Transcript of BWX Technologies First Quarter 2020 Earnings Call (BWXT)

BWX Technologies (NYSE: BWXT)
2020 first quarter earnings call
May 05, 2020, 8:30 a.m. ET

Content:

• Prepared observations
• Questions and answers
• Call participants

Prepared observations:

Operator

Ladies and gentlemen, welcome to the BWX Technologies First Quarter Earnings Conference Call. [Operator instructions] Now I would like to pass the call on to our host, Mr. Mark Kratz, BWXT Director of Investor Relations. Please go ahead.

Mark Kratz – Investor Relations Director

Thanks Grant. Good morning, and thanks for joining the BWXT earnings call for the first quarter of 2020. Today I am joined by Rex Geveden, President and CEO; and David Black, senior vice president and chief financial officer. In today’s call, we will discuss certain matters that constitute forward-looking statements and involve risks and uncertainties, including those described in the safe harbor provision found in yesterday’s earnings release and BWXT SEC filings.

We will also provide non-GAAP financial measures, which are reconciled to GAAP measures in the quarterly materials. Copies of these documents, along with today’s earnings presentation, are available in the Investors section of our website. And with that, I’ll pass the call on to Rex.

Rex Geveden – President and CEO

Thanks, Mark, and good morning. Yesterday, we reported exceptional first quarter results despite a generally challenging business environment as a result of the COVID-19 health crisis. Consolidated revenues increased 30%, with all three segments growing. And earnings were $ 0.79 a share, both setting new quarterly records for BWXT.

Superior Q1 performance was led by the Nuclear Operations Group, achieved through the Columbia Class product line ramp combined with strong operating performance and recognition of contractual savings, as well as accelerated production of long lead originally anticipated in the second quarter of this year. While we are very pleased with the first quarter results, we remain highly focused on protecting the health and safety of employees. That is our top priority as we navigate through the coronavirus crisis. In the first quarter, we created a pandemic planning and response team to address the COVID-19 threat.

We update the policies, procedures, and practices necessary to respond to all aspects of the health crisis. Examples include temperature controls at factory entry points, shifting to stepping, and telecommuting where possible. Based on CDC guidance, we also provide employees with facial coverage in the workplace and continue to demand social distancing whenever possible. It is worth noting that our employees have been remarkably resilient in adapting to very significant changes in the way we do business.

We have experienced a limited number of coronavirus cases at some BWXT sites. The protocol we established to respond to these cases is quite comprehensive, and so far appears to be effective in minimizing the impact on other employees and the business. As the situation continues to evolve, we will evaluate, modify, and update our practices frequently to maintain a high level of effectiveness at all BWXT locations. As you know, the USA USA

The federal government and corresponding Canadian provincial governments have designated BWXT’s various businesses as essential, given our role in national security, energy production, and medical manufacturing. All 12 of our major operating sites are running more or less normally at this time. That said, we have experienced commercial impacts related to the coronavirus, and I wanted to offer some details at the commercial segment level. As I said earlier, the Nuclear Operations Group has had a good start to the year.

COVID-19’s impacts have been limited in this segment with no notable interruptions in business to date. We continue to contract and grow as we enter the first full calendar year of production for the Columbia class and are preparing for an incremental growth in the advanced carrier work that we secured at the end of last year. On the budget front, the House and Senate Armed Services Committees are slated to provide their margins to the President’s budget request in the coming months, and we are seeing incremental bipartisan support for a second Virginia-class submarine. in the budget discussions for fiscal year ’21. We continue to work with the Navy client on the upcoming multi-year pricing agreement, and are providing pricing information for one and two Virginia Class powertrains in fiscal ’21 government.

However, we still anticipate and are planning for the next multi-year pricing agreement to span two years, the government’s fiscal year 21 and 22, and contain content for four Virginia-class fast-attack submarines and the next missile submarine. Columbia class ballistics. We may see a scenario where the second Virginia-class submarine transport is not ordered, but the nuclear powered equipment for a second submarine is still ordered with advanced acquisition funds. This would allow the government to keep work hours balanced and take advantage of cost efficiencies through the optimized production volume for these key systems that BWXT provides for the Navy nuclear fleet. The segment of the nuclear power group has experienced the greatest impact of the COVID-19 pandemic.

