Babcock & Wilcox Enterprises, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company supplies power-generation, renewable-energy, environmental and cooling systems, and related services. Results were materially affected by COVID-19, project delays and the completion of prior large construction projects.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $135.4 million | $248.1 million | $284.0 million | $480.1 million |
| Operating loss | $7.7 million | $4.3 million | $18.0 million | $36.2 million |
| Net loss attributable to stockholders | $18.1 million | $27.6 million | $49.6 million | $77.4 million |
| Loss per share | $0.39 | $1.50 | $1.06 | $4.22 |
| Adjusted EBITDA | $1.4 million | $8.2 million | $2.1 million | $3.9 million |
| Operating cash flow | Not stated by quarter | $(49.3) million | $(193.0) million |
Revenue fell 45% in Q2 and 41% for the first half. Q2 operating and net loss margins were approximately negative 5.7% and 13.5%; first-half margins were approximately negative 6.3% and 17.6%. These are calculated from reported figures. Interest expense was $15.5 million in Q2 and $37.6 million for the first half. The company recorded a $6.2 million debt-extinguishment loss in Q2.
At June 30, cash and cash equivalents were $36.8 million, with another $11.3 million restricted. Total debt was approximately $338.0 million: $164.7 million under the revolving facility and $173.3 million of last-out term loans. Total liabilities were $916.7 million, assets $578.0 million and stockholders’ deficit $338.7 million. First-half cash declined by $8.8 million to $48.1 million, including restricted cash.
Segments, backlog and material changes
- Babcock & Wilcox: Q2 revenue was $104.8 million, down 48%; adjusted EBITDA was $9.5 million, down from $19.1 million. Lower project volume and COVID-19 effects were partly offset by cost savings.
- Vølund & Other Renewable: Q2 revenue was $20.3 million, down 40%; adjusted EBITDA loss improved slightly to $0.5 million. First-half adjusted EBITDA loss improved to $3.8 million from $9.5 million, largely reflecting lower losses on legacy European EPC contracts.
- SPIG: Q2 revenue was $10.9 million, down 52%; adjusted EBITDA loss widened to $2.5 million. Customer project postponements and lower volume were key factors.
- Backlog was $457 million at June 30, down from $585 million a year earlier. Management expects to recognize about $133 million in the remainder of 2020, $155 million in 2021 and $169 million thereafter. Backlog may be cancelled or changed; $156 million relates to long-term Vølund operations and maintenance contracts extending to 2034.
- First-half operating cash use was substantially lower than in 2019, when cash outflows included funding for European EPC settlements and accrued losses. Q2 and first-half reported losses also improved year over year, despite sharply lower revenue.
Liquidity, outlook and risks
- On May 14, 2020, the company refinanced and extended its credit facilities: revolving-facility maturity to June 30, 2022, and term-loan maturity to December 30, 2022. B. Riley committed up to $70 million of additional term loans; $30 million was funded at closing. Last-out term loans carry a 12% rate. B. Riley also provided a limited guaranty of revolving-credit obligations.
- The company had about $40.3 million available for additional revolver borrowings at June 30. Borrowings and letters of credit use substantial facility capacity. Certain covenant testing was suspended through September 30, 2020, with revised levels and definitions required to be negotiated by October 31; failure to do so is an event of default.
- Management concluded that, based on the refinancing and cost-conservation actions, projected liquidity was sufficient for at least one year after issuance and substantial doubt about going concern no longer existed. This depends on the financing arrangements, cash conservation and business assumptions continuing to hold.
- COVID-19 delayed project starts, reduced customer orders and restricted field-service travel; some projects were pushed into 2021 or 2022. The filing gives no quantitative earnings or revenue guidance. Management said it would continue cost-saving measures and evaluate non-core asset sales.
- Cash conservation included furloughs, executive and director compensation deferrals, suspension of the U.S. 401(k) match, rent deferrals and pension contribution deferrals. An adverse IRS decision on a requested pension waiver could increase required 2020 funding by about $25 million, to approximately $46 million or more, plus possible interest and penalties.
- Six European Vølund EPC contracts carried estimated aggregate liquidated damages of $88.2 million; five had been turned over to customers, with remaining close-out, testing or warranty work. The company is pursuing insurance and subcontractor recoveries for estimated structural-steel-related costs of about $36 million.
- Contingencies include Glatfelter litigation alleging damages exceeding $58.9 million and a formal SEC investigation into Vølund and Other Renewable accounting matters from 2015–2019. The company said it could not estimate potential SEC-related losses; material impact cannot be ruled out.
- Other important risks include fixed-price contract cost overruns, ability to maintain surety and letter-of-credit capacity, refinancing and covenant compliance, foreign-exchange exposure, pension liabilities, and continuing COVID-19 disruption. Management reported no impairment in its interim goodwill and long-lived-asset assessments.
Important facts for investors to verify
- Whether the remaining committed B. Riley funding is delivered on schedule and revised financial covenants are agreed before the October 31, 2020 deadline.
- Cash availability and revolver capacity after letters of credit, surety requirements, debt service and pension contributions are considered.
- Whether COVID-19 project delays convert into cancellations, and whether backlog is executed on schedule and at estimated margins.
- Final costs, liquidated damages, warranty exposure and any recoveries on legacy Vølund and SPIG loss contracts.
- Developments in the Glatfelter case and SEC investigation, including any estimable exposure or material findings.
- Outcome of the pension waiver request and resulting 2020 contribution requirements.