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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 September 30, 2016
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
 
¨
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 October 27, 2016 was 99,233,414.


Table of Contents

BWX TECHNOLOGIES, INC.
INDEX - FORM 10-Q
 
 
 
PAGE
 
 
 
 
 
 
September 30, 2016 and December 31, 2015 (Unaudited)
 
 
 
Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
 
Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
 
Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
 
Nine Months Ended September 30, 2016 and 2015 (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1

Table of Contents

PART I
BWX TECHNOLOGIES, INC.
FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
(In thousands)
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
45,226

 
$
154,729

Restricted cash and cash equivalents
 
5,811

 
15,364

Investments
 
14,700

 
3,476

Accounts receivable – trade, net
 
157,188

 
153,326

Accounts receivable – other
 
23,868

 
22,444

Contracts in progress
 
345,966

 
265,770

Other current assets
 
24,591

 
32,185

Total Current Assets
 
617,350

 
647,294

Property, Plant and Equipment
 
879,015

 
846,936

Less accumulated depreciation
 
615,023

 
578,092

Net Property, Plant and Equipment
 
263,992

 
268,844

Investments
 
7,334

 
6,070

Goodwill
 
168,700

 
168,434

Deferred Income Taxes
 
175,872

 
181,359

Investments in Unconsolidated Affiliates
 
47,870

 
32,088

Intangible Assets
 
56,903

 
58,328

Other Assets
 
27,123

 
12,981

TOTAL
 
$
1,365,144

 
$
1,375,398

See accompanying notes to condensed consolidated financial statements.

2

Table of Contents

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
September 30,
2016
 
December 31,
2015
 
 
(Unaudited)
(In thousands, except share
and per share amounts)
Current Liabilities:
 
 
 
 
Current maturities of long-term debt
 
$
20,625

 
$
15,000

Accounts payable
 
76,500

 
74,130

Accrued employee benefits
 
56,743

 
67,603

Accrued liabilities – other
 
70,383

 
44,947

Advance billings on contracts
 
144,233

 
138,558

Accrued warranty expense
 
12,865

 
13,542

Total Current Liabilities
 
381,349

 
353,780

Long-Term Debt
 
423,211

 
278,259

Accumulated Postretirement Benefit Obligation
 
19,871

 
20,418

Environmental Liabilities
 
62,548

 
60,239

Pension Liability
 
339,986

 
358,512

Other Liabilities
 
19,540

 
24,555

Commitments and Contingencies (Note 6)
 

 

Stockholders’ Equity:
 
 
 
 
Common stock, par value $0.01 per share, authorized 325,000,000 shares; issued 124,083,156 and 122,813,135 shares at September 30, 2016 and December 31, 2015, respectively
 
1,241

 
1,228

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

 

Capital in excess of par value
 
16,171

 
22,732

Retained earnings
 
857,841

 
739,350

Treasury stock at cost, 24,853,379 and 17,515,757 shares at September 30, 2016 and December 31, 2015, respectively
 
(761,956
)
 
(498,346
)
Accumulated other comprehensive income
 
5,003

 
752

Stockholders’ Equity – BWX Technologies, Inc.
 
118,300

 
265,716

Noncontrolling interest
 
339

 
13,919

Total Stockholders’ Equity
 
118,639

 
279,635

TOTAL
 
$
1,365,144

 
$
1,375,398

See accompanying notes to condensed consolidated financial statements.


3

Table of Contents

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
(In thousands, except share and per share amounts)
Revenues
 
$
379,505

 
$
358,970

 
$
1,146,713

 
$
1,051,592

Costs and Expenses:
 
 
 
 
 
 
 
 
Cost of operations
 
271,174

 
250,558

 
785,060

 
727,685

Research and development costs
 
1,746

 
1,518

 
5,043

 
8,999

Gains on asset disposals and impairments, net
 
(5
)
 

 
(55
)
 
(3
)
Selling, general and administrative expenses
 
49,225

 
47,550

 
146,474

 
152,736

mPower framework agreement
 

 

 
30,000

 

Income related to litigation proceeds
 

 
(65,728
)
 

 
(65,728
)
Special charges for restructuring activities
 

 

 

 
16,608

Costs to spin-off the Power Generation business
 

 

 

 
25,987

Total Costs and Expenses
 
322,140

 
233,898

 
966,522

 
866,284

Equity in Income of Investees
 
5,008

 
5,894

 
13,249

 
11,028

Operating Income
 
62,373

 
130,966

 
193,440

 
196,336

Other Income (Expense):
 
 
 
 
 
 
 
 
Interest income
 
128

 
30,028

 
533

 
30,262

Interest expense
 
(2,049
)
 
(1,231
)
 
(5,326
)
 
(6,792
)
Other – net
 
228

 
(1,666
)
 
25,119

 
(2,950
)
Total Other Income (Expense)
 
(1,693
)
 
27,131

 
20,326

 
20,520

Income from continuing operations before provision for income taxes and noncontrolling interest
 
60,680

 
158,097

 
213,766

 
216,856

Provision for Income Taxes
 
20,032

 
51,589

 
66,622

 
76,789

Income from continuing operations before noncontrolling interest
 
40,648

 
106,508

 
147,144

 
140,067

Income (loss) from discontinued operations, net of tax
 

 
(2,474
)
 

 
(8,311
)
Net Income
 
$
40,648

 
$
104,034

 
$
147,144

 
$
131,756

Net (Income) Loss Attributable to Noncontrolling Interest
 
(145
)
 
(164
)
 
(373
)
 
224

Net Income Attributable to BWX Technologies, Inc.
 
$
40,503

 
$
103,870

 
$
146,771

 
$
131,980

Amounts Attributable to BWX Technologies, Inc.’s Common Shareholders:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
40,503

 
$
106,344

 
$
146,771

 
$
140,397

Income (loss) from discontinued operations, net of tax
 

 
(2,474
)
 

 
(8,417
)
Net Income Attributable to BWX Technologies, Inc.
 
$
40,503

 
$
103,870

 
$
146,771

 
$
131,980

Earnings per Common Share:
 
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.39

 
$
0.99

 
$
1.42

 
$
1.31

Income (loss) from discontinued operations
 

 
(0.02
)
 

 
(0.08
)
Net Income Attributable to BWX Technologies, Inc.
 
$
0.39

 
$
0.97

 
$
1.42

 
$
1.23

Diluted:
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
0.39

 
$
0.98

 
$
1.40

 
$
1.30

Income (loss) from discontinued operations
 

 
(0.02
)
 

 
(0.08
)
Net Income Attributable to BWX Technologies, Inc.
 
