Babcock & Wilcox Enterprises, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context and results
B&W supplies power-generation, renewable-energy and industrial equipment and services. Its three segments are Power, Renewable and Industrial. Results were dominated by substantial cost-estimate revisions on European Renewable projects; acquisitions of SPIG and Universal increased Industrial revenue.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $349.8 | $383.2 | $740.9 | $787.3 |
| Gross profit (loss) | ($55.8) | $26.1 | $7.1 | $106.2 |
| Operating loss | ($144.6) | ($72.6) | ($153.4) | ($55.3) |
| Net loss attributable to shareholders | ($151.0) | ($63.5) | ($158.0) | ($53.0) |
| Loss per diluted share | ($3.09) | ($1.25) | ($3.24) | ($1.04) |
Consolidated gross margin was approximately negative 16% in Q2 2017, versus approximately 7% in Q2 2016; first-half gross margin was approximately 1%, versus approximately 13%. Interest expense was $6.3 million in Q2 and $8.1 million for the first half, including $3.7 million of ARPA prejudgment interest recorded in Q2.
Segments and changes versus prior year
- Power: Q2 revenue fell 18% to $213.8 million and gross profit declined to $49.1 million from $62.5 million. Gross margin held at 23% versus 24%, as restructuring helped offset lower coal-market and construction activity. First-half revenue fell 26% to $410.1 million; gross margin remained 22%.
- Renewable: Q2 revenue declined 44% to $48.1 million; gross loss widened to $110.9 million from $17.5 million. First-half gross loss was $100.3 million versus $4.1 million. The company recorded $115.2 million of Q2 losses from revised estimates on six European loss contracts; the filing reports $112.2 million of net estimate-change losses for the first half. Delays and subcontractor productivity shortcomings were principal drivers.
- Industrial: Q2 revenue rose 137% to $90.2 million, largely from SPIG and Universal, which together contributed $59.2 million of Q2 revenue. Gross profit was $9.5 million versus $11.1 million, with lower margins reflecting mix and project productivity issues. First-half revenue rose to $182.4 million and gross profit to $24.8 million.
Bookings were $310 million in Q2 versus $213 million a year earlier; backlog was $1.98 billion at June 30, down from $2.15 billion at June 30, 2016. B&W acquired Universal in January 2017 for approximately $52.5 million net of cash acquired. Management expected it to generate more than $80 million in 2017 revenue and contribute positively to Industrial gross profit.
Cash flow, balance sheet and financing
- First-half operating cash flow was negative $81.7 million, compared with negative $15.8 million in 2016. Investing cash flow was negative $53.9 million, including the Universal acquisition; financing cash flow was positive $103.5 million, primarily reflecting net U.S. revolver borrowings.
- Cash and cash equivalents were $67.9 million at June 30, 2017, down from $95.9 million at year-end; $64.4 million was held by foreign entities. Restricted cash was $22.8 million.
- Revolving debt totaled $131.4 million at June 30: $118.1 million under the U.S. facility and $13.3 million under foreign facilities. Total liabilities were $1.17 billion and stockholders’ equity was $417.6 million.
- After the August 9, 2017 amendment, the U.S. revolver commitment was reduced to $500 million and the company reported $92.1 million of availability based on June 30 information. The amended facility includes a $75 million minimum-liquidity requirement, tighter operating restrictions and increased borrowing costs. B&W reported compliance with covenants at June 30.
- On August 9, B&W borrowed $175.9 million under a new second-lien term loan at 10% interest, maturing December 30, 2020, with a conditional delayed-draw facility of up to $20 million at 12%. Approximately $125 million of proceeds went to revolver repayment and fees; approximately $50.9 million funded repurchase of 4.8 million shares from an AIP affiliate.
Management expected cash use through 2017 and into the first half of 2018, particularly to fund Renewable contract losses and work down advance billings. It expected liquidity sources to be sufficient for at least 12 months from the filing date, subject to its operating forecast and borrowing capacity. It estimated $40 million to $175 million of U.S. revolver capacity during the next 12 months, after required cash availability.
Outlook, risks and unusual items
- Management said Renewable contract-loss provisions were considered adequate but cautioned that further losses could be required as estimates change. It planned to focus Renewable on core technology, with a partner handling balance-of-plant and civil-construction scope.
- Six European projects had estimated aggregate liquidated damages of $49.6 million. Completion timing ranged from the second half of 2017 to the first half of 2018, with some projects expected to finish in early 2018.
- The company identified a material weakness in controls over completeness and accuracy of project-cost information used in percentage-of-completion accounting at Vølund. Disclosure controls were deemed ineffective as of June 30. Management said the financial statements were fairly stated, described remediation steps, and said remediation was not yet complete.
- Goodwill testing found no impairment at June 30, but headroom was only 3% for MEGTEC and less than 1% for SPIG. Management noted that weaker forecasts or higher discount rates could result in future impairment.
- Other unusual items included an $18.2 million non-cash impairment of the TBWES India joint-venture investment, attributed to reduced expected Indian market opportunities, and $3.7 million of ARPA prejudgment interest. The ARPA jury award was $4.2 million; B&W was evaluating appeal options. A consolidated securities class action relating to Renewable project disclosures sought unspecified damages; the company stated it believed the claims lacked merit.
- The board approved a key executive retention program on August 7, with cash and stock awards vesting over 2018–2020. The filing provided no formal consolidated revenue or earnings guidance.
Most important facts for investors to verify
- Whether the six Renewable projects’ cost-to-complete estimates, schedule, subcontractor performance and liquidated-damages assumptions stabilize or lead to further charges and cash use.
- Whether Vølund’s material weakness is remediated and whether project-accounting estimates and controls remain reliable.
- Actual liquidity, revolver availability and covenant compliance under amended credit terms, including the impact of the high-cost second-lien debt and share repurchase.
- Performance and impairment headroom at MEGTEC and SPIG, and the expected contribution from Universal.
- Outcomes and potential financial exposure from ARPA post-trial proceedings, securities litigation, surety obligations and contract-related claims.