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BWX Technologies Inc
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Ladies and gentlemen, thank you for standing by and welcome to BWX Technologies, Inc.’s Third 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. Please note this event is being recorded.
I would now like to turn the call over to our host, Mr. Alan Nethery, BWXT’s Vice President and Chief Investor Relations Officer. Please go ahead.
Thank you, Nicole, and good morning, everyone. We appreciate your joining us to discuss our 2018 third quarter results which we reported Tuesday afternoon. Copies of our press release and investor briefing, including details related to today’s discussion are available on the Investors section of our website at bwxt.com.
Joining me this morning are Rex Geveden, President and Chief Executive Officer; and David Black, Senior Vice President and Chief Financial Officer. As always, please understand that certain matters discussed on today’s call constitute forward-looking statements under Federal Securities Laws. Forward-looking statements involve risks and uncertainties, including those described in a safe harbor provision at the end of Tuesday’s press release and the risk factor section of our most recent 10-K and 10-Q filings. These risks and uncertainties may cause actual company results to differ materially and we undertake no obligation to update these forward-looking statements except when required by law.
On today's call, we will also provide non-GAAP financial measures such as adjusted earnings per share which are reconciled to GAAP in Tuesday’s earnings release and our investor briefing presentation. BWXT believes that non-GAAP measures provide greater insight and transparency in the company’s operational performance. And that these measures help to facilitate comparisons of operating results with prior periods and assist in understanding BWXT’s ongoing operations.
With that, I will now turn the call over to Rex.
Thank you, Alan, and good morning, everyone.
Yesterday, we reported third quarter earnings of $0.40 per share with revenue growth of 1.5%. Our results include an incremental reserve from missile tube rework, resulting in a $0.21 negative impact to our third quarter reported figures and a $0.23 negative impact year-to-date. We saw a good growth in orders primarily in Nuclear Operations, which resulted in a consolidated backlog growth to over $3.8 billion.
Let me briefly give you some third quarter highlights across our three reporting segments. In Nuclear Operations, we were awarded a 6-year $505 million for downblending of highly enriched uranium. As anticipated, this is the single largest contract in the history of the nuclear fuel services business, creating additional substantial backlog and providing visibility through the middle of the next decade.
We also continued negotiations on the next multiyear pricing agreement, which is on schedule to be completed in the first quarter of 2019. Based on discussions and scenario planning with the customer, we believe that accelerated work scope related to the two carrier procurement, which has been appropriated by the Congress to be more likely than not.
In the Nuclear Power Group, we continued our trend of double-digit revenue growth and superb margins. We completed the medical radioisotope acquisition for $213 million, which includes approximately $50 million of future cash tax benefits. In the first 100 days since the close, we have transitioned the employees to BWXT, transferred seven of eight nuclear regulatory licenses and integrated the financial systems.
Most importantly, we've utilized the expertise of our new employees to further develop detailed infrastructure plans for the moly-99 product line. Notably we accomplished all the foregoing without disruption to ongoing operations.
We have included a summary of the medical radioisotope transaction in our investor briefing. The business generated about $8 million of revenue within the NPG segment in the third quarter and we expect it to generate between $40 million and $50 million in the first year. Intangible amortization will run approximately $6 million annually and we now expect the business to be slightly accretive in the first 12 months.
Finally on Nuclear Services, BWXT was awarded an $850 million 30 month contract extension at the Portsmouth gaseous diffusion plant in Pike County, Ohio as well as a multiyear commercial nuclear steam generator servicing contract.
We continue to demonstrate the capacity for long-term growth and see positive secular trends in every aspect of our business. Year-to-date NOG and NPG revenues are up a combined 6.2%. Our year-to-date earnings per share increase is driven by $0.17 from revenue growth and operational improvements coupled with $0.19 of tax rate benefit. These gains are offset by $0.23 of missile tube reserves and $0.05 of interest costs and other investments including R&D.
We have updated our 2018 guidance to reflect year-to-date performance including the missile tube reserve and now expect earnings per share in the range of $2.23 to $2.27 on revenue of about $1.8 billion.
During our investor Analyst Day in October last year, we offered long-term guidance of low double-digit compound in earnings per share growth off of 2017 over a three to five year period. We are 10 months into this time frame and our long-term guidance remains intact with positive traction and all of our pillars of growth and line of sight to a variety of organic growth initiatives.