$
0.39

 
$
0.96

 
$
1.40

 
$
1.23

Shares used in the computation of earnings per share (Note 12):
 
 
 
 
 
 
 
 
Basic
 
102,735,989

 
106,962,168

 
103,542,578

 
106,952,744

Diluted
 
103,815,585

 
108,184,304

 
104,799,178

 
107,634,732

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
(In thousands)
Net Income
 
$
40,648

 
$
104,034

 
$
147,144

 
$
131,756

Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
Currency translation adjustments, net of tax benefit (provision) of $54, $0, $(680) and $0, respectively
 
(272
)
 
(3,633
)
 
1,841

 
(12,412
)
Derivative financial instruments:
 
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period, net of tax benefit (provision) of $20, $803, $(332) and $1,581, respectively
 
(58
)
 
(2,313
)
 
954

 
(4,531
)
Reclassification adjustment for losses (gains) included in net income, net of tax (benefit) provision of $(45), $(684), $240 and $(1,254), respectively
 
129

 
1,976

 
(694
)
 
3,553

Amortization of benefit plan costs, net of tax benefit of $(142), $(139), $(425) and $(497), respectively
 
267

 
269

 
797

 
929

Investments:
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period, net of tax (provision) benefit of $(219), $344, $(744) and $358, respectively
 
407

 
(638
)
 
1,384

 
(664
)
Reclassification adjustment for gains included in net income, net of tax provision of $4, $5, $16 and $69, respectively
 
(8
)
 
(6
)
 
(31
)
 
(121
)
Other Comprehensive Income (Loss)
 
465

 
(4,345
)
 
4,251

 
(13,246
)
Total Comprehensive Income
 
41,113

 
99,689

 
151,395

 
118,510

Comprehensive (Income) Loss Attributable to Noncontrolling Interest
 
(145
)
 
(164
)
 
(373
)
 
199

Comprehensive Income Attributable to BWX Technologies, Inc.
 
$
40,968

 
$
99,525

 
$
151,022

 
$
118,709

See accompanying notes to condensed consolidated financial statements.


5

Table of Contents

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, 2015
 
122,813,135

 
$
1,228

 
$
22,732

 
$
739,350

 
$
752

 
$
(498,346
)
 
$
265,716

 
$
13,919

 
$
279,635

Net income
 

 

 

 
146,771

 

 

 
146,771

 
373

 
147,144

Dividends declared ($0.27 per share)
 

 

 

 
(28,280
)
 

 

 
(28,280
)
 

 
(28,280
)
Currency translation adjustments
 

 

 

 

 
1,841

 

 
1,841

 

 
1,841

Derivative financial instruments
 

 

 

 

 
260

 

 
260

 

 
260

Defined benefit obligations
 

 

 

 

 
797

 

 
797

 

 
797

Available-for-sale investments
 

 

 

 

 
1,353

 

 
1,353

 

 
1,353

Exercise of stock options
 
864,036

 
9

 
21,129

 

 

 

 
21,138

 

 
21,138

Shares placed in treasury
 

 

 
(40,000
)
 

 

 
(263,610
)
 
(303,610
)
 

 
(303,610
)
Stock-based compensation charges
 
405,985

 
4

 
8,924

 

 

 

 
8,928

 

 
8,928

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(382
)
 
(382
)
Deconsolidation of Generation mPower LLC
 

 

 

 

 

 

 

 
(13,571
)
 
(13,571
)
Other
 

 

 
3,386

 

 

 

 
3,386

 

 
3,386

Balance September 30, 2016 (unaudited)
 
124,083,156

 
$
1,241

 
$
16,171

 
$
857,841

 
$
5,003

 
$
(761,956
)
 
$
118,300

 
$
339

 
$
118,639

Balance December 31, 2014
 
121,604,332

 
$
1,216

 
$
775,393

 
$
642,489

 
$
3,596

 
$
(423,990
)
 
$
998,704

 
$
15,497

 
$
1,014,201

Net income
 

 

 

 
131,980

 

 

 
131,980

 
(224
)
 
131,756

Dividends declared ($0.26 per share)
 

 

 

 
(28,191
)
 

 

 
(28,191
)
 

 
(28,191
)
Currency translation adjustments
 

 

 

 

 
(12,437
)
 

 
(12,437
)
 
25

 
(12,412
)
Derivative financial instruments
 

 

 

 

 
(978
)
 

 
(978
)
 

 
(978
)
Defined benefit obligations
 

 

 

 

 
929

 

 
929

 

 
929

Available-for-sale investments
 

 

 

 

 
(785
)
 

 
(785
)
 

 
(785
)
Exercise of stock options
 
156,467

 
2

 
4,108

 

 

 

 
4,110

 

 
4,110

Contributions to thrift plan
 
149,753

 
1

 
4,530

 

 

 

 
4,531

 

 
4,531

Shares placed in treasury
 

 

 

 

 

 
(22,572
)
 
(22,572
)
 

 
(22,572
)
Stock-based compensation charges
 
701,020

 
7

 
24,275

 

 

 

 
24,282

 

 
24,282

Distributions to noncontrolling interests
 

 

 

 

 

 

 

 
(332
)
 
(332
)
Spin-off of Power Generation Business
 

 

 
(792,342
)
 

 
10,407

 

 
(781,935
)
 
(1,120
)
 
(783,055
)
Balance September 30, 2015 (unaudited)
 
122,611,572

 
$
1,226

 
$
15,964

 
$
746,278

 
$
732

 
$
(446,562
)
 
$
317,638

 
$
13,846

 
$
331,484

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

BWX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
 
(Unaudited) (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
Net Income
 
$
147,144

 
$
131,756

Non-cash items included in net income from continuing operations:
 
 
 
 
Depreciation and amortization
 
37,090

 
65,010

Income of investees, net of dividends
 
(6,083
)
 
(221
)
(Gains) losses on asset disposals and impairments, net
 
(55
)
 
26,441

Gain on deconsolidation of Generation mPower LLC
 
(13,571
)
 

Recognition of losses for pension and postretirement plans
 
1,222

 
3,587

Stock-based compensation expense
 
8,373

 
25,105

Excess tax benefits from stock-based compensation
 
(2,294
)
 
(381
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(4,379
)
 
(273
)
Accounts payable
 
2,635

 
(33,825
)
Contracts in progress and advance billings on contracts
 
(72,918
)
 
59,020

Income taxes
 
18,511

 
(17,257
)
Accrued and other current liabilities
 
6,834

 
5,417

Pension liability, accrued postretirement benefit obligation and employee benefits
 
(37,532
)
 
(41,340
)
Other, net
 
(3,839
)
 
15,819

NET CASH PROVIDED BY OPERATING ACTIVITIES
 
81,138

 
238,858

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Decrease in restricted cash and cash equivalents
 
9,553

 
1,578

Purchases of property, plant and equipment
 
(30,865
)
 
(52,193
)
Purchases of securities
 
(17,599
)
 
