BWX Technologies, Inc. 2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2016; the filing is not a standalone fourth-quarter report, although it includes unaudited quarterly data. BWXT designs and manufactures naval nuclear components, reactors and fuel; provides nuclear, environmental and technical services to the U.S. Government; and supplies equipment, fuel and services to commercial nuclear customers. Reportable segments are Nuclear Operations, Technical Services and Nuclear Energy. The former Power Generation business was spun off into Babcock & Wilcox Enterprises, Inc. in June 2015 and is presented as discontinued operations.
The U.S. Government represented approximately 87% of consolidated revenue in 2016, compared with 88% in 2015. BWXT employed approximately 5,900 people worldwide at year-end.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $1,550.6 million | $1,415.5 million | 9.5% increase |
| Operating income | $239.3 million | $205.9 million | 16.2% increase |
| Operating margin | 15.4% | 14.6% | Improved |
| Income before taxes | $257.3 million | $221.1 million | 16.4% increase |
| Effective tax rate | 28.6% | 36.4% | Improved |
| Net income attributable to BWXT | $183.1 million | $131.5 million | 39.2% increase |
| Diluted EPS | $1.76 | $1.22 | 44.3% increase |
| Operating cash flow | $239.9 million | $335.2 million | 28.4% decrease |
| Capital expenditures | $52.6 million | $56.8 million | Decrease |
Net margin was approximately 11.8% in 2016 versus 9.3% in 2015. Results benefited from higher revenue, Nuclear Energy segment improvement, a lower effective tax rate, a $16.1 million reversal of a commercial nuclear litigation contingency and a $9.3 million gain from release of substantially all legacy performance guarantees related to the spin-off. Results were reduced by a $30.0 million mPower loss contingency and a $21.5 million non-cash pension and postretirement mark-to-market loss.
Segment results and backlog
| Segment | 2016 revenue | 2016 operating income | 2015 comparison |
|---|---|---|---|
| Nuclear Operations | $1,269.3 million | $268.5 million | Revenue up 7.6%; operating income up 4.3%; margin declined to 21.2% from 21.8% |
| Technical Services | $97.2 million | $16.5 million | Revenue up 16.0%; operating income down 8.8% |
| Nuclear Energy | $189.2 million | $38.5 million | Revenue up 22.0%; operating income increased from $1.7 million; margin rose to 20.3% |
Total backlog was $4.0 billion at December 31, 2016, up from $2.7 billion. Nuclear Operations backlog was $3.5 billion and Nuclear Energy backlog was $493 million. Approximately $1.45 billion of total backlog was expected to convert to revenue in 2017. Approximately $265.3 million of Nuclear Operations government backlog was not yet funded. The company reported that 2016 government awards exceeded $3.0 billion, with approximately $2.1 billion added to backlog during the year.
Liquidity, debt and capital allocation
- Cash, restricted cash and investments totaled approximately $158.1 million at year-end, down from $182.4 million.
- Management-defined liquidity declined to $394.3 million from $482.1 million, primarily because of the NEC acquisition and share repurchases.
- Debt under the amended credit agreement totaled $531.0 million, with no revolving borrowings outstanding. Current maturities were $27.4 million and long-term debt was $497.7 million after debt issuance costs.
- The credit facility matures June 30, 2020. Approximately $245.1 million remained available for borrowing or letters of credit, excluding an additional $250 million incremental capacity. The weighted-average borrowing rate was 2.08%.
- BWXT was in compliance with its credit covenants, including a maximum leverage ratio of 3.00-to-1.00 and minimum interest coverage ratio of 4.00-to-1.00.
- Letters of credit and bank guarantees totaled $154.9 million; surety bonds totaled $19.7 million.
- BWXT repurchased approximately $293.0 million of common stock during 2016, including a $200 million accelerated share repurchase agreement, and declared dividends of $0.36 per share.
- Management stated that available cash, borrowing capacity and letter-of-credit capacity were sufficient to fund operating requirements for at least the next twelve months.
Material changes, outlook and unusual items
- On December 16, 2016, BWXT acquired BWXT Nuclear Energy Canada Inc., formerly GE Hitachi Nuclear Energy Canada Inc., for approximately $117.8 million. The acquisition added CANDU nuclear fuel, fuel-handling and replacement-component capabilities and contributed $2.9 million of revenue in 2016 after acquisition.
- BWXT deconsolidated Generation mPower LLC after entering a March 2016 framework agreement. It recognized a $13.6 million gain on deconsolidation and a $30.0 million contingent settlement obligation. DOE funding for the mPower program remained suspended.
- Management expected 2017 revenue of approximately $1.246 billion from existing Nuclear Operations backlog and $197 million from Nuclear Energy backlog, excluding new awards and change orders. No formal consolidated earnings guidance was provided in the filing.
- Research and development totaled $40.1 million in 2016, including $33.7 million funded by customers. BWXT limited planned mPower spending to no more than $10 million annually during the fundraising period.
- Environmental accruals increased to $86.3 million from $63.4 million. Environmental compliance charges were $14.2 million in 2016, and the company expects approximately $4.3 million of related capital expenditures over the next five years.
- Defined benefit pension and postretirement plans were underfunded by approximately $374.0 million. Expected 2017 pension and other postretirement contributions were approximately $24.5 million and $1.5 million, respectively.
- The company recorded no material goodwill or indefinite-lived intangible-asset impairment in 2016. Contract revenue is generally recognized using percentage-of-completion accounting, making results sensitive to changes in cost-to-complete estimates.
Principal risks and contingencies
- Heavy dependence on U.S. Government contracts exposes BWXT to Congressional appropriations, budget delays, sequestration, contract termination, rebidding and regulatory audit risk.
- Backlog may be cancelled, delayed, modified or unfunded and is not a GAAP measure; funded status and timing should not be treated as guaranteed revenue.
- Fixed-price and incentive-fee contracts expose the company to labor, materials, productivity, supplier, schedule and project-execution risks, including potentially material losses from adverse estimate revisions.
- Nuclear operations create regulatory, environmental, safety, decommissioning, insurance and potential liability exposures. The Apollo and Parks litigation had been dismissed by the trial court, but appeals remained pending; management considered recovery by plaintiffs remote and disclosed a possible loss range of $0 to $125 million.
- The mPower framework agreement could require payment of the $30.0 million settlement amount if the program is not restarted.
- The company has significant pension obligations, environmental liabilities, letters of credit and debt amortization requirements. Foreign exchange exposure arises primarily from Canadian operations.
Investor verification checklist
- Verify the sustainability of 2016 earnings excluding the $16.1 million litigation-contingency reversal, $13.6 million mPower deconsolidation gain, $9.3 million guarantee-release gain and $30.0 million mPower charge.
- Reconcile the sharp improvement in Nuclear Energy profitability and assess the ongoing contribution, integration costs and liabilities of the NEC acquisition.
- Review government funding, contract options and the $265.3 million of unfunded Nuclear Operations backlog.
- Assess cash conversion, especially the decline in operating cash flow and the increase in contracts in progress.
- Evaluate leverage, 2020 debt maturity concentration, covenant headroom and the impact of continued share repurchases and dividends.
- Review pension underfunding, environmental accrual estimates, decommissioning obligations and the Apollo and Parks litigation appeals.
- Confirm 2017 backlog conversion assumptions and the absence of formal consolidated earnings guidance.