Amounts relating to leases were presented on our Condensed Consolidated Balance Sheets in the following line items:
We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. Warranty expense for the nine months ended September 30, 2019 includes $3.9 million of warranty reversal related to developments in the quarter stemming from the March 29, 2019 settlement agreement for the B&W Renewable EPC loss contracts described in Note 4.
NOTE 12 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three months ended September 30, | | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 |
Interest cost | $ | 5,603 | | | $ | 8,263 | | | $ | 16,883 | | | $ | 24,773 | | | $ | 109 | | | $ | 88 | | | $ | 187 | | | $ | 232 | |
Expected return on plan assets | (13,527) | | | (15,452) | | | (40,309) | | | (46,636) | | | — | | | — | | | — | | | — | |
Amortization of prior service cost (credit) | 28 | | | 44 | | | 84 | | | 130 | | | 173 | | | (271) | | | 519 | | | (813) | |
Recognized net actuarial gain | (2,253) | | | — | | | (2,253) | | | — | | | — | | | — | | | — | | | — | |
Benefit plans, net (1) | (10,149) | | | (7,145) | | | (25,595) | | | (21,733) | | | 282 | | | (183) | | | 706 | | | (581) | |
Service cost included in COS (2) | 217 | | | 212 | | | 652 | | | 632 | | | 6 | | | 5 | | | 18 | | | 14 | |
Net periodic benefit cost (benefit) | $ | (9,932) | | | $ | (6,933) | | | $ | (24,943) | | | $ | (21,101) | | | $ | 288 | | | $ | (178) | | | $ | 724 | | | $ | (567) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
| Three months ended September 30, | Nine months ended September 30, | | Three months ended September 30, | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | 2020 | 2019 | | 2020 | 2019 | 2020 | 2019 |
Interest cost | $ | 8,263 |
| $ | 10,685 |
| $ | 24,773 |
| $ | 32,507 |
| | $ | 88 |
| $ | 139 |
| $ | 232 |
| $ | 378 |
|
Expected return on plan assets | (15,452 | ) | (13,901 | ) | (46,636 | ) | (41,700 | ) | | — |
| — |
| — |
| — |
|
Amortization of prior service cost | 44 |
| 28 |
| 130 |
| 83 |
| | (271 | ) | (540 | ) | (813 | ) | (1,618 | ) |
Recognized net actuarial (gain) loss | — |
| 18 |
| — |
| 1,278 |
| | — |
| — |
| — |
| — |
|
Benefit plans, net (1) | (7,145 | ) | (3,170 | ) | (21,733 | ) | (7,832 | ) | | (183 | ) | (401 | ) | (581 | ) | (1,240 | ) |
Service cost included in COS (2) | 212 |
| 346 |
| 632 |
| 646 |
| | 5 |
| 4 |
| 14 |
| 12 |
|
Net periodic benefit cost (benefit) | $ | (6,933 | ) | $ | (2,824 | ) | $ | (21,101 | ) | $ | (7,186 | ) | | $ | (178 | ) | $ | (397 | ) | $ | (567 | ) | $ | (1,228 | ) |
| |
(1)
| Benefit plans, net, which is presented separately in the Condensed Consolidated Statements of Operations, is not allocated to the segments.
|
| |
(2)
| Service cost related to a small group of active participants is presented within cost of operations in the Condensed Consolidated Statement of Operations and is allocated to the B&W Thermal segment.
|
(1) Benefit plans, net, which is presented separately in our Condensed Consolidated Statements of Operations, is not allocated to the segments.
(2) Service cost related to a small group of active participants is presented within cost of operations in our Condensed Consolidated Statement of Operations and is allocated to the B&W Thermal segment.
Recognized net actuarial (gain) lossgain consists primarily of our reported actuarial (gain) loss, curtailments, settlements,gain and the difference between the actual return on plan assets and the expected return on plan assets. Total mark to market (“MTM”) adjustments for our pension benefit plans were gains of $2.3 million for the three and nine months ended September 30, 2021. There were no MTM adjustments for our other postretirement benefit plans during the three and nine months ended September 30, 2021. There were no MTM adjustments for our pension and other postretirement benefit plans during the three and nine months ended September 30, 2020 or the third quarter of 2019 and we incurred losses of $1.3 million in the nine months ended September 30, 2019. We have excluded the recognized net actuarial (gain) loss from our reportable segments and such amount has been reflected in Note 3 as the MTM loss from benefit plans in the reconciliation of Adjusted EBITDA for each segment to consolidated loss before income tax.2020. The recognized net actuarial (gain) lossgain was recorded in benefit plans, net in our Condensed Consolidated Statements of Operations.
We made contributions to our pension and other postretirement benefit plans totaling $0.4 million and $24.7 million during the three and nine months ended September 30, 2021, respectively, as compared to $0.5 million and $1.6 million during the three and nine months ended September 30, 2020,, respectively, as compared to $0.5 million and $3.3 million respectively. Contributions made during the three and nine months ended September 30, 2019, respectively. Expected employer contributions to trusts2021 includes no interest and during the nine months ended September 30, 2021 includes $0.4 million of defined benefit plans assume that relief is granted under U.S. pension contribution waivers, which would defer minimum pension contributions for approximately one year to then be repaid over a five-year period. Related to the 2018 Plan year, we filed a request for waiver with the IRS in January 2019 and obtained a letter on August 27, 2019 that the waiver request had been approved subject to certain conditions.
We filed a temporary hardship waiver request with the IRS on March 12, 2020 related to our contributions for our pension and other postretirement benefit plans for the 2019 Plan year and obtained a letter on October 1, 2020 that the waiver request had been approved subject to certain conditions. Pursuant to the provisions of the waiver granted by the IRS related to the 2018 Plan year, the Company wasinterest as required to resume quarterly contributions on April 15, 2020 equal to the required quarterly contributions to the Plan.
On March 27, 2020,per the CARES Act that was signed into law and among other things, provides deferralon March 27, 2020.
In accordance with the American Rescue Plan Act of certain U.S. pension plan contributions until January 1, 2021. We elected to defer the contribution payments of $5.5 million each for the 2020 Plan year that were due on April 15, 2020, July 15, 2020 and October 15, 2020, respectively. In addition,2021, we elected to defer $20.9 million of the estimated Pension Plan contribution payments of $1.1$45.6 million for the 2018 Plan year and $23.7 million for the 2019 Plan year that were both due on September 15, 2020. Per the 2019 Plan year waiver received on October 1, 2020, the $23.7 million deferred for the 2019 Plan year will now be funded over the next five years.
The total funding contributions of approximately $46.0 million estimated for 2020 thatwould have been deferred includes $1.1 million for the 2018 Plan year, $23.7 million for the 2019 Plan year, $16.5 million for the 2020 Plan year and $4.5 million related to other non-qualified pension plans, non-U.S. pension plans and other postretirement benefits plans.due during 2021.
NOTE 13 – REVOLVING DEBT2021 SENIOR NOTES OFFERING
Our revolving debt is comprisedOn February 12, 2021, we completed a public offering of $125.0 million aggregate principal amount of our U.S. Revolving Credit Facility8.125% senior notes due 2026 (the "Senior Notes"). At the completion of the offering, we received net proceeds of approximately $120.0 million after deducting underwriting discounts, commissions, and before expenses.
In addition to the public offering, we issued $35.0 million of Senior Notes to B. Riley Financial, Inc. in the U.S. with balancesexchange for a deemed prepayment of $181.9 million as of September 30, 2020 and $179.0 million as of December 31, 2019.
A&R Credit Agreement
our existing Last Out Term Loan Tranche A-3 in a concurrent private offering.
On May 11, 2015,March 31, 2021, we entered into an amended credita sales 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 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.
Under the A&R Credit Agreement, B. Riley has committedSecurities, Inc., a related party, in which we may sell to provide the Company withor through B. Riley Securities, Inc., from time to time, additional Senior Notes up to $70.0an aggregate principal amount of $150.0 million of additional Last Out Term Loans onSenior Notes. The Senior Notes have the same terms as (other than date of issuance), form a single series of debt securities with and have the term loans extended under the prior 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 willsame CUSIP number and 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 Last Out Term Loans will be used to pay transaction fees and expenses and repay outstanding borrowings under the U.S. Revolving Credit Facility. Proceeds from the remaining $40.0 million of Last Out Term Loans will be used to repay outstanding borrowings under the U.S. Revolving Credit Facility, with any remaining amounts used for working capital, capital expenditures, permitted acquisitions and general corporate purposes.
The A&R Credit Agreement also provides that, (i) the U.S. Revolving Credit Facility continues to be available for issuances of existing and new letters of credit, subject to the L/C Sublimit (as defined below), (ii) the $205.0 million sublimit on borrowings under the U.S. Revolving Credit Facility is maintained, and (iii) interest payments on the unpaid principal amount of revolving credit loans incurred during the period from May 14, 2020 through and including August 31, 2020 of $3.8 million are deferred and will be paid in six equal installments on the last business day of each calendar month beginning on January 29, 2021 and through June 30, 2021. No swing line borrowings are permitted under the A&R Credit Agreement.
The A&R Credit Agreement also amends the following terms, among others, as comparedfungible with, the prior credit agreement:
| |
(i) | the maturity date of the U.S. Revolving Credit Facility is extended to June 30, 2022, and the maturity date of all Last Out Term Loans under the A&R Credit Agreement is extended to December 30, 2022 (six months after the maturity date of the U.S. Revolving Credit Facility); |
| |
(ii) | the interest rate for loans under the U.S. Revolving Credit Facility have been reduced to LIBOR plus 7.0% or base rate (as defined in the A&R Credit Agreement) plus 6.0%. These margins have been reduced by 2.0% if commitments under the U.S. 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 is set at 12.0%; |
| |
(iv) | the commitments under the U.S. Revolving Credit Facility automatically and permanently decrease in the following amounts on the following dates, which match the funding dates and amounts for the committed term loans: (x) $10.0 million on November 30, 2020; and (y) $5.0 million on each of March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022, respectively; |
| |
(v) | the amount of revolving loans and letters of credit available in currencies other than U.S. dollars has been 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 has been 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 prior credit agreement, except that, among other changes: (i) the indebtedness covenant has been modified to permit the incurrence of any governmental assistance in the form of indebtedness in connection with COVID-19 relief in an aggregate principal amount not to exceed $10.0 million; (ii) a third-party letter of credit basket of up to $50.0 million has been added; (iii) certain liens and restricted payments are modified to permit liens and repayments of indebtedness incurred in connection with governmental assistance in connection with COVID-19 relief; and (iv) covenants related to the European B&W Renewable EPC loss projects have been removed. The minimum required liquidity condition of $30.0 million remains constant but was 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 negotiate such covenant levels and related definitions prior to October 31, 2020. See A&R Credit Agreement subsequent eventSenior Notes issued February 12, 2021, as described below for a discussion of the results of the negotiation.
Events of default under the A&R Credit Agreement are substantially consistent with the prior 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 negotiate 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 incurred certain customary amendment and commitment fees, a portion of which were deferred pursuant to the terms of the A&R Credit Agreement along with certain previously deferred fees incurred under the amended credit agreement.
A&R Credit Agreement - subsequent event
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.
Effective October 30, 2020, the minimum interest coverage ratios under our A&R Credit Agreement are as follows:
0.50:1.00 for the quarter ending December 31, 2020
0.50:1.00 for the quarter ending March 31, 2021
0.80:1.00 for the quarter ending June 30, 2021
1.00:1.00 for the quarter ending September 30, 2021
1.10:1.00 for the quarter ending December 31, 2021
1.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
Effective October 30, 2020, the maximum permitted senior leverage ratios under our A&R Credit Agreement are as follows:
7.75:1.00 for the quarter ending December 31, 2020
7.75:1.00 for the quarter ending March 31, 2021
4.25:1.00 for the quarter ending June 30, 2021
3.75:1.00 for the quarter ending September 30, 2021
3.00:1.00 for the quarter ending December 31, 2021
2.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
B. Riley Limited Guaranty
In connection with the Company’s entry into the A&R Credit Agreement, B. Riley entered into the B. Riley Guaranty for the benefit of the Administrative Agent and the lenders under the U.S. Revolving Credit Facility. The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations with respect to the U.S. Revolving Credit Facility (other than with respect to letters of credit and contingent obligations), including the obligation to repay outstanding revolving credit loans and pay earned interest and fees. The B. Riley Guaranty is enforceable in certain circumstances, including, among others: (i) B. Riley’s failure to timely fund in full any of its additional Last Out Term Loans committed under the A&R Credit Agreement; (ii) certain events of default relating to bankruptcy or insolvency occurring with respect to B. Riley; (iii) the acceleration of the Company’s borrowings under the U.S. Revolving Credit Facility; (iv) the Company’s failure to pay any
amount due to the Administrative Agent or any lender under the U.S. Revolving Credit Facility; or (v) any assertion that the B. Riley Guaranty or any portion thereof is not valid, binding or enforceable.
