BWX Technologies, Inc. (formerly The Babcock & Wilcox Company) — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. Operations comprised Power Generation, Nuclear Operations, Technical Services and Nuclear Energy. The former mPower business was reclassified to Other for segment reporting purposes.
Management was pursuing a tax-free spin-off of the Power Generation business from the Government & Nuclear Operations businesses. The transaction was expected by mid-summer 2015, subject to SEC effectiveness of the registration statement and Board approval. The company expected to change its name to BWX Technologies, Inc. upon completion.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $730.6 million | $662.0 million | +10.4% |
| Operating income | $70.8 million | $53.6 million | +$17.2 million |
| Operating margin | 9.7% | 8.1% | +160 basis points |
| Net income | $45.0 million | $41.2 million | +9.4% |
| Net income attributable to company | $45.3 million | $45.0 million | +$0.2 million |
| Diluted EPS | $0.42 | $0.41 | +$0.01 |
| Cash flow from operations | $5.0 million | $(113.5) million | +$118.6 million |
| Capital expenditures | $21.3 million | $21.2 million | Approximately flat |
Cash and cash equivalents were $274.4 million at March 31, 2015, compared with $313.0 million at December 31, 2014. Total cash, restricted cash and investments were $346.3 million, down from $382.6 million. Working capital increased to approximately $687.1 million from $654.2 million.
Debt consisted primarily of $296.3 million outstanding under the term loan, plus $18.2 million of current maturities and notes payable as presented on the balance sheet. The company had $174.8 million of letters of credit outstanding under its $1.0 billion credit facility, leaving $825.2 million available for borrowings or letters of credit. The company was in compliance with its credit agreement covenants.
Unfunded pension and postretirement obligations totaled $620.2 million at March 31, 2015. The company contributed $6.4 million to benefit plans during the quarter and expected to contribute approximately $24.0 million during the remainder of 2015.
Material changes versus the prior comparable period
- Power Generation revenue increased $85.1 million, or 27.3%, to $397.2 million. The increase reflected aftermarket activity, new-build steam generation projects and $41.1 million of revenue from the MEGTEC acquisition. Segment operating margin improved to 5.8% from 3.4%.
- Nuclear Operations revenue was broadly stable at $284.4 million, while operating income increased $8.5 million to $68.0 million. The improvement reflected contract performance in naval nuclear fuel and downblending and a $3.0 million property-related insurance settlement.
- Technical Services revenue declined $5.9 million to $18.6 million and operating income declined $13.1 million to $1.6 million, primarily following the loss of equity income from the Pantex and Y-12 contracts and termination of American Centrifuge work.
- Nuclear Energy revenue decreased $14.8 million to $33.0 million and the segment reported a $3.7 million operating loss, compared with $0.5 million of operating income, due to lower Canadian service activity and nuclear equipment volume.
- Other operating loss improved by $21.5 million, primarily because the company slowed mPower development. Research and development expense declined substantially, but DOE reimbursements also declined by $17.1 million. DOE funding under the applicable cooperative agreement was suspended after its latest extension expired.
- Operating results benefited from the absence of the $7.6 million Berlin Station contract loss provision recorded in Q1 2014. Current-quarter contract estimate revisions increased operating income by approximately $5.8 million, compared with $4.9 million in the prior-year quarter.
- The effective tax rate increased to 32.7% from 24.5%, principally because the prior-year period benefited from a favorable IRS ruling.
Guidance, outlook, risks and unusual items
Backlog increased to $5.684 billion at March 31, 2015, from $5.292 billion at December 31, 2014. Approximately $1.853 billion was expected to convert to revenue during 2015, $1.383 billion during 2016 and $2.448 billion thereafter. Backlog is not a GAAP measure and may be cancelled, modified or affected by government appropriations.
Management expected the GCI and other cost initiatives to generate at least $75 million of annual savings once fully implemented. Additional initiatives were expected to improve Power Generation margins by 200 to 300 basis points and support a minimum 10% operating margin in Nuclear Energy, with total additional restructuring charges and related costs estimated at $35 million to $50 million. The company incurred $2.5 million of restructuring charges in the quarter.
- The planned spin-off could affect financing, liquidity, operating relationships and business continuity, and depended on regulatory and Board approvals.
- Significant contingencies included the Apollo and Parks Township litigation, Berlin Station dispute, Prairie Island claims, ARPA litigation, the AREVA judgment under appeal and environmental matters involving joint ventures at WIPP and Los Alamos.
- The Berlin Station customer had drawn approximately $11.0 million under letters of credit, with $21.9 million remaining potentially subject to draw. The company had recorded provisions for amounts called but had not recognized offsetting claim revenue.
- ARPA claimed approximately $170 million in damages, although the company cited contractual liability limitations and stated that loss could not currently be estimated.
- Foreign exchange forward contracts had a notional value of $170.2 million, with maturities through August 2017. The company had approximately $1.6 million of deferred net derivative gains expected to be recognized largely within twelve months.
- Approximately 76.5% of unrestricted cash and cash equivalents related to foreign operations and generally was not available for U.S. operations without potential tax costs.
- Major risks included fixed-price contract cost overruns, project delays and liquidated damages, government spending and appropriations, environmental and nuclear liabilities, pension funding, litigation outcomes, DOE funding for mPower, foreign exchange exposure and the ability to maintain surety bonds, letters of credit and financing.
Most important facts for investors to verify
- Completion terms, liabilities, financing arrangements and post-spin-off financial statements for the Power Generation separation and name change to BWX Technologies, Inc.
- Conversion of the $5.684 billion backlog into revenue and cash, particularly the unfunded portion of Nuclear Operations government backlog.
- Progress and final exposure in the Berlin Station, Apollo and Parks Township, ARPA, Prairie Island and AREVA matters.
- Actual savings and remaining charges from GCI, Power Generation margin initiatives and Nuclear Energy restructuring.
- DOE funding status and future cash requirements for the mPower program.
- Funding needs and actuarial sensitivity of the $620.2 million unfunded pension and postretirement obligations.
- Availability of U.S. liquidity given the concentration of cash in foreign operations and the company’s credit ratings of Ba1 from Moody’s and BB+ from S&P.