We expect an order for Columbian next multi-year pricing agreement coupled with some potential upside from a two-carrier buy. And while this ramp takes the better part of a decade, we continue to see positive signals for incremental growth in this market.
Our commercial nuclear power business in Canada continues to display robust growth as we make our way through the beginning of a long refurbishment cycle. The improving win rate and nuclear services is starting to lift the financials for that segment and there remains significant pending opportunities including the re-award of the Savannah River liquid waste contract, Savannah River management and operations, and large opportunities at Hanford and Oakridge.
Our recent acquisition is off to a strong start, and it enables commercialization of the technetium-99 generator product line. Beyond that, the company is postured to take advantage of both organic and inorganic opportunities. We have a balance sheet that is well-positioned to handle rising interest rates and contain sufficient capacity to support additional growth.
Before I turn the call over to David to discuss more financial detail, let me provide you an update on missile tubes. Early in the second quarter, we self-identified an issue related to inspection technique and the quality of missile tube volumetric wells.
We halted production on the specific welding and inspection activities and began working with the customer to implement remedial actions. At the end of the second quarter, we established an early reserve as we began examining the scope and extent of the required remedies.
And since that time, we identified several causal factors related to the issue and have implemented corrective actions to prevent recurrence. A comprehensive reinspection of all affected components has been largely completed, and well repairs have begun. It is worth noting that none of the affected missile tubes were integrated into a submarine.
After completing a joint investigation with our customers, we determined that the issues and the rework effort were more substantial than previously contemplated. Accordingly, we took an incremental $26.7 million reserve in the third quarter, which we estimate will cover the expected repairs with a reasonable contingency for residual uncertainties and cost.
We have performed extent of cause and extent of condition critiques and are certain that the issue is restricted to particular types of welds on this product line only. The problem is fully characterized, and it required remediations are understood.
Our customers rely on BWXT to deliver high-quality complex components that we must operate reliably in challenging environments, and we will take every step necessary to return these missile tubes to fit-for-service condition and reestablish normal delivery tempo for the balance of the program.
Now, let me turn the call over to David to discuss segment results, guidance and other financial matters.
Thanks Rex.
Nuclear operations group generated revenue of $319 million for the third quarter of 2018, inclusive of a $40 million negative impact from the missile tube reserve, resulting in a 1.6% decrease from the third quarter of 2017. The year-over-year decrease was partially offset by an increase in naval, nuclear fuel and downblending operations.
Operating income for the quarter was $45.6 million inclusive of the $26.7 million dollar reserve for missile tube rework. Excluding the reserve, third-quarter NOG operating margins expanded 120 basis points to 21.7% compared to 20.5% in the prior-year period. And as Rex mentioned segment backlog grew to over $2.9 billion driven by a contract award for over $0.5 billion for uranium downblending.
Nuclear Power Group revenue was $79.2 million for the third quarter of 2018, a 15% increase from the third quarter of 2017 driven by increased fuel manufacturing and the medical radioisotope acquisition. On an organic basis excluding medical radioisotopes, segment revenue is up about 4%. NPG operating income was up 7.6% to $9.1 million compared to the prior year period and was driven by an increase in fuel manufacturing, as well as the medical radioisotope acquisition.
NPG backlog finished the third quarter at $868 million. In the third quarter, the Nuclear Services Group contributed operating income of $6.5 million significantly higher than the prior year period. The company's third quarter capital expenditures were up 29% to $27 million compared with the third quarter of 2017.
Depreciation and amortization totaled $15 million for the third quarter, up about 10% compared with the prior year period. Today, we have spent $60 million in capital and continue to expect to spend about $150 million for the year although it may be on the lighter side. At the end of the third quarter, the company's cash and short-term investments position net of restricted cash was $68.9 million.
Third quarter cash flow from operating activities usually utilized $26 million compared to $80.7million generated in the third quarter of 2017. Lower year-over-year operating cash flow change was driven by incremental pension funding of approximately $118 million. Without the additional pension funding, operating cash flow was approximately 14% above the prior year period.
At the end of the third quarter, the company had a gross debt of $781 million, including $400 million in senior notes, $291 million in term loans and $90 million in borrowings under our credit facility. We also had $68 million in letters of credit under our credit facility and, as a result, have $342 million of remaining availability.
