May 2, 2017
Executives
Alan Nethery – Vice President, Investor Relations and Corporate Procurement John Fees – Executive Chairman David Black – Senior Vice President and Chief Financial Officer Rex Geveden – President and Chief Executive Officer
Analysts
Pete Skibitski – Drexel Hamilton Tate Sullivan – Sidoti Pete Lucas – CJS Nicholas Chen – Alembic Kristine Liwag – Bank of America Merrill Lynch. Michael Ciarmoli – SunTrust
Operator
Ladies and gentlemen, thank you for standing by and welcome to BWX Technology Inc.’ s First Quarter 2017 Earnings Conference Call.
At this time, all participants are in 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.
Please note this event is being recorded. I would now like to turn the call over to our host, Mr.
Alan Nethery, BWXT’s Vice President of Investor Relations and Corporate Procurement. Please go ahead.
Alan Nethery
Thank you, Keith, and good morning, everyone. We appreciate your joining us to discuss our 2017 first quarter results, which we reported yesterday afternoon.
A copy of our press release is available on the Investor section of our website at bwxt.com. Joining me this morning are John Fees, BWXT’s Executive Chairman; Rex Geveden, President and Chief Executive Officer; and David Black, Senior Vice President and Chief Financial Officer.
As always, please understand that certain matters discussed on today’s call constitute forward-looking statements under federal securities laws. Forward-looking statements involve risks and uncertainties, including those described in the Safe Harbor provision at the end of yesterday’s press release and the Risk Factors section of our most recent 10-K and 10-Q filings.
These risks and uncertainties may cause actual company results to differ materially, and we undertake no obligation to update these forward-looking statements, except where required by law. On today’s call, we may also provide non-GAAP financial measures that are reconciled in yesterday’s earnings release and our company overview presentation, both of which are available on the Investor section of our website.
BWXT believes the non-GAAP measures provide greater insight and transparency into the Company’s operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior period, and to assist them in understanding BWXT’s ongoing operations. With that, I will now turn the call over to John.
John Fees
Thank you, Alan, and good morning, everyone. 2017 is off to a very good start, and we continue to exhibit strong overall operational performance this quarter.
Since the spinoff of our former Power Generation business in the second quarter of 2015, we have increased our trailing 12 months GAAP EPS from $0.11 per share to $1.84 per share and by more than 40% on an adjusted basis, from $1.31 to $1.85, delivering 21% compounded annual growth rate. Our discipline approach towards executing our long-term strategy drive stability, profitability and growth that will continue to shape our future performance.
The first quarter of 2017, the company achieved 17% consolidated revenue growth compared to the first quarter of 2016. Consolidated operating income in the quarter was $83.2 million, much higher than our prior year period of $42.6 million on a GAAP basis and a 14.6% increase compared to the prior year period non-GAAP operating income of $72.6 million.
Compared to Q1 last year, GAAP EPS and adjusted EPS grew by 17% and 22%, respectively. Backlog continues to be strong, totaling $3.9 billion at the end of the quarter.
This strong financial performance is the result of our disciplined operational execution and management of our costs. Despite an excellent 2016, which exceeded our internal forecast and produced an adjusted EPS growth of nearly 24% from 2015, I’ll remind you that we approach 2017 with an ambitious plan.
Further, the outstanding first quarter results caused us to debate raising our 2017 guidance. We believe that our full-year guidance remains appropriate as our experience of quarterly fluctuations year-over-year dictates caution.
There are a number of growth areas that I’m very excited about. The first of which is our Naval Nuclear Propulsion business.
Our relationship with the customer has been built over decades and we continue to see this business as the core strength of our company. As the additional built rate become more definitive and we receive adequate assurances, we’re prepared to accelerate our rate of capital investment and be ready for the severing production growth that is anticipated.
Additionally, we are in the early stages of planning a possible quicker cadence on aircraft carrier production. As we evaluate the multiple procurement scenarios that are possible, we see the potential for significant growth beyond our current levels of volume and in excess of our planning that led to our multi-year guidance of low-double digit EPS growth.
