Ladies and gentlemen, welcome to BWX Technologies’ Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to our host, Mark Kratz, BWXT’s Vice President of Investor Relations. Please go ahead.

Thank you, Matt. Good evening and welcome to BWXT’s third quarter 2021 earnings call. Joining me are Rex Geveden, President and CEO and David Black, Senior Vice President and CFO. On today’s call, we will discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the Safe Harbor provision found in today’s earnings release and in the company’s SEC filings. We will also discuss non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials that are available on the BWXT website. With that, Rex, I’ll turn the call over to you.

Thank you, Mark and good evening everyone. Before I begin with the business update, I want to address the COVID-19 pandemic and share with you my thoughts about the future on that topic. We say at BWXT that we are people strong and we see that value expressed everyday across the business and the actions of our employees. And I want to thank them for their commendable efforts during the last 18 months through this awful pandemic. We have all adapted to new protocols to keep everyone as safe as reasonably possible and to protect our business. We deliver critical materials, components and services for national security clean energy, nuclear medicine and nuclear environmental remediation, and these missions simply cannot be derailed by COVID-19. In compliance with federal executive orders associated contract changes and safety regulations concerning COVID-19, we are requiring all U.S. employees to be fully vaccinated. While this new hurdle may create some disruption to our business either directly or through the supply chain, I fully expect our company and our nation for that matter to come together again over the next few months to stop this pandemic so that we can go about the business of fulfilling our shared and deeply important mission objectives. Now on to the business update. Earlier today, we reported third quarter earnings of $0.76 per share, our strongest quarter year-to-date as we executed well across all business lines. The Nuclear Operations Group continued to reliably perform for our customers and to generate cash. The third quarter was no exception, achieving several important milestones and generating in excess of 20% operating margins. However, pandemic headwinds have remained persistent and were particularly acute during the first and third quarters this year, aligning with the pre-vaccine and delta variant surges in cases. While the business…

Thanks, Rex and good evening everyone. Starting on Slide 4 of the earnings presentation with total company results, third quarter revenue was just shy of $0.5 billion, down 4% compared with the third quarter last year, driven by fewer commercial power outages in the Nuclear Power Group. Third quarter adjusted EBITDA was about flat on lower revenue, resulting in 70 basis points of margin expansion, driven by more favorable contract adjustments and increasing depreciation expense. And third quarter earnings per share were down 4% to $0.76 as a result of lower operating segment earnings, higher commercialization costs related to the Tech-99 generator line, higher interest and a higher tax rate. Those headwinds were partially offset by a lower share count and higher pension income. Year-to-date, consolidated revenue was down 2%, and earnings were down 8% per share. Third quarter and year-to-date EPS bridges can be found on Slides 5 and 6. Moving to segment results on Slide 7 and 8, the Nuclear Operations Group generated $387 million of revenue, consistent with the prior year period. NOG operating income was $79.5 million, up 16% versus the prior year period as we recognized more favorable contract adjustments. As expected, NOG operating margin strengthened to 20.6% in the third quarter. Year-to-date, NOG revenue is down about 4% compared with the same period in 2020. Year-to-date operating margin remained strong at 19.1% despite COVID-related operations inefficiencies and other supply chain disruptions related to planned capital equipment installations as part of our multiyear NOG campaign. In the Nuclear Power Group, third quarter revenue was $83 million, down 23% compared with the third quarter last year, driven by lower field service activity due to the timing of planned outages, which was partially offset by higher medical isotope demand. NPG operating income was down primarily from a…

Thank you, David. We look forward to sharing more details about BWXT, its unique capabilities, competitive positioning and our strategic growth plans and financials that feed into our medium-term outlook at the BWXT Investor Day in about 2 weeks. You’ll hear more about the investments we have made in our core defense markets as well as other adjacencies where BWXT’s nuclear technologies can offer differentiated solutions and global security, clean energy, nuclear medicine and microreactor power and propulsion applications. These investments position us well even in a flatter defense budget environment as we continue to manage the business over a longer-term horizon. We believe our strategy and forward thinking will enable meaningful long-term shareholder value as we strive to maintain industry-leading performance you have grown to appreciate as shareholders of this unique and durable company. With that, operator, let’s open the line for questions.

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

Yes. Good evening, Rex and David.

Hey, Peter.

Hi, Peter.

Hey, Rex, maybe if you could just give us a little more color on sort of the persistent code disruptions. Are you having any sort of supply chain issues that are – that you think are watch items that we should be thinking about going into ‘22?

