Business Context and Reporting Period
Company: The Babcock & Wilcox Company (BWX Technologies, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2011
Overview: BWX is a technology innovator in power generation systems, a specialty constructor of nuclear components, and a service provider. The company operates in four segments: Power Generation, Nuclear Operations, Technical Services, and Nuclear Energy. It became an independent public company following a spin-off from McDermott International, Inc. in July 2010.
Key Financial Metrics (Year Ended Dec 31, 2011)
| Metric | 2011 Value | 2010 Value |
|---|---|---|
| Total Revenues | $2,952.0 million | $2,688.8 million |
| Operating Income | $236.0 million | $264.0 million |
| Net Income (Attributable to BWX) | $169.7 million | $153.3 million |
| Diluted EPS | $1.43 | $1.30 |
| Total Assets | $2,789.1 million | $2,500.5 million |
| Long-Term Debt | $0.6 million | $0.9 million |
| Working Capital | $332.3 million | $227.3 million |
| Cash & Cash Equivalents | $415.2 million | $391.1 million |
| Backlog (Total) | $5,339 million | $5,202 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 9.8% ($263.2 million) driven by growth in Power Generation (8.2%), Nuclear Operations (4.7%), Technical Services (32.8%), and Nuclear Energy (63.7%).
- Operating Income Decline: Despite revenue growth, operating income decreased 10.6% ($28.0 million). This was primarily due to a $91.1 million increase in operating losses within the Nuclear Energy segment.
- Nuclear Energy Segment Loss: The Nuclear Energy segment recorded a loss of $118.7 million, compared to a loss of $27.6 million in 2010. This was caused by $50.7 million in costs to complete a specific nuclear project and $43.5 million in increased R&D for the B&W mPower reactor.
- Technical Services Growth: Operating income in Technical Services rose 49.6% to $68.2 million, driven by increased equity income from investees and new contract awards.
- Acquisitions: Completed the acquisition of Loibl (Germany) for $24.2 million in November 2011.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2012 Revenue Expectations: Management expects the current backlog to generate approximately $2.3 billion in revenue in 2012 ($1.1B Power Generation, $1.0B Nuclear Operations, $0.2B Nuclear Energy).
- Technical Services: Operating income is expected to be lower in 2012 than 2011 due to cost-cutting and budget constraints from the U.S. Department of Energy (DOE).
- Nuclear Energy: R&D spending for the B&W mPower reactor is expected to be higher in 2012. The company seeks NRC certification to deploy the technology as early as 2020.
Key Risks and Contingencies
- USEC Investment: The company holds a $42.6 million investment in USEC Inc. The second and third phases of a $200 million strategic investment agreement are on hold because USEC has not met closing conditions (DOE funding and credit facility refinancing). The standstill period has expired, and termination rights are active.
- Government Funding: Approximately 38% of revenue comes from the U.S. Government. The company faces risks related to the Budget Control Act of 2011, which mandates automatic spending cuts starting in 2013.
- Contractual Pricing: Fixed-price contracts expose the company to cost overruns. In 2011, $61.8 million in additional costs were recognized due to productivity and scheduling issues on specific projects.
- Pension Obligations: Defined benefit pension plans were underfunded by approximately $852.0 million as of December 31, 2011. A reduction in the discount rate increased the obligation significantly.
- Legal Proceedings: Ongoing litigation includes a class action against Nuclear Fuel Services (NFS) regarding alleged radioactive releases and the "Apollo and Parks" litigation regarding former facilities. The company has a favorable judgment in the ANI Litigation regarding insurance recovery, pending appeal.
Investor Verification Checklist
- USEC Investment Status: Verify the current status of the USEC strategic investment agreement and the likelihood of the second/third phase funding given the DOE funding uncertainties.
- Nuclear Energy Project Losses: Confirm the final status of the completed nuclear project that incurred $50.7 million in losses and the probability of recovering claims.
- Government Budget Impact: Assess the potential impact of the 2013 automatic spending cuts (sequestration) on the Nuclear Operations and Technical Services segments.
- Pension Funding Requirements: Review the $186.0 million expected cash contribution for pension plans in 2012 and its impact on free cash flow.
- Backlog Realization: Monitor the conversion of the $5.3 billion backlog into revenue, noting that 56% is with the U.S. Government and subject to funding appropriations.