That being said, we have to understand procurement plans to definitize capital spending for our plants by year-end to be able to expand our capacity. The actual procurement scenarios to be more of an evolution over a few years, defining only materials and build rates.
As announced last week, we booked a $76 million contract for CMC missile tubes in the first quarter of 2017. CMC missile tubes will be used on both the U.S.
Columbia Class and UK Dreadnought Class submarines. This block two award, it’s the third CMC contract that we booked.
We continue to execute well in production of the Block I CMC missile tubes and has been awarded approximately half of the available CMC tube assembly work to-date. In the Canadian commercial market, we will continue to grow through our newly aligned NPG segment.
The Q1 results from this segment were our best first quarter in recent history and the performance at BWXT Nuclear Energy Canada, or BWXT NEC as we call it, has exceeded our expectations so far. Accordingly, we continue to evaluate that market for organic and acquired growth opportunities.
Rex will growth opportunities. Rex will elaborate on these items and other strategic initiatives that we’re working on in the later part of the call.
Before he does that, let me turn the call over to David, who will discuss our new segment reporting structure, first quarter results and other financial matters. David?
David Black
Thanks, John. Beginning this quarter, we are reporting our results in 3 realigned business segments.
Nuclear Operations Group referred to as NOG is unchanged from prior reporting period. The Nuclear Services Group referred to as NSG comprises our previous technical services segment and portions of our Nuclear Energy business, which includes our U.S.
Nuclear business, service business and our portfolio work in advanced reactors for both terrestrial and space power applications. Finally, the Nuclear Power Group, referred to as NPG, includes our legacy BWXT Canadian nuclear business and our recently acquired BWXT NEC.
In yesterday’s evening’s earnings release, we provided new segment historical results for the full year 2015 and for all 4 quarters of 2016 and the segment tables. NOG’s record first quarter 2017 revenues grew 10% to $325 million compared to $295 million in the first quarter of 2016.
Revenues for the segment came in higher than first quarter 2016 results due to timing of increased component manufacturing activity as well as our naval nuclear fuel and downblending operations. Operating income was the first quarter record of $73 million, 12.8% higher than the $65 million in the first quarter of 2016.
NOG delivered a strong operating income margin of over 22% during the quarter. Additionally, we booked $245 million of work for NOG this quarter, including the $141.7 million award for Nuclear Fuel Services that we announced last week.
This segment’s backlog at the end of March was $3.4 billion, an increase $1.3 million from a year ago. For the first quarter of 2017, NPG more than doubled the revenue over the prior year period, reaching $78 million compared to $36 million in the first quarter of 2016.
Revenue growth in the segment was primarily due to the acquisition of BWXT NEC. Operating income in this segment was $13.8 million, roughly doubling the $7 million for the corresponding period of 2016.
This increase was driven by the net impact of the acquisition as well as increased income from BWXT Canada. Despite the higher run rate, the segment continues to build backlog, booking $82.7 million in the first quarter and ending the quarter with a backlog of $478 million, 50% higher than the $319 million of backlog a year ago.
Our NSG segment contributed operating income of $662,000 in the first quarter. Operating income for this segment was lower in the first quarter compared to prior year period because of segment transitioned off in Idaho joint venture project in May 2016 and experienced lower Q1 outage work as compared to the prior year quarter as anticipated due to year-over-year outage timing differences.
The Company’s capital expenditures were $13.7 million in the first quarter, $3.6 million higher than the prior year quarter. Depreciation and amortization totaled $14 million for the first quarter, up $2.1 million due largely to the acquisition.
The GAAP effective tax rate was 30.6% in the first quarter, better than our full-year guidance due to tax benefits recognized and equity award investing in the quarter. As of March 31, 2017, the Company’s cash and short-term investments position net of restricted cash was $108.3 million.
