NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
NOTE 1 – BASIS OF PRESENTATION
The 2020 and 2019 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”). We have eliminated all intercompany transactions and accounts. We present the notes to our Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.
Recent Developments
In February and March 2021, we entered into a series of agreements and completed a series of financing transactions including the following:
•on February 8, 2021, we entered into A&R Amendment No. 2 with Bank of America. A&R Amendment No. 2, among other matters, (i) permits the issuance of senior notes, (ii) permits the deemed prepayment of $35 million of our Tranche A term loan with $35 million principal amount of senior notes, (iii) provides that 75% of the senior notes gross proceeds shall be used to repay outstanding borrowings and permanently reduce the commitments under our senior secured credit facilities, and (iv) provide that $5 million of certain previously deferred facility fees will be paid by the Company;
•on February 12, 2021, we entered into a letter agreement (the “Exchange Agreement”) with B. Riley Financial, Inc. (“B. Riley”), a related party, pursuant to which we agreed to issue to B. Riley $35 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35 million of our existing Tranche A term loan with B. Riley. On February 12, 2021, we issued $35 million of senior notes to B. Riley in exchange for a deemed prepayment of our existing Last Out Term Loan' Tranche A-6. The interest rate on the remaining Last Out Term Loan Tranche A balances has been reduced to 6.625% from 12.0%;
•on February 12, 2021, we received gross proceeds of approximately $172.5 million after closing a public offering of our common stock in which 29,487,180 shares of common stock were issued, inclusive of 3,846,154 shares issued to B. Riley Securities, Inc., a related party, as representative of several underwriters to the common stock offering. Net proceeds received were approximately $163 million after deducting underwriting discounts and commissions, but before expenses;
•on February 12, 2021, we received gross proceeds of approximately $125 million after completing an issuances of our 8.125% Senior Notes due 2026 from a public offering of $120 million and $5 million of the senior notes issued to B. Riley Securities, Inc., a related party, as representative of several underwriters to the senior notes offering. Net proceeds received were approximately $120 million after deducting underwriting discounts and commissions, but before expenses;
•on March 4, 2021, we entered into A&R Amendment No. 3 with Bank of America. A&R Amendment No. 3, among other matters, at the date of effectiveness (i) permits the prepayment of certain term loans, (ii) reduces the revolving credit commitments to $130 million and removes the ability to obtain revolving loans under the credit agreement, and (iii) amends certain covenants and conditions to the extension of credit; and
•on March 4, 2021, effective with the execution of A&R Amendment No. 3, we paid $75 million towards our existing Last Out Term Loans and paid $21.8 million of accrued and deferred fees related to the revolving credit facility.
For further information, see Note 25 to our Consolidated Financial Statements.
COVID-19
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally. This global pandemic has disrupted business operations, 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 the changes in the severity of the virus in these countries and localities. These restrictions, including travel and curtailment of other activity, negatively impact our ability to conduct business. 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 at least one new strain thereof, 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 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 2021 and beyond. Additionally, out of concern for our employees, even where restrictions permit employees to return to our offices and worksites, we have incurred additional costs to protect our employees as well as, advising 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 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.
Beginning in April 2020, as part of the Company’s response to the impact of the COVID-19 pandemic on its business, the Company has taken a number of cash conservation and cost reduction measures which include:
•temporary unpaid furloughs of certain employees;
•temporarily deferral of 50% of the monthly fee paid to BRPI Executive Consulting, LLC for the services of our Chief Executive Officer;
•deferrals of 30% of the base salaries of our Chief Financial Officer and Chief Operating Officer, and 50% of our previous Chief Strategy Officer;
•suspension of our 401(k) company match for U.S. employees for 2020 and for 2021 as of the issuance date of these financial statements;
•approval by the Company’s Board for a temporary deferral of 50% of the cash compensation payable to non-employee directors under the Company’s board compensation program paid during the first quarter of 2021;
•temporary rent payment deferrals related to leased facilities located in the U.S., Canada, Italy and Denmark;
•utilizing options for government loans and programs in the U.S. and abroad that are appropriate and available; and
•deferring, in accordance with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law in March 2020, the Pension Plan contribution payments of $5.5 million each for the 2020 Plan year that would have been made on April 15, 2020, July 15, 2020 and October 15, 2020, respectively. In addition, we elected to defer the contribution payments of $1.1 million for the 2018 Plan year and $23.7 million for the 2019 Plan year that were both due on September 15, 2020. Per the 2019 Plan year waiver received on October 1, 2020, the $23.7 million deferred for the 2019 Plan year will now be funded over the next five years.
NOTE 2– SIGNIFICANT ACCOUNTING POLICIES
Reportable segments
Our operations are assessed based on three reportable segments which changed during our third quarter of 2020 as part of our 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:
•B&W Renewable segment: 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. The segment'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.
•B&W Environmental segment: full suite of best-in-class emissions control and environmental technology solutions for utility and industrial steam generation applications around the world. The segment'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.
•B&W Thermal segment: steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. The segment has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
For financial information about our segments see Note 4 to our Consolidated Financial Statements.
Use of estimates
We use estimates and assumptions to prepare our Consolidated Financial Statements in conformity with GAAP. Some of our more significant estimates include our estimate of costs to complete long-term construction contracts, estimates associated with assessing whether goodwill and other long-lived assets are impaired, estimates of costs to be incurred to satisfy contractual warranty requirements, estimates of the value of acquired intangible and tangible assets, estimates associated with the realizability of deferred tax assets, and estimates we make in selecting assumptions related to the valuations of our pension and postretirement plans, including the selection of our discount rates, mortality and expected rates of return on our pension plan assets. These estimates and assumptions affect the amounts we report in our Consolidated Financial Statements and accompanying notes. Our actual results could differ from these estimates. Variances could result in a material effect on our financial condition and results of operations in future periods.
Earnings per share
We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. The weighted average shares used to calculate basic and diluted earnings per share reflect the bonus element for the 2019 Rights Offering on July 23, 2019 and the one-for-ten reverse stock split on July 24, 2019. We have a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units, performance shares, and performance units, subject to satisfaction of specific performance goals. We include the shares applicable to these plans in dilutive earnings per share when related performance criteria have been met. The computation of basic and diluted earnings per share is included in Note 3.
Investments
Our investments primarily relate to our wholly owned insurance subsidiary. We classify investments available for current operations in the Consolidated Balance Sheets as current assets, while we classify investments held for long-term purposes as non-current assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in other - net in our Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method. We include interest on securities in interest income.
Foreign currency translation
We translate assets and liabilities of our foreign operations into U.S. 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 income. We have included transaction gains of $58.8 million and losses of $16.6 million in the years ended December 31, 2020 and 2019, respectively, in foreign exchange in our Consolidated Statements of Operations. These foreign exchange net gains and losses are primarily related to transaction gains or losses from unhedged intercompany loans when the loan is denominated in a currency different than the participating entity's functional currency. Certain reclassifications have been made to the 2019 balances related to foreign currency gains and losses in the Consolidated Statements of Cash Flows to conform to the current year presentation.
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 29% and 21% of our revenue for the years ended December 31, 2020 and 2019, respectively. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon shipment or delivery and acceptance by the customer. Standard commercial payment terms generally apply to these sales.
Revenue from products and services transferred to customers over time accounted for 71% and 79% of our revenue for the years ended December 31, 2020 and 2019, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services. Typically, revenue is recognized over time using the cost-to-cost input method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the
transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the cost-to-cost input method contains a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position. Refer to Note 4 for our disaggregation of revenue by product line.
As of December 31, 2020, we have estimated the costs to complete of all our in-process contracts in order to estimate revenues using a cost-to-cost input method. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, transportation, fluctuations in foreign exchange rates or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for enforcing the claim, the cause of any additional costs incurred and whether those costs are identifiable or otherwise determinable, the nature and reasonableness of those costs, the objective evidence available to support the amount of the claim, and our relevant history with the counter-party that supports our expectations about their willingness and ability to pay for the additional cost along with a reasonable margin.
We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception has not been recorded for sales commission as a liability has not been incurred at that point.
Contract balances
Contracts in progress, a current asset in our Consolidated Balance Sheets, includes revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts. Advance billings, a current liability in our Consolidated Balance Sheets, includes advance billings on contracts invoices that exceed accumulated contract costs and revenues and costs recognized under the cost-to-cost input method. Those balances are classified as current based on the life cycle of the associated contracts. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and the collection of all amounts for unbilled revenues is deemed probable. We review contract price and cost estimates each reporting period as the work progresses and reflect adjustments proportionate to the costs incurred to date relative to total estimated costs at completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected contract loss is recognized in full through the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in other accrued liabilities in the Consolidated Balance Sheets. In addition, when we determine that an uncompleted contract will not be completed on-time and the contract has liquidated damages provisions, we recognize the estimated liquidated damages at the most likely amount we will incur and record them as a reduction of the estimated selling price in the period the change in estimate occurs. Losses accrued in advance of the completion of a contract are included in other accrued liabilities in our Consolidated Balance Sheets.
Warranty expense
We accrue estimated expense included in cost of operations on our 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 addition, we
record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.
Research and development
Our research and development activities are related to improving our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our and our customers' expectations. Research and development activities totaled $4.4 million and $2.9 million in the years ended December 31, 2020 and 2019, respectively.
Advertising expense
Advertising expense is charged when incurred and is included in selling, general and administrative expenses on our Consolidated Statements of Operations. Advertising expenses in the years ended December 31, 2020 and 2019 were not significant.
Pension plans and postretirement benefits
We sponsor various defined benefit pension and postretirement plans covering certain employees of our U.S., Canadian and U.K. subsidiaries. We use actuarial valuations to calculate the cost and benefit obligations of our pension and postretirement benefits. The actuarial valuations use significant assumptions in the determination of our benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends.
We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. We use an alternative spot rate method for discounting the benefit obligation rather than a single equivalent discount rate because it more accurately applies each year's spot rates to the projected cash flows.
The components of benefit cost related to service cost, interest cost, expected return on plan assets and prior service cost amortization are recorded on a quarterly basis based on actuarial assumptions. In the fourth quarter of each year, or as interim remeasurements are required, we recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost (mark to market (“MTM”) pension adjustment). Recognized net actuarial gains and losses consist primarily of our reported actuarial gains and losses and the difference between the actual return on plan assets and the expected return on plan assets.
We recognize the funded status of each plan as either an asset or a liability in the Consolidated Balance Sheets. The funded status is the difference between the fair value of plan assets and the present value of its benefit obligation, determined on a plan-by-plan basis. See Note 13 for a detailed description of our plan assets.
Income taxes
Income tax expense for federal, foreign, state and local income taxes are calculated on taxable income based on the income tax law in effect at the latest balance sheet date and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess the need for a valuation allowance on a quarterly basis. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our Consolidated Financial Statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of income tax expense on our Consolidated Statements of Operations.
Cash and cash equivalents and restricted cash
Our cash equivalents are highly liquid investments, with maturities of three months or less when we purchase them. We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes.
Trade accounts receivable and allowance for doubtful accounts
Our trade accounts receivable balance is stated at the amount owed by our customers, net of allowances for estimated uncollectible balances. We maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management's evaluation of the ability of customers to make payments, with emphasis on historical remittance experience, known customer financial difficulties, the age of receivable balances and any other known factors specific to a receivable. Accounts receivable are charged to the allowance when it is determined they are no longer collectible. Our allowance for doubtful accounts was $17.2 million and $25.1 million at December 31, 2020 and 2019, respectively. Amounts charged to selling, general and administrative expenses were $(0.2) million and $0.2 million for the years ended December 31, 2020 and 2019, respectively.
Inventories
We carry our inventories at the lower of cost or market. We determine cost principally on the first-in, first-out basis, except for certain materials inventories of our B&W Thermal segment, where we use the last-in, first-out (“LIFO”) method. We determined the cost of approximately 20% of our total inventories using the LIFO method at December 31, 2020 and 2019, and our total LIFO reserve at December 31, 2020 and 2019 was approximately $7.3 million and $7.2 million, respectively. Our obsolete inventory reserve was $7.1 million and $6.9 million at December 31, 2020 and 2019, respectively. The components of inventories can be found in Note 6.
Property, plant and equipment
We carry our property, plant and equipment at depreciated cost, less any impairment provisions. We depreciate our property, plant and equipment using the straight-line method over estimated economic useful lives of eight to 33 years for buildings and three to 28 years for machinery and equipment. Our depreciation expense was $11.3 million and $19.3 million for the years ended December 31, 2020 and 2019, respectively. We expense the costs of maintenance, repairs and renewals that do not materially prolong the useful life of an asset as we incur them.
Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business and result in future asset impairments.
Investments in unconsolidated joint ventures
We use the equity method of accounting for investments in joint ventures in which we are able to exert significant influence, but not control. Joint ventures in which our investment ownership is less than 20% and where we are unable to exert significant influence are carried at cost. We assess our investments in unconsolidated joint ventures for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other-than-temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated joint venture at fair value.
Investments in consolidated joint ventures
SPIG maintains a 60% ownership interest in a joint venture entity, which is consolidated into the B&W Environmental segment results.
Goodwill
Goodwill represents the excess of the cost of our acquired businesses over the fair value of the net assets acquired. We perform testing of goodwill for impairment annually or when impairment indicators are present. We may elect to perform a qualitative test when we believe that there is substantially in excess fair value over carrying value based on our most recent
quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform a quantitative impairment test. In all other circumstances, we perform a quantitative impairment test to identify potential goodwill impairment and measure the amount of any goodwill impairment. Goodwill impairment tests recognize impairment for the amount that the carrying value of a reporting unit exceeds its fair value up to the remaining amount of goodwill.
Intangible assets
Intangible assets are recognized at fair value when acquired. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and tested for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to impairment testing at least annually or in interim periods when impairment indicators are present. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite lived intangible assets for impairment by determining the fair value of the indefinite lived intangible asset and comparing the fair value of the intangible asset to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we recognize impairment for the amount of the difference.
Derivative financial instruments
Derivative assets and liabilities usually consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. As of December 31, 2020, we do not hold any derivative assets or liabilities; the last of our derivative contracts were sold during the first quarter of 2019.
Self-insurance
We have a wholly owned insurance subsidiary that provides employer's liability, general and automotive liability and workers' compensation insurance and, from time to time, builder's risk insurance (within certain limits) to our companies. We may also, in the future, have this insurance subsidiary accept other risks that we cannot or do not wish to transfer to outside insurance companies. Included in other non-current liabilities on our Consolidated Balance Sheets are reserves for self-insurance totaling $11.6 million and $15.7 million as of December 31, 2020 and 2019, respectively.
Loss contingencies
We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such probable loss is not reasonably estimable. We are currently involved in some significant litigation, as discussed in Note 19. Our losses are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties; the attribution of damages, if any, among multiple defendants; plaintiffs, in most cases involving personal injury claims, do not specify the amount of damages claimed; the discovery process may take multiple years to complete; during the litigation process, it is common to have multiple complex unresolved procedural and substantive issues; the potential availability of insurance and indemnity coverages; the wide-ranging outcomes reached in similar cases, including the variety of damages awarded; the likelihood of settlements for de minimis amounts prior to trial; the likelihood of success at trial; and the likelihood of success on appeal. Consequently, it is possible future earnings could be affected by changes in our assessments of the probability that a loss has been incurred in a material pending litigation against us and/or changes in our estimates related to such matters.
Loss recoveries
We recognize loss recoveries and provide disclosures only when receipt of the recovery is probable and we are able to reasonably estimate the amount of the recovery. Our loss recoveries are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties, multiple complex unresolved procedural and substantive issues; the wide-ranging outcomes reached in similar cases, including the variety of losses incurred. Consequently, it is possible future earnings could be affected by changes in our assessments of the probability that a loss recovery has been recognized and/or changes in our estimates related to such matters. See Note 5 for discussion regarding the loss recovery recognized in 2020 and 2019.
