Ladies and gentlemen, welcome to BWX Technologies' First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will conduct a question and answer session, and instructions will be given at that time. I would now like to turn the call over to our host, Mr. Mark Kratz, BWXT's Director of Investor Relations. Please go ahead.
Thanks, Grant. Good morning, and thank you for joining BWXT's First Quarter 2020 Earnings Call. Joining me today are Rex Geveden, President and Chief Executive Officer, and David Black, Senior Vice President and Chief Financial Officer. On today's call, we will discuss certain matters that constitute forward-looking statements and involve risks and uncertainties, including those described in the safe harbor provision found in yesterday's earnings release and BWXT SEC filings. We will also provide non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials. Copies of these documents, along with today's earnings presentation, are available on the investors section of our website. With that, I will turn the call over to Rex.
Thank you, Mark, and good morning. Yesterday, we reported exceptional first-quarter results despite a generally challenging business environment resulting from the COVID-19 health crisis. Consolidated revenues were up 30%, with all three segments growing, and earnings were $0.79 per share, both setting new quarterly records for BWXT. First-quarter outperformance was led by the Nuclear Operations Group, achieved through the Columbia-class product line ramp, combined with solid operating performance and recognition of contract savings, as well as accelerated long lead material production originally anticipated in the second quarter of this year. While we are well-pleased with the first-quarter results, we remain acutely focused on protecting employee health and safety. That is our top priority as we navigate through the coronavirus crisis. In the first quarter, we created a pandemic planning and response team to address the COVID-19 threat.
We updated policies, procedures, and practices required to respond to all aspects of the health crisis. Examples include temperature screenings at factory entry points, shift staggering, and teleworking where possible. Based on CDC guidance, we also provided employees with face coverings to wear at work, and we continue to require social distancing where possible. It is worth noting that our employees have been remarkably resilient in adapting to very significant changes in how we do business. We have experienced a limited number of coronavirus cases at some BWXT sites. The protocol that we established for responding to these cases is quite thorough and so far appears to be effective in minimizing the impact to other employees and the business. As the situation continues to evolve, we will evaluate, modify, and update our practices frequently to maintain a high level of effectiveness across all BWXT locations.
As you may know, the U.S. federal government and appropriate Canadian provincial governments have designated the various businesses of BWXT as essential, given our roles in national security, energy production, and medical manufacturing. All 12 of our major operating sites are running more or less normally at this time. Having said that, we have experienced coronavirus-related business impacts, and I wanted to offer some details at the business segment level. As I stated earlier, the Nuclear Operations Group is off to a strong start to the year. COVID-19 impacts have been limited in this segment, with no notable disruptions to the business to date. We've continued to hire and ramp as we enter the first full calendar year of Columbia-class production and are gearing up for incremental growth on the Ford carrier work that we secured late last year.
On the budget front, the House and Senate Armed Services Committees are slated to provide their markups to the president's budget request in the coming months. We are seeing incremental bipartisan support for a second Virginia-class submarine in the FY 2021 budget discussions. We continue to work with the Navy customer on the next multi-year pricing agreement. We are providing pricing information for both one and two Virginia-class propulsion systems in government fiscal year 2021. We still anticipate and are planning for the next multi-year pricing agreement to encompass two years, government fiscal year 2021 and 2022, and to contain content for four Virginia-class fast attack submarines and the next Columbia-class ballistic missile submarine. We may see a scenario where the second Virginia-class submarine hull is not ordered. The nuclear propulsion equipment for a second submarine is still ordered with advanced procurement funding.
This would enable the government to keep shop hours balanced and take advantage of cost efficiencies through optimized production volume for these key systems that BWXT provides for the Navy's nuclear fleet. The Nuclear Power Group segment has experienced the largest impact from the COVID-19 pandemic. Canadian utility customers are managing on-site work differently to limit personnel exposure and have opted to delay some upcoming refurbishment and service outage activities until conditions improve. Additionally, we are seeing weaker demand for current medical radioisotope products as hospitals prioritize resources for COVID-19 patients. While most isotope procedures are still considered critical, physicians are scheduling fewer procedures to limit potential patient exposure to COVID-19. Lastly, for NPG, the global economic fallout and lower oil prices have weakened the Canadian dollar, the result of which is to lower revenue and operating income for that segment through the currency conversion.
