BWX Technologies Inc (BWXT) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And, welcome to the BWX Technologies, Inc's second-quarter 2015 earnings conference call.

(Operator Instructions)

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, sir.

Thank you, Ian. Good morning, everyone. We appreciate you joining us to discuss our 2015 second quarter results, which we reported yesterday afternoon. A copy of our press release is available on the Investor Relations section of our website at BWXT.com. Joining me this morning are John Fees, BWXT's Executive Chairman; Sandy Baker, 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 that are described in the Safe Harbor provision at the end of yesterday's press release, and the risk factor section of our most recent 10-K and 10-Q filings. These risks and uncertainties may cause actual Company results to differ materially. 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 BWXT.com. 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. With that, I will now turn the call over to John.

Thank you, Alan. And, good morning, everyone. Let me begin by saying it is my distinct pleasure to host this call. The first call for what is now BWX Technologies, or BWXT. It's an honor to have the opportunity, once again, to work with a strong leadership team, alongside a talented group of employees, in growing such a reputable company. I also look forward to my continuing engagement with many of you all participating in this call.

I'm pleased to report that we are off to a great start. We successfully completed the spin-off of our former Power Generation business and have delivered solid second quarter results, producing our expected $0.32 EPS, after adjustments. Our commercial nuclear segment had its best booking quarter in nearly five years. And with a strategic win at NASA, we expanded outside of our traditional DOE service business, by landing the SACOM contract. Our pipeline for new work is robust, and we have a number of exciting opportunities in front of us. And, we are financially strong. Each of our business segments continue to meet expectations in the second quarter, and have very good momentum going forward. Let me provide a few details. Consolidated revenues for the quarter were $357.1 million, 1.5% lower than the prior-year second quarter. And, adjusted earnings per share were $0.32, verses $0.35 in the second quarter of 2014. Non-GAAP operating income totaled $54.7 million for the period, a 4% increase over the second quarter of 2014. As I indicated, these results were in line with our second quarter expectations. Our backlog is strong and stands at $3 billion as of the end of June, $200 million higher than June of 2014. Bookings for the second quarter totaled $245.7 million, which is double the second quarter 2014 bookings of $119.5 million. This is primarily attributable to a recent success in the nuclear energy segment, related to an order to serve a market nation.

Before we get into the details of the operations and segment opportunities which Sandy will present, let me turn it over to David who will discuss the segment results and other financial matters.

Thanks, John. The Nuclear Operations segment reported strong second quarter revenues of $291.8 million, very close to the revenue of $293.4 million in the same quarter of 2014. The Nuclear Operations segment operating income in the quarter totaled $61.1 million, an increase of $2.5 million, compared to $58.7 million in the prior-year period. Return on sales was 21%, compared to 20% in the same period of 2014. The increase is due to operational efficiency improvements. Backlog in Nuclear Operations, at the end of the second quarter was $2.6 billion, essentially, unchanged from the same period last year. The nuclear energy segment revenues were $45.5 million in the second quarter of 2015, compared to revenues of $44.9 million in the corresponding period of 2014. The increase in revenues in the current quarter was primarily due to an increase in our nuclear services business, attributed to outage work, both in Canada and the US. Operating income in the quarter increased by $0.8 million, to $2.4 million in the second quarter, compared to operating income of $1.5 million in the second quarter of 2014. Primarily, the result of improved operating performance in our nuclear services business, and our ongoing efforts to restructure the segment to produce increased returns. Return on sales was 5.2%, compared to the 3.4% in the same period of 2014. Our backlog position in this segment has strengthened significantly and, there are a number of additional opportunities in the pipeline. Backlog at the end of the second quarter of 2015 was $380.5 million, an increase of $188.1 million, compared to $192.5 million a year ago. This is our highest backlog in the nuclear energy segment since December of 2011. Operating income and technical services decreased $9.6 million, to $5.5 million, compared to $15.1 million in the corresponding period of 2014, primarily, due to the loss of the Pantex and Y-12 contracts. Most of the earnings in technical services flow through our financials as equity income, so revenue isn't particularly meaningful in this segment.

