Babcock & Wilcox Enterprises, Inc 10-Q for FY2021 Q3
Babcock & Wilcox Enterprises, Inc. (BW)
10-Q
2021-11-10
For: 2021-09-30
View Original
Added on
April 04, 2026
About this 10-Q
Babcock & Wilcox Enterprises, Inc filed this 10-Q on November 10, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $159.96M
- up 20.7% from $132.51M a year earlier
- Net income
- $13.64M
- down 60.7% from net income of $34.72M a year earlier
- Diluted EPS
- $0.11
- down 84.1% from $0.69 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
Commission File No. 001-36876
(Exact name of registrant as specified in its charter)
| (State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of Principal Executive Offices) | (Zip Code) | |||||||
Registrant's Telephone Number, Including Area Code: (330) 753-4511
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||||||||||||||||
| ☒ | Smaller reporting company | |||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
The number of shares of the registrant's common stock outstanding at November 5, 2021 was 86,260,649 .
1
TABLE OF CONTENTS
| PAGE | ||||||||
2
***** Cautionary Statement Concerning Forward-Looking Information *****
This quarterly report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. Statements that include the words "expect," "intend," "plan," "believe," "project," "forecast," "estimate," "may," "should," "anticipate" and similar statements of a future or forward-looking nature identify forward-looking statements.
These forward-looking statements are based on management’s current expectations and involve a number of risks and uncertainties, including, among other things, the impact of COVID-19 on us and the capital markets and global economic climate generally; our ability to integrate acquired businesses and the impact of those acquired businesses on our cash flows, results of operations and financial condition, including our acquisition of Fosler Construction Company Inc; our recognition of any asset impairments as a result of any decline in the value of our assets or our efforts to dispose of any assets in the future; our ability to obtain and maintain sufficient financing to provide liquidity to meet our business objectives, surety bonds, letters of credit and similar financing; our ability to comply with the requirements of, and to service the indebtedness under, our debt facility agreements; our ability to pay dividends on our 7.75% Series A Cumulative Perpetual Preferred Stock, the highly competitive nature of our businesses and our ability to win work, including identified project opportunities in our pipeline; general economic and business conditions, including changes in interest rates and currency exchange rates; cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings; our ability to perform contracts on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers; failure by third-party subcontractors, partners or suppliers to perform their obligations on time and as specified; our ability to successfully resolve claims by vendors for goods and services provided and claims by customers for items under warranty; our ability to realize anticipated savings and operational benefits from our restructuring plans, and other cost savings initiatives; our ability to successfully address productivity and schedule issues in our B&W Renewable, B&W Environmental and B&W Thermal segments; our ability to successfully partner with third parties to win and execute contracts within our B&W Environmental, B&W Renewable and B&W Thermal segments; changes in our effective tax rate and tax positions, including any limitation on our ability to use our net operating loss carryforwards and other tax assets; our ability to successfully manage research and development projects and costs, including our efforts to successfully develop and commercialize new technologies and products; the operating risks normally incident to our lines of business, including professional liability, product liability, warranty and other claims against us; difficulties we may encounter in obtaining regulatory or other necessary permits or approvals; changes in actuarial assumptions and market fluctuations that affect our net pension liabilities and income; our ability to successfully compete with current and future competitors; our ability to negotiate and maintain good relationships with labor unions; changes in pension and medical expenses associated with our retirement benefit programs; social, political, competitive and economic situations in foreign countries where we do business or seek new business; and the other factors specified and set forth under "Risk Factors" in our periodic reports filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K.
These forward-looking statements are made based upon detailed assumptions and reflect management’s current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.
The forward-looking statements included herein are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
3
PART I - FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | |||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of operations | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Advisory fees and settlement costs | |||||||||||||||||||||||
| Restructuring activities | |||||||||||||||||||||||
| Research and development (benefit) costs | ( | ||||||||||||||||||||||
| Gain on asset disposals, net | ( | ( | ( | ( | |||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Gain (loss) on debt extinguishment | ( | ||||||||||||||||||||||
| Loss on sale of business | ( | ( | |||||||||||||||||||||
| Benefit plans, net | |||||||||||||||||||||||
| Foreign exchange | ( | ( | |||||||||||||||||||||
| Other – net | ( | ( | ( | ( | |||||||||||||||||||
| Total other income (expense) | ( | ( | ( | ||||||||||||||||||||
| Income (loss) before income tax expense | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Income (loss) from continuing operations | ( | ||||||||||||||||||||||
| Income from discontinued operations, net of tax | |||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Net (income) loss attributable to non-controlling interest | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to stockholders | ( | ||||||||||||||||||||||
| Less: Dividend on Series A preferred stock | |||||||||||||||||||||||
| Net income (loss) attributable to stockholders of common stock | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Basic earnings (loss) per share | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Discontinued operations | |||||||||||||||||||||||
| Basic earnings (loss) per share | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Diluted earnings (loss) per share | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Discontinued operations | |||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Shares used in the computation of earnings (loss) per share: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
4
BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Other comprehensive income (loss): | |||||||||||||||||||||||
| Currency translation adjustments (CTA) | ( | ( | ( | ( | |||||||||||||||||||
| Reclassification of CTA to net income (loss) | ( | ||||||||||||||||||||||
| Benefit obligations: | |||||||||||||||||||||||
| Amortization of benefit plan benefits | ( | ( | |||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
| Total comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Comprehensive income attributable to non-controlling interest | |||||||||||||||||||||||
| Comprehensive income (loss) attributable to stockholders | $ | $ | $ | ( | $ | ( | |||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
5
BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| (in thousands, except per share amount) | September 30, 2021 | December 31, 2020 | |||||||||
| Cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Accounts receivable – trade, net | |||||||||||
| Accounts receivable – other | |||||||||||
| Contracts in progress | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Current assets held for sale | |||||||||||
| Total current assets | |||||||||||
| Net property, plant and equipment, and finance lease | |||||||||||
| Goodwill | |||||||||||
| Intangible assets | |||||||||||
| Right-of-use assets | |||||||||||
| Other assets | |||||||||||
| Non-current assets held for sale | |||||||||||
| Total assets | $ | $ | |||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued employee benefits | |||||||||||
| Advance billings on contracts | |||||||||||
| Accrued warranty expense | |||||||||||
| Financing lease liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Other accrued liabilities | |||||||||||
| Loans payable | |||||||||||
| Current liabilities held for sale | |||||||||||
| Total current liabilities | |||||||||||
| Senior notes | |||||||||||
| Long term loans payable | |||||||||||
| Last out term loans | |||||||||||
| Revolving credit facilities | |||||||||||
| Pension and other accumulated postretirement benefit liabilities | |||||||||||
| Non-current finance lease liabilities | |||||||||||
| Non-current operating lease liabilities | |||||||||||
| Other non-current liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies | |||||||||||
| Stockholders' equity (deficit): | |||||||||||
Preferred stock, par value $ | |||||||||||
Common stock, par value $ | |||||||||||
| Capital in excess of par value | |||||||||||
Treasury stock at cost, | ( | ( | |||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Stockholders' deficit attributable to shareholders | ( | ( | |||||||||
| Non-controlling interest | |||||||||||
| Total stockholders' equity (deficit) | ( | ||||||||||
| Total liabilities and stockholders' equity (deficit) | $ | $ | |||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
6
BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
| Common Stock | Preferred Stock | Capital In Excess of Par Value | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Loss | Non-controlling Interest | Total Stockholders’ Equity (Deficit) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands, except share and per share amounts) | Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Defined benefit obligations | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation charges | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock offering, net | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to non-controlling interest | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Defined benefit obligations | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation charges | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock offering | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock offering, net | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Equitized Last Out Term Loan principal payment | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to preferred stockholders | — | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to non-controlling interest | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Defined benefit obligations | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation charges | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock offering | — | — | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock offering, net | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to preferred stockholders | — | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest from acquisition | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends to non-controlling interest | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||
7
| Common Stock | Capital In Excess of Par Value | Treasury Stock | Accumulated Deficit | Accumulated Other Comprehensive Income | Non-controlling Interest | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||||||||||||
| (in thousands, except share and per share amounts) | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Defined benefit obligations | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation charges | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Dividends to non-controlling interest | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | $ | ( | |||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| Defined benefit obligations | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation charges | — | — | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Equitized guarantee fee payment | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Equitized Last Out Term Loan interest payment | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Dividends to non-controlling interest | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Currency translation adjustments | — | — | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Defined benefit obligations | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation charges | ( | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Equitized Last Out Term Loan interest payment | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Dividends to non-controlling interest | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
8
BABCOCK & WILCOX ENTERPRISES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation and amortization of long-lived assets | |||||||||||
| Amortization of deferred financing costs and debt discount | |||||||||||
| Amortization of guaranty fee | |||||||||||
| Non-cash operating lease expense | |||||||||||
| Loss on sale of business | |||||||||||
| (Gain) loss on debt extinguishment | ( | ||||||||||
| Gain on asset disposals | ( | ( | |||||||||
| Provision for (benefit from) deferred income taxes, including valuation allowances | ( | ||||||||||
| Mark to market, prior service cost amortization for pension and postretirement plans | ( | ( | |||||||||
| Stock-based compensation, net of associated income taxes | |||||||||||
| Equitized non-cash interest expense | |||||||||||
| Foreign exchange | ( | ||||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | |||||||||||
| Accrued insurance receivable | ( | ||||||||||
| Contracts in progress | ( | ||||||||||
| Advance billings on contracts | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Income taxes | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued and other current liabilities | ( | ||||||||||
| Accrued contract loss | ( | ( | |||||||||
| Pension liabilities, accrued postretirement benefits and employee benefits | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchase of property, plant and equipment | ( | ( | |||||||||
| Acquisition of business | ( | ||||||||||
| Proceeds from sale of business and assets, net | |||||||||||
| Purchases of available-for-sale securities | ( | ( | |||||||||
| Sales and maturities of available-for-sale securities | |||||||||||
| Net cash (used in) from investing activities | ( | ||||||||||
9
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Cash flows from financing activities: | |||||||||||
| Issuance of senior notes, net | |||||||||||
| Borrowings on loan payable | |||||||||||
| Borrowings under last out term loans | |||||||||||
| Repayments under last out term loans | ( | ||||||||||
| Borrowings under U.S. revolving credit facility | |||||||||||
| Repayments of U.S. revolving credit facility | ( | ( | |||||||||
| Issuance of preferred stock, net | |||||||||||
| Payment of preferred stock dividends | ( | ||||||||||
| Shares of common stock returned to treasury stock | ( | ( | |||||||||
| Issuance of common stock, net | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Net cash from financing activities | |||||||||||
| Effects of exchange rate changes on cash | |||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
10
BABCOCK & WILCOX ENTERPRISES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2021
NOTE 1 – BASIS OF PRESENTATION
These interim Condensed Consolidated Financial Statements of Babcock & Wilcox Enterprises, Inc. (“B&W,” “management,” “we,” “us,” “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our Condensed Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.
COVID-19
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and subsequently spread globally. This global pandemic has disrupted business operations including global supply chains, trade, commerce, financial and credit markets, and daily life throughout the world. Our business has been, and continues to be, adversely impacted by the measures taken and restrictions imposed in the countries in which we operate and by local governments and others to control the spread of this virus. These measures and restrictions have varied widely and have been subject to significant changes from time to time depending on changes in the severity of the virus in these countries and localities. These restrictions, including curtailment of travel and other activity, negatively impact our ability to conduct business.
The COVID-19 pandemic has also disrupted our global supply chains including the manufacturing, supply, distribution, transportation and delivery of our products. We could also see significant disruptions of the operations of our logistics, service providers, delays in shipments and negative impacts to pricing of certain of our products. Disruptions and delays in our supply chains as a result of the COVID-19 pandemic could adversely our ability to meet our customers’ demands. Lastly, the prioritization of shipments of certain products as a result of the pandemic could cause delays in the shipment or delivery of our products. Such disruptions could result in reduced sales.
The volatility and variability of the virus has limited our ability to forecast the impact of the virus on our customers and our business. The continuing resurgence of COVID-19, including new strains such as the delta variant, has resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented in response to efforts to reduce the spread of the virus. These varying and changing events have caused many of the projects we had anticipated would begin in 2020 to be delayed into the second half of 2021 and beyond. Many customers and projects require B&W's employees to travel to customer and project worksites. Certain customers and significant projects are located in areas where travel restrictions have been imposed, certain customers have closed or reduced on-site activities, and timelines for completion of certain projects have, as noted above, been extended into the fourth quarter of 2021 and beyond. Additionally, out of concern for our employees, even where restrictions permit employees to return to our offices and worksites, we incurred additional costs to protect our employees and advised those who are uncomfortable returning to worksites due to the pandemic that they are not required to do so for an indefinite period of time. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus has also caused significant volatility and, at times, illiquidity in global equity and credit markets. The full extent of the COVID-19 impact, including new strains such as the delta variant, that may arise along with the availability of vaccines and anti-vaccination attitudes of the public, that could negatively impact our evaluation on our operational and financial performance will depend on future developments, including the ultimate duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent disease spread, as well as the availability and effectiveness of COVID-19 vaccinations in the U.S. and abroad, all of which are uncertain, out of our control, and cannot be predicted.
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NOTE 2 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of our common stock, net of non-controlling interest and dividends on preferred stock:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands, except per share amounts) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Income (loss) from continuing operations attributable to stockholders of common stock | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Income from discontinued operations attributable to stockholders of common stock, net of tax | |||||||||||||||||||||||
| Net income (loss) attributable to stockholders of common stock | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Weighted average shares used to calculate basic earnings (loss) per share | |||||||||||||||||||||||
| Dilutive effect of stock options, restricted stock and performance units | |||||||||||||||||||||||
| Weighted average shares used to calculate diluted earnings (loss) per share | |||||||||||||||||||||||
| Basic earnings (loss) per share | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Discontinued operations | |||||||||||||||||||||||
| Basic earnings (loss) per share | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Diluted earnings (loss) per share | |||||||||||||||||||||||
| Continuing operations | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Discontinued operations | |||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | $ | $ | ( | $ | ( | |||||||||||||||||
Because we incurred a net loss in the nine months ended September 30, 2021 and 2020, basic and diluted shares are the same.
If we had net income in the nine months ended September 30, 2021 and 2020, diluted shares would include an additional 1.3 million and 422.3 thousand shares, respectively.
We excluded 0.9 million and 1.1 million shares related to stock options from the diluted share calculation for the three months ended September 30, 2021 and 2020, respectively, because their effect would have been anti-dilutive. We excluded 1.0 million and 1.3 million shares related to stock options from the diluted share calculation for the nine months ended September 30, 2021 and 2020, respectively, because their effect would have been anti-dilutive.