The three foregoing conditions lead us to lower NPG segment guidance for the year, both from a revenue and margin perspective. From a COVID standpoint, NSG has experienced some operational impacts. Most DOE laboratory and production sites are in MinSafe condition to limit site personnel exposure, and we do not yet know the potential impacts to award or performance fees. We are also seeing incremental delays in new awards. For example, we now anticipate the Hanford tank contract will occur sometime in late summer with the contract transition to occur in the fall timeframe. The BWXT supply chain across the company has been resilient through the global health crisis. So far, COVID impacts have been relatively minor, and we continue to closely monitor the health of the supplier base. The fundamentals of BWXT's long-term business remain strong.
The near-term business impacts we are witnessing are generally characterized as timing related, particularly from the Nuclear Power Group. First quarter performance, combined with the current outlook across the company, lead us to reiterate earnings guidance for the year while modifying some of the underlying components of guidance. The 2020 guidance has been updated to reflect the current business conditions as they relate to the COVID-19 pandemic. Based on generally positive trends within our business concerning active cases and employee quarantine counts, the updated guidance assumes that the current conditions continue through the second quarter of 2020 and return to generally normal conditions beyond that. Our guidance does not contemplate worsening conditions that could extend beyond the second quarter and further into 2020. We will continue to closely monitor business activity across the company and will provide investors with any significant updates as appropriate.
With that, I will turn the call over to David.
Thanks, Rex. Good morning. Starting with total company results on slide five of the earnings presentation, first quarter revenue set a new high water mark at $542 million, up 30% on a consolidated basis, with all segments growing. First quarter non-GAAP EPS was also a record at $0.79. EPS was up 55% compared with the first quarter of 2019, of which the majority came from $0.27 of operational volume and contract improvements. Other favorable income and expenses were partially offset by a higher tax rate of 23.2%. A quarter-over-quarter bridge can be found on slide six of the presentation. Moving to segment results on slide seven. Nuclear Operations Group delivered a record quarter with revenue up 39% to $424 million. We continue to see higher volume from Columbia -class production and also some accelerated material purchases into the first quarter.
NOG operating income was $90 million, resulting in a 21.3% operating margin. This was up significantly versus the first quarter of 2019 as a result of higher volume and favorable contract adjustments as we recognized savings and efficiencies. The Nuclear Power Group produced $88 million of revenue in the first quarter, a 4% increase when compared with the first quarter last year, primarily driven by the Laker Energy acquisition and higher component manufacturing, partially offset by lower field service activity. Without the acquisition, organic NPG revenues were down about 2%. NPG first quarter non-GAAP operating income was $8.6 million, resulting in a non-GAAP operating margin of 9.8%. Operating income and margin were down when compared to the first quarter 2019 due to an unfavorable shift in product line mix, including the absence of the China steam generator project.
Lastly, the Nuclear Services Group delivered operating income of $6.4 million in the first quarter, up $4.8 million versus the prior- year period, as a result of lower expenses and increased volume from U.S. commercial nuclear services and advanced technology programs. Turning now to guidance on slide eight. As Rex mentioned during his opening remarks, we are reiterating our consolidated guidance for 2020. Revenue is still expected to be up approximately 8% with earnings of about $2.80 per share. Although we had an exceptional first quarter, we reiterate our expectation that earnings for the year are still slightly back half weighted with approximately a 48/52 first half versus second half split, resulting in the second quarter being the low point for the year due to accelerating some long lead material production into Q1 and COVID-19 service outage delays impacting NPG.
We have updated some of the underlying components of our 2020 guidance to reflect the impact and risks related to COVID-19, as well as some actions we are taking to optimize cost. Nuclear Power Group revenue is now expected to be down slightly or about 1% as the Canadian utility customers shift outage services and refurbishment activity to the right to help manage the impact of COVID-19. We also now expect NPG operating margins of 11% versus our prior assumption of 13%. In addition to lower volume from shift of utility work, there are two other major contributing factors that cause us to lower NPG income expectations. First is foreign exchange rate fluctuations and volatility between the Canadian and U.S. dollar. Second is suppressed demand for medical isotopes since hospitals are prioritizing COVID-19 patients.