As noted in last quarter's filings, we completed the purchase of an annuity contract that transferred approximately $244 million of pension benefit obligations. Our cash pension contributions for the third quarter totaled $128 million, inclusive of $118 million of discretionary contributions that supported both the annuity and voluntary pre-funding.
In addition to maximizing a favorable corporate tax rate environment, we expect that this incremental cash contribution will pause any material mandatory pension funding requirements on our domestic qualified plans for the next four years. At the end of the third quarter, the aggregate pension sits at 93% funded, with liabilities at about $1.2 billion.
We also returned $79 million in cash to shareholders in the third quarter, inclusive of $63 million in share repurchases and $16 million in dividends. On November 6, our board declared a cash dividend of $0.16 per common share, payable in the fourth quarter of 2018, and also approved a new $250 million share repurchase authorization. This results in a total share repurchase authorization outstanding of $337 million.
Turning to guidance, as Rex mentioned, we have updated our 2018 guidance and now expect non-GAAP EPS in a range of $2.23 to $2.27 and revenue of about $1.8 billion. Our guidance contemplates missile tube reserves, the medical radioisotope acquisition increased interest expense and year-to-date performance.
In NOG we now expect revenue of approximately $1.3 billion with expected margins in the high teens inclusive of CAS pension reimbursements and the missile tube reserve. In NPG, we now expect revenue of approximately $370 million inclusive of the medical radioisotopes acquisition.
Margins are expected to be higher than typical this year at approximately 14% driven primarily by a surge in outage service work related to commercial nuclear power in Ontario. The acquisition is expected to contribute to income in 2018 but is largely offset due to deal amortization. But as Rex said, it is slightly accretive in the first year.
All other components of 2018 guidance remained unchanged except our effective tax rate which we expect to be between 22% and 23% for the year. We will provide more formal 2019 guidance in the fourth quarter call, but let me give you color on some moving parts as we approach the beginning of the year.
We see 2019 top line growth in the mid-single digits. In NOG, we expect growth from the first Columbia order. Since the execution for a nuclear core is six to eight years, we will essentially be moving from processing an average about 15 cores to about 16 cores.
In NPG, we should see growth from the medical radioisotopes acquisition and the power business will be going through a cyclical swing in field services as outages are anticipated to be lower than 2018.
We also expect a low double-digit EPS growth off of our revised 2018 guidance, which includes the missile tube reserves. From a non-operational standpoint, we will face EPS headwinds from continued interest rate pressure in the first half of the year, along with non-cash EPS headwinds from lower pension income as a result of the purchase of an annuity to transfer pension obligations.
2019 effective tax rates are expected to be largely in line with 2018 and we see higher total company capital spend with continued elevated spend for Navy growth, along with capital for our technetium-99m commercial product line, as we build out the facilities.
And with that, I'll hand the call back over to Rex for some closing remarks.
Thank you, David.
We remain excited about our entry into the medical radioisotopes market. With the acquisition, we have a more detailed understanding of the facility modifications required to stand up the moly-99 Mo-99 product line. And through continued discussions with our irradiation services provider, Ontario Power Generation, we have refined our schedule for the provision of reactor tooling.
A few weeks ago, we had a formal Type C meeting with the FDA and have validated our planning assumptions and regulatory pathway for the technetium generators. Based on all the foregoing factors, our revised baseline schedule is to introduce the product in the first quarter of 2021.
Let me briefly take you through our milestones and what has changed over the past few months. Our path forward has three major components; one, reactor access equipment to support irradiation; two, the manufacturing product lines; and, three, the regulatory process.
For the reactor access equipment, we are undertaking some necessary modifications to the tooling design. We intend to complete design work by the spring of 2019 and manufacture the equipment by next fall. Pending CNSC approval, we will install the equipment during the first quarter 2020 outage.
On the manufacturing side completing the medical radioisotope acquisition, enable design concept refinement for the radio chemistry and radio pharmaceutical process lines. Our future milestones call for final equipment design in the summer of 2019, facility modifications by the end of next year and final installation by the spring of 2020.
And lastly on the regulatory front, we are pleased with our interactions with the FDA. We expect to irradiate moly-99 reference batches in the summer of 2020 and anticipate FDA approval of our technetium-99 generator supporting first revenues in the first quarter of 2021.
For the overall business, we continue to anticipate long-term growth in all segments as supported by our robust backlog, our introduction of new technologies and our superior competitive positioning.
