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EX-31.1 - EXHIBIT 31.1 - BWX Technologies, Inc.exhibit311_93018x10q.htm
EX-32.2 - EXHIBIT 32.2 - BWX Technologies, Inc.exhibit322_93018x10q.htm
EX-32.1 - EXHIBIT 32.1 - BWX Technologies, Inc.exhibit321_93018x10q.htm
EX-31.2 - EXHIBIT 31.2 - BWX Technologies, Inc.exhibit312_93018x10q.htm
EX-3.3 - EXHIBIT 3.3 - BWX Technologies, Inc.exhibit33_93018x10q.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 __________________________________________________ 
FORM 10-Q
 __________________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File No. 001-34658
 BWX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
  __________________________________________________ 
DELAWARE
 
80-0558025
(State of Incorporation
or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
800 MAIN STREET, 4TH FLOOR
 
 
LYNCHBURG, VIRGINIA
 
24504
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (980) 365-4300
  __________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant's common stock outstanding at November 2, 2018 was 98,726,135.



BWX TECHNOLOGIES, INC.
INDEX - FORM 10-Q
 
 
 
PAGE
 
 
 
 
 
 
September 30, 2018 and December 31, 2017 (Unaudited)
 
 
 
Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)
 
 
 
Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)
 
 
 
Nine Months Ended September 30, 2018 and 2017 (Unaudited)
 
 
 
Nine Months Ended September 30, 2018 and 2017 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


PART I
FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
 
 
September 30,
2018
 
December 31,
2017
 
 
(Unaudited)
(In thousands)
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
66,125

 
$
203,404

Restricted cash and cash equivalents
 
4,359

 
7,105

Investments
 
2,732

 
2,934

Accounts receivable – trade, net
 
194,575

 
189,217

Accounts receivable – other
 
46,183

 
19,365

Contracts in progress
 
326,355

 
420,628

Other current assets
 
44,528

 
30,437

Total Current Assets
 
684,857

 
873,090

Property, Plant and Equipment
 
1,073,893

 
1,013,141

Less accumulated depreciation
 
684,530

 
664,512

Net Property, Plant and Equipment
 
389,363

 
348,629

Investments
 
8,604

 
9,301

Goodwill
 
278,939

 
218,331

Deferred Income Taxes
 
45,105

 
86,740

Investments in Unconsolidated Affiliates
 
62,160

 
43,266

Intangible Assets
 
240,081

 
110,405

Other Assets
 
26,595

 
22,577

TOTAL
 
$
1,735,704

 
$
1,712,339

See accompanying notes to condensed consolidated financial statements.

2


BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
September 30,
2018
 
December 31,
2017
 
 
(Unaudited)
(In thousands, except share
and per share amounts)
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
14,745

 
$
27,870

Accounts payable
 
100,004

 
93,421

Accrued employee benefits
 
74,398

 
82,477

Accrued liabilities – other
 
53,508

 
64,738

Advance billings on contracts
 
104,646

 
246,192

Accrued warranty expense
 
12,426

 
13,428

Total Current Liabilities
 
359,727

 
528,126

Long-Term Debt
 
756,492

 
481,059

Accumulated Postretirement Benefit Obligation
 
20,111

 
21,368

Environmental Liabilities
 
89,429

 
79,786

Pension Liability
 
102,093

 
296,444

Other Liabilities
 
15,351

 
19,799

Commitments and Contingencies (Note 5)
 

 

Stockholders' Equity:
 
 
 
 
Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 125,796,671 and 125,381,591 shares at September 30, 2018 and December 31, 2017, respectively
 
1,258

 
1,254

Preferred stock, par value $0.01 per share, authorized 75,000,000 shares; No shares issued
 

 

Capital in excess of par value
 
112,300

 
98,843

Retained earnings
 
1,159,552

 
990,652

Treasury stock at cost, 27,070,536 and 25,964,088 shares at September 30, 2018 and December 31, 2017, respectively
 
(884,200
)
 
(814,809
)
Accumulated other comprehensive income
 
3,542

 
9,454

Stockholders' Equity – BWX Technologies, Inc.
 
392,452

 
285,394

Noncontrolling interest
 
49

 
363

Total Stockholders' Equity
 
392,501

 
285,757

TOTAL
 
$
1,735,704

 
$
1,712,339

See accompanying notes to condensed consolidated financial statements.


3


BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
(In thousands, except share and per share amounts)
Revenues
 
$
425,507

 
$
419,360

 
$
1,321,891

 
$
1,257,600

Costs and Expenses:
 
 
 
 
 
 
 
 
Cost of operations
 
326,314

 
302,267

 
971,887

 
883,839

Research and development costs
 
3,959

 
2,597

 
11,673

 
5,268

Losses (gains) on asset disposals and impairments, net
 
243

 
(2
)
 
(2
)
 
(33
)
Selling, general and administrative expenses
 
53,919

 
51,351

 
159,199

 
150,881

Total Costs and Expenses
 
384,435

 
356,213

 
1,142,757

 
1,039,955

Equity in Income of Investees
 
9,323

 
3,630

 
22,698

 
10,832

Operating Income
 
50,395

 
66,777

 
201,832

 
228,477

Other Income (Expense):
 
 
 
 
 
 
 
 
Interest income
 
1,121

 
402

 
2,340

 
750

Interest expense
 
(7,925
)
 
(3,837
)
 
(19,354
)
 
(11,260
)
Other – net
 
40,968

 
7,252

 
63,984

 
21,487

Total Other Income (Expense)
 
34,164

 
3,817

 
46,970

 
10,977

Income before Provision for Income Taxes
 
84,559

 
70,594

 
248,802

 
239,454

Provision for Income Taxes
 
6,482

 
23,901

 
43,578

 
75,556

Net Income
 
$
78,077

 
$
46,693

 
$
205,224

 
$
163,898

Net Income Attributable to Noncontrolling Interest
 
(158
)
 
(140
)
 
(201
)
 
(364
)
Net Income Attributable to BWX Technologies, Inc.
 
$
77,919

 
$
46,553

 
$
205,023

 
$
163,534

Earnings per Common Share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
0.78

 
$
0.47

 
$
2.06

 
$
1.65

Diluted:
 
 
 
 
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
0.78

 
$
0.46

 
$
2.04

 
$
1.63

Shares used in the computation of earnings per share (Note 10):
 
 
 
 
 
 
 
 
Basic
 
99,421,031

 
99,328,677

 
99,542,933

 
99,313,264

Diluted
 
100,420,766

 
100,260,255

 
100,501,597

 
100,367,383

See accompanying notes to condensed consolidated financial statements.

4


BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
(In thousands)
Net Income
 
$
78,077

 
$
46,693

 
$
205,224

 
$
163,898

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
Currency translation adjustments
 
2,008

 
4,590

 
(4,725
)
 
7,425

Derivative financial instruments:
 
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period, net of tax benefit (provision) of $24, $90, $(5) and $(149), respectively
 
(39
)
 
(259
)
 
7

 
429

Reclassification adjustment for (gains) losses included in net income, net of tax provision (benefit) of $7, $(71), $16 and $0, respectively
 
(26
)
 
204

 
(41
)
 
(3
)
Amortization of benefit plan costs, net of tax benefit of $(78), $(146), $(286) and $(459), respectively
 
360

 
282

 
1,145

 
861

Investments:
 
 
 
 
 
 
 
 
Unrealized losses arising during the period, net of tax benefit (provision) of $270, $(52), $270 and $(182), respectively
 
(388
)
 
(227
)
 
(432
)
 
(1,531
)
Reclassification adjustment for losses (gains) included in net income, net of tax provision of $25, $5, $25 and $19, respectively
 
379

 
(9
)
 
379

 
(143
)
Other Comprehensive Income (Loss)
 
2,294

 
4,581

 
(3,667
)
 
7,038

Total Comprehensive Income
 
80,371

 
51,274

 
201,557

 
170,936

Comprehensive Income Attributable to Noncontrolling Interest
 
(158
)
 
(140
)
 
(201
)
 
(364
)
Comprehensive Income Attributable to BWX Technologies, Inc.
 
$
80,213

 
$
51,134

 
$
201,356

 
$
170,572

See accompanying notes to condensed consolidated financial statements.

5


BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
 
 
Common Stock
 
Capital In
Excess of
Par Value
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
 
 
 
 
Total
Stockholders'
Equity
 
 
Shares
 
Par
Value
 
 
Retained
Earnings
 
 
Treasury
Stock
 
Stockholders'
Equity
 
Noncontrolling
Interest
 
 
 
 
 
(In thousands, except share and per share amounts)
Balance December 31, 2017
 
125,381,591

 
$
1,254

 
$
98,843

 
$
990,652

 
$
9,454

 
$
(814,809
)
 
$
285,394

 
$
363

 
$
285,757

Recently adopted accounting standards
 

 

 

 
12,171

 
(2,245
)
 

 
9,926

 


 
9,926

Net income
 

 

 

 
205,023

 

 

 
205,023

 
201

 
205,224

Dividends declared ($0.48 per share)
 

 

 

 
(48,294
)
 

 

 
(48,294
)
 

 
(48,294
)
Currency translation adjustments
 

 

 

 

 
(4,725
)
 

 
(4,725
)
 

 
(4,725
)
Derivative financial instruments
 

 

 

 

 
(34
)
 

 
(34
)
 

 
(34
)
Defined benefit obligations
 

 

 

 

 
1,145

 

 
1,145

 

 
1,145

Available-for-sale investments
 

 

 

 

 
(53
)
 

 
(53
)
 

 
(53
)
Exercise of stock options
 
207,686

 
2

 
4,940

 

 

 

 
4,942

 

 
4,942

Shares placed in treasury
 

 

 

 

 

 
(69,391
)
 
(69,391
)
 

 
(69,391
)
Stock-based compensation charges
 
207,394

 
2

 
8,517

 

 

 

 
8,519

 

 
8,519

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(515
)
 
(515
)
Balance September 30, 2018 (unaudited)
 
125,796,671

 
$
1,258

 
$
112,300

 
$
1,159,552

 
$
3,542

 
$
(884,200
)
 
$
392,452

 
$
49

 
$
392,501

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
 
124,149,609

 
$
1,241

 
$
22,018

 
$
885,117

 
$
3,811

 
$
(762,169
)
 
$
150,018

 
$
392

 
$
150,410

Net income
 

 

 

 
163,534

 

 

 
163,534

 
364

 
163,898

Dividends declared ($0.31 per share)
 

 

 

 
(31,107
)
 

 

 
(31,107
)
 

 
(31,107
)
Currency translation adjustments
 

 

 

 

 
7,425

 

 
7,425

 

 
7,425

Derivative financial instruments
 

 

 

 

 
426

 

 
426

 

 
426

Defined benefit obligations
 

 

 

 

 
861

 

 
861

 

 
861

Available-for-sale investments
 

 

 

 

 
(1,674
)
 

 
(1,674
)
 

 
(1,674
)
Exercise of stock options
 
874,872

 
9

 
20,602

 

 

 

 
20,611

 

 
20,611

Shares placed in treasury
 

 

 
39,907

 

 

 
(51,980
)
 
(12,073
)
 

 
(12,073
)
Stock-based compensation charges
 
286,187

 
3

 
9,876

 

 

 

 
9,879

 

 
9,879

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(415
)
 
(415
)
Balance September 30, 2017 (unaudited)
 
125,310,668

 
$
1,253

 
$
92,403

 
$
1,017,544

 
$
10,849

 
$
(814,149
)
 
$
307,900

 
$
341

 
$
308,241

See accompanying notes to condensed consolidated financial statements.

