BWX Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; filed August 8, 2016. The interim financial statements are unaudited and presented under U.S. GAAP. BWXT operates through Nuclear Operations, Technical Services, and Nuclear Energy. The former Power Generation business was spun off on June 30, 2015 and is presented as discontinued operations in the prior-year comparison.
Financial Results and Key Metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $402.4 million | $357.1 million | $767.2 million | $692.6 million |
| Operating income | $88.5 million | $11.6 million | $131.1 million | $65.4 million |
| Net income attributable to BWXT | $57.5 million | $(17.1) million | $106.3 million | $28.1 million |
| Diluted EPS | $0.55 | $(0.16) | $1.01 | $0.26 |
| Operating margin | 22.0% | 3.2% | 17.1% | 9.4% |
| Effective tax rate | 34.5% | 104.7% | 30.4% | 42.9% |
- Revenue growth: Revenue increased 12.7% in the quarter and 10.8% year to date. Nuclear Operations contributed the largest increase, while Nuclear Energy grew strongly on Canadian outage and inspection work.
- Segment performance: Q2 operating income was $64.4 million for Nuclear Operations, $4.6 million for Technical Services, and $26.5 million for Nuclear Energy. Nuclear Energy’s Q2 margin was 48.8%, compared with 5.2% in the prior-year quarter, largely due to a favorable legal ruling and stronger Canadian activity.
- Cash flow: Operating cash flow was $62.6 million for the first six months, down from $83.3 million in 2015. Investing cash use was $28.9 million, including $18.5 million of capital expenditures. Financing cash use was $91.6 million, including $81.5 million of share repurchases and $19.0 million of dividends.
- Liquidity: Cash and cash equivalents were $97.8 million at June 30, 2016, compared with $154.7 million at December 31, 2015. Cash, restricted cash and investments totaled $127.4 million, versus $182.4 million at year-end.
- Debt: Debt consisted primarily of $292.5 million outstanding under the term loan, with no revolving borrowings. Letters of credit totaled $111.6 million, leaving $288.4 million available under the credit facility, excluding permitted incremental commitments of up to $250 million. The borrowing rate was 1.71%, and the company was in compliance with all covenants.
- Balance sheet: Contracts in progress increased to $358.2 million from $265.8 million at year-end, while advance billings increased to $153.1 million from $138.6 million. Unfunded pension and postretirement obligations totaled $361.9 million.
Material Changes Versus the Prior Comparable Period
- Operating income benefited from the reversal of a previously recorded $16.1 million legal liability after the Virginia Supreme Court dismissed the related claims.
- Prior-year results included $16.5 million of Q2 restructuring charges, $24.5 million of spin-off costs, and a $2.2 million pension mark-to-market adjustment; none were recorded in Q2 2016.
- Six-month 2016 results included a $30.0 million charge related to the mPower Framework Agreement, partly offset by a $13.6 million gain from deconsolidating Generation mPower LLC and a $9.3 million gain from release of substantially all remaining Power Generation performance guarantees.
- BWXT repurchased approximately 2.9 million shares for $81.5 million during the first six months. In Q2, it repurchased 1.1 million shares, including employee tax-withholding repurchases, at an average price of $34.00.
- Backlog increased to $3.673 billion at June 30, 2016 from $2.650 billion at December 31, 2015. Approximately $1.4 billion of new U.S. Government awards was added during the first six months, including component, fuel, and downblending contracts awarded in April.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects cash on hand, operating cash flow, and available credit capacity to satisfy liquidity needs for the next twelve months. No specific earnings or revenue guidance is provided in the filing.
- Backlog and government dependence: Nuclear Operations and Technical Services depend substantially on U.S. Government spending and congressional appropriations. Of the $3.248 billion Nuclear Operations backlog, $255.0 million was not yet funded. Backlog may be canceled, modified, or delayed.
- mPower contingency: Under the March 2016 Framework Agreement, Bechtel has a 12-month fundraising period to determine whether the mPower program will restart. If it is not restarted, BWXT may be required to pay a $30.0 million settlement amount; the company recognized this amount and secured it with a letter of credit. DOE funding has been suspended.
- Contract risk: Percentage-of-completion estimates are subject to changes in labor productivity, raw-material prices, and other cost assumptions. Net contract estimate revisions increased operating income by $7.3 million in the first six months of 2016.
- Legal and environmental matters: The Apollo and Parks radioactive-release litigation remains on appeal, although all 17 filed lawsuits were dismissed at the trial level. Insurance and an ARCO indemnity are expected to provide coverage, but may not be sufficient. Environmental liabilities were $61.7 million at June 30, 2016.
- Pension and capital requirements: BWXT expects to contribute approximately $6.4 million to pension and postretirement plans during the remainder of 2016.
- Market and operating risks: Nuclear Energy results depend on the timing of Canadian maintenance outages, commercial nuclear demand, foreign exchange rates, and large project execution. The company uses foreign-exchange forwards with $38.9 million of notional value at June 30, 2016.
Most Important Facts for Investors to Verify
- Whether the sharp improvement in operating margin is sustainable after excluding the $16.1 million legal-liability reversal and other unusual items.
- The status and eventual outcome of the mPower fundraising period, potential restart, or $30.0 million settlement payment.
- The funding, timing, and conversion of the $3.673 billion backlog, particularly the $255.0 million of unfunded Nuclear Operations backlog and dependence on appropriations.
- Operating cash conversion, given the $20.7 million year-over-year decline in first-half operating cash flow and the increase in contracts in progress.
- Future cash uses for share repurchases, dividends, debt repayment, pension obligations, environmental liabilities, and potential acquisitions.
- Exposure to fixed-price contract overruns, Canadian nuclear-service cycles, foreign-exchange movements, litigation appeals, and nuclear regulatory or government-program changes.