Babcock & Wilcox Enterprises, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed March 1, 2018 and includes significant subsequent financing developments. B&W supplies power-generation, renewable-energy and industrial equipment and related services.
Financial performance
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $1.558 billion | $1.578 billion |
| Gross profit | $99.9 million | $179.1 million |
| Gross margin | 6.4% | 11.3% |
| Operating loss | $281.6 million | $102.8 million |
| Net loss attributable to shareholders | $379.8 million | $115.6 million |
| Basic and diluted loss per share | $8.09 | $2.31 |
| Cash from (used in) operations | $(189.8) million | $2.3 million |
| Capital expenditures | $14.3 million | $22.5 million |
Cash and cash equivalents were $56.7 million at year-end, down from $95.9 million; $54.3 million was held by foreign entities. Current assets were $732.3 million and current liabilities were $744.3 million. Total assets were $1.322 billion, versus $1.529 billion a year earlier.
Year-end borrowings were $263.6 million on a carrying-value basis: $94.3 million under the U.S. revolver, $160.1 million net carrying value on the second-lien loan, and $9.2 million under foreign facilities. The second-lien loan’s face value was $195.9 million; total debt face value was approximately $299.3 million. The filing also reports $269.1 million of letters of credit and bank guarantees and $378.8 million of surety bonds outstanding.
Segments and backlog
| Segment | 2017 revenue | 2017 gross profit (loss) | 2016 revenue |
|---|---|---|---|
| Power | $821.1 million | $192.0 million | $982.0 million |
| Renewable | $347.2 million | $(128.2) million | $349.2 million |
| Industrial | $397.8 million | $41.4 million | $253.6 million |
Year-end backlog was $1.676 billion, down from $2.072 billion. Management expected $883 million of that backlog to convert to revenue in 2018. Bookings were $1.139 billion, approximately level with 2016.
Material changes versus 2016
- Revenue declined 1.3%, principally as Power revenue fell $160.9 million amid continued weakness in coal-fired power markets. Industrial revenue rose with the SPIG and Universal acquisitions.
- Gross profit fell $79.2 million, chiefly due to the worsening European renewable-contract losses, lower Power volume and productivity issues on Industrial cooling-system projects.
- Operating loss widened by $178.8 million. Key items included $86.9 million of goodwill impairments, an $18.2 million impairment of the Indian joint-venture investment and lower equity-method income.
- Operating cash flow deteriorated by $192.1 million to a $189.8 million outflow. Management attributed the pressure in part to renewable-project funding, contract billing timing and changes in contract-related payables and accruals.
- Interest expense increased to $26.3 million from $3.8 million, reflecting higher borrowing and financing costs, including the second-lien facility.
Outlook, risks and unusual items
- Going concern and financing: Covenant defaults at December 31, 2017 and liquidity constraints raised substantial doubt about the Company’s ability to continue as a going concern. The auditor’s report includes a going-concern paragraph, while expressing an unqualified opinion on the financial statements. On March 1, 2018, the revolver amendment temporarily waived specified defaults. The second-lien agreement provided a 180-day standstill beginning that date. B&W planned a rights offering of at least $182 million, backstopped by existing stockholders, and intended to combine proceeds with up to $35 million of permitted revolver borrowings to repay the second lien. Completion and adequate covenant performance were not assured.
- Renewable contracts: The segment recorded $158.5 million of net estimated losses in 2017 on six European projects, following $141.1 million in 2016. A structural-steel failure and related design issues across three projects contributed to approximately $42 million of estimated costs, including delays. Estimated liquidated damages on the six projects totaled $77.1 million. Management expected five facilities to be handed over in 2018 and one in early 2019, but warned estimates could change. One civil-works partner was expected to enter administration; B&W estimated assuming the remaining scope could cost up to $10 million.
- Contract exposure: Fixed-price work, subcontractor performance, schedule delays, customer rejection rights and percentage-of-completion estimates create potential for additional losses, penalties or cash demands. The company recorded a $153.3 million net adverse change in estimates on long-term contracts in 2017.
- Impairments and tax: B&W recorded $86.9 million in goodwill impairments ($50.0 million Renewable and $36.9 million SPIG) and an $18.2 million impairment of its Indian joint-venture investment. The 2017 tax provision was $64.8 million, including $62.4 million of provisional expense from remeasuring deferred taxes under the U.S. Tax Cuts and Jobs Act.
- Management actions and outlook: Restructuring affected about 9% of the global workforce, including an approximately 30% reduction at B&W Vølund; estimated 2018 annual savings were at least $45 million. Power revenue was expected to decline by a low-single-digit percentage in 2018. Management expected Industrial profitability to improve as legacy cooling contracts were completed. Cash use was expected to continue through the first half of 2018, particularly in Renewable. These are management expectations, not guarantees.
- Further financial flexibility measures: The amended revolver required asset sales of at least $100 million before March 31, 2019 and imposed operating, borrowing and capital-expenditure restrictions. B&W was also evaluating strategic alternatives for MEGTEC and Universal. It sold its BWBC China joint-venture interest in early 2018 for approximately $21 million, with an expected gain of about $4 million.
- Additional risks include coal-market and regulatory uncertainty, backlog cancellation or changes, international and currency exposure, pension underfunding, litigation and the availability of bonding and letters of credit. Pension and postretirement obligations were underfunded by approximately $258.8 million.
Most important facts for investors to verify
- Whether the rights offering closed on the intended terms and whether proceeds and permitted borrowings repaid the second lien before the standstill and waiver deadlines.
- Actual revolver availability, covenant compliance, minimum-liquidity headroom and progress toward the required asset sales.
- Updated cost-to-complete, completion and customer handover status for each of the six European renewable projects, including the partner administration exposure and liquidated damages.
- Actual operating cash flow and working-capital needs as renewable contracts are completed, and whether the planned restructuring savings are achieved.
- Whether Industrial contract execution improves and whether the proposed strategic alternatives for MEGTEC and Universal result in transactions.
- Final accounting for the Tax Act and any subsequent changes to deferred-tax assets, valuation allowances or reported tax expense.