First quarter cash flow from operating activities was a usage of approximately $54.8 million compared to a usage of $12.8 million in the prior year period. This is inclusive of a $30 million settlement payment to Bechtel in the first quarter of 2017 related to the mPower framework agreement, which we recognized in 2016.
As of March 31, 2017, we had $525.9 million borrowing in term loan. So including those made available under the September 2016 amendment, $50 million in borrowings under the revolving line of credit, and letters of credit totaling $125.1 million.
As a result, the Company had $224.9 million of remaining availability under our credit facility, excluding the additional $250 million accordion provision. On April 28, 2017, our Board declared a cash dividend of $0.11 per common share payable in the second quarter of 2017, a 22% increase over the prior year quarterly dividend level.
Beginning in 2018, we will adopt the updated pension guidance of the FASB issued in March of 2017. These income statement classification changes will not impact our EPS or net income, but will alter operating income and margins of the consolidated and segment levels.
Reducing what we reported operating margin in NOG by 150 basis points to 200 basis points. We provided a few more details in yesterday’s 10-Q filing.
Now I hand the call over to Rex for a discussion of the segment operations and the outlook for the remainder of 2017. Rex?
Rex Geveden
Thank you, David and good morning. John and David have already discussed our accomplishments to start the new year and I now will provide some additional operating details from the first quarter.
First, as we discussed we had impressive revenue and operating margins in the first quarter. These improvements are due principally to strong results in our Nuclear Operations and Nuclear Power Groups.
We are beginning to see a positive manifestation of our growth strategy in Canada organically and in the acquired business. As anticipated, we are realizing very good cost synergies from the acquisition of the BWXT NEC business, and we expect to see significant revenue synergies in the future.
This is underscored by NPG segment operating margins inclusive of amortization of intangibles of nearly 18% in the first in the first quarter. Nuclear Operations delivered strong operating margins of over 22% upon adoption of the pension accounting change in 2018 that David mentioned earlier, we anticipate that we will continue to have 200 basis points to 300 basis points of pension benefit for several years in that segment.
NOG also realized a revenue increase of about 10% as compared to the first quarter of 2016, which was our lowest revenue quarter last year. We continue to perform well on our Missile Tube contracts and as we announced last week, we were awarded a $76 million Block II contract in the first quarter to build additional Common Missile Compartment or CMC missile tube assemblies.
The CMC missile tubes, which weigh over 50 tons each will be used on both the U.S. Columbia Class and the UK Dreadnought Class strategic nuclear submarines.
To date BWXT has been awarded approximately half of the available missile tube work and we continue to project the market share up 60% as we move toward full rate production. We are investing in manufacturing facilities to support this additional work including dedicated production facility at our Mount Vernon, Indiana site.
We continue to rationalize and realign our Nuclear Services Group, in order to improve its performance and address that market more competitively. U.S.
Nuclear Service volume was softer in Q1, mainly due to seasonality and cyclicality. However, we still expect overall outage volume for 2017 to be at least the strong as it was in 2016.
Timing delays and advance reactor programs contributed to depressed performance in the NSG business in the first quarter. Furthermore, Department of Energy management and operations contract awards have been delayed, likely due to the presidential transition.
However, we remain confident of our ability to gain share in this market based upon our history and unique value proposition in all aspects of Nuclear Operations and Nuclear Environmental Management. We booked approximately $365 million of new orders in the first quarter of 2017, of which $245 million came from NOG.
As mentioned earlier, we ended the quarter with a near record level consolidated backlog of over $3.9 billion, excluding unawarded but negotiated options of an additional $800 million. We are reaffirming our previous guidance for 2017, we expect revenues to grow to the range of $1.6 billion to $1.7 billion and for adjusted earnings to be between $1.85 and $1.95 per share, including the amortization impact of the BWXT NEC acquisition and excluding any mark to market adjustments for pension and post retirement benefits.
We continue to anticipate our earnings per share compounded annual growth rate to be in the low double-digits for the three to five year period following 2017. This longer range forecast includes anticipated growth in the missile tubes, adding the larger size Columbia class production and Virginia class production remaining at two submarines per year.
