BWX Technologies, Inc. — Q2 2018 Form 10-Q Summary
Business context and reporting period
BWXT filed its unaudited Form 10-Q for the quarter and six months ended June 30, 2018. The company operates through Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group, serving U.S. government, commercial nuclear and Canadian nuclear customers. Approximately $2.7 billion of Nuclear Operations Group backlog was with the U.S. Government, including $252.4 million not yet funded.
Financial performance and key metrics
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|
| Revenue | $438.9 million | $410.0 million | $896.4 million | $838.2 million |
| Operating income | $71.5 million | $85.4 million | $151.4 million | $161.7 million |
| Operating margin | 16.3% | 20.8% | 16.9% | 19.3% |
| Net income attributable to BWXT | $60.7 million | $61.3 million | $127.1 million | $117.0 million |
| Diluted EPS | $0.60 | $0.61 | $1.26 | $1.16 |
| Net margin attributable to BWXT | 13.8% | 14.9% | 14.2% | 14.0% |
- Second-quarter revenue increased 7.1%; six-month revenue increased 6.9%.
- Operating income declined 16.2% in the quarter and 6.3% year to date, primarily reflecting lower Nuclear Services Group results, higher Nuclear Operations Group costs and increased other costs.
- The effective tax rate declined to 23.3% in the quarter and 22.6% year to date from 30.6% in both comparable 2017 periods, primarily reflecting the U.S. Tax Cuts and Jobs Act.
- Net cash provided by operating activities was $17.3 million for the six months, down from $64.1 million. Cash flow was affected by contract asset timing, higher cash taxes and benefit-related payments.
- Capital expenditures were $34.0 million, and investing cash outflow was $41.4 million for the six months.
- Cash and cash equivalents were $317.6 million at June 30, 2018; total cash, including restricted cash, was $326.1 million.
- Working capital was $581.3 million, compared with $345.0 million at December 31, 2017.
- Total remaining performance obligations were approximately $3.6 billion: $2.686 billion in Nuclear Operations, $44 million in Nuclear Services and $883 million in Nuclear Power.
Segment results and changes versus the prior period
| Segment | Q2 2018 revenue | Q2 change | Q2 operating income | Six-month revenue change |
|---|
| Nuclear Operations Group | $332.1 million | Up $19.3 million | $67.0 million | Up $10.8 million |
| Nuclear Services Group | $32.6 million | Down $12.2 million | $3.5 million | Down $10.0 million |
| Nuclear Power Group | $75.7 million | Up $21.1 million | $7.8 million | Up $56.3 million |
- Nuclear Operations revenue benefited from increased U.S. government component manufacturing, naval nuclear fuel and downblending activity, but margins declined because of higher costs.
- Nuclear Services results were adversely affected by the absence of a $7.9 million contract-dispute settlement recorded in 2017 and fewer U.S. commercial nuclear maintenance outages. New Mexico joint-venture work and NASA nuclear-space design and engineering work partially offset the decline.
- Nuclear Power benefited from higher inspection, maintenance, modification and refurbishment work, as well as increased nuclear component, China steam-generator and nuclear-fuel activity.
- Management recorded $14.5 million of favorable net contract-estimate changes that increased operating income during the first six months of 2018, compared with $11.2 million in the prior-year period.
- The company identified rework issues involving non-nuclear components in Nuclear Operations Group during the second quarter. Management did not expect additional costs to have a material adverse effect, but contract estimates remain a key earnings sensitivity.
Debt, liquidity, outlook and unusual items
- On May 24, 2018, BWXT refinanced its former credit facility, issued $400.0 million of 5.375% senior notes due 2026 and entered into a new credit facility. Gross debt at June 30 was $676.6 million, including $400.0 million of senior notes and $291.1 million of new-credit-facility borrowings, less deferred issuance costs.
- The new credit facility includes a $500.0 million revolving facility and $300.0 million of term loans, with maturities generally in 2023. No revolving borrowings were outstanding; $428.5 million was available for borrowings or letters of credit after $71.5 million of letters of credit.
- BWXT was in compliance with all credit-facility and senior-note covenants at June 30, 2018. The facility includes a maximum leverage ratio of 4.00 to 1.00, a minimum interest-coverage ratio of 3.00 to 1.00 and other restrictive covenants.
- Interest expense increased by $4.0 million year over year because of higher debt and included $2.4 million of accelerated recognition of former-credit-facility debt issuance costs.
- Other income included a $6.0 million gain on derivative instruments not designated as hedges. The company had $249.4 million of FX-forward notional exposure, primarily involving Canadian dollars.
- Backlog declined to $3.613 billion from $3.971 billion at December 31, 2017, mainly because of revenue recognized during the period. Backlog is subject to government appropriations, customer changes or cancellations and timing of nuclear maintenance and refurbishment work.
- BWXT completed the acquisition of Nordion’s medical isotope business on July 30, 2018, after the reporting date. The business adds approximately 150 employees and two production centers and is expected to be reported in Nuclear Power Group beginning in the third quarter.
- In July 2018, the company purchased a group annuity contract transferring approximately $240 million of domestic pension obligations for about 1,300 retirees. BWXT expects pension settlement-related charges and an interim mark-to-market remeasurement in the third quarter.
- Unfunded pension and postretirement obligations were $265.7 million at June 30; expected contributions for the remainder of 2018 were approximately $14.2 million.
- Management stated that available cash, borrowing capacity and letter-of-credit capacity should fund operating requirements for at least the next 12 months. No material contingencies were reported during the period.
Investor verification points
- Verify the sustainability of the $14.5 million of favorable contract-estimate adjustments and the resolution and cost impact of the Nuclear Operations rework issues.
- Track Nuclear Services Group recovery, including commercial outage timing, government contract performance and the nonrecurrence of the 2017 contract-dispute settlement.
- Assess the effect of the Nordion acquisition on revenue, margins, capital spending, integration costs and leverage beginning in the third quarter.
- Monitor cash conversion, particularly contract assets, milestone billings, retainages, taxes and pension-related payments.
- Evaluate refinancing-related interest expense, variable-rate exposure, covenant headroom and the 2023 and 2026 debt maturities.
- Consider U.S. government appropriations and funding risk, fixed-price contract cost overruns, nuclear project execution, warranty exposure, regulatory requirements, FX movements and pension remeasurement risk.