NOTE 3 – SEGMENT REPORTING
B&W’s innovative products and services are organized into three market-facing segments as part of the Company's strategic, market-focused organizational and re-branding initiative to accelerate growth and provide stakeholders improved visibility into our renewable and environmental growth platforms. Our reportable segments are as follows:
•Babcock & Wilcox Renewable: Supplies cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, biomass energy and black liquor systems for the pulp and paper industry. B&W’s leading technologies support a circular economy, diverting waste from landfills to use for power generation and replacing fossil fuels, while recovering metals and reducing emissions.
•Babcock & Wilcox Environmental: Provides a full suite of best-in-class emissions control and environmental technology solutions for utility, waste to energy, biomass, carbon black, and industrial steam generation applications
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around the world. B&W’s broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control, and mercury control.
•Babcock & Wilcox Thermal: Distributes and manufactures steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. B&W has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
Total revenues exclude revenues generated from sales to other segments. An analysis of our operations by segment is as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| B&W Renewable segment | |||||||||||||||||||||||
| B&W Renewable | $ | $ | $ | $ | |||||||||||||||||||
| Vølund | |||||||||||||||||||||||
| B&W Environmental segment | |||||||||||||||||||||||
| B&W Environmental | |||||||||||||||||||||||
| SPIG | |||||||||||||||||||||||
| GMAB | |||||||||||||||||||||||
| B&W Thermal segment | |||||||||||||||||||||||
| B&W Thermal | |||||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||
| Total Revenues | $ | $ | $ | $ | |||||||||||||||||||
The presentation of the components of our adjusted EBITDA in the table below is consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, net pension benefits, restructuring costs, impairments, gains and losses on debt extinguishment, costs related to financial consulting, research and development costs and other costs that may not be directly controllable by segment management are not allocated to the segments.
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| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Adjusted EBITDA (1) | |||||||||||||||||||||||
B&W Renewable segment (2) | $ | $ | $ | $ | |||||||||||||||||||
| B&W Environmental segment | |||||||||||||||||||||||
| B&W Thermal segment | |||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | |||||||||||||||||||
| Research and development benefit (costs) | ( | ( | ( | ||||||||||||||||||||
| Restructuring activities | ( | ( | ( | ( | |||||||||||||||||||
| Acquisition pursuit and related costs | ( | ( | |||||||||||||||||||||
| Financial advisory services | ( | ( | ( | ( | |||||||||||||||||||
| Advisory fees for settlement costs and liquidity planning | ( | ( | ( | ( | |||||||||||||||||||
| Litigation legal costs | ( | ( | ( | ( | |||||||||||||||||||
| Stock compensation | ( | ( | ( | ( | |||||||||||||||||||
| Interest on letters of credit included in cost of operations | ( | ( | ( | ( | |||||||||||||||||||
| Loss from business held for sale | ( | ( | ( | ||||||||||||||||||||
| Depreciation & amortization | ( | ( | ( | ( | |||||||||||||||||||
| Contract asset amortization | ( | ( | |||||||||||||||||||||
Product development | ( | ( | |||||||||||||||||||||
| Gain (loss) from a non-strategic business | ( | ( | ( | ||||||||||||||||||||
| Gain on asset disposals, net | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Interest expense, net | ( | ( | ( | ( | |||||||||||||||||||
| Gain (loss) on debt extinguishment | ( | ||||||||||||||||||||||
| Loss on sale of business | ( | ( | |||||||||||||||||||||
| Net pension benefit before MTM | |||||||||||||||||||||||
| MTM gain from benefit plans | |||||||||||||||||||||||
| Foreign exchange | ( | ( | |||||||||||||||||||||
| Other – net | ( | ( | ( | ( | |||||||||||||||||||
| Total other income (expense) | ( | ( | ( | ||||||||||||||||||||
| Income (loss) before income tax expense | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | |||||||||||||||||||||
| Income (loss) from continuing operations | ( | ||||||||||||||||||||||
| Income from discontinued operations, net of tax | |||||||||||||||||||||||
| Net income (loss) | ( | ||||||||||||||||||||||
| Net (income) loss attributable to non-controlling interest | ( | ( | |||||||||||||||||||||
| Net income (loss) attributable to stockholders | ( | ||||||||||||||||||||||
| Less: Dividend on Series A preferred stock | |||||||||||||||||||||||
| Net income (loss) attributable to stockholders of common stock | $ | $ | $ | ( | $ | ( | |||||||||||||||||
(1) Adjusted EBITDA for the three and nine months ended September 30, 2020, excludes losses related to a non-strategic business and interest on letters of credit included in cost of operations that were previously included in Adjusted EBITDA and total $0.9 million and $0.2 million, respectively, and $1.2 million and $0.6 million, respectively.
(2) Adjusted EBITDA for the three and nine months ended September 30, 2020 includes a $26
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NOTE 4 – REVENUE RECOGNITION AND CONTRACTS
Revenue Recognition
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services, accounted for 21 % and 34 % for the three months ended September 30, 2021 and 2020, respectively, and 20 % and 32 % of our revenue for the nine months ended September 30, 2021 and 2020, respectively. Revenue from products and services transferred to customers over time, which primarily relates to customized, engineered solutions and construction services, accounted for 79 % and 66 % for the three months ended September 30, 2021 and 2020, respectively, and 80 % and 68 % of our revenue for the nine months ended September 30, 2021 and 2020, respectively.
Refer to Note 3 for our disaggregation of revenue by product line.
Contract Balances
The following represents the components of our contracts in progress and advance billings on contracts included in our Condensed Consolidated Balance Sheets:
| (in thousands) | September 30, 2021 | December 31, 2020 | $ Change | % Change | |||||||||||||||||||
| Contract assets - included in contracts in progress: | |||||||||||||||||||||||
| Costs incurred less costs of revenue recognized | $ | $ | $ | % | |||||||||||||||||||
| Revenues recognized less billings to customers | % | ||||||||||||||||||||||
| Contracts in progress | $ | $ | $ | % | |||||||||||||||||||
| Contract liabilities - included in advance billings on contracts: | |||||||||||||||||||||||
| Billings to customers less revenues recognized | $ | $ | $ | ( | ( | % | |||||||||||||||||
| Costs of revenue recognized less cost incurred | ( | ( | % | ||||||||||||||||||||
| Advance billings on contracts | $ | $ | $ | ( | ( | % | |||||||||||||||||
| Net contract balance | $ | $ | ( | $ | ( | % | |||||||||||||||||
| Accrued contract losses | $ | $ | $ | ( | ( | % | |||||||||||||||||
Backlog
On September 30, 2021 we had $540.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 29.1 %, 32.6 % and 38.3 % of our remaining performance obligations as revenue in the remainder of 2021, 2022 and thereafter, respectively.
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Changes in Contract Estimates
In the three and nine months ended September 30, 2021 and 2020, we recognized changes in estimated gross profit related to long-term contracts accounted for on the over time basis, which are summarized as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Increases in gross profit for changes in estimates for over time contracts (1) | $ | $ | $ | $ | |||||||||||||||||||
| Decreases in gross profit for changes in estimates for over time contracts | ( | ( | ( | ( | |||||||||||||||||||
| Net changes in gross profit for changes in estimates for over time contracts | $ | $ | $ | $ | |||||||||||||||||||
(1) Increases in gross profits for changes in estimates for over time contracts reflects a non-recurring loss recovery of $26.0 million in the three and nine months ended September 30, 2020.
B&W Renewable EPC Loss Contracts
We had six B&W Renewable EPC contracts for renewable energy facilities in Europe that were loss contracts at December 31, 2017. The scope of these EPC (Engineer, Procure and Construct) contracts extended beyond our core technology, products and services. In addition to these loss contracts, we have one remaining extended scope contract in our Babcock & Wilcox Renewable segment which turned into a loss contract in the fourth quarter of 2019.
In October 2020, we entered into a settlement agreement with an insurer under which we received a settlement of $26.0 million to settle claims in connection with five of six European B&W Renewable EPC loss contracts disclosed above. We recognized this non-recurring loss recovery of $26.0 million as a reduction of our cost of operations in our Condensed Consolidated Statements of Operations and recorded the insurance receivable in accounts receivable - other in our Condensed Consolidated Balance Sheets at September 30, 2020 because we determined the loss recovery was probable as of such date.
During the third quarter of 2021, the Company received an offer from a subcontractor to reimburse the Company for project costs related to three of the Renewable EPC loss contracts described above. As we have been in negotiations with this subcontractor for some time, our determination that this recent offer, while not accepted, was deemed to have met the probability threshold for recognition. Accordingly, we have recognized this offer as a reduction of our cost of operations in our Condensed Consolidated Statements of Operations and recorded the receivable in accounts receivable - other in our Condensed Consolidated Balance Sheets at September 30, 2021 and in the Table above. We continue to pursue further recoveries relative to these project costs, similar to our normal practice, and the ultimate resolution of this matter could change materially.
The Company, as a normal part of its ongoing business operations, is continuing to pursue other additional potential claims and recoveries from subcontractors and others where appropriate and available.
B&W Environmental Loss Contracts
At September 30, 2021, the B&W Environmental segment had two significant loss contracts of which both contracts were nearly 100 % complete. We did not recognize additional contract losses in the three months ended September 30, 2021 and in the nine months ended September 30, 2021 our estimated loss on these contracts improved by $0.4 million. In the three and nine months ended September 30, 2020, we recognized $1.3
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NOTE 5 – INVENTORIES
The components of inventories are as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Raw materials and supplies | $ | $ | |||||||||
| Work in progress | |||||||||||
| Finished goods | |||||||||||
| Total inventories | $ | $ | |||||||||
NOTE 6 – PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASE
Property, plant and equipment less accumulated depreciation is as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Land | $ | $ | |||||||||
| Buildings | |||||||||||
| Machinery and equipment | |||||||||||
| Property under construction | |||||||||||
| Less accumulated depreciation | |||||||||||
| Net property, plant and equipment | |||||||||||
| Finance lease | |||||||||||
| Less finance lease accumulated amortization | |||||||||||
| Net property, plant and equipment, and finance lease | $ | $ | |||||||||
NOTE 7 - GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of September 30, 2021:
| (in thousands) | B&W Renewable | B&W Environmental | B&W Thermal | Total | ||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ||||||||||
Addition - Fosler Construction(1) | ||||||||||||||
| Currency translation adjustments | ( | ( | ( | ( | ||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ||||||||||
Goodwill is tested for impairment annually and when impairment indicators exist. No impairment indicators were identified during the three months ended September 30, 2021. Because the B&W Thermal, B&W Construction Co., LLC, B&W Renewable and B&W Environmental reporting units each had negative carrying values, reasonable changes in assumptions would not indicate impairment.
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NOTE 8 – INTANGIBLE ASSETS
Our intangible assets are as follows:
| (in thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Definite-lived intangible assets | |||||||||||
| Customer relationships | $ | $ | |||||||||
| Unpatented technology | |||||||||||
| Patented technology | |||||||||||
| Tradename | |||||||||||
| Acquired backlog | |||||||||||
| All other | |||||||||||
| Gross value of definite-lived intangible assets | |||||||||||
| Customer relationships amortization | ( | ( | |||||||||
| Unpatented technology amortization | ( | ( | |||||||||
| Patented technology amortization | ( | ( | |||||||||
| Tradename amortization | ( | ( | |||||||||
| All other amortization | ( | ( | |||||||||
| Accumulated amortization | ( | ( | |||||||||
| Net definite-lived intangible assets | $ | $ | |||||||||
| Indefinite-lived intangible assets | |||||||||||
| Trademarks and trade names | $ | $ | |||||||||
| Total intangible assets, net | $ | $ | |||||||||
The following summarizes the changes in the carrying amount of intangible assets:
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Balance at beginning of period | $ | $ | |||||||||
Business acquisitions and adjustments(1) | |||||||||||
| Amortization expense | ( | ( | |||||||||
| Currency translation adjustments | ( | ||||||||||
| Balance at end of the period | $ | $ | |||||||||
Amortization of intangible assets is included in cost of operations and SG&A in our Condensed Consolidated Statement of Operations but is not allocated to segment results.
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Estimated future intangible asset amortization expense, including the increase in amortization expense resulting from the September 30, 2021 acquisition of Fosler Construction, is as follows (in thousands):
Amortization Expense(1) | |||||
| Year ending December 31, 2021 | $ | ||||
| Year ending December 31, 2022 | |||||
| Year ending December 31, 2023 | |||||
| Year ending December 31, 2024 | |||||
| Year ending December 31, 2025 | |||||
| Year ending December 31, 2026 | |||||
| Thereafter | |||||
NOTE 9 – LEASES
Certain real property assets for our Copley, Ohio location were sold on March 15, 2021, as described in Note 24. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 and expiring on March 31, 2033. The lease is classified as a finance lease with total future minimum payments during the initial term of the lease of approximately $5.6 million as of September 30, 2021. An incremental borrowing rate of 7.19 % was used to determine the right-of-use (the "ROU") asset. As of September 30, 2021, a $3.5 million ROU asset is recorded in net property, plant and equipment, and finance lease with corresponding liabilities of $3.8 million in other accrued liabilities and other non-current finance liabilities in our Condensed Consolidated Balance Sheets.
Certain real property assets for our Lancaster, Ohio location were sold on August 13, 2021, as described in Note 24. In conjunction with the sale, we executed a leaseback agreement commencing August 13, 2021 and expiring on August 31, 2041. The lease is classified as a finance lease with total future minimum payments during the initial term of the lease of approximately $36.6 million as of September 30, 2021. An incremental borrowing rate of 6.65 % was used to determine the ROU asset. We recorded a $19.4 million ROU asset in net property, plant and equipment, and finance lease and corresponding liabilities of $19.5 million in other accrued liabilities and other non-current finance liabilities in our Condensed Consolidated Balance Sheets as of September 30, 2021.
On September 30, 2021, we acquired a 60 % controlling ownership stake in Illinois-based solar energy contractor Fosler Construction, as described in Note 24. As of September 30, 2021, there were two Fosler Construction leases classified as operating leases with total future minimum payments during the remaining term of the leases of approximately $1.5 million. As of September 30, 2021, a $1.1 million ROU asset is recorded in right-of-use assets with corresponding liabilities of $1.1 million in operating lease liabilities and non-current operating lease liabilities in our Condensed Consolidated Balance Sheets. As of September 30, 2021, there was one lease classified as a finance lease with total future minimum payments during the remaining term of the leases of approximately $1.5 million. An incremental borrowing rate of 6.65 % was used to determine the ROU asset. We recorded a $0.7 million ROU asset in net property, plant and equipment, and finance lease and corresponding liabilities of $0.7 million in other accrued liabilities and other non-current finance liabilities in our Condensed Consolidated Balance Sheets as of September 30, 2021.
