BWX Technologies: When the past repeats itself, are you listening to it?

Jehoshaphat Research is the abbreviation for BWX Technologies Inc (NYSE: BWXT).

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With this report, we uncover the results of a multi-year investigation of BWX Technologies (BWXT). The decision to make these discoveries public is now based mainly on two convictions:

The CFO and the chairman of A. BWXT both unexpectedly gave notice of resignation during Q421. These two were also in leadership positions at the start of the disaster now known as Babcock & Wilcox (BW, derived from BWXT in 2015). BW’s stock today is around 90% less than the spin-off, thanks to projects that conveniently “started” to degrade almost immediately after BWXT split them up. The signs of trouble at BW looked a lot like what we discovered at BWXT. In other words, BWXT looks like the next BW, and the guys who’ve seen this movie before are leaving before the series ends.

B. We have discovered serious problems at BWXT regarding financial accounting practices. Some of the freedoms taken here include changing project estimates in a way that results in higher reported profits, changing cost accounting schedules, and constantly changing targets on capital expenditure inflation. We believe BWXT is hiding project losses, inflating profits, and distorting the cash power available throughout the company, all to the detriment of its shareholders.

If you’re reading this report, you’re probably smart enough to understand that a fact pattern like this doesn’t just happen by accident. We have alerted BWXT listeners, the press and others who will be interested in these findings. We are available at [email protected] for questions.

BWX Technologies

BWX Technologies

Summary

  1. BWXT plays a multitude of accounting games, especially around long-term projects. Its earnings are substantially overstated and its free cash flow will not rebound as investors think.
    • If you owned shares in a company with long-term, fixed-price projects, and you were told it had all of the following characteristics:
      • 27 consecutive quarters of positive project accounting revisions (no other company in the peer group comes close), increasing operating income by nearly $ 300 million
      • In 2018, management said high investments would fall back to baseline in 2 years. In 2019, they said 2 more years. In 2020, they said 2 more years. In 2021, they said 2 more years … all that goalpost move worth around $ 600 million in ‘unexpected’ capital expenditure
      • Likewise, moving goal posts for working capital as it drains cash worth around $ 200 million
      • A deliberate change in accounting policy that inflates EBIT by around $ 27 million per year
      • An explosion of unbilled DSOs from the 1930s to the 1970s
      • The CFO and the President both give notice of resignation when these issues arise. Would you be intellectually honest enough to ask, “What’s going on here?” “
  2. The BWXT situation today resembles the BW situation just before it imploded.
    • BWXT dumped BW on the market in a spin-off in 2015, and BW stock continued to fall by around 90%.
    • The cause of BW’s death spiral was a series of horribly mispriced projects – projects that seemed to be doing well until shortly after the spin-off.
    • Investors could have seen the implosion of BW coming if they had heeded the warning signs – warning signs that closely resemble BWXT’s today. BW presented the same constraints on the project’s working capital and oddly persistent positive accounting revisions.
    • The outgoing CFO and chairman held similar roles at BWXT when he held the BW portfolio and must have been involved in it prior to the split.
  3. BWXT’s balance sheet is more leveraged than investors realize.
    • Management and the seller side refer to BWXT as “2.7x leverage”. This calculation does not take into account an underfunded pension and environmental exposure obligations. The leverage is really ~ 3.5x.
    • Clawback payments for COVID relief are starting now, government cash refunds are declining to lower levels, and the company has toned down on previous promises of working capital clawback. A single customer late payment seems to have required a bank overdraft.
    • Given its dividend, BWXT has less room for pressure on balance sheets or weak cash flow.
    • The maintenance investments required by BWXT are likely significantly higher than the company claims, which means that the free cash flow forecast for the “dead years” is significantly overestimated.
  4. Some investors own BWXT because of the history of molybdenum. These investors are part of our short thesis.
    • If you are a bull on BWXT, you may mistakenly believe that BWXT will sell some medical imaging isotopes by the end of 2022 and make money for them in subsequent years due to chronic under-supply. .
    • BWXT’s timeline for FDA approval within months of submitting its application is unrealistic. It took years for a major competitor to go through this process. BWXT has already started moving those approval posts, of course.
    • The capacity picture for molybdenum-99 goes from under-supply to over-abundance. A competitor marketed and approved by the FDA is already adding about 50% to its total capacity. BWXT intends to join the fray and add more, as other newcomers are doing.
  5. Assessment: Suppose we are dead wrong about all of this. The stock is still a scam.
    • Assuming BWXT’s capital spending drops to around $ 100 million, as management has said, this impressive reversal would still only bring in around $ 160 million in free cash flow. Today’s price is a multiple of twenty of FCF’s ambitious number.
    • BWXT’s peer group is trading at a high multiple of this year’s FCF (not ambitious).
    • BWXT is also heavily in debt relative to its peers, so its EV / FCF is even more outlier.

