BWX Technologies, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for The Babcock & Wilcox Company, not an entity identified in the filing as BWX Technologies, Inc. The report covers the quarter and six months ended June 30, 2011, filed August 8, 2011. Comparisons are against the corresponding 2010 periods, which reflect combined results before the July 2010 spin-off from McDermott International.
Business Context and Reporting Period
The company operated through four segments: Power Generation, Nuclear Operations, Technical Services and Nuclear Energy. Effective March 31, 2011, the former two-segment structure was reorganized into these four segments without changing consolidated results. The company designs, manufactures and services power-generation and nuclear equipment and provides U.S. Government nuclear and technical services.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $752.4 million | $688.5 million | $1,443.6 million | $1,350.9 million |
| Operating income | $63.3 million | $85.7 million | $85.2 million | $124.4 million |
| Operating margin | 8.4% | 12.4% | 5.9% | 9.2% |
| Net income attributable to company | $46.2 million | $47.6 million | $59.7 million | $64.5 million |
| Diluted EPS | $0.39 | $0.41 | $0.51 | $0.55 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(51.6) million | $(56.6) million |
Revenue increased 9.3% in the second quarter and 6.9% year to date, but operating income declined 26.1% and 31.5%, respectively. Net income attributable to the company declined 3.0% in the quarter and 7.4% year to date. Effective tax rates decreased to 30.5% from 38.3% in the quarter and to 29.9% from 39.9% year to date, benefiting from tax credits, deductions, a $3.8 million uncertain-tax-position benefit and a $2.5 million tax-authority settlement benefit in the first six months.
At June 30, 2011, cash and cash equivalents were $258.4 million, restricted cash was approximately $25.7 million, and investments had a fair value of $92.8 million. Total current assets were $1.290 billion versus $1.209 billion at December 31, 2010; working capital was $246.0 million versus $227.3 million. Debt was minimal: notes payable and current maturities were $3.4 million and long-term debt was $0.8 million.
The $700 million revolving credit facility had no borrowings outstanding, $193.8 million of letters of credit issued and $506.2 million available for borrowings or letters of credit. The facility matures in May 2014, and the company was in compliance with all covenants. Outstanding surety bonds totaled approximately $295.4 million, and foreign bank guarantees totaled $36.8 million.
Material Changes Versus Prior Comparable Period
- Nuclear Energy deteriorated materially: second-quarter operating loss widened to $33.3 million from $2.3 million; the six-month loss widened to $70.8 million from $13.7 million.
- The company recorded approximately $26.0 million of additional Nuclear Energy project costs in the quarter and $47.6 million year to date, primarily from productivity, scheduling and execution issues.
- Nuclear Operations improved, with quarterly operating income rising to $59.3 million from $40.7 million and six-month operating income rising to $89.7 million from $65.2 million. Results included a favorable $10.9 million NFS settlement.
- Power Generation revenue grew, primarily from aftermarket services, but operating income declined because of weaker new-build environmental and steam-generation activity.
- Technical Services revenue and operating income increased substantially because of expanded remediation, specialty manufacturing and new government contract work.
- Backlog declined to $4.630 billion at June 30, 2011 from $5.202 billion at December 31, 2010, principally reflecting lower Nuclear Operations backlog.
- Cash used in investing increased to $93.9 million from $18.1 million, including additional investments in unconsolidated affiliates. Financing provided $6.6 million versus $152.8 million used in the prior-year period, which included a $100 million dividend and other settlement payments.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit quantitative earnings or revenue guidance. Management stated that quarterly results are not necessarily indicative of full-year results. Backlog included approximately $1.148 billion expected to be recognized in 2011, $1.368 billion in 2012 and $2.114 billion thereafter.
Management identified continued opportunities from EPA air-pollution rules, including the Cross-State Air Pollution Rule and anticipated Utility MACT requirements. However, utility capital spending, environmental-rule uncertainty, fuel economics and demand for new coal-fired plants remained significant influences on Power Generation.
The company’s fixed-price and percentage-of-completion contracts are exposed to changes in productivity, schedules, material costs and cost-to-complete estimates. Claims and equitable adjustments related to the loss-making Nuclear Energy project were significant but were not included in the recorded provisions and may not be recovered.
Major risks include U.S. Government spending and appropriations, nuclear regulatory changes following the Fukushima events, potential project delays or cancellations, environmental and nuclear liabilities, unfunded pension obligations, insurance and indemnity availability, surety and letter-of-credit capacity, foreign-exchange exposure, and potential tax consequences of the spin-off.
In June 2011, approximately 18 plaintiffs filed a class-action lawsuit relating to the NFS facility in Erwin, Tennessee, alleging radiation and hazardous-material exposure. The company expects insurance and Price-Anderson indemnity coverage but stated that an adverse uncovered outcome could materially affect financial condition, results and cash flow. Separate Apollo and Parks litigation involved approximately 95 claimants; the company expects insurance and an ARCO indemnity to cover potential liabilities.
A standstill agreement with Toshiba and USEC extended to August 15, 2011 the parties’ ability to terminate an agreement related to a proposed $2 billion Department of Energy loan guarantee for the American Centrifuge project. The filing does not confirm whether the loan guarantee or related investment ultimately closed.
Investor Verification Points
- Confirm that the filing entity and requested company name are correctly matched; the document identifies the registrant as The Babcock & Wilcox Company.
- Review the Nuclear Energy project provisions, remaining cost-to-complete estimates, claims and any subsequent recoveries or additional losses.
- Assess backlog quality, funding and cancellation risk, especially the decline in Nuclear Operations backlog and the concentration in U.S. Government programs.
- Verify liquidity after considering negative operating cash flow, restricted cash, letters of credit, surety bonds, pension obligations and environmental liabilities.
- Monitor the NFS and Apollo and Parks litigation, insurance coverage, indemnities and potential Price-Anderson protection.
- Follow the American Centrifuge standstill agreement, DOE loan-guarantee process and related Toshiba and USEC obligations.
- Evaluate the potential effect of post-Fukushima nuclear regulatory requirements and changes in commercial nuclear demand.