Babcock & Wilcox Enterprises, Inc. quarterly report, Q2 FY2022

Babcock & Wilcox Enterprises, Inc. — Q2 2022 Form 10-Q

Reporting period: Three and six months ended June 30, 2022. B&W provides renewable, environmental and thermal energy and emissions-control technologies, equipment and services. Unless otherwise stated, amounts below are in U.S. dollars.

Financial performance and position

MetricQ2 2022Q2 2021Six months 2022Six months 2021
Revenue$221.0 million$202.9 million$425.1 million$371.1 million
Operating income (loss)$3.7 million$2.8 million$(3.1) million$(3.7) million
Net income (loss)$(3.0) million$3.1 million$(11.7) million$(12.3) million
Net income (loss) attributable to common stockholders$(6.3) million$1.4 million$(18.3) million$(14.1) million
Basic and diluted EPS$(0.07)$0.02$(0.21)$(0.18)
Adjusted EBITDA, non-GAAP$20.6 million$15.2 million$32.6 million$23.8 million
  • Revenue increased 9% in Q2 and 15% for the first half. Growth reflected acquisitions and higher Renewable and Environmental activity; Thermal construction revenue declined.
  • GAAP operating margin was approximately 1.7% in Q2 versus 1.4% a year earlier; the first-half operating margin remained negative. Adjusted EBITDA includes a non-recurring $7.0 million solar development-rights sale gain.
  • Q2 net loss widened despite higher operating income, primarily due to higher interest expense and a $4.3 million foreign-exchange loss, compared with a $1.8 million gain in Q2 2021. First-half net loss improved modestly year over year.
  • First-half operating cash flow was negative $63.6 million, compared with negative $86.1 million in 2021. Investing used $65.6 million, primarily for acquisitions; financing used $15.6 million. Cash, cash equivalents and restricted cash declined $146.5 million to $80.2 million.
  • At June 30, unrestricted cash was $71.5 million, including $33.2 million held by foreign entities that management generally does not consider available for U.S. operations without repatriation or intercompany repayment. Current assets were $515.6 million and current liabilities $302.5 million.
  • Debt was $334.3 million on the carrying-value basis reported by management; senior notes have $340.0 million aggregate principal and mature in 2026. Gross preferred stock outstanding was $191.7 million. The company paid $7.4 million of preferred dividends in the first half.

Segments, backlog and changes from the prior period

  • Renewable: Q2 revenue rose to $75.2 million from $38.3 million; adjusted EBITDA increased to $8.9 million from $3.4 million. The segment’s 2022 adjusted EBITDA includes the $7.0 million sale gain. Acquisitions of Fosler and VODA contributed to growth.
  • Environmental: Q2 revenue rose to $31.6 million from $28.4 million, while adjusted EBITDA fell to $0.6 million from $2.7 million, mainly because higher-margin prior-year projects were completed.
  • Thermal: Q2 revenue declined to $116.3 million from $136.3 million as construction activity fell. Adjusted EBITDA increased to $16.4 million from $12.6 million, supported by product mix and acquisitions of Fossil Power Systems and Optimus Industries.
  • Bookings were $245 million in Q2 and $484 million in the first half, compared with $168 million and $337 million, respectively, in 2021. Backlog was $731 million at June 30, up from $500 million a year earlier. Management expects to recognize approximately 48.4% in 2022, 28.2% in 2023 and 23.4% thereafter; backlog can be canceled or modified and is not a guarantee of revenue.
  • Acquisitions increased goodwill and intangible assets. Fosler project conditions not adequately disclosed at acquisition led to recognition of $14.1 million of accrued liabilities and $0.4 million of warranty accruals, with a corresponding goodwill adjustment; B&W submitted insurance claims for a portion of losses.

Outlook, liquidity, risks and unusual items

  • The filing provides no specific earnings or revenue guidance. Management expects restructuring and cost-saving initiatives to support results and cites growth opportunities across its three segments. It also plans to consider further cost savings, non-core asset sales and subcontractor recoveries.
  • Liquidity is subject to cash generation, working-capital needs, debt service, preferred dividends and the ability to maintain financing and contract-security capacity. Debt facility covenants include minimum liquidity of $30 million, a fixed-charge coverage test and a senior net leverage limit. No revolver borrowings were outstanding at June 30, 2022; letter-of-credit usage was $112.3 million under the described facility. Surety bonds outstanding totaled approximately $293.3 million.
  • Management cited supply and material shortages, inflation, project delays and foreign-exchange volatility associated in part with Russia’s invasion of Ukraine, as well as continuing COVID-19-related supply-chain and travel disruption. The company reported that these factors had already affected project timing and revenue.
  • A proposed settlement of stockholder litigation totals $9.5 million and remains subject to court approval; the full amount was accrued. The Glatfelter contract litigation alleges damages exceeding $58.9 million; the company says the outcome’s material effect cannot yet be determined.
  • Fosler contingent consideration has a reported fair value of $9.6 million, with a possible undiscounted payment of up to $10 million. Acquisition purchase-price allocations remain provisional.
  • Subsequent events: a B. Riley affiliate exercised warrants for approximately 1.54 million common shares at $0.01 per share on July 20, 2022. On July 28, B&W was the successful bidder for Hamon Research-Cottrell assets for approximately $2.9 million.

Most important facts for investors to verify

  1. Whether operating cash use and declining cash balances moderate, and how much reported cash is practically available to U.S. operations.
  2. Whether backlog converts to revenue and cash on schedule, especially given material shortages, project delays and the risk of contract changes or cancellations.
  3. Underlying segment profitability excluding the $7.0 million non-recurring gain, and whether Environmental profitability recovers.
  4. Compliance with liquidity and other debt covenants, as well as continued access to letters of credit and surety-bond capacity needed to support contracts.
  5. The final cost and insurance recovery, if any, for Fosler project liabilities; the stockholder-settlement approval and funding; and the outcome of material litigation.