(9,711
)
Sales and maturities of securities
 
7,895

 
5,441

Proceeds from asset disposals
 
55

 
60

Investments, net of return of capital, in equity method investees
 
(9,165
)
 

NET CASH USED IN INVESTING ACTIVITIES
 
(40,126
)
 
(54,825
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Borrowings under the Credit Agreement
 
241,300

 
177,350

Repayments under Credit Agreement
 
(91,150
)
 
(177,350
)
Payment of debt issuance costs
 
(663
)
 
(4,929
)
Repurchase of common shares
 
(292,997
)
 
(18,088
)
Dividends paid to common shareholders
 
(28,421
)
 
(28,105
)
Exercise of stock options
 
18,775

 
3,646

Excess tax benefits from stock-based compensation
 
2,294

 
381

Cash divested in connection with spin-off of Power Generation business
 

 
(307,562
)
Other
 
(382
)
 
(332
)
NET CASH USED IN FINANCING ACTIVITIES
 
(151,244
)
 
(354,989
)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
 
729

 
(6,092
)
TOTAL DECREASE IN CASH AND CASH EQUIVALENTS
 
(109,503
)
 
(177,048
)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
 
154,729

 
312,969

CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
45,226

 
$
135,921

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
4,367

 
$
5,294

Income taxes (net of refunds)
 
$
48,779

 
$
82,054

SCHEDULE OF NON-CASH INVESTING ACTIVITY:
 
 
 
 
Accrued capital expenditures included in accounts payable
 
$
5,628

 
$
2,161

See accompanying notes to condensed consolidated financial statements.

7

Table of Contents

BWX TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(UNAUDITED)
NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
We have presented the condensed consolidated financial statements of BWX Technologies, Inc. ("BWXT") 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, 2015 (our "2015 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 amounts previously reported to conform to the presentation as of and for the three and nine month periods ended September 30, 2016. 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.
Spin-off
On June 30, 2015, we completed the spin-off of our former Power Generation business (the "spin-off") into an independent, publicly traded company named Babcock & Wilcox Enterprises, Inc. ("BWE"). The separation was effected through a pro rata distribution of 100% of BWE’s common stock to BWXT’s stockholders. The distribution of BWE common stock consisted of one share of BWE common stock for every two shares of BWXT common stock to holders of BWXT common stock on the record date of June 18, 2015. Cash was paid in lieu of any fractional shares of BWE common stock. Following the spin-off, BWXT did not retain any ownership interest in BWE. Prior to June 30, 2015, we completed an internal restructuring that separated the subsidiaries involved in our former Power Generation business and established BWE as the direct or indirect parent company of those subsidiaries. Concurrent with the spin-off, The Babcock & Wilcox Company was renamed BWX Technologies, Inc. The results of operations of our former Power Generation business are presented as discontinued operations on the condensed consolidated statements of income. See Note 2 for further information regarding the spin-off of BWE.
Reportable Segments
We operate in three reportable segments: Nuclear Operations, Technical Services and Nuclear Energy. Our reportable segments are further described as follows:
 
Our Nuclear Operations segment manufactures naval nuclear reactors for the U.S. Department of Energy ("DOE")/National Nuclear Security Administration’s ("NNSA") Naval Nuclear Propulsion Program, which in turn supplies them to the U.S. Navy for use in submarines and aircraft carriers. Through this segment, we own and operate manufacturing facilities located in Lynchburg, Virginia; Mount Vernon, Indiana; Euclid, Ohio; Barberton, Ohio; and Erwin, Tennessee. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components. The Euclid facility, which is N-Stamp certified by the American Society of Mechanical Engineers, fabricates electro-mechanical equipment for the U.S. Government, and performs design, manufacturing, inspection, assembly and testing activities. 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. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. ("NFS"), one of our wholly owned subsidiaries. Located in Erwin, Tennessee, NFS also converts Cold War-era government stockpiles of highly enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.
 
Our Technical Services segment provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities. These services are provided to the DOE, including the NNSA, the Office of Nuclear Energy, the Office of

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Science and the Office of Environmental Management; the Department of Defense and NASA. Through this segment we deliver products and management solutions to nuclear operations and high-consequence manufacturing facilities. A significant portion of this segment’s operations are conducted through joint ventures.

Our Nuclear Energy segment supplies commercial nuclear steam generators and components to nuclear utility customers. BWXT has supplied the nuclear industry with more than 1,300 large, heavy components worldwide. This segment is the only heavy nuclear component, N-Stamp certified manufacturer in North America. Our Nuclear Energy segment fabricates pressure vessels, reactors, steam generators, heat exchangers and other auxiliary equipment. This segment also provides specialized engineering services that include structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process development and metallurgy and materials engineering. In addition, this segment offers services for nuclear steam generators and balance of plant equipment, as well as nondestructive examination and tooling/repair solutions for other plant systems and components. This segment also offers engineering and licensing services for new nuclear plant designs.
See Note 11 for further information regarding our segments.
Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and the related footnotes included in our 2015 10-K.
GE Hitachi Nuclear Energy Canada Inc. Acquisition
On August 18, 2016, we signed a definitive agreement to acquire all of the shares of GE Hitachi Nuclear Energy Canada Inc. (“GEH-C”). GEH-C is a leading supplier of nuclear fuel, fuel handling systems, delivery systems and replacement components for CANDU reactors. The transaction is expected to be completed, subject to required Canadian regulatory reviews and other closing conditions, during the fourth quarter of 2016. Following successful completion of the transaction, GEH-C would be reported as part of our Nuclear Energy segment. GEH-C will expand our current commercial nuclear product and service portfolio and allow us to leverage our technology-based competencies in offering new products and services related to plant life extensions as well as the ongoing maintenance of nuclear power generation equipment.
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 have deconsolidated Generation mPower LLC ("GmP") from our financial statements as of the date of the Framework Agreement. We recorded a gain of approximately $13.6 million during the nine months ended September 30, 2016 related to the deconsolidation of GmP as a component of other - net in our condensed consolidated statement of income.
For additional information on the Framework Agreement, see Note 6 to our condensed consolidated financial statements.
Contracts and Revenue Recognition
We generally recognize contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts based on work performed, man hours or a cost-to-cost method, as applicable to the product or activity involved. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress towards completion as a percentage of the total project. Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for materials and major third-party subcontractors, if it appears that such exclusion would result in a more meaningful measurement of actual contract progress and resulting periodic allocation of income. We include revenues and related costs so recorded, 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 under the percentage-of-completion method. 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. 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. 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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For contracts as to which we are unable to estimate the final profitability except to assure that no loss will ultimately be incurred, we recognize equal amounts of revenue and cost until the final results can be estimated more precisely. For these deferred profit recognition contracts, we recognize revenue and cost equally and only recognize gross margin when probable and reasonably estimable, which we generally determine to be when the contract is approximately 70% complete. We treat long-term contracts that contain such a level of risk and uncertainty that estimation of the final outcome is impractical, except to assure that no loss will be incurred, as deferred profit recognition contracts.
Our policy is to account for fixed-price contracts under the completed-contract method if we believe that we are unable to reasonably forecast cost to complete at start-up. Under the completed-contract method, income is recognized only when a contract is completed or substantially complete.
Comprehensive Income
The components of accumulated other comprehensive income included in stockholders’ equity are as follows:
 
