BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

We have presented the condensed consolidated financial statements of BWX Technologies, Inc. ("BWXT" or the "Company") in U.S. dollars in accordance with the interim reporting requirements of Form 10-Q, Rule 10-01 of Regulation S-X and accounting principles generally accepted in the United States ("GAAP"). Certain financial information and disclosures normally included in our financial statements prepared annually in accordance with GAAP have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and notes in our annual report on Form 10-K for the year ended December 31, 2017 (our "2017 10-K"). We have included all adjustments, in the opinion of management, consisting only of normal recurring adjustments, necessary for a fair presentation.

We use the equity method to account for investments in entities that we do not control, but over which we have the ability to exercise significant influence. We generally refer to these entities as "joint ventures." We have eliminated all intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform to the presentation at June 30, 2018 and for the three and six months ended June 30, 2018 related to recently adopted accounting standards. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.

Unless the context otherwise indicates, "we," "us" and "our" mean BWXT and its consolidated subsidiaries.

Reportable Segments

We operate in three reportable segments: Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group. Our reportable segments are further described as follows:

•

Our Nuclear Operations Group segment manufactures naval nuclear reactors for the Naval Nuclear Propulsion Program for use in U.S. Navy submarines and aircraft carriers. Through this segment, we own and operate manufacturing facilities located in Lynchburg, Virginia; Barberton, Ohio; Mount Vernon, Indiana; Euclid, Ohio; and Erwin, Tennessee. The Lynchburg operations fabricate fuel-bearing precision components that range in weight from a few grams to hundreds of tons. In-house capabilities also include wet chemistry uranium processing, advanced heat treatment to optimize component material properties and a controlled, clean-room environment with the capacity to assemble railcar-size components. The Barberton and Mount Vernon locations specialize in the design and manufacture of heavy components inclusive of development and fabrication activities for submarine missile launch tubes. The Euclid facility fabricates electro-mechanical equipment and performs design, manufacturing, inspection, assembly and testing activities. Fuel for the naval nuclear reactors is provided by Nuclear Fuel Services, Inc. ("NFS"), one of our wholly owned subsidiaries. Located in Erwin, NFS also downblends Cold War-era government stockpiles of high-enriched uranium into material suitable for further processing into commercial nuclear reactor fuel.

•

Our Nuclear Services Group segment provides various services to the U.S. Government and the commercial nuclear industry. Services provided to the U.S. Government include nuclear materials management and operation, environmental management and administrative and operating services for various U.S. Government-owned facilities. These services are provided to the U.S. Department of Energy ("DOE"), including the National Nuclear Security Administration ("NNSA"), the Office of Nuclear Energy, the Office of Science and the Office of Environmental Management, and NASA. Through this segment we deliver services and management solutions to nuclear and high-consequence operations. A significant portion of this segment's operations are conducted through joint ventures.

Our Nuclear Services Group segment also provides inspection and maintenance services primarily for the U.S. commercial nuclear industry including steam generator and heat exchanger inspection services, high pressure water lancing, non-destructive examination and customized tooling solutions. This segment also offers complete advanced fuel and reactor engineering, licensing and manufacturing services for new advanced nuclear reactors.

•

Our Nuclear Power Group segment fabricates steam generators, nuclear fuel, fuel handling systems, pressure vessels, reactor components, heat exchangers, tooling delivery systems and other auxiliary equipment, including containers for the storage of spent nuclear fuel and other high-level waste, for nuclear utility customers. BWXT has supplied the nuclear industry with more than 1,300 large, heavy components worldwide and is the only heavy nuclear component, N-Stamp certified manufacturer in North America. This segment also provides specialized engineering services that include structural component design, 3-D thermal-hydraulic engineering analysis, weld and robotic process development, electrical and controls engineering and metallurgy and materials engineering. In addition, this segment offers in-plant inspection, maintenance and modification services for nuclear steam generators, heat exchangers, reactors, fuel handling systems and balance of plant equipment, as well as specialized non-destructive examination and tooling/repair solutions.

See Note 9 for financial information about our segments.

Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the consolidated financial statements and the related footnotes included in our 2017 10-K.