Canadian utility customers are managing on-site work differently to limit staff exposure and have chosen to delay some restoration and service interruption activities until conditions improve. Additionally, we are seeing weaker demand for current medical radioisotope products as hospitals prioritize resources for COVID-19 patients. While most isotope procedures are still considered critical, doctors are scheduling fewer procedures to limit possible patient exposure to COVID-19. Finally, for NPG, the global economic consequences and lower oil prices have weakened the Canadian dollar, the result of which is to reduce that segment’s income and operating income through currency conversion.

The three previous conditions lead us to reduce the orientation of the NPG segment for the year, both from a revenue and margin perspective. From COVID’s point of view, NSG has experienced some operational impacts. Most DOE laboratory and production sites are in immensely safe conditions to limit exposure of site personnel, and we are not yet aware of the potential impact of awarding our performance fees. We are also seeing incremental delays in new awards.

For example, we now anticipate that the Hanford tank contract will occur sometime in late summer with a contract transition in the fall period. The company-wide BWXT supply chain has been resilient through the global health crisis. So far, COVID-19’s impacts have been relatively minor, and we continue to closely monitor the health of the supplier base. BWXT’s long-term business fundamentals remain strong.

The short-term trade impacts we are witnessing are generally characterized as time-related, particularly from the nuclear power group. The performance of the first quarter, combined with the current perspective of the company, leads us to reiterate the earnings guide for the year, while modifying some of the underlying components of the guide. The 2020 guide has been updated to reflect current business conditions in relation to the COVID-19 pandemic. Based on generally positive trends within our business regarding active cases and employee quarantine count, the updated guide assumes that current conditions continue through the second quarter of 2020 and return to generally normal conditions beyond that. .

Our guidance does not address worsening conditions that could extend beyond the second quarter and beyond in 2020. We will continue to closely monitor business activity across the company and provide investors with significant updates as appropriate. And with that, I’ll pass the call on to David.

David Black – Senior Vice President and Chief Financial Officer

Thanks, Rex, and good morning. Starting with the company’s total results on Slide 5 of the earnings presentation. First quarter revenue established a new high watermark at $ 542 million, 30% more on a consolidated basis, with all segments growing. First quarter non-GAAP EPS also posted a record $ 0.79.

EPS increased 55% compared to the first quarter of 2019, of which the majority came from $ 0.27 in operating volume and contractual improvements. Other favorable income and expenses were partially offset by a higher tax rate of 23.2%. A quarter-by-quarter bridge can be found on Slide 6 of the presentation. Go to segment results on Slide 7.

The nuclear operations group delivered a record quarter with revenues of up to 39% at $ 424 million. We continue to see higher production volume for the Columbia class and also some accelerated material purchases in the first quarter. NOG’s operating income was $ 90 million, resulting in an operating margin of 21.3%. This increased significantly compared to the first quarter of 2019 as a result of higher volume and favorable contract adjustments as we recognize savings and efficiencies.

The nuclear power group produced $ 88 million in revenue in the first quarter, an increase of 4% compared to the first quarter of last year, driven primarily by the acquisition of Laker Energy and increased component manufacturing, partially offset by a less field service activity. Without the acquisition, organic NPG revenue fell about 2%. NPG’s first quarter non-GAAP operating income was $ 8.6 million, resulting in a non-GAAP operating margin of 9.8%. Operating income and margin decreased compared to the first quarter of 2019 due to an unfavorable change in the product line mix, including the absence of the China steam generator project.

And finally, the nuclear services group generated operating income of $ 6.4 million in the first quarter, an increase of $ 4.8 million compared to the prior year period as a result of lower expenses and a higher volume of commercial nuclear services than USA USA And advanced technology programs. Turning now to the orientation on Slide 8. As Rex mentioned during his opening remarks, we are reiterating our consolidated orientation for 2020.

