Babcock & Wilcox Enterprises, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2015. BW became an independent, publicly traded company on June 30 after its tax-free spin-off from The Babcock & Wilcox Company, now BWX Technologies. The business comprises Global Power, Global Services and Industrial Environmental. Results are presented as combined historical operations before the spin-off; the June 2015 balance sheet is consolidated, while December 2014 is combined, which limits direct balance-sheet comparison. The Nuclear Energy segment is treated as discontinued operations.
Financial performance and liquidity
Unless stated otherwise, amounts are in millions of dollars. Income-statement and cash-flow figures compare the three or six months ended June 30; balance-sheet figures compare June 30, 2015 with December 31, 2014.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $437.5 | $327.4 | $834.6 | $639.5 |
| Gross profit | $81.9 | $69.0 | $165.3 | $125.9 |
| Gross margin | 18.7% | 21.1% | 19.8% | 19.7% |
| Operating income | $4.9 | $3.2 | $22.2 | $7.7 |
| Income from continuing operations | $4.1 | $1.6 | $15.5 | $8.9 |
| Net income attributable to BW | $5.5 | $4.9 | $18.2 | $16.0 |
| Diluted EPS | $0.10 | $0.09 | $0.34 | $0.29 |
- Revenue and segment trends: Q2 revenue rose 33.6%; six-month revenue rose 30.5%. Growth reflected higher Global Power and Global Services activity and the MEGTEC acquisition, which was completed in June 2014. Q2 Global Services gross profit declined despite higher revenue; its margin was 19.6% versus 22.6% a year earlier. Global Power’s Q2 margin was 17.0% versus 17.8%.
- Cash flow: Six-month operating cash flow was $55.6 million, compared with cash used of $57.9 million a year earlier, which management attributed mainly to improved contract-in-progress and advance-billing positions. Investing cash use was $17.2 million versus $129.4 million, primarily reflecting the prior-year MEGTEC acquisition. Financing cash provided was $80.6 million, including $125.3 million received from the former parent at spin-off. Cash increased $88.9 million to $307.6 million; this total cash change includes $25.2 million of outflows from discontinued operations.
- Balance sheet and liquidity: Cash and cash equivalents were $307.6 million; restricted cash was $35.5 million. Current assets were $897.7 million and current liabilities $447.9 million. Reported notes payable and current maturities of long-term debt were $3.2 million. The $600 million secured revolving facility had no borrowings outstanding; after $109.1 million of letters of credit, approximately $383.9 million remained available. BW reported compliance with its covenants.
- Other key figures: Backlog was $2.443 billion, up from $2.247 billion at year-end 2014. Unfunded pension and postretirement obligations totaled $281.3 million. Approximately $175.7 million, or 57%, of unrestricted cash was held in foreign operations; repatriating it could incur taxes not accrued in the reported results.
Material changes and unusual items
- MEGTEC contributed $43.4 million of Q2 revenue and $84.5 million for the six-month period in 2015; the corresponding 2014 reported periods included only $3.6 million, as the acquisition occurred June 20, 2014.
- A $9.0 million Q2 impairment charge related primarily to research and development facilities and equipment for a carbon-capture process judged not commercially viable.
- Prior-year Global Power results included Berlin Station contract loss provisions of $4.0 million in Q2 and $11.6 million for the six-month period, benefiting year-over-year comparisons in 2015.
- Six-month operating income included approximately $9.4 million of favorable net changes in estimates on percentage-of-completion contracts. Such estimates may change as work progresses.
- Six-month other comprehensive loss was $9.2 million, mainly reflecting currency translation adjustments. Net income also includes discontinued-operation income of $1.4 million in Q2 and $2.8 million for the six months, versus $3.4 million and $7.3 million, respectively, in 2014.
Outlook, management commentary and risks
- Management said recent backlog growth, particularly international boiler and renewable bookings, is expected to support Global Power revenue growth, while cautioning that demand depends on external factors and may vary. The filing provides no specific earnings or revenue guidance.
- Management expected approximately $40 million of 2015 capital expenditures, including a Mexico manufacturing facility and IT investment for stand-alone operations. It estimated annual incremental costs of $14–$16 million to replace former-parent services and establish stand-alone functions; initial run rates could be somewhat higher.
- The Global Competitiveness Initiative was expected to deliver approximately $50 million in annual savings once fully implemented. Additional margin-improvement initiatives were expected to involve $35–$50 million of total restructuring charges and annual savings in that range. Management said it expected available cash, operating cash flow and borrowing capacity to meet liquidity needs for at least 12 months.
- Litigation and contingencies: The Berlin Station dispute includes claims by BW of at least $70 million and customer draws of approximately $11.0 million on letters of credit; a further $21.9 million of letters of credit could be called. Management said the outcome was premature to predict and a substantially adverse result could materially harm the company. In the ARPA dispute, the customer alleges approximately $170 million in damages; BW cited a contractual overall liability cap of approximately $20.5 million, said loss was not estimable, and did not believe the claims were probable to succeed.
- A separate approximately $16 million AREVA jury verdict was under appeal; the former parent agreed to indemnify BW for losses in that matter. The former parent also had $1.670 billion of outstanding performance guarantees for BW projects, and the parties were obligated to use commercially reasonable efforts to terminate cross-business guarantees. BW reported $160.9 million of other letters of credit and bank guarantees and approximately $514.0 million of outstanding surety bonds supporting contracts.
- Fixed-price contract costs, labor productivity, material prices, completion timing and warranty estimates may affect results. BW also relies on percentage-of-completion estimates and customer progress billings. The company’s disclosure controls were judged effective as of June 30, 2015, and management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether backlog converts to revenue and cash as planned, including the timing and profitability of large Global Power projects.
- Whether Global Services margins recover and whether restructuring savings offset stand-alone costs and other expense growth.
- The resolution, potential letter-of-credit exposure and financial-statement treatment of the Berlin Station and ARPA disputes.
- The accessibility and tax implications of foreign-held cash, and future pension contributions, capital spending and liquidity needs.
- The effects of the spin-off on ongoing costs, former-parent guarantees, indemnities, transition services and the comparability of historical results.