Babcock & Wilcox Enterprises, Inc. quarterly report, Q2 FY2019

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

MetricQ2 2019Q2 2018Six months 2019Six 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 flowSix-month cash used: $193.0M2018 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

  1. Confirm near-term liquidity, revolver refinancing progress and covenant compliance, including the December 2019 and March 2020 deadlines and actual available borrowing capacity.
  2. Track operating cash burn and working-capital movements; reported first-half operating cash use was $193.0M despite improved operating results.
  3. Assess remaining Vølund project, warranty and liquidated-damages exposure, and whether expected insurance or subcontractor recoveries are received.
  4. Test backlog quality and conversion to revenue and cash, particularly after the sharp year-over-year backlog decline and contract debookings.
  5. Monitor NYSE listing status, dilution and related-party governance, pension waiver outcomes, and developments in the SEC investigation and litigation.