BWX Technologies, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
BWX Technologies, Inc. reported results for the three months ended March 31, 2019. The company operates through Nuclear Operations Group, Nuclear Power Group and Nuclear Services Group, serving U.S. government, commercial nuclear, industrial and medical-isotope markets. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $416.5 million | $457.5 million | Down 9.0% |
| Operating income | $63.6 million | $79.9 million | Down $16.2 million |
| Operating margin | 15.3% | 17.5% | Down 2.2 percentage points |
| Net income attributable to BWXT | $49.0 million | $66.4 million | Down 26.3% |
| Diluted EPS | $0.51 | $0.66 | Down $0.15 |
| Effective tax rate | 21.9% | 21.9% | Unchanged |
| Operating cash flow | $(17.7) million | $(18.6) million | Improved $0.9 million |
| Capital expenditures | $44.5 million | $17.6 million | Up $26.9 million |
Segment revenue was $304.8 million for Nuclear Operations, $84.4 million for Nuclear Power and $29.1 million for Nuclear Services. Segment operating margins were 18.9%, 14.9% and 5.4%, respectively.
At March 31, 2019, cash and cash equivalents were $23.0 million, restricted cash totaled $6.7 million and investments had a fair value of $12.2 million. Total cash and restricted cash included in the cash-flow statement was $29.7 million, compared with $36.4 million at December 31, 2018.
Current and long-term debt totaled approximately $870.4 million, comprising $14.4 million of current maturities and $856.0 million of long-term debt. Credit Facility borrowings included $276.9 million of term loans and $202.7 million drawn on the revolving facility. Letters of credit totaled $64.3 million, leaving $233.0 million of borrowing or letter-of-credit capacity. The company reported compliance with all debt covenants.
Working capital was $251.8 million at March 31, 2019, compared with $165.1 million at December 31, 2018. Total stockholders’ equity was $242.9 million. The company declared a quarterly dividend of $0.17 per share and repurchased $20.0 million of common stock during the quarter.
Material changes versus the prior comparable period
- Revenue declined primarily because of lower activity in Nuclear Operations and Nuclear Power.
- Nuclear Operations revenue decreased 3.7%, reflecting the timing of long-lead-material procurement for government programs. Operating margin fell from 21.4% to 18.9%, partly because the prior-year period benefited from favorable contract estimate changes and because of employee onboarding costs.
- Nuclear Power revenue decreased 25.2%, mainly because the China steam-generator project neared completion and fewer plant outages reduced inspection, maintenance and modification activity. The Nuclear Power margin declined from 19.3% to 14.9%. The decline was partly offset by revenue from the medical-isotope business acquired in July 2018.
- Nuclear Services revenue was broadly stable, while operating income increased from $1.2 million to $1.6 million.
- Interest expense increased to $8.7 million from $3.6 million, reflecting debt incurred in connection with the Nordion medical-isotope acquisition and other financing activities.
- Financing activities generated $55.4 million of cash, compared with cash use of $25.3 million in the prior-year quarter, primarily due to $212.5 million of borrowings and $113.5 million of repayments.
- Backlog increased to approximately $4.824 billion from $3.479 billion at December 31, 2018. Nuclear Operations accounted for $4.010 billion of backlog, including approximately $1.5 billion added from a March 2019 government award.
Outlook, commentary, risks and unusual items
Management stated that it is exploring growth strategies across the segments and expects potential opportunities to be funded with operating cash flow or additional debt or equity. The filing does not provide a specific quantitative full-year revenue or earnings guidance range.
Remaining performance obligations totaled approximately $4.824 billion, with $933 million expected to be recognized during 2019, $1.096 billion in 2020 and $2.795 billion thereafter. Approximately $171.7 million of Nuclear Operations government backlog was unfunded and remains subject to appropriations. The company noted that backlog can be canceled, modified or delayed and may not be indicative of future results.
Contract estimates remain a significant risk because the company recognizes much of its revenue over time using a cost-to-cost method. Changes in labor productivity, steel and other raw-material prices, completion dates or other costs could materially affect earnings and cash flow, particularly on fixed-price contracts. Net favorable contract-estimate changes increased revenue and operating income by approximately $4.8 million in Q1 2019, compared with $5.3 million in Q1 2018.
The company identified risks related to U.S. government budgets and appropriations, timing of nuclear plant outages, commercial nuclear demand, project execution, acquisitions, foreign exchange, pension and postretirement obligations, environmental liabilities and debt covenant compliance. No material contingencies were reported for the quarter, and the filing stated that there were no material changes to previously disclosed risk factors.
The July 2018 acquisition of the Nordion medical-isotope business for approximately $213.0 million expanded the Nuclear Power Group and added radioisotope production capabilities. BWXT adopted the new lease standard on January 1, 2019, recognizing $45.1 million of right-of-use assets and $11.9 million of lease liabilities; the adoption did not affect reported income or cash flows.
Management believes available cash, borrowing capacity and letter-of-credit capacity are sufficient to fund operating requirements for at least the next 12 months. Unfunded pension and postretirement obligations totaled $193.1 million, and approximately $5.7 million of related contributions were expected during the remainder of 2019.
Important facts for investors to verify
- Whether the higher backlog converts to revenue and cash flow as scheduled, particularly the $1.5 billion added from the March 2019 government award and the $0.6 billion of unexercised options.
- The funding and appropriations status of approximately $171.7 million of unfunded Nuclear Operations backlog.
- Execution, cost estimates and margin recovery on fixed-price contracts, including the impact of future contract-estimate adjustments.
- The timing of the China steam-generator project completion, commercial nuclear outages and the ramp-up of the Nordion medical-isotope business.
- Leverage, interest expense, covenant headroom and available capacity under the Credit Facility.
- Cash conversion and working-capital requirements, given negative operating cash flow and substantial contracts-in-progress and retainage balances.
- Future pension, postretirement, environmental and decommissioning funding requirements.