BWX Technologies Inc (BWXT) 2015 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BWX Technologies, Inc 2015 earnings conference call.

(Operator Instructions)

I would now like to turn the call over to your host, Mr. Alan Nethery, BWXT's Vice President, Investor Relations and Corporate Procurement. Please go ahead.

We appreciate your joining us to discuss our 2015 fourth-quarter and full-year 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 risk and uncertainties, including those described in the Safe Harbor provision at the end of yesterday's press release, and the risk factors section of our most recent 10-K and 10-Q filings. These risks and uncertainties may cause actual Company results to differ materially, and we undertake no obligation to update these forward-looking statements, except where required by law.

On today's call, we may also provide non-GAAP financial measures that are reconciled in the yesterday's earnings release and our Company overview presentation, both of which are available on the investor relations section of BWXT.com. BWXT believes that the non-GAAP measures provide meaningful insight into the Company's operational performance, and provides these measures to investors to help facilitate comparisons of operating results with prior periods, and to assist them in understanding BWXT's ongoing operations. And with that, I will now turn the call over to John.

Thank you, Alan, and good morning everyone. Looking back over the past year, I am proud of what we have been able to achieve as a Company. We've successfully completed the spinoff of our former power generation business in July, with no significant issues. And in doing so, unlocked value for our shareholders, as evidenced by BWXT share price increase during the second half of 2015.

After the spin, we've maintained focus on execution, and delivered on the commitments we laid out for 2015. As a result, our adjusted or non-GAAP operating margin increased, from 15.1% in 2014 to 16.8% in 2015, and adjusted EPS came in above our guidance, at $1.42 for the year, a 7.6% increase over 2014.

Our GAAP operating margin was 14.5%, and GAAP EPS was $1.31. This growth was due in part to the successful restructuring of our nuclear energy business, as operating income grew by $25 million from a loss position of the prior year. Our nuclear energy segment accomplished its margin goal for 2015, and we believe it is on track to reach its previously announced margin target of 10% for 2016.

Furthermore, we executed on our balanced capital allocation strategy, and accelerated our share repurchase program, purchasing $52 million of BWXT stock in the fourth quarter. As we begin a new year, we will continue to drive value to our shareholders, by returning capital and delivering on our 2016 guidance, which we will discuss later in this call.

For the fourth quarter of 2015, our consolidated non-GAAP operating income was $62 million, and reached $238 million for the full year, 8.7% higher than 2014. Our GAAP fourth-quarter and fully-year 2015 operating income was $10 million and $206 million, respectively.

We accomplished year-over-year growth due to margin improvement in the nuclear energy segment, and a reduction in mPower spending, which was supported by a very good performance from our nuclear operations business, which had excellent margins, the result of terrific contract execution.

Our backlog stands at $2.7 billion at the end of December. The nuclear energy segment ended the year with a backlog of $335 million, a level not seen since the end of 2011. The segment's strong backlog heading into 2016 is expected to support the segment's continued margin expansion.

Bookings for the fourth quarter were $215 million, lighter than in the prior year, due to the timing of the nuclear operations segment's new pricing agreement, for 2016 awards and out-year options. Sandy will provide more detail regarding the status of the pricing agreement negotiations later in this call.

Despite the lower bookings for the year, nuclear operations backlog was $2.3 billion at the end of the year. We expect to complete this new pricing agreement negotiation in the next few weeks, establishing a new record backlog.

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 fourth-quarter and full-year results, and other financial matters.

Thanks, John. The nuclear operations segment's fourth-quarter 2015 results came in below its fourth-quarter 2014 results, due to beneficial contract amendments realized in the fourth quarter of 2014. Fourth-quarter revenues were $300 million, down from revenues of $344 million in the same quarter of 2014. And fourth-quarter operating income was $66 million, down from $90 million in the prior-year period.

Similarly, for 2015, nuclear operations revenue was down $41 million, and operating income was down $13 million compared to 2014. For the year, the effect of the contract amendments was partially offset by higher volume.

