BWX Technologies, Inc. (formerly The Babcock & Wilcox Company) — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited quarter ended March 31, 2012, filed May 9, 2012. Operations comprised Power Generation, Nuclear Operations, Technical Services, and Nuclear Energy. The business serves commercial power, nuclear, industrial, and U.S. government markets, with substantial activity under long-term contracts and percentage-of-completion accounting.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $765.9 million | $691.3 million | Up 10.8% |
| Operating income | $65.7 million | $21.9 million | Up $43.8 million |
| Operating margin | 8.6% | 3.2% | Up approximately 5.4 points |
| Net income attributable to the company | $46.7 million | $13.5 million | Up $33.2 million |
| Diluted EPS | $0.39 | $0.11 | Up $0.28 |
| Net margin attributable to the company | 6.1% | 2.0% | Improved |
| Cash flow from operations | $(103.2) million | $(81.6) million | Greater use of cash |
- Gross cash and investments were approximately $426.6 million at March 31, 2012, comprising $249.6 million of cash, $61.8 million of restricted cash and approximately $115.2 million of investments. This was down $124.5 million from year-end 2011.
- Operating cash consumption primarily reflected pension and employee-benefit funding timing, working-capital investments, and changes in receivables and contracts in progress.
- The company had no borrowings under its $700 million revolving credit facility; $216.2 million of letters of credit were outstanding and $483.8 million remained available. The facility matures May 3, 2014, and all covenants were satisfied.
- Current assets were $1.409 billion versus current liabilities of $1.075 billion. Long-term debt was only $0.6 million, while pension liability was $539.2 million and accrued warranty expense was $98.4 million.
- Backlog increased to $5.954 billion from $5.339 billion at December 31, 2011. Management expected approximately $1.976 billion of backlog revenue in 2012, $1.800 billion in 2013, and $2.178 billion thereafter.
Material changes versus the prior comparable period
- Power Generation revenue increased 16.3% to $414.3 million, driven by new-build environmental equipment and waste-to-energy and biomass projects. Operating income rose modestly to $28.0 million, as competitive pricing, higher bidding costs, and increased research and development offset part of the revenue benefit.
- Nuclear Operations revenue was essentially flat at $250.2 million, but operating income increased to $48.0 million from $30.5 million because of improved contract performance and improved naval nuclear fuel and downblending results.
- Technical Services revenue declined 12.0% to $25.0 million because of reduced American Centrifuge Program funding, while operating income increased to $14.6 million due primarily to higher equity income from joint ventures and government contract awards.
- Nuclear Energy revenue increased 32.6% to $86.6 million. The segment’s operating loss narrowed to $16.8 million from $37.5 million, primarily because the prior-year period included approximately $21.6 million of additional estimated costs on a nuclear equipment project. The segment continued to incur substantial costs for the B&W mPower small modular reactor program.
- Changes in long-term contract estimates increased 2012 operating income by approximately $20.3 million. The comparable 2011 period included approximately $32.7 million of cost overruns on certain Nuclear Energy and Nuclear Operations projects.
- Research and development expense increased to $29.0 million from $17.3 million. The 2012 period included $3.6 million of non-cash, nondeductible in-kind research and development costs related to Generation mPower LLC; the effect on company-attributable net income was approximately negative $0.9 million.
- The effective tax rate increased to approximately 31.7% from 27.7%, partly because of the nondeductible in-kind research and development costs and a $2.5 million tax benefit recorded in the 2011 period.
Outlook, risks, contingencies, and unusual items
- No specific consolidated revenue, earnings, or cash-flow guidance was provided. Management stated that quarterly results are not necessarily indicative of full-year results.
- Backlog is subject to customer cancellation, modification, funding, and appropriation risks and is not a GAAP measure. Approximately $63.0 million of Nuclear Operations government backlog was unfunded at March 31, 2012.
- Fixed-price contracts expose the company to labor productivity, scheduling, scope, raw-material, liquidated-damages, and cost-to-complete risks. Changes in estimates can materially affect quarterly results.
- The company had gross unrecognized tax benefits of $31.8 million, including $1.3 million of accrued interest. Approximately $24.7 million could potentially reverse within the following 12 months, subject to tax authority developments.
- The company held a $43.7 million investment in USEC, including in-kind dividends, but USEC had not satisfied conditions for later investment phases. USEC’s funding constraints and the status of the American Centrifuge Program created uncertainty regarding the investment and related negotiations.
- Approximately 150 claimants were involved in litigation alleging personal injury and property damage related to former nuclear fuel-processing facilities in Pennsylvania. Insurance and an ARCO indemnity were expected to provide coverage, but sufficiency was not assured.
- The company obtained favorable judgments in insurance-reimbursement litigation related to prior settlements, including approximately $8.8 million and $6.2 million of prejudgment interest. ANI appealed, execution was stayed, and the company had not recognized any recovery because of uncertainty.
- A separate Columbia Generating Station contract dispute was subject to a proposed settlement that had not yet been recognized and remained subject to ratification as of the filing date.
- Key ongoing risks included U.S. government spending, commercial nuclear demand, environmental and nuclear regulation, pension funding, foreign exchange, insurance and surety capacity, cybersecurity, and the ability to obtain financing and contract security.
Important facts for investors to verify
- Confirm the issuer’s corporate-name transition and whether the filing should be attributed to BWX Technologies, Inc. or The Babcock & Wilcox Company.
- Review the sustainability of the $20.3 million favorable contract-estimate impact and the absence of comparable prior-year cost overruns.
- Assess operating cash use, pension funding requirements, and the concentration of unrestricted cash in foreign subsidiaries.
- Monitor Nuclear Energy losses, mPower development spending, and any DOE funding or licensing developments.
- Track USEC’s financial condition and the potential impairment or restructuring of the $43.7 million investment.
- Follow the ANI appeal and Pennsylvania facility litigation, including available insurance and indemnification coverage.
- Verify renewal or extension of the revolving credit facility and continued compliance with its covenants.