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The components of lease expense included on our Condensed Consolidated Statements of Operations were as follows:
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
| (in thousands) | Classification | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||
| Operating lease expense: | ||||||||||||||||||||||||||
| Operating lease expense | Selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||||||||||
| Short-term lease expense | Selling, general and administrative expenses | |||||||||||||||||||||||||
Variable lease expense (1) | Selling, general and administrative expenses | |||||||||||||||||||||||||
| Total operating lease expense | $ | $ | $ | $ | ||||||||||||||||||||||
| Finance lease expense: | ||||||||||||||||||||||||||
| Amortization of right-of-use assets | Cost of operations | $ | $ | $ | $ | |||||||||||||||||||||
| Amortization of right-of-use assets | Selling, general and administrative expenses | |||||||||||||||||||||||||
| Interest on lease liabilities | Interest expense | |||||||||||||||||||||||||
| Total finance lease expense | $ | $ | $ | $ | ||||||||||||||||||||||
Sublease income (2) | Other – net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||
| Net lease cost | $ | $ | $ | $ | ||||||||||||||||||||||
(1) Variable lease expense primarily consists of common area maintenance expenses paid directly to lessors of real estate leases.
(2) Sublease income excludes rental income from owned properties, which is not material.
Other information related to leases is as follows:
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||
| Operating cash flows from finance leases | |||||||||||
| Financing cash flows from finance leases | ( | ||||||||||
| (in thousands) | September 30, 2021 | December 31, 2020 | |||||||||
| Right-of-use assets obtained in exchange for lease liabilities: | |||||||||||
| Operating leases | $ | $ | |||||||||
| Finance leases | $ | $ | |||||||||
| Weighted-average remaining lease term: | |||||||||||
| Operating leases (in years) | |||||||||||
| Finance leases (in years) | |||||||||||
| Weighted-average discount rate: | |||||||||||
| Operating leases | % | % | |||||||||
| Finance leases | % | % | |||||||||
20
Amounts relating to leases were presented on our Condensed Consolidated Balance Sheets in the following line items:
| (in thousands) | ||||||||||||||
| Assets: | Classification | September 30, 2021 | December 31, 2020 | |||||||||||
| Operating lease assets | Right-of-use assets | $ | $ | |||||||||||
| Finance lease assets | Net property, plant and equipment, and finance lease | |||||||||||||
| Total non-current lease assets | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||
| Current | ||||||||||||||
| Operating lease liabilities | Operating lease liabilities | $ | $ | |||||||||||
| Finance lease liabilities | Financing lease liabilities | |||||||||||||
| Non-current | ||||||||||||||
| Operating lease liabilities | Non-current operating lease liabilities | |||||||||||||
| Finance lease liabilities | Non-current finance lease liabilities | |||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
| (in thousands) | Operating Leases | Finance Leases | Total | ||||||||
| 2021 (excluding the nine months ended September 30, 2021) | $ | $ | $ | ||||||||
| 2022 | |||||||||||
| 2023 | |||||||||||
| 2024 | |||||||||||
| 2025 | |||||||||||
| Thereafter | |||||||||||
| Total | $ | $ | $ | ||||||||
| Less imputed interest | ( | ( | ( | ||||||||
| Lease liability | $ | $ | $ | ||||||||
NOTE 10 – ACCRUED WARRANTY EXPENSE
We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Balance at beginning of period | $ | $ | |||||||||
| Additions | |||||||||||
| Expirations and other changes | ( | ( | |||||||||
| Payments | ( | ( | |||||||||
| Translation and other | ( | ||||||||||
| Balance at end of period | $ | $ | |||||||||
We accrue estimated expense included in cost of operations on our Condensed Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In
21
NOTE 11 – RESTRUCTURING ACTIVITIES
The Company incurred restructuring charges in the three months ended September 30, 2021 and 2020. The charges primarily consist of severance and business service transition costs related to actions taken, including as part of the Company’s strategic, market-focused organizational and re-branding initiative. During 2020, these charges also include actions taken to address the impact of COVID-19 on our business.
The following tables summarizes the restructuring activity incurred by segment:
| Three months ended September 30, | Three months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands) | Total | Severance and related costs | Other (1) | Total | Severance and related costs | Other (1) | |||||||||||||||||
| B&W Renewable segment | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| B&W Environmental segment | |||||||||||||||||||||||
| B&W Thermal segment | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| (in thousands) | Total | Severance and related costs | Other (1) | Total | Severance and related costs | Other (1) | |||||||||||||||||
| B&W Renewable segment | $ | $ | $ | $ | $ | $ | |||||||||||||||||
| B&W Environmental segment | |||||||||||||||||||||||
| B&W Thermal segment | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cumulative costs to date | $ | ||||||||||||||||||||||
Restructuring liabilities are included in other accrued liabilities on our Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | |||||||||||||||||||||||||
| Restructuring expense | |||||||||||||||||||||||||||||
| Payments | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance at end of period | $ | $ | $ | $ | |||||||||||||||||||||||||
The payments shown above for the three months ended September 30, 2021 and 2020 relate primarily to severance and business service transition costs. Accrued restructuring liabilities at September 30, 2021 and 2020 relate primarily to employee termination benefits and business service transition costs.
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NOTE 12 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
| Pension Benefits | Other Benefits | ||||||||||||||||||||||||||||||||||||||||||||||
| Three months ended September 30, | Nine months ended September 30, | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Amortization of prior service cost (credit) | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Recognized net actuarial gain | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
Benefit plans, net (1) | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
Service cost included in COS (2) | |||||||||||||||||||||||||||||||||||||||||||||||
| Net periodic benefit cost (benefit) | $ | ( | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||
(1) Benefit plans, net, which is presented separately in our Condensed Consolidated Statements of Operations, is not allocated to the segments.
(2) Service cost related to a small group of active participants is presented within cost of operations in our Condensed Consolidated Statement of Operations and is allocated to the B&W Thermal segment.
Recognized net actuarial gain consists primarily of our reported actuarial gain and the difference between the actual return on plan assets and the expected return on plan assets. Total mark to market (“MTM”) adjustments for our pension benefit plans were gains of $2.3 no no
We made contributions to our pension and other postretirement benefit plans totaling $0.4 million and $24.7 million during the three and nine months ended September 30, 2021, respectively, as compared to $0.5 million and $1.6 million during the three and nine months ended September 30, 2020, respectively. Contributions made during the three months ended September 30, 2021 includes no interest and during the nine months ended September 30, 2021 includes $0.4 million of interest as required per the CARES Act that was signed into law on March 27, 2020.
NOTE 13 – 2021 SENIOR NOTES OFFERING
On February 12, 2021, we completed a public offering of $125.0 million aggregate principal amount of our 8.125 % senior notes due 2026 (the "Senior Notes"). At the completion of the offering, we received net proceeds of approximately $120.0 million after deducting underwriting discounts, commissions, and before expenses.
In addition to the public offering, we issued $35.0 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Last Out Term Loan Tranche A-3 in a concurrent private offering.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell to or through B. Riley Securities, Inc., from time to time, additional Senior Notes up to an aggregate principal amount of $150.0 million of Senior Notes. The Senior Notes have the same terms as (other than date of issuance), form a single series of debt securities with and have the same CUSIP number and be fungible with, the Senior Notes issued February 12, 2021, as described above.
As of September 30, 2021, the Company has sold $25.6 million aggregate principal amount of Senior Notes under the sales agreement disclosed above for $26.0 million of net proceeds after commissions and fees.
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The components of the Senior Notes are as follows:
| (in thousands) | September 30, 2021 | ||||
| $ | |||||
| Unamortized deferred financing costs | ( | ||||
| Unamortized premium | |||||
| Net debt balance | $ | ||||
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes bear interest at the rate of 8.125 % per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on April 30, 2021. The Senior Notes mature on February 28, 2026.
NOTE 14 – LAST OUT TERM LOANS
Effective with the new debt facilities the Company entered into on June 30, 2021, as described in Note 15 below, the Company has no remaining Last Out Term Loans and no further borrowings thereunder are available. The Last our Term Loan activity is described as follows:
| Last Out Term Loan Tranche | ||||||||||||||
| (in thousands) | A-3 | A-4 | A-6 | Total | ||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ||||||||||
| Payments in cash | ( | ( | ( | ( | ||||||||||
| Equitized deemed prepayment - preferred stock issuance | ( | ( | ||||||||||||
| Deemed prepayment - senior notes issuance | ( | ( | ||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | ||||||||||
NOTE 15 – REVOLVING DEBT
Debt Facilities
On June 30, 2021, we entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as administrative agent (“PNC”) and a letter of credit agreement (the “Letter of Credit Agreement”) with PNC, pursuant to which PNC agreed to issue up to $110 million in letters of credit that is secured in part by cash collateral provided by an affiliate of MSD Partners, MSD PCOF Partners XLV, LLC (“MSD”), as well as a reimbursement, guaranty and security agreement with MSD, as administrative agent, and the cash collateral providers from time to time party thereto, along with certain of our subsidiaries as guarantors, pursuant to which we are obligated to reimburse MSD and any other cash collateral provider to the extent the cash collateral provided by MSD and any other cash collateral provider to secure the Letter of Credit Agreement is drawn to satisfy draws on letters of credit (the “Reimbursement Agreement” and collectively with the Revolving Credit Agreement and Letter of Credit Agreement, the “Debt Documents” and the facilities thereunder, the “Debt Facilities”). The obligations of the Company under each of the Debt Facilities are guaranteed by certain existing and future domestic and foreign subsidiaries of the Company. B. Riley Financial, Inc. (“B. Riley”), a related party, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as described below. The Company expects to use the proceeds and letter of credit availability under the Debt Facilities for working capital purposes and general corporate purposes, including to backstop certain letters of credit issued under our previous A&R Credit Agreement, dated as of May 14, 2020 (as amended, restated or otherwise modified from time to time), by and among the Company, as borrower, Bank of America, N.A., as administrative agent, the lenders and the other parties from time to time party thereto, which was repaid and commitments thereunder terminated as of June 30, 2021. The Revolving Credit Agreement matures on June 30, 2025. As of September 30, 2021, no borrowings have occurred under the Revolving Credit Agreement and under the Letter of Credit Agreement, usage consisted of $19.5 million of financial letters of credit and $69.0 million of performance letters of credit.
Each of the Debt Facilities has a maturity date of June 30, 2025. The interest rates applicable under the Revolving Credit Agreement float at a rate per annum equal to either (i) a base rate plus 2.0 % or (ii) 1 or 3 month reserve-adjusted LIBOR rate
24
plus 3.0 %. The interest rates applicable to the Reimbursement Agreement float at a rate per annum equal to either (i) a base rate plus 6.50 % or (ii) 1 or 3 month reserve-adjusted LIBOR plus 7.50 %. Under the Letter of Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) administrative fees of 0.75 % and (ii) fronting fees of 0.25 %. Under the Revolving Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) letter of credit commitment fees of 3.0 % and (ii) letter of credit fronting fees of 0.25 %. Under each of the Revolving Credit Agreement and the Letter of Credit Agreement, we are required to pay a facility fee equal to 0.375 % per annum of the unused portion of the Revolving Credit Agreement or the Letter of Credit Agreement, respectively. The Company is permitted to prepay all or any portion of the loans under the Revolving Credit Agreement prior to maturity without premium or penalty. Prepayments under the Reimbursement Agreement shall be subject to a prepayment fee of 2.25 % in the first year after closing, 2.0 % in the second year after closing and 1.25 % in the third year after closing, with no prepayment fee payable thereafter.
The Company has mandatory prepayment obligations under the Reimbursement Agreement upon the receipt of proceeds from certain dispositions or casualty or condemnation events. The Revolving Credit Agreement and Letter of Credit Agreement require mandatory prepayments to the extent of an over-advance.
The obligations under the Debt Facilities are secured by substantially all assets of the Company and each of the guarantors, in each case subject to inter-creditor arrangements. As noted above, the obligations under the Letter of Credit Facility are also secured by the cash collateral provided by MSD and any other cash collateral provider thereunder.
The Debt Documents contain certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. The Debt Documents require the Company to comply with certain financial maintenance covenants, including a quarterly fixed charge coverage test of not less than 1.00 to 1.00, a quarterly senior net leverage ratio test of not greater than 2.50 to 1.00, a non-guarantor cash repatriation covenant not to exceed $35 million at any one time, a minimum liquidity covenant of at least $30.0 million at all times, and an annual cap on maintenance capital expenditures of $7.5 million. The Debt Documents also contain customary events of default (subject, in certain instances, to specified grace periods) including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under the respective facility, the failure to comply with certain covenants and agreements specified in the applicable Debt Agreement, defaults in respect of certain other indebtedness, and certain events of insolvency. If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Debt Documents may become due and payable immediately.
In connection with the Company’s entry into the Debt Documents, on June 30, 2021, B. Riley, a related party, entered into a Guaranty Agreement in favor of MSD, in its capacity as administrative agent under the Reimbursement Agreement, for the ratable benefit of MSD, the cash collateral providers and each co-agent or sub-agent appointed by MSD from time to time (the “B. Riley Guaranty”). The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations under the Reimbursement Agreement. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and the acceleration of the Company’s obligations under the Reimbursement Agreement. Under a fee letter with B. Riley, the Company agreed to pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty. The Company entered into a reimbursement agreement with B. Riley governing the Company’s obligation to reimburse B. Riley to the extent the B. Riley Guaranty is called upon by the agent or lenders under the Reimbursement Agreement.
A&R Credit Agreement
As described above, the A&R Credit Agreement commitments were terminated, all loans were repaid and all outstanding and undrawn letters of credit were collateralized on June 30, 2021. The Company recognized a gain on debt extinguishment of $6.5 million in the quarter ended June 30, 2021, primarily representing the write-off of accrued revolver fees of $11.3 million offset by the unamortized deferred financing fees of $4.8 million related to the prior A&R Credit Agreement.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees as of September 30, 2021 was $53.1 million. The aggregate value of the outstanding letters of credit provided under the Letter of Credit Agreement backstopping letters of credit or bank guarantees was $21.7 million as of September 30, 2021. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $29.8 million are subject to foreign currency revaluation.
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We have also posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. These bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2021, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $157.6 million. The aggregate value of the letters of credit backstopping surety bonds was $13.1 million.