Any acceleration of the pace of carrier production above the current rate of one vessel every five years or more than two Virginia class submarines per year is not included in our strategic forecast or in our CapEx guidance. However, as John mentioned earlier, we have begun planning for the possibility of accelerating the pace of aircraft carrier production, and this can be viewed as upside should it occur.
Moving forward, we will emphasize five key dimensions of our growth. First, growth in our Navy Nuclear Propulsion business based upon higher customer demand, growth in the Canadian commercial nuclear market through our NPG segment with abundant opportunities in reactor servicing and refurbishment, increasing profitability of the NSG business as we regain market share, R&D driven organic growth and selective acquired growth.
We see significant opportunities in each of these areas and we will provide additional details at the appropriate time. We remain committed to a balanced capital allocation approach with a focus on investments and operational improvements that will smartly grow our business.
We are confident in our numerous organic growth prospects and we will continue to invest capital to support these opportunities. We are also actively working our M&A pipeline and see multiple opportunities that maybe actionable.
To make sure we are maximizing value for our shareholders, returns on these growth focused investments will continue to be evaluated against share repurchases and other capital investment options. We have $193 million remaining in share repurchase authorization in order to maintain optionality and support opportunistic share repurchases over the next three years.
To conclude, we had a strong first quarter due both to operational performance and the impact of some project timing. We remain committed to our previous full year guidance and optimistic about the strategic opportunities developing.
Looking beyond 2017, our strategic plan will guide us toward additional growth opportunities that fit our strength and increased options to participate in the markets we are currently serving and potential adjacent markets. We remain very well positioned to serve our customers and address market needs, and we are prepared to face the growth challenges that lie before us.
That concludes our prepared remarks. I will now turn the call back over to the operator, who will assist us in taking your questions.
Operator
Yes, thank you. We will now begin the question-and-answer session.
[Operator Instructions] And the first question comes from Pete Skibitski with Drexel Hamilton.
Pete Skibitski
Hey, good morning guys.
Rex Geveden
Good morning, Pete.
Pete Skibitski
I guess, I’ll start off just – I want to make sure I understand this $30 million cash payment to Bechtel. Does that fully end – did you say, I think, you mentioned David, does that fully end the mPower agreement or is that just part of kind of change over to the lower kind of R&D framework going forward.
David Black
Okay, remember that we did framework agreement last year and took the financials for it. And this $30 million payment now completes that framework agreement with Bechtel.
The IP is now ours. We go forward with that IP, so it’s done.
Pete Skibitski
Okay, okay. And the R&D profile will remain the way it’s been the last few quarters?
Rex Geveden
Yes. So Pete, this is Rex.
We will be winding down the mPower program in an orderly fashion. We do have an R&D program funded at a low level continuing into the future.
Pete Skibitski
I see. Okay.
That’s helpful. I guess I’ll ask you, there has been a lot of color out there on aircraft carrier acceleration and Virginia work and stuff like that.
There’s also a lot of articles out there in terms of the need to repair the fleet – the naval fleet and increases in O&M budget and that sort of stuff. Just wonder if you guys clarify for us your exposure to the O&M budget?
I mentioned it’s minority of your work, but to what extent do you – the thing that you do can the U.S. Navy require your repair work, spare parts-type work.
I don’t know if you have any exposure to aircraft carrier reco-type work. Could you just give us some color on that?
Rex Geveden
Yes. So Peter, yes, our exposure to the O&M budget is pretty limited.
We’re generally delivering new components, cores, pressurizers, steam generators and such. So we don’t generally do much sustaining, engineering or parts replacement for the operating fleet.
Pete Skibitski
Okay, okay. I will then ask just one more and I’ll get to the – back the queue.
One thing I’m trying to figure out is the extent to which you are going to have R&D work on the Columbia Class versus production work? And then I’m just trying to figure out the timing of each maybe how if you do have R&D, how long that would last?
And then on the production work, when that may start, when that might end? I know GD sort of a scheduled to begin production I think around 2020, 2021.
