BWX Technologies, Inc. 10-K

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements we make in the following discussion, which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance or achievements, or industry results, could differ materially from those we express in the following discussion as a result of a variety of factors, including the risks and uncertainties we have referred to under the headings "Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors" in Items 1 and 1A of Part I of this Report. GENERAL We are a leading supplier of nuclear components and fuel to the U.S. Government; provide technical, management and site services to support governments in the operation of complex facilities and environmental remediation activities; supply precision manufactured components, nuclear fuel and services for the commercial nuclear power industry; supply critical medical radioisotopes and radiopharmaceuticals; and develop nuclear technologies for a variety of applications, including medical radioisotopes, advanced nuclear power sources and advanced nuclear reactors. In general, we operate in capital-intensive industries and rely on large contracts for a substantial amount of our revenues. We operate in three reportable segments: Nuclear Operations Group, Nuclear Power Group and Nuclear Services Group. We are currently exploring growth strategies across our segments through strategic investments and acquisitions to expand and complement our existing businesses. We would expect to fund these opportunities with cash generated from operations or by raising additional capital through debt, equity or some combination thereof. Outlook Nuclear Operations Group We expect the backlog of our Nuclear Operations Group segment of approximately $3,659 million at December 31, 2020 to produce revenues of approximately $1,221 million in 2021, not including any change orders or new contracts that may be awarded during the year. The revenues of our Nuclear Operations Group segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, we are a significant participant in the defense industry and have not been negatively impacted by sequestration or federal budget reductions to date. We believe many of our programs are well-aligned with national defense and other strategic priorities as we supply high-end equipment for submarines and aircraft carriers for the U.S. Navy. However, it is possible that reductions in federal government spending and sequestration could have an adverse impact on the operating results and cash flows of this segment in the future. We expect that orders for nuclear components will continue to be a significant part of backlog for the foreseeable future. In addition, the U.S. Navy issued its fiscal year 2022 long-range shipbuilding plan in December 2020, which maintains recommendations made in its fiscal year 2020 long-range shipbuilding plan (released in September 2019) to increase the size of its fleet of ships to include additional submarines and aircraft carriers beyond the number disclosed prior to September 2019. While the new Administration may make further changes with its fiscal year 2022 budget submission, we have made additional capital expenditures and investments in personnel to meet this anticipated growth in demand and we expect to continue making such expenditures and investments. Nuclear Power Group We expect the backlog of our Nuclear Power Group segment of approximately $726 million at December 31, 2020 to produce revenues of approximately $307 million in 2021, not including any change orders or new contracts that may be awarded during the year. The revenues in this segment primarily depend on the demand and competitiveness of nuclear energy. The activity of this segment depends on the timing of maintenance and refueling outages, the cyclical nature of capital expenditures and major refurbishment and plant life extension projects, as well as the demand for nuclear fuel and fuel handling equipment primarily in the Canadian market, which could cause variability in our financial results. Our acquisition of the MI business in July 2018 expanded our Nuclear Power Group segment's offerings to include medical radioisotope products. The MI business will be the platform from which we plan to launch our Molybdenum-99 product line and a number of future radioisotope-based imaging, diagnostic and therapeutic products. 28 Table of Contents Nuclear Services Group A significant portion of this segment's operations is conducted through joint ventures, which typically earn fees, and we account for them following the equity method of accounting. See Note 4 to our consolidated financial statements included in this Report for financial information on our equity method investments. As a result, this segment reports minimal backlog and revenues. Given our specialized capabilities of full life-cycle management of special materials, facilities and technologies, we believe our Nuclear Services Group segment is well-positioned to participate in the continuing cleanup, operation and management of critical government-owned nuclear sites, laboratories and manufacturing complexes maintained by the DOE, NASA and other federal agencies. However, it is possible that reductions in federal government spending and sequestration could have an adverse impact on the operating results and cash flows of this segment in the future. This segment also specializes in the development of advanced technologies. The nature, timing and duration of any related contracts are dependent on the demand and funding availability for such technologies. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe the following are our most critical accounting policies that we apply in the preparation of our financial statements. These policies require our most difficult, subjective and complex judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Contracts and Revenue Recognition. We determine the appropriate accounting method for each of our long-term contracts before work on the project begins. We generally recognize contract revenues and related costs over time for individual performance obligations based on a cost-to-cost method in accordance with 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. 