6


BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
 
(Unaudited) (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net Income
 
$
205,224

 
$
163,898

Non-cash items included in net income from continuing operations:
 
 
 
 
Depreciation and amortization
 
43,692

 
42,135

Income of investees, net of dividends
 
(8,471
)
 
731

Gains on asset disposals and impairments, net
 
(2
)
 
(33
)
Gain on forward contracts
 
(4,743
)
 

Recognition of debt issuance costs from Former Credit Facility
 
2,441

 

Provision for deferred taxes
 
38,685

 
17,501

Recognition of (gains) losses for pension and postretirement plans
 
(33,699
)
 
1,320

Stock-based compensation expense
 
8,519

 
9,879

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
3,384

 
(17,748
)
Accounts payable
 
2,061

 
(10,978
)
Contracts in progress and advance billings on contracts
 
(35,049
)
 
(2,963
)
Income taxes
 
(46,511
)
 
21,587

Accrued and other current liabilities
 
3,344

 
(33,736
)
Pension liability, accrued postretirement benefit obligation and employee benefits
 
(184,898
)
 
(47,109
)
Other, net
 
(2,418
)
 
345

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
 
(8,441
)
 
144,829

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of property, plant and equipment
 
(60,488
)
 
(49,361
)
Acquisition of business
 
(212,993
)
 

Purchases of securities
 
(3,111
)
 
(3,237
)
Sales and maturities of securities
 
3,378

 
12,406

Investments, net of return of capital, in equity method investees
 
(9,037
)
 
2,142

Proceeds from asset disposals
 
499

 
142

Other, net
 
4,743

 
(24
)
NET CASH USED IN INVESTING ACTIVITIES
 
(277,009
)
 
(37,932
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings of long-term debt
 
901,300

 
73,600

Repayments of long-term debt
 
(624,987
)
 
(94,320
)
Payment of debt issuance costs
 
(9,443
)
 

Repurchase of common shares
 
(62,558
)
 

Dividends paid to common shareholders
 
(48,014
)
 
(31,072
)
Exercise of stock options
 
3,511

 
16,019

Cash paid for shares withheld to satisfy employee taxes
 
(5,402
)
 
(7,389
)
Other
 
(515
)
 
(415
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
 
153,892

 
(43,577
)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
 
(8,464
)
 
15,290

TOTAL (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
 
(140,022
)
 
78,610

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
213,144

 
134,600

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
73,122

 
$
213,210

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
13,325

 
$
10,762

Income taxes (net of refunds)
 
$
51,779

 
$
36,425

SCHEDULE OF NON-CASH INVESTING ACTIVITY:
 
 
 
 
Accrued capital expenditures included in accounts payable
 
$
13,457

 
$
7,680

See accompanying notes to condensed consolidated financial statements.

7


BWX TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
We have presented the condensed consolidated financial statements of BWX Technologies, Inc. ("BWXT" or the "Company") in U.S. dollars in accordance with the interim reporting requirements of Form 10-Q, Rule 10-01 of Regulation S-X and accounting principles generally accepted in the United States ("GAAP"). Certain financial information and disclosures normally included in our financial statements prepared annually in accordance with GAAP have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and notes in our annual report on Form 10-K for the year ended December 31, 2017 (our "2017 10-K"). We have included all adjustments, in the opinion of management, consisting only of normal recurring adjustments, necessary for a fair presentation.
We use the equity method to account for investments in entities that we do not control, but over which we have the ability to exercise significant influence. We generally refer to these entities as "joint ventures." We have eliminated all intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform to the presentation at September 30, 2018 and for the three and nine months ended September 30, 2018. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.
Unless the context otherwise indicates, "we," "us" and "our" mean BWXT and its consolidated subsidiaries.
Reportable Segments
We operate in three reportable segments: Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group. Our reportable segments are further described as follows:
Our Nuclear Operations Group segment manufactures naval nuclear reactors for the Naval Nuclear Propulsion Program for use in U.S. Navy submarines and aircraft carriers. Through this segment, we own and operate manufacturing facilities located in Lynchburg, Virginia; Barberton, Ohio; Mount Vernon, Indiana; Euclid, Ohio; and Erwin, Tennessee. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components inclusive of development and fabrication activities for submarine missile launch tubes at the Mount Vernon facility. The Euclid facility fabricates electro-mechanical equipment and performs design, manufacturing, inspection, assembly and testing activities. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. ("NFS"), one of our wholly owned subsidiaries. Located in Erwin, NFS also downblends Cold War-era government stockpiles of high-enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.
Our Nuclear Services Group segment provides various services to the U.S. Government and the commercial nuclear industry. Services provided to the U.S. Government include nuclear materials management and operation, environmental management and administrative and operating services for various U.S. Government-owned facilities. These services are provided to the U.S. Department of Energy ("DOE"), including the National Nuclear Security Administration ("NNSA"), the Office of Nuclear Energy, the Office of Science and the Office of Environmental Management, and NASA. Through this segment we deliver services and management solutions to nuclear and high-consequence operations. A significant portion of this segment's operations are conducted through joint ventures.
Our Nuclear Services Group segment also provides inspection and maintenance services primarily for the U.S. commercial nuclear industry including steam generator and heat exchanger inspection services, high pressure water lancing, non-destructive examination and customized tooling solutions. This segment also offers complete advanced fuel and reactor engineering, licensing and manufacturing services for new advanced nuclear reactors.
Our Nuclear Power Group segment fabricates steam generators, nuclear fuel, fuel handling systems, pressure vessels, reactor components, heat exchangers, tooling delivery systems and other auxiliary equipment, including containers for the storage of spent nuclear fuel and other high-level waste, for nuclear utility customers. BWXT has supplied the nuclear industry with more than 1,300 large, heavy components worldwide and is the only heavy nuclear component, N-Stamp certified manufacturer in North America. This segment also provides specialized engineering services that include structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process

8


development, electrical and controls engineering and metallurgy and materials engineering. In addition, this segment offers in-plant inspection, maintenance and modification services for nuclear steam generators, heat exchangers, reactors, fuel handling systems and balance of plant equipment, as well as specialized non-destructive examination and tooling/repair solutions.
On July 30, 2018, our subsidiary BWXT ITG Canada, Inc. acquired Sotera Health's Nordion medical isotope business (the "MI business") for $213.0 million, subject to customary working capital, cash and debt adjustments. The MI business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies. Its primary operations are located in Kanata, Ontario and Vancouver, British Columbia. This acquisition adds approximately 150 highly trained and experienced personnel, two specialized production centers and a uniquely licensed infrastructure. In addition to the growing portfolio of radioisotope products we acquired, the MI business will be the platform from which we plan to launch our Molybdenum-99 product line and a number of future radioisotope-based imaging and therapeutic products. This business is reported as part of our Nuclear Power Group segment. See Note 2 for additional information on the acquisition of the MI business.
See Note 9 for financial information about our segments. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and the related footnotes included in our 2017 10-K.
Deconsolidation of Generation mPower LLC
On March 2, 2016, we entered into a framework agreement with Bechtel Power Corporation ("Bechtel"), BWXT Modular Reactors, LLC and BDC NexGen Power, LLC for the potential restructuring and restart of our mPower small modular reactor program (the "Framework Agreement"). As a result of entering into the Framework Agreement, we deconsolidated Generation mPower LLC ("GmP") from our financial statements as of the date of the Framework Agreement and recognized a $30.0 million loss contingency, which was ultimately paid to Bechtel in the first quarter of 2017 following the receipt of Bechtel's notice that the mPower program would not be restarted.
Contracts and Revenue Recognition
We generally recognize contract revenues and related costs over time for individual performance obligations based on a cost-to-cost method in accordance with Financial Accounting Standards Board ("FASB") Topic Revenue from Contracts with Customers. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress toward completion as a percentage of the total project (percentage-of-completion basis). Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for uninstalled materials, if such costs do not depict our performance in transferring control of goods or services to the customer. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. Certain of our contracts recognize revenue at a point in time, and revenue on these contracts is recognized when control transfers to the customer. The majority of our revenue that is recognized at a point in time is related to parts and certain medical isotopes and radiopharmaceuticals in our Nuclear Power Group segment. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.
Accumulated Other Comprehensive Income
The components of Accumulated other comprehensive income included in Stockholders' Equity are as follows:
 
 
September 30,
2018
 
December 31,
2017
 
 
(In thousands)
Currency translation adjustments
 
$
8,423

 
$
13,148

Net unrealized gain on derivative financial instruments
 
319

 
353

Unrecognized prior service cost on benefit obligations
 
(5,092
)
 
(6,237
)
Net unrealized gain (loss) on available-for-sale investments
 
(108
)
 
2,190

Accumulated other comprehensive income
 
$
3,542

 
$
9,454

Upon adopting the FASB update to the Topic Financial Instruments, we reclassified $2.2 million of net unrealized gains on available-for-sale investments from Accumulated other comprehensive income to Retained earnings on January 1, 2018.

9


The amounts reclassified out of Accumulated other comprehensive income by component and the affected condensed consolidated statements of income line items are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
2018
 
2017
 
 
Accumulated Other Comprehensive Income (Loss) Component Recognized
 
(In thousands)
 
Line Item Presented
Realized gain (loss) on derivative financial instruments
 
$
(86
)
 
$
195

 
$
(90
)
 
$
182

 
Revenues
 
 
119

 
(470
)
 
147

 
(179
)
 
Cost of operations
 
 
33

 
(275
)
 
57

 
3

 
Total before tax
 
 
(7
)
 
71

 
(16
)
 

 
Provision for Income Taxes
 
 
$
26

 
$
(204
)
 
$
41

 
$
3

 
Net Income
Amortization of prior service cost on benefit obligations
 
$
(438
)
 
$
(428
)
 
$
(1,431
)
 
$
(1,320
)
 
Other – net
 
 
78

 
146

 
286

 
459

 
Provision for Income Taxes
 
 
$
(360
)
 
$
(282
)
 
$
(1,145
)
 
$
(861
)
 
Net Income
Realized gain (loss) on investments
 
$
(354
)
 
$
14

 
$
(354
)
 
$
162

 
Other – net
 
 
(25
)
 
(5
)
 
(25
)
 
(19
)
 
Provision for Income Taxes
 
 
$
(379
)
 
$
9

 
$
(379
)
 
$
143

 
Net Income
Total reclassification for the period
 
$
(713
)
 
$
(477
)
 
$
(1,483
)
 
$
(715
)
 
 
Inventories
At September 30, 2018 and December 31, 2017, Other current assets included inventories totaling $15.5 million and $8.6 million, respectively, consisting entirely of raw materials and supplies.
Restricted Cash and Cash Equivalents
At September 30, 2018, we had restricted cash and cash equivalents totaling $7.0 million, $2.6 million of which was held for future decommissioning of facilities (which is included in Other Assets on our condensed consolidated balance sheets) and $4.4 million of which was held to meet reinsurance reserve requirements of our captive insurer.
The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents within our condensed consolidated balance sheets to the totals presented in our condensed consolidated statement of cash flows:
 
 
September 30,
2018
 
December 31,
2017
 
 
(In thousands)
Cash and cash equivalents
 
$
66,125

 
$
203,404

Restricted cash and cash equivalents
 
4,359

 
7,105

Restricted cash and cash equivalents included in Other Assets
 
2,638

 
2,635

Total cash and cash equivalents and restricted cash and cash equivalents as presented in our condensed consolidated statement of cash flows
 
$
73,122

 
$
213,144

Warranty Expense
We accrue estimated warranty expense, included in Cost of operations on our condensed consolidated statements of income, to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.