I don’t know if is you’re production work done by them or half done by them. Could you just give us a little more fidelity in terms of the timing of your work on the Columbia?
David Black
Sure, Pete. So if you look at the shipbuilding schedule, it shows that first Columbia holding order in 2021.
As we often say, you need to think of that as advancing two years in terms of the long-lead for us in components that we provide. So the clock starts for us about two years prior to that, which means we would be in development production.
Sorry, we would be in production in 2019. We have been funded for Columbia production developmental work over the past couple of years at low level.
So we’re preparing for production right now, but we’ll go fully into production in 2019.
Pete Skibitski
Okay. And then would you finish up by 2021?
Or would you go to may be a year or 2 before GD – I think GD finished just…
David Black
Yes. No, that production work for a particular ships that goes on for many years.
And then the other work in the future layers up on top of that. So think of it as being multiple years once the orders has given and we will deliver several years after that.
Pete Skibitski
Got it, okay. It’s very helpful.
Thanks, guys.
Operator
Thank you. And the next question comes from Tate Sullivan with Sidoti.
Tate Sullivan
Hi, hi. Thank you, good morning.
A couple from me. Just can you point to I mean we have all read increased cadence of aircraft carriers and more submarines.
But I have always discounted the comments about building more aircraft carriers, but what – between your last earnings call and this earnings call, what I think its incrementally your confers eight year discussion about aircraft carrier a higher cadence. So what did you see just or talking about more this quarter?
John Fees
Well. This is John.
We’ve continued to get information from – emanating from Congress with the need to increase the cadence of aircraft carriers. I think there is a – that there is a concern that it has been existing.
It’s been a bipartisan concern going back to the Obama administration about submarines. And I think world events as they exist have continued to drive the thought into aircraft carriers as well.
I think there is a general feeling that we’re a little bit under shipped right now in many of these areas and I believe that there’s got to be some increases on the horizon beyond some of the things that we are currently assumed on our forecast. That being said, we’ve got to get – Congress needs to get itself together.
They have to figure out what they’re going to fund and how they’re going to fund it. But I think there’s broad-based general support to do more.
We’re just going to have to see what that turns into and aircraft carriers are firmly in that conversation right now.
Tate Sullivan
Okay. You listed and it’s everyone, thank you.
Is on you listed yourfive areas of growth and if you compare, I mean what’s more meaningful to you, do you look at relative, I mean the missile tube growth opportunity versus the commercial regular work you can do out of Canada?
Rex Geveden
Yes. So I mean – yes, its – we have got tailwinds in just about every market we’re participating in, Tate.
Naval reactor work that we do, obviously lots of momentum there. We really like with our position in Canada.
We’re well positioned on missile tubes. I’m repeating a little bit, but our organic R&D opportunities are going to become interesting.
So we’re happy to be participating in all those robust markets right now.
Tate Sullivan
Okay, thank you. I’ll get back in queue.
Thanks.
Operator
Thank you. And the next question comes from Bob Labick with CJS.
Pete Lucas
Hi, good morning. It’s Pete Lucas for Bob.
Just a question, when you guys gave guidance in February, you expected NOG guidance to be flat. Looking at the 10-Q, it appears an increase in 2017 revenue there.
Just wondering if that was related to anything specific that you can talk on?
David Black
Our NOG business, we more or less, there is some growth in there. The revenues because of the savings we get in the contract.
There is adjustments. How that goes into the revenues and as we get savings, the revenues are be booked, if bookings are to be booked that we get less revenue.
So on a ongoing basis, there’s not a lot of growth even though there’ is some savings build and then we will continue to say at this point in time, that of the $1.6 billion to $1.7 billion that we are projecting that NOG’s portion of that will be reasonable to what it’s been in the past. Even though timely on the quarters, there could be some variation to make you think that it’s climbing.
Pete Lucas
Helpful, thanks. And last one from me.
In terms of the missile tubes, given your most recent award, how long does it take for this work to run and about when would you expect to hear about the next awards, in terms economic?
