Babcock & Wilcox Enterprises, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2021. B&W operates Renewable, Environmental and Thermal businesses serving energy, industrial and emissions-control markets. It acquired a 60% controlling interest in solar contractor Fosler Construction on September 30, adding solar construction to Renewable.
Financial performance and liquidity
- Revenue: Q3 revenue was $160.0 million, up from $132.5 million; nine-month revenue was $531.1 million, up from $416.5 million.
- Earnings: Q3 operating income was $14.8 million versus $14.1 million; net income was $13.6 million, or $0.12 basic and $0.11 diluted per common share, compared with $34.6 million, or $0.70 and $0.69. Nine-month operating income was $11.1 million versus an operating loss of $3.9 million. Net income was $1.3 million, but the common-stockholder result was a loss of $4.1 million after preferred dividends, compared with a $14.9 million common-stockholder loss in 2020.
- Adjusted EBITDA: Q3 was $18.7 million versus $26.8 million; nine-month results were $42.3 million versus $29.5 million. These are non-GAAP measures. The prior-year Renewable comparison included a $26.0 million one-time recovery on EPC contract claims.
- Segment trends: Q3 revenue was $38.0 million Renewable, $38.2 million Environmental and $83.8 million Thermal. Nine-month revenue was $105.2 million, $97.8 million and $328.4 million, respectively. Environmental and Thermal improved on higher project activity and volume; Renewable was affected by lower volume and project timing. Q3 adjusted gross-profit margins were 45.7% Renewable, 20.6% Environmental and 25.4% Thermal; the filing reports lower year-over-year percentages for Environmental and Thermal.
- Cash flow: Operating activities used $107.8 million in the first nine months, versus $67.3 million used in 2020. Investing activities used $5.9 million; financing activities provided $159.2 million. Cash, cash equivalents and restricted cash ended at $115.7 million, including $107.1 million unrestricted cash and $8.7 million restricted cash. $39.2 million of unrestricted cash was held by foreign entities and was not readily available for U.S. operations.
- Debt and capital: Total debt was reported as $193.1 million at September 30, including $181.2 million of net senior notes and loans payable. The company issued 8.125% senior notes due 2026 and raised capital through common and preferred stock offerings; it repaid its prior term loans and revolving facility and entered new facilities. The new revolving credit agreement had no borrowings outstanding; letter-of-credit facilities were in use. Preferred stock carries a 7.75% cumulative dividend.
- Balance sheet: Total assets were $729.4 million and total liabilities $709.0 million; stockholders’ equity was $20.4 million, versus a $338.3 million deficit at year-end 2020. Pension and other postretirement liabilities were $205.1 million. Current assets were $446.8 million and current liabilities $230.3 million.
Material changes and notable items
- Revenue growth came chiefly from Thermal and Environmental. Renewable results compared unfavorably with 2020 in part because 2020 included the non-recurring $26.0 million insurer recovery.
- Q3 operating income included a $13.8 million gain on asset disposals, primarily from the Lancaster, Ohio property sale. The sale generated $15.8 million net proceeds and was followed by a leaseback. A separate Copley property sale generated a $1.9 million gain.
- Foreign exchange changed from a $25.0 million gain in Q3 2020 to a $1.7 million loss in Q3 2021, contributing to the lower year-over-year net income comparison.
- Backlog was $540 million at quarter-end, up from $509 million a year earlier. Management expected to recognize about 29.1% in the remainder of 2021, 32.6% in 2022 and 38.3% thereafter; the filing cautions that backlog can be canceled or modified.
- Fosler’s acquisition consideration was preliminarily valued at $33.4 million, including $6.2 million estimated contingent consideration, potentially up to $10.0 million. Purchase accounting remains provisional. The company also recognized a receivable based on an unaccepted subcontractor offer for Renewable EPC project costs; management said the ultimate resolution could change materially.
Outlook, risks and contingencies
Management cited continuing COVID-19 effects, including travel constraints, project delays and supply-chain disruption, and said forecasting remains difficult. It expects restructuring and other cost-saving actions to support results and is evaluating further savings and non-core asset sales, but provided no numerical earnings or revenue guidance in the supplied filing text. A proposed approximately $30 million acquisition of Denmark-based VODA A/S was expected to close by year-end, subject to customary conditions and Danish foreign-investment clearance.
Liquidity and contract execution remain key risks. The debt documents require, among other covenants, minimum liquidity of $30 million, fixed-charge coverage of at least 1.00:1.00 and senior net leverage no greater than 2.50:1.00. The company also relies on financing capacity to support letters of credit, bank guarantees and approximately $157.6 million of outstanding surety bonds. Pension funding, foreign-cash access, customer project timing, supplier performance, contract losses, and the ability to obtain financing and bonding capacity are additional risks. The Glatfelter lawsuit alleges damages above $58.9 million; the court previously found potential damages subject to a contractual cap, and B&W is pursuing a counterclaim. The SEC informed the company its investigation was concluded with no enforcement recommendation. Management reported no material change in previously disclosed risk factors.
Investor verification priorities
- Confirm operating cash use, the drivers of the $107.8 million outflow and the extent of liquidity available after excluding restricted and foreign-held cash.
- Review covenant headroom, facility availability, letter-of-credit usage, and capacity to maintain surety bonds and guarantees.
- Assess whether segment performance and backlog convert to cash and earnings, particularly in Renewable, and account for the non-recurring 2020 recovery and 2021 asset-sale gains.
- Track Fosler’s final purchase-price allocation, contingent consideration and acquired debt, as well as the proposed VODA transaction and funding needs.
- Monitor the unaccepted subcontractor reimbursement offer, remaining contract and warranty exposures, pension contributions deferred under ARPA, and the Glatfelter litigation.