 
September 30,
2016
 
December 31,
2015
 
 
(In thousands)
Currency translation adjustments
 
$
9,661

 
$
7,820

Net unrealized loss on derivative financial instruments
 
(428
)
 
(688
)
Unrecognized prior service cost on benefit obligations
 
(5,534
)
 
(6,331
)
Net unrealized gain (loss) on available-for-sale investments
 
1,304

 
(49
)
Accumulated other comprehensive income
 
$
5,003

 
$
752

The amounts reclassified out of accumulated other comprehensive income by component and the affected condensed consolidated statements of income line items are as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
 
2016
 
2015
 
2016
 
2015
 
 
Accumulated Other Comprehensive Income (Loss) Component Recognized
 
(In thousands)
 
Line Item Presented
Realized gain (loss) on derivative financial instruments
 
$
(2
)
 
$
(23
)
 
$
(42
)
 
$
461

 
Revenues
 
 
(172
)
 
(2,637
)
 
976

 
(5,355
)
 
Cost of operations
 
 
(174
)
 
(2,660
)
 
934

 
(4,894
)
 
Total before tax
 
 
45

 
684

 
(240
)
 
1,259

 
Provision for Income Taxes
 
 
$
(129
)
 
$
(1,976
)
 
$
694

 
$
(3,635
)
 
Net Income
Amortization of prior service cost on benefit obligations
 
$
(401
)
 
$
(399
)
 
$
(1,200
)
 
$
(1,200
)
 
Cost of operations
 
 
(8
)
 
(9
)
 
(22
)
 
(27
)
 
Selling, general and administrative expenses
 
 
(409
)
 
(408
)
 
(1,222
)
 
(1,227
)
 
Total before tax
 
 
142

 
139

 
425

 
417

 
Provision for Income Taxes
 
 
$
(267
)
 
$
(269
)
 
$
(797
)
 
$
(810
)
 
Net Income
Realized gain on investments
 
$
12

 
$
11

 
$
47

 
$
188

 
Other – net
 
 
(4
)
 
(5
)
 
(16
)
 
(68
)
 
Provision for Income Taxes
 
 
$
8

 
$
6

 
$
31

 
$
120

 
Net Income
Total reclassification for the period
 
$
(388
)
 
$
(2,239
)
 
$
(72
)
 
$
(4,325
)
 
 
Inventories
At September 30, 2016 and December 31, 2015, included in other current assets we had inventories totaling $8.0 million and $7.3 million, respectively, consisting entirely of raw materials and supplies.

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Restricted Cash and Cash Equivalents
At September 30, 2016, we had restricted cash and cash equivalents totaling $8.6 million, $2.8 million of which was held for future decommissioning of facilities (which is included in other assets on our condensed consolidated balance sheets) and $5.8 million of which was held to meet reinsurance reserve requirements of our captive insurer.
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:
 
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
 
(In thousands)
Balance at beginning of period
 
$
13,542

 
$
15,889

Additions
 
847

 
890

Expirations and other changes
 
(1,759
)
 
(3
)
Payments
 
(20
)
 
(56
)
Translation and other
 
255

 
(735
)
Balance at end of period
 
$
12,865

 
$
15,985

Research and Development
Our research and development activities are related to the development and improvement of new and existing products and equipment, as well as conceptual and engineering evaluation for translation into practical applications. We charge the costs of research and development unrelated to specific contracts as incurred. Substantially all of these costs are related to our mPower program for the development of our BWXT mPower™ reactor and the associated power plant.
Provision for Income Taxes
We are subject to federal income tax in the United States 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. Beginning in the second quarter of 2015, we began recognizing our consolidated income tax provision based on the U.S. federal statutory rate of 35% due to the presumed repatriation of our Canadian earnings. We classify interest and penalties related to taxes (net of any applicable tax benefit) as a component of provision for income taxes on our condensed consolidated statements of income.
Our effective tax rate for the three months ended September 30, 2016 was approximately 33.0% as compared to 32.6% for the three months ended September 30, 2015. The effective tax rate for the three months ended September 30, 2015 was lower than our statutory rate primarily due to the remeasurement of uncertain tax positions as a result of the close of a previously ongoing IRS audit as well as adjustments related to the filing of our 2014 U.S. tax return.
Our effective tax rate for the nine months ended September 30, 2016 was approximately 31.2% as compared to 35.4% for the nine months ended September 30, 2015. The effective tax rate for the nine months ended September 30, 2016 was lower than our statutory rate primarily due to the $13.6 million gain recognized related to the deconsolidation of GmP. The effective tax rate for the nine months ended September 30, 2015 was impacted by the spin-off of our former Power Generation business. Specifically, we recognized $3.8 million of tax provision due to the change in our tax footprint associated with the spin-off, resulting in the revaluations of deferred tax assets and liabilities as well as the need to recognize tax provision on our global earnings at our U.S. federal rate due to the likely repatriation of future foreign earnings. These amounts were offset by the remeasurement of uncertain tax positions and adjustments related to the filing of our 2014 U.S. tax return discussed above.

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As of September 30, 2016, we have gross unrecognized tax benefits of $1.9 million. Of the $1.9 million gross unrecognized tax benefits, $1.8 million would reduce our effective tax rate if recognized.
New 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. In August 2015, the FASB deferred the effective date of this amendment until 2018. The update may be adopted either retrospectively to each prior period or as a cumulative-effect adjustment on the date of adoption. We are currently evaluating the methods of adoption allowed by the updated standard and the effect it may have on our consolidated financial statements and related disclosures. Since the updated standard will supersede substantially all existing guidance related to revenue recognition, it could impact revenue and cost recognition for each of our segments, in addition to business processes and information technology systems. As a result, our evaluation of the effects of this Topic will extend over future periods.
In February 2016, the FASB issued an update to the Topic Leases, which supersedes previous lease reporting requirements. 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 are currently evaluating the impact of the adoption of this standard on our financial statements.
In March 2016, the FASB issued an update to the Topic Compensation - Stock Compensation, which identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax reporting implications, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This update will be effective for us in 2017, with early adoption permitted. We are currently evaluating the impact of the adoption of this standard on our financial statements.
In March 2016, the FASB issued an update to the Topic Financial Instruments. This update, among other changes, requires companies to measure equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income. This update is effective in 2018 and early adoption is not permitted. We are currently evaluating the impact of the adoption of this standard on our financial statements.
NOTE 2 – DISCONTINUED OPERATIONS
Spin-off of BWE
On June 30, 2015, we completed the spin-off of BWE to our stockholders through a distribution of BWE stock. BWE’s assets and business primarily consist of those that we previously reported as our Power Generation segment.
At the spin-off, BWXT had outstanding performance guarantees for various projects executed by the Power Generation business in the normal course of business. These guarantees totaled $1,542 million and ranged in expiration dates from 2015 to 2035. In February 2016, BWE notified us that we have been released from substantially all remaining performance guarantees. Accordingly, we reduced the outstanding liability and recorded a gain of approximately $9.3 million during the nine months ended September 30, 2016 as a component of other – net in our condensed consolidated statement of income.

