BWX Technologies, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
BWXT filed its unaudited quarterly report for the three and six months ended June 30, 2019. The company operates through Nuclear Operations Group, Nuclear Power Group and Nuclear Services Group, serving U.S. government, commercial nuclear and medical isotope markets. The July 2018 acquisition of Nordion’s medical isotope business contributed to the Nuclear Power Group.
Financial performance and key metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $471.2 million | $438.9 million | $887.7 million | $896.4 million |
| Operating income | $80.5 million | $71.5 million | $144.2 million | $151.4 million |
| Operating margin | 17.1% | 16.3% | 16.2% | 16.9% |
| Net income attributable to BWXT | $58.9 million | $60.7 million | $107.9 million | $127.1 million |
| Diluted EPS | $0.62 | $0.60 | $1.13 | $1.26 |
| Effective tax rate | 24.1% | 23.3% | 23.1% | 22.6% |
- Six-month operating cash flow was $47.1 million, compared with $17.3 million in the prior-year period.
- Capital expenditures were $75.7 million, versus $34.0 million in the prior-year period, producing negative operating cash flow less capital expenditures of approximately $28.6 million.
- Cash, cash equivalents and restricted cash totaled $41.5 million at June 30, 2019. Including investments, domestic and foreign cash and cash equivalents, restricted cash and investments totaled approximately $54.2 million.
- Working capital was $272.0 million, compared with $165.1 million at December 31, 2018.
- Total debt was approximately $870.4 million, consisting of $855.7 million of long-term debt and $14.7 million of current maturities. The company also had $200.0 million outstanding under its revolving facility and $279.2 million outstanding under term loans.
- Available borrowing capacity under the credit facility was $234.1 million after considering outstanding borrowings and letters of credit. The company reported compliance with all debt covenants.
- Backlog increased to $4.505 billion at June 30, 2019 from $3.479 billion at December 31, 2018. Approximately $847 million was expected to convert to revenue during the remainder of 2019.
Material changes versus the prior comparable period
- Second-quarter revenue increased 7.4%, led by higher Nuclear Operations Group revenue of $26.2 million and Nuclear Power Group revenue of $10.9 million. Six-month revenue decreased 1.0% because of lower Nuclear Power Group and Nuclear Services Group revenue.
- Second-quarter operating income increased $9.0 million, while six-month operating income decreased $7.3 million. Six-month results were affected by lower segment earnings, increased onboarding costs in Nuclear Operations and higher research and development spending.
- Nuclear Operations Group revenue increased 7.9% in the quarter, but six-month operating income declined $1.9 million because of employee onboarding costs associated with anticipated volume growth.
- Nuclear Power Group quarterly operating income rose $7.1 million, aided by favorable contract estimate changes and the medical isotope business. Six-month revenue declined $17.5 million because of fewer outage projects and the nearing completion of a China steam generator project.
- Nuclear Services Group revenue and operating income declined in both periods because of lower joint-venture activity and fewer commercial nuclear maintenance outages.
- Other income changed from income of $7.7 million in the second quarter of 2018 to expense of $2.8 million in 2019, and from income of $12.8 million to expense of $3.6 million for the six-month periods. The comparison was primarily affected by $6.0 million of derivative gains in the prior year and higher interest expense.
- Interest expense increased to $18.2 million for the first six months, from $11.4 million, reflecting higher debt levels.
Guidance, outlook, commentary, risks and unusual items
- The filing does not provide explicit full-year revenue or earnings guidance.
- Management expects to fund growth opportunities with operating cash flow or additional debt, equity or a combination of financing sources.
- In March 2019, BWXT received a U.S. government nuclear component and fuel award exceeding $2.1 billion including options. Approximately $1.5 billion was included in backlog at June 30, 2019; approximately $0.6 billion of options remained excluded and were expected to be exercised primarily in 2020, subject to appropriations.
- U.S. government spending, Congressional appropriations, contract funding and performance scores are significant business drivers. Of Nuclear Operations Group government backlog, $3.206 billion was unfunded at June 30, 2019.
- Contract estimates are subject to labor productivity, material prices, performance and completion-date risks, particularly on fixed-price contracts. Favorable estimate changes increased operating income by approximately $18.9 million in the quarter and $23.7 million year to date, compared with $9.2 million and $14.5 million in the prior-year periods.
- The company states that no material contingencies arose during the period and that there were no material changes to the risk factors disclosed in its 2018 Form 10-K.
- BWXT adopted the new lease standard on January 1, 2019, recognizing $45.1 million of right-of-use assets and $11.9 million of lease liabilities. The adoption did not affect income or cash flows.
- Unfunded pension and postretirement obligations totaled $190.2 million. The company expects approximately $4.5 million of related contributions during the remainder of 2019.
- Management believes available cash, borrowing capacity and letter-of-credit capacity are sufficient to fund operating requirements for at least the next 12 months.
Most important facts for investors to verify
- Whether the $4.505 billion backlog, particularly the unfunded U.S. government portion and unexercised options, converts to revenue as scheduled.
- Whether Nuclear Operations onboarding costs and elevated capital spending moderate as expected.
- The sustainability of contract estimate gains that materially supported operating income.
- Debt reduction, interest expense and compliance with the 4.00-to-1.00 maximum leverage and 3.00-to-1.00 minimum interest coverage covenants.
- Recovery in Nuclear Power outage and maintenance activity and progress of the Nordion medical isotope business.
- Future pension, postretirement, environmental and decommissioning funding requirements.