The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
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 and •Last Out Term Loans and Revolving Debt. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on Level 2 inputs such as the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our debt instrumentsLast Out Term Loans approximated their carrying value at June 30, 2020March 31, 2021 and December 31, 2019.
2020. The fair value of our Revolving Debt approximated their carrying value at December 31, 2020.•Warrants. The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
Non-Recurring Fair Value Measurements
The measurement of the net actuarial gain or loss associated with our pension and other postretirement plans was determined using unobservable inputs (see Note 12). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.
Tests for impairment annually and when impairment indicators exist require significant fair value measurements using unobservable inputs (see Note 7). The fair values of the reporting units were based on an income approach using a discounted cash flow analysis, a market approach using multiples of revenue and EBITDA of guideline companies, and a market approach using multiples of revenue and EBITDA from recent, similar business combinations.
Property, plant and equipment and definite-lived intangible asset 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 based on an income approach using a discounted cash flow analysis or based on the price that the Company expects to receive upon the sale of these assets. Both of those approaches utilize unobservable inputs (see Note 6 and Note 8).
NOTE 2022– 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 22.5%33.2% of our outstanding common stock as of June 30, 2020.March 31, 2021.
B. Riley is party to the Last Out Term Loans as described in Note 14. B. Riley has also provided the B. Riley Guaranty as more fully described in Note 13.15.
In connection with the B. Riley Guaranty, the Company entered into a Fee and Interest Equitization Agreement as described in Note 13. Under the Equitization Agreement the Company issued 1.7 million shares of common stock on June 8, 2020 and 1.2 million shares of common stock on June 30, 2020 to B. Riley in satisfaction of the B. Riley Guaranty Fee and payment of certain interest payments as more fully described in Note 13.
We entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 forand amended the agreement on November 9, 2020 to retain the services of Mr. Kenny Young, to serve as our Chief Executive Officer until November 30, 2020,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. 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 more fully 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 $3.3were $0.2 million and $7.5$4.2 million for the three and six months ended June 30,March 31, 2021 and 2020, respectively,respectively.
On November 13, 2020 we entered into an agreement with B. Riley Principal Merger Corp. II, an affiliate of B. Riley, to purchase 200,000 shares of Class A common stock of Eos Energy Storage LLC for an aggregate purchase price of $2.0 million. The shares were sold in January 2021 for which the Company recognized net proceeds of $4.5 million.
The public offering of our Senior Notes in February 2021, as described in Note 13, was conducted pursuant to an underwriting agreement dated February 10, 2021, between us and were $10.1 million and $11.5B. Riley Securities, Inc., 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 threeSenior Notes offering.
The public offering of our common stock, as described in Note 14, was conducted pursuant to the Underwriting Agreement dated February 9, 2021, between us and six months ended June 30, 2019, respectively.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 August 10, 2020,February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to which we agreed to issue to B. Riley $35.0 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley Financial Inc.in the Exchange, as described in Note 13.
On March 31, 2021, we 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,sales agreement with B. Riley will indemnify the Surety for losses the SuretySecurities, Inc., a related party, in which we may incur as a result sell, from time to time, up to an aggregated principal amount of providing a payment and performance bond in an aggregate amount not$150.0 million of 8.125% senior notes due 2026 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 will payor through B. Riley a fee of $0.6 million no later than 30 days 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.Securities, Inc., as described in Note 13.
Refer to Note 1325 for additional related party transactions with B. Riley and its affiliates.affiliates regarding the subsequent events in conjunction with the public offering of the 7.75% Series A Cumulative Perpetual Preferred Stock between the Company and B. Riley Securities, Inc., as representative of the several underwriters.
Transactions with Vintage Capital Management, LLC
On March 26, 2021, Vintage and B. Riley completed a transaction pursuant to which B. Riley agreed to purchase from Vintage, and Vintage agreed to sell to B. Riley, all 10,720,785 shares of our common stock owned by Vintage.
Based on its Schedule 13D filings, Vintage beneficially owns 31.8%0% of our outstanding common stock as of June 30, 2020.March 31, 2021.
NOTE 2123 – ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS
Assets Held for Sale
Certain fixed assets for the Copley, Ohio location were sold on March 15, 2021 for $4.0 million. We received $3.3 million of net proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 and expiring on March 31, 2033.
In December 2019, we determined that a small business within the Babcock & WilcoxB&W Thermal segment met the criteria to be classified as held for sale. Assets and liabilities held for sale are required to be recorded at the lower of carrying value or fair value less any costs to sell. At June 30,December 31, 2020, the carrying value of the net assets held for saleplanned to be sold approximated the estimated fair value less costs to sell, therefore an impairment charge was not required. The divestiture of the business held forsell. Refer to Divestitures below as this 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 sale is expected to occur in 2020.closed March 5, 2021.
The following table summarizes the carrying value of the assets and liabilities held for sale at June 30, 2020March 31, 2021 and December 31, 2019:2020:
| | | | | | | | |
| (in thousands) | March 31, 2021 | December 31, 2020 |
| Accounts receivable – trade, net | $ | 0 | | $ | 2,103 | |
| Accounts receivable – other | 0 | | 86 | |
| Contracts in progress | 0 | | 458 | |
| Inventories | 0 | | 1,676 | |
| Other current assets | 0 | | 405 | |
| Current assets held for sale | 0 | | 4,728 | |
| | |
| Net property, plant and equipment | 1,870 | | 10,365 | |
| Intangible assets | 0 | | 759 | |
| Right-of-use-asset | 0 | | 32 | |
| Non-current assets held for sale | 1,870 | | 11,156 | |
| | |
| Total assets held for sale | $ | 1,870 | | $ | 15,884 | |
| | |
| Accounts payable | $ | 0 | | $ | 5,211 | |
| Accrued employee benefits | 0 | | 178 | |
| Advance billings on contracts | 0 | | 370 | |
| Accrued warranty expense | 0 | | 466 | |
| Operating lease liabilities | 0 | | 32 | |
| Other accrued liabilities | 0 | | 2,048 | |
| Current liabilities held for sale | 0 | | 8,305 | |
| | |
| Total liabilities held for sale | $ | 0 | | $ | 8,305 | |
|
| | | | | | |
| (in thousands) | June 30, 2020 | December 31, 2019 |
| Accounts receivable – trade, net | $ | 3,289 |
| $ | 5,472 |
|
| Accounts receivable – other | 150 |
| 147 |
|
| Contracts in progress | 452 |
| 586 |
|
| Inventories | 2,646 |
| 1,555 |
|
| Other current assets | 189 |
| 329 |
|
| Current assets held for sale | 6,726 |
| 8,089 |
|
| | | |
| Net property, plant and equipment | 6,537 |
| 6,534 |
|
| Intangible assets | 708 |
| 725 |
|
| Right-of-use-asset | 34 |
| 63 |
|
| Other assets | 17 |
| — |
|
| Non-current assets held for sale | 7,296 |
| 7,322 |
|
| | | |
| Total assets held for sale | $ | 14,022 |
| $ | 15,411 |
|
| | | |
| Accounts payable | $ | 5,719 |
| $ | 7,898 |
|
| Accrued employee benefits | 453 |
| 430 |
|
| Advance billings on contracts | 90 |
| 227 |
|
| Accrued warranty expense | 472 |
| 515 |
|
| Operating lease liabilities | 18 |
| 6 |
|
| Other accrued liabilities | 785 |
| 462 |
|
| Current liabilities held for sale | 7,537 |
| 9,538 |
|
| | | |
| Non-current liabilities held for sale | 46 |
| — |
|
| | | |
| Total liabilities held for sale | $ | 7,583 |
| $ | 9,538 |
|
Divestitures
Effective March 5, 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, to BPE Clyde Pte Ltd. 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. We recognized a $0.4 million pre-tax gain, inclusive of the recognition of $4.5 million of CTA, on the sale of the business in the three months ended March 31, 2021.
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 the sale of this business in the quarter ended June 30, 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 2224 – NEW ACCOUNTING STANDARDS
We adopted the following new accounting standard during the first quarter of 2020:2021:
In August 2018, the FASB issued 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 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 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 condensed 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. ForThe 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 March 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This update is an amendment to ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting, which was issued in March 2020 and provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in the updates apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the updates do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in both updates are effective for all entities upon issuance and may be adopted any date on or after March 12, 2020 up to December 31, 2022. We are currently evaluating the impact of the standards on our condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40). The amendments in this update simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity by removing major separation models required under current U.S. GAAP. The amendments also improve the consistency of diluted earnings per share calculations. The amendments in this update are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years andbeginning 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. Early adoption of the amendments is permitted,2020, including adoption in any interim period for public business entities for periods in which financial statements have not yet been issued.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.
NOTE 25 – SUBSEQUENT EVENTS
2021 Preferred Stock Offerings
On May 7, 2021, we completed a public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the closing, we issued to the public 4,000,000 shares of our Preferred Stock, at an offering price of $25.00 per share for gross proceeds of approximately $100.0 million before deducting underwriting discounts, commissions and estimated offering expenses. We have granted the underwriters a 30-day option to purchase up to an additional 600,000 shares of the Preferred Stock in connection with the offering. Net proceeds from the offering were approximately $95.7 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75% per year on the liquidation preference amount of $25.00 per share and payable quarterly in arrears.
The Preferred Stock will, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up, rank: (1) senior to all classes or series of our common stock and to all other capital stock issued by us expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of our capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all our existing and future indebtedness.
The Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. We will pay cumulative cash dividends on the Preferred Stock when, as and if declared by our Board of Directors (or a duly authorized committee of our Board of Directors), only out of funds legally available for payment of dividends. Dividends on the Preferred Stock will accrue on the stated amount of $25.00 per share of the Preferred Stock at a rate per annum equal to 7.75% (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the Series A Preferred Stock declared by our board of directors (or a duly authorized committee of our board of directors) will be payable quarterly in arrears on March 31, June 30, September 30 and December 31, beginning on June 30, 2021.
The net proceeds of the offering are intended to be used for general corporate purposes, including clean energy growth initiatives, potential future acquisitions and reduction of net leverage.
The Preferred Stock is expected to begin trading on the NYSE under the symbol “BW PRA” within 30 business days of the closing date.
Revolving Debt - A&R Credit Agreement
On May 10, 2021, we entered into Amendment No. 5 to Amended and Restated Credit Agreement with Bank of America, N.A., in its capacity as administrative agent (“A&R Amendment No. 5”). A&R Amendment No. 5 amends the terms of our A&R Credit Agreement to, among other matters, (i) permit the payment of dividends on the Preferred Stock and (ii) permit certain future issuances of Preferred Stock to B. Riley, a related party, in exchange for deemed prepayments of amounts outstanding under our A&R Credit Agreement.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
***** Cautionary Statement Concerning Forward-Looking Information *****
This quarterly report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. Statements that include the words "expect," "intend," "plan," "believe," "project," "forecast," "estimate," "may," "should," "anticipate" and similar statements of a future or forward-looking nature identify forward-looking statements.
These forward-looking statements are based on management’s current expectations and involve a number of risks and uncertainties, including, among other things, the impact of COVID-19 on us and the capital markets and global economic climate generally; our recognition of any asset impairments as a result of any decline in the value of our assets or our efforts to dispose of any assets in the future; our ability to obtain and maintain sufficient financing to provide liquidity to meet our business objectives, surety bonds, letters of credit and similar financing; our ability to comply with the requirements of, and to service the indebtedness under, our credit agreement as amended and restated (the "AA&R Credit Agreement"); our ability to obtain waivers of required pension contributions;Agreement; the highly competitive nature of our businesses and our ability to win work, including identified project opportunities in our pipeline; general economic and business conditions, including changes in interest rates and currency exchange rates; cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings; our ability to perform contracts on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers; failure by third-party subcontractors, partners or suppliers to perform their obligations on time and as specified; our ability to successfully resolve claims by vendors for goods and services provided and claims by customers for items under warranty; our ability to realize anticipated savings and operational benefits from our restructuring plans, and other cost-savings initiatives; our ability to successfully address productivity and schedule issues in our Vølund & OtherB&W Renewable, B&W Environmental and SPIGB&W Thermal segments, including the ability to complete our B&W Renewable's European EPC projects and SPIGB&W Environmental's U.S. loss projects within the expected time frame and the estimated costs; our ability to successfully partner with third parties to win and execute contracts within our SPIGB&W Environmental, B&W Renewable and Vølund & Other RenewableB&W Thermal segments; changes in our effective tax rate and tax positions, including any limitation on our ability to use our net operating loss carryforwards and other tax assets; our ability to maintain operational support for our information systems against service outages and data corruption, as well as protection against cyber-based network security breaches and theft of data; our ability to protect our intellectual property and renew licenses to use intellectual property of third parties; our use of the percentage-of-completion method of accounting to recognize revenue over time; our ability to successfully manage research and development projects and costs, including our efforts to successfully develop and commercialize new technologies and products; the operating risks normally incident to our lines of business, including professional liability, product liability, warranty and other claims against us; changes in, or our failure or inability to comply with, laws and government regulations; actual or anticipated changes in governmental regulation, including trade and tariff policies; difficulties we may encounter in obtaining regulatory or other necessary permits or approvals; changes in and liabilities relating to, existing or future environmental regulatory matters; changes in actuarial assumptions and market fluctuations that affect our net pension liabilities and income; potential violations of the Foreign Corrupt Practices Act; our ability to successfully compete with current and future competitors; the loss of key personnel and the continued availability of qualified personnel; our ability to negotiate and maintain good relationships with labor unions; changes in pension and medical expenses associated with our retirement benefit programs; social, political, competitive and economic situations in foreign countries where we do business or seek new business; the possibilities of war, other armed conflicts or terrorist attacks; the willingness of customers and suppliers to continue to do business with us on reasonable terms and conditions; our ability to successfully consummate strategic alternatives for non-core assets, if we determine to pursue them; and the other factors specified and set forth under "Risk Factors" in our periodic reports filed with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly report on Form 10-Q for the quarter ended June 30, 2020. The Company cautions not to place undue reliance on these10-K.
