Babcock & Wilcox Enterprises, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 28, 2017. The company provides power-generation, renewable-energy, industrial environmental and cooling equipment, and related services through Power, Renewable and Industrial segments. It became independent in June 2015, so 2015 and 2016 results reflect different portions of its post-spin-off operations.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $1,578.3 million | $1,757.3 million |
| Gross profit | $179.1 million | $308.2 million |
| Operating income (loss) | $(102.8) million | $21.9 million |
| Net income (loss) attributable to shareholders | $(115.6) million | $19.1 million |
| Diluted EPS | $(2.31) | $0.36 |
| Cash from operating activities | $2.3 million | $170.4 million |
- Revenue fell 10.2%, primarily due to a $259.5 million decline in Power, partly offset by Renewable growth and the SPIG acquisition. Consolidated gross margin declined to approximately 11.3% from 17.5%.
- Power revenue was $975.5 million, down 21.0%; segment gross margin improved to 23.9% from 20.1% after restructuring. Renewable revenue rose 3.1% to $349.2 million, but the segment recorded a $68.1 million gross loss. Industrial revenue rose 38.1% to $253.6 million, including $96.3 million from SPIG; its gross margin was 20.0%, down from 29.8%.
- FY 2016 operating cash flow was nearly breakeven, while investing activities used $180.8 million and financing activities used $83.4 million. Cash and cash equivalents fell $269.3 million to $95.9 million.
- At year-end, restricted cash was $27.8 million and investments were approximately $18.0 million. Total revolving borrowings were $24.0 million ($9.8 million U.S. and $14.2 million foreign). The balance sheet reported total liabilities of $968.2 million and equity of $561.0 million.
- Backlog declined to $2.072 billion from $2.328 billion. Management expected $889 million of year-end backlog to convert to revenue in 2017.
Material changes and unusual items
- European Renewable contract estimates drove $141.1 million of FY 2016 losses, including $98.1 million in the fourth quarter and $35.8 million of anticipated liquidated damages recorded as reduced revenue. Four projects became loss contracts. Q4 revenue was $380.0 million, gross loss $0.8 million, operating loss $58.6 million and shareholder net loss $71.6 million.
- The company reported a $106.8 million net unfavorable change in estimates on percentage-of-completion contracts, compared with a $0.4 million favorable change in 2015. Management said the Renewable contract changes were expected to reduce 2017 results by $27.9 million.
- Power restructuring and related actions included $31.4 million in 2016 charges, including $14.1 million severance and $14.9 million non-cash impairment of the Ebensburg coal-fired plant. Management reduced the U.S. coal-power organization by about 20%.
- SPIG was acquired July 1, 2016, for approximately $170.8 million net acquisition cost. Universal was acquired January 11, 2017, for approximately $55 million cash, principally financed through the U.S. revolver; its 2016 sales were approximately $80 million.
- Other notable items included $24.1 million of pension and postretirement mark-to-market losses, an $8.3 million gain on the sale of the HMA joint-venture interest, and $40.8 million of restructuring and spin-off transaction costs. The company repurchased $78.4 million of stock during 2016.
Liquidity, outlook and risks
- Management stated that cash, operating cash flows and borrowing capacity were expected to meet liquidity needs for at least twelve months from the filing date. However, $94.4 million of year-end unrestricted cash was held outside the U.S.; management said it had no current plan to repatriate those funds.
- Management expected Renewable operations to use significant cash in 2017 as loss-making projects were completed. It anticipated completion of the most advanced project’s construction in early 2017, with commissioning and turnover through mid-2017; other affected projects were expected to finish in mid-2017, late 2017 and 2018.
- A February 24, 2017 credit amendment provided covenant relief but raised borrowing and letter-of-credit costs, capped aggregate U.S. facility borrowings at $300 million during the relief period, limited acquisitions and investments, and prohibited dividends and share repurchases during that period. It allowed a 3.50:1 maximum leverage ratio during relief, versus 3.00:1 thereafter. At December 31, 2016, reported borrowing capacity under the then-applicable covenant calculation was $228.8 million.
- Key exposures include project cost overruns and schedule delays under fixed-price contracts, backlog cancellations, customer credit and collections, coal-market contraction, international and foreign-exchange risks, and the ability to maintain bonding and letter-of-credit capacity. Outstanding letters of credit and bank guarantees totaled $351.8 million, and surety bonds totaled $527.9 million.
- Defined-benefit pension and postretirement obligations were underfunded by approximately $300.8 million; management expected $19–$21 million of benefit-plan contributions in 2017. The company also disclosed continuing litigation and environmental contingencies. In the ARPA case, a jury awarded $4.2 million; the company had not accrued the plaintiff’s requested $4.1 million pre-judgment interest, which remained pending.
- Management expected about $15 million of savings in 2017 from restructuring, alongside up to $11 million of related costs to achieve savings. It expected capital expenditures of approximately $22.5 million. Renewable bidding involving European resources was to be limited for at least the first half of 2017; management expected potential backlog growth in the second half and beyond, subject to external conditions.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting; SPIG was excluded from the year-end control assessment.
Important facts for investors to verify
- Progress, remaining costs, liquidated damages and cash requirements for each of the four Renewable loss contracts, including whether the expected $27.9 million 2017 impact changes.
- Compliance with amended credit covenants, available borrowing and bonding capacity, and the timing and terms for ending covenant relief.
- Whether operating cash flow improves as the Renewable projects are completed and whether overseas cash can support U.S. liquidity if needed.
- Power-segment performance as U.S. coal-related demand declines, and whether Industrial growth and Universal integration offset that pressure.
- Developments in the ARPA litigation, pension funding requirements, and any other material contingencies or changes in contract estimates.