BWX Technologies, Inc. 2015 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015, filed February 24, 2016. BWXT designs and manufactures naval nuclear components, reactors and fuel; provides U.S. Government nuclear, environmental and technical services; and supplies commercial nuclear equipment and services. The company operates through Nuclear Operations, Technical Services and Nuclear Energy.
On June 30, 2015, BWXT completed the spin-off of its former Power Generation business into Babcock & Wilcox Enterprises, Inc. The former business is reported as discontinued operations, and prior-period income statement data has been restated accordingly. The filing is an annual report, not a quarterly filing; fourth-quarter information is included in unaudited quarterly data.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1,415.5 million | $1,450.6 million | Down 2.4% |
| Operating income | $205.9 million | $25.1 million | Up $180.8 million |
| Income from continuing operations | $140.8 million | $38.7 million | Up $102.0 million |
| Net income attributable to BWXT | $131.5 million | $29.4 million | Up $102.1 million |
| Diluted EPS | $1.22 | $0.27 | Up $0.95 |
| Cash flow from operations | $330.2 million | $74.9 million | Up $255.2 million |
| Effective tax rate | 36.4% | 5.3% | Higher |
Operating income included a $65.7 million benefit from litigation proceeds, a $54.7 million non-cash pension and postretirement mark-to-market loss, $16.6 million of restructuring charges and $26.0 million of spin-off costs. Excluding the litigation benefit and other unusual items, reported profitability was materially less than the headline operating result.
- Nuclear Operations revenue was $1,179.9 million and operating income was $257.4 million, representing a 21.8% operating margin.
- Technical Services revenue was $83.8 million and operating income was $18.1 million.
- Nuclear Energy revenue was $155.0 million and operating income was $1.7 million, compared with a $23.2 million loss in 2014.
- Backlog was $2.65 billion at year-end, down from $3.05 billion. Nuclear Operations represented $2.31 billion, Nuclear Energy $335 million and Technical Services $4 million.
- Cash and cash equivalents were $154.7 million; total cash, restricted cash and investments were $182.4 million.
- Total debt was $300.0 million, consisting of $285.0 million of long-term debt and $15.0 million of current maturities. The company had no revolving borrowings and $317.8 million of remaining borrowing or letter-of-credit capacity under its facility.
- Letters of credit and bank guarantees totaled $82.2 million; surety bonds outstanding totaled $19.3 million.
- The defined benefit pension and postretirement plans were underfunded by approximately $377.7 million. Expected 2016 pension and other postretirement contributions were approximately $11.1 million and $3.1 million, respectively.
Material changes versus the prior comparable period
- Revenue declined primarily because 2014 included a $46.4 million cumulative revenue impact from a Nuclear Operations contract change order.
- Operating income improved sharply because 2014 included a $141.1 million pension mark-to-market loss, a $16.1 million Nuclear Energy litigation loss and substantially higher mPower development spending. The 2015 pension loss was $54.7 million.
- Nuclear Operations revenue and operating income decreased 3.4% and $13.1 million, respectively, largely reflecting the fading impact of the 2014 contract change order.
- Technical Services operating income declined $17.1 million, primarily following the loss of the Pantex and Y-12 contracts and the termination of American Centrifuge work.
- Nuclear Energy returned to a modest profit as margin-improvement actions and higher Canadian services and equipment activity offset foreign-exchange pressure.
- Research and development activity declined to $38.2 million from $124.3 million, principally because the mPower program was restructured and spending was reduced.
- Operating cash flow increased substantially due to improved project cash flows, working capital changes and receipt of the $94.8 million litigation payment.
- Liquidity declined to approximately $482.1 million from $964.2 million, primarily because the refinancing reduced aggregate borrowing capacity by $600 million and cash was transferred in the spin-off.
Guidance, outlook, risks and unusual items
- Management expected 2016 revenue of approximately $894.3 million from Nuclear Operations backlog and $144.7 million from Nuclear Energy backlog, excluding new awards and change orders.
- Management expected post-spin-off unallocated corporate expenses of approximately $15 million to $20 million annually.
- Nuclear Energy management continued targeting a 10% segment operating margin by the end of 2016 through restructuring and competitiveness initiatives.
- A December 2015 memorandum of understanding for a Canadian steam-generator life-extension program was not included in year-end backlog.
- mPower DOE funding was suspended after the latest cooperative-agreement extension expired. Bechtel asserted claims related to alleged required investment commitments, including a claim for 150% of its approximately $80 million investment. Negotiations were ongoing at filing, and an adverse outcome could materially affect BWXT.
- BWXT received $94.8 million in September 2015 from the ANI litigation, including $29.1 million of interest. The filing records $65.7 million as an operating benefit and $29.1 million as interest income.
- At year-end, approximately $1.07 billion of performance guarantees related to the spun-off BWE remained outstanding, with a recorded liability of $9.3 million. BWXT was notified in February 2016 that it had been released from substantially all of these guarantees.
- Environmental accruals were $63.4 million, and the company provided $52.3 million of decommissioning financial assurance through letters of credit. The Shallow Land Disposal Area cleanup has a revised estimated cost of $350 million plus $62 million previously expended; the filing notes uncertainty regarding potential recovery from ARCO.
- Principal risks include dependence on U.S. Government appropriations, contract termination or renewal risk, fixed-price contract cost overruns, percentage-of-completion estimate changes, nuclear and environmental liabilities, cybersecurity, joint-venture performance, pension obligations, foreign-exchange exposure and limited insurance coverage.
- The company was in compliance with its credit-facility covenants at December 31, 2015. Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported 2015 operating income and EPS for the $65.7 million litigation benefit, pension mark-to-market loss, spin-off costs and restructuring charges.
- Assess the sustainability of Nuclear Operations margins and the timing, funding and cancellation risk of the $2.31 billion government backlog, including $232.1 million not yet funded.
- Review the mPower dispute with Bechtel, suspended DOE funding and potential contractual liabilities.
- Evaluate debt maturities, variable-rate exposure, borrowing capacity, letters of credit and restrictive covenants.
- Review the approximately $377.7 million pension and postretirement underfunding and expected future contributions.
- Monitor environmental accruals, decommissioning obligations, the Shallow Land Disposal Area matter and related indemnities or insurance recoveries.
- Confirm that the spin-off-related performance guarantees were released as described in the February 2016 subsequent event disclosure.