Ladies and gentlemen, welcome to BWX Technologies Second 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, Jason. Good morning, and thank you for joining BWXT's second 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 our 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. With that, Rex, I’ll turn the call over to you.

Thank you, Mark, and good morning. Yesterday, we’ve reported strong second quarter results with non-GAAP earnings per share of $0.71, up 15% on 7% of revenue growth, while delivering robust free cash flow of $111 million, three times the second quarter last year. These results extend BWXT’s exceptional first quarter and producing very strong first-half performance, with non-GAAP earnings per share of 33% on 18% of revenue growth, and positive free cash flow despite substantial capital investments to lay the foundation for future organic growth. This performance leads us to increase 2020 earnings per share guidance, despite negative impacts related to COVID-19 in commercial business lines. Second quarter and year-to-date, our outperformance are driven by the Nuclear Operations Group, through the Columbia Class product line ramp, and accelerated work volume and long lead material production. These were bolstered by contract performance improvements through operational excellence, as we execute against the robust backlog. Over the last several months, both the House and Senate have made significant progress on the 2021 NDAA. Budget authorization is trending well for BWXT programs, particularly for a second Virginia Class nuclear propulsion system in 2021. Both the House and Senate passed two bills contain increased funding for the Virginia program, with the House adding an incremental $272 million, and the Senate allocating $472 million for long lead items for a second Virginia ship. Additionally, the House Appropriations Committee's FY'21 Defense Appropriations Bill includes the same $272 million increase for Virginia Advanced Procurement. As I discussed on the last earnings call, there was a scenario where the entire second Virginia Class submarine is not ordered, but the nuclear propulsion equipment for a second submarine is ordered. This is the action by the Senate thus far with the House fully funding the program. Consequently, the actions of both…

Thanks, Rex, and good morning, everyone. Starting with total company results on Slide 4 of the earnings presentation. Second quarter and year-to-date revenues were up 7% and 18%, respectively, and as Rex mentioned, were driven primarily from outperformance in the Nuclear Operations Group. The strong execution this year resulted in second quarter earnings per share of 15% and year-to-date EPS of the $1.50, up 33% when compared with the first-half of 2019. First-half operating margins expanded 140 basis points to 17.7%. So year-to-date earnings growth was dominated by segment operations, which is depicted on Slide 5 of the presentation. Operating segments drove $0.28 of improvement and corporate cost controls resulted in $0.04 of improvement. Lastly, we drove $0.05 of EPS improvement through higher pension income and lower interest expense. Our year-to-date cash generation has been strong, resulting in lower borrowings. And the actions we took in the first six months of this year to restructure debt has resulted in more liquidity, a credit facility with lower rates and an extended debt maturity scheduled with no debt due until 2025. Moving to second quarter segment results on Slide 6. Nuclear Operations Group delivered another solid quarter, with revenue up 14% to $410 million. We continue to see accelerated material production in the second quarter, including higher volume from the Columbia product line, as well as higher volume from naval nuclear fuel and downblending. NOG operating income was $86 million, resulting in a 21% operating margin for the quarter. The Nuclear Power Group produced $68 million of revenue in the second quarter, a 22% decrease when compared with the second quarter last year, primarily driven by lower components manufacturing and commercial nuclear power, and lower medical isotope volume as demand for procedures remain depressed due to COVID-19. NPG second quarter non-GAAP operating…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Pete Skibitski from Alembic Global. Please go ahead.

Good morning, guys. Nice quarter. On the strong first-half growth NOG, coming into this year did you guys kind of expect this? It's very strong growth. I know most of it is I think Columbia related. I don't know if you expected coming into this year more kind of a level load across the year, or if some materials purchases just kind of been pulled in from 2021. I'm just wondering how surprised you are or kind of in line with expectations this phenomenon is? Because, it obviously implies kind of a weaker relative second-half of the year.