In connection with the B. Riley Guaranty, the Company entered into a fee letter with B. Riley pursuant to which the Company agreed to pay B. Riley a fee of $3.9 million (the “B. Riley Guaranty Fee”). On June 8, 2020, the Company issued 1,712,479 unregistered shares of Common Stock, 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 unregistered shares of the Company’s Common Stock, calculated as explained below.
Under the Equitization Agreement, B. Riley will receive a number of unregistered 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 for 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.
On September 30, 2020 and June 30, 2020, the Company issued 2,334,002 and 1,192,371 unregistered shares of Common Stock, respectively, to B. Riley and certain of its affiliates in settlement of the quarterly interest payable in connection with the Equitization Agreement discussed above.
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 of Common Stock. 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.
U.S. Revolving Credit Facility
As of September 30, 2020,2021, the U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in anCompany has sold $25.6 million aggregate principal amount of up to $326.9 million, as amended and adjusted for completed asset sales. The proceeds from loansSenior Notes under the U.S. Revolving Credit Facilitysales agreement disclosed above for $26.0 million of net proceeds after commissions and fees.
The components of the Senior Notes are available for working capital needs, capital expenditures, permitted acquisitionsas follows:
| | | | | |
(in thousands) | September 30, 2021 |
8.125% Senior Notes due 2026 | $ | 185,599 | |
Unamortized deferred financing costs | (5,039) | |
Unamortized premium | 590 | |
Net debt balance | $ | 181,150 | |
The Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other general corporate purposes,existing and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the agreement.
As of September 30, 2020, in connection with Amendment No. 16, we have accrued deferred ticking fee costs of $6.7 million due to certain required actions that were not completed by December 15, 2019.
At September 30, 2020, borrowings under the U.S. Revolving Credit Facility consisted of $181.9 millionfuture senior unsecured and unsubordinated indebtedness. The Senior Notes bear interest at a weighted average interestthe rate of 7.63%. Usage under8.125% per annum. Interest on the U.S. Revolving Credit Facility consistedSenior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of $181.9 million of revolving loan borrowings, $23.0 million of financial letters of credit and $89.6 million of performance letters of credit. At Septembereach year, commencing on April 30, 2020, we had approximately $32.4 million available to meet letter of credit requirements based2021. The Senior Notes mature on our overall facility size, of which $23.1 million was available for additional borrowings under our Sublimit.February 28, 2026.
On October 23, 2020, we received $26.0 million under the settlement agreement described in Note 4. As required by the Company’s U.S. Revolving Credit Facility, 50% of the net proceeds (gross proceeds less costs) or approximately $8.0 million of the settlement received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility in October 2020.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of September 30, 2020 and December 31, 2019 was $80.6 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 $31.6 million as of September 30, 2020. Of the letters of credit issued under the U.S. Revolving Credit Facility, $37.5 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 September 30, 2020, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $277.6 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds was $34.7 million.
Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facility is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
NOTE 14– LAST OUT TERM LOANS
The components ofEffective with the new debt facilities the Company entered into on June 30, 2021, as described in Note 15 below, the Company has no remaining Last Out Term Loans by Trancheand no further borrowings thereunder are available. The Last our Term Loan activity is described as follows:
| | | | | | | | | | | | | | |
| Last Out Term Loan Tranche |
(in thousands) | A-3 | A-4 | A-6 | Total |
Balance at December 31, 2020 | $ | 113,330 | | $ | 30,000 | | $ | 40,000 | | $ | 183,330 | |
Payments in cash | (40,408) | | (30,000) | | (5,000) | | (75,408) | |
Equitized deemed prepayment - preferred stock issuance | (72,922) | | — | | — | | (72,922) | |
Deemed prepayment - senior notes issuance | — | | — | | (35,000) | | (35,000) | |
Balance at September 30, 2021 | $ | — | | $ | — | | $ | — | | $ | — | |
|
| | | | | | | | | | | | |
| September 30, 2020 |
(in thousands) | A-3 | A-4 | A-6 | Total |
Proceeds (1) | $ | 101,660 |
| $ | 30,000 |
| $ | 30,000 |
| $ | 161,660 |
|
Discount and fees | 8,650 |
| — |
| — |
| 8,650 |
|
Paid-in-kind interest | 3,020 |
| — |
| — |
| 3,020 |
|
Net debt balance | $ | 113,330 |
| $ | 30,000 |
| $ | 30,000 |
| $ | 173,330 |
|
NOTE 15 – REVOLVING DEBT(1) Tranche A-3 proceeds represent
Debt Facilities
On June 30, 2021, we entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as administrative agent (“PNC”) and a letter of credit agreement (the “Letter of Credit Agreement”) with PNC, pursuant to which PNC agreed to issue up to $110 million in letters of credit that is secured in part by cash collateral provided by an affiliate of MSD Partners, MSD PCOF Partners XLV, LLC (“MSD”), as well as a reimbursement, guaranty and security agreement with MSD, as administrative agent, and the net proceeds aftercash collateral providers from time to time party thereto, along with certain of our subsidiaries as guarantors, pursuant to which we are obligated to reimburse MSD and any other cash collateral provider to the $39.7 million principal prepaymentextent the cash collateral provided by MSD and any other cash collateral provider to secure the Letter of Credit Agreement is drawn to satisfy draws on letters of credit (the “Reimbursement Agreement” and collectively with the Revolving Credit Agreement and Letter of Credit Agreement, the “Debt Documents” and the facilities thereunder, the “Debt Facilities”). The obligations of the tranche as of July 23, 2019, the dateCompany under each of the Equitization Transactions.
|
| | | |
| December 31, 2019 |
(in thousands) | A-3 |
Proceeds (1) | $ | 101,660 |
|
Discount and fees | 8,650 |
|
Paid-in-kind interest | 3,020 |
|
Principal | 113,330 |
|
Unamortized discount and fees | (9,377 | ) |
Net debt balance | $ | 103,953 |
|
(1) Tranche A-3 proceeds represent the net proceeds after the $39.7 million principal prepaymentDebt Facilities are guaranteed by certain existing and future domestic and foreign subsidiaries of the trancheCompany. B. Riley Financial, Inc. (“B. Riley”), a related party, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as described below. The Company expects to use the proceeds and letter of July 23, 2019,credit availability under the dateDebt Facilities for working capital purposes and general corporate purposes, including to backstop certain letters of the Equitization Transactions.
Last Out Term Loans are incurredcredit issued under our previous A&R Credit Agreement, dated as of May 14, 2020 (as amended, restated or otherwise modified from time to time), by and are pari passu withamong the U.S.Company, as borrower, Bank of America, N.A., as administrative agent, the lenders and the other parties from time to time party thereto, which was repaid and commitments thereunder terminated as of June 30, 2021. The Revolving Credit Facility except for certain payment subordination provisions.Agreement matures on June 30, 2025. As of September 30, 2021, no borrowings have occurred under the Revolving Credit Agreement and under the Letter of Credit Agreement, usage consisted of $19.5 million of financial letters of credit and $69.0 million of performance letters of credit.
Each of the Debt Facilities has a maturity date of June 30, 2025. The Last Out Term Loansinterest rates applicable under the Revolving Credit Agreement float at a rate per annum equal to either (i) a base rate plus 2.0% or (ii) 1 or 3 month reserve-adjusted LIBOR rate
plus 3.0%. The interest rates applicable to the Reimbursement Agreement float at a rate per annum equal to either (i) a base rate plus 6.50% or (ii) 1 or 3 month reserve-adjusted LIBOR plus 7.50%. Under the Letter of Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) administrative fees of 0.75% and (ii) fronting fees of 0.25%. Under the Revolving Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) letter of credit commitment fees of 3.0% and (ii) letter of credit fronting fees of 0.25%. Under each of the Revolving Credit Agreement and the Letter of Credit Agreement, we are required to pay a facility fee equal to 0.375% per annum of the unused portion of the Revolving Credit Agreement or the Letter of Credit Agreement, respectively. The Company is permitted to prepay all or any portion of the loans under the Revolving Credit Agreement prior to maturity without premium or penalty. Prepayments under the Reimbursement Agreement shall be subject to a prepayment fee of 2.25% in the samefirst year after closing, 2.0% in the second year after closing and 1.25% in the third year after closing, with no prepayment fee payable thereafter.
The Company has mandatory prepayment obligations under the Reimbursement Agreement upon the receipt of proceeds from certain dispositions or casualty or condemnation events. The Revolving Credit Agreement and Letter of Credit Agreement require mandatory prepayments to the extent of an over-advance.
The obligations under the Debt Facilities are secured by substantially all assets of the Company and each of the guarantors, in each case subject to inter-creditor arrangements. As noted above, the obligations under the Letter of Credit Facility are also secured by the cash collateral provided by MSD and any other cash collateral provider thereunder.
The Debt Documents contain certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. The Debt Documents require the Company to comply with certain financial maintenance covenants, including a quarterly fixed charge coverage test of not less than 1.00 to 1.00, a quarterly senior net leverage ratio test of not greater than 2.50 to 1.00, a non-guarantor cash repatriation covenant not to exceed $35 million at any one time, a minimum liquidity covenant of at least $30.0 million at all times, and an annual cap on maintenance capital expenditures of $7.5 million. The Debt Documents also contain customary events of default as(subject, in certain instances, to specified grace periods) including, but not limited to, the U.S. Revolving Credit Facility. Under U.S. GAAP, a debt modificationfailure to make payments of interest or premium, if any, on, or principal under the respective facility, the failure to comply with certain covenants and agreements specified in the applicable Debt Agreement, defaults in respect of certain other indebtedness, and certain events of insolvency. If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Debt Documents may become due and payable immediately.
In connection with the same borrower that resultsCompany’s entry into the Debt Documents, on June 30, 2021, B. Riley, a related party, entered into a Guaranty Agreement in substantially different terms is accountedfavor of MSD, in its capacity as administrative agent under the Reimbursement Agreement, for as an extinguishmentthe ratable benefit of MSD, the cash collateral providers and each co-agent or sub-agent appointed by MSD from time to time (the “B. Riley Guaranty”). The B. Riley Guaranty provides for the guarantee of all of the existing debt
Company’s obligations under the Reimbursement Agreement. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair valueacceleration of the new debt as comparedCompany’s obligations under the Reimbursement Agreement. Under a fee letter with B. Riley, the Company agreed to pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty. The Company entered into a reimbursement agreement with B. Riley governing the Company’s obligation to reimburse B. Riley to the carrying valueextent the B. Riley Guaranty is called upon by the agent or lenders under the Reimbursement Agreement.
A&R Credit Agreement
As described above, the A&R Credit Agreement commitments were terminated, all loans were repaid and all outstanding and undrawn letters of the extinguished debt.credit were collateralized on June 30, 2021. The Company recognized a lossgain on debt extinguishment of $6.2$6.5 million in the quarter ended June 30, 2020,2021, primarily representing the write-off of accrued revolver fees of $11.3 million offset by the unamortized deferred financing fees of $4.8 million related to the prior A&R Credit Agreement.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees as of September 30, 2021 was $53.1 million. The aggregate value of the originaloutstanding letters of credit provided under the Letter of Credit Agreement backstopping letters of credit or bank guarantees was $21.7 million as of September 30, 2021. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $29.8 million are subject to foreign currency revaluation.
