NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2022
NOTE 1 – BASIS OF PRESENTATION
These interim Condensed Consolidated Financial Statements of Babcock & Wilcox Enterprises, Inc. (“B&W,” “management,” “we,” “us,” “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our Condensed Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.
COVID-19
In December 2019, a novel strain of coronavirus, ("COVID-19"), was identified in Wuhan, China and subsequently spread globally. This global pandemic has disrupted business operations, including trade, commerce, financial and credit markets, and daily life throughout the world. Our business has been, and continues to be, adversely impacted by the measures taken and restrictions imposed in the countries in which we operate and by local governments and others to control the spread of this virus. These measures and restrictions have varied widely and have been subject to significant changes from time to time depending on changes in the severity of the virus in these countries and localities. These restrictions, including curtailment of travel and other activity, negatively impact our ability to conduct business.
Disruption to our global supply changes from COVID-19 has included impacts to the manufacturing, supply, distribution, transportation and delivery of our products. We also observed significant disruptions of the operations of our logistics, service providers, delays in shipments and negative impacts to pricing of certain of our products. Disruptions and delays in our supply chains as a result of the COVID-19 pandemic could continue to adversely impact our ability to meet our customers’ demands. Additionally, the prioritization of shipments of certain products as a result of the pandemic could cause delays in the shipment or delivery of our products. Such disruptions could result in reduced sales.
The volatility and variability of the virus has limited our ability to forecast the impact of COVID-19 on our customers and our business. The ongoing impact of COVID-19, including evolving strains such as the delta and omicron variants, has resulted in the reimposition of certain restrictions and may lead to the implementation of other restrictions 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 to begin during the prior two years to be delayed into 2022 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 2022 and beyond. Additionally, out of concern for our employees, even where restrictions permit employees to return to our offices and worksites, we incurred additional costs to protect our employees and advised those who are uncomfortable returning to worksites due to the pandemic that they are not required to do so for an indefinite period of time. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus has also caused significant volatility and, at times, illiquidity in global equity and credit markets. The full extent of the impact of COVID-19 and its variants 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 outbreaks, as well as the availability, effectiveness and acceptance of COVID-19 vaccinations in the U.S. and abroad, all of which are uncertain, out of our control, and cannot be predicted.
NOTE 2 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per share of our common stock, net of non-controlling interest and dividends on preferred stock:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands, except per share amounts) | | | | | 2022 | | 2021 | | |
| | | | | | | | | |
| | | | | | | | | |
Net loss attributable to stockholders of common stock | | | | | $ | (11,979) | | | $ | (15,464) | | | |
| | | | | | | | | |
Weighted average shares used to calculate basic and diluted loss per share | | | | | 87,992 | | | 71,396 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Basic loss per share | | | | | $ | (0.14) | | | $ | (0.22) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Diluted loss per share | | | | | $ | (0.14) | | | $ | (0.22) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
If we were in a net income position during the three months ended March 31, 2022 and 2021, diluted shares would include an additional 0.9 million and 1.6 million shares, respectively.
We excluded 0.4 million and 0.4 million shares related to stock options from the diluted share calculation for the three months ended March 31, 2022 and 2021, respectively, because their effect would have been anti-dilutive.
NOTE 3 – SEGMENT REPORTING
Our operations are assessed based on three reportable market-facing segments as part of the Company's strategic, market-focused organizational and re-branding initiative to accelerate growth and provide stakeholders with improved visibility into our renewable and environmental growth platforms. Our reportable segments are as follows:
•Babcock & Wilcox Renewable: Cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, solar construction and installation, biomass energy and black liquor systems for the pulp and paper industry. B&W’s leading technologies support a circular economy by diverting waste from landfills to use for power generation and replacing fossil fuels while recovering metals and reducing emissions.
•Babcock & Wilcox Environmental: A full suite of best-in-class emissions control and environmental technology solutions for utility, waste to energy, biomass, carbon black and industrial steam generation applications around the world. B&W’s broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control, and mercury control.
•Babcock & Wilcox Thermal: Steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. B&W has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
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:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 | | |
Revenues: | | | | | | | | | |
B&W Renewable segment | | | | | | | | | |
B&W Renewable | | | | | $ | 19,711 | | | $ | 17,997 | | | |
B&W Renewable Services (1) | | | | | 8,288 | | | 5,260 | | | |
Vølund | | | | | 16,336 | | | 5,554 | | | |
Fosler Solar | | | | | 23,626 | | | — | | | |
| | | | | 67,961 | | | 28,811 | | | |
B&W Environmental segment | | | | | | | | | |
B&W Environmental | | | | | 18,185 | | | 17,433 | | | |
SPIG | | | | | 12,060 | | | 11,184 | | | |
GMAB | | | | | 4,703 | | | 2,543 | | | |
| | | | | 34,948 | | | 31,160 | | | |
B&W Thermal segment | | | | | | | | | |
B&W Thermal | | | | | 102,239 | | | 108,281 | | | |
| | | | | 102,239 | | | 108,281 | | | |
| | | | | | | | | |
Eliminations | | | | | (1,099) | | | (4) | | | |
Total Revenues | | | | | $ | 204,049 | | | $ | 168,248 | | | |
(1) B&W Renewable Services' 2021 revenues were reclassed from Vølund's prior year reported amount for year-over-year comparability.
Adjusted EBITDA on a consolidated basis is a non-GAAP metric defined as the sum of the adjusted EBITDA for each of the segments, further adjusted for corporate allocations and research and development costs. At a segment level, the adjusted EBITDA presented below is consistent with the manner in which the Company's chief operating decision maker ("CODM") reviews the results of operations and makes strategic decisions about the business and is calculated as earnings before interest, tax, depreciation and amortization adjusted for items such as gains or losses on asset sales, net pension benefits, restructuring costs, impairments, gains and losses on debt extinguishment, costs related to financial consulting, research and development costs and other costs that may not be directly controllable by segment management and are not allocated to the segment. The Company uses adjusted EBITDA internally to evaluate its performance and in making financial and operational decisions. When viewed in conjunction with GAAP results, the Company believes that its presentation of adjusted EBITDA provides investors with greater transparency and a greater understanding of factors affecting its financial condition and results of operations than GAAP measures alone. Prior period results have been revised to conform with the revised definition and present separate reconciling items in our reconciliation.
Adjusted EBITDA for each segment is presented below with a reconciliation from net loss.