Operating income in our technical services segment was up $2 million in the fourth quarter of 2015, compared to the corresponding period of 2014, primarily due to higher fees realized at one of our sites. For the year, technical services operating income declined to $18 million, from $35 million in 2014, due to the contracts for the Pantex plant and the Y-12 National Security Complex ending in 2014, as well as the termination of our work scope for the American Centrifuge Program. Since the technical services segment primarily operates through unconsolidated joint ventures at its sites, revenue isn't particularly meaningful in this segment.

For the fourth quarter and for the year, revenues were relatively flat in the nuclear energy segment. The impact of a weakening Canadian dollar exchange rate over the year was offset by revenue growth in our US and Canadian services businesses, as well as the work on the China steam generator project.

Operating income increased from a loss of $19 million in the fourth quarter of 2014, to $2 million in the fourth quarter of 2015. For the year, operating income increased by $25 million, from a loss of $23 million in 2014, with the fourth quarter of 2014 impacted by a $16 million loss related to an adverse jury verdict.

However, if the loss was excluded from the 2014 results, nuclear energy still achieved impressive operating income growth, due to sound project execution, our margin improvement initiatives, growth in the higher margin equipment business, and growth in our nuclear services business. We delivered on our expectation of a low-single-digit margin for the segment, and we are on track to deliver on our 2016 promise to achieve a 10% operating profit margin for the year as announced at the end of the third quarter.

For 2015, we have good bookings in this segment of $229 million, primarily due to the recent steam generator win in China. As a result, our backlog in this segment is strong at $335 million, reaching levels not seen since 2011. We also recently announced the Bruce Power Memorandum of Understanding, which is expected to provide an additional lift to backlog in 2016. It is worth noting that revenue, operating income, bookings and backlog were all negatively impacted by the weakening of the Canadian dollar during 2015, but we were able to accomplish strong growth, and the segment is in a good position to continue growth in 2016.

For the year, the GAAP effective tax rate was 36.4%, slightly above our 2015 guidance of 34% to 36%, due to adjustments to the valuation allowance related to our legacy investment in Centrus Energy Corp, formally USEC, and the loss of certain capital loss carry-back opportunities. Our guidance for 2016 effective tax rate to be between 34% and 36% remains unchanged.

The Company's cash and investments positions, net of restricted cash, as of December 31, 2015, was $164 million, an increase of $28 million compared to $136 million at the end of 2014. Fourth-quarter cash flow represented a net source of cash from operating activities of approximately $91 million. BWXT's second half of the year cash flow is typically higher compared to the first half of the year, due to receipts of contract retention payments.

For the year, cash flow generated from operating activities, which is inclusive of cash flows generated from our former power generation business through the date of the spin, totaled $330 million, versus $75 million in 2014, primarily due to working capital and project cash flow improvements, as well as the proceeds from the legal judgment received in the third quarter.

The Company's capital expenditures for the quarter totaled $16 million, which is consistent with the capital expenditures in the fourth quarter of 2014. For the year, capital expenditures were $57 million, compared to $61 million in 2014.

Depreciation and amortization for the Company was $14 million in the fourth quarter, compared to $39 million in the same quarter last year. For 2015, depreciation and amortization decreased $18 million, from $75 million to $57 million. We expect capital expenditures in 2016 to be between $55 million and $60 million, with depreciation and amortization in a range of $40 million to $45 million, consistent with our previously provided guidance.

As of December 31, 2015, we have $300 million borrowing under the term loan, and letters of credit totaling $82 million under our credit facility. Our liquidity under the credit facility is $318 million, which excludes the additional $250 million accordion provision available to us for term loan and revolving credit borrowings, as well as letter of credit commitments. The $200 million delayed draw included in the credit facility expired at the end of 2015.

As John mentioned, during the fourth quarter of 2015, we accelerated our share repurchases, and repurchased 1.7 million shares of BWXT, at a total cost of $52 million, with an average share price of $29.84. This brings our total repurchases for 2015 up to 2.4 million shares, at a total cost of $70 million, with an average share price of $28.69. In October of 2015, our Board approved a new two-year $300 million share repurchase authorization, which will begin on February 26, 2016, after our existing authorization expires.

