BWX Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The financial statements are unaudited and prepared under U.S. GAAP. BWXT operates through Nuclear Operations Group, Nuclear Services Group and Nuclear Power Group.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|
| Revenue | $419.4 million | $379.5 million | $1,257.6 million | $1,146.7 million |
| Operating income | $73.7 million | $62.4 million | $249.2 million | $193.4 million |
| Net income attributable to BWXT | $46.6 million | $41.1 million | $163.5 million | $149.1 million |
| Diluted EPS | $0.46 | $0.39 | $1.63 | $1.42 |
| Operating margin | 17.6% | 16.4% | 19.8% | 16.9% |
| Effective tax rate | 33.9% | 32.1% | 31.6% | 30.1% |
- Q3 revenue increased 10.5%; nine-month revenue increased 9.7%.
- Q3 operating income increased 18.1%; nine-month operating income increased 28.8%.
- Q3 net income attributable to BWXT increased approximately 13.4%; nine-month net income increased approximately 9.7%.
- Nine-month operating cash flow was $144.7 million, compared with $92.5 million in 2016.
- Capital expenditures were $49.4 million, compared with $30.9 million in the prior-year period.
- Cash and cash equivalents were $203.1 million at September 30, 2017, compared with $125.6 million at December 31, 2016. Including restricted cash and investments, total reported liquidity was approximately $225.4 million.
- Working capital increased to approximately $371.0 million from $253.7 million at year-end 2016.
- Debt totaled approximately $517.1 million on the balance sheet, consisting of $28.0 million of current maturities and $489.1 million of long-term debt. Credit-facility borrowings were $521.7 million, with no revolving borrowings outstanding; $78.7 million of letters of credit were issued.
- Approximately $321.3 million remained available under the credit facility for borrowings or letters of credit, excluding additional expansion capacity. The company was in compliance with its debt covenants.
Segment Performance and Changes Versus Prior Period
| Segment | Q3 2017 Revenue | Q3 2017 Operating Income | 9M 2017 Revenue | 9M 2017 Operating Income |
|---|
| Nuclear Operations Group | $324.5 million | $71.9 million | $962.5 million | $219.9 million |
| Nuclear Services Group | $27.5 million | $1.0 million | $100.1 million | $17.4 million |
| Nuclear Power Group | $68.6 million | $9.3 million | $200.9 million | $29.6 million |
- Nuclear Operations Group: Nine-month revenue rose $24.7 million and operating income rose $28.1 million, primarily from higher U.S. Government nuclear-component, naval-fuel and downblending activity. Favorable contract-estimate changes were a significant contributor.
- Nuclear Services Group: Nine-month revenue increased $5.2 million and operating income increased $6.5 million. Results included $7.9 million of fee income from settlement of a contract dispute related to work completed in 2013, as well as lower business-development expenses.
- Nuclear Power Group: Nine-month revenue increased $80.6 million, substantially reflecting the December 2016 acquisition of BWXT Nuclear Energy Canada Inc. Revenue from the acquired business was $70.2 million during the nine-month period. Operating income declined $9.0 million because the prior-year period included a $15.0 million reversal of a loss contingency and because of higher acquisition-related SG&A and lower Canadian outage activity.
- Reported results benefited from the absence of the $30.0 million mPower framework-agreement charge recognized in the first nine months of 2016. The 2016 period also included a $13.6 million gain from deconsolidation of Generation mPower LLC.
Backlog, Liquidity and Cash Flow
- Total backlog was approximately $3.535 billion at September 30, 2017, down from $3.983 billion at December 31, 2016. Backlog consisted of $2.970 billion in Nuclear Operations, $37 million in Nuclear Services and $528 million in Nuclear Power.
- Management expected to recognize approximately $395 million of backlog revenue in the remainder of 2017, $1.193 billion in 2018 and $1.947 billion thereafter.
- Approximately $2.967 billion of Nuclear Operations backlog with the U.S. Government was unfunded at September 30, 2017. The company stated that most government awards depend on annual appropriations.
- Approximately $0.8 billion of unexercised options from a 2016 U.S. Government award were excluded from backlog; most was expected to be exercised in the fourth quarter of 2017 subject to congressional appropriations.
- Financing cash use was $43.6 million in the first nine months, including $31.1 million of dividends. No shares were repurchased under publicly announced programs during the quarter, although 17,044 shares were repurchased for employee tax-withholding obligations.
Outlook, Risks and Unusual Items
- The filing does not provide a specific quantitative revenue, earnings or cash-flow guidance range.
- Management stated that available cash, borrowing capacity and letter-of-credit capacity should be sufficient to fund operating requirements for at least the next 12 months.
- Key operating risks include dependence on U.S. Government defense spending and appropriations, timing of Canadian nuclear maintenance outages and refurbishments, commercial nuclear market conditions, and performance on large contracts.
- Fixed-price and percentage-of-completion contracts are exposed to labor productivity, steel and other raw-material costs, schedule changes and estimates of cost to complete. Net changes in contract estimates increased operating income by approximately $22.0 million in the first nine months of 2017, compared with $15.8 million in 2016.
- Unfunded pension and postretirement obligations totaled approximately $334.3 million; management expected approximately $3.1 million of related contributions during the remainder of 2017.
- The Apollo and Parks nuclear litigation involved approximately 107 claimants and a claimed potential settlement demand of $125 million. The trial court dismissed all 17 lawsuits, and the Third Circuit affirmed in August 2017. A petition for rehearing was denied; plaintiffs could still seek U.S. Supreme Court review. The company considered recovery by plaintiffs remote, and insurance and an ARCO indemnity were identified as potential coverage sources.
- BWXT planned to adopt the new revenue-recognition standard using the modified retrospective method on January 1, 2018. The company had not fully determined the financial-statement impact, but expected changes in the timing of revenue and cost recognition and reductions in contract-asset and advance-billing balances.
- Management reported that disclosure controls and procedures were effective as of September 30, 2017, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of favorable contract-estimate adjustments, particularly the $22.0 million nine-month operating-income benefit.
- Track U.S. Government appropriations, funding of the $2.967 billion unfunded Nuclear Operations backlog and exercise of the approximately $0.8 billion in excluded options.
- Assess the contribution, integration costs and margins of BWXT Nuclear Energy Canada Inc. relative to the acquired business’s revenue contribution.
- Monitor backlog conversion, Canadian outage timing and the decline in total backlog from year-end 2016.
- Evaluate leverage, pension and environmental liabilities, letters of credit, surety bonds and future cash requirements.
- Confirm the eventual impact of the January 2018 revenue-standard adoption and any Supreme Court developments in the Apollo and Parks litigation.