Yes. Pete, good morning. Yes, certainly we performed relative to our expectations in the first-half. And as we said, some of that's contract performance through operational excellence, good amount of that is long lead materials. And so, it's a bit surprise, a bit of an upside surprise in the first-half. And I would say that, one of the reasons we give annual guidance instead of quarterly guidance is because, the materials component of our performance can be pretty lumpy, and a little bit unpredictable. And the reason for that is because a lot of that comes through suppliers, who are making, for example forgings and alloys for the business. And they can pull on their backlog and book and bill to us. We can take percentage completion credit on that and book and bill our customer. So there is that amount of unpredictability in it, and certainly pleasant surprise in the first-half, and wouldn't expect the same kind of upsides in a second-half. But, we should have good second-half as well.

Okay. That make sense. I appreciate it. And just on the MPG margin guidance of 11%. You're calling for a big ramp in the second-half. What's going to kind of drive those margins higher in H2?

There's about three things going on there, as we discussed in the script. We've had currency pressure that's drifted back in our favor in the last quarter or so. The conversion rate got as low as a $1.40, its $1.34 today. So that's helping a little bit. So, that may give us a little bit of lift. We expect and we certainly hope for a rebound in the isotope business. I mean, there's still some pressure there, but that's a high gross margin business. And so that one cuts both ways with a little bit of lift that will improve margins substantially, Pete. And the other part of it is the Nuclear Power Group, the commercial nuclear component of the Nuclear Power Group was weak in the first-half. Some of it was COVID-related, because some service outages got pushed from the first-half into the second-half of the year. The original bias on service outages was going to be five in the first-half and two in the second-half. And now it's three in the first-half and four in the second-half, if I recall correctly. So, there will be -- sorry I got that reverse. There will be more service outages in the second-half than there were in the first-half. And we've got good production tempo on our component manufacturing in the second-half as well. So, I think just about all three of those things conspire to give a small lift in the second-half, Pete.

Okay. I appreciate all the color, guys. One last quick one. On the Hanford protest, do you have a date when that's supposed to be adjudicated by?

No, I think that's a little bit unpredictable. So, we don't know. I don't expect we'll get much of anything out of that in 2020 at this point though.

Okay. Thanks, guys.

Thanks, Pete.

The next question comes from Robert Spingarn from Credit Suisse. Please go ahead.

Hi, good morning. I wanted to first ask on Nuclear Operations Group, just on the back of the comments that were just made in Pete's question. But, with respect to Virginia funding that Rex talked about earlier and the overall visibility that you have in the business, I'm wondering if there's anything you can say to help us level set in terms of growth for next year, especially you talked about the material purchases and the trend this year, first-half to second-half. How do we think about our NOG growth next year, with potentially the second Virginia and again the cadence on the material purchases?

So, Rob, we're certainly not going to get into forecasting '21 at this juncture. We do expect some growth there. We've got some residual growth from the accelerated Ford aircraft carrier procurement, but we will characterize our 2021 at a later time.

All right. And then just separately, we saw some news regarding the possibility of the U.S. developing nuclear powered icebreakers. I'm wondering if that's a real possibility, if there's anything you can offer in terms of the timeline or value of such a thing.

Yes. Rob, I think it absolutely is a possibility, as you know the White House asked the Coast Guard to go and develop plans for some nuclear powered icebreakers. And that plan is due to the White House this month actually, literally. There are only a couple of active icebreakers in the Coast Guard fleet right now operating in the Arctic region. And so the administration has said it would like to have a fleet of about 10. The mix between nuclear and non-nuclear I don't think is clear at this point. They're certainly on a path to add some non-nuclear icebreakers in the first-half of this decade. So, I think it's an interesting possibility. If that should transpire, we would certainly be in a position to supply those reactors to that application. But, I wouldn't expect anything meaningful to happen until probably the second-half of this decade, when we might see some order activity should that opportunity transpire.

Okay. Thank you.

Thank you.

Thanks, Rob.

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

Yes. Good morning, Rex, David, Mark.

Good morning, Peter.

Rex, maybe I just want to come back to Rob's question a little bit on your growth for '21 and NOG, just because when we think about how your backlog converts. There's quite a bit of a step up in the backlog conversion for next year. So, is there something that offsets that? Or is it just the timing of the way the revenues flow through?