We are still on track to spend $15 million on mPower for 2015, to align with existing market conditions. In the quarter, mPower spending was $4.5 million, compared to $31.9 million in the second quarter of 2014. A decrease of $27.4 million, year over year, due to the restructuring of the program with a focuses on technology development. The Company incurred $15.9 million in asset impairments, related to mPower, as a result of the significant adverse changes experienced in the business prospects of the mPower program. For the second quarter of 2015, the Company's GAAP effective tax rate was approximately 104.7%, as compared to 29.2% for the last year's second quarter. The non-GAAP effective tax rate was approximately 34.5%, as compared to 31.5% for last year's second quarter. The high effective GAAP tax rate, when prepared to the US statutory federal rate, was driven by the revaluation of our deferred tax assets and liabilities, due to the spin-off. In addition, we also recognized tax provisions on our global earnings, at our US federal statutory rate, due to the likely repatriation of future foreign earnings, now that our global tax footprint is predominantly domestic. We expect a return to a more normal effective tax rate in subsequent quarters, in the range of 34% to 36%.

The Company's cash and investments position, net of restricted cash, as of June 30, 2015, was $58.7 million, a decrease of $77.3 million, compared to $136.1 million at the end of 2014. The decrease in cash is primarily attributable to the $132 million cash payment to our former Power Generation business, to complete the spin, dividend payments and capital expenditures which were partially offset by the $36 million Prairie Island settlement, and cash flow from operations. The $132 million cash payment is a component of the $308 million of cash that was distributed to our former Power Generation business. BWXT's first half of the year cash flow is typically lower, compared to the end of the year, due to customer receipts and contract retention payments being made by year end. Year-to-date cash flow, generated from operating activities, totaled $83.3 million, verses the net usage of $107.7 million in the prior year-to-date period, primarily, due to working capital and project cash flow improvements. At the completion of the spin-off, our new credit facility became effective. As of June 30, 2015, we have repaid all indebtedness under the former secured credit facility. And, have $300 million borrowing under the term loan, and $30 million borrowed under the revolver to provide for working capital. There is a $200 million delay-draw feature under the term loan that expires December 31, 2015. Our liquidity is $498 million, and obligations under the new credit facility are scheduled to mature in 2020.

The Company's capital expenditures for the quarter totaled $13.6 million, which is consistent with the capital expenditures in the second quarter of 2014. Depreciation and amortization for the Company was a little over $15 million in the second quarter, compared to $12.3 million in the same quarter last year. We expect depreciation and amortization for the second half of 2015 to be near, or under the D&A level at the first half of the year. Now, I'll hand the call over to Sandy, for a discussion on the operations and segment opportunity. Sandy?

Thanks, David. Before discussing the individual segment details, let me touch on three highlights for the quarter. First, our production execution was strong across the business. We experienced improved contract performance and continue to provide high quality and consistent product delivery across all segments. Secondly, we delivered robust financial results, increasing adjusted operating income compared to the same period last year, while supporting spin-related activities. And third, we continue to generate significant cash from ongoing operations, which enables us to support our growth initiatives, as well as return capital to our shareholders.

Moving to the segment reviews, our Nuclear Operations business again delivered strong, stable results. We increased operating income on slightly lower revenue, compared to the second quarter of 2014, as a result of smart execution on our contracts. The nuclear fuel services operation, which manufactures nuclear fuel for the US Navy, and supports nuclear non-proliferation through downblending activities, continued to deliver solid results and improved operating and safety performance. Now, looking through the quarter, we're $22 million stronger and backlog $20 million higher, than the same period last year. The Nuclear Operations segment continues to consistently deliver operating cash, providing the platform for our capital deployment initiatives. Looking ahead, we have several opportunities for organic growth in the Nuclear Operations segment. We won a competitive bid to build missile tubes for use by the US Navy. And, are excited about the opportunities available in this adjacent market. The market for this product line is valued at $1.5 billion, and extends for 15 years to 20 years. We are well positioned to be a major participant.

The Ohio class replacement program is in the design and development phase, and we will begin production efforts in 2018, 2019, for this new class. We are exploring additional manufacturing opportunities for the shipyards. And, are continuing to leverage our unique capabilities, and regulatory licenses, to pursue other commercial activities regarding medical targets and emerging reactor designs.