Revenue is still expected to increase approximately 8% with earnings of approximately $ 2.80 per share. Although we had an exceptional first quarter, we reiterate that our expected earnings for the year are still slightly weighted in the past half, with approximately a 48-52 split in the first half versus the second half. As a result, the second quarter was the lowest point of the year due to the acceleration of long lead material production in Q1 and delays in COVID-19 service disruption impacting NPG. We have updated some of the underlying components of our 2020 guidance to reflect the impact and risks related to COVID-19, as well as some actions we are taking to optimize costs.

Nuclear power group revenue is now expected to decrease slightly or about 1% as Canadian utility customers shift disruption services and restoration activity to the right to help manage the impact of COVID-19 . We now also expect 11% NPG operating margins against our previous assumption of 13%. In addition to the lower volume of the public service shift, there are two other major contributing factors that lower NPG’s revenue expectations. First, exchange rate fluctuations and volatility between Canada and the United States.

dollar. And second, the demand for medical isotopes is suppressed, as hospitals prioritize patients with COVID-19. All three components carry the same weight as pushing segment operating income down. On the upside, we continue to streamline our cost structure, and have updated the unassigned corporate cost expectation, which we now anticipate to be approximately $ 15 million for the year compared to the prior expectation of approximately $ 20 million.

Additionally, we now expect depreciation and amortization to be approximately $ 65 million for the year. As the timing of asset acquisitions and placement in service has changed. All other components of the orientation remain consistent with our initial perspective, and we have updated our 2020 orientation bridge on Slide 9 to reflect the aforementioned changes. I will close my comments with a few comments about our debt and liquidity position.

In late March, we amended our line of credit that increased the revolver by $ 250 million to a total of $ 750 million. The amendment also extended the expiration date of the revolver and improved pricing terms compared to the previous deal, which provides some tailwind in 2020 with lower expected interest expense through better rates and lower loans from the expected. This was an important step for the company, and we appreciate that our banks work with us in a volatile debt market environment. Having the ability to secure a more favorable price debt amendment in the March rate environment speaks to the credibility of the business and our long-term prospect for cash generation.

This action also gives us greater flexibility in the balance sheet as we try to finance our capital investments and future growth opportunities, and is underlined by the current environment related to COVID-19. The company’s gross debt totaled $ 934 million at the end of the first quarter with $ 404 million of remaining availability under the amended line of credit. And the company’s debt leverage remained at a comfortable level around twice. BWXT’s capital allocation strategy has not changed in light of the current environment.

We continue to demonstrate a balanced allocation of capital over time with an emphasis from year to year on certain priorities. By 2020, we still expect capital expenditures to be in a peak year of $ 270 million as we focus on investing in future organic growth. After 2020, capital expenditures are anticipated to begin a downward trajectory, with 2021 expected to be somewhat lower than the $ 270 million we anticipate for this year, and we will return to close maintenance levels in 2022. We also continue to return capital to shareholders, and in the first quarter, allocated $ 18.6 million in dividend payments and $ 20 million in share buybacks to offset the dilution.

Our overall stock buyback strategy during these years of high capital spending has not changed, and we remain opportunistic beyond offsetting any annual dilution. Based on capital spending and dividend commitments for 2020, we do not anticipate incremental buybacks for the remainder of the year. From a cash point of view, the company used $ 6.4 million in net cash and operating activities in the first quarter of 2020, approximately $ 11 million less than the prior year period. Cash and short-term investments, net of restricted cash, were $ 81.3 million at the end of the first quarter, as we remain well positioned from a cash perspective for the future.

And with that, I’ll call Rex back with some closing remarks.

Rex Geveden – President and CEO

Thanks, David. Let me finish my prepared remarks with a brief update on our moly 99 business efforts and some traction that we are gaining with micro reactors. As I said in the last call, we were dealing with scheduling issues in the moly show within the radioisotope line of business, which led us to an overrun line for the show. In addition to those challenges, we have since experienced some delays in European and Canadian supplier and sub-supplier components due to COVID-19.

