Babcock & Wilcox Enterprises, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. B&W supplies equipment and services across Power, Renewable, and Industrial segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $408.7 million | $411.0 million | $1,149.6 million | $1,198.3 million |
| Gross profit | $47.3 million | $73.8 million | $54.4 million | $180.0 million |
| Gross margin | 11.6% | 17.9% | 4.7% | 15.0% |
| Operating income (loss) | $(104.7) million | $11.1 million | $(258.2) million | $(44.2) million |
| Net income (loss) attributable to shareholders | $(114.3) million | $8.9 million | $(272.3) million | $(44.1) million |
| Diluted loss per share | $(2.48) | $0.18 income | $(5.69) | $(0.87) |
Q3 operating results included $86.9 million of goodwill impairment. Nine-month results also included $18.2 million impairment of the India joint-venture investment and $123.8 million of net estimate revisions on six European Renewable loss contracts. Q3 interest expense was $7.5 million, versus $0.4 million a year earlier; nine-month interest expense was $15.6 million, versus $1.2 million.
Cash flow, debt, and liquidity
- Operating cash used was $150.8 million in the first nine months of 2017, compared with $39.8 million used in 2016. Investing cash used was $57.9 million; financing cash provided was $155.5 million.
- Cash and cash equivalents were $48.1 million at September 30, 2017, down from $95.9 million at year-end 2016. Restricted cash was $26.6 million. Most unrestricted cash, $44.8 million, was held by foreign entities and was not readily available for U.S. operations.
- Total borrowings were $209.7 million carrying value ($247.2 million face value before discounts): $58.9 million under the U.S. revolver, $12.4 million under foreign facilities, and $138.4 million carrying value on the second-lien term loan.
- U.S. revolver availability was approximately $94.7 million. The company reported compliance with its covenants at quarter-end, with a 3.00 leverage ratio and 2.59 interest coverage ratio. The amended facility requires minimum monthly liquidity of $75 million and includes tighter restrictions during a covenant-relief period.
Material changes and segment trends
- Power revenue declined 4% in Q3 and 20% year to date, mainly from weaker coal-power construction activity. Q3 gross margin was 20%, compared with 23%; management said prior restructuring helped preserve margins.
- Renewable Q3 revenue fell 13% and gross profit was approximately break-even. Year-to-date segment gross loss was $100.1 million, versus $14.5 million gross profit in 2016, largely due to six troubled European projects.
- Industrial Q3 revenue rose 29%, supported by the Universal acquisition, but gross margin fell to 10% from 19%, reflecting mix and cooling-project productivity issues. Nine-month revenue increased 91%, also including SPIG.
- Backlog was $1.826 billion at September 30, down from $2.072 billion at year-end 2016 and $2.190 billion a year earlier. Nine-month bookings were $881 million, roughly flat with $880 million in 2016.
Outlook, risks, and unusual items
- Liquidity outlook: Management expects cash use through Q4 2017 and into the first half of 2018, particularly to fund Renewable contract losses and work down advance billings. It expects cash, operating cash flows, and borrowing capacity to cover needs for at least 12 months, but noted this depends on forecasts and covenant compliance.
- Restructuring: Planned workforce reductions of about 9% globally, including about 30% at B&W Vølund, plus cost controls and office consolidations. Estimated costs are approximately $20 million, mostly in Q4 2017; estimated 2018 annual savings are approximately $45 million.
- Renewable project exposure: Structural steel problems affected three projects; estimated related costs, mainly delays, were about $20 million and included in project loss estimates. Total expected liquidated damages for the six loss contracts were $62.8 million. Project estimates remain subject to change as work proceeds.
- Financing risk: The second-lien loan carries a 10% coupon and matures in December 2020; its effective interest rate was 18.64% after discount and financing costs. Covenant thresholds tighten over time, and management said covenant compliance was forecast to be closest to minimum thresholds in Q1 2018.
- Controls: Disclosure controls were deemed ineffective because an unremediated material weakness remained at Vølund. Management expected remediation by December 31, 2017, but gave no assurance of timing or success.
- Other matters: The ARPA judgment included $4.2 million damages and $3.7 million prejudgment interest; B&W appealed and ARPA cross-appealed. A securities class action seeks unspecified damages; the company said it considers the allegations without merit. During Q3, hedge counterparties withdrew support for new FX forwards, and B&W stopped entering new contracts.
- No formal consolidated earnings guidance is provided in the filing. Universal was expected to contribute over $70 million of 2017 revenue and to add to Industrial gross profit.
Important facts for investors to verify
- Progress, remaining costs, liquidated-damages exposure, and cash requirements for the six European Renewable loss contracts.
- Liquidity availability and covenant headroom, especially against the Q1 2018 forecasted pressure point.
- Whether the restructuring achieves its estimated $45 million annual savings and reduces Vølund execution risk.
- Evidence that the Vølund material weakness has been remediated and that controls operate effectively.
- Recovery in Industrial margins and backlog conversion, and whether reported backlog translates into profitable cash flow.
- Developments in the ARPA appeal, securities litigation, and potential additional project or warranty contingencies.