All three of these components have an equal weight of pushing the segment operating income down. On the positive side, we continue to optimize our cost structure, and we have updated the expectation for corporate unallocated costs, which we now anticipate to be about $15 million for the year, versus the prior expectation of approximately $20 million. Additionally, we now expect depreciation and amortization to be approximately $65 million for the year, as the timing of asset procurements and their placement into service has shifted. All other components of guidance remain consistent with our initial outlook, and we have updated our 2020 guidance bridge on slide nine to reflect the aforementioned changes. I will close my remarks with a few comments about our debt and liquidity position. In late March, we amended our credit facility that increased the revolver by $250 million to a total of $750 million.
The amendment also extended the maturity date of the revolver and improved the pricing terms when compared with the prior agreement, which is providing some tailwind in 2020 with lower expected interest expense through better rates and lower than expected borrowings. This was an important step for the company, and we appreciated our banks working with us in a volatile debt market environment. Having the ability to secure a debt amendment with more favorable pricing in the March rate environment speaks to the credibility of the business and our long-term outlook for cash generation. This action also gives us increased balance sheet flexibility as we look to fund our capital investments and future growth opportunities, and is underscored by the current environment related to COVID-19.
Company gross debt totaled $934 million at the end of the first quarter, with $404 million of remaining availability under the amended credit facility, and the company's debt leverage remained at a comfortable level at around 2x . BWXT's capital allocation strategy has not changed in light of the current environment. We continue to demonstrate a balanced capital allocation over time with year-to-year emphasis on certain priorities. For 2020, we still expect capital expenditures to be at a peak year at $270 million as we focus on investing in future organic growth. Following 2020, capital expenditures are anticipated to start a downward trajectory, with 2021 expected to be somewhat lower than the $270 million we anticipate for this year and will return to near maintenance levels in 2022.
We also continued to return capital to shareholders and in the first quarter allocated $18.6 million in dividend payments and $20 million in share repurchases to offset dilution. Our overall share repurchase strategy during these elevated capital expenditure years has not changed, and we remain opportunistic beyond offsetting any annual dilution. Based on the CapEx and dividend commitments for 2020, we do not anticipate incremental repurchases for the remainder of the year. From a cash standpoint, the company utilized $6.4 million in net cash in operating activities in the first quarter 2020, about $11 million less than the prior- year period. Cash and short-term investments, net of restricted cash, was $81.3 million at the end of the first quarter as we remain well-positioned from a cash perspective for the future. With that, I'll turn the call back over to Rex with some closing remarks.
Thank you, David. Let me finish my prepared remarks with a brief update on our commercial Mo-99 efforts and some traction we are gaining with microreactors. As I said on the last call, we were dealing with schedule issues on the Moly program within the radioisotope business line, leading us to a [re-baseline] of the program. In addition to those challenges, we have since suffered some component delays from European and Canadian suppliers and sub-suppliers due to COVID-19. We have now completed a comprehensive re-baseline of the program considering the foregoing factors and other risks that could manifest, and we now project to reach commercial readiness in mid-year 2022. Despite the delays and challenges, we remain very enthusiastic about the new product line, the business case, and our competitive position in the market. Finally, we received several awards over the past couple of months related to microreactors and TRISO fuel.
In March, we were awarded a DOE contract for TRISO fuel to support the Transformational Challenge Reactor at Oak Ridge National Laboratory. In addition to TRISO, BWXT was also awarded a $14 million microreactor design contract from the DoD Strategic Capabilities Office. These awards, and others pending, underscore increasing government interest in compact reactors and accident-tolerant TRISO fuel to solve some of the most challenging national security power and propulsion problems. We remain well-positioned to lead the market in these new technologies and programs. With that, I'll ask the operator to open the line for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Peter Arment with Baird. Please go ahead.
