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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 __________________________________________________ 
FORM 10-Q
 __________________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File No. 001-34658
 BWX TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
  __________________________________________________ 
DELAWARE
 
80-0558025
(State of Incorporation
or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
800 MAIN STREET, 4TH FLOOR
 
 
LYNCHBURG, VIRGINIA
 
24504
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (980) 365-4300
  __________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
Emerging growth company
 
¨
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant's common stock outstanding at May 2, 2018 was 99,679,664.


Table of Contents

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


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PART I
FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
 
 
March 31,
2018
 
December 31,
2017
 
 
(Unaudited)
(In thousands)
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
143,335

 
$
203,404

Restricted cash and cash equivalents
 
5,362

 
7,105

Investments
 
1,034

 
2,934

Accounts receivable – trade, net
 
174,150

 
189,217

Accounts receivable – other
 
8,058

 
19,365

Contracts in progress
 
337,375

 
420,628

Other current assets
 
33,536

 
30,437

Total Current Assets
 
702,850

 
873,090

Property, Plant and Equipment
 
1,023,856

 
1,013,141

Less accumulated depreciation
 
673,954

 
664,512

Net Property, Plant and Equipment
 
349,902

 
348,629

Investments
 
8,909

 
9,301

Goodwill
 
216,999

 
218,331

Deferred Income Taxes
 
84,727

 
86,740

Investments in Unconsolidated Affiliates
 
47,043

 
43,266

Intangible Assets
 
106,718

 
110,405

Other Assets
 
22,391

 
22,577

TOTAL
 
$
1,539,539

 
$
1,712,339

See accompanying notes to condensed consolidated financial statements.

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BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
March 31,
2018
 
December 31,
2017
 
 
(Unaudited)
(In thousands, except share
and per share amounts)
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
27,693

 
$
27,870

Accounts payable
 
99,224

 
93,421

Accrued employee benefits
 
57,637

 
82,477

Accrued liabilities – other
 
51,662

 
64,738

Advance billings on contracts
 
77,140

 
246,192

Accrued warranty expense
 
13,699

 
13,428

Total Current Liabilities
 
327,055

 
528,126

Long-Term Debt
 
471,367

 
481,059

Accumulated Postretirement Benefit Obligation
 
20,959

 
21,368

Environmental Liabilities
 
80,682

 
79,786

Pension Liability
 
274,801

 
296,444

Other Liabilities
 
19,425

 
19,799

Commitments and Contingencies (Note 4)
 

 

Stockholders' Equity:
 
 
 
 
Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 125,722,034 and 125,381,591 shares at March 31, 2018 and December 31, 2017, respectively
 
1,257

 
1,254

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

 

Capital in excess of par value
 
107,108

 
98,843

Retained earnings
 
1,053,090

 
990,652

Treasury stock at cost, 26,056,339 and 25,964,088 shares at March 31, 2018 and December 31, 2017, respectively
 
(820,749
)
 
(814,809
)
Accumulated other comprehensive income
 
4,435

 
9,454

Stockholders' Equity – BWX Technologies, Inc.
 
345,141

 
285,394

Noncontrolling interest
 
109

 
363

Total Stockholders' Equity
 
345,250

 
285,757

TOTAL
 
$
1,539,539

 
$
1,712,339

See accompanying notes to condensed consolidated financial statements.


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Table of Contents

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(Unaudited)
(In thousands, except share and per share amounts)
Revenues
 
$
457,463

 
$
428,229

Costs and Expenses:
 
 
 
 
Cost of operations
 
327,364

 
303,216

Research and development costs
 
3,607

 
1,519

Gains on asset disposals and impairments, net
 
(8
)
 

Selling, general and administrative expenses
 
53,762

 
51,097

Total Costs and Expenses
 
384,725

 
355,832

Equity in Income of Investees
 
7,150

 
3,875

Operating Income
 
79,888

 
76,272

Other Income (Expense):
 
 
 
 
Interest income
 
778

 
137

Interest expense
 
(3,560
)
 
(3,517
)
Other – net
 
7,910

 
7,486

Total Other Income (Expense)
 
5,128

 
4,106

Income before Provision for Income Taxes
 
85,016

 
80,378

Provision for Income Taxes
 
18,603

 
24,592

Net Income
 
$
66,413

 
$
55,786

Net (Income) Loss Attributable to Noncontrolling Interest
 
28

 
(67
)
Net Income Attributable to BWX Technologies, Inc.
 
$
66,441

 
$
55,719

Earnings per Common Share:
 
 
 
 
Basic:
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
0.67

 
$
0.56

Diluted:
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
0.66

 
$
0.55

Shares used in the computation of earnings per share (Note 9):
 
 
 
 
Basic
 
99,526,187

 
99,444,910

Diluted
 
100,512,287

 
100,690,968

See accompanying notes to condensed consolidated financial statements.

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BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(Unaudited)
(In thousands)
Net Income
 
$
66,413

 
$
55,786

Other Comprehensive Income (Loss):
 
 
 
 
Currency translation adjustments
 
(3,124
)
 
791

Derivative financial instruments:
 
 
 
 
Unrealized gains arising during the period, net of tax provision of $(59) and $(97), respectively
 
173

 
279

Reclassification adjustment for gains included in net income, net of tax provision of $30 and $13, respectively
 
(79
)
 
(37
)
Amortization of benefit plan costs, net of tax benefit of $(183) and $(156), respectively
 
322

 
290

Investments:
 
 
 
 
Unrealized losses arising during the period, net of tax benefit (provision) of $0 and $(70), respectively
 
(66
)
 
(94
)
Reclassification adjustment for gains included in net income, net of tax provision of $0 and $8, respectively
 

 
(14
)
Other Comprehensive Income (Loss)
 
(2,774
)
 
1,215

Total Comprehensive Income
 
63,639

 
57,001

Comprehensive (Income) Loss Attributable to Noncontrolling Interest
 
28

 
(67
)
Comprehensive Income Attributable to BWX Technologies, Inc.
 
$
63,667

 
$
56,934

See accompanying notes to condensed consolidated financial statements.