Stock-based compensation
The fair value of equity-classified awards, such as restricted stock, performance shares and stock options, is determined on the date of grant and is not remeasured. The fair value of liability-classified awards, such as cash-settled stock appreciation rights, restricted stock units and performance units, is determined on the date of grant and is remeasured at the end of each reporting period through the date of settlement. Fair values for restricted stock, restricted stock units, performance shares and performance units are determined using the closing price of our common stock on the date of grant. Fair values for stock options are determined using a Black-Scholes option-pricing model (“Black-Scholes”). For performance shares or units that contain a Relative Total Shareholder Return vesting criteria and for stock appreciation rights, we utilize a Monte Carlo simulation to determine the fair value, which determines the probability of satisfying the market condition included in the award. The determination of the fair value of a share-based payment award using an option-pricing model or a Monte Carlo simulation requires the input of significant assumptions, such as the expected life of the award and stock price volatility.
We recognize expense for all stock-based awards granted on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. For liability-classified awards, changes in fair value are recognized through cumulative catch-ups each period. Excess tax benefits on stock-based compensation are to be presented as a financing cash flow, rather than as a reduction of taxes paid. These excess tax benefits result from tax deductions in excess of the cumulative compensation expense recognized for options exercised and other equity-classified awards. See Note 17 for further discussion of stock-based compensation.
Recently adopted accounting standards
Effective January 1, 2020, we adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The new guidance requires companies acting as the customer in a cloud hosting service arrangement to follow the requirements of ASC 350-40 for capitalizing implementation costs for internal-use software and requires the amortization of these costs over the life of the related service contract. The impact of this standard on our consolidated financial statements was immaterial.
NOTE 3 – EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share of our common stock, net of non-controlling interest:
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|
|
|
|
|
|
|
|
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Year ended December 31,
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(in thousands, except per share amounts)
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2020
|
2019
|
Loss from continuing operations
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$
|
(12,118)
|
|
$
|
(122,668)
|
|
Income from discontinued operations, net of tax
|
1,800
|
|
694
|
|
Net loss attributable to stockholders
|
$
|
(10,318)
|
|
$
|
(121,974)
|
|
|
|
|
Weighted average shares used to calculate basic and diluted earnings per share
|
48,710
|
|
31,514
|
|
|
|
|
Basic and diluted (loss) earnings per share:
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|
|
Continuing operations
|
$
|
(0.25)
|
|
$
|
(3.89)
|
|
Discontinued operations
|
0.04
|
|
0.02
|
|
Basic and diluted loss per share
|
$
|
(0.21)
|
|
$
|
(3.87)
|
|
In July 2019, the Company completed a rights offering to existing common stockholders (the “2019 Rights Offering”). Because the rights issuance was offered to all existing stockholders at an exercise price that was less than the fair value of our Common Stock, as of such time, the weighted average shares outstanding and basic and diluted earnings (loss) per share were adjusted retroactively to reflect the bonus element of the rights offering for all periods presented by a factor of 1.0875. Weighted average shares, prior to giving effect to the 2019 Rights Offering, in 2019 were 11,635 thousand.
Because we incurred a net loss in the years ended December 31, 2020 and 2019, respectively basic and diluted shares are the same. If we had net income in years ended December 31, 2020 and 2019 diluted shares would include an additional 610.9 thousand and 150.0 thousand shares, respectively.
We excluded 1.3 million and 0.3 million shares related to stock options from the diluted share calculation for the years ended December 31, 2020 and 2019, respectively, because their effect would have been anti-dilutive.
NOTE 4 – SEGMENT REPORTING
Effective September 30, 2020 as part of our strategic, market-focused organizational and re-branding initiative to accelerate growth and provide stakeholders improved visibility into our renewable and environmental growth platforms, we realigned certain businesses and management structure to recognize how we allocate resources and analyze the operating performance of our businesses. This realignment changed our reportable segments beginning with our third quarter of 2020. All periods have been recast to reflect this change. Our operations are assessed based on three reportable segments as described in Note 2. Revenues exclude eliminations of revenues generated from sales to other segments or to other product lines within the segment. An analysis of our operations by segment is as follows:
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|
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Year ended December 31,
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(in thousands)
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2020
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2019
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Revenues:
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B&W Renewable segment
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|
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B&W Renewable
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$
|
89,790
|
|
$
|
94,119
|
|
Vølund
|
66,397
|
|
111,432
|
|
|
156,187
|
|
205,551
|
|
B&W Environmental segment
|
|
|
B&W Environmental
|
45,186
|
|
184,477
|
|
SPIG
|
52,341
|
|
80,729
|
|
BWV-AB
|
10,441
|
|
10,429
|
|
|
107,968
|
|
275,635
|
|
B&W Thermal segment
|
|
|
B&W Thermal
|
304,968
|
|
409,744
|
|
|
304,968
|
|
409,744
|
|
|
|
|
Eliminations
|
(2,806)
|
|
(31,819)
|
|
|
$
|
566,317
|
|
$
|
859,111
|
|
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, MTM pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segments.
Adjusted EBITDA for each segment is presented below with a reconciliation to net loss attributable to stockholders.
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Adjusted EBITDA (1)(2)
|
|
|
B&W Renewable segment
|
$
|
24,957
|
|
$
|
1,617
|
|
B&W Environmental segment
|
3,474
|
|
12,512
|
|
B&W Thermal segment
|
35,435
|
|
51,353
|
|
Corporate
|
(14,425)
|
|
(17,579)
|
|
Research and development costs
|
(4,379)
|
|
(2,861)
|
|
|
45,062
|
|
45,042
|
|
|
|
|
Restructuring activities
|
(11,849)
|
|
(11,707)
|
|
Financial advisory services
|
(4,384)
|
|
(9,069)
|
|
Settlement cost to exit Vølund contract (3)
|
—
|
|
(6,575)
|
|
Advisory fees for settlement costs and liquidity planning
|
(6,357)
|
|
(11,824)
|
|
Litigation fees and settlement
|
(2,137)
|
|
(475)
|
|
Loss on business held for sale
|
(467)
|
|
(5,850)
|
|
Stock compensation
|
(4,587)
|
|
(3,376)
|
|
Interest on letters of credit included in cost of operations
|
(917)
|
|
(365)
|
|
Depreciation & amortization
|
(16,805)
|
|
(23,605)
|
|
Loss from a non-strategic business
|
(2,559)
|
|
(5,518)
|
|
Gain on asset disposals, net
|
3,263
|
|
3,940
|
|
Operating loss
|
(1,737)
|
|
(29,382)
|
|
Interest expense, net
|
(59,150)
|
|
(93,978)
|
|
Loss on debt extinguishment
|
(6,194)
|
|
(3,969)
|
|
Loss on sale of business
|
(108)
|
|
(3,601)
|
|
Net pension benefit before MTM
|
28,754
|
|
13,996
|
|
MTM (loss) gain from benefit plans
|
(23,154)
|
|
8,804
|
|
Foreign exchange
|
58,799
|
|
(16,602)
|
|
Other – net
|
(1,128)
|
|
285
|
|
Total other expense
|
(2,181)
|
|
(95,065)
|
|
Loss before income tax expense
|
(3,918)
|
|
(124,447)
|
|
Income tax expense
|
8,179
|
|
5,286
|
|
Loss from continuing operations
|
(12,097)
|
|
(129,733)
|
|
Income from discontinued operations, net of tax
|
1,800
|
|
694
|
|
Net loss
|
(10,297)
|
|
(129,039)
|
|
Net (income) loss attributable to non-controlling interest
|
(21)
|
|
7,065
|
|
Net loss attributable to stockholders
|
$
|
(10,318)
|
|
$
|
(121,974)
|
|
(1) During the year ended December 31, 2020, we redefined our definition of adjusted EBITDA to eliminate the effects of certain items including loss from a non-strategic business, interest on letters of credit included in cost of operations and loss on business held for sale. Consequently, adjusted EBITDA in prior periods have been revised to conform with the revised definition and present separate reconciling items in our reconciliation.
(2) Adjusted EBITDA for the year ended December 31, 2020, includes the recognition of a $26.0 million loss recovery settlement related to certain historical EPC loss contracts in the third quarter.
(3) In March 2019, we entered into a settlement in connection with an additional B&W Renewable waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The settlement eliminated our obligations to act, and our risk related to acting, as the prime EPC should the project have moved forward.
We do not separately identify or report our assets by segment as our chief operating decision maker does not consider assets by segment to be a critical measure by which performance is measured.
We provide our products and services to a diverse customer base that includes utilities and other power producers located around the world. We have no customers that individually account for more than 10% of our consolidated revenues for the years ended December 31, 2020 and 2019.
We estimate that 43% and 45% of our consolidated revenues in 2020 and 2019, respectively, were related to coal-fired power plants. The availability of natural gas in great supply has caused, in part, low prices for natural gas in the United States, which has led to more demand for natural gas relative to energy derived from coal. A material decline in spending by electric power generating companies and other steam-using industries on coal-fired power plants over a sustained period of time could materially and adversely affect the demand for our power generation products and services and, therefore, our financial condition, results of operations and cash flows. Coal-fired power plants have been scrutinized by environmental groups and government regulators over the emissions of potentially harmful pollutants. This scrutiny and other economic incentives including tax advantages, have promoted the growth of nuclear, wind and solar power, among others, and a decline in cost of renewable power plant components and power storage. The recent economic environment and uncertainty concerning new environmental legislation or replacement rules or regulations in the United States and elsewhere has caused many of our major customers, principally electric utilities, to delay making substantial expenditures for new plants, and delay upgrades to existing power plants.
Information about our consolidated operations in different geographic areas
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
REVENUES (1)
|
|
|
United States
|
$
|
310,958
|
|
$
|
460,484
|
|
Canada
|
43,936
|
|
113,660
|
|
Denmark
|
28,590
|
|
27,311
|
|
United Kingdom
|
25,811
|
|
54,347
|
|
Indonesia
|
19,644
|
|
16,739
|
|
Sweden
|
11,430
|
|
18,789
|
|
China
|
8,461
|
|
18,430
|
|
Finland
|
6,606
|
|
14,118
|
|
South Korea
|
4,050
|
|
14,443
|
|
Aggregate of all other countries, each with less than $10 million in revenues
|
106,831
|
|
120,790
|
|
|
$
|
566,317
|
|
$
|
859,111
|
|
(1) We allocate geographic revenues based on the location of the customer's operations.
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
NET PROPERTY, PLANT AND EQUIPMENT, AND FINANCE LEASE
|
|
|
United States
|
$
|
46,734
|
|
$
|
61,111
|
|
Mexico
|
18,173
|
|
19,241
|
|
Denmark
|
7,327
|
|
6,801
|
|
United Kingdom
|
5,274
|
|
5,469
|
|
China
|
889
|
|
76
|
|
Aggregate of all other countries
|
6,681
|
|
4,355
|
|
|
$
|
85,078
|
|
$
|
97,053
|
|
NOTE 5 – REVENUE RECOGNITION AND CONTRACTS
Revenue Recognition
We generate the vast majority of our revenues from the supply of, and aftermarket services for, steam-generating, environmental and auxiliary equipment. We also earn revenue from the supply of custom-engineered cooling systems for
steam applications along with related aftermarket services. Our revenue recognition accounting policy is described in more detail in Note 2.
Contract Balances
The following represents the components of our contracts in progress and advance billings on contracts included in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
$ Change
|
% Change
|
Contract assets - included in contracts in progress:
|
|
|
|
|
Costs incurred less costs of revenue recognized
|
$
|
25,888
|
|
$
|
29,877
|
|
$
|
(3,989)
|
|
(13)
|
%
|
Revenues recognized less billings to customers
|
33,420
|
|
61,702
|
|
(28,282)
|
|
(46)
|
%
|
Contracts in progress
|
$
|
59,308
|
|
$
|
91,579
|
|
$
|
(32,271)
|
|
(35)
|
%
|
Contract liabilities - included in advance billings on contracts:
|
|
|
|
|
Billings to customers less revenues recognized
|
$
|
61,884
|
|
$
|
76,468
|
|
$
|
(14,584)
|
|
(19)
|
%
|
Costs of revenue recognized less cost incurred
|
2,118
|
|
(1,181)
|
|
3,299
|
|
(279)
|
%
|
Advance billings on contracts
|
$
|
64,002
|
|
$
|
75,287
|
|
$
|
(11,285)
|
|
(15)
|
%
|
|
|
|
|
|
Net contract balance
|
$
|
(4,694)
|
|
$
|
16,292
|
|
$
|
(20,986)
|
|
129
|
%
|
|
|
|
|
|
Accrued contract losses
|
$
|
582
|
|
$
|
6,139
|
|
$
|
(5,557)
|
|
(91)
|
%
|
The following amounts represent retainage on contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
$ Change
|
% Change
|
Retainage expected to be collected within one year
|
$
|
2,969
|
|
$
|
474
|
|
$
|
2,495
|
|
526
|
%
|
Retainage expected to be collected after one year
|
632
|
|
5,739
|
|
(5,107)
|
|
(89)
|
%
|
Total retainage
|
$
|
3,601
|
|
$
|
6,213
|
|
$
|
(2,612)
|
|
(42)
|
%
|
We have included retainage expected to be collected in 2020 in accounts receivable – trade, net in our Consolidated Balance Sheets. Retainage expected to be collected after one year are included in other assets in our Consolidated Balance Sheets. Of the long-term retainage at December 31, 2020, we anticipate collecting $0.6 million in 2022.
Backlog
On December 31, 2020 we had $535.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 56.4%, 12.9% and 30.7% of our remaining performance obligations as revenue in 2021, 2022 and thereafter, respectively.
Changes in Contract Estimates
In the years ended December 31, 2020 and 2019, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Increases in gross profits for changes in estimates for over time contracts (1)
|
$
|
43,597
|
|
$
|
34,622
|
|
Decreases in gross profits for changes in estimates for over time contracts
|
(17,480)
|
|
(50,050)
|
|
Net changes in gross profits for changes in estimates for over time contracts
|
$
|
26,117
|
|
$
|
(15,428)
|
|
(1) Increases in gross profits for changes in estimates for over time contracts reflects insurance loss recovery of $26.0 million in the year ended December 31, 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 had one remaining extended scope contract in our B&W Renewable segment which turned into a loss contract in 2019.
In the years ended December 31, 2020 and 2019, we recorded $3.7 million and $6.9 million in net losses, respectively, inclusive of warranty expense as described in Note 11, resulting from changes in the estimated revenues and costs to complete the six European B&W Renewable EPC loss contracts. We did not change our estimate of liquidated damages in the year ended December 31, 2020. The changes in estimates in the year ended December 31, 2019 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these six contracts by $1.8 million. Total anticipated liquidated damages associated with these six contracts were $95.6 million and $86.8 million at December 31, 2020 and December 31, 2019, respectively.
As of December 31, 2019, five of the six European B&W Renewable EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the March 29, 2019 settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying a combined £70 million ($91.5 million) on April 5, 2019 in exchange for limiting and further defining our obligations under the second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately $144 million), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by May 31, 2019, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminated all historical claims and remaining liquidated damages. In accordance with the settlement, we have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed. We estimated the portion of this settlement related to waiver of the rejection right on the fifth loss contract was $81.1 million, which was recorded in the fourth quarter of 2018 as a reduction in the selling price. We continue to pursue claims against subcontractors.. For the second loss contract, the settlement limited the remaining performance obligations and settled historic claims for nonconformance and delays, and we turned over the plant in May 2019, and subsequently began the operations and maintenance contract to operate this plant.
As of December 31, 2020, the status of these six B&W Renewable EPC loss contracts was as follows:
•The first contract, a waste-to-energy plant in Denmark, became a loss contract in 2016. As of December 31, 2020, this contract was approximately 100% complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017. A settlement was reached with the customer to achieve takeover on January 31, 2019, after which only punch list items and other agreed to remediation items remain, most of which are expected to be performed during the customer's scheduled maintenance outages. As of January 31, 2019, the contract is in the warranty phase. On January 15, 2021 we reached agreement with the customer to achieve final takeover which completes the base warranty period and confirms the agreed to remaining remediation items. During the year ended December 31, 2020, we recognized additional contract losses of $2.7 million, inclusive of warranty. Our estimate at completion as of December 31, 2020 includes $9.8 million of total expected liquidated damages. As of December 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.1 million. In the year ended December 31, 2019, we recognized additional contract losses of $2.3 million as a result of identifying additional remediation costs. As of December 31, 2019, this contract had $1.1 million of accrued losses and was approximately 99% complete.
