Babcock & Wilcox Enterprises, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless otherwise noted. Amounts are in U.S. dollars.
Business context and results
B&W supplies power-generation, renewable-energy and industrial equipment and services. Results deteriorated sharply, primarily because of additional estimated losses on six European Renewable contracts and lower Power-segment revenue amid a weak coal-fired new-build market.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $311.4 million | $391.1 million |
| Gross profit (loss) | $(10.7) million | $58.6 million |
| Operating loss | $(102.7) million | $(13.0) million |
| Net loss attributable to stockholders | $(120.4) million; $(2.73) per share | $(7.0) million; $(0.14) per share |
| Adjusted EBITDA | $(61.6) million | $8.4 million |
| Interest expense | $13.5 million | $1.8 million |
| Cash used in operating activities | $84.8 million | $74.8 million |
Revenue declined 20%. The consolidated gross margin was approximately negative 3.4%, versus positive 15.0% a year earlier. Segment adjusted EBITDA was $11.2 million in Power (down from $17.4 million), negative $61.7 million in Renewable (versus positive $0.9 million), and negative $3.4 million in Industrial (versus positive $0.5 million). Adjusted EBITDA is a non-GAAP measure.
Liquidity, debt and capital
- At March 31, cash and cash equivalents were $37.4 million; restricted cash was $49.7 million. Of unrestricted cash, $34.3 million was held by foreign entities. Cash, cash equivalents and restricted cash totaled $87.1 million.
- Reported borrowings were approximately $343.9 million on a carrying-value basis ($377.3 million face value before discounts). This included $177.0 million under the U.S. revolving facility, $162.5 million carrying value of the second-lien loan and $4.3 million of foreign revolver debt. Revolver availability was approximately $45.3 million after facility usage.
- Current assets were $722.1 million and current liabilities $734.2 million. Total stockholders’ equity fell to $70.0 million from $190.7 million at year-end 2017.
- After quarter-end, the April 30 rights offering issued 124.3 million shares for gross proceeds of $248.5 million. On May 4, B&W used $214.9 million to repay and terminate the second-lien loan; remaining proceeds, net of offering costs, were intended for working capital. B&W expects a roughly $49.2 million debt-extinguishment loss in Q2 and estimated annual interest savings of about $25 million in cash payments and $30 million in interest expense.
- Investing activities provided $23.0 million, including proceeds from the sale of the China joint-venture interest and a small business; financing activities provided $71.5 million, primarily from net U.S. revolver borrowings.
Material changes, outlook and risks
- European Renewable contracts: B&W recorded $52.6 million of net losses from estimate revisions on six loss contracts in Q1, including $13.3 million of additional estimated liquidated damages. Total anticipated liquidated damages on the six contracts were $90.3 million at March 31. The revisions reflected delays, cost increases, subcontractor productivity and commissioning issues, and structural-steel problems. The company said it would pursue insurance, customer relief and other claims, but gave no assurance of recoveries.
- One of the six projects includes a customer rejection clause: if a specified milestone is not met by September 30, 2018, the customer may reject the deliverable, seek repayment of amounts paid (up to approximately $153 million), and require restoration of the property. B&W said it was taking remedial steps to meet the milestone.
- Going concern: The filing states that substantial doubt exists about B&W’s ability to continue as a going concern. Covenant defaults at December 31 and March 31 were temporarily waived through credit amendments. Management said its plan was designed to provide liquidity for at least 12 months after May 8, 2018, but it could not conclude that the plan would probably fully resolve the uncertainty. The plan includes selling at least $100 million of assets by March 31, 2019, cost reductions and contract-management actions. Failure to meet amended covenants or complete asset sales could threaten liquidity and access to borrowing and letters of credit.
- Management expected operations to begin generating cash in late 2018, while noting that 2018 cash use was expected to be concentrated in Renewable as contract losses were funded and advance-billing positions were worked down. No formal earnings guidance was provided.
- Backlog was $1.763 billion at March 31, up from $1.676 billion at year-end but down from $2.021 billion a year earlier. Bookings were $399 million versus $317 million. The company expected to recognize approximately 44% of remaining performance obligations in the rest of 2018, 15% in 2019 and 42% thereafter.
- Other unusual or material items include an $18.4 million impairment of the India joint-venture investment and a $6.5 million gain on sale of the China joint-venture interest. An SEC staff investigation, for which the company received subpoenas, concerns Renewable-segment accounting charges and related matters in 2016–2018. Stockholder and derivative litigation seek unspecified damages; the company says it believes the claims are without merit. The ARPA matter was settled for $7.0 million, payable in installments through 2020.
- Outstanding surety bonds supporting contracts totaled approximately $439.9 million. The company noted that continued access to surety capacity, letters of credit, bank guarantees and customer and supplier support is important to operations.
Most important facts for investors to verify
- Progress and final costs, schedules, liquidated damages and potential recoveries on the six European Renewable loss contracts, especially the September 30, 2018 milestone and rejection clause.
- Actual liquidity, covenant compliance, revolver availability and the timing and net proceeds of the required asset sales.
- Use of rights-offering proceeds, completion of the second-lien repayment, and the realized Q2 extinguishment charge and interest savings.
- Whether management achieves its late-2018 cash-generation expectation and how backlog converts into revenue and cash.
- Developments in the SEC investigation, shareholder litigation and the company’s ability to maintain bonding, letters-of-credit and bank-guarantee capacity.