BW : Babcock & Wilcox Enterprises Stock Analysis and Research Report
2017-10-19 - by Asif, Contributing Analyst
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B&W is a leading technology-based provider of advanced fossil and renewable power generation and environmental equipment that includes a broad suite of boiler products, environmental systems, and services for power and industrial uses. B&W specialize in technology and engineering for power generation and various other industries, the related procurement, erection and specialty manufacturing of equipment, and the provision of related services, including:
- high-pressure equipment for energy conversion, such as boilers fueled by coal, oil, bitumen, natural gas, and renewables including municipal solid waste and biomass fuels;
- environmental control systems for both power generation and industrial applications to incinerate, filter, capture, recover and/or purify air, liquid and vapor-phase effluents from a variety of power generation and specialty manufacturing processes;
- aftermarket support for the global installed base of operating plants with a wide variety of products and technical services including replacement parts, retrofit and upgrade capabilities, field engineering, construction, inspection, operations and maintenance, condition assessment and other technical support;
- custom-engineered comprehensive dry and wet cooling solutions;
- gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures; and
- engineered-to-order services, products and systems for energy conversion worldwide and related auxiliary equipment, such as burners, pulverizers, soot blowers and ash and material handling systems.
B&W operate in three reportable segments: Power, Renewable and Industrial. Through its Power segment, the company provide the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. Through its Renewable segment, the company supply steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries. Its Industrial segment provides custom-engineered environmental solutions, industrial equipment and aftermarket parts and services through Babcock & Wilcox MEGTEC Holdings, Inc. ("MEGTEC"), and provides custom-engineered comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets through SPIG S.p.A. ("SPIG"), which B&W acquired on July 1, 2016. See Note 5 in its consolidated and combined financial statements included in Item 8 for additional information about its segments.
Its overall activity depends significantly on the capital expenditures and operations and maintenance expenditures of global electric power generating companies, other steam-using industries and industrial facilities with environmental compliance and noise abatement needs. Several factors influence these expenditures, including:
- prices for electricity, along with the cost of production and distribution including the cost of fuel within the United States or internationally;
- demand for electricity and other end products of steam-generating facilities;
- requirements for environmental and noise abatement improvements;
- expectation of future requirements to further limit or reduce greenhouse gas and other emissions in the United States and internationally;
- environmental policies which include waste-to-energy or biomass as options to meet legislative requirements and clean energy portfolio standards;
- level of capacity utilization at operating power plants and other industrial uses of steam production;
- requirements for maintenance and upkeep at operating power plants to combat the accumulated effects of usage;
- overall strength of the industrial industry; and
- ability of electric power generating companies and other steam users to raise capital.
Customer demand is heavily affected by the variations in its customers' business cycles and by the overall economies and energy, environmental and noise abatement needs of the countries in which they operate.
On June 8, 2015, the board of directors of The Babcock & Wilcox Company (now known as BWX Technologies, Inc.) ("BWC" or the "former Parent") approved the spin-off of B&W through the distribution of shares of B&W common stock to holders of BWC common stock. The distribution of B&W common stock was made on June 30, 2015, and consisted of one share of B&W common stock for every two shares of BWC common stock to holders of BWC common stock as of 5:00 p.m. New York City time on the record date, June 18, 2015. Cash was paid in lieu of any fractional shares of B&W common stock. On June 30, 2015, B&W became a separate publicly traded company, and BWC did not retain any ownership interest in B&W. B&W filed its Form 10 describing the spin-off with the Securities and Exchange Commission, which was declared effective on June 16, 2015. The spin-off is further described in Note 1 to the consolidated and combined financial statements included in Item 8.
B&W is a leading technology-based provider of advanced fossil and renewable power generation equipment with a broad suite of new build boiler and environmental products. B&W provide a comprehensive platform of aftermarket services to a large global installed base of power generation facilities. In addition, B&W is a leading provider of technology and services in the growing market for industrial environmental and noise abatement systems. Across all of its capabilities, B&W specialize in engineering, specialty manufacturing, procurement and erection of equipment and technology for a large and global customer base.
