BWX Technologies, Inc. Q3 FY2025 Earnings Call

Ladies and gentlemen, welcome to BWX Technologies Third Quarter 2025 Earnings Conference Call. I would now like to turn the call over to our host, Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead.

Thank you. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Mike Fitzgerald, Senior Vice President and CFO. On today's call, we will reference the third quarter 2025 earnings presentation that is available on the Investors section of the BWXT website. We will also discuss certain matters that constitute forward-looking statements. These statements involve risks and uncertainties, including those described in the safe harbor provision found in the investor materials in the company's SEC filings. We'll frequently discuss non-GAAP financial measures, which are reconciled to GAAP measures in the appendix of the earnings presentation that can be found on the Investors section of the BWXT website. I would now like to turn the call over to Rex.

Thank you, Chase, and good evening to all of you. I'm excited to report another strong quarter for BWXT showcasing the effectiveness of our battle plan strategy and our leading position in nuclear solutions for the global security, clean energy and medical end markets, all of which are enjoying unprecedented demand. Third quarter financial results exceeded our expectations driven by focused execution and revenue growth in both Government and Commercial Operations. We delivered 12% organic revenue growth and roughly 20% adjusted EBITDA and earnings per share growth alongside robust free cash flow generation. Book-to-bill was a stout 2.6 this quarter driven by large multiyear national security contracts for the production of defense fuels and high-purity depleted uranium in our Special Materials line of business. This led to a total backlog of $7.4 billion, up 23% from last quarter and up 119% year-over-year. Our year-to-date financial results, deep backlog and unprecedented end market demand position us to enter 2026 from a position of financial strength. Our preliminary 2026 outlook calls for another year of record financial results with a posture to exceed our medium-term financial targets. Turning to segment results and market outlook. Government Operations revenue was up 10% and adjusted EBITDA was up 1%, both ahead of expectations. In the Naval Propulsion business, our teams are intensely focused on meeting delivery commitments for submarine and aircraft carrier programs and driving operational excellence. In addition to traditional process optimization strategies, we are finding new ways to leverage artificial intelligence and advanced manufacturing to drive efficiencies around quality control and workflow in our facilities that will lead to improved productivity, throughput and margin performance. Technical Services is on a growth trajectory, powered by a win streak that unfolded over the last several years. Our team began transition for the strategic petroleum reserve M&O contract in early October and the BWXT-led joint venture, which includes Kinectrics, is in the preferred bidder period, which is the transition period for management and operations of the Canadian Nuclear Laboratories. We expect to assume full operational control before the end of the year. In microreactors and advanced nuclear technologies, the market is evolving positively. We are currently manufacturing the reactor core for Pele, which is on track for delivery in 2027. Related to Pele, last month, the Army announced the Janus program, which aims to deploy a nuclear reactor on a military installation no later than September 2028, building on lessons learned from Project Pele. BWXT's qualification should be a differentiator for Janus and other important national security projects that are within our cost and capital risk tolerances. During the quarter, we announced a collaboration with Kairos Power to commercially optimize TRISO nuclear fuel production. We are excited to have a partner that is aligned with Google. BWXT is currently producing TRISO fuel for Project Pele and a variety of other customers and we'll continue to evaluate options to enter the commercial market on a larger scale as demand for advanced reactors grows. Lastly, over the last several quarters, we pointed to our Special Materials business line, having some of the most exciting growth opportunities within the company. I'm pleased to say 2 of these opportunities, both within the NNSA, materialized during the quarter. First, we were selected for the defense fuels contract valued at $1.5 billion to establish a domestic uranium enrichment capability for defense purposes. We booked the first task order under the contract and are building a centrifuge manufacturing development facility in Oak Ridge, Tennessee. Over the next several years, our focus will be on centrifuge manufacturing and designing and licensing a plant for defense uranium enrichment. Second, we were awarded a $1.6 billion 10-year contract to supply high-purity depleted uranium to the NNSA. This is a direct result of our foray into special materials and our deliberate strategy of expanding into the depleted uranium assay through the AOT acquisition. Under this contract, we will build a manufacturing plant adjacent to our existing facility in Jonesborough, Tennessee, capable of producing up to 300 metric tons of high-purity depleted uranium per year that will be used for multiple defense purposes. These are both exciting long-term projects for BWXT, not only for the revenue growth, but also the demonstration of trust our customers put in BWXT to execute on mission-critical national security programs. Turning now to Commercial Operations. Reported revenue grew 122% and organic revenue grew 38% year-over-year, driven by the Kinectrics acquisition, strong growth in commercial nuclear power and medical isotopes. BWXT Medical revenue grew double digits, driven by PET and other diagnostic product lines for which the outlook remains favorable. We expect this trend, along with the increasing therapeutic isotope sales for clinical trials to support continued revenue growth in 2026. Consistent with our commentary last quarter, the tech-99 development is progressing nicely and is on track for an FDA submittal in the near future. In the therapeutics market, Kinectrics commissioned 4 new electromagnetic isotope separator units that increased production capacity of ytterbium-176, the precursor material for lutetium-177, to over 500 grams annually. This expansion reinforces our role as a global supplier of highly enriched stable isotopes needed for cancer radiotherapy. Turning now to Commercial Power, where demand is very strong and our opportunity set is expanding across various geographies and with many of the leading reactor technology OEM providers. In the CANDU market, we have a deep backlog of heavy nuclear components supporting life extensions in Canada, including the 48 steam generators for the Pickering life extension, which are driving significant revenue growth this year. Beyond that, BWXT and Kinectrics are tracking opportunities for international CANDU life extensions, the Canadian new builds we have discussed in the past, other large-scale opportunities, including the Westinghouse AP1000 and multiple SMR projects. In the SMR sector, we are a key partner with the majority of leading technology providers in this rapidly expanding market. To this point, we recently signed a contract with Rolls-Royce to design steam generators for its SMR along with an MOU for the manufacturing phase, highlighting the power of our merchant supplier position in the market. With that, I will now turn the call over to Mike.

