BWX Technologies, Inc. (filed as The Babcock & Wilcox Company) — 2014 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013. The company operated through five reportable segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. The filing was signed May 12, 2014.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $662.0 million | $805.4 million | Down 17.8% |
| Operating income | $53.6 million | $60.2 million | Down $6.6 million |
| Operating margin | 8.1% | 7.5% | Up approximately 60 bps |
| Net income | $41.2 million | $44.9 million | Down 8.3% |
| Net income attributable to the company | $45.0 million | $47.2 million | Down 4.5% |
| Effective tax rate | 24.5% | 26.6% | Down 210 bps |
| Diluted EPS | $0.41 | $0.41 | Flat |
| Operating cash flow | $(113.5) million | $(26.3) million | Greater use of cash |
| Capital expenditures | $21.2 million | $18.8 million | Up $2.4 million |
Cash and cash equivalents were $208.1 million at March 31, 2014, compared with $346.1 million at December 31, 2013. Restricted cash and investments brought reported cash, restricted cash and investments to approximately $257.3 million according to management. Working capital was $530.6 million, up from $510.2 million at year-end.
Total debt was approximately $20.1 million, including $15.0 million of long-term borrowings under the credit agreement and $5.1 million of current debt and maturities. The company had a $700 million revolving credit facility maturing June 8, 2017, with $15.0 million of borrowings and $158.0 million of letters of credit outstanding, leaving $527.0 million available. The company was in compliance with its credit covenants.
Other liquidity-related obligations included $109.5 million of subsidiary letters of credit and bank guarantees, approximately $394.5 million of surety bonds, and $438.4 million of unfunded pension and postretirement obligations. The company expected to contribute $67.4 million to these plans during the remainder of 2014.
Material changes versus the prior comparable period
- Revenue declined primarily because Power Generation revenue fell $149.4 million, reflecting lower environmental equipment and steam-generation activity, lower aftermarket revenue and reduced Berlin Station activity.
- Nuclear Operations revenue increased $25.1 million to $286.2 million, and operating income increased $4.8 million to $59.5 million, driven by higher U.S. Government nuclear-component manufacturing and naval-fuel activity.
- Nuclear Energy revenue declined $15.7 million to $47.8 million, while operating income declined $1.7 million to $0.5 million, mainly because prior-year maintenance, service and replacement steam-generator projects had been completed.
- Power Generation operating income declined $22.8 million to $10.5 million. The segment recorded $7.6 million of additional estimated Berlin Station contract losses, including potential liquidated damages.
- Restructuring charges declined to $2.7 million from $8.4 million. The company stated that its Global Competitiveness Initiative is expected to produce at least $75 million of annual savings after approximately $60 million of total restructuring charges.
- Backlog increased to $5.007 billion from $4.590 billion at December 31, 2013, principally because Nuclear Operations received $763 million of new bookings. Approximately $252.3 million of Nuclear Operations government backlog was not yet funded.
- Cash used in operations increased substantially because of working-capital movements, including higher contracts in progress and lower accounts payable. Share repurchases declined to $15.7 million from $57.1 million.
Guidance, outlook, commentary, risks and unusual items
- The company did not provide a clear consolidated revenue or earnings guidance range in the filing.
- On April 14, 2014, management announced a restructuring of the mPower program to focus on technology development. Beginning in the third quarter of 2014, annual investment was expected to be no more than $15 million. Continued Department of Energy funding was subject to an amended program and mutually agreeable milestones.
- The DOE had authorized $99.3 million of mPower funding as of March 31, 2014; $19.2 million of related receivables was outstanding. An additional $85 million had been allocated by Congress but was not yet obligated by the DOE.
- The Berlin Station dispute remains material. The customer had drawn approximately $4.9 million against letters of credit and claimed delay liquidated damages capped at approximately $18.7 million. The company had recorded $11.0 million of provisions for calls to date and estimated further calls. A temporary restraining order issued April 9, 2014 barred further draws pending a court decision.
- The company asserted claims exceeding $50 million related to Berlin Station delays, fuel specifications and other matters, but no recovery was recorded. Management stated that the litigation outcome was premature to predict and could materially adversely affect results if the customer prevailed.
- Other significant risks include government spending and appropriations, project execution and fixed-price contract estimates, liquidated damages and warranty claims, pension funding, environmental and nuclear liabilities, foreign exchange exposure, availability of letters of credit and surety capacity, cybersecurity, joint-venture performance and legal proceedings.
- The filing disclosed approximately 95 primary claimants in ongoing Apollo and Parks Township litigation involving alleged radioactive releases. Insurance and an ARCO indemnity were expected to provide coverage, but their sufficiency was not assured. The company had not recognized amounts sought in related ANI insurance litigation.
Most important facts for investors to verify
- Whether the sharp decline in Power Generation revenue and margin is temporary or reflects a sustained reduction in environmental and new-build demand.
- The final cost, liquidated-damages exposure and potential recovery associated with the Berlin Station project and related letters of credit.
- The revised mPower development plan, DOE funding availability, required company spending and potential partner or contractual claims.
- The conversion of the $5.0 billion backlog into revenue and the funding status of government backlog, particularly the $252.3 million not yet funded.
- The sustainability of cash generation given the $113.5 million quarterly operating cash outflow, working-capital requirements and planned pension contributions.
- The company’s ability to maintain credit availability, letters of credit and surety-bond capacity while managing pension, environmental, warranty and litigation obligations.