We have also posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance discountof 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 feescertain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2021, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $157.6 million. The aggregate value of the letters of credit backstopping surety bonds was $13.1 million.
Our ability to obtain and maintain sufficient capacity under our new Debt Facilities is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
Other Indebtedness - Loans Payable
During the nine months ended September 30, 2021, our Denmark subsidiary received 3 unsecured interest free loans totaling $3.4 million under a local government loan program related to COVID-19. The loans of $0.8 million, $1.7 million and $0.9 million are payable in April 2022, May 2022 and May 2023, respectively. The loan payable in May 2023 is included in long term loans payables in our Condensed Consolidated Balance Sheets.
As of September 30, 2021, as a result of our recent acquisition of a 60% controlling ownership stake in Fosler Construction Company Inc. (“Fosler Construction”) as described in Note 24, Fosler Construction has 2 loans totaling $7.6 million. Both loans have a variable interest rate with a minimum rate of 6% and are payable January 1, 2022. Fosler Construction also has loans primarily for vehicles and equipment totaling $0.9 million at September 30, 2021. The vehicle and equipment loans are included in long term loans payables in our Condensed Consolidated Balance Sheets.
NOTE 16 – PREFERRED STOCK
On May 7, 2021, we completed a public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters (the “Underwriters”). At the closing, we issued to the public 4,000,000 shares of our Preferred Stock, at an offering price of $25.00 per share for net proceeds of approximately $95.7 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by our Board of Directors, at a rate of 7.75% per year on the Tranche A-3 Last Out Term Loan. In connectionliquidation preference amount of $25.00 per share and payable quarterly in arrears.
On May 26, 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to the grant to the underwriters described above, at an offering price of $25.00 per share for net proceeds of approximately $10.7 million after deducting underwriting fees and commissions.
The Preferred Stock ranks, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up: (1) senior to all classes or series of our common stock and to all other capital stock issued by us expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the effectivenessPreferred 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 A&R Credit Agreement,Preferred Stock at a rate per annum equal to 7.75% (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the maturityPreferred Stock declared by our Board of Directors (or a duly authorized committee of our Board of Directors) will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year.
On June 8, 2021, the Company's Board of Directors approved a dividend of $0.290625 per share of the Company's outstanding Preferred Stock, with a record date for the Last Out Term Loans was extended to Decemberdividend of June 18, 2021 and a payment date of June 30, 2022.2021. On June 30, 2021, the Company paid dividends totaling $1.7 million.
On September 2, 2021, the Company's Board of Directors approved a dividend of $0.484375 per share of the Company's outstanding Preferred Stock, with a record date for the dividend of September 15, 2021 and a payment date of September 30, 2020 and June2021. On September 30, 2020,2021, the Company issued 2,334,002 and 1,192,371 unregistered shares of common stock, respectively, to B. Riley and certain of its affiliates in settlement ofpaid dividends totaling $3.7 million. After the quarterly interest payable in connection withCompany paid the Fee and Interest Equitization Agreement discussed in Note 13.
The total effective interest rate of Tranche A-3, Tranche A-4 and Tranche A-6 was 12.0%dividends on September 30, 2020. The interest rate on the Last Out Term Loans under the A&R Credit Agreement is a fixed rate per annum of 12.0%. Interest expense associated with the Last Out Term Loans is detailed in Note 15.
Tranche A-1
We borrowed $30.0 million of net proceeds under Tranche A-12021, there are no cumulative undeclared dividends of the Last Out Term Loans fromPreferred Stock at September 30, 2021.
On June 1, 2021, the Company and B. Riley, a related party, in September and October of 2018. In November 2018, Tranche A-1 was assignedentered into an agreement (the “Exchange Agreement”) pursuant 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 forwhich we (i) issued B. Riley 2,916,880 shares of Common Stock.
Tranche A-2
We borrowed $10.0our Preferred Stock, representing an exchange price of $25.00 per share and paid $0.4 million in cash, and (ii) paid $0.9 million in cash to B. Riley for accrued interest due, in exchange for a deemed prepayment of $73.3 million of net proceedsour then existing term loans with B. Riley under Tranche A-2 of Last Out Term Loans fromthe Company’s A&R Credit Agreement.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in March 2019. Tranche A-2 was fully repaid on July 23, 2019connection with proceedsthe offer and to or through B. Riley Securities, Inc., from time to time, additional shares of Preferred Stock up to an aggregate amount of $76.0 million of Preferred Stock. The Preferred Stock will have the same terms as (other than date of issuance and first dividend) with and have the same CUSIP number and be fungible with, the Preferred Stock issued during May 2021. The first dividend for the Preferred Stock issued thereunder, when, as and if declared, will accumulate and be cumulative from the 2019 Rights Offering as partdividend payment date (March 31, June 30, September 30 and December 31 of each year) for which full cumulative dividends have been paid immediately prior to the Equitization Transactions in July 2019.original issue date for each such share.
Tranche A-3
Under Amendment No. 16 to our credit agreement, we borrowed $150.0As of September 30, 2021, the Company sold $5.9 million face value from B. Riley, a related party, under a Tranche A-3aggregate amount of Last Out Term Loans. The $141.4Preferred Stock for $5.9 million net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European B&W Renewable loss projects as described in Note 4, with the remainder used for working capitalafter commission and general corporate purposes.
Interest rates for Tranche A-3 are described above. Tranche A-3 may be prepaid, subjectfees related to the subordination provisions under the amended creditJuly 7, 2021 sales agreement as described above, but not re-borrowed. As partdisclosed above.
The net proceeds of the Equitization Transactions, the total prepayment of principal of Tranche A-3 of the Last Out Term Loans was $39.7 million.
Tranche A-4
On January 31, 2020, we entered into Amendment No. 20offerings are intended to our credit agreement ("Amendment No. 20") 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, including clean energy growth initiatives, potential future acquisitions and reduction of net leverage.
NOTE 17 – COMMON STOCK
On February 12, 2021, we completed a public offering of our common stock pursuant to reimburse certain expenses ofan underwriting agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as specified by Amendment No. 20. The terms of Tranche A-4 are the same as the terms for the Tranche A-3.
As of January 31, 2020, we borrowed $30.0 million face valuerepresentative of the Tranche A-4several underwriters. At the closing, we issued to the public 29,487,180 shares of our common stock and received net proceeds of $26.3approximately $163.0 million after incurring total fees of $3.7 million related to Amendment No. 20 described above.deducting underwriting discounts and commissions, but before expenses.
Tranche A-5
Amendment No. 20 also provides an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturityThe net proceeds of the Last Out Term Loansoffering were used to make a prepayment toward the balance outstanding under our U.S. Revolving Credit Facility and permanently reduce the A&R Credit Agreement in the event certain customer letters ofcommitments under our senior secured credit are drawn. The terms of Tranche A-5 are the same as the terms for the Tranche A-3 under the A&R Credit Agreement. As of November 13, 2020, no borrowings occurred under Tranche A-5.facilities.
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 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 offerings of our Common Stock by the Company. The remaining $5.0 million will be available upon request by the Company.
On May 14, 2020, we borrowed $30.0 million face value20, 2021, at the 2021 annual meeting of stockholders of the Tranche A-6Company, the stockholders of the Company, upon the recommendation of the Company’s Board of Directors, approved the Babcock & Wilcox Enterprises, Inc. 2021 Long-Term Incentive Plan. The 2021 Plan became effective upon such stockholder approval. The maximum number of shares of the Company’s common stock that may be issued or transferred pursuant to awards under the 2021 Plan equals: (1) 1,250,000 shares, plus (2) the number of any shares subject to awards granted under the Company’s Amended and received gross proceedsRestated 2015 Long-Term Incentive Plan (the “2015 Plan”) and outstanding as of $30.0 million relatedMay 20, 2021 which expire, or are terminated, surrendered, or forfeited for any reason without issuance of such shares (including for outstanding performance share awards to the entry intoextent they are earned at less than maximum). No new awards may be granted under the A&R Credit Agreement.
Tranche A-7
The A&R Credit Agreement provided us with up2015 Plan. As of May 20, 2021 (immediately prior to $50.0 millionthe stockholder approval of additional funding for lettersthe 2021 Plan), the total number of credit in the formshares of Tranche A-7 Last Out Term Loans from B. Riley, a related party, as described in Note 13. The $50.0 million will be available upon request by the Company,our common stock subject to certain limitations. Asoutstanding awards granted under the 2015 Plan was 2,007,152 shares.
NOTE 1518 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense in our Condensed Consolidated Financial Statements consisted of the following components:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Components associated with borrowings from: | | | | | | | |
Senior Notes | $ | 3,801 | | | $ | — | | | $ | 8,993 | | | $ | — | |
Last Out Term Loans - cash interest | — | | | — | | | 4,349 | | | 6,140 | |
Last Out Term Loans - equitized interest | — | | | 5,315 | | | — | | | 8,031 | |
U.S. Revolving Credit Facility | — | | | 3,382 | | | 1,416 | | | 10,830 | |
| 3,801 | | | 8,697 | | | 14,758 | | | 25,001 | |
Components associated with amortization or accretion of: | | | | | | | |
Revolving Credit Agreement | 1,057 | | | — | | | 1,057 | | | — | |
Senior Notes | 335 | | | — | | | 2,101 | | | — | |
Last Out Term Loans - discount and financing fees | — | | | (545) | | | — | | | 3,183 | |
U.S. Revolving Credit Facility - deferred financing fees and commitment fees | — | | | 1,711 | | | 5,995 | | | 14,376 | |
U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16 | — | | | — | | | — | | | 1,660 | |
| 1,392 | | | 1,166 | | | 9,153 | | | 19,219 | |
| | | | | | | |
Components associated with interest from: | | | | | | | |
Lease liabilities | 870 | | | 612 | | | 2,194 | | | 1,843 | |
Other interest expense | 2,267 | | | 1,728 | | | 4,469 | | | 3,713 | |
| 3,137 | | | 2,340 | | | 6,663 | | | 5,556 | |
| | | | | | | |
Total interest expense | $ | 8,330 | | | $ | 12,203 | | | $ | 30,574 | | | $ | 49,776 | |
|
| | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | 2020 | 2019 |
Components associated with borrowings from: | | | | |
U.S. Revolving Credit Facility | $ | 3,382 |
| $ | 4,292 |
| $ | 10,830 |
| $ | 11,644 |
|
Last Out Term Loans - cash interest | — |
| 3,613 |
| 6,140 |
| 7,732 |
|
Last Out Term Loans - equitized interest | 5,315 |
| — |
| 8,031 |
| — |
|
Last Out Term Loans - paid-in-kind interest | — |
| 1,024 |
| — |
| 5,964 |
|
| 8,697 |
| 8,929 |
| 25,001 |
| 25,340 |
|
Components associated with amortization or accretion of: | | | | |
U.S. Revolving Credit Facility - deferred financing fees and commitment fees | 1,711 |
| 8,836 |
| 14,376 |
| 22,985 |
|
U.S. Revolving Credit Facility contingent consent fee for Amendment 16 | — |
| 5,011 |
| — |
| 9,686 |
|
U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16 | — |
| — |
| 1,660 |
| — |
|
Last Out Term Loans - discount and financing fees | (545 | ) | 6,445 |
| 3,183 |
| 8,514 |
|
| 1,166 |
| 20,292 |
| 19,219 |
| 41,185 |
|
| | | | |
Other interest expense | 2,340 |
| 242 |
| 5,556 |
| 909 |
|
| | | | |
Total interest expense | $ | 12,203 |
| $ | 29,463 |
| $ | 49,776 |
| $ | 67,434 |
|
The following table provides a reconciliation of cash and cash equivalents and restricted cash reporting withinthat sum to the total cash amount in the Condensed Consolidated Balance Sheets that sum to the total of the same amounts in theand Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | | | | | | | |
(in thousands) | September 30, 2021 | | December 31, 2020 | | September 30, 2020 |
Held by foreign entities | $ | 39,238 | | | $ | 38,726 | | | $ | 36,848 | |
Held by U.S. entities | 67,817 | | | 18,612 | | | 2,086 | |
Cash and cash equivalents | 107,055 | | | 57,338 | | | 38,934 | |
| | | | | |
Reinsurance reserve requirements | 774 | | | 4,551 | | | 3,443 | |
Restricted foreign accounts | — | | | 2,869 | | | 2,752 | |
Bank guarantee collateral | 1,026 | | | 2,665 | | | 3,240 | |
Letters of credit collateral | 6,892 | | | — | | | — | |
Restricted cash and cash equivalents | 8,692 | | | 10,085 | | | 9,435 | |
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Cash Flows | $ | 115,747 | | | $ | 67,423 | | | $ | 48,369 | |
As disclosed above, letters of credit collateral of $6.9 million as of September 30, 2021 represents cash pledged to secure the outstanding and undrawn letters of credit issued under our prior A&R Credit Agreement, most of which are expected to be
|
| | | | | | | | | | | | |
(in thousands) | September 30, 2020 | December 31, 2019 | September 30, 2019 | December 31, 2018 |
Held by foreign entities | $ | 36,848 |
| $ | 38,921 |
| $ | 30,590 |
| $ | 35,522 |
|
Held by U.S. entities | 2,086 |
| 4,851 |
| 1,473 |
| 7,692 |
|
Cash and cash equivalents of continuing operations | 38,934 |
| 43,772 |
| 32,063 |
| 43,214 |
|
| | | | |
Reinsurance reserve requirements | 3,443 |
| 9,318 |
| 8,802 |
| 11,768 |
|
Restricted foreign accounts | 2,752 |
| 3,851 |
| 2,480 |
| 5,297 |
|
Bank guarantee collateral | 3,240 |
| — |
| — |
| — |
|
Restricted cash and cash equivalents | 9,435 |
| 13,169 |
| 11,282 |
| 17,065 |
|
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 48,369 |
| $ | 56,941 |
| $ | 43,345 |
| $ | 60,279 |
|
Our U.S. Revolving Credit Facilitycancelled and replaced by new letters of credit issued by PNC, as described in Note 13 allows for nearly immediate borrowing15 – Revolving Debt. We expect the completion of available capacitythe issuance of new letters of credit to fund cash requirements incover the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.remaining collateral balance by December 31, 2021.
