Babcock & Wilcox Enterprises, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statements are unaudited. The company supplies power-generation, renewable-energy and cooling-system equipment and services.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $248.1M | $291.3M | $480.1M | $544.5M |
| Gross profit (loss) | $44.3M | $(41.1)M | $75.2M | $(65.2)M |
| Operating loss | $(4.3)M | $(137.4)M | $(36.2)M | $(243.8)M |
| Net loss attributable to stockholders | $(27.6)M | $(265.8)M | $(77.4)M | $(386.2)M |
| Loss per share | $(1.50) | $(19.52) | $(4.22) | $(41.82) |
| Operating cash flow | Six-month cash used: $193.0M | 2018 six-month cash used: $150.6M |
Gross margin improved to approximately 17.8% in Q2 from negative 14.1% a year earlier; six-month gross margin was approximately 15.7%, versus negative 12.0%. The company reported Q2 adjusted EBITDA of $8.0M, compared with a loss of $82.4M; six-month adjusted EBITDA was $3.1M versus a loss of $160.1M. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP results or cash flow.
Liquidity, debt and balance sheet
- At June 30, cash and cash equivalents were $35.2M, with a further $9.2M restricted. Cash declined from $60.3M, including restricted cash, at year-end 2018.
- Total debt was approximately $367.5M: $184.4M drawn on the U.S. revolver and $183.1M of net Last Out Term Loans. Revolver availability was about $18.6M, constrained partly by letters of credit.
- Current assets were $586.6M versus current liabilities of $805.1M. Stockholders’ deficit was $343.0M; total liabilities were $1.12B.
- Six-month financing cash inflow of $175.1M, principally from term-loan proceeds and net revolver borrowing, did not offset $193.0M of operating cash use.
- Interest expense rose to $26.8M in Q2 from $11.9M in Q2 2018, and to $38.0M for the first half from $25.3M. The Last Out loans carried a 15.5% stated rate at quarter-end, including 8% paid in kind.
Business performance and changes
- Revenue declined 14.8% in Q2 and 11.8% in the first half. Lower Vølund and SPIG revenue more than offset growth in Babcock & Wilcox.
- Babcock & Wilcox segment revenue rose 2% in Q2 and 9% in the first half; adjusted EBITDA increased to $19.0M and $28.0M, respectively, helped by construction volume, lower warranty costs and cost reductions.
- Vølund & Other Renewable revenue fell 39% in Q2 and 45% in the first half, including effects of the PBRRC and Loibl divestitures, reduced bidding and lower project activity. Segment adjusted EBITDA improved substantially but remained negative: $(0.8)M in Q2 and $(9.6)M for the half, versus losses of $78.6M and $140.4M.
- SPIG revenue fell 50% in Q2 and 37% in the first half as the company pursued more selective bidding. Adjusted EBITDA improved to a Q2 loss of $0.1M and first-half income of $0.5M.
- Backlog was $585M at June 30, down from $1.52B a year earlier. The filing expects about $220M of backlog revenue in the rest of 2019, $118M in 2020 and $247M thereafter; backlog may be canceled or changed.
Outlook, significant events and risks
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It said its remedial plans may not fully resolve liquidity challenges, and refinancing depends partly on credit-market conditions and forecast performance.
- Subsequent financing and equity transactions: On July 23, 2019, the company completed its rights offering and related equitization transactions. The offering generated $41.8M in cash; proceeds repaid Tranche A-2 and reduced Tranche A-3. Tranche A-1 debt of about $38.2M was exchanged for shares. After the transactions, approximately $114M remained on Tranche A-3, at a 12% cash interest rate. A one-for-ten reverse stock split took effect July 24.
- The credit agreement required refinancing or termination of the U.S. revolver by March 15, 2020, with a separate refinancing-related fee deadline of December 15, 2019. Covenant compliance depended on achieving forecast results. At June 30, the company reported compliance with the amended agreement.
- Six European Vølund EPC projects generated $3.2M of additional net losses in Q2 and $7.4M in the first half, compared with $57.3M and $110.0M in 2018. Five projects had been turned over to customers, but warranty, remediation, performance testing and other closeout exposure remained. The company continued seeking insurance and subcontractor recoveries.
- Management expected one remaining extended-scope Vølund contract to be turned over in Q3 2019 and to produce a small profit. A significant SPIG loss contract was expected to finish in 2019; the filing gives differing timing references, including mid-year and Q3.
- The company sold Loibl effective May 31 for €10.0M, received $7.4M net and recorded a $3.6M pretax loss. It continued cost-reduction efforts, targeting approximately $100M in annual savings once fully implemented, and evaluated further asset sales.
- Requested U.S. pension contribution waivers remained uncertain. If granted, they could defer approximately $15M of 2019 contributions and a similar or greater amount in 2020, with repayment over five years.
- Other notable matters include an SEC investigation into Vølund-related accounting charges; pending or proposed settlements in shareholder litigation; NYSE minimum-price compliance risk despite the reverse split; and a post-transaction ownership concentration, including Vintage at 32.8% and B. Riley at 18.4% (including warrants). The transactions also limited future use of federal tax attributes under Section 382; the company estimated annual federal NOL utilization of approximately $1.2M, subject to refinement.
Investor verification priorities
- Confirm near-term liquidity, revolver refinancing progress and covenant compliance, including the December 2019 and March 2020 deadlines and actual available borrowing capacity.
- Track operating cash burn and working-capital movements; reported first-half operating cash use was $193.0M despite improved operating results.
- Assess remaining Vølund project, warranty and liquidated-damages exposure, and whether expected insurance or subcontractor recoveries are received.
- Test backlog quality and conversion to revenue and cash, particularly after the sharp year-over-year backlog decline and contract debookings.
- Monitor NYSE listing status, dilution and related-party governance, pension waiver outcomes, and developments in the SEC investigation and litigation.