Now, I will hand the call over to Sandy, for a discussion of the operations and segment opportunities. Sandy?

Thanks, David, and good morning everyone. John and David have discussed in detail our strong full-year results, and I echo their remarks. I will now provide further details regarding our segments' operations in 2015 and going forward.

Our nuclear operations segment continued its very good performance during the fourth quarter. We were again able to achieve an impressive operating margin, due to smart execution on the backlog, realizing contract incentives for ongoing cost reductions.

As John mentioned, we continued discussions with our customers, regarding the next product pricing agreement for 2016 awards and subsequent year options. We expect to complete these negotiations during the first quarter of 2016, and for the placement of the 2016 options to occur within a few weeks thereafter.

With this schedule, we do not expect any disruptions to delivery or manufacturing schedules, going forward. Additionally, the timing of the award should have little impact on our 2016 results, since the contract awards will be for work planned later in the year.

We expect the total awards under this pricing agreement to be approximately $3 billion, inclusive of the work for our nuclear fuel services business. Looking ahead, we continue to perform well on our missile tube work, and are in discussions to perform more of this work, going forward. Additional tubes have been requested under our current work order, with a potential award date sometime in the second quarter of this year.

Proposals from lock two of this work are due next month, and could potentially be awarded in the third quarter of this year. Our customer has been pleased with our performance thus far, and we feel positive about our opportunity to capture additional market share in this space.

In addition to the missile tube work, we have several other opportunities for organic growth in the nuclear operations segment. The Ohio class replacement program is in the design development phase, and remains on schedule with our expectations.

We will begin production of this new class in 2018-2019, and have begun ramping up our capital expenditures to prepare for this work. The nuclear fuel services business has a pending award for a [thin metric ton dam lending] project expected to book in the first quarter, which will contribute to this business' very good performance.

And lastly, we are continuing to leverage our unique design and manufacturing capabilities and regulatory licenses, to pursue other opportunities in the medical target and emerging reactor markets. We recently were awarded a fuel contract for a research test reactor in Belgium, our first international success in several years.

Moving to nuclear energy, we started work on the Chinese steam generator design and build contract, which will ramp up this year. In addition, our Canadian services business performed well during 2015, as we have successfully completed added services in Bruce Power, and the US services business completed a very successful fall outage campaign at four sites.

We were also excited to announce the Memorandum of Understanding with Bruce Power, for supplying replacement steam generators for four Bruce units, requiring a total of 32 steam generators, worth between CAD400 million and CAD500 million. Bruce Power's total cost for the refurbishment is expected to be CAD13 billion, and we expect to perform additional equipment and service work during this life extension process, which would add to the previously mentioned total. We anticipate booking work related to this project starting in 2016.

OPG announced in early January that their Darlington life extension project was approved by the government. The project includes the refurbishment of four reactor units, and the total cost of the project is expected to be [CAD13 billion]. We've developed a great working relationship with OPG over the years, and are confident we can capitalize on this opportunity.

The work will have a similar scope to the Bruce Power life extension work, except steam generators will not be replaced. We believe that our portion of the work for OPG could be between CAD300 million and CAD400 million over the life of the project.

The technical services group continues to perform well on its current contracts, and remains especially active in the DOE Laboratory, national security and environmental management areas. We have now completed the transition to our management and operations role on the new SACOM project for NASA's Stennis and Michoud facilities, in Mississippi and Louisiana. We expect to transition off the Idaho treatment group advanced mixed waste project in late 2016, and have included this in our 2016 guidance for the segment.

We are optimistic regarding the segment's long-term growth prospects, and have submitted several recent proposals on project extensions, re-bids, and new contracts that would contribute to the segment's operating income growth, starting in 2017. In addition, we have several opportunities that could start in the next 24 months. A few of the more significant projects include management and operations of the Nevada National Security Site, the Savannah River Site, and Sandia National Laboratory.

