BWX Technologies, Inc. (formerly The Babcock & Wilcox Company) — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2014. The company operated through Power Generation, Nuclear Operations, Technical Services, Nuclear Energy and mPower. The filing was signed November 5, 2014.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Revenue | $737.9 million | $774.8 million | $2,085.9 million | $2,466.4 million |
| Operating income | $65.2 million | $82.1 million | $153.9 million | $241.0 million |
| Operating margin | 8.8% | 10.6% | 7.4% | 9.8% |
| Net income attributable to company | $61.2 million | $60.4 million | $132.7 million | $180.5 million |
| Diluted EPS | $0.57 | $0.54 | $1.21 | $1.60 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(85.2) million | $(6.0) million |
Q3 net margin attributable to the company was approximately 8.3%, compared with 7.8% in the prior-year quarter. Nine-month net margin was approximately 6.4%, compared with 7.3% in the prior-year period.
- September 30, 2014 cash and cash equivalents were $196.9 million, restricted cash was approximately $45.8 million, and investments were $23.5 million.
- Total debt was approximately $307.7 million, comprising $150.0 million of term-loan borrowings, $154.4 million of revolving borrowings and $8.9 million of current debt and notes payable.
- The new credit agreement provides up to $1.0 billion of revolving capacity and a $300 million term-loan facility. Remaining availability for borrowings or letters of credit was $825.4 million; the company was in compliance with covenants.
- Letters of credit under the new credit agreement totaled $170.2 million; additional subsidiary letters of credit and bank guarantees totaled $117.8 million. Outstanding surety bonds totaled approximately $400.8 million.
- Unfunded pension and postretirement obligations were $399.8 million. Nine-month contributions were $63.2 million, with $4.3 million expected during the remainder of 2014.
- Backlog increased to $4.786 billion at September 30, 2014 from $4.590 billion at December 31, 2013, primarily reflecting increases in Power Generation and Nuclear Energy.
Material changes versus the prior comparable period
- Nine-month revenue declined 15.4%, principally because Power Generation revenue fell $318.1 million and Nuclear Energy revenue fell $64.9 million.
- Nine-month operating income declined $87.1 million. Excluding restructuring charges and the $11.1 million Canadian pension mark-to-market adjustment, operating income still declined approximately $72.7 million.
- Power Generation revenue declined 23.4% and operating income declined 40.3%, reflecting lower environmental-equipment, new-build steam-generation and aftermarket activity. MEGTEC contributed $52.5 million of nine-month revenue and $3.3 million of operating income after its June 20, 2014 acquisition.
- Nuclear Operations revenue was essentially flat for nine months, while operating income declined $4.2 million because of lower margins on U.S. Government nuclear-component manufacturing.
- Technical Services operating income declined $13.0 million, primarily following the loss of the Pantex and Y-12 contracts effective June 30, 2014.
- Nuclear Energy shifted to a $4.6 million nine-month operating loss from $10.2 million of operating income, reflecting completed steam-generator and service projects and the exit from the Nuclear Projects business.
- mPower's nine-month operating loss increased to $63.8 million from $53.6 million, despite substantially lower quarterly spending, because DOE cost-sharing recognition declined.
- The company repurchased 4.7 million shares for $149.8 million during the first nine months and declared $0.30 per-share dividends.
Outlook, commentary, risks and unusual items
- Management slowed mPower development beginning in Q3 2014 and intends to invest no more than $15 million annually, net of DOE reimbursements. Of the $150 million DOE award, $112.9 million had been authorized and $4.2 million remained authorized at September 30. Continued funding depends on an amended program with revised milestones and a later commercial operating date.
- Management targeted Power Generation margin improvement of 200–300 basis points and a minimum 10% Nuclear Energy operating margin by the end of 2015. GCI and other restructuring initiatives are expected to produce at least $75 million of annual savings, but additional restructuring charges are expected.
- The June 2014 MEGTEC acquisition was funded partly with new debt and added preliminary goodwill of $115.9 million and intangible assets of $42.0 million.
- The Berlin Station project generated additional estimated contract losses of $11.6 million during the first nine months. Substantial completion was certified July 19, 2014, but litigation and potential further letters-of-credit draws remain.
- The company recorded an $18.6 million gain from exchanging its USEC investment for Centrus Energy stock and notes. This nonrecurring gain also contributed to the lower effective tax rate.
- A $11.1 million pension mark-to-market loss resulted from remeasurement of certain Canadian plans and reduced Q3 and nine-month operating income.
- The company filed a $37.4 million mechanic’s lien relating to unpaid Nuclear Projects receivables; $45.4 million of related accounts receivable remained outstanding at September 30. Recovery depends on subcontract and litigation proceedings.
- Management announced a planned tax-free spin-off of the Power Generation business into a separate public company, targeted for mid-summer 2015, subject to SEC, Nuclear Regulatory Commission, board and other conditions. The transaction may not be completed and could disrupt operations.
- Key ongoing risks include U.S. Government appropriations and sequestration, project cost overruns and contract-estimate changes, customer claims and liquidated damages, DOE funding uncertainty, pension funding, environmental and nuclear liabilities, access to surety and letter-of-credit capacity, foreign exchange exposure and spin-off execution.
Most important facts for investors to verify
- Reconcile the $85.2 million operating cash outflow with earnings, particularly accounts payable, contracts in progress, advance billings and pension payments.
- Assess leverage, interest costs, credit-agreement covenants and the extent to which letters of credit and surety bonds consume liquidity.
- Evaluate whether Power Generation demand and margins can recover after the 2014 revenue decline and whether stated 200–300 basis-point improvement is achievable.
- Review mPower’s revised DOE milestones, remaining authorized funding and potential partner or customer claims.
- Monitor Berlin Station and Nuclear Projects litigation, remaining letter-of-credit exposure and recoverability of disputed receivables.
- Determine the recurring earnings impact of the MEGTEC acquisition, restructuring costs, pension remeasurement and the nonrecurring Centrus gain.
- Confirm the regulatory, tax and operational conditions required to complete the proposed Power Generation spin-off.