In the near-term, we remain focused on capitalizing for nuclear enabled growth and entry to the medical radioisotopes market, pursuing promising opportunities and Canadian commercial nuclear power and in the nuclear technical services space while laying the groundwork for new opportunities in space nuclear power and propulsion, nuclear materials processing and small modular reactors.
And with that, I would like to open the line for questions. Operator?
[Operator Instructions] Our first question comes from Pete Skibitski of Alembic Global. Please go ahead.
Rex, if I heard you right, did you say that the tube issue was $0.21 in the quarter and another $0.02 in the fourth quarter? Is it - did I hear that correctly?
It was $0.21 for the quarter and $0.23 overall, including that reserve that we took in Q2.
Right. The $0.02 is for last quarter, Pete.
And are you going to book it at a zero margin going forward?
Yes.
But you're still going to compete for the next multi-year that, I think, is going to be awarded in 2019. Is that accurate?
So, the original award schedule was to award in the first quarter of 2019. That's correct.
And you're still in the running for that?
We are.
Just to finish off on the tubes. Rex, can you talk about kind of what went wrong with the wells? Well, was it a training issue, materials issue, something else? Can you give us a sense of how you guys kind of wrap your heads around fully characterizing that?
So, there were two kind of factors going on there. One is our inspection technique, an ultrasonic inspection technique was - and it was inappropriate. And so, we’re missing some rejectable weld indications, to use the parlance of welding.
These are to give you a little bit of context, very large volumetric wells. Think of them, the largest ones, as being about a 100-inch long and sort of a cross-section the size of a playing card. So, lots of weld material, hundreds of weld beads, many weld layers.
And so, they're complex and challenging welds to begin with. And typically speaking, on welds of this size, you're going to have some workmanship issues. Unfortunately, because of our inspection technique, we’re missing a good number of those. And then - so that's one part of it.
The other part of it is our weld techniques were not adequate for those large volumetric welds. And so, we have changed both the qualification standards in that and intensive training standards for that.
So, we're screening our welders in a very different way. We're screening our inspection people in a very different way. And so, we feel like we're right on top of the problem. Having said all that, these are really challenging wells, very large volumetric wells, and they are difficult to make.
And last one for me and I'll get back in queue. Should we expect you guys capital deployment-wide to get a little more active on the repurchase front from here, given the new authorization?
So, we've been very specific about that yet, Pete. I would say that what we have said is that we would use our share repurchase reauthorization to mop up dilution every year, and that's not going to change. We're going to clear up that dilution probably typically in the first quarter of the year. But we do want that tool available because we do have balance sheet capacity and as we think about how to deploy capital over the next two or three years, that option should be available. And if we see a really interesting opportunity, an opportunistic situation to repurchase some shares, we will absolutely do it if we think we can create significant value for the shareholder.
Our next question comes from Rob Spingarn of Credit Suisse. Please go ahead.
I wanted to ask, knowing now that you've closed the deal, if you could walk us through maybe with a little bit more clarity or detail on how you get from the existing business to the future business. You talked about 2021, but I want to reconcile what we've talked about as a several-hundred-million-dollar annual market to a business that's doing - the existing business you acquired is obviously a small subset of that. How should we think about revenues flowing over time as the new product lines come online?
So, the first thing, there are about five existing business lines there and the business that we acquired, none of them are moly-99 of course, which is the largest volume of radioisotope product in the world. But there are a number of interesting product lines there including TheraSphere and Strontium and some other things. And by the way, there will be a couple of new product lines coming online in the next year or two in that business organically.
What we will do is build the moly technetium product line into that one using the existing facilities in modifying those to some extent the hot cells on the radio chemistry side, and then a new regular pharmaceutical side for the generators themselves.
We do believe that we have an opportunity to capture a large part of the market in North America from moly-99. And so, you can expect that business from a revenue perspective to be increasing very significantly over the next few years as we bring the product line on from moly-99.
Is it fair to think about the existing business is $50 million a year with some kind of a modest growth rate because you said they are already bringing some new products online and that's what it looks like between now and let's say the end of 2020 or the middle of 2021, and then there's a step function when the moly-99 starts to shift?
Yes, you've perfectly characterized it. We've said that it's a $40 million to $50 million business over the next 12 months. We are seeing increasing demand signals for the two major product lines and again, these new products are coming on indium oxine for example, a generic infection labeling drug is coming into the product mix which was in the pipeline when we acquired the business and then another one that's an iodine isotope. And so yes, you'll see a step change a rather significant one when the moly comes on.