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

 
$
1,254

 
$
98,843

 
$
990,652

 
$
9,454

 
$
(814,809
)
 
$
285,394

 
$
363

 
$
285,757

Recently adopted accounting standards
 

 

 

 
12,171

 
(2,245
)
 

 
9,926

 

 
9,926

Net income
 

 

 

 
66,441

 

 

 
66,441

 
(28
)
 
66,413

Dividends declared ($0.16 per share)
 

 

 

 
(16,174
)
 

 

 
(16,174
)
 

 
(16,174
)
Currency translation adjustments
 

 

 

 

 
(3,124
)
 

 
(3,124
)
 

 
(3,124
)
Derivative financial instruments
 

 

 

 

 
94

 

 
94

 

 
94

Defined benefit obligations
 

 

 

 

 
322

 

 
322

 

 
322

Available-for-sale investments
 

 

 

 

 
(66
)
 

 
(66
)
 

 
(66
)
Exercise of stock options
 
159,126

 
1

 
3,806

 

 

 

 
3,807

 

 
3,807

Shares placed in treasury
 

 

 

 

 

 
(5,940
)
 
(5,940
)
 

 
(5,940
)
Stock-based compensation charges
 
181,317

 
2

 
4,459

 

 

 

 
4,461

 

 
4,461

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(226
)
 
(226
)
Balance March 31, 2018 (unaudited)
 
125,722,034

 
$
1,257

 
$
107,108

 
$
1,053,090

 
$
4,435

 
$
(820,749
)
 
$
345,141

 
$
109

 
$
345,250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance December 31, 2016
 
124,149,609

 
$
1,241

 
$
22,018

 
$
885,117

 
$
3,811

 
$
(762,169
)
 
$
150,018

 
$
392

 
$
150,410

Net income
 

 

 

 
55,719

 

 

 
55,719

 
67

 
55,786

Dividends declared ($0.09 per share)
 

 

 

 
(9,058
)
 

 

 
(9,058
)
 

 
(9,058
)
Currency translation adjustments
 

 

 

 

 
791

 

 
791

 

 
791

Derivative financial instruments
 

 

 

 

 
242

 

 
242

 

 
242

Defined benefit obligations
 

 

 

 

 
290

 

 
290

 

 
290

Available-for-sale investments
 

 

 

 

 
(108
)
 

 
(108
)
 

 
(108
)
Exercise of stock options
 
412,991

 
4

 
9,789

 

 

 

 
9,793

 

 
9,793

Shares placed in treasury
 

 

 
39,907

 

 

 
(45,100
)
 
(5,193
)
 

 
(5,193
)
Stock-based compensation charges
 
272,141

 
3

 
3,409

 

 

 

 
3,412

 

 
3,412

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(146
)
 
(146
)
Balance March 31, 2017 (unaudited)
 
124,834,741

 
$
1,248

 
$
75,123

 
$
931,778

 
$
5,026

 
$
(807,269
)
 
$
205,906

 
$
313

 
$
206,219

See accompanying notes to condensed consolidated financial statements.

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BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
(Unaudited)
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net Income
 
$
66,413

 
$
55,786

Non-cash items included in net income from continuing operations:
 
 
 
 
Depreciation and amortization
 
14,061

 
13,976

Income of investees, net of dividends
 
(2,299
)
 
1,779

Gains on asset disposals and impairments, net
 
(8
)
 

Recognition of losses for pension and postretirement plans
 
505

 
446

Stock-based compensation expense
 
4,461

 
3,412

Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
16,943

 
(41,153
)
Accounts payable
 
10,528

 
(14,003
)
Contracts in progress and advance billings on contracts
 
(74,153
)
 
(4,890
)
Income taxes
 
(5,502
)
 
(2,607
)
Accrued and other current liabilities
 
364

 
(29,810
)
Pension liability, accrued postretirement benefit obligation and employee benefits
 
(48,929
)
 
(38,891
)
Other, net
 
(989
)
 
1,279

NET CASH USED IN OPERATING ACTIVITIES
 
(18,605
)
 
(54,676
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of property, plant and equipment
 
(17,634
)
 
(13,713
)
Purchases of securities
 
(1,033
)
 
(3,503
)
Sales and maturities of securities
 
2,948

 
3,317

Investments, net of return of capital, in equity method investees
 

 
(1,701
)
Proceeds from asset disposals
 
8

 

Other, net
 

 
691

NET CASH USED IN INVESTING ACTIVITIES
 
(15,711
)
 
(14,909
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings under the Credit Agreement
 

 
73,600

Repayments under Credit Agreement
 
(6,951
)
 
(30,476
)
Dividends paid to common shareholders
 
(15,947
)
 
(8,985
)
Exercise of stock options
 
2,525

 
9,665

Cash paid for shares withheld to satisfy employee taxes
 
(4,657
)
 
(4,973
)
Other
 
(226
)
 
(146
)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
 
(25,256
)
 
38,685

EFFECTS OF EXCHANGE RATE CHANGES ON CASH
 
(2,236
)
 
1,013

TOTAL DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS
 
(61,808
)
 
(29,887
)
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
213,144

 
134,600

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
151,336

 
$
104,713

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
3,463

 
$
3,330

Income taxes (net of refunds)
 
$
24,370

 
$
27,082

SCHEDULE OF NON-CASH INVESTING ACTIVITY:
 
 
 
 
Accrued capital expenditures included in accounts payable
 
$
4,735

 
$
3,016

See accompanying notes to condensed consolidated financial statements.

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

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offers in-plant inspection, maintenance and modification services for nuclear steam generators, heat exchangers, reactors, fuel handling systems and balance of plant equipment, as well as specialized non-destructive examination and tooling/repair solutions.
See Note 8 for financial information about our segments.
Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and the related footnotes included in our 2017 10-K.
Acquisition of Sotera Health LLC's Nordion Medical Isotope Business
On April 17, 2018, we signed a definitive agreement to acquire Sotera Health LLC's Nordion medical isotope business. Nordion's medical radioisotopes business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies. Its primary operations are located in Kanata, Ontario and Vancouver, British Columbia. This acquisition will allow us to accelerate our entry into the medical radioisotope market by adding licensed infrastructure, approximately 150 highly trained and experienced personnel and two production centers. Subject to required Canadian and U.S. regulatory reviews and approvals, this transaction is expected to close by the end of 2018.
Deconsolidation of Generation mPower LLC
On March 2, 2016, we entered into a framework agreement with Bechtel Power Corporation ("Bechtel"), BWXT Modular Reactors, LLC and BDC NexGen Power, LLC for the potential restructuring and restart of our mPower small modular reactor program (the "Framework Agreement"). As a result of entering into the Framework Agreement, we deconsolidated Generation mPower LLC ("GmP") from our financial statements as of the date of the Framework Agreement and recognized a $30.0 million loss contingency, which was ultimately paid to Bechtel in the first quarter of 2017 following the receipt of Bechtel's notice that the mPower program would not be restarted.
Contracts and Revenue Recognition
We generally recognize contract revenues and related costs over time for individual performance obligations based on a cost-to-cost method in accordance with Financial Accounting Standards Board ("FASB") Topic Revenue from Contracts with Customers. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress toward completion as a percentage of the total project (percentage-of-completion basis). Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for uninstalled materials, if such costs do not depict our performance in transferring control of goods or services to the customer. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. Certain of our contracts recognize revenue at a point in time, and revenue on these contracts is recognized when control transfers to the customer. The majority of our revenue that is recognized at a point in time is related to parts in our Nuclear Power Group segment. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