10


The following summarizes the changes in the carrying amount of our Accrued warranty expense:
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
 
(In thousands)
Balance at beginning of period
 
$
13,428

 
$
11,477

Additions
 
1,136

 
1,011

Expirations and other changes
 
(1,400
)
 
(188
)
Payments
 
(482
)
 
(21
)
Translation
 
(256
)
 
434

Balance at end of period
 
$
12,426

 
$
12,713

Provision for Income Taxes
We are subject to federal income tax in the U.S. and Canada as well as income tax within multiple U.S. state jurisdictions. We provide for income taxes based on the enacted tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to nominal rates and with respect to the basis on which these rates are applied. This variation, along with changes in our mix of income within these jurisdictions, can contribute to shifts in our effective tax rate from period to period.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted, making significant changes to existing U.S. tax laws that impact us, including, but not limited to, a reduction to the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, the taxation of global intangible low-taxed income ("GILTI") and additional deduction limitations related to executive compensation. We recognized the income tax effects of the Act within our condensed consolidated financial statements in accordance with FASB Topic Income Taxes. Our Canadian operations continue to be subject to tax at a local statutory rate of approximately 25%.
Our effective tax rate for the three months ended September 30, 2018 was 7.7% as compared to 33.9% for the three months ended September 30, 2017. Our effective tax rate for the nine months ended September 30, 2018 was 17.5% as compared to 31.6% for the nine months ended September 30, 2017. The effective tax rates for the three and nine months ended September 30, 2018 were lower than the 2018 U.S. corporate income tax rate of 21% primarily due to remeasurement adjustments to our deferred tax assets as a result of accelerating additional contributions made in August 2018 to certain of our domestic pension plans for inclusion in our 2017 U.S. tax return. Our effective tax rate for the nine months ended September 30, 2017 was lower than the 2017 U.S. corporate income tax rate of 35% primarily due to benefits recognized for excess tax benefits related to employee share-based payments of $5.4 million.
As of September 30, 2018, we had gross unrecognized tax benefits of $0.3 million (exclusive of interest and federal and state benefits), all of which would reduce our effective tax rate if recognized.
Recently Adopted Accounting Standards
There were no accounting standards adopted during the period covered by this Form 10-Q. For more information regarding recently adopted accounting standards, refer to Note 1 to the consolidated financial statements in Part II of our 2017 10-K, as updated by our Form 10-Q for the quarter ended March 31, 2018.
New Accounting Standards
In February 2016, the FASB issued an update to the Topic Leases, which supersedes the lease reporting requirements in Topic Leases (previously "FAS 13"). This update requires that a lessee recognize on its balance sheet the assets and liabilities for all leases with lease terms of more than 12 months, along with additional qualitative and quantitative disclosures. The effect of leases in a consolidated statement of income and a consolidated statement of cash flows is expected to be largely unchanged. Accounting by lessors was not significantly impacted by this update. This update will be effective for us in 2019, with early adoption permitted. We expect to adopt the provisions in this update effective January 1, 2019 using the modified retrospective approach. We do not anticipate a material impact on our financial statements upon adoption.

11


NOTE 2 – ACQUISITIONS
Acquisition of Sotera Health LLC's Nordion Medical Isotope Business
On July 30, 2018, our subsidiary BWXT ITG Canada, Inc. acquired Sotera Health's Nordion medical isotope business (the "MI business") for $213.0 million, subject to customary working capital, cash and debt adjustments. The MI business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies. Its primary operations are located in Kanata, Ontario and Vancouver, British Columbia. This acquisition adds approximately 150 highly trained and experienced personnel, two specialized production centers and a uniquely licensed infrastructure. In addition to the growing portfolio of radioisotope products we acquired, the MI business will be the platform from which we plan to launch our Molybdenum-99 product line and a number of future radioisotope-based imaging and therapeutic products. This business is reported as part of our Nuclear Power Group segment.
The purchase price of the acquisition has been allocated among assets acquired and liabilities assumed at fair value, with the excess purchase price recorded as goodwill. Our preliminary purchase price allocation, as follows, is subject to change upon receipt of additional information and completion of further analysis, including, but not limited to, finalization of valuations related to long-lived and intangible assets (amounts in thousands):
Accounts receivable – trade
 
$
7,732

Contracts in progress
 
51

Inventories
 
2,113

Other current assets
 
97

Property, plant and equipment
 
12,948

Goodwill
 
62,495

Deferred Income Taxes
 
3,006

Intangible assets
 
139,257

Total assets acquired
 
$
227,699

Accounts payable
 
$
654

Accrued employee benefits
 
579

Accrued liabilities – other
 
1,665

Environmental liabilities
 
2,062

Pension liability
 
9,746

Total liabilities assumed
 
$
14,706

Net assets acquired
 
$
212,993

Amount of tax deductible goodwill
 
$
53,693

The intangible assets included above consist of the following (dollar amounts in thousands):
 
 
Amount
 
Amortization Period
Technical support agreement and relationship
 
$
67,500

 
23 years
Unpatented technology
 
$
33,000

 
19 years
Favorable operating leases
 
$
28,157

 
13-30 years
Customer relationship
 
$
10,600

 
19 years
Our consolidated financial statements for the three and nine months ended September 30, 2018 include $8.0 million of revenues and $0.5 million of net income related to the MI business operations occurring from the acquisition date to September 30, 2018. Additionally, the following unaudited pro forma financial information presents our results of operations for the three and nine months ended September 30, 2018 and 2017 as if the acquisition of the MI business had occurred on January 1, 2017. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2017. This information is presented for comparative purposes only and should not be taken as representative of our future consolidated results of operations.

12


 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
 
(In thousands, except per share amounts)
Revenues
 
$
429,558

 
$
429,791

 
$
1,347,031

 
$
1,285,536

Net Income Attributable to BWX Technologies, Inc.
 
$
79,141

 
$
45,788

 
$
206,435

 
$
159,499

Basic Earnings per Common Share
 
$
0.80

 
$
0.46

 
$
2.07

 
$
1.61

Diluted Earnings per Common Share
 
$
0.79

 
$
0.46

 
$
2.05

 
$
1.59

The unaudited pro forma results include the following pre-tax adjustments to the historical results presented above:
Increase in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of approximately $0.5 million and $3.7 million for the three and nine months ended September 30, 2018, respectively, and $1.6 million and $4.8 million for the three and nine months ended September 30, 2017, respectively.
Additional interest expense associated with the incremental borrowings that would have been incurred to acquire the MI business as of January 1, 2017 of approximately $2.4 million for the nine months ended September 30, 2018, and $1.4 million and $3.8 million for the three and nine months ended September 30, 2017, respectively.
Elimination of $0.9 million and $2.5 million in acquisition related costs recognized in the three and nine months ended September 30, 2018, respectively, that are not expected to be recurring.
NOTE 3 – REVENUE RECOGNITION
The initial impact of the adoption of the FASB Topic Revenue from Contracts with Customers, which was recognized in a cumulative catch-up adjustment on January 1, 2018, is illustrated below:
 
 
January 1,
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Assets:
 
 
 
 
Contracts in progress
 
$
260,932

 
$
420,628

Deferred Income Taxes
 
$
85,193

 
$
86,740

Liabilities:
 
 
 
 
Accrued liabilities – other
 
$
66,371

 
$
64,738

Advance billings on contracts
 
$
73,390

 
$
246,192

Stockholders' Equity:
 
 
 
 
Retained earnings
 
$
1,000,578

 
$
990,652

Within our Nuclear Operations Group segment, we continue to recognize revenue over time and now measure progress on performance obligations using a cost-to-cost method. Historically, we utilized man-hours or a cost-to-cost method to measure progress on certain performance obligations within this segment. The performance obligations identified for recognizing revenue are similar to our historical units of account. As a result of the change to a cost-to-cost method, the timing of revenue recognition on affected contracts, in the aggregate, results in the recognition of revenue and cost of operations earlier in the process of satisfying performance obligations. This change impacted the life-to-date revenue and cost of operations recognized on performance obligations, and the adjustment to capture the impact of the new revenue recognition standard was recorded as a cumulative catch-up adjustment in Retained earnings. The new standard also resulted in a reduction in both our Contracts in progress and Advance billings on contracts account balances as a result of measuring the asset and liability at the contract level. Historically, contract assets and liabilities were measured at the unit of account, which we concluded was at a lower level than that of the contract.
The impact of the adoption of the new revenue standard on our Nuclear Power Group and Nuclear Services Group segments was not material.

13


Contracts and Revenue Recognition
Nuclear Operations Group
Our Nuclear Operations Group segment recognizes revenue over time for the manufacturing of naval nuclear reactor components and fuel, submarine missile launch tubes and the downblending of high-enriched uranium. Certain of our contracts contain two or more different types of components, each of which we identify as a separate performance obligation. We recognize revenue using a cost-to-cost method to measure progress as control is continually transferred to the customer as we incur costs on the performance obligations. We allocate revenue to the individual performance obligations within contracts with multiple performance obligations based on the stand-alone selling price of the individual performance obligations.
Our fixed-price incentive fee contracts include incentives that we concluded to be variable consideration. The amount of the variable consideration to which we are entitled is dependent on our actual costs incurred on the performance obligation compared to the target costs for that performance obligation and subject to incentive price revisions included within the contracts. We include these incentive fees in revenue when there is sufficient evidence to determine that the variable consideration is not constrained. The remaining contracts typically have immaterial amounts of variable consideration and have a single performance obligation. Our estimates of variable consideration and total estimated costs at completion are determined through a detailed process based on historical performance and our expertise using the most likely method. Variations from estimated contract performance could result in a material effect on our financial condition and results of operations in future periods.
Our Nuclear Operations Group segment's contracts allow for billings as costs are incurred, subject to certain retainages on our fixed-price incentive fee contracts, that require milestones to be reached for the remaining consideration to be paid.
Nuclear Services Group
Our contracts within our Nuclear Services Group segment are primarily cost-plus service contracts on which we recognize revenue over time based on a cost-to-cost method, which is consistent with the structure of the billings associated with these contracts. Ownership continuously transfers to the customer as we perform the services. The contracts within this segment do not contain significant variable consideration and contain a single performance obligation. Certain of these contracts contain assurance warranties and/or provisions for liquidated damages, which are expected to have an immaterial impact on the contracts based on our historical experience.
Nuclear Power Group
Our Nuclear Power Group segment recognizes revenue over time using a cost-to-cost method for the manufacturing of large components, non-standard parts, fuel bundles and service contracts as control continually transfers to the customers. For standard parts, revenue is recognized at the point in time control transfers to the customer, which is consistent with the transfer of ownership. For medical isotopes, we recognize revenue either at the point in time control transfers to the customer or over time using a unit of output method. This segment generates revenue primarily from firm-fixed-price contracts that do not contain variable consideration as well as time-and-materials based contracts. Certain of these contracts contain assurance warranties and/or provisions for liquidated damages, which are expected to have an immaterial impact to the contracts based on our historical experience. We are entitled to payment on the majority of our Nuclear Power Group segment contracts when we achieve certain milestones related to our progress.