•The second contract, a biomass plant in the United Kingdom, became a loss contract in 2016. As of December 31, 2020, this contract was approximately 100% complete. Trial operations began in April 2019 and takeover by the customer occurred effective May 2019. This project is subject to the March 29, 2019 settlement agreement described above. During the year ended December 31, 2020, we recognized additional contract losses of $0.7 million on this contract, inclusive of warranty, as a result of additional punch list and other commissioning costs. Our estimate at completion as of December 31, 2020 includes $20.6 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of December 31, 2020 and 2019 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of December 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.1 million.
In the year ended December 31, 2019, we recognized contract losses of $2.3 million on this contract as a result of repairs required during startup commissioning activities, additional expected punch list and other commissioning costs, and changes in construction cost estimates. As of December 31, 2019, this contract had no accrued losses and was approximately 100% complete.
•The third contract, a biomass plant in Denmark, became a loss contract in 2016. As of December 31, 2020, this contract was approximately 100% complete. Warranty began in March 2018, when we agreed to a partial takeover with the customer, and we agreed to a full takeover by the customer at the end of October 2018, when we also agreed to a scheduled timeline for remaining punch list activities to be completed around the customer's future planned outages. During the year ended December 31, 2020, we recognized additional contract losses of $1.1 million, inclusive of warranty. Our estimate at completion as of December 31, 2020 includes $7.3 million of total expected liquidated damages due to schedule delays. As of December 31, 2020, we expect no future charges due to this contract and, accordingly, we have no reserve for estimated contract losses. In the year ended December 31, 2019, we recognized additional contract losses of $0.1 million as a result of changes in the estimated costs at completion. As of December 31, 2019, this contract had no accrued losses and was approximately 100% complete.
•The fourth contract, a biomass plant in the United Kingdom, became a loss contract in 2016. As of December 31, 2020, this contract was approximately 100% complete. Trial operations began in November 2018 and takeover by the customer occurred in February 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. During the year ended December 31, 2020, we recognized additional contract losses of $1.1 million on this contract, inclusive of warranty, due to changes in cost to complete remaining punch list items and other close out items. Our estimate at completion as of December 31, 2020 includes $22.5 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of December 31, 2020 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of December 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.1 million. In the year ended December 31, 2019, we recognized additional contract losses of $5.2 million on this contract due to changes in estimated bonus revenue and cost to complete remaining punch list, remediation of certain performance guarantees and other close out items. As of December 31, 2019, this contract had $0.2 million of accrued losses and was approximately 100% complete.
•The fifth contract, a biomass plant in the United Kingdom, became a loss contract in 2017. As of December 31, 2020, this contract was approximately 100% complete. This project is subject to the March 29, 2019 settlement agreement described above. We estimated the portion of this settlement related to waiver of the rejection right on the fifth loss contract was $81.1 million, which was recorded in the fourth quarter of 2018 as a reduction in the selling price. We continue to pursue claims against subcontractors. Under the settlement, our remaining performance obligations were limited to construction support services to complete certain key systems of the plant by May 31, 2019. The settlement also eliminated all historical claims and remaining liquidated damages. Remaining items at December 31, 2020 primarily related to subcontract close outs and other finalization items under the terms of the settlement. During the year ended December 31, 2020, our estimated loss on the contract improved by $0.4 million. Our estimate at completion as of December 31, 2020, includes $14.7 million of total expected liquidated damages due to schedule delays. Our estimates at completion as of December 31, 2020 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of December 31, 2020, we expect no future charges due to this contract and, accordingly, we have no reserve for estimated contract losses. During the year ended December 31, 2019, our estimated loss on the contract improved by $5.6 million inclusive of warranty. As of December 31, 2019, this contract had $2.4 million of accrued losses and was approximately 98% complete.
•The sixth contract, a waste-to-energy plant in the United Kingdom, became a loss contract in 2017. As of December 31, 2020, this contract was approximately 100% complete. The contract is in the warranty phase. During the year ended December 31, 2020, our estimated loss on the contract improved by $1.5 million, inclusive of warranty. Our estimate at completion as of December 31, 2020 includes $20.6 million of total expected liquidated damages due to schedule delays. As of December 31, 2020, we expect no future charges due to this contract and, accordingly, we have no reserve for estimated contract losses. In the year ended December 31, 2019, we revised our revenue and costs at completion for this contract, which resulted in additional contract losses of $2.5 million related to matters encountered in completing punch list items. As of December 31, 2019, this contract had $0.3 million of accrued losses and was approximately 99% complete.
In the fourth quarter of 2019, one of our other B&W Renewable energy contracts turned into a loss contract (estimate loss of $0.2 million) due to the extension of time and other start-up costs associated with the completion of the trial operations run and turnover to the client. This contract was turned over to the client in October 2019. During the years ended December 31, 2020 and 2019, we recognized additional charges of $2.5 million and $3.4 million, respectively, on this contract.
In September 2017, we identified the failure of a structural steel beam on the fifth contract, which stopped work in the boiler building and other areas pending corrective actions to stabilize the structure. Provisional regulatory approval to begin structural repairs to the failed beam was obtained on March 29, 2018 (later than previously estimated), and full approval to proceed with repairs was obtained in April 2018. Full access to the site was obtained on June 6, 2018 after completion of the repairs to the structure. The engineering, design and manufacturing of the steel structure were the responsibility of our subcontractors. A similar design was also used on the second and fourth contracts, and although no structural failure occurred on these two other contracts, work was also stopped in certain restricted areas while we added reinforcement to the structures, which also resulted in delays that lasted until late January 2018. The total costs related to the structural steel issues on these three contracts, including contract delays, are estimated to be approximately $36 million, which is included in the December 31, 2020 estimated losses at completion for these three contracts. We continue to pursue recovery of this cost from responsible subcontractors. In June 2019, we agreed in principle to a settlement agreement under one insurance policy related to recover GBP 2.8 million ($3.5 million) of certain losses on the fifth project; which our insurer paid us in September 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 loss recovery of $26.0 million as a reduction of our Cost of operations in our Consolidated Statements of Operations. On October 23, 2020, we received $26.0 million of gross proceeds under the settlement agreement. As required by the Company’s U.S. Revolving Credit Facility, 50% of the net proceeds (gross proceeds less costs) or $8.0 million of the settlement received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility in October 2020.
The Company is continuing to pursue other potential loss recoveries and claims where appropriate and available.
Other B&W Renewable Contract Settlement
In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The £5.0 million (approximately $6.6 million) payment on April 5, 2019 for the settlement eliminated our obligations to act, and our risk related to acting, as the prime EPC should the project have moved forward.
B&W Environmental Loss Contracts
At December 31, 2020, the B&W Environmental segment had two significant loss contracts, each of which are contracts for a dry cooling system for a gas-fired power plant in the United States. In the years ended December 31, 2020 and 2019, we recorded $1.3 million and $5.6 million in net losses, respectively, resulting from changes in estimated revenue and cost to complete these two loss contracts.
At December 31, 2020, construction and procurement are complete on the first loss contract. Overall, the contract is approximately 100% complete as of 2020 with only warranty obligations remaining. As of December 31, 2020, we have no reserve for estimated contract losses. As of December 31, 2019, this contract had accrued losses of $0.1 million and was approximately 99% complete. Construction is being performed by the B&W Thermal segment, but the contract loss is included in the B&W Environmental segment.
At December 31, 2020, the design and procurement are nearing completion on the second loss contract. Overall, the contract is approximately 99% complete and final completion is expected to be in the first quarter of 2021. During the year ended December 31, 2020, we recognized additional contract losses of $1.3 million on this contract due to issues with the seismic design and fan screens. As of December 31, 2020, the reserve for estimated contract losses recorded in other accrued liabilities in our Consolidated Balance Sheets was $0.1 million related to this contract. In the year ended December 31, 2019, we recognized additional contract losses of $3.3 million on this contract due to issues with seismic design and fan screens. As of December 31, 2019, this contract had accrued losses of $0.9 million and was 87% complete.
NOTE 6 – INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Raw materials and supplies
|
$
|
46,659
|
|
$
|
42,685
|
|
Work in progress
|
8,195
|
|
7,502
|
|
Finished goods
|
12,307
|
|
12,916
|
|
Total inventories
|
$
|
67,161
|
|
$
|
63,103
|
|
NOTE 7 – PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASE
Property, plant and equipment, and finance lease less accumulated depreciation is as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Land
|
$
|
1,584
|
|
$
|
2,998
|
|
Buildings
|
34,207
|
|
84,005
|
|
Machinery and equipment
|
151,399
|
|
154,016
|
|
Property under construction
|
5,336
|
|
6,204
|
|
|
192,526
|
|
247,223
|
|
Less accumulated depreciation
|
135,925
|
|
180,562
|
|
Net property, plant and equipment
|
56,601
|
|
66,661
|
|
Finance lease
|
30,551
|
|
30,405
|
|
Less finance lease accumulated amortization
|
2,074
|
|
13
|
|
Net property, plant and equipment, and finance lease
|
$
|
85,078
|
|
$
|
97,053
|
|
In December 2019, we consolidated all of our Barberton and most of our Copley, Ohio operations into new, leased office space in Akron, Ohio and $4.9 million of accelerated depreciation was recognized during the year ended December 31, 2019.
NOTE 8 – GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of December 31, 2020 after giving effect to the reallocation of our goodwill across our new reportable segments as more fully described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
B&W Renewable
|
B&W Environmental
|
B&W Thermal
|
Total
|
Balance at December 31, 2019
|
$
|
10,169
|
|
$
|
5,652
|
|
$
|
31,339
|
|
$
|
47,160
|
|
Currency translation adjustments
|
42
|
|
21
|
|
140
|
|
203
|
|
Balance at December 31, 2020
|
$
|
10,211
|
|
$
|
5,673
|
|
$
|
31,479
|
|
$
|
47,363
|
|
Goodwill is tested for impairment annually and when impairment indicators exist. No impairment was recorded during the years ended December 31, 2020 and December 31, 2019. 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.
In conducting the annual impairment test for goodwill, the Company has the option to first assess qualitative factors to determine whether it is more likely than not the fair value of any reporting unit is less than its carrying amount. If the Company elects to perform a qualitative assessment and determines an impairment is more likely than not, the Company is required to perform a quantitative impairment test. Otherwise, no further analysis is required. Alternatively, the Company may elect to proceed directly to the quantitative impairment test.
During the annual goodwill impairment testing as of October 1, 2020, the Company first assessed qualitative factors to determine whether it was necessary to perform the quantitative impairment test. Based on the assessment of qualitative
factors, including the fact that the company had performed a quantitative impairment test as of September 30, 2020, it was determined that it is not more likely than not the fair value of any reporting unit was less than its carrying amount. No impairment charges were recorded as a result of the qualitative testing performed.
On September 30, 2020, the previous Babcock & Wilcox and Babcock & Wilcox Construction Co., LLC reporting units became the B&W Thermal and B&W Construction Co., LLC reporting units, respectively, within the Babcock & Wilcox Thermal operating segment. The Company also identified the B&W Renewable and B&W Environmental reporting units related to the transfer of businesses from the former Babcock & Wilcox reporting unit to the Babcock & Wilcox Renewable and Babcock & Wilcox Environmental operating segments. Consequently, the Company re-allocated goodwill between the affected reporting units based on their relative fair values and compared the carrying value to the fair value of each impacted reporting unit. In conjunction with the changes mentioned above, the Company determined that this represented a triggering event for an interim goodwill assessment and performed a goodwill impairment test of the impacted reporting units on a before and after basis and based on the assessment, as of September 30, 2020, concluded that the fair value of the impacted reporting units exceeded their carrying values. Accordingly, no impairment was indicated during the interim assessment, as of September 30, 2020.
In the first quarter of 2020, our share price declined significantly, which we considered to be a triggering event for an interim goodwill assessment. We primarily attributed the significant decline in our share price to the current macroeconomic conditions and impacts COVID-19 will have on our operations. Based on the interim assessment, as of March 31, 2020, no impairment was indicated during the first quarter of 2020.
No impairment indicators were identified during 2019.
NOTE 9 – INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Definite-lived intangible assets
|
|
|
Customer relationships
|
$
|
24,862
|
|
$
|
24,440
|
|
Unpatented technology
|
15,713
|
|
14,917
|
|
Patented technology
|
2,642
|
|
2,598
|
|
Tradename
|
13,088
|
|
12,372
|
|
All other
|
9,262
|
|
9,225
|
|
Gross value of definite-lived intangible assets
|
65,567
|
|
63,552
|
|
Customer relationships amortization
|
(19,537)
|
|
(18,616)
|
|
Unpatented technology amortization
|
(6,751)
|
|
(5,245)
|
|
Patented technology amortization
|
(2,593)
|
|
(2,476)
|
|
Tradename amortization
|
(4,831)
|
|
(4,257)
|
|
All other amortization
|
(9,252)
|
|
(8,963)
|
|
Accumulated amortization
|
(42,964)
|
|
(39,557)
|
|
Net definite-lived intangible assets
|
$
|
22,603
|
|
$
|
23,995
|
|
Indefinite-lived intangible assets
|
|
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
Total intangible assets, net
|
$
|
23,908
|
|
$
|
25,300
|
|
The following summarizes the changes in the carrying amount of intangible assets:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Balance at beginning of period
|
$
|
25,300
|
|
$
|
30,793
|
|
Amortization expense
|
(3,406)
|
|
(4,274)
|
|
|
|
|
Currency translation adjustments and other
|
2,014
|
|
(1,219)
|
|
Balance at end of the period
|
$
|
23,908
|
|
$
|
25,300
|
|
Amortization of intangible assets is included in cost of operations and SG&A in our Consolidated Statement of Operations but is not allocated to segment results.
Estimated future intangible asset amortization expense is as follows (in thousands):
|
|
|
|
|
|
|
Amortization Expense
|
Year ending December 31, 2021
|
$
|
3,369
|
|
Year ending December 31, 2022
|
3,323
|
|
Year ending December 31, 2023
|
3,322
|
|
Year ending December 31, 2024
|
3,250
|
|
Year ending December 31, 2025
|
2,661
|
|
Thereafter
|
6,678
|
|
Long-lived assets, including definite-lived intangible assets are reviewed for impairment whenever circumstances indicate that the carrying amount might not be recoverable. The circumstances leading to the first quarter interim goodwill assessment as described in Note 8 also triggered an evaluation of long-lived assets, including intangible assets. The Company performed an analysis as required by ASC 360-10-35 to assess the recoverability of other long-lived assets in its B&W Renewable and B&W Environmental asset groups. With respect to these asset groups the sum of the undiscounted cash flows and the residual value of the primary assets exceeded the carrying value of both the B&W Vølund and B&W SPIG asset groups and no impairment was indicated during the first quarter of 2020.
Interim impairment testing was performed for the B&W Renewable and B&W Environmental asset groups due to continued net operating losses and significant decreases in revenues experienced during 2019. In our interim test as of September 30, 2019, the sum of the undiscounted cash flows and the residual value of the primary assets exceeded the carrying value of both the B&W Renewable and B&W Environmental asset groups and no impairment was indicated.
As of December 31, 2020 and 2019, the B&W Vølund asset group had $0.5 million and $1.1 million of identifiable intangible assets, net of accumulated amortization, respectively.
As of December 31, 2020 and 2019, the B&W SPIG asset group had $21.1 million and $21.6 million of identifiable intangible assets, net of accumulated amortization, respectively.
We believe the estimates and assumptions utilized in our interim impairment testing are reasonable. However, actual results could differ substantially from those used in our valuations. To the extent such factors result in a failure to achieve the level of undiscounted forecasted cash flows used to estimate fair value for the purpose determining whether or not an impairment calculation should be performed for the intangible assets, or if we committed to a strategy to sell one or more of the reporting units in the near future as we continue to reevaluate our ongoing operations, we may be required to record non-cash impairment charges in the future which could have an adverse impact on our business, financial condition and results of operations.
NOTE 10 – LEASES
Accounting for Leases
We determine if an arrangement is a lease at inception. Operating leases are included in right-of-use (“ROU”) assets, operating lease liabilities and non-current operating lease liabilities in the Consolidated Balance Sheets. Finance leases are included in net property, plant and equipment, and finance lease, other accrued liabilities and other non-current finance liabilities in the Consolidated Balance Sheets. Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As substantially all of our leases do not provide an
implicit rate, we use our incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The ROU assets also include any prepaid lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, which we recognize when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
For leases beginning in 2019 and later, we account for lease components (e.g., fixed payments including rent) together with the non-lease components (e.g., common-area maintenance costs) as a single lease component for all classes of underlying assets.
