Earnings Call Transcript - BWXT Q4 2024

Operator, Operator

Ladies and gentlemen, welcome to BWX Technologies Fourth Quarter and Full Year 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the company’s prepared remarks, we will conduct a question-and-answer session, and instructions will be given at that time. I would now like to turn the call over to our host, Chase Jacobson, BWXT's Vice President of Investor Relations. Please go ahead.

Chase Jacobson, Vice President of Investor Relations

Thank you, Gail. Good evening, and welcome to today's call. Joining me are Rex Geveden, President and CEO; and Robb LeMasters, Executive Vice President and CFO. On today's call, we will reference the fourth quarter 2024 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 and the company's SEC filings. We will 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.

Rex Geveden, President and CEO

Thank you, Chase, and good evening to all of you. This afternoon, we reported better than expected fourth quarter earnings, capping off another strong year for BWXT. We generated record revenue, adjusted EBITDA, adjusted earnings per share, and free cash flow, all meeting or exceeding the full year guidance metrics we set last year. Demand in our end markets is unprecedented. Major players in national security, clean energy, and medical end markets view nuclear technologies as novel solutions for their mission needs. BWXT is well positioned to benefit from this accelerating demand, which drove our extremely strong fourth quarter and full year bookings. We ended 2024 with a backlog of $4.8 billion, up 21% year-over-year from large contract awards in both of our operating segments. In addition to the focus on growth, we are obsessive about improving the business in all its aspects. Internally, we call this the BWXT Battle Plan. It has five elements that intertwine with one another, which are sustain and grow the core, invest strategically, expand into adjacent markets, drive performance, and deliver the mission. The Battle Plan is our operating system, and I use it to communicate our purpose and to drive the focus on execution every day. With that backdrop, let me take a few minutes to highlight how we are executing under this framework and how this is positioning BWXT for continued success in 2025 and beyond. First, we are investing strategically organically and inorganically across our business lines. These investments create capacity, expand our capabilities with new products and services, and importantly, increase customer confidence in choosing BWXT to support their most critical needs. In government operations, we recently completed the expansion of the BWXT Innovation Campus, the home of our advanced nuclear business line. This facility located adjacent to our naval reactor manufacturing plant in Lynchburg, Virginia is home to over 300 employees and has state-of-the-art capabilities for the design and manufacturing of micro reactors and advanced nuclear fuels for defense and commercial applications. We have spoken extensively about the major investments in our naval nuclear propulsion manufacturing plants. While the largest are behind us, we continue to make these strategic investments in our infrastructure to meet the current and future demands of our naval reactors customer. This includes maintaining a steady production rate of Virginia-class reactor cores, increasing the cadence of Columbia-class submarine production as we enter a serial ordering pattern over the next decade, and capacity expansion for Augusta. Further, in the first week of the new year, we completed the acquisition of A.O.T., expanding our special materials business line into the depleted uranium assay with exciting new capabilities in R&D, prototyping, testing, and production for major customers, including the Department of Energy and Department of Defense. We are already uncovering interesting opportunities at A.O.T. that would drive growth beyond the acquisition business case. In commercial operations, it is a similar story. The demand signals in commercial nuclear power and medical markets are strong and visible, and we are investing in plant capacity and workforce to address that demand. The ongoing expansion of the Cambridge manufacturing plant just outside of Toronto positions BWXT to pursue more projects for large heavy nuclear equipment. Beyond this investment, we are assessing options for additional capacity in North America as demand from utilities and nontraditional high-tech buyers for green base load power generation precipitates. In early January to complement and enhance our commercial nuclear power business, we announced an agreement to acquire Kinectrics Inc., which we expect to close in mid-2025. Kinectrics offers a comprehensive specialty service portfolio to commercial nuclear players globally covering key stages of the project life cycle that we have coveted from reactor design and site licensing on the front end to testing, analysis, and materials management throughout the life of a plant through to decommissioning support at the end of a plant's life. We have received unequivocally positive feedback on the announcement from our customers, whom we will be able to serve more effectively with a larger portfolio of services. Kinectrics also has an interesting play in nuclear medicine isotope radiation services and stable isotope enrichment for the production of the most important oncology radio therapeutic on the