That concludes the discussion of the segment operations. I will hand the call back over to John for a discussion of the Company's outlook for 2016.

Thank you, Sandy. The guidance we provided last quarter for 2016 remains unchanged, with the exception of our mPower project spending, which I'll discuss in a moment, and our EPS guidance. As explained in our press release, we are increasing EPS guidance by $0.05, and now see the full year at between $1.50 to $1.60. In addition, our Board has also evaluated our dividend, and approved a 50% increase, reflecting confidence in both near-term and long-term business prospects.

This increase, combined with our accelerated share repurchase activities, demonstrates our commitment to returning capital to our shareholders. Through February 19, we have repurchased almost 1.1 million shares, for $31.8 million, in 2016. For our segments, we expect the operating revenue to be consistent with the levels we've achieved in the last three years, and expect an operating margin in the high teens, with some potential for upside.

Since some of our contracts are set to expire in our technical services segment, and the upcoming contract awards are not expected to have a meaningful impact until 2017, we expect operating profit in the range of $15 million to $20 million, as we continue to focus on improving the business and adding new projects.

In our nuclear energy segment, we expect revenues between $160 million to $190 million. With the margin improvement plan still on track, we expect to achieve full-year operating margin of 10% at year end.

We are reducing our spending on mPower to less than $10 million annually, while we continue to evaluate options for the program with our partners. Our un-allocated corporate costs are expected to be between $15 million to $20 million, with an effective tax rate for the Company between 34% and 36%. For your reference, the full list of our 2016 guidance is included in the Company overview presentation that we issued yesterday evening.

To wrap up, we had a great year in 2015, and delivered on all of the objectives we laid out for our shareholders, post-spin. The Company finished an excellent year, with overall -- an excellent year overall, and we are in a great position for a strong 2016. We continue to execute on our balanced capital allocation approach, as seen with our decision to increase the dividend and accelerate our share repurchases. Furthermore, we have our acquisition platform up and running, and have developed a good pipeline of potential targets.

We have begun acting on that pipeline, and will continue to pursue opportunities, while maintaining a disciplined approach towards evaluating these targets. That concludes our prepared remarks. I will now turn the call over to the operator, who will assist us in taking questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Bob Labick of CJS Securities. Your line is open.

Good morning, congratulations on a nice quarter and 2015.

Thanks, Bob.

Thank you, Bob.

You talked about this a little bit on the call. I was hoping you could elaborate. You talked about the new pricing agreement that you expect to sign for 2016. And I know this is the normal course of business.

Could you talk a little about how it works, in relation to your existing projects, given that you do multiple-year projects, they take a long time. So your past work and pricing, does that stay intact? And then how does this impact what's going forward? And particularly, as it relates to the commodity environment, given the commodities are likely much lower than the last time you had a pricing agreement?

Yes, Bob, this is Sandy. I'll try to answer that for you. The pricing agreement we have been working -- we started a little late with that customer, began negotiations in the November/December timeframe. What we see for this agreement -- and we're in -- continuing negotiations right now -- that we will be completing that sometime in the March timeframe, and that is not unusual.

Our previous what we call market basket contracts, which are typically three-year buys -- agreement on price for three year buys of equipment. It's not any -- this one is not any different than the others we have signed. The first market basket was booked in late March, the following -- the beginning of the government year. Market baskets three and four were booked in late January.

So the fact that we haven't booked this one yet is not unusual, and is not exciting me at all. We are working toward completion of that, and expect to have it done by the end of March, as I said.

We watch commodity pricing very closely, on the material side. It does play a part in our ability to save money for our customer. And so we watch that market -- watch those markets closely. We take action where we need to, to facilitate getting that material in place as quickly as possible.

The -- as I said, it is a three-year buy. So we reach pricing agreement on what they want to buy in 2016, with options to buy equipment in 2017 and 2018. That is how it works. This is not any different than what we have experienced in the past, and I don't see it having any impact on our 2016 and go-forward numbers.