Acquisition of Sotera Health LLC's Nordion Medical Isotope Business

On April 17, 2018, we signed a definitive agreement to acquire Sotera Health LLC's Nordion medical isotope business. Nordion's medical radioisotopes business is a leading global manufacturer and supplier of critical medical isotopes and radiopharmaceuticals for research, diagnostic and therapeutic uses. Its customers include radiopharmaceutical companies, hospitals and radiopharmacies. Its primary operations are located in Kanata, Ontario and Vancouver, British Columbia. This acquisition was completed on July 30, 2018 and will allow us to accelerate our entry into the medical radioisotope market by adding licensed infrastructure, approximately 150 highly trained and experienced personnel and two production centers. Beginning in the third quarter of 2018, this business will be reported as part of our Nuclear Power Group segment.

Deconsolidation of Generation mPower LLC

On March 2, 2016, we entered into a framework agreement with Bechtel Power Corporation ("Bechtel"), BWXT Modular Reactors, LLC and BDC NexGen Power, LLC for the potential restructuring and restart of our mPower small modular reactor program (the "Framework Agreement"). As a result of entering into the Framework Agreement, we deconsolidated Generation mPower LLC ("GmP") from our financial statements as of the date of the Framework Agreement and recognized a $30.0 million loss contingency, which was ultimately paid to Bechtel in the first quarter of 2017 following the receipt of Bechtel's notice that the mPower program would not be restarted.

Contracts and Revenue Recognition

We generally recognize contract revenues and related costs over time for individual performance obligations based on a cost-to-cost method in accordance with Financial Accounting Standards Board ("FASB") Topic Revenue from Contracts with Customers. We recognize estimated contract revenue and resulting income based on the measurement of the extent of progress toward completion as a percentage of the total project (percentage-of-completion basis). Certain costs may be excluded from the cost-to-cost method of measuring progress, such as significant costs for uninstalled materials, if such costs do not depict our performance in transferring control of goods or services to the customer. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. Certain of our contracts recognize revenue at a point in time, and revenue on these contracts is recognized when control transfers to the customer. The majority of our revenue that is recognized at a point in time is related to parts in our Nuclear Power Group segment. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined.

Accumulated Other Comprehensive Income

The components of Accumulated other comprehensive income included in Stockholders' Equity are as follows:



	June 30, 2018			December 31, 2017
	(In thousands)
Currency translation adjustments	$	6,415		$	13,148
Net unrealized gain on derivative financial instruments	384			353
Unrecognized prior service cost on benefit obligations	(5,452		)	(6,237		)
Net unrealized gain (loss) on available-for-sale investments	(99		)	2,190
Accumulated other comprehensive income	$	1,248		$	9,454

Upon adopting the FASB update to the Topic Financial Instruments, we reclassified $2.2 million of net unrealized gains on available-for-sale investments from Accumulated other comprehensive income to Retained earnings on January 1, 2018.

The amounts reclassified out of Accumulated other comprehensive income by component and the affected condensed consolidated statements of income line items are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Accumulated Other Comprehensive Income (Loss) Component Recognized	(In thousands)												Line Item Presented
Realized gain (loss) on derivative financial instruments	$	7		$	(9	)	$	(4	)	$	(13	)	Revenues
	(92		)	237			28			291			Cost of operations
	(85		)	228			24			278			Total before tax
	21			(58		)	(9		)	(71		)	Provision for Income Taxes
	$	(64	)	$	170		$	15		$	207		Net Income
Amortization of prior service cost on benefit obligations	$	(488	)	$	(446	)	$	(993	)	$	(892	)	Other – net
	25			157			208			313			Provision for Income Taxes
	$	(463	)	$	(289	)	$	(785	)	$	(579	)	Net Income
Realized gain on investments	$	—		$	126		$	—		$	148		Other – net
	—			(6		)	—			(14		)	Provision for Income Taxes
	$	—		$	120		$	—		$	134		Net Income
Total reclassification for the period	$	(527	)	$	1		$	(770	)	$	(238	)

Inventories

At June 30, 2018 and December 31, 2017, included in Other current assets, we had inventories totaling $11.7 million and $8.6 million, respectively, consisting entirely of raw materials and supplies.

Deferred Debt Issuance Costs

We have included deferred debt issuance costs in the condensed consolidated balance sheets as a direct deduction from the carrying amount of our Long-Term Debt. We amortize deferred debt issuance costs as interest expense over the life of the related debt. The following summarizes the changes in the carrying amount of our deferred debt issuance costs.



