Babcock & Wilcox Enterprises, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company supplies power-generation, renewable-energy and industrial equipment and services through its Babcock & Wilcox, Vølund & Other Renewable, and SPIG segments. Financial statements are unaudited and present continuing operations unless otherwise noted.
Financial results and liquidity
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $198.6 | $295.0 | $678.7 | $839.5 |
| Operating loss | $(3.2) | $(45.1) | $(39.4) | $(288.9) |
| Net loss attributable to stockholders | $(57.0) | $(105.7) | $(134.4) | $(491.9) |
| Loss per share | $(1.39) | $(5.76) | $(5.18) | $(39.97) |
| Interest expense | $29.5 | $10.4 | $67.4 | $35.7 |
| Adjusted EBITDA | $10.1 | $(26.7) | $14.0 | $(183.5) |
- Q3 revenue declined 33% year over year; nine-month revenue fell 19%. The filing attributes the declines principally to divestitures, lower renewable EPC activity and reduced SPIG new-build volume.
- Q3 gross profit, calculated as revenue less cost of operations, was approximately $40.4 million (20.3% of revenue), compared with $10.5 million (3.5%) a year earlier. Nine-month gross profit was approximately $115.5 million (17.0%), versus a gross loss of $54.8 million in 2018.
- Foreign-exchange losses were $26.7 million in Q3 and $27.4 million for the nine months, primarily from unhedged intercompany loans and a stronger U.S. dollar. These losses, alongside higher interest expense, contributed substantially to the net loss.
- Operating cash use was $201.1 million for the first nine months, compared with $213.5 million in 2018. Investing activities provided $7.1 million and financing activities provided $181.0 million. Cash, cash equivalents and restricted cash ended the period at $43.3 million, including $32.1 million of unrestricted cash.
- At September 30, total debt was $293.6 million: $191.7 million outstanding on the U.S. revolving facility and $101.9 million net carrying value of Last Out Term Loans. Revolver borrowings carried a weighted-average rate of 8.95%; Tranche A-3 carried a 12% cash coupon and a 20.64% effective rate.
- Current assets were $495.0 million versus current liabilities of $655.6 million. Total liabilities were $962.7 million and stockholders’ deficit was $290.1 million. The company reported approximately $18.3 million of additional revolving borrowing availability, subject to facility terms and capacity needs.
Material changes versus the prior comparable period
- Operating losses improved by $42.0 million in Q3 and $249.5 million for the nine months, mainly because Vølund’s six European EPC loss contracts generated far smaller additional losses than in 2018. Those contracts produced $0.7 million of losses in Q3 and $8.0 million for the nine months, versus $19.1 million and $129.1 million, respectively, in 2018.
- The Babcock & Wilcox segment’s adjusted EBITDA rose to $19.3 million in Q3 and $47.5 million year to date, supported by better construction margins, lower warranty costs and restructuring savings.
- Vølund & Other Renewable’s adjusted EBITDA improved to a loss of $2.9 million in Q3 and $12.4 million for the nine months. SPIG’s adjusted EBITDA loss narrowed to $2.4 million and $1.8 million, respectively, reflecting selective bidding and cost reductions.
- Interest expense almost tripled in Q3, reflecting costly debt, financing-fee amortization and a $5.0 million quarterly amortization of the contingent consent fee. The 2018 comparison also included substantial goodwill and other impairments, debt-extinguishment losses, and a gain on sale of a business.
- Backlog was $473 million at September 30, down from $921 million a year earlier. The company expects to recognize approximately $131 million in the remainder of 2019, $156 million in 2020 and $186 million thereafter; backlog may be canceled or changed.
Outlook, risks and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It stated that actions taken may not fully address liquidity challenges and that refinancing depends on factors outside its control. The statements are prepared on a going-concern basis.
- Refinancing and covenants: The revolving facility must be terminated or refinanced by March 15, 2020 to avoid a new event of default. A $13.9 million contingent consent fee may be waived if specified refinancing actions occur by December 15, 2019; additional ticking fees may apply otherwise. Covenant compliance depends on achieving forecast results.
- Contract exposure: Five of six European Vølund loss contracts had been turned over, but punch-list, remediation, testing and warranty obligations remained. The company had $86.3 million of anticipated liquidated damages associated with the six contracts. Estimated structural-steel-related costs on three projects were approximately $36 million; the company is pursuing insurance and subcontractor recoveries.
- Liquidity measures: The July 2019 rights offering and debt-equity transactions raised approximately $41.8 million in gross cash proceeds, extinguished Tranches A-1 and A-2, and reduced Tranche A-3. A related party provided $150 million face value of A-3 financing earlier in 2019. The company also sold Loibl for net cash proceeds of $7.4 million and used proceeds primarily to reduce revolver borrowings.
- Pension: The IRS approved a waiver request for 2018 minimum pension contributions, subject to conditions. A waiver for 2019 was expected to be sought; if not granted, required contributions could increase by approximately $15 million or more in 2020, plus possible interest and penalties.
- Other commitments and contingencies: A planned 15-year Akron office lease, not yet commenced, entails approximately $55 million of minimum payments over its initial term. Outstanding contract surety bonds were approximately $218.5 million. The company also disclosed an SEC investigation concerning Vølund accounting charges and related matters; its duration and outcome were unknown.
- The company reported no formal earnings guidance. It targeted approximately $119 million in annual savings from restructuring and other cost reductions once fully implemented, and said it would continue evaluating asset sales and further savings. It expected a remaining extended-scope Vølund contract to turn over in Q4 2019.
Important facts for investors to verify
- Progress and terms of refinancing the revolving facility before the December 15, 2019 fee trigger and March 15, 2020 default date, including covenant headroom and available borrowing capacity.
- Cash generation, working-capital movements, access to foreign-held cash, and the sustainability of the reported improvement in operating results.
- Remaining Vølund contract, warranty and liquidated-damages exposure, as well as the timing and collectability of insurance and subcontractor recoveries.
- Whether backlog converts to revenue as scheduled, given the year-over-year decline and possible cancellations or changes.
- Outcomes of pension-waiver requests, the SEC investigation, and pending litigation approvals or other claims.
- Effects of the 2019 equity issuance and related-party financing on dilution, ownership, governance and future interest costs.