Thanks, Rex, and good evening, everyone. I'll begin with total company financial highlights on Slide 4 of the earnings presentation. Third quarter revenue was $866 million, up 29%, driven by both segments. Excluding contributions from acquisitions, organic revenue was up 12%. Adjusted EBITDA was $151 million, up 19% year-over-year, driven by robust double-digit growth in Commercial Operations, a modest increase in government operations and lower corporate expense. Adjusted earnings per share were $1, up 20%, driven by strong operating performance. Nonoperating items were neutral on a net basis. Our adjusted effective tax rate in the quarter was 23.6%, and we continue to expect a tax rate of approximately 21% for the year. In 2026, given a greater percentage of international earnings following the Kinectrics acquisition, we expect our tax rate to be slightly higher year-over-year. Third quarter free cash flow was $95 million, driven by solid earnings performance and timing of cash receipts from major awards. We anticipate free cash flow in 2025 to be approximately $285 million, the high end of our previous outlook range. Capital expenditures were $48 million in the quarter and $114 million year-to-date. We anticipate full year CapEx to be approximately 6% of sales, indicating an increase in the fourth quarter due to timing of spend on growth initiatives, including capacity expansion for commercial nuclear and a number of smaller projects in our government business. In 2026, we expect CapEx to remain at 5.5% to 6% of sales, supportive of our longer-term growth outlook. Moving now to the segment results on Slide 6. In Government Operations, third quarter revenue was up 10%, driven by Naval Propulsion, Long Lead Material Procurement, Special Materials and a roughly 3% contribution from the AOT acquisition, partially offset by a decline in microreactor volume. Adjusted EBITDA of $118 million was up modestly compared to last year, resulting in adjusted EBITDA margin of 19.2%. We expect Government Operations revenue to be up mid-single digits organically in 2025, plus just over 2% contribution from the AOT acquisition, slightly ahead of our previous outlook, and we continue to expect adjusted EBITDA margin of approximately 20.5%. Turning to Commercial Operations. Revenue was up a robust 122%, driven by contribution from the Kinectrics acquisition. Organic revenue growth was 38%, driven by strong year-over-year growth in our Commercial Power business and double-digit growth in Medical. Adjusted EBITDA in the segment was $36 million, up 163%. This results in adjusted EBITDA margin of 14.2%, a nice improvement compared to our first half results and up from the 11.9% in the same quarter last year. Margin expansion was driven by solid operational performance and more favorable mix compared to recent periods. We now anticipate 2025 commercial revenue to be up approximately 60% compared to last year, driven by high teens organic growth and contribution from Kinectrics, which is performing slightly ahead of our expectations since the closing of the acquisition in May. We expect segment adjusted EBITDA margin to be approximately 13.5%, the low end of our previous range due to the timing of the recovery of higher material procurement costs, which acutely impacted our results in the first half of the year. Turning to our consolidated guidance for the remainder of 2025 and our preliminary outlook for 2026. In 2025, we anticipate adjusted EBITDA to be approximately $570 million, the midpoint of our previous range. However, we now expect adjusted earnings per share to be $3.75 to $3.80, up $0.075 at the midpoint given the benefit from nonoperating items, including foreign currency gains and slightly lower interest expense. Looking to 2026, we anticipate another year of strong financial performance with low double-digit to low teens adjusted EBITDA growth, yielding high single-digit to low double-digit adjusted earnings per share growth given modest nonoperating headwinds. This should lead to another year of solid cash generation, although near-term working capital investments related to the significant growth in our business will likely lead to flat to slightly higher free cash flow. In our segments, Government Operations revenue is expected to grow in the mid-teens, led by growth in Special Materials and supported by higher revenue in Naval Propulsion and microreactors. Of note, the defense fuels program in HPDU will account for over half of the segment's growth in 2026. This growth includes a significant amount of what is essentially customer-funded CapEx to build the unique infrastructure required for these programs, meaning they are expected to have below average margin in the first phases compared to the rest of our Special Materials portfolio. As such, we anticipate Government Operations adjusted EBITDA to grow in the high single-digit percentage range compared to 2025, ahead of our medium-term outlook for mid-single-digit growth in this segment. In Commercial Operations, we anticipate another year of robust revenue performance with low double-digit organic revenue growth plus contribution from Kinectrics. We anticipate adjusted EBITDA growth to outperform revenue growth driven by better margins due to the favorable mix and solid execution. Overall, we had a strong quarter, and we are well positioned for another year of record financial results. Our backlog is robust. We have good visibility into the future, and we remain focused on driving improved margin performance and cash generation in our business.