The following cash activity is presented as a supplement to our Condensed Consolidated Statements of Cash Flows and is included in Net cash used in activities:
| | | | | | | | | | | |
| Nine months ended September 30, |
(in thousands) | 2021 | | 2020 |
Income tax payments, net | $ | 6,094 | | | $ | 3,967 | |
| | | |
Interest payments on our 8.125% Senior Notes due 2026 | $ | 6,681 | | | $ | — | |
Interest payments on our U.S. Revolving Credit Facility | 5,979 | | | 8,280 | |
Interest payments on our Last Out Term Loans | 6,140 | | | 6,140 | |
Total cash paid for interest | $ | 18,800 | | | $ | 14,420 | |
|
| | | | | | |
| Nine months ended September 30, |
(in thousands) | 2020 | 2019 |
Income tax payments, net | $ | 3,967 |
| $ | 304 |
|
| | |
Interest payments on our U.S. Revolving Credit Facility | $ | 8,280 |
| $ | 9,748 |
|
Interest payments on our Last Out Term Loans | 6,140 |
| 4,909 |
|
Total cash paid for interest | $ | 14,420 |
| $ | 14,657 |
|
NOTE 1619 – PROVISION FOR INCOME TAXES
In the three months ended September 30, 2021, income tax expense was $0.3 million, resulting in an effective tax rate of 2.2%. In the three months ended September 30, 2020, income tax benefit was $0.5 million, resulting in an effective tax rate of (1.5)%.
In the threenine months ended September 30, 2019,2021, income tax expense was $1.0$6.7 million, withresulting in an effective tax rate of (1.9)%83.2%.
Our effective tax rate for the three months ended September 30, 2020 and 2019 is not reflective of the U.S. statutory rate primarily due to valuation allowances against our net deferred tax assets. We have unfavorable discrete items of $0.1 million for the three months ended September 30, 2020 and unfavorable discrete items of $0.5 million for the three months ended September 30, 2019.
In the nine months ended September 30, 2020, income tax benefit was $0.5 million, resulting in an effective tax rate of 2.7%. In the nine months ended September 30, 2019, income tax expense was $3.6 million, resulting in an effective tax rate of (2.7)%.
Our effective tax rate for the three and nine months ended September 30, 20202021 and 20192020 is not reflective of the U.S. statutory rate primarily due to valuation allowances against ourcertain net deferred tax assets.assets and discrete items. We have favorable discrete items of $1.2$0.6 million and unfavorable discrete items of $0.6$2.9 million for the three and nine months ended September 30, 2021, respectively, which primarily represent withholding taxes ($3.0 million expense), adjustment to our United Kingdom deferred tax liabilities due to an enacted change in tax rate ($0.6 million expense), return to provision adjustments ($0.4 million benefit), and miscellaneous items ($0.3 million benefit) for the nine months ended September 30, 20202021. We had unfavorable discrete items of $0.1 million and 2019,favorable discrete items of $1.2 million for the three and nine months ended September 30, 2020, respectively.
We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the United States federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden, and the United Kingdom, with effective tax rates ranging between approximately 19% and 30%. We provide for income taxes based on the tax laws and rates in the jurisdictions where we conduct operations.
These jurisdictions may have regimes of taxation that vary in both nominal rates and the basis on which these rates are applied. Our consolidated effective income tax rate can vary significantly from period to period due to these foreign income tax rate variations, changes in the jurisdictional mix of our income, and valuation allowances.
CARES Act
On March 27, 2020, in response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act” or “Act”) was signed into law. The Act contains a number of provisions designed to assist companies during the pandemic. Certain provisions may impact the Company’s income tax provision. Management has concluded the CARES Act will not have an impact on the Company’s tax attributes.
NOTE 1720 – CONTINGENCIES
Litigation Relating to Boiler Installation and Supply Contract
On December 27, 2019, a complaint was filed against Babcock & Wilcox by P.H. Glatfelter Company (“Glatfelter”) in the United States District Court for the Middle District of Pennsylvania, Case No. 1:19-cv-02215-JPW, alleging claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment (the “Glatfelter Litigation”). The complaint alleges damages in excess of $58.9 million. We are evaluating Glatfelter’sOn March 16, 2020 we filed a motion to dismiss, and on December 14, 2020 the court issued its order dismissing the fraud and negligent misrepresentation claims and finding that, in the event that parties’ contract is found to be valid, Plaintiffs’ claims for damages will be subject to the contractual cap on liability (defined as well as potential counter claims against Glatfelterthe $11.7 million purchase price subject to certain adjustments). On January 11, 2021, we filed our answer and a counterclaim for breach of contract, seeking damages in excess of $2.9 million. We intend to continue to vigorously defend againstlitigate the action. However, given the preliminary stage of the litigation, it is too early to determine if the outcome of the Glatfelter
Litigation will have a material adverse impact on our condensed consolidated financial condition, results of operations or cash flows.
SEC Investigation
The staff of the SEC has informed the Company that its investigation is now concluded and that the staff does not intend to recommend any enforcement action against the Company. As the Company previously disclosed, the U.S. SEC ishad been conducting a formal investigation of the Company, focusing on the accounting charges and related matters involving the Company's B&W Renewable segment from 2015-2019. The SEC has served multiple subpoenas on the Company for documents. The Company is cooperating with the SEC related to the subpoenas and investigation. The Company is still in the process of producing documents to the SEC. In addition, the SEC has taken testimony from past and current officers, directors, and present and former employees. It is reasonably possible that the SEC may bring one or more claims against the Company and certain individuals. Due to the stage of the investigation, we are unable to estimate the amount of loss or range of potential loss of any claim. However, there can be no assurance that such claims will not have a material impact on the Company.
Stockholder Derivative and Class Action Litigation
On April 14, 2020, a putative B&W stockholder (“Plaintiff”) filed a derivative and class action complaint against certain of the Company’s directors (current and former), executives and significant stockholders (“Defendants”) and the Company (as a nominal defendant). The action was filed in the Delaware Court of Chancery and is captioned Parker v. Avril, et al., C.A. No. 2020-0280-PAF.2020-0280-PAF ("Stockholder Litigation"). Plaintiff alleges that Defendants, among other things, did not properly discharge their fiduciary duties in connection with the 2019 rights offering and related transactions. The Companycase is evaluating Plaintiff’s claims and intends to vigorously defend againstcurrently in discovery. We believe that the action.outcome of the Stockholder Litigation will not have a material adverse impact on our condensed consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our condensed consolidated financial condition, results of operations or cash flows.