14


Disaggregated Revenues
Revenues by geographical area and customer type are as follows:
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
 
(In thousands)
United States:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Government
 
$
315,744

 
$
27,120

 
$

 
$
342,864

 
$
960,271

 
$
81,175

 
$

 
$
1,041,446

Non-Government
 
2,066

 
536

 
3,890

 
6,492

 
5,915

 
7,623

 
4,477

 
18,015

 
 
$
317,810

 
$
27,656

 
$
3,890

 
$
349,356

 
$
966,186

 
$
88,798

 
$
4,477

 
$
1,059,461

Canada:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Government
 
$
358

 
$

 
$

 
$
358

 
$
358

 
$

 
$

 
$
358

Non-Government
 
161

 
611

 
65,234

 
66,006

 
161

 
2,096

 
212,302

 
214,559

 
 
$
519

 
$
611

 
$
65,234

 
$
66,364

 
$
519

 
$
2,096

 
$
212,302

 
$
214,917

Other:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Government
 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Non-Government
 
996

 
99

 
10,038

 
11,133

 
1,391

 
101

 
50,896

 
52,388

 
 
$
996

 
$
99

 
$
10,038

 
$
11,133

 
$
1,391

 
$
101

 
$
50,896

 
$
52,388

Segment Revenues
 
$
319,325

 
$
28,366

 
$
79,162

 
426,853

 
$
968,096

 
$
90,995

 
$
267,675

 
1,326,766

Adjustments and Eliminations
 
 
 
 
 
 
 
(1,346
)
 
 
 
 
 
 
 
(4,875
)
Revenues
 
 
 
 
 
 
 
$
425,507

 
 
 
 
 
 
 
$
1,321,891

Revenues by timing of transfer of goods or services are as follows:
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
 
(In thousands)
Over-time
 
$
319,325

 
$
28,366

 
$
66,219

 
$
413,910

 
$
968,096

 
$
90,995

 
$
240,652

 
$
1,299,743

Point-in-time
 

 

 
12,943

 
12,943

 

 

 
27,023

 
27,023

Segment Revenues
 
$
319,325

 
$
28,366

 
$
79,162

 
426,853

 
$
968,096

 
$
90,995

 
$
267,675

 
1,326,766

Adjustments and Eliminations
 
 
 
 
 
 
 
(1,346
)
 
 
 
 
 
 
 
(4,875
)
Revenues
 
 
 
 
 
 
 
$
425,507

 
 
 
 
 
 
 
$
1,321,891

Revenues by contract type are as follows:
 
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
 
(In thousands)
Fixed-Price Incentive Fee
 
$
255,944

 
$

 
$
3,748

 
$
259,692

 
$
763,334

 
$

 
$
13,365

 
$
776,699

Firm-Fixed-Price
 
38,262

 
4,393

 
58,451

 
101,106

 
137,792

 
15,435

 
177,035

 
330,262

Cost-Plus Fee
 
25,117

 
23,496

 

 
48,613

 
66,800

 
73,535

 
45

 
140,380

Time-and-Materials
 
2

 
477

 
16,963

 
17,442

 
170

 
2,025

 
77,230

 
79,425

Segment Revenues
 
$
319,325

 
$
28,366

 
$
79,162

 
426,853

 
$
968,096

 
$
90,995

 
$
267,675

 
1,326,766

Adjustments and Eliminations
 
 
 
 
 
 
 
(1,346
)
 
 
 
 
 
 
 
(4,875
)
Revenues
 
 
 
 
 
 
 
$
425,507

 
 
 
 
 
 
 
$
1,321,891


15


Performance Obligations
As we progress on our contracts and the underlying performance obligations for which we recognize revenue over time, we refine our estimates of variable consideration and total estimated costs at completion, which impact the overall profitability on our contracts and performance obligations. Changes in these estimates result in the recognition of cumulative catch-up adjustments that impact our revenue and/or costs of contracts. During the nine months ended September 30, 2018, we recognized net favorable changes in estimates that resulted in increases in revenue of $23.4 million and an increase in cost of operations of $12.3 million. Included in these amounts are contract adjustments resulting from rework issues related to the manufacture of non-nuclear components being produced within our Nuclear Operations Group segment. We have recognized decreases in operating income of $26.7 million and $29.2 million for the three and nine months ended September 30, 2018, respectively, related to this matter. These contract adjustments resulted in a decrease in earnings per share of $0.21 and $0.23 for the three and nine months ended September 30, 2018, respectively.
Contract Assets and Liabilities
We include revenues and related costs incurred, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in Contracts in progress. We include in Advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized over time. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. Changes in Contracts in progress and Advance billings on contracts are primarily driven by differences in the timing of revenue recognition and billings to our customers. During the nine months ended September 30, 2018, our unbilled receivables increased $66.0 million, primarily as a result of revenue in excess of billings on certain firm-fixed-price contracts within our Nuclear Operations Group segment and the timing of milestone billings on large components and contracts started in 2018 within our Nuclear Power Group segment. Our fixed-price incentive fee contracts for our Nuclear Operations Group segment include provisions that result in an increase in retainages on contracts during the first and third quarters of the year, with larger payments made during the second and fourth quarters. Retainages also vary as a result of timing differences between incurring costs and achieving milestones that allow us to recover these amounts. This resulted in an increase in retainages on contracts from January 1 to September 30, 2018 as shown below:
 
 
September 30,
 
January 1,
 
 
2018
 
2018
 
 
(In thousands)
Included in Contracts in progress:
 
 
 
 
Unbilled receivables
 
$
316,341

 
$
250,325

Included in Accounts receivable – trade, net:
 
 
 
 
Retainages
 
$
102,555

 
$
82,801

Included in Other Assets:
 
 
 
 
Retainages
 
$
1,626

 
$
1,669

Advance billings on contracts
 
$
104,646

 
$
73,390

During the nine months ended September 30, 2018, we recognized $49.0 million of revenue that was in Advance billings on contracts at January 1, 2018.
Remaining Performance Obligations
Remaining performance obligations represent the dollar amount of revenue we expect to recognize in the future from performance obligations on contracts previously awarded and in progress. Of the September 30, 2018 remaining performance obligations on our contracts with customers, we expect to recognize revenues as follows:
 
 
2018
 
2019
 
Thereafter
 
Total
 
 
(In approximate millions)
Nuclear Operations Group
 
$
304

 
$
889

 
$
1,747

 
$
2,940

Nuclear Services Group
 
18

 
3

 
5

 
26

Nuclear Power Group
 
84

 
176

 
608

 
868

Total Remaining Performance Obligations
 
$
406

 
$
1,068

 
$
2,360

 
$
3,834


16


Historical Method
Prior to the adoption of FASB Topic Revenue from Contracts with Customers, we accounted for revenue under previous GAAP. In accordance with our adoption of the new revenue recognition standard utilizing the modified retrospective approach, we are required to disclose the impact on our financial statements on a line item basis.
A comparison of certain line items in our condensed consolidated balance sheet is shown below:
 
 
September 30, 2018
 
 
Current
Method
 
Historical
Method
 
 
(In thousands)
Assets:
 
 
 
 
Contracts in progress
 
$
326,355

 
$
352,389

Deferred Income Taxes
 
$
45,105

 
$
46,785

Liabilities:
 
 
 
 
Accrued liabilities – other
 
$
53,508

 
$
50,435

Advance billings on contracts
 
$
104,646

 
$
150,081

Stockholders' Equity:
 
 
 
 
Retained earnings
 
$
1,159,552

 
$
1,144,904

Differences in the amounts above are primarily the result of the initial adoption of the new revenue recognition standard. Additional differences were caused by revenue under the current method being $8.5 million higher than the historical method as discussed below.
A comparison of certain line items in our condensed consolidated statements of income is shown below:
 
 
Three Months Ended
September 30, 2018
 
Nine Months Ended
September 30, 2018
 
 
Current
Method
 
Historical
Method
 
Current
Method
 
Historical
Method
 
 
(In thousands)
Revenues
 
$
425,507

 
$
407,759

 
$
1,321,891

 
$
1,313,392

Cost of operations
 
$
326,314

 
$
315,196

 
$
971,887

 
$
969,683

Operating Income
 
$
50,395

 
$
43,765

 
$
201,832

 
$
195,537

Provision for Income Taxes
 
$
6,482

 
$
4,962

 
$
43,578

 
$
42,005

Net Income
 
$
78,077

 
$
72,967

 
$
205,224

 
$
200,502

We recognized $17.7 million and $8.5 million more revenue under the current method compared to the historical method for the three and nine months ended September 30, 2018, respectively. This was primarily driven by more progress being achieved on contracts as a result of using a cost-to-cost method for measuring progress under the current method as compared to man-hours or units of output under our historical method.

17


NOTE 4 – PENSION PLANS AND POSTRETIREMENT BENEFITS
We record the service cost component of net periodic benefit cost within Operating income on our condensed consolidated statements of income. For the three months ended September 30, 2018 and 2017, these amounts were $2.5 million and $1.8 million, respectively. For the nine months ended September 30, 2018 and 2017, these amounts were $7.7 million and $6.4 million, respectively. All other components of net periodic benefit cost are included in Other – net within the condensed consolidated statements of income. For the three months ended September 30, 2018 and 2017, these amounts were $(42.4) million and $(6.9) million, respectively. For the nine months ended September 30, 2018 and 2017, these amounts were $(60.1) million and $(20.8) million, respectively. Components of net periodic benefit cost included in net income are as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Service cost
 
$
2,380

 
$
1,721

 
$
7,198

 
$
6,017

 
$
132

 
$
116

 
$
459

 
$
423

Interest cost
 
11,575

 
13,727

 
36,225

 
40,735

 
504

 
557

 
1,404

 
1,635

Expected return on plan assets
 
(19,272
)
 
(21,019
)
 
(62,450
)
 
(62,659
)
 
(548
)
 
(596
)
 
(1,581
)
 
(1,787
)
Amortization of prior service cost (credit)
 
565

 
506

 
1,665

 
1,556

 
(127
)
 
(79
)
 
(234
)
 
(236
)
Recognized net actuarial gain
 
(35,130
)
 

 
(35,130
)
 

 

 

 

 

Net periodic benefit (income) cost
 
$
(39,882
)
 
$
(5,065
)
 
$
(52,492
)
 
$
(14,351
)
 
$
(39
)
 
$
(2
)
 
$
48

 
$
35

We immediately recognize net actuarial gains and losses for our pension and postretirement benefit plans into earnings as a component of net periodic benefit cost. In July 2018, we completed the purchase of a group annuity contract to transfer certain domestic pension benefit obligations of $244.1 million to an insurance company for approximately 1,300 retirees. As a result, we remeasured two of our domestic pension plans resulting in the recognition of a net actuarial gain of $35.1 million in Other – net within the condensed consolidated statement of income, which includes a $10.4 million settlement loss and a $45.5 million actuarial gain.
We made contributions to our pension and postretirement plans totaling $157.9 million during the nine months ended September 30, 2018. In August 2018, we accelerated $118.1 million of pension contributions to certain domestic pension plans in order to capture a tax benefit in our 2017 U.S. tax return due to the change in corporate tax rates. For the remainder of 2018, we expect cash requirements totaling approximately $3.6 million for contributions to our pension and other postretirement benefit plans.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Other than as noted below, there have been no material changes during the period covered by this Form 10-Q in the status of the legal proceedings disclosed in Note 10 to the consolidated financial statements in Part II of our 2017 10-K.
Investigations and Litigation
Apollo and Parks Township
In January 2010, Michelle McMunn, Cara D. Steele and Yvonne Sue Robinson filed suit against Babcock & Wilcox Power Generation Group, Inc. ("B&W PGG"), Babcock & Wilcox Technical Services Group, Inc., formerly known as B&W Nuclear Environmental Services, Inc. and now known as BWXT Technical Services Group, Inc. (the "BWXT Parties") and Atlantic Richfield Company ("ARCO") in the U.S. District Court for the Western District of Pennsylvania. Since January 2010, additional suits were filed by additional plaintiffs and there were 17 lawsuits pending in the U.S. District Court for the Western District of Pennsylvania (the "Trial Court") against the BWXT Parties and ARCO, including the most recent lawsuits filed in June and October 2015. In total, the suits involved approximately 107 primary claimants. The primary claimants alleged, among other things, personal injuries and property damage as a result of alleged releases of radioactive material relating to the operation, remediation and/or decommissioning of two former nuclear fuel processing facilities located in the Borough of Apollo and Parks Township, Pennsylvania (collectively, the "Apollo and Parks Litigation"). Those facilities previously were

