BWX Technologies, Inc. — 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
BWX Technologies, Inc. filed its unaudited Form 10-Q for the three and nine months ended September 30, 2016. BWXT operates through Nuclear Operations, Technical Services, and Nuclear Energy. Its business is substantially tied to U.S. government nuclear programs, government technical services, and commercial nuclear equipment and services.
The 2015 comparison reflects the June 30, 2015 spin-off of the former Power Generation business to Babcock & Wilcox Enterprises, Inc.; that business is presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2016 | Three Months Ended September 30, 2015 | Nine Months Ended September 30, 2016 | Nine Months Ended September 30, 2015 |
|---|---|---|---|---|
| Revenue | $379.5 million | $359.0 million | $1,146.7 million | $1,051.6 million |
| Operating income | $62.4 million | $131.0 million | $193.4 million | $196.3 million |
| Net income attributable to BWXT | $40.5 million | $103.9 million | $146.8 million | $132.0 million |
| Diluted EPS | $0.39 | $0.96 | $1.40 | $1.23 |
| Operating margin | 16.4% | 36.5% | 16.9% | 18.7% |
| Effective tax rate | 33.0% | 32.6% | 31.2% | 35.4% |
Net cash provided by operating activities was $81.1 million for the nine months, compared with $238.9 million in the prior-year period. Capital expenditures were $30.9 million, and net cash used in investing activities was $40.1 million. Net cash used in financing activities was $151.2 million, including $293.0 million of share repurchases and $28.4 million of dividends, partially offset by net borrowings.
Cash and cash equivalents were $45.2 million at September 30, 2016, compared with $154.7 million at December 31, 2015. Including restricted cash and investments, total domestic and foreign cash, restricted cash, and investments were $75.9 million. Working capital was $236.0 million, down from $293.5 million at year-end 2015.
Total debt consisted of $401.3 million of term loans and $48.9 million drawn on the revolving facility. Letters of credit totaled $111.5 million, and $377.1 million remained available under the credit agreement for borrowings or letters of credit, excluding additional potential commitments. The weighted-average interest rate on outstanding borrowings was 2.02%.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 5.7%, while nine-month revenue increased 9.0%, with growth in all three segments.
- Third-quarter operating income declined $68.6 million primarily because the 2015 period included $65.7 million of litigation-related income. Nine-month operating income declined $2.9 million.
- Net income attributable to BWXT increased for the nine months despite slightly lower operating income, reflecting the absence of 2015 spin-off, restructuring, and discontinued-operation losses, as well as lower taxes and other income items.
- Nuclear Operations revenue rose 6.6% for the nine months, but operating income was essentially flat at $191.9 million; the segment margin declined to 20.5% from 21.8%.
- Technical Services revenue rose 16.9% for the nine months, while operating income fell 5.2% to $14.7 million due to lower fee performance, the absence of favorable billing-rate adjustments recorded in 2015, and higher business-development costs.
- Nuclear Energy revenue increased 23.2% and operating income increased to $34.8 million from $0.1 million. The improvement included a $16.1 million reversal of a loss contingency following a favorable commercial nuclear contract ruling.
- Operating cash flow declined primarily because contracts in progress and advance billings used $72.9 million of cash, compared with a $59.0 million source in the prior-year period.
- BWXT repurchased approximately 4.4 million shares during the third quarter, including 4.1 million shares under a $200 million accelerated share repurchase agreement.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expects cash on hand, operating cash flow, and available borrowing capacity to satisfy liquidity needs for the next 12 months. No formal revenue or earnings guidance is provided in the filing.
- Backlog increased to $3.388 billion at September 30, 2016, from $2.650 billion at December 31, 2015. Approximately $358 million was expected to convert to revenue in 2016, $1.187 billion in 2017, and $1.843 billion thereafter.
- Nuclear Operations backlog was $2.983 billion, including $2.970 billion with the U.S. government; $266.2 million of that government backlog was not yet funded. Approximately $1.6 billion of options remained unexercised and depended on annual congressional appropriations.
- BWXT signed an agreement to acquire GE Hitachi Nuclear Energy Canada Inc.; closing was expected in the fourth quarter of 2016, subject to Canadian regulatory review and other conditions.
- Under the mPower framework agreement, BWXT recognized a $30.0 million charge for a potential settlement payment to Bechtel. The payment is contingent on Bechtel determining that the program should not restart. BWXT also recognized an approximately $13.6 million gain from deconsolidating Generation mPower LLC.
- The Apollo and Parks radioactive-material litigation claims had been dismissed by the trial court, but appeals were pending. Insurance and an ARCO indemnity were expected to provide coverage, although sufficiency was not assured.
- Unfunded pension and postretirement obligations totaled $350.9 million. Management expected approximately $1.7 million of related contributions during the remainder of 2016.
- Fixed-price and percentage-of-completion contracts remain exposed to labor productivity, material costs, schedule performance, contract estimates, customer funding, and potential cost overruns. Net contract-estimate changes increased operating income by $15.8 million in the nine-month period.
- The company remained in compliance with its credit-facility covenants. The facility required a maximum leverage ratio of 3.00 to 1.00 and minimum interest coverage of 4.00 to 1.00.
Most Important Facts for Investors to Verify
- Whether the GEH-C acquisition closed as expected and its purchase price, financing, and subsequent segment contribution.
- Whether government appropriations and funding support conversion of the $2.970 billion Nuclear Operations government backlog.
- The ultimate outcome of the mPower program, including any $30.0 million settlement payment and future development obligations.
- Cash conversion and working-capital requirements, particularly contracts in progress and advance billings.
- Debt levels, covenant headroom, and the potential Canadian-dollar incremental term loan.
- Final settlement of the $200 million accelerated share repurchase agreement, expected no later than the first quarter of 2017.
- Progress and financial impact of the Apollo and Parks litigation appeals and related indemnity or insurance coverage.
- Future pension funding requirements and the effect of contract estimate changes on reported margins.