Babcock & Wilcox Enterprises, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unless noted otherwise, amounts below are in millions of dollars. The filing was signed August 9, 2018.
Business context and reporting period
B&W supplies power-generation and industrial equipment and services through its Power, Renewable and Industrial segments. Results were heavily affected by six loss-making European renewable-energy contracts. MEGTEC and Universal were classified as discontinued operations following an agreement to sell them; the sale of a separate subsidiary holding two Florida waste-to-energy operations and maintenance contracts was agreed after quarter-end.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $291.3 | $306.2 | $544.5 | $654.3 |
| Operating loss | $(137.4) | $(146.6) | $(243.8) | $(157.9) |
| Net loss | $(265.6) | $(150.9) | $(385.9) | $(157.7) |
| Net loss attributable to stockholders | $(265.8) | $(151.0) | $(386.2) | $(158.0) |
| Loss per share | $(2.12) | $(3.09) | $(4.55) | $(3.24) |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $(150.6) | $(81.7) |
Q2 consolidated gross loss was $41.1 million, or about 14.1% of revenue, versus a $69.6 million loss, or about 22.7%, a year earlier. For the six-month period, gross loss was $65.2 million, about 12.0% of revenue, compared with $20.0 million, about 3.1%, in 2017. Q2 continuing-operations loss was $209.7 million; discontinued operations added a $55.9 million loss. Six-month continuing-operations loss was $326.5 million, with $59.4 million from discontinued operations.
At June 30, cash and cash equivalents were $28.5 million, with a further $32.3 million restricted; continuing-operations cash, cash equivalents and restricted cash totaled $60.8 million. Total borrowings were $200.4 million, comprising $196.3 million under the U.S. revolver and $4.1 million under foreign facilities. The second-lien term loan had been repaid. Total liabilities were $1,048.6 million and stockholders’ equity was $55.6 million. Revolver availability was reported at approximately $28.6 million. Six-month interest expense was $25.3 million.
Six-month investing cash flow provided $24.2 million, principally from joint-venture and business-sale proceeds; financing cash flow provided $122.1 million, including rights-offering proceeds and net revolver borrowings. The company raised $248.4 million gross in the rights offering, issuing 124.3 million shares, and used $214.9 million to repay the second-lien loan. The weighted-average Q2 share count rose to 125.2 million from 48.9 million a year earlier.
Material changes versus the prior comparable period
- Revenue declined 4.9% in Q2 and 16.8% for the first six months. Six-month revenue fell in Power, Renewable and Industrial.
- Q2 operating loss narrowed year over year, mainly because Renewable contract-loss charges were lower than in Q2 2017. First-half operating loss widened, with six-month gross loss increasing to $65.2 million.
- The six European Renewable contracts generated estimated net losses of $57.3 million in Q2 and $110.0 million in the first half of 2018. Comparable 2017 charges were $115.2 million and $112.2 million.
- Power segment revenue and adjusted EBITDA weakened: Q2 adjusted EBITDA was $16.4 million versus $27.4 million; six-month adjusted EBITDA was $27.6 million versus $44.8 million. Renewable segment adjusted EBITDA was a loss of $78.6 million in Q2 and $140.4 million in the first half.
- Foreign-exchange losses were $20.2 million in Q2 and $17.7 million for the first half, versus gains in both 2017 periods. The filing attributes the 2018 losses mainly to a stronger U.S. dollar against European currencies on unhedged intercompany loans.
Outlook, unusual items and key risks
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern and stated it could not conclude that its plans would probably fully mitigate liquidity challenges. Its plan was intended to provide liquidity for at least 12 months after August 9, 2018, but depended on asset-sale approvals, customer concessions, financing and future results.
- Required actions: The August 9 credit amendment required at least $25 million of customer concessions on Renewable loss contracts by September 30, 2018, and advanced the deadline for at least $100 million of asset sales to October 31, 2018. A related-party commitment contemplated $30 million of net proceeds from last-out loans, at a high stated rate of LIBOR plus 14%, subject to implementation and borrowing conditions. These proceeds and concessions were not presented as completed at the filing date.
- Asset sales and savings: The MEGTEC and Universal sale was agreed at $130 million, subject to adjustment and closing conditions. The Palm Beach subsidiary sale was agreed after quarter-end at $45 million, subject to adjustment and approvals. Management estimated annual savings of about $34 million from restructuring and other cost reductions; the quarter included elimination of 74 positions.
- Contract and execution exposure: Management recorded $15.1 million of additional expected warranty costs on the six European loss contracts in Q2. Total anticipated liquidated damages on those contracts were $93.4 million at June 30. One U.K. biomass customer had a contractual rejection right that could require repayment of up to approximately $144 million if a milestone was not met or modified; management did not assume the customer would exercise that right.
- Other unusual charges: The company recorded a $37.5 million goodwill impairment in the SPIG reporting unit and a $72.3 million non-cash impairment on MEGTEC and Universal. Repayment of the second lien produced a $49.2 million extinguishment loss, including make-whole interest and unamortized discount. The insurer disputed a $15.5 million Renewable-project claim; B&W fully reserved the receivable and filed for arbitration.
- Legal and financing risks: Covenant defaults had occurred at December 31, 2017, March 31 and June 30, 2018; waivers and amendments temporarily addressed them. The company reported approximately $426.1 million of outstanding surety bonds supporting contracts. It also disclosed securities and derivative litigation, an SEC staff investigation into Renewable-segment accounting charges, and ongoing performance, warranty and subcontractor risks.
- Operating outlook: Management expected operations to begin generating cash in the second half of 2019, based on its forecast. It anticipated lower coal-fired new-build demand, and expected Industrial margins to begin normalizing in late 2018 as legacy contracts were completed. The filing provides no conventional earnings or revenue guidance.
Most important facts for investors to verify
- Whether the $30 million last-out loan was funded and the required $25 million of customer concessions and asset-sale milestones were achieved.
- Closing proceeds, timing, approvals and debt-repayment effects of the MEGTEC/Universal and Palm Beach sales.
- Actual costs to complete the six European Renewable contracts, liquidated damages, warranty exposure and the status of the customer rejection right.
- Cash burn, revolver availability, covenant compliance, letter-of-credit and surety capacity, and whether liquidity plans support continued operations.
- Outcome of the insurer arbitration, SEC investigation and shareholder litigation, and any resulting financial or disclosure effects.