BWX Technologies, Inc. quarterly report, Q2 FY2013

BWX Technologies, Inc. (formerly The Babcock & Wilcox Company) — 2013 Q2 Form 10-Q Summary

Business context and reporting period

The filing covers the three and six months ended June 30, 2013, and was filed August 7, 2013. The company reported five segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. The mPower small modular reactor business was separately reported beginning in 2013, with prior periods recast for comparability.

Financial performance and liquidity

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Revenue	$886.1 million	$852.6 million	$1.692 billion	$1.618 billion
Operating income	$98.7 million	$110.1 million	$158.9 million	$196.5 million
Operating margin	11.1%	12.9%	9.4%	12.1%
Net income attributable to the company	$72.9 million	$77.2 million	$120.0 million	$137.2 million
Diluted EPS	$0.65	$0.65	$1.06	$1.15
Net cash provided by operating activities	Not separately provided	Not separately provided	$11.8 million	$(74.7) million

Six-month revenue increased 4.5%, while operating income declined 19.1% and diluted EPS declined 7.8%.
At June 30, 2013, cash and cash equivalents were $242.2 million, restricted cash was approximately $51.3 million, and investments were approximately $73.3 million. Total cash, restricted cash and investments were approximately $366.8 million, down from $540.3 million at December 31, 2012.
Total debt was approximately $5.1 million, consisting primarily of current notes payable and current maturities; no borrowings were outstanding under the $700 million revolving credit facility. Letters of credit totaled $147.8 million, leaving $552.2 million available for borrowings or letters of credit.
Six-month investing cash use was $5.8 million, including $33.4 million of capital expenditures. Financing cash use was $141.9 million, including $125.8 million of share repurchases and $18.1 million of dividends.
Approximately $154.7 million, or 64%, of unrestricted cash and cash equivalents related to foreign operations and was not readily available for U.S. operations without potential tax consequences.

Material changes versus the prior comparable period

Power Generation revenue increased 2.3% for the six-month period, but segment operating income declined to $63.9 million from $97.6 million. Results included $30.2 million of additional estimated losses on a new-build steam-generation project due primarily to unforeseen worksite conditions.
Nuclear Operations revenue increased 14.8% to $592.1 million, and operating income increased 9.3% to $120.5 million, driven by higher U.S. Government nuclear-component manufacturing and naval nuclear fuel and downblending activity.
Nuclear Energy revenue declined 17.7% to $126.7 million and operating income declined to $10.2 million from $32.0 million. The prior-year period benefited from approximately $18.4 million of revenue and approximately $18.1 million of net operating income from a contract-claim settlement.
mPower operating loss improved to $28.1 million from $60.6 million, primarily because the company recognized $37.8 million of DOE cost-sharing reimbursements as a reduction of research and development expense, including $21.5 million of pre-award cost reimbursement.
The Global Competitiveness Initiative produced $20.7 million of restructuring charges in the first six months, including $15.1 million of employee termination benefits and $5.6 million of consulting and administrative costs. Management expects annual savings of at least $40 million to $50 million after implementation, with total restructuring charges not expected to exceed $60 million.
The company repurchased approximately 4.7 million shares for $125.8 million during the first six months. The board authorized an additional repurchase program of up to $250 million in May 2013.
Backlog declined to $5.366 billion at June 30, 2013, from $5.749 billion at December 31, 2012. Approximately $1.355 billion was expected to convert to revenue during 2013 and $1.415 billion during 2014.

Guidance, outlook, risks and unusual items

Management expected 2013 net mPower spending of approximately $85 million after recognized DOE cost reimbursements. The DOE agreement provides for an award expected to total at least $150 million, but only $78.8 million had been authorized; remaining funding was subject to Congressional appropriations and performance requirements.
mPower development targets included a planned first commercial plant operation date in 2022. Continued funding depends on achieving specified milestones, annual DOE decisions and future appropriations.
Nuclear Operations and Technical Services remain exposed to U.S. Government spending, appropriations and sequestration. Of the $2.8 billion Nuclear Operations government backlog, $149 million was not yet funded.
The company had approximately $3.0 million of potential liquidated damages exposure that was not accrued because the amounts were not currently due and were not considered probable and estimable.
Fixed-price contract estimates remain a significant risk. Changes in labor productivity, material prices, project schedules or costs to complete could materially affect earnings, cash flow and financial condition.
Thirteen lawsuits involving approximately 87 primary claimants remained pending in the Apollo and Parks Township litigation concerning alleged radioactive releases. Insurance coverage and an ARCO indemnity were expected to provide coverage, but sufficiency and availability were not assured.
In July 2013, an appellate court reversed a prior judgment in the company’s insurance reimbursement litigation against American Nuclear Insurers. The company had not recognized amounts claimed because the ultimate recovery was uncertain.
The company’s USEC preferred-stock investment remained exposed to USEC’s disclosed financial distress and going-concern uncertainty. The company had previously recorded a $27.0 million impairment in 2012 and continued to evaluate the remaining investment.
The filing states that disclosure controls and procedures were effective as of June 30, 2013, and that no material change in internal control over financial reporting occurred during the quarter.

Most important facts for investors to verify

Whether the Power Generation project losses are complete or could increase further, and whether the approximately $3.0 million liquidated-damages exposure becomes probable or estimable.
DOE authorization and reimbursement timing for the mPower program, including the portion of the expected $150 million award that remains subject to appropriations.
Conversion, funding status and cancellation risk within the $5.366 billion backlog, particularly the $149 million of unfunded Nuclear Operations backlog.
Progress and total cost of the Global Competitiveness Initiative relative to the expected $40 million to $50 million of annual savings and $60 million charge ceiling.
Cash availability for U.S. operations, given that approximately 64% of unrestricted cash was held by foreign operations, as well as future pension funding requirements.
Outcomes of the Apollo and Parks Township litigation and the American Nuclear Insurers reimbursement proceedings, including the availability of insurance and indemnification.
The sustainability of reported earnings after excluding the $37.8 million DOE reimbursement, restructuring charges and the prior-year Nuclear Energy contract-claim benefit.