BWX Technologies, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
BWXT designs and manufactures nuclear components, fuels and equipment and provides nuclear services to U.S. government, commercial nuclear and medical customers. Reportable segments are Nuclear Operations Group, Nuclear Power Group and Nuclear Services Group. This filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
BWXT was designated an essential business in the United States and Canada during the COVID-19 pandemic. Operations continued without a significant disruption through June 30, 2020, although management reported delays in government bidding and contracting, rescheduled nuclear outage services and lower demand for medical radioisotopes and radiopharmaceuticals.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $504.5 million | $471.2 million | $1,046.7 million | $887.7 million |
| Operating income | $82.4 million | $80.5 million | $180.7 million | $144.2 million |
| Operating margin | 16.3% | 17.1% | 17.3% | 16.2% |
| Net income attributable to BWXT | $64.3 million | $58.9 million | $139.8 million | $107.9 million |
| Diluted EPS | $0.67 | $0.62 | $1.46 | $1.13 |
| Operating cash flow | Not separately provided | Not separately provided | $155.6 million | $47.1 million |
- Q2 revenue increased 7.1%; six-month revenue increased 17.9%.
- Q2 operating income increased 2.4%; six-month operating income increased 25.3%.
- Q2 net income attributable to BWXT increased 9.1%; six-month net income increased 29.6%.
- Effective tax rates were 23.4% for Q2 and 23.3% for the first six months, compared with 24.1% and 23.1%, respectively, in 2019.
- Capital expenditures were $115.5 million in the first six months, versus $75.7 million in 2019. The company also paid $16.2 million for the acquisition of Laker Energy Products.
Segment performance and material changes
| Segment | Q2 2020 revenue | Q2 operating income | Six-month revenue | Six-month operating income |
|---|---|---|---|---|
| Nuclear Operations Group | $410.3 million | $86.0 million | $834.0 million | $176.3 million |
| Nuclear Power Group | $68.0 million | $1.1 million | $155.9 million | $9.6 million |
| Nuclear Services Group | $33.3 million | $4.1 million | $70.1 million | $10.5 million |
- Nuclear Operations Group: Q2 revenue rose 14.5% and six-month revenue rose 25.8%, driven by increased production for Columbia-Class nuclear propulsion, naval nuclear fuel and downblending operations, as well as procurement timing for long-lead materials. Six-month operating income benefited from favorable naval nuclear fuel contract adjustments.
- Nuclear Power Group: Q2 revenue declined 21.5% and six-month revenue declined 8.9%. Lower nuclear component activity, reduced steam-generator contract activity, lower inspection and maintenance work, and lower medical radioisotope volumes contributed to the decline. Operating margin fell to 1.6% in Q2 from 17.2% in the prior-year quarter, partly because of favorable contract estimate changes recorded in 2019 and unfavorable product mix.
- Nuclear Services Group: Q2 revenue increased 11.7% and six-month revenue increased 19.0%, primarily from advanced-technology design and engineering work and, year to date, higher U.S. commercial nuclear outage activity.
- Net favorable contract estimate changes increased revenue by $11.4 million in Q2 and $21.0 million in the first six months; management stated these changes increased operating income by approximately the same amounts in the respective periods.
Cash flow, liquidity and debt
- Cash, cash equivalents and restricted cash totaled $67.6 million at June 30, 2020, down from $92.4 million at December 31, 2019. Unrestricted cash and cash equivalents were $61.6 million.
- Working capital increased to $248.6 million from $225.0 million at year-end 2019.
- First-half cash flow was $155.6 million from operations, $(129.4) million from investing activities and $(50.4) million from financing activities. Cash declined by $24.8 million after exchange-rate effects.
- Total debt was $840.0 million gross, or $826.8 million net of deferred issuance costs, at June 30, 2020, compared with $817.4 million gross and $809.4 million net at December 31, 2019.
- On June 12, 2020, BWXT issued $400 million of 4.125% senior notes due 2028. Proceeds were used primarily to repay the term loans and reduce revolving-credit borrowings.
- The revolving credit facility was increased to $750 million and extended to March 24, 2025. At June 30, 2020, borrowings were $40.0 million, letters of credit were $64.7 million and available capacity was $645.3 million. The company was in compliance with its debt covenants.
- Management stated that available cash, borrowing capacity and letter-of-credit capacity were sufficient to fund operating requirements for at least the next 12 months.
Backlog, outlook, risks and unusual items
- Backlog, defined as remaining performance obligations, was approximately $4.7 billion at June 30, 2020, down from $5.3 billion at December 31, 2019. Expected recognition was approximately $933 million in 2020, $1.3 billion in 2021 and $2.5 billion thereafter.
- Nuclear Operations backlog was $3.9 billion, Nuclear Power backlog was $771 million and Nuclear Services backlog was $43 million. Approximately $3.5 billion of Nuclear Operations backlog was with the U.S. government, including $401.8 million not yet funded.
- The filing does not provide explicit quantitative full-year revenue or earnings guidance.
- COVID-19 risks include employee illness or absenteeism, facility restrictions, supply-chain disruption, delayed government contracting, rescheduled nuclear outages and reduced elective diagnostic procedures. Future effects were described as uncertain and potentially material.
- Fixed-price contract risks include labor productivity changes, steel and raw-material cost inflation, performance guarantees and potential cost overruns. Contract estimates can materially affect revenue, earnings, cash flow and margins.
- BWXT acquired Laker Energy Products for approximately $16.2 million on January 2, 2020, subject to contingent consideration of up to CAD12.0 million. It divested its U.S.-based commercial nuclear services business on May 29, 2020 in a cashless exchange of approximately $18.0 million of net assets for a manufacturing facility and land of approximately equal value.
- Underfunded pension and postretirement obligations totaled approximately $183.2 million; expected contributions for the remainder of 2020 were approximately $5.6 million.
- Outstanding surety bonds totaled approximately $73.3 million. The filing states that there were no material contingencies during the period.
Important facts for investors to verify
- Whether Nuclear Operations growth and Columbia-Class production continue at the reported pace and whether government funding supports the related backlog.
- Whether Nuclear Power margins recover from the significant Q2 decline and how COVID-19 affects medical products and nuclear outage activity.
- Actual COVID-19 impacts on workforce availability, supply chains, customer demand and government contracting.
- Execution of fixed-price contracts, future contract estimate adjustments and exposure to cost inflation or schedule guarantees.
- Debt-service requirements, covenant compliance, refinancing needs and utilization of the $750 million revolving facility.
- Conversion of the $4.7 billion backlog into revenue, including the $401.8 million of unfunded U.S. government backlog and approximately $1.0 billion of unexercised options excluded from backlog.
- Future pension contributions, surety-bond capacity and the financial effects of the Laker acquisition and commercial-services divestiture.