Research: Rating Action: Moody’s Confirms BWXT’s Ba2 CFR; the outlook has changed from negative to stable

New York, October 13, 2022 — Moody’s Investors Service (“Moody’s”) has affirmed the ratings of BWX Technologies, Inc. (“BWXT”), including its Ba2 Corporate Family Rating (CFR) and Ba3 senior unsecured ratings. Simultaneously, Moody’s raised BWXT’s speculative liquidity rating (SGL) from SGL-2 to SGL-3 and changed the outlook from negative to stable.

The stabilization of the outlook and the improvement in the SGL rating mainly reflect the increased liquidity of BWXT following the expiration of part of the company’s revolver, as well as the extended duration of the revolving credit facility. These metrics also reflect Moody’s expectations for near-term improvements in free cash flow as the company’s capital expenditures will continue to decline after a multi-year investment cycle.

The ratings affirmation reflects these factors, as well as the inherent predictability of the company’s core nuclear propulsion business, extremely high barriers to entry and BWXT’s single-source position in a general growth industry.

Here is a summary of today’s rating actions:

Updates :

..Issuer: BWX Technologies, Inc.

…. Speculative liquidity rating, upgrade to SGL-2 from SGL-3

Statement:

..Issuer: BWX Technologies, Inc.

…. Business family ranking, confirmed Ba2

…. Default rating probability, confirmed Ba2-PD

….Senior Regular Unsecured Bond/Debenture, Confirmed Ba3 (LGD5)

Outlook Actions:

..Issuer: BWX Technologies, Inc.

….Outlook, changed to stable from negative

RATINGS RATIONALE

BWXT’s Ba2 Corporate Family rating reflects the company’s unique position as the sole supplier of nuclear propulsion systems for US Navy submarines and aircraft carriers. BWXT has a large backlog ($4.7 billion as of June 2022) which provides good long-term revenue visibility. BWXT is expanding into its commercial operations segment which serves, among others, nuclear energy, medical and radiopharmaceutical customers. These diverse end markets present good growth opportunities, although BWXT’s focus on new markets comes with execution risk and has required significant up-front capital investments. Moreover, even if the company succeeds in these end markets, the company will remain relatively small overall and highly dependent on one customer (the US Navy) with revenue generated from a limited number of ship platforms. .

Moody’s expects BWXT to maintain relatively robust credit metrics with a debt to EBITDA ratio of 3.5x in June 2022. Over the next few years, Moody’s expects significant improvements in BWXT’s cash generation as the he company is moving from an investment cycle to a cash generation cycle. BWXT has made nearly $1 billion in cumulative capital investments between 2019 and 2022, split roughly 50/50 between naval reactor investments and the medical radioisotope business. In 2023 and beyond, Moody’s anticipates a significant reduction in capital spending. This should result in a mid single digit FCF/debt ratio in 2023 and a near high single digit FCF/debt ratio in 2024.

The SGL-2 speculative liquidity rating indicates that Moody’s expects good liquidity over the next 12 months. The company reported $67 million in cash in June 2022. Moody’s expects BWXT to generate negative free cash flow of between $30 million and $50 million in 2022, primarily due to high levels of investment in capital. Moody’s expects cash generation to improve in 2023 in the face of lower capital investments, and free cash flow (before dividends) in excess of $100 million should be achievable. Approximately 60% of BWXT’s reported debt is fixed and 40% is floating, so the company is exposed to rising interest rates. External liquidity is provided by a $750 million revolving credit facility (expected to expire in 2027) with availability of approximately $375 million (pro forma for the $250 million pending expiry of a part of the revolver). The senior credit facilities contain two maintenance-based covenants, a net leverage ratio of 4x and an interest coverage ratio of 3x. Moody’s provides comfortable cushions for these covenants.

The stable outlook reflects Moody’s expectation that free cash flow will be significantly positive in 2023 and the company will maintain at least good liquidity.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Ratings could be lowered if free cash generation does not turn materially positive in 2023. Ratings could also be lowered if the debt to EBITDA ratio remains above 3.5x, if there are additional unanticipated draws on the revolver or if the company undertakes significant share buybacks that are financed by debt.

The ratings could be upgraded if the company successfully executes its growth strategy, showing healthy returns on its recent investments. An upgrade would also be supported by a sustained return to strong free cash flow and liquidity improvements. The debt/EBITDA ratio kept below 3x could also support an upgrade.

BWX Technologies, Inc., headquartered in Lynchburg, Virginia, is a specialty manufacturer of nuclear components, primarily serving the United States Navy. The company is also involved in the commercial nuclear industry in Canada, as well as nuclear technology services to the government and commercial sectors. Revenue for the twelve months ended June 2022 was approximately $2.2 billion.

The main methodology used in these ratings is Aeronautics and Defense published in October 2021 and available on https://ratings.moodys.com/api/rmc-documents/75735. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to the jurisdiction: Ancillary services, Disclosures to the rated entity, Disclosures to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Eoin Roche
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Jessica Gladstone, CFA
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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