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| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 | | |
Net loss | | | | | $ | (8,684) | | | $ | (15,443) | | | |
Interest expense | | | | | 12,324 | | | 14,509 | | | |
Income tax expense | | | | | 1,230 | | | 2,836 | | | |
Depreciation & amortization | | | | | 6,202 | | | 4,058 | | | |
EBITDA | | | | | 11,072 | | | 5,960 | | | |
| | | | | | | | | |
Benefit plans, net | | | | | (7,452) | | | (9,098) | | | |
Gain on sales, net | | | | | (20) | | | (2,362) | | | |
Stock compensation | | | | | 1,319 | | | 7,829 | | | |
Restructuring activities and business services transition costs | | | | | 2,688 | | | 993 | | | |
Advisory fees for settlement costs and liquidity planning | | | | | 1,032 | | | 1,978 | | | |
Litigation costs | | | | | 2,528 | | | 380 | | | |
Acquisition pursuit and related costs | | | | | 843 | | | — | | | |
Product development (1) | | | | | 852 | | | — | | | |
Foreign exchange | | | | | (3,085) | | | 1,209 | | | |
Financial advisory services | | | | | 375 | | | 933 | | | |
Contract step-up purchase price adjustment | | | | | 1,745 | | | — | | | |
Loss from business held for sale | | | | | — | | | 483 | | | |
Other - net | | | | | 123 | | | 266 | | | |
Adjusted EBITDA | | | | | $ | 12,020 | | | $ | 8,571 | | | |
(1) Costs associated with development of commercially viable products that are ready to go to market.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 | | |
Adjusted EBITDA | | | | | | | | | |
B&W Renewable segment | | | | | $ | 1,455 | | | $ | 204 | | | |
B&W Environmental segment | | | | | 1,439 | | | 1,105 | | | |
B&W Thermal segment | | | | | 14,154 | | | 10,535 | | | |
Corporate | | | | | (4,373) | | | (2,685) | | | |
Research and development costs | | | | | (655) | | | (588) | | | |
| | | | | $ | 12,020 | | | $ | 8,571 | | | |
We do not separately identify or report our assets by segment as our CODM does not consider assets by segment to be a critical measure by which performance is measured.
NOTE 4 – 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.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services, accounted for 19% and 27% of our revenue for the three months ended March 31, 2022 and 2021, respectively. Revenue from products and services transferred to customers over time, which primarily relates to customized, engineered solutions and construction services, accounted for 81% and 73% of our revenue for the three months ended March 31, 2022 and 2021, respectively.
Refer to Note 3 for our disaggregation of revenue by product line.
Contract Balances
The following represents the components of our Contracts in progress and Advance billings on contracts included in our Condensed Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 | | $ Change | | % Change |
Contract assets - included in contracts in progress: | | | | | | | |
Costs incurred less costs of revenue recognized | $ | 32,101 | | | $ | 35,939 | | | $ | (3,838) | | | (11) | % |
Revenues recognized less billings to customers | 63,871 | | | 44,237 | | | 19,634 | | | 44 | % |
Contracts in progress | $ | 95,972 | | | $ | 80,176 | | | $ | 15,796 | | | 20 | % |
Contract liabilities - included in advance billings on contracts: | | | | | | | |
Billings to customers less revenues recognized | $ | 100,130 | | | $ | 68,615 | | | $ | 31,515 | | | 46 | % |
Costs of revenue recognized less cost incurred | (220) | | | (235) | | | 15 | | | (6) | % |
Advance billings on contracts | $ | 99,910 | | | $ | 68,380 | | | $ | 31,530 | | | 46 | % |
| | | | | | | |
Net contract balance | $ | (3,938) | | | $ | 11,796 | | | $ | (15,734) | | | (133) | % |
| | | | | | | |
Accrued contract losses | $ | 4,652 | | | $ | 378 | | | $ | 4,274 | | | 1,131 | % |
Backlog
On March 31, 2022 we had $721.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately 61.4%, 15.4% and 23.2% of our remaining performance obligations as revenue in 2022, 2023 and thereafter, respectively.
Changes in Contract Estimates
In the three months ended March 31, 2022 and 2021, we recognized changes in estimated gross profit related to long-term contracts accounted for on the over time basis, which are summarized as follows:
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
(in thousands) | | | | | 2022 | | 2021 | | |
Increases in gross profit for changes in estimates for over time contracts | | | | | $ | 3,341 | | | $ | 3,025 | | | |
Decreases in gross profit for changes in estimates for over time contracts | | | | | (2,862) | | | (1,358) | | | |
Net changes in gross profit for changes in estimates for over time contracts | | | | | $ | 479 | | | $ | 1,667 | | | |
B&W Renewable Projects
During March 2022, we determined that our Fosler Solar reporting unit had seven projects located in the United States that existed at the time we acquired Fosler on September 30, 2021 which generated losses that arose due to the status of certain construction activities, existing at acquisition date, not adequately disclosed in the sales agreement and not recognized in the financial records of the seller. As of March 31, 2022, we recorded an increase in goodwill of $14.9 million resulting from the
initial recognition of $14.5 million of accrued liabilities and $0.4 million of warranty accruals during this acquisition's annual measurement period. We have submitted insurance claims to recover a portion of these losses as of March 31, 2022.
NOTE 5 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value. The components of inventories are as follows:
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Raw materials and supplies | $ | 63,772 | | | $ | 56,352 | |
Work in progress | 7,212 | | | 5,723 | |
Finished goods | 19,417 | | | 17,452 | |
Total inventories | $ | 90,401 | | | $ | 79,527 | |
NOTE 6 – PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASES
Property, plant and equipment less accumulated depreciation is as follows:
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Land | $ | 1,533 | | | $ | 1,489 | |
Buildings | 32,681 | | | 31,895 | |
Machinery and equipment | 145,134 | | | 144,325 | |
Property under construction | 4,877 | | | 12,480 | |
| 184,225 | | | 190,189 | |
Less accumulated depreciation | 134,639 | | | 133,137 | |
Net property, plant and equipment | 49,586 | | | 57,052 | |
Finance leases | 34,160 | | | 34,159 | |
Less finance lease accumulated amortization | 6,590 | | | 5,584 | |
Net property, plant and equipment, and finance lease | $ | 77,156 | | | $ | 85,627 | |
NOTE 7 - GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | B&W Renewable | | B&W Environmental | | B&W Thermal | | Total |
Balance at December 31, 2021 | $ | 79,357 | | | $ | 5,667 | | | $ | 31,438 | | | $ | 116,462 | |
Addition - Fossil Power(1) | — | | | — | | | 35,392 | | | 35,392 | |
Addition - Optimus Industries(1) | — | | | — | | | 11,081 | | | 11,081 | |
Measurement period adjustments - Fosler(1)(2) | 11,163 | | | — | | | — | | | 11,163 | |
Measurement period adjustments - VODA(1)(2) | (61) | | | — | | | — | | | (61) | |
Currency translation adjustments | 57 | | | 45 | | | 232 | | | 334 | |
Balance at March 31, 2022 | $ | 90,516 | | | $ | 5,712 | | | $ | 78,143 | | | $ | 174,371 | |
(1) As described in Note 21, we are in the process of completing the purchase price allocation associated with the Fosler Construction, VODA, Fossil Power and Optimus Industries acquisitions and as a result, the provisional measurements of goodwill associated with these acquisitions are subject to change.
(2) Our preliminary purchase price allocation changed due to additional information and further analysis.
Goodwill is tested for impairment annually and on an interim basis when impairment indicators exist. No impairment indicators were identified during the three months ended March 31, 2022.
As of March 31, 2022, Fosler's goodwill increase of $11.2 million included a $14.9 million increase resulting from the initial recognition of $14.5 million of accrued liabilities and $0.4 million of warranty accruals during this acquisition's annual measurement period, as described in Note 4.