In December 2019, we consolidated all of our Barberton and most of our Copley, Ohio operations into new leased office space in Akron, Ohio as described in Note 7. The lease is classified as a finance lease and has an initial term of fifteen years, with an option to extend up to two additional ten-year terms and no option of early termination. As we are not reasonably certain to exercise the option to extend the lease beyond the initial base term, only payments related to the initial term were included in the initial ROU asset. Base rent will increase two percent annually, making the total future minimum payments during the initial term of the lease approximately $51.6 million as of December 31, 2020. Based upon an initial term of fifteen years, an incremental borrowing rate of 8% was used to determine the ROU asset, as no implicit rate was identified in the lease agreement. We recorded a $28.3 million ROU asset in net property, plant and equipment, and finance lease and corresponding liabilities in other accrued liabilities and other non-current finance liabilities in the Consolidated Balance Sheets as of December 31, 2020.
We have operating and finance leases for real estate, vehicles, and certain equipment. Our leases have remaining lease terms of up to 15 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.
The components of lease expense included on our Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Year ended December 31,
|
(in thousands)
|
Classification
|
2020
|
2019
|
Operating lease expense:
|
|
|
|
Operating lease expense
|
Selling, general and administrative expenses
|
$
|
5,736
|
|
$
|
6,624
|
|
Short-term lease expense
|
Selling, general and administrative expenses
|
1,960
|
|
6,575
|
|
Variable lease expense (1)
|
Selling, general and administrative expenses
|
1,973
|
|
2,349
|
|
Total operating lease expense
|
|
$
|
9,669
|
|
$
|
15,548
|
|
|
|
|
|
Finance lease expense:
|
|
|
|
Amortization of right-of-use assets
|
Selling, general and administrative expenses
|
$
|
2,061
|
|
$
|
13
|
|
Interest on lease liabilities
|
Interest expense
|
2,452
|
|
14
|
|
Total finance lease expense
|
|
$
|
4,513
|
|
$
|
27
|
|
|
|
|
|
Sublease income (2)
|
Other – net
|
$
|
(86)
|
|
$
|
(67)
|
|
Net lease cost
|
|
$
|
14,096
|
|
$
|
15,508
|
|
(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:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
5,603
|
|
$
|
6,578
|
|
Operating cash flows from finance leases
|
2,452
|
|
14
|
|
Financing cash flows from finance leases
|
(13)
|
|
(12)
|
|
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
Operating leases
|
$
|
2,629
|
|
$
|
3,014
|
|
Finance leases
|
$
|
146
|
|
$
|
30,404
|
|
|
|
|
Weighted-average remaining lease term:
|
|
|
Operating leases (in years)
|
3.1
|
3.4
|
Finance leases (in years)
|
13.9
|
15.0
|
Weighted-average discount rate:
|
|
|
Operating leases
|
9.26
|
%
|
9.27
|
%
|
Finance leases
|
8.00
|
%
|
8.00
|
%
|
Amounts relating to leases were presented on our Consolidated Balance Sheets as of December 31, 2020 and 2019 in the following line items:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Assets:
|
Classification
|
December 31, 2020
|
December 31, 2019
|
Operating lease assets
|
Right-of-use assets
|
$
|
10,814
|
|
$
|
12,498
|
|
Finance lease assets
|
Net property, plant and equipment, and finance lease
|
28,477
|
|
30,392
|
|
Total non-current lease assets
|
|
$
|
39,291
|
|
$
|
42,890
|
|
|
|
|
|
Liabilities:
|
|
|
|
Current
|
|
|
|
Operating lease liabilities
|
Operating lease liabilities
|
$
|
3,995
|
|
$
|
4,323
|
|
Finance lease liabilities
|
Other accrued liabilities
|
886
|
|
(38)
|
|
Non-current
|
|
|
|
Operating lease liabilities
|
Non-current operating lease liabilities
|
7,031
|
|
8,388
|
|
Finance lease liabilities
|
Non-current finance lease liabilities
|
29,690
|
|
30,454
|
|
Total lease liabilities
|
|
$
|
41,602
|
|
$
|
43,127
|
|
Future minimum lease payments required under non-cancellable leases as of December 31, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Operating Leases
|
Finance Leases
|
Total
|
Year ending December 31, 2021
|
$
|
4,783
|
|
$
|
3,278
|
|
$
|
8,061
|
|
Year ending December 31, 2022
|
3,509
|
|
3,342
|
|
6,851
|
|
Year ending December 31, 2023
|
2,394
|
|
3,408
|
|
5,802
|
|
Year ending December 31, 2024
|
1,424
|
|
3,473
|
|
4,897
|
|
Year ending December 31, 2025
|
315
|
|
3,498
|
|
3,813
|
|
Thereafter
|
7
|
|
34,787
|
|
34,794
|
|
Total
|
$
|
12,432
|
|
$
|
51,786
|
|
$
|
64,218
|
|
Less imputed interest
|
(1,406)
|
|
(21,210)
|
|
(22,616)
|
|
Lease liability
|
$
|
11,026
|
|
$
|
30,576
|
|
$
|
41,602
|
|
NOTE 11 – 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:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Balance at beginning of period
|
$
|
33,376
|
|
$
|
45,117
|
|
Additions
|
11,912
|
|
9,557
|
|
Expirations and other changes
|
(8,391)
|
|
(7,622)
|
|
Payments
|
(13,916)
|
|
(12,446)
|
|
Translation and other
|
2,418
|
|
(1,230)
|
|
Balance at end of period
|
$
|
25,399
|
|
$
|
33,376
|
|
We accrue estimated expense included in cost of operations on our 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 cost is accrued when the contract becomes a loss contract. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. Warranty expense in the year ended December 31, 2019 includes $3.9 million of warranty reversal related to developments stemming from the March 29, 2019 settlement agreement for the B&W Renewable EPC loss contracts described in Note 5.
NOTE 12 – RESTRUCTURING ACTIVITIES
The Company incurred restructuring charges in 2019 and 2020. The charges primarily consist of severance 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 to impact of COVID-19 on our business.
The following tables summarize the restructuring activity incurred by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
Year ended December 31,
|
|
2020
|
|
2019
|
(in thousands)
|
Total
|
Severance and related costs
|
Other (1)
|
|
Total
|
Severance and related costs
|
Other (1)
|
B&W Renewable segment
|
$
|
5,926
|
|
$
|
4,537
|
|
$
|
1,389
|
|
|
$
|
2,233
|
|
$
|
2,176
|
|
$
|
57
|
|
B&W Environmental segment
|
745
|
|
293
|
|
452
|
|
|
2,000
|
|
1,888
|
|
112
|
|
B&W Thermal segment
|
4,725
|
|
1,962
|
|
2,763
|
|
|
3,040
|
|
2,791
|
|
249
|
|
Corporate
|
453
|
|
(52)
|
|
505
|
|
|
4,434
|
|
3,566
|
|
868
|
|
|
$
|
11,849
|
|
$
|
6,740
|
|
$
|
5,109
|
|
|
$
|
11,707
|
|
$
|
10,421
|
|
$
|
1,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative costs to date
|
$
|
40,314
|
|
$
|
33,213
|
|
$
|
7,101
|
|
(1) Other amounts consist primarily of exit, spin-off, relocation, COVID-19 related and other costs.
Restructuring liabilities are included in other accrued liabilities on our Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Balance at beginning of period
|
$
|
5,359
|
|
$
|
7,359
|
|
Restructuring expense
|
11,849
|
|
11,707
|
|
Payments
|
(9,062)
|
|
(13,707)
|
|
Balance at end of period
|
$
|
8,146
|
|
$
|
5,359
|
|
As of December 31, 2020, approximately $4.0 million in severance payments were made related to restructuring charges. Accrued restructuring liabilities at December 31, 2020 and 2019 relate primarily to employee termination benefits. In the fourth quarter of 2020, as part of the Company's continuing integration of worldwide teams, we accrued $3.5 million of employee severance and related costs. Restructuring liabilities are included in other accrued liabilities on our Consolidated Balance Sheets.
Additional charges may be recognized in future periods related to the actions described above, the timing and amount of which are not known at this time.
NOTE 13 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
We have historically provided defined benefit retirement benefits to domestic employees under the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the “U.S. Plan”), a noncontributory plan. As of 2006, the U.S. Plan was closed to new salaried plan entrants. Effective December 31, 2015, benefit accruals for those salaried employees covered by, and continuing to accrue service and salary adjusted benefits under the U.S. Plan ceased. As of December 31, 2020, and 2019, approximately 85 and 100 hourly union employees continue to accrue benefits under the U.S. Plan, respectively.
Effective January 1, 2012, a defined contribution component was adopted applicable to Babcock & Wilcox Canada, Ltd. (the “Canadian Plans”). Any employee with less than two years of continuous service as of December 31, 2011 was required to enroll in the defined contribution component of the Canadian Plans as of January 1, 2012 or upon the completion of 6 months of continuous service, whichever is later. These and future employees will not be eligible to enroll in the defined benefit component of the Canadian Plans. In 2014, benefit accruals under certain hourly Canadian pension plans were ceased with an effective date of January 1, 2015. As part of the spin-off transaction, we split the Canadian defined benefit plans from BWXT, which was completed in 2017. We did not present these plans as multi-employer plans because our portion was separately identifiable, and we were able to assess the assets, liabilities and periodic expense in the same manner as if it were a separate plan in each period.
We also sponsor the Diamond Power Specialty Limited Retirement Benefits Plan (the “U.K. Plan”) through our subsidiary. Benefit accruals under this plan ceased effective November 30, 2015. We have accounted for the GMP equalization following the U.K. High Court ruling during the fourth quarter of 2018 by recording prior service cost in accumulated other comprehensive income that will be amortized through net periodic pension cost over 15 years, ending December 31, 2033.
We do not provide retirement benefits to certain non-resident alien employees of foreign subsidiaries. Retirement benefits for salaried employees who accrue benefits in a defined benefit plan are based on final average compensation and years of service, while benefits for hourly paid employees are based on a flat benefit rate and years of service. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended, or other applicable law. Funding provisions under the Pension Protection Act accelerate funding requirements to ensure full funding of benefits accrued.
We make available other benefits which include postretirement health care and life insurance benefits to certain salaried and union retirees based on their union contracts, and on a limited basis, to future retirees.
Obligations and funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
Year Ended December 31,
|
Other Benefits
Year Ended December 31,
|
(in thousands)
|
2020
|
2019
|
2020
|
2019
|
Change in benefit obligation:
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
1,218,968
|
|
$
|
1,140,127
|
|
$
|
12,134
|
|
$
|
14,019
|
|
Service cost
|
792
|
|
778
|
|
19
|
|
15
|
|
Interest cost
|
33,267
|
|
43,312
|
|
288
|
|
424
|
|
Plan participants’ contributions
|
—
|
|
—
|
|
160
|
|
180
|
|
Curtailments
|
—
|
|
—
|
|
—
|
|
—
|
|
Settlements
|
—
|
|
115
|
|
—
|
|
—
|
|
Amendments
|
—
|
|
—
|
|
—
|
|
—
|
|
Actuarial loss (gain)
|
108,623
|
|
114,125
|
|
478
|
|
(1,200)
|
|
Gain due to transfer
|
—
|
|
—
|
|
—
|
|
—
|
|
Foreign currency exchange rate changes
|
1,615
|
|
2,007
|
|
33
|
|
66
|
|
Benefits paid
|
(79,246)
|
|
(81,496)
|
|
(1,310)
|
|
(1,370)
|
|
Benefit obligation at end of period
|
$
|
1,284,019
|
|
$
|
1,218,968
|
|
$
|
11,802
|
|
$
|
12,134
|
|
Change in plan assets:
|
|
|
|
|
Fair value of plan assets at beginning of period
|
$
|
974,117
|
|
$
|
871,925
|
|
$
|
—
|
|
$
|
—
|
|
Actual return on plan assets
|
148,100
|
|
177,560
|
|
—
|
|
—
|
|
Employer contribution
|
2,892
|
|
4,049
|
|
1,150
|
|
1,191
|
|
Plan participants' contributions
|
—
|
|
—
|
|
160
|
|
180
|
|
Transfers
|
—
|
|
—
|
|
—
|
|
—
|
|
Foreign currency exchange rate changes
|
1,783
|
|
2,079
|
|
—
|
|
—
|
|
Benefits paid
|
(79,246)
|
|
(81,496)
|
|
(1,310)
|
|
(1,371)
|
|
Fair value of plan assets at the end of period
|
1,047,646
|
|
974,117
|
|
—
|
|
—
|
|
Funded status
|
$
|
(236,373)
|
|
$
|
(244,851)
|
|
$
|
(11,802)
|
|
$
|
(12,134)
|
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
Accrued employee benefits
|
$
|
(1,163)
|
|
$
|
(1,153)
|
|
$
|
(1,399)
|
|
$
|
(1,683)
|
|
Accumulated postretirement benefit obligation
|
—
|
|
—
|
|
(10,403)
|
|
(10,451)
|
|
Pension liability
|
(241,889)
|
|
(248,821)
|
|
—
|
|
—
|
|
Prepaid pension
|
6,679
|
|
5,123
|
|
—
|
|
—
|
|
Accrued benefit liability, net
|
$
|
(236,373)
|
|
$
|
(244,851)
|
|
$
|
(11,802)
|
|
$
|
(12,134)
|
|
Amount recognized in accumulated comprehensive income (before taxes):
|
|
|
Prior service cost
|
$
|
557
|
|
$
|
643
|
|
$
|
3,046
|
|
$
|
1,962
|
|
Supplemental information:
|
|
|
|
|
Plans with accumulated benefit obligation in excess of plan assets
|
|
|
Projected benefit obligation
|
$
|
1,219,129
|
|
$
|
1,159,083
|
|
$
|
—
|
|
$
|
—
|
|
Accumulated benefit obligation
|
$
|
1,219,129
|
|
$
|
1,159,083
|
|
$
|
11,802
|
|
$
|
12,134
|
|
Fair value of plan assets
|
$
|
976,078
|
|
$
|
909,110
|
|
$
|
—
|
|
$
|
—
|
|
Plans with plan assets in excess of accumulated benefit obligation
|
|
|
Projected benefit obligation
|
$
|
64,890
|
|
$
|
59,885
|
|
$
|
—
|
|
$
|
—
|
|
Accumulated benefit obligation
|
$
|
64,890
|
|
$
|
59,885
|
|
$
|
—
|
|
$
|
—
|
|
Fair value of plan assets
|
$
|
71,568
|
|
$
|
65,007
|
|
$
|
—
|
|
$
|
—
|
|
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Year ended December 31,
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
|
2020
|
2019
|
Interest cost
|
$
|
33,267
|
|
$
|
43,312
|
|
|
$
|
288
|
|
$
|
424
|
|
Expected return on plan assets (3)
|
(61,322)
|
|
(55,717)
|
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
97
|
|
142
|
|
|
(1,084)
|
|
(2,157)
|
|
Recognized net actuarial loss (gain)
|
22,676
|
|
(7,603)
|
|
|
478
|
|
(1,201)
|
|
Benefit plans, net (1)
|
(5,282)
|
|
(19,866)
|
|
|
(318)
|
|
(2,934)
|
|
Service cost included in COS (2)
|
792
|
|
778
|
|
|
19
|
|
15
|
|
Net periodic benefit cost (benefit)
|
$
|
(4,490)
|
|
$
|
(19,088)
|
|
|
$
|
(299)
|
|
$
|
(2,919)
|
|
(1) Benefit plans, net, which is presented separately in the 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 the Consolidated Statement of Operations and is allocated to the B&W Thermal segment.
(3) Expected return on plan assets includes $0.8 million related to interest incurred for deferred contribution payments.
Recognized net actuarial loss (gain) consists primarily of our reported actuarial loss (gain), curtailments, settlements, and the difference between the actual return on plan assets and the expected return on plan assets. Total net MTM adjustments for our pension and other postretirement benefit plans were losses (gains) of $23.2 million and $(8.8) million in the years ended December 31, 2020 and 2019, respectively. The recognized net actuarial loss (gain) was recorded in Benefit plans, net in our Consolidated Statements of Operations.