Our ability to obtain and maintain sufficient capacity under our new Debt Facilities is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
Other Indebtedness - Loans Payable
During the nine months ended September 30, 2021, our Denmark subsidiary received three unsecured interest free loans totaling $3.4 million under a local government loan program related to COVID-19. The loans of $0.8 million, $1.7 million and $0.9 million are payable in April 2022, May 2022 and May 2023, respectively. The loan payable in May 2023 is included in long term loans payables in our Condensed Consolidated Balance Sheets.
As of September 30, 2021, as a result of our recent acquisition of a 60 % controlling ownership stake in Fosler Construction Company Inc. (“Fosler Construction”) as described in Note 24, Fosler Construction has two loans totaling $7.6 million. Both loans have a variable interest rate with a minimum rate of 6 % and are payable January 1, 2022. Fosler Construction also has loans primarily for vehicles and equipment totaling $0.9 million at September 30, 2021. The vehicle and equipment loans are included in long term loans payables in our Condensed Consolidated Balance Sheets.
NOTE 16 – PREFERRED STOCK
On May 7, 2021, we completed a public offering of our 7.75 % Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters (the “Underwriters”). At the closing, we issued to the public 4,000,000 shares of our Preferred Stock, at an offering price of $25.00 per share for net proceeds of approximately $95.7 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75 % per year on the liquidation preference amount of $25.00 per share and payable quarterly in arrears.
On May 26, 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to the grant to the underwriters described above, at an offering price of $25.00 per share for net proceeds of approximately $10.7 million after deducting underwriting fees and commissions.
The Preferred Stock ranks, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up: (1) senior to all classes or series of our common stock and to all other capital stock issued by us expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of our capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all our existing and future indebtedness.
The Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. We will pay cumulative cash dividends on the Preferred Stock when, as and if declared by our Board of Directors (or a duly authorized committee of our Board of Directors), only out of funds legally available for payment of dividends. Dividends on the Preferred Stock will accrue on the stated amount of $25.00 per share of the Preferred Stock at a rate per annum equal to 7.75 % (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the Preferred Stock declared by our Board of Directors (or a duly authorized committee of our Board of Directors) will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year.
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On June 8, 2021, the Company's Board of Directors approved a dividend of $0.290625 per share of the Company's outstanding Preferred Stock, with a record date for the dividend of June 18, 2021 and a payment date of June 30, 2021. On June 30, 2021, the Company paid dividends totaling $1.7 million.
On September 2, 2021, the Company's Board of Directors approved a dividend of $0.484375 per share of the Company's outstanding Preferred Stock, with a record date for the dividend of September 15, 2021 and a payment date of September 30, 2021. On September 30, 2021, the Company paid dividends totaling $3.7 million. After the Company paid the dividends on September 30, 2021, there are no cumulative undeclared dividends of the Preferred Stock at September 30, 2021.
On June 1, 2021, the Company and B. Riley, a related party, entered into an agreement (the “Exchange Agreement”) pursuant to which we (i) issued B. Riley 2,916,880 shares of our Preferred Stock, representing an exchange price of $25.00 per share and paid $0.4 million in cash, and (ii) paid $0.9 million in cash to B. Riley for accrued interest due, in exchange for a deemed prepayment of $73.3 million of our then existing term loans with B. Riley under the Company’s A&R Credit Agreement.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in connection with the offer and to or through B. Riley Securities, Inc., from time to time, additional shares of Preferred Stock up to an aggregate amount of $76.0 million of Preferred Stock. The Preferred Stock will have the same terms as (other than date of issuance and first dividend) with and have the same CUSIP number and be fungible with, the Preferred Stock issued during May 2021. The first dividend for the Preferred Stock issued thereunder, when, as and if declared, will accumulate and be cumulative from the dividend payment date (March 31, June 30, September 30 and December 31 of each year) for which full cumulative dividends have been paid immediately prior to the original issue date for each such share.
As of September 30, 2021, the Company sold $5.9 million aggregate amount of Preferred Stock for $5.9 million net proceeds after commission and fees related to the July 7, 2021 sales agreement disclosed above.
The net proceeds of the offerings are intended to be used for general corporate purposes, including clean energy growth initiatives, potential future acquisitions and reduction of net leverage.
NOTE 17 – COMMON STOCK
On February 12, 2021, we completed a public offering of our common stock pursuant to an underwriting agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters. At the closing, we issued to the public 29,487,180 shares of our common stock and received net proceeds of approximately $163.0 million after deducting underwriting discounts and commissions, but before expenses.
The net proceeds of the offering were used to make a prepayment toward the balance outstanding under our U.S. Revolving Credit Facility and permanently reduce the commitments under our senior secured credit facilities.
On May 20, 2021, at the 2021 annual meeting of stockholders of the Company, the stockholders of the Company, upon the recommendation of the Company’s Board of Directors, approved the Babcock & Wilcox Enterprises, Inc. 2021 Long-Term Incentive Plan. The 2021 Plan became effective upon such stockholder approval. The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2021 Plan equals: (1) 1,250,000 shares, plus (2) the number of any shares subject to awards granted under the Company’s Amended and Restated 2015 Long-Term Incentive Plan (the “2015 Plan”) and outstanding as of May 20, 2021 which expire, or are terminated, surrendered, or forfeited for any reason without issuance of such shares (including for outstanding performance share awards to the extent they are earned at less than maximum). No new awards may be granted under the 2015 Plan. As of May 20, 2021 (immediately prior to the stockholder approval of the 2021 Plan), the total number of shares of our common stock subject to outstanding awards granted under the 2015 Plan was 2,007,152 shares.
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NOTE 18 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense in our Condensed Consolidated Financial Statements consisted of the following components:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Components associated with borrowings from: | |||||||||||||||||||||||
| Senior Notes | $ | $ | $ | $ | |||||||||||||||||||
| Last Out Term Loans - cash interest | |||||||||||||||||||||||
| Last Out Term Loans - equitized interest | |||||||||||||||||||||||
| U.S. Revolving Credit Facility | |||||||||||||||||||||||
| Components associated with amortization or accretion of: | |||||||||||||||||||||||
| Revolving Credit Agreement | |||||||||||||||||||||||
| Senior Notes | |||||||||||||||||||||||
| Last Out Term Loans - discount and financing fees | ( | ||||||||||||||||||||||
| U.S. Revolving Credit Facility - deferred financing fees and commitment fees | |||||||||||||||||||||||
| U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16 | |||||||||||||||||||||||
| Components associated with interest from: | |||||||||||||||||||||||
| Lease liabilities | |||||||||||||||||||||||
| Other interest expense | |||||||||||||||||||||||
| Total interest expense | $ | $ | $ | $ | |||||||||||||||||||
The following table provides a reconciliation of cash and cash equivalents and restricted cash reporting that sum to the total cash amount in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows:
| (in thousands) | September 30, 2021 | December 31, 2020 | September 30, 2020 | ||||||||||||||
| Held by foreign entities | $ | $ | $ | ||||||||||||||
| Held by U.S. entities | |||||||||||||||||
| Cash and cash equivalents | |||||||||||||||||
| Reinsurance reserve requirements | |||||||||||||||||
| Restricted foreign accounts | |||||||||||||||||
| Bank guarantee collateral | |||||||||||||||||
| Letters of credit collateral | |||||||||||||||||
| Restricted cash and cash equivalents | |||||||||||||||||
| Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows | $ | $ | $ | ||||||||||||||
As disclosed above, letters of credit collateral of $6.9 million as of September 30, 2021 represents cash pledged to secure the outstanding and undrawn letters of credit issued under our prior A&R Credit Agreement, most of which are expected to be
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cancelled and replaced by new letters of credit issued by PNC, as described in Note 15 – Revolving Debt. We expect the completion of the issuance of new letters of credit to cover the remaining collateral balance by December 31, 2021.
The following cash activity is presented as a supplement to our Condensed Consolidated Statements of Cash Flows and is included in Net cash used in activities:
| Nine months ended September 30, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Income tax payments, net | $ | $ | |||||||||
Interest payments on our | $ | $ | |||||||||
| Interest payments on our U.S. Revolving Credit Facility | |||||||||||
| Interest payments on our Last Out Term Loans | |||||||||||
| Total cash paid for interest | $ | $ | |||||||||
NOTE 19 – PROVISION FOR INCOME TAXES
In the three months ended September 30, 2021, income tax expense was $0.3 million, resulting in an effective tax rate of 2.2 %. In the three months ended September 30, 2020, income tax benefit was $0.5 million, resulting in an effective tax rate of (1.5 )%.
In the nine months ended September 30, 2021, income tax expense was $6.7 million, resulting in an effective tax rate of 83.2 %. In the nine months ended September 30, 2020, income tax benefit was $0.5 million, resulting in an effective tax rate of 2.7 %.
Our effective tax rate for the three and nine months ended September 30, 2021 and 2020 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets and discrete items. We have favorable discrete items of $0.6 million and unfavorable discrete items of $2.9 million for the three and nine months ended September 30, 2021, respectively, which primarily represent withholding taxes ($3.0 million expense), adjustment to our United Kingdom deferred tax liabilities due to an enacted change in tax rate ($0.6 million expense), return to provision adjustments ($0.4 million benefit), and miscellaneous items ($0.3 million benefit) for the nine months ended September 30, 2021. We had unfavorable discrete items of $0.1 million and favorable discrete items of $1.2 million for the three and nine months ended September 30, 2020, respectively.
We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the United States federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden, and the United Kingdom, with effective tax rates ranging between approximately 19% and 30%. We provide for income taxes based on the tax laws and rates in the jurisdictions where we conduct operations. These jurisdictions may have regimes of taxation that vary in both nominal rates and the basis on which these rates are applied. Our consolidated effective income tax rate can vary from period to period due to these foreign income tax rate variations, changes in the jurisdictional mix of our income, and valuation allowances.
NOTE 20 – CONTINGENCIES
Litigation Relating to Boiler Installation and Supply Contract
On December 27, 2019, a complaint was filed against Babcock & Wilcox by P.H. Glatfelter Company (“Glatfelter”) in the United States District Court for the Middle District of Pennsylvania, Case No. 1:19-cv-02215-JPW, alleging claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment (the “Glatfelter Litigation”). The complaint alleges damages in excess of $58.9 million. On March 16, 2020 we filed a motion to dismiss, and on December 14, 2020 the court issued its order dismissing the fraud and negligent misrepresentation claims and finding that, in the event that parties’ contract is found to be valid, Plaintiffs’ claims for damages will be subject to the contractual cap on liability (defined as the $11.7 million purchase price subject to certain adjustments). On January 11, 2021, we filed our answer and a counterclaim for breach of contract, seeking damages in excess of $2.9 million. We intend to continue to vigorously litigate the action. However, given the preliminary stage of the litigation, it is too early to determine if the outcome of the Glatfelter
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Litigation will have a material adverse impact on our condensed consolidated financial condition, results of operations or cash flows.
SEC Investigation
The staff of the SEC has informed the Company that its investigation is now concluded and that the staff does not intend to recommend any enforcement action against the Company. As the Company previously disclosed, the U.S. SEC had been conducting a formal investigation of the Company, focusing on the accounting charges and related matters involving the Company's B&W Renewable segment from 2015-2019.
Stockholder Derivative and Class Action Litigation
On April 14, 2020, a putative B&W stockholder (“Plaintiff”) filed a derivative and class action complaint against certain of the Company’s directors (current and former), executives and significant stockholders (“Defendants”) and the Company (as a nominal defendant). The action was filed in the Delaware Court of Chancery and is captioned Parker v. Avril, et al., C.A. No. 2020-0280-PAF ("Stockholder Litigation"). Plaintiff alleges that Defendants, among other things, did not properly discharge their fiduciary duties in connection with the 2019 rights offering and related transactions. The case is currently in discovery. We believe that the outcome of the Stockholder Litigation will not have a material adverse impact on our condensed consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.
NOTE 21 – COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are generally reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first three quarters of 2021 and 2020 were as follows:
| (in thousands) | Currency translation loss | Net unrecognized loss related to benefit plans (net of tax) | Total | ||||||||
| Balance at December 31, 2020 | $ | ( | $ | ( | $ | ( | |||||
| Other comprehensive loss before reclassifications | ( | ( | |||||||||
| Reclassified from AOCI to net income (loss) | ( | ( | |||||||||
| Net other comprehensive (loss) income | ( | ( | |||||||||
| Balance at March 31, 2021 | $ | ( | $ | ( | $ | ( | |||||
| Other comprehensive loss before reclassifications | ( | ( | |||||||||
| Reclassified from AOCI to net income | |||||||||||
| Net other comprehensive (loss) income | ( | ( | |||||||||
| Balance at June 30, 2021 | $ | ( | $ | ( | $ | ( | |||||
| Other comprehensive income (loss) before reclassifications | ( | ( | |||||||||
| Reclassified from AOCI to net income (loss) | |||||||||||
| Net other comprehensive income (loss) | ( | ( | |||||||||
| Balance at September 30, 2021 | $ | ( | $ | ( | $ | ( | |||||
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| (in thousands) | Currency translation gain (loss) | Net unrecognized loss related to benefit plans (net of tax) | Total | ||||||||
| Balance at December 31, 2019 | $ | $ | ( | $ | |||||||
| Other comprehensive income before reclassifications | |||||||||||
| Reclassified from AOCI to net loss | ( | ( | |||||||||
| Net other comprehensive income (loss) | ( | ||||||||||
| Balance at March 31, 2020 | $ | $ | ( | $ | |||||||
| Other comprehensive loss before reclassifications | ( | ( | |||||||||
| Reclassified from AOCI to net loss | ( | ( | |||||||||
| Net other comprehensive loss | ( | ( | ( | ||||||||
| Balance at June 30, 2020 | $ | $ | ( | $ | ( | ||||||
| Other comprehensive loss before reclassifications | ( | $ | ( | ||||||||
| Reclassified from AOCI to net income (loss) | $ | ( | ( | ||||||||
| Net other comprehensive (loss) income | ( | ( | ( | ||||||||
| Balance at September 30, 2020 | $ | ( | $ | ( | $ | ( | |||||
The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
| AOCI component | Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||
| Release of currency translation adjustment with the sale of business | Loss on sale of business | $ | $ | $ | $ | ||||||||||||||||||||||||
| Amortization of prior service cost on benefit obligations | Benefit plans, net | ( | ( | ||||||||||||||||||||||||||
| Net (loss) income | $ | ( | $ | $ | $ | ||||||||||||||||||||||||
NOTE 22 – FAIR VALUE MEASUREMENTS
The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic, Fair Value Measurements and Disclosures).
| (in thousands) | ||||||||||||||
| Available-for-sale securities | September 30, 2021 | Level 1 | Level 2 | |||||||||||
| Corporate notes and bonds | $ | $ | $ | |||||||||||
| Mutual funds | ||||||||||||||
| United States Government and agency securities | ||||||||||||||
| Total fair value of available-for-sale securities | $ | $ | $ | |||||||||||
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| (in thousands) | ||||||||||||||
| Available-for-sale securities | December 31, 2020 | Level 1 | Level 2 | |||||||||||
| Corporate notes and bonds | $ | $ | $ | |||||||||||
| Mutual funds | ||||||||||||||
| Corporate Stocks | ||||||||||||||
| United States Government and agency securities | ||||||||||||||
| Total fair value of available-for-sale securities | $ | $ | $ | |||||||||||
Available-For-Sale Securities
Our investments in available-for-sale securities are presented in other assets on our Condensed Consolidated Balance Sheets with contractual maturities ranging from 0 -5 years.
