Babcock & Wilcox Enterprises, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company provides renewable, environmental and thermal technologies and services. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $202.9 | $135.4 | $371.1 | $284.0 |
| Operating income (loss) | $2.8 | $(7.7) | $(3.7) | $(18.0) |
| Net income (loss) | $3.1 | $(18.2) | $(12.3) | $(49.9) |
| Net income (loss) attributable to common stockholders | $1.4 | $(18.1) | $(14.1) | $(49.6) |
| Adjusted EBITDA (non-GAAP) | $15.1 | $1.7 | $23.5 | $2.7 |
- Q2 operating margin was approximately 1.4%, compared with approximately negative 5.7% a year earlier. The filing reports segment adjusted gross profit, not a consolidated gross margin.
- Q2 2021 earnings included a $6.5 million gain on debt extinguishment and a $5.9 million net pension benefit; these items affect comparability with operating performance.
- Six-month operating cash flow was negative $86.1 million, versus negative $49.3 million in 2020. Investing activities provided $6.6 million; financing activities provided $151.3 million. Cash, cash equivalents and restricted cash ended at $143.6 million.
- Management reported $30.1 million of unrestricted cash and $110.7 million of restricted cash at June 30. Much of the restricted cash collateralized letters of credit; $60.7 million had been released by August 12, 2021.
- Total debt was approximately $170.9 million at June 30, comprising $168.4 million net carrying value of senior notes and $2.6 million of loans payable. The company also reported $45.9 million of lease liabilities. Total liabilities exceeded total assets, leaving a $15.7 million stockholders’ deficit.
Changes versus prior comparable period
- Q2 revenue increased $67.5 million, primarily from higher construction activity. Six-month revenue rose $87.2 million.
- Thermal drove the growth: Q2 revenue increased to $136.3 million from $67.2 million. Environmental revenue rose to $28.4 million from $25.2 million. Renewable revenue declined to $38.3 million from $43.5 million, principally due to project delays and prior-year projects not being replaced.
- All three segments improved adjusted EBITDA year over year. Q2 results were $12.4 million for Thermal, $2.7 million for Environmental and $3.4 million for Renewable.
- Financing changed substantially: the company issued common stock, senior notes and preferred stock, repaid its prior credit facilities and term loans, and entered new credit and letter-of-credit facilities. Common shares outstanding increased from 54.5 million at December 31, 2020 to 85.7 million at June 30, 2021.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Backlog was $500 million at June 30, versus $457 million a year earlier; the company expected to recognize approximately $226 million in the remainder of 2021, $106 million in 2022 and $168 million thereafter. Backlog may be canceled or modified and is not a guarantee of future results.
- Management cited cost savings and restructuring as ongoing priorities and said it would continue pursuing growth, further cost reductions and possible non-core asset sales. COVID-19 continued to delay projects and constrain travel and site activity; the company noted uncertainty from resurgences and new variants.
- New debt documents impose financial covenants, including minimum liquidity of $30 million, as well as leverage, fixed-charge coverage and capital-expenditure limits. The company’s ability to support letters of credit, bank guarantees and surety bonds depends on available facility capacity. Outstanding surety bonds were approximately $259.3 million.
- Six European Renewable EPC loss contracts were nearly complete or complete, with limited warranty obligations remaining; two significant U.S. Environmental loss contracts were also nearly complete. Further contract-cost changes or warranty claims could affect results.
- The SEC is conducting a formal investigation concerning B&W Renewable accounting charges and related matters from 2015–2019. The company says it cannot estimate potential loss; material impact cannot be ruled out. Other disclosed matters include Glatfelter litigation and stockholder litigation.
- Other notable items include a $2.2 million six-month loss on sale of a business, a 53.0% Q2 effective tax rate, and $1.7 million of preferred dividends. Preferred stock carries a cumulative 7.75% dividend when declared.
Investor verification priorities
- Track unrestricted liquidity and the release or continuing restriction of letter-of-credit collateral.
- Assess operating cash conversion, working-capital and pension cash needs, and progress against the new debt covenants.
- Verify execution, margins and timing of the $500 million backlog, especially COVID-delayed work and remaining loss contracts.
- Review dilution from common and preferred issuances, the cost of the new debt and preferred dividends, and related-party arrangements with B. Riley.
- Monitor developments in the SEC investigation, litigation, warranty exposure and subcontractor recovery claims.