NOTE 1821 – COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are generally reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first twothree quarters of 20202021 and 20192020 were as follows:
| | | | | | | | | | | |
(in thousands) | Currency translation loss | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2020 | $ | (47,575) | | $ | (4,815) | | $ | (52,390) | |
Other comprehensive loss before reclassifications | (70) | | — | | (70) | |
Reclassified from AOCI to net income (loss) | (4,512) | | 198 | | (4,314) | |
Net other comprehensive (loss) income | (4,582) | | 198 | | (4,384) | |
Balance at March 31, 2021 | $ | (52,157) | | $ | (4,617) | | $ | (56,774) | |
Other comprehensive loss before reclassifications | (1,478) | | — | | (1,478) | |
Reclassified from AOCI to net income | — | | 198 | | 198 | |
Net other comprehensive (loss) income | (1,478) | | 198 | | (1,280) | |
Balance at June 30, 2021 | $ | (53,635) | | $ | (4,419) | | $ | (58,054) | |
Other comprehensive income (loss) before reclassifications | (1,292) | | — | | (1,292) | |
Reclassified from AOCI to net income (loss) | — | | 197 | | 197 | |
Net other comprehensive income (loss) | (1,292) | | 197 | | (1,095) | |
Balance at September 30, 2021 | $ | (54,927) | | $ | (4,222) | | $ | (59,149) | |
|
| | | | | | | | | |
(in thousands) | Currency translation (loss) gain | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2019 | $ | 5,743 |
| $ | (3,817 | ) | $ | 1,926 |
|
Other comprehensive income (loss) before reclassifications | 2,380 |
| — |
| 2,380 |
|
Reclassified from AOCI to net income (loss) | — |
| (246 | ) | (246 | ) |
Net other comprehensive income (loss) | 2,380 |
| (246 | ) | 2,134 |
|
Balance at March 31, 2020 | $ | 8,123 |
| $ | (4,063 | ) | $ | 4,060 |
|
Other comprehensive income (loss) before reclassifications | (4,095 | ) | — |
| (4,095 | ) |
Reclassified from AOCI to net income (loss) | — |
| (246 | ) | (246 | ) |
Net other comprehensive income (loss) | (4,095 | ) | (246 | ) | (4,341 | ) |
Balance at June 30, 2020 | $ | 4,028 |
| $ | (4,309 | ) | $ | (281 | ) |
Other comprehensive income (loss) before reclassifications | (22,916 | ) | — |
| (22,916 | ) |
Reclassified from AOCI to net income (loss) | — |
| (246 | ) | (246 | ) |
Net other comprehensive income (loss) | (22,916 | ) | (246 | ) | (23,162 | ) |
Balance at September 30, 2020 | $ | (18,888 | ) | $ | (4,555 | ) | $ | (23,443 | ) |
|
| | | | | | | | | | | | |
(in thousands) | Currency translation (loss) gain | Net unrealized gain (loss) on derivative instruments | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2018 | $ | (10,834 | ) | $ | 1,362 |
| $ | (1,960 | ) | $ | (11,432 | ) |
Other comprehensive income (loss) before reclassifications | 10,260 |
| (1,178 | ) | — |
| 9,082 |
|
Reclassified from AOCI to net income (loss) | — |
| 224 |
| (356 | ) | (132 | ) |
Net other comprehensive income (loss) | 10,260 |
| (954 | ) | (356 | ) | 8,950 |
|
Balance at March 31, 2019 | $ | (574 | ) | $ | 408 |
| $ | (2,316 | ) | $ | (2,482 | ) |
Other comprehensive loss before reclassifications | (7,979 | ) | (189 | ) | — |
| (8,168 | ) |
Reclassified from AOCI to net income (loss) | 3,176 |
| (22 | ) | (514 | ) | 2,640 |
|
Net other comprehensive (loss) income | (4,803 | ) | (211 | ) | (514 | ) | (5,528 | ) |
Balance at June 30, 2019 | $ | (5,377 | ) | $ | 197 |
| $ | (2,830 | ) | $ | (8,010 | ) |
Other comprehensive loss before reclassifications | 21,433 |
| $ | — |
| $ | — |
| 21,433 |
|
Reclassified from AOCI to net income (loss) | — |
| $ | — |
| $ | (515 | ) | (515 | ) |
Amounts reclassified from AOCI to advanced billings on contracts | — |
| (197 | ) | — |
| (197 | ) |
Net other comprehensive (loss) income | 21,433 |
| (197 | ) | (515 | ) | 20,721 |
|
Balance at September 30, 2019 | $ | 16,056 |
| $ | — |
| $ | (3,345 | ) | $ | 12,711 |
|
| | | | | | | | | | | |
(in thousands) | Currency translation gain (loss) | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2019 | $ | 5,743 | | $ | (3,817) | | $ | 1,926 | |
Other comprehensive income before reclassifications | 2,380 | | — | | 2,380 | |
Reclassified from AOCI to net loss | — | | (246) | | (246) | |
Net other comprehensive income (loss) | 2,380 | | (246) | | 2,134 | |
Balance at March 31, 2020 | $ | 8,123 | | $ | (4,063) | | $ | 4,060 | |
Other comprehensive loss before reclassifications | (4,095) | | — | | (4,095) | |
Reclassified from AOCI to net loss | — | | (246) | | (246) | |
Net other comprehensive loss | (4,095) | | (246) | | (4,341) | |
Balance at June 30, 2020 | $ | 4,028 | | $ | (4,309) | | $ | (281) | |
Other comprehensive loss before reclassifications | (22,916) | | $ | — | | (22,916) | |
Reclassified from AOCI to net income (loss) | — | | $ | (246) | | (246) | |
Net other comprehensive (loss) income | (22,916) | | (246) | | (23,162) | |
Balance at September 30, 2020 | $ | (18,888) | | $ | (4,555) | | $ | (23,443) | |
The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
AOCI component | Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI | Three months ended September 30, | | Nine months ended September 30, | |
2021 | | 2020 | | 2021 | | 2020 | |
Release of currency translation adjustment with the sale of business | Loss on sale of business | $ | — | | | $ | — | | | $ | 4,512 | | | $ | — | | |
Amortization of prior service cost on benefit obligations | Benefit plans, net | (197) | | | 246 | | | (593) | | | 738 | | |
| Net (loss) income | $ | (197) | | | $ | 246 | | | $ | 3,919 | | | $ | 738 | | |
|
| | | | | | | | | | | | | |
AOCI component | Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI | Three months ended September 30, | Nine months ended September 30, |
2020 | 2019 | 2020 | 2019 |
Release of currency translation gain with the sale of equity method investment and the sale of business | Loss on sale of business | $ | — |
| $ | — |
| $ | — |
| $ | (3,176 | ) |
Derivative financial instruments | Other – net | — |
| — |
| — |
| (202 | ) |
| Net loss | $ | — |
| $ | — |
| $ | — |
| $ | (3,378 | ) |
| | | | | |
Amortization of prior service cost on benefit obligations | Benefit plans, net | 246 |
| 515 |
| 738 |
| 1,385 |
|
| Net income | $ | 246 |
| $ | 515 |
| $ | 738 |
| $ | 1,385 |
|
NOTE 1922 – FAIR VALUE MEASUREMENTS
The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic, Fair Value Measurements and Disclosures).
| | | | | | | | | | | | |
(in thousands) | | | | |
Available-for-sale securities | September 30, 2021 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 8,719 | | $ | 8,719 | | $ | — | | |
Mutual funds | 701 | | — | | 701 | | |
United States Government and agency securities | 4,131 | | 4,131 | | — | | |
Total fair value of available-for-sale securities | $ | 13,551 | | $ | 12,850 | | $ | 701 | | |
| | (in thousands) | | (in thousands) | | |
Available-for-sale securities | September 30, 2020 | Level 1 | Level 2 | Available-for-sale securities | December 31, 2020 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 10,612 |
| $ | 10,612 |
| $ | — |
| Corporate notes and bonds | $ | 6,139 | | $ | 6,139 | | $ | — | | |
Mutual funds | 577 |
| — |
| 577 |
| Mutual funds | 636 | | — | | 636 | | |
Corporate Stocks | | Corporate Stocks | 4,168 | | 4,168 | | — | | |
United States Government and agency securities | 6,132 |
| 6,132 |
| — |
| United States Government and agency securities | 4,365 | | 4,365 | | ��� | | |
Total fair value of available-for-sale securities | $ | 17,321 |
| $ | 16,744 |
| $ | 577 |
| Total fair value of available-for-sale securities | $ | 15,308 | | $ | 14,672 | | $ | 636 | | |
|
| | | | | | | | | |
(in thousands) | | | |
Available-for-sale securities | December 31, 2019 | Level 1 | Level 2 |
Corporate notes and bonds | $ | 8,310 |
| $ | 8,310 |
| $ | — |
|
Mutual funds | 587 |
| — |
| 587 |
|
United States Government and agency securities | 3,868 |
| 3,868 |
| — |
|
Total fair value of available-for-sale securities | $ | 12,765 |
| $ | 12,178 |
| $ | 587 |
|
Available-For-Sale Securities
Our investments in available-for-sale securities are presented in other assets on our Condensed Consolidated Balance Sheets with contractual maturities ranging from 0-60-5 years.
DerivativesSenior Notes
Derivative assets and liabilities usually consistSee Note 13 above for a discussion of FX forward contracts. Where applicable, theour recent offerings of Senior Notes. The fair value of these derivative assets and liabilitiesthe Senior Notes is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. Asbased on readily available quoted market prices as of September 30, 2020, we do not hold any derivative assets or liabilities; the last of our derivative contracts were sold during the first quarter of 2019.2021.
| | | | | | | | | |
(in thousands) | September 30, 2021 | |
Senior Notes | Carrying Value | Estimated Fair Value | |
8.125% Senior Notes due 2026 ('BWSN') | $ | 185,599 | | $ | 194,211 | | |
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 and Revolving Debt approximated their carrying value at September 30, 2020 and December 31, 2019.
2020.•Warrants. The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
Non-Recurring Fair Value MeasurementsNon-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 inputspurchase price allocation associated with the plan participants.
Tests for impairment annually and when impairment indicators exist requireSeptember 30, 2021 acquisition of controlling ownership of Fosler Construction Company Inc. ("Fosler Construction") required significant fair value measurements using unobservable inputs (see("Level 3" inputs as defined in the fair value hierarchy established by FASB Topic Fair Value Measurements and Disclosures). See Note 7). The fair values of24 for additional information regarding 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.Fosler Construction acquisition.
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 2023– 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 with the SEC, B. Riley beneficially owns 29.5%30.3% of our outstanding common stock as of September 30, 2020.2021.
B. Riley iswas party to the Last Out Term Loans under our A&R Credit Agreement, as described in Note 14. B. Riley has also provided the B. Riley Guaranty as described in Note 13.
In connection with the B. Riley Guaranty, the Company entered into the Fee and Interest Equitization Agreement described in Note 13. Under the Equitization Agreement the Company issued 1.7 million shares of common stock on June 8, 2020, 1.2 million shares of common stock on June 30, 2020 and 2.3 million shares of common stock on September 30, 2020 to B. Riley
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 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 describeddescribed above, were $0.1$0.2 million and $7.6$0.6 million for the three and nine months ended September 30, 2020,2021, respectively, and were $0.1 million and $7.6 million for the three and nine months ended September 30, 2020, respectively.
On November 13, 2020 we entered into an agreement with B. Riley Principal Merger Corp. II, an affiliate of B. Riley, to purchase 200,000 shares of Class A common stock of Eos Energy Storage LLC for an aggregate purchase price of $2.0 million. The shares were sold in January 2021 for which the Company recognized net proceeds of $4.5 million.
The public offering of our Senior Notes in February 2021, as described in Note 13, was conducted pursuant to an underwriting agreement dated February 10, 2021, between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date on February 12, 2021, we paid B. Riley Securities, Inc. $5.2 million for underwriting fees and other transaction cost related to the Senior Notes offering.
The public offering of our common stock, as described in Note 17, was conducted pursuant to an underwriting agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the several underwriters. Also on February 12, 2021, we paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction costs related to the offering.
On February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to which we agreed to issue to B. Riley $35.0 million aggregate principal amount of Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley Financial in the Exchange, as described in Note 13.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $150.0 million of 8.125% senior notes due 2026 to or through B. Riley Securities, Inc., as described in Note 13. As of September 30, 2021, we paid B. Riley Securities, Inc. $0.5 million for underwriting fees and other transaction costs related to the offering.
The public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock, as described in Note 16, was conducted pursuant to an underwriting agreement dated May 4, 2021, between us and B. Riley Securities, Inc., as representative of several underwriters. At the closing date on May 7, 2021, we paid B. Riley Securities, Inc. $4.3 million for underwriting fees and other transaction cost related to the Preferred Stock offering.
On May 26, 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to the grant to the underwriters, as described in Note 16, and paid B. Riley Securities, Inc. $0.4 million for underwriting fees in conjunction with the transaction.
On June 1, 2021, we issued 2,916,880 shares of the Company’s 7.75% Series A Cumulative Perpetual Preferred Stock and $11.9paid $0.4 million in cash due to B. Riley, a related party, in exchange for a deemed prepayment of $73.3 million of our then existing Last Out Term Loans and paid $0.9 million in cash for accrued interest, as described in Note 16.
On June 30, 2021, we entered into new Debt Facilities, as described in Note 15. In connection with the Company’s entry into the Debt Facilities, B. Riley Financial, Inc., an affiliate of B. Riley, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as describe in Note 15. Under a fee letter with B. Riley, the Company shall pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell, from time to time, up to an aggregated principal amount of $76 million of Preferred Stock to or through B. Riley Securities, Inc., as described in Note 16. As of September 30, 2021, we paid B. Riley Securities, Inc. $0.1 million for underwriting fees and other transaction costs related to the offering.
Transactions with Vintage Capital Management, LLC
On March 26, 2021, Vintage and B. Riley completed a transaction pursuant to which B. Riley agreed to purchase from Vintage, and Vintage agreed to sell to B. Riley, all 10,720,785 shares of our common stock owned by Vintage.
Based on its Schedule 13D filings, Vintage beneficially owns 0% of our outstanding common stock as of September 30, 2021.
NOTE 24 – ACQUISITIONS, ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS
Acquisitions
On September 30, 2021, we acquired a 60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) for approximately $27.2 million in cash plus a contingent consideration arrangement. The acquisition was accounted for under the acquisition method of accounting for business combinations. We are in the process of completing the purchase price allocation associated with the Fosler Construction business combination and as a result, the provisional measurements of goodwill and any other assets and liabilities acquired are subject to change. Fosler Construction provides commercial, industrial and utility-scale solar services and owns 2 community solar projects in Illinois being developed under the Illinois Solar for All program. Fosler Construction was founded in 1998 and employs approximately 120 people with a track record of successfully completing solar projects profitably with union labor and aligning its model with a growing number of renewable project incentives in the U.S. We believe Fosler Construction is positioned to capitalize on the high-growth solar market in the U.S. and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. Fosler Construction will be reported as part of our B&W Renewable segment, and it will operate under the name Fosler Solar, a Babcock and Wilcox company.
The total fair value of consideration for the acquisition is $33.4 million, including $6.2 million in estimated fair value of the contingent consideration arrangement. In connection with the acquisition, the Company agreed to pay contingent consideration based on the achievement of specified objectives, including reaching targeted revenue thresholds. The range of undiscounted amounts the Company could be required to pay under the contingent consideration arrangement is between $0.0 million and $10.0 million.
