BWX Technologies, Inc. 10-Q Summary
Business context and reporting period
BWX Technologies, Inc. filed its unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. BWXT operates through Government Operations, which primarily serves U.S. government naval nuclear and nuclear-site programs, and Commercial Operations, which serves commercial nuclear, nuclear fuel, maintenance, and medical radioisotope markets. The company changed its reportable segments in the first quarter of 2022; prior-period information was recast for comparability.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $523.7 million | $498.7 million | $1.609 billion | $1.532 billion |
| Operating income | $79.9 million | $87.5 million | $246.7 million | $243.6 million |
| Net income attributable to BWXT | $61.6 million | $59.9 million | $195.2 million | $189.0 million |
| Diluted EPS | $0.67 | $0.63 | $2.13 | $1.99 |
| Operating margin | 15.3% | 17.5% | 15.3% | 15.9% |
| Net margin attributable to BWXT | 11.8% | 12.0% | 12.1% | 12.3% |
- Government Operations revenue rose 1.3% in the quarter and 3.6% year to date, but operating income declined 11.2% in the quarter and 2.1% year to date. Government Operations margin was 18.4% in Q3 and 18.1% year to date.
- Commercial Operations revenue increased 22.1% in the quarter and 9.4% year to date. Operating income increased 39.0% in the quarter and 40.4% year to date, with year-to-date margin improving to 7.4% from 5.8%.
- Other income included a $36.6 million foreign-exchange gain in the third quarter from non-designated FX forward contracts. Nine-month other income also benefited from FX activity and other items; the filing does not identify all components of the $35.4 million “Other—net” amount.
- Cash and cash equivalents were $51.4 million at September 30, 2022, or $56.9 million including restricted cash. Working capital was $442.9 million, compared with $314.1 million at December 31, 2021.
- Net cash provided by operating activities was $137.0 million for the first nine months, down from $225.6 million in the prior-year period. Capital expenditures were $134.6 million, and investing cash use totaled $193.1 million.
- Long-term debt was $1.341 billion at September 30, 2022, compared with $1.189 billion at year-end 2021. September borrowings and letters of credit under the former revolving facility were $550.0 million and $37.1 million, respectively, leaving $162.9 million available.
- On October 12, 2022, BWXT refinanced the former facility with a $750 million revolving facility and a $250 million term loan, both scheduled to mature in 2027. Outstanding borrowings were $570.0 million, with $392.9 million of revolving capacity available after letters of credit.
- BWXT declared quarterly dividends of $0.22 per share and paid $60.9 million in common-stock dividends during the first nine months. It repurchased $20.0 million of common stock year to date; no shares were repurchased under the publicly announced program during the third quarter.
Material changes versus the prior comparable period
- Consolidated revenue increased 5.0% in both the quarter and first nine months.
- Third-quarter operating income decreased $7.6 million, primarily because Government Operations had substantially lower favorable contract adjustments than in the prior year. Nine-month operating income increased $3.1 million.
- Government Operations recorded an $11.3 million year-to-date operating-income reduction related to cost overruns on a non-nuclear component manufacturing project, reducing year-to-date EPS by approximately $0.09. Management is exploring potential recovery of the overruns.
- Commercial Operations benefited from higher in-plant inspection, maintenance, and modification activity, as well as stronger nuclear fuel handling and medical radioisotope revenue. The prior-year period included a $2.0 million gain from settlement of contingent consideration and higher Canadian wage subsidies.
- BWXT acquired Dynamic Controls Limited and Citadel Capital Corporation, including Cunico Corporation, on April 11, 2022, for approximately $49.9 million. The acquired businesses supply engineered valves, manifolds, and fittings and are included in Government Operations.
- Accumulated other comprehensive income changed from a $12.1 million gain at year-end 2021 to a $32.3 million loss at September 30, 2022, primarily because of currency translation losses.
- Backlog declined to $4.319 billion from $5.176 billion at December 31, 2021, including $3.686 billion in Government Operations and $633 million in Commercial Operations. Approximately 46% of remaining performance obligations was expected to be recognized by the end of 2023.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide specific full-year revenue, earnings, or margin guidance. Management states that it expects sufficient cash, operating cash flow, borrowing capacity, and debt-market access to satisfy requirements for the next 12 months and beyond.
- Backlog is subject to U.S. government budget and appropriations cycles; contracts may be canceled, modified, or delayed. Approximately $104.3 million of backlog was unfunded, and approximately $0.4 billion of unexercised options was excluded from backlog.
- Fixed-price contracts expose BWXT to labor, productivity, steel, raw-material, schedule, and completion-cost risks. Contract estimates can materially affect revenue, costs, operating income, cash flow, and EPS.
- COVID-19-related operating disruptions had subsided significantly, but management continued to identify potential risks involving employee illness, supply-chain disruption, and contractor delays. Deferred payroll taxes of $10.7 million were due by January 2023.
- BWXT reported no material contingencies during the period and stated that its risk factors were not materially changed from the 2021 Form 10-K.
- The company had approximately $112.7 million of outstanding surety bonds, underfunded pension and postretirement obligations of approximately $74.2 million, and expected to contribute approximately $8.0 million to those plans during the remainder of 2022.
- Foreign-exchange forward contracts had a notional value of $442.4 million at September 30, 2022, with maturities extending through December 2024. The company reported counterparty and market-value risks associated with these instruments.
- Disclosure controls and procedures were evaluated as effective as of September 30, 2022, and management reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Government Operations margins recover after the $11.3 million cost-overrun charge and reduced favorable contract adjustments.
- The timing and collectability of retainages, contracts in progress, and other contract assets, which totaled substantial amounts on the balance sheet.
- Progress on recovery efforts for the non-nuclear component project cost overruns and any further contract estimate revisions.
- Actual terms, interest costs, covenant requirements, and future leverage under the October 2022 refinancing.
- Whether the $4.319 billion backlog converts to revenue as projected, particularly the unfunded and appropriations-dependent portions.
- The sustainability of the unusually large FX-related gain included in third-quarter and year-to-date other income.
- Future cash requirements for capital expenditures, acquisitions, pension and postretirement funding, environmental liabilities, surety obligations, dividends, and debt service.