These forward-looking statements which speakare made based upon detailed assumptions and reflect management’s current expectations and beliefs. While we believe that these assumptions underlying the forward-looking statements are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect actual results.
The forward-looking statements included herein are made only as of the date of this report, and the Company undertakeshereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except to the extentas required by applicable law.
OVERVIEW OF RESULTS
In December 2019,B&W is a novel straingrowing, globally-focused renewable, environmental and thermal technologies provider with decades of coronavirus, COVID-19, was identified in Wuhan, Chinaexperience providing diversified energy and has subsequently spread globally. This global pandemic has disrupted business operations, trade, commerce, financialemissions control solutions to a broad range of industrial, electrical utility, municipal and credit markets,other customers. B&W’s innovative products and daily life throughoutservices are organized into three market-facing segments:
•Babcock & Wilcox Renewable: Cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, biomass energy and black liquor systems for the pulp and paper
industry. B&W’s leading technologies support a circular economy, diverting waste from landfills to use for power generation and replacing fossil fuels, while recovering metals and reducing emissions.
•Babcock & Wilcox Environmental: A full suite of best-in-class emissions control and environmental technology solutions for utility, waste to energy, biomass, carbon black, and industrial steam generation applications around the world. B&W’s broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control, and mercury control.
•Babcock & Wilcox Thermal: Steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. B&W has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
Our business has been adversely impacteddepends significantly on the capital, operations and maintenance expenditures of global electric power generating companies, including renewable and thermal powered heat generation industries and industrial facilities with environmental compliance policy requirements. Several factors may influence these expenditures, including:
•climate change initiatives promoting environmental policies which include renewable energy options utilizing waste-to-energy or biomass to meet legislative requirements and clean energy portfolio standards in the United States, European, Middle East and Asian markets;
•requirements for environmental improvements in various global markets;
•expectation of future governmental requirements to further limit or reduce greenhouse gas and other emissions in the United States, Europe and other international climate change sensitive countries;
•prices for electricity, along with the cost of production and distribution including the cost of fuels within the United States, Europe, Middle East and Asian based countries;
•demand for electricity and other end products of steam-generating facilities;
•level of capacity utilization at operating power plants and other industrial uses of steam production;
•requirements for maintenance and upkeep at operating power plants to combat the accumulated effects of usage;
•overall strength of the industrial industry; and
•ability of electric power generating companies and other steam users to raise capital.
Customer demand is heavily affected by the measures takenvariations in our customers' business cycles and restrictions imposed inby the overall economies and energy, environmental and noise abatement needs of 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 activitythey operate.
negatively impact our ability to conduct business. In some countries restrictions have lessened, in others they have lessened and then increased. These varying and changing events have caused many of the projects we anticipated to begin in 2020 to be delayed to later in 2020 and others to be delayed further into 2021 and 2022. Also, we have experienced and continue to experience variations in the levels of restrictions and expect such restrictions to continue to change depending on the severity of the virus in various locations around the world. 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 next year and beyond. Additionally, out of concern for our employees, even where restrictions permit employees to return to our offices and worksites, we have 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.
Our operating results for the three and six months ended June 30, 2020 have been negatively impacted by the COVID-19 pandemic. Because the majority of our revenues are driven by projects, we cannot reasonably estimate the amount of the decreases in our operating results directly caused by COVID-19. We have experienced adverse impacts on our 2020 revenues due to delays in closing new business deals, deferrals or delays in starting new projects, and other product volume decreases due to COVID-19 in 2020 caused by the following, among other reasons:
Customers’ concern regarding the duration and magnitude of COVID-19;
Customers’ hesitance to place large orders;
Certain planned 2020 projects being extended out to next year and beyond;
Field service personnel unable to get to certain site projects;
Travel restrictions impeding our ability to acquire new customers; and
International growth plans hindered by recruitment, training & deployment of new field personnel.
We recorded operating lossesloss of $7.7 million and $18.0$6.5 million in the three and six months ended June 30, 2020, respectively,first quarter of 2021 as compared to lossesoperating loss of $4.3 million and $36.2$10.3 million in the three and six months ended June 30, 2019, respectivelyfirst quarter of 2020 and we showed improved results in all three segments as described below.
Adjusted EBITDA in the B&W Renewable segment was $0.2 million and $(1.4) million in the first quarter of 2021 and 2020, respectively. The increase was primarily due to favorable product mix in our Vølund & Other Renewable segment.parts business and the benefits of cost savings and restructuring initiatives being partially offset by lower revenue in the current quarter.
Our Babcock & WilcoxThe B&W Environmental segment generated adjusted EBITDA of $9.5$1.1 million and $20.2$0.3 million in the threefirst quarter of 2021 and six months ended June 30, 2020, respectively, compared to $19.1 million and $28.2 million in the three and six months ended June 30, 2019, respectively. This declineThe increase is primarily attributable to higher volume in the decrease in revenue volume includingcurrent quarter and the impactsbenefits of COVID-19, as described above,cost savings and restructuring initiatives being partially offset by unfavorable mix in our parts business.
Our B&W Thermal segment generated adjusted EBITDA of $10.4 million and $7.6 million in the resultsfirst quarter of costs2021 and 2020, respectively. This increase is primarily attributable to a higher level of activity on construction projects, favorable project execution and the benefits of cost savings and restructuring initiatives.
Adjusted EBITDA in the Vølund & Other Renewable segment was $(0.5) million and $(3.8) million in the three and six months ended June 30, 2020, respectively, and $(0.7) million and $(9.5) million in the three and six months ended June 30, 2019, respectively. The improvement was primarily due to changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts being partially offset by the divestiture of Loibl, a material handling business in
Germany, as well as the impacts of COVID-19, as described above. In the three and six months ended June 30, 2020, we recorded $0.4 million of additional costs related to the six European Vølund EPC loss contracts as compared to $3.2 million and $7.4 million, in net losses recorded for the three and six months ended June 30, 2019, respectively. Aside from these loss projects, we have one remaining extended scope contract in our Vølund & Other Renewable business which turned into a loss contract in the fourth quarter of 2019 due to an increase in estimate to complete; this contract was turned over to the customer in October 2019.
As of June 30, 2020, five of the six European Vølund 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 are still pursuing insurance recoveries and 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. See further discussion of the loss projects in Note 4 to the Condensed Consolidated Financial Statements.
The SPIG segment included operating results of $(2.5) million and $(3.7) million of adjusted EBITDA in the three and six months ended June 30, 2020, respectively, compared to $(0.1) million and $0.5 million in the three and six months ended June 30, 2019, respectively. The decline is due to the impacts of COVID-19, as described above. While the segment was able to mitigate the impact on project executions, the decision for new investments by several customers has been postponed impacting revenues and operating results. At June 30, 2020, SPIG had two significant legacy loss contracts. The first loss contract is a contract to engineer, procure materials and then construct a dry cooling system for a gas-fired power plant in the United States, which continued through the six months ended June 30, 2020. Final completion of the first loss contract is expected to be in the third quarter of 2020. The second loss contract is a contract to engineer and procure materials for a dry cooling system for a gas-fired power plant in the United States, which continued through the six months ended June 30, 2020. Final completion of the second loss contract is expected to be in the third quarter of 2020. SPIG's two significant loss contracts, as disclosed in Note 4 to the Condensed Consolidated Financial Statements, generated revenues of $2.3 million and $3.2 million in the three and six months ended June 30, 2020, respectively, compared to $7.8 million and $19.3 million in the three and six months ended June 30, 2019, respectively.
We have manufacturing facilities in Mexico, China, Unitesthe United States, Denmark, Scotland and Scotland.China. Many aspects of our operations and properties could be affected by political developments, environmental regulations and operating risks. These and other factors may have a material impact on our international and domestic operations or our business as a whole.
Through our restructuring efforts, we continue to make significant progress to make our cost structure more variable and to reduce costs. We expect our cost-savings measures to continue to translate to bottom-line results, with top-line growth driven by opportunities for our core technologies and support services across the Babcock & Wilcox, VølundB&W Renewable, B&W Environmental, and Other Renewable, and SPIGB&W Thermal segments globally.
We have identified additional initiatives that are underway as of the date of this filing that are expected to further reduce costs, and we expect to continue to explore other cost saving initiatives to improve cash generation and evaluate additional non-core asset sales to continue to strengthen our liquidity. There are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.
Year-over-year comparisons of our results from continuing operations were also affectedimpacted by:
•$2.41.0 million and $4.3$2.0 million of restructuring costs were recognized in the threefirst quarter of 2021 and six months ended June 30, 2020, respectively, compared to $0.9 million and $7.0 million of restructuring costs recognized in the three and six months ended June 30, 2019, respectively. The restructuring costs primarily related to severance and COVID-19 related costs in the first six months of 2020 and was primarily related to severance in the first six months of 2019.severance.
•$0.60.9 million and $1.5$0.9 million of financial advisory service fees were recorded in the threefirst quarter of 2021 and six months ended June 30, 2020, respectively, compared to $3.2 million and $7.2 million in the corresponding periods of 2019.respectively. These services are required under our U.S. Revolving Credit Facility. Financial advisory service fees are included in advisory fees and settlement costs in the Condensed Consolidated Statement of Operations.
•$6.6 million of settlement cost was recognized in the first quarter of 2019 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 and is included in advisory fees and settlement costs in the Condensed Consolidated Statement of Operations. The settlement limits our obligations to our core scope activities and eliminates risk related to acting as the prime EPC should the project have moved forward.
$1.22.0 million and $3.8$2.6 million of legal and other advisory fees were recognized in the threefirst quarter of 2021 and six months ended June 30, 2020, respectively, compared to $1.6 million and $4.7 million in the corresponding periods of 2019.respectively. These fees are related to the contract settlement and liquidity planning and are included in advisory fees and settlement
costs in the Condensed Consolidated Statement of Operations. The contract settlement is further described above and in Note 4 to the Condensed Consolidated Financial Statements.
$2.0 million and 4.0 million of accelerated depreciation expense for the three and six months ended June 30, 2019, respectively, for fixed assets affected by our September 2018 announcement to consolidate office space and relocate our global headquarters to Akron, Ohio in December 2019.
$0.9 million and $1.3 million of actuarially determined mark to market ("MTM") losses on our pension and other post-retirement benefits in the three and six months ended June 30, 2019, respectively. MTM losses are further described in Note 12 to the Condensed Consolidated Financial Statements.
In addition to the discussions described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurance recoveries and other claims where appropriate and available. If the value of our business was to decline, or if we were to determine that we were unable to recognize an amount in connection with any proposed disposition in excess of the carrying value of any disposed asset, we may be required to recognize impairments for one or more of our assets that may adversely impact our business, financial condition and results of operations.
RESULTS OF OPERATIONS
Condensed Consolidated Results of Operations
The presentation of the components of our adjusted EBITDA in the table below is consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, mark to market ("MTM")MTM pension adjustments, restructuring and spin-off costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility, research and development costs and other costs that may not be directly controllable by segment management are not allocated to the segment.segments.