We estimated fair values primarily using the discounted cash flow method at September 30, 2021 for the preliminary allocation of consideration to the assets acquired and liabilities assumed. During the measurement period, we will continue to obtain information to assist in finalizing the fair value of assets acquired and liabilities assumed, which may differ materially from these preliminary estimates. If we determine any measurement period adjustments are material, we will apply those adjustments, including any related impacts to net income, in the reporting period in which the adjustments are determined.
The provisional measurements noted in the table below are preliminary and subject to modification in the future. The preliminary purchase price allocation to assets acquired and liabilities assumed in the acquisition was:
| | | | | |
(in thousands) | Estimated Acquisition Date Fair Value |
Accounts receivable | 1,904 | |
Contracts in progress | 1,363 | |
Other current assets | 1,137 | |
Property, plant and equipment | 9,527 | |
Goodwill(1) | 43,230 | |
Other assets | 17,497 | |
Right of use assets | 1,093 | |
Debt | (7,625) | |
Current liabilities | (6,630) | |
Non-current lease liabilities | (1,730) | |
Other non-current liabilities | (4,112) | |
Non-controlling interest(2) | (22,262) | |
Net acquisition cost | $ | 33,392 | |
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Fosler Construction acquisition, goodwill represents Fosler's ability to significantly expand EPC and O&M services among new customers across the U.S. by leveraging B&W's access to capital and geographic reach. Goodwill is not expected to be deductible for U.S federal income tax purposes.
(2) The fair value of the non-controlling interest was derived based on the fair value of the 60% controlling interest acquired by B&W. The transaction price paid by B&W reflects a Level 2 input involving an observable transaction involving an ownership interest in Fosler Construction. Also, as described above, a portion of the purchase consideration relates to the contingent consideration.
Intangible assets is included in other assets above and consists of the following:
| | | | | | | | |
(in thousands) | Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life |
Customer Relationships | 14,400 | | 12 years |
Backlog | 2,700 | | 5 months |
Total intangible assets(1) | $ | 17,100 | | |
(1) Intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth, profitability, discount rates and customer attrition. Such assumptions are classified as level 3 inputs within the fair value hierarchy.
The Company incurred approximately $0.4 million of costs related to the acquisition of Fosler Construction which were recorded as a component of our operating expenses in our Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2019, respectively.2021.
On August 10, 2020, B. Riley Financial, Inc. entered into a project specific indemnity rider (the “Indemnity Rider”) to the General Agreement of Indemnity, dated May 28, 2015, between us and Berkley Insurance Company (the “Surety”). Pursuant to the terms of the Indemnity Rider, B. Riley will indemnify the Surety for losses the Surety may incur as a result of providing a payment and performance bond in an aggregate amount not to exceed $30.0 million in connection with our proposed performance on a specified project. In consideration of B. Riley's execution of the Indemnity Rider, we paid B. Riley a fee of $0.6 million following the issuance of the bond by the Surety, which represents approximately 2.0% of the bonded obligations. Under the A&R Credit Agreement, any draw or claim under the Indemnity Rider will convert into a Tranche A-5 Last Out Term Loan for the benefit of B. Riley.
Refer to Note 13 for additional related party transactions with B. Riley and its affiliates.
Transactions with B. Riley - subsequent event
On November 9, 2020 we entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley to extend the services of Mr. Kenny Young, to serve as our Chief Executive Officer until December 31, 2023. Other than the term extension, there are no other changes to the agreement with BRPI Executive Consulting, LLC.
Transactions with Vintage Capital Management, LLC
Based on its Schedule 13D filings, Vintage beneficially owns 20.6% of our outstanding common stock as of September 30, 2020.
NOTE 21 – ASSETS HELD FOR SALE, DIVESTITURES AND DISCONTINUED OPERATIONS
Assets Held for Sale
Certain real property assets for the Copley, Ohio location were sold on March 15, 2021 for $4.0 million. We received $3.3 million of net proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing March 16, 2021 and expiring on March 31, 2033. These assets were treated as assets held for sale on our Condensed Consolidated Balance Sheets as of December 31, 2020.
Certain real property assets for the Lancaster, Ohio location were sold on August 13, 2021 for $18.9 million. We received $15.8 million of net proceeds after adjustments and expenses and recognized a gain on sale of $13.9 million. In conjunction with the sale, we executed a leaseback agreement commencing August 13, 2021 and expiring on August 31, 2041. These assets were treated as assets held for sale on our Condensed Consolidated Balance Sheets as of December 31, 2020.
In December 2019, we determined that a small business within the B&W Thermal segment met the criteria to be classified as held for sale. 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 September 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 September 30, 2020 and December 31, 2019:2020:
| | | | | | |
(in thousands) | | December 31, 2020 |
Accounts receivable – trade, net | | $ | 2,103 | |
Accounts receivable – other | | 86 | |
Contracts in progress | | 458 | |
Inventories | | 1,676 | |
Other current assets | | 405 | |
Current assets held for sale | | 4,728 | |
| | |
Net property, plant and equipment | | 10,365 | |
Intangible assets | | 759 | |
Right-of-use-asset | | 32 | |
Non-current assets held for sale | | 11,156 | |
| | |
Total assets held for sale | | $ | 15,884 | |
| | |
Accounts payable | | $ | 5,211 | |
Accrued employee benefits | | 178 | |
Advance billings on contracts | | 370 | |
Accrued warranty expense | | 466 | |
Operating lease liabilities | | 32 | |
Other accrued liabilities | | 2,048 | |
Current liabilities held for sale | | 8,305 | |
| | |
Total liabilities held for sale | | $ | 8,305 | |
|
| | | | | | |
(in thousands) | September 30, 2020 | December 31, 2019 |
Accounts receivable – trade, net | $ | 1,527 |
| $ | 5,472 |
|
Accounts receivable – other | 77 |
| 147 |
|
Contracts in progress | 797 |
| 586 |
|
Inventories | 2,292 |
| 1,555 |
|
Other current assets | 123 |
| 329 |
|
Current assets held for sale | 4,816 |
| 8,089 |
|
| | |
Net property, plant and equipment | 6,793 |
| 6,534 |
|
Intangible assets | 732 |
| 725 |
|
Right-of-use-asset | 57 |
| 63 |
|
Other assets | (39 | ) | — |
|
Non-current assets held for sale | 7,543 |
| 7,322 |
|
| | |
Total assets held for sale | $ | 12,359 |
| $ | 15,411 |
|
| | |
Accounts payable | $ | 5,352 |
| $ | 7,898 |
|
Accrued employee benefits | 317 |
| 430 |
|
Advance billings on contracts | 76 |
| 227 |
|
Accrued warranty expense | 517 |
| 515 |
|
Operating lease liabilities | 33 |
| 6 |
|
Other accrued liabilities | 630 |
| 462 |
|
Current liabilities held for sale | 6,925 |
| 9,538 |
|
| | |
Total liabilities held for sale | $ | 6,925 |
| $ | 9,538 |
|
Divestitures
Effective March 5, 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, for $2.8 million. We received $2.0 million in gross proceeds before expenses and recorded an $0.8 million favorable contract asset for the amortization period from March 8, 2021 through December 31, 2023. For the nine months ended September 30, 2021, we recognized a $2.2 million pre-tax loss, inclusive of the recognition of $4.5 million of currency translation adjustment, on the sale of the business and after consideration of certain working capital adjustments that are in dispute. Additional adjustments may be necessary as this is finalized.
On March 17, 2020, we fully settled the remaining escrow associated with the sale of PBRRC and received $4.5 million in cash.
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 September 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 2225 – NEW ACCOUNTING STANDARDS
We adopted the following new accounting standard during the first quarternine months of 2020:2021:
In August 2018,December 2019, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)2019-12, Income Taxes (Topic 740): Customer'sSimplifying the Accounting for Implementation Costs IncurredIncome Taxes. The amendments in a Cloud Computing Arrangement That Is a Service
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,
Contract. The new guidance requires companies acting asevaluating the customer in a cloud hosting service arrangement to follow the requirementstax basis step up of ASC 350-40 for capitalizing implementation costs for internal-use softwaregoodwill, allocation of consolidated current and requires the amortization of these costs over the lifedeferred tax expense, reflection of the related service contract.impact of enacted tax law or rate changes in annual effective tax rate calculations in the interim period that includes enactment date, and other minor codification improvements. The impact of this standard on our condensed consolidated financial statements was immaterial.
New accounting standards not yet adopted that could affect our Condensed Consolidated Financial Statements in the future are summarized as follows:
In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Equity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force). The amendments in this update affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with the guidance in Earnings Per Share (Topic 260). The amendments in this update do not apply to modifications or exchanges of financial instruments that are within the scope of another Topic. That is, accounting for those instruments continues to be subject to the requirements in other Topics. The amendments in this update do not affect a holder’s accounting for freestanding call options. The update is applicable to B&W as we have previously issued freestanding written call options however those options remain unexercised as of September 30, 2021 and they have not been modified or exchanged to date. The amendments are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. We are currently evaluating the impact of the standards on our condensed consolidated financial statements.
In March 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. This update is an amendment to ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform of Financial Reporting, which was issued in March 2020 and provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in the updates apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The expedients and exceptions provided by the updates do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The amendments in both updates are effective for all entities upon issuance and may be adopted any date on or after March 12, 2020 up to December 31, 2022. We are currently evaluating the impact of the standards on our condensed consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40). The amendments in this update simplify the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity by removing major separation models required under current U.S. GAAP. The amendments also improve the consistency of diluted earnings per share calculations. The amendments in this update are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of the standard on our condensed consolidated financial statements.
In 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. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for periods in which financial statements have not yet been issued. We are currently evaluating the impact of the standard on our 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 26 – PROPOSED ACQUISITION
During the third quarter, we announced our intention to acquire 100% of the equity interests of VODA A/S, a leading multi-brand aftermarket parts and service provider for the waste-to-energy and biomass-to-energy markets based in Vejen, Denmark, for approximately $30.0 million.
VODA focuses on energy producing incineration plants including waste-to-energy, biomass-to-energy or other fuels, providing service, engineering services, spare parts as well as general outage support and management. VODA has extensive experience within incineration technology, boiler / pressure parts, SRO, automation, and performance optimization.They employ people mainly in Denmark and Sweden. The planned acquisition of VODA aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses.
The foregoing planned acquisition is expected to close by the end of December 2021 and remains subject to the satisfaction or waiver of certain customary closing conditions specified in the share purchase agreement, including the receipt of Foreign Direct Investment clearance in Denmark by December 31, 2021.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
***** 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 "A&R Credit Agreement"); our ability to obtain waivers of required pension contributions; the highly competitive nature of our businesses and our ability to win work, including identified project opportunities in our pipeline; general economic and business conditions, including changes in interest rates and currency exchange rates; cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings; our ability to perform contracts on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers; failure by third-party subcontractors, partners or suppliers to perform their obligations on time and as specified; our ability to successfully resolve claims by vendors for goods and services provided and claims by customers for items under warranty; our ability to realize anticipated savings and operational benefits from our restructuring plans, and other cost-savings initiatives; our ability to successfully address productivity and schedule issues in our B&W Renewable and B&W Environmental segments, including the ability to complete our B&W Renewable's European EPC projects and B&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 B&W Environmental and B&W Renewable 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 September 30, 2020. The Company cautions not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and the Company undertakes no obligation to update or revise any forward-looking statement, except to the extent required by applicable law.
OVERVIEW OF RESULTS
Our assessment of operating results is based on three reportable segments, which changed in the third quarter of 2020 as part of the Company's strategic, market-focused organizational and re-branding initiative to accelerate growth and provide
stakeholders improved visibility into our renewable and environmental growth platforms. Segment results for all periods have been restated for comparative purposes. Our reportable segments are as follows:
B&W Renewable segment: cost-effectiveis a growing, globally-focused renewable, environmental and thermal technologies provider with decades of experience providing diversified energy and emissions control solutions to a broad range of industrial, electrical utility, municipal and other customers. B&W’s innovative products and services are organized into three market-facing segments:
•Babcock & Wilcox Renewable: Cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, solar construction and installation, biomass energy and black liquor systems for the pulp and paper industry. The segment'sB&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.
