Babcock & Wilcox Enterprises, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. The company supplies power-generation, environmental, renewable-energy and cooling-system equipment and services. Results are for continuing operations unless noted.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $231.9 million | $253.2 million |
| Gross profit (loss) | $30.9 million | $(24.2) million |
| Operating loss | $(32.0) million | $(106.4) million |
| Net loss attributable to stockholders | $(49.8) million | $(120.4) million |
| Basic and diluted loss per share | $(0.29) | $(2.73) |
| Cash used in operating activities | $(37.7) million | $(84.8) million |
Revenue declined 8.4% year over year. Gross margin was approximately 13.3%, compared with a negative 9.5% in Q1 2018. The narrower operating and net losses chiefly reflect substantially lower Vølund European contract losses and lower SG&A; Q1 2018 also included an $18.4 million impairment of an equity-method investment. Q1 2019 included a $10.2 million foreign-exchange loss.
Segments: Babcock & Wilcox revenue rose to $188.6 million from $159.1 million, while adjusted EBITDA increased to $9.0 million from $4.2 million. Vølund & Other Renewable revenue fell to $29.5 million from $60.0 million; its adjusted EBITDA loss narrowed to $8.9 million from $61.8 million. SPIG revenue decreased to $28.9 million from $36.7 million, but adjusted EBITDA improved to $0.7 million from a $7.3 million loss. Adjusted EBITDA is a non-GAAP measure.
At March 31, cash and cash equivalents were $43.5 million, with another $7.0 million restricted. Total debt was $217.7 million, comprising $175.3 million of revolving borrowings and $42.4 million of net last-out term loans. The company reported only about $2.8 million of revolving availability at quarter-end; after subsequent financing and other transactions, it reported about $35 million available on April 8. Current assets of $556.8 million were below current liabilities of $765.9 million; stockholders’ deficit was $317.9 million.
Material changes and business developments
- Operating loss improved by $74.5 million year over year, mainly as Vølund contract losses fell to $4.1 million from $52.6 million. Revenue was nevertheless lower, reflecting reduced Vølund activity and the prior sale of operations and maintenance contracts, along with lower SPIG volume.
- Bookings were $216 million versus $343 million a year earlier; backlog was $766 million versus $1.682 billion. The company said backlog is subject to cancellation, modification and estimate changes. It expected to recognize approximately half of remaining performance obligations in the rest of 2019, 15% in 2020 and 35% thereafter.
- Four of six European Vølund loss-contract plants had been turned over to customers by quarter-end. On March 29, the company agreed to settle the remaining two; it paid £70 million ($91.5 million) on April 5, funded with subsequent financing. The settlements limited remaining obligations and claims, but some completion, remediation and warranty work remains.
- Q1 included $13.6 million of advisory fees and settlement costs, including $6.6 million for exiting an additional European EPC project that had not started and $3.1 million of legal/advisory fees for contract settlements and liquidity planning. Restructuring expense was $6.1 million. Management said restructuring and cost reductions initiated since Q2 2018 targeted approximately $100 million of annual savings once fully implemented.
Outlook, risks and contingencies
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern and said it could not conclude that its plans would probably fully mitigate liquidity challenges. The statements were prepared on a going-concern basis.
- After quarter-end, B. Riley provided $150 million gross under a new term-loan tranche. An April 5 credit amendment reset covenants, extended last-out term-loan maturities to December 31, 2020, and changed the term-loan rate to 15.5% (7.5% cash and 8% paid-in-kind). The rate would be 12% cash if the proposed rights offering is completed within the specified period, or 18% if it is not.
- The proposed $50 million rights offering, debt-for-equity exchange, warrant issuance and related corporate actions require shareholder approvals and other conditions. The company must also terminate or replace its revolving facility by March 15, 2020 under the amendment; refinancing depends on factors outside management’s control. Failure to complete the proposed transactions or obtain financing could materially affect liquidity.
- Credit-facility covenant defaults had occurred at December 31, 2018 and March 31, 2019; the company obtained waivers and amendments. Its revolving facility was nearly fully drawn at quarter-end. It also relied on letters of credit, bank guarantees and surety bonds to support contracts.
- Other risks include remaining Vølund and SPIG loss-contract obligations, warranty and insurance recoveries, pension funding, and NYSE listing compliance. The company had received notice of a share-price listing deficiency and planned to seek shareholder approval for a reverse split. It also disclosed an SEC staff investigation into Vølund accounting charges and related matters.
- A tentative shareholder-litigation settlement contemplated a $19.5 million insurer payment, recorded with an offsetting insurance receivable; definitive documentation and court approval remained outstanding. The derivative-litigation settlement in principle contemplated governance changes and insurer-paid legal fees, without a company monetary payment.
No formal revenue or earnings guidance is provided in the filing. Management said it was pursuing additional cost savings, potential asset dispositions and insurance or other claims, while warning that outcomes were uncertain.
Key investor verification points
- Confirm completion, approval and actual proceeds or debt reduction from the proposed rights offering, debt exchange and related transactions; assess dilution, warrants and governance effects.
- Track cash, borrowing availability, refinancing progress, covenant compliance and the March 2020 revolving-facility deadline, including the high cash and paid-in-kind interest burden.
- Monitor costs and remaining obligations under the European Vølund settlements and the SPIG U.S. loss contract, plus progress on insurance and subcontractor recoveries.
- Assess whether backlog converts to revenue and cash as projected, given the substantial year-over-year decline and the company’s stated cancellation and estimate risks.
- Follow NYSE listing status, the SEC investigation, shareholder-litigation approvals and the company’s ability to sustain operations as a going concern.