Yes, thanks. Good morning, Rex, David, Mark.
Good morning, Peter.
Rex, thanks for the details on your comments on the second Virginia-class. Maybe you could just give us your thoughts around if there is a continuing resolution in the fall, what that would do, and given the long lead nature of your contracts.
Well, in a continuing resolution scenario, normally the funding is year-over-year funding and content are similar. I think that would actually be a favorable situation for us, Peter.
Okay. You wouldn't expect that in terms of any slip.
I would just speculate we'd stay on the two Virginia tempo in a CR.
Okay. No, that's helpful. Then maybe just on the supply chain impact from Moly- 99, could you give us a little more color exactly what you're seeing there and why we see such a push out from just the latest impact from COVID?
Right. Most of that push out in the start date for the Moly program is related to programmatic challenges that we outlined earlier. We saw, Peter, about a quarter of impact, let's call it, from the COVID effects. That has to do with most of our key suppliers for the hot cell equipment are in Europe. We have two Italian suppliers, we have a German supplier, and some of those factories slowed down or shut down during the peak of the pandemic crisis. They are more or less back to normal now. We factored those delays into the product launch date.
Okay. That's helpful. Thank you.
You're welcome.
Our next question will come from Pete Skibitski with Alembic Global. Please go ahead.
Hey. Good morning, guys. Nice quarter.
Thanks, Pete.
Just a couple top-level questions. Rex, you guys named a Chief Strategy Officer, I think was the title. Can you just talk about that, your thoughts there. I have one quick follow-up.
Sure. We hired Robb LeMasters, who, as you would know, came from Blue Harbour. Blue Harbour had a heavy position in BWXT at the time of the spin and had been an investor in Babcock & Wilcox prior. Robb came onto our Board about five years ago, and he went with BWXT during the spin into that Board and has been active there for over that period of time in our history as a public company. He stayed on the Board after Blue Harbour sold down its position, and the Board was very happy to keep him. So was the executive team. He's always been useful and sort of a bright star on that Board. He was going through a career transition and was interested in doing something with a public company. We took an opportunity to make an offer to Robb as Chief Strategy Officer.
His portfolio will have strategy, he'll have investor relations, and also the corporate development piece, mergers and acquisitions, and have oversight of those positions. The team members will stay the same, but Robb will have the oversight of that. He'll bring a very interesting perspective. He understands, I think, how investors react to the business. He understands the down and in aspects of the business, and he works well with all members of our executive team. It was a great add. He's very talented, and I think it'll be good for our business in terms of what he brings and also to expand our executive depth.
Great. Thanks for that color. Just last question from me is, your thoughts on the White House, I think, looking to revitalize the domestic uranium industry. Does that impact you guys in any way? I was just curious.
Yeah, not so much, Pete. We certainly haven't been in mining or enrichment any time in the past. If the nation starts to need High-Assay Low-Enriched Uranium in that 5%-20% enrichment category or above that into highly enriched uranium, there's a role we could play because we supported USEC back in the days on the American Centrifuge Program. There are roles that we could play there, including priming an effort like that. Generally speaking, we're not too active in that part of the supply chain, that part of the value chain right now.
Okay. Appreciate it. Thanks, guys.
Yeah. Thanks, Pete.
Our next question will come from Bob Labick with CJS Securities. Please go ahead.
Good morning. Thanks for taking the questions.
Good morning, Bob.
Hi. I wanted to start with the long-term guidance. You reiterated your long-term guidance, the 2022 guidance. Obviously the isotope contribution has shifted out since now you're expecting revenues and contribution to start in mid-2022. Can you just give us a sense of some of the puts and takes to maintain the longer- term guidance and perhaps how much isotope contribution is built into that, if there's any other cushions in that guidance?