B&W Environmental segment:•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. The segment'sB&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.
B&W Thermal segment: steam•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. The segmentB&W has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
On September 30, 2021, we acquired a 60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) for approximately $27.2 million in cash plus a contingent consideration arrangement. Fosler Construction provides commercial, industrial and utility-scale solar services and owns two community solar projects in Illinois being developed under the Illinois Solar for All program. Fosler Construction was founded in 1998 and employs approximately 120 people with a track record of successfully completing solar projects profitably with union labor and aligning its model with a growing number of renewable project incentives in the U.S. We believe Fosler Construction is positioned to capitalize on the high-growth solar market in the U.S. and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. Fosler Construction will be reported as part of our B&W Renewable segment, and it will operate under the name Fosler Solar, a Babcock and Wilcox company.
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,depends significantly on the capital, operations and continuesmaintenance 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 be, adversely impactedmeet 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 operatethey operate.
We recorded operating income of $14.8 million 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$11.1 million in the severity of the virus in these countries and localities. These restrictions, including travel and curtailment of other activity, negatively impact our ability to conduct business. Although some of these restrictions have been lifted or scaled back, a recent resurgence of COVID-19 has resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented in response to efforts to reduce the spread of the virus. These varying and changing events have caused many of the projects we anticipated to begin in 2020 to be delayed to later in 2020 and others to be delayed further into 2021 and 2022. 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 nine months ended September 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 due2021, respectively, compared 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 income of $14.1 million and an operating loss of $3.9 million in the three and nine months ended September 30, 2020, respectively, compared to losses of $3.2and we showed improved results in our Environmental and Thermal segments as described below.
Adjusted EBITDA in the B&W Renewable segment was $11.4 million and $39.4$15.0 million in the three and nine months ended September 30, 2019,2021, respectively, and we showed improved results in our B&W Renewable segment.
Adjusted EBITDA in the B&W Renewable segment wascompared to $23.6 million and $22.0 million in the three and nine months ended September 30, 2020, respectively, comparedrespectively. The decline is primarily attributable to $(0.6)the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
Adjusted EBITDA in the B&W Environmental segment was $3.5 million and $(4.2)$7.3 million in the three and nine months ended September 30, 2019, respectively. The improvement was primarily due2021, respectively, compared to the recognition in the third quarter of the non-recurring loss recovery of $26.0 million under the insurance settlement agreement dated October 10, 2020 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 nine months ended September 30, 2020, we recorded $1.1$2.2 million and $1.4 million in net losses, respectively, inclusive of warranty expense related to the six European B&W Renewable EPC loss contracts as compared to $0.7 million and $8.0 million, in net losses recorded for the three and nine months ended September 30, 2019, respectively. Aside from these loss projects, we have one remaining extended scope contract in our B&W Renewable segment 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 September 30, 2020, five of the six European B&W Renewable EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the March 29, 2019 settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying a combined £70 million ($91.5 million) on April 5, 2019 in exchange for limiting and further defining our obligations under the second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately $144 million), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by May 31, 2019, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminated all historical claims and remaining liquidated damages. In accordance with the settlement, we have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed. We estimated the portion of this settlement related to waiver of the rejection right on the fifth loss contract was $81.1 million, which was recorded in the fourth quarter of 2018 as a reduction in the selling price. We 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 B&W Environmental segment generated adjusted EBITDA of $1.1 million and $(0.1) million in the three and nine months ended September 30, 2020, respectively, and $1.8respectively. The increase is driven primarily by the higher volume partially offset by an increase in shared resources.
Adjusted EBITDA in the B&W Thermal segment was $9.2 million and $2.5$32.1 million in the three and nine months ended September 30, 2019, respectively. The decline is due2021, respectively, compared to the impacts of COVID-19, as described above. In particular, while the segment was able to mitigate the impact of COVID-19 on project executions, the decision for new investments by several customers has been postponed impacting revenues and operating results. As of September 30, 2020, the B&W Environmental segment 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 nine months ended September 30, 2020. Final completion of the first loss contract is expected to be in the fourth 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 nine months ended September 30, 2020. Final completion of the second loss contract is expected to be in the fourth quarter of 2020. B&W Environmental's two significant loss contracts, as disclosed in Note 4 to the Condensed Consolidated Financial Statements, generated revenues of $0.4$7.3 million and $3.6$22.9 million in the three and nine months ended September 30, 2020, respectively, compared to $1.3 million and $20.6 million in the three and nine months ended September 30, 2019, respectively.
Our B&W Thermal segment generated adjusted EBITDA of $7.3 million and $22.7 million in the three and nine months ended September 30, 2020, respectively, compared to $12.9 million and $35.0 million in the three and nine months ended September 30, 2019, respectively. This declineincrease is primarily attributable to the decreaseincrease in revenue volume including the impacts of COVID-19, as described above,offset partially offset by the results of costs savingsproduct mix, an increase in expenses due to growth in Asia and restructuring initiatives.Middle East, and an increase in shared resources due to higher volume.
We have manufacturing facilities in Mexico, China, Unitesthe United States, Denmark and Scotland. Many aspects of our operations and properties could be affected by political developments, environmental regulations and operating risks. These and other factors may have a material impact on our international and domestic operations or our business as a whole.
Through our restructuring efforts, we continue to make significant progress to make our cost structure more variable and to reduce costs. We expect our cost-savingscost saving measures to continue to translate to bottom-line results, with top-line growth driven by opportunities for our core technologies and support services across the B&W Renewable, B&W Environmental and B&W Thermal segments globally.
We have identified additional initiatives that are underway as of the date of this filing that are expected to further reduce costs, and we expect to continue to explore other cost saving initiatives to improve cash generation and evaluate additional non-core asset sales to continue to strengthen our liquidity. There are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. If one or more events related to these or other risks or
uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.
Year-over-year comparisons of our results from continuing operations were also impacted by:
On October 10, 2020, we entered into a settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts. In connection with the insured losses recognized in prior years, we recognized this non-recurring loss recovery of $26.0 million as a reduction of our Cost of operations in our Condensed Consolidated Statements of Operations and recorded the insurance receivable in Accounts receivable - other in our Condensed Consolidated Balance Sheets for the period ending September 30, 2020 because we determined the loss recovery was probable as of such date. On October 23, 2020, we received gross proceeds of $26.0 million, as described in Note 4.
•$2.44.6 million and $6.7$8.0 million of restructuring costs were recognized in the three and nine months ended September 30, 2020,2021, respectively, compared to $2.6$2.4 million and $9.6$6.7 million of restructuring costs recognized in the three and nine months ended September 30, 2019,2020, respectively. The restructuring costs primarily related to severance and other costs in the first nine months of 2020 and was primarily related to severance in the first nine months of 2019.business service transition costs.
•$1.70.3 million and $3.2$2.6 million of financial advisory service fees were recordedrecognized in the three and nine months ended September 30, 2020,2021, respectively, as compared to $1.2$1.7 million and $8.4$3.2 million in the corresponding periods of 2019. These services are required under our U.S. Revolving Credit Facility.2020. Financial advisory service fees are included in advisory fees and settlement costs in theour 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.
$1.41.0 million and $5.2$5.0 million of legal and other advisory fees were recognized in the three and nine months ended September 30, 2020,2021, respectively, as compared to $2.8$1.4 million and $7.4$5.2 million in the corresponding periods of 2019.2020 These fees are related to the contract settlement and liquidity planning and are included in advisory fees and settlement costs in theour Condensed Consolidated Statement of Operations. The contract settlement is further described above and in Note 4 to the Condensed Consolidated Financial Statements.
•$2.00.6 million and 4.0$2.1 million of accelerated depreciation expense forlitigation legal costs were recognized in the three and nine months ended September 30, 2019,2021, respectively, for fixed assets affected byas compared to $0.8 million and $1.8 million in the corresponding periods of 2020. These fees are included in advisory fees and settlement costs in our September 2018 announcement to consolidate office space and relocate our global headquarters to Akron, Ohio in December 2019.Condensed Consolidated Statement of Operations.
•$1.34.0 million of actuarially determined markcosts related to market ("MTM") losses on our pensionactual or potential acquisitions were recognized in the three and other post-retirement benefits in the nine months ended September 30, 2019. MTM losses2021. These costs are further describedincluded in Note 12 to theselling, general and administrative costs in our Condensed Consolidated Financial Statements.
Statement of Operations.
In addition to the discussions described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurancesubcontractor 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")net pension adjustments,benefits, restructuring and spin-off costs, impairments, gains and losses on debt extinguishment, costs related to financial consulting, required under our U.S. Revolving Credit Facilityresearch and development costs and other costs that may not be directly controllable by segment management are not allocated to the segment.segments.
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| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Revenues: | | | | | | | | | | | |
B&W Renewable segment | $ | 38,000 | | | $ | 39,062 | | | $ | (1,062) | | | $ | 105,155 | | | $ | 118,570 | | | $ | (13,415) | |
B&W Environmental segment | 38,249 | | | 25,262 | | | 12,987 | | | 97,767 | | | 76,354 | | | 21,413 | |
B&W Thermal segment | 83,819 | | | 70,025 | | | 13,794 | | | 328,416 | | | 223,920 | | | 104,496 | |
Other | (108) | | | (1,836) | | | 1,728 | | | (270) | | | (2,380) | | | 2,110 | |
| $ | 159,960 | | | $ | 132,513 | | | $ | 27,447 | | | $ | 531,068 | | | $ | 416,464 | | | $ | 114,604 | |
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change | (in thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Revenues: | | |
B&W Renewable segment | $ | 39,062 |
| $ | 51,292 |
| $ | (12,230 | ) | $ | 118,570 |
| $ | 158,901 |
| $ | (40,331 | ) | |
Adjusted EBITDA (1) | | Adjusted EBITDA (1) | | | | | | | | | | | |
B&W Renewable segment (2) | | B&W Renewable segment (2) | $ | 11,399 | | | $ | 23,575 | | | $ | (12,176) | | | $ | 15,030 | | | $ | 22,003 | | | $ | (6,973) | |
B&W Environmental segment | 25,262 |
| 45,036 |
| (19,774 | ) | 76,354 |
| 234,485 |
| (158,131 | ) | B&W Environmental segment | 3,471 | | | 2,177 | | | 1,294 | | | 7,270 | | | 1,408 | | | 5,862 | |
B&W Thermal segment | 70,025 |
| 108,157 |
| (38,132 | ) | 223,920 |
| 315,587 |
| (91,667 | ) | B&W Thermal segment | 9,205 | | | 7,287 | | | 1,918 | | | 32,066 | | | 22,879 | | | 9,187 | |
Eliminations | (1,836 | ) | (5,841 | ) | 4,005 |
| (2,380 | ) | (30,278 | ) | 27,898 |
| |
Corporate | | Corporate | (5,866) | | | (4,916) | | | (950) | | | (11,548) | | | (12,864) | | | 1,316 | |
Research and development costs | | Research and development costs | 513 | | | (1,355) | | | 1,868 | | | (560) | | | (3,927) | | | 3,367 | |
| $ | 132,513 |
| $ | 198,644 |
| $ | (66,131 | ) | $ | 416,464 |
| $ | 678,695 |
| $ | (262,231 | ) | | $ | 18,722 | | | $ | 26,768 | | | $ | (8,046) | | | $ | 42,258 | | | $ | 29,499 | | | $ | 12,759 | |
(1) Adjusted EBITDA for the three and nine months ended September 30, 2020, excludes losses related to a non-strategic business and interest on letters of credit included in cost of operations that were previously included in Adjusted EBITDA and total $0.9 million and $0.2 million, respectively, and $1.2 million and $0.6 million, respectively. |
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Adjusted EBITDA | | | | | | |
B&W Renewable segment | $ | 23,575 |
| $ | (615 | ) | $ | 24,190 |
| $ | 22,003 |
| $ | (4,185 | ) | $ | 26,188 |
|
B&W Environmental segment | 1,078 |
| 1,771 |
| (693 | ) | (137 | ) | 2,453 |
| (2,590 | ) |
B&W Thermal segment | 7,255 |
| 12,871 |
| (5,616 | ) | 22,676 |
| 34,994 |
| (12,318 | ) |
Corporate | (4,916 | ) | (3,059 | ) | (1,857 | ) | (12,864 | ) | (16,973 | ) | 4,109 |
|
Research and development costs | (1,355 | ) | (828 | ) | (527 | ) | (3,927 | ) | (2,281 | ) | (1,646 | ) |
| $ | 25,637 |
| $ | 10,140 |
| $ | 15,497 |
| $ | 27,751 |
| $ | 14,008 |
| $ | 13,743 |
|
(2)Adjusted EBITDA for the three and nine months ended September 30, 2020 includes a $26 million non-recurring loss recovery related to claims in connection with multiple Renewable EPC loss contracts.