Moving to nuclear energy, the segment's financials have continued to improve, due to the successes of our cost restructuring initiatives. That restructure is progressing the plan. We expect full-year margins to be in the low-single digits for 2015. However, we expect to achieve 10% full-year margins by the end of 2016. These restructuring efforts better position us to capitalize on the significant bookings we realized in the second quarter, which are more than double what we achieved in the same quarter last year, and the highest booking quarter for this segment in nearly five years. The nuclear energy business is anticipated to grow in 2016, and beyond, due to opportunities in Canada, Asia and Europe. In Canada, engineering and procurement activity supporting live extension of the full reactors at Ontario Power Generation's Darlington station, are underway. We have also received orders to supply high-level waste containers and replacement reactor components, as well as orders for service work that will commence later in 2016. In addition, we anticipate that Bruce Power will announce life extension projects for up to six reactors, with execution occurring between 2020 and 2035. The engineering and procurement of long-lead components in support of the Bruce Power projects will provide us with opportunities starting in 2016.

In eastern Europe, modest growth is expected, due to significant need for maintenance services on steam generators in Romania. If awarded this contract, it would potentially be our largest ever for international services. Our component supply business will also experience significant growth during 2016, due to design and supply contracts for the new plant market in Asia.

The technical services group continues to be a major federal contractor, especially active in the DOE laboratory, national security and environmental management areas. And, remains committed to, and focused on, excellent performance across its operations projects. We are optimistic about the segment's prospects for growth, going forward, as evidenced by BWXT's recent successful diversification into NASA, with the award of the contract to operate both Stennis Space Flight Center and the Michoud Assembly Facility. Though operating income for the first six months was below our full-year run rate, TSG remains on track to deliver $15 million to $20 million of operating income for the year. Looking forward, TSG is actively positioning for significant DOE opportunities, over the next two years that include management and operations of Sandia National Laboratory, The Savannah River site and the Nevada Nuclear Security site. That concludes our discussion on segment operations. I'll hand the call back over to John for a discussion on the Company's outlook of the remainder of 2015. John?

Thanks, Sandy. At our Investor Analyst Day held in June, we provided guidance for 2015 on a segment basis. That guidance remains unchanged. We expect the Nuclear Operations segment to achieve revenues consistent with levels achieved in the last two years, and operating margins to be in the high teens for the second half of this year. For TSG, we anticipate achieving an operating income in the range of $15 million to $20 million. We expect nuclear energy revenues to be between $150 million to $175 million, with an operating margin in low-single digits. Given our year-to-date performance, we are on track to deliver those results in each business. Additionally, we are maintaining our expected 2015 EPS guidance of between $1.30 and $1.40 per share. To wrap up, I would like to emphasize that the second quarter demonstrates the commitment, quality and strength of our Company and more importantly, of our employees and leadership team. As we successfully completed the spin-off of the former Power Generation business, we remain focused on safe execution and delivering quality to our customers. Energy continues to be a solid Core business, with strong margins while NE has positioned itself well, for margin improvement, and TSG is on the path towards growth. We see good prospects in all three of our business segments, to deliver EPS growth in the second half of the year, and create value for our shareholders.

That concludes our prepared remarks. I will now turn the call back over to the operator, who will assist us in taking questions. Thank you.

Thank you.

(Operator Instructions)

Bob Labick, CJS Securities.

Good morning. Congratulations on the successful spin of PPG and a nice Q2.

Thank you, Bob.

Absolutely. There was a recent article in the Wall Street Journal about Huntington Ingalls laying off people, due to a lull in shipbuilding for them. Given that you work closely with them, can you discuss if you are impacted? And, if not, how your build schedule would be different than they?

That is a very good question. If you take a look at our procurements, our procurements are in advance of activities that happen in the shipyard. Proceeding, sometimes, by very many years. And as a result of that, there is a tremendous level of consistency that we have in our volumes, as we proceed into the future on these programs. We typically don't have the kind of swings you would have, with major programs coming in and going out on a more cyclical type of a basis.