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (in thousands) | | | | 2021 | 2020 | $ Change |
| Revenues: | | | | | | |
| B&W Renewable segment | | | | $ | 28,811 | | $ | 35,999 | | $ | (7,188) | |
| B&W Environmental segment | | | | 31,160 | | 25,920 | | 5,240 | |
| B&W Thermal segment | | | | 108,281 | | 86,683 | | 21,598 | |
| Other | | | | (4) | | (48) | | 44 | |
| | | | $ | 168,248 | | $ | 148,554 | | $ | 19,694 | |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (In thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
| Revenues: | | | | | | |
| Babcock & Wilcox segment | $ | 104,790 |
| $ | 200,964 |
| $ | (96,174 | ) | $ | 226,746 |
| $ | 389,522 |
| $ | (162,776 | ) |
| Vølund & Other Renewable segment | 20,250 |
| 33,695 |
| (13,445 | ) | 35,559 |
| 63,227 |
| (27,668 | ) |
| SPIG segment | 10,853 |
| 22,834 |
| (11,981 | ) | 22,190 |
| 51,736 |
| (29,546 | ) |
| Eliminations | (496 | ) | (9,378 | ) | 8,882 |
| (544 | ) | (24,434 | ) | 23,890 |
|
| | $ | 135,397 |
| $ | 248,115 |
| $ | (112,718 | ) | $ | 283,951 |
| $ | 480,051 |
| $ | (196,100 | ) |
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (in thousands) | | | | 2021 | 2020 | $ Change |
Adjusted EBITDA (1) | | | | | | |
| B&W Renewable segment | | | | $ | 204 | | $ | (1,434) | | $ | 1,638 | |
| B&W Environmental segment | | | | 1,101 | | 270 | | 831 | |
| B&W Thermal segment | | | | 10,430 | | 7,606 | | 2,824 | |
| Corporate | | | | (2,685) | | (4,143) | | 1,458 | |
| Research and development costs | | | | (588) | | (1,341) | | 753 | |
| | | | $ | 8,462 | | $ | 958 | | $ | 7,504 | |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Adjusted EBITDA (1) | | | | | | |
| Babcock & Wilcox segment | $ | 9,498 |
| $ | 19,137 |
| $ | (9,639 | ) | $ | 20,152 |
| $ | 28,226 |
| $ | (8,074 | ) |
| Vølund & Other Renewable segment | (506 | ) | (718 | ) | 212 |
| (3,799 | ) | (9,507 | ) | 5,708 |
|
| SPIG segment | (2,525 | ) | (142 | ) | (2,383 | ) | (3,717 | ) | 516 |
| (4,233 | ) |
| Corporate | (3,807 | ) | (9,323 | ) | 5,516 |
| (7,950 | ) | (13,914 | ) | 5,964 |
|
| Research and development costs | (1,231 | ) | (710 | ) | (521 | ) | (2,572 | ) | (1,453 | ) | (1,119 | ) |
| | $ | 1,429 |
| $ | 8,244 |
| $ | (6,815 | ) | $ | 2,114 |
| $ | 3,868 |
| $ | (1,754 | ) |
(1)Adjusted EBITDA for the three and six months ended June 30, 2019,March 31, 2020, excludes stock compensationlosses related to a non-strategic business and interest on letters of credit included in cost of operations that waswere previously included in segment resultsAdjusted EBITDA and totals $0.1total $(0.1) million and $0.2$(0.2) million, respectively, in the Babcock & Wilcox segment, $0.1 million and $0.1 million, respectively, in the Vølund & Other Renewable segment, and $0.0 million and $0.4 million, respectively, in Corporate. Beginning in the third quarter of 2019, stock compensation is no longer considered in Adjusted EBITDA for purposes of managing the business, and prior periods have been adjusted to be presented on a comparable basis.respectively.
Three Months Ended June 30,March 31, 2021 and 2020 and 2019
Revenues decreasedincreased by$112.719.7 millionto $135.4$168.2 million in the secondfirst quarter of 2021 as compared to $148.6 million in the first quarter of 2020 as comparedprimarily due to $248.1 milliona higher level of construction project activity in the second quarter of 2019.current quarter. Revenues for each of our segments have been adversely impacted by COVID-19. RevenueCOVID-19 including the postponement and delay of several projects. In addition revenue was impacted by segment specific changes which are discussed in further detail in the Babcock & Wilcox segment decreased by $96.2sections below.
Operating losses improved $3.8 million to $(6.5) million in the first quarter of 2021 compared to $(10.3) million in the first quarter of 2020. The increase is primarily due to the completion of several largehigher construction projects
and a lower level of volume related to customers' concern regarding the duration and magnitude of COVID-19 as well as delays to place large orders due to the impacts of COVID-19. Revenue in the Vølund & Other Renewable segment decreased by $13.4 million partially due to the divestiture of Loibl, a materials handling business in Germany, which contributed $7.1 million of revenue in the second quarter of 2019, as well as new anticipated activities being deferred due to COVID-19. Revenue was also lower in the Vølund & Other Renewable segment due to the advanced completion of activities on the EPC loss projects being partially offset by a full period of activities on two operations and maintenance contracts in the U.K. which followed the turnover of the EPC loss contracts to the customers. SPIG segment revenue declined $12.0 million partially due to the postponement of new projects by several customers as a result of COVID-19.
Operating losses increased $3.4 million to $(7.7) million in the second quarter of 2020 from $(4.3) million in the second quarter of 2019, primarily due to the decrease in revenue volume as described above, partially offset byimproved project execution and the impactsbenefits of costs savings and restructuring initiatives in the Babcock & Wilcox segment, the divestiture of Loibl and the impacts of COVID-19 in the Vølund & Other Renewable segment being partially offset by lower levels of direct overhead support and SG&A and a decline in overall volume and unfavorable product mix in the SPIG segment.initiatives. Restructuring expenses, advisory fees, amortization expense, gains (losses) on dispositions of equity method investees, and impairments are discussed in further detail in the sections below.
Six Months Ended June 30, 2020 and 2019
Revenues decreased by $196.1 million to $284.0 million in the six months ended June 30, 2020 as compared to $480.1 million in the six months ended June 30, 2019. Revenues for each of our segments have been adversely impacted by COVID-19. Revenue in the Babcock & Wilcox segment decreased by $162.8 million primarily due to the completion of several large construction projects that were actively being worked on during the comparable prior year period. Additionally, revenue is down due to a lower level of volume related to customers' concern regarding the duration and magnitude of COVID-19 as well as delays to place large orders due to the impacts of COVID-19. Revenue in the Vølund & Other Renewable segment decreased by $27.7 million partially due to the divestiture of Loibl, a materials handling business in Germany, which contributed $14.3 million of revenue in the six months ended June 30, 2019, as well as new anticipated revenues being deferred due to COVID-19. Revenue was also lower in the Vølund & Other Renewable segment due to the advanced completion of activities on the EPC loss projects in the prior year being partially offset by the startup and full period of activities on two operations and maintenance contracts in the U.K. which followed the turnover of the EPC loss contracts to the customers. SPIG segment revenue declined $29.5 million partially due to the postponement of new projects by several customers as a result of COVID-19.
Operating losses improved $18.2 million to $(18.0) million in the six months ended June 30, 2020 from $(36.2) million in the six months ended June 30, 2019, primarily due to the absence of losses on the EPC loss contracts, profit from the startup and full period of activities on two operations and maintenance contracts in the U.K. and lower levels of direct overhead support and SG&A, in the Vølund & Other Renewable segment being partly offset by the divestiture of Loibl and the impacts of COVID-19 in the Vølund & Other Renewable segment, a decline in overall volume in the SPIG segment and an overall decrease in revenue volume in the Babcock & Wilcox segment as described above. Restructuring expenses, advisory fees, amortization expense, gains (losses) on dispositions of equity method investees, and impairments are discussed in further detail in the sections below.
Non-GAAP Financial Measures
The following discussion of our business segment results of operations includes a discussion of adjusted gross profit, a non-GAAP financial measure. Adjusted gross profit differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles ("GAAP"). Amortization expense is not allocated to the segments’ adjusted gross profit. A reconciliation of operating loss,income (loss), the most directly comparable GAAP measure, to adjusted gross profit is included in the table below. Management believes that this financial measure is useful to investors because it excludes certain expenses, allowing investors to more easily compare our financial performance period to period.
|
| | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| (in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Adjusted gross profit (loss) (1) | | | |
|
| | |
| Operating loss | $ | (7,703 | ) | $ | (4,258 | ) | $ | (3,445 | ) | $ | (18,001 | ) | $ | (36,220 | ) | $ | 18,219 |
|
| Selling, general and administrative ("SG&A") expenses | 34,504 |
| 41,948 |
| (7,444 | ) | 72,036 |
| 84,217 |
| (12,181 | ) |
| Advisory fees and settlement costs | 1,989 |
| 4,778 |
| (2,789 | ) | 6,228 |
| 18,388 |
| (12,160 | ) |
| Amortization expense | 1,335 |
| 1,142 |
| 193 |
| 2,745 |
| 2,329 |
| 416 |
|
| Restructuring activities | 2,392 |
| 936 |
| 1,456 |
| 4,343 |
| 7,015 |
| (2,672 | ) |
| Research and development costs | 1,231 |
| 710 |
| 521 |
| 2,572 |
| 1,453 |
| 1,119 |
|
| Losses (gains) on asset disposals, net | 2 |
| 42 |
| (40 | ) | (913 | ) | 42 |
| (955 | ) |
| | $ | 33,750 |
| $ | 45,298 |
| $ | (11,548 | ) | $ | 69,010 |
| $ | 77,224 |
| $ | (8,214 | ) |
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (in thousands) | | | | 2021 | 2020 | $ Change |
Adjusted gross profit (1)(2) | | | | | | |
| Operating loss | | | | $ | (6,462) | | $ | (10,298) | | $ | 3,836 | |
| Selling, general and administrative ("SG&A") expenses | | | | 40,391 | | 37,532 | | 2,859 | |
| Advisory fees and settlement costs | | | | 3,291 | | 4,239 | | (948) | |
| Amortization expense | | | | 1,385 | | 1,410 | | (25) | |
| Restructuring activities | | | | 993 | | 1,951 | | (958) | |
| Research and development costs | | | | 588 | | 1,341 | | (753) | |
| (Gain) loss from a non-strategic business | | | | (12) | | 121 | | (133) | |
| Gains on asset disposals, net | | | | (2,004) | | (915) | | (1,089) | |
| | | | $ | 38,170 | | $ | 35,381 | | $ | 2,789 | |
(1) Amortization is not allocated to the segments' adjusted gross profit, but depreciation is allocated to the segments' adjusted gross profit.
(2) Adjusted gross profit for the three months ended March 31, 2020, excludes losses related to a non-strategic business that was previously included in Adjusted gross profit and totals $(0.1) million.
Adjusted gross profit by segment is as follows:
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (in thousands) | | | | 2021 | 2020 | $ Change |
| Adjusted gross profit (loss) | | | | | | |
| B&W Renewable segment | | | | $ | 6,900 | | $ | 6,921 | | $ | (21) | |
| B&W Environmental segment | | | | 5,942 | | 5,299 | | 643 | |
| B&W Thermal segment | | | | 25,328 | | 23,161 | | 2,167 | |
| | | | $ | 38,170 | | $ | 35,381 | | $ | 2,789 | |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
| Adjusted gross profit (loss) | | | | | | |
| Babcock & Wilcox segment | $ | 29,264 |
| $ | 37,853 |
| $ | (8,589 | ) | $ | 62,145 |
| $ | 68,959 |
| $ | (6,814 | ) |
| Vølund & Other Renewable segment | 4,174 |
| 5,057 |
| (883 | ) | 5,632 |
| 2,201 |
| 3,431 |
|
| SPIG segment | 312 |
| 2,388 |
| (2,076 | ) | 1,233 |
| 6,064 |
| (4,831 | ) |
| | $ | 33,750 |
| $ | 45,298 |
| $ | (11,548 | ) | $ | 69,010 |
| $ | 77,224 |
| $ | (8,214 | ) |
Babcock & WilcoxB&W Renewable Segment Results
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (in thousands) | | | | 2021 | 2020 | $ Change |
| Revenues | | | | $ | 28,811 | | $ | 35,999 | | $ | (7,188) | |
| Adjusted EBITDA | | | | $ | 204 | | $ | (1,434) | | $ | 1,638 | |
| Adjusted gross profit | | | | $ | 6,900 | | $ | 6,921 | | $ | (21) | |
| Adjusted gross profit (loss) % | | | | 23.9 | % | 19.2 | % | |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (In thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
| Revenues | $ | 104,790 |
| $ | 200,964 |
| $ | (96,174 | ) | $ | 226,746 |
| $ | 389,522 |
| $ | (162,776 | ) |
| Adjusted EBITDA | $ | 9,498 |
| $ | 19,137 |
| $ | (9,639 | ) | $ | 20,152 |
| $ | 28,226 |
| $ | (8,074 | ) |
| Adjusted gross profit | $ | 29,264 |
| $ | 37,853 |
| $ | (8,589 | ) | $ | 62,145 |
| $ | 68,959 |
| $ | (6,814 | ) |
| Adjusted gross profit % | 27.9 | % | 18.8 | % | | 27.4 | % | 17.7 | % | |
Three Months Ended June 30,March 31, 2021 and 2020 and 2019
Revenues in the Babcock & WilcoxB&W Renewable segment decreased 48%20%, or $96.2$7.2 million to $104.8$28.8 million in the secondfirst quarter of 20202021 compared to $201.0$36.0 million in the secondfirst quarter of 2019.2020. The reduction in revenue decrease is attributabledue to the completion of several large construction projectsproject delays and adverse impacts of COVID-19 including a lower level of volume related to customers' concern regardingactivity in the duration and magnitude of COVID-19 as well as delays to place large orderscurrent quarter due to the impacts of COVID-19.