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Accumulated Other Comprehensive Income
The components of Accumulated other comprehensive income included in Stockholders' Equity are as follows:
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands)
Currency translation adjustments
 
$
10,024

 
$
13,148

Net unrealized gain on derivative financial instruments
 
447

 
353

Unrecognized prior service cost on benefit obligations
 
(5,915
)
 
(6,237
)
Net unrealized gain (loss) on available-for-sale investments
 
(121
)
 
2,190

Accumulated other comprehensive income
 
$
4,435

 
$
9,454

As a result of the adoption of the FASB update to the Topic Financial Instruments, we reclassified $2.2 million of net unrealized gains on available-for-sale investments from Accumulated other comprehensive income to Retained earnings on January 1, 2018.
The amounts reclassified out of Accumulated other comprehensive income by component and the affected condensed consolidated statements of income line items are as follows:
 
 
Three Months Ended
March 31,
 
 
 
 
2018
 
2017
 
 
Accumulated Other Comprehensive Income (Loss) Component Recognized
 
(In thousands)
 
Line Item Presented
Realized gain (loss) on derivative financial instruments
 
$
(11
)
 
$
(4
)
 
Revenues
 
 
120

 
54

 
Cost of operations
 
 
109

 
50

 
Total before tax
 
 
(30
)
 
(13
)
 
Provision for Income Taxes
 
 
$
79

 
$
37

 
Net Income
Amortization of prior service cost on benefit obligations
 
$
(505
)
 
$
(446
)
 
Other – net
 
 
183

 
156

 
Provision for Income Taxes
 
 
$
(322
)
 
$
(290
)
 
Net Income
Realized gain on investments
 
$

 
$
22

 
Other – net
 
 

 
(8
)
 
Provision for Income Taxes
 
 
$

 
$
14

 
Net Income
Total reclassification for the period
 
$
(243
)
 
$
(239
)
 
 
Inventories
At March 31, 2018 and December 31, 2017, included in Other current assets, we had inventories totaling $10.6 million and $8.6 million, respectively, consisting entirely of raw materials and supplies.
Restricted Cash and Cash Equivalents
At March 31, 2018, we had restricted cash and cash equivalents totaling $8.0 million, $2.6 million of which was held for future decommissioning of facilities (which is included in Other Assets on our condensed consolidated balance sheets) and $5.4 million of which was held to meet reinsurance reserve requirements of our captive insurer.

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The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents within our condensed consolidated balance sheets to the totals presented in our condensed consolidated statement of cash flows:
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands)
Cash and cash equivalents
 
$
143,335

 
$
203,404

Restricted cash and cash equivalents
 
5,362

 
7,105

Restricted cash and cash equivalents included in Other Assets
 
2,639

 
2,635

Total cash and cash equivalents and restricted cash and cash equivalents as presented in our condensed consolidated statement of cash flows
 
$
151,336

 
$
213,144

Warranty Expense
We accrue estimated expense, included in Cost of operations on our condensed consolidated statements of income, to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.
The following summarizes the changes in the carrying amount of our Accrued warranty expense:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands)
Balance at beginning of period
 
$
13,428

 
$
11,477

Additions
 
517

 
386

Expirations and other changes
 
(53
)
 

Payments
 
(20
)
 
(15
)
Translation
 
(173
)
 
60

Balance at end of period
 
$
13,699

 
$
11,908

Provision for Income Taxes
We are subject to federal income tax in the U.S. and Canada as well as income tax within multiple U.S. state jurisdictions. We provide for income taxes based on the enacted tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to nominal rates and with respect to the basis on which these rates are applied. This variation, along with changes in our mix of income within these jurisdictions, can contribute to shifts in our effective tax rate from period to period.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted, making significant changes to existing U.S. tax laws that impact BWXT, including, but not limited to, a reduction to the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, the taxation of global intangible low-taxed income ("GILTI") and additional deduction limitations related to executive compensation. We recognized the income tax effects of the Act within our condensed consolidated financial statements in accordance with FASB Topic Income Taxes. Our Canadian operations continue to be subject to tax at a local statutory rate of approximately 25%.
Our effective tax rate for the three months ended March 31, 2018 was 21.9% as compared to 30.6% for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 was slightly higher than the U.S. corporate income tax rate of 21% primarily due to state income taxes within the U.S. and the unfavorable rate differential associated with our Canadian earnings. Our effective tax rate for the three months ended March 31, 2018 and March 31, 2017 was favorably impacted by benefits recognized for excess tax benefits related to employee share-based payments of $2.2 million and $2.3 million, respectively.
As of March 31, 2018, we had gross unrecognized tax benefits of $1.7 million (exclusive of interest and federal and state benefits), all of which would reduce our effective tax rate if recognized.