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 and certain medical radioisotopes and radiopharmaceuticals 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. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity or steel and other raw material prices. We routinely review estimates related to our contracts, and revisions to profitability are reflected in the quarterly and annual earnings we report. In the years ended December 31, 2020, 2019 and 2018, we recognized net favorable changes in estimates related to long-term contracts that increased operating income by approximately $42.8 million, $71.6 million and $46.3 million, respectively. Although we continually strive to improve our ability to estimate our contract costs and profitability, adjustments to overall contract costs due to unforeseen events could be significant in future periods. We recognize contract change orders or changes in scope of work in contract revenues, to the extent of costs incurred, when we believe collection is probable and can be reasonably estimated. We recognize income from claims when formally agreed with the customer. We regularly assess the collectability of contract revenues and receivables from customers. Pension Plans and Postretirement Benefits. We utilize actuarial and other assumptions in calculating the cost and benefit obligations of our pension and postretirement benefits. The assumptions utilized in the determination of our benefit cost and obligations include assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends. The assumptions utilized represent our best estimates based on historical experience and other factors. We calculate the majority of our pension costs under both financial accounting standards ("FAS") in accordance with GAAP and CAS in accordance with the FAR. We have prepared our consolidated financial statements and segment reporting disclosures utilizing pension costs calculated under FAS. Pension costs calculated under CAS are utilized as the basis for recovery of pension costs on our U.S. Government contracts. For the years ended December 31, 2020, 2019 and 2018, our CAS pension costs attributed to U.S. Government contracts totaled $43.6 million, $46.7 million and $44.0 million, respectively. The 29 Table of Contents amount of recoverable CAS pension costs recognized as revenue on an annual basis may differ from the amounts noted above. See further discussion of our accounting for contracts and revenue recognition above and in Note 1 to our consolidated financial statements included in this Report. Actual experience that differs from these assumptions or future changes in assumptions will affect our recognized benefit obligations and related costs. We immediately recognize net actuarial gains and losses in earnings in the fourth quarter as a component of net periodic benefit cost. Net actuarial gains and losses occur when actual experience differs from any of the various assumptions used to value our pension and postretirement benefit plans or when assumptions, which are revisited annually through our update of our actuarial valuations, change due to current market conditions or underlying demographic changes. The primary factors contributing to net actuarial gains and losses are changes in the discount rate used to value the obligations as of the measurement date each year, the difference between the actual return on plan assets and the expected return on plan assets and changes in health care cost trends. The effect of changes in the discount rate and expected rate of return on plan assets assumptions in combination with the actual return on plan assets can result in significant changes in our estimated pension and postretirement benefit cost and our consolidated financial condition. The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate, return on assets and health care cost trend rate on our FAS pension and postretirement benefit plan obligations and expense for the year ended December 31, 2020: .25% Increase .25% Decrease (In millions) Pension Plans Discount Rate: Effect on ongoing net periodic benefit cost (1) $ 1.3 $ (1.3) Effect on projected benefit obligation $ (42.1) $ 44.3 Return on Assets: Effect on ongoing net periodic benefit cost $ (2.8) $ 2.8 Postretirement Plans Discount Rate: Effect on ongoing net periodic benefit cost (1) $ 0.1 $ (0.1) Effect on projected benefit obligation $ (1.7) $ 1.9 Return on Assets: Effect on ongoing net periodic benefit cost $ 0.1 $ (0.1) Health Care Cost Trend Rate: Effect on ongoing net periodic benefit cost $ 0.1 $ (0.1) Effect on projected benefit obligation $ 1.4 $ (1.2) (1) Excludes effect of annual mark to market adjustment. Goodwill and Intangible Assets. Each year, we evaluate goodwill at each reporting unit to assess recoverability, and impairments, if any, are recognized in earnings. We perform a qualitative analysis when we believe that there is sufficient excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant facts and circumstances that could affect fair value. Deterioration in macroeconomic, industry and market conditions, cost factors, overall financial performance, share price decline or entity and reporting unit specific events could cause us to believe a qualitative test is no longer appropriate. When we determine that it is appropriate to test goodwill for impairment utilizing a quantitative test, we compare the fair value of a reporting unit to its carrying amount, including goodwill. We utilize both the income and market valuation approaches to provide inputs into the estimate of the fair value of our reporting units, which would be considered by market participants. Under the income valuation approach, we employ a discounted cash flow model