Q2 2022 BWX Technologies Inc Earnings Call
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Ladies and gentlemen, welcome to the W. X technologies second quarter 2022 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 Mark Kratz B M X Ts Vice President of Investor Relations. Please go ahead.
Thank you Amber and good evening and welcome to Bwxt's second quarter 2022 earnings call.
Joining me are rich, Kevin President and CEO , and Rob Lemasters Senior Vice President and CFO .
On today's call, we will reference second quarter earnings presentation is available on the investors section of the BWXT website.
We will also discuss certain matters that constitute forward looking statements. These statements involve risks and uncertainties, including those described in the safe Harbor provision found in the investor materials and the company's SEC filings.
Frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures and a separate presentation that can also be found on the investors section of the BWXT website.
I would now like to turn the call over to Rex.
Thank you Mark and good evening to everyone earlier today, we reported robust second quarter 2022 results revenue was up 10% net income and adjusted EBITDA were up 26% and earnings were up 32% per share. We also delivered good operating cash flow, which was up 29%. These results were.
Driven by a combination of strong site and commercial field services performance, along with favorable timing of activities that were originally planned for the third quarter.
It is worth noting that we delivered these positive results in spite of some production inefficiencies in the naval component manufacturing business at our sites in Ohio and Indiana.
<unk> second quarter performance reduces uncertainty for the year and leads us to increase underlying operational guidance and narrowed the earnings outlook for 2022.
Our team continues to do a commendable job of supporting the ongoing operations, while simultaneously building strategically significant new business lines in advance micro reactors and nuclear medicine since the last earnings call. We've achieved several important milestones on both fronts. So let me offer you a quick update on those and the commercial.
<unk> segment, the BWXT medical team has completed all operational qualifications and registration batches.
For the Tech 99, FDA submit all the data collected from those batches demonstrate our ability to supply our competitive offering that matches industry standards for product quality.
<unk> team is now finalizing the FDA package. Furthermore, we continued to build an impressive portfolio of other products in the medical business in June we announced the signing of a commercial agreement to supply a Bayer with high purity actinium $2 25, an alpha emitting radioisotope that has highly desirable characteristics for targeted cancer therapy.
<unk> that improve patient outcomes.
In developing that product line, we have already successfully irradiated material for the first batch and expect to begin low level production later this year to supply Bayer with this product for clinical trials.
Over the last two years, we are positioned BWXT medical as a global leader in nuclear medicine manufacturing.
The base business is growing smartly and we've invested heavily in the tech 99 generator line and we have developed and expanded relationships with global scale pharmaceutical companies, leading irradiation partners in other important manufacturing value chain participants to stake out a unique competitive position in the market between irradiation.
Services and finished product manufacturing.
As the business transitions from a build out phase to a commercialized in ramp phase, we are making corresponding leadership changes recruiting external resources, where necessary and dedicating some of Bwxt's best executive talent to accelerate our progress in this exciting market.
Dr. Jonathan certain Bwxt's corporate Chief Technology Officer for the past two years is taking leadership with the BWXT medical business as its president and CEO .
He will oversee the ramp of the commercial tech 99 production as well as a pipeline of new products in development, Jonathan is not new to that business unit, having overseeing the company's entry to the nuclear medicine market, a few years ago and tackling some of BWXT medicals, most daunting technical and operational historical challenges with.
We have built a world class leadership team in medical that is prepared for the next stages of growth.
We hope you will be able to meet the management team and see all the capabilities. We have built in Kanata, Ontario over the past couple of years, when we host investors customers and other stakeholders at BWXT Medical's headquarters in the near future.
And the commercial nuclear power business.
We are seeing a step up in demand in volume for 2022, particularly for some of the outage services that are scheduled this year.
Last month, we also announced a contract valued at over $100 million.
For major component replacements for five of Bruce Power's reactors, providing incremental long term visibility into our clean energy business.
Beyond the work, we do and the can do market. We remain cautiously optimistic that small modular reactors will gain traction in North America and globally, the pipeline of interested utility and power generation customers.