And so, it is a very big distinction between our business and some of the major aerospace and defense businesses that may have a thrust of volume, and then change in the future. We have consistently seen in the past and expect, consistently in the future, to be able to very reliably predict our volumes. And, not have big swings that would impact employment. And, volumes that we could not foresee, anticipate and otherwise.

Okay, great, thank you. And then, obviously, you noted very strong bookings on the nuclear energy side. Is there anything rolling off, or should that translate to accelerated growth? Could you give us a sense of the three-to-five-year growth rate, given those bookings and some of the exciting opportunities that you just highlighted, that you are bidding on for nuclear energy?

We feel that the increase in bookings in 2015, for the NE segment, will allow us to have more robust revenues in 2016, 2017 and beyond. We will be providing more revenue guidance, as far as 2016, as we get further in the year. But, we do anticipate that we will not see much of that in 2015 at all. But, it will help us increase 2016 and 2017, to get us to our growth rate we need to achieve.

It's very exciting for us, that we have been able to successfully complete -- and we're not fully complete, but we are completing a cost restructuring and facility restructuring of that business. That combined with some very interesting bookings for us, that have opened up some other potential markets for us, is really terrific news. And, we are sort of at the forefront of that activity. I think the success in Asia has been very important. And again, we'll continue to pursue that and provide additional details as we go forward.

Okay. Great. And then, if I could sneak one last one in. You discussed some nice organic growth opportunities. Could you just remind us of your thoughts about M&A, the outlook? And then, your capital allocation expectations, or strategy, going forward?

Well, as we discussed at the Investor Day, our thinking has not changed much at all. We have indicated that we had three legs to capital allocation, that we were pursuing. One is the issuance of a dividend, which we have done $0.06 per share this quarter. And, the Board will continue to evaluate the appropriateness and the level of that, as we go into the future.

In addition to that, we have in place a $250 million authorization for repurchase of shares. That program is active, and implemented. And, we will provide you updates on a quarterly basis, as to what progress we are making against that particular activity. Obviously, in this report that we put out, it's at the end of the June quarter. Of which, the shares were not really available until this current quarter that we are in. So, just be aware that the program is active, and it's being worked as appropriately. In accordance with what we, as Management and the Board, determine to pursue.

And further, we believe we still have capacity for some strategic acquisitions. We continue to look in that area. We are active. We don't have anything really to discuss today, any further than that. But, it is active. And, we are working on seeing some things that are consistent with our strategy, to be able to pursue our existing and our adjacent markets. Again, our concentration is going to be in things that we know, and we understand, and that is our focus.

Terrific. Thank you very much.

Chase Jacobson, William Blair.

Good morning.

Hi, Chase.

So, margin in Nuclear Operations, clearly it continues to outperform the expectations of high teens. With respect to that, if you can talk about the sustainability of that? And, tie in any update on the contract negotiations for the next phase of that contract? And also, how the mechanics of a transition, from the current contract to the next, work? Does it stop the work on the existing one, and you move directly to the next one? Or, is there a period where there is work on both contracts?

Yes, Chase. This is Sandy. I'll try to answer that for you. From the high margin perspective, we would like to think that it's sustainable. However, it's hard to predict that. Most of that margin improvement from the [ASO] numbers is due to execution in the shop. And, the prediction of that is relatively hard to do. So, we're holding our forecast for the rest of the year, that we'll be in the high teens, as compared to where we are today. So again, predictability's a little difficult.

We are just beginning the discussions on the next major contract with our customer. That will continue on, probably, for the next several months, looking for a conclusion of that in late October, early November. That is where we would like to see that. The one contract does not end, and another start. We have -- we're doing work on probably 100 contracts today, line items in contracts. We have four active, large contracts that we booked, starting in 2006, we're still doing work on. So, it's a continuation. It's an overlap. It's multiple contracts in production at the same time.

And, Chase, just a point too. When Sandy talks about predictability, it's more in that area of, when we give guidance to say we are going to be somewhere in the high teens, it's that range between there and what we have seen in recent quarters. We have the ability of being able to look at our backlog and our percent complete. Our projections on our backlog, and we understand that. But, that takes us into this other space.