Adjusted EBITDA in the Babcock & WilcoxB&W Renewable segment decreased 50%, or $9.6increased $1.6 million, to $9.5$0.2 million in the secondfirst quarter of 20202021 compared to $19.1$(1.4) million in the secondfirst quarter of 2019,2020. The benefits of cost savings and restructuring initiatives and favorable product mix in our parts business more than offset the decrease in volume, as discussed above.
Adjusted gross profit in the B&W Renewable segment remained flat at $6.9 million due to lower volume as described above which was offset by favorable product mix in our parts business and the benefits of cost savings and restructuring initiatives.
B&W Environmental Segment Results
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (In thousands) | | | | 2021 | 2020 | $ Change |
| Revenues | | | | $ | 31,160 | | $ | 25,920 | | $ | 5,240 | |
| Adjusted EBITDA | | | | $ | 1,101 | | $ | 270 | | $ | 831 | |
| Adjusted gross profit | | | | $ | 5,942 | | $ | 5,299 | | $ | 643 | |
| Adjusted gross profit % | | | | 19.1 | % | 20.4 | % | |
Three Months Ended March 31, 2021 and 2020
Revenues in the B&W Environmental segment increased 20%, or $5.2 million to $31.2 million in the first quarter of 2021 compared to $25.9 million in the first quarter of 2020. The increase is primarily due to higher service and project activity in the current quarter.
Adjusted EBITDA in the B&W Environmental segment was $1.1 million in the first quarter of 2021 compared to $0.3 million in the first quarter of 2020. The increase is driven primarily by the higher volume, as described above and the benefits of cost savings and restructuring initiatives partially offset by unfavorable mix in our parts business.
Adjusted gross profit in the B&W Environmental segment increased $0.6 million to $5.9 million in the first quarter of 2021 compared to $5.3 million in the first quarter of 2020. The increase is primarily attributable to the increase in volume being partially offset by unfavorable product mix in our parts business.
B&W Thermal Segment Results
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (In thousands) | | | | 2021 | 2020 | $ Change |
| Revenues | | | | $ | 108,281 | | $ | 86,683 | | $ | 21,598 | |
| Adjusted EBITDA | | | | $ | 10,430 | | $ | 7,606 | | $ | 2,824 | |
| Adjusted gross profit | | | | $ | 25,328 | | $ | 23,161 | | $ | 2,167 | |
| Adjusted gross profit % | | | | 23.4 | % | 26.7 | % | |
Three Months Ended March 31, 2021 and 2020
Revenues in the B&W Thermal segment increased 25%, or $21.6 million, to $108.3 million in the first quarter of 2021 compared to $86.7 million generated in the first quarter of 2020. The revenue increase is attributable to a higher level of activity on construction projects in the current quarter.
Adjusted EBITDA in the B&W Thermal segment increased $2.8 million to $10.4 million in the first quarter of 2021 compared to $7.6 million in the first quarter of 2020, which is mainly attributable to the decreaseincrease in volume as described above, favorable project execution and the benefits of costs savings and restructuring initiatives.
Adjusted gross profit in the B&W Thermal segment increased $2.2 million, to $25.3 million in the first quarter of 2021, compared to $23.2 million in the first quarter of 2020, which is consistent with the increase in revenue volume as described above being partially offset by the results of costs savings and restructuring initiatives.unfavorable product mix in our parts business.
Adjusted gross profit in the Babcock & Wilcox segment decreased $8.6 million to $29.3 million in the second quarter of 2020 compared to $37.9 million in the second quarter of 2019, which is consistent with the decrease in Adjusted EBITDA as described above.
Six Months Ended June 30, 2020 and 2019
Revenues in the Babcock & Wilcox segment decreased 42%, or $162.8 million, to $226.7 million in the six months ended June 30, 2020 compared to $389.5 million in the six months ended June 30, 2019. The revenue decrease is attributable to the completion of several large construction projects that were actively being worked on during the comparable prior year period. Additionally, revenue decreased due to adverse impacts of COVID-19 including a lower level of volume related to customers' concern regarding the duration and magnitude of COVID-19 as well as delays to place large orders due to the impacts of COVID-19.
Adjusted EBITDA in the Babcock & Wilcox segment decreased 29%, or $8.1 million, to $20.2 million in the six months ended June 30, 2020 compared to $28.2 million in the six months ended June 30, 2019, which is mainly attributable to lower revenue volume as described above being partially offset by higher parts margins and the results of costs savings and restructuring initiatives.
Adjusted gross profit in the Babcock & Wilcox segment decreased $6.8 million to $62.1 million in the six months ended June 30, 2020 compared to $69.0 million in the six months ended June 30, 2019, which is consistent with the decrease in Adjusted EBITDA as described above.
Vølund & Other Renewable Segment Results
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
| Revenues | $ | 20,250 |
| $ | 33,695 |
| $ | (13,445 | ) | $ | 35,559 |
| $ | 63,227 |
| $ | (27,668 | ) |
| Adjusted EBITDA | $ | (506 | ) | $ | (718 | ) | $ | 212 |
| $ | (3,799 | ) | $ | (9,507 | ) | $ | 5,708 |
|
| Adjusted gross profit | $ | 4,174 |
| $ | 5,057 |
| $ | (883 | ) | $ | 5,632 |
| $ | 2,201 |
| $ | 3,431 |
|
| Adjusted gross profit (loss) % | 20.6 | % | 15.0 | % | | 15.8 | % | 3.5 | % | |
Three Months Ended June 30, 2020 and 2019
Revenues in the Vølund & Other Renewable segment decreased 40%, or $13.4 million to $20.3 million in the second quarter of 2020 compared to $33.7 million in the second quarter of 2019. The reduction in revenue partially relates to the divestiture of Loibl, a materials handling business in Germany, that had previously generated annual revenues of approximately $30 million annually and contributed $7.1 million in the second quarter of 2019, as well as new anticipated revenues being deferred due to COVID-19. The reduction in revenue was also due to the advanced completion of activities on the EPC loss projects being partially offset by a full period of activities on two operations and maintenance contracts in the U.K. which followed the turnover of the EPC loss contracts to the customers.
Adjusted EBITDA in the Vølund & Other Renewable segment was $(0.5) million in the second quarter of 2020 compared to $(0.7) million in the second quarter of 2019. The small improvement is primarily attributable to lower levels of direct overhead support and SG&A, reflecting the benefits of restructuring, offset by the divestiture of Loibl and the impacts of COVID-19, as described above
Adjusted gross profit in the Vølund & Other Renewable segment decreased $0.9 million to $4.2 million in the second quarter of 2020 compared to $5.1 million in the second quarter of 2019. The decline was primarily driven by the divestiture of Loibl, the impacts of COVID-19 and lower revenue, as described above, partially offset by lower levels of direct overhead.
Six Months Ended June 30, 2020 and 2019
Revenues in the Vølund & Other Renewable segment decreased 44%, or $27.7 million to $35.6 million in the six months ended June 30, 2020 compared to $63.2 million in the six months ended June 30, 2019. The reduction in revenue partially relates to the divestiture of Loibl, a materials handling business in Germany, that had previously generated annual revenues of approximately $30 million annually and contributed $14.3 million in the six months ended June 30, 2019, as well as new anticipated revenues being deferred due to COVID-19. The reduction in revenue was also due to the advanced completion of activities on the EPC loss projects in the prior year being partially offset by the startup and full period of activities on two operations and maintenance contracts in the U.K. which followed the turnover of the EPC loss contracts to the customers.
Adjusted EBITDA in the Vølund & Other Renewable segment improved $5.7 million to $(3.8) million in the six months ended June 30, 2020 compared to $(9.5) million in the six months ended June 30, 2019. The improvement was primarily due to changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. In the six months ended June 30, 2020 and 2019, we recorded $0.3 million and $7.4 million in net losses, respectively. Beyond the effect of the loss contracts, Adjusted EBITDA for 2020 included profit from the startup and full period of activities on two operations and maintenance contracts in the U.K. and lower levels of direct overhead support and SG&A, reflecting the benefits of restructuring, partially offset by the divestiture of Loibl and the impacts of COVID-19, as described above.
Adjusted gross profit in the Vølund & Other Renewable segment increased $3.4 million to $5.6 million in the six months ended June 30, 2020 compared to $2.2 million in the six months ended June 30, 2019. The improvement was primarily driven by the additional costs related to the six European Vølund EPC loss contracts as described in the Adjusted EBITDA section above. Beyond the effect of the loss contracts, adjusted gross profit for the six months ended June 30, 2020 included lower levels of direct overhead support and profits from operations and maintenance contracts, offset by the absence of adjusted gross profit from Loibl and the impacts of COVID-19 as described above.
SPIG Segment Results
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (In thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
| Revenues | $ | 10,853 |
| $ | 22,834 |
| $ | (11,981 | ) | $ | 22,190 |
| $ | 51,736 |
| $ | (29,546 | ) |
| Adjusted EBITDA | $ | (2,525 | ) | $ | (142 | ) | $ | (2,383 | ) | $ | (3,717 | ) | $ | 516 |
| $ | (4,233 | ) |
| Adjusted gross profit | $ | 312 |
| $ | 2,388 |
| $ | (2,076 | ) | $ | 1,233 |
| $ | 6,064 |
| $ | (4,831 | ) |
| Adjusted gross profit % | 2.9 | % | 10.5 | % | | 5.6 | % | 11.7 | % | |
Three Months Ended June 30, 2020 and 2019
Revenues in the SPIG segment decreased 52%, or $12.0 million, to $10.9 million in the second quarter of 2020 from $22.8 million in the second quarter of 2019. The decrease is primarily due to the postponement of new projects by several customers as a result of COVID-19. SPIG's two significant legacy loss contracts, as disclosed in Note 4 to the Condensed Consolidated Financial Statements, generated revenues of $2.3 million and $7.8 million in the second quarter of 2020 and 2019, respectively.
Adjusted EBITDA in the SPIG segment decreased $2.4 million to $(2.5) million in the second quarter of 2020 compared to $(0.1) million in the second quarter of 2019, driven primarily by the impact of COVID-19. While the segment was able to mitigate the impact on project executions, the decision for new investments by several customers has been postponed impacting revenues and operating results.
Adjusted gross profit in the SPIG segment decreased $2.1 million, to $0.3 million in the second quarter of 2020, compared to $2.4 million in the second quarter of 2019. The decrease is primarily attributable to the decrease in volume.
Six Months Ended June 30, 2020 and 2019
Revenues in the SPIG segment decreased 57%, or $29.5 million, to $22.2 million in the six months ended June 30, 2020 from $51.7 million in the six months ended June 30, 2019. The decrease is primarily due to the postponement of new projects nt by several customers as a result of COVID-19. Additionally, revenue is down due to selective bidding in core geographies and products and a focus on profitability. SPIG's two significant legacy loss contracts, as disclosed in Note 4 to the Condensed
Consolidated Financial Statements, generated revenues of $3.2 million and $19.3 million in the six months ended June 30, 2020 and 2019, respectively.
Adjusted EBITDA in the SPIG segment decreased $4.2 million to $(3.7) million in the six months ended June 30, 2020 compared to $0.5 million in the six months ended June 30, 2019, driven primarily by the impact of COVID-19. While the segment was able to mitigate the impact on project executions, the decision for new investments by several customers has been postponed impacting revenues and operating results.
Adjusted gross profit in the SPIG segment decreased $4.8 million, to $1.2 million in the six months ended June 30, 2020, compared to $6.1 million in the six months ended June 30, 2019. The decrease is primarily attributable to the decrease in volume.
Bookings and Backlog
Bookings and backlog are our measure of remaining performance obligations under our sales contracts. It is possible that our methodology for determining bookings and backlog may not be comparable to methods used by other companies.
We generally include expected revenue from contracts in our backlog when we receive written confirmation from our customers authorizing the performance of work and committing the customers to payment for work performed. Backlog may not be indicative of future operating results, and contracts in our backlog may be canceled, modified or otherwise altered by customers. Backlog can vary significantly from period to period, particularly when large new build projects or operations and maintenance contracts are booked because they may be fulfilled over multiple years. Additionally, because we operate globally, our backlog is also affected by changes in foreign currencies each period. We do not include orders of our unconsolidated joint ventures in backlog.