We have now completed a comprehensive baseline of the program considering the above factors and other risks that could manifest themselves, and we now plan to achieve business readiness by mid-2022. Despite the challenges of the delays, we remain very excited about the new line of products, the business case and our competitive position in the market. Finally, we received several awards in recent months related to micro reactors and TRISO fuel. In March, we were awarded a contract with the DOE for TRISO fuel to support the Transformational Challenge Reactor at Oak Ridge National Laboratory.

In addition to TRISO, BWXT also received a $ 14 million micro-reactor design contract from DOD’s office of strategic capabilities. These awards and others pending underscore the government’s growing interest in compact reactors and accident-tolerant TRISO fuel to solve some of the most challenging national security, energy and propulsion issues, and we maintain a good position to lead the market in these new technologies and programs. And with that, I will ask the operator to open the line for questions.

Questions and answers:

Operator

[Operator instructions]Our first question will come from Peter Arment with Baird. Please go ahead.

Peter Arment – Baird – Analyst

Yes sir. Thank my Lord. Good morning Rex. David, are you there? Thank you for the details about the type of your comments on Virginia Second Class.

But perhaps you could tell us what you think if there is a continuing resolution in the fall, what would that do, and given the long leadership nature of your contracts?

Rex Geveden – President and CEO

Well, in a scenario of continuous solutions, normally, the financing is year after year and the content is similar. So I think it would actually be a favorable situation for us, Peter.

Peter Arment – Baird – Analyst

OK. So you wouldn’t expect that in terms of any slip. And then right in the …

Rex Geveden – President and CEO

I would only speculate, we would keep the two Virginia tempo in a CR.

Peter Arment – Baird – Analyst

OK. That’s useful. And then maybe just on the impact of the moly 99 supply chain. Could you give us a little more color exactly what you’re seeing there, and why do we see such momentum from the latest COVID impact?

Rex Geveden – President and CEO

Right. So most of that momentum at the moly program start date is related to the programmatic challenges we described above. Peter, about a quarter of the impact, let’s call it the COVID effects, and it has to do with most of our key suppliers for hot selling equipment found in Europe. We have two Italian suppliers.

We have a German supplier. And some of those factories declined or closed during the peak of the pandemic crisis. Now they are more or less back to normal. But we consider those delays in the product launch date.

Peter Arment – Baird – Analyst

Thank you.

Rex Geveden – President and CEO

You’re welcome.

Operator

Our next question will come from Pete Skibitski with Alembic Global.

Pete Skibitski – Alembic Global Advisors – Analyst

Good morning guys Nice neighborhood. Just a couple of high-level questions. Rex, can you name a chief strategy officer, I think it was the title?

Can you talk about it, your thoughts there? And then I have a quick follow up.

Rex Geveden – President and CEO

Of course. So we hired Robb LeMasters, who, as you may know, came from Blue Harbor. Blue Harbor had a major position in BWXT at the time of the transfer and had previously been an investor in Babcock & Wilcox. But Robb came to our board about five years ago, and he left with BWXT during the turn on that board and has been active there for that period of time in our history as a public company.

He remained on the board after Blue Harbor sold his position, and the board was very happy to hold it, as was the executive team. He’s always been helpful and kind of a bright star on that board. I was going through a professional transition and was interested in doing something with a public company. So we took the opportunity to bid Robb as chief strategy officer.

Thus, your portfolio will have strategy, have investor relations and also the corporate development, mergers and acquisitions piece, and will oversee those positions. The team members will stay the same, but Robb will have oversight of that. Then he will bring a very interesting perspective. He understands, I think, how investors react to the business.

He understands the downsides and negatives of the business, and works well with all members of our executive team. So it was a great addition. He is very talented. And I think it will be good for our business in terms of what it brings and also to expand our executive depth.

Pete Skibitski – Alembic Global Advisors – Analyst

Excellent. Thanks for that color. And the last question for me is, I think, your thoughts on the White House, seeking to revitalize the national uranium industry. Does that impact you anyway? I was just curious.