And as Sandy has indicated, if we have excellent performance in our shops and we very aggressively manage our costs, we can produce these other numbers. And, we're geared towards that end. But, the ability to predict that rationally, on an ongoing basis, is to say that, we produce over 20 this quarter. Why aren't we predicting 20 in the next quarter. It falls into that realm. That is why we always indicate that we are somewhere in this high-teens range. Because, we feel that that is very reliable and very solid.

Okay. Thank you. And then, you have been talking about this missile tube opportunity for a bit. You mentioned a $1.5 billion market opportunity over the next 15 years to 20 years. Can you maybe expand on that a little bit, as to give us some idea of what BWXT's share of that could be? And, when you think that could become more meaningful to your Business?

Well, we have the first -- the initial contract is booked. We are actively manufacturing today. And, that will be followed up by subsequent contracts through the period that I described. It is about a billion and a half. It's 300 plus tubes. It's for our higher-class replacement submarines. It's for Virginia class submarines. So, it's a sizable market.

There are a couple of competitors to us right now. We expect that to be reduced to, probably, two in the future. We plan to be one of them. So, in looking at that -- again, in a competitive environment going forward, it's hard to predict what you are going to see. But, we have been very successful so far, and I think that success is going to lead to a major position in the missile tube manufacturing contracts going forward.

Okay. And then just last one here. There was a pretty large transfer of cash to the power business this quarter. I think it was based on their performance. Can you just confirm that any transfers between the Companies are kind of done at this point?

Yes, we have. Everything's settled between us and the spin-off of the Power Generation group. They have their cash, we have our cash. So from here on out, going forth with our own.

Perfect. Thank you

Thank you.

(Operator Instructions)

Tahira Afzal, KeyBanc.

Hi folks. Congrats on the strong quarter.

Thank you, Tahira.

I guess my first question is really a follow-up to what Chase was asking. To assume high teens for the full year, you would have to see your margins drop off by, let's say, 300 basis points, I believe sequentially. So, I would like to get a sense of if you've looked at -- You guys had a good idea of why execution is performing better than expected. But, can you see sequential dips and fluctuations of that amount, without any real contractual changes that are flowing through the numbers? Just on pure execution?

Tahira, let me clarify a little bit. We really don't see a degradation of performance against that high-teens goal, an expectation going forward. We really don't see us significantly decaying in the rest of the year. We just say that we believe that, subsequent quarters going forward are going to be delivered at about that range, based upon our contracts, our backlog and our predictions against those contracts. That's the view that we have on that. We are really not looking at deteriorating at this point. We are looking at maintaining our performance at that level. And again, we'll continue to work on opportunities that may be available for us to deliver.

And, in your prepared commentary, you talked about you mentioned about some more opportunities at shipyards for nuclear ops. I would love to get a better idea, some more color on what type of opportunities those could be.

This is Sandy. As a result of the missile tube contract that we have, and the job we're doing there, we're seeing opportunities. Other opportunities manifest themselves for manufacturing hardware in at least one of the shipyards. So, it's metal manufacturing much like we do now. High-consequence stuff. And so, we're actively responding to RFP's for that kind of work.

We're also looking at a medical target business, particularly in Europe and Australia. There are opportunities there. We have manufactured medical targets in the past, domestically. And, we see an opportunity, internationally, to gain some ground in that arena. Also, in our research and test reactor business. There are opportunities, internationally. Again, particularly in Australia and Europe. And, we are actively providing proposals for work in that arena.

Got it, okay. And Sandy, when you -- before the spin, if I rewind back a year or two, I have always thought of that part of the business, and what is now BWXT, as sort of more plotting along what it was doing, to a great degree. Has the spin-off, or the lead into the spin-off, actually sort of rejuvenated your work force, and yourselves, to really explore these opportunities? Or, have they always been on the map, and it's just that now, we are starting to see more action on them?

Tahira, it's probably a combination. One of the major thrusts in doing this was to concentrate the focus of management, focus on capital. And, I believe that we're seeing that in both sides of the business. A lot of the initiatives and things didn't just fall out of the sky in the last 30 days. These are things that have been on the table. We have been working on them. There has been a lot of energy towards them.

