Babcock & Wilcox Enterprises, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions of dollars unless noted.
Business context and reporting period
B&W supplies renewable-energy, environmental-control and thermal-power equipment and services. Its segments are B&W Renewable, B&W Environmental and B&W Thermal. Revenue growth in 2022 included contributions from Fosler Solar and VODA in Renewable and Fossil Power Systems and Optimus Industries in Thermal.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $214.9 | $160.0 | $639.9 | $531.1 |
| Operating income (loss) | $(10.3) | $14.8 | $(13.4) | $11.1 |
| Net income (loss) | $(20.6) | $13.6 | $(32.2) | $1.3 |
| Net income (loss) attributable to common stockholders | $(21.5) | $10.0 | $(39.7) | $(4.1) |
| Basic earnings (loss) per share | $(0.24) | $0.12 | $(0.45) | $(0.05) |
| Adjusted EBITDA (non-GAAP) | $13.1 | $18.9 | $45.7 | $42.6 |
Operating margin was approximately (4.8)% in Q3 2022 versus 9.2% in Q3 2021, and (2.1)% for the first nine months versus 2.1% in 2021. Interest expense rose to $11.3 million in Q3 and $33.2 million year to date, from $8.3 million and $30.6 million, respectively.
- Cash flow: Operating activities used $67.4 million in the first nine months, versus $107.8 million in 2021. Investing activities used $67.6 million, principally for acquisitions; financing activities used $19.1 million. Cash, cash equivalents and restricted cash declined $157.2 million to $69.5 million.
- Liquidity: September 30 cash and cash equivalents were $48.5 million; restricted cash was $21.0 million. The company said $27.4 million of unrestricted cash was held abroad and was not generally available for U.S. operations without repatriation or repayment of intercompany loans.
- Debt and capital: Senior notes had a $343.1 million principal balance and $333.5 million net carrying amount. Total debt, including loans payable, was reported as $336.3 million. Preferred stock outstanding had a gross amount of $191.7 million and carries a 7.75% cumulative dividend. Total stockholders’ equity was a deficit of $17.1 million.
- Working capital: Current assets were $498.6 million and current liabilities $319.5 million. Contracts in progress increased to $125.0 million from $80.2 million at year-end; advance billings rose to $98.0 million from $68.4 million.
Material changes versus the prior comparable period
- Q3 revenue increased $54.9 million, led by acquired businesses and higher Environmental volume. Nine-month revenue increased $108.9 million. Thermal nine-month revenue declined $18.5 million, reflecting lower construction activity, partly offset by acquisitions.
- Despite higher revenue, Q3 shifted from operating income to an operating loss and from net income to a net loss. Management cited higher costs, supply-chain disruption, increased interest expense and foreign-exchange losses.
- Q3 adjusted EBITDA fell $5.8 million year over year. Renewable adjusted EBITDA declined $6.9 million and Environmental declined $0.4 million; Thermal increased $1.4 million. Nine-month adjusted EBITDA increased $3.0 million, with Thermal improvement offsetting weaker Environmental results and corporate/R&D costs.
- Bookings were $227 million in Q3 and $711 million year to date. Backlog was $730 million at September 30, up from $540 million a year earlier. The company expected to recognize $237 million in 2022, $339 million in 2023 and $154 million thereafter; backlog may be canceled, modified or otherwise change.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific revenue or earnings guidance. Management said it expects future operating cash flows to cover debt service, contractual obligations, capital expenditures and preferred dividends over the next 12 months and thereafter, while also emphasizing active liquidity and cost management.
- Financing covenant: B&W was not in compliance with its quarterly fixed-charge coverage covenant at September 30, 2022 and received a lender waiver for that period. On November 7, 2022, after quarter-end, amendments reset future financial covenants, added minimum cash-flow tests and retained a $30 million minimum-liquidity covenant. The amendments establish staged fixed-charge coverage and leverage thresholds through 2023.
- Fosler Solar: The company recorded $8.6 million of net losses on eleven loss-making projects in Q3 and year to date, and submitted insurance claims to recover a portion. A triggering event led to a $7.2 million goodwill impairment. The company also reversed $9.6 million of contingent consideration, reducing SG&A expense; the reported nine-month adjusted EBITDA included this benefit and a $7.0 million gain on sale of solar-project development rights.
- Contract estimates: Changes in estimated gross profit on over-time contracts were a net reduction of $8.7 million in Q3 and for the first nine months, compared with increases of $5.5 million and $6.3 million in the prior-year periods.
- Operating risks: Management reported inflation, higher interest rates, currency volatility, COVID-related project postponements, and supply-chain and service-provider disruptions linked in part to the Ukraine conflict. These conditions delayed projects and deliveries, increased costs and affected the company’s ability to meet customer demand; the potential financial impact could not be reasonably estimated.
- Contingencies: A proposed $9.5 million stockholder-litigation settlement remained subject to court approval and was accrued. In the Glatfelter contract case, the plaintiff alleged damages exceeding $58.9 million; the court had found that contractual limits may cap damages if the contract is valid, and B&W asserted a counterclaim exceeding $2.9 million. Outcome and potential impact were not clear.
- Contract support: Outstanding surety bonds were approximately $333.9 million. The company stated that adequate letter-of-credit and bonding capacity is important to supporting future contract requirements.
Important facts for investors to verify
- Whether operating cash flow improves and whether the company maintains the required $30 million minimum liquidity, considering restricted and foreign-held cash.
- Compliance with amended lender covenants, access to letters of credit and surety capacity, and ability to service debt and preferred dividends.
- Fosler project completion costs, potential insurance recoveries, and whether further contract losses or impairment charges arise.
- The sustainability of backlog conversion, margins and adjusted EBITDA, including the effects of acquisitions, supply-chain delays and unusual gains or reversals.
- Resolution and cash consequences of the stockholder settlement and Glatfelter litigation.