to estimate the fair value of each reporting unit. This model requires the use of significant estimates and assumptions regarding future revenues, costs, margins, capital expenditures, changes in working capital, terminal year growth rate and cost of capital. Our cash flow models are based on our forecasted results for the applicable reporting units. Actual results could differ materially from our projections. Some assumptions, such as future revenues, costs and changes in working capital are company driven and could be affected by a loss of one or more significant contracts or customers, failure to control costs on certain contracts, a decline in U.S. Government 30 Table of Contents funding or a decline in demand based on changing economic or regulatory conditions. Changes in external market conditions may affect certain other assumptions, such as the cost of capital. Market conditions can be volatile and are outside of our control. Under the market valuation approach, we employ the guideline publicly traded company method, which indicates the fair value of the equity of each reporting unit by comparing it to publicly traded companies in similar lines of business. After identifying and selecting guideline companies, we analyze their business and financial profiles for relative similarity. Factors such as size, growth, risk and profitability are analyzed and compared to each of our reporting units. Assumptions include the selection of our peer companies and use of market multiples, which could deteriorate or increase based on the profitability of our competitors and performance of their stock, which is often dependent on the performance of the stock market and general economy as a whole. Adverse changes in the assumptions utilized in our impairment test could cause a reduction or elimination of excess fair value over carrying value, resulting in potential recognition of impairment. If the fair value of the reporting unit exceeds its carrying value, no impairment charge is recorded. If the carrying value of a reporting unit exceeds its fair value, an impairment charge is recorded to goodwill in the amount by which the carrying value exceeds fair value. We completed our annual review of goodwill for each of our reporting units for the year ended December 31, 2020, which indicated that we had no impairment of goodwill. The fair value of our reporting units was substantially in excess of carrying value. Each year, we evaluate indefinite-lived intangible assets to assess recoverability, and impairments, if any, are recognized in earnings. We perform a qualitative assessment when testing indefinite-lived intangible assets for impairment to determine whether events or circumstances that could affect the significant inputs used in determining fair value have occurred that indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. Deterioration in macroeconomic, industry and market conditions, cost factors or overall financial performance could cause us to believe a qualitative test is no longer appropriate. When quantitative assessments are performed, we primarily utilize income-based valuation approaches. Under the income-based valuation approach, we employ a relief from royalty method of valuation. This method requires significant assumptions, including assumed royalty rate, future revenues and cost of capital. Assumptions related to operating performance, such as future revenues, could be affected by loss of a customer contract, a decline in U.S. Government funding or a decline in demand based on changing economic or regulatory conditions. Changes in external market conditions may affect certain other assumptions, such as the cost of capital. Market conditions can be volatile and are outside of our control. Adverse changes in these assumptions utilized within our indefinite-lived intangible asset impairment test could cause a reduction or elimination of excess fair value over carrying value, resulting in potential recognition of impairment. We have completed our annual review of our indefinite-lived intangible assets for the year ended December 31, 2020, which indicated that we had no impairment. The fair value of our indefinite-lived intangible assets was substantially in excess of carrying value. Asset Retirement Obligations and Environmental Cleanup Costs. We accrue for future decommissioning of our nuclear facilities that will permit the release of these facilities to unrestricted use at the end of each facility's service life, which is a requirement of our licenses from the NRC and the CNSC. In accordance with the FASB Topic Asset Retirement and Environmental Obligations , we record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. In estimating fair value, we use present value of cash flows expected to be incurred in settling our obligations. To the extent possible, we perform a marketplace assessment of the cost and timing of performing the retirement activities. We apply a credit-adjusted risk-free interest rate to our expected cash flows in our determination of fair value. When we initially record such a liability, we capitalize a cost by increasing the carrying amount of the related long-lived asset. When we acquire a business that has an asset retirement obligation, the asset retirement obligation is recognized at fair value without a corresponding increase to the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Actual costs incurred to decommission our facilities may differ from the accreted liability. As a result, upon completion of a decommissioning activity, we will either settle the obligation for its recorded amount or incur a gain or loss. This topic applies to environmental liabilities associated with assets that we currently operate and are obligated to remove from service. For environmental liabilities associated with assets that we no longer operate, we have accrued amounts based on the estimated costs of cleanup activities, net of the anticipated effect of any applicable