	Six Months Ended June 30,
	2018			2017
	(In thousands)
Balance at beginning of period	$	4,202		$	5,892
Additions	9,443			—
Interest expense ⁽¹⁾	(3,273		)	(850		)
Balance at end of period	$	10,372		$	5,042


(1)	Includes the recognition of prior deferred debt issuance costs associated with the Former Credit Facility of $2.4 million for the six months ended June 30, 2018.

Restricted Cash and Cash Equivalents

At June 30, 2018, we had restricted cash and cash equivalents totaling $8.5 million, $2.6 million of which was held for future decommissioning of facilities (which is included in Other Assets on our condensed consolidated balance sheets) and $5.9 million of which was held to meet reinsurance reserve requirements of our captive insurer.

The following table provides a reconciliation of cash and cash equivalents and restricted cash and cash equivalents within our condensed consolidated balance sheets to the totals presented in our condensed consolidated statement of cash flows:



	June 30, 2018		December 31, 2017
	(In thousands)
Cash and cash equivalents	$	317,624	$	203,404
Restricted cash and cash equivalents	5,870		7,105
Restricted cash and cash equivalents included in Other Assets	2,647		2,635
Total cash and cash equivalents and restricted cash and cash equivalents as presented in our condensed consolidated statement of cash flows	$	326,141	$	213,144

Warranty Expense

We accrue estimated expense, included in Cost of operations on our condensed consolidated statements of income, to satisfy contractual warranty requirements when we recognize the associated revenue on the related contracts. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.

The following summarizes the changes in the carrying amount of our Accrued warranty expense:



	Six Months Ended June 30,
	2018			2017
	(In thousands)
Balance at beginning of period	$	13,428		$	11,477
Additions	810			667
Expirations and other changes	(709		)	(84		)
Payments	(347		)	(16		)
Translation	(360		)	173
Balance at end of period	$	12,822		$	12,217

Provision for Income Taxes

We are subject to federal income tax in the U.S. and Canada as well as income tax within multiple U.S. state jurisdictions. We provide for income taxes based on the enacted tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions may have regimes of taxation that vary with respect to nominal rates and with respect to the basis on which these rates are applied. This variation, along with changes in our mix of income within these jurisdictions, can contribute to shifts in our effective tax rate from period to period.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was enacted, making significant changes to existing U.S. tax laws that impact BWXT, including, but not limited to, a reduction to the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, the taxation of global intangible low-taxed income ("GILTI") and additional deduction limitations related to executive compensation. We recognized the income tax effects of the Act within our condensed consolidated financial statements in accordance with FASB Topic Income Taxes. Our Canadian operations continue to be subject to tax at a local statutory rate of approximately 25%.

Our effective tax rate for the three months ended June 30, 2018 was 23.3% as compared to 30.6% for the three months ended June 30, 2017. Our effective tax rate for the six months ended June 30, 2018 was 22.6% as compared to 30.6% for the six months ended June 30, 2017. The effective tax rates for the three and six months ended June 30, 2018 were slightly higher than the U.S. corporate income tax rate of 21% primarily due to state income taxes within the U.S. and the unfavorable rate differential associated with our Canadian earnings. Our effective tax rate for the three months ended June 30, 2018 and 2017 was favorably impacted by benefits recognized for excess tax benefits related to employee share-based payments of $0.2 million and $2.6 million, respectively. Our effective tax rate for the six months ended June 30, 2018 and 2017 was favorably impacted by benefits recognized for excess tax benefits related to employee share-based payments of $2.4 million and $4.9 million, respectively.

As of June 30, 2018, we had gross unrecognized tax benefits of $0.8 million (exclusive of interest and federal and state benefits), all of which would reduce our effective tax rate if recognized.

New Accounting Standards

In February 2016, the FASB issued an update to the Topic Leases, which supersedes the lease reporting requirements in Topic Leases (previously "FAS 13"). This update requires that a lessee recognize on its balance sheet the assets and liabilities for all leases with lease terms of more than 12 months, along with additional qualitative and quantitative disclosures. The effect of leases in a consolidated statement of income and a consolidated statement of cash flows is expected to be largely unchanged. Accounting by lessors was not significantly impacted by this update. This update will be effective for us in 2019, with early adoption permitted. We expect to adopt the provisions in this update effective January 1, 2019 using the modified retrospective approach. We do not anticipate a material impact on our financial statements upon adoption.