Babcock & Wilcox Enterprises, Inc. — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. B&W supplies power-generation, renewable-energy and industrial equipment and services. Management said results were slightly ahead of expectations, but year-over-year comparisons were affected by a shrinking Power business, troubled European renewable contracts and acquisitions.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $391.1 million | $404.1 million |
| Gross profit | $62.9 million | $80.2 million |
| Gross margin | 16.1% | 19.8% |
| Operating income (loss) | $(8.8) million | $17.3 million |
| Net income (loss) attributable to shareholders | $(7.0) million | $10.5 million |
| Diluted earnings (loss) per share | $(0.14) | $0.20 |
| Cash from (used in) operations | $(74.8) million | $(37.9) million |
- Revenue fell 3%; gross profit fell 22%. Operating results included higher acquired-intangible amortization ($6.0 million versus $1.5 million), $1.1 million of pension mark-to-market losses, and acquisition and integration costs.
- Segment revenue and gross profit: Power $196.3 million and $43.0 million; Renewable $105.5 million and $10.6 million; Industrial $92.2 million and $15.3 million. Power revenue declined 32%, while Industrial revenue rose 184%, mainly due to SPIG and Universal acquisitions. Renewable gross margin declined to 10.0% from 16.0%.
- Cash and cash equivalents were $46.3 million at March 31, down from $95.9 million at year-end; restricted cash was an additional $25.0 million. About $35.5 million of cash was held by foreign entities.
- Total revolving debt was $102.6 million, including $90.0 million under the U.S. facility. U.S. facility availability was about $55.1 million after borrowing and letter-of-credit usage. The company reported compliance with covenants; leverage ratio was 2.40 and interest coverage ratio 6.41.
Material changes versus Q1 2016
- Power revenue decreased $92.4 million, reflecting lower coal-market demand and reduced new-build, retrofit and emissions-monitoring activity. Restructuring helped lift Power gross margin to 21.9% from 20.6%, despite lower volume.
- Renewable revenue increased $21.8 million with higher contract activity, but gross profit decreased $2.8 million amid loss-making European projects and reduced estimated profits on other contracts.
- Industrial revenue increased $59.8 million. SPIG and Universal together contributed $70.4 million of Q1 revenue and $9.6 million of gross profit, partly offset by weaker legacy business.
- Bookings declined to $317 million from $401 million; backlog was $2.021 billion versus $2.325 billion a year earlier. Renewable represented $1.171 billion of backlog.
- Operating cash outflow nearly doubled, principally due to contract-related working-capital movements and the timing of billings and costs on Renewable projects. Investing outflow included the Universal acquisition; financing cash inflow included $80.2 million of net U.S. revolver borrowings.
Outlook, risks and unusual items
- Management expects cash use for full-year 2017, particularly in Renewable, as the company funds contract losses and works down advance billings. It expects some funding from the U.S. revolver and said cash, operating cash flows and borrowing capacity should cover liquidity needs for at least 12 months.
- Management expected Power quarterly revenue to improve through 2017 based on the timing of new opportunities. Universal was expected to contribute more than $80 million of 2017 revenue and be accretive to Industrial earnings. The filing gives no consolidated earnings or revenue guidance.
- Four European Renewable projects remained loss contracts. Their estimated loss reserves totaled approximately $9.0 million at March 31; project completion schedules and liquidated-damages estimates remain subject to change. The company also recorded $15.0 million of expected insurance recovery relating to one project.
- The February 2017 credit amendment provides covenant relief, but raises borrowing costs and restricts borrowing, acquisitions, investments, dividends and stock repurchases during the relief period. The period cannot end before submission of the compliance certificate for Q4 2017. Management also disclosed expected additional 2017 restructuring charges of up to $6.7 million across current and earlier initiatives.
- In the ARPA case, a $4.2 million jury award was accrued; the plaintiff sought additional interest and costs, which the company had not accrued. Separate securities class-action complaints related to Renewable-project disclosures sought unspecified damages; the company considered them without merit and did not expect a material adverse effect.
- Universal was acquired on January 11 for approximately $52.5 million cash, primarily financed with U.S. revolver borrowings. Its purchase-price allocation remained provisional. Management identified contract-estimate uncertainty, cash timing, liquidity and covenant constraints, and market demand as important considerations.
Important facts for investors to verify
- Progress, final costs, loss reserves, schedule penalties and customer acceptance for the four European Renewable loss contracts; also verify collectability and timing of the $15.0 million insurance recovery.
- Operating cash use, advance-billing run-off, available revolver capacity and compliance with amended credit-facility covenants as 2017 progresses.
- Whether Power demand and margins improve as management anticipated, and whether Industrial acquisition contributions offset weakness in legacy operations.
- Universal integration, purchase-price allocation, expected revenue and earnings contribution, and acquired-intangible amortization burden.
- Developments in the ARPA post-trial proceedings and securities litigation, including any additional accruals or material disclosures.