BWX TECHNOLOGIES : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) – marketscreener.com

Posted: August 4, 2020 at 8:59 am

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTSThe following information should be read in conjunction with the unauditedcondensed consolidated financial statements and the notes thereto included underItem 1 of this quarterly report on Form 10-Q ("Report") and the auditedconsolidated financial statements and the related notes and Item 7 "Management'sDiscussion and Analysis of Financial Condition and Results of Operations"included in our annual report on Form 10-K for the year ended December 31, 2019(our "2019 10-K").In this Report, unless the context otherwise indicates, "we," "us" and "our"mean BWX Technologies, Inc. ("BWXT" or the "Company") and its consolidatedsubsidiaries.From time to time, our management or persons acting on our behalf makeforward-looking statements to inform existing and potential security holdersabout our Company. Forward-looking statements include those statements thatexpress a belief, expectation or intention, as well as those that are notstatements of historical fact, within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,as amended (the "Exchange Act"). Statements and assumptions regardingexpectations and projections of specific projects, our future backlog, revenues,income and capital spending, strategic investments, acquisitions ordivestitures, return of capital activities, margin improvement initiatives orimpacts of the novel strain of coronavirus ("COVID-19") pandemic are examples offorward-looking statements. Forward-looking statements are generally accompaniedby words such as "estimate," "project," "predict," "believe," "expect,""anticipate," "plan," "seek," "goal," "could," "intend," "may," "should" orother words that convey the uncertainty of future events or outcomes. Inaddition, sometimes we will specifically describe a statement as being aforward-looking statement and refer to this cautionary statement.We have based our forward-looking statements on information currently availableto us and our current expectations, estimates and projections about ourindustries and our Company. We caution that these statements are not guaranteesof future performance and you should not rely unduly on them as they involverisks, uncertainties and assumptions that we cannot predict. In addition, wehave based many of these forward-looking statements on assumptions about futureevents that may prove to be inaccurate. For example, the extent to which theCOVID-19 outbreak impacts our business will depend on future developments thatare highly uncertain and cannot be predicted, including new information that mayemerge concerning the length and severity of the COVID-19 health crisis, and theactions to contain its impact, in addition to the potential recurrence orsubsequent waves of COVID-19 or similar diseases. While our management considersthese statements and assumptions to be reasonable, they are inherently subjectto numerous factors, including potentially the risk factors described in thesections labeled Item 1A, "Risk Factors" of our 2019 10-K, of our quarterlyreport on Form 10-Q for the quarter ended March, 31, 2020 (our "First Quarter2020 10-Q") and of this Report, most of which are difficult to predict and manyof which are beyond our control. Accordingly, our actual results may differmaterially from the future performance that we have expressed or forecast in ourforward-looking statements.We have discussed many of these factors in more detail elsewhere in this Report,including under the heading "COVID-19 Assessment" of this Item 2 "Management'sDiscussion and Analysis of Financial Condition and Results of Operations" andItem 1A, "Risk Factors", and in Item 1A "Risk Factors" in our 2019 10-K and ourFirst Quarter 2020 10-Q. These factors are not necessarily all the factors thatcould affect us. Unpredictable or unanticipated factors we have not discussed inthis Report or in our 2019 10-K and our First Quarter 2020 10-Q could also havematerial adverse effects on actual results of matters that are the subject ofour forward-looking statements. We do not intend to update or review anyforward-looking statement or our description of important factors, whether as aresult of new information, future events or otherwise, except as required byapplicable laws.GENERALWe operate in three reportable segments: Nuclear Operations Group, Nuclear PowerGroup and Nuclear Services Group. In general, we operate in capital-intensiveindustries and rely on large contracts for a substantial amount of our revenues.We are currently exploring growth strategies across our segments to expand andcomplement our existing businesses. We would expect to fund these opportunitieswith cash generated from operations or by