Babcock & Wilcox Enterprises, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; includes unaudited fourth-quarter data. The company was spun off from BWX Technologies (formerly The Babcock & Wilcox Company) on June 30, 2015. Results before the spin-off are combined historical results and may not represent costs or performance as an independent company.
Business context
B&W supplies power-generation boilers and environmental systems, provides aftermarket services, and sells industrial environmental equipment. Its three segments are Global Power, Global Services, and Industrial Environmental (MEGTEC, acquired in June 2014). Global Services was the largest segment, contributing 53.1% of 2015 revenue. Management says approximately 50% of 2015 revenue was related to coal-fired power plants; international operations generated approximately 41%.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Revenue | $1,757.3 million | $1,486.0 million |
| Gross profit | $308.2 million | $219.0 million |
| Gross margin | 17.5% | 14.7% |
| Operating income (loss) | $21.9 million | $(38.0) million |
| Income (loss) from continuing operations | $16.5 million | $(11.9) million |
| Net income (loss) attributable to shareholders | $19.1 million | $(26.5) million |
| Diluted EPS | $0.36 | $(0.49) |
| Operating cash flow | $170.4 million | $(24.2) million |
Reported gross profit includes pension and postretirement mark-to-market (MTM) charges. Excluding those charges, gross profit was $352.5 million in 2015 versus $313.2 million in 2014. Reported operating margin was approximately 1.2% in 2015, compared with a 2.6% operating loss margin in 2014.
- Revenue by segment: Global Power $640.0 million, up $168.0 million; Global Services $933.6 million, up $24.9 million; Industrial Environmental $183.7 million, up $78.3 million. The latter comparison reflects a full year of MEGTEC in 2015 versus about six months in 2014.
- Segment gross profit: Global Power $111.3 million, up $16.7 million; Global Services $192.2 million, down $1.4 million; Industrial Environmental $48.9 million, up $24.0 million.
- Cash and liquidity: Cash and cash equivalents were $365.2 million at year-end, plus $37.1 million restricted cash and $5.1 million investments. About $221.2 million of unrestricted cash was held outside the United States.
- Debt and credit: No long-term debt; $2.0 million short-term line-of-credit borrowing. The $600 million revolving facility had no borrowings and approximately $373 million available after letters of credit. The company reported covenant compliance.
- Other balance-sheet items: Total assets were $1.66 billion; stockholders’ equity was $748.4 million. Pension and postretirement obligations were underfunded by approximately $314.0 million.
Material changes and unusual items
- Revenue rose 18.3%, principally from higher Global Power project activity and a full year of MEGTEC. Operating results also benefited from restructuring savings, but stand-alone public-company costs and higher SG&A offset part of the improvement.
- 2015 pension and postretirement MTM adjustments were a $40.2 million pre-tax loss, compared with a $101.3 million loss in 2014 and a $92.1 million gain in 2013. These adjustments can make earnings volatile.
- The company recorded a $14.6 million impairment, primarily for carbon-capture research facilities and equipment deemed no longer commercially viable.
- Berlin Station litigation was settled in 2015. Related 2015 charges included $9.6 million, including a $7.8 million reversal of accrued claims revenue; the project had also generated losses in prior years.
- Global Services recorded a $12.9 million contract loss accrual for a large construction project affected by unfavorable labor productivity and higher-than-expected costs.
- Fourth-quarter revenue was $502.7 million, but operating loss was $10.0 million and shareholder net loss was $5.2 million. The quarter included the annual pension MTM adjustment.
- Backlog increased to $2.328 billion from $2.248 billion. Management expected $1.058 billion to convert to revenue in 2016; backlog is not a GAAP measure and may be changed, delayed, or cancelled.
Outlook, risks, and contingencies
- Management expected cash, operating cash flow, and borrowing capacity to cover liquidity needs for at least 12 months from the filing date. Planned 2016 capital expenditures were $30–$32 million.
- Restructuring initiatives were expected to generate $35–$50 million in annual savings when fully implemented; approximately $10 million had been realized through year-end 2015, with about $15 million expected in each of 2016 and 2017. Total initiative costs were estimated at $35–$50 million.
- Annual incremental costs of operating independently were estimated at $14–$16 million; approximately $8.5 million was incurred in the second half of 2015.
- Key business risks include cyclicality in power and industrial spending, coal exposure and environmental regulation, project delays or cancellations, fixed-price contract overruns, labor productivity, and reliance on percentage-of-completion estimates. A sustained decline in customer spending could hurt revenue, margins, and cash flow.
- Outstanding contractual support included $302.7 million in letters of credit and bank guarantees and $541.7 million in surety bonds. The company said it did not expect significant cash payments if it fulfills underlying contract commitments.
- In the ARPA dispute, the customer claimed approximately $170 million in damages; the company disputed the claims and cited an approximately $20.5 million contractual liability cap. The company said it could not estimate the possible loss; trial was scheduled for June 2016.
- Spin-off-related risks include higher stand-alone costs, contingent tax and other liabilities, and dependence on former-parent indemnities. The company also disclosed potential environmental, insurance, joint-venture, pension, foreign-exchange, and cybersecurity exposures.
Important facts for investors to verify
- Whether the Global Services construction project’s cost overrun is contained and whether other contracts require additional loss accruals.
- Whether backlog converts as expected, particularly the $1.058 billion forecast for 2016, and whether new awards offset cancellations or delays.
- How much of the reported improvement reflects sustainable operating performance versus pension MTM, acquisition timing, and other unusual items.
- Progress against restructuring savings and the actual run rate of stand-alone public-company costs.
- Funding requirements and sensitivity of the approximately $314 million underfunded pension and postretirement obligations.
- Developments in the ARPA litigation, spin-off tax arrangements, and remaining former-parent performance guarantees.