Bookings represent changes to the backlog. Bookings include additions from booking new business, subtractions from customer cancellations or modifications, changes in estimates of liquidated damages that affect selling price and revaluation of backlog denominated in foreign currency. We believe comparing bookings on a quarterly basis or for periods less than one
year is less meaningful than for longer periods, and that shorter-term changes in bookings may not necessarily indicate a material trend.
| | | | | | | | | | |
| | Three months ended March 31, |
| (In approximate millions) | | | 2021 | 2020 |
B&W Renewable(1) | | | $ | 37 | | $ | 34 | |
| B&W Environmental | | | 41 | | 45 | |
| B&W Thermal | | | 91 | | 130 | |
| Other/eliminations | | | — | | — | |
| Bookings | | | $ | 169 | | $ | 209 | |
|
| | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (In approximate millions) | 2020 | 2019 | 2020 | 2019 |
| Babcock & Wilcox | $ | 67 |
| $ | 140 |
| $ | 226 |
| $ | 327 |
|
Vølund & Other Renewable (1) | 15 |
| (78 | ) | 33 |
| (59 | ) |
| SPIG | 3 |
| 18 |
| 36 |
| 30 |
|
| Other/eliminations | (1 | ) | (13 | ) | (1 | ) | (15 | ) |
| Bookings | $ | 84 |
| $ | 67 |
| $ | 294 |
| $ | 283 |
|
(1) Vølund & OtherB&W Renewable bookings includes the revaluation of backlog denominated in currency other than U.S. dollars. The foreign exchange impact on Vølund & OtherB&W Renewable bookings in the secondfirst quarter of 2021 and 2020 and 2019 was $(1.6)$7.0 million and $(4.0)$(6.9) million, respectively. The foreign exchange impact on Vølund & Other Renewable bookings in the six months ended June 30, 2020 and 2019 was $(0.6) million and $(0.5) million, respectively.respectively.
Our backlog decline, as expected is primarily driven by the timing of large new build projects in addition to the Company's focus on core technologies and profitability across all segments, as well as resolution of the European EPC loss contracts. Our backlog as of June 30,March 31, 2021 and 2020 and 2019 was as follows:
| | | | | | | | |
| As of March 31, |
| (In approximate millions) | 2021 | 2020 |
B&W Renewable(1) | $ | 215 | | $ | 224 | |
| B&W Environmental | 118 | | 100 | |
| B&W Thermal | 206 | | 183 | |
| Other/eliminations | (4) | | (6) | |
| Backlog | $ | 535 | | $ | 501 | |
|
| | | | | | |
| | Six months ended June 30, |
| (In approximate millions) | 2020 | 2019 |
| Babcock & Wilcox | $ | 220 |
| $ | 323 |
|
Vølund & Other Renewable (1) | 185 |
| 205 |
|
| SPIG | 52 |
| 65 |
|
| Other/eliminations | — |
| (8 | ) |
| Backlog | $ | 457 |
| $ | 585 |
|
| |
(1)
| Vølund & Other Renewable backlog at June 30, 2020, includes $156.0 million related to long-term operation and maintenance contracts for renewable energy plants, with remaining durations extending until 2034. Generally, such contracts have a duration of 10-20 years and include options to extend. |
(1) B&W Renewable backlog at March 31, 2021, includes $164.0 million related to long-term operation and maintenance contracts for renewable energy plants, with remaining durations extending until 2034. Generally, such contracts have a duration of 10-20 years and include options to extend.
Of the backlog at June 30, 2020,March 31, 2021, we expect to recognize revenues as follows:
| | | | | | | | | | | | | | |
| (In approximate millions) | 2021 | 2022 | Thereafter | Total |
| B&W Renewable | $ | 55 | | $ | 22 | | $ | 138 | | $ | 215 | |
| B&W Environmental | 69 | | 28 | | 21 | | 118 | |
| B&W Thermal | 153 | | 50 | | 3 | | 206 | |
| Other/eliminations | (4) | | — | | — | | (4) | |
| Expected revenue from backlog | $ | 273 | | $ | 100 | | $ | 162 | | $ | 535 | |
|
| | | | | | | | | | | | |
| (In approximate millions) | 2020 | 2021 | Thereafter | Total |
| Babcock & Wilcox | $ | 83 |
| $ | 124 |
| $ | 13 |
| $ | 220 |
|
| Vølund & Other Renewable | 29 |
| 15 |
| 141 |
| 185 |
|
| SPIG | 21 |
| 16 |
| 15 |
| 52 |
|
| Other/eliminations | — |
| — |
| — |
| — |
|
| Expected revenue from backlog | $ | 133 |
| $ | 155 |
| $ | 169 |
| $ | 457 |
|
Corporate
Corporate costs in adjusted EBITDA include SG&A expenses that are not allocated to the reportable segments. These costs include, among others, certain executive, compliance, strategic, reporting and legal expenses associated with governance of the total organization and being an SEC registrant. Corporate costs decreased $5.5$1.5 million to $3.8$2.7 million in the secondfirst quarter of 2021 as compared to $4.1 million in the first quarter of 2020, as compared to $9.3 million in the second quarter of 2019, primarily due to the benefits of restructuring, discretionary spend reductionslower audit fees, bonus costs and lower bonus costs. Corporate costs decreased $6.0 million to $8.0 milliontemporary consultant fees incurred in the six months ended June 30, 2020 as compared to $13.9 million in the six months ended June 30, 2019, primarily due to the benefitsfirst quarter of restructuring, discretionary spend reductions and lower bonus costs.2021.
Advisory Fees and Settlement Costs
Advisory fees and settlement costs decreased by $2.8$0.9 million to $2.0$3.3 million in the second quarter of 2020 as compared to $4.8 million in the second quarter of 2019, primarily due to a decrease in financial advisory fees.
Advisory fees and settlement costs decreased by $12.2 million to $6.2 million in the six months ended June 30, 2020 as compared to $18.4 million in the six months ended June 30, 2019, primarily due to settlement costs to exit the fifth Vølund contract in the first quarter of 20192021 as describedcompared to $4.2 million in Note 4the first quarter of 2020, primarily due to reduced use of external consultants in 2021 as the Condensed Consolidated Financial Statements and a decrease in financial advisory fees.Company staffed certain positions internally.
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 costs unrelated to specific contracts are expensed as incurred. Research and development expenses totaled $1.2$0.6 million and $0.7$1.3 million for the second quarter of 2020 and 2019, respectively. Research and development expenses totaled $2.6 million and $1.5 million for the six three
months ended June 30,March 31, 2021 and 2020, and 2019, respectively. The increasedecrease resulted primarily from timing of specific research and development efforts.
Restructuring
Restructuring actions across our business units and corporate functions including executive severances, resulted in $2.4$1.0 million and $0.9$2.0 million of expense in the second quarter ofthree months ended March 31, 2021 and 2020, respectively.
Depreciation and 2019, respectively. Restructuring actions across our business units and corporate functions, including executive severances, resulted in $4.3Amortization
Depreciation expense was $2.7 million and $7.0$2.8 million of expense in the six months ended June 30, 2020 and 2019, respectively. Severance expense is recognized over the remaining service periods of affected employees, and as of June 30, 2020, we do not expect additional severance expense to be recognized based on actions taken through that date.
Goodwill Impairment
Goodwill is tested for impairment annually and when impairment indicators exist. All of our remaining goodwill is related to the Babcock & Wilcox reporting unit and the Babcock & Wilcox Construction Company reporting unit, which are both included in the Babcock & Wilcox segment. Because the Babcock & Wilcox and the Babcock & Wilcox Construction Company reporting units each had a negative carrying value, reasonable changes in the assumptions would not indicate impairment. No impairment indicators were identified during the three months ended June 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, 2021 and 2020, no impairment was indicated during the first quarter of 2020.respectively.
Also as a result of the conditions associated with COVID-19, including the adverse impacts on our operations, the company performed an analysis as required by ASC 360-10-35 to assess the recoverability of other long-lived assets in its Vølund and SPIG asset groups. With respect to these asset groups no impairment was indicated during the first quarter of 2020.
Depreciation and Amortization
Depreciation expense was $2.9$1.4 million and $5.4$1.4 million in the second quarter of 2020 and 2019, respectively.
Depreciation expense was $5.5 million and $11.5 million in the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively.
We recorded amortization expense of $1.3 million and $1.1 million in the second quarter of 2020 and 2019, respectively. We recorded amortization expense of $2.7 million and $2.3 million in the six months ended June 30, 2020 and 2019, respectively.
Pension and Other Postretirement Benefit Plans
We recognize benefits from our defined benefit and other postretirement benefit plans based on actuarial calculations primarily because our expected return on assets is greater than our service costs. Service cost is low because our plan benefits are frozen except for a small number of hourly participants. Pension benefits were $7.5$9.1 million and $3.3$7.5 million in the second quarter of 2020 and 2019, respectively. Pension benefits were $15.0 million and $6.8 million in the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively. There were no MTM adjustments for our pension and other postretirement benefit plans during the three and six months ended June 30, 2020. The pension benefits for thethree and six months ended June 30, 2019 exclude MTM adjustment losses $0.9 million and $1.3 million, respectively. first quarter of 2021 or 2020. Refer to Note 12 to the Condensed Consolidated Financial Statements.
Our pension costs also include MTM adjustments from time to time, as described further in Note 12 to the Condensed Consolidated Financial Statements. Interim MTM charges are a result of curtailments or settlements. Any MTM charge or gain should not be considered to be representative of future MTM adjustments as such events are not currently predicted and are in each case subject to market conditions and actuarial assumptions as of the date of the event giving rise to the MTM adjustment.
Other than service cost of $0.2$0.2 million and $0.2 million in the second quarter of 2020 and 2019, respectively, and $0.4 million and$0.3 million in the sixthree months ended June 30,March 31, 2021 and 2020,and2019, respectively, which are related to the small number of hourly participants stillstill accruing benefits within the Babcock & Wilcox Thermal segment, pension benefit and MTM adjustments are excluded from the results of our segments. Refer to Note 12 to the Condensed Consolidated Financial Statements for further information regarding our pension and other postretirement plans.
The costs and funding requirements of our pension and postretirement benefit plans depend on our various assumptions, including estimates of rates of return on benefit-related assets, discount rates for future payment obligations, rates of future cost growth, mortality assumptions and trends for future costs. Variances from these estimates could have a material adverse effect on us. Our policy to recognize these variances annually through MTM accounting could result in volatility in our results of operations, which could be material. The funding obligations for the Company’s pension plans are impacted by the performance of the financial markets, particularly the equity markets, and interest rates. If the financial markets do not provide the long-term returns that are expected, or discount rates increase the present value of liabilities, the Company could be required to make larger contributions.
Foreign Exchange
We translate assets and liabilities of our foreign operations into United States dollars at current exchange rates, and we translate items in our statement of operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive income (loss). We report foreign currency transaction gains and losses in income.Condensed Consolidated Statements of Operations.
Foreign exchange was a gainloss of $7.1$1.2 million and $9.5$9.3 million for the three months ended June 30, 2020March 31, 2021 and 2019, respectively. Foreign exchange was a loss of $2.2 million and $0.6 million for the six months ended June 30, 2020 and 2019, respectively. Foreign exchange gains and losses are primarily related to unhedged intercompany loans denominated in European currencies to fund foreign operations. Foreign exchange losses for the six months ended June 30, 2020 and 2019 were driven primarily by a strengthening U.S. dollar compared to the underlying European currencies.
Income Taxes
| | | | | | | | | | | | | | |
| | Three months ended March 31, |
| (In thousands, except for percentages) | | | | 2021 | 2020 | $ Change |
| Income (loss) before income taxes | | | | $ | (12,607) | | $ | (34,345) | | $ | 21,738 | |
| Income tax expense (benefit) | | | | $ | 2,836 | | $ | (810) | | $ | 3,646 | |
| Effective tax rate | | | | (22.5) | % | 2.4 | % | |
|
| | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, | Six months ended June 30, |
| (In thousands, except for percentages) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
| Loss before income taxes | $ | (17,288 | ) | $ | (26,444 | ) | $ | 9,156 |
| $ | (51,633 | ) | $ | (75,684 | ) | $ | 24,051 |
|
| Income tax expense | $ | 845 |
| $ | 1,891 |
| $ | (1,046 | ) | $ | 35 |
| $ | 2,517 |
| $ | (2,482 | ) |
| Effective tax rate | (4.9 | )% | (7.2 | )% | | (0.1 | )% | (3.3 | )% | |
Our income tax expense in the secondfirst quarter of 20202021 reflects a full valuation allowance against substantially all our net deferred tax assets, except in Mexico, Canada, the United Kingdom, Finland, Germany, Thailand, the Philippines. Indonesia, and Sweden. Deferred tax assets are evaluated each period to determine whether realization is more likely than not. Valuation allowances are recordedestablished when the likelihoodmanagement determines it is more likely than not that some portion, or all, of having the ability to utilize particular deferred tax assets to reduce taxable income in the future is less than more likely than not.will not be realized. Valuation allowances may be reversedremoved in the future if sufficient positive evidence exists to outweigh the negative evidence under the framework of ASC 740, Income Taxes.