With that, I will turn it back to Rex for closing remarks. Thanks, Mike. It is an exciting time for BWXT. The secular trends of decarbonization, electrification and data center power demand, combined with an increasing appetite for nuclear solutions in the national security space are meaningful tailwinds to BWXT. We are proud of our strong market position and the customer trust we have earned, built upon the expertise of our workforce, our differentiated infrastructure and credentials and our strategic organic and inorganic investments. We are winning in our core businesses and expanding into new and exciting areas. During this period of exceptional growth, we are doubling down on operational excellence focus and expanding its application across the entire BWXT enterprise. We are driving further process improvements and increasing the use of industrial automation and artificial intelligence to optimize cost structure, product quality and cash generation to maintain our winning position and drive shareholder value. And with that, we look forward to taking your questions.

First question comes from the line of Pete Skibitski with Alembic Global.

Nice quarter. I guess for anyone, certainly on an absolute basis, this is one of the bigger revenue beats of consensus that you guys have ever had. I think. So I just wonder if you could clarify, did you book any revenue on the 2 new contracts in the quarter? I know it went into backlog, but did you book any actual revenue on those 2 new ones? And then just kind of the modest full year sales guidance increase implies a fourth quarter that will be down pretty sharply sequentially? So I wonder if you could explain that also. I don't know if there's some conservatism or something else. I'll stop there.

