Business context and reporting period
BWX Technologies, Inc. filed its Form 10-K for the fiscal year ended December 31, 2017, with quarterly data for the fourth quarter. BWXT is a specialty manufacturer and nuclear technology and services provider focused on naval nuclear components, reactors and fuel; U.S. Government nuclear services; and commercial nuclear equipment, fuel and engineering services. Operations are reported in the Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group. The former Power Generation business was spun off in 2015 and is presented as discontinued operations.
Financial performance and position
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $1,687.7 million | $1,550.6 million | +8.8% |
| Operating income | $308.9 million | $239.3 million | +29.1% |
| Operating margin | 18.3% | 15.4% | +290 bps |
| Net income attributable to BWXT | $147.8 million | $183.1 million | -19.2% |
| Diluted EPS | $1.47 | $1.76 | -16.5% |
| Cash flow from operations | $222.2 million | $239.9 million | -7.4% |
- Net margin was approximately 8.8%, compared with 11.8% in 2016. Results were reduced by a $53.0 million tax expense related primarily to the Tax Cuts and Jobs Act.
- Segment revenue and operating income were $1,271.9 million and $289.9 million for Nuclear Operations, $137.2 million and $23.1 million for Nuclear Services, and $285.8 million and $40.0 million for Nuclear Power.
- Backlog was $4.0 billion at year-end, consisting of $3.305 billion in Nuclear Operations, $29 million in Nuclear Services and $637 million in Nuclear Power. Approximately $1.442 billion was expected to convert to revenue in 2018.
- Cash and cash equivalents were $203.4 million; total cash, restricted cash and investments were approximately $225.4 million. Working capital was $345.0 million.
- Total debt was $513.1 million, including $27.9 million due within one year. The company had no revolving borrowings, $324.1 million of remaining borrowing or letter-of-credit capacity under the facility, and total liquidity of $530.4 million. BWXT was in compliance with its debt covenants.
- Capital expenditures were $96.9 million, compared with $52.6 million in 2016, principally reflecting higher Nuclear Operations investment.
- The pension and postretirement plans were underfunded by approximately $308.3 million. Environmental accruals totaled $93.3 million.
Material changes versus the prior comparable period
- Revenue growth was concentrated in Nuclear Power, whose revenue increased $124.3 million, primarily because the NEC acquisition was owned for a full year in 2017 and because of higher Canadian nuclear components activity. Nuclear Operations revenue was essentially flat, while Nuclear Services benefited from a $7.9 million contract-dispute settlement.
- Operating income increased $69.6 million. Nuclear Operations benefited from favorable long-term contract estimate revisions, and Nuclear Services benefited from the contract settlement and lower selling, general and administrative expenses.
- Nuclear Power operating income declined $2.8 million because 2016 included a $15.0 million reversal of a litigation loss contingency, and 2017 included higher NEC-related selling, general and administrative costs and fewer Canadian outage projects.
- Net income and EPS declined despite higher operating income because the 2017 tax provision increased to $147.4 million from $73.7 million, including the $53.0 million Tax Cuts and Jobs Act charge. The 2016 period also included favorable items, including a $13.6 million gain from deconsolidating Generation mPower LLC and a $9.3 million gain from release of former performance guarantees.
- Operating cash flow decreased by $17.7 million, primarily because of working-capital movements and higher pension contributions. Investing cash outflows fell substantially because the 2016 period included the NEC acquisition.
- The 2017 fourth quarter reported a net loss attributable to BWXT of $15.7 million, or $(0.16) diluted EPS, reflecting the tax-law charge and a $11.1 million pretax pension and postretirement mark-to-market loss.
Guidance, outlook, commentary and risks
- Management expected approximately $1.190 billion of 2018 Nuclear Operations revenue and $230 million of 2018 Nuclear Power revenue from year-end backlog, excluding change orders and new awards.
- The U.S. Navy’s February 2018 long-range shipbuilding plan recommended additional submarines and aircraft carriers. BWXT was evaluating the impact and expected increased capital expenditures and personnel investment if demand expands.
- Approximately 81% of 2017 consolidated revenue came from U.S. Government contracts. Government appropriations, contract options, renewals, audits, delays and termination rights therefore remain central to revenue visibility.
- Backlog is not a GAAP measure and may be cancelled, modified, delayed or affected by funding. Of Nuclear Operations backlog with the U.S. Government, $266.6 million was not yet funded at year-end.
- Fixed-price and percentage-of-completion contracts expose results to cost overruns, productivity, schedule changes, supplier performance and revisions to estimated costs. Favorable contract estimate changes increased 2017 operating income by approximately $35.2 million.
- Environmental and nuclear-operating risks include decommissioning obligations, regulatory changes, remediation uncertainty, potential liability claims and the adequacy of insurance, indemnification and government reimbursement.
- The Apollo and Parks litigation claims were dismissed, and the U.S. Supreme Court denied review in February 2018. Separately, the company disclosed possible loss exposure of $0 to $125 million based on a prior settlement demand, although management considered plaintiffs’ recovery remote.
- BWXT adopted the new revenue standard on January 1, 2018 using the modified retrospective method. The filing indicates a substantial reduction in contracts in progress and advance billings upon adoption, with retained earnings increasing to approximately $1.002 billion from $990.7 million.
- Management stated that cash, borrowing capacity and letter-of-credit capacity were sufficient to fund operating requirements for at least the next 12 months. Expected 2018 pension contributions were approximately $35.4 million, with another $1.6 million expected for other postretirement benefits.
Most important facts for investors to verify
- Whether Congressional appropriations and the Navy shipbuilding plan translate into funded awards, backlog conversion and the anticipated capital and labor investment.
- The sustainability of Nuclear Operations contract margins, including the effect of the $35.2 million of favorable contract estimate revisions in 2017.
- NEC integration, Canadian outage timing, refurbishment activity and the normalization of Nuclear Power margins after 2016’s litigation-contingency reversal.
- The recurring effective tax rate after the one-time $53.0 million Tax Cuts and Jobs Act charge and any subsequent tax-return or regulatory adjustments.
- Debt repayment and refinancing requirements, particularly the $457.4 million scheduled maturity in 2020, covenant headroom and remaining letter-of-credit capacity.
- Changes in pension funding requirements, environmental accruals, decommissioning costs and nuclear or commercial litigation exposure.
- The effect of the new revenue-recognition standard on reported revenue timing, contract assets and liabilities, margins and comparability with prior periods.
- The company’s ability to convert backlog to cash while managing fixed-price contract risk, customer concentration and government funding dependence.
Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2017.