BWX Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
Filed November 4, 2015, for the quarter and nine months ended September 30, 2015. BWXT operates in Nuclear Operations, Technical Services and Nuclear Energy. On June 30, 2015, it completed the tax-free spin-off of its former Power Generation business into Babcock & Wilcox Enterprises, Inc. The former business is reported as discontinued operations, and historical results were reclassified accordingly.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $359.0 million, up 6.4% | $1,051.6 million, down 0.3% |
| Operating income | $131.0 million, versus $34.7 million | $196.3 million, versus $106.8 million |
| Operating margin | 36.5%, versus 10.3% | 18.7%, versus 10.1% |
| Income from continuing operations attributable to common shareholders | $106.3 million; diluted EPS $0.98 | $140.4 million; diluted EPS $1.30 |
| Net income attributable to BWXT | $103.9 million; diluted EPS $0.96 | $132.0 million; diluted EPS $1.23 |
| Cash flow from operations | Not separately provided | $238.9 million, versus $(85.2) million |
Operating results included a $65.7 million reduction of expenses related to litigation proceeds and $29.1 million of related interest income. Excluding these unusual litigation items, reported operating income and margins would have been materially lower.
- Nuclear Operations revenue was $303.3 million in the quarter and $879.5 million year to date; operating margins were 20.7% and 21.8%, respectively.
- Technical Services revenue was $21.3 million in the quarter and $61.4 million year to date. Year-to-date operating income declined to $15.5 million from $34.8 million.
- Nuclear Energy revenue was $34.9 million in the quarter and $113.4 million year to date. The segment returned to quarterly profitability, with $1.4 million of operating income, but generated only $0.1 million year to date.
- Backlog was $2.8 billion at September 30, 2015, down from $3.0 billion at December 31, 2014. Approximately $328 million was expected to convert to revenue in 2015, $987 million in 2016 and $1.485 billion thereafter.
At September 30, 2015, cash and cash equivalents were $135.9 million, restricted cash was $20.1 million and investments were $8.6 million. Total debt was approximately $300.0 million, consisting of $288.8 million of long-term debt and $11.3 million of current debt. Under the new credit agreement, BWXT had $530.1 million available for borrowing or letters of credit, excluding an additional $250 million of potential commitments. Management stated that cash on hand, operating cash flow and borrowing capacity should meet liquidity needs for the next twelve months.
Working capital was $327.3 million, down from $348.8 million at December 31, 2014. Unfunded pension and postretirement obligations totaled $332.8 million; approximately $4 million of contributions were expected during the remainder of 2015.
Material changes versus the prior comparable period
- The spin-off substantially reduced reported assets, liabilities and equity because the former Power Generation business was removed from the continuing operations balance sheet. Total assets declined to $1.41 billion from $2.86 billion, and total stockholders’ equity declined to $331.5 million from $1.01 billion.
- Continuing-operations revenue was broadly stable year to date, while operating income increased primarily because of the $65.7 million litigation benefit, lower mPower-related costs and improved Nuclear Operations and Nuclear Energy results.
- Net operating cash flow improved by $324.1 million, largely due to the $94.8 million insurance litigation recovery, improved project cash flows and working-capital changes.
- Technical Services year-to-date revenue declined $9.3 million and operating income declined $19.3 million, principally following the loss of the Pantex and Y-12 contracts and termination of American Centrifuge work.
- Research and development expense fell to $9.0 million from $50.5 million year to date as the mPower program was restructured and focused on technology development. Restructuring charges were $16.6 million, primarily mPower asset impairments.
- The effective tax rate increased to 35.4% from 22.6% year to date, reflecting the spin-off-related tax footprint and presumed repatriation of Canadian earnings, partly offset by tax-position remeasurement and 2014 tax-return adjustments.
Outlook, risks, contingencies and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management expects annual unallocated corporate expenses of approximately $15 million to $20 million after the spin-off and does not anticipate significant additional restructuring expenditures.
- BWXT intends to continue investing approximately $15 million annually in the restructured mPower program. DOE funding under the applicable Cooperative Agreement was suspended after its latest extension expired.
- Bechtel asserted that BWXT and Generation mPower breached their agreement and claimed entitlement to 150% of Bechtel’s approximately $80 million in-kind investment. BWXT disputes the claims and planned negotiations through December 18, 2015. An adverse outcome could materially affect financial condition.
- Performance guarantees related to the spun-off Power Generation business totaled approximately $1.145 billion at September 30, 2015, with expirations from 2016 through 2035. BWXT recorded a related liability of $9.4 million and remains subject to indemnification and substitution risks.
- BWXT is responsible for 60% of certain taxes if the spin-off or related transactions fail to qualify for tax-free treatment, subject to specified exceptions.
- The Apollo and Parks radioactive-release litigation involved 17 lawsuits and approximately 108 primary claimants. Summary judgment favored BWXT parties in 11 consolidated cases, but appeals and additional lawsuits remained pending. The filing notes a prior $125 million settlement demand and reliance on insurance and an ARCO indemnity.
- BWXT received $94.8 million from the ANI litigation in September 2015, recognizing $65.7 million as an operating benefit and $29.1 million as interest income.
- Other principal risks include U.S. government appropriations and contract funding, fixed-price contract cost overruns, nuclear and environmental liabilities, pension obligations, joint-venture performance, litigation, tax matters, foreign exchange and credit-agreement covenant compliance.
Most important facts for investors to verify
- Separate recurring operating performance from the $94.8 million ANI litigation recovery and other nonrecurring spin-off, restructuring and pension items.
- Confirm the sustainability of Nuclear Operations margins and the recovery trajectory of Nuclear Energy.
- Assess Technical Services exposure to lost government contracts and future appropriations.
- Review mPower funding, the Bechtel dispute and potential contractual or impairment consequences.
- Verify the status and substitution of the remaining $1.145 billion of legacy performance guarantees.
- Monitor debt covenants, available revolver capacity, pension funding requirements and cash conversion after the spin-off.
- Reconcile continuing-operations results with prior periods, recognizing that the Power Generation business was reclassified as discontinued operations.