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Recently Adopted Accounting Standards
In May 2014, the FASB issued the Topic Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in the Topic Revenue Recognition and most industry specific guidance. The core principle of this guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance also outlines a five-step model whereby revenue is recognized as performance obligations within a contract are satisfied, as well as new, expanded disclosures. We adopted the new revenue recognition standard on January 1, 2018 for all of our contracts utilizing the modified retrospective method resulting in changes to our opening balance sheet that were recognized through a cumulative catch-up adjustment. See Note 2 for further information regarding revenue recognition and our adoption of the new revenue standard.
In October 2016, the FASB issued an update to the Topic Statement of Cash Flows. This update clarifies guidance on the classification and presentation of restricted cash and cash equivalents in the statement of cash flows. Restricted cash and cash equivalents will now be included with cash and cash equivalents when reconciling the beginning and end of period totals shown on the statement of cash flows. In addition, a reconciliation between the amounts of cash and cash equivalents and restricted cash and cash equivalents reported in the balance sheets and the statement of cash flows is now required. We adopted this update on January 1, 2018 with retrospective application. This update resulted in an increase to cash and cash equivalents and restricted cash and cash equivalents of $9.0 million and $8.8 million at December 31, 2016 and March 31, 2017 on our condensed consolidated statement of cash flows, respectively. This update did not otherwise have a material impact on our financial statements.
In March 2017, the FASB issued an update to the Topic Compensation – Retirement Benefits. This update amends the presentation requirements of the components of net periodic benefit cost related to defined benefit pension and postretirement plans in our consolidated statements of income. Previously, components of net periodic benefit cost were aggregated and reported net in the consolidated statements of income as part of operating income. This update requires entities to disaggregate the service cost component of net periodic benefit cost and present it with other current compensation costs within operating income. Other components of net periodic benefit cost are required to be classified outside of operating income within the consolidated statements of income. These changes to classification will result in no changes to net income. We adopted this update on January 1, 2018 with retrospective presentation. The impact of this update on our condensed consolidated statement of income for the three months ended March 31, 2017 was a reduction of Operating Income, along with a corresponding increase to Other Income (Expense), of $6.9 million. See Note 3 for additional information.
In March 2016, the FASB issued an update to the Topic Financial Instruments. This update amends the classification and measurement of financial instruments including the requirement to measure equity investments at fair value with changes in fair value recognized in net income (except those accounted for under the equity method of accounting or those that result in consolidation of the investee). We adopted this update on January 1, 2018 through the modified retrospective method, which resulted in a cumulative catch-up adjustment, which reclassified $2.2 million of net gains from Accumulated other comprehensive income to Retained earnings on our condensed consolidated balance sheet.
New Accounting Standards
In February 2016, the FASB issued an update to the Topic Leases, which supersedes the lease reporting requirements in Topic Leases (previously "FAS 13"). This update requires that a lessee recognize on its balance sheet the assets and liabilities for all leases with lease terms of more than 12 months, along with additional qualitative and quantitative disclosures. The effect of leases in a consolidated statement of income and a consolidated statement of cash flows is expected to be largely unchanged. Accounting by lessors was not significantly impacted by this update. This update will be effective for us in 2019, with early adoption permitted. We expect to adopt the provisions in this update effective January 1, 2019 and are currently evaluating the impact of the adoption on our financial statements.

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NOTE 2 – REVENUE RECOGNITION
The initial impact of the adoption of the FASB Topic Revenue from Contracts with Customers, which was recognized in a cumulative catch-up adjustment, is illustrated below:
 
 
January 1,
 
December 31,
 
 
2018
 
2017
 
 
(In thousands)
Assets:
 
 
 
 
Contracts in progress
 
$
260,932

 
$
420,628

Deferred Income Taxes
 
$
85,193

 
$
86,740

Liabilities:
 
 
 
 
Accrued liabilities – other
 
$
66,371

 
$
64,738

Advance billings on contracts
 
$
73,390

 
$
246,192

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

 
$
990,652

Within our Nuclear Operations Group segment, we continue to recognize revenue over time, and now measure progress on performance obligations using a cost-to-cost method. Historically, we utilized man-hours or a cost-to-cost method to measure progress on certain performance obligations within this segment. The performance obligations identified for recognizing revenue are similar to our historical units of account. As a result of the change to a cost-to-cost method, the timing of revenue recognition on affected contracts, in the aggregate, results in the recognition of revenue and cost of operations earlier in the process of satisfying performance obligations. This change impacted the life-to-date revenue and costs of operations recognized on performance obligations, and the adjustment to capture the impact of the new revenue recognition standard was recorded as a cumulative catch-up adjustment in Retained earnings. The new standard also resulted in a reduction in both our Contracts in progress and Advance billings on contracts account balances as a result of measuring the asset and liability at the contract level. Historically, contract assets and liabilities were measured at the unit of account, which we concluded was at a lower level than that of the contract.
The impact of the adoption of the new revenue standard on our Nuclear Power Group and Nuclear Services Group segments was not material.
Contracts and Revenue Recognition
Nuclear Operations Group
Our Nuclear Operations Group segment recognizes revenue over time for the manufacturing of naval nuclear reactor components and fuel, submarine missile launch tubes and the downblending of high-enriched uranium. Certain of our contracts contain two or more different types of components, each of which we identify as a separate performance obligation. We recognize revenue using a cost-to-cost method to measure progress as control is continually transferred to the customer as we incur costs on the performance obligations. We allocate revenue to the individual performance obligations within contracts with multiple performance obligations based on the stand-alone selling price of the individual performance obligations.
Our fixed-price incentive fee contracts include incentives that we concluded to be variable consideration. The amount of the variable consideration to which we are entitled is dependent on our actual costs incurred on the performance obligation compared to the target costs for that performance obligation and subject to incentive price revisions included within the contracts. We include these incentive fees in revenue when there is sufficient evidence to determine that the variable consideration is not constrained. The remaining contracts typically have immaterial amounts of variable consideration and have a single performance obligation. Our estimates of variable consideration and total estimated costs at completion are determined through a detailed process based on historical performance and our expertise using the most likely method. Variations from estimated contract performance could result in a material effect on our financial condition and results of operations in future periods.
Our Nuclear Operations Group segment's contracts allow for billings as costs are incurred, subject to certain retainages on our fixed-price incentive fee contracts, that require milestones to be reached for the remaining consideration to be paid.

