Babcock & Wilcox Enterprises, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. The company operates Power, Renewable and Industrial segments. Because B&W became a separate public company on June 30, 2015, some prior-year figures reflect the pre-spin combined business and may not be fully comparable.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $411.0m | $420.0m | $1,198.3m | $1,254.6m |
| Gross profit | $73.8m | $77.9m | $180.0m | $243.2m |
| Operating income (loss) | $11.1m | $9.6m | $(44.2)m | $31.8m |
| Net income (loss) attributable to shareholders | $8.9m | $6.2m | $(44.1)m | $24.3m |
| Diluted EPS | $0.18 | $0.11 | $(0.87) | $0.45 |
| Cash from operating activities | Not separately provided | Not separately provided | $(39.8)m | $93.0m |
Q3 reported gross margin was approximately 18.0% and operating margin 2.7%. For the first nine months, reported gross margin was approximately 15.0% and operating margin was negative 3.7%. Nine-month 2016 results included a $30.5m pension mark-to-market loss and substantial restructuring and renewable-contract charges. Excluding intangible amortization and pension mark-to-market adjustments, gross profit was $82.1m in Q3 versus $78.4m, and $218.9m year to date versus $250.4m.
Balance sheet and liquidity at September 30, 2016: Cash and cash equivalents were $65.1m, plus $28.9m of restricted cash; total current assets were $772.6m and current liabilities $561.6m. Revolving debt was $44.7m. The company reported approximately $203.8m available under its U.S. facility after considering borrowings, letters of credit and covenant limits, and stated it was in covenant compliance. Approximately $64.1m of unrestricted cash was held by foreign entities; repatriation could trigger taxes not accrued by the company.
Material changes and business drivers
- Q3 revenue declined 2.1% year over year. Power revenue fell $84.4m, partly offset by higher Renewable activity and $38.3m of revenue from SPIG, acquired July 1.
- Power revenue fell 28.7%, reflecting lower coal-related demand and aftermarket activity, as well as delays to a Canadian oil sands contract. Restructuring helped maintain or improve Power gross margin.
- Renewable revenue rose 43.1% in Q3, but the nine-month segment gross profit fell to $14.5m from $36.6m, largely because of losses on a European project.
- Industrial Q3 revenue nearly doubled, principally due to SPIG. SPIG contributed $38.3m of revenue and $4.2m of gross profit in the quarter. Its purchase-price allocation, including intangible asset values and deferred taxes, remained provisional.
- Backlog was approximately $2.19bn at September 30, down from $2.44bn a year earlier. Nine-month bookings were $880m versus $1.45bn.
- Cash fell from $365.2m at year-end 2015, reflecting the SPIG acquisition, investment in the Indian joint venture, negative operating cash flow and share repurchases. The company repurchased $75.7m of shares during the first nine months.
Outlook, risks and unusual items
- Management cited lower expected U.S. coal-fired power demand and restructured the Power business, reducing the organization supporting the coal market by approximately 20%. It expected up to $19m of additional charges from 2016 restructuring actions, potentially extending through 2017, and up to $7.5m of additional pre-2016 restructuring charges, largely in Q4 2016.
- A European Renewable contract incurred $45.7m of estimated losses in the first nine months, including a $14.0m estimate revision in Q3. The company recorded a $15.0m probable insurance recovery, the full amount available under the policy. The project was approximately 79% complete; construction was expected to finish in early 2017, with commissioning and turnover potentially continuing through mid-2017. Final costs and timing remain uncertain.
- Management said cash, operating cash flows and borrowing capacity should meet liquidity needs for at least 12 months from the filing date. Operating cash generation remains a concern given the year-to-date cash outflow and contract billing timing.
- SPIG added currency exposure, which the company said it manages in part with foreign-exchange hedges. Hedged foreign-currency contracts had a $161.4m notional value at quarter-end.
- In the ARPA lawsuit concerning a boiler project, the company said it could not estimate a possible loss. It cited a contractual liability cap of approximately $20.5m and noted a trial date of November 7, 2016.
- Outstanding surety bonds supporting contracts totaled approximately $555.7m. The company said current bonding capacity was adequate for existing requirements over the next 12 months, but noted capacity was not assured.
- Other unusual items included $13.1m of additional deferred-tax valuation allowances associated with restructuring, $30.8m of 2016 restructuring costs for the first nine months, and $11.9m of intangible-asset amortization expense.
Investor verification points
- Track the European project’s remaining costs, schedule, insurance recovery collection and effect on operating cash flow.
- Confirm progress against management’s restructuring savings and the expected additional charges.
- Review backlog conversion, bookings and coal-related demand, particularly in Power and Renewable.
- Monitor cash availability, the foreign-held cash balance, borrowing capacity, letters of credit and covenant compliance.
- Follow SPIG integration, final purchase-price allocation, amortization expense and contribution to Industrial profitability.
- Check developments in the ARPA litigation and the company’s broader surety, warranty and contract obligations.