cost-sharing arrangements. We adjust the estimated costs as further information develops or circumstances change. Given the long-lived nature of these facilities, we are required to estimate retirement costs that will be incurred in the future, which may extend up to 40 years at the time the asset retirement obligation is established. Due to the significance of the remaining useful life of these facilities, the timing of retirement and future costs for material components of the asset retirement 31 Table of Contents obligations, such as labor and waste disposal fees, could differ from our estimates. An exception to this accounting treatment relates to the work we perform for two facilities for which the U.S. Government is obligated to pay substantially all the decommissioning costs. See Note 1 to our consolidated financial statements included in this Report for further discussion of recently adopted accounting standards. COVID-19 ASSESSMENT General A global outbreak of COVID-19 has occurred impacting over 200 countries, including the U.S. and Canada where we maintain our principal operations. Developments have been occurring rapidly with respect to the spread of COVID-19 and its impact on human health and businesses, with new and changing government actions occurring on a daily basis. As a result, we have been closely monitoring the COVID-19 pandemic and its impacts and potential impacts on our business. We have received notifications from the U.S. and Canadian governments designating BWXT as an essential business given our roles in national security, energy production and medical manufacturing. We continue to operate our facilities and have taken numerous precautions to mitigate exposure and protect the health and well-being of our workforce. To date, we have experienced localized operational challenges as a result of employee illness, quarantines and social distancing protocols. Within our Canadian operations, revenues in our medical radioisotopes and radiopharmaceuticals business have declined year over year due to a decrease in demand for elective diagnostic procedures, and certain services scheduled during nuclear power plant outages have been rescheduled, delaying the performance of services by our Nuclear Power Group segment. We have also experienced delays in the bidding and contracting process for our U.S. Government businesses due to COVID-19 concerns. Because developments related to the spread of COVID-19 and its impacts have been occurring rapidly, it is difficult to predict any future impact at this time. We may experience further disruptions to demand for our products and services and our operations in the future as a result of, among other things, national, state, provincial or local government enforced quarantines, worker illness or absenteeism, and travel and other restrictions. For similar reasons, the COVID-19 pandemic may also adversely impact our supply chain and other manufacturers which could delay our receipt of essential goods and services. Any number of these potential risks could have a material adverse effect on our financial condition, results of operations and cash flows. The extent to which the COVID-19 outbreak impacts our business will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. Government Assistance On March 27, 2020, the U.S. Government enacted the CARES Act, which among other things, provides employers an option to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, we qualify for the deferral of payroll tax payments in the future and as of December 31, 2020, and we have deferred $21.4 million of payroll taxes that will be paid beginning in December 2021. Additionally, on April 11, 2020, the Canadian Government enacted CEWS under the COVID-19 Economic Response Plan to prevent large layoffs and help employers offset a portion of their employee salaries and wages for a limited period. During the year ended December 31, 2020, we recognized $20.4 million of subsidies under CEWS as an offset to operating expenses. The Canadian Government has extended CEWS to June 2021 with a number of modifications. These modifications are expected to significantly decrease the amount of future claims for which we may qualify. See Item 1A "Risk Factors" in this Report for an additional discussion of risks of the COVID-19 pandemic on our business. 32 Table of Contents RESULTS OF OPERATIONS – YEARS ENDED DECEMBER 31, 2020, 2019 and 2018 Selected financial highlights are presented in the table below: Year Ended December 31, 2020 2019 2018 (In thousands) REVENUES: Nuclear Operations Group $ 1,646,257 $ 1,428,587 $ 1,319,170 Nuclear Power Group 371,269 352,640 365,911 Nuclear Services Group 136,493 131,339 122,438 Eliminations (30,503) (17,646) (7,630) $ 2,123,516 $ 1,894,920 $ 1,799,889 OPERATING INCOME: Nuclear Operations Group $ 326,049 $ 298,328 $ 271,405 Nuclear Power Group 51,989 53,815 52,270 Nuclear Services Group 26,436 14,226 20,374 Other (22,309) (23,099) (18,074) $ 382,165 $ 343,270 $ 325,975 Unallocated Corporate (23,613) (17,749) (20,998) Total Operating Income $ 358,552 $ 325,521 $ 304,977 This section discusses our 2020 and 2019 results of operations and contains year-to-year comparisons between 2020 and 2019. Discussions of our 2018 results and year-to-year comparisons between 2019 and 2018 that are not included in this Report can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019. Consolidated Results of Operations Consolidated revenues increased 12.1%, or $228.6 million, to $2,123.5 million in the year ended December 31, 2020 compared to $1,894.9 million for the corresponding period of 2019, due to increases in revenues from our Nuclear Operations Group, Nuclear Power Group and Nuclear Services Group segments totaling $217.7 million, $18.6 million and $5.2 million, respectively. Consolidated operating income increased $33.0 million to $358.6 million in the year ended December 31, 2020 compared to $325.5 million for the corresponding period of 2019. Operating