B&W assessment of operating results is based on three reportable segments, which changed during the third quarter of 2016. its reportable segments are as follows:
Power segmentits B&W's Power segment focuses on the supply of and aftermarket services for steam-generating, environmental, and auxiliary equipment for power generation and other industrial applications. The segment provides a comprehensive mix of aftermarket products and services to support peak efficiency and availability of steam generating and associated environmental and auxiliary equipment, serving large steam generating utility and industrial customers globally. Its products and services include replacement parts, field technical services, retrofit and upgrade projects, fuel switching and repowering projects, construction and maintenance services, start-up and commissioning, training programs and plant operations and maintenance for its full complement of boiler, environmental and auxiliary equipment. Its auxiliary equipment includes boiler cleaning equipment and material handling equipment.
B&W's worldwide new build boiler and environmental products businesses serve large steam generating and industrial customers. The segment provides a full suite of product and service offerings including engineering, procurement, specialty manufacturing, construction and commissioning. The segment's boilers include utility boilers and industrial boilers fired with coal and natural gas. Its boiler products include advanced supercritical boilers, subcritical boilers, fluidized bed boilers, chemical recovery boilers, industrial power boilers, package boilers, heat recovery steam generators and waste heat boilers.
B&W's environmental systems offerings include air pollution control products and related equipment for the treatment of nitrogen oxides, sulfur dioxide, fine particulate, mercury, acid gases and other hazardous air emissions, including carbon dioxide capture and sequestration technologies, wet and dry flue gas desulfurization systems, catalytic and non-catalytic nitrogen oxides reduction systems, low nitrogen oxides burners and overfire air systems, fabric filter baghouses, wet and dry electrostatic precipitators, mercury control systems and dry sorbent injection for acid gas mitigation.
The segment also receives license fees and royalty payments through licensing agreements of its proprietary technologies.
While opportunities to increase revenues in the segment are limited, B&W is striving to grow margins by:
- selectively bid projects in emerging international markets needing state-of-the-art technology for fossil power generation and environmental systems;
- growing sales of industrial steam generation products in the petrochemical and pulp & paper markets, such as heat recovery, natural gas and oil fired package boilers, due in part to lower fuel prices;
- continuing its strong service presence in support of its installed fleet of steam generation equipment and expand support of other OEM equipment; and
- reducing costs through a focus on operational efficiencies.
B&W focus its research dollars on improving its products for the markets it serve through: (i) cost reductions resulting in more competitive products in a highly competitive global market and margin improvement; (ii) reduced performance risk assuring its products meet its and its customers' expectations; and (iii) standards development and updates, which results in lower engineering hours consumed on projects and enables it to sublet engineering to low cost engineering centers of excellence.
B&W's Power segment generated revenues of $975.5 million, $1,235.0 million and $1,156.6 million in 2016, 2015 and 2014, respectively, which was 61.8%, 70.3% and 77.8% of its total revenues in those years, respectively.
B&W's Renewable segment provides steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries, and plant operations and maintenance services for its full complement of systems and equipment. B&W deliver these products and services to a large base of customers primarily in Europe through its extensive network of technical support personnel and global sourcing capabilities. Its customers consist of traditional, renewable and carbon neutral power utility companies that require steam generation and environmental control technologies to enable beneficial use of municipal waste and biomass. This segment's activity is dependent on the demand for electricity and ultimately the capacity utilization and associated operations and maintenance expenditures of waste-to-energy power generating companies and other industries that use steam to generate energy.
Globally, efforts to reduce the environmental impact of burning fossil fuels may create opportunities for it as existing generating capacity is replaced with cleaner technologies. B&W expect growth in backlog in the second half of 2017 and beyond, primarily from renewable waste-to-energy projects, as the company continue to see numerous opportunities around the globe, although the rate of backlog growth is dependent on many external factors. B&W has elected to limit bidding any additional Renewable contracts that involve its European resources for at least the first six months of 2017 as B&W work through its existing contracts.
B&W's Renewable segment generated revenues of $349.2 million, $338.6 million and $224.0 million in 2016, 2015 and 2014, respectively, which was 22.1%, 19.3% and 15.1% of its total revenues in those years, respectively.
Through December 31, 2016, its Industrial segment was comprised of its MEGTEC and SPIG businesses. The segment is focused on custom-engineered cooling, environmental, noise abatement and industrial equipment along with related aftermarket services.