market, lutetium-177. This complements BWXT's capabilities in isotope production systems and processing, and provides us exposure to the largest and most advanced pipeline of drugs in nuclear medicine. Our investments extend beyond operations. Over the last year, we have taken on a full digital transformation initiative, including cloud migration, better collaboration tools, ERP consolidation, elimination of redundant on-premise IT systems, and vastly improved financial integration tools, enabling faster and better business decisions. Overall, our investments to enhance capabilities, drive growth, and improve efficiency are paying off, yet we remain committed to an active and disciplined capital deployment strategy. How does all this translate into our results and future growth? As I noted, in 2024, we achieved record financial performance. Adjusted EBITDA grew 6%, adjusted earnings per share were up 10%, and free cash flow was nearly 20% higher driven by strong operations and supported by many of the financial initiatives Robb and his team have implemented. In government operations, despite multiple severe weather disruptions, and a tough year-over-year comparison, we delivered revenue and adjusted EBITDA growth in line with our expectations. We continue to hire and drive productivity through lean manufacturing processes and increased use of technology, mitigating the impact of higher labor costs and a business mix shift toward less mature, and therefore, lower margin programs. During the year, we delivered multiple, critical components to naval reactors and drove progress in our microreactor and special materials programs such as Pele, DRACO, and U-Metal processing. In the fourth quarter, we booked our next pricing agreement for naval propulsion reactors and components. Through the year, we also secured several long-term technical services contracts. In November, we took responsibility for management and operations at the Pantex site. And just today, we assumed full responsibility for environmental restoration at the Hanford tank site after a successful four-month transition period. Both contracts boost the bottom line and provide added earnings visibility over a multiyear period. Further, in September, we announced that BWXT was the sole awardee of a contract to study the build-out of a national security enrichment plant, a vital strategic capability that the U.S. does not presently possess. This could blossom into a new and exciting long-term opportunity for BWXT, which would enhance the security and energy independence of the United States. These wins with our existing book of business provide the foundation for continued growth in government operations in 2025. In commercial operations, we delivered double-digit revenue and adjusted EBITDA growth in 2024, driven by strong growth in commercial power and medical end markets. Commercial power revenue grew by more than 10%, driven by steam generator deliveries and services to the Bruce Power life extension project, which will persist through the early 2030s. We are entering the final phases of the Darlington refurbishment, one of the highest-performing nuclear projects in the world over the past decade. We are particularly proud of this project as it serves as a proof point against the misapprehension that all nuclear projects experience cost and schedule overruns. The positive precedent set by these projects led OPG to commit to extending the life of its Pickering B reactors for which BWXT has been selected to provide 48 steam generators. Finally, earlier in the year, we were awarded the contract to manufacture the reactor pressure vessel for the BWRX-300 small modular reactor project at the Darlington site. And we continue to anticipate multiple follow-on orders in Canada, U.S.A., and Europe. Having booked the RPV and a considerable portion of the Pickering contract in the fourth quarter, commercial operations enters 2025 with a record backlog of $930 million, up 19%, supporting our expectation for another year of double-digit commercial power revenue growth. Looking ahead, the opportunity set in commercial power is rich to say the least. In Canada, Ontario Power Generation recently announced that it is assessing adding up to 10 gigawatts of new nuclear capacity at Port Hope. Bruce Power is evaluating technologies to add up to 5 gigawatts of new capacity. And in the United States, the Tennessee Valley Authority, along with a group of industry partners, including BWXT, announced that it is seeking DOE support to build SMRs at the Clinch River site. BWXT Medical continued its strong growth trajectory. Revenue grew 23% in 2024 and EBITDA turned more meaningfully positive. This was driven by CDMO and PET diagnostics business lines and increased sales of therapeutic isotopes for actinium-225 clinical trials. We signed our second Tc-99 commercial agreement with a key distributor during the fourth quarter, further affirming industry appetite for our brand and our product and keeping us on track for contracted volumes in 2026. Overall, we expect 2025 medical revenue to grow at a similar rate to 2024. In conclusion, we are executing on our strategy and delivering the forecasted growth. Demand for nuclear solutions is strong, and we are driving performance through the organization to maintain our competitive edge, improve financial performance, serve our customers, and build on the momentum we have generated. With that, I will now turn the call over to Robb.