income in our Nuclear Operations Group, Nuclear Services Group and Other segments increased by $27.7 million, $12.2 million and $0.8 million, respectively. These increases were partially offset by lower operating income in our Nuclear Power Group segment of $1.8 million and higher Unallocated Corporate expenses of $5.9 million when compared to the prior year. Nuclear Operations Group Year Ended December 31, 2020 2019 $ Change (In thousands) Revenues $ 1,646,257 $ 1,428,587 $ 217,670 Operating Income $ 326,049 $ 298,328 $ 27,721 % of Revenues 19.8% 20.9% Revenues increased by 15.2%, or $217.7 million, to $1,646.3 million in the year ended December 31, 2020 compared to $1,428.6 million for the corresponding period of 2019 as we continue to expand production related to the Columbia-Class nuclear propulsion system. The increase comprised additional volume in the manufacture of nuclear components for U.S. Government programs and the timing of the procurement of certain long-lead materials when compared to the prior year. We also experienced a volume increase in our naval nuclear fuel and downblending operations. 33 Table of Contents Operating income increased $27.7 million to $326.0 million in the year ended December 31, 2020 compared to $298.3 million for the corresponding period of 2019. The increase was due to the operating income impact of the changes in revenues noted above. Nuclear Power Group Year Ended December 31, 2020 2019 $ Change (In thousands) Revenues $ 371,269 $ 352,640 $ 18,629 Operating Income $ 51,989 $ 53,815 $ (1,826) % of Revenues 14.0% 15.3% Revenues increased by 5.3%, or $18.6 million, to $371.3 million in the year ended December 31, 2020 compared to $352.6 million for the corresponding period of 2019. This was primarily related to an increase in revenues of $38.0 million associated with the acquisition of Laker Energy Products during the first quarter of 2020. We also experienced additional volume related to the fabrication of nuclear fuel and a higher levels of in-plant inspection, maintenance and modification services. These increases were partially offset by lower revenues in our nuclear components business largely attributable to decreased activity associated with major steam generator design and supply contracts of $34.2 million. In addition, we experienced lower demand for our medical radioisotopes when compared to the prior year, due to a decrease in elective diagnostic procedures caused in part by the COVID-19 pandemic. Operating income decreased $1.8 million to $52.0 million in the year ended December 31, 2020 compared to $53.8 million for the corresponding period of 2019, primarily attributable to a $5.2 million favorable change in estimate associated with an asset retirement obligation in addition to net favorable changes in estimates related to certain long-term contracts recorded in the prior year. We also experienced a shift in our product line mix when compared to the prior year which resulted in a decline in operating margins. This was offset by $20.4 million of wage subsidies received under the CEWS to offset the effects of COVID-19 on our Canadian operations. Nuclear Services Group Year Ended December 31, 2020 2019 $ Change (In thousands) Revenues $ 136,493 $ 131,339 $ 5,154 Operating Income $ 26,436 $ 14,226 $ 12,210 % of Revenues 19.4% 10.8% Revenues increased by 3.9%, or $5.2 million, to $136.5 million in the year ended December 31, 2020 compared to $131.3 million for the corresponding period of 2019. The increase was primarily attributable to design and engineering work executed by our advanced technologies business which was partially offset by a decline in revenues due to the divestiture of our U.S.-based commercial nuclear services business during the second quarter of 2020. Operating income increased $12.2 million to $26.4 million in the year ended December 31, 2020 compared to $14.2 million for the corresponding period of 2019 due to the operating income impact of the changes in revenues noted above in addition to year over year improvements in our U.S.-based commercial nuclear services business prior to divestiture. Other Year Ended December 31, 2020 2019 $ Change (In thousands) Operating Income $ (22,309) $ (23,099) $ 790 34 Table of Contents Operating income increased $0.8 million to a loss of $22.3 million in the year ended December 31, 2020 compared to a loss of $23.1 million for the corresponding period of 2019, primarily due to a decrease in research and development activities related to our medical and industrial radioisotope capabilities and other advanced technologies when compared to the prior year. Unallocated Corporate Unallocated corporate expenses increased $5.9 million to $23.6 million in the year ended December 31, 2020 compared to $17.7 million for the corresponding period of 2019, primarily due to a $2.6 million reserve related to a franchise tax audit of years prior to 2016, higher levels of incentive compensation and a $1.6 million increase in legal and consulting costs associated with the divestiture of our U.S.-based commercial nuclear services business during the second quarter of 2020. Other Income (Expense) During the year ended December 31, 2020, other income (expense) increased $15.4 million to a gain of $3.6 million compared to a loss of $11.8 million for the corresponding period of 2019. A component of other income (expense) is net periodic benefit cost inclusive of mark to market adjustments due to our immediate recognition of net actuarial gains (losses) for our pension and postretirement benefit plans. Net periodic benefit cost resulted in an increase to other income of $14.1 million when compared to the prior year. Provision for Income Taxes Year Ended December 31, 2020 2019 $ Change (In thousands) Income before Provision for Income Taxes $ 362,172 $ 313,742 $ 48,430 Provision for Income Taxes $ 82,976 $ 69,065 $ 13,911 Effective Tax Rate 22.9% 22.0% For the year ended December 31, 2020, our provision for income taxes increased $13.9 million to $83.0 million, while income before provision for income taxes increased $48.4 million to $362.2 million. Our effective tax rate was approximately 22.9% as compared to 22.0% for the years ended December 31, 2020 and 2019, respectively. Our effective tax rates for the years ended December 31, 2020 and 2019 were 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. These unfavorable rate impacts were partially offset by benefits recognized for excess tax benefits related to employee share-based payments of $1.1 million and $2.4 million for the years ended December 31, 2020 and 2019, respectively. See Note 5 to our consolidated financial statements included in this Report for further information on income taxes. EFFECTS OF INFLATION AND CHANGING PRICES Our financial statements are prepared in accordance with GAAP, using historical U.S. dollar accounting ("historical cost"). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the U.S. dollar, especially during times of significant and continued inflation. In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. However, there can be no assurance we will be able to cover all changes in cost using this strategy. LIQUIDITY AND CAPITAL RESOURCES Our overall liquidity position, which we generally define as our unrestricted cash and cash equivalents plus amounts available for borrowings under our credit facility, increased by approximately $290.4 million to $649.3 million at December 31, 2020 compared to $358.9 million at December 31, 2019. We experienced net cash generated from operations in each of the years ended December 31, 2020, 2019 and 2018. Typically, the fourth quarter has been the period of highest cash flows from operating activities because of the timing of payments received from the U.S. Government on accounts receivable retainages and cash dividends received from our joint ventures. 35 Table of Contents On June 12, 2020, we issued $400 million aggregate principal amount of our 4.125% senior notes due 2028 (the "Senior Notes due 2028") pursuant to an indenture dated June 12, 2020 (the "2020 Indenture") among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee. The proceeds from the issuance of the Senior Notes due 2028 were used to (1) repay in full the Term Loans, as defined below, under our Credit Agreement dated as of May 24, 2018 (as amended, the "Credit Facility"), (2) repay a portion of the borrowings under the Revolving Credit Facility, as defined below, under the Credit Facility and (3) pay all fees and expenses related to the issuance of the Senior Notes due 2028. Credit Facility On March 24, 2020, we entered into an Amendment No. 1 to Credit Agreement (the "Amendment"), which amended the Credit Facility with Wells Fargo Bank, N.A., as administrative agent, and the other lenders party thereto. The Credit Facility originally provided for a $500 million senior secured revolving credit facility (the "Revolving Credit Facility"), a $50 million U.S. dollar senior secured term loan A made available to the Company (the "USD Term Loan") and a $250 million (U.S. dollar equivalent) Canadian dollar senior secured term loan A made available to BWXT Canada Ltd. (the "CAD Term Loan" and together with the USD Term Loan, the "Term Loans"). On June 12, 2020, we repaid in full the Term Loans, at par, with a portion of the proceeds from the issuance of the Senior Notes due 2028. The Amendment, among other things, (1) provided additional commitments to increase the Revolving Credit Facility by $250 million, such that the Revolving Credit Facility is now $750 million; (2) extended the maturity date of the Revolving Credit Facility to March 24, 2025; (3) removed BWXT Canada Ltd. as a borrower under the Revolving Credit Facility; (4) modified the applicable margin for borrowings under the Revolving Credit Facility to be, at the Company's option, either (i) the Eurocurrency rate plus a margin ranging from 1.0% to 1.75% per year or (ii) the base rate plus a margin ranging from 0.0% to 0.75% per year, in each case depending on the Company's leverage ratio; (5) modified the commitment fee on the unused portion of the Revolving Credit Facility to range from 0.15% to 0.225% per year, depending on the Company's leverage ratio; and (6) modified the letter of credit fee with respect to each financial letter of credit and performance letter of credit issued under the Revolving Credit Facility to range from 1.0% to 1.75% and 0.75% to 1.05% per year, respectively, in each case, depending on the Company's leverage ratio. All obligations under the Revolving Credit Facility are scheduled to mature on March 24, 2025. The proceeds of loans under the Revolving Credit Facility are available for working capital needs, permitted acquisitions and other general corporate purposes. The Credit Facility allows for additional parties to become lenders and, subject to certain conditions, for the increase of the commitments under the Credit Facility, subject to an aggregate maximum for all additional commitments of (1) the greater of (a) $250 million and (b) 65% of EBITDA, as defined in the Credit Facility, for the last four full fiscal quarters, plus (2) all voluntary prepayments of the Term Loans, plus (3) additional amounts provided the Company is in compliance with a pro forma first lien leverage ratio test of less than or equal to 2.50 to 1.00. The Company's obligations under the Credit Facility are guaranteed, subject to certain exceptions, by substantially all of the Company's present and future wholly owned domestic restricted subsidiaries. The Credit Facility is secured by first-priority liens on certain assets owned by the Company and its subsidiary guarantors (other than its subsidiaries comprising its Nuclear Operations Group segment and a portion of its Nuclear Services Group segment). The Revolving Credit Facility requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans under the Credit Facility at any time without premium or penalty (other than