A tenuous to build in the wake of forward leaning players like Ontario power generation and the Tennessee Valley Authority, both of whom have announced plans to build GE Hitachi BW Rx 300, small module reactor at existing grid ready sites.
And government operations, we are excited to build the first advanced micro reactor in the United States, where the Dod's strategic capabilities office named project Pele.
In June we announced that BWXT was awarded a competitively bid contract valued at about $300 million for the fabrication of a full scale micro reactor prototype slated for completion in 2024.
The team is aggressively ramping up the program and we are making incremental capital investments for this exciting new line of business beyond.
Beyond terrestrial applications, we continue to pursue space based micro reactor solutions in June the dome in conjunction with NASA awarded three teams at 12 month contract to develop preliminary design for a 40 kilowatt class vision power system for the lunar surface and we are pleased to be partnering with Lockheed Martin.
On this strategically significant effort.
BWXT is also preparing to submit a proposal to DARPA for the demonstration of our space based micro reactor, which is anticipated to be awarded around at the end of the year for our national security space propulsion application.
It has been our long held vision that multiple national security and space agencies of the federal government would see the capabilities of these terrestrial and space demonstrations.
To fulfill their special mission needs for nuclear power and propulsion if that demand if.
If that demand signal translates into orders BWXT will be well positioned to interest stage of low rate initial production in the back half of this decade.
Such a buildup could put us on a trajectory toward our long term aspiration of replicating the core nuclear naval franchise and support in the U S government with our specialized and unique nuclear capabilities across see land and space domains.
And of course to update you on the strength of our core naval franchise conditions remain supportive from a federal budget perspective, as we continue to tackle challenging operating conditions at certain sites.
As I mentioned earlier this quarter, we experienced production inefficiencies in some of our northern U S plants, where we make steam generators missile tubes and other components. These challenges are similar to some of the issues. We experienced last year around workforce disruptions connected to COVID-19 more recently, our difficulties have been attributed to manufacture manufacturer.
Chokepoints labor shortages and the challenge of building out capacity in a production environment.
These factors coupled with the general macro pressures many industries, including our defense peers are facing around wage pressure supply chain issues and hiring set up for a tough environment as we face increasing demand.
The team has put in place an aggressive set of action plans to address these conditions, including intense recruiting and intercompany movement of experienced personnel as well as focused investments to alleviate key production bottlenecks.
Prime example of that is the recent appointment of sharing smooth to lead nuclear operations within Bwxt's government segment. She is a proven executive with over 30 years of civilian Navy service in the United States Navy.
And a variety of impressive positions, including most notably leadership of naval nuclear shipyards.
On the Legislative front, we see strong bicameral and bipartisan support for increased shipbuilding for National security investments more broadly both the house and Senate have proposed budgets above the president's request for key programs in.
Nuclear Naval Shipbuilding project, Pele, and site management, and environmental restoration for BOE and in NSA.
And similar actions validate our long term government operations growth thesis and increase our confidence in our firm outlook for defense spending over the coming years.
In summary, BWXT remains positioned for growth over both the short and long term horizons. The business is highly differentiated with major content on programs that are well funded across the government space and reaching inflection points in commercial nuclear clean energy and nuclear medicine.
That diversity and the work we do across the portfolio serves as a distinctive advantage that positions the company to outperform in the face of challenges and a choppy macro environment.
That let me turn it over to Rob.
Thanks, Greg and good evening everyone.
Let's start with total company results on slide four of the earnings presentation.
Second quarter revenue grew nicely by 10% to $554 million driven by growth in both operating segments.
Third quarter, adjusted EBITDA was robust up 26% year over year to $115 million, which was driven.
By higher revenues and strong margins in both segments, despite lower recoverable Cas pension income.
Earnings were up 32% per share in the second quarter, given strong operational performance and the benefit of some below the line items, including lower interest expense tax rate and share count, which was partially offset by lower pension income and some foreign exchange losses.
Operating cash flow was also up $18 million year over year, driven by an increased net income and some modest working capital improvements free.
Free cash flow improved more significantly as we continue to wind down the two major capital campaign and the Navy medical businesses.