18


owned by Nuclear Materials and Equipment Company, a former subsidiary of ARCO ("NUMEC"), which was acquired by B&W PGG. The plaintiffs in the Apollo and Parks Litigation sought compensatory and punitive damages.
Between May 2015 and March 2016, the presiding judge in the Apollo and Parks Litigation granted the BWXT Parties' motions to dismiss or motions for summary judgment in all 17 of the existing lawsuits. Accordingly, all claims in the Apollo and Parks Litigation have been dismissed by the Trial Court. All plaintiffs filed notices of appeal, and the appeals were consolidated in the U.S. Court of Appeals for the Third Circuit (the "Court of Appeals"). On August 23, 2017, the Court of Appeals affirmed the rulings of the Trial Court, dismissing all claims against the BWXT Parties and other defendants in the cases. Plaintiffs filed a notice of petition for rehearing, which was denied by the Court of Appeals on September 21, 2017. The plaintiffs filed a writ of certiorari for review by the U.S. Supreme Court on December 20, 2017. On February 20, 2018, the U.S. Supreme Court denied plaintiffs' petition for writ of certiorari making the Court of Appeals decision affirming the dismissal of all 17 lawsuits final.
At the time of ARCO's sale of NUMEC stock to B&W PGG, B&W PGG received an indemnity and hold harmless agreement from ARCO, which has been assigned to BWXT and its affiliates, with respect to claims and liabilities arising prior to or as a result of conduct or events predating the acquisition.
The ARCO indemnity remains applicable should any future claims similar in nature to the Apollo and Parks Litigation be made, although no assurance can be given that the indemnity will be available or sufficient in the event of liability, if any.
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
Our operations give rise to exposure to market risks from changes in foreign currency exchange ("FX") rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities' functional currencies. In addition, we have entered into FX forward contracts to hedge our exposure on pending acquisitions. We do not hold or issue derivative financial instruments for trading or other speculative purposes.
We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our condensed consolidated balance sheets. Based on the hedge designation at the inception of the contract, the related gains and losses on these contracts are deferred in stockholders' equity as a component of Accumulated other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of a derivative's change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in Other – net in our condensed consolidated statements of income. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on derivative financial instruments that require immediate recognition are included as a component of Other – net in our condensed consolidated statements of income.
We have designated the majority of our FX forward contracts that qualify for hedge accounting as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At September 30, 2018, we had deferred approximately $0.3 million of net gains on these derivative financial instruments in Accumulated other comprehensive income. Assuming market conditions continue, we expect to recognize the majority of this amount in the next 12 months.
At September 30, 2018, our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts totaled $49.0 million at September 30, 2018, with maturities extending to December 2021. These instruments consist primarily of contracts to purchase or sell Canadian dollars. We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. Our counterparties have the benefit of the same collateral arrangements and covenants as described under our credit facility.

19


The following tables summarize our derivative financial instruments at September 30, 2018 and December 31, 2017:
 
 
Asset and Liability Derivatives
 
 
September 30,
2018
 
December 31,
2017
 
 
(In thousands)
Derivatives Designated as Hedges:
 
 
 
 
FX Forward Contracts:
 
 
 
 
Location
 
 
 
 
Accounts receivable – other
 
$
218

 
$
250

Other Assets
 
$
211

 
$
348

Accounts payable
 
$
120

 
$
177

Other Liabilities
 
$
152

 
$
93

The effects of derivatives on our financial statements are outlined below:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Derivatives Designated as Hedges:
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
FX Forward Contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income
 
$
(63
)
 
$
(349
)
 
$
12

 
$
578

Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings: effective portion
 
 
 
 
 
 
 
 
Location
 
 
 
 
 
 
Revenues
 
$
(86
)
 
$
195

 
$
(90
)
 
$
182

Cost of operations
 
$
119

 
$
(470
)
 
$
147

 
$
(179
)
Derivatives Not Designated as Hedges:
 
 
 
 
 
 
 
 
FX Forward Contracts:
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
 
 
 
 
 
 
 
 
Location
 
 
 
 
 
 
 
 
Other – net
 
$
(1,254
)
 
$

 
$
4,743

 
$

NOTE 7 – FAIR VALUE MEASUREMENTS
Investments
The following is a summary of our investments measured at fair value at September 30, 2018:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Equity securities
 
 
 
 
 
 
 
 
Equities
 
$
1,851

 
$

 
$
1,851

 
$

Mutual funds
 
5,170

 

 
5,170

 

Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Government and agency securities
 
1,982

 
1,982

 

 

Corporate bonds
 
2,228

 
1,479

 
749

 

Asset-backed securities and collateralized mortgage obligations
 
105

 

 
105

 

Total
 
$
11,336

 
$
3,461

 
$
7,875

 
$


20


The following is a summary of our investments measured at fair value at December 31, 2017:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Government and agency securities
 
$
1,299

 
$
1,299

 
$

 
$

Corporate bonds
 
3,169

 
1,534

 
1,635

 

Equities
 
2,759

 

 
2,759

 

Mutual funds
 
4,847

 

 
4,847

 

Asset-backed securities and collateralized mortgage obligations
 
161

 

 
161

 

Total
 
$
12,235

 
$
2,833

 
$
9,402

 
$

We estimate the fair value of investments based on quoted market prices. For investments for which there are no quoted market prices, we derive fair values from available yield curves for investments of similar quality and terms.
Derivatives
Level 2 derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. At September 30, 2018 and December 31, 2017, we had forward contracts outstanding to purchase or sell Canadian dollars, with a total fair value of $0.2 million and $0.3 million, respectively.
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments, as follows:
Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying condensed consolidated balance sheets for Cash and cash equivalents and Restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
Long-term and short-term debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair values of our debt instruments approximated their carrying values at September 30, 2018 and December 31, 2017.
NOTE 8 – STOCK-BASED COMPENSATION
Stock-based compensation recognized for all of our plans for the three months ended September 30, 2018 and 2017 totaled $2.8 million and $3.9 million, respectively, with associated tax benefit totaling $0.5 million and $1.4 million, respectively. Stock-based compensation recognized for all of our plans for the nine months ended September 30, 2018 and 2017 totaled $9.1 million and $12.6 million, respectively, with associated tax benefit totaling $1.7 million and $4.4 million, respectively.

21


NOTE 9 – SEGMENT REPORTING
As described in Note 1, our operations are assessed based on three reportable segments. An analysis of our operations by reportable segment is as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
REVENUES:
 
 
 
 
 
 
 
 
Nuclear Operations Group
 
$
319,325

 
$
324,545

 
$
968,096

 
$
962,492

Nuclear Services Group
 
28,366

 
27,507

 
90,995

 
100,146

Nuclear Power Group
 
79,162

 
68,621

 
267,675

 
200,864

Adjustments and Eliminations (1)
 
(1,346
)
 
(1,313
)
 
(4,875
)
 
(5,902
)
 
 
$
425,507

 
$
419,360

 
$
1,321,891

 
$
1,257,600

(1)
Segment revenues are net of the following intersegment transfers and other adjustments:
Nuclear Operations Group Transfers
 
$
(978
)
 
$
(192
)
 
$
(2,958
)
 
$
(592
)
Nuclear Services Group Transfers
 
(273
)
 
(1,043
)
 
(1,813
)
 
(5,113
)
Nuclear Power Group Transfers
 
(95
)
 
(78
)
 
(104
)
 
(197
)
 
 
$
(1,346
)
 
$
(1,313
)
 
$
(4,875
)
 
$
(5,902
)
OPERATING INCOME:
 
 
 
 
 
 
 
 
Nuclear Operations Group
 
$
45,580

 
$
66,459

 
$
180,283

 
$
203,503

Nuclear Services Group
 
6,494

 
776

 
11,182

 
16,577

Nuclear Power Group
 
9,063

 
8,426

 
38,637

 
27,094

Other
 
(5,142
)
 
(2,255
)
 
(13,542
)
 
(4,937
)
 
 
$
55,995

 
$
73,406

 
$
216,560

 
$
242,237

Unallocated Corporate (2)
 
(5,600
)
 
(6,629
)
 
(14,728
)
 
(13,760
)
Total Operating Income
 
$
50,395

 
$
66,777

 
$
201,832

 
$
228,477

Other Income (Expense):
 
 
 
 
 
 
 
 
Interest income
 
1,121

 
402

 
2,340

 
750

Interest expense
 
(7,925
)
 
(3,837
)
 
(19,354
)
 
(11,260
)
Other – net
 
40,968

 
7,252

 
63,984

 
21,487

Total Other Income (Expense)
 
34,164

 
3,817

 
46,970

 
10,977

Income before Provision for Income Taxes
 
$
84,559

 
$
70,594

 
$
248,802

 
$
239,454

(2)
Unallocated corporate includes general corporate overhead not allocated to segments.

22


NOTE 10 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands, except share and per share amounts)
Basic:
 
 
 
 
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
77,919

 
$
46,553

 
$
205,023

 
$
163,534

Weighted-average common shares
 
99,421,031

 
99,328,677

 
99,542,933

 
99,313,264

Basic earnings per common share
 
$
0.78

 
$
0.47

 
$
2.06

 
$
1.65

Diluted:
 
 
 
 
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
77,919

 
$
46,553

 
$
205,023

 
$
163,534

Weighted-average common shares (basic)
 
99,421,031

 
99,328,677

 
99,542,933

 
99,313,264

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options, restricted stock units and performance shares (1)
 
999,735

 
931,578

 
958,664

 
1,054,119

Adjusted weighted-average common shares
 
100,420,766

 
100,260,255

 
100,501,597

 
100,367,383

Diluted earnings per common share
 
$
0.78

 
$
0.46

 
$
2.04

 
$
1.63

(1)
At September 30, 2018 and 2017, none of our shares were antidilutive.

23


Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included under Item 1 of this quarterly report on Form 10-Q ("Report") and the audited consolidated financial statements and the related notes and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our annual report on Form 10-K for the year ended December 31, 2017 (our "2017 10-K").
In this Report, unless the context otherwise indicates, "we," "us" and "our" mean BWX Technologies, Inc. ("BWXT" or the "Company") and its consolidated subsidiaries.
From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. In addition, various statements in this Report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. Statements and assumptions regarding expectations and projections of specific projects, our future backlog, revenues, income, capital spending, strategic investments, acquisitions or divestitures, research and development initiatives, return on capital activities or margin improvement initiatives are examples of forward-looking statements. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "plan," "seek," "goal," "could," "intend," "may," "should" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.
We have based our forward-looking statements on our current expectations, estimates and projections about our industries and our company. We caution that these statements are not guarantees of future performance and you should not rely unduly on them, as they involve risks, uncertainties and assumptions that we cannot predict. In addition, we have based many of these forward-looking statements on assumptions about future events that may prove to be inaccurate. While our management considers these assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Accordingly, our actual results may differ materially from the future performance that we have expressed or forecast in our forward-looking statements.
We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this Report or elsewhere by us or on our behalf. Differences between actual results and any future performance suggested in our forward-looking statements could result from a variety of factors. We have discussed many of these factors in more detail elsewhere in this Report and in Item 1A "Risk Factors" in our 2017 10-K. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this Report or in our 2017 10-K could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.
GENERAL
We operate in three reportable segments: Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group. In general, we operate in capital-intensive industries and rely on large contracts for a substantial amount of our revenues. We are currently exploring growth strategies across our segments to expand and complement our existing businesses. We would expect to fund these opportunities with cash on hand or by raising additional capital through debt, equity or some combination thereof.
Nuclear Operations Group
The revenues of our Nuclear Operations Group segment are largely a function of defense spending by the U.S. Government. Through this segment, we engineer, design and manufacture precision naval nuclear components, reactors and nuclear fuel for the DOE/NNSA's Naval Nuclear Propulsion Program. In addition, we perform missile launch tube development and fabrication activities for use on submarines. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry.