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Financial Information
The following table presents selected financial information regarding the results of operations of our former Power Generation business:
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
 
2015
 
2015
 
(Unaudited)
(In thousands)
Revenues
 
$

 
$
830,234

Costs and Expenses:
 
 
 
 
Cost of operations
 

 
665,558

Research and development costs
 

 
8,480

Losses on asset disposals and impairments, net
 

 
8,963

Selling, general and administrative expenses (1)
 

 
108,911

Special charges for restructuring activities
 

 
7,666

Costs to spin-off
 

 
34,358

Total Costs and Expenses
 

 
833,936

Equity in Income (Loss) of Investees
 

 
(1,104
)
Operating Income (Loss)
 

 
(4,806
)
Other Income
 
(2,003
)
 
(1,698
)
Income (Loss) before Provision for Income Taxes
 
(2,003
)
 
(6,504
)
Provision for (Benefit from) Income Taxes
 
471

 
1,807

Net Income (Loss)
 
(2,474
)
 
(8,311
)
Net Income Attributable to Noncontrolling Interest
 

 
(106
)
Income (Loss) from Discontinued Operations
 
$
(2,474
)
 
$
(8,417
)
 
(1)
Included in selling, general and administrative expenses are allocations of corporate administrative expenses of $0.0 million and $28.0 million for the three and nine months ended September 30, 2015, respectively.
We incurred approximately $66.5 million in total spin-off related costs, which includes approximately $29.8 million for professional services and $23.1 million of retention and severance-related charges. Income (loss) from discontinued operations for the nine months ended September 30, 2015 includes $34.4 million of these charges, and included in continuing operations are spin-off costs of $26.0 million for the nine months ended September 30, 2015. A total of $6.1 million was recognized in the year ended December 31, 2014.
Included in income from discontinued operations for the three months ended September 30, 2015 were certain adjustments made pursuant to FASB Topic Income Taxes which requires that adjustments made to remeasure uncertain tax positions directly associated with operations discontinued in a prior period be recognized in the current period as a component of discontinued operations. The remeasurement in the three months ended September 30, 2015 was the result of the close of a previously ongoing IRS audit as well as adjustments related to the filing of our 2014 U.S. tax return. Additionally, we revised our estimated annual effective tax rate during the three months ended September 30, 2015, which had an impact on the provision for income taxes associated with our former Power Generation business and was recorded as a component of discontinued operations.


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The following table presents selected financial information regarding cash flows of our former Power Generation business that are included in the condensed consolidated statements of cash flows:
 
 
Nine Months Ended
September 30,
 
 
2015
 
 
(Unaudited)
(In thousands)
Non-cash items included in net income (loss):
 
 
Depreciation and amortization
 
$
21,458

Income (loss) of investees, net of dividends
 
$
(2,293
)
Losses on asset disposals and impairments, net
 
$
10,544

Purchases of property, plant and equipment
 
$
11,494

NOTE 3 – SPECIAL CHARGES FOR RESTRUCTURING ACTIVITIES
As of June 30, 2015, margin improvement initiatives designed to strengthen the operating performance of our Nuclear Energy segment were substantially complete. In the nine months ended September 30, 2015, we incurred $0.7 million of expenses related to facility consolidation and employee termination benefits in connection with these initiatives. In addition, we incurred $15.9 million for the nine months ended September 30, 2015 related to the restructuring of our mPower program, consisting primarily of asset impairments as a result of the significant adverse changes in the business prospects of the mPower program.
The following summarizes the changes in our restructuring liability for the nine months ended September 30, 2016 and 2015:
 
 
Nine Months Ended
 
 
September 30,
2016
 
September 30,
2015
 
 
(In thousands)
Balance at the beginning of the period
 
$
901

 
$
4,967

Special charges for restructuring activities (1)
 

 
610

Payments
 
(488
)
 
(4,076
)
Translation and other
 
(123
)
 
(240
)
Balance at the end of the period
 
$
290

 
$
1,261

(1)
Excludes non-cash charges of $16.0 million for the nine months ended September 30, 2015, which did not impact the restructuring liability.
At September 30, 2016, unpaid restructuring charges totaled $0.3 million for employee termination benefits.
NOTE 4 - CREDIT FACILITY
Our gross long-term debt consists of the following:
 
 
September 30,
2016
 
December 31,
2015
 
 
(In thousands)
Secured Debt:
 
 
 
 
Revolving Credit Facility
 
48,900

 

Term Loan
 
288,750

 
300,000

Incremental Term Loans
 
112,500

 

