BWX Technologies, Inc. 2019 Form 10-K Summary
Business context and reporting period
BWXT is a specialty manufacturer and nuclear technology and services provider operating in three segments: Nuclear Operations Group, Nuclear Power Group and Nuclear Services Group. Its businesses serve the U.S. Government, commercial nuclear utilities, Canadian CANDU operators, and medical radioisotope customers. The filing covers the fiscal year ended December 31, 2019, with comparisons to 2018 and 2017. The filing also reports fourth-quarter 2019 results.
The U.S. Government represented approximately 77% of consolidated revenue in 2019, down from 79% in 2018 and 81% in 2017. BWXT employed approximately 6,450 people worldwide at year-end.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $1,894.9 million | $1,799.9 million | Up 5.3% |
| Operating income | $325.5 million | $305.0 million | Up $20.5 million |
| Operating margin | 17.2% | 16.9% | Up approximately 30 basis points |
| Income before tax | $313.7 million | $280.1 million | Up $33.6 million |
| Net income attributable to BWXT | $244.1 million | $227.0 million | Up 7.6% |
| Diluted EPS | $2.55 | $2.27 | Up 12.3% |
| Effective tax rate | 22.0% | 18.9% | Up 310 basis points |
| Net cash from operations | $279.4 million | $169.3 million | Up $110.1 million |
| Capital expenditures | $182.1 million | $109.3 million | Up $72.8 million |
Segment results were mixed. Nuclear Operations Group revenue increased 8.3% to $1,428.6 million and operating income increased 9.9% to $298.3 million, with margin improving to 20.9% from 20.6%. Nuclear Power Group revenue decreased 3.6% to $352.6 million, while operating income increased 3.0% to $53.8 million and margin improved to 15.3% from 14.3%. Nuclear Services Group revenue increased 7.3% to $131.3 million, but operating income decreased 30.2% to $14.2 million and margin declined to 10.8% from 16.6%.
Other operating losses increased to $23.1 million from $18.1 million, primarily due to higher research, development and commercialization spending related to medical and industrial radioisotopes and advanced technologies. Equity income from investees was $28.9 million, compared with $30.3 million in 2018.
Backlog, cash flow, debt and liquidity
- Total backlog increased to approximately $5.288 billion at December 31, 2019, from $3.479 billion in 2018. Nuclear Operations Group represented $4.515 billion, or 85%, of total backlog.
- Approximately $1.645 billion of backlog was expected to convert to revenue in 2020, $1.188 billion in 2021 and $2.455 billion thereafter.
- 2019 U.S. Government awards exceeded $3.9 billion, including unexercised options; approximately $2.8 billion was added to backlog and approximately $1.1 billion remained outside backlog, subject to annual appropriations.
- Cash and cash equivalents, restricted cash and investments totaled $105.9 million at year-end, versus $47.4 million in 2018. Working capital increased to $225.0 million from $165.1 million.
- Total debt principal was $832.2 million, consisting primarily of $400.0 million of 5.375% senior notes due 2026 and $432.2 million under the credit facility. The company had $272.4 million of additional borrowing or letter-of-credit capacity.
- Liquidity, defined by management as cash, short-term investments and available credit capacity, was $364.8 million at year-end, compared with $370.0 million in 2018.
- BWXT remained in compliance with its credit facility and senior note covenants. The credit facility includes a maximum leverage ratio of 4.00 to 1.00 and minimum interest coverage ratio of 3.00 to 1.00.
- Letters of credit outstanding were $67.6 million and surety bonds outstanding were $73.3 million. Total outstanding letters of credit and surety bonds were approximately $140.9 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by increased Nuclear Operations Group activity, including nuclear component manufacturing for U.S. Government programs, partially offset by lower Nuclear Power Group inspection, refurbishment and maintenance revenue.
- Nuclear Operations Group benefited from the absence of $29.2 million of unfavorable contract adjustments recorded in 2018 relating to rework issues on non-nuclear components.