NOTE 8 – INTANGIBLE ASSETS
Our intangible assets are as follows:
| | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 |
Definite-lived intangible assets(1) | | | |
Customer relationships | $ | 67,332 | | | $ | 46,903 | |
Unpatented technology | 18,591 | | | 15,410 | |
Patented technology | 3,682 | | | 3,103 | |
Tradename | 13,383 | | | 12,747 | |
Acquired backlog | 3,100 | | | 3,100 | |
All other | 9,128 | | | 9,319 | |
Gross value of definite-lived intangible assets | 115,216 | | | 90,582 | |
Customer relationships amortization | (21,820) | | | (20,800) | |
Unpatented technology amortization | (8,729) | | | (8,313) | |
Patented technology amortization | (2,769) | | | (2,729) | |
Tradename amortization | (5,595) | | | (5,425) | |
Acquired backlog | (3,100) | | | (1,620) | |
All other amortization | (9,056) | | | (9,205) | |
Accumulated amortization | (51,069) | | | (48,092) | |
Net definite-lived intangible assets | $ | 64,147 | | | $ | 42,490 | |
Indefinite-lived intangible assets | | | |
Trademarks and trade names | $ | 1,305 | | | $ | 1,305 | |
Total intangible assets, net | $ | 65,452 | | | $ | 43,795 | |
(1) As described in Note 21, we are in the process of completing the purchase price allocation associated with the Fosler Construction, VODA, Fossil Power and Optimus Industries acquisitions and as a result, the increase in intangible assets associated with these acquisitions are subject to change.
The following summarizes the changes in the carrying amount of intangible assets, net:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Balance at beginning of period | $ | 43,795 | | | $ | 23,908 | |
Business acquisitions and adjustments(1) | 25,092 | | | — | |
Amortization expense | (2,978) | | | (856) | |
Currency translation adjustments | (457) | | | (843) | |
Balance at end of the period | $ | 65,452 | | | $ | 22,209 | |
(1) As described in Note 21, we are in the process of completing the purchase price allocation associated with the Fosler Construction, VODA, Fossil Power and Optimus Industries acquisitions and as a result, the increase in intangible assets associated with these acquisitions are subject to change.
Amortization of intangible assets is included in Cost of operations and SG&A in our Condensed Consolidated Statement of Operations but is not allocated to segment results.
Intangible assets are assessed for impairment on an interim basis when impairment indicators exist. No impairment indicators were identified during the three months ended March 31, 2022.
Estimated future intangible asset amortization expense as of March 31, 2022 is as follows (in thousands):
| | | | | |
| Amortization Expense |
Year ending December 31, 2022 | 5,990 | |
Year ending December 31, 2023 | 7,986 | |
Year ending December 31, 2024 | 7,906 | |
Year ending December 31, 2025 | 7,089 | |
Year ending December 31, 2026 | 5,890 | |
Year ending December 31, 2027 | 5,229 | |
Thereafter | 24,057 | |
See Note 21 for intangible assets identified in conjunction with the acquisitions of Fosler Construction, VODA, Fossil Power and Optimus Industries, which are subject to change pending the finalization of the purchase price allocation associated with these acquisitions.
NOTE 9 – ACCRUED WARRANTY EXPENSE
We may offer assurance type warranties on products and services that we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Balance at beginning of period | $ | 12,925 | | | $ | 25,399 | |
Additions | 1,300 | | | 1,475 | |
Expirations and other changes | (1,467) | | | (1,318) | |
Payments | (193) | | | (5,943) | |
Translation and other | (692) | | | (76) | |
Balance at end of period | $ | 11,873 | | | $ | 19,537 | |
We accrue estimated expense included in Cost of operations on our Condensed Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. Additions at March 31, 2022 included $0.4 million related to the Fosler projects, as described in Note 4. 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.
NOTE 10 – RESTRUCTURING ACTIVITIES
The Company incurred restructuring charges in the three months ended March 31, 2022, and 2021. The charges primarily consist of severance and related costs to actions taken as part of the Company’s strategic, market-focused organizational and re-branding initiative.
The following tables summarizes the restructuring activity incurred by segment:
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| Three Months Ended March 31, | | Three Months Ended March 31, |
| 2022 | | 2021 |
(in thousands) | Total | Severance and related costs | Other (1) | | Total | Severance and related Costs | Other(1) |
B&W Renewable segment | $ | (193) | | $ | (229) | | $ | 36 | | | $ | 509 | | $ | 453 | | $ | 56 | |
B&W Environmental segment | 69 | | 10 | | 59 | | | 89 | | 35 | | 54 | |
B&W Thermal segment | 198 | | 50 | | 148 | | | 348 | | 12 | | 336 | |
Corporate | 20 | | — | | 20 | | | 47 | | — | | 47 | |
| $ | 94 | | $ | (169) | | $ | 263 | | | $ | 993 | | $ | 500 | | $ | 493 | |
Cumulative costs to date | $ | 45,277 | | 37,083 | | 8,194 | | | | | |
(1) Other amounts consist primarily of exit, relocation, COVID-19 related and other costs.
Restructuring liabilities are included in Other accrued liabilities on our Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
| | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
(in thousands) | | | | | | | 2022 | | 2021 |
Balance at beginning of period | | | | | | | $ | 6,561 | | | $ | 8,146 | |
Restructuring expense | | | | | | | 94 | | | 993 | |
Payments | | | | | | | (749) | | | (1,117) | |
Balance at end of period | | | | | | | $ | 5,906 | | | $ | 8,022 | |
The payments shown above for the three months ended March 31, 2022 and 2021 relate primarily to severance. Accrued restructuring liabilities at March 31, 2022 and 2021 relate primarily to employee termination benefits.
NOTE 11 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of net periodic cost (benefit) included in net (loss) income are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three Months Ended March 31, | | Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 | | | | 2022 | | 2021 | | |
Interest cost | $ | 6,664 | | | $ | 5,671 | | | | | $ | 49 | | | $ | 39 | | | |
Expected return on plan assets | (14,366) | | | (15,009) | | | | | — | | | — | | | |
Amortization of prior service cost (credit) | 28 | | | 28 | | | | | 173 | | | 173 | | | |
Benefit plans, net (1) | (7,674) | | | (9,310) | | | | | 222 | | | 212 | | | |
Service cost included in COS (2) | 201 | | | 217 | | | | | 5 | | | 6 | | | |
Net periodic benefit cost (benefit) | $ | (7,473) | | | $ | (9,093) | | | | | $ | 227 | | | $ | 218 | | | |
(1) Benefit plans, net, which is presented separately in our Condensed Consolidated Statements of Operations, is not allocated to the segments.
(2) Service cost related to a small group of active participants is presented within Cost of operations in our Condensed Consolidated Statements of Operations and is allocated to the B&W Thermal segment.
There were no mark-to-market ("MTM") adjustments for our pension and other postretirement benefit plans during the three months ended March 31, 2022 and 2021.
We made contributions to our pension and other postretirement benefit plans totaling $0.4 million and $24.0 million during the three months ended March 31, 2022 and 2021, respectively.
NOTE 12 – DEBT
Senior Notes
8.125% Senior Notes
During 2021, we completed sales of $151.2 million aggregate principal amount of our 8.125% senior notes due 2026 (the “8.125% Senior Notes”) for net proceeds of approximately $146.6 million. In addition to the completed sales, we issued $35.0 million of 8.125% Senior Notes to B. Riley Financial, Inc., a related party, in exchange for a deemed prepayment of our then existing Last Out Term Loan Tranche A-3. The 8.125% Senior Notes bear interest at the rate of 8.125% per annum which is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on April 30, 2021. The 8.125% Senior Notes mature on February 28, 2026.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell to or through B. Riley Securities, Inc., from time to time, additional 8.125% Senior Notes up to an aggregate principal amount of $150.0 million. The 8.125% Senior Notes have the same terms as (other than date of issuance), form a single series of debt securities with and have the same CUSIP number and are fungible with the initial 8.125% Senior Notes issuance in 2021.