Our effective tax rate for the secondfirst quarter of 20202021 is not reflective of the United States statutory rate primarily due to a full valuation allowance against substantially allcertain net deferred tax assets.assets and unfavorable discrete items, including estimated withholding taxes on the divestiture of Diamond Power Machine (Hubei) Co. referenced in Note 23. In certain jurisdictions where we have available net operating loss carryforwards ("NOLs"), such as(namely, the United States, Denmark, and Italy,Italy) where the existencecompany anticipates a loss for the fiscal year or incurs a loss for the year-to-date period for which a tax benefit cannot be realized in accordance with ASC 740, the company excludes the loss in that jurisdiction from the overall computation of a full valuation allowance against netthe estimated annual effective tax rate.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740, primarily related to intraperiod tax allocation, recognizing deferred tax assetsliabilities for outside basis differences, and calculating income taxes in those jurisdictions results in income tax benefit or expense relating primarily to discrete items. Our income tax expense (benefit) also reflects changes in the jurisdictional mix of income and losses.interim periods. The Company adopted ASU No. 2019-12 on January 1, 2021, on a prospective basis. The adoption did not have a material impact on our interim consolidated financial statements.
In the second quarter of 2019, our effective tax rate was also impacted by valuation allowances related to losses incurred in certain jurisdictions. Additionally, we operated in numerous countries that had statutory tax rates different from that of 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 statutory tax rates ranging between 19% and 30%. In addition to statutory rate differences, the jurisdictional mix of our income (loss) before tax can be significantly impacted by mark-to-market adjustments related to our pension and postretirement plans, discrete items, and other nondeductible expenses.
See Note 16 for an explanation of differences between our effective income tax rate and our statutory rate.
Liquidity and Capital Resources
Liquidity
Our primary liquidity requirements include debt service and working capital needs. We fund our liquidity requirements primarily through cash generated from operations, and external sources of financing, including our senior notes and A&R Credit Agreement (as defined below) that governs the U.S. Revolving Credit Facility and the last out term loans (the "Last“Last Out Term Loans"Loans”), and equity offerings, each of which are described below in further detail along with other sources of liquidity.
As of December 31, 2019 and March 30, 2020, the date we issued our 2019 Consolidated Financial Statements, we were in compliance with the terms of the agreements governing our debt and no events of default existed. However, the Company’s uncertainty regarding liquidity and the ability to refinance our credit agreement (as amended, the "Amended Credit Agreement") by May 11, 2020 represented conditions and events that raised substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 2019 Consolidated Financial Statements were issued, as we were not able to assert that it was probable that our plans when fully implemented would alleviate the events and conditions.
Since January 1, 2020 and through the issuance of our 2019 Consolidated Financial Statements on March 30, 2020,2021, we took the following actions, among others, and have successfully implemented, or are in the process of implementing the following:
entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in Note 13 and Note 14, the most recent of which were Amendments No. 19, No. 20 and No. 21 dated January 17, 2020, January 31, 2020 and March 27, 2020, respectively;
on January 31, 2020, received $30.0 million of additional gross borrowings from B. Riley Financial, Inc. (together with its affiliates, "B. Riley") under a new Tranche A-4 of Last Out Term Loans, as described in in Note 14;
on January 31, 2020, received an incremental Tranche A-5 of Last Out Term Loan commitment to be used in the event certain customer letters of credit are drawn, as described in Note 14;
on March 12, 2020, filed for waiver of required minimum contributions to the U.S. Pension Plan as described in Note 12, that if granted, would reduce cash funding requirements in 2020 by approximately $25.0 million and would increase contributions over the following five years. The Company cannot make any assurances that such waiver will be granted; and
on March 17, 2020, we fully settled the remaining escrow associated with the sale of Palm Beach Resource Recovery Corporation and received $4.5 million in cash.
In addition to the actions taken above, subsequent to March 30, 2020 we have takenexecuted the following actions:
•on April 6, 2020,February 8, 2021, we fully settled the remaining escrow associated with the sale of the MEGTEC and Universal businesses and received $3.5 million in cash;
on May 14, 2020, the Company entered into an agreement with its lenders amendingA&R Amendment No. 2 to Amended and restating the AmendedRestated Credit Agreement among the Company,(“A&R Amendment No. 2”) with Bank of America, N.A., as administrative agent to the lenders under our Amended and Restated Credit Agreement. A&R Amendment No. 2 amends our Amended and Restated Credit Agreement (the “Administrative Agent”) and lender, and the other lenders party thereto. The credit agreement, as amended and restated (the "A“A&R Credit Agreement"Agreement”), to, among other amendments, extendsmatters, (i) permit the maturityissuance of 8.125% senior notes due 2026 (the “Senior Notes”) in the offering described below, (ii) permit the deemed prepayment of $35.0 million of our Last Our Term Loan Tranche A with $35.0 million principal amount of Senior Notes, (iii) provide 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 $5.0 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 $35.0 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley. On February 12, 2021, we issued $35.0 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 in the common stock offering. Net proceeds received were approximately $163.0 million after deducting underwriting discounts and commissions, but before expenses;
•on February 12, 2021, we received gross proceeds of approximately $125.0 million after completing an issuance of our $125.0 million aggregate principal amount of Senior Notes, in a public offering through B. Riley Securities, Inc., a related party, as representative of several underwriters in the senior notes offering. Net proceeds received were approximately $120.0 million after deducting underwriting discounts and commissions, but before expenses;
•on March 4, 2021, we entered into A&R Amendment No. 3 to Amended and Restated Credit Agreement (“A&R Amendment No. 3”) with Bank of America, N.A., as administrative agent to the lenders under our A&R Credit Agreement. A&R Amendment No. 3, among other matters, at the date onof effectiveness (i) permits the prepayment of certain term loans, (ii) reduces the revolving credit facilitycommitments under our A&R Credit Agreement to June 30, 2022$130.0 million and removes the maturity date ability to obtain revolving loans under our A&R Credit Agreement, and (iii) amends certain covenants and conditions to the extension of credit under our A&R Credit Agreement;
•on March 4, 2021, effective with the execution of A&R Amendment No. 3, we paid $75.0 million towards our existing Last Out Term Loans and paid $21.8 million of accrued and deferred fees related to the revolving credit facility; and
•on March 5, 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, to BPE Clyde Pte Ltd. for $2.8 million. We received $2.0 million in cash and recorded an $0.8 million favorable contract asset for the amortization period from March 8, 2021 through December 30, 2022. Under31, 2023. We recognized a $0.4 million gain on the sale of the business.
•on March 15, 2021, we completed the sale of certain fixed assets for the Copley, Ohio location for $4.0 million, received $3.3 million of net cash proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 and expiring on March 31, 2033;
•on March 26, 2021, we entered into A&R Amendment No. 4 to Amended and Restated Credit Agreement (“A&R Amendment No. 4”) with Bank of America, N.A., as administrative agent to the lenders under our A&R Credit Agreement. A&R Amendment No. 4, among other matters, at the date of effectiveness (i) permits the issuance of additional Senior Notes of up to an aggregate principle amount of $150 million, and (ii) modifies the calculation of the senior leverage ratio, as described in Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report;
•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 million of 8.125% senior notes due 2026 to or through B. Riley Securities, Inc., as described in Note 13 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report;
•as of May 10, 2021, the Company has sold $10.6 million aggregate principal amount of Senior Notes for $11.0 million gross proceeds related to the March 31, 2021 sales agreement disclosed in Note 13 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report. The Company received $10.7 million of net cash proceeds after commission and fees;
•on May 7, 2021, we completed a public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the closing, we issued to the public 4,000,000 shares of our Preferred Stock, at an offering price of $25.00 per share for gross proceeds of approximately $100 million before deducting underwriting discounts, commissions and estimated offering expenses. We have granted the underwriters a 30-day option to purchase up to an additional 600,000 shares of the Preferred Stock in connection with the offering. Net proceeds from the offering were approximately $95.7 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75% per year on the liquidation preference amount of $25.00 per share and payable quarterly in arrears as described in Note 25 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report; and
•on May 10, 2021, we entered into Amendment No. 5 to Amended and Restated Credit Agreement with Bank of America, N.A., in its capacity as administrative agent (“A&R Amendment No. 5”). A&R Amendment No. 5 amends the terms of our A&R Credit Agreement to, among other matters, (i) permit the payment of dividends on the Preferred Stock and (ii) permit certain future issuances of Preferred Stock to B. Riley, has committed to provide the Company with up to $70.0 milliona related party, in exchange for deemed prepayments of additional Last Out Term Loans. B. Riley has entered into a limited guaranty (the "B. Riley Guaranty") which provides for the guarantee of all of the Company's obligations with respect to the revolving credit facility (other than with respect to letters of credit and contingent obligations), including the obligation to repayamounts outstanding revolving credit loans and pay earned interest and fees; and,under our A&R Credit Agreement.
on May 14, 2020, we received $30.0 million of additional gross borrowings from B. Riley Financial, Inc. (together with its affiliates, "B. Riley") under a new Tranche A-6 of Last Out Term Loans, as described in in Note 14.
Beginning in April 2020 and continuing as of May 13, 2021, as part of the Company’s response to the impact of the COVID-19 pandemic on its business, the Company has taken the followingcontinues to take a number of cash conservation and cost reduction measures which include:
temporary unpaid furloughs for certain employees:
temporarily deferring the monthly fee paid to BRPI Executive Consulting, LLC for the services of our Chief Executive Officer by 50%;
deferrals of the base salaries of our Chief Strategy Officer by 50%, Chief Financial Officer by 30% and our Senior Vice President of The Babcock & Wilcox Company by 30%;
•suspension of our 401(k) company match for U.S. employees for the remainder of 2020;2021;
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 to be paid during the first quarter of 2021;
negotiating 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
we elected to defer,•deferring the remaining $20.9 million of the estimated Pension Plan contribution payments of $45.6 million that would have been due during 2021, in accordance with the Coronavirus Aid, Relief, and Economic SecurityAmerican Rescue Plan Act of 2021 (the "CARES Act""ARPA relief plan") signed into law in March 2020, the contribution payments2021. In January 2021, we made Pension Plan contributions of $5.5$23.1 million, each for the 2020 Plan year that would have been made on April 15, 2020 and July 15, 2020, respectively, related to our Pension Plan.excluding interest.
Based upon the terms of the A&R Credit Agreement and the cash conservation and cost reduction measures taken to date, the Company is projecting sufficient liquidity to fund future operations and to meet its obligations as they become due for at least one year following the date that these Condensed Consolidated Financial Statements are issued. As a result, the Company has concluded that conditions and events, considered in the aggregate, no longer raise substantial doubt about the entity’s ability to continue as a going concern.
Cash and Cash Flows
At June 30, 2020,March 31, 2021, our unrestricted cash and cash equivalents totaled $36.8$53.8 million and we had total debt of $338.0$228.8 million. Our foreign business locations held $34.7$25.2 million of our total unrestricted cash and cash equivalents at June 30, 2020. Our U.S. Revolving Credit Facility allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that U.S. cash on hand is minimized to reduce borrowing costs.March 31, 2021. In general, our foreign cash balances are not available to fund our U.S. operations unless the funds are repatriated or used to repay intercompany loans made from the U.S. to foreign entities, which could expose us to taxes we presently have not made a provision for in our results of operations. We presently have no plans to repatriate these funds to the U.S. At June 30, 2020,As described above, effective with A&R Amendment No. 3 on March 4, 2021, we had approximately $40.3 million available for borrowingscan no longer obtain revolving loans under the U.S. Revolving Credit Facility.credit agreement.
Cash used in operations was $49.3$54.0 million in the sixthree months ended June 30,March 31, 2021, which is primarily represented in the net loss of continuing operations, the change in pension, postretirement and employee benefit liabilities. There was also a $13.2 million net decrease in operating cash outflows associated with changes in working capital. In the three months ended March 31, 2020, which iscash used in operations was $35.5 million primarily represented in the net loss of continuing operations before depreciation and amortization. There was also a $0.9$10.7 million net increase in operating cash outflows associated with changes in working capital. In the six months ended June 30, 2019, cash used in operations was $193.0 million primarily due to funding settlements related to European Vølund EPC contracts,progress against accrued losses on the six European Vølund EPC loss contracts and working capital build within the Babcock & Wilcox segment related to the timing of and mix of work.
Cash flows from investing activities provided net cash of $4.3$4.5 million in the sixthree months ended June 30, 2020,March 31, 2021, primarily related to $8.0$3.3 million proceeds from the settlement of remaining escrows associated with the sale of Palm Beach Resource Recovery Corporationbusiness, proceeds from asset disposals and MEGTEC and Universal businesses,net change in available-for-sale securities, offset by $1.4 million of capital expenditures. In the three months ended March 31, 2020, cash flows from investing activities used net cash of $4.5 million, primarily from the net change in available-for-sale securities and $1.7$2.4 million of capital expenditures. In the six months ended June 30, 2019, cash flows from investing activities provided net cash of $5.2 million, primarily from proceeds received from the sale of Loibl for $7.4 million.
Cash flows from financing activities provided net cash of $35.7$35.9 million in the sixthree months ended June 30, 2020,March 31, 2021, primarily related to $60.0the $125.0 million face value borrowings from the Tranche A-4issuance of senior notes and Tranche A- 6 of the Last Out Term Loans, partly$161.5 million common stock issuance, primarily offset by $75.0 million last out term loans repayments, a $14.3$164.3 million changenet reduction on the U.S. Revolving Credit Facility and $10.4$7.7 million of financing fees. Cash flows from financing activities provided net cash of $175.1$30.8 million in the sixthree months ended June 30, 2019,March 31, 2020, primarily related to $151.4$30.0 million of proceedsface value borrowings from the Last Out Term Loans and $39.5last out term loans, $6.0 million of net borrowings from the U.S. Revolving Credit Facility,revolving credit facility, partly offset by $14.4$5.7 million of financing fees.