24


Nuclear Services Group
Our Nuclear Services Group segment provides various services to the U.S. Government and the commercial nuclear industry primarily in the U.S. The revenues and equity in income of investees under our U.S. Government contracts are largely a function of spending of the U.S. Government and the performance scores we and our consortium partners earn in managing and operating high-consequence operations at U.S. nuclear weapons sites, national laboratories and manufacturing complexes. With its specialized capabilities of full life-cycle management of special materials, facilities and technologies, we believe our Nuclear Services Group segment is well-positioned to continue to participate in the continuing cleanup, operation and management of critical government-owned nuclear sites, laboratories and manufacturing complexes maintained by the DOE, NASA and other federal agencies.
This segment is also engaged in inspection and maintenance services for the commercial nuclear industry primarily in the U.S. These services include the inspection of steam generators and heat exchangers, high pressure water lancing, non-destructive examination and the development of customized tooling solutions. This segment also develops technology for a variety of applications, including advanced nuclear power sources, and offers complete advanced fuel and reactor engineering, licensing and manufacturing services for new advanced nuclear reactors.
Nuclear Power Group
Through this segment, we design and manufacture commercial nuclear steam generators, heat exchangers, pressure vessels, reactor components, and other auxiliary equipment, including containers for the storage of spent nuclear fuel and other high-level nuclear waste. This segment is a leading supplier of nuclear fuel, fuel handling systems, tooling delivery systems and related services for CANDU nuclear power plants. This segment also provides a variety of engineering and in-plant services and is a significant supplier to nuclear power utilities undergoing major refurbishment and plant life extension projects.
Our Nuclear Power Group segment's overall activity primarily depends on the demand and competitiveness of nuclear energy. A significant portion of our Nuclear Power Group segment's operations depend on the timing of maintenance outages, principally in the Canadian market, and the cyclical nature of capital expenditures and major refurbishments for nuclear utility customers, which could cause variability in our financial results.
Acquisition of Sotera Health LLC's Nordion Medical Isotope Business
On July 30, 2018, our subsidiary BWXT ITG Canada, Inc. acquired Sotera Health's Nordion medical isotope business (the "MI business") for $213.0 million, subject to customary working capital, cash and debt adjustments. The MI business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies. Its primary operations are located in Kanata, Ontario and Vancouver, British Columbia. This acquisition adds approximately 150 highly trained and experienced personnel, two specialized production centers and a uniquely licensed infrastructure. In addition to the growing portfolio of radioisotope products we acquired, the MI business will be the platform from which we plan to launch our Molybdenum-99 product line and a number of future radioisotope-based imaging and therapeutic products. This business is reported as part of our Nuclear Power Group segment.
Critical Accounting Policies and Estimates
For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2017 10-K. There have been no material changes to our policies during the nine months ended September 30, 2018 with the exception of changes to Financial Accounting Standards Board ("FASB") Topics Revenue from Contracts with Customers and Compensation – Retirement Benefits as described in the notes to our condensed consolidated financial statements in Item 1 of our Form 10-Q for the quarter ended March 31, 2018.
Accounting for Contracts
On certain of our performance obligations, we recognize revenue over time. In accordance with FASB Topic Revenue from Contracts with Customers, we are required to estimate the total amount of costs on these performance obligations. As of September 30, 2018, we have provided for the estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. A principal risk on fixed-priced contracts is that revenue from the customer is insufficient to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in

25


forecasted labor productivity or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects or provide performance guarantees. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows. During the nine months ended September 30, 2018, we recognized net favorable changes in estimates that resulted in increases in revenue of $23.4 million and an increase in cost of operations of $12.3 million. Included in these amounts are contract adjustments resulting from rework issues related to the manufacture of non-nuclear components being produced within our Nuclear Operations Group segment. We have recognized decreases to operating income of $26.7 million and $29.2 million for the three and nine months ended September 30, 2018, respectively, related to this matter. These contract adjustments resulted in a decrease in earnings per share of $0.21 and $0.23 for the three and nine months ended September 30, 2018, respectively. During the nine months ended September 30, 2017, we recognized net changes in estimates related to contracts that recognize revenue over time, which increased operating income by approximately $22.0 million.
RESULTS OF OPERATIONS – THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 VS. THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
Selected financial highlights are presented in the table below:
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
 
 
(In thousands)
REVENUES:
 
 
 
 
 
 
 
 
 
 
 
 
Nuclear Operations Group
 
$
319,325

 
$
324,545

 
$
(5,220
)
 
$
968,096

 
$
962,492

 
$
5,604

Nuclear Services Group
 
28,366

 
27,507

 
859

 
90,995

 
100,146

 
(9,151
)
Nuclear Power Group
 
79,162

 
68,621

 
10,541

 
267,675

 
200,864

 
66,811

Adjustments and Eliminations
 
(1,346
)
 
(1,313
)
 
(33
)
 
(4,875
)
 
(5,902
)
 
1,027

 
 
$
425,507

 
$
419,360

 
$
6,147

 
$
1,321,891

 
$
1,257,600

 
$
64,291

OPERATING INCOME:
 
 
 
 
 
 
 
 
 
 
 
 
Nuclear Operations Group
 
$
45,580

 
$
66,459

 
$
(20,879
)
 
$
180,283

 
$
203,503

 
$
(23,220
)
Nuclear Services Group
 
6,494

 
776

 
5,718

 
11,182

 
16,577

 
(5,395
)
Nuclear Power Group
 
9,063

 
8,426

 
637

 
38,637

 
27,094

 
11,543

Other
 
(5,142
)
 
(2,255
)
 
(2,887
)
 
(13,542
)
 
(4,937
)
 
(8,605
)
 
 
$
55,995

 
$
73,406

 
$
(17,411
)
 
$
216,560

 
$
242,237

 
$
(25,677
)
Unallocated Corporate
 
(5,600
)
 
(6,629
)
 
1,029

 
(14,728
)
 
(13,760
)
 
(968
)
Total Operating Income
 
$
50,395

 
$
66,777

 
$
(16,382
)
 
$
201,832

 
$
228,477

 
$
(26,645
)
Consolidated Results of Operations
Three months ended September 30, 2018 vs. 2017
Consolidated revenues increased 1.5%, or $6.1 million, to $425.5 million in the three months ended September 30, 2018 compared to $419.4 million for the corresponding period in 2017, due to increases in revenues from our Nuclear Services Group and Nuclear Power Group segments totaling $0.9 million and $10.5 million, respectively. These increases were partially offset by a decrease in revenues in our Nuclear Operations Group segment of $5.2 million.
Consolidated operating income decreased $16.4 million to $50.4 million in the three months ended September 30, 2018 compared to $66.8 million for the corresponding period of 2017. Operating income in our Nuclear Operations Group and Other segments decreased by $20.9 million and $2.9 million, respectively. The decrease associated with the Nuclear Operations Group segment was primarily due to contract adjustments related to the manufacture of non-nuclear components of $26.7 million. These decreases were partially offset by operating income improvements in our Nuclear Services Group and Nuclear Power Group segments of $5.7 million and $0.6 million, respectively. Unallocated corporate expenses also decreased by $1.0 million when compared to the corresponding period of 2017.

26


Nine months ended September 30, 2018 vs. 2017
Consolidated revenues increased 5.1%, or $64.3 million, to $1,321.9 million in the nine months ended September 30, 2018 compared to $1,257.6 million for the corresponding period in 2017, due to increases in revenues from our Nuclear Operations Group and Nuclear Power Group segments totaling $5.6 million and $66.8 million, respectively. These increases were partially offset by a decrease in revenues in our Nuclear Services Group segment of $9.2 million.
Consolidated operating income decreased $26.6 million to $201.8 million in the nine months ended September 30, 2018 compared to $228.5 million for the corresponding period of 2017. Operating income in our Nuclear Operations Group, Nuclear Services Group and Other segments decreased by $23.2 million, $5.4 million and $8.6 million, respectively. The decrease associated with the Nuclear Operations Group segment was primarily due to contract adjustments related to the manufacture of non-nuclear components of $29.2 million. Operating income in our Nuclear Services Group segment decreased primarily due to the settlement of a contract dispute of $7.9 million that was recorded in 2017. In addition, unallocated corporate expenses were higher by $1.0 million when compared to the corresponding period of 2017. These decreases were partially offset by operating income improvements in our Nuclear Power Group segment of $11.5 million.
Nuclear Operations Group
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Revenues
 
$
319,325

 
$
324,545

 
$
(5,220
)
 
$
968,096

 
$
962,492

 
$
5,604

Operating Income
 
$
45,580

 
$
66,459

 
$
(20,879
)
 
$
180,283

 
$
203,503

 
$
(23,220
)
% of Revenues
 
14.3%

 
20.5%

 
 
 
18.6%

 
21.1%

 
 
Three months ended September 30, 2018 vs. 2017
Revenues decreased 1.6%, or $5.2 million, to $319.3 million in the three months ended September 30, 2018 compared to $324.5 million for the corresponding period of 2017. The decrease was primarily attributable to lower activity in the manufacturing of non-nuclear components for U.S. Government programs, which was partially offset by increased activity in our naval nuclear fuel and downblending operations.
Operating income decreased $20.9 million to $45.6 million in the three months ended September 30, 2018 compared to $66.5 million for the corresponding period of 2017. The decrease was primarily due to contract adjustments resulting from rework issues related to the manufacture of non-nuclear components of $26.7 million, which was partially offset by increased income in our naval nuclear fuel and downblending operations.
Nine months ended September 30, 2018 vs. 2017
Revenues increased 0.6%, or $5.6 million, to $968.1 million in the nine months ended September 30, 2018 compared to $962.5 million for the corresponding period of 2017. The increase was primarily attributable to increased activity in our naval nuclear fuel and downblending operations, which was partially offset by a decrease in activity related to the manufacturing of nuclear components for U.S. Government programs.
Operating income decreased $23.2 million to $180.3 million in the nine months ended September 30, 2018 compared to $203.5 million for the corresponding period of 2017. The decrease was primarily due to contract adjustments resulting from rework issues related to the manufacture of non-nuclear components of $29.2 million, which was partially offset by increased income in our naval nuclear fuel and downblending operations.