Settlements are triggered in a plan when the distributions exceed the sum of the service cost and interest cost of the respective plan. Lump sum payments from our Canadian Plans resulted in plan settlements of a $0.1 million loss during 2019. The settlements themselves were not material, but they triggered interim MTM remeasurements of the Canadian Plan's assets and liabilities, resulting in a $0.6 million loss during 2019. Both the settlements and the MTM remeasurements are reflected in the Recognized net actuarial loss (gain) in the table above and are included in our Consolidated Statements of Operations in the Benefit plans, net line item.
Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Year ended December 31,
|
|
Year ended December 31,
|
|
2020
|
2019
|
|
2020
|
2019
|
Weighted average assumptions used to determine net periodic benefit obligations:
|
|
|
|
|
|
Comparative single equivalent discount rate
|
2.50%
|
3.25%
|
|
1.97%
|
2.99%
|
Rate of compensation increase
|
0.08%
|
0.07%
|
|
—
|
—
|
Weighted average assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
Comparative single equivalent discount rate
|
3.23%
|
4.28%
|
|
1.97%
|
2.99%
|
Expected return on plan assets
|
6.63%
|
6.66%
|
|
—
|
—
|
Rate of compensation increase
|
0.08%
|
0.07%
|
|
—
|
—
|
The expected rate of return on plan assets is based on the long-term expected returns for the investment mix of assets currently in the portfolio. In setting this rate, we use a building-block approach. Historic real return trends for the various asset classes in the plan's portfolio are combined with anticipated future market conditions to estimate the real rate of return for each asset class. These rates are then adjusted for anticipated future inflation to determine estimated nominal rates of return for each asset class. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the asset classes within the total asset portfolio. We use an expected return on plan assets assumption of 6.89% for the majority of our pension plan assets (approximately 93% of our total pension assets at December 31, 2020).
Investment goals
The overall investment strategy of the pension trusts is to achieve long-term growth of principal, while avoiding excessive risk and to minimize the probability of loss of principal over the long term. The specific investment goals that have been set for the pension trusts in the aggregate are (1) to ensure that plan liabilities are met when due and (2) to achieve an investment return on trust assets consistent with a reasonable level of risk.
Allocations to each asset class for both domestic and foreign plans are reviewed periodically and rebalanced, if appropriate, to assure the continued relevance of the goals, objectives and strategies. The pension trusts for both our domestic and foreign plans employ a professional investment advisor and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the plans' overall investment objectives. The goals of each investment manager are (1) to meet (in the case of passive accounts) or exceed (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark.
The investment performance of total portfolios, as well as asset class components, is periodically measured against commonly accepted benchmarks, including the individual investment manager benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact the ability to achieve desired investment results.
Domestic plans: We sponsor the U.S. Plan, which is a domestic defined benefit plan. The assets of this plan are held by the Trustee in The Babcock & Wilcox Company Master Trust (the “Master Trust”). For the years ended December 31, 2020 and 2019, the investment return on domestic plan assets of the Master Trust (net of deductions for management fees) was approximately 17% and 23%, respectively.
The following is a summary of the asset allocations for the Master Trust by asset category:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
2019
|
Asset category:
|
|
|
Commingled and mutual funds
|
41
|
%
|
68
|
%
|
United States government securities
|
16
|
%
|
30
|
%
|
Corporate stocks
|
5
|
%
|
—
|
%
|
Venture capital
|
18
|
%
|
—
|
%
|
Hedge funds
|
13
|
%
|
—
|
%
|
Cash and accrued items
|
7
|
%
|
2
|
%
|
The target asset allocation for the Master Trust as of December 31, 2020 was 54% of alternative, liquid credit and direct lending funds, 22% of fixed income securities, and 24% of equity and other investments. As of December 31, 2019, the target allocation was 65% of commingled and mutual funds and 35% of fixed income investments. We routinely reassess the target asset allocation with a goal of better aligning the timing of expected cash flows from those assets to the anticipated timing of benefit payments.
Foreign plans: We sponsor various plans through certain of our foreign subsidiaries. These plans are the Canadian Plans and the U.K. Plan. The combined weighted average asset allocations of these plans by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
2019
|
Asset category:
|
|
|
Commingled and mutual funds
|
35
|
%
|
30
|
%
|
Fixed income
|
62
|
%
|
68
|
%
|
Other
|
3
|
%
|
2
|
%
|
The target allocation for 2020 for the foreign plans, by asset class, is as follows:
|
|
|
|
|
|
|
|
|
|
Canadian
Plans
|
U.K. Plan
|
Asset class:
|
|
|
United States equity
|
23
|
%
|
6
|
%
|
Global equity
|
27
|
%
|
6
|
%
|
Fixed income and other
|
50
|
%
|
88
|
%
|
Fair value of plan assets
See Note 21 for a detailed description of fair value measurements and the hierarchy established for valuation inputs. In accordance with Subtopic 820-10, Fair Value Measurement and Disclosures, certain investments that are measured at fair value using the net asset value ("NAV") per share practical expedient have not been classified in the fair value hierarchy. The investments that are measured at fair value using NAV per share included in the tables below are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at the end of each period, which is presented in the first table above titled “obligations and funded status”. The following is a summary of total investments for our plans measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year ended December 31, 2020
|
Level 1
|
Level 2
|
Level 3
|
Commingled and mutual funds
|
$
|
429,101
|
|
$
|
402,935
|
|
$
|
26,166
|
|
$
|
—
|
|
United States government securities
|
160,488
|
|
160,488
|
|
—
|
|
—
|
|
Fixed income
|
44,604
|
|
—
|
|
44,604
|
|
—
|
|
Equity
|
45,539
|
|
45,539
|
|
—
|
|
—
|
|
Venture capital
|
56,719
|
|
—
|
|
—
|
|
56,719
|
|
Cash and accrued items
|
69,822
|
|
69,822
|
|
—
|
|
—
|
|
Investments measured at fair value
|
$
|
806,273
|
|
$
|
678,784
|
|
$
|
70,770
|
|
$
|
56,719
|
|
Investments measured at net asset value
|
241,568
|
|
|
|
|
Pending trades
|
(195)
|
|
|
|
|
Total pension and other postretirement benefit assets
|
$
|
1,047,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Year ended December 31, 2019
|
Level 1
|
Level 2
|
Level 3
|
Commingled and mutual funds
|
$
|
531,823
|
|
$
|
—
|
|
$
|
531,823
|
|
$
|
—
|
|
United States government securities
|
271,272
|
|
—
|
|
271,272
|
|
—
|
|
Fixed income
|
39,625
|
|
—
|
|
39,625
|
|
—
|
|
Cash and accrued items
|
21,548
|
|
729
|
|
20,819
|
|
—
|
|
Investments measured at fair value
|
$
|
864,268
|
|
$
|
729
|
|
$
|
863,539
|
|
$
|
—
|
|
Investments measured at net asset value
|
109,849
|
|
|
|
|
Total pension and other postretirement benefit assets
|
$
|
974,117
|
|
|
|
|
Expected cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
Foreign Plans
|
(in thousands)
|
Pension
Benefits
|
Other
Benefits
|
|
Pension
Benefits
|
Other
Benefits
|
Expected employer contributions to trusts of defined benefit plans:
|
2021
|
$
|
45,605
|
|
$
|
1,225
|
|
|
$
|
1,502
|
|
$
|
174
|
|
Expected benefit payments (1):
|
|
|
|
|
|
2021
|
$
|
75,113
|
|
$
|
1,225
|
|
|
$
|
2,623
|
|
$
|
174
|
|
2022
|
74,688
|
|
1,131
|
|
|
2,660
|
|
152
|
|
2023
|
74,099
|
|
1,041
|
|
|
2,666
|
|
143
|
|
2024
|
73,356
|
|
953
|
|
|
2,740
|
|
132
|
|
2025
|
72,386
|
|
870
|
|
|
2,885
|
|
121
|
|
2026-2030
|
340,845
|
|
3,251
|
|
|
15,135
|
|
460
|
|
(1) Pension benefit payments are made from their respective plan's trust.
We made contributions to our pension and other postretirement benefit plans totaling $4.0 million and $5.2 million during the years ended December 31, 2020 and 2019, respectively. Expected employer contributions to trusts of defined benefit plans above reflect relief granted under pension contribution waivers, which deferred minimum pension contributions for approximately one year to then be repaid over a five-year period.
On October 1, 2020 we received IRS approval of our temporary hardship waiver request for our pension and other postretirement benefit plans' contribution for the 2019 Plan year. Pursuant to the provisions of the waiver granted by the IRS related to the 2018 Plan year, we were required to resume quarterly contributions on April 15, 2020 equal to the required quarterly contributions to the Plan. The 2019 Plan year deferred contribution of $23.7 million is allowed to be funded over the next five years.
On March 27, 2020, the CARES Act was signed into law and among other things, provides deferral of certain U.S. pension plan contributions until January 1, 2021. This was updated to allow payments due on January 1, 2021 to be considered timely made no later than January 4, 2021. We elected to defer the contribution payments of $5.5 million each for the 2020 Plan year that would have been made on April 15, 2020 and July 15, 2020 and October 15, 2020, respectively. In addition, we elected to defer the contribution payments of $1.1 million for the 2018 waiver for the 2019 Plan year and $23.7 million for the 2019 Plan year that were both due on September 15, 2020.
The total funding contributions of approximately $46.0 million originally estimated for 2020 includes $1.1 million for the 2018 waiver payment for the 2019 Plan year, $23.7 million for the 2019 Plan year, $16.5 million for the 2020 Plan year and $4.5 million related to other non-qualified pension plans, non-U.S. pension plans and other postretirement benefits plans.
In January 2021, we made contributions of $22.0 million for the 2020 Plan year and $1.1 million for the 2018 waiver payment for the 2019 Plan year and $0.4 million of interest as required per the CARES Act deferral.
Defined contribution plans
We provide benefits under The B&W Thrift Plan (the “Thrift Plan”). The Thrift Plan generally provides for matching employer contributions of 50% of the first 8% of the participants' compensation. These matching employer contributions are typically made in cash. Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately $1.0 million and $3.1 million in the years ended December 31, 2020 and 2019, respectively.
Also, our salaried Canadian employees are provided with a defined contribution plan. The amount charged to expense for employer contributions was approximately $0.3 million and $0.3 million in the years ended December 31, 2020 and 2019, respectively.
Multi-employer plans
One of our subsidiaries in the B&W Thermal segment contributes to various multi-employer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. The following table summarizes our contributions to multi-employer plans for the years covered by this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Fund
|
|
EIN/PIN
|
|
Pension Protection
Act Zone Status
|
|
FIP/RP Status
Pending/
Implemented
|
|
Contributions
|
|
Surcharge Imposed
|
|
Expiration Date
of Collective
Bargaining
Agreement
|
|
2020
|
|
2019
|
2020
|
|
2019
|
(in millions)
|
Boilermaker-Blacksmith National Pension Trust
|
|
48-6168020/ 001
|
|
Yellow
|
|
Red
|
|
Yes
|
|
$
|
4.0
|
|
|
$
|
7.5
|
|
|
No
|
|
Described
Below
|
All other
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4.9
|
|
|
$
|
12.4
|
|
|
|
|
|
Our collective bargaining agreements with the Boilermaker-Blacksmith National Pension Trust (the “Boilermaker Plan”) is under a National Maintenance Agreement platform which is evergreen in terms of expiration. However, the agreement allows for termination by either party with a 90-day written notice. Our contributions to the Boilermaker Plan constitute less than 5% of total contributions to the Boilermaker Plan. All other contributions expense for all periods included in this report represents multiple amounts to various plans that, individually, are deemed to be insignificant.
NOTE 14 – REVOLVING DEBT
Our revolving debt is comprised of a revolving credit facility in the U.S. totaling $164.3 million and $179.0 million at December 31, 2020 and 2019, respectively.
On May 11, 2015, we entered into the Amended Credit Agreement with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc. or “BWXT”) which governs the U.S. Revolving Credit Facility and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments to the Amended Credit Agreement, including several to avoid default under the financial and other covenants specified in the Amended Credit Agreement.
A&R Credit Agreement
On May 14, 2020, we entered into an agreement with our lenders amending and restating the Amended Credit Agreement (the “A&R Credit Agreement”). The A&R Credit Agreement refinances and extends the maturity of our U.S. Revolving Credit Facility and Last Out Term Loans.
Under the A&R Credit Agreement, B. Riley has committed to provide the Company with up to $70.0 million of additional Last Out Term Loans on the same terms as the term loans extended under the Amended Credit Agreement. An aggregate $30.0 million of this new commitment was funded upon execution of the A&R Credit Agreement. Of the remaining commitments, at least $35.0 million will be funded in installments, subject to reduction for the gross proceeds from certain equity offerings conducted by the Company, and $5.0 million will be funded upon request by the Company. The proceeds from the $30.0 million of new term loans will be used to pay transaction fees and expenses and repay outstanding borrowings under the U.S. Revolving Credit Facility. Proceeds from the additional $40.0 million of term loans will be used to repay outstanding borrowings under the U.S. Revolving Credit Facility, with any remaining amounts used for working capital, capital expenditures, permitted acquisitions and general corporate purposes.
The A&R Credit Agreement also provides that, (i) the U.S. Revolving Credit Facility continues to be available for issuances of existing and new letters of credit, subject to the L/C Sublimit (as defined below), (ii) the $205.0 million sublimit on borrowings under the U.S. Revolving Credit Facility is maintained, and (iii) interest payments on the unpaid principal amount of revolving credit loans incurred during the period from May 14, 2020 through and including August 31, 2020 of $3.8 million are deferred and will be paid in six equal installments on the last business day of each calendar month beginning on January 29, 2021 and through June 30, 2021. No swing line borrowings are permitted under the A&R Credit Agreement.
The A&R Credit Agreement also amends the following terms, among others, as compared with the Amended Credit Agreement:
(i) the maturity date of the U.S. Revolving Credit Facility is extended to June 30, 2022, and the maturity date of all Last Out Term Loans under the A&R Credit Agreement is extended to December 30, 2022 (six months after the maturity date of the U.S. Revolving Credit Facility);
(ii) the interest rate for loans under the U.S. Revolving Credit Facility remained the same at LIBOR plus 7% or base rate (as defined in the A&R Credit Agreement) plus 6%. These margins will be reduced by 2% if commitments under the U.S. Revolving Credit Facility are reduced to less than $200.0 million. The fee for letters of credit is set at 4%;
(iii) the interest rate for all Last Out Term Loans is set at 12%;
(iv) the commitments under the U.S. Revolving Credit Facility automatically and permanently decrease in the following amounts on the following dates, which match the funding dates and amounts for the committed term loans: (x) $10.0 million on November 30, 2020; and (y) $5.0 million on each of March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022, respectively;
(v) the amount of revolving loans and letters of credit available in currencies other than U.S. dollars are capped at $125.0 million through April 30, 2021 and step down to $110.0 million on May 1, 2021; and
(vi) the amount of financial letters of credit is capped at $75.0 million, and the amount of all letters of credit is capped at $190.0 million through April 30, 2021 and step down to $175.0 million on May 1, 2021 (the “L/C Sublimit”).
Affirmative and negative covenants under the A&R Credit Agreement are substantially consistent with the Amended Credit Agreement, except that, among other changes: (i) the indebtedness covenant has been modified to permit the incurrence of any governmental assistance in the form of indebtedness in connection with COVID-19 relief in an aggregate principal amount not to exceed $10.0 million; (ii) a third-party letter of credit basket of up to $50.0 million has been added; (iii) certain liens and restricted payments are modified to permit liens and repayments of indebtedness incurred in connection with governmental assistance in connection with COVID-19 relief; and (iv) covenants related to the European B&W Renewable EPC loss projects have been removed. The minimum required liquidity condition of $30.0 million remains constant but has been modified to exclude cash of non-loan parties in an amount in excess of $25.0 million.
Events of default under the A&R Credit Agreement are substantially consistent with the Amended Credit Agreement, except that B. Riley’s failure to fund any of its additional Last Out Term Loans committed under the A&R Credit Agreement will constitute an event of default.
In connection with the A&R Credit Agreement, the Company has incurred certain customary amendment and commitment fees, a portion of which will be deferred pursuant to the terms of the A&R Credit Agreement along with certain previously deferred fees incurred under the Amended Credit Agreement.
