Babcock & Wilcox Enterprises, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. B&W supplies renewable-energy, environmental-control and thermal power-generation equipment and services. Segment reporting was reorganized into B&W Renewable, Environmental and Thermal; comparative segment results were restated.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $132.5 million | $198.6 million | $416.5 million | $678.7 million |
| Operating income (loss) | $14.1 million | $(3.2) million | $(3.9) million | $(39.4) million |
| Net income (loss) | $34.6 million | $(57.0) million | $(15.3) million | $(134.5) million |
| Net income (loss) attributable to stockholders | $34.7 million | $(57.0) million | $(14.9) million | $(134.4) million |
| Operating cash flow | Not separately provided | Not separately provided | $(67.3) million | $(201.1) million |
- Q3 diluted EPS was $0.69, compared with a loss of $1.39 a year earlier; nine-month diluted EPS was a loss of $0.31, compared with a loss of $5.18.
- Q3 operating results included a $26.0 million non-recurring insurance recovery recognized in cost of operations. Q3 also included a $25.0 million foreign-exchange gain, versus a $26.7 million loss in Q3 2019. These items materially affected the period comparison.
- Adjusted EBITDA was $25.6 million in Q3 and $27.8 million for the nine months, versus $10.1 million and $14.0 million, respectively, in 2019. The renewable segment’s improvement included the insurance recovery; Thermal EBITDA declined with lower activity.
- Revenue fell 33% in Q3 and 39% for the nine-month period. Management cited COVID-19-related project delays, postponed customer investment, travel restrictions and lower orders, as well as prior-year project completions and the Loibl divestiture.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $38.9 million, with an additional $9.4 million of restricted cash. Much of unrestricted cash—$36.8 million—was held by foreign entities and generally was not available to fund U.S. operations without repatriation or repayment of intercompany loans.
- Total debt was approximately $355.2 million: $181.9 million outstanding under the revolving facility and $173.3 million of Last Out Term Loans. The revolver’s weighted-average rate was 7.63%; term loans carried a 12.0% rate. The balance sheet reported a $320.8 million stockholders’ deficit.
- Approximately $23.1 million was available for additional revolver borrowings at quarter-end. Facility usage also included $23.0 million of financial letters of credit and $89.6 million of performance letters of credit. Outstanding surety bonds totaled approximately $277.6 million.
- Nine-month operating cash use was $67.3 million; investing activities provided $2.0 million and financing activities provided $52.4 million. Cash, cash equivalents and restricted cash declined $8.6 million to $48.4 million.
- The May 2020 refinancing extended revolver maturity to June 2022 and term-loan maturity to December 2022, with up to $70 million of additional term-loan commitments from B. Riley. The October 30, 2020 amendment established stepped interest-coverage and senior-leverage covenants. B. Riley’s limited guaranty covers specified revolver obligations, subject to its terms.
- Management said the refinancing and cost-conservation actions support sufficient liquidity for at least one year after issuance of the statements and concluded substantial doubt about going concern was alleviated. The company had previously disclosed substantial doubt before the refinancing.
Backlog, outlook and management commentary
- Backlog was $509 million at September 30, 2020, versus $473 million a year earlier. Management expected to recognize about 18.3% in the remainder of 2020, 34.6% in 2021 and 47.1% thereafter. Backlog may be canceled or changed and is not a guarantee of future results.
- Nine-month bookings were $478 million, compared with $369 million in 2019. Management noted shorter-period bookings can be volatile and less informative.
- COVID-19 had delayed some anticipated projects into 2021 and 2022; management said the effects on revenue could not be reasonably quantified. It continued restructuring, cost reductions and evaluation of non-core asset sales, but provided no specific earnings or revenue guidance.
- The October 2020 insurer settlement generated $26.0 million in proceeds, received after quarter-end; approximately $8.0 million was applied to permanently reduce the revolver. The recovery was recognized in Q3 because management considered it probable at quarter-end.
- Approximately $46 million of estimated 2020 pension contributions were deferred. The IRS approved a waiver for $23.7 million of 2019-plan-year contributions, to be funded over five years, subject to conditions. Pension funding needs remain sensitive to investment returns, interest rates and actuarial assumptions.
Risks, contingencies and unusual items
- Two legacy Environmental dry-cooling contracts remained loss contracts; final completion was expected in Q4 2020. European Renewable EPC projects continued to involve warranty, punch-list and liquidated-damages exposure. Estimated liquidated damages for the six European contracts totaled $92.7 million at September 30, 2020.
- A customer, P.H. Glatfelter Company, alleged damages exceeding $58.9 million in litigation; B&W intended to defend the action and said it was too early to assess the outcome.
- The SEC was conducting a formal investigation into accounting charges and related matters involving the Renewable segment from 2015–2019. The company could not estimate any potential loss; material impact could not be ruled out. A stockholder derivative and class action also challenged aspects of the 2019 rights offering and related transactions.
- Fixed-price contract estimates, subcontractor performance, customer claims, access to credit and surety capacity, covenant compliance, foreign-exchange movements and continued COVID-19 disruption could materially affect results and liquidity.
Most important facts for investors to verify
- Whether operating performance and cash generation improve without the one-time $26.0 million insurance recovery and unusually favorable foreign-exchange results.
- Actual revolver availability, covenant headroom and compliance under the amended credit agreement, including scheduled commitment reductions and B. Riley funding conditions.
- Progress on delayed projects, bookings conversion and backlog quality, including completion costs and remaining exposures on loss contracts.
- Cash requirements and timing for pension contributions, letters of credit, surety bonds and other contract-related commitments.
- Developments in the SEC investigation, Glatfelter litigation and stockholder litigation, and any related financial exposure.