Babcock & Wilcox Enterprises, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unless otherwise noted, figures are in U.S. dollars; financial statement amounts below are in millions. BW became an independent public company on June 30, 2015, in a spin-off from its former parent. Historical periods include combined results before the spin-off, so comparisons may not reflect the costs of operating independently. Nuclear Energy is presented as a discontinued operation.
Financial performance
- Q3 revenue: $420.0 million, up 4.5% from $402.0 million. Global Power grew, while Global Services and Industrial Environmental revenue declined.
- Q3 profitability: Gross profit was $77.9 million, down 11.8%; gross margin was approximately 18.6%, versus 22.0%. Operating income fell to $9.6 million from $25.5 million, with operating margin about 2.3% versus 6.4%. Net income attributable to BW was $6.2 million, or $0.11 per diluted share, versus $5.6 million, or $0.10 per share. Continuing-operations diluted EPS was $0.11 versus $0.24.
- Nine-month results: Revenue was $1,254.6 million, up 20.5%; gross profit was $243.2 million, up 13.5%. Operating income was $31.8 million, down from $33.2 million. Net income attributable to BW was $24.3 million, or $0.45 per diluted share, versus $21.6 million, or $0.40. Continuing-operations diluted EPS was $0.40 versus $0.39. The 2014 comparison includes only a partial year of MEGTEC, acquired in June 2014.
- Cash flow: Nine-month cash provided by operating activities was $93.0 million, versus cash used of $102.4 million in 2014. Management attributed the improvement mainly to contract-in-progress and advance-billing positions from large Global Power projects. Investing activities used $25.0 million; financing activities provided $79.1 million, including a $125.3 million contribution from the former parent at the spin-off.
- Liquidity and debt: September 30 cash and cash equivalents were $334.2 million, plus $40.3 million of restricted cash. About $194.4 million of unrestricted cash was held in foreign operations and was generally unavailable for U.S. needs without repatriation and potential taxes. The company had no borrowings under its $600 million revolving credit facility, with approximately $364.6 million available after letters of credit. Current notes payable and maturities were $3.1 million. The company reported compliance with credit covenants.
- Balance sheet: Total assets were $1,611.7 million and total liabilities $835.1 million at September 30, 2015. Unfunded pension and postretirement obligations totaled $278.4 million.
Material changes and operating drivers
- Q3 Global Power revenue rose 29.1% on higher new-build boiler activity, but gross profit fell to $25.8 million from $29.7 million, including the Berlin Station settlement impact.
- Q3 Global Services revenue declined 3.5%; gross profit decreased $8.8 million, mainly due to an $8.4 million accrual for forecast losses on a large construction-services project, including unfavorable labor productivity and other cost adjustments.
- Q3 Industrial Environmental revenue declined 20.5% due to lower aftermarket volume and delivery timing. Gross profit increased, partly because amortization of the acquired backlog intangible asset ended in June 2015.
- Backlog was $2.442 billion at September 30, up from $2.247 billion at December 31, 2014. Global Power backlog increased to $1.253 billion, while Global Services backlog declined to $1.097 billion. Backlog is not a GAAP measure and projects may be changed or canceled.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management said cash, operating cash flow and borrowing capacity should meet liquidity needs for at least 12 months. It expected 2015 capital expenditures of approximately $40 million, principally for a Mexico facility expansion and information technology.
- Management estimated $14–$16 million of annual incremental costs to replace parent-provided services and support stand-alone operations. Its restructuring program was expected to generate $35–$50 million of annual savings when fully implemented; approximately $10 million had been realized through September 30, with about $15 million expected in 2016 and an additional $15 million in 2017.
- The Berlin Station settlement negatively affected Q3 results by $9.6 million, including a $7.8 million revenue reversal and $1.8 million of legal costs. The settlement canceled the remaining $21.9 million of project letters of credit.
- An approximately $9.0 million impairment was recognized in the first half of 2015, primarily for carbon-capture research facilities and equipment deemed not commercially viable. Nine-month contract-estimate changes reduced operating income by $2.0 million, compared with a $13.2 million increase in 2014.
- In the ARPA litigation, the customer alleged damages of approximately $170 million. The company cited an overall contractual liability cap of about $20.5 million, disputed the claims, and said a possible loss could not be estimated. A significant adverse outcome could materially affect financial condition.
- Fixed-price contracts expose the company to cost overruns, including labor productivity and raw-material price changes. Additional commitments include approximately $1.3 billion of performance guarantees by the former parent for company projects, $186.1 million of subsidiary letters of credit and bank guarantees, and $513.5 million of outstanding surety bonds.
- Foreign-currency exposure is managed principally with forward contracts; their notional value was $95.3 million. Management reported no material change in market-risk exposures from its prior disclosure.
Important facts for investors to verify
- Whether the Global Services project loss accrual adequately reflects remaining cost-to-complete and execution risks.
- Progress and potential financial exposure in the ARPA litigation, and any developments affecting the Berlin Station settlement.
- Conversion of the $2.442 billion backlog into revenue, including cancellation risk and Global Services backlog trends.
- Actual stand-alone costs, restructuring charges and realized savings compared with management’s estimates.
- Availability and use of foreign-held cash, future pension funding needs, and capacity under credit, letter-of-credit and surety arrangements.
- How independent-company results compare with historical periods that included parent allocations and a partial-year MEGTEC contribution.