Robb LeMasters, Executive Vice President and CFO

Thanks, Rex, and good evening, everyone. I'll start with some total company financial highlights on Slide 4 of the earnings presentation. Fourth quarter revenue was $746 million, up 3% organically with growth in commercial operations offsetting a modest decline in government operations. Adjusted EBITDA was $130 million compared to $148 million in the same quarter last year as growth in commercial operations was offset by lower government operations and timing of quarterly corporate expense accruals. Corporate EBITDA expense in the quarter was higher, primarily based on the timing of health care and other expenses, following several quarters of below-average expenditures. On an annual basis, corporate EBITDA expense was $16.9 million, slightly lower compared to 2023. In 2025, we expect another slight decline in corporate EBITDA expense. Adjusted earnings per share were $0.92 compared to $1.01 last year due to the operating items previously discussed. This was partially offset by slightly higher pension income and lower interest expense as well as a lower tax rate. Last quarter, I applauded the efforts of our tax team, which has been hard at work finding ways to improve our tax rate. After a thorough evaluation and infield analysis of certain expense activities, we determined that many tasks that we engage in are considered qualified research expenditures under IRS definitions. This effort will release meaningful cash tax savings as we amend returns and recover money for past tax years. This will permanently reduce our tax rate by over 100 basis points per year compared to historical levels. As such, we recognized a $6 million benefit to our tax provision in the fourth quarter on both a GAAP and non-GAAP basis related to this favorable tax planning change, which accounts for the accruals for the fourth quarter as well as what we should have been accruing over the course of the year. This led to an adjusted effective tax rate of 18.9% in the quarter and 21.7% for the full year, a favorable outcome compared to our guidance of approximately 23%. In addition to the benefit related to the 2024 tax provision, we also recorded a roughly $7 million benefit to GAAP earnings only for refunds we expect for the 2020 through 2023 tax years. Said differently, we have excluded the positive benefit from prior years from our non-GAAP results as we deemed it to be non-recurring. As we look to 2025, we expect our tax rate to be approximately 22%, a notable decrease from the 23% to 24% we observed in 2022 and 2023. However, slightly higher than 2024's non-GAAP tax rate of 21.7%. This slight increase is due to a geographical earnings mix shift toward Canada, a higher tax jurisdiction compared to the U.S., given our expectation for outsized organic growth in Canadian commercial nuclear power and medical operations. Free cash flow in the quarter was $224 million, bringing full year free cash flow to $255 million, up 20% year-over-year. During the quarter, our intense focus on working capital management and timing of cash receipts associated with strong bookings allowed us to exceed the high end of our original free cash flow guidance. Our capital expenditures in 2024 were 5.7% of sales or $154 million, in line with our expectation. In 2025, we anticipate capital expenditures to remain in the range of 5% to 6% of sales as we continue to see our maintenance CapEx at 4% and anticipate spending 1% to 2% on select growth initiatives. Major capital projects in 2024 will include the previously announced expansion of our Cambridge commercial nuclear manufacturing plant as well as incremental capital investment into our U.S. facilities, including the support of increasing production of Columbia-class submarine reactor cores as Rex mentioned. I would note, similar to several other defense peers, while heightened investment in certain naval programs runs through our CapEx, it is often recovered through operating cash flow or working capital releases. Despite likely higher capital expenditures, we expect another strong year of operating cash flow, leading to free cash flow growth in 2025. We anticipate $265 million to $285 million of free cash flow as we continue to progress toward our medium-term target of 90% free cash flow conversion. Moving to the segment results on Slide 7. In government operations, fourth quarter revenue was down slightly to $295 million, adjusted EBITDA was $117 million, leading to an adjusted EBITDA margin of 19.6%, down from last year, mainly due to a tough comparison and shifting mix towards less mature programs. On an annual basis, government operations revenue was up 8% and adjusted EBITDA was up 3%, yielding an adjusted EBITDA margin of 20.2%, consistent with the guidance we provided over the last several quarters of slightly higher than 20%. Our underlying performance in our largest facilities, as measured by efficiency and utilization, remained solid. However, our year-over-year margin comparisons continue to be impacted by a mix shift toward cost-reimbursable microreactor projects and contracts that are earlier in their life cycle, providing less opportunity to recognize cost savings. We anticipate that this dynamic will remain with us through 2025, and therefore, we expect GEO segment margin to be relatively flat compared to 2024. Turning to commercial operations. Revenue was $152 million, up 23% year-over-year with double-digit growth in commercial power and medical. Adjusted EBITDA in the segment was $23.7 million, up 11% as good execution and improving medical profitability was offset by mix with less outage work in the quarter and growth investment. Turning now to our 2025 guidance on Slide 8 and 9 of the earnings presentation. On an organic basis, our operating assumptions are generally in line with the preliminary outlook we provided last quarter, however, we have also included a contribution from the Kinectrics acquisition, which we are still targeting to close in mid-2025. On the top line, we expect revenue of approximately $3 billion. In government operations, we expect mid-single-digit growth consisting of low single-digit organic growth plus a contribution from the acquisition of A.O.T. Organic growth will be led by our special materials business with flatter revenue in microreactors and naval propulsion as we enter our second year of the forward carrier lull. In commercial operations, we expect significantly higher revenue with mid-teens organic growth plus a contribution from the pending acquisition of Kinectrics. As a reminder, we expect Kinectrics to generate revenue of slightly more than $300 million annually in 2025, with approximately half of a year included in our guidance given an expected midyear closing. This continues the mid- to high-single-digit organic growth trend Kinectrics has exhibited the past couple of years as an independent company. Additionally, I will note that our commercial operations guidance includes a foreign currency translation headwind of approximately 5% due to the strength of the U.S. dollar versus the Canadian dollar. For adjusted EBITDA, we are guiding $550 million to $570 million, inclusive of solid organic growth plus the incremental contribution from A.O.T. and Kinectrics. As mentioned, in government operations, we expect EBITDA to grow at a similar rate to revenue. And in commercial operations, we anticipate EBITDA margin to be in the 14% to 15% range compared to 14.1% in 2024 as the increase of higher-margin medical sales will be somewhat offset by the large contribution of acquired commercial power revenue. Moving to non-GAAP EPS. We are introducing 2025 guidance of $3.40 to $3.55. As you can see in the detailed guidance bridge on Slide 9 of our presentation, we expect higher EBITDA to be largely offset by non-operating items, including a roughly $0.08 headwind from lower pension and other income and $0.08 to $0.10 from higher interest expense related to the funding of the A.O.T. and Kinectrics acquisitions. I will also note that beginning in the first quarter of 2025, our non-GAAP EPS will exclude acquisition-related amortization for these two acquisitions. Looking at the quarterly cadence of earnings, we expect first quarter EPS to be flat to up modestly year-over-year. Beyond that, we anticipate the remainder of the full year earnings per share to be evenly distributed across the second, third, and fourth quarters. This could be moderately affected by when the Kinectrics acquisition closes and the resulting impact on non-operating items such as interest expense, pension income, and the other net on the P&L. To sum it up, we had a solid finish to a record year. BWXT has a strong competitive position in growing markets, supported by our unique infrastructure capabilities and a robust workforce. We are focused on execution and have a strategy in place that we believe will allow us to effectively and efficiently capitalize on market opportunities and, therefore, continue to drive shareholder value. And with that, we look forward to taking your questions.