Sure. Thanks, Bob, for the question. Some pressure on that long-term guidance, obviously, with isotope delays and concerns over DOE award timing and such. We still feel confident about that. Those are some of the takes. In terms of the puts that you ask about. We do have this gathering momentum in microreactors and fuel, and we'll see where that takes us and how quickly that can become a major component of the business. One of the things in our toolkit is we have such significant backlog in our Nuclear Operations business that we can pull on that backlog by working additional hours, by requiring mandatory overtime, and sort of burning the backlog. There's some levers that we have in the business. There is certainly admitted pressure on that long-term guidance, but we remain committed to it.
Got it. Great. The pressure seemingly is, again, timing, right? As things are pushed out a little bit as opposed to existing businesses. Maybe just talk about, if we stop thinking about just the end of 2022, a five-year kind of growth drivers and outlook as well. We've talked in the past about space. You just brought up microreactors again, and maybe given market disruptions in your steady business, any potential M&A. Can you think about or help us think about the next five years and growth aspirations and opportunities?
Sure, Bob. Certainly the space and defense reactors are a very interesting future component of growth. Our core business, the franchise platform, does have, obviously, the Columbia-class submarines coming in, assuming we maintain the Virginia tempo and the slight acceleration in the Ford, there's very good prospects for that business. We like all that. We certainly like the isotope business. That's a growing business. Sort of a bit of a bright spot in the isotope picture right now is that pulmonary imaging, which is done with Moly- 99, is exploding in light of COVID-19. That's been driven by cardiology procedures in the past. I think you'll see there's a whole class of people out there that may have permanent lung damage from COVID-19 and will need periodic assessment through imaging. There's interesting growth prospects around even that.
Then, we certainly have balance sheet capacity, and we can drive earnings through share repurchases, but also through acquisitions. So we have some interesting opportunities in our pipeline and balance sheet capacity for those. So I think the long- term, you put it perfectly, right? Despite the sort of artificial window around 2020 - 2022, the long-term growth prospects for this business are quite strong.
I'll reiterate, Bob, that if you look on page 14 of the investor briefing, that's where we show the NOG business and the power unit production ramp. If we look five years out on the Columbia, we've got four Columbias going through the shop, where today we have one. That gives you an indication. We won't quantify that, but that gives you an indication of the growth between now and then.
Super. Thank you very much.
If you'd like to ask a question, it is star then one. Star then one to ask a question. Our next question will come from Michael Ciarmoli with Truist. Please go ahead.
Hey, good morning, guys. Thanks for taking the question. Nice quarter.
Thanks.
Rex or David, maybe on NOG, the cadence of revenues for the remainder of the year looks fairly flat. You obviously pulled in some work there on the long lead time. Can you give us a sense, just as we think about the Virginia- class, when does a decision have to be made before you guys would start to maybe see or feel some of that headwind if the boat isn't added back into the budget?
Yeah. Hey, Mike. Michael, good morning. Well, we said on a prior call that it would start to impact the business potentially in Q4 of this year, obviously would continue over the duration of the life of that project, which is about six years altogether. You know the story on the incremental effects on our business. There are, give or take, at any one point in time, about 12 Virginia-class ship sets going through our factories at various stages of maturity, from just starting to on the verge of delivery. On top of that, you have the single Columbia going through, generally speaking, there are two to four Ford ship sets based on the acquisition tempo and then the delivery schedule for those. Give or take 15, 16, 17 systems, ship sets moving through our factories at any one point in time.
By ship set, I mean, of course, fuel, cores, core barrels, reactor vessels, control rod drive mechanisms, steam generators, pressurizers, that whole thing, at the various factories. It would have that kind of incremental effect on the business starting in Q4 2020. As Peter questioned earlier, what would happen in a CR scenario? I think with a CR scenario, we'd probably just carry on as normal doing two Virginia ship sets a year. I certainly doubt we'll have a full appropriation done by the beginning of government fiscal year 2020, so I think that that decision will be hanging out there for some time.
Okay. If this drags out, if they finally make a decision in November on funding that Virginia-class, do you think there would be any impact at that point? If we kind of stay in this purgatory environment where we see bipartisan support but a firm decision isn't made. I guess I'm trying to figure out at what point does it become a headwind? In other words, do you need to see the funding or that decision made now, or can it be made as late as September, October, without impact to your current year?