raising additional capital throughdebt, equity or some combination thereof.Nuclear Operations GroupThe revenues of our Nuclear Operations Group segment are largely a function ofdefense spending by the U.S. Government. Through this segment, we engineer,design and manufacture precision naval nuclear components, reactors and 21-------------------------------------------------------------------------------- Table of Contentsnuclear fuel for the DOE/NNSA's Naval Nuclear Propulsion Program. In addition,we perform development and fabrication activities for missile launch tubes forU.S. Navy submarines. As a supplier of major nuclear components for certain U.S.Government programs, this segment is a significant participant in the defenseindustry.Nuclear Power GroupThrough this segment, we design and manufacture commercial nuclear steamgenerators, heat exchangers, pressure vessels, reactor components, as well asother auxiliary equipment, including containers for the storage of spent nuclearfuel and other high-level nuclear waste. This segment is a leading supplier ofnuclear fuel, fuel handling systems, tooling delivery systems, nuclear-gradematerials and precisely machined components, and related services for CANDUnuclear power plants. This segment also provides a variety of engineering andin-plant services and is a significant supplier to nuclear power utilitiesundergoing major refurbishment and plant life extension projects. Additionally,this segment is a leading global manufacturer and supplier of critical medicalradioisotopes and radiopharmaceuticals.Our Nuclear Power Group segment's overall activity primarily depends on thedemand and competitiveness of nuclear energy. A significant portion of ourNuclear Power Group segment's operations depend on the timing of maintenance andrefueling outages, the cyclical nature of capital expenditures and majorrefurbishment and life extension projects, as well as the demand for nuclearfuel and fuel handling equipment primarily in the Canadian market, which couldcause variability in our financial results.Nuclear Services GroupOur Nuclear Services Group segment provides various services to the U.S.Government. The revenues and equity in income of investees under our U.S.Government contracts are largely a function of spending of the U.S. Governmentand the performance scores we and our consortium partners earn in managing andoperating high-consequence operations at U.S. nuclear weapons sites, nationallaboratories and manufacturing complexes. With its specialized capabilities offull life-cycle management of special materials, facilities and technologies, webelieve our Nuclear Services Group segment is well-positioned to continue toparticipate in the continuing cleanup, operation and management of criticalgovernment-owned nuclear sites, laboratories and manufacturing complexesmaintained by the DOE, NASA and other federal agencies. This segment alsodevelops technology for a variety of applications, including advanced nuclearpower sources, and offers complete advanced nuclear fuel and reactor design andengineering, licensing and manufacturing services for new advanced nuclearreactors.Divestiture of U.S.-Based Commercial Nuclear Services BusinessOn May 29, 2020, our subsidiary BWXT Nuclear Energy, Inc. divested itsU.S.-based commercial nuclear services business, a component of our NuclearServices Group segment. In a cashless transaction, we exchanged net assetstotaling $18.0 million, consisting primarily of property, plant and equipmentand certain warranty obligations, for a manufacturing facility and theassociated land of approximately the same value. The acquired assets arereported as part of the Nuclear Services Group segment.Acquisition of Laker Energy Products Ltd.On January 2, 2020, our subsidiary BWXT Canada Ltd. acquired Laker EnergyProducts Ltd. ("Laker Energy Products"). Laker Energy Products is a globalsupplier of nuclear-grade materials and precisely machined components for CANDUnuclear power utilities and employs approximately 140 personnel. Laker EnergyProducts is reported as part of our Nuclear Power Group segment.Critical Accounting Policies and EstimatesFor a summary of the critical accounting policies and estimates that we use inthe preparation of our unaudited condensed consolidated financial statements,see Item 7 "Management's Discussion and Analysis of Financial Condition andResults of Operations" in our 2019 10-K. There have been no material changes toour critical accounting policies during the six months ended June 30, 2020 withthe exception of the adoption of Financial Accounting Standards Board ("FASB")Topic Intangibles - Goodwill and Other (Topic 350): Simplifying the Test forGoodwill Impairment as described in the notes to the condensed consolidatedfinancial statements in Part I of this Report. 