Rex Geveden – President and CEO

Yes. Not so much, Pete. We have not been in mining or enrichment in the past. I mean, if the nation starts needing a high assay, low-enriched uranium in that enrichment category of 5% to 20% or more, in highly enriched uranium.

There is a role we could play because we supported USEC in the past in the American Centrifuge program. So there are roles we could play there, including preparing for an effort like that. But generally speaking, at the moment we are not overly active in that part of the value chain.

Pete Skibitski – Alembic Global Advisors – Analyst

OK. I appreciate. Thanks guys.

Operator

Our next question will come from Bob Labick with CJS Securities. Please go ahead.

Bob Labick – CJS Securities – Analyst

Good Morning. Thanks for taking my questions.

I wanted to start with long-term orientation. He reiterated his long-term orientation, the 2022 orientation. And obviously, the contribution of isotopes has changed, as he is now beginning to expect income and contribution to start in mid-2022. Can you give us an idea of ​​some of the buy and sell options to maintain long-term orientation? And perhaps how much contribution of isotopes is incorporated into that.

Are there other cushions in that guide?

Rex Geveden – President and CEO

Of course. Thanks Bob for the question. Obviously, there is some pressure on that long-term orientation, with isotope delays and concerns about the timing of the DOE award, but we are still confident about it. Those are some of the shots.

In terms of the options you requested, we have a growing momentum in micro-reactors and fuel, and we’ll see where it takes us and how fast it can become a major component of the business. One of the things in our toolkit is that we have such a significant delay in our nuclear operations business that we can take advantage of that delay by working overtime by requiring mandatory overtime and burning the delay. So there are some levers that we have in the business. The pressure on that long-term orientation is admittedly admitted, but we remain committed to it.

Bob Labick – CJS Securities – Analyst

It is understood. Excellent. And then maybe, I mean, the pressure apparently is, again, the time, right? As things get a little removed compared to existing companies. Maybe we’ll just talk, if we start thinking about the end of 2022, a kind of momentum and five-year growth prospect as well.

We have talked in the past about space. You just mentioned microreactors again and maybe due to market disruptions in your stable business, are there any possible mergers and acquisitions? Can you think or help us think about the next five years and the aspirations and opportunities for growth?

Rex Geveden – President and CEO

Of course. Sure Bob Certainly, space and defense reactors are a very interesting future component of growth. Our core business, the franchise platform, obviously has Columbia class subs coming in and assuming we keep pace with Virginia and the slight acceleration of Ford, there are very good prospects for that business, so we like all of that.

We certainly like the isotope business. That is a growing business and a kind of bright spot in the isotope image right now is that the lung imaging, which is done with moly 99 is exploding in light of COVID-19. And that has been fueled by cardiology procedures in the past. And I think you will see, there are a whole class of people out there who may have permanent lung damage from COVID-19, and we will need periodic evaluation through imaging, so there are interesting growth prospects even in that regard.

And then, without a doubt, we have balance capacity and we can drive profits through the repurchase of shares, but also through acquisitions. And so we have some interesting opportunities in our portfolio and balance capacity for those. And I think you put it perfectly, right? Despite the artificial window rate around ’20 to 2022, the long-term growth prospects for this business are quite strong.

David Black – Senior Vice President and Chief Financial Officer

And I’ll reiterate, Bob, if you look at page 14 of the investor briefing, that’s where we show the NOG business and the power unit production ramp. If we look at five years at Columbia, we have four Colombians passing by the store, where today we have one. So that gives you an indication, we won’t quantify it, but that gives you an indication of the growth between now and then.

Operator

[Operator instructions] Our next question will come from Michael Ciarmoli with SunTrust. Please go ahead.

Michael Ciarmoli – SunTrust Robinson Humphrey – Analyst

Hello good morning guys Thanks for answering the question. Nice neighborhood. Rex or David, maybe at NOG, the revenue cadence for the rest of the year seems pretty flat.

You obviously did some work there in the long lead time. But can you give us an idea by thinking about Virginia’s class? Should the decision be made before you can begin to see or feel some of that headwind, if the ship is not added to the budget again?