Yes, Peter, I would say that most of the headwind has really been internal we had this large peak in Q4 and Q1. And on the worst days, we had several hundred people out either sick or in quarantine or out for deep cleaning. So we saw that peak then. And then in the third quarter, we saw this delta variant peak out at nearly 200 a day in – across our North American plants. So we’ve seen that kind of impact. In the supply chain, not so much in the way of materials and forge and things like that show up in long lead materials. But we have seen an impact from these large capital campaigns, it’s large capital equipment related to the NOG capital campaign, where we’ve had trouble, for example, getting technicians into the plant to help us install equipment and things like that. And so what that’s done has impacted volume through the shops and impacted some planned production capacity that we expected to be there as we ramp throughout the year this year. So those are really the two things. It’s absences in the plant, just from quarantine and from sickness and then the large machine tool installation has been somewhat delayed by that.

Okay. And then just as a follow-up on the Savannah River award, can you maybe walk us through a little bit how that contract ramps up for you? Thanks.

Sure. So to give you a little granularity on the timing, Peter, there is a period that leads up to debriefs to the successful and unsuccessful offers and that’s a couple of weeks and that’s followed by a 5 to 10-day protest period. And assuming we got through all of that in a reasonable time frame, say, in the next 30 days, then you could begin what’s called transition where it’s a non-fee-bearing part of the contract, but it does provide you with meaningful absorption. And those periods normally last from 3 to 4 months. So if things progressed sort of on a good time line for us, and we were able to avoid a protest period, then you could see us getting into full production, if you will, late in the first quarter next year.

Okay. And just one quick one for David, just on the CapEx increase, is that – can we assume that, that amount that you’ve increased would be the amount that would kind of fall out of ‘22? Or is this just a step up in broader terms? Thanks.

No, it will be shifting in years. So we still anticipate that 2022 will still be a high CapEx year for us. At the end of ‘22, we will be reaching the run rate of what we call our maintenance CapEx of 3.5% to 4%.

Okay, thanks so much.

Thanks, Peter.

Thank you.

Our next question will come from Pete Skibitski with Alembic Global. Please, go ahead.

Hi, good evening, guys. Hey, Rex, just another question on the impact of COVID, do you guys have a sense of what percentage of the factory population is vaccinated? I’m just wondering, is it pretty low and that’s why so many people were out? And to what extent these the mandates might impact your 4Q and into 2022 or today, there was news out that maybe there were some workarounds around the mandate? So maybe you could just maybe shed a little more light on all that?

Yes, I’d be happy to do that, Pete. We’ve done – we haven’t been specific about broadcasting our vaccination rates, but they have been quite good, particularly strong in Canada, and really, really I’m well pleased with the vaccination rates generally in the U.S. plants. So we’ve got a bit of a gap there between the fully vaccinated and the unvaccinated, but it’s manageable in my estimation. So I feel pretty good about that. But we’re certainly going to have some challenges around getting all the way there based on the federal mandate.

Okay. Okay. So yes. So there is still kind of a range you’re thinking about for 4Q just from COVID risk?

So we haven’t really factored any of that additional COVID risk into our numbers. But – so we’re hoping to manage through it in a reasonable way is the way I would put it.

Okay. Okay. I think I missed maybe what you guys said in the opening remarks about MPG. On MPG the revenue was a little bit light by my forecast in the third quarter, but you raised the full year guidance. Are you just seeing more outages crop up in the fourth quarter at MPG?

Yes. We’ve got a good strong fourth quarter for a couple of reasons. One is, we’ve got some nice material volume and profit and some of our higher-margin contracts. And we’ve also got a bit of growth in the medical business in the fourth quarter. So we’re expecting a good strong fourth quarter and NPG and also in NOG, obviously, implied in our guidance and SG typically delivers a strong fourth quarter itself. So I’m really kind of expecting good numbers across the board in 4Q.

Okay, got it. Thanks guys. I will hop back in queue. Thank you.

Thanks, Pete.

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

Good afternoon. Thanks for taking the question. Rex, you mentioned, obviously, preparing for the FDA submission and talk a little bit about the technetium. Could you give us an update on where you are in terms of running the hot chemistry? And what else is necessary to be done before you do submit to the FDA? And if it’s still on track for kind of December, January as you’ve been talking about?

Sure, Bob. Yes, we’re going through cold runs right now in radiochemistry, that’s to kind of shake out the equipment with – obviously, with non-irradiated material, chemistry behaves the same. So it’s a very instructive thing to do. We mentioned in the script here that we have all the equipment in for the terminal sterilization. That was kind of the long pole in the tent that e-beam sterilization equipment is now in and fully integrated, and we’re going through checkout and validation of that. That’s in the radiopharmacy line. So kind of – to kind of review the bidding, we had – I always talked about four major work streams, there are other things, of course, but four major ones. The construction work stream is essentially done. The radiochemistry line is done and going through cold chemistry runs right now. Radio farm line is just about fully assembled and ready to go into validation and then the target stem the reactor access equipment, we call it sometimes was completed, integrated, tested and is now being disassembled to take down to the reactor itself, so very mature in all four work streams. We will start hot chemistry very shortly, just – that’s just around the corner for us. In terms of the FDA package I was a little – sort of a little mushy in my statement around this the last time that we would submit it around the end of the year. We’re sticking to that schedule. We will not get the FDA package in ‘21, but sometime in the first quarter of 2022, so more or less on track.