27


Nuclear Services Group
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Revenues
 
$
28,366

 
$
27,507

 
$
859

 
$
90,995

 
$
100,146

 
$
(9,151
)
Operating Income
 
$
6,494

 
$
776

 
$
5,718

 
$
11,182

 
$
16,577

 
$
(5,395
)
% of Revenues
 
22.9%

 
2.8%

 
 
 
12.3%

 
16.6%

 
 
Three months ended September 30, 2018 vs. 2017
Revenues increased 3.1%, or $0.9 million, to $28.4 million in the three months ended September 30, 2018 which were relatively unchanged compared to $27.5 million for the corresponding period of 2017.
Operating income increased $5.7 million to $6.5 million in the three months ended September 30, 2018 compared to $0.8 million for the corresponding period of 2017. The increase was attributable to improved operational performance at several of our sites as well as lower selling, general and administrative expenses related to a decrease in business development activities caused by the timing of proposal activities.
Nine months ended September 30, 2018 vs. 2017
Revenues decreased 9.1%, or $9.2 million, to $91.0 million in the nine months ended September 30, 2018 compared to $100.1 million for the corresponding period of 2017. The decrease was primarily attributable to the settlement of a contract dispute in the prior year, which resulted in the recovery of $7.9 million of fee income. In addition, we performed fewer commercial nuclear maintenance outages in the U.S. when compared to the same period in the prior year, which resulted in a decrease of $5.4 million. These decreases were partially offset by an increase in revenue attributable to task order work related to a new joint venture site in New Mexico and an increase in design and engineering revenues in support of NASA's nuclear space programs.
Operating income decreased $5.4 million to $11.2 million in the nine months ended September 30, 2018 compared to $16.6 million for the corresponding period of 2017. The decrease was primarily attributable to the settlement of the contract dispute of $7.9 million noted above in addition to lower income associated with performing fewer commercial nuclear maintenance outages in the U.S. when compared to the same period in the prior year. These decreases were partially offset by improved operational performance at several of our sites as well as lower selling, general and administrative expenses related to a decrease in business development activities caused by the timing of proposal activities.
Nuclear Power Group
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Revenues
 
$
79,162

 
$
68,621

 
$
10,541

 
$
267,675

 
$
200,864

 
$
66,811

Operating Income
 
$
9,063

 
$
8,426

 
$
637

 
$
38,637

 
$
27,094

 
$
11,543

% of Revenues
 
11.4%

 
12.3%

 
 
 
14.4%

 
13.5%

 
 
Three months ended September 30, 2018 vs. 2017
Revenues increased 15.4%, or $10.5 million, to $79.2 million in the three months ended September 30, 2018 compared to $68.6 million for the corresponding period of 2017. The increase was primarily attributable to our newly acquired MI business, which produced revenues of $8.0 million. In addition, we experienced an increase in volume related to the fabrication of nuclear fuel of $4.1 million. These increases were partially offset by lower levels of activity associated with our nuclear components business resulting from the completion of several projects during the prior year.
Operating income increased $0.6 million to $9.1 million in the three months ended September 30, 2018 compared to $8.4 million for the corresponding period of 2017, primarily attributable to the increase in revenues noted above.

28


Nine months ended September 30, 2018 vs. 2017
Revenues increased 33.3%, or $66.8 million, to $267.7 million in the nine months ended September 30, 2018 compared to $200.9 million for the corresponding period of 2017. The increase was attributable to higher levels of in-plant inspection, maintenance and modification services, as well as refurbishment work totaling $28.3 million. In addition, we experienced an increase in revenues in our nuclear components business of $20.8 million primarily as a result of an increase in design and manufacturing work associated with the China steam generator project as well as higher volume related to the fabrication of nuclear fuel totaling $11.9 million. Our newly acquired MI business also resulted in an increase in revenues of $8.0 million.
Operating income increased $11.5 million to $38.6 million in the nine months ended September 30, 2018 compared to $27.1 million for the corresponding period of 2017, primarily attributable to the increase in revenue noted above.
Other
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Operating Income
 
$
(5,142
)
 
$
(2,255
)
 
$
(2,887
)
 
$
(13,542
)
 
$
(4,937
)
 
$
(8,605
)
Operating income decreased $2.9 million and $8.6 million in the three and nine months ended September 30, 2018, respectively, primarily due to an increase in research and development activities related to our medical and industrial radioisotope capabilities.
Unallocated Corporate
Unallocated corporate expenses decreased $1.0 million to $5.6 million for the three months ended September 30, 2018 compared to $6.6 million for the corresponding period of 2017. This decrease was primarily due to lower levels of incentive compensation, which was partially offset by legal and consulting costs associated with due diligence activities.
Unallocated corporate expenses increased $1.0 million to $14.7 million for the nine months ended September 30, 2018 compared to $13.8 million for the corresponding period of 2017. This increase was primarily due to legal and consulting costs associated with due diligence activities, which was partially offset by lower levels of incentive compensation.
Other Income Statement Items
Other income (expense) increased $30.3 million to a gain of $34.2 million in the three months ended September 30, 2018, as compared to a gain of $3.8 million for the corresponding period of 2017 due primarily to a $35.1 million mark to market adjustment related to the interim remeasurement of two of our domestic pension plans as discussed in Note 4 to our condensed consolidated financial statements included in this Report. The mark to market adjustment was partially offset by an increase in interest expense associated with higher levels of long-term debt when compared to the prior year.
Other income (expense) increased $36.0 million to a gain of $47.0 million in the nine months ended September 30, 2018, as compared to a gain of $11.0 million for the corresponding period of 2017 due primarily to the $35.1 million mark to market adjustment noted above as well as $4.7 million of gains related to derivative instruments not designated as hedges and a decrease in net periodic benefit cost of $4.2 million. These items were partially offset by an increase in interest expense associated with higher levels of long term debt when compared to the prior year. Included in interest expense is $2.4 million of expense related to the recognition of prior deferred debt issuance costs associated with the Former Credit Facility.
Provision for Income Taxes
 
 
Three Months Ended
September 30,
 
 
 
Nine Months Ended
September 30,
 
 
 
 
2018
 
2017
 
$ Change
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Income before Provision for Income Taxes
 
$
84,559

 
$
70,594

 
$
13,965

 
$
248,802

 
$
239,454

 
$
9,348

Provision for Income Taxes
 
$
6,482

 
$
23,901

 
$
(17,419
)
 
$
43,578

 
$
75,556

 
$
(31,978
)
Effective Tax Rate
 
7.7%

 
33.9%

 
 
 
17.5%

 
31.6%

 
 

29


We primarily operate in the U.S. and Canada. On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted, making significant changes to existing U.S. tax laws that impact us, including, but not limited to, a reduction to the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, the taxation of global intangible low-taxed income ("GILTI") and additional deduction limitations related to executive compensation. We recognized the income tax effects of the Act within our condensed consolidated financial statements in accordance with FASB Topic Income Taxes. Our Canadian operations continue to be subject to tax at a local statutory rate of approximately 25%.
Our effective tax rate for the three months ended September 30, 2018 was 7.7% as compared to 33.9% for the three months ended September 30, 2017. Our effective tax rate for the nine months ended September 30, 2018 was 17.5% as compared to 31.6% for the nine months ended September 30, 2017. The effective tax rates for the three and nine months ended September 30, 2018 were lower than the 2018 U.S. corporate income tax rate of 21% primarily due to remeasurement adjustments to our deferred tax assets as a result of accelerating additional contributions made in August 2018 to certain of our domestic pension plans for inclusion in our 2017 U.S. tax return. Our effective tax rate for the nine months ended September 30, 2017 was lower than the 2017 U.S. corporate income tax rate of 35% primarily due to benefits recognized for excess tax benefits related to employee share-based payments of $5.4 million.
Backlog
Backlog represents the dollar amount of revenue we expect to recognize in the future from contracts awarded and in progress. Not all of our expected revenue from a contract award is recorded in backlog for a variety of reasons, including that some projects are awarded and completed within the same fiscal quarter.
Our backlog is equal to our remaining performance obligations under contracts that meet the criteria in FASB Topic Revenue from Contracts with Customers, as discussed in Note 3 to our condensed consolidated financial statements included in this Report. It is possible that our methodology for determining backlog may not be comparable to methods used by other companies.
We are subject to the budgetary and appropriations cycle of the U.S. Government as it relates to our Nuclear Operations Group and Nuclear Services Group segments. Backlog may not be indicative of future operating results, and projects in our backlog may be cancelled, modified or otherwise altered by customers.
 
 
September 30,
2018
 
December 31,
2017
 
 
(In approximate millions)
Nuclear Operations Group
 
$
2,940

 
$
3,305

Nuclear Services Group
 
26

 
29

Nuclear Power Group
 
868

 
637

Total Backlog
 
$
3,834

 
$
3,971

We do not include the value of our unconsolidated joint venture contracts in backlog. These unconsolidated joint ventures are included in our Nuclear Services Group segment.
Of the September 30, 2018 backlog, we expect to recognize revenues as follows:
 
 
2018
 
2019
 
Thereafter
 
Total
 
 
(In approximate millions)
Nuclear Operations Group
 
$
304

 
$
889

 
$
1,747

 
$
2,940

Nuclear Services Group
 
18

 
3

 
5

 
26

Nuclear Power Group
 
84

 
176

 
608

 
868

Total Backlog
 
$
406

 
$
1,068

 
$
2,360

 
$
3,834

At September 30, 2018, Nuclear Operations Group backlog with the U.S. Government was $2,412.1 million, $276.1 million of which had not yet been funded.
At September 30, 2018, Nuclear Services Group backlog with the U.S. Government was $14.9 million, all of which was funded.
At September 30, 2018, Nuclear Power Group had no backlog with the U.S. Government.

30


Major new awards from the U.S. Government are typically received following congressional approval of the budget for the Government's next fiscal year, which starts October 1, and may not be awarded to us before the end of the calendar year. Due to the fact that most contracts awarded by the U.S. Government are subject to these annual funding approvals, the total values of the underlying programs are significantly larger. In April 2016, we were awarded a component and fuel contract, along with a three-year downblending contract by the U.S. Government with a combined value in excess of $3.0 billion, inclusive of unexercised options.
As of September 30, 2018, the U.S. Government had awarded us approximately $2.8 billion of the April 2016 award. The value of unexercised options excluded from backlog as of September 30, 2018 was approximately $0.2 billion, the majority of which is expected to be exercised in 2019, subject to annual congressional appropriations.
Liquidity and Capital Resources
On May 24, 2018, we and certain of our subsidiaries entered into a credit agreement (the "New Credit Facility") with Wells Fargo Bank, N.A., as administrative agent, and the other lenders party thereto. We also issued notes pursuant to an indenture among the Company, certain of our subsidiaries, as guarantors, and U.S. Bank National Association, as trustee. In connection with the closing of the New Credit Facility and the issuance of the notes, we concurrently repaid all outstanding debt obligations and terminated our credit agreement dated as of May 11, 2015, as amended, among the Company, certain of our subsidiaries, Bank of America, N.A., as administrative agent, and the other lenders party thereto (the "Former Credit Facility"). The Former Credit Facility consisted of (1) a $400.0 million revolving credit facility, (2) a $300.0 million term loan facility, (3) a $137.5 million (U.S. dollar equivalent) Canadian dollar term loan facility, and (4) a $112.5 million term loan facility.
Credit Facility
The New Credit Facility includes a $500.0 million senior secured revolving credit facility (the "New Revolving Credit Facility"), a $50.0 million U.S. dollar senior secured term loan A made available to the Company (the "New USD Term Loan") and a $250.0 million (U.S. dollar equivalent) Canadian dollar senior secured term loan A made available to BWXT Canada Ltd. (the "New CAD Term Loan"). All obligations under the New Credit Facility are scheduled to mature on May 24, 2023. The proceeds of loans under the New Credit Facility are available for working capital needs and other general corporate purposes.
The New Credit Facility allows for additional parties to become lenders and, subject to certain conditions, for the increase of the commitments under the New Revolving Credit Facility, the New USD Term Loan or the New CAD Term Loan, subject to an aggregate maximum for all additional commitments of (1) the greater of (a) $250 million and (b) 65% of EBITDA, as defined in the New Credit Facility, for the last four full fiscal quarters, plus (2) all voluntary prepayments of term loans, plus (3) additional amounts provided the Company is in compliance with a pro forma first lien leverage ratio test of less than or equal to 2.50 to 1.00.
The Company's obligations under the New Credit Facility are guaranteed, subject to certain exceptions, by substantially all of the Company's present and future wholly owned domestic restricted subsidiaries (other than its captive insurance subsidiary and the domestic holding company of its Canadian subsidiaries). The obligations of BWXT Canada Ltd. under the New Credit Facility are guaranteed, subject to certain exceptions, by (1) substantially all of the present and future wholly owned Canadian restricted subsidiaries of BWXT Canada Ltd., (2) substantially all of the Company's present and future wholly owned domestic restricted subsidiaries (other than its captive insurance subsidiary and the domestic holding company of its Canadian subsidiaries), (3) BWXT Canada Holdings Corp. and (4) BWXT ITG Canada, Inc.
The New Credit Facility is secured by first-priority liens on certain assets owned by the Company (other than its subsidiaries comprising its Nuclear Operations Group segment and a portion of its Nuclear Services Group segment); provided that (1) the Company's domestic obligations are only secured by assets and property of the domestic loan parties and (2) the obligations of BWXT Canada Ltd. and the Canadian guarantors are secured by assets and property of the Canadian guarantors and the domestic loan parties.
The New Credit Facility requires interest payments on revolving loans on a periodic basis until maturity. We began making quarterly amortization payments on the New USD Term Loan and the New CAD Term Loan in amounts equal to 1.25% of the initial aggregate principal amount of each term loan in the third quarter of 2018. We may prepay all loans under the New Credit Facility at any time without premium or penalty (other than customary Eurocurrency breakage costs), subject to notice requirements.

