Babcock & Wilcox Enterprises, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. B&W became a standalone public company on June 30, 2015; comparisons with 2015 therefore include pre-spin-off combined results and may reflect different corporate cost allocations. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $383.2m | $437.5m | $787.3m | $834.6m |
| Gross profit | $26.1m | $81.9m | $106.2m | $165.3m |
| Gross margin | 6.8% | 18.7% | 13.5% | 19.8% |
| Operating income (loss) | $(72.6)m | $4.9m | $(55.3)m | $22.2m |
| Net income (loss) attributable to shareholders | $(63.5)m | $5.5m | $(53.0)m | $18.2m |
| Diluted earnings (loss) per share | $(1.25) | $0.10 | $(1.04) | $0.34 |
| Cash from operating activities | First half: $(15.8)m | First half 2015: $55.6m |
Q2 revenue fell 12% year over year; first-half revenue declined 5.7%. Operating results included a $31.7m loss from a European renewable-energy contract estimate revision and $29.9m of pension mark-to-market expense. The reported restructuring and spin-off costs line was $31.6m for Q2 and $35.6m for the first half. Q2 income tax benefit was $9.0m; first-half tax benefit was $2.4m. EPS share counts exclude potentially dilutive shares because the company reported losses.
Segments and material changes
- Global Power: Q2 revenue decreased 19% to $127.2m and gross profit was a $9.1m loss, versus $26.7m profit a year earlier. The European renewable contract charge drove the decline; the project was about 73% complete at quarter-end and expected to finish by early 2017.
- Global Services: Q2 revenue decreased 7.9% to $218.0m, while gross profit increased 15.8% to $53.6m. Better construction project performance and close-outs more than offset weaker parts volumes and a delayed Canadian oil sands project.
- Industrial Environmental: Q2 revenue decreased 12.4% to $38.0m; gross profit rose to $11.0m, helped by lower amortization. Management cited weaker industrial-market demand in the Americas.
- Backlog was $2.154bn at June 30, down from $2.328bn at December 31, 2015 and $2.444bn a year earlier. Backlog is not a GAAP measure and projects may change or be cancelled.
- Effective September 2016, the company planned to reorganize reporting into Power, Renewable and Industrial segments.
Liquidity, cash flow and capital
- At June 30, cash and cash equivalents were $251.0m, down from $365.2m at year-end; restricted cash was an additional $34.1m. About 76% of unrestricted cash was held by foreign entities and generally was not available for U.S. operations without repatriation taxes.
- First-half cash use was $15.8m from operations, $42.4m from investing and $51.5m from financing. The cash decline was $114.2m. Investing included a $26.2m contribution to an Indian joint venture; financing included $52.3m of share repurchases.
- No borrowings were outstanding under the $600m revolving facility; approximately $217.1m was available after considering the leverage limit and $94.3m of facility letters of credit. The balance sheet separately reported $3.0m of short-term line-of-credit obligations. The company said it was covenant-compliant.
- Current assets were $843.9m and current liabilities $519.8m. Pension liabilities were $299.7m. Outstanding project-related letters of credit and bank guarantees were $196.7m; surety bonds supporting contracts totaled about $554.3m.
- On July 1, 2016, after quarter-end, B&W acquired SPIG for €155m (approximately $174m) in cash, subject to customary purchase-price adjustments.
Outlook, risks and unusual items
- Management cited significantly lower projected U.S. coal-fired power demand and announced a restructuring that reduced the organization supporting the coal market by approximately 20%. Q2 charges included $13.5m severance and $14.6m non-cash long-lived-asset impairment. Further charges were expected: up to $18m for 2016 restructuring actions and up to $9m for earlier initiatives.
- Management expected positive operating cash flow for full-year 2016, based on project billing milestones, and said cash, operating flows and borrowing capacity should meet liquidity needs for at least 12 months. No earnings or revenue guidance was provided in the filing.
- The European renewable contract became a loss contract following a piping-design deficiency requiring re-engineering, rework and delay. A $6.4m estimated-loss reserve was recorded; management cautioned that completion estimates could change.
- The Arkansas River Power Authority lawsuit remained pending, with trial set for November 2016. The company could not estimate potential loss; the contract has an approximately $20.5m liability cap, which the company believes applies.
- A $13.1m increase in deferred-tax valuation allowances was recorded in connection with restructuring. Management also noted possible further pension remeasurement charges in the second half, dependent on future events and market inputs.
- Management reported disclosure controls were effective. A new general-ledger system was being implemented in phases; management said it did not expect a material adverse effect on internal controls.
Important facts for investors to verify
- Progress, revised completion costs and remaining exposure on the European renewable contract, including whether the $6.4m reserve remains adequate.
- Actual restructuring costs and savings versus expected coal-market demand, including any additional pension remeasurement effects.
- Post-acquisition cash, debt, purchase-price adjustments and operating performance of SPIG.
- Backlog conversion, project cancellations or delays, and the timing of cash collections and operating cash flow.
- Available revolver capacity and covenant headroom after the SPIG acquisition, together with cash accessible to U.S. operations.
- Developments in the ARPA litigation and other contractual, warranty, bonding and letter-of-credit exposures.