Thank you, Pete. Regarding the new contracts, they made a very modest contribution, so they aren't a significant factor here. We've noticed a trend this year in the second and third quarters concerning the seasonality of some of our large material procurements. As we've discussed before, when entering our pricing arrangements, we aim to expedite long lead material procurements to secure pricing. We managed to achieve that somewhat earlier this quarter compared to our initial forecast for the fourth quarter. This is why there was a considerable overperformance this quarter, but we anticipate a bit of seasonality in the fourth quarter as some of those material procurements have been delayed. Aside from that, our shop performance is strong, and both our Government Ops and Commercial Ops segments are doing well. We are optimistic about this and remain focused on enhancing operational excellence initiatives within the factories.

Okay. Just one last one for me, maybe for Rex. Rex, on the new Janus program, it seems like this is supposed to be kind of a co-co arrangement, which I know you guys typically don't like to actually operate reactors in the field. So I'm wondering kind of what the approach is going to be for BWXT here. Maybe it's just a simple teaming agreement is all that's needed, but I was curious as to your thoughts on that?

Yes. Pete, we certainly do intend to compete for that Janus program, very interesting. The government is obviously looking at putting a number of reactors at a number of different sites. And I think they'll pick at least 2 contract teams for that. Yes, we typically don't own and operate reactors. That's normally the job of the nuclear utility. So it will be a matter of finding the right teammates to go after that opportunity, but we'll do that, and we'll go in and compete hard for it.

Our next question comes from the line of Robert Labick with CJS Securities.

This is Will, on for Bob. With 6 months or so under your belt now, what are the key takeaways from the Kinectrics acquisition? And what are some of the new market and revenue synergy opportunities?

Kinectrics is performing well so far. The two acquisitions we made this year, the Jonesborough acquisition and the Kinectrics acquisition, are both exceeding expectations. We have created significant value by acquiring these businesses at favorable multiples, and both are doing quite well. Specifically for Kinectrics, its strong performance is driven by the transmission and distribution sector, which is experiencing substantial growth due to two main factors. First, the aging infrastructure demands extensive testing, which we are providing. Second, we have a growing business in offshore wind cable testing, especially in Europe. Additionally, the life extension programs at the Pickering plant present many opportunities that Kinectrics is ideally positioned to address. We are also seeing significant business related to licensing support for Canadian nuclear utilities involved in large reactor projects. This is encouraging not only for Kinectrics but also demonstrates the commitment of nuclear utilities to advance their plans for large reactors. Kinectrics is a great fit for BWXT, and their medical division is performing exceptionally well, benefiting from a talented workforce that enhances synergies with BWXT Medical.

And just one more. With the exponential increase in the focus on energy production and security, where are the biggest and nearest-term opportunities for BWX to participate in the growth in nuclear energy? And how are you prioritizing investment into so many opportunities?

Yes, we see demand everywhere in both the commercial and government sectors. Specifically, in Commercial Power, the opportunities mainly revolve around small modular reactors. As a merchant supplier, we engage in projects like the X300 and the TerraPower Natrium reactor, and we have partnered with Rolls-Royce to support their reactor and steam generator design and manufacturing. Our interests span Canada, the U.S., Europe, Poland, the U.K., and other regions. We anticipate announcements regarding small modular reactors in the U.S. soon. Additionally, there are strong prospects for large reactors, particularly with plans in Canada to build at least eight CANDU derivative reactors at sites like Wesleyville and Bruce. The recent Westinghouse announcement for $80 billion worth of reactors in the U.S. is also a positive indicator for industry capacity. We are actively bidding on AP1000 components regularly. Pete mentioned the Janus program, which is a contractor-owned, contractor-operated initiative for U.S. military sites, adding another layer of interest. Furthermore, we identify commercial applications for TRISO and growth in nuclear medicine. Overall, opportunities are widespread.

Next question comes from the line of Peter Arment with Baird.

Nice results. Rex, regarding the two large contracts booked this quarter for uranium enrichment and depleted uranium, Mike mentioned that some government-funded capital expenditures will help initiate those projects. Can you explain how the revenue progression will look once these programs start? Also, Mike, you indicated that the initial margins might be lower. How long is that expected to continue?