During the first quarter of 2022, the Company sold $2.0 million aggregate principal of 8.125% Senior Notes under the sales agreement described above for $2.0 million of net proceeds.
6.50% Senior Notes
During 2021, we completed sales of $151.4 million aggregate principal amount of our 6.50% senior notes due in 2026 (the “6.50% Senior Notes”) for net proceeds of approximately $145.8 million. Interest on the 6.50% Senior Notes is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, and commenced on March 31, 2022. The 6.50% Senior Notes mature on December 31, 2026.
The components of the Company's senior notes at March 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | |
| Senior Notes |
(in thousands) | 8.125% | | 6.50% | | Total |
Senior notes due 2026 | $ | 188,200 | | | $ | 151,440 | | | $ | 339,640 | |
Unamortized deferred financing costs | (5,043) | | | (6,297) | | | (11,340) | |
Unamortized premium | 570 | | | — | | | 570 | |
Net debt balance | $ | 183,727 | | | $ | 145,143 | | | $ | 328,870 | |
Revolving Debt
On June 30, 2021, we entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as administrative agent (“PNC”) and a letter of credit agreement (the “Letter of Credit Agreement”) with PNC, pursuant to which PNC agreed to issue up to $110 million in letters of credit that is secured in part by cash collateral provided by an affiliate of MSD Partners, MSD PCOF Partners XLV, LLC (“MSD”), as well as a reimbursement, guaranty and security agreement with MSD, as administrative agent, and the cash collateral providers from time to time party thereto, along with certain of our subsidiaries as guarantors, pursuant to which we are obligated to reimburse MSD and any other cash collateral provider to the extent the cash collateral provided by MSD and any other cash collateral provider to secure the Letter of Credit Agreement is drawn to satisfy draws on letters of credit (the “Reimbursement Agreement”) and collectively with the Revolving Credit Agreement and Letter of Credit Agreement, the “Debt Documents” and the facilities thereunder, the “Debt Facilities”). The obligations of the Company under each of the Debt Facilities are guaranteed by certain existing and future domestic and foreign subsidiaries of the Company. B. Riley Financial, Inc. (“B. Riley”), a related party, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as described below. The Company expects to use the proceeds and letter of credit availability under the Debt Facilities for working capital purposes and general corporate purposes. The Revolving Credit Agreement matures on June 30, 2025. As of March 31, 2022, no borrowings have occurred under the Revolving Credit Agreement and under the Letter of Credit Agreement, usage consisted of $16.2 million of financial letters of credit and $90.8 million of performance letters of credit.
Each of the Debt Facilities has a maturity date of June 30, 2025. The interest rates applicable under the Revolving Credit Agreement float at a rate per annum equal to either (i) a base rate plus 2.0% or (ii) 1 or 3 month reserve-adjusted LIBOR rate plus 3.0%. The interest rates applicable to the Reimbursement Agreement float at a rate per annum equal to either (i) a base rate plus 6.50% or (ii) 1 or 3 month reserve-adjusted LIBOR plus 7.50%. Under the Letter of Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) administrative fees of 0.75% and (ii) fronting fees of 0.25%. Under the Revolving Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) letter of credit commitment fees of 3.0% and (ii) letter of credit fronting fees of 0.25%. Under each of the Revolving Credit Agreement and the Letter of Credit Agreement, we are required to pay a facility fee equal to 0.375% per annum of the unused portion of the Revolving Credit Agreement or the Letter of Credit Agreement, respectively. The Company is permitted to prepay all or any portion of the loans under the Revolving Credit Agreement prior to maturity without premium or penalty. Prepayments under the Reimbursement Agreement shall be subject to a prepayment fee of 2.25% in the first year after closing, 2.0% in the second year after closing and 1.25% in the third year after closing with no prepayment fee payable thereafter.
The Company has mandatory prepayment obligations under the Reimbursement Agreement upon the receipt of proceeds from certain dispositions or casualty or condemnation events. The Revolving Credit Agreement and Letter of Credit Agreement require mandatory prepayments to the extent of an over-advance.
The obligations under the Debt Facilities are secured by substantially all assets of the Company and each of the guarantors, in each case subject to inter-creditor arrangements. As noted above, the obligations under the Letter of Credit Facility are also secured by the cash collateral provided by MSD and any other cash collateral provider thereunder.
The Debt Documents contain certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. The Debt Documents require the Company to comply with certain financial maintenance covenants, including a quarterly fixed charge coverage test of not less than 1.00 to 1.00, a quarterly senior net leverage ratio test of not greater than 2.50 to 1.00, a non-guarantor cash repatriation covenant not to exceed $35 million at any one time, a minimum liquidity covenant of at least $30.0 million at all times, and an annual cap on maintenance capital expenditures of $7.5 million. The Debt Documents also contain customary events of default (subject, in certain instances, to specified grace periods) including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under the respective facility, the failure to comply with certain covenants and agreements specified in the applicable Debt Agreement, defaults in respect of certain other indebtedness and certain events of insolvency. If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Debt Documents may become due and payable immediately.
In connection with the Company’s entry into the Debt Documents on June 30, 2021, B. Riley, a related party, entered into a Guaranty Agreement in favor of MSD, in its capacity as administrative agent under the Reimbursement Agreement, for the ratable benefit of MSD, the cash collateral providers and each co-agent or sub-agent appointed by MSD from time to time (the “B. Riley Guaranty”). The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations under the Reimbursement Agreement. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and the acceleration of the Company’s obligations under the Reimbursement Agreement. Under a fee letter with B. Riley, the Company agreed to pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty. The Company entered into a reimbursement agreement with B. Riley governing the Company’s obligation to reimburse B. Riley to the extent the B. Riley Guaranty is called upon by the agent or lenders under the Reimbursement Agreement.
As of March 31, 2022, a subsidiary has borrowed $1.7 million against a $3.5 million line of credit with a variable interest rate on the line of credit of 5.0% per annum. On April 1, 2022, the line of credit was paid in full and terminated.
Effective with the Revolving Credit Agreement, the Company entered into on June 30, 2021, the Company has no remaining Last Out Term Loans and no further borrowings thereunder are available.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries, primarily outside of the United States, have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees outside of our Letter of Credit Agreement as of March 31, 2022 was $48.3 million. The aggregate value of the outstanding letters of credit provided under the Letter of
Credit Agreement backstopping letters of credit or bank guarantees was $34.8 million as of March 31, 2022. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $52.0 million are subject to foreign currency revaluation.
We have also posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. These bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds the underwriters issue in support of some of our contracting activity. As of March 31, 2022, bonds issued and outstanding under these arrangements in support of our contracts totaled approximately $221.5 million. The aggregate value of the letters of credit backstopping surety bonds was $9.2 million.
