Business Context and Reporting Period
BWX Technologies, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. On June 30, 2015, the company completed the spin-off of its Power Generation business into Babcock & Wilcox Enterprises, Inc. (BWE) and changed its name from The Babcock & Wilcox Company to BWX Technologies, Inc. Continuing operations comprise Nuclear Operations, Technical Services, Nuclear Energy, and Other.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Revenue | $357.1 million | $362.5 million | $692.6 million | $717.9 million |
| Operating income | $11.6 million | $27.5 million | $65.4 million | $72.1 million |
| Operating margin | 3.2% | 7.6% | 9.4% | 10.0% |
| Income from continuing operations attributable to BWXT | $(0.2) million | $22.2 million | $34.1 million | $61.4 million |
| Net income attributable to BWXT | $(17.1) million | $26.4 million | $28.1 million | $71.5 million |
| Diluted EPS | $(0.16) | $0.24 | $0.26 | $0.65 |
| Operating cash flow | Not separately provided | Not separately provided | $83.3 million | $(107.7) million |
- Nuclear Operations generated $291.8 million of second-quarter revenue and $61.1 million of operating income, representing a 21.0% margin. Six-month revenue was $576.2 million and operating income was $129.2 million, with a 22.4% margin.
- Technical Services revenue declined to $21.6 million in the quarter and $40.2 million year to date; operating income declined to $5.5 million and $7.1 million, respectively.
- Nuclear Energy revenue was $45.5 million in the quarter and $78.4 million year to date. Operating income was $2.4 million in the quarter and a $(1.3) million loss year to date.
- At June 30, 2015, cash and cash equivalents were $46.9 million, restricted cash was $18.0 million, and investments totaled $11.8 million at fair value.
- Total debt included $315.0 million of long-term debt and $15.0 million of current debt. Under the new credit agreement, borrowings consisted of a $300.0 million term loan and $30.0 million revolver balance; letters of credit totaled $71.7 million, with $498.3 million available for borrowings or letter-of-credit requirements.
- Working capital was approximately $283.3 million at June 30, 2015, down from $348.8 million at December 31, 2014.
- Backlog was $3.0 billion, compared with $3.045 billion at December 31, 2014. Approximately $660 million was expected to be recognized in 2015, $933 million in 2016, and $1.4 billion thereafter.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue decreased 1.5%; six-month revenue decreased 3.5%, primarily because of lower Technical Services and Nuclear Energy revenue.
- Second-quarter operating income decreased $15.9 million, while six-month operating income decreased $6.7 million. Results included $24.5 million and $26.0 million of spin-off costs in the quarter and six-month period, respectively.
- Restructuring charges increased to $16.5 million in the quarter and $16.6 million year to date, primarily from $15.9 million of mPower asset impairments and related restructuring costs.
- The effective tax rate increased to 104.7% for the quarter and 42.9% for the six-month period, compared with 29.2% and 23.3%, respectively, in 2014. The change reflected the spin-off, deferred-tax revaluations, and expected repatriation of foreign earnings.
- Operating cash flow improved by $191.0 million year over year to $83.3 million, principally because of improved project cash flows and working capital.
- Financing cash flow was $(301.2) million, primarily reflecting $307.6 million of cash transferred in connection with the spin-off and dividends of $21.5 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected annual unallocated corporate expenses of approximately $15 million to $20 million following the spin-off and stated that cash on hand, operating cash flow, and credit availability should satisfy liquidity needs for the next twelve months.
- The mPower program was restructured to focus on technology development, with annual investment targeted at approximately $15 million. DOE funding under the Cooperative Agreement was suspended after the latest extension expired.
- Bechtel asserted that BWXT and Generation mPower breached their limited liability company agreement and sought 150% of Bechtel’s approximately $80 million in-kind investment. BWXT disputes the claims and states that an adverse outcome could materially affect financial condition.
- BWXT retained performance guarantees related to the former Power Generation business totaling $1.542 billion, with expirations ranging from 2015 to 2035. The company recorded an estimated fair value of $10.2 million for these guarantees and expects BWE to terminate or replace them and indemnify BWXT for related losses.
- The company recorded approximately $66.5 million of cumulative spin-off costs, including professional services, retention and severance charges, and facility and infrastructure separation costs.
- The Apollo and Parks litigation involved approximately 97 primary claimants and a prior settlement demand of $125 million. A magistrate recommended summary judgment for the BWXT parties on key issues, but the presiding judge had not ruled as of the filing date.
- The Pennsylvania Supreme Court reinstated a favorable 2012 judgment in the ANI insurance litigation; ANI sought reargument. BWXT had not recognized amounts claimed in that litigation.
- A Prairie Island dispute was settled for a $36.3 million lump-sum payment, equal to the recorded net asset.
- Unfunded pension and postretirement obligations totaled $333.4 million at June 30, 2015, and approximately $9.2 million of additional contributions were expected during the remainder of 2015.
- Contract estimates remain a significant risk because changes in labor productivity, material prices, project schedules, or performance guarantees could materially affect percentage-of-completion revenue and margins.
Investor Verification Points
- Verify post-spin-off revenue, margin, cash generation, and corporate-cost trends without the former Power Generation business.
- Review the credit agreement’s leverage and interest-coverage compliance, debt amortization requirements, collateral package, and available borrowing capacity.
- Assess the ability to replace or terminate the $1.542 billion of legacy performance guarantees and the adequacy of related indemnities from BWE.
- Monitor the mPower dispute with Bechtel, suspended DOE funding, and any additional impairment or restructuring charges.
- Evaluate exposure from Apollo and Parks, environmental matters, pension funding, warranty obligations, and other legal contingencies.
- Reconcile backlog conversion assumptions with U.S. Government funding, appropriations, customer cancellations, and Nuclear Energy project timing.