Got it. Okay. Great, thanks. And then obviously, you gave the initial outlook for ‘22. What are some of the biggest swing factors from the NOG side in terms of your visibility into delivering on ‘22’s expectations?

Feel pretty – very solid around what we’re going to get from NOG, Bob. We have organic growth in the 3%, 4% range in NOG. It just happens that the pension headwind offsets that from on the earnings side. But we are entering into government fiscal year ‘22. So we have long lead materials on the next Columbia ship set. So we will have that tailwind, if you will. And we also have been building out the volume capacity building out the production capacity across all the sites, as you know, for the last 2 or 3 years. And so we’re nearing the end of that campaign, and so should be able to produce a higher volume numbers next year, and that’s what is in the plan for us. So, higher volume plus long lead materials are both tailwinds for us. The headwinds are, as I mentioned in the script, we’ve got the reloads coming out the last of the chemistry loads is really coming out of the business in ‘22. And although it’s not profitable on the margin, the missile tubes are coming out. So, that’s a revenue headwind and an absorption headwind. And so those things don’t go in our favor. But altogether, feel confident about the NOG picture for next year.

Okay, great. Thank you.

You’re welcome.

Our next question will come from Michael Ciarmoli with Truist. Please go ahead.

Hi, good evening guys. Thanks for taking my questions. Maybe Rex, just to stay on ‘22, I guess maybe relative to some of the other defense guys, it seems like some of the headwinds are more internal for you guys. And maybe I would have expected next year, that this seems like internal timing. And if you are not really modeling or planning for anything to get worse, why aren’t we seeing more of a NOG pick up next year? I mean I wouldn’t think a CR would have an impact. Certainly, your submarine programs are well funded and well supported. Is there any other conservatism built into that NOG outlook in terms of some of the challenges you are seeing now?

No, I think – I don’t think so, Michael. It looks like good organic growth to me in that 3%, 4% range. And of course, like I have said, it’s the Columbia continuing to ramp up, the second Colombia and the shop minus the reloads and minus the missile tubes. And so it’s a pretty good looking growth story from my perspective.

Anything else on the Virginia class or how you guys are looking or anything you are hearing from the customer on how that potential third is going to shake out?

No. We continue to model and to plan for two Virginias a year and then the Columbia is layered in on their schedule and obviously, forward on its schedule. So, we don’t build that into our baseline and into our forecast and so any third Virginia would be an upside surprise. Now of course, there are interesting possibilities around this Arkus program, so we could see what that holds for us. But again, early days on that, and we don’t know what if any contributions we have to that program.

Got it. And then just David, on free cash flow, I know you have got the medium-term target, 85% or greater conversion based on one of your prior answers. I guess we get back to that maintenance CapEx spend in sort of 4Q of next year. So, any more directional color on free cash flow? I mean it’s a little bit better than this year, presumably as some of that CapEx winds down, but how should we be thinking about free cash flow?

Yes. So, we are– as we state in our long – medium-term guidance, we have given some ideas of what we are going to be giving back. ‘23 is the year where you will see a demonstratively jump in free cash flow because you are going to the maintenance CapEx. So, it would be a modest increase in ‘22. I mean we are not going to provide what that is, but CapEx is going to be lower, but it’s still very strong.

Got it. Alright. Great. Thanks guys. I will jump back in the queue.

Thanks Michael.

Our next question will come from David Strauss with Barclays. Please go ahead.

Good evening. Thanks for taking the question. The Savannah award, can you talk about what your share is on that amongst the TME arrangement and what could this be in annual revenue for you as the program kind of ramps up?

Yes. So David, we don’t typically disclose equity share for competitive reasons. And then on the revenue question, we don’t generally do not consolidate revenue on these kind of programs because we are normally in a minority equity interest position, even if we are the lead equity holder in the joint venture. So, we don’t bring across that revenue. And frankly, we don’t want to bring it across because of the margins that are associated to it. On the big management and operations jobs, those fee pools are in the 2%, 3% range and the environmental ones, maybe up to 5%, 6%, 7%. So, we don’t consolidate those margins and so – I am sorry, those revenues. And so you can think about this as an EBITDA booster to the business. So, the net effect of that kind of a business is to give us nice margin accretion when these large ones come in. So, you – what you will see is equity income across onto the books and nothing else.