Through MEGTEC, B&W provide environmental products and services to numerous industrial end markets. MEGTEC designs, engineers and manufactures products including oxidizers, solvent and distillation systems, wet electrostatic precipitators, scrubbers and heat recovery systems. MEGTEC also provides specialized industrial process systems, coating lines and equipment. MEGTEC's suite of technologies for pollution abatement includes systems that control volatile organic compounds and air toxins, particulate, nitrogen oxides and acid gas air emissions from industrial processes. MEGTEC serves a diverse set of industrial end markets globally with a current emphasis on the chemical, pharmaceutical, energy storage, packaging, and automotive markets. MEGTEC's activity is dependent primarily on the capacity utilization of operating industrial plants and an increased emphasis on environmental emissions globally across a broad range of industries and markets.
B&W acquired SPIG on July 1, 2016. It provides custom-engineered cooling systems, services and aftermarket products. SPIG’s product offerings include air-cooled (dry) cooling systems, mechanical draft wet cooling towers and natural draft wet cooling hyperbolic towers. SPIG also provides end-to-end aftermarket services, including spare parts, upgrades/revamps for existing installations and remote monitoring. SPIG's comprehensive dry and wet cooling solutions and aftermarket products and services are primarily provided to the power generation industry, including natural gas-fired and renewable energy power plants, and downstream oil and gas, petrochemical and other industrial end markets in the Europe, the Middle East and the Americas. SPIG's activity is dependent primarily on global energy demand from utilities and other industrial plants, regulatory requirements, water scarcity and energy efficiency needs.
Beginning with the first quarter of 2017, Universal Acoustic & Emission Technologies, Inc. ("Universal"), which B&W acquired on January 11, 2017, will be added to the Industrial segment. B&W expect that its acquisition of Universal will complement the product and service offerings B&W is able to provide through its Industrial segment. Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal’s product offering includes gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures. Historically, almost all of Universal's activity has been in the United States. With the integration of Universal with the Industrial segment, B&W expect its business will grow globally with the benefit of B&W's global network of current and future customers and the evolving needs of noise abatement controls in the industrial market.
B&W see opportunities for growth in revenues in the Industrial segment relating to a variety of factors. B&W's new equipment customers purchase equipment as part of major capacity expansions, to replace existing equipment, or in response to regulatory initiatives. Additionally, its significant installed base provides a consistent and recurring aftermarket stream of parts, retrofits and services. Major investments in global chemical markets have strengthened demand for its industrial equipment, while tightening environmental and noise abatement regulations in the United States, China, India and other developing countries are creating new opportunities. B&W foresee long-term trends toward increased environmental and noise abatement controls for industrial manufacturers around the world. Together, the companies that comprise the Industrial segment are well-positioned to capitalize on opportunities in these markets.
B&W's Industrial segment generated revenues of $253.6 million, $183.7 million and $105.4 million in 2016, 2015 and 2014, respectively, which was 16.1%, 10.4% and 7.1% of its total revenues in those years, respectively.
Since its spin-off, B&W has pursued a strategy to acquire businesses that meet its long-term growth and diversification objectives. Its acquisition focus is primarily on companies that would complement its Industrial segment. To date, B&W has completed two such acquisitions, which are summarized below:
On July 1, 2016, B&W completed the acquisition of SPIG. Based in Arona, Italy, SPIG is a global provider of custom-engineered comprehensive dry and wet cooling solutions and aftermarket services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets. See Note 4 to its consolidated and combined financial statements included in Item 8 for additional information.
On January 11, 2017, B&W acquired Universal for approximately $55 million in cash, funded primarily by borrowings under its United States revolving credit facility. Based in Wisconsin, Universal is a bolt-on acquisition for MEGTEC. Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal’s product offering includes gas turbine inlet and exhaust systems, custom silencers, filters and custom enclosures. See Note 30 to its consolidated and combined financial statements included in Item 8 for additional information.