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Nuclear Services Group
Our contracts within our Nuclear Services Group segment are primarily cost-plus service contracts on which we recognize revenue over time based on a cost-to-cost method, which is consistent with the structure of the billings associated with these contracts. Ownership continuously transfers to the customer as we perform the services. The contracts within this segment do not contain significant variable consideration and contain a single performance obligation. Certain of these contracts contain assurance warranties and/or provisions for liquidated damages, which are expected to have an immaterial impact on the contracts based on our historical experience.
Nuclear Power Group
Our Nuclear Power Group segment recognizes revenue over time using a cost-to-cost method for the manufacturing of large components, non-standard parts, fuel bundles and service contracts as control continually transfers to the customers. For standard parts, revenue is recognized at the point in time control transfers to the customer, which is consistent with the transfer of ownership. This segment generates revenue primarily from firm-fixed-price contracts that do not contain variable consideration as well as time-and-materials based contracts. Certain of these contracts contain assurance warranties and/or provisions for liquidated damages, which are expected to have an immaterial impact to the contracts based on our historical experience. We are entitled to payment on the majority of our Nuclear Power Group segment contracts when we achieve certain milestones related to our progress on the contract.
Disaggregated Revenues
Revenues by geographical area and customer type are as follows:
 
 
Three Months Ended March 31, 2018
 
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
 
(In thousands)
United States:
 
 
 
 
 
 
 


Government
 
$
316,631

 
$
25,881

 
$

 
$
342,512

Non-Government
 

 
3,177

 
260

 
3,437

 
 
$
316,631

 
$
29,058

 
$
260

 
$
345,949

Canada:
 
 
 
 
 
 
 


Government
 
$

 
$

 
$

 
$

Non-Government
 

 
975

 
82,325

 
83,300

 
 
$

 
$
975

 
$
82,325

 
$
83,300

Other:
 
 
 
 
 
 
 


Government
 
$

 
$

 
$

 
$

Non-Government
 

 

 
30,231

 
30,231

 
 
$

 
$

 
$
30,231

 
$
30,231

Segment Revenues
 
$
316,631

 
$
30,033

 
$
112,816

 
459,480

Adjustments and Eliminations
 
 
 
 
 
 
 
(2,017
)
Revenues
 
 
 
 
 
 
 
$
457,463

Revenues by timing of transfer of goods or services are as follows:
 
 
Three Months Ended March 31, 2018
 
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
 
(In thousands)
Over-time
 
$
316,631

 
$
30,033

 
$
105,109

 
$
451,773

Point-in-time
 

 

 
7,707

 
7,707

Segment Revenues
 
$
316,631

 
$
30,033

 
$
112,816

 
459,480

Adjustments and Eliminations
 
 
 
 
 
 
 
(2,017
)
Revenues
 
 
 
 
 
 
 
$
457,463


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Revenues by contract type are as follows:
 
 
Three Months Ended March 31, 2018
 
 
Nuclear
Operations
Group
 
Nuclear
Services
Group
 
Nuclear
Power
Group
 
Total
 
 
(In thousands)
Fixed-Price Incentive Fee
 
$
249,240

 
$

 
$
4,028

 
$
253,268

Firm-Fixed-Price
 
47,058

 
5,410

 
74,282

 
126,750

Cost-Plus Fee
 
20,233

 
23,953

 
45

 
44,231

Time-and-Materials
 
100

 
670

 
34,461

 
35,231

Segment Revenues
 
$
316,631

 
$
30,033

 
$
112,816

 
459,480

Adjustments and Eliminations
 
 
 
 
 
 
 
(2,017
)
Revenues
 
 
 
 
 
 
 
$
457,463

Performance Obligations
As we progress on our contracts and the underlying performance obligations for which we recognize revenue over time, we refine our estimates of variable consideration and total estimated costs at completion, which impact the overall profitability on our contracts and performance obligations. Changes in these estimates result in the recognition of cumulative catch-up adjustments that impact our revenue and/or costs of contracts. During the three months ended March 31, 2018, we recognized net favorable changes in estimates that resulted in an increase in revenue of $5.3 million.
Contract Assets and Liabilities
We include revenues and related costs incurred, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts, in Contracts in progress. We include in Advance billings on contracts billings that exceed accumulated contract costs and revenues and costs recognized over time. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. Changes in Contracts in progress and Advance billings on contracts are primarily driven by differences in the timing of revenue recognition and billings to our customers. During the three months ended March 31, 2018, our unbilled receivables increased $75.4 million, primarily as a result of revenue in excess of billings on certain firm-fixed-price contracts within our Nuclear Operations Group segment and the timing of milestone payments on large components and contracts started in 2018 within our Nuclear Power Group segment. Our fixed-price incentive fee contracts for our Nuclear Operations Group segment include provisions that result in an increase in retainages on contracts during the first and third quarters of the year, with larger payments made during the second and fourth quarters. This resulted in an increase in retainages on contracts from January 1 to March 31, 2018 as shown below:
 
 
March 31,
 
January 1,
 
 
2018
 
2018
 
 
(In thousands)
Included in Contracts in progress:
 
 
 
 
Unbilled receivables
 
$
325,745

 
$
250,325

Included in Accounts receivable – trade, net:
 
 
 
 
Retainages
 
$
93,258

 
$
82,801

Included in Other Assets:
 
 
 
 
Retainages
 
$
1,656

 
$
1,669

Advance billings on contracts
 
$
77,140

 
$
73,390

During the three months ended March 31, 2018, we recognized $30.4 million of revenue that was in Advance billings on contracts at January 1, 2018.

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Remaining Performance Obligations
Remaining performance obligations represent the dollar amount of revenue we expect to recognize in the future from performance obligations on contracts previously awarded and in progress. Of the March 31, 2018 remaining performance obligations on our contracts with customers, we expect to recognize revenues as follows:
 
 
2018
 
2019
 
Thereafter
 
Total
 
 
(In approximate millions)
Nuclear Operations Group
 
$
944

 
$
802

 
$
1,256

 
$
3,002

Nuclear Services Group
 
21

 
3

 
4

 
28

Nuclear Power Group
 
168

 
111

 
271

 
550

Total Remaining Performance Obligations
 
$
1,133

 
$
916

 
$
1,531

 
$
3,580

Historical Method
Prior to the adoption of FASB Topic Revenue from Contracts with Customers, we accounted for revenue under previous GAAP. In accordance with our adoption of the new revenue recognition standard utilizing the modified retrospective approach, we are required to disclose the impact on our financial statements on a line item basis.
A comparison of certain line items in our condensed consolidated balance sheet is shown below:
 
 
March 31, 2018
 
 
Current
Method
 
Historical
Method
 
 
(In thousands)
Assets:
 
 
 
 
Contracts in progress
 
$
337,375

 
$
365,192

Deferred Income Taxes
 
$
84,727

 
$
85,443

Liabilities:
 
 
 
 
Accrued liabilities – other
 
$
51,662

 
$
49,327

Advance billings on contracts
 
$
77,140

 
$
117,174

Stockholders' Equity:
 
 
 
 
Retained earnings
 
$
1,053,090

 
$
1,043,924

Differences in the amounts above are primarily the result of the initial adoption of the new revenue recognition standard. Additional differences were caused by revenue under the current method being $8.1 million lower than the historical method as discussed below.
A comparison of certain line items in our condensed consolidated statement of operations is shown below:
 
 
Three Months Ended
March 31, 2018
 
 
Current
Method
 
Historical
Method
 
 
(In thousands)
Revenues
 
$
457,463

 
$
465,530

Cost of operations
 
$
327,364

 
$
334,542

Operating Income
 
$
79,888

 
$
80,777

Provision for Income Taxes
 
$
18,603

 
$
18,732

Net Income
 
$
66,413

 
$
67,173

We recognized $8.1 million less revenue under the current method compared to the historical method for the three months ended March 31, 2018. This was primarily driven by less progress being achieved on contracts as a result of using a cost-to-cost method for measuring progress under the current method as compared to man-hours or units of output under our historical method.

