Babcock & Wilcox Enterprises, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; comparisons are to the corresponding 2022 periods. Figures below are in U.S. dollars and millions unless noted.
Business context
B&W supplies renewable-energy, environmental-control and thermal technologies, equipment and services. Its reportable segments are B&W Renewable, B&W Environmental and B&W Thermal. The filing describes ongoing supply-chain and provider delays, inflation, higher interest rates and foreign-exchange volatility.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $305.2 | $221.0 | $562.4 | $425.1 |
| Operating income (loss) | $7.0 | $3.7 | $8.3 | $(3.1) |
| Net loss | $(5.0) | $(3.0) | $(17.5) | $(11.7) |
| Net loss attributable to common stockholders | $(8.8) | $(6.3) | $(25.0) | $(18.3) |
| Basic and diluted loss per share | $(0.10) | $(0.07) | $(0.28) | $(0.21) |
| Adjusted EBITDA, non-GAAP | $21.9 | $22.9 | $36.1 | $35.8 |
Calculated operating margins were approximately 2.3% for Q2 and 1.5% for the first six months of 2023; net margins were approximately (1.6)% and (3.1)%, respectively. Adjusted EBITDA is a company-defined non-GAAP measure and should be considered alongside GAAP results.
- Segment trends: Q2 revenue rose in all segments. Renewable revenue was $98.9 million, but segment adjusted EBITDA fell to $0.5 million from $11.2 million, reflecting the prior-year solar development-rights gain and B&W Solar contract losses. Environmental revenue was $48.7 million and adjusted EBITDA $3.4 million. Thermal revenue was $158.0 million and adjusted EBITDA $24.4 million.
- Cash flow: Six-month operating cash use was $22.3 million, versus $63.6 million in 2022. Investing activities used $4.2 million and financing activities used $4.2 million. Total cash, cash equivalents and restricted cash declined to $83.9 million from $113.5 million at year-end 2022; unrestricted cash was $55.0 million.
- Debt and liquidity: Management reported total debt of $358.2 million and gross preferred stock of $191.7 million. Senior notes had a $336.6 million net carrying balance and mature in 2026; loans payable were $21.6 million, including $6.0 million of revolving debt reported outstanding. The company also had $103.9 million of letters of credit under its facility and $278.2 million of outstanding surety bonds.
- Balance sheet: Total assets were $986.9 million and total liabilities $999.9 million, resulting in a $13.0 million stockholders’ deficit. Current assets were $618.2 million and current liabilities $425.6 million.
- Preferred dividends: The company paid $7.4 million in preferred dividends during the first half of 2023. The 7.75% Series A preferred stock is perpetual and cumulative.
Material changes versus prior periods
- Six-month revenue increased $137.4 million, while operating results improved from a $3.1 million operating loss to $8.3 million of operating income. Net loss nevertheless widened to $17.5 million from $11.7 million.
- Management attributed the higher net loss primarily to a $7.0 million one-time gain and a larger pension benefit in 2022. Interest expense increased to $23.8 million for the first half from $21.9 million.
- Bookings were $191 million in Q2 versus $245 million a year earlier; first-half bookings were $457 million versus $484 million. Backlog was approximately $567 million at June 30, down from $601 million a year earlier.
- Renewable adjusted EBITDA declined materially, while Environmental and Thermal adjusted EBITDA improved. Across long-term contracts, estimate changes reduced gross profit by a net $2.9 million in Q2 and $2.5 million in the first half, compared with increases in the comparable 2022 periods.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management said it expects future operating cash flows to cover debt service, contractual obligations, capital expenditures and dividends for the next 12 months and foreseeable future. This is management’s expectation, not a guarantee.
- Management expects cost-saving measures to continue, is evaluating further savings and non-core asset sales, and is pursuing subcontractor recoveries and other claims. It also cited growth opportunities across its three segments.
- Debt documents require financial covenants, including a minimum liquidity covenant of $30 million. The company reported compliance with all financial covenants at June 30, 2023, following amendments that adjusted covenant calculations and limits. A June amendment increased the permitted unrestricted-cash threshold under the revolving agreement from $30 million to $40 million.
- Foreign unrestricted cash was $35.4 million and generally is not available to fund U.S. operations without repatriation or intercompany repayment, which could have tax consequences. Restricted cash included $11.2 million for letter-of-credit collateral. An approximately $11.0 million customer escrow was released and received on August 3, 2023, following an amended bank guaranty.
- B&W Solar has a portfolio of loss-making contracts. The company recorded additional losses of $4.1 million in Q2 2023 and $3.3 million net for the first half, with the six-month amount offset by savings on two projects. It also recorded $0.7 million of estimated losses on a B&W Thermal contract during the first half.
- Approximately $14.4 million of change orders and claims were included in contract transaction prices and remained subject to resolution; outcomes could be higher or lower than estimated. Backlog can be canceled or modified and is not necessarily indicative of future results.
- In the Glatfelter litigation, a June 2023 court ruling dismissed certain claims and capped damages on remaining claims at the contractual limit, stated as a $11.7 million purchase price subject to adjustments. The litigation remained ongoing. The stockholder litigation settlement was approved by the court on July 14, 2023; the company’s payment obligation was accrued at June 30.
- Management cited possible adverse effects from supply-chain disruptions, provider delays, pricing pressure, customer schedule changes, contract execution and warranty issues, inflation, foreign-exchange volatility, Ukraine-related risks, and the company’s ability to maintain financing and bonding capacity.
Most important facts for investors to verify
- Whether operating cash flow, liquidity and covenant headroom improve as contract working-capital needs evolve, particularly given foreign cash restrictions and substantial letter-of-credit and surety requirements.
- Whether Renewable segment profitability recovers and B&W Solar loss-contract estimates, insurance claims and project completion costs are ultimately borne out.
- Whether bookings and backlog stabilize, and whether backlog converts into revenue and cash on schedule.
- Whether management’s cash-flow outlook supports debt service and preferred dividends; verify the terms and implications of covenant amendments and upcoming covenant tests.
- How the Glatfelter case, contract claims and change orders resolve, and whether any resulting losses, recoveries or revenue reversals differ materially from recorded estimates.
- Whether the company can execute its cost-saving plans and manage provider delays, pricing, customer schedules and contract performance without further margin pressure.