BWX Technologies, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
BWX Technologies, Inc. (BWXT) filed its quarterly report for the period ended September 30, 2018. BWXT operates through Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group. Its activities include naval nuclear components and fuel, U.S. government nuclear services, commercial nuclear equipment and services, and medical isotopes.
The financial statements are unaudited and presented under U.S. GAAP. The company adopted the revenue recognition standard using the modified retrospective method on January 1, 2018.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $425.5 million | $419.4 million | $1,321.9 million | $1,257.6 million |
| Operating income | $50.4 million | $66.8 million | $201.8 million | $228.5 million |
| Net income attributable to BWXT | $77.9 million | $46.6 million | $205.0 million | $163.5 million |
| Diluted EPS | $0.78 | $0.46 | $2.04 | $1.63 |
| Operating margin | 11.8% | 15.9% | 15.3% | 18.2% |
| Effective tax rate | 7.7% | 33.9% | 17.5% | 31.6% |
Net income benefited materially from other income, including a $35.1 million pension-related mark-to-market gain in the third quarter and $4.7 million of derivative gains during the first nine months. The lower tax rate also increased reported earnings.
Operating cash flow was an $8.4 million use in the first nine months of 2018, compared with $144.8 million provided in the prior-year period. Investing cash flow was a $277.0 million use, including $213.0 million for the Nordion medical isotope acquisition and $60.5 million of capital expenditures. Financing cash flow provided $153.9 million, reflecting new borrowings, partially offset by debt repayments, $62.6 million of share repurchases and $48.0 million of dividends.
Cash and cash equivalents were $66.1 million at September 30, 2018, or $73.1 million including restricted cash. Working capital was $325.1 million. Long-term debt was $756.5 million, with total current and long-term debt of approximately $771.2 million.
Material changes versus the prior comparable period
- Third-quarter revenue increased 1.5%, while nine-month revenue increased 5.1%.
- Operating income declined 24.5% in the quarter and 11.7% for the first nine months. The principal driver was $26.7 million of third-quarter and $29.2 million of nine-month operating-income reductions from rework issues involving non-nuclear components in the Nuclear Operations Group.
- Nuclear Operations Group revenue was broadly stable for the nine months, but operating income declined to $180.3 million from $203.5 million; its margin fell to 18.6% from 21.1%.
- Nuclear Services Group nine-month revenue declined $9.2 million, primarily because the prior-year period included a $7.9 million contract-dispute settlement and because of fewer U.S. commercial nuclear maintenance outages.
- Nuclear Power Group nine-month revenue increased 33.3% to $267.7 million and operating income increased to $38.6 million, supported by inspection, maintenance, refurbishment, nuclear components, fuel fabrication and the acquired medical isotope business.
- On July 30, 2018, BWXT acquired Nordion’s medical isotope business for $213.0 million. The acquired business contributed $8.0 million of revenue and $0.5 million of net income after acquisition.
- Pension contributions totaled $157.9 million during the first nine months, including $118.1 million accelerated in August for tax-planning purposes. Pension and postretirement liabilities declined substantially following a $244.1 million pension-obligation transfer to an insurer.
- The company issued $400.0 million of 5.375% senior notes due 2026 and entered into a new credit facility. Debt and interest expense increased, while cash balances declined because of the acquisition and pension funding.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific consolidated earnings or revenue guidance figure in the filing. Management stated that liquidity, borrowing capacity and letters-of-credit capacity were sufficient to fund operating requirements for at least the next 12 months.
Backlog was approximately $3.834 billion at September 30, 2018, down from $3.971 billion at December 31, 2017. Expected revenue conversion was approximately $406 million in 2018, $1.068 billion in 2019 and $2.360 billion thereafter. Nuclear Operations Group backlog included $2.412 billion with the U.S. government, of which $276.1 million was not yet funded and remained subject to appropriations.
Key risks include execution and cost-estimation risk on long-term fixed-price contracts, rework and productivity issues, dependence on U.S. government budgets and appropriations, timing of nuclear outages and commercial projects, pension and environmental obligations, acquisition integration, foreign-exchange exposure, and the ability to maintain surety-bonding capacity. The filing states that no material changes occurred to the risk factors disclosed in the 2017 Form 10-K.
Remaining 2018 pension and postretirement contributions were expected to be approximately $3.6 million. Surety bonds outstanding totaled approximately $67.9 million, and unfunded pension and postretirement obligations totaled $107.8 million.
The Apollo and Parks Township litigation was finally dismissed after the U.S. Supreme Court denied review. The company noted that an ARCO indemnity remains applicable to certain historical claims, although its availability or sufficiency is not assured.
Most important facts for investors to verify
- Whether the non-nuclear component rework issues are resolved and whether further contract adjustments will affect margins or cash flow.
- The sustainability of earnings excluding the $35.1 million pension remeasurement gain, derivative gains and unusually low effective tax rate.
- Integration, operating performance and growth prospects of the Nordion medical isotope business, including the planned Molybdenum-99 product line.
- Government funding and appropriations supporting the $2.412 billion Nuclear Operations Group backlog, including the $276.1 million currently unfunded amount.
- Post-acquisition leverage, interest expense, covenant compliance and remaining borrowing capacity under the new credit arrangements.
- Cash conversion, given negative operating cash flow after substantial pension contributions and the acquisition.
- Progress on pension funding, environmental liabilities, contract contingencies and surety-bonding capacity.