Prologue: Some exhibitions

Here are some of the top charts and text snapshots in this report for those who want a quick analysis. They will take on more meaning as you find them in the relevant sections and they are described in context.

  • Accounting reviews of BWXT’s project against peers, using the peer group that BWXT uses in its proxy. This graph is a visualized and summary version of a table that we have in the section on the accounting revisions of the project. It shows the longest streak, at any time, of positive net project accounting revisions for each company since 2015:

BWX Technologies

In a world where all of BWXT’s peers periodically check their income statement when updating their project estimates, BWXT is the only one with an unblemished track record of exclusively positive “reviews” for seven years now. Each quarterly review of the final profitability of a project, like the initial estimate, reflects the judgment of the company’s management. This footage is too good to be true, and we will be spending considerable time explaining why later in this report.

  • BWXT’s story of moving the goalposts on capital spending. For this summary below, we’ve picked just a few of the clearest selections showing management’s ever-changing assessment of its ‘peak’ investment year. These are the words of management, not ours. To us, they say BWXT has minimized its ongoing maintenance investments and decided to admit it (and now that’s the new CFO’s problem):
    • Q118: “But the – to the extent that – this [2018] will be the top of our capital [expenditure], and I think it’s going to start to go down.
    • Q418: “So with regard to capital, at the moment, we are in a capital year of about [150], and we think this will probably be maintained in 19. “
    • Q220: “After 2020, capital spending should start on a downward trajectory …”
    • Q321: “And Peter, to answer the capital question, you asked about the capital for the rest of [2021]. We said about $ 250 million for the year. We said next year, which is ’22, would be less than that … [and continue declining from there]. “

We have a table later in this report noting every investment goal post moved over the past five years in much greater detail and explanation.

  • BWXT’s explosion in net unbilled DSOs, which are driven by revenue recognized in excess of billings. We note that the US Navy is BWXT’s biggest customer (by far) and therefore a rising DSO does not appear to be evidence of sheer slowness in collection. We adjust the net DSO to (remove) the minor impact of the missile reserve taken in Q318:

BWX Technologies

  • BWXT’s evolving timeline for FDA approval of its moly-99 / TC-99 medical isotope products. This refers to the fact that management repeatedly “updates” their expectations as to when FDA submission will take place and FDA approval is expected:

BWX Technologies

  • BWXT’s operating cash flow, adjusted for COVID grants and discretionary pension contributions, versus its Adjusted EBITDA:

BWX Technologies

  • BWXT’s multi-year transition from a cash-rich balance sheet to a high-leverage balance sheet:

BWX Technologies

  • The decreasing depreciation of BWXT as a percentage of gross property, plant and equipment, highlighting the quarter in which a change in the recognition of apparent depreciation was disclosed. We estimate this discretionary accounting change represents approximately $ 27 million in annual EBIT for BWXT:

BWX Technologies

Read the full report here by Josaphat Research

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