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NOTE 3 – PENSION PLANS AND POSTRETIREMENT BENEFITS
We record the service cost component of net periodic benefit cost within Operating income on our condensed consolidated statements of income. For the three months ended March 31, 2018 and 2017, these amounts were $2.6 million and $2.3 million, respectively. All other components of net periodic benefit cost are included in Other – net within the condensed consolidated statements of income. For the three months ended March 31, 2018 and 2017, these amounts were $(8.9) million and $(6.9) million, respectively. Components of net periodic benefit cost included in net income are as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
2018
 
2017
 
 
(In thousands)
Service cost
 
$
2,413

 
$
2,151

 
$
165

 
$
154

Interest cost
 
12,343

 
13,513

 
549

 
540

Expected return on plan assets
 
(21,625
)
 
(20,837
)
 
(634
)
 
(595
)
Amortization of prior service cost (credit)
 
550

 
525

 
(45
)
 
(79
)
Net periodic benefit (income) cost
 
$
(6,319
)
 
$
(4,648
)
 
$
35

 
$
20

NOTE 4 – COMMITMENTS AND CONTINGENCIES
Other than as noted below, there have been no material changes during the period covered by this Form 10-Q in the status of the legal proceedings disclosed in Note 10 to the consolidated financial statements in Part II of our 2017 10-K.
Investigations and Litigation
Apollo and Parks Township
In January 2010, Michelle McMunn, Cara D. Steele and Yvonne Sue Robinson filed suit against Babcock & Wilcox Power Generation Group, Inc. ("B&W PGG"), Babcock & Wilcox Technical Services Group, Inc., formerly known as B&W Nuclear Environmental Services, Inc. and now known as BWXT Technical Services Group, Inc. (the "BWXT Parties") and Atlantic Richfield Company ("ARCO") in the U.S. District Court for the Western District of Pennsylvania. Since January 2010, additional suits were filed by additional plaintiffs and there are currently 17 lawsuits pending in the U.S. District Court for the Western District of Pennsylvania (the "Trial Court") against the BWXT Parties and ARCO, including the most recent lawsuits filed in June and October 2015. In total, the suits involve approximately 107 primary claimants. The primary claimants allege, among other things, personal injuries and property damage as a result of alleged releases of radioactive material relating to the operation, remediation and/or decommissioning of two former nuclear fuel processing facilities located in the Borough of Apollo and Parks Township, Pennsylvania (collectively, the "Apollo and Parks Litigation"). Those facilities previously were owned by Nuclear Materials and Equipment Company, a former subsidiary of ARCO ("NUMEC"), which was acquired by B&W PGG. The plaintiffs in the Apollo and Parks Litigation seek compensatory and punitive damages, and in November 2014 delivered a demand of $125.0 million for the settlement of all then-filed actions. While we consider the likelihood of the plaintiffs' recovery to be remote, solely on the basis of this demand we estimate the range of a possible loss at between $0.0 million and $125.0 million. In connection with the spin-off of our former Power Generation business, we agreed to indemnify B&W PGG and its affiliates for any losses arising from the Apollo and Parks Litigation pursuant to the Master Separation Agreement.
Between May 2015 and March 2016, the presiding judge in the Apollo and Parks Litigation granted the BWXT Parties' motions to dismiss or motions for summary judgment in all 17 of the existing lawsuits. Accordingly, all current claims in the Apollo and Parks Litigation have been dismissed by the Trial Court. All plaintiffs filed notices of appeal, and the appeals were consolidated in the U.S. Court of Appeals for the Third Circuit (the "Court of Appeals"). On August 23, 2017, the Court of Appeals affirmed the rulings of the Trial Court, dismissing all claims against the BWXT Parties and other defendants in the cases. Plaintiffs filed a notice of petition for rehearing, which was denied by the Court of Appeals on September 21, 2017. The plaintiffs filed a writ of certiorari for review by the U.S. Supreme Court on December 20, 2017. On February 20, 2018, the U.S. Supreme Court denied plaintiffs' petition for writ of certiorari making the Court of Appeals decision affirming the dismissal of all 17 lawsuits final.
At the time of ARCO's sale of NUMEC stock to B&W PGG, B&W PGG received an indemnity and hold harmless agreement from ARCO, which has been assigned to BWXT and its affiliates, with respect to claims and liabilities arising prior to or as a result of conduct or events predating the acquisition.

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The ARCO indemnity remains applicable should any future claims similar in nature to the Apollo and Parks Litigation be made, although no assurance can be given that the indemnity will be available or sufficient in the event of liability, if any.
NOTE 5 – DERIVATIVE FINANCIAL INSTRUMENTS
Our operations give rise to exposure to market risks from changes in foreign currency exchange ("FX") rates. We use derivative financial instruments, primarily FX forward contracts, to reduce the impact of changes in FX rates on our operating results. We use these instruments primarily to hedge our exposure associated with revenues or costs on our long-term contracts that are denominated in currencies other than our operating entities' functional currencies. We do not hold or issue derivative financial instruments for trading or other speculative purposes.
We enter into derivative financial instruments primarily as hedges of certain firm purchase and sale commitments denominated in foreign currencies. We record these contracts at fair value on our condensed consolidated balance sheets. Based on the hedge designation at the inception of the contract, the related gains and losses on these contracts are deferred in stockholders' equity as a component of Accumulated other comprehensive income until the hedged item is recognized in earnings. Any ineffective portion of a derivative's change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in Other – net in our condensed consolidated statements of income. The gain or loss on a derivative instrument not designated as a hedging instrument is also immediately recognized in earnings. Gains and losses on derivative financial instruments that require immediate recognition are included as a component of Other – net in our condensed consolidated statements of income.
We have designated all of our FX forward contracts that qualify for hedge accounting as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At March 31, 2018, we had deferred approximately $0.4 million of net gains on these derivative financial instruments in Accumulated other comprehensive income. Assuming market conditions continue, we expect to recognize the majority of this amount in the next 12 months.
At March 31, 2018, our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts totaled $31.6 million at March 31, 2018, with maturities extending to December 2021. These instruments consist primarily of contracts to purchase or sell Canadian dollars. We are exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions included in our credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our credit facility.
The following tables summarize our derivative financial instruments at March 31, 2018 and December 31, 2017:
 
