Babcock & Wilcox Enterprises, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless noted, amounts are in millions of dollars. The company supplies power-generation, renewable-energy and industrial equipment and services.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue from continuing operations | $295.0 | $356.9 | $839.5 | $1,011.2 |
| Gross profit (loss) | $10.5 | $30.8 | $(54.8) | $10.8 |
| Operating loss | $(45.1) | $(110.9) | $(288.9) | $(268.8) |
| Net loss attributable to stockholders | $(105.7) | $(114.3) | $(491.9) | $(272.3) |
| Loss per share | $(0.63) | $(2.48) | $(4.35) | $(5.69) |
| Cash used in operating activities | Not separately presented | Not separately presented | $(213.5) | $(150.8) |
Q3 gross margin was approximately 3.5%, versus 8.6% a year earlier; nine-month gross margin was approximately negative 6.5%, versus positive 1.1%. Q3 operating loss narrowed year over year largely because the prior-year quarter included $86.9 million of goodwill impairment; operating performance remained under pressure. Q3 loss included $94.3 million of income-tax expense, principally a non-cash $99.6 million increase in the valuation allowance against deferred tax assets. The nine-month loss also included a $49.2 million debt-extinguishment loss and a $37.5 million goodwill impairment.
At September 30, cash and cash equivalents from continuing operations were $32.5 million and restricted cash was $19.7 million. Total debt was approximately $214.0 million: $190.6 million under the U.S. revolving facility, $20.0 million carrying value for the Last Out Term Loan and $3.4 million of foreign borrowings. Stockholders’ equity was negative $46.8 million. Facility availability was approximately $59.4 million at quarter-end and $78.1 million on October 12 after asset-sale proceeds. A substantial portion of unrestricted cash was held abroad and was not readily available for U.S. operations.
Material changes and business developments
- Revenue declined 17% in Q3 and 17% for the first nine months. Q3 declines affected all segments; lower activity reflected fewer costs incurred as European renewable projects approached completion, weaker retrofit demand in Power, and selective bidding and lower aftermarket activity in Industrial.
- The Renewable segment remained the principal source of losses: its adjusted EBITDA was negative $25.8 million in Q3 and negative $166.2 million for nine months. The six European loss contracts generated $19.1 million of additional estimated losses in Q3 and $129.1 million year to date.
- Power segment Q3 adjusted EBITDA was $21.9 million, little changed year over year; nine-month adjusted EBITDA fell to $49.5 million from $66.4 million. Industrial segment adjusted EBITDA losses widened to $11.2 million in Q3 and $24.7 million for nine months.
- Backlog was $921 million at September 30, down from $1.71 billion a year earlier. The reported Q3 Renewable bookings reduction included approximately $467 million removed with the PBRRC divestiture.
- The company raised $248.4 million gross in an April rights offering, issuing 124.3 million shares, and used $214.9 million to repay its second-lien term loan. It sold PBRRC in September for $45 million subject to adjustment, recognizing a $39.7 million pre-tax gain. The MEGTEC and Universal sale closed October 5 for $130 million subject to adjustment; proceeds included $115.0 million net cash and $7.7 million held in escrow.
Outlook, risks and unusual items
- Going concern and liquidity: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It said its plans were designed to provide adequate liquidity for at least 12 months after November 8, 2018, but it could not conclude that those plans would probably resolve the liquidity challenges. Its forecasts depended on cost savings, cash generation from core operations, customer concessions and continued access to borrowing and contract-security capacity. Management expected operations to begin generating cash in the second half of 2019.
- Debt covenants: The company had been out of compliance with certain financial covenants at multiple 2017–18 quarter-ends and obtained repeated waivers and amendments. The October 31 amendment reset covenant levels, required at least $25 million of customer concessions by February 15, 2019, and included project milestones and liquidity requirements. Failure to comply could restrict borrowing and letters of credit or trigger acceleration.
- Renewable contract exposure: Estimates on six European projects remain sensitive to completion costs, commissioning, warranties, schedules and liquidated damages. Expected liquidated damages on the six contracts totaled $93.2 million. A customer on one U.K. project retains a rejection right that could require repayment of amounts received—up to approximately $144 million—and restoration of the site. The company missed the stated accreditation milestone and was negotiating to suspend the rejection rights; its cost estimate assumed the customer would not exercise them.
- Other contingencies: A $15.5 million insurance receivable relating to a European project was fully reserved after the insurer disputed coverage; the company filed for arbitration. It also disclosed shareholder and derivative litigation and an SEC staff investigation into Renewable-segment accounting charges and related matters; the company said it was cooperating.
- Financing cost and execution: The Last Out Term Loan from related party B. Riley FBR carried a reported effective interest rate of 27.54% at September 30. The company also had $311 million of outstanding surety bonds, making continued access to credit, letters of credit and bonding important to contract execution.
- Management cited approximately $38 million of annualized savings targeted from restructuring. It also expected $7.0 million of accelerated depreciation through mid-2019 due to office consolidation and relocation.
Most important facts for investors to verify
- Whether the company meets amended liquidity and covenant requirements and obtains the required $25 million of customer concessions by February 15, 2019.
- Actual cost, timing, customer takeover and liquidated-damages outcomes for the six European Renewable contracts, including resolution of the U.K. project’s rejection rights.
- Whether operating cash generation and restructuring savings track management’s forecast, particularly its expectation of positive operating cash generation in the second half of 2019.
- Availability and cost of revolving credit, letters of credit and surety bonds, alongside the unusually high-cost Last Out Term Loan.
- Resolution of the insurance dispute, litigation and SEC investigation, and any resulting financial or operational effects.
- Whether the reported backlog converts to revenue and cash as expected; the filing cautions that backlog may be cancelled, modified or otherwise changed.