BWX Technologies, Inc. 2017 Q1 Form 10-Q Summary
Business context and reporting period
BWXT filed its quarterly report for the three months ended March 31, 2017. The company operates through Nuclear Operations Group, Nuclear Services Group, and Nuclear Power Group. The segment presentation was revised in 2017; prior-period amounts were recast accordingly without changing consolidated results.
Nuclear Operations primarily serves U.S. government naval nuclear programs. Nuclear Services provides government and commercial nuclear services. Nuclear Power supplies commercial nuclear equipment, fuel, components, and related services, including the Canadian business acquired in December 2016.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $428.2 million | $364.8 million | Up 17.4% |
| Operating income | $83.2 million | $42.6 million | Up $40.6 million |
| Operating margin | 19.4% | 11.7% | Up approximately 7.7 points |
| Net income attributable to BWXT | $55.7 million | $49.6 million | Up 12.3% |
| Diluted EPS | $0.55 | $0.47 | Up $0.08 |
| Effective tax rate | 30.6% | 23.6% | Up 7.0 points |
| Operating cash flow | $(54.8) million | $(12.8) million | Use increased $42.0 million |
| Capital expenditures | $13.7 million | $10.1 million | Up $3.6 million |
Revenue growth was led by Nuclear Operations, up $29.8 million, and Nuclear Power, up $41.5 million. Nuclear Services revenue declined $6.1 million. Nuclear Operations operating income increased $8.3 million, Nuclear Power increased $6.8 million, and Nuclear Services declined $5.1 million.
Cash and cash equivalents were $95.9 million at March 31, 2017, compared with $125.6 million at December 31, 2016. Restricted cash and cash equivalents totaled $8.8 million, and investments had a fair value of $22.8 million. Working capital was approximately $361.1 million, up from $253.7 million at year-end, primarily due to higher receivables and lower current liabilities.
Total debt was approximately $570.5 million, consisting of $27.5 million of current maturities and $543.0 million of long-term debt. Credit Agreement borrowings totaled $575.9 million, including $525.9 million of term loans and $50.0 million drawn on the revolving facility. Letters of credit totaled $125.1 million, leaving $224.9 million of borrowing or letter-of-credit capacity, excluding an additional $250 million of potential incremental commitments. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue increased 17.4%, while operating income nearly doubled, partly because Q1 2016 included a $30.0 million mPower Framework Agreement charge.
- Q1 2016 also included a $13.6 million gain from deconsolidation of Generation mPower LLC, which contributed to the lower prior-year effective tax rate and other income.
- Nuclear Power benefited from the December 2016 acquisition of BWXT Nuclear Energy Canada Inc. The acquired business contributed $26.6 million of revenue and $3.2 million of net income in Q1 2017.
- Operating cash flow deteriorated because of increased accounts receivable, accrued liabilities, employee benefit payments, and the $30.0 million mPower settlement payment made in March 2017.
- The company completed the accelerated share repurchase agreement, repurchasing 4,982,003 shares at an average price of $40.14 per share. The weighted-average diluted share count declined to 100.7 million from 105.9 million.
- Backlog declined to approximately $3.919 billion from $3.983 billion at December 31, 2016. Approximately $1.193 billion was expected to convert to revenue during 2017.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide specific full-year revenue or earnings guidance. Management stated that first-quarter results are not necessarily indicative of the full year and expects sufficient cash, borrowing capacity, and letter-of-credit capacity to fund operations for at least the next 12 months.
Approximately $3.399 billion of Nuclear Operations backlog was with the U.S. government, including $313.0 million not yet funded. Government contracts are subject to annual congressional appropriations. An April 2016 government award had approximately $0.8 billion of unexercised options at March 31, 2017.
Key operating risks include U.S. government budget and appropriations decisions, timing of commercial nuclear maintenance outages, the cyclical nature of nuclear utility capital spending, fixed-price contract cost overruns, labor and raw-material cost changes, project performance guarantees, pension and postretirement obligations, and the ability to maintain surety bonding capacity.
Unfunded pension and postretirement obligations totaled $364.5 million. BWXT expected to contribute approximately $21.1 million to those plans during the remainder of 2017.
The Apollo and Parks litigation remains subject to appeals after the trial court dismissed all 17 lawsuits. The company considers plaintiffs’ recovery unlikely but disclosed a possible loss range of $0 to $125.0 million; insurance and an ARCO indemnity may provide coverage but may not be sufficient.
The mPower program will not be restarted. BWXT paid the $30.0 million settlement amount to Bechtel on March 16, 2017, and the parties were completing the dissolution of Generation mPower LLC. Previously asserted claims, including a $120.0 million breach claim, were released under the framework arrangement.
Management reported effective disclosure controls and no material change in internal control over financial reporting. The company was evaluating the future effects of new revenue recognition, lease, restricted-cash, and retirement-benefit accounting standards.
Important facts for investors to verify
- Whether the strong operating-income comparison remains favorable after excluding the prior-year $30.0 million mPower charge and $13.6 million deconsolidation gain.
- The sustainability of Nuclear Operations contract performance and the timing and funding of U.S. government backlog.
- Integration, profitability, and cash-flow contribution from the NEC acquisition.
- The causes and reversibility of negative operating cash flow and the growth in receivables and contracts in progress.
- Debt amortization, interest-rate exposure, covenant compliance, and remaining revolving-credit and letter-of-credit capacity.
- Potential outcomes of the Apollo and Parks appeals and the availability of related insurance or indemnification.
- Future pension contributions and the effect of fixed-price contract estimates, warranty obligations, and project performance guarantees.
- Whether reported margins are affected by contract estimate revisions; Q1 2017 contract estimate changes increased operating income by approximately $4.9 million.