Yes. So for both of those contracts, they're kind of over an extended period of time. So I think for HBDU, we announced 10 years. And in DUECE, we've talked about that being a roughly 10- to 15-year program. We will see a little bit of front-loading as we build up kind of the infrastructure investments on those in the early parts of the year. But generally speaking, they're pretty distributed over the life of the period of performance. So maybe a little bit waiting early, but certainly not significant. So it will be relatively distributed over those 10 or 10 to 15 years depending on the contract that you're talking about. Those contracts are structured as fixed price programs. As you know, we typically will enter into kind of a base level margin percentage and then ultimately work to outperform those over a period of time. Our Special Materials business has had a long history of being able to outperform. And so typically, we do not make any of those kind of large-scale adjustments from an EAC perspective until we're probably around 25% or more on the contract. So I would expect the kind of lower margin to last for the first couple of years. And then ultimately, we would be highly focused on driving improvement in that EAC and being able to recognize a higher profit.

I appreciate that information, Mike. Rex, could you provide the latest update on Project Pele? It sounds like you mentioned delivery in 2027. Is that timeline later than what was previously planned? Any additional updates would be helpful.

Yes, Peter, that is later than the contract originally called for. That said, the requirements for that program have been evolving, particularly the role of the National Labs in that, and so it's not unexpected. And the program is doing very nicely. We are assembling the reactor core down in Lynchburg, Virginia right now and do expect to deliver that reactor and that fuel to Idaho National Laboratory in 2027, and they'll fire it up and test it out there. So program is going great.

Next question comes from the line of Jeffrey Campbell with Seaport.

First of all, congratulations on the strong quarter. Regarding DUECE, the press release announcing the $1.5 billion award said that the pilot plant will demonstrate LEU production for defense missions before being repurposed to produce HEU for Naval Propulsion applications. To be clear, will the capabilities to produce HEU be accomplished in the current appropriation or will it require additional funding?

The initial tranche of funding is focused on licensing, which is being prepared for the high enriched uranium cascade at our fuel services business in Erwin, Tennessee. This is combined with the centrifuge manufacturing development capability in Oak Ridge, Tennessee. Therefore, the first tranche of funding does not pertain to the actual production of the material itself.

Okay. And regarding the 4 new second-generation electromagnetic isotope separator units that you announced being commissioned by Kinectrics, does the entirety of that 500 kilogram of ytterbium output now belong or will it belong to BWXT Medical? And were there any noteworthy differences between the first and the second-generation EMIS units?

Yes, that's 500 grams of ytterbium-176 output, which is the base material for lutetium-177, an important precursor for that nuclear medicine product. There’s no essential difference between this generation and the prior generation; it’s really just an increase in capacity of about 500%. It’s an impressive capability. We haven't integrated Kinectrics Medical into BWXT's Medical business for valid reasons, but those businesses are supporting each other, and we are discovering powerful strategic synergies there.

Next question comes from the line of Scott Deuschle with Deutsche Bank.

Mike, could you slice up the shipset value of the steam generator content you won with Rolls-Royce?

So we haven't given specifics around that, I think, Scott. When we talk about the SMR opportunity with Rolls, we've discussed kind of similar to the rest of our SMR in the $50 million to $100 million range. I think we're squarely in the middle of that as it relates to the Rolls content. So we feel comfortable kind of being in that range from a Rolls perspective, but we haven't disclosed the specifics.

Okay. And then the press release announcing that win discussed the localization plan for future manufacturing work. I think most of what Rolls-Royce is currently bidding on is for reactors in Europe. So is the implication here that you may elect to build out a manufacturing footprint in Europe if the demand is there?

Yes. I think, Scott, we are evaluating that and other opportunities for localization. That seems to be the trend in commercial nuclear power. So we certainly are considering it.

Okay. And then last question, sorry to be a pig. But Mike, can you walk us through the puts and takes on 2026 free cash flow that resulted in that guide of flat to slightly up? I heard some of the pieces in the script. I was just curious if you could put a bow on it for us?

