Babcock & Wilcox Enterprises, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2016. B&W operates Global Power, Global Services, and Industrial Environmental businesses. It became an independent public company in June 2015; therefore, the 2015 comparison includes pre-spin-off allocations and discontinued Nuclear Energy operations, which can limit comparability.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $404.1 million | $397.2 million |
| Gross profit | $80.2 million; 19.8% margin | $83.4 million; 21.0% margin |
| Operating income | $17.3 million | $17.3 million |
| Income from continuing operations attributable to shareholders | $10.5 million; $0.20 diluted EPS | $11.3 million; $0.21 diluted EPS |
| Net income attributable to shareholders | $10.5 million; $0.20 diluted EPS | $12.7 million; $0.24 diluted EPS |
| Cash from operating activities | $(37.9) million | $52.4 million |
| Cash and cash equivalents | $286.8 million | $365.2 million at December 31, 2015 |
| Revolving credit facility | No borrowings; approximately $340.5 million available | — |
At March 31, 2016, total liabilities were $879.1 million, including $279.1 million of pension liabilities. Cash included $37.2 million of restricted cash; approximately $210.8 million of unrestricted cash was held in foreign operations. The company reported $3.1 million of short-term line-of-credit debt on its balance sheet and was in compliance with its credit-facility covenants. Letters of credit under the revolving facility totaled $109.2 million.
Changes versus the prior comparable period
- Revenue increased 1.8%, but gross profit declined 3.9%; operating income was nearly unchanged.
- Global Power: Revenue rose 5.3% to $130.5 million and gross profit rose to $24.4 million, supported by utility and renewable steam-generation projects and favorable project milestones.
- Global Services: Revenue rose 3.9% to $241.2 million, while gross profit fell to $48.2 million and margin declined to 20.0% from 23.0%. Management cited a less favorable construction/services mix and weaker electricity demand and pricing at its Ebensburg plant.
- Industrial Environmental: Revenue declined 21.0% to $32.5 million amid market pressure, lower product sales, and installation timing. Gross profit fell to $7.6 million.
- Equity income from investees improved to $2.7 million from a $2.1 million loss. The 2015 quarter included $1.4 million of discontinued-operation income and $1.4 million of former-parent allocations in continuing SG&A.
Outlook, management commentary, and risks
- Management expects positive operating cash flow for full-year 2016, an approximately 33% full-year effective tax rate, and capital expenditures of approximately $30–$32 million. It said cash, operating cash flow, and borrowing capacity should meet liquidity needs for at least twelve months.
- The restructuring program is expected to produce annual savings of $35–$50 million when fully implemented, against expected total costs of $35–$50 million. By March 31, approximately $13 million of cumulative annual savings had been realized; management expected about $15 million in 2016 and a further $15 million in 2017.
- Backlog was $2.324 billion, versus $2.328 billion at year-end 2015 and $2.581 billion a year earlier. Management cautions that backlog is not a GAAP measure and may be canceled or changed. It expected $884 million of backlog revenue in 2016.
- Operating cash use reflected working down advance billings on contracts and seasonal incentive payments; cash provided by contract billing milestones can vary materially. The company also cited contract-performance estimate uncertainty, warranty estimates, foreign-currency exposure, and dependence on letters of credit and surety bonding.
- A lawsuit brought by Arkansas River Power Authority alleges claims related to a boiler project. The company said it could not estimate the possible loss; the contract has an asserted liability cap of approximately $20.5 million. Trial was set for November 2016.
- Q1 restructuring and spin-off transaction costs totaled $4.0 million, including $1.9 million of spin-off-related costs. The company repurchased 1.8 million shares for $34.7 million during the quarter. In April, it contributed approximately $26.2 million to its Indian joint venture to help repay the venture’s debt; the related bank letter of credit was released in May.
Important facts for investors to verify
- Whether Global Services margins recover and whether Industrial Environmental revenue stabilizes.
- Whether management’s full-year positive operating cash flow, tax-rate, capital-spending, and restructuring-savings expectations are achieved.
- The conversion, timing, and cancellation risk of the $2.324 billion backlog, particularly the amount expected in 2016.
- The location and availability of foreign-held cash, remaining credit capacity, and ongoing letter-of-credit and surety-bond requirements.
- Developments in the Arkansas River Power Authority litigation and any changes to warranty, contract-estimate, or other contingency exposures.