Operator, Operator

Your first question comes from Scott Deuschle with Deutsche Bank. Please go ahead.

Scott Deuschle, Analyst

Hey, good evening. Robb, can you offer an update on where medical profitability was for the full year 2024 and how we should be thinking about the incremental EBITDA margins in medical from here?

Robb LeMasters, Executive Vice President and CFO

Yeah. So I'll remind you that in 2023, we sort of slightly turned positive and then built upon that in 2024. I think as far as we want to go is that we're really seeing the margins in that particular part of the commercial at or slightly above where the overall segment is. So that was accretive to margin. And I think that margin upside, we'll see as ultimately the tech business continues to grow and the revenue grows. So right now, it's a really nice contributor to both EBITDA and revenue.

Scott Deuschle, Analyst

Okay. And just to clarify, it grew about 25% in '24 and you're expecting a similar amount of growth in 2025 or is that not...

Robb LeMasters, Executive Vice President and CFO

That's exactly right. In the transcript, we specifically stated it was 23%, and we observed the same rate when looking at 2025.

Scott Deuschle, Analyst

Okay. And then Rex, if GE Hitachi were to get some SMR orders here from U.S. customers like Tennessee Valley Authority. Just curious if you would be able to service that manufacturing work out of your facilities in Canada or do you think you’d be required to build out capacity for U.S. customers in the United States, particularly given some of this tariff risk overhang?

Rex Geveden, President and CEO

Yeah. I mean sort of setting the tariff risk aside for a moment, Scott, yes, we would be able to service that out of our Cambridge plant. In fact, that's what that capacity expansion is about. It's about the ability to build all the Pickering steam generators concurrent with reactor pressure vessels and other things that we have moving through that plant. And so we designed it so that we have an output capacity of about three reactor pressure vessels a year. So I think all things being equal, we would want to fill that plant up before we would move to expand in the U.S. So we have plenty of capacity for, let's say, a four-pack at Clinch River completing the Darlington reactors and maybe some opportunities in Poland.

Scott Deuschle, Analyst

Okay. And then how are you thinking about that tariff risk, I guess, both on the commercial nuclear side and on the medical side?

Rex Geveden, President and CEO

Yeah. So I'll start this and maybe flip it over to Robb. It's obviously concerning to us, most particularly in our medical business because we export a good amount of products into the U.S. Of course, that import tariff is paid by the customer, but it might put some, might splash some pricing pressure back onto our medical products. The commercial power business is really kind of self-contained in Canada. Obviously, the labor is there and a lot of the components are manufactured there and sold there. So there's not as much effect there, but it is a concerning thing and we're evaluating it and keeping a close eye on it. With that, I flip it over to Robb.

Robb LeMasters, Executive Vice President and CFO

We've been closely analyzing the situation daily, and there are headlines emerging even today. We anticipate this will present a challenge, and Canada will likely respond as well. From our perspective, about 75% of our earnings come from the government side of the business, while 25% comes from commercial. The government segment is mainly self-sustaining, allowing us to source materials domestically whenever possible and ensuring we have multiple supply sources available. This puts us in a strong position since our supply chain and workforce are predominantly based in the U.S. For the 25% commercial segment, which primarily consists of our power business, it is largely self-sustaining as well. The competitive dynamics suggest that utilities in Canada will seek more sources, enhancing our position. We have assessed the supply chains for our products, and while we occasionally source from overseas or the U.S., it represents a small percentage of our needs, which we can replace without much difficulty. Regarding the medical business, we do have concerns since the majority of manufacturing is based in Canada, distributing to the U.S. and occasionally Europe. If changes occur, we must reach out to our customers to emphasize that the supply chain has limited participants. We're expanding our capacity and exploring collaboration with our customers, knowing this will be a long-term effort. The medical segment is high-margin for many of our customers, meaning any price adjustments on our end may not severely impact their profitability. We aim to be long-term partners and will communicate openly about any necessary price adjustments.

Scott Deuschle, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Thomas Meric with Janney Montgomery Scott. Please go ahead.

Thomas Meric, Analyst

Good afternoon. Thanks for the time. Rex, you mentioned expanding into adjacencies being a part of the battle plan. I’m curious how you think about the possibility of expansion into hexafluoride conversion, whether that’s organically or through acquisitions?