customary Eurocurrency breakage costs), subject to notice requirements. The Credit Facility includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio is 4.00 to 1.00, which may be increased to 4.50 to 1.00 for up to four consecutive fiscal quarters after a material acquisition. The minimum consolidated interest coverage ratio is 3.00 to 1.00. In addition, the Credit Facility contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. As of December 31, 2020, we were in compliance with all covenants set forth in the Credit Facility. Outstanding loans under the Revolving Credit Facility bear interest at our option at either (1) the Eurocurrency rate plus a margin ranging from 1.0% to 1.75% per year or (2) the base rate plus a margin ranging from 0.0% to 0.75% per year. We are charged a commitment fee on the unused portion of the Revolving Credit Facility, and that fee ranges from 0.15% to 0.225% per year. Additionally, we are charged a letter of credit fee of between 1.0% and 1.75% per year with respect to the amount of each financial letter of credit issued under the Credit Facility, and a letter of credit fee of between 0.75% and 1.05% per year 36 Table of Contents with respect to the amount of each performance letter of credit issued under the Credit Facility. The applicable margin for loans, the commitment fee and the letter of credit fees set forth above will vary quarterly based on our leverage ratio. Based on the leverage ratio applicable at December 31, 2020, the margin for Eurocurrency rate and base rate revolving loans was 1.25% and 0.25%, respectively, the letter of credit fee for financial letters of credit and performance letters of credit was 1.25% and 0.825%, respectively, and the commitment fee for the unused portion of the Revolving Credit Facility was 0.175%. As of December 31, 2020, borrowings and letters of credit issued under the Revolving Credit Facility totaled $75.0 million and $68.3 million, respectively. As a result, as of December 31, 2020 we had $606.7 million available under the Revolving Credit Facility for borrowings and to meet letter of credit requirements. As of December 31, 2020, the interest rate on outstanding borrowings under our Credit Facility was 1.41%. The Credit Facility generally includes customary events of default for a secured credit facility. Under the Credit Facility, (1) if an event of default relating to bankruptcy or other insolvency events occurs with respect to the Company, all related obligations will immediately become due and payable; (2) if any other event of default exists, the lenders will be permitted to accelerate the maturity of the related obligations outstanding; and (3) if any event of default exists, the lenders will be permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral. If any default occurs under the Credit Facility, or if we are unable to make any of the representations and warranties in the Credit Facility, we will be unable to borrow funds or have letters of credit issued under the Credit Facility. Senior Notes due 2026 On May 24, 2018, we issued $400 million aggregate principal amount of 5.375% senior notes due 2026 (the "Senior Notes due 2026") pursuant to an indenture dated May 24, 2018 (the "2018 Indenture"), among the Company, certain of our subsidiaries, as guarantors, and U.S. Bank National Association, as trustee. The Senior Notes due 2026 are guaranteed by each of the Company's present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Credit Facility. Interest on the Senior Notes due 2026 is payable semi-annually in cash in arrears on January 15 and July 15 of each year at a rate of 5.375% per annum. The Senior Notes due 2026 will mature on July 15, 2026. On and after July 15, 2021, we may redeem the Senior Notes due 2026, in whole or in part, at a redemption price equal to (i) 102.688% of the principal amount to be redeemed if the redemption occurs during the twelve-month period beginning on July 15, 2021, (ii) 101.344% of the principal amount to be redeemed if the redemption occurs during the twelve-month period beginning on July 15, 2022 and (iii) 100.0% of the principal amount to be redeemed if the redemption occurs on or after July 15, 2023, in each case plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to July 15, 2021, we may also redeem up to 40.0% of the Senior Notes due 2026 with net cash proceeds of certain equity offerings at a redemption price equal to 105.375% of the principal amount of the Senior Notes due 2026 to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to July 15, 2021, we may redeem the Senior Notes due 2026, in whole or in part, at a redemption price equal to 100.0% of the principal amount of the Senior Notes due 2026 to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable "make-whole" premium. The 2018 Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the 2018 Indenture or the Senior Notes due 2026 and certain provisions related to bankruptcy events. The 2018 Indenture also contains customary negative covenants. As of December 31, 2020, we were in compliance with all covenants set forth in the 2018 Indenture and the Senior Notes due 2026. Senior Notes due 2028 On June 12, 2020, we issued $400 million aggregate principal amount of our Senior Notes due 2028 pursuant to the 2020 Indenture. The Senior Notes due 2028 are guaranteed by each of the Company's present and future direct and indirect wholly owned domestic subsidiaries that is a guarantor under the Credit Facility. Interest on the Senior Notes due 2028 is payable semi-annually in cash in arrears on June 30 and December 30 of each year at a rate of 4.125% per annum. The Senior Notes due 2028 will mature on June 30, 2028. 