Senior Notes
See Note 13 above for a discussion of our recent offerings of Senior Notes. The fair value of the Senior Notes is based on readily available quoted market prices as of September 30, 2021.
| (in thousands) | September 30, 2021 | ||||||||||
| Senior Notes | Carrying Value | Estimated Fair Value | |||||||||
| $ | $ | ||||||||||
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
•Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying Condensed Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
•Last Out Term Loans and Revolving Debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on Level 2 inputs such as the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our Last Out Term Loans and Revolving Debt approximated their carrying value at December 31, 2020.
•Warrants. The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
Non-recurring fair value measurements
The purchase price allocation associated with the September 30, 2021 acquisition of controlling ownership of Fosler Construction Company Inc. ("Fosler Construction") required significant fair value measurements using unobservable inputs ("Level 3" inputs as defined in the fair value hierarchy established by FASB Topic Fair Value Measurements and Disclosures). See Note 24 for additional information regarding the Fosler Construction acquisition.
NOTE 23 – RELATED PARTY TRANSACTIONS
Transactions with B. Riley
Based on its Schedule 13D filings with the SEC, B. Riley beneficially owns 30.3 % of our outstanding common stock as of September 30, 2021.
B. Riley was party to the Last Out Term Loans under our A&R Credit Agreement, as described in Note 14.
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We entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 and amended the agreement on November 9, 2020 to retain the services of Mr. Kenny Young, to serve as our Chief Executive Officer until December 31, 2023, unless terminated by either party with thirty days written notice. Under this agreement, payments are $0.75 million per annum, paid monthly. Subject to the achievement of certain performance objectives as determined by the Compensation Committee of the Board, a bonus or bonuses may also be earned and payable to BRPI Executive Consulting, LLC.
Total fees associated with B. Riley related to the Last Out Term Loans and services of Mr. Kenny Young, both as described above, were $0.2 million and $0.6 million for the three and nine months ended September 30, 2021, respectively, and were $0.1 million and $7.6 million for the three and nine months ended September 30, 2020, respectively.
On November 13, 2020 we entered into an agreement with B. Riley Principal Merger Corp. II, an affiliate of B. Riley, to purchase 200,000 shares of Class A common stock of Eos Energy Storage LLC for an aggregate purchase price of $2.0 million. The shares were sold in January 2021 for which the Company recognized net proceeds of $4.5 million.
The public offering of our Senior Notes in February 2021, as described in Note 13, was conducted pursuant to an underwriting agreement dated February 10, 2021, between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date on February 12, 2021, we paid B. Riley Securities, Inc. $5.2 million for underwriting fees and other transaction cost related to the Senior Notes offering.
The public offering of our common stock, as described in Note 17, was conducted pursuant to an underwriting agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters. Also on February 12, 2021, we paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction costs related to the offering.
On February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to which we agreed to issue to B. Riley $35.0 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley Financial in the Exchange, as described in Note 13.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $150.0 million of 8.125 % senior notes due 2026 to or through B. Riley Securities, Inc., as described in Note 13. As of September 30, 2021, we paid B. Riley Securities, Inc. $0.5 million for underwriting fees and other transaction costs related to the offering.
The public offering of our 7.75 % Series A Cumulative Perpetual Preferred Stock, as described in Note 16, was conducted pursuant to an underwriting agreement dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters. At the closing date on May 7, 2021, we paid B. Riley Securities, Inc. $4.3 million for underwriting fees and other transaction cost related to the Preferred Stock offering.
On May 26, 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to the grant to the underwriters, as described in Note 16, and paid B. Riley Securities, Inc. $0.4 million for underwriting fees in conjunction with the transaction.
On June 1, 2021, we issued 2,916,880 shares of the Company’s 7.75 % Series A Cumulative Perpetual Preferred Stock and paid $0.4 million in cash due to B. Riley, a related party, in exchange for a deemed prepayment of $73.3 million of our then existing Last Out Term Loans and paid $0.9 million in cash for accrued interest, as described in Note 16.
On June 30, 2021, we entered into new Debt Facilities, as described in Note 15. In connection with the Company’s entry into the Debt Facilities, B. Riley Financial, Inc., an affiliate of B. Riley, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as describe in Note 15. Under a fee letter with B. Riley, the Company shall pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $76 million of Preferred Stock to or through B. Riley Securities, Inc., as described in Note 16. As of September 30, 2021, we paid B. Riley Securities, Inc. $0.1 million for underwriting fees and other transaction costs related to the offering.
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Transactions with Vintage Capital Management, LLC
On March 26, 2021, Vintage and B. Riley completed a transaction pursuant to which B. Riley agreed to purchase from Vintage, and Vintage agreed to sell to B. Riley, all 10,720,785 shares of our common stock owned by Vintage.
Based on its Schedule 13D filings, Vintage beneficially owns 0 % of our outstanding common stock as of September 30, 2021.
NOTE 24 – ACQUISITIONS, ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS
Acquisitions
On September 30, 2021, we acquired a 60 % controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) for approximately $27.2 million in cash plus a contingent consideration arrangement. The acquisition was accounted for under the acquisition method of accounting for business combinations. We are in the process of completing the purchase price allocation associated with the Fosler Construction business combination and as a result, the provisional measurements of goodwill and any other assets and liabilities acquired are subject to change. Fosler Construction provides commercial, industrial and utility-scale solar services and owns two community solar projects in Illinois being developed under the Illinois Solar for All program. Fosler Construction was founded in 1998 and employs approximately 120 people with a track record of successfully completing solar projects profitably with union labor and aligning its model with a growing number of renewable project incentives in the U.S. We believe Fosler Construction is positioned to capitalize on the high-growth solar market in the U.S. and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. Fosler Construction will be reported as part of our B&W Renewable segment, and it will operate under the name Fosler Solar, a Babcock and Wilcox company.
The total fair value of consideration for the acquisition is $33.4 million, including $6.2 million in estimated fair value of the contingent consideration arrangement. In connection with the acquisition, the Company agreed to pay contingent consideration based on the achievement of specified objectives, including reaching targeted revenue thresholds. The range of undiscounted amounts the Company could be required to pay under the contingent consideration arrangement is between $0.0 million and $10.0 million.
We estimated fair values primarily using the discounted cash flow method at September 30, 2021 for the preliminary allocation of consideration to the assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined.
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The provisional measurements noted in the table below are preliminary and subject to modification in the future. The preliminary purchase price allocation to assets acquired and liabilities assumed in the acquisition was:
| (in thousands) | Estimated Acquisition Date Fair Value | ||||
| Accounts receivable | |||||
| Contracts in progress | |||||
| Other current assets | |||||
| Property, plant and equipment | |||||
Goodwill(1) | |||||
| Other assets | |||||
| Right of use assets | |||||
| Debt | ( | ||||
| Current liabilities | ( | ||||
| Non-current lease liabilities | ( | ||||
| Other non-current liabilities | ( | ||||
Non-controlling interest(2) | ( | ||||
| Net acquisition cost | $ | ||||
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Fosler Construction acquisition, goodwill represents Fosler's ability to significantly expand EPC and O&M services among new customers across the U.S. by leveraging B&W's access to capital and geographic reach. Goodwill is not expected to be deductible for U.S federal income tax purposes.
Intangible assets is included in other assets above and consists of the following:
| (in thousands) | Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life | ||||||
| Customer Relationships | ||||||||
| Backlog | ||||||||
Total intangible assets(1) | $ | |||||||
(1) Intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth, profitability, discount rates and customer attrition. Such assumptions are classified as level 3 inputs within the fair value hierarchy.
The Company incurred approximately $0.4
Assets Held for Sale
Certain real property assets for the Copley, Ohio location were sold on March 15, 2021 for $4.0 million. We received $3.3 million of net proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 and expiring on March 31, 2033. These assets were treated as assets held for sale on our Condensed Consolidated Balance Sheets as of December 31, 2020.
Certain real property assets for the Lancaster, Ohio location were sold on August 13, 2021 for $18.9 million. We received $15.8 million of net proceeds after adjustments and expenses and recognized a gain on sale of $13.9 million. In conjunction with the sale, we executed a leaseback agreement commencing August 13, 2021 and expiring on August 31, 2041. These assets were treated as assets held for sale on our Condensed Consolidated Balance Sheets as of December 31, 2020.
In December 2019, we determined that a small business within the B&W Thermal segment met the criteria to be classified as held for sale. At December 31, 2020, the carrying value of the net assets planned to be sold approximated the estimated fair value less costs to sell. Refer to Divestitures below as this sale closed March 5, 2021.
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The following table summarizes the carrying value of the assets and liabilities held for sale at December 31, 2020:
| (in thousands) | December 31, 2020 | |||||||
| Accounts receivable – trade, net | $ | |||||||
| Accounts receivable – other | ||||||||
| Contracts in progress | ||||||||
| Inventories | ||||||||
| Other current assets | ||||||||
| Current assets held for sale | ||||||||
| Net property, plant and equipment | ||||||||
| Intangible assets | ||||||||
| Right-of-use-asset | ||||||||
| Non-current assets held for sale | ||||||||
| Total assets held for sale | $ | |||||||
| Accounts payable | $ | |||||||
| Accrued employee benefits | ||||||||
| Advance billings on contracts | ||||||||
| Accrued warranty expense | ||||||||
| Operating lease liabilities | ||||||||
| Other accrued liabilities | ||||||||
| Current liabilities held for sale | ||||||||
| Total liabilities held for sale | $ | |||||||
Divestitures
Effective March 5, 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, for $2.8 million. We received $2.0 million in gross proceeds before expenses and recorded an $0.8 million favorable contract asset for the amortization period from March 8, 2021 through December 31, 2023. For the nine months ended September 30, 2021, we recognized a $2.2 million pre-tax loss, inclusive of the recognition of $4.5 million of currency translation adjustment, on the sale of the business and after consideration of certain working capital adjustments that are in dispute. Additional adjustments may be necessary as this is finalized.
On March 17, 2020, we fully settled the remaining escrow associated with the sale of PBRRC and received $4.5 million in cash.
Discontinued Operations
On April 6, 2020, we fully settled the remaining escrow associated with the sale of the MEGTEC and Universal businesses and received $3.5 million in cash.
NOTE 25 – NEW ACCOUNTING STANDARDS
We adopted the following accounting standard during the nine months of 2021:
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update simplify the accounting for income taxes by removing exceptions related to the incremental approach for intra-period tax allocation, certain deferred tax liabilities, and the general methodology for calculating income taxes in an interim period. The amendment also provides simplification related to accounting for franchise (or similar) tax,
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evaluating the tax basis step up of goodwill, allocation of consolidated current and deferred tax expense, reflection of the impact of enacted tax law or rate changes in annual effective tax rate calculations in the interim period that includes enactment date, and other minor codification improvements. The impact of this standard on our condensed consolidated financial statements was immaterial.
New accounting standards not yet adopted that could affect our Condensed Consolidated Financial Statements in the future are summarized as follows:
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Equity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The amendments in this update affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Earnings Per Share (Topic 260). The amendments in this update do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. That is, accounting for those instruments continues to be subject to the requirements in other Topics. The amendments in this update do not affect a holder’s accounting for freestanding call options. The update is applicable to B&W as we have previously issued freestanding written call options however those options remain unexercised as of September 30, 2021 and they have not been modified or exchanged to date. The amendments are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We are currently evaluating the impact of the standards on our condensed consolidated financial statements.
In March 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This update is an amendment to ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting, which was issued in March 2020 and provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in the updates apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the updates do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in both updates are effective for all entities upon issuance and may be adopted any date on or after March 12, 2020 up to December 31, 2022. We are currently evaluating the impact of the standards on our condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40). The amendments in this update simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity by removing major separation models required under current U.S. GAAP. The amendments also improve the consistency of diluted earnings per share calculations. The amendments in this update are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of the standard on our condensed consolidated financial statements.
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses. This update is an amendment to the new credit losses standard, ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that was issued in June 2016 and clarifies that operating lease receivables are not within the scope of Topic 326. The new credit losses standard changes the accounting for credit losses for certain instruments. The new measurement approach is based on expected losses, commonly referred to as the current expected credit loss (CECL) model, and applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investment in leases, and reinsurance and trade receivables, as well as certain off-balance
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NOTE 26 – PROPOSED ACQUISITION
During the third quarter, we announced our intention to acquire 100 % of the equity interests of VODA A/S, a leading multi-brand aftermarket parts and service provider for the waste-to-energy and biomass-to-energy markets based in Vejen, Denmark, for approximately $30.0 million.
VODA focuses on energy producing incineration plants including waste-to-energy, biomass-to-energy or other fuels, providing service, engineering services, spare parts as well as general outage support and management. VODA has extensive experience within incineration technology, boiler / pressure parts, SRO, automation, and performance optimization.They employ people mainly in Denmark and Sweden. The planned acquisition of VODA aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses.
The foregoing planned acquisition is expected to close by the end of December 2021 and remains subject to the satisfaction or waiver of certain customary closing conditions specified in the share purchase agreement, including the receipt of Foreign Direct Investment clearance in Denmark by December 31, 2021.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW OF RESULTS
B&W is a growing, globally-focused renewable, environmental and thermal technologies provider with decades of experience providing diversified energy and emissions control solutions to a broad range of industrial, electrical utility, municipal and other customers. B&W’s innovative products and services are organized into three market-facing segments:
•Babcock & Wilcox Renewable: Cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, solar construction and installation, biomass energy and black liquor systems for the pulp and paper industry. B&W’s leading technologies support a circular economy, diverting waste from landfills to use for power generation and replacing fossil fuels, while recovering metals and reducing emissions.
•Babcock & Wilcox Environmental: A full suite of best-in-class emissions control and environmental technology solutions for utility, waste to energy, biomass, carbon black, and industrial steam generation applications around the world. B&W’s broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control, and mercury control.