Our ability to obtain and maintain sufficient capacity under our current Debt Facilities is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
Other Indebtedness - Loans Payable
As of March 31, 2022, our Denmark subsidiary has three unsecured interest-free loans totaling $3.3 million under a local government loan program related to COVID-19. The loans of $0.8 million, $1.6 million and $0.9 million are payable in April 2022, May 2022 and May 2023, respectively. The loan payable in May 2023 is included in Long term loans payables in our Condensed Consolidated Balance Sheets. Subsequent to March 31, 2022, the loan due April 2022 was repaid on April 1, 2022.
As of March 31, 2022, Fosler Construction has two loans totaling $8.9 million. Both loans have a variable interest rate with a minimum rate of 6.0% and are due June 30, 2022. Fosler Construction also has loans, primarily for vehicles and equipment, totaling $0.6 million at March 31, 2022. The vehicle and equipment loans are included in long term loans payables in our Condensed Consolidated Balance Sheets.
NOTE 13 – PREFERRED STOCK
In May 2021, we completed a public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) between us and B. Riley Securities, Inc.. At the closing, we issued to the public 4,444,700 shares of our Preferred Stock, at an offering price of $25.00 per share for net proceeds of approximately $106.4 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75% per year on the liquidation preference amount of $25.00 per share and payable quarterly in arrears.
The Preferred Stock ranks, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up: (1) senior to all classes or series of our common stock and to all other capital stock issued by us expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of our capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all our existing and future indebtedness.
The Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. We will pay cumulative cash dividends on the Preferred Stock when, as and if declared by our Board of Directors, only out of funds legally available for payment of dividends. Dividends on the Preferred Stock will accrue on the stated amount of $25.00 per share of the Preferred Stock at a rate per annum equal to 7.75% (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the Preferred Stock declared by our Board of Directors will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year.
During the three months ending March 31, 2022, the Company's Board of Directors approved dividends totaling $3.7 million. There are no cumulative undeclared dividends of the Preferred Stock at March 31, 2022.
On June 1, 2021, the Company and B. Riley, a related party, entered into an agreement (the “Exchange Agreement”) pursuant to which we (i) issued B. Riley 2,916,880 shares of our Preferred Stock, representing an exchange price of $25.00 per share
and paid $0.4 million in cash, and (ii) paid $0.9 million in cash to B. Riley for accrued interest due, in exchange for a deemed prepayment of $73.3 million of our then existing term loans with B. Riley under the Company’s prior A&R Credit Agreement.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in connection with the offer to or through B. Riley Securities, Inc., from time to time, additional shares of Preferred Stock up to an aggregate amount of $76.0 million of Preferred Stock. The Preferred Stock has the same terms and have the same CUSIP number and is fungible with, the Preferred Stock issued during May 2021. For the three months ending March 31, 2022, the Company has sold no additional Preferred Stock pursuant to the sales agreement. As of December 31, 2021, the Company sold $7.7 million aggregate principal amount of Preferred Stock for $7.7 million of net proceeds.
NOTE 14 – COMMON STOCK
On February 12, 2021, we completed a public offering of our common stock pursuant to an underwriting agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters. At the time of closing, we issued to the public 29,487,180 shares of our common stock and received net proceeds of approximately $163.0 million after deducting underwriting discounts and commissions, but before expenses. The net proceeds of the offering were used to make a prepayment toward the balance outstanding under our then existing U.S. Revolving Credit Facility and permanently reduced the commitments under our senior secured credit facilities.
NOTE 15 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense in our Condensed Consolidated Financial Statements consisted of the following components:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 | | |
Components associated with borrowings from: | | | | | | | | | |
Senior notes | | | | | $ | 6,216 | | | $ | 1,733 | | | |
Last Out Term Loans - cash interest | | | | | — | | | 3,513 | | | |
U.S. Revolving Credit Facility | | | | | — | | | 1,416 | | | |
| | | | | 6,216 | | | 6,662 | | | |
Components associated with amortization or accretion of: | | | | | | | | | |
Revolving Credit Agreement | | | | | 1,060 | | | — | | | |
Senior notes | | | | | 643 | | | 1,468 | | | |
U.S. Revolving Credit Facility | | | | | — | | | 4,400 | | | |
| | | | | 1,703 | | | 5,868 | | | |
| | | | | | | | | |
Components associated with interest from: | | | | | | | | | |
Lease liabilities | | | | | 708 | | | 616 | | | |
Other interest expense | | | | | 2,640 | | | 1,077 | | | |
| | | | | 3,348 | | | 1,693 | | | |
| | | | | | | | | |
Total interest expense | | | | | $ | 11,267 | | | $ | 14,223 | | | |
The following table provides a reconciliation of Cash and cash equivalents and Restricted cash and cash equivalents reporting within the Condensed Consolidated Balance Sheets and in the Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | |
(in thousands) | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
Held by foreign entities | $ | 35,870 | | | $ | 42,070 | | | $ | 25,169 | |
Held by U.S. entities | 72,267 | | | 182,804 | | | 28,664 | |
Cash and cash equivalents | 108,137 | | | 224,874 | | | 53,833 | |
| | | | | |
Reinsurance reserve requirements | 584 | | | 443 | | | 2,053 | |
Bank guarantee collateral | 492 | | | 997 | | | 2,560 | |
Letters of credit collateral | 1,858 | | | 401 | | | — | |
Hold-back for acquisition purchase price (1) | 5,899 | | | — | | | — | |
Restricted cash and cash equivalents | 8,833 | | | 1,841 | | | 4,613 | |
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 116,970 | | | $ | 226,715 | | | $ | 58,446 | |
(1) The purchase price for Fossil Power Systems ("FPS") was $59.1 million, including a hold-back of $5.9 million as reflected above. The hold-back is being held in escrow for potential payment of up to the maximum amount twelve months from the February 1, 2022 date of acquisition if the conditions are met. The hold-back amount is included in Restricted cash and cash equivalents and Other accrued liabilities on our Condensed Consolidated Balance Sheets.
The following cash activity is presented as a supplement to our Condensed Consolidated Statements of Cash Flows and is included in Net cash used in operating activities:
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 | | |
Income tax payments, net | $ | 471 | | | $ | 1,499 | | | |
| | | | | |
Interest payments - 8.125% Senior Notes due 2026 | $ | 3,783 | | | $ | — | | | |
Interest payments - 6.50% Senior Notes due 2026 | 2,926 | | | — | | | |
Interest payments on our U.S. Revolving Credit Facility | — | | | 5,979 | | | |
Interest payments on our Last Out Term Loans | — | | | 3,560 | | | |
Total cash paid for interest | $ | 6,709 | | | $ | 9,539 | | | |
NOTE 16 – PROVISION FOR INCOME TAXES
In the three months ended March 31, 2022, income tax expense was $1.2 million, resulting in an effective tax rate of (16.5)%. In the three months ended March 31, 2021, income tax expense was $2.8 million, resulting in an effective tax rate of (22.5)%.
Our effective tax rate for the three months ended March 31, 2022 and 2021 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets and discrete items. We have unfavorable discrete items of $0.4 million for the three months ended March 31, 2022, which primarily represent withholding taxes. We had unfavorable discrete items of $2.5 million in the three months ended March 31, 2021, which primarily represented withholding taxes.