We have detailed our second quarter EPS bridge on slide five and I will now move to segment results on slide six.
In the second quarter government operations revenue was up 8% to $437 million driven by timing of long lead material and the naval reactors business and higher volume in uranium processing.
These increases were partially offset by lower missile tube revenue due to contract adjustments.
Second quarter government operations, adjusted EBITDA was up 15% year over year to $95 $7 million driven by strong contract performance and uranium processing and technical services, which was partially offset by lower recoverable Cas pension income and fewer positive contract adjustments, particularly at some of the northern site.
That Rex mentioned.
And commercial operations revenue was up as we expected due to the seasonality of commercial power service outage.
The 16% year over year growth was also aided by higher fuel handling and the commercial nuclear power business and higher BWXT medical revenue.
Second quarter commercial operations, adjusted EBITDA was up significantly to $18 $2 million driven by a combination of higher revenue and a more favorable business mix when compared to the second quarter of last year.
Turning now to guidance on slide seven.
As we detailed in the press release earlier today, we are increasing revenue and adjusted EBITDA guidance and narrowing non-GAAP EPS guidance.
We now expect consolidated revenue growth of six 5% to 8% this year versus our prior range of 3% to 4%.
This revision is driven by a combination of factors.
And government operations, we have increased segment revenue guidance the six to seven 5% primarily as a result of the project Pele win and the <unk> acquisition and.
In commercial operations, we anticipate seven five to eight 5% revenue growth as we gained service outage scope, coupled with increased volume in nuclear component manufacturing and medical isotopes.
Consolidated EBITDA is now expected to grow five to six 5% versus the prior range of 3% to 4%.
We see a relatively more modest step up in EBITDA growth given a higher mix of commercial operations as well as the addition of a lower margin project Pele contract.
We have also incorporated some of the operational challenges and fewer favorable contract adjustments into the government operations EBITDA guidance, which we now expect to be $400 million to $405 million.
<unk> operations EBITDA is now expected to be $48 million to $50 million given heightened field service demand increased volume in nuclear component manufacturing, a strong showing by our BWXT medical business and efficient cost management across that segment.
We continue to make good progress on managing and rationalizing corporate costs, while also capturing some modest synergies from the re segmentation.
This results in lowering the corporate unallocated cost guidance to about $17 million versus the prior estimate of about $20 million.
As a result of these changes we are tightening our non-GAAP EPS range to 15.
Our revised earnings guidance is now $3 eight to.
To $3 23 per share and we continue to anticipate the midpoint is still the most likely outcome for the year.
As I mentioned on the last call. We continue to believe that the next couple of years will show a return to a more normalized level of capital expenditures with only modest growth capital to turbocharge, our strategic initiatives.
We continue to see such investments at a scale of tens of millions each that would be spread across a couple of years.
With the strategic win a project Pele, we will upgrade our facilities for this program in the second half of this year and into next year, causing us to increase capex guidance to a range of $195 million to $210 million for the year or about $12 $5 million increase at the midpoint.
As I mentioned last time, we had projected that the investment for Pele would add less than $30 million of incremental capital to our initial capex forecast presented at our Investor day, and so the guidance now incorporates about half of that spend in 2022, as we aggressively stand up that effort for our highly ambitious government customer.
Finishing up my remarks on guidance I wanted to provide some quarterly color.
As Rex and I, both mentioned beyond some out performance strong second quarter results included certain items that were originally anticipated in the third quarter. Therefore, we see third quarter earnings lining up to be similar to our first quarter in 2022 and pine simply a shift.
Yes, chip into and out of Q2, and Q3, respectively, driven by a modest change in seasonality.
We continue to anticipate a strong fourth quarter as field service demand in the commercial power business returns and we ramp up on government service projects and the new project Pele contract.
We have updated our guidance bridge on slide eight that incorporates the various changes to the components of EPS.
By and large we are anticipating slightly better operational results for 2022 with some modest incremental headwinds in the non operating components of the income statements.
Let me continue that thread of non operational items as we start to think a little bit about 2023.
Namely I wanted to flag interest rate expectations, and noncash pension income given the macro environment in capital markets performance.
