Business Context and Reporting Period
BWX Technologies, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2016. BWXT operates through Nuclear Operations, Technical Services, and Nuclear Energy. Its former Power Generation business was spun off on June 30, 2015; 2015 results therefore include $11.0 million of after-tax discontinued-operations income that is not present in 2016.
Financial Performance and Liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $364.8 million | $335.5 million | Up 8.7% |
| Operating income | $42.6 million | $53.8 million | Down $11.2 million |
| Operating margin | 11.7% | 16.0% | Down 4.3 percentage points |
| Net income attributable to BWXT | $48.8 million | $45.3 million | Up $3.5 million |
| Diluted EPS | $0.46 | $0.42 | Up $0.04 |
| Cash flow from operations | $(18.3) million | $5.0 million | Down $23.3 million |
Revenue growth was led by Nuclear Energy, up $14.4 million to $47.3 million, Nuclear Operations, up $10.8 million to $295.3 million, and Technical Services, up $3.9 million to $22.5 million. Segment operating income was $64.9 million for Nuclear Operations, $5.4 million for Technical Services, and $7.4 million for Nuclear Energy.
The quarter included a $30.0 million charge related to the mPower Framework Agreement, partially offset by approximately $13.6 million of gain from deconsolidating Generation mPower LLC and approximately $9.3 million from release of substantially all remaining Power Generation performance guarantees. Excluding these unusual items, reported operating performance improved versus the prior year, although the filing does not provide a single non-GAAP adjusted operating-income figure.
At March 31, 2016, cash and cash equivalents were $67.7 million, restricted cash was $18.0 million, and investments were $12.5 million. Working capital was $261.4 million, down from $293.5 million at December 31, 2015. Total debt reported on the balance sheet was approximately $289.9 million, while borrowings outstanding under the Credit Agreement totaled $296.3 million, including $0.0 million drawn on the revolving facility. Letters of credit totaled $111.8 million, leaving $288.2 million available under the facility, excluding an additional $250 million of potential incremental commitments.
BWXT repurchased $50.0 million of common stock and paid $9.5 million of dividends during the quarter. Management stated that cash on hand, operating cash flow, and available borrowing capacity should be sufficient for the next twelve months. The company was in compliance with its credit-facility covenants at March 31, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue increased 8.7%, but operating income declined 20.8% primarily because of the $30.0 million mPower charge.
- Operating performance improved materially in Nuclear Energy, which moved from a $3.7 million loss to $7.4 million of income, reflecting higher services and equipment revenue and completed margin-improvement initiatives.
- Technical Services operating income increased $3.7 million, supported by higher project activity, lower selling, general and administrative expense, and higher equity income from investees.
- Nuclear Operations revenue increased, but operating income declined $3.1 million because the prior-year period benefited from a $3.0 million property-related insurance settlement and stronger fuel and downblending performance.
- The effective tax rate declined to 24.9% from 32.3%, primarily because the mPower deconsolidation gain was non-taxable.
- Operating cash flow changed from $5.0 million provided to $18.3 million used, mainly because of contract-work-in-progress cash requirements and lower accrued employee benefits.
- Backlog was $2.463 billion at March 31, 2016, down from $2.650 billion at December 31, 2015. Subsequent to quarter-end, BWXT reported awards exceeding $3.0 billion, with approximately $1.4 billion added to backlog in April 2016; the remainder was expected in 2017 and 2018 subject to appropriations and options.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal full-year revenue or earnings guidance. Management expects liquidity to be adequate for the next twelve months and is exploring growth opportunities, including acquisitions. Nuclear Operations and Technical Services remain substantially dependent on U.S. government spending, appropriations, and contract awards. Nuclear Energy results may vary with nuclear-utility maintenance outages, customer capital spending, Canadian market activity, and the broader demand for nuclear energy.
Under the mPower Framework Agreement, Bechtel has a twelve-month fundraising period to seek third-party funding. If the program is not restarted, BWXT may be required to pay a $30.0 million settlement amount; that amount was recognized in the quarter and secured by a letter of credit. If adequately funded, BWXT could be required to provide up to $60.0 million of in-kind development costs, subject to annual limits.
Key risks include cost overruns or estimate changes on fixed-price and percentage-of-completion contracts, dependence on government appropriations, performance and surety obligations, pension and postretirement liabilities, environmental matters, foreign-exchange exposure, and litigation. Unfunded pension and postretirement obligations totaled $370.2 million, and management expected approximately $11.9 million of related contributions during the remainder of 2016.
In the Apollo and Parks litigation, all 17 currently filed lawsuits had been dismissed by the trial court, but plaintiffs had appealed. BWXT also awaited a Virginia Supreme Court decision regarding an approximately $16.1 million AREVA-related jury verdict for which the company had previously recorded a provision.
Important Facts for Investors to Verify
- Reconcile reported earnings with unusual items, particularly the $30.0 million mPower charge, $13.6 million deconsolidation gain, and $9.3 million performance-guarantee release.
- Assess whether the April 2016 government awards are funded and converted into backlog, and monitor congressional appropriations and contract options.
- Evaluate cash conversion, including the impact of contracts in progress, advance billings, and working-capital requirements.
- Review debt maturities, covenant compliance, letters of credit, and the potential $30.0 million mPower settlement obligation.
- Monitor pension funding requirements and the $370.2 million unfunded pension and postretirement obligation.
- Follow the mPower fundraising and restart decision, the related development-cost commitments, and the pending litigation appeals.