Okay, great. Thank you. And as it relates to the nuclear energy segment, you said you were tracking, obviously, to your guidance of 10% for the year for next year. I am assuming that means you ramp up, given that you are obviously below that, ending this year?

If that is the case -- I just want to verify if that is the case. And does that also mean that 2017 would be higher? Or -- given that you will start lower in 2016, and end higher than 10%, probably, in 2016?

Bob, I would say that it is going to be -- because of the commercial nature of that business, I would say that it is going to be a little lumpy. It is going to be up and down some, but we expect that when we complete the year, we will look back on the year collectively, and the margins collectively for the year will be around 10%. We feel fairly firm in our convictions in that area, so I don't consider it to be a straight ramp-up line. It's going to ramp up and down a bit, but it's going to achieve that 10% for the year.

We haven't really provided anything for 2017 at this time. We are taking a look at -- we will continue to take a look at our bookings, and where we go. We are excited about our prospects. What we are doing with Bruce is very exciting to us, to the Company. We are just going to have to see how all that materializes. And as soon as we have a firm footing on what we think 2017 will be, we'll let you.

Okay, fair enough. Figured I would try there. And congratulations on the Bruce Power. Could you just talk a little bit about -- I was unclear -- is that currently in the backlog? Or is that -- that's going to come into it, as we go through 2016?

That will be coming to us as we go through 2016. It is not in the backlog at this point.

Okay, terrific. All right, that's it for me right now. I will get back in queue. Thank you very much.

Thank you. Our next question is from Chase Jacobson of William Blair. Your line is open.

Hi. Good morning.

Good morning, Chase.

A couple questions. First, you mentioned some incremental CapEx required to ramp up the Ohio class program. Could you just give us some color on that, as to what it is for, and how much it might be? And then also, how that compares to CapEx that was required ahead of previous programs, Virginia class being the most relevant one?

Yes, Chase, this is Sandy. I will try to answer that. The CapEx -- the Ohio class replacement program is going to be a different kind of design. It is life of ship core. And even though we're still just in the design phase, we know there are some aspects of the manufacturing processes that are going to be different than what we have for past product. And so there are some capital needs for that, in the range of $20 million to $25 million that we have to put in place, to be able to manufacture the components.

I can't talk about specifically what that is. I know what it is, but it's process-related, and I can't discuss that here. And this is not a atypical of a first-of-a-kind cores and equipment that we've had to build, where we have to procure capital, in order to meet the needs of the program. So this is not unusual at all.

Okay, yes, $20 million to $25 million certainly sounds reasonable. On mPower, looking at their reduction there from 15 to 10, I think previously, your partner was a little bit concerned with the reduction previously. Can you just talk about how you're working through that? And with the reduction to 10, what are your thoughts on the future of the program, from here?

I don't think our thoughts have really changed substantially. We believe that we have a great technology. We feel that we have got a fabulous, robust design. We're concerned about the markets, and where the markets are, based upon things like the cost of natural gas, the lack of new nuclear structure in the world, et cetera. So those are all the concerns that we have continued to bear over the last several years.

We are having a very good dialogue with our partners about how to continue to proceed in the future. We are looking for opportunities. We don't consider this to be a throwaway. We consider it to be a longer-term play, and we're working into it, from that standpoint.

So we will keep you tuned in, if we -- as we continue to make developments in this area. The thing we are trying to do is, we're trying to prudently manage expenditures, but also trying to capitalize on opportunities as we see them.

Okay. And last one, on capital allocation -- I apologize if I missed it. But did you comment on pacing of further share repurchases, under the new program that starts in a few days? And what is baked into the guidance?

As we indicated, we've updated you on what we've purchased so far. We have given you a view as to what has been authorized for purchases in the future, and we have a concept on how we want to proceed on those. But I would not, at this point, try to give you a pacing set of guidance.