I mentioned on the last call. We continue to monitor the impacts we see from higher interest rates from the higher interest rate environment.
As you'll recall, we had adjusted our expected interest expense for 2022 upward at that point and we continue to see the rising interest rate environment affecting our floating rate debt, which is about 40% of our outstanding debt balance.
This will surely have an impact on our anticipated interest expense next year as we think about higher rates on a full year basis.
With current floating rate debt of about $600 million every 100 basis point increase in the interest rate is about $5 million after tax or about <unk> of EPS headwind.
Beyond the interest expense line in our P&L, if current market conditions lead us to believe that noncash pension reported in other income may also be negatively impacted by discount rates and asset returns.
We provide these sensitivities in our 10-K and we have included a slide in the appendix of todays earnings presentation for quick reference.
We see the potential for negative impact to non service pension income in two respects.
First for every 100 basis point increase in the discount rate, which is mostly derived from the prevailing interest rate curve, we anticipate approximately $6 million of additional net periodic benefit costs, resulting in a decline in the other.
Line of the P&L.
The other income line.
In the P&L.
Second we are a little different from most defense peers in that we mark the pension to market at the end of each year through the P&L and adjust those negative or positive entries and the non-GAAP results.
As a guide of 100 basis point decrease in pension assets with lower future net periodic benefit income, causing a decline in the other income line of the P&L by about $1 million.
Final estimates of pension asset and liability balances will be made as part of our standard year end process, but we wanted to give you that initial estimate amid these muddled macro markets so far.
We snap the chalk line at the end of June we would estimate just over a $20 million noncash earnings headwind to other income, but about half of that impact coming from higher interest rates and the other half coming from about a 10% decrease in pension assets.
On the flip side after years of solid management of our pension assets and conscious contributions and our new realizations Don during calculated circumstances, we find ourselves in a constructive funded status using these June estimates.
These conditions prevail through the end of the year, we estimate that we are fully if not slightly overfunded on a GAAP basis with a projection of no material cash contributions to the pension for the foreseeable future.
So while it is still too early in the year to give specific guidance for 2023, we anticipate another year of underlying operational EBITDA growth being masked by the potential for material interest in noncash pension income reductions should these market conditions sustain themselves through the end of the year.
And with that I'll turn the call back over to Rex for some closing remarks.
Thank you Rob I want to thank our employees for rising up together to take on a new missions that we see ahead.
We are a strong company that does not back away from the challenge our corporate purpose is to take on some of the world's most important problems using nuclear technologies.
And we all continue to be inspired by that vision every day in 2022, we expect to grow underlying EBITDA in the high single digits muted somewhat by a Fas Cas pension headwind, which demonstrates the benefit of participating in a remarkable multifaceted end markets and positions us to drive strong economic performance. Despite.
<unk> challenging operating and macro conditions.
This year, we found ways to offset pension headwinds and interest rate pressures and next year. We will again seek to outrun interest increased interest expense depreciation headwinds and potential pension income decreases before the growth vectors that we laid out at our Investor day fully inflict.
We are prime to deliver on our medium term financial targets, given an attractive exposure to multiple defense and commercial markets, we intend to harness our capabilities facilities and uniquely qualified and talented workforce to attain the bright future. We have laid out for this company and its shareholders.
We now look forward to taking your questions.
Thank you well now begin the Q&A session. If you would like to ask a question. Please press star one on your telephone keypad.
Any reason you would like to remove your question. Please press star followed by Tim again to ask a question Thats Star one.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pause here briefly you ask questions are registered.
Our first question comes from.
Bob Lubbock.
C J S Securities.
Your line is now open.
Great. Thank you good afternoon, and congratulations on a nice quarter.
Wanted to start also obviously congratulations on project Pele fantastic win for you.
So it could be a big.
Big opportunity can you give us a sense of.
How the revenue will run through the P&L and kind of timing and will this be.
You'd be running this neutral is it accretive will opinion investment.
In the P&L it will run at a loss or how should we think about that over the next couple of years.