David Black
Yes. So we build these missile tubes over a period of 2 years to 3 years.
And what we expect to see happen in the future, Pete, is to see the customer go to 100 probably on the order of 100 tube block buys in 3 separate blocks. And we will start to see some request information on that this year.
We are seeing it in fact and we anticipate a contract award sometime in 2018 for that first block of about 100 missile tubes.
Pete Lucas
Helpful. That’s it for me.
Thanks.
Operator
Thank you. And the next question comes from Nicholas Chen with Alembic.
Nicholas Chen
Hi guys, congrats on the great quarter and thanks for taking our questions this morning.
David Black
Okay.
Nicholas Chen
It seems like the Nuclear Energy Canada acquisition is off to a solid start. So can you just provide some additional details around the integration of that business and whether there has been any surprises to the upside versus downside from your initial expectations?
David Black
Yes. So far the integration is going very smoothly.
We’ve got a fully integrated organization. And we – our strategy on that business was obviously to go after the cost synergies that we could get straightaway.
And so that’s where we’ve been focused on in this first year and we’re starting to see some of the benefits of that right now. So the cost synergies are going well.
There are strategic synergies around that business. Frankly, we wouldn’t have acquired that business if there weren’t significant strategic synergies or revenue synergies, and those are related to the refurbishment activities that are going on at both the Bruce Power site and at the Ontario Power Generation, Darlington site.
So with the acquisition of that business, we have opportunities to do work in detube and retube feeder replacements and things like that that might have been less available to us before. And so that’s where we see some of the future year growth, but as of right now the business is operating very well.
We’re taking cost synergies into fully integrated from an organizational perspective, and I think frankly exceeding our expectations a bit up to this point.
Nicholas Chen
Okay, great. And then just finally, it seems like every quarter we’re seeing more NASA work in the press releases.
Can you just give us an idea of what type of work you’re doing there? And the sort of opportunity you think that might extend into over the next several years?
David Black
Sure. So we’re exposed to NASA in two parts of our portfolio.
One is in our Nuclear Services Group. We have a management and operations contract with NASA that’s called SACOM.
And basically that’s to run the sites that NASA has rocket engine testing facility in Stennis, Mississippi and also the large manufacturing facility in Michoud, Louisiana. So that’s kind of like our Department of Energy management and operations contract where we do.
We do all kinds of things on behalf of the client. They are running their site.
And those are both pretty interesting and pretty exciting sites with some growth in them. It’s not a big income driver for us, but it’s strategically kind of interesting.
The other part of it is, is NASA, is working now on its architectural options for a manned mission to Mars, which would occur sometime in the current timetables late in the 2030s. But, of course, the systems development actually will begin sometime in early 2020s.
And so NASA is going through these trade studies right now to look at what kind of propulsion architecture, what kind of vehicles to build, and so forth. And one of the options is to power the spacecraft with the in-space propulsion system with nuclear thermal propulsion it’s called and there are other options available too.
So NASA is looking pretty hard at that. It’s a very efficient form of propulsion, a very high energy density and very many advantages in terms of how quickly to get to Mars and back.
So we’re right in the middle of doing the Nuclear Thermal Propulsion work with NASA. We’re doing field design and core design.
It’s not a significant part of our portfolio at this time, but we could see it growing into a significant program for us should it continue with its current momentum. I’ll mention that the omnibus appropriation bill that just got passed has $35 million for NTP, Nuclear Thermal Propulsion.
We should see a fair chunk of that funding as it dribbles down through the system. The President’s request was $7 million by the way.
So that’s a quite an upper. So that’s a pretty encouraging sign for us and maybe to start of a substantial program.
Nicholas Chen
That’s great. Thank you so much guys.
Operator
Thank you. And the next question comes from Ron Epstein with Bank of America Merrill Lynch.
Kristine Liwag
Hey, good morning, guys. It’s Kristine Liwag calling in for Ron.
Rex Geveden
Good morning.
