Babcock & Wilcox Enterprises, Inc. — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019; filed March 30, 2020. This annual report includes full-year results, not a standalone fourth-quarter earnings report. Amounts below are in U.S. dollars.
Business context
B&W supplies steam-generating, environmental-control and cooling equipment, plus aftermarket services, for power generation and industrial customers. Its reportable segments are Babcock & Wilcox, Vølund & Other Renewable, and SPIG. Demand is exposed to customer capital spending, energy markets and environmental regulation. Coal-fired power plants accounted for an estimated 45% of 2019 revenue.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $859.1 million | $1,062.4 million |
| Operating loss | $29.4 million | $426.6 million |
| Loss before income taxes | $124.4 million | $555.8 million |
| Net loss | $129.0 million | $724.9 million |
| Net loss attributable to stockholders | $122.0 million | $725.3 million |
| Loss per share, basic and diluted | $3.87 | $52.45 |
| Adjusted EBITDA, non-GAAP | $33.3 million | $(297.7) million |
| Cash used in operating activities | $176.3 million | $281.9 million |
Revenue declined 19% year over year. Operating loss narrowed by $397.2 million, chiefly reflecting much lower charges on the six European Vølund EPC loss contracts, restructuring and cost savings, and improved SPIG results. The operating loss was approximately 3.4% of revenue in 2019. Interest expense rose to $94.9 million from $49.6 million, including substantial financing fees and debt-cost amortization. Income tax expense was $5.3 million despite a pretax loss; deferred tax assets are subject to a substantial valuation allowance.
Segments and backlog
| Segment | 2019 revenue | 2019 adjusted EBITDA | Comparison / context |
|---|---|---|---|
| Babcock & Wilcox | $688.3 million | $66.6 million | Revenue down $66.2 million; EBITDA up $7.1 million, with cost reductions partly offsetting lower volumes. |
| Vølund & Other Renewable | $121.9 million | $(10.5) million | Revenue down $59.3 million; EBITDA improved $265.4 million as EPC contract losses fell sharply. |
| SPIG | $80.7 million | $(2.4) million | Revenue down $72.9 million; EBITDA improved $50.9 million after more selective bidding and cost reductions. |
Year-end backlog was $441 million, down from $782 million in 2018. Management expected $237 million of that backlog to be recognized in 2020. Backlog includes $171.8 million of Vølund long-term renewable operations and maintenance work, with remaining durations extending to 2034; backlog is not a guarantee of future revenue or profit.
Cash, debt and liquidity
- At December 31, 2019, unrestricted cash was $43.8 million, total debt was approximately $283.0 million, and stockholders’ deficit was $294.9 million. Current assets of $412.2 million compared with current liabilities of $602.5 million, a working-capital deficit of approximately $190.3 million.
- Of the unrestricted cash, $38.9 million was held by foreign entities and generally was not available to fund U.S. operations without repatriation or repayment of intercompany loans. Restricted cash was an additional $13.2 million.
- The U.S. revolving facility had $179.0 million drawn; reported availability for additional borrowing under its borrowing sublimit was approximately $26.0 million. Letters of credit and surety bonds are important to the company’s ability to bid on and perform contracts.
- Operating cash outflow was $176.3 million, primarily for European contract settlements and loss-contract costs, and working-capital needs. Financing activities provided $167.0 million, including term-loan borrowings and rights-offering proceeds.
Material developments, outlook and risks
- Going concern: The auditor issued an unqualified opinion on the financial statements but included a going-concern paragraph. The filing states that substantial doubt remained about B&W’s ability to continue as a going concern, given operating losses, negative operating cash flow and uncertainty about refinancing. The statements contain no adjustments that might result from that uncertainty.
- Refinancing condition: A January 2020 credit amendment required at least $200 million of new debt or equity financing by May 11, 2020, with total refinancing debt capped at $275 million. B. Riley agreed to backstop a shortfall, subject to the agreement’s terms and conditions. Failure to complete the refinancing could result in default and threaten continued operations. The filing describes the refinancing as a plan, not a completed transaction.
- COVID-19: As of the filing date, restrictions, travel limits and customer site closures had disrupted operations and delayed project schedules. Management said the full effect could not be reasonably estimated and linked the uncertainty to refinancing and going-concern risk.
- Management outlook: Management expected continued improvement in 2020 compared with 2019, supported by restructuring, cost savings and core-technology opportunities, while acknowledging normal industry variability. No quantified revenue or earnings guidance was provided.
- European EPC contracts: B&W paid £70 million ($91.5 million) in April 2019 to settle obligations and limit exposure on two major contracts. Five of six legacy loss projects had been turned over by year-end, with remaining punch-list, remediation or testing obligations on some projects. The company continued to pursue insurance and subcontractor recoveries; recovery amounts and timing were uncertain.
- Other contract exposure: Two SPIG U.S. cooling-system loss contracts remained in progress; one was expected to be completed in early 2020 and the other in the third quarter of 2020. Fixed-price contract estimates and remaining completion costs could materially affect results.
- Legal and regulatory matters: A customer lawsuit alleged damages exceeding $58.9 million; B&W said it intended to defend the case and could not yet assess the outcome. The SEC was investigating accounting charges and related Vølund matters from 2015–2019; the company could not estimate potential losses. A shareholder class action and derivative cases had been settled.
- Pensions: Defined-benefit pension and postretirement plans were underfunded by approximately $257 million. A requested waiver of 2019 pension contributions, if granted, could reduce 2020 cash funding needs by about $25 million; otherwise, expected 2020 pension and postretirement funding was approximately $46 million.
- Other unusual items: B&W sold Loibl in 2019, recording a $3.6 million loss and receiving $7.4 million net proceeds. It also recognized $11.7 million in restructuring costs and $27.9 million in advisory and settlement costs. The 2018 comparison included substantial EPC losses and impairment charges.
Important facts for investors to verify
- Whether the required refinancing was completed by May 11, 2020, on what terms, and whether the B. Riley backstop was used.
- Subsequent cash balances, borrowing availability, covenant compliance and access to letters of credit and surety bonds.
- Actual project costs, completion status and remaining obligations on Vølund and SPIG loss contracts, as well as recoveries from insurers or subcontractors.
- The operational and liquidity effects of COVID-19-related delays, customer site restrictions and project extensions.
- Developments in the SEC investigation and the Glatfelter litigation, including any quantified exposure or settlement.
- Whether pension contribution relief was granted and the resulting 2020 cash funding requirement.