22-------------------------------------------------------------------------------- Table of ContentsAccounting for ContractsOn certain of our performance obligations, we recognize revenue over time. Inaccordance with FASB Topic Revenue from Contracts with Customers, we arerequired to estimate the total amount of costs on these performance obligations.As of June 30, 2020, we have provided for the estimated costs to complete all ofour ongoing contracts. However, it is possible that current estimates couldchange due to unforeseen events, which could result in adjustments to overallcontract revenues and costs. A principal risk on fixed-price contracts is thatrevenue from the customer is insufficient to cover increases in our costs. It ispossible that current estimates could materially change for various reasons,including, but not limited to, fluctuations in forecasted labor productivity orsteel and other raw material prices. In some instances, we guarantee completiondates related to our projects or provide performance guarantees. Increases incosts on our fixed-price contracts could have a material adverse impact on ourconsolidated results of operations, financial condition and cash flows.Alternatively, reductions in overall contract costs at completion couldmaterially improve our consolidated results of operations, financial conditionand cash flows. During the three months ended June 30, 2020 and 2019, werecognized net changes in estimates related to contracts that recognize revenueover time, which increased operating income by approximately $11.4 million and$18.9 million, respectively. During the six months ended June 30, 2020 and 2019,we recognized net changes in estimates related to contracts that recognizerevenue over time, which increased operating income by approximately$21.0 million and $23.7 million, respectively.COVID-19 AssessmentA global outbreak of COVID-19 has occurred impacting over 200 countries,including the U.S. and Canada where we maintain our principal operations.Developments have been occurring rapidly with respect to the spread of COVID-19and its impact on human health and businesses, with new and changing governmentactions occurring on a daily basis. As a result, we have been closely monitoringthe COVID-19 pandemic and its impacts and potential impacts on our business.We have received notifications from the U.S. and Canadian governmentsdesignating BWXT as an essential business given our roles in national security,energy production and medical manufacturing. We continue to operate ourfacilities and have taken numerous precautions to mitigate exposure and protectthe health and well-being of our workforce. The COVID-19 pandemic has not causeda significant disruption to our operations or our supply chain to date.Because developments related to the spread of COVID-19 and its impacts have beenoccurring rapidly, it is difficult to predict any future impact at this time. Wemay experience material disruptions to demand for our products and services andour operations in the future as a result of, among other things, national,state, provincial or local government enforced quarantines, worker illness orabsenteeism, and travel and other restrictions. For example, we have experienceda year over year decline in revenues in our medical radioisotopes andradiopharmaceuticals business due to a decrease in demand for electivediagnostic procedures. For similar reasons, the COVID-19 pandemic may alsoadversely impact our supply chain and other manufacturers which could delay ourreceipt of essential goods and services. For example, certain services scheduledduring nuclear power plant outages during which our Nuclear Power Group segmentwould operate have been rescheduled. We have also experienced delays in thebidding and contracting process for our U.S. Government businesses due toCOVID-19 concerns. Any number of these potential risks could have a materialadverse effect on our financial condition, results of operations and cash flows.The extent to which the COVID-19 outbreak impacts our business will depend onfuture developments that are highly uncertain and cannot be predicted, includingnew information that may emerge concerning the severity of the virus and theactions to contain its impact.See Item 1A "Risk Factors" in this Report for an additional discussion of risksof the COVID-19 pandemic on our business. 