BWX Technologies, Inc. quarterly report, Q3 FY2013

BWX Technologies, Inc. — 2013 Q3 Form 10-Q Summary

Filing entity: The Babcock & Wilcox Company, the predecessor name reflected in the filing. The report covers the three and nine months ended September 30, 2013, with comparisons to the same periods in 2012. The company operated through Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower segments.

Financial performance and position

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Revenue	$774.8 million	$807.6 million	$2,466.4 million	$2,426.1 million
Operating income	$82.1 million	$84.4 million	$241.0 million	$280.9 million
Net income attributable to the company	$60.4 million	$51.4 million	$180.5 million	$188.6 million
Diluted EPS	$0.54	$0.43	$1.60	$1.58
Operating margin	10.6%	10.5%	9.8%	11.6%

Q3 revenue declined 4.1%, while nine-month revenue increased 1.7%.
Q3 net income attributable to the company rose 17.5%, primarily because the 2012 quarter included a $27.0 million USEC investment impairment. Nine-month attributable net income declined 4.3%.
Effective tax rates were approximately 30.0% in Q3 2013 versus 12.8% in Q3 2012, and 29.0% for the nine months versus 29.2% in 2012.
Net cash used in operating activities improved to $6.0 million in the first nine months from $79.2 million used in the prior-year period, but operating cash flow remained negative.
Capital expenditures were $45.3 million. Investing activities provided $7.9 million, while financing activities used $163.3 million, including $140.1 million for share repurchases and $27.1 million for dividends.
Cash and cash equivalents were $219.8 million at September 30, 2013, down from $383.5 million at December 31, 2012. Cash, restricted cash and investments totaled approximately $319.2 million, versus $540.3 million at year-end 2012.
Total debt was approximately $5.1 million, including current maturities and long-term debt. The company had no borrowings under its $700 million revolving credit facility; $146.2 million of letters of credit were outstanding, leaving $553.8 million available.
Major balance-sheet obligations included a $532.8 million pension liability, $66.4 million of postretirement obligations and $48.2 million of environmental liabilities.

Material changes versus the prior comparable periods

Power Generation: Nine-month revenue increased $21.9 million, but operating income fell $36.0 million to $102.2 million. The decline primarily reflected $30.2 million of additional estimated losses on a fixed-price project, as well as lower margins and fewer favorable project close-outs.
Nuclear Operations: Nine-month revenue increased $74.2 million and operating income increased $17.2 million to $184.3 million, driven by higher U.S. Government component manufacturing and naval nuclear fuel and downblending activity.
Technical Services: Revenue decreased $1.4 million, while operating income increased $2.2 million to $47.8 million due to improved project performance, higher estimated award fees and lower business-development costs.
Nuclear Energy: Nine-month revenue declined $49.7 million and operating income declined $31.3 million to $10.2 million, reflecting completion of large contracts and the absence of $18.4 million of prior-year revenue from an Energy Northwest claim settlement.
mPower: The segment loss improved to $53.6 million from $88.2 million, primarily because of $54.2 million of DOE cost-sharing reimbursements that reduced research and development expense. The mPower program remained loss-making.
The company recorded $25.5 million of Global Competitiveness Initiative restructuring costs in the first nine months, including employee termination, consulting and facility-consolidation costs. Treasury stock increased substantially after $140.1 million of share repurchases.
Backlog decreased to $4.91 billion at September 30, 2013 from $5.75 billion at December 31, 2012. Nuclear Operations represented $2.53 billion of backlog, including $181.9 million not yet funded by the U.S. Government.

Guidance, outlook, risks and unusual items

The Global Competitiveness Initiative was expected to generate at least $60 million to $70 million of annual savings when fully implemented, with total restructuring charges not expected to exceed $60 million. Most efficiency actions were planned for completion by the end of 2013, with manufacturing initiatives extending to mid-2015.
The DOE mPower cooperative agreement contemplated at least $150 million of funding, reimbursing up to 50% of qualified costs through March 2018. Only $99.3 million had been authorized at September 30, 2013; remaining funding depended on Congressional appropriations and achievement of milestones.
Management identified risks from fixed-price contract execution, project cost estimates, potential liquidated damages, customer cancellations, backlog funding and government budget or sequestration actions.
Approximately $3.0 million of potential liquidated damages on a project had not been accrued because they were considered reasonably possible rather than probable.
The Apollo and Parks litigation involved approximately 95 primary claimants alleging radioactive releases and seeking compensatory and punitive damages. Insurance and an ARCO indemnity were expected to provide coverage, but sufficiency was not assured.
The company had not recognized amounts sought in the ANI insurance litigation because the ultimate recovery was uncertain; a Pennsylvania Superior Court decision had reversed an earlier judgment and further appeal was pending.
USEC reported substantial financial distress and going-concern uncertainty. The company continued to evaluate its remaining USEC preferred-stock investment and restructuring discussions.
A collective bargaining agreement covering approximately 350 Barberton employees had expired; negotiations continued while employees worked under the expired agreement.
Approximately $165.7 million, or 75%, of unrestricted cash was held by foreign subsidiaries and was not generally available for U.S. operations without potential tax consequences.

Most important facts for an investor to verify

Whether the $30.2 million Power Generation contract loss is final or could lead to additional losses, claims or liquidated damages.
Progress toward the stated $60 million to $70 million annual GCI savings target and remaining restructuring charges.
DOE authorization and continuation of mPower funding, including Congressional appropriations and milestone compliance.
Backlog conversion, cancellation risk and the $181.9 million of unfunded Nuclear Operations backlog.
Future pension funding requirements, government reimbursement of pension costs and the company’s ability to maintain positive operating cash flow.
Developments in the Apollo and Parks litigation, ANI appeal and related insurance or indemnity recoveries.
Liquidity availability after share repurchases, dividends, letters of credit, surety bonds and foreign-cash restrictions.