BWX Technologies, Inc. annual report, FY2013

Business Context and Reporting Period

The filing is The Babcock & Wilcox Company’s Form 10-K for the fiscal year ended December 31, 2013, filed February 26, 2014. The request identifies the company as BWX Technologies, Inc.; the filing itself identifies the registrant as The Babcock & Wilcox Company. The company operated five segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. Its businesses are concentrated in large, long-term projects, U.S. Government contracting, nuclear components and services, power-generation equipment, and development of a small modular reactor.

The filing presents full-year 2013 results and unaudited quarterly data. Fourth-quarter 2013 revenue was $802.8 million, operating income was $295.3 million, and net income attributable to the company was $165.6 million, including a significant pension mark-to-market gain.

Financial Performance and Key Metrics

Metric	2013	2012	Change
Revenue	$3.269 billion	$3.291 billion	Down 0.7%
Operating income	$536.4 million	$346.6 million	Up $189.8 million
Income before taxes	$517.2 million	$319.4 million	Up $197.8 million
Net income attributable to the company	$346.1 million	$227.7 million	Up 52.0%
Diluted EPS	$3.07	$1.91	Up $1.16
Operating margin	16.4%	10.5%	Up 5.9 percentage points
Effective tax rate	35.7%	31.9%	Up 3.8 percentage points
Cash flow from operations	$137.9 million	$184.9 million	Down $47.0 million

Reported operating income benefited from a $222.7 million fourth-quarter non-cash pension and postretirement mark-to-market gain, compared with a $31.9 million loss in 2012. Results also included $39.6 million of restructuring charges and a $19.1 million impairment of the USEC investment. Excluding pension mark-to-market and restructuring items, segment and corporate operating income declined by $25.3 million.

Power Generation: Revenue was $1.768 billion and operating income was $155.8 million, down from $1.786 billion and $183.4 million. Results were affected by $35.6 million of additional estimated losses on a troubled steam-generation project.
Nuclear Operations: Revenue increased 6.3% to $1.168 billion and operating income increased 5.1% to $237.9 million, driven by higher U.S. Government nuclear-component, naval-fuel and uranium-downblending activity.
Technical Services: Revenue declined 3.3% to $104.3 million and operating income declined to $58.2 million, primarily because of lower NNSA award fees and lower activity on certain projects.
Nuclear Energy: Revenue fell 12.8% to $283.9 million and operating income fell to $8.6 million, reflecting completion of large contracts, weaker project mix and the absence of a favorable 2012 settlement.
mPower: Operating loss improved to $81.3 million from $113.5 million, primarily because $78.4 million of DOE cost-sharing reimbursement reduced research and development costs. The program nevertheless remained loss-making.

Liquidity, Capital Structure and Cash Flow

Liquidity, defined as unrestricted cash and investments plus available credit capacity, was $898.2 million at December 31, 2013, down from $1.0185 billion.
Cash and cash equivalents were $346.1 million; restricted cash was $48.7 million; and investments totaled approximately $15.2 million at fair value.
Operating cash flow was $137.9 million. Investing activities provided $20.1 million, while financing activities used $190.9 million, principally due to share repurchases and dividends.
The company had no borrowings under its $700 million revolving credit facility. Letters of credit under the facility totaled $163.0 million, leaving $537.0 million available for borrowings or letters of credit.
Total debt was minimal: $4.7 million of current maturities and $0.2 million of long-term debt. The company was in compliance with its credit covenants, including a 0.08-to-1.0 leverage ratio against a maximum of 2.75-to-1.0.
Outstanding letters of credit and bank guarantees totaled $259.4 million, and surety bonds totaled $405.8 million. Pension and other postretirement plans were underfunded by approximately $441.4 million, with expected 2014 contributions of approximately $66.6 million to pension plans and $9.4 million to other postretirement plans.

Backlog, Material Changes and Outlook

Total backlog declined to $4.590 billion at December 31, 2013 from $5.749 billion. Power Generation backlog was $2.072 billion, Nuclear Operations $2.369 billion, Technical Services $5 million, Nuclear Energy $142 million and mPower $2 million. Approximately $1.739 billion was expected to convert to revenue in 2014. Approximately $700 million of anticipated U.S. Government awards were delayed from the fourth quarter of 2013 to the first quarter of 2014 because of the government shutdown and delayed budget approvals.

Management expected approximately $0.8 billion of 2014 Power Generation revenue from year-end backlog and noted that environmental-market growth would be slower and more competitive because of regulatory uncertainty and low natural-gas prices.
Management expected approximately $0.9 billion of 2014 Nuclear Operations revenue from backlog, plus the delayed government awards. The segment had not been materially affected by sequestration through the filing date, but future defense-budget reductions remained a risk.
Technical Services operating income was expected to decline in 2014 because of a new ownership-fee structure or the potential loss of the combined Y-12/Pantex contract.
Nuclear Energy was expected to generate approximately $92 million of 2014 revenue from backlog, with results dependent on Canadian nuclear-utility maintenance and capital spending.
The mPower program required substantial continuing investment. The DOE cooperative agreement contemplated at least $150 million of cost-sharing support, with $99.3 million authorized at year-end. An additional $85 million had been designated by Congress but was not yet obligated by the DOE.
Management accelerated its search for additional mPower investors that would collectively own a majority interest in Generation mPower LLC. Failure to secure additional funding could delay development and commercialization.

Guidance, Risks, Contingencies and Unusual Items

The company used percentage-of-completion accounting, making earnings sensitive to changes in estimated costs, productivity, schedules, claims and fixed-price contract performance.
A major Power Generation project generated cumulative contract losses of approximately $52.5 million through 2013, including $35.6 million recognized in 2013. The company filed suit against the customer in January 2014.
In the Berlin Station dispute, the customer had drawn approximately $4.6 million against letters of credit and could seek additional draws. The company recorded $7.8 million of provisions and asserted claims exceeding $37 million.
The joint venture’s non-selection for the combined Y-12/Pantex management contract was under protest before the Government Accountability Office. An unfavorable outcome could materially reduce Technical Services earnings and cash flow.
The company fully impaired its USEC investment, recording a $19.1 million fourth-quarter charge and reducing its carrying value to zero. A proposed USEC restructuring could provide future securities and notes, but the filing did not recognize those potential recoveries.
Environmental accruals totaled $58.1 million at year-end, up from $49.6 million. The company also faced nuclear decommissioning, radioactive-material, insurance, asbestos, litigation and regulatory risks.
The U.S. Government represented approximately 38% of 2013 revenue, creating exposure to appropriations, sequestration, contract renewal, audit, termination and procurement risks.
Management reported effective disclosure controls and internal control over financial reporting. Deloitte & Touche issued unqualified opinions on the financial statements and internal controls.

Investor Verification Checklist

Verify the registrant’s identity and corporate history, given the request’s reference to BWX Technologies, Inc. versus the filing’s stated name, The Babcock & Wilcox Company.
Separate the $222.7 million pension mark-to-market gain from recurring operating performance and assess results excluding restructuring charges.
Monitor execution and ultimate claims resolution on the troubled Power Generation project and the Berlin Station dispute, including potential letters-of-credit draws.
Confirm the timing and funding of the approximately $700 million delayed U.S. Government awards and the status of the Y-12/Pantex contract protest.
Assess mPower funding, additional-investor requirements, DOE appropriations, NRC licensing progress and the potential change in Generation mPower’s consolidation status.
Review pension funding requirements, environmental accrual adequacy, contingent liabilities and the availability of insurance and government indemnification.
Evaluate cash conversion and working-capital trends, particularly the decline in operating cash flow and the effect of contracts in progress and advance billings.