Okay. And then the last question, you were talking about 85% free cash flow conversion on net income. What should – David, what should that number look like as converting EBITDA into free cash flow? Do you think you guys can convert at a 60%, 70% level of EBITDA into free cash flow once you get to that normal kind of CapEx levels?

Yes, I would have to calculate that. So, I mean I think that – right now, we will just talk about the 85% of free cash flow in the medium to long-term. But obviously, from an EBITDA standpoint, your EBITDA is growing because you do have depreciation growing in the out years. So – but I mean – so, we will give – stick to the free cash flow for a while and see how we go there.

Okay. And last one for me, still kind of yet to be determined whether this R&D capitalization will actually happen. But if it does, what kind of exposure do you guys have there, if any?

Very, very little.

Very little. Our budget as a percentage of sales is pretty modest there.

Alright. Thanks very much.

Thank you.

Thanks David.

Our next question will come from Ronald Epstein with Bank of America. Please go ahead.

Good evening guys. Can you give us a feel for the NPV of the CAS/FAS, or another way, I mean are there any significant pension prepayment balance that you guys have?

So, let me step back there a little for you. And first of all, I can give you the prepayment credits that we currently have is about $100 million. Obviously, we have talked at the beginning of the year, and we were still assuming a 4-year period of time. And now – so that you could have calculated what we thought the prepayment credits were then. And then what they are now assumed to be today. The big difference for us is the fact that when we started the year, we weren’t going to take advantage of the yield curves on the pension funding because we don’t really have funding. We are pretty well funded. But the other side of that coin is that the government decided to take advantage of that yield curve and what they pay us. And so that does make a change in our funding. So, when we got our actuarial results here in the third quarter, we saw all of that next 4 years push out quite a bit in time. The government now will be taking advantage of market returns and to help their funding. So, that takes away from our funding. So, that would be the biggest change. There was also some market returns in there. But the NPV – the $100 million just depends on when we have the funding that has to go out to determine how that cash would flow. But we got $100 million in credits roughly.

Got it. And what’s – how should we think about the organic growth for NOC?

For NOG, did you mean?

Yes. The NOG, yes.

Yes. I think we have laid out in the investor deck sort of a notional view of what that organic growth looks like. It’s the growth signal that we have is around Colombia and we have got that layered in into the future years.

Okay. And then maybe one last final one, how do we think about the margin performance when you guys have a lower level of long-lead materials? Is it right to assume that on the long lead stuff, it’s just lower margin?

No, when we have long lead materials in the mix, it tends to be a good margin for us. And so that’s a slightly better mix for us with long-lead materials.

So, on the margins, I also want to reiterate the fact that for years, we have been saying that our margins in the NOG business are going to be in the high-teens with room for improvement for CAS/FAS reimbursement. So, I reiterate that our margins in the NOG business will continue to be in the high-teens.

Got it. Okay. Thank you, guys.

Thanks.

Our next question is a follow-up from Pete Skibitski with Alembic Global. Please go ahead.

Yes. Thanks guys. I just want to see if I can tie it up on the CAS recoveries, David. So, we expect now that – because I think your CAS recovery, you plan that going to zero previously around 2024 or 2025. Is that still the case, or does that change down it stays around that $10 million to $12 million level for a longer period?

The CAS expense, I think we forecasted in our next – or in our presentation that next year, 2022, the recoverable CAS cost about $12 million. We do have some active plans, mainly hourly plans. So, there will always be some active costs inside of CAS that will carry out into the future, so.

Is that $12 million, is that a decent run rate to carry that out at for a while after 2022?

Yes.

Okay. And then maybe, Rex, can you ballpark us on the Nimitz refueling? I guess just a couple of things. The trimming doesn’t redeliver I think into like 2029, 2030. Did you guys just build ahead for that? And I was just wondering if you can maybe ballpark for us the magnitude of the headwind from refuelings in ‘22 and maybe ‘23?

Yes. Pete, we have never been specific about the scale of that because of some disclosure limitations that we have. But yes, we are – we have built ahead and the last unit is coming through the shops right now.

Okay. Rex, we need to wait maybe a couple of more weeks or so before we find out if we get a protest on Savannah River?

That’s right. It will be deep briefs are within about 1.5 weeks, I believe. And then there is either a 5-day or a 10-day protest period depending on which agency is involved in adjudicated protests. And so I think we would have real clarity about a month from now.

Okay, great. Thanks guys.

Thank you.

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

Thanks. This concludes today’s conference call. As a reminder, please join us in person or virtually on November 16th, for BWXT’s 2021 Investor Day. If you have further questions, please call me at 980-365-4300. Thank you again for joining us this evening.

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