 
Asset and Liability Derivatives
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands)
Derivatives Designated as Hedges:
 
 
 
 
FX Forward Contracts:
 
 
 
 
Location
 
 
 
 
Accounts receivable – other
 
$
295

 
$
250

Other Assets
 
$
390

 
$
348

Accounts payable
 
$
54

 
$
177

Other Liabilities
 
$
62

 
$
93


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The effects of derivatives on our financial statements are outlined below:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands)
Derivatives Designated as Hedges:
 
 
 
 
Cash Flow Hedges:
 
 
 
 
FX Forward Contracts:
 
 
 
 
Amount of gain recognized in other comprehensive income
 
$
232

 
$
376

Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings: effective portion
 
 
 
 
Location
 
 
Revenues
 
$
(11
)
 
$
(4
)
Cost of operations
 
$
120

 
$
54

NOTE 6 – FAIR VALUE MEASUREMENTS
Investments
The following is a summary of our investments measured at fair value at March 31, 2018:
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Equity securities
 
 
 
 
 
 
 
 
Equities
 
$
2,442

 
$

 
$
2,442

 
$

Mutual funds
 
4,851

 

 
4,851

 

Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Government and agency securities
 
1,034

 
1,034

 

 

Corporate bonds
 
1,469

 
1,469

 

 

Asset-backed securities and collateralized mortgage obligations
 
147

 

 
147

 

Total
 
$
9,943

 
$
2,503

 
$
7,440

 
$

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

 
$
1,299

 
$

 
$

Corporate bonds
 
3,169

 
1,534

 
1,635

 

Equities
 
2,759

 

 
2,759

 

Mutual funds
 
4,847

 

 
4,847

 

Asset-backed securities and collateralized mortgage obligations
 
161

 

 
161

 

Total
 
$
12,235

 
$
2,833

 
$
9,402

 
$

We estimate the fair value of investments based on quoted market prices. For investments for which there are no quoted market prices, we derive fair values from available yield curves for investments of similar quality and terms.
Derivatives
Level 2 derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk

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adjustments. At March 31, 2018 and December 31, 2017, we had forward contracts outstanding to purchase or sell Canadian dollars, with a total fair value of $0.6 million and $0.3 million, respectively.
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments, as follows:
Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying condensed consolidated balance sheets for Cash and cash equivalents and Restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
Long-term and short-term debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our debt instruments approximated their carrying value at March 31, 2018 and December 31, 2017.
NOTE 7 – STOCK-BASED COMPENSATION
Stock-based compensation recognized for all of our plans for the three months ended March 31, 2018 and 2017 totaled $4.9 million and $4.7 million, respectively, with associated tax benefit totaling $0.9 million and $1.6 million, respectively.

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NOTE 8 – SEGMENT REPORTING
As described in Note 1, our operations are assessed based on three reportable segments. An analysis of our operations by reportable segment is as follows:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands)
REVENUES:
 
 
 
 
Nuclear Operations Group
 
$
316,631

 
$
325,081

Nuclear Services Group
 
30,033

 
27,854

Nuclear Power Group
 
112,816

 
77,674

Adjustments and Eliminations (1)
 
(2,017
)
 
(2,380
)
 
 
$
457,463

 
$
428,229

(1)
Segment revenues are net of the following intersegment transfers and other adjustments:
Nuclear Operations Group Transfers
 
$
(1,139
)
 
$
(195
)
Nuclear Services Group Transfers
 
(838
)
 
(2,157
)
Nuclear Power Group Transfers
 
(40
)
 
(28
)
 
 
$
(2,017
)
 
$
(2,380
)
OPERATING INCOME:
 
 
 
 
Nuclear Operations Group
 
$
67,657

 
$
67,749

Nuclear Services Group
 
1,177

 
402

Nuclear Power Group
 
21,764

 
12,956

Other
 
(4,043
)
 
(1,612
)
 
 
$
86,555

 
$
79,495

Unallocated Corporate (2)
 
(6,667
)
 
(3,223
)
Total Operating Income
 
$
79,888

 
$
76,272

Other Income (Expense):
 
 
 
 
Interest income
 
778

 
137

Interest expense
 
(3,560
)
 
(3,517
)
Other – net
 
7,910

 
7,486

Total Other Income (Expense)
 
5,128

 
4,106

Income before Provision for Income Taxes
 
$
85,016

 
$
80,378

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

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NOTE 9 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
 
 
(In thousands, except share and per share amounts)
Basic:
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
66,441

 
$
55,719

Weighted-average common shares
 
99,526,187

 
99,444,910

Basic earnings per common share
 
$
0.67

 
$
0.56

Diluted:
 
 
 
 
Net Income Attributable to BWX Technologies, Inc.
 
$
66,441

 
$
55,719

Weighted-average common shares (basic)
 
99,526,187

 
99,444,910

Effect of dilutive securities:
 
 
 
 
Stock options, restricted stock units and performance shares (1)
 
986,100

 
1,246,058

Adjusted weighted-average common shares
 
100,512,287

 
100,690,968

Diluted earnings per common share
 
$
0.66

 
$
0.55

(1)
At March 31, 2018 and 2017, we excluded 79,278 and 103,608 shares, respectively, from our diluted share calculation as their effect would have been antidilutive.