Rex Geveden, President and CEO

We have the ability within BWXT to handle conversion and deconversion. However, it would necessitate additional plant capacity and a new process line. Therefore, I don't believe we would consider acquiring this capability; instead, we would likely develop it internally if we decided to pursue it.

Thomas Meric, Analyst

And then second one for me is really on kind of win rate after the Kinectrics acquisition and just how to think about the commercial win rate improvement that the Kinectrics acquisition could bring. And specifically, I’m also thinking about the BANR project and potentially options for micro reactors at industrial facilities or data centers, things like that, just kind of the overall package that you now have with the acquisition. And that’s it from me. Thanks.

Rex Geveden, President and CEO

Sure. I would respond a bit differently than you framed the question. The Kinectrics acquisition provides us with a range of capabilities that complement what BWXT already does. We specialize in engineering, component manufacturing, fuel waste containers, and fuel manufacturing, and Kinectrics adds valuable capabilities such as licensing and safety analysis. They also have support services for decommissioning and areas we haven't previously covered, like distribution and transmission. This acquisition really enhances our vertical integration. Kinectrics has a strong win rate on its own, and BWXT's Canadian commercial power sector does as well. This won't change, but the synergy between the two creates a vertically integrated offering that can attract customers with potentially larger and more diverse projects than we had anticipated. It's a powerful combination that will help us enhance our position in the market in meaningful ways over the long term.

Chase Jacobson, Vice President of Investor Relations

Operator?

Operator, Operator

Your next question comes from the line of Bob Labick with CJS Securities. Please go ahead.

Bob Labick, Analyst

Great. Good afternoon. Thanks for taking our questions.

Rex Geveden, President and CEO

Hey, Bob.

Bob Labick, Analyst

All right. I just want to start with a quick one first and I had a slightly longer one for my follow-up. But in terms of moly you mentioned another contract win or potential for contracting for Tc-99 in the ‘26 contract season. Can you just give us kind of the latest update on your – the process with the FDA where – and timeline and I guess the ‘26 contract season is towards the very end of this year, you have still plenty of time ahead of you, but how is that process playing out?

Rex Geveden, President and CEO

We have successfully signed a second supply agreement with one of the major radiopharmaceutical chains in the U.S., which is great news for us as it shows the demand for our product and brand. Regarding the Tc development, I've mentioned before that we are working through several items and we're nearing the finish line on this. We've dedicated significant time to refining our formulation, ensuring we balance elution efficiency and moly breakthrough effectively. We're focused on perfecting the product before we submit our final data package, and I'm optimistic about our position. I expect to receive approval this year, allowing us to enter production contracts in 2026.

Bob Labick, Analyst

Thank you for your insights. You had an impressive year last year, and you maintain a consistent long-term growth outlook with numerous medium-term opportunities. The diversity in growth is also commendable. I would appreciate it if you could share more specifically about the major contributors in terms of dollar amounts over the next five years, without revealing the actual figures, but rather by ranking them. Some potential contributors I have in mind include the recovery in aircraft cadence, increases in Columbia rates, growth in Canadian refurbishments, moly sales, new builds in Canada, microreactors, and SMRs. Could you help us understand the ranking of these dollar contributors and your thoughts on the variability of those medium-term drivers?

Robb LeMasters, Executive Vice President and CFO

It's Robb. I can provide some insights on how we’re approaching our growth strategy. We’re currently in a strategic planning cycle that looks out over the next 10 years, with a more focused review on one to three years for our near-term plans. In the near term, I see all our base businesses growing steadily, but I expect significant contributions from the expansion of small modular reactors (SMRs) and nuclear medicine over the next one to three years. Moving to the medium term, I see growth opportunities specifically related to AUKUS, which should gain momentum. Additionally, we may enter the microreactor space, either by supporting others or by launching our own initiatives. This may also involve a focus on fuels for microreactors, particularly TRISO. Looking further out, I believe there’s substantial potential for growth in enrichment, and while it may take time to develop, I anticipate this will be a significant driver over the five-year horizon. Lastly, large-scale commercial nuclear reactors will also play a crucial role in our long-term growth. So, to summarize, we’re starting with steady growth in our existing businesses, focusing on microreactors and AUKUS in the medium term, and developing enrichment and large-scale reactors over the longer term. Additionally, I expect that therapeutic developments will be integrated throughout this timeline.

Bob Labick, Analyst

Super. That’s great. Thank you so much.

Robb LeMasters, Executive Vice President and CFO

Sure.

Operator, Operator

Your next question comes from the line of Peter Skibitski with Alembic Global. Please go ahead.

Peter Skibitski, Analyst

Hey, good evening, guys.

Rex Geveden, President and CEO

Hi, Pete.

Peter Skibitski, Analyst

Maybe just following on Robb’s comments on micro reactors. Could you guys talk more about – I feel like we haven’t heard in a while on BANR, maybe you could talk about if there’s any dependency on BANR from Pele, if that builds on it. And you’ve got, I think, this LOI with Tata as well. And it seems like we’ve had a proliferation of microreactor kind of planning globally, right? So I was wondering if you can give us kind of a real overview of where you’re at there with BANR. Thanks.