We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the United States federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden, and the United Kingdom, with effective tax rates ranging between approximately 19% and 30%. We provide for income taxes based on the tax laws and rates in the jurisdictions where we conduct operations. These jurisdictions may have regimes of taxation that vary in both nominal rates and the basis on which these rates are applied. Our consolidated effective income tax rate can vary from period to period due to these foreign income tax rate variations, changes in the jurisdictional mix of our income and valuation allowances.
NOTE 17 – 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 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.
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 litigation is currently ongoing and at this time we are unable to determine whether the outcome of the Stockholder Litigation will have a material adverse impact on our consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Russian Invasion of Ukraine
We do not currently have contracts directly with Russian entities or businesses and we currently do not do business in Russia directly. We believe the Company’s only involvement with Russia or Russian-entities, involves sales of our products in the amount of approximately $3.1 million by a wholly-owned Italian subsidiary of the Company to non-Russian counterparties who may resell our products to Russian entities or perform services in Russia using our products. The economic sanctions and export-control measures and the ongoing invasion of Ukraine could impact our subsidiary’s rights and responsibilities under the contracts and could result in potential losses to the Company.
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 18 – COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are generally reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first quarter of 2022 and 2021 were as follows:
| | | | | | | | | | | | |
(in thousands) | Currency translation loss | | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2021 | $ | (55,499) | | | $ | (3,323) | | $ | (58,822) | |
Other comprehensive loss before reclassifications | (4,285) | | | — | | (4,285) | |
Reclassified from AOCI to net loss | — | | | 593 | | 593 | |
Net other comprehensive (loss) income | (4,285) | | | 593 | | (3,692) | |
Balance at March 31, 2022 | (59,784) | | | (2,730) | | (62,514) | |
| | | | | | | | | | | | |
(in thousands) | Currency translation loss | | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2020 | $ | (47,575) | | | $ | (4,815) | | $ | (52,390) | |
Other comprehensive loss before reclassifications | (70) | | | — | | (70) | |
Reclassified from AOCI to net (loss) income | (4,512) | | | 198 | | (4,314) | |
Net other comprehensive (loss) income | (4,582) | | | 198 | | (4,384) | |
Balance at March 31, 2021 | $ | (52,157) | | | $ | (4,617) | | $ | (56,774) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
AOCI component | Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI | | | Three Months Ended March 31, |
| | | | 2022 | | 2021 | | |
Release of currency translation adjustment with the sale of business | Loss on sale of business | | | | | $ | — | | | $ | 4,512 | | | |
| | | | | | | | | | |
Pension and post retirement adjustments, net of tax | Benefit plans, net | | | | | (593) | | | (198) | | | |
| Net (loss) income | | | | | $ | (593) | | | $ | 4,314 | | | |
NOTE 19 – 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 | March 31, 2022 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 8,218 | | $ | 8,218 | | $ | — | | |
Mutual funds | 673 | | — | | 673 | | |
United States Government and agency securities | 2,933 | | 2,933 | | — | | |
Total fair value of available-for-sale securities | $ | 11,824 | | $ | 11,151 | | $ | 673 | | |
| | | | | | | | | | | | |
(in thousands) | | | | |
Available-for-sale securities | December 31, 2021 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 9,477 | | $ | 9,477 | | $ | — | | |
Mutual funds | 714 | | — | | 714 | | |
United States Government and agency securities | 2,017 | | 2,017 | | — | | |
Total fair value of available-for-sale securities | $ | 12,208 | | $ | 11,494 | | $ | 714 | | |
Available-For-Sale Securities
Our investments in available-for-sale securities are presented in other assets on our Condensed Consolidated Balance Sheets with contractual maturities ranging from 0-5 years.
Senior Notes
See Note 12 above for a discussion of our senior notes. The fair value of the senior notes is based on readily available quoted market prices as of March 31, 2022.
| | | | | | | | | |
(in thousands) | March 31, 2022 | |
Senior Notes | Carrying Value | Estimated Fair Value | |
8.125% Senior Notes due 2026 ('BWSN') | $ | 188,200 | | $ | 197,759 | | |
6.50% Senior Notes due 2026 ('BWNB') | $ | 151,440 | | $ | 144,353 | | |
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
•Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that we have reported in the accompanying Condensed Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
•Revolving Debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on Level 2 inputs such as the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our Revolving Debt approximated their carrying value at March 31, 2022.
•Warrants. The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
•Contingent consideration: In connection with the Fosler Construction Company acquisition, the Company agreed to pay contingent consideration based on the achievement of targeted revenue thresholds for the year ended December 31, 2022. The range of undiscounted amounts the Company could be required to pay under the contingent consideration arrangement is between $0.0 million and $10.0 million. As of March 31, 2022, the fair value of the contingent consideration liability is $9.6 million and is classified as a component of other current liabilities in the Company's Condensed Consolidated Balance Sheets. The fair value measurement of the contingent consideration related to the Fosler Construction Company acquisition was categorized as a Level 3 liability, as the measurement amount is based primarily on significant inputs not observable in the markets. The Company evaluates the fair value of contingent consideration and the corresponding liability each reporting period using an option pricing framework. The Company estimates projections during the earn-out period and volatility within the option pricing model captures variability in the potential pay-out. The analysis considers a discount rate applicable to the underlying projections and the risk of the Company paying the future liability.
NOTE 20 – RELATED PARTY TRANSACTIONS
The Company believes transactions with related parties were conducted on terms equivalent to those prevailing in an arm's length transaction.
Transactions with B. Riley
Based on its Schedule 13D filings with the SEC, B. Riley beneficially owns approximately 30.3% of our outstanding common stock as of March 31, 2022.
We entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 and amended the agreement on November 9, 2020 to retain the services of Mr. Kenny Young, to serve as our Chief Executive Officer until December 31, 2023, unless terminated by either party with thirty days written notice. Under this agreement, payments are $0.75 million per annum, paid monthly. Subject to the achievement of certain performance objectives as determined by the Compensation Committee of the Board, a bonus or bonuses may also be earned and payable to BRPI Executive Consulting, LLC. Total fees associated with B. Riley related to the services of Mr. Kenny Young were $0.2 million and $0.2 million for the three months ended March 31, 2022 and 2021, respectively.
The public offering of our 8.125% Senior Notes in February 2021, as described in Note 12, was conducted pursuant to an underwriting agreement dated February 10, 2021, between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date on February 12, 2021, we paid B. Riley Securities, Inc. $5.2 million for underwriting fees and other transaction cost related to the 8.125% Senior Notes offering.
The public offering of our common stock, as described in Note 14, was conducted pursuant to an underwriting agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters. Also on February 12, 2021, we paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction costs related to the offering.
On February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to which we agreed to issue to B. Riley $35.0 million aggregate principal amount of 8.125% Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley Financial in the Exchange, as described in Note 12.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $150.0 million of 8.125% Senior Notes due 2026 to or through B. Riley Securities, Inc., as described in Note 12. As of March 31, 2022, we paid B. Riley Securities, Inc. $0.6 million for underwriting fees and other transaction costs related to the offering of which $0.1 million has been paid for the three months ended March 31, 2022.
The public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock, as described in Note 13, was conducted pursuant to an underwriting agreement dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters. At the closing date on May 2021, we paid B. Riley Securities, Inc. $4.3 million for underwriting fees and other transaction cost related to the Preferred Stock offering.