Yes, I'll start with it maybe maybe Rob will have some to add to it Bob.
Good evening to you.
<unk> $300 million contract, that's running over let's call. It a 30 month period, and so think about sort of peanut buttering over that now we have to ramp up on the front end of it so I won't achieve sort of the average run rate for a while.
But it and it is a cost plus fixed fee contract.
Pretty modest fixed fee and so think of it is dilutive to margins in that segment generally speaking. So it is not going to give us a lot of lift on the margin side, but of course theres no cost risk here. So that's an attractive proposition for us and of course it is laying the foundational pieces for that micro reactor business. So we quite like the terms of that contract.
And that's probably about it Rob anything to add to that no I think thats right. The Rex talked about good that it will be a little bit lower margin contract for us. So we really want to get set up in that business I know as we hire we're trying to vigorously higher and so thats really.
What we're after is to ramp that as quickly as we can.
Okay, great. Thanks, and then just one quick one on isotopes for me.
Maybe a little more color on the leadership transition how if at all does this impact the.
Submission to the FDA and <unk>.
Now the reference batches or done would you expect by the end of <unk>.
September to be able to submit and do you still believe it should be nine months plus or minus for approval. After you do submit.
Yes.
Yes, Bob.
We expect to submit that FDA package.
By around the end of this month or so give or take.
And the leadership change.
Yes, certainly I view it as positive for the business as I mentioned in the script Jonathan has been involved with the business for a long time. He ran he originally ran advanced technologies. The advanced technologies business before it became CTO and that was a business that hatched the neutron capture.
Technology for the for the Moly Moly Tech 99 generator project and he was also sort of on the vanguard of the technology for Lutetium 177, and other such developments and even as CTO has been deeply involved in this.
This registration batch campaign and qualification campaign for all that equipment. So he knows the business up and down back and forward a very energetic very bright person who's got very strong commercial instincts also.
And Martin.
Martin Bae waste transitioning back into his consulting business and returning to his home in the U K.
But we're retaining Martin in a commercial role he is particularly strong there and developing channels to market and in developing good commercial terms for the business. So he'll be at jonathan's right hand side.
Developing the commercial into that of that business, but it's going to be quite a good leadership transition, it's very stable and it would be good for the business and give us some lift.
Okay Super Thank you very much.
Welcome.
Thank you.
Our next question comes from.
Pete Dubicki with.
On the global peak.
Your line is now open.
Hey, good evening, guys nice quarter.
Rex can you talk maybe a little bit more about <unk>.
In Ohio in terms of how much more labor needs to be higher there and are you still adding in kind of new pieces of machinery, maybe or.
Something in that.
Contributing to maybe.
So I think maybe it was last year you had similar issues.
Yes, similar similar.
So let me let me paint the total labor picture for you.
We're about 7000 people across this entire enterprise across mainly North America, and a little bit in the U K now.
And our our attrition.
<unk> rates had been running kind of mid to high single digits. These days thats higher than historical and maybe sort of typical for what our.
Or what are we and our peers have been facing.
And if you think about that on the scale of 7000 people then you could buy through through attrition.
<unk>, let's say 500 people this year around around those kind of numbers.
And we need to hire about 500, thats the kind of ramp that we're on given the demands and the Navy program Pele program and all the other things that we're trying to do.
So we have to hire about 1000 to net 500 out of all of this and Thats the headwind that we're facing.
We are net positive on our hiring for the year, but not at the rate that to get us to 500.
And I think that's kind of typical what's going into the business right now that would be more specific about about what's happening in.
In Ohio, and Indiana. We are we continue to have some struggles with missile tubes program nothing to do with.
Well repairs or anything like that we're well past that but we did experience some cost creep in that program last year and we brought in some new leadership and they've re baseline the program and estimated some new cost to wrap that program up.
That resulted in a negative EAC adjustment now we have some claims against that number.
And we're having some discussions with our with our customer about an equitable adjustment on that program more broadly. So we've got line of sight to being able to deal with that in the future, but it did create a hole for us in the quarter that we had to overcome.
