BWX Technologies, Inc. annual report, FY2014

BWX Technologies, Inc. (formerly The Babcock & Wilcox Company) — FY2014 Form 10-K Summary

Business context and reporting period

The filing is The Babcock & Wilcox Company’s annual report for the fiscal year ended December 31, 2014. The company operated five segments: Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. In November 2014, management announced plans to spin off Power Generation as Babcock & Wilcox Enterprises, Inc. and rename the remaining company BWX Technologies, Inc. The planned transaction was expected by mid-summer 2015, subject to customary conditions and approvals.

Financial performance and key metrics

Metric	2014	2013
Revenue	$2.923 billion	$3.269 billion
Operating income (loss)	$(2.6) million	$536.4 million
Income before taxes	$5.5 million	$517.2 million
Net income attributable to B&W	$29.4 million	$346.1 million
Diluted EPS	$0.27	$3.07
Net cash from operations	$74.9 million	$137.9 million
Cash, restricted cash and investments	$382.6 million	$410.0 million
Total debt, including current maturities	$303.2 million	$4.9 million
Total backlog	$5.292 billion	$4.590 billion

Reported operating results were heavily affected by a $241.2 million non-cash pension and postretirement mark-to-market loss, compared with a $222.7 million gain in 2013, and $41.1 million of restructuring charges.
Excluding pension mark-to-market adjustments and restructuring charges, segment and corporate operating income declined by approximately $73.6 million year over year.
Segment operating margins were 6.6% for Power Generation, 22.2% for Nuclear Operations and negative 15.0% for Nuclear Energy. mPower generated a $68.9 million operating loss.
Working capital increased to $654.2 million from $510.2 million. Liquidity, defined by the company as unrestricted cash and investments plus available credit capacity, was $1.154 billion, up from $898.2 million.
The new credit agreement provided up to $1.0 billion of revolving capacity and a $300 million term loan, maturing June 24, 2019. At year-end, $300 million was drawn and $828.1 million remained available after letters of credit.
Outstanding letters of credit and bank guarantees totaled $273.4 million, and surety bonds totaled $437.9 million.
The defined benefit pension and postretirement plans were underfunded by approximately $629.2 million. Expected 2015 cash contributions were approximately $18.8 million for pensions and $11.0 million for other postretirement plans.

Material changes versus the prior comparable period

Revenue declined 10.6%, primarily because of lower Power Generation activity, completion or reduction of Nuclear Energy projects, and lower Technical Services activity. Nuclear Operations revenue increased 4.6%.
Power Generation revenue fell 15.9% and operating income fell 36.8%, reflecting lower new-build environmental and steam-generation activity, lower aftermarket project revenue and weaker joint-venture results. The MEGTEC acquisition contributed $105.4 million of revenue and $5.3 million of operating income.
Nuclear Operations revenue increased $53.3 million and operating income increased $32.7 million, helped by a $46.4 million cumulative revenue effect from a contract change order and higher nuclear-component activity.
Technical Services revenue declined 18.6% and operating income declined $23.0 million following the loss of fee income associated with the Pantex and Y-12 contracts and lower activity in other programs. Transition of those facilities to a new contractor was completed June 30, 2014.
Nuclear Energy revenue declined 45.5% and shifted to a $23.2 million operating loss, driven by the exit from the lower-margin Nuclear Projects business, lower equipment activity and a $16.1 million loss recognition from an adverse jury verdict.
mPower’s operating loss improved by $12.4 million as development spending was slowed, but the program remained loss-making. DOE funding of the program was suspended after the latest Cooperative Agreement extension expired.
Research and development spending declined to $142.8 million from $200.8 million, while DOE funding recognized under the mPower program declined to $27.8 million from $78.4 million.
Cash from operations fell $63.0 million, while investing cash use increased to $199.8 million, primarily because of the MEGTEC acquisition. Financing cash flow turned positive at $104.6 million because of new borrowings.

Guidance, outlook, commentary, risks and unusual items

Management expected 2015 revenue of approximately $1.0 billion from Power Generation backlog, $1.1 billion from Nuclear Operations backlog and $87 million from Nuclear Energy backlog, excluding new awards and change orders.
Management targeted Power Generation margin improvement of 200–300 basis points and a minimum 10% Nuclear Energy operating margin by the end of 2015. Related restructuring charges were expected to total $35 million to $50 million.
The Global Competitiveness Initiative was expected to produce at least $75 million of annual savings when fully implemented, with approximately $60 million of total restructuring charges. Manufacturing-related savings were expected primarily in 2015.
The planned spin-off was expected to generate $45 million to $55 million of after-tax separation costs and could affect capital allocation, debt, taxes, liabilities, employee arrangements and the comparability of future results.
mPower spending was expected to be no more than $15 million annually, net of DOE reimbursements, while the company sought additional investors. Future DOE funding was uncertain.
Backlog increased 15.3% to $5.292 billion, but management cautioned that backlog is not a GAAP measure and may be cancelled, delayed, modified or unprofitable. Approximately $2.7768 billion of Nuclear Operations government backlog was not yet funded.
The U.S. Government represented approximately 45% of consolidated revenue, up from 38% in 2013. Government contracts remain subject to appropriations, renewal, termination and pricing or compliance audits.
The company recorded an $11.6 million additional loss on the Berlin Station project, following $35.6 million and $16.9 million of losses in 2013 and 2012. Litigation continued over project claims, letters of credit and liquidated damages.
The company recorded a $14.2 million gain related to Centrus Energy securities received through the USEC bankruptcy settlement, but also recorded a $4.2 million other-than-temporary impairment on Centrus common stock in the fourth quarter.
Other significant exposures included the $16 million AREVA jury verdict, potential New Mexico environmental penalties involving joint ventures, environmental accruals of $59.9 million, the Parks Township cleanup and substantial nuclear, insurance, cybersecurity, fixed-price contract and joint-venture risks.

Most important facts an investor should verify

Completion, tax treatment, financing arrangements and post-separation liabilities of the Power Generation spin-off and the change to BWX Technologies.
Underlying operating performance excluding the unusually volatile pension mark-to-market adjustment and restructuring charges.
Whether Power Generation and Nuclear Energy margin-improvement targets and restructuring savings were achieved.
Funding, partner support, contractual exposure and future spending requirements for the mPower program after DOE funding was suspended.
Government appropriations, contract renewals and the funding status of Nuclear Operations backlog.
Resolution and cash impact of the Berlin Station, AREVA, Prairie Island and Apollo/Parks litigation, including potential letter-of-credit draws.
Pension underfunding, required contributions, plan freezes and the effect of changing discount rates and mortality assumptions.
Debt covenant compliance, term-loan amortization, availability of revolving and letter-of-credit capacity, and the large surety-bond portfolio.
Recoverability of environmental accruals, indemnities and insurance coverage, particularly for Parks Township and nuclear-related liabilities.