On October 30, 2020, we entered into A&R Amendment No. 1 with Bank of America, N.A. A&R Amendment No. 1, among other matters, (i) provides that, under the A&R Credit Agreement, the “Commitment Reduction Amount” shall be an amount equal to (a) for any “Prepayment Event” relating to a “Recovery Event” (each as defined under the A&R Credit Agreement), 50% of the net cash proceeds with respect to such Prepayment Event, and (b) with respect to any other Prepayment Event under the A&R Credit Agreement, the net cash proceeds with respect to such Prepayment Event, and (ii) establishes new financial covenants for interest coverage ratios and senior leverage ratios.
As of December 31 , 2020, the future minimum interest coverage ratios under our A&R Credit Agreement are as follows:
•0.50:1.00 for the quarter ending March 31, 2021
•0.80:1.00 for the quarter ending June 30, 2021
•1.00:1.00 for the quarter ending September 30, 2021
•1.10:1.00 for the quarter ending December 31, 2021
•1.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
As of December 31 , 2020, the future maximum permitted senior leverage ratios under our A&R Credit Agreement are as follows:
•7.75:1.00 for the quarter ending March 31, 2021
•4.25:1.00 for the quarter ending June 30, 2021
•3.75:1.00 for the quarter ending September 30, 2021
•3.00:1.00 for the quarter ending December 31, 2021
•2.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
Amendments to the A&R Credit Agreement - Subsequent Events
On February 8, 2021, we entered into A&R Amendment No. 2 with Bank of America. A&R Amendment No. 2, among other matters, (i) permits the issuance of the Senior Notes in the 2021 senior notes offering described above, (ii) permits the deemed prepayment of $35 million of our Tranche A term loan with $35 million principal amount of Senior Notes, (iii) provides that 75% of the Senior Notes gross proceeds shall be used to repay outstanding borrowings and permanently reduce the commitments under our senior secured credit facilities, and (iv) provide that $5 million of certain previously deferred facility fees will be paid by the Company.
On March 4, 2021, we entered into A&R Amendment No. 3 with Bank of America. A&R Amendment No. 3, among other matters, at the date of effectiveness (i) permits the prepayment of certain term loans, (ii) reduces the revolving credit commitments to $130 million and removes the ability to obtain revolving loans under the credit agreement, and (iii) amends certain covenants and conditions to the extension of credit, as described in Note 25.
U.S. Revolving Credit Facility
As of December 31, 2020, the U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to $306.2 million, as amended and adjusted for completed asset sales and other transactions. The proceeds from loans under the U.S. Revolving Credit Facility are available for working capital needs, capital expenditures, permitted acquisitions and other general corporate purposes, and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the agreement.
At December 31, 2020, borrowings under the U.S. Revolving Credit Facility consisted of $164.3 million at a weighted average interest rate of 7.46%. Usage under the U.S. Revolving Credit Facility consisted of $164.3 million of revolving loan borrowings, $22.0 million of financial letters of credit and $86.2 million of performance letters of credit. At December 31, 2020, we had approximately $33.7 million available to meet letter of credit and borrowing requirements based on our overall facility size.
On October 23, 2020, we received $26.0 million under the settlement agreement described in Note 5. As required by the Company’s U.S. Revolving Credit Facility, 50% of the net proceeds (gross proceeds less costs) or $8.0 million of the settlement received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility in October 2020.
U.S. Revolving Credit Facility - Subsequent Events
On February 12, 2021, we received gross proceeds of $125 million from the 2021 Senior Notes offering. As required by the Company’s U.S. Revolving Credit Facility, 75% of the gross proceeds or $93.8 million received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility as of February 12, 2021.
Also on February 16, 2021, we prepaid $167.1 million towards the outstanding U.S. Revolving Credit Facility.
As of March 4, 2021, effective with Amendment No. 3 to the A&R Credit Agreement described above, the U.S. Revolving Credit Facility provides for an aggregate letters of credit amount of up to $130 million, as described in Note 25.
B. Riley Limited Guaranty
In connection with the Company’s entry into the A&R Credit Agreement, B. Riley has entered into the B. Riley Guaranty for the benefit of the Administrative Agent and the lenders under the U.S. Revolving Credit Facility. The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations with respect to the U.S. Revolving Credit Facility (other than with respect to letters of credit and contingent obligations), including the obligation to repay outstanding revolving credit loans and pay earned interest and fees. The B. Riley Guaranty is enforceable in certain circumstances, including, among others: (i) B. Riley’s failure to timely fund in full any of its additional Last Out Term Loans committed under the A&R Credit Agreement; (ii) certain events of default relating to bankruptcy or insolvency occurring with respect to B. Riley; (iii) the acceleration of the Company’s borrowings under the U.S. Revolving Credit Facility; (iv) the Company’s failure to pay any amount due to the Administrative Agent or any lender under the U.S. Revolving Credit Facility; or (v) any assertion that the B. Riley Guaranty or any portion thereof is not valid, binding or enforceable.
In connection with the B. Riley Guaranty, the Company entered into a fee letter with B. Riley pursuant to which the Company agreed to pay B. Riley a fee of $3.9 million (the “B. Riley Guaranty Fee”). On June 8, 2020, the Company issued
1,712,479 unregistered shares of Common Stock to B. Riley and certain of its affiliates in settlement of the B. Riley Guaranty Fee in connection with the Fee and Interest Equitization Agreement discussed below.
Fee and Interest Equitization Agreement
In connection with the B. Riley Guaranty, the Company entered into a Fee and Interest Equitization Agreement (the “Equitization Agreement”) with B. Riley and, solely for certain limited purposes under the Equitization Agreement, B. Riley FBR, Inc.
The Equitization Agreement provides that, in lieu of receiving (a) $13.4 million of interest payments with respect to Last Out Term Loans under the A&R Credit Agreement between May 14, 2020 and December 31, 2020 (the “Equitized Interest Payments”) and (b) the B. Riley Guaranty Fee (the “Equitized Fee Payment” and, together with the Equitized Interest Payments, the “Equitized Fees and Interest Payments”), B. Riley will receive unregistered shares of the Company’s Common Stock.
Under the Equitization Agreement, B. Riley will receive a number of shares of unregistered common stock equal to (i) the aggregate dollar value of the Equitized Fees and Interest Payments divided by (ii) the Conversion Price. For purposes of the Equitization Agreement, the “Conversion Price” means the average volume weighted average price of the common stock over 15 consecutive trading days beginning on and including May 15, 2020 (the “Measurement Period”), subject to customary adjustments. On June 5, 2020, the conversion price was calculated at $2.2774 per share.
On December 31, 2020, September 30, 2020 and June 30, 2020, the Company issued 2,379,376, 2,334,002 and 1,192,371 unregistered shares of Common Stock, respectively, to B. Riley and certain of its affiliates in settlement of the quarterly interest payable in connection with the Equitization Agreement discussed above.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain 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 opened outside of the U.S. Revolving Credit Facility as of December 31, 2020 and 2019 was $84.5 million and $88.5 million, respectively. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping letters of credit or bank guarantees was $32.0 million as of December 31, 2020. Of the letters of credit issued under the U.S. Revolving Credit Facility, $34.9 million are subject to foreign currency revaluation.
We have 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 December 31, 2020, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $280.9 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping surety bonds was $34.7 million.
Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facility 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.
NOTE 15 – LAST OUT TERM LOANS
The components of the Last Out Term Loans by Tranche are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
(in thousands)
|
|
A-3
|
A-4
|
A-6
|
Total
|
Proceeds (1)
|
|
$
|
101,660
|
|
$
|
30,000
|
|
40,000
|
|
$
|
171,660
|
|
Discount and fees
|
|
8,650
|
|
—
|
|
—
|
|
8,650
|
|
Paid-in-kind interest
|
|
3,020
|
|
—
|
|
—
|
|
3,020
|
|
Net debt balance
|
|
$
|
113,330
|
|
$
|
30,000
|
|
$
|
40,000
|
|
$
|
183,330
|
|
(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepayment of the tranche as of July 23, 2019, the date of the Equitization Transactions as discussed below.
|
|
|
|
|
|
|
December 31, 2019
|
(in thousands)
|
A-3
|
Proceeds (1)
|
$
|
101,660
|
|
Discount and fees
|
8,650
|
|
Paid-in-kind interest
|
3,020
|
|
Principal
|
113,330
|
|
Unamortized discount and fees
|
(9,377)
|
|
Net debt balance
|
$
|
103,953
|
|
(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepayment of the tranche as of July 23, 2019, the date of the Equitization Transactions as discussed below.
Last Out Term Loans are incurred under our A&R Credit Agreement and are pari passu with the U.S. Revolving Credit Facility except for certain payment subordination provisions. The Last Out Term Loans are subject to the same representations and warranties, covenants and events of default as the U.S. Revolving Credit Facility. In connection with the effectiveness of the A&R Credit Agreement, the maturity date for the Last Out Term Loans was extended to December 30, 2022.
A debt modification with the same borrower that results in substantially different terms is accounted for as an extinguishment of the existing debt and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair value of the new debt as compared to the carrying value of the extinguished debt. The Company recognized a loss on debt extinguishment of $6.2 million in 2020, primarily representing the unamortized value of the original issuance discount and fees on the Tranche A-3 Last Out Term Loan.
On December 31, 2020, September 30, 2020 and June 30, 2020, the Company issued 2,379,376, 2,334,002, and 1,192,371 unregistered shares of common stock to B. Riley in settlement of the Last Out Term Loans' quarterly interest payable in connection with the Fee and Interest Equitization Agreement further discussed in Note 14.
The total effective interest rate of Tranche A-3, Tranche A-4 and Tranche A-6 was 12.0% on December 31, 2020. Interest expense associated with the Last Out Term Loans is detailed in Note 16.
As of December 31, 2020, the Last Out Term Loans are presented as a non-current liability in our Consolidated Balance Sheets as a result of the extension of their maturity dates to December 30, 2022 granted under the A&R Credit Agreement. As of December 31, 2019, the Last Out Term Loans are presented as a current liability in our Consolidated Balance Sheets as a result of limited waivers granted to maintain compliance with the covenants in the prior Amended Credit Agreement.
Tranche A-1
We borrowed $30.0 million of net proceeds under Tranche A-1 of the Last Out Term Loans from B. Riley, a related party, in September and October of 2018. In November 2018, Tranche A-1 was assigned to Vintage, also a related party. As part of the Equitization Transactions in July 2019, the outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest remaining as of March 31, 2019 was exchanged for shares of Common Stock.
Tranche A-2
We borrowed $10.0 million of net proceeds under Tranche A-2 of Last Out Term Loans from B. Riley, a related party in March 2019. Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions in July 2019.
Tranche A-3
Under Amendment No. 16 to our previous Amended Credit Agreement, we borrowed $150.0 million face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The $141.4 million net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European B&W Renewable loss projects as described in Note 5, with the remainder used for working capital and general corporate purposes.
Interest rates for Tranche A-3 are described above. Tranche A-3 may be prepaid, subject to the subordination provisions under the previous Amended Credit Agreement as described above, but not re-borrowed. As part of the Equitization Transactions, the total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million.
Tranche A-4
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement. Amendment No. 20 provides $30.0 million of additional commitments from B. Riley, a related party, under a new Tranche A-4 of Last Out Term Loans. The proceeds from Tranche A-4 may be used under the terms of Amendment No. 20 to repay revolving credit loans, for working capital and general corporate purposes, and to reimburse certain expenses of B. Riley as specified by Amendment No. 20. The terms of Tranche A-4 are the same as the terms for the Tranche A-3 under the Amended Credit Agreement.
As of January 31, 2020, we borrowed $30.0 million face value of the Tranche A-4 and received net proceeds of $26.3 million after paying total fees of $3.7 million related to amendment No. 20 described above.
Tranche A-5
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement. Amendment No. 20 provides an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturity of the Last Out Term Loans under the Amended Credit Agreement in the event certain customer letters of credit are drawn. The terms of Tranche A-5 are the same as the terms for the Tranche A-3 under the Amended Credit Agreement. As of March 8, 2021, no borrowings have occurred under Tranche A-5.
Tranche A-6
The A&R Credit Agreement provided us with up to $70.0 million of additional funding in the form of Tranche A-6 Last Out Term Loans from B. Riley, a related party, as more fully described in Note 14. An aggregate $30.0 million of this new commitment was funded upon execution of the A&R Credit Agreement. Of the remaining commitments, $35.0 million will be funded in installments, subject to reduction for the gross proceeds from certain equity offerings conducted by the Company. The remaining $5.0 million will be available upon request by the Company.
On November 30, 2020, we borrowed $10.0 million face value of the Tranche A-6 and received gross proceeds of $10.0 million pursuant to the terms of the A&R Credit Agreement which required the proceeds to be applied as a permanent reduction of the U.S. Revolving Credit Facility.
Tranche A-7
The A&R Credit Agreement provided us with up to $50.0 million of additional funding for letters of credit in the form of Tranche A-7 Last Out Term Loans from B. Riley, a related party, as more fully described in Note 14. The $50.0 million will be available upon request by the Company, subject to certain limitations. As of March 8, 2021, no borrowings have occurred under Tranche A-7.
Last Out Term Loans - Subsequent Events
On February 12, 2021, we issued $35 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Last Out Term Loan Tranche A-6. The interest rate on the remaining Last Out Term Loan Tranche A balances has been reduced to 6.625% from 12.0%, as described in Note 25.
On March 4, 2021, effective with the execution of Amendment No. 3, we paid $75 million towards our existing Last Out Term Loans, as described in Note 25.
NOTE 16 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense in our Consolidated Statements of Operations consisted of the following components:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Components associated with borrowings from:
|
|
|
U.S. Revolving Credit Facility
|
$
|
13,988
|
|
$
|
15,639
|
|
Last Out Term Loans - cash interest
|
6,140
|
|
11,207
|
|
Last Out Term Loans - equitized interest
|
13,450
|
|
—
|
|
Last Out Term Loans - paid-in-kind interest
|
—
|
|
5,964
|
|
|
33,578
|
|
32,810
|
|
Components associated with amortization or accretion of:
|
|
|
U.S. Revolving Credit Facility - deferred financing fees and commitment fees
|
14,811
|
|
31,567
|
|
U.S. Revolving Credit Facility - contingent consent fee for Amendment 16
|
—
|
|
13,879
|
|
U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16
|
1,660
|
|
5,064
|
|
Last Out Term Loans - discount and financing fees
|
3,183
|
|
10,580
|
|
|
19,654
|
|
61,090
|
|
|
|
|
Other interest expense
|
6,564
|
|
1,001
|
|
|
|
|
Total interest expense
|
$
|
59,796
|
|
$
|
94,901
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the Consolidated Balance Sheets that sum to the total of the same amounts in the Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Held by foreign entities
|
$
|
38,726
|
|
$
|
38,921
|
|
Held by U.S. entities
|
18,612
|
|
4,851
|
|
Cash and cash equivalents of continuing operations
|
57,338
|
|
43,772
|
|
|
|
|
Reinsurance reserve requirements
|
4,551
|
|
9,318
|
|
Bank guarantee collateral
|
2,665
|
|
—
|
|
Restricted foreign accounts
|
2,869
|
|
3,851
|
|
Restricted cash and cash equivalents
|
10,085
|
|
13,169
|
|
Total cash, cash equivalents and restricted cash of continuing operations shown in the Consolidated Statements of Cash Flows
|
$
|
67,423
|
|
$
|
56,941
|
|
Our U.S. Revolving Credit Facility described in Note 14 allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.