Rex Geveden, President and CEO

Sure, I'll take that one, Pete. BANR is part of the advanced reactor development program, a contract awarded by the Department of Energy that we won roughly four years ago. It's structured as an 80-20 cost share, where we contribute 20% and the government covers the remaining 80%, making it quite advantageous for us. You can view BANR as a commercial version of Pele, but it's in a different size category. Pele operates within the 1 to 5 megawatt power output range, while BANR is designed for 15 to 20 megawatts. There are notable differences; Pele is compact enough to fit in a standard Conex box and can be shipped by air or rail, whereas BANR does not have such constraints. This makes BANR simpler and likely more cost-effective, particularly in terms of scale and packaging. It's suitable for applications we've discussed in Wyoming that support trona mining with Tata and also aligns with projects the Defense Innovation Unit is considering for powering U.S. military bases. The connection between Pele and BANR is strong, with significant knowledge transfer between the two. Our team shares resources and insights, applying lessons learned from Pele to enhance BANR. It’s a positive dynamic, and we’re optimistic about favorable commercial results.

Peter Skibitski, Analyst

And I guess, Pele is the first prototype. Is that expected to be up and running next year? Is that the time line? I guess maybe BANR would be on a somewhat similar time line? Is that what you’re thinking?

Rex Geveden, President and CEO

I would say that our customers are not actively publishing schedules right now. However, both Pele and BANR have experienced some scope increases, especially in testing. These projects will continue over the next couple of years, and we are not approaching any significant decline with either one.

Robb LeMasters, Executive Vice President and CFO

Maybe just to provide a little perspective on why micro reactors might come next, at least in my opinion, when you look at the commercial nuclear market, you really see a trend where we've gotten going on the refurb side, that has given way to greenfield activity, right? That's the next thing that's happening there. You're seeing a lot of activity on the SMR side and maybe the next generation, in my opinion, could be microreactors. You just think about getting further out on experimental products, if you will. And then the last sort of analogy I would give you is that the Gen 3 reactors that are popping up in the SMR world are also starting to lay the groundwork for advanced reactors, which are based on HALEU or different fuels. So when you really think about refurbs giving way to greenfield SMRs to micros, you can start seeing that you're starting to get an ecosystem of people doing a lot of things that are paying the bills here and now with solutions that work, but also looking out over the next couple of years, and I see microreactors as kind of the next thing.

Peter Skibitski, Analyst

Great. Thanks for the overview guys.

Robb LeMasters, Executive Vice President and CFO

Thanks, Pete.

Operator, Operator

Your next question comes from the line of Michael Ciarmoli with Truist Securities. Please go ahead.

Michael Ciarmoli, Analyst

Hey, good evening, guys. Thanks for taking the question. Good results. Hey, Robb. Just on the EBITDA bridge into next year, what's the assumption from Kinectrics. Should we assume about $20 million? And I guess does that imply that the organic core margins are down 60 basis points or so? I know the corporate was going to be down, but is that the right math we should be thinking about?

Robb LeMasters, Executive Vice President and CFO

Let me address those in two parts. As you know, we acquired Kinectrics, and while we haven't finalized that yet, we still anticipate closing around midyear, which is progressing well. We mentioned it is projected to generate just under $300 million in revenue and about $40 million in EBITDA. We expect these figures to increase in 2025, slightly exceeding $300 million in revenue and $40 million in EBITDA. As we’ve noted in our guidance, we consider various scenarios for the deal closure timing, whether it’s in two months, three months, or five months. The way you've presented it is reasonable, suggesting around half a year of approximately $40 million in EBITDA, depending on how that unfolds. It's important to keep in mind that when the timing is finalized, it will also bring interest costs and some pension expenses, which will affect other income. Therefore, we expect only a slight increase in the first year. In terms of EBITDA and the associated interest and other income, we anticipate a relatively neutral effect on earnings per share, regardless of when the deal closes. Regarding margins, I didn’t quite follow the 60 basis points you mentioned. We expect to finish 2024 at 14.1%, which we have guided at 14% to 15%. The shift in mix due to medical impacts means that our existing commercial nuclear business won’t grow at rates more than 25%. This will naturally exert downward pressure on margins since those margins align with the overall commercial operations segment. However, we also expect a significant contribution from Kinectrics, which is associated with commercial power margins. So even as we expand our commercial nuclear power segment significantly through Kinectrics and growth in our core business, we expect margins to continue growing. I’m proud of how we are managing this mix for the overall commercial operations margin. Lastly, on a company-wide level, we won’t be able to achieve high growth rates when we are guiding towards nearly 50% growth in the commercial sector, which typically has lower margins compared to governmental contracts. This will inherently affect our overall mix at the company level, especially in years where we are experiencing significant commercial growth. We don't just look at geographical margins; we analyze commercial operations margins too, and we encourage you to do the same.

Michael Ciarmoli, Analyst

Okay. Fair. And then just one last one. Rex, what’s the latest on DRACO? It looks like that problem or that program kind of had some maybe challenges on testing. Are you still getting revenue there? Any expected headwinds or how should we think about that one?