•Babcock & Wilcox Thermal: Steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. B&W has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
On September 30, 2021, we acquired a 60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) for approximately $27.2 million in cash plus a contingent consideration arrangement. Fosler Construction provides commercial, industrial and utility-scale solar services and owns two community solar projects in Illinois being developed under the Illinois Solar for All program. Fosler Construction was founded in 1998 and employs approximately 120 people with a track record of successfully completing solar projects profitably with union labor and aligning its model with a growing number of renewable project incentives in the U.S. We believe Fosler Construction is positioned to capitalize on the high-growth solar market in the U.S. and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. Fosler Construction will be reported as part of our B&W Renewable segment, and it will operate under the name Fosler Solar, a Babcock and Wilcox company.
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Our business depends significantly on the capital, operations and maintenance expenditures of global electric power generating companies, including renewable and thermal powered heat generation industries and industrial facilities with environmental compliance policy requirements. Several factors may influence these expenditures, including:
•climate change initiatives promoting environmental policies which include renewable energy options utilizing waste-to-energy or biomass to meet legislative requirements and clean energy portfolio standards in the United States, European, Middle East and Asian markets;
•requirements for environmental improvements in various global markets;
•expectation of future governmental requirements to further limit or reduce greenhouse gas and other emissions in the United States, Europe and other international climate change sensitive countries;
•prices for electricity, along with the cost of production and distribution including the cost of fuels within the United States, Europe, Middle East and Asian based countries;
•demand for electricity and other end products of steam-generating facilities;
•level of capacity utilization at operating power plants and other industrial uses of steam production;
•requirements for maintenance and upkeep at operating power plants to combat the accumulated effects of usage;
•overall strength of the industrial industry; and
•ability of electric power generating companies and other steam users to raise capital.
Customer demand is heavily affected by the variations in our customers' business cycles and by the overall economies and energy, environmental and noise abatement needs of the countries in which they operate.
We recorded operating income of $14.8 million and $11.1 million in the three and nine months ended September 30, 2021, respectively, compared to operating income of $14.1 million and an operating loss of $3.9 million in the three and nine months ended September 30, 2020, respectively, and we showed improved results in our Environmental and Thermal segments as described below.
Adjusted EBITDA in the B&W Renewable segment was $11.4 million and $15.0 million in the three and nine months ended September 30, 2021, respectively, compared to $23.6 million and $22.0 million in the three and nine months ended September 30, 2020, respectively. The decline is primarily attributable to the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
Adjusted EBITDA in the B&W Environmental segment was $3.5 million and $7.3 million in the three and nine months ended September 30, 2021, respectively, compared to $2.2 million and $1.4 million in the three and nine months ended September 30, 2020, respectively. The increase is driven primarily by the higher volume partially offset by an increase in shared resources.
Adjusted EBITDA in the B&W Thermal segment was $9.2 million and $32.1 million in the three and nine months ended September 30, 2021, respectively, compared to $7.3 million and $22.9 million in the three and nine months ended September 30, 2020, respectively. This increase is primarily attributable to the increase in volume offset partially by product mix, an increase in expenses due to growth in Asia and Middle East, and an increase in shared resources due to higher volume.
We have manufacturing facilities in Mexico, the United States, Denmark and Scotland. Many aspects of our operations and properties could be affected by political developments, environmental regulations and operating risks. These and other factors may have a material impact on our international and domestic operations or our business as a whole.
Through our restructuring efforts, we continue to make significant progress to make our cost structure more variable and to reduce costs. We expect our cost saving measures to continue to translate to bottom-line results, with top-line growth driven by opportunities for our core technologies and support services across the B&W Renewable, B&W Environmental and B&W Thermal segments globally.
We have identified additional initiatives that are underway as of the date of this filing that are expected to further reduce costs, and we expect to continue to explore other cost saving initiatives to improve cash generation and evaluate additional non-core asset sales to continue to strengthen our liquidity. There are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. If one or more events related to these or other risks or
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uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.
Year-over-year comparisons of our results from continuing operations were also impacted by:
•$4.6 million and $8.0 million of restructuring costs were recognized in the three and nine months ended September 30, 2021, respectively, compared to $2.4 million and $6.7 million of restructuring costs recognized in the three and nine months ended September 30, 2020, respectively. The restructuring costs primarily related to severance and business service transition costs.
•$0.3 million and $2.6 million of financial advisory service fees were recognized in the three and nine months ended September 30, 2021, respectively, as compared to $1.7 million and $3.2 million in the corresponding periods of 2020. Financial advisory service fees are included in advisory fees and settlement costs in our Condensed Consolidated Statement of Operations.
•$1.0 million and $5.0 million of legal and other advisory fees were recognized in the three and nine months ended September 30, 2021, respectively, as compared to $1.4 million and $5.2 million in the corresponding periods of 2020 These fees are related to the contract settlement and liquidity planning and are included in advisory fees and settlement costs in our Condensed Consolidated Statement of Operations.
•$0.6 million and $2.1 million of litigation legal costs were recognized in the three and nine months ended September 30, 2021, respectively, as compared to $0.8 million and $1.8 million in the corresponding periods of 2020. These fees are included in advisory fees and settlement costs in our Condensed Consolidated Statement of Operations.
•$4.0 million of costs related to actual or potential acquisitions were recognized in the three and nine months ended September 30, 2021. These costs are included in selling, general and administrative costs in our Condensed Consolidated Statement of Operations.
In addition to the discussions described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for subcontractor recoveries and other claims where appropriate and available. If the value of our business was to decline, or if we were to determine that we were unable to recognize an amount in connection with any proposed disposition in excess of the carrying value of any disposed asset, we may be required to recognize impairments for one or more of our assets that may adversely impact our business, financial condition and results of operations.
RESULTS OF OPERATIONS
Condensed Consolidated Results of Operations
The presentation of the components of our adjusted EBITDA in the table below is consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, net pension benefits, restructuring costs, impairments, gains and losses on debt extinguishment, costs related to financial consulting, research and development costs and other costs that may not be directly controllable by segment management are not allocated to the segments.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||
| B&W Renewable segment | $ | 38,000 | $ | 39,062 | $ | (1,062) | $ | 105,155 | $ | 118,570 | $ | (13,415) | |||||||||||||||||||||||
| B&W Environmental segment | 38,249 | 25,262 | 12,987 | 97,767 | 76,354 | 21,413 | |||||||||||||||||||||||||||||
| B&W Thermal segment | 83,819 | 70,025 | 13,794 | 328,416 | 223,920 | 104,496 | |||||||||||||||||||||||||||||
| Other | (108) | (1,836) | 1,728 | (270) | (2,380) | 2,110 | |||||||||||||||||||||||||||||
| $ | 159,960 | $ | 132,513 | $ | 27,447 | $ | 531,068 | $ | 416,464 | $ | 114,604 | ||||||||||||||||||||||||
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| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
Adjusted EBITDA (1) | |||||||||||||||||||||||||||||||||||
B&W Renewable segment (2) | $ | 11,399 | $ | 23,575 | $ | (12,176) | $ | 15,030 | $ | 22,003 | $ | (6,973) | |||||||||||||||||||||||
| B&W Environmental segment | 3,471 | 2,177 | 1,294 | 7,270 | 1,408 | 5,862 | |||||||||||||||||||||||||||||
| B&W Thermal segment | 9,205 | 7,287 | 1,918 | 32,066 | 22,879 | 9,187 | |||||||||||||||||||||||||||||
| Corporate | (5,866) | (4,916) | (950) | (11,548) | (12,864) | 1,316 | |||||||||||||||||||||||||||||
| Research and development costs | 513 | (1,355) | 1,868 | (560) | (3,927) | 3,367 | |||||||||||||||||||||||||||||
| $ | 18,722 | $ | 26,768 | $ | (8,046) | $ | 42,258 | $ | 29,499 | $ | 12,759 | ||||||||||||||||||||||||
(1) Adjusted EBITDA for the three and nine months ended September 30, 2020, excludes losses related to a non-strategic business and interest on letters of credit included in cost of operations that were previously included in Adjusted EBITDA and total $0.9 million and $0.2 million, respectively, and $1.2 million and $0.6 million, respectively.
(2) Adjusted EBITDA for the three and nine months ended September 30, 2020 includes a $26 million non-recurring loss recovery related to claims in connection with multiple Renewable EPC loss contracts.
Three Months Ended September 30, 2021 and 2020
Revenues increased by $27.4 million to $160.0 million in the third quarter of 2021 compared to $132.5 million in the corresponding period of 2020, primarily due to a higher level of activity in our project business within our Thermal segment as well as increased volume and higher overall project activity in our Environmental segment being partially offset by project timing in our Renewable segment. Segment specific changes are discussed in further detail in the sections below.
Operating income increased $0.7 million to $14.8 million in the third quarter of 2021 compared to $14.1 million in the corresponding period of 2020. The increase is primarily due to the revenue increase described above partially offset by the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4. Restructuring expenses, advisory fees, research and development, depreciation and amortization expense and gains on dispositions are discussed in further detail in the sections below.
Nine Months Ended September 30, 2021 and 2020
Revenues increased by $114.6 million to $531.1 million in the nine months ended September 30, 2021 compared to $416.5 million in the corresponding period of 2020, primarily attributable to a higher level of activity in our Thermal and Environmental segments being partially offset by project timing and delays of large orders in our Renewable segment. Segment specific changes which are discussed in further detail in the sections below.
Operating income increased $15.0 million to $11.1 million in the nine months ended September 30, 2021 compared to an operating loss of $(3.9) million in the corresponding period of 2020. The increase is primarily due to higher overall revenue volume and is partially offset by the non-recurring loss recovery of $26.0 million recognized in the nine months ended September 30, 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4. Restructuring expenses, advisory fees, research and development, depreciation and amortization expense and gains on dispositions are discussed in further detail in the sections below.
Non-GAAP Financial Measures
The following discussion of our business segment results of operations includes a discussion of adjusted gross profit, a non-GAAP financial measure. Adjusted gross profit differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (“GAAP”). Amortization expense is not allocated to the segments’ adjusted gross profit. A reconciliation of operating income (loss), the most directly comparable GAAP measure, to adjusted gross
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profit is included in the table below. Management believes that this financial measure is useful to investors because it excludes certain expenses, allowing investors to more easily compare our financial performance period to period.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
Adjusted gross profit (1)(2) | |||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | 14,761 | $ | 14,074 | $ | 687 | $ | 11,083 | $ | (3,927) | $ | 15,010 | |||||||||||||||||||||||
| Selling, general and administrative ("SG&A") expenses | 37,528 | 35,611 | 1,917 | 111,081 | 107,647 | 3,434 | |||||||||||||||||||||||||||||
| Advisory fees and settlement costs | 1,841 | 3,846 | (2,005) | 9,658 | 10,074 | (416) | |||||||||||||||||||||||||||||
| Amortization expense | 2,030 | 1,365 | 665 | 5,333 | 4,110 | 1,223 | |||||||||||||||||||||||||||||
| Contract asset amortization expense | 73 | — | 73 | 146 | — | 146 | |||||||||||||||||||||||||||||
| Restructuring activities | 4,575 | 2,396 | 2,179 | 7,968 | 6,739 | 1,229 | |||||||||||||||||||||||||||||
| Research and development costs | (228) | 1,355 | (1,583) | 969 | 3,927 | (2,958) | |||||||||||||||||||||||||||||
| Losses from a non-strategic business | (184) | 945 | (1,129) | 103 | 1,163 | (1,060) | |||||||||||||||||||||||||||||
| Gain on asset disposals, net | (13,838) | (3) | (13,835) | (15,804) | (916) | (14,888) | |||||||||||||||||||||||||||||
| $ | 46,558 | $ | 59,589 | $ | (13,031) | $ | 130,537 | $ | 128,817 | $ | 1,720 | ||||||||||||||||||||||||
(1) Amortization is not allocated to the segments' adjusted gross profit, but depreciation is allocated to the segments' adjusted gross profit.
(2) Adjusted gross profit for the three and nine months ended September 30, 2020, excludes losses related to a non-strategic business that was previously included in Adjusted gross profit and totals $0.9 million and $1.2 million, respectively
Adjusted gross profit by segment is as follows:
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
| Adjusted gross profit | |||||||||||||||||||||||||||||||||||
| B&W Renewable segment | $ | 17,381 | $ | 32,092 | $ | (14,711) | $ | 34,106 | $ | 48,401 | $ | (14,295) | |||||||||||||||||||||||
| B&W Environmental segment | 7,870 | 6,874 | 996 | 20,483 | 16,628 | 3,855 | |||||||||||||||||||||||||||||
| B&W Thermal segment | 21,307 | 20,623 | 684 | 75,948 | 63,788 | 12,160 | |||||||||||||||||||||||||||||
| $ | 46,558 | $ | 59,589 | $ | (13,031) | $ | 130,537 | $ | 128,817 | $ | 1,720 | ||||||||||||||||||||||||
B&W Renewable Segment Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (in thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
| Revenues | $ | 38,000 | $ | 39,062 | $ | (1,062) | $ | 105,155 | $ | 118,570 | $ | (13,415) | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 11,399 | $ | 23,575 | $ | (12,176) | $ | 15,030 | $ | 22,003 | $ | (6,973) | |||||||||||||||||||||||
| Adjusted gross profit | $ | 17,381 | $ | 32,092 | $ | (14,711) | $ | 34,106 | $ | 48,401 | $ | (14,295) | |||||||||||||||||||||||
| Adjusted gross profit % | 45.7 | % | 82.2 | % | 32.4 | % | 40.8 | % | |||||||||||||||||||||||||||
Three Months Ended September 30, 2021 and 2020
Revenues in the B&W Renewable segment decreased 3%, or $1.1 million to $38.0 million in the third quarter of 2021 compared to $39.1 million in the corresponding period of 2020. The reduction in revenue is primarily due to the completion of large service and licensing projects in the third quarter of 2020 compared to current volume in the third quarter of 2021.
Adjusted EBITDA in the B&W Renewable segment decreased $12.2 million, to $11.4 million in the third quarter of 2021 compared to $23.6 million in the corresponding period of 2020. The decrease is primarily due to the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
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Adjusted gross profit in the B&W Renewable segment decreased $14.7 million, to $17.4 million in the third quarter of 2021 compared to $32.1 million in the corresponding period of 2020. The decrease is primarily due to the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
Nine Months Ended September 30, 2021 and 2020
Revenues in the B&W Renewable segment decreased 11%, or $13.4 million to $105.2 million in the nine months ended September 30, 2021 compared to $118.6 million in the corresponding period of 2020. The reduction in revenue is primarily due to lower volume in the first nine months of 2021 coupled with the completion of prior year large service and licensing projects that have not been replaced.