Yes, I believe we've made a significant improvement over the past couple of years. As we mentioned during our Investor Day, our medium-term outlook indicates that we expect to see continued improvement in our cash conversion cycle, which is an internal metric we track. This translates to roughly a $10 million annual improvement. We've experienced substantial progress moving from 2023 to 2024 and then from 2024 to 2025. At the beginning of the year, we projected a low end of $265 million, and now we are guiding toward approximately $285 million to $425 million. This growth is partly driven by our investments in new contracts, allowing us to negotiate certain milestones for DUECE and HBDU, which will be achieved in the fourth quarter of 2025. While this creates a significant shift when looking at the timing for next year's milestones, it’s an important factor. Additionally, we are slightly increasing our capital expenditures and expect to be in the 5.5% to 6% range of revenue next year, up from 6% this year. Therefore, while we anticipate a one-day working capital improvement, it might be offset by $10 million to $15 million in timing related to milestone payments for some of the larger new contracts.

Next question comes from the line of Jeff Grampp with Northland Securities.

I'm curious, when we look at this '26 outlook, what do you guys view as kind of the main risk to achieving that outlook? And then maybe this is more of a '25 discussion point, but does an extended government shutdown represent a risk at all to this year's or next year's outlook?

I will begin by addressing the second question about the government shutdown. The primary impact of the government shutdown is on the technical services segment of our business related to government operations, where we collaborate with external partners on maintenance and operational tasks, as well as environmental cleanup at Department of Energy sites. Our teams have effectively managed funding, and most of our sites remain fully operational. We are focused on continuing our mission. As for our guidance, we have not planned for a long-term shutdown. If the shutdown extends, it might pose some risks for 2026, but I do not see it significantly affecting 2025. Regarding our outlook for next year, we are concentrating on operational performance and operational expenditure initiatives, which we have covered extensively. We are still sorting through some older pricing agreements, and I previously mentioned that I expect these to continue into 2026. If we maintain our performance and productivity, there might be potential for some upside related to opportunities and potential write-ups. However, our guidance does not factor in a large amount of expected write-ups. Additionally, with the timing of new special materials contracts showing strong performance this year, we will continue to excel in that area, which could lead to further opportunities in our guidance. On the risk side, much of it hinges on the overall timing of our commercial nuclear opportunities. There is significant activity in requests for proposals and information, and we have a good understanding of when those orders may come in. However, any delays could impact our outlook for next year. We should also keep in mind defense spending, which has not notably affected us so far but remains a potential risk, along with the possibility of an extended government shutdown. These represent the primary considerations we need to account for.

Awesome. I appreciate that thorough answer. That's really helpful. And it kind of ties into my follow-up. So Rex, you mentioned this demand market as being unprecedented. It seems like the last couple of quarters have been more headlined more on the government segment of the business. I'm curious how you see the commercial side playing out, the potential acceleration there. I mean it sounds like that the pipeline is robust. And so maybe is this something that you guys think kind of materializes or accelerates from a kind of order backlog standpoint over the coming quarters? Or do you have that level of conviction or insight at this point in the cycle?

I believe we will begin to see an increase in orders soon. The Westinghouse announcement was likely the first significant indicator. If you observe the commitment from OPG to develop four small modular reactors, it suggests progress. I'm curious to see what the next announcement for SMRs in the U.S. will be, likely from the Tennessee Valley Authority or another nuclear utility, as there is considerable discussion around this. I fully anticipate that nuclear utilities in Canada will proceed with large construction projects shortly. We already have contracts in place to study the licensing for CANDU derivatives. Many factors are aligning, and there is a lot of demand. Therefore, I expect next year will focus more on commercial orders and announcements rather than government ones, which have characterized 2025.

Next question comes from the line of Michael Ciarmoli with Truist Securities.

Maybe Rex, not to derail things, but maybe talk more about the, I guess, the boring portion of your business. No one's asked about Navy subs, shipbuilding and just kind of general thoughts. Mike, I heard you talk about the CapEx. I think we still have a commitment to AUKUS out there. But any kind of general update on kind of what you're seeing in terms of VA, Columbia cadence? How you're thinking about whether or not AUKUS flows in at some point, you need more CapEx or more capacity?