Kristine Liwag
For the CMC missile tube business, I was wondering can you provide a little bit more color on the differences between the Columbia class program and the UK Dreadnought Class program. Is there a difference in the procurement process, and also the competitive environment?
Rex Geveden
So, yes, this is Rex. I’ll comment on that.
We are selling to a single client. The government is procuring that stuff through GD Electric Boat.
So you can kind of look at their press releases to see what happens in that market. But we don’t – that interface is not visible to us because obviously the Dreadnought stuff is going through a foreign military sales mechanism.
So it’s – from our perspective, that’s kind of a generic – that’s a generic set of customers. We build the missile tubes and then get delivered.
Kristine Liwag
I guess, to clarify for that, would Babcock also be able to bid for the Columbia class?
Rex Geveden
Yes.
Kristine Liwag
Great. And on the $142 million contract you received last week.
Is that fully reflected into your 2017 outlook, and also, for you to raise your full year 2017 outlook. Are there specific contracts that we should watch?
Rex Geveden
So the $142 million contract was funding for a contract that had been negotiated in prior year. So we anticipated that it fits our growth profile and fits clearly into the guidance that we provided at the beginning of the year and just reiterating.
Kristine Liwag
And the second part of the question on the full year outlook.
David Black
There really are – we’re really not opportunity driven in our forecast right now. The majority of the work that drives our forecast is in backlog at this particular point in time.
Certainly, we have some things that we’re looking forward to and that will factor into with our operational performance, how we see guidance evolving during the year. But right now, I would say that we’re not opportunity driven in our guidance at this point.
Kristine Liwag
Great, thank you.
Operator
Thank you. And the next question comes from Michael Ciarmoli with SunTrust.
Michael Ciarmoli
Hey, good morning guys. Nice quarter, thanks for taking my questions.
Just two on this – on the Nuclear Services unit. Correct me if I’m wrong, I think when you acquired the GE-Hitachi, it might have been a $90 million run rate per the 10-Q.
It looks like you’ve got $26.6 million. Is it performing better than expected?
I mean, I know you are talking about cost synergies, but revenue run rate seems to be up. Are you – just if you can comment on sort of the business as a whole, how it’s performing on a revenue side?
Rex Geveden
Yes. So, I think there weren’t any real surprises on the revenue side.
That business has got some steady revenues related to the fuel deliveries that we do. About half of that business is fuel.
About half of that business is fuel deliveries, robotic systems and fuel channel diagnostic robotic systems. And so, there is some nice recurring revenue streams in that business.
It’s fairly predictable, and that’s one of the reasons that we like it. So I don’t think we had any surprises in Q1 on the revenue side now.
On the bottom line, as I said earlier, I think that business is performing a bit better than we expected. Our cost synergies have been – we’ve been realizing very good cost synergies.
And so it looks good from that perspective.
Michael Ciarmoli
Yes. That’s a good segment.
And the next question, I think you put up 17.8% margin. It sounds like with the amortization, they were probably up over 20%.
But I think, you are still guiding to 10% margins. I mean, how should we think about the margin profile on that business going forward?
It would seem like if you’re getting the cost synergies and the predictability of this business, there would be some room for some maybe meaningful upside in margins there?
David Black
I mean, I think as we look at the margins, we were – as we look that the acquisitions, pre-acquisition we are talking about impacted, we are always aware of the – amortization of the intangibles. So I think, we’re showing that the business has been a great acquisition.
We are doing well with the synergies in the business coming out with the beginning of the year guidance, saying, we are including all of that inside of what we’re now saying at 10% margins. Obviously, the business as we continue to refine it and continue to transition over time.
We know, there’s opportunities in there, but that’s part of our outlook for the future as we go forward. So we hopefully can increase those.
Michael Ciarmoli
Got it. But, I mean, would there be as we move into the sequential quarter.
I mean, it’s sounds like you are forecasting the business based on backlog. I mean, is there any lower-margin work that you see in the remaining quarters or any different mix profile that would skew the margin from where it was in the first quarter?