23-------------------------------------------------------------------------------- Table of ContentsRESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 2020 VS. THREE ANDSIX MONTHS ENDED JUNE 30, 2019Selected financial highlights are presented in the table below: Three Months Ended Six Months Ended June 30, June 30, 2020 2019 $ Change 2020 2019 $ Change (In thousands)REVENUES:Nuclear Operations Group $ 410,252$ 358,352$ 51,900$ 834,027$ 663,153$ 170,874Nuclear Power Group 67,983 86,639 (18,656) 155,900 171,038 (15,138)Nuclear Services Group 33,328 29,829 3,499 70,093 58,923 11,170Eliminations (7,043) (3,589) (3,454) (13,292) (5,429) (7,863) $ 504,520$ 471,231$ 33,289$ 1,046,728$ 887,685$ 159,043OPERATING INCOME:Nuclear Operations Group $ 85,972$ 75,226$ 10,746$ 176,331$ 132,851$ 43,480Nuclear Power Group 1,102 14,883 (13,781) 9,572 27,466 (17,894)Nuclear Services Group 4,122 1,490 2,632 10,522 3,061 7,461Other (5,600) (6,744) 1,144 (10,959) (12,840) 1,881 $ 85,596$ 84,855$ 741$ 185,466$ 150,538$ 34,928Unallocated Corporate (3,162) (4,320) 1,158 (4,765) (6,359) 1,594Total Operating Income $ 82,434$ 80,535$ 1,899$ 180,701$ 144,179$ 36,522Consolidated Results of OperationsThree months ended June 30, 2020 vs. 2019Consolidated revenues increased 7.1%, or $33.3 million, to $504.5 million in thethree months ended June 30, 2020 compared to $471.2 million for thecorresponding period in 2019, due to increases in revenues from our NuclearOperations Group and Nuclear Services Group segments totaling $51.9 million and$3.5 million, respectively. These increases were partially offset by a decreasein revenues in our Nuclear Power Group segment of $18.7 million.Consolidated operating income increased $1.9 million to $82.4 million in thethree months ended June 30, 2020 compared to $80.5 million for the correspondingperiod of 2019. Operating income in our Nuclear Operations Group, NuclearServices Group and Other segments increased by $10.7 million, $2.6 million, and$1.1 million, respectively. In addition, we experienced lower UnallocatedCorporate expenses of $1.2 million when compared to the corresponding period of2019. These increases were partially offset by a decrease in operating income inour Nuclear Power Group segment of $13.8 million.Six months ended June 30, 2020 vs. 2019Consolidated revenues increased 17.9%, or $159.0 million, to $1,046.7 million inthe six months ended June 30, 2020 compared to $887.7 million for thecorresponding period in 2019, due to increases in revenues from our NuclearOperations Group and Nuclear Services Group segments totaling $170.9 million and$11.2 million, respectively. These increases were partially offset by a decreasein revenues in our Nuclear Power Group segment of $15.1 million.Consolidated operating income increased $36.5 million to $180.7 million in thesix months ended June 30, 2020 compared to $144.2 million for the correspondingperiod of 2019. Operating income in our Nuclear Operations Group, NuclearServices Group and Other segments increased by $43.5 million, $7.5 million, and$1.9 million, respectively. In addition, we experienced lower UnallocatedCorporate expenses of $1.6 million when compared to the corresponding period of2019. These increases were partially offset by a decrease in operating income inour Nuclear Power Group segment of $17.9 million. 24-------------------------------------------------------------------------------- Table of ContentsNuclear Operations Group Three Months Ended Six Months Ended June 30, June 30, 2020 2019 $ Change 2020 2019 $ Change (In thousands)Revenues $ 410,252$ 358,352$ 51,900$ 834,027$ 663,153$ 170,874Operating Income $ 85,972$ 75,226$ 10,746$ 176,331$ 132,851$ 43,480% of Revenues 21.0% 21.0% 21.1% 20.0%Three months ended June 30, 2020 vs. 2019Revenues increased 14.5%, or $51.9 million, to $410.3 million in the threemonths ended June 30, 2020 compared to $358.4 million for the correspondingperiod of 2019. The increase related to the timing of the procurement of certainlong-lead materials when compared to the corresponding period of 2019 as well asadditional volume in our naval nuclear fuel and downblending operations.Operating income increased $10.7 million to $86.0 million in the three monthsended June 30, 2020 compared to $75.2 million for the corresponding period of2019. The increase was due to the operating income impact of the changes inrevenues noted above.Six months ended June 30, 2020 vs. 2019Revenues increased 25.8%, or $170.9 million, to $834.0 million in the six monthsended June 30, 2020 compared to $663.2 million for the corresponding period of2019 as we continue to expand production related to the Columbia-Class nuclearpropulsion system. The increase comprised additional volume in the manufactureof nuclear components for U.S. Government programs and the timing of theprocurement of certain long-lead materials when compared to the correspondingperiod of 2019.Operating income increased $43.5 million to $176.3 million in the six monthsended June 30, 2020 compared to $132.9 million for the corresponding period of2019. The increase was due to the operating income impact of the changes inrevenues noted above as well as favorable contract adjustments related to ournaval nuclear fuel