Rex Geveden – President and CEO

Hi Michael, good morning. Well, we said in a previous call that it would potentially start impacting business in the fourth quarter of this year. And obviously, we continued for the duration of that project, which is approximately six years in total. And you know the story about the incremental effects on our business.

There are more or less, at any one time, about 12 sets of Virginia-class ships passing our factories in various stages of maturity from the time they begin to be delivered. On top of that, you have the only Columbia going on. And, generally speaking, there are two or four sets of Ford boats based on the acquisition tempo and then the delivery schedule for those. So roughly, 15, 16, 17 ship systems moving through our factories at any time.

And by ship, I mean, of course, fuel cores, central barrels, reactor vessels, control rod actuation mechanisms, steam generators, pressurizers, all of that in the various factories. Por lo tanto, tendría ese tipo de efecto incremental en el negocio a partir del cuarto trimestre de 2020. Como Peter cuestionó anteriormente, qué pasaría en un escenario de RC, creo que con el escenario de CR, probablemente continuamos de manera normal, haciendo dos conjuntos de barcos de Virginia un año. Así que ciertamente dudo que tengamos una apropiación total hecha al comienzo del año fiscal gubernamental ’20.

Así que creo que esa decisión estará ahí por algún tiempo.

Michael Ciarmoli – SunTrust Robinson Humphrey – Analista

OKAY. Pero si esto se prolonga, ¿si finalmente toman una decisión en noviembre sobre la financiación de esa clase de Virginia? ¿Pensarías que habría algún impacto en ese punto? Quiero decir, si nos quedamos en este ambiente purgatorio donde vemos apoyo bipartidista, pero no se toma una decisión firme. Quiero decir, supongo que estoy tratando de averiguar en qué punto se convierte en un viento en contra. En otras palabras, ¿necesita ver la financiación o la decisión tomada ahora? ¿O puede hacerse tan tarde como septiembre, octubre sin impacto en su año actual?

Rex Geveden – Presidente y Director Ejecutivo

Yes. Creo que estamos en un ritmo operativo normal en este momento. Por lo tanto, no está impactando realmente cómo pensamos o cómo planeamos. Solo diría que si ocurriera, el impacto sería en el cuarto trimestre, si la asignación se realizara a principios del año fiscal del gobierno.

Para empezar, es un impacto modesto. Y obviamente, cuanto más tarde, menor es el impacto. Así que no creo que sea algo que me preocupe particularmente en este momento para nuestro año fiscal ’20, Michael.

Michael Ciarmoli – SunTrust Robinson Humphrey – Analista

Entendido. Y luego, solo en el NPG, algunos de los retrasos que ha visto relacionados con Canadá, los cortes, los reacondicionamientos. ¿No han recibido ningún tipo de cronograma de referencia actualizado o nuevo? ¿O es este tipo de fluido todavía dependiendo de cómo COVID impacta el distanciamiento social? Solo tratando de tener una idea de si tiene una línea de tiempo actualizada allí o ¿sigue siendo un poco inestable?

Rex Geveden – Presidente y Director Ejecutivo

Todavía está en flujo. Así que tenemos algunas indicaciones de nuestros clientes sobre cuándo sucederán las cosas. Esas interrupciones que ocurrieron en el segundo trimestre fueron llevadas al cuarto trimestre. Pero creo que es un poco esperar y ver.

El desafío para las empresas de servicios públicos, por supuesto, es que no quieren que 300 personas gateen alrededor de la cara de un reactor al mismo tiempo, cuando están pasando por el reemplazo de componentes principales. Ciertamente tratarán de mantener el ritmo porque lo son, tanto como sea posible porque sus casos de negocios dependen de la finalización oportuna. Así que creo que hay mucha presión para mantener esos proyectos tan rápido como sea posible, pero creo que es un poco esperar y ver desde nuestra perspectiva.

Michael Ciarmoli – SunTrust Robinson Humphrey – Analista

Entendido. Servicial. Gracias chicos.

Rex Geveden – Presidente y Director Ejecutivo

Gracias Michael.

Operador

Nuestra próxima pregunta vendrá de Tate Sullivan con Maxim Group. Por favor adelante.