David Black
Just like the old BWXT Canada there is mix and the mix has different margins. There’s outages up there just as we have inside of any NSG work here.
So that can vary during the year. So yes, in the margin mix could be different.
Rex Geveden
Recognize where we are, we’re at quarter end. And can we continue to do more with this business.
We believe so. That’s why we bought it.
Would we include that in the guidance at this particular point in time, I don’t think so. So just recognize that we’re still at an early stage on this and continuing to develop our long-term thinking relative to what we will do with the business.
Obviously, we think we can do that stabilizes.
Michael Ciarmoli
Yes. That’s totally fair.
And then just last one I’ll get out of the way here. I think I heard two numbers on the pension accounting that the operating margin would have been down 150 basis points to 200 basis points, once you adopt the new guidance.
Was that for 2018? And then I also heard 200 basis points to 300 basis points of pension benefit going forward, just if you can kind of clarify that.
David Black
So, we got out of the pension business more or less in 2015 at the end. So last year, because the service cost went down, we were able to recognize operating income for pension.
Now the government has said that we are going to take the elements of the – the return on the assets and the liability, the interest expense, I’m going to take that out of operating margin and we’re going to put that into other. So the 150 basis points to 200 basis points is more or less that income coming out, the pension income coming out and it’s going to not change our EPS or net income, but it’s going to come out causing the operating margins to go down in NOG.
But then we said what’s still remaining inside of the NOG is the 200 basis points to 300 basis points of FAS/CAS differential, is the other pension benefit that we’re still carrying. And that’s coming from the fact that we have been overfunding the pension plan early on.
We’re not funding it over now, we are just doing aggressive funding, but we are funding it over. So this is the catch up of the government that’s adding to those margins in the side of NOG.
That will continue to happen for the 200 basis points to 300 basis points for the next few years.
Michael Ciarmoli
Got it, that’s help. All right, I’ll jump back in the queue.
Thanks, guys.
David Black
Thanks.
Operator
Thank you. And the next question is a follow-up from Tate Sullivan with Sidoti.
Tate Sullivan
Hi, thank you for taking my follow-up. An another follow-up on Nuclear Power Group.
I mean, I could see in your queue, acquisition related revenues $26.6 million. So you have been backing that out.
You had good year-over-year growth in your Nuclear Power business. Was there any – I remember, maybe it was two years ago or last year you talked about the China Boiler project.
Was there any large project within the income this quarter?
David Black
No, I don’t think there was any specific project. It’s just – I think there’s synergy, it’s somewhat how could you taken now the acquisition, you put it in BWXT Canada and it’s somehow – somewhat hard take it and separate the two out again, because of the synergies and how you are recording things.
So I think it’s just overall improvement in BWXT Canada along with the acquisition doing great.
Tate Sullivan
Okay. Thank you.
And then the last one for me, I think you said earlier that the Mount Vernon facility will be now a dedicated facility to missile tubes. Is that correct?
And what change from what it was doing before?
Rex Geveden
No, that’s not correct.
Tate Sullivan
Okay.
Rex Geveden
The Mount Vernon facility mix, the historical purpose was to make large components for our naval reactors program. And it’s certainly will continue to do that.
What we have done is, we were making missile tubes in part of that facility and we’re completely refurbishing a separate building on that site, which will be dedicated to missile tube production. So the traditional work continues and missile tubes get added.
Tate Sullivan
Okay, wonderful. Great, thank you.
Have a great rest of the day.
Rex Geveden
Thank you.
David Black
Thank you, Tate.
Operator
Thank you. This concludes our question-and-answer session.
I’d like to turn the conference back over to Mr. Alan Nethery for closing remarks.
Alan Nethery
Thank you for joining us this morning. That concludes our conference call.
A replay of this call will be posted on our website later today, will be available for a limited time. If you have further questions, please call me at 980-365-4300.
Thank you.
Operator
Thank you. The conference is now concluded.
Thank you for attending today’s presentation. You may now disconnect.