And so that's kind of what we're dealing with it and maybe another log to throw on the fire here as we are having some efficiency challenges and that's that's a multifaceted problem, but some of it has to do with trying to build these plants out while we're producing.
While while we're producing product some of its just the labor churn.
Causes you to causes to chew.
<unk> because you have to train up people for so long for them to become proficient in some of this is frankly, how we bid the work sometimes we've underestimated the.
The complexity of some of these components, particularly in the first of a kind things.
But we're getting on top of it.
Have we have a very capable leadership team in place and they are attacking this problem head on and so I feel very good about the course corrections that were making but thats those what the problems are in summary.
Okay I appreciate the color and just to tie it up on the missile tubes does that is that we're going to continue into 2023 I thought you guys were about at this point.
Yes, we.
We're in the wrapping up phases of that we have I think it's.
Eight more missile tubes to deliver and we have these box parts that go with and there are hundreds of those.
And those are the components that go one of the missile tubes in the boxed up and shipped with the tubes that will bleed into 'twenty three.
The bulk of the work is done by the end of this year, but some of it will continue.
Okay last one for me just on the sort of dynamic controls can you talk about how integration along there.
The outlook for that business.
Yes, I will I'll make a couple of comments about it and I'll ask Rob Lemasters comment Rob kind of led that acquisition activity, that's neat neat business Pete it's making.
Naval components support in the U S. Navy fleet and also the UK fleet has some exposure to Australia historically.
And like our core business, it's specialized high consequence components in this particular case valves in.
In seawater components cold form seawater components for the most part.
I would think of that business is having is having the same kind of.
The growth potential that that the nuclear Navy business has in the sense that.
Governments that have those capabilities of recapitalizing their fleets.
In the case of Australia of course, it is embarking on a new nuclear naval fleet and so we see potential upside there.
And so we quite like it and that doesn't speak to the synergies that are that are available from the combination of BWXT with that business. So it's shaping up nicely I think the business frankly, a little bit better growth trajectory than we anticipated when we bought it and then opportunities to maybe take some cost synergies along the way too so Rob you want yes.
That's right I would add.
That yes.
Being integrated quite nicely as you know there is an operation in long Beach in California, and then in operation in the U K and it's proving to be a 90 <unk> acquisition really swarming it with several people from our core business, taking different terms to trying to bring that company really into the fold and digestible.
So bringing it.
Look very similar to our to our core business and <unk> got great people. The brand has frankly in both markets really surprised us people really seem to have a great relationship with the company and they've turned out the product over the year. So if they start really being integrated with our operations. We see those three core drivers that we outlined on last call around trying to drive that.
The business around critical components for the U S Navy being being a growth channel. We find the same in the UK. We think that we can expand our mix of products. There and then thirdly as international partnerships, just become more and more relevant to to Austin to entered it to the UK and supporting all of that it just helps.
Have another entree into an international market. So those three are all growth avenues here and so we're really excited about that acquisition.
Thanks, I appreciate it guys.
Thanks Pete.
Thank you.
Our next question comes from.
Peter Arment with Baird. Peter Your line is now open.
Good evening <unk> Rob.
I wanted to circle back just on the FDA submission process.
Anything that you view as any more like long poles in the 10. It sounds like you had some challenges initially getting the reference batches that you needed, but it sounds like you're there now just your confidence level on the submission of this timeline that you're currently laid out.
Yes.
It's a little bit hard to say Peter I would.
Our view is that we would request a priority.
Historically, we've said we would request priority review with the FDA, which we will do it.
If that is granted then then you get a filing date. Shortly after you submit the FDA package in that filing date starts the clock on this six month approval process. The variable here is that.
If you're a data package is seen as an completed some wage or are there some problems in the FDA needs more information than they stopped the clock appropriately the stop the clock and then.
Wait the data submitted so there can be some back and forth net process.
And that's the reason we've always.
<unk> is up a little bit and then just once you do.
Ultimately get approval.
How quickly can you turn it onto producing revenues. So I think a lot of us are expecting to ramp up pretty materially in 'twenty, four but just thinking about back half of 'twenty three.
Yes, I think it depends on.