On May 26, 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to the grant to the underwriters, as described in Note 13, and paid B. Riley Securities, Inc. $0.4 million for underwriting fees in conjunction with the transaction.
On June 1, 2021, we issued 2,916,880 shares of the Company’s 7.75% Series A Cumulative Perpetual Preferred Stock and paid $0.4 million in cash due to B. Riley, a related party, in exchange for a deemed prepayment of $73.3 million of our then existing Last Out Term Loans and paid $0.9 million in cash for accrued interest, as described in Note 13.
On June 30, 2021, we entered into new Debt Facilities, as described in Note 12. In connection with the Company’s entry into the Debt Facilities, B. Riley Financial, Inc., an affiliate of B. Riley, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as describe in Note 12. Under a fee letter with B. Riley, the Company shall pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $76.0 million of Preferred Stock to or through B. Riley Securities, Inc., as described in Note 13. As of March 31, 2022, we paid B. Riley Securities, Inc. $0.2 million for underwriting fees and other transaction costs related to the offering.
The public offering of our 6.50% Senior Notes in December 2021, as described in Note 12, was conducted pursuant to an underwriting agreement dated December 8, 2021, between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date on December 13, 2021, we paid B. Riley Securities, Inc. $5.5 million for underwriting fees and other transaction cost related to the 6.50% Senior Notes offering.
On December 17, 2021, B. Riley Financial, Inc. entered into a General Agreement of Indemnity (the "Indemnity Agreement"), between us and AXA-XL and or its affiliated associated and subsidiary companies (collectively the “Surety”). Pursuant to the terms of the Indemnity Agreement, 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 Agreement, we paid B. Riley a fee of $1.7 million following the issuance of the bond by the Surety, which represents approximately 5.0% of the bonded obligations, to be amortized over the term of the agreement.
On December 28, 2021, we received a notice that the underwriters of the 6.50% Senior Notes had elected to exercise their overallotment option for an additional $11.4 million in aggregate principal amount of the Senior Notes. At the closing date on December 30, 2021, we paid B. Riley Securities, Inc. $0.5 million for underwriting fees and other transaction cost related to the 6.50% Senior Notes overallotment.
NOTE 21 – ACQUISITIONS AND DIVESTITURES
Acquisitions
Fosler Construction
On September 30, 2021, we acquired a 60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”). Fosler Construction provides commercial, industrial and utility-scale solar services and owns two community solar projects in Illinois that are being developed under the Illinois Solar for All program. Fosler Construction was founded in 1998 with a track record of successfully completing solar projects profitably with union labor while aligning its model with a growing number of renewable project incentives in the U.S. We believe Fosler Construction is positioned to capitalize on the high-growth solar market in the U.S. and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. Fosler Construction is reported as part of our B&W Renewable segment, and operates under the name Fosler Solar, a Babcock and Wilcox company.
The total fair value of consideration for the acquisition is $36.0 million, including $27.2 million in cash plus $8.8 million in estimated fair value of the contingent consideration arrangement. In connection with the acquisition, the Company agreed to pay contingent consideration based on the achievement of targeted revenue thresholds for the year ended December 31, 2022. The range of undiscounted amounts the Company could be required to pay under the contingent consideration arrangement is between $0.0 million and $10.0 million.
We estimated fair values primarily using the discounted cash flow method at September 30, 2021 for the preliminary allocation of consideration to the assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. Any subsequent changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
As of March 31, 2022, we recorded an increase in goodwill of $14.9 million resulting from the initial recognition of $14.5 million of accrued liabilities and $0.4 million of warranty accruals during this acquisition's annual measurement period, as described in Note 4.
VODA
On November 30, 2021, we acquired 100% ownership of VODA A/S (“VODA”) through our wholly-owned subsidiary, B&W PGG Luxembourg Finance SARL, for approximately $32.9 million. VODA is a Denmark-based multi-brand aftermarket parts and services provider, focusing on energy-producing incineration plants including waste-to-energy, biomass-to-energy or other fuels, providing service, engineering services, spare parts as well as general outage support and management. VODA has extensive experience in incineration technology, boiler and pressure parts, SRO, automation, and performance optimization. VODA is reported as part of our B&W Renewable segment and is included in the B&W Renewable Services product line.
We estimated fair values primarily using the discounted cash flow method at November 30, 2021 for the preliminary allocation of consideration to the assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. Any subsequent changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
Fossil Power Systems
On February 1, 2022, we acquired 100% ownership of Fossil Power Systems, Inc. (“FPS”) for approximately $59.1 million, excluding working capital adjustments. The consideration paid for FPS included a hold-back of $5.9 million, payable twelve months from the date of the acquisition if certain conditions of the purchase agreement are met an is recorded on our Condensed Consolidated Balance Sheets in restricted cash and cash equivalents and other accrued liabilities.
FPS is a leading designer and manufacturer of hydrogen, natural gas and renewable pulp and paper combustion equipment including ignitors, plant controls and safety systems based in Dartmouth, Nova Scotia, Canada and is reported as part of our B&W Thermal segment.
We estimated fair values primarily using the discounted cash flow method at February 1, 2022 for the preliminary allocation of consideration to the assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. Any subsequent changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
Optimus Industries
On February 28, 2022, we acquired 100% ownership of Optimus Industries, LLC ("Optimus Industries") for approximately $19.0 million, excluding working capital adjustments. Optimus Industries designs and manufactures waste heat recovery products for use in power generation, petrochemical, and process industries, including package boilers, watertube and firetube waste heat boilers, economizers, superheaters, waste heat recovery equipment and units for sulfuric acid plants and is based in Tulsa, Oklahoma and Chanute, Kansas. Optimus Industries is reported as part of our B&W Thermal segment.
The fair values for the Optimus Industries acquisition have not been completed as of the filing date of this Quarterly report.
We will estimate fair values primarily using the discounted cash flow method at February 28, 2022 for the preliminary allocation of consideration to the assets acquired and liabilities assumed. During the measurement period, we will obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. Any subsequent changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
Purchase Price Allocations
The provisional measurements noted in the tables below are preliminary and subject to modification in the future. The preliminary purchase price allocation to assets acquired and liabilities assumed in the acquisitions were:
| | | | | | | | | | | |
| Fosler Construction |
(in thousands) | Initial Allocation of Consideration | Measurement Period Adjustments | Updated Preliminary Allocation |
| | | |
Accounts receivable | $ | 1,904 | | $ | 121 | | $ | 2,025 | |
Contracts in progress | 1,363 | | 9,433 | | 10,796 | |
Other current assets | 1,137 | | (304) | | 833 | |
Property, plant and equipment | 9,527 | | (7,860) | | 1,667 | |
Goodwill(1) (4) | 43,230 | | 19,912 | | 63,142 | |
Other assets | 17,497 | | (4,600) | | 12,897 | |
Right of use assets | 1,093 | | — | | 1,093 | |
Debt | (7,625) | | — | | (7,625) | |
Current liabilities (4) | (5,073) | | (15,829) | | (20,902) | |
Advance billings on contracts | (1,557) | | 238 | | (1,319) | |
Non-current lease liabilities | (1,730) | | — | | (1,730) | |
Other non-current liabilities | (4,112) | | 3,218 | | (894) | |
Non-controlling interest(2) | (22,262) | | (1,734) | | (23,996) | |
Net acquisition cost | $ | 33,392 | | $ | 2,595 | | $ | 35,987 | |
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Fosler Construction acquisition, goodwill represents Fosler's ability to significantly expand EPC and O&M services among new customers across the U.S. by leveraging B&W's access to capital and geographic reach.