Thank you for the question, Mike. We've seen a positive shift in our Naval Nuclear Propulsion sector over the last quarter. There had been uncertainty about AUKUS due to its review by the Department of Defense, but the recent interactions between the Australian Prime Minister and the President indicate that AUKUS is moving forward. Simultaneously, both GD and HII shipyards appear to be improving in their production, which is encouraging for us all. Additionally, there was an unexpected announcement regarding South Korea, where they have established a shipyard for nuclear-powered submarines in the U.S. This initiative is still in its early stages, and its details remain unclear. However, the involvement of the U.S. in the nuclear propulsion aspect could present interesting opportunities. Overall, I perceive a lot of potential for growth compared to a few quarters ago. We will require increased capacity to fulfill the demand for the AUKUS program, and we are already engaged in CapEx projects with our customer and naval reactors to address that need. So, we are moving forward.

Got it. Got it. And then just one more, Mike, I think I've got this. I mean the implied government EBITDA margins look to be down next year. It sounds like it's just the front-end loading of some of that lower-margin work and maybe even some of the other pilot progression projects. But is anything changing with that core Navy business? Or is it really just kind of some lower-margin start-up contracts that's weighing on the margins?

No, that's exactly right. If you look at 2026, most of it is mix pressure, with half of the revenue growth driven by DUECE and HPDU. As mentioned, we start off with pretty low margins and anticipate higher positive EACs in the future. In addition, we are still dealing with some residual effects of the pricing arrangements we entered into shortly before COVID, which were impacted by significant labor costs and other factors. As mentioned before, that mix will start to change next year as we transition into the new pricing arrangements we recently established. We're hopeful that we can focus on that. Additionally, we are strongly focused on operational excellence initiatives, with a large emphasis on improving margins that we are actively pursuing. We will continue to make investments to enhance performance in the business, and hopefully, we will be able to outperform and see some positive EACs next year.

Next question comes from the line of Jed Dorsheimer with William Blair.

I'll echo the other sentiments. Congratulations on a great quarter here, guys. To start, regarding your commercial growth, I noticed you separated out growth from Kinectrics. In particular, for your radiopharma business, the supply with Novartis shows that Pluvicto received approval for off-label use prior to chemotherapy, which expands its use. My question is whether you faced supply constraints in the quarter for the precursor or lutetium-177. Previously, you mentioned around 30 Phase III trials, so I'm curious how we should anticipate radiopharma growth and if that growth was affected by capacity limitations.

Yes. I don't think we were supply constrained for that product. We're already quite far downstream in the process. We handle the base materials, ytterbium-176 and lutetium-177, but we do not produce the active pharmaceutical ingredient that goes to customers before us. So, we do not feel we are facing a supply constraint for that product. Regarding future growth, I expect the demand for lutetium to continue to accelerate. I can't currently predict specific figures for our business, but it is clear that demand will increase in the future.

Got it. Sticking with commercial but shifting to the reactor side, if you received an RFP for a Rolls SMR or even for an AP1000, that would drive the backlog but wouldn't contribute to growth next year, correct? I just want to confirm that it seems like that would be the case. In other words, 2026 is a year for RFPs and wins, and most of the reactor side would be with Bruce and OPG in Canada, correct?

Yes, that's correct.

Yes, that's correct.

From my perspective, I believe the growth numbers we set for '26 are not very risky, especially on the revenue side. We have secured a significant amount of business in naval reactors, special materials, as well as in commercial and medical sectors. Therefore, I view our revenue outlook as low-risk. Our focus now needs to be on improving margins. Additionally, any commercial gains from the AP1000 would enhance our overall situation.

Next question comes from the line of Andre Madrid with BTIG.

Could you maybe give us a status update on DRACO? I know you said last quarter, it kind of lives on through NASA, but we did see you guys call out some weaker micro reactor volumes in the quarter, and I wanted to know if it was attributable to this?