We're going to try to take advantage of the opportunities that we see there. We are going to try to buy, as we indicated before, at a more accelerated rate than we did in the past. I think we have demonstrated that in the fourth quarter and year to date today. And we are just going to continue to pursue that, and we will let you know where we end up when we get there.

Okay, thank you.

Thank you.

(Operator instructions)

Our next question is from the line of Kevin Ciabattoni of KeyBanc Capital.

Good morning guys. Thanks for taking my question.

Good morning, Kevin.

A couple of big picture questions. On the naval side of the business, is there a cadence there, in terms of build activity that you guys see? I suppose you'd be more on the carrier side than on Virginia class, just given the quantities. But I'm wondering if you could talk about that, given that you mentioned some timing impacting 4Q and the full-year results, versus the comps in the press release. Is there a predictable cadence there?

I think, Kevin, if you look at our -- when we spun off, we had a slide inside of our presentation that's still on the website, I think. And it showed a cadence, pretty much, from now to 2040. And two Virginia class every year, except for in some years, there's going to be an Ohio class and a Virginia class, and it gave you the carrier build. So we pretty much know what we're building for the next 25 years.

Right. But that hasn't changed at all, though, given what we have seen in the budget?

No, that's strong program.

Okay. And then, along those lines, now that we've got the president's budget out there, anything you've seen that's led you to adjust how you're thinking about the budgetary environment, or your specific programs?

No, we've analyzed the budget pretty closely, and it stacks up well to what we expected. There's not a whole lot new in it, but nothing was taken away, either. So we are in pretty good shape, opposite the budget.

Okay. And then, last one for me, going back to the bookings. You did a pretty good job of explaining the ongoing pricing negotiations. Was there anything else in the fourth quarter? Obviously, that was the bulk of it, but anything else that slipped out or didn't materialize, that you were expecting to see?

No.

No, I think we've mentioned the fact that we have got work coming into this year, from Bruce and other things. But there is nothing from fourth quarter, other than the fact that the normal market basket program with the government, we're in negotiations still, and that sometimes goes from fourth quarter to first quarter.

Okay. Thanks.

Thank you. Our next question is from the line of Nicholas Chen of Alembic Global.

Hi, guys. Good morning, and congratulations on a great quarter. In terms of the missile tubes, it sounds like you got more work under the current order you guys have. What is your confidence in becoming the exclusive provider of those?

This is Sandy. A pretty high confidence. We have built nine missile tubes so far under this program. That is nine more than anyone else has built, and we have done a great job with it. Our customer was very pleased with that, and we are in dialogue on adding to the quantity on the current contract.

And we are out putting our proposal together for block two, which will be for somewhere between 2 and 48 tubes. So feel pretty confident about our ability to manufacture the bulk of those units.

That's great. And then in terms of the M&A environment right now, it seems like the capital allocation, obviously, in Q4 is focused on additional share buybacks accelerated, and increasing the dividend. Is that a sign that the M&A environment isn't that appealing right now? Or what should we think of that?

No, it is not a sign of that at all. We have reasonably good cash generation, and we certainly have balance sheet capacity. We have a number of things that we're looking at, that we are attracted to.

But as I indicated on -- in some environments before, I think M&A is something that you look a lot, and you buy very few. And you buy things that you really like, and you're confident that you'd like to fit -- that they would fit strategically with where you're going as a Company. So that's the approach we're taking.

We are being very selective, but we are also being very aggressive. We have people dedicated to it. They work on it every day. And we have a number of things that we like.

So we're working through that process, and I think we certainly have the capacity, as we indicated in past to do all three. Provide a dividend, repurchase some level of shares back off the Street, and in addition to that, pursue some level of M&A, to incrementally add to the Company. And we continue to be on that track.

That's great. Thanks so much, guys. I will jump back into the queue.

Thank you. And I am not showing any further questions on the phone lines. I would now like to turn the call back over to Alan Nethery for any further remarks.

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

Ladies and gentlemen, thank you for your participation in today's program. You may all disconnect. Thank you all. Have a great day.