U.S. Revolving Credit Facility2021 Senior Notes Offering
On May 11, 2015,February 12, 2021, we completed a public offering of $125.0 million aggregate principal amount of our 8.125% senior notes due 2026. 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 $125.0 million. Net proceeds received were approximately $120.0 million after deducting underwriting discounts and commissions, but before expenses. The Senior Notes were issued in denominations of $25.00 per Senior Note and in integral multiples thereof.
In addition to the public offering, we issued $35.0 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Last Out Term Loan Tranche A-3 in a concurrent private offering.
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future senior unsecured and unsubordinated indebtedness. The Senior Notes bear interest at the rate of 8.125% per annum. Interest on the Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on April 30, 2021. The Senior Notes 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 Senior Notes. The Indenture governing the Senior Notes contains customary events of default and cure provisions.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell to or through B. Riley Securities, Inc., from time to time, additional Senior Notes up to an aggregated principal amount of $150.0 million of Senior Notes. The Senior Notes will have the Amended Creditsame terms as (other than date of issuance), form a single series of debt securities with and have the same CUSIP number and be fungible with, the Senior Notes issued February 12, 2021, as described above.
Senior Notes - Subsequent Event
As of May 10, 2021, the Company has sold $10.6 million aggregate principal amount of Senior Notes for $11.0 million gross proceeds related to the March 31, 2021 sales agreement disclosed above. The Company received $10.7 million of net cash proceeds after commission and fees.
Exchange Agreement
On February 12, 2021, the Company and B. Riley entered into a letter agreement (the “Exchange Agreement”) pursuant to which we issued to B. Riley, a related party, $35.0 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley Financial (the “Exchange”).
2021 Common Stock Offering
On February 12, 2021, we completed a syndicatepublic offering of lenders in connection with our spin-offcommon stock 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 to the public 29,487,180 shares of our common stock and received gross proceeds of approximately $172.5 million. Net proceeds from the offering were approximately $163.0 million after deducting underwriting discounts and commissions, but before expenses.
The Babcock & Wilcox Company (now BWX Technologies, Inc. or "BWXT") which governsnet proceeds of the offering were used to make a prepayment towards the balance outstanding under our 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. As of June 30, 2020, the U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to $326.9 million, as amended and adjusted for completed asset sales. 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. As of June 30, 2020, we were in compliance with the terms of the Amended Credit Agreement.
As of June 30, 2020, in connection with Amendment No. 16, we have accrued deferred ticking fee costs of $6.7 million due to certain actions required that were not completed by December 15, 2019.
At June 30, 2020, borrowings under the U.S. Revolving Credit Facility consisted of $164.7 million at a weighted average interest rate of 7.53%. Usage under the U.S. Revolving Credit Facility consisted of $164.7 million of borrowings, $25.0 million of financial letters of credit and $95.4 million of performance letters of credit. At June 30, 2020, we had approximately $41.8 million available to meet letter of credit requirements based on our overall facility size, of which $40.3 million was available for additional borrowings under our sublimit.
Under the A&R Credit Agreement, the interest rate for the revolving credit facility will be reduced to LIBOR plus 7.0% or base rate (as defined in the A&R Credit Agreement) plus 6.0%, which margins will be reduced by 2.0% uponpermanently reduce the commitments under such facility being reduced to less than $200.0 million. The interest payments on the unpaid principal amount of revolvingour senior secured credit loans incurred during the period from May 14, 2020 through and including August 31, 2020 arefacilities.
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. The maturity date under the revolving credit facility will be extended to June 30, 2022 pursuant to the terms of the A&R Credit Agreement.
Last Out Term Loans
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. Under U.S. GAAP, 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 the quarter ended June 30, 2020, primarily representing the unamortized value of the original issuance discount and fees on the Tranche A-3 Last Out Term Loan. 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.
On June 30, 2020, the company issued 1,192,371 shares of common stock to B. Riley in settlement of the quarterly interest payableFebruary 12, 2021, in connection with the Equitization Agreement further discussedExchange described in Note 13.
The total effective interest rate of Tranche A-3, Tranche A-4 and Tranche A-6 was 12.0% on June 30, 2020. The13, the interest rate on the remaining Last Out Term Loans under theLoan Tranche A&R Credit Agreement is a fixed rate per annum of balances was reduced to 6.625% from 12.0%. Interest expense associated with the Last Out Term Loans is detailed in Note 15.17.
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
UnderEffective with Amendment No. 16 to our Amended Credit Agreement,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.A-3. 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 VølundB&W Renewable loss projects as described in Note 4, 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 Amended Credit Agreement as described above, but not re-borrowed. As part of the Equitization Transactions the total prepayment of July 23, 2019, we prepaid $39.7 million principal of Tranche A-3 of the Last Out Term Loans was $39.7 million.A-3. Also, on March 4, 2021, effective with A&R Amendment No. 3, we paid down an additional $40.0 million on our existing Tranche A-3.
Tranche A-4
On January 31, 2020, we entered intoeffective with 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,Agreement, we borrowed $30.0 million face value of the Tranche A-4 from B. Riley, a related party and received net proceeds of $26.3 million after incurring total fees of $3.7 million. On March 4, 2021, effective with A&R Amendment No. 3, we paid down the $30.0 million related to Amendment No, 20 described above.outstanding on our existing Tranche A-4.
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 August 12, 2020,May 13, 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 13. An aggregate $30.0 million of this new commitment was funded upon execution of the A&R Credit Agreement. The $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 May 14, 2020, effective with the A&R Credit Agreement, we borrowed $30.0 million face value of the Tranche A-6 and received gross proceedsfrom B. Riley, a related party, as described in Note 16. On November 30, 2020, we borrowed an additional $10.0 million face value of $30.0 million relatedthe Tranche A-6 pursuant to the terms of the A&R Credit Agreement that is more fullywhich required the proceeds to be applied as a permanent reduction of the U.S. Revolving Credit Facility.
As described in Note 13.13, on February 12, 2021, we issued $35.0 million of Senior Notes to B. Riley Financial, Inc. in exchange for a deemed prepayment of our existing Tranche A-6 as part of the Exchange. Also, on March 4, 2021, effective with A&R Amendment No. 3, we paid down the remaining $5 million outstanding on our existing Tranche A-6.
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 13.16. The $50.0 million will be available upon request by the Company, subject to certain limitations. As of August 12, 2020,May 13, 2021, no borrowings have occurred under Tranche A-7.
A&R Credit Agreement
On May 11, 2015, we entered into an amended credit agreement with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc.) 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 credit agreement, including several to avoid default under the financial and other covenants specified in the credit agreement.
On May 14, 2020, we entered into the A&R Credit Agreement which refinances and extends the maturity of our U.S. Revolving Credit Facility and Last Out Term Loans.
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.
On February 8, 2021, we entered into A&R Amendment No. 2 with Bank of America, N.A., as administrative agent to the lenders under our Amended and Restated Credit Agreement. A&R Amendment No. 2 amends our A&R Credit Agreement to, among other matters, (i) permit the issuance of 8.125% Senior Notes offering described above, (ii) permit the deemed prepayment of $35.0 million of our Last Out Term Loan Tranche A with $35.0 million principal amount of Senior Notes, (iii)
provide 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 $5.0 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 $130.0 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 26, 2021, we entered into A&R Amendment No. 4 with Bank of America. A&R Amendment No. 4, among other matters, at the date of effectiveness (i) permits the issuance of 8.125% senior notes due 2026 up to an aggregate principle amount of $150.0 million, and (ii) modifies the calculation of the senior leverage ratio.
On May 10, 2021, we entered into A&R Amendment No. 5 with Bank of America, N.A. A&R Amendment No. 5, among other matters, at the date of effectiveness (i) permits the issuance of certain disqualified stock and the payment of regular cash dividends thereon and (ii) permits the related cashless prepayment of term loans.
U.S. Revolving Credit Facility
As of March 31, 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 $130.0 million.
At March 31, 2021, usage under the U.S. Revolving Credit Facility consisted of $22.0 million of financial letters of credit and $82.1 million of performance letters of credit. At March 31, 2021, we had approximately $25.9 million available to meet letter of credit requirements based on our overall facility size.
On February 12, 2021, we received gross proceeds of $125.0 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 remaining outstanding U.S. Revolving Credit Facility.
Effective with A&R Amendment No. 3 on March 4, 2021, we can no longer obtain revolving loans under the credit agreement.
2021 Preferred Stock Offerings
On May 7, 2021, we completed a public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters (the “Underwriters”). At the closing, we issued to the public 4,000,000 shares of our Preferred Stock, at an offering price of $25.00 per share for gross proceeds of approximately $100.0 million before deducting underwriting discounts, commissions and estimated offering expenses. We have granted the underwriters a 30-day option to purchase up to an additional 600,000 shares of the Preferred Stock in connection with the offering. Net proceeds from the offering were approximately $95.7 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75% per year on the liquidation preference amount of $25.00 per share and payable quarterly in arrears.
The Preferred Stock will, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up, rank: (1) senior to all classes or series of our common stock and to all other capital stock issued by us expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of our capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all our existing and future indebtedness.
The Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. We will pay cumulative cash dividends on the Preferred Stock when, as and if declared by our Board of Directors (or a duly authorized committee of our Board of Directors), only out of funds legally available for payment of dividends. Dividends on the Preferred Stock will accrue on the stated amount of $25.00 per share of the Preferred Stock at a rate per annum equal to
7.75% (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the Series A Preferred Stock declared by our board of directors (or a duly authorized committee of our board of directors) will be payable quarterly in arrears on March 31, June 30, September 30 and December 31, beginning on June 30, 2021.
The net proceeds of the offering are intended to be used for general corporate purposes, including clean energy growth initiatives, potential future acquisitions and reduction of net leverage.
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 June 30, 2020March 31, 2021 and December 31, 20192020 was $81.7$60.7 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 $30.7$18.0 million as of June 30, 2020.March 31, 2021. Of the letters of credit issued under the U.S. Revolving Credit Facility, $35.2$27.3 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 June 30, 2020,March 31, 2021, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $272.0$266.4 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds was $31.7$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.
A&R Credit Agreement
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.
On May 14, 2020, we entered into an agreement with our lenders amending and restating the Amended Credit Agreement.
among the Company, Bank of America, N.A., as administrative agent (the “Administrative Agent”) and lender, and the
other lenders party thereto. The credit agreement, as amended and restated (the “A&R Credit Agreement”) refinances and
extends the maturity of our existing 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 revolving credit facility governed by the A&R Credit Agreement (the "revolving credit facility"). Proceeds from the additional $40.0 million of term loans will be used to repay outstanding borrowings under the 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 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 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 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 revolving credit facility will be extended to June 30, 2022, and the maturity date of all Last Out Term Loans under the A&R Credit Agreement will be extended to December 30, 2022 (six months after the maturity date of the revolving credit facility); |
| |
(ii) | the interest rate for loans under the revolving credit facility will be reduced to LIBOR plus 7.0% or base rate (as defined in the A&R Credit Agreement) plus 6.0%. These margins will be reduced by 2.0% if commitments under the revolving credit facility are reduced to less than $200.0 million. The fee for letters of credit will be set at 4.0%; |
| |
(iii) | the interest rate for all Last Out Term Loans will be set at 12.0%; |
| |
(iv) | the commitments under the revolving credit facility will 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 will be capped at $125.0 million through April 30, 2021 and will step down to $110.0 million on May 1, 2021; and |
| |
(vi) | the amount of financial letters of credit will be capped at $75.0 million, and the amount of all letters of credit will be 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 Vølund 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. Certain financial covenant testing has
been suspended through September 30, 2020, with the Company and the Administrative Agent having agreed to renegotiate such covenant levels and related definitions prior to October 31, 2020.
Events of default under the A&R Credit Agreement are substantially consistent with the Amended Credit Agreement, except that: (i) 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; and (ii) the failure to renegotiate and set certain financial covenant testing levels and related definitions prior to October 31, 2020 will constitute an event of default.
In connection with the A&R Credit Agreement, the Company will incur 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.
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 revolving credit facility. The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations with respect to the 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 revolving credit facility; (iv) the Company’s failure to pay any amount due to the Administrative Agent or any lender under the 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 and June 30, 2020, the company issued 1,712,479 shares of common stock and 1,192,371 shares of common stock, respectively, to B. Riley and certain of its affiliates in settlement of the B. Riley Guaranty Fee in connection with the 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 shares of the Company’s common stock.
Under the Equitization Agreement, B. Riley will receive a number of shares of 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. For purposes of the listing requirements of the New York Stock Exchange (the "NYSE"), the Equitization Agreement sets a minimum for the Conversion Price of $1.55 per share of common stock, unless and until approval is obtained from the Company’s stockholders under the rules of the NYSE. On June 5, 2020, the conversion price was calculated at $2.2774 per share.