37 Table of Contents We may redeem the Senior Notes due 2028, in whole or in part, at any time on or after June 30, 2023 at a redemption price equal to (i) 102.063% of the principal amount to be redeemed if the redemption occurs during the twelve-month period beginning on June 30, 2023, (ii) 101.031% of the principal amount to be redeemed if the redemption occurs during the twelve-month period beginning on June 30, 2024 and (iii) 100.0% of the principal amount to be redeemed if the redemption occurs on or after June 30, 2025, in each case plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time prior to June 30, 2023, we may also redeem up to 40.0% of the Senior Notes due 2028 with net cash proceeds of certain equity offerings at a redemption price equal to 104.125% of the principal amount of the Senior Notes due 2028 to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to June 30, 2023, we may redeem the Senior Notes due 2028, in whole or in part, at a redemption price equal to 100.0% of the principal amount of the Senior Notes due 2028 to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date plus an applicable "make-whole" premium. The 2020 Indenture contains customary events of default, including, among other things, payment default, failure to comply with covenants or agreements contained in the 2020 Indenture or the Senior Notes due 2028 and certain provisions related to bankruptcy events. The 2020 Indenture also contains customary negative covenants. As of December 31, 2020, we were in compliance with all covenants set forth in the 2020 Indenture and the Senior Notes due 2028. Other Arrangements We have posted surety bonds to support regulatory and contractual obligations for certain decommissioning responsibilities, projects and legal matters. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is adequate to support our existing requirements for the next twelve months. In addition, these bonds generally indemnify the beneficiaries should we fail to perform our obligations under the applicable agreements. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue. As of December 31, 2020, bonds issued and outstanding under these arrangements totaled approximately $73.7 million. OTHER Cash, Cash Equivalents, Restricted Cash and Investments In the aggregate, our cash and cash equivalents, restricted cash and cash equivalents and investments decreased by approximately $44.5 million to $61.4 million at December 31, 2020 from $105.9 million at December 31, 2019, primarily due to the items discussed below. Our domestic and foreign cash and cash equivalents, restricted cash and cash equivalents and investments as of December 31, 2020 and 2019 were as follows: December 31, 2020 2019 (In thousands) Domestic $ 31,376 $ 76,337 Foreign 29,985 29,526 Total $ 61,361 $ 105,863 Our working capital increased by $18.8 million to $243.9 million at December 31, 2020 from $225.0 million at December 31, 2019, primarily attributable to changes in net contracts in progress and advance billings due to the timing of project cash flows. This increase was partially offset by a decrease in cash and cash equivalents and an increase in other accrued liabilities primarily related to the deferral of payroll tax payments under the CARES Act. Our net cash provided by operating activities decreased by $82.9 million to $196.4 million in the year ended December 31, 2020, compared to cash provided by operating activities of $279.4 million in the year ended December 31, 2019, primarily attributable to the timing of project cash flows. This decrease was partially offset by an increase in net income and the deferral of payroll tax payments under the CARES Act of $21.4 million. Our net cash used in investing activities increased by $85.3 million to $265.3 million in the year ended December 31, 2020, compared to $180.0 million in the year ended December 31, 2019. The increase in cash used in investing activities was primarily attributable to an increase in purchases of property, plant and equipment of $72.9 million as well as our acquisition of Laker Energy Products for $15.9 million during the year ended December 31, 2020. 38 Table of Contents Our net cash provided by financing activities increased by $68.8 million to $25.0 million in the year ended December 31, 2020, compared to cash used in financing activities of $43.7 million in the year ended December 31, 2019. The increase in net cash provided by financing activities was primarily attributable to bank overdrafts of $88.7 million, partially offset by the payment of debt issuance costs of $6.8 million and an increase in dividends paid to common shareholders of $7.6 million compared to the prior year. At December 31, 2020, we had restricted cash and cash equivalents totaling $5.7 million, $2.6 million of which was held for future decommissioning of facilities (which is included in other assets on our consolidated balance sheets) and $3.1 million of which was held to meet reinsurance reserve requirements of our captive insurer. At December 31, 2020, we had short-term and long-term investments with a fair value of $13.1 million. Our investment portfolio consists primarily of U.S. Government and agency securities, corporate bonds and equities and mutual funds. Based on our liquidity position, we believe we have sufficient cash and letter of credit and borrowing capacity to fund our operating requirements for at least the next 12 months. CONTRACTUAL OBLIGATIONS Our cash requirements as of December 31, 2020 under current contractual obligations were as follows: Total Less than 1 Year 1-3 Years 3-5 Years After 5 Years (In thousands) Long-term debt principal $ 875,000 $ — $ — $ 75,000 $ 800,000 Interest payments $ 252,750 $ 38,000 $ 76,000 $ 76,000 $ 62,750 Lease payments $ 10,488 $ 3,348 $ 3,108 $ 1,204 $ 2,828 We expect cash requirements totaling approximately $4.7 million for contributions to our pension plans in 2021. In addition, we anticipate cash requirements totaling approximately $1.4 million for contributions to our other postretirement benefit plans in 2021. Our contingent commitments under letters of credit and surety bonds currently outstanding expire as follows: Total Less than 1 Year 1-3 Years 3-5 Years Thereafter (In thousands) $ 142,022 $ 129,952 $ 3,100 $ 8,970 $ —