Reframe that question for me, Peter. I didn't get that.

In terms of you're trying to think about the growth profile for 2021, just because we see in the backlog there is a -- what you're planning to recognize next year in 2021 in the Q for NOG certainly shows like a big step up. I am just wondering if there's something that maybe offsets that growth or just its timing related. Just trying to understand a better profile for growth in '21.

Yes. Peter, this is David. As you look at our backlog, obviously, we do provide that. We provide future run off there. As we look at NOG, there's a couple of things going into play here. One of the things is, as Rex mentioned, there was some pull ahead of some materials, so, that will have some offset depending on what we forecasted last year or next year to this year. But, Rex also said there is growth in next year. We're just at this point in time not defining what that growth is, at this time. And we'll do that when we talk about the 2021 guidance.

Okay, that's helpful. And then just David, just quickly on kind of your cash outlook, really strong free cash flow in 2Q, CapEx still ramps. Are you expecting this year still to be kind of around the breakeven level? Or what's your thoughts on how the timing is there?

Breakeven on the cash?

Yes, on free cash flow?

Yes. So, I mean, once again, we are forecasting $270 million of CapEx for the year. And you know the other elements of what we're forecasting. So, because of the high CapEx, we're still forecasting. We haven't given the operating or the free cash flow number, but as you have forecasted, that number has not changed.

Okay. That's helpful. Thanks very much.

Thanks Peter.

The next question comes from Michael Ciarmoli from Truist Securities. Please go ahead.

Hey, good morning, guys. Thanks for taking the question. Maybe, I'll take another swipe at the NOG in second-half and '21 here. I mean, is it fair to say guys that the positive developments with the Virginia Class, and you didn't really mention the impacts of potentially a multiyear contracting for the Columbia Class. But, it sounds like the visibility for NOG improves in the second-half. And then if we think about, I guess we're actually talking about the forging and other casting suppliers. Some of those guys also cater to the commercial aerospace markets. Maybe they're directing more resources towards defense now. I mean, is it fair to say that your visibility and momentum as we sit here today is a lot better than where you were three months ago?

I don't think we've seen a material change in our visibility. Michael, it's a very long cycle and somewhat predictable business. And I think, if you look at what's happening with the Congress, on the second Virginia for 2021, that certainly stabilizes our outlook. And so we still expect -- and this is in the absence of the Navy shipbuilding plan. But we still expect to stay on that tempo of two Virginia's, one Columbia when we get into the end of the normal tempo on that one, and the Fords every on five year intervals. So, I think our visibility is really unchanged.

Okay. What would be the implications of a multi-contract with a Columbia Class? Accelerate -- okay.

Yes, I think it would be kind of the same effect as the advance Ford procurement, the two Ford carrier buy. We would be able to order materials earlier. We'd be able to offer some potential savings to our customer on that, which would be the appeal of it. So, I think it would pull forward some volume in a way that would be meaningful to the business.

Got it. Perfect. And then any additional color on where we stand with missile tubes in terms of how you guys are thinking about? That market going forward, do you think you're going to have some leverage to get the pricing and the margins you want, if you stay in that? Or have you kind of definitively made a decision to pump on that business?

Yes. In terms of the missile tube, maybe two categories of an answer here, Michael. On the repairs that's going according to plan. We feel quite good about where that is. And we'll be starting to ship completed missile tubes pretty shortly. In terms of future opportunities, I think it just doesn't have the margin profile that we want to see in the business. And so, we're not likely to pursue that in the future.

Got it. Perfect. Thanks, guys. I'll jump back in the queue.

Thanks, Michael.

[Operator Instructions] Next question is from Ron Epstein from Bank of America. Please go ahead.

Yes. Hey, good morning, guys. Just a question and when you look at the National Nuclear Security Administration budget and the request for 2021, it's up relative to 2020. And if you actually look for the preceding maybe four years, it's gone up every year, and then the projections going out have gone up a lot, too. So, what kind of opportunities does that present for you guys? Because if you look at the 2021, and then let's say, budget relative to 2020, it is materially higher than the 2020 budget. So, what's that present for you guys?