The Company is required under the Equitization Agreement to use its reasonable best efforts to take all actions to obtain any necessary stockholder approval under the rules of the NYSE for the issuance of the Shares. B. Riley has agreed to cause all shares of common stock beneficially owned by B. Riley to be voted in favor of any proposal presented to the Company’s stockholders seeking approval of the issuance of shares pursuant to the Equitization Agreement. The required stockholder
approvals were obtained at the Company’s 2020 annual meeting of stockholders held on June 16, 2020.
Off-Balance Sheet Arrangements
There were no significantThe Company does not have any off-balance sheet arrangements that have, or are reasonably expected to have, a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources. at June 30, 2020.March 31, 2021.
Equitization Transactions
In connection with Amendment No. 16 to the Amended Credit Agreement and the extension of Tranche A-3 of the Last Out Term Loans, the Company, B. Riley and Vintage, each related parties, entered into the "Letter Agreement" 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, subject to, among other things, stockholder approval. Stockholder approval was received at the Company's annual stockholder meeting on June 14, 2019 and the contemplated transactions (the "Equitization Transactions") occurred on July 23, 2019. The Equitization Transactions included:
The 2019 Rights Offering, for which B. Riley agreed to act as a backstop, by purchasing from us, at a price of $0.30 per share, all unsubscribed shares in the 2019 Rights Offering for cash or by exchanging an equal principal amount of outstanding Tranche A-2 or Tranche A-3 Last Out Term Loans (the "Backstop Commitment"). Under the 2019 Rights Offering, 16,666,666 shares of common stock were issued, of which 12,589,170 shares were purchased through the exercise of rights in the rights offering generating $37.8 million of cash, 1,333,333 shares were issued through assigned portions of the Backstop Commitment generating an additional $4.0 million of cash, and the final 2,744,163 shares were exchanged for $8.2 million of principal value including accrued paid-in-kind interest of Tranche A-3 Last Out Term Loans.
$10.3 million of the proceeds of the 2019 Rights Offering were used to fully repay Tranche A-2 of the Last Out Term Loans, including accrued paid-in-kind interest.
$31.5 million of the proceeds of the 2019 Rights Offering were used to partially prepay Tranche A-3 of the Last Out Term Loans including paid-in-kind interest. The total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million inclusive of the $8.2 million of principal value exchanged for common shares under the Backstop Commitment described above.
All $38.2 million of outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest was exchanged for 12,720,785 shares of common stock (10,720,785 shares to Vintage and 2,000,000 shares to B. Riley) at a price of $0.30 per share (the "Debt Exchange"). Prior to the Debt Exchange, $6.0 million of Tranche A-1 was held by B. Riley and the remainder was held by Vintage.
1,666,667 warrants, each to purchase one share of our common stock at an exercise price of $0.01 per share were issued to B. Riley.
Immediately after completion of the Equitization Transactions, Tranches A-1 and A-2 of the Last Out Term Loans were fully extinguished, and Tranche A-3 of the Last Out Term Loans had a balance of $114.0 million, including accrued paid-in-kind interest, which bears interest at a fixed rate of 12.0% per annum and continues to bear the other terms described in Note 14. Based on Schedule 13D filings made by B. Riley and Vintage, after completion of the Equitization Transactions, Vintage increased its beneficial ownership in us to 32.8% and B. Riley increased its beneficial ownership in us to 18.4% inclusive of the outstanding warrants held by B. Riley.
2019 Rights Offering
On June 28, 2019, we distributed to holders of our common stock one nontransferable subscription right to purchase 0.986896 common shares for each common share held as of 5:00 p.m., New York City time, on June 27, 2019 at a subscription price of $0.30 per whole share of common stock (the "2019 Rights Offering"). The 2019 Rights Offering expired at 5:00 p.m., New York City time, on July 18, 2019, and settled on July 23, 2019. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2019 Rights Offering did not include an oversubscription privilege.
The 2019 Rights Offering resulted in the issuance of 13.9 million common shares as a result of the exercise of subscription rights in the offering. Gross proceeds from the 2019 Rights Offering were $41.8 million, $10.3 million which was used to fully repay Tranche A-2 of the Last Out Term Loans and the remaining $31.5 million was used to reduce outstanding borrowings under Tranche A-3 of the Last Out Term Loans. Concurrently with the closing of the 2019 Rights Offering, and in satisfaction of the Backstop Commitment, the Company issued an aggregate of 2.7 million common shares in exchange for a portion of the Tranche A-3 Last Out Term Loans totaling $8.2 million, to B. Riley, a related party, as described in Note 20.
The 2019 Rights Offering was pursuant to the April 5, 2019 Letter Agreement and the Equitization Transactions and was approved by stockholders at the Company's annual stockholder meeting on June 14, 2019.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited Condensed Consolidated Financial Statements, see "Critical“Critical Accounting Policies and Estimates"Estimates” in our Annual Report. There have been no significant changes to our policies during the sixthree months ended June 30, 2020.March 31, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposures to market risks have not changed materially from those disclosed under "Quantitative“Quantitative and Qualitative Disclosures About Market Risk"Risk” in our Annual Report excepton Form 10-K for those described below.the year ended December 31, 2020.
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 adversely impacted by the measures taken by local governments and others to control the spread of this virus. 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.
This outbreak, and any outbreak of a contagious disease or any other adverse public health developments in countries where we operate, could have material and adverse effects on our business, financial condition and results of operations. In addition, any outbreak may result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn or recession that could affect demand for our products or our ability to obtain financing for our business or projects.
The ultimate effect of the COVID-19 outbreak or any other outbreak on our business, financial condition and operations will depend heavily on the future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information that may emerge concerning the severity of the virus and the actions taken to contain the virus or treat its impact, among others. In particular, the actual and threatened spread of the virus could have a material adverse effect on the global economy, could continue to negatively impact financial markets, including the trading price of our common stock, and could cause continued interest rate volatility and movements that could make obtaining financing or refinancing our debt obligations more challenging or more expensive. Any of these developments could have a material adverse effect on our business, liquidity, capital resources and financial results and may result in our inability to continue operating as a going concern or require us to reorganize our company in its entirety, including through bankruptcy proceedings.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company's management, with the participation of our Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures, by their nature, can provide only reasonable assurance regarding the control objectives. It should be noted that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood
of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2020March 31, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the sixthree months ended June 30, 2020March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting, despite the fact that some of our team members are working remotely in response to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to ensure their operating effectiveness.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
For information regarding ongoing investigations and litigation, see Note 1719 to the unaudited Condensed Consolidated Financial Statements in Part I of this report, which we incorporate by reference into this Item.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and
in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. There have been no material changes to such risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In accordance with the provisions of the employee benefit plans, the Company acquired the following shares in connection with the vesting of employee restricted stock that require us to repurchasewithhold shares to satisfy employee statutory income tax withholding obligations. The following table identifies the number of common shares and average purchase price paid by the Company,per share for each month during the quarter ended June 30, 2020.March 31, 2021. The Company does not have a general share repurchase program at this time. | | | | | | | | | | | | | | |
| (data in whole amounts) | | | | |
| Period | Total number of shares acquired (1) | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs |
| January 2021 | 79,182 | | $ | 3.51 | | — | | $ | — | |
| February 2021 | 416,665 | | $ | 7.27 | | — | | $ | — | |
| March 2021 | — | | $ | — | | — | | $ | — | |
| Total | 495,847 | | $ | 6.67 | | — | | $ | — | |
|
| | | | | | | | | | |
| (share data in thousands) | | | | |
| Period | Total number of shares purchased (1) | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs |
| April 2020 | — |
| $ | — |
| — |
| $ | — |
|
| May 2020 | 156 |
| $ | 0.93 |
| — |
| $ | — |
|
| June 2020 | — |
| $ | — |
| — |
| $ | — |
|
| Total | 156 |
| $ | — |
| — |
| $ | — |
|
(1) Repurchased Acquired shares are recorded in treasury stock in our Condensed Consolidated Balance Sheets.
Item 6. Exhibits
| | | | | | | | |
| | Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)). |
| | |
| | Certificate of Amendment and Restatement Agreement (attachingof the Amended and Restated Credit Agreement), dated asCertificate of May 14, 2020, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party theretoIncorporation (incorporated by reference to Exhibit 10.1 of3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed May 15, 2020on June 17, 2019 (File No. 001-36876)). |
| | |
| | Fee Letter, datedCertificate of Amendment of the Restated Certificate of Incorporation, as of May 14, 2020, among Babcock & Wilcox Enterprises, Inc. and B. Riley Financial, Inc.(incorporatedamended (incorporated by reference to Exhibit 10.2 of3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed May 15, 2020on July 24, 2019 (File No. 001-36876)). |
| | |
| | FeeAmended and Interest Equitization Agreement, dated May 14, 2020, betweenRestated Bylaws (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc., B. Riley Financial, Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-36876)). |
| | |
| | Indenture dated February 12, 2021 (incorporated by reference to Exhibit 4.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on February 12, 2021 (File No. 001-36876)). |
| | |
| | Supplemental Indenture dated February 12, 2021 (incorporated by reference to Exhibit 4.2 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on February 12, 2021 (File No. 001-36876)). |
| | |
| | Form of 8.125% Senior Note Due 2026 (included in Exhibit 4.4) |
| | |
| | Consultant Agreement by and between The Babcock & Wilcox Company Inc. and solely for limited purposes under the Equitization Agreement, B. Riley FBR, Inc.(incorporatedHenry Bartoli effective as of January 1, 2021 (incorporated by reference to Exhibit 10.3 of the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed May 15,November 10, 2020 (File No. 001-36876)). |
| | |
| | TerminationExchange Agreement dated as of May 14, 2020,by and between Babcock & Wilcox Enterprises Inc. and B. Riley Financial, Inc. and acknowledged by Bank of America, N.A.dated February 12, 2021 (incorporated by reference to Exhibit 10.4 of1.3 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed May 15, 2020on February 12, 2021 (File No. 001-36876)). |
| | |
| | Amendment No. 2 to Amended and Restated Credit Agreement by and between Babcock &and Wilcox Enterprises Inc. Amended and Restated 2015 Long-Term Incentive Plan (Amended and RestatedBank of America, N.A., as of June 16, 2020)Administrative Agent, dated February 8, 2021 (incorporated by reference to Appendix DExhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Definitive Proxy StatementCurrent Report on Form 8-K filed with the Securities and Exchange Commission on May 5, 2020)February 12, 2021 (File No. 001-36876)). |
| | |
| | First Amendment No. 3 to Amended and Restated Credit Agreement by and between Babcock and Wilcox Enterprises Inc. and Bank of America, N.A., as Administrative Agent, dated March 4, 2021 (incorporated by reference to Exhibit 10.68 to the Executive Services Agreement between Babcock & Wilcox Enterprises, Inc. and BRPI Executive Consulting, LLC.Annual Report on Form 10-K for the year ended December 31, 2020 (File No. 001-36876)). |
| | |
| | Second Amendment No. 4 to Amended and Restated Credit Agreement by and between Babcock and Wilcox Enterprises Inc. and Bank of America, N.A., as Administrative Agent, dated March 26, 2021 (incorporated by reference to Exhibit 10.1 to the Executive Employment Agreement between Babcock & Wilcox Enterprises, Inc. and Henry Bartoli.Current Report on Form 8-K filed on April 1, 2021 (File No. 001-36876)). |
| | |
| | First Amendment No. 5 to the Executive EmploymentAmended and Restated Credit Agreement by and between Babcock &and Wilcox Enterprises Inc. and Louis Salamone.Bank of America, N.A., as Administrative Agent, dated May 10, 2021 |
| | |
| | Salary Deferral Agreement, dated as of April 21, 2020, by and between Babcock & Wilcox Enterprises, Inc. and Jimmy Morgan. |
| | |
| | Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer. |
| |
| | Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer. |
| |
| | Section 1350 certification of Chief Executive Officer. |
| |
| | Section 1350 certification of Chief Financial Officer. |
| |
101.INS101.SCH | | XBRL Instance Document. |
| |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
| |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
| |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
| 104 | | Cover Page Interactive Data File (embedded within the inline XBRL document) |
* The Company has omitted certain information contained in this exhibit pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is not material and, if publicly disclosed, would likely cause competitive harm to the Company. Certain schedules and annexes to this exhibit have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or annex will be furnished to the U.S. Securities and Exchange Commission or its staff upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| | BABCOCK & WILCOX ENTERPRISES, INC. |
| | |
| May 13, 2021 | By: | BABCOCK & WILCOX ENTERPRISES, INC. |
| | |
August 12, 2020 | By: | /s/ Louis Salamone |
| | Louis Salamone |
| | Executive Vice President, Chief Financial Officer and Chief Accounting Officer
(Principal Financial and Accounting Officer and Duly Authorized Representative)
|
| |