Yes, that's exactly right. So the DRACO program evolved into single agency support. It was a DARPA and NASA joint program. Now it's a NASA nuclear thermal propulsion program called Sentry. And the funding hasn't really shaped up for that in a meaningful way yet. We do have some task orders under that contract, and we're able to keep our team together, but it's a lower level of revenue. And it's hard to predict what the outcome of that will be. Certainly, NASA seems to be focused on lunar efficient surface power right now, and we've assembled the team to go attack that opportunity. But nuclear thermal propulsion is still a need on the civil space and national security side. So I do think that program goes forward in some form in the future. It's just hard to predict right now.

Got it. No, that makes sense. Mike, you mentioned earlier the $80 billion nuclear partnership that was recently announced. What potential gains could we expect from that, if any? How should we evaluate that opportunity for your team, assuming it is an opportunity?

Yes, we haven't provided specific guidance on the size of that opportunity at this point.

I would just add to that, the opportunity there is for component manufacturing, which is obviously right in our sweet spot. So it could be steam generators, reactor pressure vessels, those kinds of things. And so I think the opportunity set is pretty interesting, but it's not specific yet.

Next question comes from the line of Ron Epstein with Bank of America.

This is Alex Preston, on for Ron today. I was just curious on M&A, right? Obviously, talked through a couple of times AOT and Kinectrics performing really well. Curious if you could just walk us through a little bit about the environment you're seeing, any appetite going forward for more investments. It seems like you'll be well within your sort of 2 to 3x leverage range going even to the end of the year?

Yes, maybe I'll make a broad comment about that and then flip it over to Mike. We've been historically pretty picky about doing acquisitions because our philosophy there is to go and get things that amplify our strategic intentions in the nuclear space. And so I think that means you're necessarily limited on the number of targets. That said, we did a couple of really good ones this year with Kinectrics and AOT, and we've done some very good ones in the past. Nordion was a good acquisition for us. The GE Hitachi assets in Canada, a very good acquisition for us. I would say that we are interested in acquiring right now because, as I said on the call, or as I said in one of the answers, we certainly can get assets within our multiple. So you've got an opportunity to create value there. So we're continuing to look. I think it's super interesting, and we'll acquire if it matches what we're trying to do strategically. Otherwise, we'll stay away from it.

Yes. And I think we feel comfortable where we are from a leverage standpoint. One of my priorities is to continue to clean up some of the balance sheet and create some capacity and dry powder to be opportunistic about acquisitions going forward.

Next question comes from the line of Pete Skibitski with Alembic Global.

Just a quick housekeeping question, I guess, for Mike. Mike, the $15 million step-up in D&A in 2026, this is a small EBIT impact. But I was just wondering, does that relate to the 2 new contracts in government or from tech-99 or something completely different?

It's not related to either. Part of this is the timing difference between when we receive recovery under cost accounting standards and financial accounting standards. However, there won't be any major changes related to tech-99 until that program has received full approval. We're beginning to allocate funds from the initial investments related to the new contracts, but those aren't yet in service. Therefore, you won't see a significant increase in 2026; that will happen gradually over time.

And our last question comes from the line of Scott Deuschle with Deutsche Bank.

All right. I saved this question from the end of the call because it's probably where it belongs. But Rex, is rare earth handling or processing at all an area of strategic interest to the company given your existing experience in the handling and processing of hazardous materials?

So I don't think so, Scott. Our capabilities are around special nuclear materials and the materials handling and accountability systems that go with that. We just aren't involved with rare earths typically, I mean, apart from ytterbium-176, but just not in our playbook. And so I would say the answer to that is broadly no.

That concludes the question-and-answer session. I would like to turn the call back over to Chase Jacobson for closing remarks.

Thank you, Desiree. Thank you, everybody, for joining us today. We appreciate your questions. We appreciate your interest in BWXT. We look forward to seeing many of you and speaking with you in the coming days and weeks and seeing you at investor events. If you have any questions, please reach out to me at investors@bwxt.com. Thank you.

Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.