Rex Geveden, President and CEO

It's actually the opposite, Michael. There is a need to conduct more thorough ground testing before the mission launches, and most of that work is included in our contract since it pertains to testing the nuclear engine. This will certainly affect the schedule, but it represents new work for our program, so it's beneficial for us.

Operator, Operator

Your next question comes from the line of David Straus with Barclays. Please go ahead.

Joshua Korn, Analyst

Hi, good afternoon. This is Josh Korn on for David. Just wanted to ask about the new Navy contract. Any color you could provide and how that might flow through to margins over the next couple of years. And then in the same vein, if you've gotten help from any of the shipbuilding funding from the CR. Thanks.

Rex Geveden, President and CEO

I'll address the latter question first and then turn it back to Robb regarding any effects of the pricing agreement on margins. We are not receiving any direct funding from the current shipbuilding submarine industrial base funding, nor have we observed any. A few years ago, we did benefit from some of that funding, which positively impacted our workforce development. However, we don't have any specifics on the latter inquiry.

Robb LeMasters, Executive Vice President and CFO

Yeah. And maybe I'll just address the recent price agreement. I don't think you're going to see any kink up, if you will, from the signing of that. As you know, we sign agreements every two to three years, and the agreements that we signed pre-COVID, frankly, we've been working through the economic realities of workforce and inflation and so forth. And so we've been chewing our way through that. So we're pleased that we've got a new contract. But it will take a few years to even dive into that one, if you will. We always talk about layers of the cake. So six years ago, we signed one; four years ago we signed one; two years ago we signed one, from all those layers of the cake are really what we're eating out of now. Yes, it's true that we'll start eating out of a layer of the cake that I think better probably reflects some of the realities of the economic environment that we've been dealing with the past couple of years. But also it raises the bar on us, right? We're actively working with our customer to reflect all the efficiency and utilization goodness that we've been working on in the past couple of years. And so we continue to try to set the bar higher on ourselves and work with our customer. We're in a fixed-price incentive fee contract there. And during these times, I think we look quite favorable. We're working with our customers to share in that profit and really be judged by a very scrupulous customer that's looking to have us always improve our margins. So no kink up. I think we're really pleased with the contract that we reached, and we believe our customer is too.

Joshua Korn, Analyst

Okay. Thanks. And then if I could just follow up. If you could quantify the cash tax benefit from the tax change you mentioned during the prepared remarks. Thanks.

Robb LeMasters, Executive Vice President and CFO

Yes. So two impacts. First, going forward, if you will, the 100 basis points applied to our profit before taxes is really the way to think about what happens through our book and taxes. Said differently, 100 basis points right against our PBT would be about $6 million over the next couple of years. And so that's really going to help both our ETR. 100 basis points to 150 basis points is really what we see over time, slowly building to that level over a couple of years from the benefit. You take a reserve in the early years and then you work that down. So we see 100 basis points plus, and that would be a positive to our P&L income going forward to be at that 22% and the cash. So really, on a going forward basis, we'd have that. As we look back, we talked about that we've been reviewing what we did in the 2020 through 2023 timeframe. In order of magnitude, we were getting R&D tax credits of a minimal amount. We'll review that with the IRS and ultimately try to release, if you will, the past couple of years of that $5 million or $6 million. So ultimately, to release all that money, we're going to have to work through that, and that will be a couple of years in the making. But we'll work through the past. And then ultimately, we get a permanent benefit for ETR and tax savings going forward.

Joshua Korn, Analyst

Great. Thanks for all the help.

Operator, Operator

Your last question comes from the line of Andre Madrid with BTIG. Please go ahead.

Andre Madrid, Analyst

Hey, everyone. Thanks for taking the question. I wanted to focus specifically on the regulatory environment with all the news recently with the NNSA firings and rehirings, and I know you guys put out a release not long after that, but just trying to talk broadly, is those really something that we're going to have to need to worry about moving forward? I mean I thought with regard to BWX, things would be pretty secure just given the high priority of the work that you guys do?

Rex Geveden, President and CEO

Certainly, we are monitoring the situation closely and it does raise some concerns. However, I believe we are well-equipped to handle it. Our focus is not on staff augmentation or producing white papers; rather, everything we do adds significant value for the government. We are involved in making nuclear fuel, creating reactor pressure vessels, and restoring environments impacted by Cold War activities. This work is substantial. Additionally, concerning naval reactors, we hold an open-book contract with them, which means they are reviewing our costs on a daily basis. While we are attentive to the situation, I believe we are in a strong position given the circumstances.