Adjusted EBITDA in the B&W Renewable segment decreased $7.0 million, to $15.0 million in the nine months ended September 30, 2021 compared to $22.0 million in the corresponding period of 2020. The decrease is primarily due to lower volume and the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
Adjusted gross profit in the B&W Renewable segment decreased $14.3 million, to $34.1 million in the third quarter of 2021 compared to $48.4 million in the corresponding period of 2020. The decrease is primarily due to lower volume and the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
B&W Environmental Segment Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
| Revenues | $ | 38,249 | $ | 25,262 | $ | 12,987 | $ | 97,767 | $ | 76,354 | $ | 21,413 | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 3,471 | $ | 2,177 | $ | 1,294 | $ | 7,270 | $ | 1,408 | $ | 5,862 | |||||||||||||||||||||||
| Adjusted gross profit | $ | 7,870 | $ | 6,874 | $ | 996 | $ | 20,483 | $ | 16,628 | $ | 3,855 | |||||||||||||||||||||||
| Adjusted gross profit % | 20.6 | % | 27.2 | % | 21.0 | % | 21.8 | % | |||||||||||||||||||||||||||
Three Months Ended September 30, 2021 and 2020
Revenues in the B&W Environmental segment increased 51%, or $13.0 million to $38.2 million in the third quarter of 2021 compared to $25.3 million in the corresponding period of 2020. The increase is primarily driven by increased volume in our ASH project business as well as higher overall project activity in the current quarter as compared to the prior quarter which was impacted due to the postponement of new projects as a result of COVID-19.
Adjusted EBITDA in the B&W Environmental segment was $3.5 million in the third quarter of 2021 compared to $2.2 million in the corresponding period of 2020. The increase is driven primarily by the higher volume, as described above partially offset by an increase in shared resources.
Adjusted gross profit in the B&W Environmental segment increased $1.0 million to $7.9 million in the third quarter of 2021 compared to $6.9 million in the corresponding period of 2020. The increase is primarily attributable to the increase in volume, as described above partially offset by an increase in shared resources.
Nine Months Ended September 30, 2021 and 2020
Revenues in the B&W Environmental segment increased 28%, or $21.4 million to $97.8 million in the nine months ended September 30, 2021 compared to $76.4 million in the corresponding prior year period of 2020. The increase is primarily driven by increased volume in our ASH project business as well as projects which were previously postponed due to COVID-19 in the prior periods being released in the current period.
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Adjusted EBITDA in the B&W Environmental segment was $7.3 million in the nine months ended September 30, 2021 compared to $1.4 million in the corresponding prior year period of 2020. The increase is driven primarily by the higher volume, as described above, and a $1.3 million charge recognized in the prior period related to completion of two B&W Environmental Loss Contracts as compared to a $0.4 million improvement recognized in the current period on those same projects, as described in Note 4.
Adjusted gross profit in the B&W Environmental segment increased $3.9 million to $20.5 million in the nine months ended September 30, 2021 compared to $16.6 million in the corresponding prior year period of 2020. The increase is primarily attributable to the increase in volume and a $1.3 million charge recognized in the prior period related to completion of two B&W Environmental Loss Contracts as compared to a $0.4 million improvement recognized in the current period on those same projects, as described in Note 4.
B&W Thermal Segment Results
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (In thousands) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
| Revenues | $ | 83,819 | $ | 70,025 | $ | 13,794 | $ | 328,416 | $ | 223,920 | $ | 104,496 | |||||||||||||||||||||||
| Adjusted EBITDA | $ | 9,205 | $ | 7,287 | $ | 1,918 | $ | 32,066 | $ | 22,879 | $ | 9,187 | |||||||||||||||||||||||
| Adjusted gross profit | $ | 21,307 | $ | 20,623 | $ | 684 | $ | 75,948 | $ | 63,788 | $ | 12,160 | |||||||||||||||||||||||
| Adjusted gross profit % | 25.4 | % | 29.5 | % | 23.1 | % | 28.5 | % | |||||||||||||||||||||||||||
Three Months Ended September 31, 2021 and 2020
Revenues in the B&W Thermal segment increased 20%, or $13.8 million, to $83.8 million in the third quarter of 2021 compared to $70.0 million generated in the corresponding period of 2020. The revenue increase is attributable to a higher level of activity in our project business than in the comparable prior year quarter which was negatively impacted by COVID-19.
Adjusted EBITDA in the B&W Thermal segment increased $1.9 million to $9.2 million in the third quarter of 2021 compared to $7.3 million in the corresponding period of 2020. The increase is due to higher volume as described above offset partially by product mix and an increase in shared resources due to higher volume.
Adjusted gross profit in the B&W Thermal segment increased $0.7 million, to $21.3 million in the third quarter of 2021, compared to $20.6 million in the corresponding period of 2020, which is mainly attributable to the increase in revenue as described above offset partially by product mix and an increase in shared resources due to higher volume.
Nine Months Ended September 31, 2021 and 2020
Revenues in the B&W Thermal segment increased 47%, or $104.5 million, to $328.4 million in the nine months ended September 30, 2021 compared to $223.9 million generated in the corresponding prior year period of 2020. The revenue increase is attributable to a higher level of activity on parts, construction, package boilers and international service orders which were all negatively impacted in the comparable prior year period due to COVID-19.
Adjusted EBITDA in the B&W Thermal segment increased $9.2 million to $32.1 million in the nine months ended September 30, 2021 compared to $22.9 million in the corresponding prior year period of 2020, which is mainly attributable to the increase in volume as described above offset partially by product mix, an increase in expenses due to growth in Asia and Middle East, and an increase in shared resources due to higher volume.
Adjusted gross profit in the B&W Thermal segment increased $12.2 million, to $75.9 million in the nine months ended September 30, 2021, compared to $63.8 million in the corresponding prior year period of 2020, which is consistent with the increase in revenue as described above offset partially by product mix, and an increase in shared resources due to higher volume.
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Bookings and Backlog
Bookings and backlog are our measure of remaining performance obligations under our sales contracts. It is possible that our methodology for determining bookings and backlog may not be comparable to methods used by other companies.
We generally include expected revenue from contracts in our backlog when we receive written confirmation from our customers authorizing the performance of work and committing the customers to payment for work performed. Backlog may not be indicative of future operating results, and contracts in our backlog may be canceled, modified or otherwise altered by customers. Backlog can vary significantly from period to period, particularly when large new build projects or operations and maintenance contracts are booked because they may be fulfilled over multiple years. Because we operate globally, our backlog is also affected by changes in foreign currencies each period. We do not include orders of our unconsolidated joint ventures in backlog.
Bookings represent changes to the backlog. Bookings include additions from booking new business, subtractions from customer cancellations or modifications, changes in estimates of liquidated damages that affect selling price and revaluation of backlog denominated in foreign currency. We believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods, and that shorter-term changes in bookings may not necessarily indicate a material trend.
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| (In approximate millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
B&W Renewable(1) | $ | 103 | $ | 26 | $ | 184 | $ | 91 | |||||||||||||||
| B&W Environmental | 22 | 41 | 90 | 98 | |||||||||||||||||||
| B&W Thermal | 48 | 114 | 236 | 294 | |||||||||||||||||||
| Other/eliminations | — | (4) | — | (5) | |||||||||||||||||||
| Bookings | $ | 173 | $ | 177 | $ | 510 | $ | 478 | |||||||||||||||
(1) B&W Renewable bookings includes the revaluation of backlog denominated in currency other than U.S. dollars. The foreign exchange impact on B&W Renewable bookings in the third quarter of 2021 and 2020 was $3.6 million and $(6.4) million, respectively. The foreign exchange impact on B&W Renewable bookings in the nine months ended September 30, 2021 and 2020 was $8.1 million and $(7.0) million, respectively.
Our backlog as of September 30, 2021 and 2020 was as follows:
| As of September 30, | |||||||||||
| (In approximate millions) | 2021 | 2020 | |||||||||
B&W Renewable(1) | $ | 313 | $ | 196 | |||||||
| B&W Environmental | 101 | 107 | |||||||||
| B&W Thermal | 130 | 208 | |||||||||
| Other/eliminations | (4) | (2) | |||||||||
| Backlog | $ | 540 | $ | 509 | |||||||
(1) B&W Renewable backlog at September 30, 2021, includes $152.8 million related to long-term operation and maintenance contracts for renewable energy plants, with remaining durations extending until 2034. Generally, such contracts have a duration of 10-20 years and include options to extend.
Of the backlog at September 30, 2021, we expect to recognize revenues as follows:
| (In approximate millions) | 2021 | 2022 | Thereafter | Total | ||||||||||
| B&W Renewable | $ | 60 | $ | 76 | $ | 177 | $ | 313 | ||||||
| B&W Environmental | 32 | 42 | 27 | 101 | ||||||||||
| B&W Thermal | 69 | 58 | 3 | 130 | ||||||||||
| Other/eliminations | (4) | — | — | (4) | ||||||||||
| Expected revenue from backlog | $ | 157 | $ | 176 | $ | 207 | $ | 540 | ||||||
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Corporate
Corporate costs in adjusted EBITDA include SG&A expenses that are not allocated to the reportable segments. These costs include, among others, certain executive, compliance, strategic, reporting and legal expenses associated with governance of the total organization and being an SEC registrant. Corporate costs increased $1.0 million to $5.9 million compared to $4.9 million incurred for the three months ended September 30, 2021 and 2020, respectively. The increase is primarily due to higher incentive compensation costs recognized for the third quarter ended September 30, 2021.
Corporate costs decreased $1.3 million to $11.5 million compared to $12.9 million incurred for the nine months ended September 30, 2021 and 2020, respectively. The decrease is primarily due to lower audit fees, personnel, director fees and insurance costs, offset by higher incentive compensation costs recognized in the first nine months of 2021.
Advisory Fees and Settlement Costs
Advisory fees and settlement costs decreased by $2.0 million to $1.8 million in the third quarter of 2021 compared to $3.8 million in the corresponding period of 2020 and advisory fees and settlement costs decreased $0.4 million to $9.7 million in the nine months ended September 30, 2021 as compared to $10.1 million in the corresponding period of 2020. The change is primarily due to decreased use of external consultants in the third quarter of 2021.
Research and Development
Our research and development activities are focused on improving our products through innovations to reduce the cost of our products and make them more competitive, as well as to reduce performance risk of our products to better meet our and our customers' expectations. Research and development (benefit) expenses totaled $(0.2) million and $1.4 million in the third quarter of 2021 and 2020, respectively, and totaled $1.0 million and $3.9 million in the nine months ended September 30, 2021 and 2020, respectively. The $(0.2) million benefit in the third quarter of 2021 resulted from the recognition of a foreign research and development refundable credit of $0.8 million from the 2020 tax year. Excluding the effects of the refundable credit, the decreases for the three and nine months ending September 30, 2021 resulted primarily from timing of specific research and development efforts.
Restructuring
Restructuring actions across our business units and corporate functions resulted in $4.6 million and $2.4 million in the third quarter of 2021 and 2020, respectively, and totaled $8.0 million and $6.7 million of expense in the nine months ended September 30, 2021 and 2020, respectively. The charges primarily consist of severance and business service transition costs related to actions taken, including as part of the Company’s strategic, market-focused organizational and re-branding initiative
Depreciation and Amortization
Depreciation expense was $2.3 million and $2.7 million in the third quarter of 2021 and 2020, respectively and depreciation expense was $7.4 million and $8.2 million in the nine months ended September 30, 2021 and 2020, respectively.
Amortization expense was $2.1 million and $1.4 million in the third quarter of 2021 and 2020, respectively and amortization expense was $5.5 million and $4.1 million in the nine months ended September 30, 2021 and 2020, respectively.
Pension and Other Postretirement Benefit Plans
We recognize benefits from our defined benefit and other postretirement benefit plans based on actuarial calculations primarily because our expected return on assets is greater than our service cost. Service cost is low because our plan benefits are frozen except for a small number of hourly participants. Pension benefits before MTM were $7.6 million and $7.3 million in the third quarter of 2021 and 2020, respectively. Pension benefits before MTM were $22.6 million and $22.3 million in the nine months ended September 30, 2021 and 2020, respectively.
Our pension costs also include MTM adjustments from time to time. Interim MTM charges are primarily a result of changes in the discount rate, curtailments and settlements. Any MTM charge or gain should not be considered to be representative of
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future MTM adjustments as such events are not currently predicted and are in each case subject to market conditions and actuarial assumptions as of the date of the event giving rise to the MTM adjustment. Total MTM adjustments for our pension benefit plans were gains of $2.3 million for the three and nine months ended September 30, 2021. There were no MTM adjustments for our other postretirement benefit plans during the three and nine months ended September 30, 2021. There were no MTM adjustments for our pension and other postretirement benefit plans during the three and nine months ended September 30, 2020.
Other than service cost of $0.2 million and $0.2 million in the third quarter of 2021 and 2020, respectively, and $0.7 million and $0.6 million in the nine months ended September 30, 2021 and 2020, respectively, which are related to the small number of hourly participants still accruing benefits within the Babcock & Wilcox Thermal segment, pension benefit and MTM adjustments are excluded from the results of our segments.
The costs and funding requirements of our pension and postretirement benefit plans depend on our various assumptions, including estimates of rates of return on benefit-related assets, discount rates for future payment obligations, rates of future cost growth, mortality assumptions and trends for future costs. Variances from these estimates could have a material adverse effect on us. Our policy to recognize these variances annually through MTM accounting could result in volatility in our results of operations, which could be material. The funding obligations for the Company’s pension plans are impacted by the performance of the financial markets, particularly the equity markets, and interest rates. If the financial markets do not provide the long-term returns that are expected, or discount rates increase the present value of liabilities, the Company could be required to make larger contributions. Refer to Note 12 to the Condensed Consolidated Financial Statements for further information regarding our pension and other postretirement plans.
Foreign Exchange
We translate assets and liabilities of our foreign operations into United States dollars at current exchange rates, and we translate items in our statement of operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive income (loss). We report foreign currency transaction gains and losses in Condensed Consolidated Statements of Operations.
Foreign exchange was a gain/(loss) of $(1.7) million and $25.0 million for the third quarter of 2021 and 2020, respectively, and a gain/(loss) of $(1.1) million and $22.7 million for the nine months ended September 30, 2021 and 2020, respectively. Foreign exchange gains and losses are primarily related to unhedged intercompany loans denominated in European currencies to fund foreign operations.