operations.Nuclear Power Group Three Months Ended Six Months Ended June 30, June 30, 2020 2019 $ Change 2020 2019 $ Change (In thousands)Revenues $ 67,983$ 86,639$ (18,656)$ 155,900$ 171,038$ (15,138)Operating Income $ 1,102$ 14,883$ (13,781)$ 9,572$ 27,466$ (17,894)% of Revenues 1.6% 17.2% 6.1% 16.1%Three months ended June 30, 2020 vs. 2019Revenues decreased 21.5%, or $18.7 million, to $68.0 million in the three monthsended June 30, 2020 compared to $86.6 million for the corresponding period of2019. The decrease was primarily related to lower revenues in our nuclearcomponents business of $20.9 million largely attributable to decreased activityassociated with major steam generator design and supply contracts as well as adecrease in volume associated with our medical radioisotopes business. Thesedecreases were partially offset by revenues associated with the Laker EnergyProducts acquisition of $5.7 million.Operating income decreased $13.8 million to $1.1 million in the three monthsended June 30, 2020 compared to $14.9 million for the corresponding period of2019, primarily attributable to the decrease in revenues noted above as well asa decline in operating margins as a result of net favorable changes in estimatesrelated to certain long-term contracts recorded in the prior year.Six months ended June 30, 2020 vs. 2019Revenues decreased 8.9%, or $15.1 million, to $155.9 million in the six monthsended June 30, 2020 compared to $171.0 million for the corresponding period of2019. The decrease was primarily related to lower revenues in our nuclearcomponents 25-------------------------------------------------------------------------------- Table of Contentsbusiness of $11.3 million largely attributable to decreased activity associatedwith major steam generator design and supply contracts. We also experienced adecrease in revenue of $9.5 million due to lower levels of in-plant inspection,maintenance and modification services when compared to the same period in theprior year. These decreases were partially offset by revenues associated withthe Laker Energy Products acquisition.Operating income decreased $17.9 million to $9.6 million in the six months endedJune 30, 2020 compared to $27.5 million for the corresponding period of 2019,primarily attributable to the decrease in revenues noted above as well as adecline in operating margins as a result of net favorable changes in estimatesrelated to certain long-term contracts recorded in the prior year, as well ashift in our product line mix when compared to the same period in the prioryear.Nuclear Services Group Three Months Ended Six Months Ended June 30, June 30, 2020 2019 $ Change 2020 2019 $ Change (In thousands)Revenues $ 33,328$ 29,829$ 3,499$ 70,093$ 58,923$ 11,170Operating Income $ 4,122$ 1,490$ 2,632$ 10,522$ 3,061$ 7,461% of Revenues 12.4% 5.0% 15.0% 5.2%Three months ended June 30, 2020 vs. 2019Revenues increased 11.7%, or $3.5 million, to $33.3 million in the three monthsended June 30, 2020 compared to $29.8 million for the corresponding period of2019, primarily attributable to an increase in design and engineering workexecuted by our advanced technologies business.Operating income increased $2.6 million to $4.1 million in the three monthsended June 30, 2020 compared to $1.5 million for the corresponding period of2019. The increase was due to the operating income impact of the changes inrevenues noted above in addition to a decrease in selling, general andadministrative expenses related to business development activities caused by thetiming of proposal activities.Six months ended June 30, 2020 vs. 2019Revenues increased 19.0%, or $11.2 million, to $70.1 million in the six monthsended June 30, 2020 compared to $58.9 million for the corresponding period of2019. The increase was primarily attributable to design and engineering workexecuted by our advanced technologies business and an increase in the volume ofcommercial nuclear inspection and maintenance outage work in the U.S. whencompared to the same period in the prior year.Operating income increased $7.5 million to $10.5 million in the six months endedJune 30, 2020 compared to $3.1 million for the corresponding period of 2019 dueto the operating income impact of the changes in revenues noted above.Other Three Months Ended Six Months Ended June 30, June 30, 2020 2019 $ Change 2020 2019 $ Change (In thousands)

Operating Income $ (5,600)$ (6,744)$ 1,144$ (10,959)$ (12,840)$ 1,881

We do not include the value of our unconsolidated joint venture contracts inbacklog. These unconsolidated joint ventures are included in our NuclearServices Group segment.

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BWX TECHNOLOGIES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q) - marketscreener.com

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