Babcock & Wilcox Enterprises, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. B&W provides renewable, environmental and thermal energy and emissions-control technologies, equipment and services. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $221.0 million | $202.9 million | $425.1 million | $371.1 million |
| Operating income (loss) | $3.7 million | $2.8 million | $(3.1) million | $(3.7) million |
| Net income (loss) | $(3.0) million | $3.1 million | $(11.7) million | $(12.3) million |
| Net income (loss) attributable to common stockholders | $(6.3) million | $1.4 million | $(18.3) million | $(14.1) million |
| Basic and diluted EPS | $(0.07) | $0.02 | $(0.21) | $(0.18) |
| Adjusted EBITDA, non-GAAP | $20.6 million | $15.2 million | $32.6 million | $23.8 million |
- Revenue increased 9% in Q2 and 15% for the first half. Growth reflected acquisitions and higher Renewable and Environmental activity; Thermal construction revenue declined.
- GAAP operating margin was approximately 1.7% in Q2 versus 1.4% a year earlier; the first-half operating margin remained negative. Adjusted EBITDA includes a non-recurring $7.0 million solar development-rights sale gain.
- Q2 net loss widened despite higher operating income, primarily due to higher interest expense and a $4.3 million foreign-exchange loss, compared with a $1.8 million gain in Q2 2021. First-half net loss improved modestly year over year.
- First-half operating cash flow was negative $63.6 million, compared with negative $86.1 million in 2021. Investing used $65.6 million, primarily for acquisitions; financing used $15.6 million. Cash, cash equivalents and restricted cash declined $146.5 million to $80.2 million.
- At June 30, unrestricted cash was $71.5 million, including $33.2 million held by foreign entities that management generally does not consider available for U.S. operations without repatriation or intercompany repayment. Current assets were $515.6 million and current liabilities $302.5 million.
- Debt was $334.3 million on the carrying-value basis reported by management; senior notes have $340.0 million aggregate principal and mature in 2026. Gross preferred stock outstanding was $191.7 million. The company paid $7.4 million of preferred dividends in the first half.
Segments, backlog and changes from the prior period
- Renewable: Q2 revenue rose to $75.2 million from $38.3 million; adjusted EBITDA increased to $8.9 million from $3.4 million. The segment’s 2022 adjusted EBITDA includes the $7.0 million sale gain. Acquisitions of Fosler and VODA contributed to growth.
- Environmental: Q2 revenue rose to $31.6 million from $28.4 million, while adjusted EBITDA fell to $0.6 million from $2.7 million, mainly because higher-margin prior-year projects were completed.
- Thermal: Q2 revenue declined to $116.3 million from $136.3 million as construction activity fell. Adjusted EBITDA increased to $16.4 million from $12.6 million, supported by product mix and acquisitions of Fossil Power Systems and Optimus Industries.
- Bookings were $245 million in Q2 and $484 million in the first half, compared with $168 million and $337 million, respectively, in 2021. Backlog was $731 million at June 30, up from $500 million a year earlier. Management expects to recognize approximately 48.4% in 2022, 28.2% in 2023 and 23.4% thereafter; backlog can be canceled or modified and is not a guarantee of revenue.
- Acquisitions increased goodwill and intangible assets. Fosler project conditions not adequately disclosed at acquisition led to recognition of $14.1 million of accrued liabilities and $0.4 million of warranty accruals, with a corresponding goodwill adjustment; B&W submitted insurance claims for a portion of losses.
Outlook, liquidity, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management expects restructuring and cost-saving initiatives to support results and cites growth opportunities across its three segments. It also plans to consider further cost savings, non-core asset sales and subcontractor recoveries.
- Liquidity is subject to cash generation, working-capital needs, debt service, preferred dividends and the ability to maintain financing and contract-security capacity. Debt facility covenants include minimum liquidity of $30 million, a fixed-charge coverage test and a senior net leverage limit. No revolver borrowings were outstanding at June 30, 2022; letter-of-credit usage was $112.3 million under the described facility. Surety bonds outstanding totaled approximately $293.3 million.
- Management cited supply and material shortages, inflation, project delays and foreign-exchange volatility associated in part with Russia’s invasion of Ukraine, as well as continuing COVID-19-related supply-chain and travel disruption. The company reported that these factors had already affected project timing and revenue.
- A proposed settlement of stockholder litigation totals $9.5 million and remains subject to court approval; the full amount was accrued. The Glatfelter contract litigation alleges damages exceeding $58.9 million; the company says the outcome’s material effect cannot yet be determined.
- Fosler contingent consideration has a reported fair value of $9.6 million, with a possible undiscounted payment of up to $10 million. Acquisition purchase-price allocations remain provisional.
- Subsequent events: a B. Riley affiliate exercised warrants for approximately 1.54 million common shares at $0.01 per share on July 20, 2022. On July 28, B&W was the successful bidder for Hamon Research-Cottrell assets for approximately $2.9 million.
Most important facts for investors to verify
- Whether operating cash use and declining cash balances moderate, and how much reported cash is practically available to U.S. operations.
- Whether backlog converts to revenue and cash on schedule, especially given material shortages, project delays and the risk of contract changes or cancellations.
- Underlying segment profitability excluding the $7.0 million non-recurring gain, and whether Environmental profitability recovers.
- Compliance with liquidity and other debt covenants, as well as continued access to letters of credit and surety-bond capacity needed to support contracts.
- The final cost and insurance recovery, if any, for Fosler project liabilities; the stockholder-settlement approval and funding; and the outcome of material litigation.