BWX Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
BWXT filed an unaudited Form 10-Q for the quarter ended March 31, 2018. The company operates through Nuclear Operations Group, Nuclear Services Group, and Nuclear Power Group, serving U.S. government, Canadian, commercial nuclear, and other customers. The filing reflects continuing operations and adoption of the new revenue recognition standard on January 1, 2018.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $457.5 million | $428.2 million | 6.8% increase |
| Operating income | $79.9 million | $76.3 million | 4.7% increase |
| Operating margin | 17.5% | 17.8% | Down approximately 30 bps |
| Net income attributable to BWXT | $66.4 million | $55.7 million | 19.3% increase |
| Diluted EPS | $0.66 | $0.55 | 20.0% increase |
| Effective tax rate | 21.9% | 30.6% | Lower by 870 bps |
| Net cash used in operating activities | $(18.6) million | $(54.7) million | Improved by $36.1 million |
- Segment revenue was $316.6 million for Nuclear Operations, $30.0 million for Nuclear Services, and $112.8 million for Nuclear Power. Segment operating margins were 21.4%, 3.9%, and 19.3%, respectively.
- Cash and cash equivalents were $143.3 million at March 31, 2018; total cash, including restricted cash, was $151.3 million. Investments had a fair value of $9.9 million.
- Total debt was approximately $499.1 million on the balance sheet, comprising $27.7 million of current maturities and $471.4 million of long-term debt. Credit-agreement borrowings totaled $502.8 million, with no revolving borrowings outstanding.
- Available credit capacity for borrowings or letters of credit was $326.2 million, excluding an additional $250 million of potential incremental commitments. The company was in compliance with all credit-facility covenants.
- Working capital was $375.8 million, compared with $345.0 million at December 31, 2017. The company stated that liquidity was sufficient to fund operating requirements for at least the next 12 months.
- Capital expenditures were $17.6 million, and cash dividends paid were $15.9 million. The quarterly dividend declared was $0.16 per share.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by Nuclear Power, which increased revenue by $35.1 million and operating income by $8.8 million, reflecting higher China steam generator activity, in-plant services, nuclear fuel volume, and fuel-handling work.
- Nuclear Operations revenue declined $8.5 million because of lower activity in U.S. government nuclear-component manufacturing, while operating income was essentially unchanged.
- Nuclear Services revenue increased $2.2 million and operating income increased $0.8 million, partly due to higher naval reactor decommissioning and NASA-related design activity.
- Corporate and other operating costs increased by approximately $5.9 million in aggregate, including higher research and development spending for medical and industrial radioisotopes, due-diligence costs, and stock-based compensation.
- Net income benefited from the lower effective tax rate following the U.S. Tax Cuts and Jobs Act and from excess tax benefits related to employee share-based payments.
- Operating cash use improved substantially, but cash declined by $61.8 million during the quarter after operating, investing, financing, and foreign-exchange effects.
- Adoption of the new revenue standard reduced reported March 31, 2018 revenue by $8.1 million versus the historical method and changed contract-asset, advance-billing, and retained-earnings balances. Q1 revenue included $5.3 million of favorable contract-estimate adjustments.
- Backlog declined to $3.58 billion from $3.97 billion at December 31, 2017. Expected recognition was $1.13 billion in 2018, $916 million in 2019, and $1.53 billion thereafter.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide specific quantitative full-year revenue or earnings guidance. Management stated that quarterly results are not necessarily indicative of full-year results.
- On April 17, 2018, BWXT agreed to acquire Nordion’s medical isotope business from Sotera Health. Closing was expected by year-end 2018, subject to Canadian and U.S. regulatory approvals. The acquisition would add approximately 150 employees, licensed infrastructure, and two production centers.
- Approximately $3.58 billion of remaining performance obligations supported future revenue, but backlog may be cancelled, modified, or delayed. Government backlog is subject to congressional appropriations; $283.5 million of Nuclear Operations government backlog was not yet funded.
- Fixed-price and fixed-price incentive contracts expose BWXT to labor productivity, raw-material cost, schedule, performance, and estimate-to-complete risk. Contract-estimate changes can materially affect future revenue, earnings, cash flow, and financial condition.
- Unfunded pension and postretirement obligations totaled $284.1 million. The company expected approximately $25.6 million of related contributions during the remainder of 2018.
- Outstanding surety bonds totaled approximately $60.8 million. Environmental liabilities were $80.7 million, and accrued warranty expense was $13.7 million.
- The Apollo and Parks litigation was finally dismissed after the U.S. Supreme Court denied review in February 2018. The company nevertheless noted that future similar claims could arise and that indemnity protection may not be available or sufficient.
- Foreign-exchange exposure was hedged with forward contracts having a total notional value of $31.6 million and maturities extending to December 2021.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Nuclear Power growth and margin improvement are sustainable after project-specific China steam generator and outage-related activity.
- The timing and funding of U.S. government awards, including the approximately $283.5 million of unfunded Nuclear Operations backlog and approximately $0.2 billion of unexercised options.
- The effect of the new revenue-recognition methodology and future contract-estimate revisions on revenue, margins, contract assets, and cash conversion.
- Completion, regulatory approval, financing, and integration risks associated with the Nordion acquisition.
- Future cash requirements for debt amortization, capital expenditures, pensions, postretirement benefits, environmental liabilities, warranties, and potential contingencies.
- Whether cash generation improves as contract retainages and milestone payments are collected, given the quarter-end increase in unbilled receivables and contracts in progress.