I think we're in a normal operational tempo right now, so it's not really impacting how we think or how we would plan. I would just say that if it occurred, the impact would be in Q4 if the appropriation got done by the beginning of the government fiscal year. It's a modest impact to begin with, and obviously the later, the lesser the impact. I don't think it's a thing I'm particularly concerned about right now for our fiscal year 2020, Michael.
Got it. Just on the NPG, some of the delays you've seen related to Canada, the outages, refurbs, have you guys seen or received any updated or new sort of baseline schedules, or is this kind of still fluid depending on how COVID impacts social distancing? Just trying to get a sense of do you have a refreshed timeline there, or is it still sort of in flux?
It's still in flux. We do have some indications from our clients about when things will happen. Those outages that were in the second quarter got pushed into the fourth quarter. I think it's a little bit of a wait and see. The challenge for the utilities, of course, is they don't want 300 people crawling around the face of a reactor at the same time when they're going through major component replacement. They'll certainly try to maintain tempo as much as possible because their business cases rely on timely completion. I think there's certainly a lot of pressure to keep those projects going as quickly as possible. I think it's a bit of a wait and see from our perspective.
Got it. Helpful. Thanks, guys.
Yeah. Thank you, Michael.
Our next question will come from Tate Sullivan with Maxim Group. Please go ahead.
Hi. Thank you. A follow-up, Rex, to earlier on the Mo-99. You said some supply component delays. Was that for cold kits or reactor access equipment? If you can't specify, please.
Hey, Tate. Good morning. As I said before, there are three major components in this system. One is called the Target Delivery System. That's the equipment that goes onto the reactor to put the moly into the reactor to have it irradiated, to get it hot so that we can then subsequently process it in our factory down in Canada. In the factory in Canada, there is the radiochemical system, which is to do the initial processing on that irradiated material, and then there's a radiopharmaceutical system which packages it and sterilizes it, that's a fully automated robotic system. The suppliers I was referring to in that delay are supplying hot cells and various internal equipment for that hot cells like autoclaves and the like. A number of different complex components coming from continental Europe and ultimately destined for our plant in Canada.
If I could, Tate, maybe add a little more color to this. That's part of what has driven our schedule, and we have accounted for that in this re-baseline. I would want to point out to all the listeners on the call that we've had some schedule challenges. This is the second significant schedule challenge we've identified on this program, and so the re-baseline to mid-2022 has a number of, let me call it, components of conservatism in it. We have, for example, some months of unencumbered schedule reserve in there. We have extended the regulatory approval timeline from about six months to about nine months so we can completely envelop what we perceive as any uncertainty in that timeline.
We have also accounted for and costed from a schedule and dollar perspective, any technical risks that relate to the conversion of design and into manufacturing and ultimately integration into our factories. We've laid out for ourselves a pretty conservative timeline here, and I think appropriately so, because we certainly need to have this one right, as we re-baseline the program for our investors and for our Board and for our team. I feel quite positive about where we are with that schedule.
Okay. Thank you for that additional detail. On fuel, as you've had multiple releases on fuel manufacturing, it seems a bit more consistent than previous years. The economics behind fuel manufacturing, should I look at it as similar to manufacturing individual units in terms of the five to eight-year production schedule? Can you share anything on what drives economics in fuel manufacturing versus the unit schedules, please?
You mean the fuel manufacturing and the Nuclear Operations business, Tate?
Yes, please. Yes.
Yeah. That's a very steady business. We of course manufacture the fuel for all three classes of nuclear vessels, the Virginia, the Columbia, and the Ford-class carriers. Generally the timing of those pricing agreements is somewhat similar to what we do in all the major component agreements. They are separate contracts, but generally it follows the tempo and the scale of the rest of the business. There's sort of no important distinction there in terms of volume and timing.
Okay. Thank you, Rex.
Yeah. Thank you, Tate.
This concludes our question and answer session. I would like to turn the call back to Mark Kratz for any closing remarks.
Thank you for joining us this morning. That concludes our First Quarter 2020 Conference Call. If you have further questions, please call me at nine eight zero-three six five-four three zero zero. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.