So Ron, I think, most of that opportunity for us lies in the area of management and operations of DOE in an assay site. And so what you see there is largely increased funding in places like Los Alamos and Livermore and Sandia, Nevada, and then Pantex and Y-12. And so, it shows up at the labs for the most part, and the opportunity for us is a significant boost in equity income around the management of those sites for DOE. That's the most tangible I think opportunity for us in that budget trajectory.

Got you. And then maybe just a detail on the R&D amortization change that's going to happen in 2022. If it were to happen in 2022 as stated, what impact do you expect that to have on your cash flow? I mean, we've heard from other contractors that relatively big numbers relative to their operating cash flow. I don't know if you guys thought about it or if you're comfortable to talk about it. But, as the R&D amortization were to change, like it's supposed to, if the law doesn't change, what impact would that have on your cash flow?

Now, when you look at our R&D, we're less than 1% of our revenue. So, it's not as much of an impact for us, as it would be others. But once again, when we see the change then we'll talk about what that does to us. But, if the amortization changes then, you get the same benefits that others get ours would just be a lot smaller.

Okay. Thank you.

Thanks, Ron.

The next question comes from Matt Akers from Barclays. Please go ahead.

Good morning, guys. Thanks for the question. Can you talk a little bit about working capital and how that could trend either in terms of that absolute dollars or days or percent of revenue, kind of as we go through the Columbia ramp and if that could be kind of a meaningful impact to free cash flow?

So, anytime we build up in the business, you're going to have additional working capital to support that build of your manufacturing. You've got to remember that when we talk about our largest customers, the U.S. government, we do have terms by which we build twice a month, and when we build we get paid very quickly. So, there is an initial pop of working capital, but we tend to manage that. And so, there is some fluctuation change here. Now, when we look at to the future, and we look at the isotope business, there'll be changes in working capital there and the commercial line of businesses. But once again, our biggest impact being the government, there doesn't tend to be a long-term working capital issue.

Got it. Thanks. And then I guess on tax. So, I think I know that the CARES Act, you get to defer some of the payroll taxes from 2020 into 2021. Can you give us what the impact of that would be for this year?

So we've included a forecast of tax, and you've seen year-to-date where we are. We've got everything built in. We are -- from us, from a tax perspective, from a cash perspective we're allowed -- part of the reason why our free cash flow is up is because we've delayed payments of that until next year. So that helps us from a free cash flow perspective. Tax range, we're trending and expecting that our tax range is about the same as we forecasted for the year.

Got it. Thanks. And then I guess just one more following up on the missile tube question. But to me, you're getting out of that business. I think you talked about maybe repurposing some of those facilities for other uses. Is that something you could still do? And if so, when that? Does that have any sort of positive offset versus CapEx that you might otherwise spend?

Yes, we certainly will repurpose that facility. That's at Mount Vernon, Indiana, which is the production site for some of our largest components for naval reactors, and so there's plenty of volume there. So repurpose that entire facility for those large components that are coming through and there is a bit of a benefit on CapEx, not striking, but it's incrementally positive to the business.

All right. Thanks guys.

Operator, we'll take our last question.

Okay. Last question is the follow-up from Michael Ciarmoli from Truist Securities. Please go ahead.

Hey, thanks, guys. Just on the Columbia Class, Rex. If the second one is going to get ordered in 24, when should we expect you guys to start booking some revenue for the long lead materials there?

Yes. So Michael, you know that for the reactor components. Those precede the ship procurement schedule by the shipyards by two years. So for the 2021, Columbia, the first one that business began to pick up for us in 2019 as an example, and we ramped that through last year. So, for the 2024 Columbia, you'll see that start to hit our business in 2022, and then ramp up through that year and pick up beyond that. And so, from our investor deck, you see how those Columbia's layer into our future business. And on a seven year delivery tempo, you see some accumulation of volume over the course of time.

Yes, perfect. All right. Thanks guys.

Yes. Thanks, Michael.

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

Thank you, and thank you for joining us this morning. This concludes our second quarter 2020, conference call. If you have further questions, please call me at 980-365-4300.

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