- Medical isotope revenue increased by $23.9 million in Nuclear Power Group, reflecting the full-year contribution of the Nordion medical isotope business acquired in July 2018.
- Nuclear Services Group profitability declined because of higher business-development costs and lower income at a New Mexico site exited in 2018.
- Net periodic benefit cost improved by approximately $18.2 million, changing from $0.7 million of expense in 2018 to $17.5 million of income in 2019, partially offset by a $7.5 million increase in interest expense.
- Capital expenditures increased substantially, particularly in Nuclear Operations Group and Nuclear Power Group, while cash flow from operations rose primarily because pension contributions were $153.3 million lower than in 2018.
- Share repurchases declined to $20.0 million in 2019 from approximately $214.8 million in 2018. The company had approximately $165.3 million remaining under its $250 million authorization.
Guidance, outlook, risks and unusual items
Management expected 2020 revenue of approximately $1.396 billion from Nuclear Operations Group backlog and $217 million from Nuclear Power Group backlog, excluding new awards and change orders. Management expects continued demand from the U.S. Navy’s expanded shipbuilding plan but anticipates additional capital expenditures and personnel investment to support that demand. Nuclear Power Group results remain dependent on outage timing, Canadian refurbishment activity and the competitiveness of nuclear energy. Nuclear Services Group opportunities depend heavily on DOE, NNSA and NASA funding and joint-venture contract awards.
- Revenue recognition relies heavily on cost-to-cost estimates for long-term contracts. Net favorable contract estimate changes increased operating income by approximately $71.6 million in 2019; future adverse revisions could materially reduce earnings.
- The company is highly dependent on U.S. Government appropriations, contract renewals, option exercises and the government's ability to modify or terminate contracts.
- Fixed-price contracts expose BWXT to labor, material, supplier, productivity, schedule and execution risks.
- Environmental accruals, including asset retirement obligations, were $90.8 million at year-end. Management states that remediation estimates may change materially as work progresses.
- The Shallow Land Disposal Area cleanup remains a significant contingency. A 2014 federal estimate indicated an additional remediation cost of approximately $350 million, plus $62 million expended through September 2014. BWXT may rely on an indemnity from Atlantic Richfield, but the filing provides no assurance that the indemnity will be available or sufficient.
- Defined benefit pension and postretirement obligations were underfunded by approximately $168.9 million on the detailed plan disclosures, while the risk-factor discussion cites obligations totaling approximately $199.8 million. The filing text does not clearly reconcile these presentation differences.
- BWXT acquired Laker Energy Products on January 2, 2020 for approximately $16.2 million, subject to contingent consideration of up to approximately $9.2 million, for the Nuclear Power Group.
- The filing identifies cybersecurity, nuclear safety, environmental compliance, insurance availability, single-source suppliers, joint ventures, foreign exchange, labor and regulatory licensing as material risks.
- Goodwill and indefinite-lived intangible asset testing identified no impairment for 2019. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the $5.288 billion backlog converts to revenue and cash flow as scheduled, particularly the $1.1 billion of options subject to appropriations.
- The sustainability of Nuclear Operations Group margins after the favorable comparison with 2018 contract rework charges.
- The effect of higher capital spending and expanded Navy demand on free cash flow, execution risk and leverage.
- The profitability trajectory of the Nuclear Services Group and the commercialization timeline and required approvals for medical radioisotope products.
- Potential changes in long-term contract estimates, fixed-price project exposure and associated warranty or liquidated-damages liabilities.
- The adequacy of environmental accruals, decommissioning financial assurances, insurance coverage and the Atlantic Richfield indemnity related to the Shallow Land Disposal Area.
- Debt maturities, variable-rate exposure, covenant headroom and refinancing requirements beginning with the credit facility maturity in 2023.
- The impact of pension assumptions, future contributions and annual mark-to-market adjustments on earnings and cash flow.