The following cash activity is presented as a supplement to our Consolidated Statements of Cash Flows and is included in Net cash used in activities:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Income tax payments, net
|
$
|
6,960
|
|
$
|
3,873
|
|
|
|
|
Interest payments on our U.S. Revolving Credit Facility
|
$
|
11,675
|
|
$
|
14,715
|
|
Interest payments on our Last Out Term Loans
|
6,140
|
|
12,220
|
|
Total cash paid for interest
|
$
|
17,815
|
|
$
|
26,935
|
|
NOTE 17 – STOCK-BASED COMPENSATION
Stock options
There were no stock options awarded in 2020. The following table summarizes activity for outstanding stock options for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of shares
|
Weighted-average
exercise price
|
Weighted-average
remaining
contractual term
(in years)
|
Aggregate
intrinsic value
(in thousands)
|
Outstanding at beginning of period
|
396
|
|
$
|
106.56
|
|
|
|
Granted
|
—
|
|
—
|
|
|
|
Exercised
|
—
|
|
—
|
|
|
|
Cancelled/expired/forfeited
|
(56)
|
|
96.90
|
|
|
|
Outstanding at end of period
|
340
|
|
$
|
107.84
|
|
4.61
|
$
|
—
|
|
Exercisable at end of period
|
340
|
|
$
|
107.84
|
|
4.61
|
$
|
—
|
|
The aggregate intrinsic value included in the table above represents the total pretax intrinsic value that would have been received by the option holders had all option holders exercised their options on December 31, 2020. The intrinsic value is calculated as the total number of option shares multiplied by the difference between the closing price of our common stock on the last trading day of the period and the exercise price of the options. This amount changes based on the price of our common stock.
Restricted stock units
Non-vested restricted stock units activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of shares
|
Weighted-average grant date fair value
|
Non-vested at beginning of period
|
2,029
|
|
$
|
4.97
|
|
Granted
|
1,168
|
|
2.56
|
|
Vested
|
(544)
|
|
4.93
|
|
Cancelled/forfeited
|
(163)
|
|
7.00
|
|
Non-vested at end of period
|
2,490
|
|
$
|
3.77
|
|
As of December 31, 2020, total compensation expense not yet recognized related to non-vested restricted stock units was $4.1 million and the weighted-average period in which the expense is expected to be recognized is 0.8 years.
Performance-based restricted stock units
Performance-based restricted stock units activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of shares
|
Weighted-average grant date fair value
|
Non-vested at beginning of period
|
47
|
|
$
|
70.06
|
|
Granted
|
1,275
|
|
2.50
|
|
Vested
|
—
|
|
—
|
|
Cancelled/forfeited
|
(47)
|
|
78.57
|
|
Non-vested at end of period
|
1,275
|
|
$
|
2.50
|
|
As of December 31, 2020, total compensation expense not yet recognized related to non-vested performance-based restricted stock units was $3.0 million and the weighted-average period in which the expense is expected to be recognized is 1.9 years.
Performance-based, cash settled units
Cash-settled performance units activity for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of shares
|
Weighted-average grant date fair value
|
Non-vested at beginning of period
|
24
|
|
$
|
18.78
|
|
Granted
|
—
|
|
—
|
|
Vested
|
(19)
|
|
2.41
|
|
Cancelled/forfeited
|
(3)
|
|
102.28
|
|
Non-vested at end of period
|
2
|
|
$
|
140.30
|
|
Stock Appreciation Rights
In December 2018, we granted stock appreciation rights to certain employees (“Employee SARs”) and to a non-employee related party, BRPI Executive Consulting, LLC (“Non-employee SARs”). The Employee SARs and Non-employee SARs both expire ten years after the grant date and primarily vest 100% upon completion after the required years of service. Upon vesting, the Employee SARs and Non-employee SARs may be exercised within 10 business days following the end of any calendar quarter during which the volume weighted average share price is greater than the share price goal. Upon exercise of the SARs, holders receive a cash-settled payment equal to the number of SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the SARs base price. Employee SARs are issued under the Fourth Amended and Restated 2015 LTIP, and Non-employee SARs are issued under a Non-employee SARs agreement. The liability method is used to recognize the accrued compensation expense with cumulatively adjusted revaluations to the then current fair value at each reporting date through final settlement.
We used the following assumptions to determine the fair value of the SARs granted to employees and non-employee as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2020
|
2019
|
Risk-free interest rate
|
0.74
|
%
|
1.89
|
%
|
Expected volatility
|
50
|
%
|
46
|
%
|
Expected life in years
|
7.72
|
8.71
|
Suboptimal exercise factor
|
2.0x
|
2.0x
|
In making these assumptions, we based estimated volatility on the historical returns of the Company's stock price and selected guideline companies. We based risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we convert to a continuously compounded rate. We relied upon a suboptimal exercise factor, representing the ratio of the base price to the stock price at the time of exercise, to account for potential early exercise
prior to the expiration of the contractual term. With consideration to the executive level of the SARs holders, a suboptimal exercise multiple of 2.0x was selected. Subject to vesting conditions, should the stock price achieve a value of 2.0x above the base price, we assume the holders will exercise prior to the expiration of the contractual term of the SARs. The expected term for the SARs is an output of our valuation model in estimating the time period that the SARs are expected to remain unexercised. Our valuation model assumes the holders will exercise their SARs prior to the expiration of the contractual term of the SARs.
The following table presents the changes in our outstanding employee SARs and non-employee SARs for the year ending December 31, 2020 and the associated weighted-average values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(share data in thousands)
|
Number of employee SARs
|
Number of non-employee SARs
|
Total number of SARs
|
Weighted-average value
|
Weighted-average exercise price
|
Non-vested at beginning of period
|
168
|
|
844
|
|
1,012
|
|
$
|
0.51
|
|
$
|
23.44
|
|
Granted
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Vested
|
(168)
|
|
(844)
|
|
(1,012)
|
|
0.49
|
|
23.44
|
|
Non-vested at end of period
|
—
|
|
—
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
As of December 31, 2020, the total intrinsic value of the vested SARs was $3.3 million.
NOTE 18 – PROVISION FOR INCOME TAXES
Income (loss) before income taxes includes the following:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
United States
|
$
|
(65,591)
|
|
$
|
(64,610)
|
|
Other than the United States
|
61,673
|
|
(59,837)
|
|
Loss before provision for income taxes
|
$
|
(3,918)
|
|
$
|
(124,447)
|
|
Significant components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Current:
|
|
|
Federal (1)
|
$
|
(21)
|
|
$
|
534
|
|
State
|
246
|
|
454
|
|
Foreign
|
3,737
|
|
3,705
|
|
Total current provision
|
3,962
|
|
4,693
|
|
Deferred:
|
|
|
Federal (2)
|
1,084
|
|
(257)
|
|
State
|
—
|
|
—
|
|
Foreign
|
3,133
|
|
850
|
|
Total deferred provision
|
4,217
|
|
593
|
|
Provision for income taxes
|
$
|
8,179
|
|
$
|
5,286
|
|
(1) The 2020 amount reflects a benefit of $0.6 million offsetting tax expense of $0.6 million in discontinued operations pursuant to the guidance in paragraph 740-20-45-7 that requires all components, including discontinued operations, be considered when determining the tax benefit from a loss from continuing operations.
(2) The 2020 amount reflects $1.1 million of deferred tax expense as a result of the change in indefinite reinvestment assertion related to certain foreign subsidiaries.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income (loss) before the provision for income taxes.
The sources and tax effects of the differences are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Income tax benefit at federal statutory rate
|
$
|
(823)
|
|
$
|
(26,134)
|
|
State and local income taxes
|
346
|
|
3,205
|
|
Foreign rate differential
|
2,422
|
|
2,053
|
|
Intra-entity debt restructuring (1)
|
2,908
|
|
—
|
|
Deferred taxes - change in tax rate
|
8,512
|
|
9,799
|
|
Non-deductible (non-taxable) items
|
1,963
|
|
4,190
|
|
Tax credits
|
(2,939)
|
|
144
|
|
Valuation allowances
|
(17,498)
|
|
56,254
|
|
Luxembourg impairment of investments
|
(30,603)
|
|
(65,848)
|
|
Accrual adjustments
|
405
|
|
(995)
|
|
Unrecognized tax benefits
|
37,387
|
|
(271)
|
|
Withholding taxes
|
1,416
|
|
1,331
|
|
Change in indefinite reinvestment assertion
|
1,084
|
|
—
|
|
Disallowed interest deductions
|
11,155
|
|
11,009
|
|
Return to provision and prior year true-up
|
(7,855)
|
|
9,875
|
|
Other
|
299
|
|
674
|
|
Income tax expense
|
$
|
8,179
|
|
$
|
5,286
|
|
(1) The 2020 amount reflects a restructuring of intercompany debt that resulted in the reduction of certain foreign net operating loss carryforwards.
Deferred income taxes reflect the tax effects of differences between the financial and tax bases of assets and liabilities.
Significant components of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Deferred tax assets:
|
|
|
Pension liability
|
$
|
50,849
|
|
$
|
64,046
|
|
Other accruals
|
12,989
|
|
14,283
|
|
Long-term contracts
|
1,121
|
|
4,879
|
|
Net operating loss carryforward
|
399,321
|
|
386,949
|
|
State net operating loss carry forward
|
23,956
|
|
21,190
|
|
Interest limitation carryforward
|
38,539
|
|
37,221
|
|
Foreign tax credit carryforward
|
7,312
|
|
2,535
|
|
Property, plant and equipment
|
—
|
|
614
|
|
Other tax credits
|
3,270
|
|
3,243
|
|
Other
|
8,478
|
|
11,695
|
|
Total deferred tax assets
|
$
|
545,835
|
|
$
|
546,655
|
|
Valuation allowance for deferred tax assets
|
(536,251)
|
|
(539,791)
|
|
Total deferred tax assets, net
|
$
|
9,584
|
|
$
|
6,864
|
|
|
|
|
Deferred tax liabilities:
|
|
|
Property, plant and equipment
|
$
|
2,763
|
|
$
|
—
|
|
Unremitted earnings
|
1,084
|
|
—
|
|
Intangibles
|
9,449
|
|
8,785
|
|
Total deferred tax liabilities
|
13,296
|
|
8,785
|
|
Net deferred tax liabilities
|
$
|
(3,712)
|
|
$
|
(1,921)
|
|
At December 31, 2020, the Company has tax-effected foreign net operating loss (NOL) carryforwards of approximately $356.8 million available to offset future taxable income in certain foreign jurisdictions. Of these foreign NOL carryforwards, $185.5 million do not expire. The remaining foreign NOLs will expire between 2021 and 2037.
As December 31, 2020, the Company has tax-effected U.S. federal NOL carryforwards of approximately $42.5 million. Of this amount, $20.7 million will expire between 2031 and 2037. The remaining amount of U.S. NOL carryforward does not expire. A portion of the net operating loss carryforward is limited under Code Section 382. Approximately $19.2 million of our U.S. federal NOL carryforward is not subject to the Code Section 382 limitation.
At December 31, 2020, the Company has tax-effected state NOL carryforwards of $23.9 million available to offset future taxable income in various jurisdictions. Of this amount, $23.3 million will expire between 2021 and 2040.
At December 31, 2020,the Company has tax-effected foreign tax credit carryforwards of $7.3 million. These carryforwards will expire between 2021 and 2028.
At December 31, 2020, the Company has valuation allowances of $536.3 million for deferred tax assets, which we expect will not be realized, through carrybacks, reversals of existing taxable temporary differences, estimates of future taxable income or tax-planning strategies. Deferred tax assets are evaluated for realizability under ASC 740, considering all positive and negative evidence. At December 31, 2020, our weighting of positive and negative evidence included an assessment of historical income by jurisdiction adjusted for nonrecurring items, as well as an evaluation of other qualitative factors such as the length and magnitude of pretax losses. The valuation allowances may be reversed in the future if sufficient positive evidence exists. Any reversal of our valuation allowance could be material to the income or loss for the period in which our assessment changes.
The net change during the year in the total valuation allowance is as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Balance at beginning of period
|
$
|
(539,791)
|
|
$
|
(483,967)
|
|
Charges to costs and expenses
|
17,498
|
|
(56,254)
|
|
Charges to other accounts
|
(13,958)
|
|
430
|
|
Balance at end of period
|
$
|
(536,251)
|
|
$
|
(539,791)
|
|
Sections 382 and 383 of the Code limits, for U.S. federal income tax purposes, the annual use of NOL carryforwards (including previously disallowed interest carryforwards) and tax credit carryforwards, respectively, following an ownership change. Under Code Section 382, a company has undergone an ownership change if shareholders owning at least 5% of the company have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, the Company determined that a Section 382 ownership change occurred on July 23, 2019 as a result of the Equitization Transactions described in Part II, Item 7, Liquidity and Capital Resources, 2019 Rights Offering. As a result of this change in ownership, the Company estimated that the future utilization of our federal NOLs (and certain credits and previously disallowed interest deductions) will become limited to approximately $1.2 million annually ($0.3 million tax effected) The Company maintains a full valuation allowance on its U.S. deferred tax assets, including the deferred tax assets associated with the federal NOLs, credits and disallowed interest carryforwards.
Undistributed earnings of certain foreign subsidiaries amounted to approximately $222.4 million. The Company no longer intends to assert indefinite reinvestment with respect to withholding taxes of $1.1 million that could be assessed on the repatriation of $14.3 million in undistributed earnings. The Company continues to assert indefinite reinvestment in the remaining $208.1 million of existing earnings that are not expected to be distributed in the future. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to withholding taxes payable to the various foreign countries. The Company expects to take the 100% dividends received deduction to offset any U.S. federal taxable income on the undistributed earnings. Withholding taxes of approximately $2.8 million would be payable upon remittance of these previously unremitted earnings.
We recognize the benefit of a tax position when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. A recognized tax benefit is measured as the largest amount of benefit, on a cumulative probability basis, which is more likely-than-not to be realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Below is a tabular rollforward of the beginning and ending aggregate unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
(in thousands)
|
2020
|
2019
|
Balance at beginning of period
|
$
|
1,229
|
|
$
|
1,500
|
|
Increases based on tax positions taken in the current year
|
37,900
|
|
29
|
|
Increases based on tax positions taken in prior years
|
—
|
|
27
|
|
Decreases based on tax positions taken in prior years
|
(29)
|
|
(223)
|
|
Decreases due to settlements with tax authorities
|
—
|
|
—
|
|
Decreases due to lapse of applicable statute of limitation
|
(87)
|
|
(104)
|
|
Balance at end of period
|
$
|
39,013
|
|
$
|
1,229
|
|
Unrecognized tax benefits of $0.8 million would, if recognized, impact the effective tax rate. The remaining balance of unrecognized tax benefits relates to deferred tax assets that, if recognized, would require a full valuation allowance. It is not expected that the amount of unrecognized tax benefits will change significantly during the next 12 months. We recognize interest and penalties related to unrecognized tax benefits in our provision for income taxes; however, such amounts are not significant to any period presented.
Tax years 2015 through 2019 remain open to assessment by the United States Internal Revenue Service and various state and international tax authorities. With few exceptions, we do not have any returns under examination for years prior to 2014. The United States Internal Revenue Service has completed examinations of the federal tax returns of our former parent, BWXT, through 2014, and all matters arising from such examinations have been resolved.
NOTE 19 – 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 Litigation will have a material adverse impact on our consolidated financial condition, results of operations or cash flows.
SEC Investigation
The U.S. SEC is 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. The SEC has served multiple subpoenas on the Company for documents. The Company is cooperating with the SEC related to the subpoenas and investigation. The SEC has taken testimony from past and current officers, directors, and employees in addition to also seeking testimony from certain third-parties. It is reasonably possible that the SEC may bring one or more claims against the Company and certain individuals. Due to the stage of the investigation, we are unable to estimate the amount of loss or range of potential loss of any claim. However, there can be no assurance that such claims will not have a material impact on the Company.
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 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 consolidated financial condition, results of operations or cash flows.
