BWX Technologies, Inc. (formerly The Babcock & Wilcox Company) — 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2014, filed August 6, 2014. The company operated through Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. Results are unaudited and presented under U.S. GAAP.
The company completed the $142.2 million net acquisition of MEGTEC Holdings on June 20, 2014. MEGTEC provides air-pollution-control and coating/drying equipment and was included in consolidated results from the acquisition date.
Financial results and key metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $686.0 million | $886.1 million | $1,348.0 million | $1,691.6 million |
| Operating income | $35.1 million | $98.7 million | $88.8 million | $158.9 million |
| Operating margin | 5.1% | 11.1% | 6.6% | 9.4% |
| Net income | $23.5 million | $69.7 million | $64.6 million | $114.6 million |
| Net income attributable to company | $26.4 million | $72.9 million | $71.5 million | $120.0 million |
| Diluted EPS | $0.24 | $0.65 | $0.65 | $1.06 |
| Operating cash flow | Not separately provided | Not separately provided | $(107.7) million | $11.8 million |
Six-month segment revenue and operating income were $639.5 million and $25.8 million for Power Generation, $579.7 million and $118.2 million for Nuclear Operations, $50.5 million and $29.9 million for Technical Services, $92.7 million and $2.1 million for Nuclear Energy, and $0.3 million and $(58.6) million for mPower.
- Cash and cash equivalents were $215.9 million at June 30, 2014, compared with $346.1 million at December 31, 2013. Restricted cash and investments brought reported cash, restricted cash and investments to approximately $267.0 million.
- Working capital was approximately $634.0 million, up from $510.2 million at year-end 2013.
- Total debt was approximately $267.5 million, consisting principally of $150.0 million of term debt and $113.8 million of revolving borrowings under the new credit facility.
- The company had $173.0 million of letters of credit outstanding and $863.2 million available for borrowings or letter-of-credit requirements under its credit agreement.
- Unfunded pension and postretirement obligations totaled $432.6 million. The company contributed $27.0 million during the first six months and expected to contribute $37.6 million during the remainder of 2014.
- Backlog increased to $5.0 billion from $4.6 billion at December 31, 2013, primarily due to Nuclear Operations and Power Generation bookings.
Material changes versus the prior comparable period
- Second-quarter revenue declined 22.6%, and six-month revenue declined 20.3%. Power Generation was the largest contributor to the decline, reflecting lower environmental equipment, steam-generation and aftermarket activity.
- Second-quarter operating income fell 64.4%, while six-month operating income fell 44.1%. Consolidated operating margins declined by approximately 6.0 percentage points for the quarter and 2.8 percentage points for the six-month period.
- Power Generation revenue declined 30.5% in the quarter and 31.4% year to date; its operating margin declined to 4.6% from 6.5% for the quarter and to 4.0% from 6.8% year to date.
- mPower operating losses increased to $31.9 million in the quarter and $58.6 million year to date, compared with losses of $1.1 million and $28.1 million, respectively, in the prior-year periods. The change primarily reflected reduced recognition of DOE cost-sharing reimbursements and restructuring costs.
- Nuclear Energy revenue declined 29.0% in the quarter and 26.8% year to date, with operating margin falling to 3.4% and 2.2%, respectively, following completion of major contracts and service projects.
- Operating cash flow shifted from $11.8 million provided in the first six months of 2013 to $107.7 million used in 2014, primarily because of lower accounts payable and contract-related working-capital movements.
- Investing cash use increased to $157.7 million from $5.8 million, primarily because of the MEGTEC acquisition. Financing provided $139.6 million, including new credit-facility borrowings, while the company repurchased approximately 3.1 million shares for $99.7 million during the first six months.
Guidance, outlook, risks and unusual items
- Management planned to slow mPower development beginning in the third quarter of 2014 and limit annual investment to no more than $15 million net of DOE reimbursements. DOE had authorized $105.5 million under the funding program, while an additional $79 million allocated by Congress had not yet been obligated. Continued funding depended on agreement with DOE regarding revised milestones.
- The company targeted at least $75 million of annual savings from the Global Competitiveness Initiative and other efficiency actions, with manufacturing initiatives expected to be completed by mid-2015. Management targeted a 200-to-300-basis-point Power Generation margin improvement and at least a 10% Nuclear Energy operating margin by the end of 2015. Additional restructuring charges were expected during the remainder of 2014.
- The Berlin Station project generated additional estimated contract losses of $4.0 million in the quarter and $11.6 million year to date. The company had recorded $12.8 million of provisions for liquidated damages and faced potential further letter-of-credit draws. The customer subsequently certified substantial completion effective July 19, 2014, ending further delay-liquidated-damages claims, but related litigation remained unresolved.
- The company had approximately $37.5 million of accounts receivable and $8.2 million of contracts in progress related to the exited Nuclear Projects business. It filed a $37.4 million mechanic’s lien and was pursuing payment through subcontract dispute-resolution procedures.
- Key risks include fixed-price contract cost overruns, project delays and liquidated damages, dependence on U.S. government spending and appropriations, DOE funding uncertainty, acquisition integration, pension obligations, environmental and nuclear liabilities, litigation, credit ratings and covenant compliance, foreign-exchange exposure, and the availability of letters of credit and surety bonding.
- At June 30, 2014, the company was in compliance with its credit-facility covenants. Moody’s corporate family rating was Ba1 and S&P’s corporate rating was BB+.
Most important facts for an investor to verify
- Whether MEGTEC integration, backlog and expected synergies offset the company’s sharp organic revenue decline.
- The ultimate cost, cash impact and litigation outcome of the Berlin Station dispute and related letters of credit.
- Whether DOE funding for mPower continues under amended milestones and whether the reduced spending plan limits future losses.
- The sustainability of the $5.0 billion backlog, including the $225.6 million of unfunded Nuclear Operations backlog and the timing of conversion to revenue.
- Future operating cash generation, working-capital requirements and the effect of acquisition financing, share repurchases and pension contributions on liquidity.
- Progress toward the stated Power Generation and Nuclear Energy margin targets and the amount of remaining restructuring charges.
- Potential exposure from pension, environmental, nuclear, warranty and other legal contingencies, including the Apollo and Parks litigation.