Less: Amounts due within one year
 
20,625

 
15,000

Long-term debt
 
429,525

 
285,000


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On September 2, 2016, we entered into an amendment (the “Amendment”) to our Credit Agreement dated May 11, 2015 with Bank of America, N.A., as administrative agent, and certain lenders and letter of credit issuers party thereto (collectively, the “Amended Credit Agreement”). Prior to the Amendment, our Credit Agreement provided for a five-year, senior secured revolving credit facility in an aggregate amount of up to $400 million, the full amount of which is available for the issuance of letters of credit, and a senior secured term loan facility of $300 million, which was drawn on June 30, 2015. The Amendment added a new U.S. dollar term loan facility in an aggregate principal amount of up to $112.5 million, which was drawn on September 16, 2016, and a new Canadian dollar term loan facility in an aggregate principal amount of up to the equivalent of $137.5 million U.S. dollars, which may be drawn in a single drawing at any time prior to December 31, 2016 (collectively, the “Incremental Term Loans”). All obligations under the Amended Credit Agreement are scheduled to mature on June 30, 2020. The proceeds of loans under the Amended Credit Agreement are available for working capital needs and other general corporate purposes.
The Amended Credit Agreement includes provisions for additional financial institutions to become lenders, or for any existing lender to increase its commitment thereunder, subject to an aggregate maximum of $250 million for all additional term loans, revolving credit borrowings and letter of credit commitments.
The Amended Credit Agreement is (i) guaranteed by substantially all of our wholly owned domestic subsidiaries, excluding our captive insurance subsidiary, and (ii) secured by first-priority liens on certain assets owned by us and the guarantors (other than our subsidiaries comprising our Nuclear Operations and Technical Services segments).
The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We began making quarterly amortization payments on the $300 million term loan in an amount equal to 1.25% of the aggregate principal amount in the first quarter of 2016. We are required to make quarterly amortization payments on the Incremental Term Loans equal to 1.25% of the aggregate principal amount beginning in the fourth quarter of 2016. We may prepay all loans under the Amended Credit Agreement at any time without premium or penalty (other than customary Eurocurrency Rate breakage costs), subject to notice requirements.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio is 3.00 to 1.00, which may be increased to 3.25 to 1.00 for up to four consecutive fiscal quarters after a material acquisition. The minimum consolidated interest coverage ratio is 4.00 to 1.00. In addition, the Amended Credit Agreement contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. At September 30, 2016, we were in compliance with all covenants set forth in the Amended Credit Agreement.
Outstanding loans denominated in U.S. dollars under the Amended Credit Agreement bear interest at our option at either the Eurocurrency Rate plus a margin ranging from 1.25% to 1.75% per year or the base rate (the highest of the Federal Funds rate plus 0.50%, the one-month Eurocurrency Rate plus 1.0%, or the administrative agent’s prime rate) plus a margin ranging from 0.25% to 0.75% per year. Canadian dollar loans, if outstanding, will bear interest at the Eurocurrency Rate plus a margin ranging from 1.25% to 1.75% per year. We are charged a commitment fee on the unused portions of the revolving credit facility and the term loan facilities, and that fee varies between 0.15% and 0.25% per year. Additionally, we are charged a letter of credit fee of between 1.25% and 1.75% per year with respect to the amount of each financial letter of credit issued under the Amended Credit Agreement and a letter of credit fee of between 0.75% and 1.05% per year is charged with respect to the amount of each performance letter of credit issued under the Amended Credit Agreement. The applicable margin for loans, the commitment fee and the letter of credit fees set forth above will vary quarterly based on our leverage ratio. Upon the closing of the Credit Agreement and the subsequent Amendment, we paid certain upfront fees to the lenders thereunder, and paid arrangement and other fees to the arrangers and agents of the Amended Credit Agreement. At September 30, 2016, borrowings outstanding totaled $401.3 million and $48.9 million under our term loans and revolving line of credit, respectively, and letters of credit issued under the Amended Credit Agreement totaled $111.5 million. As a result, we had $377.1 million available for borrowings or to meet letter of credit requirements as of September 30, 2016, excluding the additional $250 million available to us for term loan, revolving credit borrowings and letter of credit commitments. As of September 30, 2016, the weighted-average interest rate on outstanding borrowings under our Amended Credit Agreement was 2.02%.
Based on the current credit ratings of the Amended Credit Agreement, the applicable margin for Eurocurrency Rate loans is 1.25% for the term loan facility drawn June 30, 2015 and 1.375% for the Incremental Term Loans. The commitment fee for unused portions of the Incremental Term Loans is 0.175%. The letter of credit fee for financial letters of credit is 1.25%, and the letter of credit fee for performance letters of credit is 0.75%. The commitment fee for unused portions of the revolving credit facility is 0.15%. The applicable interest rate at September 30, 2016 was 3.75% per year for the revolving credit facility. The Amended Credit Agreement does not have a floor for the base rate or the Eurocurrency Rate.

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The Amended Credit Agreement generally includes customary events of default for a secured credit facility, some of which allow for an opportunity to cure. If an event of default relating to bankruptcy or other insolvency events occurs under the Amended Credit Agreement, all obligations under the Amended Credit Agreement will immediately become due and payable. If any other event of default exists under the Amended Credit Agreement, the lenders will be permitted to accelerate the maturity of the obligations outstanding under the Amended Credit Agreement. If any event of default occurs under the Amended Credit Agreement, the lenders will be permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral.
If any default occurs under the Amended Credit Agreement, or if we are unable to make any of the representations and warranties in the Amended Credit Agreement, we will be unable to borrow funds or have letters of credit issued under the Amended Credit Agreement.
NOTE 5 – PENSION PLANS AND POSTRETIREMENT BENEFITS
Components of net periodic benefit cost included in net income are as follows:
 
 
Pension Benefits
 
Other Benefits
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Service cost
 
$
1,793

 
$
6,110

 
$
5,493

 
$
18,598

 
$
105

 
$
219

 
$
423

 
$
661

Interest cost
 
13,724

 
16,186

 
41,178

 
48,900

 
551

 
685

 
1,645

 
2,058

Expected return on plan assets
 
(20,634
)
 
(22,374
)
 
(62,009
)
 
(67,551
)
 
(577
)
 
(586
)
 
(1,729
)
 
(1,754
)
Amortization of prior service cost (credit)
 
485

 
458

 
1,449

 
1,373

 
(76
)
 
(50
)
 
(227
)
 
(146
)
Recognized net actuarial loss
 

 

 

 
2,161

 

 

 

 

Net periodic benefit (income) cost
 
$
(4,632
)
 
$
380

 
$
(13,889
)
 
$
3,481

 
$
3

 
$
268

 
$
112

 
$
819

Beginning in the first quarter of 2016, we changed the method we use to estimate the interest and service cost components of our net periodic benefit cost for our pension and postretirement benefit plans. Previously, we estimated interest and service cost utilizing a single weighted-average discount rate derived from the yield curve data used to measure the benefit obligation. Our new method for estimating interest and service cost is a spot rate approach, which utilizes duration specific spot rates from the yield curve that was used to measure the benefit obligation.
Our combined net periodic benefit cost for our pension and postretirement plans decreased $18.1 million in the nine months ended September 30, 2016. The decrease is primarily due to the change in the method used to estimate the interest and service cost components of net periodic benefit cost discussed above. While this change in estimate provides a more precise estimate of interest and service cost by improving the relationship of the discount rates utilized to measure our benefit obligation and the rates utilized to estimate interest and service cost, this change will not affect the measurement of our total pension and postretirement benefit obligations or our total annual net periodic benefit cost as the change in our interest and service cost will be offset in our recognized net actuarial (gain) loss recognized in the fourth quarter each year. Net periodic benefit cost also decreased due to lower service cost resulting from the December 31, 2015 plan freeze of our major U.S. and Canadian defined benefit qualified pension plans, which was partially offset by a lower expected return on plan assets.