Robb LeMasters, Executive Vice President and CFO

Yeah. Maybe I'll just offer. I mean, I think you touched on something that concerns us here, which is there is a lot of change going on in D.C., and we're concerned about an air pocket just in general, right, as everybody gets back to work and understands what their priorities are. We think we're going to fare as Rex said, quite well versus the competition, but it's that sort of not knowing that causes different pieces of business that we're going after to potentially get delayed. But we're not worried about that over the long term. As you said, we're sort of built for this. We think all of our programs and all the recent media of where they're looking to make adjustments would most likely not affect us. To Rex's point, just to put numbers around it, it is in our 10-K that I think we filed earlier today. We are 80% fixed price incentive fee and/or firm fixed price already, right, within our government business. We break it out in the 10-K. So you'll see that for 2024. So as Rex talked about, 80% of our business is highly scrutinized by a very informed customer. We're a sole supplier. And in many circumstances, we're actually showing that cost to our customer and working with them to try to find ways to save ourselves money and give that back to the government. So again, we're really nicely aligned with all the themes that we've been reading about.

Andre Madrid, Analyst

No. That’s very, very helpful. Thank you both for breaking that out. And I guess on a similar note, thinking about the prospect of a full year CR, what could the potential impact be for GovOps specifically? I mean, does the long lead nature of the work and its priority within the DoD kind of help offset any potential impact there? Kind of in a similar vein, so the question I just asked, but put a different way.

Rex Geveden, President and CEO

The other thing that you worry about in a year-long CR is whether or not you have programs of record. The programs of record to get funded at some percentage of the prior fiscal year is the typical formula and all of our major programs are programs of record. So that would include, obviously, naval reactors, Virginia, Ford, Colombia, Pele, DRACO. So from that perspective, it's not too worrisome. You do worry about new programs and new starts. That said, since the advent of this administration, the changeover in the White House and the new fiscal year, we have received authority to proceed on our West Valley project, authority to proceed on our Hanford Tanks project. So there's a bit of a business-as-usual theme going on in the business, and so we're comforted by that and hopeful that it won't be disruptive to us overly.

Andre Madrid, Analyst

Excellent. Rex, Robb, thanks so much for your comments. I’ll leave it there.

Rex Geveden, President and CEO

Yeah. Thank you for your questions.

Operator, Operator

Your next question comes from the line of Peter Arment with Baird. Please go ahead.

Peter Arment, Analyst

Good afternoon, Rex, Robb, and Chase. I'll be brief, as it's been a long call and many questions have been asked. Robb, could you remind us, or Rex, regarding the impressive organic growth in the commercial operations? We know you're just starting to ramp up with Pickering. How does that overlap with Bruce and the refurbishment work there? Will there be an overlap for a few years, or how should we think about that?

Robb LeMasters, Executive Vice President and CFO

We previously announced the Darlington project, which will conclude much of its work over the next couple of years, and that has been very positive for us. We are currently focused on the Bruce project, and we will also be undertaking the refurbishment of the Pickering reactor. The Pickering project is particularly significant for us, as we are processing 48 steam generators in our plants, which is a product we are very familiar with. This ensures stable conditions and we are confident about this work. I see this as a transition from one project rolling off to two equally important refurbishments, if not more so. Additionally, we are looking forward to the first small modular reactor (SMR) and anticipate a decision in the coming quarters about advancing that in Canada. This next phase wouldn't be a first-of-its-kind situation; it would be building on previous experiences. Overall, I am optimistic about our business prospects and do not have concerns about the upcoming transitions in the refurbishment projects.

Rex Geveden, President and CEO

I want to add that the Darlington opportunity was smaller for us compared to the Bruce opportunity because they did not replace steam generators there. We did have a feeder contract and some other interesting work, but the Bruce refurbishment involved replacing steam generators prior to those reactors. Therefore, we had feeders, steam generators, heat exchangers, and primary coolant pump motors. The Pickering project seems to resemble Bruce more than it does Darlington. As Robb mentioned, it presents a medium opportunity for us, with a richer set of prospects.

Peter Arment, Analyst

So could that accelerate a little bit, I mean, not in terms of the overall segment? I'm just in general, that mix of business, just given the size of the Pickering operation.

Robb LeMasters, Executive Vice President and CFO

I think it's a good question because our guidance for 2025 includes an expected acceleration in the core non-Kinectrics. If you exclude the medical business this year and focus on the underlying nuclear power growth for 2024, you will notice a slight acceleration into the double digits for 2025 on the power side. We are not providing guidance for 2026 and 2027 at this time, but with all the drivers such as SMRs, Pickering, and the phase-out of Darlington, we have a strong chance of continuing to grow organically at mid to high-single digits, as mentioned at Investor Day. Rex also mentioned potential opportunities with Kinectrics to assist our customers, and I hope they will choose us not just for their planned projects but for the ease of handoff points. I believe this could positively impact our sales, and I look forward to seeing the benefits of that. Your question does seem plausible.

Peter Arment, Analyst

Appreciate all the color. Nice results, guys. Thanks.

Rex Geveden, President and CEO

Thanks, Peter.

Operator, Operator

Thank you, everyone. That concludes our Q&A session for today. I will now turn the call over back to Chase Jacobson. Please go ahead.

Chase Jacobson, Vice President of Investor Relations

Yeah. Thanks, everybody for joining us today. We look forward to seeing many of you and speaking with you at upcoming investor events or on the phone. If you have any questions, you can reach us at investors@bwxt.com.

Operator, Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect. Have a nice day, everyone.