(2) The fair value of the non-controlling interest was derived based on the fair value of the 60% controlling interest acquired by B&W. The transaction price paid by B&W reflects a Level 2 input involving an observable transaction involving an ownership interest in Fosler Construction. Also, as described above, a portion of the purchase consideration relates to the contingent consideration.
(3) Our preliminary purchase price allocation changed due to additional information and further analysis.
(4) Our preliminary goodwill and current liabilities adjustments increased $14.5 million due to additional accrued liabilities recognized attributable to the Fosler projects described in Note 4.
| | | | | | | | | | | |
| VODA |
(in thousands) | Initial Allocation of Consideration | Measurement Period Adjustments | Updated Preliminary Allocation |
Cash | $ | 4,737 | | $ | — | | $ | 4,737 | |
Accounts receivable | 5,654 | | — | | 5,654 | |
Contracts in progress | 258 | | — | | 258 | |
Other current assets | 825 | | — | | 825 | |
Property, plant and equipment | 253 | | — | | 253 | |
Goodwill(1) | 17,176 | | (61) | | 17,115 | |
Other assets | 14,321 | | — | | 14,321 | |
Right of use assets | 433 | | — | | 433 | |
Current liabilities | (5,181) | | — | | (5,181) | |
Advance billings on contracts | (2,036) | | — | | (2,036) | |
Non-current lease liabilities | (302) | | — | | (302) | |
Other non-current liabilities | (3,264) | | — | | (3,264) | |
Net acquisition cost | $ | 32,874 | | $ | (61) | | $ | 32,813 | |
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the VODA acquisition, goodwill represents VODA's ability to significantly expand within the aftermarket parts and services industries by leveraging B&W's access to capital and existing platform within the renewable service market. Goodwill is not expected to be deductible for U.S federal income tax purposes.
(2) Our preliminary purchase price allocation changed due to additional information and further analysis.
| | | | | | | | | | | |
| Purchase Price Allocation at March 31, 2022 |
(in thousands) | Fossil Power Systems | | Optimus Industries(2) |
Cash | $ | 1,869 | | | $ | 5,338 | |
Accounts receivable | 2,624 | | | 5,165 | |
Contracts in progress | 370 | | | 2,598 | |
Other current assets | 3,228 | | | 2,115 | |
Property, plant and equipment | 178 | | | 2,441 | |
Goodwill(1) | 35,392 | | | 11,081 | |
Other assets | 25,092 | | | 12 | |
Right of use assets | 1,115 | | | 94 | |
Current liabilities | (1,792) | | | (4,240) | |
Advance billings on contracts | (645) | | | (3,779) | |
Non-current lease liabilities | (989) | | | (2) | |
Other non-current liabilities | (7,384) | | | (1,858) | |
Net acquisition cost | $ | 59,058 | | | $ | 18,965 | |
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the FPS acquisition, goodwill represents FPS's ability to significantly expand services among new customers by leveraging cross-selling opportunities and recognizing general cost synergies.
(2) With respect to Optimus Industries, the fair value analysis has not been completed. We will update the purchase price allocations after the fair value analysis has been completed.
Intangible assets are included in other assets above and consists of the following:
| | | | | | | | | | | | | | | | | |
| Fosler Construction | | VODA |
(in thousands) | Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life | | Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life |
Customer Relationships | $ | 9,400 | | 12 years | | $ | 13,855 | | 11 years |
Tradename | — | | — | | | 228 | | 3 years |
Backlog | 3,100 | | 5 months | | — | | — | |
Total intangible assets(1) | $ | 12,500 | | | | $ | 14,083 | | |
| | | | | |
| Fossil Power Systems | | |
| Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life | | | |
Customer Relationships | $ | 20,451 | | 9 years | | | |
Tradename | 787 | | 14 years | | | |
Patented Technology | 578 | | 12 years | | | |
Unpatented Technology | 3,276 | | 12 years | | | |
Total intangible assets(1) | $ | 25,092 | | | | | |
(1) Intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth, profitability, discount rates and customer attrition. Such assumptions are classified as level 3 inputs within the fair value hierarchy.
Costs related to our acquisitions of Fosler, VODA, Fossil Power Systems, and Optimus Industries, which were recorded as a component of our operating expenses in our Condensed Consolidated Statements of Operations, consists of the following:
| | | | | |
| For the Three Months Ended |
(in thousands) | March 31, 2022 |
Fosler Construction | $ | 195 | |
VODA | 140 | |
FPS | 31 | |
Optimus Industries | 69 | |
Total | $ | 435 | |
Divestitures
Certain real property assets for the Copley, Ohio location were sold on March 15, 2021 for $4.0 million. We received $3.3 million of net proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 which expires on March 31, 2033.
Certain real property assets for the Lancaster, Ohio location were sold on August 13, 2021 for $18.9 million. We received $15.8 million of net proceeds after adjustments and expenses and recognized a gain on sale of $13.9 million. In conjunction with the sale, we executed a leaseback agreement commencing August 13, 2021 which expires on August 31, 2041.
Effective March 5, 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, for $2.8 million. We received $2.0 million in gross proceeds before expenses and recorded an $0.8 million favorable contract asset for the amortization period from March 8, 2021 through December 31, 2023. For the twelve months ended December 31, 2021, we recognized a $1.8 million pre-tax loss, inclusive of the recognition of $4.5 million of currency translation adjustment, on the sale of the business and after consideration of certain working capital adjustments that are in dispute. Additional adjustments may be necessary as this is finalized.
NOTE 22 – NEW ACCOUNTING STANDARDS
We adopted the following accounting standard during the first quarter of 2022:
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 impact of this standard on our Condensed Consolidated Financial Statements was immaterial.
New accounting standards not yet adopted that could affect our Condensed Consolidated Financial Statements in the future are summarized as follows:
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendment in this update provides an exception to fair value measurement for contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination. As a result, contract assets and contract liabilities will be recognized and measured by the acquirer in accordance with ASC 606, Revenue from Contracts with Customers. The amendment also improves consistency in revenue recognition in the post-acquisition period for acquired contracts as compared to contracts entered into after the business combination. The amendment in this update is effective for public business entities in January 2023; all other entities have an additional year to adopt. Early adoption is permitted; however, if the new guidance is adopted in an interim period, it is required to be applied retrospectively to all business combinations within the year of adoption. This amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We are currently evaluating the impact of the standard on our condensed consolidated financial statements.
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses. This update is an amendment to the new credit losses standard, ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that was issued in June 2016 and clarifies that operating lease receivables are not within the scope of Topic 326. The new credit losses standard changes the accounting for credit losses for certain instruments. The new measurement approach is based on expected losses, commonly referred to as the current expected credit loss ("CECL") model, and applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investment in leases, and reinsurance and trade receivables, as well as certain off-balance 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 Condensed Consolidated Financial Statements.