BWX Technologies, Inc. 2018 Form 10-K Summary
Business context and reporting period
BWXT filed its annual report for the fiscal year ended December 31, 2018, with audited financial statements covering 2018, 2017 and 2016. The company operates three reportable segments: Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group. Its businesses focus on naval nuclear components, reactors and fuel; government nuclear services and environmental remediation; commercial nuclear equipment and services; and medical radioisotopes and radiopharmaceuticals.
The U.S. Government represented approximately 79% of 2018 consolidated revenue, compared with 81% in 2017. BWXT had approximately 6,250 employees at year-end. On July 30, 2018, it acquired Sotera Health’s Nordion medical isotope business for $213.0 million, adding approximately 150 employees and expanding the Nuclear Power Group.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $1,799.9 million | $1,687.7 million | +6.6% |
| Operating income | $305.0 million | $292.2 million | +4.4% |
| Operating margin | 17.0% | 17.3% | Down approximately 30 bps |
| Income before tax | $280.1 million | $295.8 million | Down 5.3% |
| Net income attributable to BWXT | $227.0 million | $147.8 million | +53.5% |
| Diluted EPS | $2.27 | $1.47 | +54.4% |
| Effective tax rate | 18.9% | 49.8% | Improved substantially |
| Operating cash flow | $169.3 million | $222.0 million | Down $52.7 million |
| Capital expenditures | $109.3 million | $96.9 million | +12.9% |
Revenue growth was led by the Nuclear Operations Group, up $47.3 million to $1,319.2 million, and the Nuclear Power Group, up $80.1 million to $365.9 million. Nuclear Services Group revenue declined $14.8 million to $122.4 million. Segment operating margins were 20.6% for Nuclear Operations, 16.6% for Nuclear Services and 14.3% for Nuclear Power.
Net income benefited from the lower 2018 tax rate, including a $13.5 million tax benefit associated with accelerated pension contributions. The 2017 tax provision included $53.0 million of expense related primarily to the Tax Cuts and Jobs Act. Interest expense increased to $27.8 million from $14.9 million following the 2018 refinancing and higher debt levels. Other expense included a $32.6 million pre-tax pension and postretirement mark-to-market loss.
Fourth-quarter 2018 revenue was $478.0 million and operating income was $103.1 million. Net income attributable to BWXT was $21.9 million, or $0.22 diluted EPS, substantially affected by a $67.8 million pre-tax actuarial pension and postretirement adjustment recorded in the quarter.
Cash flow, balance sheet, debt and liquidity
- Cash, cash equivalents, restricted cash and investments totaled approximately $47.4 million at December 31, 2018, compared with $225.4 million at year-end 2017.
- Working capital declined to $165.1 million from $345.0 million.
- Operating cash flow was $169.3 million; investing cash outflow was $326.7 million, including $213.0 million for the Nordion acquisition and $109.3 million of capital expenditures.
- Aggregate debt principal was $777.4 million, consisting primarily of $400.0 million of 5.375% senior notes due 2026 and borrowings under the new credit facility.
- The new credit facility includes a $500.0 million revolving facility and term loans. Borrowings outstanding under the facility were $377.4 million, with $336.5 million available for borrowings or letters of credit at year-end.
- BWXT reported compliance with its credit facility and senior note covenants. The facility requires a maximum leverage ratio of 4.00 to 1.00, subject to specified acquisition flexibility, and a minimum interest coverage ratio of 3.00 to 1.00.
- Letters of credit outstanding were $63.5 million and surety bonds outstanding were approximately $67.5 million.
- The pension and postretirement plans were underfunded by approximately $196.7 million, although the company made $159.0 million of plan contributions during 2018.
Material changes versus the prior comparable period
- Total backlog declined to $3.479 billion from $3.971 billion. Nuclear Operations backlog fell to $2.637 billion from $3.305 billion, while Nuclear Power backlog increased to $804 million from $637 million.
- Approximately $1.253 billion of backlog was expected to convert to revenue in 2019, including $980 million from Nuclear Operations and $240 million from Nuclear Power.
- The Nuclear Power Group benefited from higher inspection, maintenance, refurbishment, nuclear fuel and component activity, plus $19.5 million of revenue from the acquired medical isotope business.
- Nuclear Operations operating income increased modestly despite $29.2 million of contract adjustments related to rework issues involving non-nuclear components. Management reported net favorable contract estimate changes that increased operating income by approximately $46.3 million for the year.
- Nuclear Services results declined because 2017 included a $7.9 million contract-dispute settlement and 2018 included fewer U.S. commercial nuclear maintenance outages.
- Share repurchases totaled approximately $214.8 million in 2018, including 4.5 million shares. The company authorized an additional $250 million repurchase program in November 2018.
- BWXT adopted the revenue recognition standard effective January 1, 2018. Under the new method, 2018 revenue was $58.4 million higher than under the historical method, and operating income was $20.5 million higher.
Guidance, outlook, commentary and risks
Management expected approximately $980 million of 2019 revenue from the Nuclear Operations backlog and approximately $240 million from the Nuclear Power backlog, excluding new awards and change orders. Management viewed the U.S. Navy’s expanded shipbuilding plan as a source of potential long-term demand, but noted that additional capital expenditures and personnel investment would be required.
The Nordion acquisition is intended to provide a platform for a future Molybdenum-99 product line and other radioisotope products. Commercialization depends on technical execution and regulatory approvals, including from the FDA, Health Canada and the Canadian Nuclear Safety Commission.
- Dependence on U.S. Government appropriations, contract renewals, option exercises and possible termination or modification of contracts.
- Execution and estimating risk on large, long-term and fixed-price contracts; unfavorable cost or productivity changes can reduce margins or create losses.
- Backlog may be canceled, delayed, modified or converted to revenue at lower profitability than anticipated.
- Nuclear safety, environmental, decommissioning, regulatory, insurance and potential liability exposures remain significant. Environmental accruals were $104.9 million at year-end.
- The Shallow Land Disposal Area remediation remains a material contingency; the Army Corps’ revised cost estimate was $350 million plus $62 million expended through September 2014, with recovery claims potentially subject to the ARCO indemnity.
- Higher leverage increases interest-rate and covenant risk. The revolving facility has variable-rate exposure, and debt maturities include $320.5 million in 2023 and $400.0 million thereafter.
- Joint ventures, single-source suppliers, labor availability, cybersecurity, international operations and Canadian nuclear refurbishment demand could affect results.
Most important facts for investors to verify
- Whether U.S. Government funding, Navy shipbuilding plans and contract option exercises support replacement of the $668 million backlog decline.
- Whether the $29.2 million non-nuclear component rework issue is fully resolved and whether future contract estimate changes remain favorable.
- The earnings contribution, regulatory progress and capital requirements of the Nordion medical isotope business.
- Cash conversion after unusually large 2018 pension contributions, the Nordion acquisition, capital expenditures, dividends and share repurchases.
- Leverage, variable-rate debt exposure, 2023 maturities and continued compliance with credit facility covenants.
- The adequacy of environmental, decommissioning, pension and litigation reserves, including potential exposure related to the Shallow Land Disposal Area.
- The effect of adopting the new revenue recognition standard when comparing 2018 results with prior periods.