During the nine months ended September 30, 2015, significant lump sum payments were made from certain salaried Canadian pension plans. As a result, we remeasured certain of our Canadian pension plans resulting in the recognition of a net actuarial loss of $2.2 million, which includes a $2.6 million settlement loss and a $0.4 million actuarial gain. We have excluded the recognized net actuarial loss from our reportable segments, and such amount has been reflected in Note 11 as the Mark to Market Adjustment in the reconciliation of reportable segment income to consolidated operating income. We recorded $1.0 million of the net actuarial loss within cost of operations and $1.2 million of the loss within selling, general and administrative expenses.

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NOTE 6 – 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 2015 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 United States District Court for the Western District of Pennsylvania. Since January 2010, additional suits have been filed by additional plaintiffs for a total of seventeen lawsuits filed in the U.S. District Court for the Western District of Pennsylvania against the BWXT Parties and ARCO. 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. All of the suits, except for the two most recent filings in June and October 2015 (the "2015 Lawsuits"), have been consolidated for non-dispositive pre-trial matters. Fact discovery in the Apollo and Parks Litigation is now closed for all claims other than the 2015 Lawsuits, but no trial date has been set. In connection with the spin-off, 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.
In May 2015, the magistrate judge overseeing the consolidated suits (representing fifteen of the lawsuits filed to date and 93 primary claimants) issued a report recommending, among other things, that two motions for summary judgment filed by the BWXT Parties (Failure to Raise a Genuine Issue For Trial on Breach of Duty and Lack of Evidence Regarding Exposure and Dose) be granted in 11 of the 15 consolidated cases. This recommendation was accepted in all respects by the presiding judge and the motions for summary judgment were formally granted in September 2015. In December 2015, the presiding judge in the consolidated cases accepted the magistrate judge's recommendation and granted the summary judgment motion in the other 4 consolidated cases, but not the 2015 Lawsuits. In March 2016, the presiding judge also granted motions to dismiss the two remaining 2015 Lawsuits on the grounds of preemption and failure to adequately plead the remaining cause of action with specificity. Accordingly, all claims in the existing 17 lawsuits have been dismissed by the trial court.
The plaintiffs in the initial 11 consolidated suits filed their notice of appeal on the Motions for Summary Judgment decision on October 15, 2015 in the 3rd Circuit of the United States Court of Appeals, and the 4 additional consolidated cases have now joined this appeal. On April 16, 2016, the plaintiffs in the 2015 Lawsuits filed their notices of appeal in the 2015 Lawsuits and all cases on appeal have now been consolidated. Although the appeal process could be lengthy, if ultimately upheld the decision would result in the dismissal of all seventeen currently filed suits.
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.
Insurance coverage and/or the ARCO indemnity currently provides coverage for the claims alleged in the Apollo and Parks Litigation, although no assurance can be given that insurance and/or the indemnity will be available or sufficient in the event of liability, if any.
mPower
In April 2014, BWXT announced plans to restructure our mPower program for the development of our mPower reactor to focus on technology development. Since then, BWXT has worked with the DOE, Bechtel - our partner in Generation mPower LLC (“GmP”) - and other stakeholders and potential investors in continuing efforts to restructure the mPower program in light of deteriorated market conditions. Although BWXT has continued to invest in the program during 2014 and 2015 at the rate of approximately $15.0 million annually, on July 13, 2015, Bechtel provided a written notice asserting that BWXT and GmP were in material breach of the GmP Limited Liability Company Agreement dated February 28, 2011 (the “GmP LLC Agreement”). BWXT asserted, among other things, that it had the right under the LLC Agreement to terminate the mPower program and

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Bechtel was therefore not entitled to any return of its investment. In October 2015, BWXT and Bechtel agreed to a 60-day period of negotiations for the purpose of negotiating a resolution of these matters, which was subsequently extended.
On March 2, 2016, BWXT entered into a Framework Agreement with Bechtel, BWXT Modular Reactors, LLC and BDC NexGen Power, LLC for the potential restructuring and restart of our mPower program (the "Framework Agreement"). The Framework Agreement provides that during a 12-month fundraising period beginning on the effective date of the Framework Agreement, Bechtel will attempt to secure funding from third parties (including the DOE) to complete development of the mPower Plant design sufficient to achieve design certification by the U.S. Nuclear Regulatory Commission. During this fundraising period, BWXT plans to continue advancing the mPower design through in-kind engineering services within our previously announced planned mPower project spending of no more than $10.0 million per year.
If Bechtel is successful in securing adequate commitments of funding from external sources (as determined by Bechtel in its sole discretion), then the Framework Agreement requires (a) BWXT and Bechtel to negotiate and execute a new GmP limited liability company agreement and ancillary-related agreements, with Bechtel taking over management of the mPower program from BWXT, and (b) BWXT to fund an aggregate of $60.0 million in in-kind development costs toward achieving design certification (not to exceed $12.0 million per year).
In the event that Bechtel determines in its sole discretion that the mPower program should not be restarted, whether due to (1) adequate third party funding not being secured, (2) the parties being unable to finalize the new GmP limited liability company agreement and other ancillary-related agreements, or (3) otherwise, the mPower program would be terminated, GmP would be wound up and Bechtel would be entitled to payment of a settlement amount of $30.0 million (the “Settlement Amount”). Our sole liability and Bechtel’s sole remedy arising out of the Framework Agreement will be our obligation to pay, and Bechtel’s right to receive, respectively, the Settlement Amount. Any and all other previously existing claims, demands or actions between Bechtel and us arising out of the GmP LLC Agreement and ancillary-related agreements, whether known or unknown (including Bechtel’s previously asserted breach claim for $120.0 million), were released upon our delivery of a letter of credit equal in value to the Settlement Amount on March 2, 2016.
In the nine months ended September 30, 2016, we recognized the $30.0 million potential Settlement Amount, payment of which is contingent upon determination in Bechtel’s sole discretion not to restart the mPower program. In addition, provisions of the Framework Agreement result in the deconsolidation of GmP and the associated recognition of an approximate $13.6 million gain upon deconsolidation.
As BWXT has previously disclosed, the latest extension to the Cooperative Agreement with the DOE has expired and the DOE funding has been suspended.
NOTE 7 – DERIVATIVE FINANCIAL INSTRUMENTS
Our international 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 on 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 September 30, 2016, we had deferred approximately $0.4 million of net losses on these derivative financial instruments in accumulated other comprehensive income. Assuming market conditions continue, we expect to recognize substantially all of this amount in the next 12 months.