And that was obviously, the acquisition thesis. We like the radioisotope market to begin with but we were interested of course in being able to sort of amplify our strategic intentions around the moly-99 line and this was the enabling acquisition for that.
And can you remind us how you see the overall market size for the market that you're getting into with your molybdenum-99?
So the moly-99, there are various opinions about the future size of that market depending on how you think about spot pricing, availability of products and things like that. We have said we think the global market for moly-99 is around 400 million and the North American market is somewhere around 160 million.
There are estimates that say that market is high as a billion. We're a little more conservative in our view of that. But think of it as and we are attacking the North American market first and so think of that as a total accessible market, addressable market for us of about 160 million for that single product line.
And then just switching gears a little bit to your mid-single digit top line growth or color for next year. What are the business lines behind that? How do we think about that? Because I think that comes in a little bit light relative to what the Street might have been thinking.
Think of that as mostly driven by the nuclear operations group. We're getting some additional volume with the Columbia order that will be coming in with the new pricing agreement that we're negotiating with our clients at naval reactors.
The Nuclear Power Group will be benefiting from the acquired revenue and the radioisotope business but there's a bit of, there’s a negative cyclicality in the servicing business. That one has - the service businesses is outage dependent and it cycles kind of plus and 30 minus million a year-ish.
And so that one swings, that services business swings negative next year so think of Nuclear Power Group as somewhat neutral revenue position. And then, the Nuclear Services Group, we don't think of that as a revenue-generating business because we're normally consolidating operating income from our joint ventures.
But that business is growing nicely first from a technical services piece, but then also from the advanced technology group within that. There's some new revenue-generating businesses coming out of that. So, you kind of think of it that way, dominated by growth in nuclear operations.
And then, just thank you for that one last thing on just numbers. This could be for David, but the NOG margins in the quarter excluding operating FAS/CAS and the welding rework charge, could you tell us what those were?
I mean, the margins without the missile reserves of 21.7% as we stated there. So, once again, the FAS/CAS is 200 to 300 basis points of reimbursement inside.
In the operating piece?
In the operating piece still, yes.
Okay. And then, do you have any trend info on how CAS and/or Arisa contribution should progress over the next few years? Obviously, this is for pension modeling.
So, I mean, as of the last actuarial calculation we got, we felt that we still have FAS/CAS differential in our numbers for the next three years and it we drop in half after that and then go away. So, within five years, it would go away, but it will start changing after three. So, we'll update you all when we get our next actuarial calculation on that.
We also stated some headwinds for next year because, obviously, getting rid of $244 million of pension means we got rid of the assets along with that which the earnings on that pension or the earnings on that pension would also go away. So there is some headwinds there but I think getting rid of the liability and the volatility there is important.
Our next question comes from Bob Labick of CJS Securities. Please go ahead.
Thanks for the initial outlook and color on 2019. Is this, just curious, is this lower than your initial expectations? Obviously, it’s a little lower than the Street. So wondering if it's lower than yours? And if so, what were the changes versus your expectations? Was that tube related? Was it outage related or what would cause a difference? And then just in general also, what will, what should we expect going forward in terms of the step up of growth rates just to get back to the three to five year low double digit?
I don’t think it’s inconsistent with our internal planning, Bob. In our strategic baseline for this business in that three to five year period, we had this ramping for the Navy demand that’s consistent with what we’re seeing right now. I think we don’t suddenly discretely go from three quarters a year to four quarters a year, anything like that.
As we described in the call, as David described, that revenue builds up somewhat slowly and layers up over time. And eventually gets you that, let’s call it that 20% volume increase. And so, that’s laying up the way we anticipated it too.
The Canadian growth story is going the way that we thought that it would. The medical radio isotope story, we’re - today of course talked about a little bit more in a year delay in the product introduction there but that doesn't affect 2019 at all because we didn't anticipate much in 2019 for that.
So no, I think it's very consistent with our long-term strategic plans. We certainly are going to have to ramp harder in the back end of that three to five-year period to get to that low-double digit. But it looks very achievable from our internal thinking.
Let me add that when you talk about the three to five-year, low-double-digit EPS growth, so it's not going - the revenue growth is not going to mimic that. So, that's why we push it to EPS growth because that's where the commitment is.
