BWX Technologies, Inc. — 2017 Q2 Form 10-Q Summary
Business context and reporting period
BWXT filed its quarterly report for the three and six months ended June 30, 2017. The company operates through Nuclear Operations Group, Nuclear Services Group, and Nuclear Power Group. The 2017 segment presentation was revised from prior periods without changing consolidated results. BWXT manufactures naval nuclear components and fuel, provides government and commercial nuclear services, and supplies commercial nuclear equipment, fuel, and related services.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $410.0 million, up 1.9% | $838.2 million, up 9.3% |
| Operating income | $92.3 million; 22.5% margin | $175.6 million; 20.9% margin |
| Net income attributable to BWXT | $61.3 million; 15.0% margin | $117.0 million; 14.0% margin |
| Diluted EPS | $0.61, versus $0.56 | $1.16, versus $1.02 |
| Cash flow from operations | Not separately provided | $64.0 million, versus $73.0 million |
- June 30 cash and cash equivalents were $147.9 million, with restricted cash of $10.0 million and investments of $13.6 million.
- Balance-sheet debt comprised $27.6 million of current maturities and $489.3 million of long-term debt. Credit-agreement borrowings totaled $522.0 million, with no revolving borrowings outstanding.
- Credit availability for borrowings or letters of credit was $268.7 million, excluding an additional $250 million of potential commitments. The weighted-average interest rate on outstanding borrowings was 2.64%.
- Working capital was $352.8 million, compared with $253.7 million at December 31, 2016.
- Capital expenditures were $28.7 million. Cash used in investing activities was $21.4 million and cash used in financing activities was $26.6 million.
- Backlog was approximately $3.764 billion at June 30, 2017, down from $3.983 billion at year-end 2016. Approximately $742 million was expected to convert to revenue in the remainder of 2017.
Material changes versus the prior comparable period
- Six-month revenue increased $71.0 million, led by Nuclear Power Group revenue growth of $48.1 million, Nuclear Operations Group growth of $17.0 million, and Nuclear Services Group growth of $6.4 million.
- Nuclear Operations Group operating income increased $18.7 million to $148.0 million, primarily from higher activity and favorable contract-estimate changes.
- Nuclear Services Group operating income increased $6.1 million to $16.3 million, including $7.9 million of fee income from settlement of a contract dispute involving work completed in 2013.
- Nuclear Power Group revenue increased substantially following the December 2016 acquisition of BWXT Nuclear Energy Canada Inc. (formerly GE Hitachi Nuclear Energy Canada Inc.), but operating income declined $13.3 million for the six-month period. The prior-year period benefited from reversal of a $15.0 million loss contingency after a favorable legal ruling.
- Six-month operating income benefited by comparison with 2016 because the prior-year period included a $30.0 million charge related to the mPower framework agreement and a $13.6 million gain from deconsolidation of Generation mPower LLC.
- Interest expense increased to $7.4 million for the six months from $3.3 million, reflecting higher borrowings, including acquisition-related financing.
- Share repurchases were not made under publicly announced programs during the quarter; employee tax-withholding repurchases totaled 122,547 shares. The remaining authorized repurchase capacity was approximately $193.0 million.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide specific full-year revenue, earnings, or cash-flow guidance. Management stated that available liquidity should fund operating requirements for at least the next 12 months.
- Management expects growth opportunities across segments and may fund them with cash, debt, equity, or a combination. Nuclear Operations and Nuclear Services remain dependent on U.S. government budgets, appropriations, contract awards, and performance scores.
- The company expects approximately $15.5 million of pension and postretirement contributions during the remainder of 2017. Unfunded pension and postretirement obligations totaled $352.3 million at June 30.
- Fixed-price and percentage-of-completion contracts expose BWXT to labor productivity, material-cost, schedule, performance-guarantee, and cost-estimate risks. Favorable contract-estimate changes increased operating income by approximately $11.2 million in the first six months of 2017.
- Approximately $3.256 billion of Nuclear Operations backlog was with the U.S. government, including $332.5 million that was not yet funded. Approximately $0.8 billion of options under a major 2016 government award remained unexercised and depended on appropriations.
- The Apollo and Parks Township litigation involved approximately 107 claimants and appeals of trial-court dismissals. Management considered recovery by plaintiffs remote, but disclosed a possible-loss range of $0 to $125 million. Insurance and an ARCO indemnity may provide coverage, but sufficiency is not assured.
- The company had $60.9 million of surety bonds outstanding and stated that current bonding capacity was adequate for existing project requirements for the next 12 months.
- Adoption of the new revenue standard was expected to increase disclosures and could change the timing of revenue and profit recognition, particularly in Nuclear Operations; the ultimate financial-statement effect had not been fully determined.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether U.S. government appropriations and contract awards support conversion of the $3.764 billion backlog, particularly the unfunded portion and unexercised options.
- Whether favorable contract-estimate changes remain sustainable and whether fixed-price contract costs or schedules create future charges.
- Integration, profitability, and cash generation from the NEC acquisition, including the weaker Nuclear Power Group operating margin.
- Debt amortization, interest expense, covenant compliance, and remaining liquidity under the credit agreement.
- Potential exposure from the Apollo and Parks Township appeals, pension and postretirement obligations, environmental liabilities, and warranty claims.
- The effect and implementation timing of the new revenue-recognition standard on contracts in progress, advance billings, and reported margins.