I mean, I think from an operational perspective.
All of this this has been a dress rehearsal for the commercial production of the product and so I feel good about our ability to turn it into <unk>.
Commercial operation as soon as we have contracts.
In place and are ready to go with with the radio pharmacy networks.
The variable there is when our projects is going to be available in the specifics of the supply agreements, which of course, we are in discussions on but.
So it depends on the it depends on the nature of those supply agreements when they become effective and and the timeline on the approval.
Okay, and then just Rob just a clarification you mentioned the combined headwind for the higher interest cost essentially in 'twenty three and the pension side was $20 million is that what was the combined number just wanted to clarify.
Yes, so there's really two below the line impact that you would really think about it. There is the interest expense is just true interest rate on our debt that we tried to talk to people about.
Given where rates have gone gone, we're seeing about a $10 million increase there. If you just think about taking that debt balance and running it out over the course of next year using higher interest rate, assuming we don't pay to pay down any debt. That's one item and then a second item is a 20 million dollar item in the <unk>.
Other income, which really has two components to it an interest rate component.
And in asset component, if you will and those each are $10 million. So in total if you want to think about those three items being our two items really its interest expense and then other income.
I appreciate it thanks, Rob.
Sure.
Thank you.
Our next question comes from.
David Strauss with Barclays David.
Your line is now open.
Thanks, Good evening.
Hey, Dave.
Dave.
Hey.
What were your EAC adjustments in the quarter net net EAC.
So it's about we actually had about flat.
<unk>.
And that was composed the missile tubes being down.
As we talked about it which will be in the.
The Q of about $11 million number and then other offsets.
So to make it up.
Okay.
Thanks.
And.
Rob I mean.
How are you thinking about leverage in the.
The potential of paying down debt, given or terming out this 40% that you've got that's floating at this point to try and takeaway that volatility.
Yes, we have flexibility of those markets are still completely open if we ever needed to refinance that or even enlarge that that facility as we look out over the next year or two as we've talked about the free cash flow really.
<unk> starts to get pretty.
Robust here shortly so we're sort of looking to grid are keys.
And pay down debt, we don't see a lot of need to do.
Large scale M&A of any sort. So we'll continue to just kind of look at tuck ins and very strategic deals there.
And so as we look out and you think about the sort of operating cash flow at a kind of $300 million ish number over the next couple of years and then we're hoping to bring that capex down to more of the maintenance level youre going to be generating a couple hundred million dollars. So we'll be able to pay down debt and move our leverage back below three times. So we're not in.
Any.
Rush to go deal with that we certainly aren't looking to do anything on the in the sort of bond market. So we always have the flexibility. If we wanted to do something on the bank side. So we'll review that and see whether we need any additional capacity.
Okay and then the last one for me in terms of the medical business at the Investor Day, you had put up the slide deck.
Sure showed during the 22 to 2004 timeframe $60 million sales going to $1 25.
EBITDA 10, $10 million loss going to $25 million positive or are we still in those kind of ranges in terms of.
Where things are running today and kind of how you are projecting things over the next two years.
Yes, I think Thats right I think.
We've clearly.
<unk> lost a couple of months here this year, but those are endpoints that we still see as very reasonable to get to right. So we're going to be ramping our actual our therapeutics effort that was the total BWXT medical story as you know, which included sort of the Nordion business. The ramping of the Tech 99, and then ultimately the therapeutics and so along those different there.
Slide puts and takes but ultimately that fixture still lines up quite nicely.
With what we're seeing.
Alright, Thank you very much.
Thank you.
Our next question comes from.
Got to Mali with truly Michael Your line is now open.
Hey, good evening guys. Thanks for taking the questions.
Rex.
On the on the naval the core Naval business, you mentioned some some production.
Related inefficiencies tied to the steam generators and I Wonder if you could just talk about maybe any other.
Manufacturing Chokepoints Youre seeing we keep hearing about forgings and castings.
Anything else in the supply chain that youre seeing or is that that might create or lead to further inefficiencies.
As we kind of progress here.
Hey, Michael No we haven't seen much of that our forgings business has been fine.