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At September 30, 2016, our derivative financial instruments consisted of FX forward contracts. The notional value of our FX forward contracts totaled $39.8 million at September 30, 2016, with maturities extending to June 2017. These instruments consist primarily of contracts to purchase or sell Canadian dollars. We are exposed to credit-related losses in the event of nonperformance 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 September 30, 2016 and December 31, 2015:
 
 
Asset and Liability Derivatives
 
 
September 30,
2016
 
December 31,
2015
 
 
(In thousands)
Derivatives Designated as Hedges:
 
 
 
 
FX Forward Contracts:
 
 
 
 
Location
 
 
 
 
Accounts receivable – other
 
$
224

 
$
132

Other assets
 
$

 
$
174

Accounts payable
 
$
1,542

 
$
3,790

Other liabilities
 
$

 
$
432

The effects of derivatives on our financial statements are outlined below:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
Derivatives Designated as Hedges:
 
 
 
 
 
 
 
 
Cash Flow Hedges:
 
 
 
 
 
 
 
 
FX Forward Contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in other comprehensive income (loss)
 
$
(78
)
 
$
(3,116
)
 
$
1,286

 
$
(5,754
)
Gain (loss) reclassified from accumulated other comprehensive income (loss) into earnings: effective portion
 
 
 
 
 
 
 
 
Location
 
 
 
 
 
 
Revenues
 
$
(2
)
 
$
(23
)
 
$
(42
)
 
$
461

Cost of operations
 
$
(172
)
 
$
(2,637
)
 
$
976

 
$
(5,355
)

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NOTE 8 – FAIR VALUE MEASUREMENTS
Investments
The following is a summary of our investments measured at fair value at September 30, 2016:
 
 
9/30/2016
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Trading securities
 
 
 
 
 
 
 
 
Equities
 
$
68

 
$
68

 
$

 
$

Corporate bonds
 
2,178

 
2,178

 

 

Available-for-sale securities
 
 
 
 
 
 
 
 
U.S. Government and agency securities
 
8,156

 
8,156

 

 

Corporate bonds
 
3,017

 

 
3,017

 

Equities
 
2,858

 

 
2,858

 

Mutual funds
 
4,183

 

 
4,183

 

Asset-backed securities and collateralized mortgage obligations
 
225

 

 
225

 

Commercial paper
 
1,349

 

 
1,349

 

Total
 
$
22,034

 
$
10,402

 
$
11,632

 
$

The following is a summary of our investments measured at fair value at December 31, 2015:
 
 
12/31/2015
 
Level 1
 
Level 2
 
Level 3
 
 
(In thousands)
Trading securities
 
 
 
 
 
 
 
 
Equities
 
$
891

 
$
891

 
$

 
$

Corporate bonds
 
703

 
703

 

 

Available-for-sale securities
 
 
 
 
 
 
 
 
Equities
 
948

 

 
948

 

Mutual funds
 
3,969

 

 
3,969

 

Asset-backed securities and collateralized mortgage obligations
 
262

 

 
262

 

Commercial paper
 
2,773

 

 
2,773

 

Total
 
$
9,546

 
$
1,594

 
$
7,952

 
$

We estimate the fair value of investments based on quoted market prices. For investments for which there are no quoted market prices, we derive fair values from available yield curves for investments of similar quality and terms.
Derivatives
Level 2 derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. At September 30, 2016 and December 31, 2015, we had forward contracts outstanding to purchase or sell Canadian dollars, with a total fair value of $(1.3) million and $(3.9) 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:

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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 September 30, 2016 and December 31, 2015.
NOTE 9 – STOCK-BASED COMPENSATION
Total stock-based compensation expense for all of our plans recognized for the three months ended September 30, 2016 and 2015 totaled $2.9 million and $2.9 million, respectively, with associated tax benefit totaling $1.1 million and $1.0 million, respectively. Total stock-based compensation for all of our plans recognized for the nine months ended September 30, 2016 and 2015 totaled $9.6 million and $24.4 million, respectively, with associated tax benefit totaling $3.4 million and $8.3 million, respectively.
We recognized $13.2 million of stock-based compensation expense during the nine months ended September 30, 2015 as costs to spin-off the Power Generation business. This expense related primarily to equity retention awards and expense acceleration associated with employee terminations.
NOTE 10 – ACCELERATED SHARE REPURCHASE AGREEMENT
On September 15, 2016, the Company entered into a $200 million accelerated share repurchase agreement (the “ASR Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). Pursuant to the terms of the ASR Agreement, on September 16, 2016, the Company paid Wells Fargo $200 million in cash and received 4,135,435 shares of the Company’s common stock. The final number of shares to be repurchased will be based on the volume-weighted average stock price of the Company’s common stock during the term of the ASR Agreement, less a customary discount. At settlement, under certain circumstances, Wells Fargo may be required to deliver additional shares of common stock to the Company, or under certain circumstances, the Company may be required to deliver shares of common stock or to make a cash payment, at its election, to Wells Fargo. Final settlement of the ASR Agreement is expected to be completed no later than the first quarter of 2017.
The initial repurchase of shares under the ASR Agreement resulted in an immediate reduction of the outstanding shares used to calculate the weighted-average common shares outstanding for basic and diluted earnings per share. The ASR Agreement was accounted for as a treasury stock transaction and forward stock purchase contract. The shares delivered were recorded in treasury stock and the unsettled portion of the ASR Agreement was recorded in capital in excess of par value in the Company’s condensed consolidated balance sheet. The forward stock purchase contract is considered indexed to the Company’s own stock and is classified as an equity instrument.

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NOTE 11 – SEGMENT REPORTING
As described in Note 1, our operations are assessed based on three reportable segments. An analysis of our operations by reportable segment is as follows:
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(In thousands)
 
(In thousands)
REVENUES:
 
 
 
 
 
 
 
 
Nuclear Operations
 
$
316,899

 
$
303,304

 
$
937,814

 
$
879,493

Technical Services
 
26,178

 
21,261

 
71,838

 
61,434

Nuclear Energy
 
38,190

 
34,927

 
139,698

 
113,350

Adjustments and Eliminations (1)
 
(1,762
)
 
(522
)
 
(2,637
)
 
(2,685
)
 
 
$
379,505

 
$
358,970

 
$
1,146,713

 
$
1,051,592

(1)
Segment revenues are net of the following intersegment transfers and other adjustments:
Nuclear Operations Transfers
 
$
(23
)
 
$
(512
)
 
$
(149
)
 
$
(2,634
)
Technical Services Transfers
 
(1,736
)
 

 
(2,456
)
 
(12
)
Nuclear Energy Transfers
 
(3
)
 
(10
)
 
(32
)
 
(39
)
 
 
$
(1,762
)
 
$
(522
)
 
$
(2,637
)
 
$
(2,685
)
OPERATING INCOME:
 
 
 
 
 
 
 
 
Nuclear Operations
 
$
62,537

 
$
62,720

 
$
191,886

 
$
191,877

Technical Services
 
4,683

 
8,340

 
14,675

 
15,475

Nuclear Energy
 
1,000

 
1,382

 
34,844

 
79

Other
 
(1,907
)
 
(2,357
)
 
(5,068
)
 
(12,015
)
 
 
$
66,313