And then, can you remind us of your targeted leverage levels and future between 2019 and beyond levels of expected CapEx and does the new repurchase authorization suggests you're getting towards the end of elevated CapEx?
So, our leverage ratios - we came out of spin saying that we're comfortable - the customer is comfortable with two times. Since then, we said we're comfortable with higher than that. We feel that we'll be able to delever very quickly with the cash generated. So, if it's for the right thing, as a return on shareholders, we will do the right thing and then we should be able to delever very quickly.
So, as far as capital, right now, we're in a capital year of roughly 150 and we feel that that will probably be sustained in 2019. And then, after that, we’ll start coming down for capital. We still have the capital growth to finish for the navy and we've got the facilitization we want to do on the isotope business. But then, once again, when that's over, then that cash spending will go down for that capital amount.
Our next question comes from David Strauss of Barclays. Please go ahead.
It’s actually Matt on for David. I guess just going back to the missile tubes real quick. I guess how long do you think it takes to sort of get back on schedule. And at this point, is your customer delayed or is there any risk to kind of overall sub building schedule or are you far enough ahead that they are not impacted?
So we - our plan is to call for completing all the repairs next year. Call it middle of next year. In terms of any delays, I think the Navy can speak to that schedule but it has been publicly stated that Columbia, the U.S. boats will not be affected by the missile tube device.
And I guess just one more on just sort of your overall thoughts on the elections last night. I mean, I think some talk from the democratic side on the house, just maybe cutting the budget and it seems like your programs are probably barely safe and not fully at risk but just, how do you think of sort of the upside scenarios that you’ve talked about in the past, potentially a third Virginia class or faster carrier and what’s kind of the latest that you're hearing on some of those scenarios?
Yes. So, Matt I think we'll see what the Congress does. I would say and we have said from the very beginning on this, that even before the presidential election there was good strong bipartisan support for both the Columbia which is the top acquisition program for the Navy and this idea of going to a permanent to Virginia acquisition tempo and we saw that.
We saw that playing out here over the last couple of years. That's what we built into our strategic baseline, these upside scenarios around accelerated carrier procurements or around the 13 Virginias that the authorizers approved and the Block Volume, we never built that into our strategic baseline.
And so, I think, our strategic baseline, the two Virginias per year and plus normal tempo on Columbia and Ford is a good sustainable way to think about the future of the - of those product lines. I do believe that with the change in polarity in the house, that some of those upside scenarios are less likely.
And, I guess, just one more, kind of switching over to services and, I think, your guidance implies a pretty good Q4. Is there something that’s stepping up there? And just given you also have won some contracts there this year, what’s kind of the outlook for where EBIT can kind of grow from here? And if you could give us any update on Savannah River, what's the latest there?
So, in the services business, the performance lift that we're seeing has a number of different elements to it. One is the site performance, where we execute work for the Department of Energy and our joint venture limited liability companies. We've been seeing good fee performance at all those sites. We’ve been seeing very good utilization rates for our people. And we're being able - we've been able to accomplish better absorption in the G&A and overhead accounts because of the way we're deploying people.
On top of that, we have some revenue-generating growth that's occurring in the Advanced Technologies Group, as I mentioned, in connection with an earlier answer. And that helps all of those things. It drives more to the bottom line, gives better absorption and, actually, gives us a little bit of top line.
And then, on top of that, we're seeing a bit of an upswing in a small component of that business that does U.S.-based nuclear reactor servicing. We've or we were awarded a very substantial contract in Q3 in that space, which will help that business very substantially so, sort of all the pieces of that business are working well together right now.
We haven't given any color yet on what that business will look like in 2019. But it's absolutely on an upswing. And so, it will drive some bottom line growth for us next year.
Our next question comes from Michael Ciarmoli of SunTrust. Please go ahead.
Just maybe on the current year first, the nuclear ops guide of $1.3 billion, I thought I recalled in the last quarter, we were going to get some second half strength on Columbia and down blending. The second half relative to the first half of 2018 now looks pretty flat. Is that all pressure from missile tubes or did something else slide to the right into 2019?
There's some of that pressure, and I would say the majority of it, is related to missile tubes. There's a little bit of timing risk in Q4 which we have accounted for in our guidance here, a little bit of timing risk related to the negotiation of the next pricing agreement. The assumptions that we take when we get to a term sheet influence, our views on revenue and rates and, therefore, operating income. So, it's those two factors.