And so, I attribute the ideas and the initiatives, as the way that we were running the consolidated company. But, there's no question that, when you narrow the focus down, it has an impact. That was always part of the plan of management and the Board, when we announced that we recommend pursuing this spin. I believe it's a combination.

My last question is more on the technical services side. It's interesting you have made some strides with NASA. I would love to get a little more color on what you can do there. And, as you have gone through and established that relationship, what else you can do for them? Given that you have a lot of experience with liquid fuels, et cetera. I would love to get a sense if you could, actually, really take your expertise and take it even to the commercial space benches out there.

Yes, Tahira. I think you're exactly right. Our expertise, our people, our background in that business is great. And looking at the forecast, looking at what is coming down the pipe, there are lots of opportunities inside the federal services business that we have, we'll have to garner a bigger role.

Certainly, looking at the commercial side, there are opportunities. I think the step into the NASA side of the business, with Stennis and Michoud, is a steppingstone for a larger piece of the pie there. And, there are opportunities on the DOD side, that we certainly are equipped to do and perform. And, we'll be looking at those as well. Lots of opportunities for us in that arena.

Thank you very much, folks. And congrats again.

Thank you.

Rob Norfleet, Alembic Global Advisors

Hi, good morning, guys. This is actually Nick Chen for Rob Norfleet this morning. Thanks so much for taking our question. Just a quick update on mPower would be useful. We know the reduced CapEx is going to be in the $15 million range. Are there any updates there, in terms of finding a partner for the program? Or, maybe selling down some of the ownership? Are there any ways to get the spend down further, from current levels, in 2016?

Yes, just a few views on that. We really believe that there has been an adverse change in the markets associated with where we were going with this technology. We developed a great reactor. Technically, we did a fabulous job. I think we have something that was robust and competitive. But, with a combination of reduced power demand combined with very low natural gas prices, tremendous fracking is maybe one of the most disruptive technologies that's happened in my professional career. And, it certainly has had a major impact in this particular area.

But with that, it hasn't diminished our interest in being able to capitalize on the investment that we have made. We still have a few vehicles and angles that we are pursuing on that. We haven't exhausted all the possibilities. We are continuing to provide a certain level of funding, associated with that. I believe that, if things stay the way that they are today, I see us not exceeding, or potentially even slightly reducing, the amount of funding that we're providing, going forward.

Obviously, we're not going to continue to invest in something that has no strong outlook, going forward. But, we haven't exhausted all the possibilities. We are still making some smaller, albeit smaller, investment into technology. And, we're still pursuing some alternatives there. In addition to that, as we have seen in the quarter, we're not limited to that.

We certainly have made some entrees into places like Asia, with commercial nuclear technology. We are working on, albeit at a very small level, some other alternative reactor technology for other partners. So, there is a capability there that we believe is important, that we'd really like to maintain. But, we're trying to be very prudent in management of our investments, in light of where the market has made itself apparent to the world, and everyone.

Sure. That is really helpful. And then, finally, just in terms of the Nimitz-class carriers. Is funding still intact for that program? And, should we expect any sort of contribution in 2016 from it?

The Nimitz-class, as far as our business is concerned, is mostly on the refuel side. So, for the major overhauls that are done in the shipyard, we have just booked another refuel for the Nimitz-class. And, I think there is one more to go in the next package. And then, that will complete all the refuels for the Nimitz. The Four Class is the new class. And we're building, and delivered, the reactors for the first ship, and working on the second.

That is really helpful. Thanks so much, guys. And, congratulations again on the strong quarter.

Thank you.

Thank you, Rob. There is no further questions. I'll now hand the call back to Alan Nethery for closing remarks. Please go ahead.

Thank you for joining us this morning. That concludes our conference call. A replay of the call will be posted on our website later today, will be available for a limited time. If you have further questions, please reach out to me at (980)365-4300. Thanks. Have a great day.

Thank you. Ladies and gentlemen, that concludes your conference. You may now disconnect. Have a good day.