And the other long lead material that we of course concern ourselves with our the alloys special alloys that we need for that business in those supply chains are stable. So we haven't seen much of that show up in the supply chain, it's really been around labor.
For the most part and not the other elements.
Okay, Okay, and what about just dealing with the contract structure and Youre looking for.
All the hires you just mentioned I'm, assuming there's a fair amount of wage inflation happening do you think youll be able to kind of contain that that cost growth in Europe . Your current contracting structure.
Or should we expect maybe some some pressure on margins as you bring on these new employees.
Well it is.
We've talked about the two edged sword of negotiating pricing agreements on two or three year boundaries with in a sole source configuration like this Michael.
So it cuts both ways in the <unk>.
Way that it benefits us as we get into a new pricing discussion.
Hopefully you can capture all the escalation that youre seeing in raw materials and labor and any other things.
And bring those and bring those into the cost baseline, which form the basis for how you lay into profit on top of it the downside is.
That also applies to your backlog and so you get a negative contract adjustment from the application of higher materials and labor to that so we're walking that tight rope right. Now we think we've got it under reasonable control and we and it hasnt changed our view about the long term margins in this business, we still believe.
We can deliver margins into the high teens.
And.
And we've got paths to get there.
Got it just last one any latest update or additional thoughts on the August submarines.
Not much were on the outside looking looking in on that one we're not in the room on those negotiations.
But we're seven or eight months, probably from an announcement here.
We remain excited about it I would say that from Bwxt's perspective, we certainly.
We'd like to support that effort.
Let's see what the decision makers do with it.
Got it thanks, a lot guys.
Thanks, Michael.
Thank you.
Our next question comes from.
Tate Sullivan with Maxim group.
Your line is now open.
Okay. Thank you and good evening.
Just a follow up on government operation margin increase quarter over quarter, the 19% 17%.
A portion of that Savannah River and was Savannah River was at a full run rate in 'twenty two.
Yeah Tate.
Savannah, representing there, although I would say that was probably a modest.
A modest component of all that generally speaking.
Site performance in our technical services business has been good and that did contribute to the improved improve margins in that business. We also had long lead materials that we pulled.
That we are able to deliver in the second quarter. Originally originally forecasted for the third quarter that was a contributing factor there.
And.
Those would be the primary element simply okay. Yes, we're also seeing strength in the core Navy business do you have a couple of other businesses in there as well we've talked about.
The.
Fuel business and the new metal business. The purification business. Those are good margin businesses. So we do see a ramp up there and so we're doing quite well on that on that contract and so that.
That's building up nicely for us so.
Helpful.
Okay. Thank you on that and I'll follow up on project Kelly and thanks for the detail before that.
With delivery of the prototype in 2024, but per your previous press release.
Testing period that can last up to three years can you book revenue during the period I imagine from supplying that tree so fuel.
For the testing period or is that in the $300 million.
Contract amount.
So the tape try so fuel is a separate contract for that we announced a.
A few years ago, the base phase of that contract, which I believe was 2000 $29 million. There is another option piece is a bit bigger than that that hasn't been exercised yet to manufacture the fuel itself for that reactor and so think of that as tens of millions on top of the Pele reactor in.
In fact, a try so fuel contract was competitively awarded also there was a little bit of a smaller news item for us, but those two together push you into the into the mid three hundreds are above and I thought. The point you were headed to which is also true is there would be sustaining engineering.
For BWXT modest revenues, but sustaining engineering after delivery of that reactor, while it's being tested and demonstrated <unk> at.
At Idaho National Laboratory.
Okay. Thank you.
Thanks, Dave.
Thank you.
There are no further questions in queue. So again as a reminder to submit for a question Thats Star one on your telephone keypad.
As there are no further questions in queue I will pass the conference back over to Mark Kratz for any additional or closing remarks.
Thank you everyone for joining us today. If you have further questions you can reach us by phone at 98 zero 365, 4300 or by E mail through investors at BWXT Dot com.
Thank you that concludes today's BW X technology second quarter 2022 earnings Conference call. Thank you for your participation you may now disconnect your line.