly in the other section within your segments.

Right.

But then I saw the unallocated corporate expenses increased meaningfully quarter -- year-over-year and quarter-to-quarter and I saw is most of that what you had commented on higher health insurance claims or can you go more detail on that?

No, that’s just -- that would be just the timing. So just the timing how cost is flowing through corporate so that there's no indication at this point in time that corporate costs are going up for the year. So it's just a timing thing for the corporate.

Okay. Okay. Thank you very much. Have a good rest of the day.

The next question comes from Rob Norfleet with Alembic Global Advisors. Please go ahead.

Good morning, gentlemen.

Good morning, Rob.

So just a quick question. So looking at NSG, obviously some very good wins during the quarter. How should we look at backlog conversion as we move into 2018, as you start to ramp up on some of these new contracts, in particular the Savannah River contract? And then maybe if you could provide a little bit more color on some of the additional bidding opportunities that you’re looking at over the next 12 to 18 months?

Sure. Rob, I will take that one. So, in terms of how that business looks going forward, I think we’ve always characterized that one as an equity income accounting method business. So what you see is, you don’t see much in the way of top line with these contracts wins, but you see a lot in the way of bottom line. We’ve -- I’ve always characterized that as sort of an EBITDA booster. So you should see improvements in -- significant improvements in margin and in bottom line as that business goes forward. We do have a number of opportunities in the pipeline. We talked about some of those at the Investor Day, but certainly the Savannah River management and operations contract is one that we are looking at. We still have pending awards on Los Alamos environmental management, and then there are a number of things out there, the Los Alamos management and operations and we look at all those opportunities and make decisions about whether we will compete for them. There's Hanford work out there in the future, but we are generally in the competitive mix on most of the stuff that’s in that pipeline.

Okay. That’s helpful. And just, I guess, in terms of the first question I asked, I guess really what I meant was, if you look at the term, for example, a contract like Savannah River, will the operating income and the fees that you earn be consistent across the 8 years, or will it ramp in year one and then kind of reach a plateau and go down? I just want to kind of understand the amount that you earn on an annual basis.

That one -- so that particular one is actually pretty lumpy because there's a lot of performance incentives built into that one. Others, depending on their nature, can be a lot steadier and you can get predictable income year-to-year, but Savannah River will be pretty lumpy.

Okay, great. And just David, my last question. You obviously noted the impact that obviously that pension is going to result in terms of the margins at NOG. What are some of the things that you’re looking at to do to potentially smooth that out?

I mean, obviously, anytime you talk pensions and derisking, you are looking at is there an opportunity in today’s market to annuitize and not take a lot of funding. So those would be the types of things that, other than keeping track of our investments and what we are earning on those investments as we apply them, so those are the types of things we'd look at.

Okay, great. And lastly, I know you discussed this at Investor Day briefly, but can you just kind of walk us through again what your M&A pipeline looks like, just the opportunities are at?

So I don't think we were specific at the Investor Day on what’s in the M&A pipeline, but I can say that -- and John used these words at the Investor Day, we haven't targeted transformational kind of acquisitions and mergers. What we’ve tended to look at is -- are things that are in the nuclear space, things that are adjacencies for us, things that have high strategic fitness. So those are the characteristics that we are looking for generally and we see interesting targets that have those characteristics.

Great. Thanks and congrats on a good quarter.

Thanks a lot.

Thank you.

Thank you.

This concludes our question-and-answer session. I'd like to turn the conference back over to Alan Nethery for any closing remarks.

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

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