NOTE 20 – COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) (“AOCI”) are generally reclassified and recognized in the Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the year ended December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation (loss) gain
|
|
Net unrealized gain (loss) on derivative instruments
|
Net unrecognized loss related to benefit plans
|
Total
|
Balance at December 31, 2018
|
$
|
(10,834)
|
|
|
$
|
1,362
|
|
$
|
(1,960)
|
|
$
|
(11,432)
|
|
Other comprehensive income (loss) before reclassifications
|
13,401
|
|
|
(1,367)
|
|
—
|
|
12,034
|
|
Reclassified from AOCI to net income (loss)
|
3,176
|
|
|
202
|
|
(1,857)
|
|
1,521
|
|
Amounts reclassified from AOCI to advanced billings on contracts
|
—
|
|
|
(197)
|
|
—
|
|
(197)
|
|
Net other comprehensive income (loss)
|
16,577
|
|
|
(1,362)
|
|
(1,857)
|
|
13,358
|
|
Balance at December 31, 2019
|
$
|
5,743
|
|
|
$
|
—
|
|
$
|
(3,817)
|
|
$
|
1,926
|
|
Other comprehensive loss before reclassifications
|
(53,318)
|
|
|
—
|
|
—
|
|
(53,318)
|
|
Reclassified from AOCI to net income (loss)
|
—
|
|
|
—
|
|
(998)
|
|
(998)
|
|
Net other comprehensive loss
|
(53,318)
|
|
|
—
|
|
(998)
|
|
(54,316)
|
|
Balance at December 31, 2020
|
$
|
(47,575)
|
|
|
$
|
—
|
|
$
|
(4,815)
|
|
$
|
(52,390)
|
|
The amounts reclassified out of AOCI by component and the affected Consolidated Statements of Operations line items are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI component
|
Line items in the Consolidated Statements of Operations affected by reclassifications from AOCI
|
Year ended December 31,
|
|
2020
|
2019
|
|
Release of currency translation gain with the sale of business
|
Loss on sale of business
|
$
|
—
|
|
$
|
(3,176)
|
|
|
Derivative financial instruments
|
Other – net
|
$
|
—
|
|
$
|
(202)
|
|
|
Amortization of prior service cost on benefit obligations
|
Benefit plans, net
|
$
|
998
|
|
$
|
1,857
|
|
|
NOTE 21 – 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
|
December 31, 2020
|
Level 1
|
Level 2
|
|
Corporate notes and bonds
|
$
|
6,139
|
|
$
|
6,139
|
|
$
|
—
|
|
|
Mutual funds
|
636
|
|
—
|
|
636
|
|
|
Corporate Stocks
|
4,168
|
|
4,168
|
|
—
|
|
|
United States Government and agency securities
|
4,365
|
|
4,365
|
|
—
|
|
|
Total fair value of available-for-sale securities
|
$
|
15,308
|
|
$
|
14,672
|
|
$
|
636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Available-for-sale securities
|
December 31, 2019
|
Level 1
|
Level 2
|
|
Corporate notes and bonds
|
$
|
8,310
|
|
$
|
8,310
|
|
$
|
—
|
|
|
Mutual funds
|
587
|
|
—
|
|
587
|
|
|
United States Government and agency securities
|
3,868
|
|
3,868
|
|
—
|
|
|
Total fair value of available-for-sale securities
|
$
|
12,765
|
|
$
|
12,178
|
|
$
|
587
|
|
|
Available-For-Sale Securities
Our investments in available-for-sale securities are presented in other assets on our Consolidated Balance Sheets with contractual maturities ranging from 0-6 years.
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 Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
•Revolving debt and Last Out Term Loans. 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 debt instruments approximated their carrying value at December 31, 2020 and 2019.
•Warrants. The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
NOTE 22 – RELATED PARTY TRANSACTIONS
The Letter Agreement entered into on April 5, 2019, pursuant to which the parties agreed to use their reasonable best efforts to effect a series of equitization transactions for a portion of the Last Out Term Loans, between B. Riley, Vintage and the Company included agreement to negotiate one or more agreements that provide B. Riley and Vintage with certain governance rights, including (i) the right for B. Riley and Vintage to each nominate up to three individuals to serve on our board of directors, subject to certain continued lending and equity ownership thresholds and (ii) pre-emptive rights permitting B. Riley to participate in future issuances of our equity securities. The Company also entered into a Registration Rights Agreement with B. Riley and Vintage on April 30, 2019 providing each with certain customary registration rights for the shares of our common stock that they hold. On April 30, 2019, the Company entered into an Investor Rights Agreement with B. Riley and Vintage providing the governance rights contemplated by the Letter Agreement.
Transactions with B. Riley
Based on its Schedule 13D filings, B. Riley beneficially owns 32.5% of our outstanding common stock as of December 31, 2020.
B. Riley is party to the Last Out Term Loans as described in Note 15 and also provided the B. Riley Guaranty as described in Note 14.
In connection with the B. Riley Guaranty, the Company entered into the Fee and Interest Equitization Agreement described in Note 14. Under the Equitization Agreement the Company issued 1.7 million shares of unregistered common stock on June 8, 2020, 1.2 million shares of unregistered common stock on June 30, 2020, 2.3 million shares of unregistered common stock on September 30, 2020 and 2.4 million shares of unregistered common stock on December 31, 2020 to B. Riley in satisfaction of the B. Riley Guaranty Fee and payment of certain interest payments described in Note 14. All of these issued shares are unregistered.
We entered an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 for the services of Mr. Kenny Young, to serve as our Chief Executive Officer until November 30, 2020, unless terminated by either party with thirty days written notice. On November 9, 2020 we amended the agreement with BRPI Executive Consulting, LLC to extend the services of Mr. Kenny Young to serve as our Chief Executive Officer until December 31, 2023. 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. In June 2019, we granted a total of $2.0 million in cash bonuses to BRPI Executive Consulting LLC for Mr. Young's performance and services. In April 2020, we temporarily deferred the monthly fee paid to BRPI Executive Consulting, LLC for the services of our Chief Executive Officer by 50% as described in Note 1.
Total fees associated with B. Riley related to the Last Out Term Loans and services of Mr. Kenny Young, both as described above, were $7.4 million and $12.4 million for the years ended December 31, 2020 and 2019, 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 subsequently sold in January 2021 for which the Company recognized net proceeds of $4.5 million.
On August 10, 2020, B. Riley Financial, Inc. entered into a project specific indemnity rider (the “Indemnity Rider”) to the General Agreement of Indemnity, dated May 28, 2015, between us and Berkley Insurance Company (the “Surety”). Pursuant to the terms of the Indemnity Rider, B. Riley will indemnify the Surety for losses the Surety may incur as a result of providing a payment and performance bond in an aggregate amount not to exceed $30.0 million in connection with our proposed performance on a specified project. In consideration of B. Riley's execution of the Indemnity Rider, we paid B. Riley a fee of $0.6 million following the issuance of the bond by the Surety, which represents approximately 2.0% of the bonded obligations. Under the A&R Credit Agreement, any draw or claim under the Indemnity Rider will convert into a Tranche A-5 Last Out Term Loan for the benefit of B. Riley.
Refer to Note 14 and Note 15 for additional related party transactions with B. Riley and its affiliates related to our Revolving Debt and Last Out Term Loans. Refer to Note 25 for additional related party transactions with B. Riley and its affiliates regarding the subsequent events in conjunction with the 2021 Common Stock Offering, 2021 Senior Notes Offering, 2021 Exchange Agreement and payment of $75 million towards our existing Last Out Term Loans.
Transactions with Vintage Capital Management, LLC
Based on its Schedule 13D filings, Vintage beneficially owns 19.7% of our outstanding common stock as of December 31, 2020.
NOTE 23 – ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS
Assets Held for Sale
Assets held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell.
In December 2020, we determined that certain fixed assets 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 assets held for sale was lower than the estimated fair value less costs to sell.
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. The sale closed March 8, 2021.
The sale of the fixed assets and the divestiture of the business held for sale could result in a gain or loss on sale to the extent the ultimate selling price differs from the current carrying value of the net assets recorded. The sales are expected to be completed in 2021.
The following table summarizes the carrying value of the assets and liabilities held for sale at December 31, 2020:
|
|
|
|
|
|
|
|
|
(in thousands)
|
December 31, 2020
|
December 31, 2019
|
Accounts receivable – trade, net
|
$
|
2,103
|
|
$
|
5,472
|
|
Accounts receivable – other
|
86
|
|
147
|
|
Contracts in progress
|
458
|
|
586
|
|
Inventories
|
1,676
|
|
1,555
|
|
Other current assets
|
405
|
|
329
|
|
Current assets held for sale
|
4,728
|
|
8,089
|
|
|
|
|
Net property, plant and equipment
|
10,365
|
|
6,534
|
|
Intangible assets
|
759
|
|
725
|
|
Right-of-use-asset
|
32
|
|
63
|
|
Non-current assets held for sale
|
11,156
|
|
7,322
|
|
|
|
|
Total assets held for sale
|
$
|
15,884
|
|
$
|
15,411
|
|
|
|
|
Accounts payable
|
$
|
5,211
|
|
$
|
7,898
|
|
Accrued employee benefits
|
178
|
|
430
|
|
Advance billings on contracts
|
370
|
|
227
|
|
Accrued warranty expense
|
466
|
|
515
|
|
Operating lease liabilities
|
32
|
|
6
|
|
Other accrued liabilities
|
2,048
|
|
462
|
|
Current liabilities held for sale
|
$
|
8,305
|
|
$
|
9,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Held for Sale - Subsequent Event
On January 21, 2021, we entered into a definitive agreement for the sale of a small business within the B&W Thermal segment that was classified as held for sale for a total sales price of $2.8 million. The sale closed on March 8, 2021.
Divestitures
On March 17, 2020, we fully settled the remaining escrow associated with the sale of PBRRC and received $4.5 million in cash.
Effective May 31, 2019, we sold all of the issued and outstanding capital stock of Loibl, a material handling business in Germany, to Lynx Holding GmbH for €10.0 million (approximately $11.4 million), subject to adjustment. We received $7.4 million in cash and recognized a $3.6 million pre-tax loss on sale of this business in 2019, net of $0.7 million in transaction costs. Proceeds from the transaction were primarily used to reduce outstanding balances under our U.S. Revolving Credit Facility.
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 24 – NEW ACCOUNTING STANDARDS
New accounting standards not yet adopted that could affect our Consolidated Financial Statements in the future are summarized as follows:
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 consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting. The amendments in this update provide 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 this update 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 amendments 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 this update 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 standard on our consolidated financial statements.
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, 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. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods in which financial statements have not yet been issued. We are currently evaluating the impact of the standard on our consolidated financial statements, however, we do not expect the adoption of this update will have a material impact.
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 sheet credit exposures, such as loan commitments. The standard also changes the impairment model for available-for-sale debt securities. The provisions of this standard will primarily impact the allowance for doubtful accounts on our trade receivables, contracts in progress, and potentially our impairment model for available-for-sale debt securities (to the extent we have any upon adoption). For public, smaller reporting companies, this standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of both standards on our consolidated financial statements.
NOTE 25– SUBSEQUENT EVENTS
2021 Common Stock Offering
On February 12, 2021, we completed a public offering of our common stock, par value $0.01 per share (“Common Stock”). The offering was conducted pursuant to an underwriting agreement (the “Underwriting Agreement”) dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the closing, we issued 29,487,180 shares of Common Stock, inclusive of 3,846,154 shares of Common Stock issued pursuant to the full exercise of the Underwriter’s option to purchase Common Stock. We received gross proceeds of approximately $172.5 million from the 2021 common stock offering. Net proceeds received were approximately $163 million after deducting underwriting discounts and commissions, but before expenses.
The net proceeds of the Common Stock offering and the Senior Notes offering, described below, are expected to be used to support our clean energy growth initiatives, to make a prepayment towards the outstanding U.S. Revolving Credit Facility and permanently reduce the commitments under our senior secured credit facilities.
2021 Senior Notes Offering
On February 12, 2021, we completed a public offering of $120 million aggregate principal amount of our 8.125% senior notes due 2026 (the “Senior Notes”). The offering was conducted pursuant to an underwriting agreement (the “Notes Underwriting Agreement”) dated February 10, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the completion, we received gross proceeds of approximately $125 million aggregate principal amount of Senior Notes, inclusive of $5 million aggregate principal amount of Senior Notes issued pursuant to the full exercise of the Underwriter’s option to purchase Senior Notes. Net proceeds received were approximately $120 million after deducting underwriting discounts and commissions, but before expenses.
In addition to the public offering, we issued $35 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 February 12, 2021, we also entered into an indenture (the “Base Indenture”) and a supplemental indenture (the “Supplemental Indenture” and, together with the Base Indenture, the “Indenture”) with The Bank of New York Mellon Trust Company National Association, as trustee (the “Trustee”), among the Company and the Trustee. The Indenture establishes the form and provides for the issuance of the Senior Notes.
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 are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The 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 Notes will mature on February 28, 2026.
We may, at our option, at any time and from time to time, redeem the Senior Notes for cash in whole or in part (i) on or after February 28, 2022 and prior to February 28, 2023, at a price equal to $25.75 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (ii) on or after February 28, 2023 and prior to February 29, 2024, at a price equal to $25.50 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption, (iii) on or after February 29, 2024 and prior to February 28, 2025, at a price equal to $25.25 per Senior Note, plus accrued and unpaid interest to, but excluding, the date of redemption and (iv) on or after February 28, 2025 and prior to maturity, at a price equal to 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption. On and after any redemption date, interest will cease to accrue on the redeemed Notes.
The Indenture contains customary events of default and cure provisions. If an uncured default occurs and is continuing, the Trustee or the holders of at least 25% of the principal amount of the Senior Notes may declare the entire amount of the Senior Notes, together with accrued and unpaid interest, if any, to be immediately due and payable. In the case of an event of default involving the Company’s bankruptcy, insolvency or reorganization, the principal of, and accrued and unpaid interest on, the principal amount of the Senior Notes, together with accrued and unpaid interest, if any, will automatically, and without any declaration or other action on the part of the Trustee or the holders of the Senior Notes, become due and payable.
2021 Exchange Agreement
On February 12, 2021, the Company and B. Riley entered into a letter agreement (the “Exchange Agreement”) pursuant to which we agreed to issue to B. Riley $35 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35 million of our existing Tranche A term loan with B. Riley Financial (the “Exchange”). The Exchange Agreement also provides that, promptly following the date of the Exchange Agreement, the parties thereto will negotiate in good faith and use commercially reasonable efforts to enter into an agreement providing B. Riley or its designated affiliates with customary registration rights in respect of the Senior Notes issued to B. Riley in the Exchange.
On February 12, 2021, we issued $35 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Last Out Term Loan' Tranche A-6. The interest rate on the remaining Last Out Term Loan Tranche A balances has been reduced to 6.625% from 12.0%.
Amendments to the A&R Credit Agreement
On February 8, 2021, we entered into A&R Amendment No. 2 with Bank of America. A&R Amendment No. 2, among other matters, (i) permits the issuance of the Senior Notes in the 2021 senior notes offering described above, (ii) permits the deemed prepayment of $35 million of our Tranche A term loan with $35 million principal amount of Senior Notes, (iii) provides that 75% of the Senior Notes gross proceeds shall be used to repay outstanding borrowings and permanently reduce the commitments under our senior secured credit facilities, and (iv) provide that $5 million of certain previously deferred facility fees will be paid by the Company.
On March 4, 2021, we entered into A&R Amendment No. 3 with Bank of America. A&R Amendment No. 3, among other matters, at the date of effectiveness (i) permits the prepayment of certain term loans, (ii) reduces the revolving credit commitments to $130 million and removes the ability to obtain revolving loans under the credit agreement, and (iii) amends certain covenants and conditions to the extension of credit.
On March 4, 2021, effective with the execution of Amendment No. 3, we paid $75 million towards our existing Last Out Term Loans and paid $21.8 million of accrued and deferred fees related to the revolving credit facility.
U.S. Revolving Credit Facility
On February 12, 2021, we received gross proceeds of $125 million from the 2021 Senior Notes offering. As required by the Company’s U.S. Revolving Credit Facility, 75% of the gross proceeds or $93.8 million received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility as of February 12, 2021.
Also on February 16, 2021, we prepaid $167.1 million towards the outstanding U.S. Revolving Credit Facility.
As of March 4, 2021, effective with Amendment No. 3 to the A&R Credit Agreement described above, the U.S. Revolving Credit Facility provides for an aggregate letters of credit amount of up to $130 million.
Related Parties
The Common Stock offering was conducted 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 date on February 12, 2021, we issued 3,846,154 shares of Common Stock to B. Riley Securities, Inc. pursuant to the full exercise of the Underwriter’s option to purchase common stock. We received gross proceeds of approximately $22.5 million for the common stock issued to B. Riley Securities, Inc.. Also on February 12, 2021, we paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction cost related to the Common Stock offering.
The Senior Notes offering was conducted pursuant to an underwriting agreement dated February 10, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters. At the closing date on February 12, 2021, we received gross proceeds of approximately $5.0 million for the senior notes issued to B. Riley Securities, Inc.. Also 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.
On February 12, 2021, the Company and B. Riley entered into a Letter Agreement (the “Exchange Agreement”) pursuant to which we agreed to issue to B. Riley $35 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35 million of our existing Tranche A term loan with B. Riley Financial (the “Exchange”).