And then, just on next year, just to be clear, I guess it sounds like the core organic MPG revenues would be down. That's offset by, give or take, $40 million of Nordion. If the services piece is flattish, maybe NOG, I mean, we should be thinking kind of in that 4% to 7% growth range. Is that sort of my calibrated correct there?
That's about what I think about it, yes.
And then, just the last one for me, Rex, just on the medical isotopes, I mean, just last quarter we were thinking late 2019, I mean - and I see on the slide you've got out there, you had – I guess you had the FDA meeting, but I thought Nordion was supposed to help accelerate this.
I mean, what changed so materially between last quarter and this quarter to push out the schedule?
I think - yes, Michael. So, I think, there were - well, first off, we were - it was, it was an aggressive schedule, and we were acknowledging that all along. But, I think, there were a number of schedule uncertainties that existed throughout the - through this developmental period. And we basically settled all of those schedule uncertainties over this last quarter.
One of the issues had to do with reactor insertion tooling. That's the equipment that we put at the reactor site at Darlington that belongs to Ontario Power Generation. There was some uncertainty around the regulatory time frame for that and some uncertainty around what design approach we would have to use. And we ended up having to change our fundamental design approach on that, which cost us some months of schedule.
We also got to kind of a mature negotiation point with OPG on the regulatory side and understood in much more detail what to check out and regulatory approval requirements were for the reactor side of it.
And then, the final thing was, we made certain assumptions, made the aggressive assumptions about the modifications that would be required at the Nordion side itself, the acquired business to implement these two components of the processing line, one called the radiochemistry side and one called the radio pharmaceutical side.
We didn't really know what we would have to do there. We made certain assumptions about it because we didn't have much access to that during the acquisition. And now that we have the business and can work detailed schedules from the bottom up, we’ve got a much clearer view about what that is. And we certainly didn't have that view a quarter or two ago.
So, I think, what we've done is we've largely eliminated the uncertainties in the schedule and have some room, frankly, for some room frankly for some errors here because that one has some reserve in it and have much more confidence in being able to make that...
But just to clarify. I mean, when we did talk about the acquisition, we said the acquisition would not accelerate, but it would derisk and help us derisk. And so, I think and as we were talking more about it last quarter, we said that the technology risk is pretty much off the table, but timing risk would be - is still on the table and it was an aggressive schedule.
Let me just - maybe the last one on this. Does it change, I mean, as it relates to the competition? I mean, are you now behind the competitors in this marketplace? There's a change and if your go-to-market strategy and I know they've been talking pretty aggressively, but any view on the competitive dynamic given the slippage?
I don't think it changes anything for us. We've always had a very clear view about our channels to market. That is absolutely unchanged. We've got a very clear view about how much of that market we can get and that is unchanged. I don't believe the competitive context changes for us a bit.
Our next question comes from Ronald Epstein of Bank of America Merrill Lynch. Please go ahead.
This is Kristine Liwag calling in for Ron. Rex, we’ve seen that when some companies expand into different markets, they end up taking their eye off their core business. Keeping in mind the charges of missile tubes and your expansion in Canadian civil nuclear and medical radioisotope markets, what are you doing to make sure you don't take your eye off your U.S. Navy business, especially as we are in the cusp of what may be the largest U.S. Navy procurement since the Reagan administration?
Well, so we absolutely don't take our eye off that business. And if that business remains, the most important aspect of BWXT, even this year, it’ll generate 80% of our revenue and about - and a similar fraction of the operating income.
And so, it's right in the crosshairs of what I work on every day. I’m substantially and materially involved in the capital upgrades and the missile tube issue and things like that. We get very high visibility on that business not only from the Street but also from our board of directors and certainly from our entire management team.
I would say that our focus on that has not changed. But I would also say that when we have a business like that, that is that stable with a visible backlog and the cash generating capabilities of it, it's incumbent upon us, as an executive team, to figure out ways to grow the business as well.
So, the move towards doubling down in Canada, the move towards diversifying in medical radioisotopes into markets and into businesses that are accretive to the core BWXT is the right thing for us to do. But it does not imply any lack of focus on our core business. It is the gym of our portfolio and we know it.
And can you provide context regarding your missile tube business and how that could or could not affect your nuclear reactor core for the U.S. Navy? Are these businesses very separate? Are they intermingled? And can you give us an idea of whether or not there could be some spillover in terms of operational risk?