Tate Sullivan – Grupo Maxim – Analista

Hola. Thank you. Un seguimiento, Rex anteriormente en moly 99. Usted dijo algunos retrasos en los componentes de suministro.

¿Era eso para kits de núcleo o equipos de acceso a reactores? Si puede especificar, por favor.

Rex Geveden – Presidente y Director Ejecutivo

Hola Tate Buenos días. Como dije antes, hay tres componentes principales en el sistema. Uno se llama el sistema de entrega de destino.

Ese es el equipo que pasa al reactor para poner el moly en el reactor para que se irradie para calentarlo, para que luego podamos procesarlo en nuestra fábrica en Kanata. En la fábrica de Kanata, existe el sistema radioquímico, que consiste en realizar el procesamiento inicial de ese material irradiado. Y luego hay un sistema radiofarmacéutico, que lo empaqueta y lo esteriliza y hace todo lo que es un sistema robótico totalmente automatizado. Entonces, los proveedores a los que me refería en ese retraso están suministrando celdas calientes y varios equipos internos para esas celdas calientes como autoclaves y similares.

Por lo tanto, una serie de componentes complejos diferentes procedentes de Europa continental. Y finalmente destinado a nuestra planta en Kanata. Si pudiera tomar, tal vez agregar un poco más de color a esto, eso es parte de lo que ha impulsado nuestro cronograma, y ​​lo hemos contado en esta línea de base. I would want to point out to all the listeners on the call that we have had some schedule challenges.

This is the second significant schedule challenge we have identified on this program. And so the rebaseline to mid-2022 has a number of, let me call it, components of conservatism in it. We have, for example, some months of unencumbered schedule reserve in there. We have extended the regulatory approval timeline from about six months to about nine months.

So we can completely envelope what we perceive as any uncertainty in that timeline. We have also accounted for and costed from a schedule and dollar perspective, any technical risk that relates to the conversion of design and into manufacturing and ultimately, integration into our factories. And so we’ve laid out, for ourselves, a pretty conservative timeline here, and I think appropriately so because we certainly need to have this one right as we rebaselined the program for our investors and for our board and for our team. So I feel quite positive about where we are with that schedule.

Tate Sullivan — Maxim Group — Analyst

OKAY. And then I feel as if you’ve had multiple releases on fuel manufacturing. It seems a bit more consistent in the previous years. But the economics behind fuel manufacturing, should I look at it as similar to manufacturing the nuclear units in terms of the five state year production schedule.

Can you share anything on what drives the economics in fuel manufacturing versus the unit schedules, please?

Rex Geveden — President and Chief Executive Officer

You mean the fuel manufacturing and the nuclear operations business, Tate?

Tate Sullivan — Maxim Group — Analyst

Yes, please. Yes, specifically.

Rex Geveden — President and Chief Executive Officer

Yes. So that’s a very steady business. We, of course, manufacture the fuel for all three classes of nuclear vessels, the Virginia, the Columbia and the Ford Class carriers. And generally, the timing of those pricing agreements is somewhat similar to what we do in all the major component agreements.

They are separate contracts, but generally, it follows the tempo and the scale of the rest of the business. And so there’s sort of no important distinction there in terms of volume and timing.

Tate Sullivan — Maxim Group — Analyst

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the call back to Mark Kratz for any closing remarks.

Mark Kratz — Director of Investor Relations

Thank you for joining us this morning. That concludes our first quarter 2020 conference call. If you have further questions, please call me at (980) 365-4300. Thank you.

Operator

[Operator signoff]

Duration: 39 minutes

Call participants:

Mark Kratz — Director of Investor Relations

Rex Geveden — President and Chief Executive Officer

David Black — Senior Vice President and Chief Financial Officer

Peter Arment — Baird — Analyst

Pete Skibitski — Alembic Global Advisors — Analyst

Bob Labick — CJS Securities — Analyst

Michael Ciarmoli — SunTrust Robinson Humphrey — Analyst

Tate Sullivan — Maxim Group — Analyst

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