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

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Nuclear Services Group
Our Nuclear Services Group segment provides various services to the U.S. Government and the commercial nuclear industry primarily in the U.S. The revenues and equity in income of investees under our U.S. Government contracts are largely a function of spending of the U.S. Government and the performance scores we and our consortium partners earn in managing and operating high-consequence operations at U.S. nuclear weapons sites, national laboratories and manufacturing complexes. With its specialized capabilities of full life-cycle management of special materials, facilities and technologies, we believe our Nuclear Services Group segment is well-positioned to continue to participate in the continuing cleanup, operation and management of critical government-owned nuclear sites, laboratories and manufacturing complexes maintained by the DOE, NASA and other federal agencies.
This segment is also engaged in inspection and maintenance services for the commercial nuclear industry primarily in the U.S. These services include the inspection of steam generators and heat exchangers, high pressure water lancing, non-destructive examination and the development of customized tooling solutions. This segment also develops technology for a variety of applications, including advanced nuclear power sources, and offers complete advanced fuel and reactor engineering, licensing and manufacturing services for new advanced nuclear reactors.
Nuclear Power Group
Through this segment, we design and manufacture commercial nuclear steam generators, heat exchangers, pressure vessels, reactor components, and other auxiliary equipment, including containers for the storage of spent nuclear fuel and other high-level nuclear waste. This segment is a leading supplier of nuclear fuel, fuel handling systems, tooling delivery systems and related services for CANDU nuclear power plants. This segment also provides a variety of engineering and in-plant services and is a significant supplier to nuclear power utilities undergoing major refurbishment and plant life extension projects.
Our Nuclear Power Group segment's overall activity primarily depends on the demand and competitiveness of nuclear energy. A significant portion of our Nuclear Power Group segment's operations depend on the timing of maintenance outages, principally in the Canadian market, and the cyclical nature of capital expenditures and major refurbishments for nuclear utility customers, which could cause variability in our financial results.
Acquisition of Sotera Health LLC's Nordion Medical Isotope Business
On April 17, 2018, we signed a definitive agreement to acquire Sotera Health LLC's Nordion medical isotope business. Nordion's medical radioisotopes business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies. Its primary operations are located in Kanata, Ontario and Vancouver, British Columbia. This acquisition will allow us to accelerate our entry into the medical radioisotope market by adding licensed infrastructure, approximately 150 highly trained and experienced personnel and two production centers. Subject to required Canadian and U.S. regulatory reviews and approvals, this transaction is expected to close by the end of 2018.
Critical Accounting Policies and Estimates
For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2017 10-K. There have been no material changes to our policies during the three months ended March 31, 2018 with the exception of changes to FASB Topics Revenue from Contracts with Customers and Compensation – Retirement Benefits as described in the notes to our condensed consolidated financial statements in Item 1 of this Report.
Accounting for Contracts
On certain of our performance obligations, we recognize revenue over time. In accordance with FASB Topic Revenue from Contracts with Customers, we are required to estimate the total amount of costs on these performance obligations. As of March 31, 2018, we have provided for the estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. A principal risk on fixed-priced contracts is that revenue from the customer is insufficient to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects or provide performance guarantees. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at

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completion could materially improve our consolidated results of operations, financial condition and cash flows. In the three months ended March 31, 2018 and 2017, we recognized net changes in estimates related to contracts that recognize revenue over time, which increased operating income by approximately $5.3 million and $4.9 million, respectively.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2018 VS. THREE MONTHS ENDED MARCH 31, 2017
Selected financial highlights are presented in the table below:
 
 
Three Months Ended
March 31,
 
 
 
 
2018
 
2017
 
$ Change
 
 
(In thousands)
REVENUES:
 
 
 
 
 
 
Nuclear Operations Group
 
$
316,631

 
$
325,081

 
$
(8,450
)
Nuclear Services Group
 
30,033

 
27,854

 
2,179

Nuclear Power Group
 
112,816

 
77,674

 
35,142

Adjustments and Eliminations
 
(2,017
)
 
(2,380
)
 
363

 
 
$
457,463

 
$
428,229

 
$
29,234

OPERATING INCOME:
 
 
 
 
 
 
Nuclear Operations Group
 
$
67,657

 
$
67,749

 
$
(92
)
Nuclear Services Group
 
1,177

 
402

 
775

Nuclear Power Group
 
21,764

 
12,956

 
8,808

Other
 
(4,043
)
 
(1,612
)
 
(2,431
)
 
 
$
86,555

 
$
79,495

 
$
7,060

Unallocated Corporate
 
(6,667
)
 
(3,223
)
 
(3,444
)
Total Operating Income
 
$
79,888

 
$
76,272

 
$
3,616

Consolidated Results of Operations
Three months ended March 31, 2018 vs. 2017
Consolidated revenues increased 6.8%, or $29.2 million, to $457.5 million in the three months ended March 31, 2018 compared to $428.2 million for the corresponding period in 2017, due to increases in revenues from our Nuclear Services Group and Nuclear Power Group segments totaling $2.2 million and $35.1 million, respectively. These increases were partially offset by a decrease in revenues in our Nuclear Operations Group segment of $8.5 million.
Consolidated operating income increased $3.6 million to $79.9 million in the three months ended March 31, 2018 compared to $76.3 million for the corresponding period of 2017. We experienced operating income improvements in our Nuclear Services Group and Nuclear Power Group segments of $0.8 million and $8.8 million, respectively. These increases were partially offset by lower operating income in our Nuclear Operations Group and Other segments of $0.1 and $2.4 million, respectively, as well as an increase in unallocated corporate expenses of $3.4 million.
Nuclear Operations Group
 
 
Three Months Ended
March 31,
 
 
 
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Revenues
 
$
316,631

 
$
325,081

 
$
(8,450
)
Operating Income
 
67,657

 
67,749

 
(92
)
% of Revenues
 
21.4%

 
20.8%

 
 

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Three months ended March 31, 2018 vs. 2017
Revenues decreased 2.6%, or $8.5 million, to $316.6 million in the three months ended March 31, 2018 compared to $325.1 million for the corresponding period of 2017. The decrease was primarily attributable to lower activity in the manufacturing of nuclear components for U.S. Government programs.
Operating income decreased $0.1 million to $67.7 million in the three months ended March 31, 2018 compared to $67.7 million for the corresponding period of 2017. The decrease was primarily driven by the changes in revenue noted above, which was offset by net favorable changes in estimates related to certain long-term contracts within our naval nuclear fuel and downblending operations.
Nuclear Services Group
 
 
Three Months Ended
March 31,
 
 
 
 
2018
 
2017
 
$ Change
 
 
(In thousands)
Revenues
 
$
30,033

 
$
27,854

 
$
2,179

Operating Income
 
1,177

 
402

 
775

% of Revenues
 
3.9%

 
1.4%

 
 
Three months ended March 31, 2018 vs. 2017
Revenues increased 7.8%, or $2.2 million, to $30.0 million in the