Well, first, to give it some financial characterization, the missile tube business is about 3% of our total revenues in nuclear operations. So, it's actually a small, small part of the business. It's an interesting growth business for us outside the naval reactors core because of the nature of it, but it's a small revenue generator for us at the present time.
It is related to the naval reactors business only in the sense that those components end up on nuclear submarines but it's unrelated in a sense that our customer is a different customer here. Our customer is General Dynamics Electric Boat and then ultimately to NAVC whereas our customers on the other side are naval reactors.
So, different customer lines and in terms of any spillover as I said in my script we did extensive condition, extensive cause critiques and we are dead certain that this product is this problem is restricted to this product line and in fact it's restricted to this particular type of weld on this particular product line.
And so, we're very confident there's no spillover effect on the other programs or content in the naval reactors part of the business.
And switching gears to medical radioisotopes, with your meeting with the FDA can you provide more color on what was the most significant hurdle that postponed the timeline to your first expected revenue?
I’d say that we've been - it's been our hope to be able to introduce the moly-99 technetium, 99 radio pharmaceutical as generic to the market with the belief that if we meet the existing product specifications and deliver essentially identical drug to the market we could avoid human trials in a more protracted regulatory process.
The way it goes with FDA you don't get assertions in writing about what the regulatory path is, but we did get confirmation of our belief that we can approach this as a generic and expect a more accelerated approval timeline. We'll see how that goes and the FDA will have to act upon that. But the meeting that we had with them three weeks ago did validate our planning assumptions.
Our next question comes from Josh Sullivan of Seaport Global. Please go ahead.
Just a follow-up here at the isotope. So, what is the schedule for 2021? Can you talk about any contracts, modifications with existing customers, and then maybe could you just give us an idea of what your current customer base looks like in any form?
So, Josh, to be clear, you were talking about the existing portfolio and the acquired business?
Sorry. On the TC-99 extended schedule for 2021, with an existing customer, were there any modifications, any contracts you had signed
Yes, we haven't disclosed anything about supply agreements or anything of that nature, so I would say there's no comment on that.
Our next question comes from Pete Skibitski of Alembic Global. Please go ahead.
A few follow-ups guys. David, we've got a sense, I guess, on the revenue multiple you paid for Nordion. Can you give us a sense of EBITDA multiple?
I mean, about 13 but, I mean, we've provided the data inside the Q that - and it’s about or was about 13.
And then just on fourth quarter expected cash flow, maybe if you think about it on a full year basis, if we exclude the pension contributions this quarter, do you think we'll get close to 1 times free cash net income conversion on a full year basis?
I mean, there’s not a lot of detractions left. I mean, obviously, the pensions we've put into the pension what we're going to put into the pension. And in this case, fourth quarter is usually our best quarter for cash. So, other than that, no speculation there but, I think, it’ll be a good quarter for cash.
Let me finish with one for Rex. Rex, any update from NASA or DARPA/DOD on space reactors? And I was also - I saw something in the quarter about this NASA. I think it's called Kilopower or KRUSTY, a small reactor. I just wondered how that impacts you, if that's maybe a competitor for what you guys are designing?
So, the work with NASA, the nuclear thermal propulsion work, continues to progress really nicely. We've been manufacturing some fuel samples and successfully testing those. I would say that the interest from NASA and from DARPA in space reactors is quite high. We also see, by the way, interest from the Army for terrestrial small reactors, micro reactors. And we were quite bullish about that entire market.
KRUSTY is a small power reactor, 1 to 10 kilowatts. And so, it's capable of doing a certain class of things, for example, powering a spacecraft if you ever wanted to move from, say, radioisotope thermal electric generators to a fission reactor.
So, I don't think of it as something that will be competitive to our interest for nuclear thermal propulsion. You're talking about 500-megawatt thermal reactors and things like that and for surface power, probably a much, much more, much higher than say 10 kilowatts.
It's an interesting and capable little reactor that KRUSTY is but not, not sort of in competition with our aspirations. We are very, very, very interested in and very excited about the potential for smaller reactors for military and space applications. I would say.
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Alan Nethery for any closing remarks.
Thank you, Nicole and thank you for joining us this morning. That concludes our conference call. A replay of this call will be posted on our website later today. It will be available for a limited time. If you have further questions please call me at 980-365-4300.Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.