Babcock & Wilcox Enterprises, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing was signed April 2, 2019. This is an annual report, not a standalone fourth-quarter filing. Unless noted, amounts are U.S. dollars.
Business context
The company supplies steam-generation, environmental-control and cooling equipment, and related aftermarket and operations services. Its three reportable segments are Babcock & Wilcox, Vølund & Other Renewable, and SPIG. The 2018 results include significant losses on six European Vølund projects; MEGTEC and Universal were sold and reported as discontinued operations.
Key financial results
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1,062.4 million | $1,341.4 million |
| Gross profit (loss) | $(129.6) million | $24.2 million |
| Operating loss | $(426.6) million | $(316.4) million |
| Loss from continuing operations | $(658.0) million | $(381.3) million |
| Net loss attributable to shareholders | $(725.3) million | $(379.8) million |
| Loss per share, diluted | $(5.70) | $(8.09) |
| Net cash used in operating activities | $(281.9) million | $(189.8) million |
| Cash and cash equivalents at year-end | $43.2 million | $43.7 million |
| Total debt at year-end | $176.2 million | Approximately $263.6 million |
Consolidated gross margin was approximately -12.2%, versus approximately 1.8% in 2017. Cash, cash equivalents and restricted cash totaled $60.3 million at year-end. Current assets of $549.6 million were below current liabilities of $712.0 million; stockholders’ equity was a deficit of $277.3 million. The company reported $144.9 million outstanding on its U.S. revolving facility and a $30.6 million net carrying value for its Last Out Term Loan. Both were classified as current liabilities because of covenant waivers and default uncertainty.
Segment revenue was $754.6 million for Babcock & Wilcox, $181.2 million for Vølund & Other Renewable, and $153.6 million for SPIG. Segment adjusted EBITDA was $83.6 million, $(276.3) million, and $(53.4) million, respectively. Adjusted EBITDA is a non-GAAP measure and is not a substitute for operating results or cash flow.
Material changes versus prior period
- Revenue declined $279.0 million, or about 20.8%, year over year. The largest segment decline was Vølund, reflecting contract settlements, lower activity on loss projects, reduced bidding and the PBRRC sale.
- Net losses on the six European Vølund loss contracts were $233.0 million in 2018, versus $158.5 million in 2017. The 2018 gross loss also reflected warranty increases, lower profitable activity and a $12.3 million reserve against a disputed insurance receivable.
- SPIG adjusted EBITDA loss widened to $53.4 million from $29.8 million, amid cost increases on legacy cooling contracts, lower aftermarket volume, $9.3 million bad-debt expense and legacy legal costs.
- Operating cash use increased by $92.1 million. Investing activities provided $179.2 million, mainly from asset and business sales; financing activities provided $82.6 million.
- The company raised $248.4 million gross in a rights offering, issuing 124.3 million shares, and used $214.9 million to repay its second-lien loan. Shares outstanding rose to 168.8 million from 44.1 million.
Liquidity, outlook and risks
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern, and the auditor’s report included a going-concern explanatory paragraph. The financial statements nevertheless received an unqualified opinion. Management stated its plans could not be asserted probable to fully resolve the liquidity challenges.
- Financing dependence: At December 31, 2018, approximately $25 million of U.S. revolving-facility capacity remained available; by March 20, 2019, the facility was nearly fully drawn. Covenant and default waivers were extended through April 5, 2019. Additional financing and further waivers were not committed as of April 2, 2019; failure to secure them could threaten continued operations.
- Contract settlements: A March 29, 2019 agreement for the final two Vølund loss contracts required a combined payment of £70 million (approximately $88.9 million) by April 5. The settlement limited remaining obligations and waived a rejection right that could have required repayment of up to approximately $144 million. Payment and financing remained critical conditions in the filing’s subsequent-event discussion.
- Cost actions: Restructuring and additional cost reductions initiated since the second quarter of 2018 were intended to save approximately $84 million annually. The filing does not provide a firm earnings or revenue forecast.
- Asset sales and portfolio changes: MEGTEC and Universal were sold for $130 million subject to adjustment, producing $112.0 million cash net of cash transferred and $7.7 million in escrow. PBRRC was sold for $45 million subject to adjustment, with $38.9 million cash received and $4.9 million in escrow. The company also sold its Chinese and Indian joint-venture interests.
- Other notable risks: NYSE notified the company that its share price did not meet the $1.00 minimum continued-listing standard; delisting remained possible. The SEC had issued subpoenas concerning Vølund accounting charges and related matters; the company said it was cooperating. Other exposures include fixed-price contract overruns, bonding and letter-of-credit capacity, pension and postretirement obligations of approximately $282.2 million, potential dilution and limits on tax attributes from a possible ownership change.
Fourth-quarter snapshot
For the quarter ended December 31, 2018, revenue was $222.9 million, gross loss was $74.9 million, operating loss was $137.7 million, and net loss attributable to shareholders was $233.4 million. The quarter included significant Vølund contract-estimate changes, a $72.2 million pension mark-to-market charge, and a $2.5 million SPIG intangible-asset impairment.
Most important facts for investors to verify
- Whether the company obtained financing and covenant relief beyond the April 5, 2019 waiver deadline, and on what terms.
- Whether the £70 million Vølund settlement was paid on time and whether any remaining project, warranty or remediation costs arose.
- Whether projected annual savings of approximately $84 million were realized and whether core operations generated positive cash flow.
- Final proceeds and escrow adjustments for the business sales, and any material insurance or subcontractor recoveries.
- NYSE listing compliance, potential dilution or ownership changes, and any developments in the SEC investigation or shareholder litigation.