Income Taxes
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||||||||||||||
| (In thousands, except for percentages) | 2021 | 2020 | $ Change | 2021 | 2020 | $ Change | |||||||||||||||||||||||||||||
| Income (loss) before income taxes | $ | 13,949 | $ | 34,053 | $ | (20,104) | $ | 8,029 | $ | (17,580) | $ | 25,609 | |||||||||||||||||||||||
| Income tax expense (benefit) | $ | 301 | $ | (502) | $ | 803 | $ | 6,683 | $ | (467) | $ | 7,150 | |||||||||||||||||||||||
| Effective tax rate | 2.2 | % | (1.5) | % | 83.2 | % | 2.7 | % | |||||||||||||||||||||||||||
Our income tax expense in the third quarter of 2021 reflects a full valuation allowance against our net deferred tax assets, except in Mexico, Canada, the United Kingdom, Brazil, Finland, Germany, Thailand, the Philippines, Indonesia, and Sweden. Deferred tax assets are evaluated each period to determine whether realization is more likely than not. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Valuation allowances may be removed in the future if sufficient positive evidence exists to outweigh the negative evidence under the framework of ASC 740, Income Taxes.
Our effective tax rate for the third quarter of 2021 is not reflective of the United States statutory rate primarily due to a valuation allowance against certain net deferred tax assets and favorable discrete items, including return to provision adjustments. In certain jurisdictions (namely, Denmark and Italy) where the Company anticipates a loss for the fiscal year or incurs a loss for the year-to-date for which a tax benefit cannot be realized in accordance with ASC 740, the Company excludes the loss in that jurisdiction from the overall computation of the estimated annual effective tax rate. For the period ended September 30, 2021, the United States was not considered a loss jurisdiction and was included in the estimated annual effective tax rate.
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In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740, primarily related to intraperiod tax allocation, recognizing deferred tax liabilities for changes in ownership of foreign equity method investments or foreign subsidiaries, and exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The Company adopted ASU No. 2019-12 on January 1, 2021, on a prospective basis. The adoption did not have a material impact on our interim consolidated financial statements, estimated income for the full fiscal year 2021, or to the trend of earnings.
Liquidity and Capital Resources
Liquidity
Our primary liquidity requirements include debt service, funding dividends on preferred stock and working capital needs. We fund our liquidity requirements primarily through cash generated from operations, external sources of financing, including our recent Revolving Credit Agreement, Senior Notes, and equity offerings, including our Preferred Stock, each of which are described below and in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report in further detail along with other sources of liquidity.
We recently executed the following actions:
•in June 2021, we issued 2,916,880 shares of our Preferred Stock and paid $0.4 million in cash to B. Riley, a related party, in exchange for a deemed prepayment of $73.3 million of our then existing Tranche A-3 term loan and paid $0.9 million in cash for accrued interest due to B. Riley, as described in Note 14 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report. As a result of such deemed prepayment, the total amount outstanding under our Last Out Term Loans was reduced to zero;
•on June 30, 2021 and September 30, 2021, we paid dividends on our outstanding Preferred Stock totaling $1.7 million and $3.7 million, respectively, as described in Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report;
•on June 30, 2021, we entered into the Revolving Credit Agreement with PNC, as administrative agent and swing loan lender which provides for an up to $50.0 million asset-based revolving credit facility, including a $15 million letter of credit sublimit and a $5 million swingline sublimit. In addition, we entered into the Letter of Credit Agreement with PNC, pursuant to which PNC has agreed to issue up to $110 million in letters of credit secured in part by cash collateral provided by an affiliate of MSD. Lastly, we entered into the Reimbursement Agreement with MSD, as administrative agent, and the cash collateral providers from time to time party thereto, pursuant to which we shall reimburse MSD and any other cash collateral provider to the extent the up to $110 million of cash collateral provided by MSD and any other cash collateral provider to secure the Letter of Credit Agreement is drawn to satisfy draws on letters of credit, as described in Note 15 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report;
•in August 2021, we completed the sale of certain real property assets at our Lancaster, Ohio location for $18.9 million. We received $15.8 million of net proceeds after adjustments and expenses and recognized a gain on sale of $13.9 million. In conjunction with the sale, we executed a leaseback agreement commencing August 13, 2021 and expiring on August 31, 2041;
•as of September 30, 2021, we issued an additional $25.6 million aggregate principal amount of Senior Notes for $26.0 million net proceeds under the March 31, 2021 sales agreement as described in Note 13 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report;
•as of September 30, 2021, we issued additional shares of our Preferred Stock for $5.9 million net proceeds under the sales agreement as described in Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report; and
•on September 30, 2021, we acquired a 60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) for approximately $27.2 million in cash plus a contingent consideration arrangement, preliminarily valued at $6.2 million, with a maximum value up to $10.0 million if a certain revenue target is achieved in 2022.
See Note 13, Note 14, Note 15, Note 16, Note 17 and Note 24 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for additional information on our external sources of financing and equity offerings.
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Beginning in April 2020 and continuing as of November 10, 2021, as part of the Company’s response to the impact of the COVID-19 pandemic on its business, the Company continues to take a number of cash conservation and cost reduction measures which include:
•suspension of our 401(k) company match for U.S. employees, however, the Company is implementing a new 401(k) company match for U.S. employees starting January 1, 2022;
•utilizing options for government loans and programs in the U.S. and abroad that are appropriate and available; and
•deferring the remaining $20.9 million of the estimated Pension Plan contribution payments of $45.6 million that would have been due during 2021, in accordance with the American Rescue Plan Act of 2021 (the “ARPA relief plan”) signed into law in March 2021. In January 2021, we made Pension Plan contributions of $23.1 million, excluding interest.
Cash and Cash Flows
At September 30, 2021, our unrestricted cash and cash equivalents totaled $107.1 million and we had total debt of $193.1 million. Our foreign business locations held $39.2 million of our total unrestricted cash and cash equivalents at September 30, 2021. In general, our foreign cash balances are not available to fund our U.S. operations unless the funds are repatriated or used to repay intercompany loans made from the U.S. to foreign entities, which could expose us to taxes we presently have not made a provision for in our results of operations. We presently have no plans to repatriate these funds to the U.S.. In addition, we had $6.9 million of restricted cash at September 30, 2021 related to collateral for certain letters of credit.
Cash used in operations was $107.8 million in the nine months ended September 30, 2021, which is primarily represented in the $47.1 million change in pension, postretirement and employee benefit liabilities and a $70.9 million net decrease in operating cash outflows associated with changes in working capital. In the nine months ended September 30, 2020, cash used in operations was $67.3 million primarily represented in the net loss of continuing operations, the increase in accounts receivable - other from recognizing the non-recurring loss recovery insurance settlement of $26.0 million described in Note 4, the change in pension, postretirement and employee benefit liabilities and the impact of fluctuating foreign currency exchange rates. There also was a $2.8 million net increase in operating cash outflows associated with changes in working capital.
Cash flows from investing activities used net cash of $5.9 million in the nine months ended September 30, 2021, primarily due to the acquisition of Fosler Construction of $27.2 million and $4.2 million of capital expenditures, offset by proceeds from the sale of business and assets of $23.8 million. In the nine months ended September 30, 2020, cash flows from investing activities provided net cash of $2.0 million, primarily related to $8.0 million from the settlement of remaining escrows associated with the sale of Palm Beach Resource Recovery Corporation and MEGTEC and Universal businesses, offset by the net change in available-for-sale securities and $2.3 million of capital expenditures.
Cash flows from financing activities provided net cash of $159.2 million in the nine months ended September 30, 2021, primarily related to the issuance of common stock, Senior Notes and Preferred Stock offset by $75.4 million Last Out Term Loans repayments, a $164.3 million net reduction on the prior U.S. Revolving Credit Facility and $16.7 million of financing fees. Cash flows from financing activities provided net cash of $52.4 million in the nine months ended September 30, 2020, primarily related to $60.0 million face value borrowings from the Last Out Term Loans offset by $2.9 million of net borrowings from the prior U.S. Revolving Credit Facility and $10.3 million of financing fees.
Debt Facilities
As described above and in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, on June 30, 2021, we entered into the Debt Facilities, including the Revolving Credit Agreement. The obligations of the Company under each of the Debt Facilities are guaranteed by certain existing and future domestic and foreign subsidiaries of the Company. B. Riley, a related party, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as described below. The Company expects to use the proceeds and letter of credit availability under the Debt Facilities for working capital purposes and general corporate purposes,
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including to backstop certain letters of credit issued under our previous A&R Credit Agreement, for which commitments were terminated, all loans were repaid and all outstanding and undrawn letters of credit were collateralized on June 30, 2021.
Last Out Term Loans
Effective with the new debt facilities the Company entered into on June 30, 2021, as described in Note 15 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, the Company has no remaining Last Out Term Loans and no further borrowings thereunder are available.
The Company recognized a loss on debt extinguishment of $6.2 million in the quarter ended June 30, 2020, primarily representing the unamortized value of the original issuance discount and fees on the Tranche A-3 Last Out Term Loan.
See Note 14 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for additional information on our Last Out Term Loans.
A&R Credit Agreement
As described above, the A&R Credit Agreement commitments were terminated, all loans were repaid and all outstanding and undrawn letters of credit were collateralized on June 30, 2021. The Company recognized a gain on debt extinguishment of $6.5 million in the quarter ended June 30, 2021, primarily representing the write-off of accrued revolver fees of $11.3 million offset by the unamortized deferred financing fees of $4.8 million related to the prior A&R Credit Agreement.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees as of September 30, 2021 was $53.1 million. The aggregate value of the outstanding letters of credit provided under the Letter of Credit Agreement backstopping letters of credit or bank guarantees was $21.7 million as of September 30, 2021. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $29.8 million are subject to foreign currency revaluation.
We have also posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. These bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2021, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $157.6 million. The aggregate value of the letters of credit backstopping surety bonds was $13.1 million.
Our ability to obtain and maintain sufficient capacity under our new Debt Facilities is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
Other Indebtedness - Loans Payable
During the nine months ended September 30, 2021, our Denmark subsidiary received three unsecured interest free loans totaling $3.4 million under a local government loan program related to COVID-19. The loans of $0.8 million, $1.7 million and $0.9 million are payable in April 2022, May 2022 and May 2023, respectively. The loan payable in May 2023 is included in long term loans payables in our Condensed Consolidated Balance Sheets.
As of September 30, 2021, for our recent acquisition of a 60% controlling ownership stake in Fosler Construction Company Inc. (“Fosler Construction”) as described in Note 24, Fosler Construction has two loans totaling $7.6 million. Both loans have a variable interest rate with a minimum rate of 6% and are payable January 1, 2022. In addition, Fosler Construction also has loans primarily for vehicles and equipment totaling $0.9 million at September 30, 2021. The vehicle and equipment loans are included in long term loans payables in our Condensed Consolidated Balance Sheets.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have, or are reasonably expected to have, a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources at September 30, 2021.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited Condensed Consolidated Financial Statements, see “Critical Accounting Policies and Estimates” in our Annual Report. There have been no significant changes to our policies during the nine months ended September 30, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposures to market risks have not changed materially from those disclosed under “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company's management, with the participation of our Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures, by their nature, can provide only reasonable assurance regarding the control objectives. It should be noted that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
On September 30, 2021, we acquired a 60% controlling ownership in Fosler Construction, as described in Note 24 of the unaudited condensed consolidated financial statements in Part I of this report. As the acquisition occurred during the last 12 months, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to the Fosler Construction acquisition. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our internal control over financial reporting scope in the year of acquisition.
Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the nine months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting, despite the fact that some of our team members are working remotely in response to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to ensure their operating effectiveness.
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings
For information regarding ongoing investigations and litigation, see Note 20 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, which we incorporate by reference into this Item.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and
in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 and June 30, 2021 and other filings with the SEC since the date of the Form 10-K. There have been no material changes to such risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In accordance with the provisions of the employee benefit plans, the Company acquired the following shares in connection with the vesting of employee restricted stock that require us to withhold shares to satisfy employee statutory income tax withholding obligations. The following table identifies the number of common shares and average price per share for each month during the quarter ended September 30, 2021. The Company does not have a general share repurchase program at this time.
| (data in whole amounts) | ||||||||||||||
| Period | Total number of shares acquired (1) | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs | ||||||||||
| July 2021 | — | $ | — | — | $ | — | ||||||||
| August 2021 | 198,609 | $ | 7.82 | — | $ | — | ||||||||
| September 2021 | — | $ | — | — | $ | — | ||||||||
| Total | 198,609 | $ | 7.82 | — | $ | — | ||||||||
(1) Acquired shares are recorded in treasury stock in our Condensed Consolidated Balance Sheets.
Item 6. Exhibits
| Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer. | ||||||||
| Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer. | ||||||||
| Section 1350 certification of Chief Executive Officer. | ||||||||
| Section 1350 certification of Chief Financial Officer. | ||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| 104 | Cover Page Interactive Data File (embedded within the inline XBRL document) | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BABCOCK & WILCOX ENTERPRISES, INC. | ||||||||
| November 10, 2021 | By: | /s/ Louis Salamone | ||||||
| Louis Salamone | ||||||||
| Executive Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer and Duly Authorized Representative) | ||||||||
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EXHIBIT 31.1
CERTIFICATION
I, Kenneth M. Young, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Babcock & Wilcox Enterprises, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: November 10, 2021 | /s/ Kenneth M. Young | ||||
| Kenneth M. Young | |||||
| Chairman and Chief Executive Officer | |||||
EXHIBIT 31.2
CERTIFICATION
I, Louis Salamone, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Babcock & Wilcox Enterprises, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Dated: November 10, 2021 | /s/ Louis Salamone | ||||
| Louis Salamone | |||||
Executive Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer) | |||||
EXHIBIT 32.1
BABCOCK & WILCOX ENTERPRISES, INC.
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Kenneth M. Young, President and Chief Executive Officer of Babcock & Wilcox Enterprises, Inc., a Delaware corporation (the “Company”), hereby certify, to my knowledge, that:
(1)the Company’s quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of B&W as of the dates and for the periods expressed in the Report.
| Dated: November 10, 2021 | /s/ Kenneth M. Young | ||||
| Kenneth M. Young | |||||
| Chairman and Chief Executive Officer | |||||
EXHIBIT 32.2
BABCOCK & WILCOX ENTERPRISES, INC.
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Louis Salamone, Chief Financial Officer of Babcock & Wilcox Enterprises, Inc., a Delaware corporation (the “Company”), hereby certify, to my knowledge, that:
(1)the Company’s quarterly Report on Form 10-Q for the quarter ended September 30, 2021 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of B&W as of the dates and for the periods expressed in the Report.
| Dated: November 10, 2021 | /s/ Louis Salamone | ||||
| Louis Salamone | |||||
Executive Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer) | |||||