31


The New Credit Facility includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio is 4.00 to 1.00, which may be increased to 4.50 to 1.00 for up to four consecutive fiscal quarters after a material acquisition. The minimum consolidated interest coverage ratio is 3.00 to 1.00. In addition, the New Credit Facility contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. As of September 30, 2018, we were in compliance with all covenants set forth in the New Credit Facility.
Outstanding loans under the New Credit Facility will bear interest at our option at either (1) the Eurocurrency rate plus a margin ranging from 1.25% to 2.00% per year or (2) the base rate or Canadian index rate, as applicable (described in the New Credit Facility as the highest of (a) with respect to the base rate only, the federal funds rate plus 0.50%, (b) the one-month Eurocurrency rate plus 1.0% and (c) the administrative agent's prime rate or the Canadian prime rate, as applicable), plus, in each case, a margin ranging from 0.25% to 1.00% per year. We are charged a commitment fee on the unused portion of the New Revolving Credit Facility, and that fee ranges from 0.150% to 0.275% per year. Additionally, we are charged a letter of credit fee of between 1.25% and 2.00% per year with respect to the amount of each financial letter of credit issued under the New Credit Facility, and a letter of credit fee of between 0.75% and 1.20% per year is charged with respect to the amount of each performance letter of credit issued under the New Credit Facility. The applicable margin for loans, the commitment fee and the letter of credit fees set forth above will vary quarterly based on our leverage ratio. Based on the leverage ratio applicable at September 30, 2018, the margin for Eurocurrency rate and base rate or Canadian index rate loans was 1.375% and 0.375%, respectively, the letter of credit fee for financial letters of credit and performance letters of credit was 1.375% and 0.825%, respectively, and the commitment fee for the unused portion of the New Revolving Credit Facility was 0.175%.
As of September 30, 2018, borrowings outstanding totaled $291.2 million and $90.0 million under our term loans and revolving line of credit, respectively, and letters of credit issued under the New Credit Facility totaled $67.7 million. As a result, we had $342.3 million available for borrowings or to meet letter of credit requirements as of September 30, 2018. As of September 30, 2018, the weighted-average interest rate on outstanding borrowings under our New Credit Facility was 3.33%.
The New Credit Facility generally includes customary events of default for a secured credit facility, some of which allow for an opportunity to cure. Under the New Credit Facility, (1) if an event of default relating to bankruptcy or other insolvency events occurs, all related obligations will immediately become due and payable; (2) if any other event of default exists, the lenders will be permitted to accelerate the maturity of the related obligations outstanding and (3) if any event of default exists, the lenders will be permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral.
If any default occurs under the New Credit Facility, or if we are unable to make any of the representations and warranties in the New Credit Facility, we will be unable to borrow funds or have letters of credit issued under the New Credit Facility.
Senior Notes
The Company issued $400.0 million aggregate principal amount of its 5.375% senior notes due 2026 (the "Senior Notes") pursuant to an indenture dated May 24, 2018 (the "Indenture"), among the Company, the guarantors and U.S. Bank National Association, as trustee. The Senior Notes are guaranteed by each of the Company's present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the New Credit Facility.
Interest on the Senior Notes is payable semi-annually in cash in arrears on January 15 and July 15 of each year, which commenced on July 15, 2018, at a rate of 5.375% per annum. The Senior Notes will mature on July 15, 2026.
The Company may redeem the Senior Notes, in whole or in part, at any time on or after July 15, 2021 at established redemption prices. At any time prior to July 15, 2021, the Company may also redeem up to 40% of the Senior Notes with net cash proceeds of certain equity offerings at a redemption price equal to 105.375% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to July 15, 2021, the Company may redeem the Senior Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable "make-whole" premium.
The Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the Indenture or the Senior Notes and certain provisions related to bankruptcy events. The Indenture also contains customary negative covenants. As of September 30, 2018, we were in compliance with all covenants and agreements set forth in the Indenture and the Senior Notes.

32


Other Arrangements
We have posted surety bonds to support regulatory and contractual obligations for certain decommissioning responsibilities, projects and legal matters. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is adequate to support our existing requirements for the next twelve months. In addition, these bonds generally indemnify the beneficiaries should we fail to perform our obligations under the applicable agreements. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue. As of September 30, 2018, bonds issued and outstanding under these arrangements totaled approximately $67.9 million.
Long-term Benefit Obligations
Our unfunded pension and postretirement benefit obligations totaled $107.8 million at September 30, 2018. These long-term liabilities are expected to require use of our resources to satisfy future funding obligations. Based largely on statutory funding requirements, we expect to make contributions of approximately $3.6 million for the remainder of 2018 related to our pension and postretirement plans. We may also make additional contributions based on a variety of factors including, but not limited to, tax planning, evaluation of funded status and risk mitigation strategies.
Other
Our domestic and foreign cash and cash equivalents, restricted cash and cash equivalents and investments as of September 30, 2018 and December 31, 2017 were as follows:
 
 
September 30,
2018
 
December 31,
2017
 
 
(In thousands)
Domestic
 
$
48,527

 
$
211,935

Foreign
 
35,931

 
13,443

Total
 
$
84,458

 
$
225,378

Our working capital decreased by $19.9 million to $325.1 million at September 30, 2018 from $345.0 million at December 31, 2017, primarily attributable to a decrease in cash and cash equivalents as a result of the acceleration of pension contributions related to certain of our domestic pension plans and the acquisition of the MI business. This was partially offset by an increase associated with changes in net contracts in progress and advance billings due to the timing of project cash flows and an increase in income taxes receivable.
Our net cash used in operations increased by $153.2 million to $8.4 million in the nine months ended September 30, 2018, compared to cash provided by operations of $144.8 million in the nine months ended September 30, 2017. The increase in cash used in operations was primarily attributable to increased pension contributions made in the nine months ended September 30, 2018 of $133.5 million when compared to the prior year.
Our net cash used in investing activities increased by $239.1 million to $277.0 million in the nine months ended September 30, 2018 compared to $37.9 million in the nine months ended September 30, 2017. The increase was primarily attributable our acquisition of the MI business for $213.0 million and an increase in purchases of property, plant and equipment of $11.1 million.
Our net cash provided by financing activities increased by $197.5 million to $153.9 million in the nine months ended September 30, 2018, compared to cash used in financing activities of $43.6 million in the nine months ended September 30, 2017. The increase was primarily attributable to an increase in net borrowings of $297.0 million as a result of issuing the Senior Notes and closing of the New Credit Facility. The increase in net borrowings was partially offset by an increase in repurchases of common shares of $62.6 million as well as an increase in dividends paid to common shareholders of $16.9 million.
At September 30, 2018, we had restricted cash and cash equivalents totaling $7.0 million, $2.6 million of which was held for future decommissioning of facilities (which is included in other assets on our condensed consolidated balance sheets) and $4.4 million of which was held to meet reinsurance reserve requirements of our captive insurer.
At September 30, 2018, we had short-term and long-term investments with a fair value of $11.3 million. Our investment portfolio consists primarily of U.S. Government and agency securities, corporate bonds and equities, mutual funds and asset-

33


backed securities. Our investments are carried at fair value and are either classified as trading, with unrealized gains and losses reported in earnings, or as available-for-sale, with unrealized gains and losses, net of tax, being reported as a component of other comprehensive income.
Based on our liquidity position, we believe we have sufficient cash and letter of credit and borrowing capacity to fund our operating requirements for at least the next 12 months.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposures to market risks have not changed materially from those disclosed in Item 7A included in Part II of our 2017 10-K, except as updated by our Form 10-Q for the quarter ended June 30, 2018.
Item 4.
CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2018 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure. There has been no change in our internal control over financial reporting during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION
Item 1.
LEGAL PROCEEDINGS
For information regarding ongoing investigations and litigation, see Note 5 to our unaudited condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item.
Item 1A.
RISK FACTORS
In addition to the other information in this report, the other factors presented in Item 1A Risk Factors in our 2017 10-K are some of the factors that could materially affect our business, financial condition or future results. There have been no material changes to our risk factors from those disclosed in our 2017 10-K.
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Since November 2012, we have periodically announced that our Board of Directors has authorized share repurchase programs. The following table provides information on our purchases of equity securities during the quarter ended September 30, 2018. Any shares purchased that were not part of a publicly announced plan or program are related to repurchases of common stock pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.
Period
 
Total number
of shares
purchased (1)
 
Average
price
paid
per share
 
Total number of shares purchased as part of publicly announced plans or programs
 
Approximate dollar
value of shares that
may yet be
purchased under the
plans or programs
(in millions) (2)
July 1, 2018 - July 31, 2018
 
12,799

 
$
62.47

 

 
$
150.0

August 1, 2018 - August 31, 2018
 
537,566

 
$
63.02

 
537,304

 
$
116.1

September 1, 2018 - September 30, 2018
 
462,696

 
$
61.98

 
462,696

 
$
87.5

Total
 
1,013,061

 
$
62.54

 
1,000,000

 
 
(1)
Includes 12,799 and 262 shares repurchased during July and August, respectively, pursuant to the provisions of employee benefit plans that permit the repurchase of shares to satisfy statutory tax withholding obligations.
(2)
On February 27, 2017, we announced that our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $150 million during a three-year period that expires on February 24, 2020. On November 6, 2018, our Board of Directors authorized us to repurchase an indeterminate number of shares of our common stock at an aggregate market value of up to $250 million during a three-year period that expires on November 6, 2021. The November 2018 authorization was in addition to the share repurchase amount authorized in February 2017.
Item 5.
OTHER INFORMATION
On November 6, 2018, the Company amended its Amended and Restated Bylaws (the "Bylaws") to incorporate an immaterial modification to the director and officer resignation provision. This description is qualified in its entirety by reference to, and should be read in conjunction with, the full text of the Bylaws, as amended and restated, a copy of which is attached hereto as Exhibit 3.3 and is incorporated herein by reference.

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Item 6.
EXHIBITS
Exhibit
Number
 
Description
2.1
 
 
 
 
2.2
 
 
 
 
3.1
 
 
 
 
3.2
 
 
 
 
3.3
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document

* 
Management contract or compensatory plan or arrangement.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
BWX TECHNOLOGIES, INC.
 
 
 
 
 
 
 
/s/ David S. Black
 
 
By:
 
David S. Black
 
 
 
 
Senior Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer and Duly Authorized
 
 
 
 
Representative)
 
 
 
 
 
 
 
/s/ Jason S. Kerr
 
 
By:
 
Jason S. Kerr
 
 
 
 
Vice President and Chief Accounting Officer
 
 
 
 
(Principal Accounting Officer and Duly Authorized
 
 
 
 
Representative)
 
 
 
November 6, 2018
 
 
 
 

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