B&W participate in the ownership of a variety of entities with third parties, primarily through corporations, limited liability companies and partnerships, which B&W refer to as "joint ventures." B&W enter into joint ventures primarily for specific market access and to enhance its manufacturing, design and global production operations as well as reduce operating and financial risk profiles. The company generally account for its investments in joint ventures under the equity method of accounting. Its unconsolidated joint ventures are described below.
- Babcock & Wilcox Beijing Company, Ltd. ("BWBC") the company own equal interests in this entity with Beijing Jingcheng Machinery Electric Holding Company, Ltd. BWBC was formed in 1986 and is located in Beijing, China. Its main activities are the design, manufacture, production and sale of various power plant and industrial boilers. BWBC expands its markets internationally and provides additional manufacturing capacity to its boiler products.
- Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES") In June 2010, one of its subsidiaries and Thermax Ltd., a boiler manufacturer based in India, formed a joint venture to build subcritical and highly efficient supercritical boilers and pulverizers for the Indian utility boiler market. B&W has licensed to TBWES its technology for subcritical boilers 300 MW and larger, highly efficient supercritical boilers and coal pulverizers. In 2013, TBWES finalized construction of a facility in India designed to produce parts for up to 3,000 MW of utility boiler capacity per year.
- Other Project Related Ventures From time to time, the company partner with other companies to better meet the needs of its customers, which can result in project-related joint venture entities. Examples of this include BWM Ottumwa Environmental Partners, where the company formed a joint venture with Burns & McDonnell Engineering Company, Inc., to engineer, procure, and construct environmental control systems for the Ottumwa Generating Station, a United States based project that was substantially completed in 2014. B&W also formed BWL Energy Ltd. with Lagan to complete the construction of the Teesside waste wood fired boiler project in the United Kingdom. This joint venture combines its expertise in the waste-to-energy power plant design, engineering, procurement and construction with its partner's civil construction capability to provide a full turnkey product to its customer.
- Halley & Mellowes Pty. Ltd. ("HMA") Diamond Power International, Inc., one of its wholly owned subsidiaries, owned an interest in this Australian company, which was formed in 1984. HMA manufactures, sells and services a wide range of capital plant equipment to a diverse range of industries including the mining, processing, materials handling, water management, power generation, and oil and gas industries. On December 22, 2016, the company sold all of its joint venture interest in HMA for $18.0 million, resulting in a gain of $8.3 million.
B&W execute its contracts through a variety of methods, including fixed-price, cost-plus, target price cost incentive, cost-reimbursable or some combination of these methods. Contracts are usually awarded through a competitive bid process. Factors that customers may consider include price, technical capabilities of equipment and personnel, plant or equipment availability, efficiency, safety record and reputation.
Fixed-price contracts are for a fixed amount to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to it because they require it to predetermine both the quantities of work to be performed and the costs associated with executing the work. For further specification see "Risk Factors Related to its Business – the company are subject to risks associated with contractual pricing in its industry, including the risk that, if its actual costs exceed the costs the company estimate on its fixed-price contracts, its profitability will decline, and the company may suffer losses" as detailed in Item 1A of this report.
B&W has contracts that extend beyond one year. Most of its long-term contracts have provisions for progress payments. B&W attempt to cover anticipated increases in labor, material and service costs of its long-term contracts either through an estimate of such changes, which is reflected in the original price, or through risk-sharing mechanisms, such as escalation or price adjustments for items such as labor and commodity prices.
B&W generally recognize its contract revenues and related costs on a percentage-of-completion basis. Accordingly, the company review contract price and cost estimates regularly as the work progresses and reflect adjustments in profit proportionate to the percentage of completion in the period when the company revise those estimates. To the extent that these adjustments result in a reduction or an elimination of previously reported profits with respect to a project, the company would recognize a charge against current earnings, which could be material.
B&W's arrangements with customers frequently require it to provide letters of credit, bid and performance bonds or guarantees to secure bids or performance under contracts, which may involve significant amounts for contract security.
In the event of a contract deferral or cancellation, B&W generally would be entitled to recover costs incurred, settlement expenses and profit on work completed prior to deferral or termination. Significant or numerous cancellations could adversely affect its business, financial condition, results of operations and cash flows.
Other sales, such as parts and certain aftermarket service activities, are not in the form of long-term contracts, and B&W recognize revenues as goods are delivered and work is performed.
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