Three Months Ended September 30, 20202021 and 20192020
Revenues decreasedincreased by$66.127.4 millionto $132.5$160.0 million in the third quarter of 2020 as2021 compared to $198.6$132.5 million in the third quartercorresponding period of 2019. Revenues for each of our segments have been adversely impacted by COVID-19. Revenue in the B&W Renewable segment decreased by $12.2 million2020, primarily due to a higher level of activity in the prior year related to the turnover of the EPC loss contractsour project business within our Thermal segment as well as increased volume and higher overall project activity in addition to new anticipated activitiesour Environmental segment being deferred due to COVID-19. Revenuepartially offset by project timing in our Renewable segment. Segment specific changes are discussed in further detail in the B&W Environmental segment decreased by $19.8 million due to the completion of large construction projects in the prior year in addition to the postponement of new projects by customers as a result of COVID-19. B&W Thermal segment revenue decreased $38.1 million primarily due to the adverse impacts of COVID-19 resulting in customer delays and lower parts, construction, package boilers and international service orders.sections below.
Operating income increased $17.3$0.7 million to $14.1$14.8 million in the third quarter of 2020 from $(3.2)2021 compared to $14.1 million in the third quartercorresponding period of 2019.2020. The increase is primarily due to the revenue increase described above partially offset by the non-recurring loss recovery of $26.0 million recognized in the third quarter in the B&W Renewable segmentof 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4. The increase related to the loss recovery is partially offset by lower volume in each of our segments and customer delays as a result of COVID-19. Restructuring expenses, advisory fees, research and development, depreciation and amortization expense and gains (losses) on dispositions of equity method investees, and impairments are discussed in further detail in the sections below.
Nine Months Ended September 30, 20202021 and 20192020
Revenues decreasedincreased by $262.2$114.6 millionto $416.5$531.1 million in the nine months ended September 30, 2020 as2021 compared to $678.7$416.5 million in the corresponding period of 2020, primarily attributable to a higher level of activity in our Thermal and Environmental segments being partially offset by project timing and delays of large orders in our Renewable segment. Segment specific changes which are discussed in further detail in the sections below.
Operating income increased $15.0 million to $11.1 million in the nine months ended September 30, 2019. Revenues for each2021 compared to an operating loss of our segments have been adversely impacted by COVID-19. Revenue$(3.9) million in the B&W Renewable segment decreased by $40.3 million partiallycorresponding period of 2020. The increase is primarily due to the
divestiture of Loibl, a materials handling business in Germany, which contributed $14.3 million ofhigher overall revenue in the nine months ended September 30, 2019, the advanced completion of activities on the European B&W Renewable EPC loss contracts in the prior yearvolume and new anticipated activities being deferred due to COVID-19 all beingis partially offset by a higher levelthe non-recurring loss recovery of activities on two operations and maintenance contracts in the U.K. B&W Environmental segment revenue declined $158.1$26.0 million partially due to the completion of large construction projects in addition to the postponement of new projects by several customers as a result of COVID-19. Revenue in the B&W Thermal segment decreased by $91.7 million primarily due to customers' concern regarding the duration and magnitude of COVID-19 resulting in lower parts, construction, package boilers and international service orders.
Operating losses improved $35.5 million to $(3.9) millionrecognized in the nine months ended September 30, 2020 from $(39.4) millionunder an October 10, 2020 settlement agreement with an insurer in connection with five of the nine months ended September 30, 2019, primarily due to the non-recurring insurance loss recovery of $26.0 million, as discussed above and a lower level of losses on thesix European B&W Renewable EPC loss contracts, being partially offset by the divestiture of Loibl and the impacts of COVID-19 in the B&W Renewable segment , as well as a decline in volume in the B&W Environmental and B&W Thermal segments as described above.in Note 4. Restructuring expenses, advisory fees, research and development, depreciation and amortization expense and 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"“GAAP”). Amortization expense is not allocated to the segments’ adjusted gross profit. A reconciliation of operating income (loss), the most directly comparable GAAP measure, to adjusted gross
profit is included in the table below. Management believes that this financial measure is useful to investors because it excludes certain expenses, allowing investors to more easily compare our financial performance period to period.
| |
| Three months ended September 30, | Nine months ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change | (in thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Adjusted gross profit (loss) (1) | |
|
| | |
Adjusted gross profit (1)(2) | | Adjusted gross profit (1)(2) | | | | | | | | | | | |
Operating income (loss) | $ | 14,074 |
| $ | (3,177 | ) | $ | 17,251 |
| $ | (3,927 | ) | $ | (39,397 | ) | $ | 35,470 |
| Operating income (loss) | $ | 14,761 | | | $ | 14,074 | | | $ | 687 | | | $ | 11,083 | | | $ | (3,927) | | | $ | 15,010 | |
Selling, general and administrative ("SG&A") expenses | 35,611 |
| 35,828 |
| (217 | ) | 107,647 |
| 120,045 |
| (12,398 | ) | Selling, general and administrative ("SG&A") expenses | 37,528 | | | 35,611 | | | 1,917 | | | 111,081 | | | 107,647 | | | 3,434 | |
Advisory fees and settlement costs | 3,846 |
| 4,474 |
| (628 | ) | 10,074 |
| 22,862 |
| (12,788 | ) | Advisory fees and settlement costs | 1,841 | | | 3,846 | | | (2,005) | | | 9,658 | | | 10,074 | | | (416) | |
Amortization expense | 1,365 |
| 972 |
| 393 |
| 4,110 |
| 3,301 |
| 809 |
| Amortization expense | 2,030 | | | 1,365 | | | 665 | | | 5,333 | | | 4,110 | | | 1,223 | |
Contract asset amortization expense | | Contract asset amortization expense | 73 | | | — | | | 73 | | | 146 | | | — | | | 146 | |
Restructuring activities | 2,396 |
| 2,556 |
| (160 | ) | 6,739 |
| 9,571 |
| (2,832 | ) | Restructuring activities | 4,575 | | | 2,396 | | | 2,179 | | | 7,968 | | | 6,739 | | | 1,229 | |
Research and development costs | 1,355 |
| 828 |
| 527 |
| 3,927 |
| 2,281 |
| 1,646 |
| Research and development costs | (228) | | | 1,355 | | | (1,583) | | | 969 | | | 3,927 | | | (2,958) | |
Losses (gains) on asset disposals, net | (3 | ) | (266 | ) | 263 |
| (916 | ) | (224 | ) | (692 | ) | |
Losses from a non-strategic business | | Losses from a non-strategic business | (184) | | | 945 | | | (1,129) | | | 103 | | | 1,163 | | | (1,060) | |
Gain on asset disposals, net | | Gain on asset disposals, net | (13,838) | | | (3) | | | (13,835) | | | (15,804) | | | (916) | | | (14,888) | |
| $ | 58,644 |
| $ | 41,215 |
| $ | 17,429 |
| $ | 127,654 |
| $ | 118,439 |
| $ | 9,215 |
| | $ | 46,558 | | | $ | 59,589 | | | $ | (13,031) | | | $ | 130,537 | | | $ | 128,817 | | | $ | 1,720 | |
(1) Amortization is not allocated to the segments' adjusted gross profit, but depreciation is allocated to the segments' adjusted gross profit.
(2) Adjusted gross profit for the three and nine months ended September 30, 2020, excludes losses related to a non-strategic business that was previously included in Adjusted gross profit and totals $0.9 million and $1.2 million, respectively
Adjusted gross profit by segment is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Adjusted gross profit | | | | | | | | | | | |
B&W Renewable segment | $ | 17,381 | | | $ | 32,092 | | | $ | (14,711) | | | $ | 34,106 | | | $ | 48,401 | | | $ | (14,295) | |
B&W Environmental segment | 7,870 | | | 6,874 | | | 996 | | | 20,483 | | | 16,628 | | | 3,855 | |
B&W Thermal segment | 21,307 | | | 20,623 | | | 684 | | | 75,948 | | | 63,788 | | | 12,160 | |
| $ | 46,558 | | | $ | 59,589 | | | $ | (13,031) | | | $ | 130,537 | | | $ | 128,817 | | | $ | 1,720 | |
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Adjusted gross profit (loss) | | | | | | |
B&W Renewable segment | $ | 32,092 |
| $ | 6,571 |
| $ | 25,521 |
| $ | 48,401 |
| $ | 19,297 |
| $ | 29,104 |
|
B&W Environmental segment | 5,929 |
| 9,030 |
| (3,101 | ) | 15,465 |
| 33,613 |
| (18,148 | ) |
B&W Thermal segment | 20,623 |
| 25,614 |
| (4,991 | ) | 63,788 |
| 65,530 |
| (1,742 | ) |
| $ | 58,644 |
| $ | 41,215 |
| $ | 17,429 |
| $ | 127,654 |
| $ | 118,440 |
| $ | 9,214 |
|
B&W Renewable Segment Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Revenues | $ | 38,000 | | | $ | 39,062 | | | $ | (1,062) | | | $ | 105,155 | | | $ | 118,570 | | | $ | (13,415) | |
Adjusted EBITDA | $ | 11,399 | | | $ | 23,575 | | | $ | (12,176) | | | $ | 15,030 | | | $ | 22,003 | | | $ | (6,973) | |
Adjusted gross profit | $ | 17,381 | | | $ | 32,092 | | | $ | (14,711) | | | $ | 34,106 | | | $ | 48,401 | | | $ | (14,295) | |
Adjusted gross profit % | 45.7 | % | | 82.2 | % | | | | 32.4 | % | | 40.8 | % | | |
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(in thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Revenues | $ | 39,062 |
| $ | 51,292 |
| $ | (12,230 | ) | $ | 118,570 |
| $ | 158,901 |
| $ | (40,331 | ) |
Adjusted EBITDA | $ | 23,575 |
| $ | (615 | ) | $ | 24,190 |
| $ | 22,003 |
| $ | (4,185 | ) | $ | 26,188 |
|
Adjusted gross profit | $ | 32,092 |
| $ | 6,571 |
| $ | 25,521 |
| $ | 48,401 |
| $ | 19,297 |
| $ | 29,104 |
|
Adjusted gross profit (loss) % | 82.2 | % | 12.8 | % | | 40.8 | % | 12.1 | % | |
Three Months Ended September 30, 20202021 and 20192020
Revenues in the B&W Renewable segment decreased 24%3%, or $12.2$1.1 million to $38.0 million in the third quarter of 2021 compared to $39.1 million in the corresponding period of 2020. The reduction in revenue is primarily due to the completion of large service and licensing projects in the third quarter of 2020 compared to $51.3 millioncurrent volume in the third quarter of 2019. The reduction in revenue is due to a higher level of activity in the prior year related to the turnover of the EPC loss contracts in addition to new anticipated activities being deferred due to COVID-19.2021.
Adjusted EBITDA in the B&W Renewable segment increased 3,933%, or $24.2decreased $12.2 million, to $23.6$11.4 million in the third quarter of 20202021 compared to $(0.6)$23.6 million in the third quartercorresponding period of 2019,2020. The improvementdecrease is primarily due to the non-recurring loss recovery of $26.0 million recognized in the third quarter under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4, partially offset by lower volume, as discussed above.
Adjusted gross profit in the B&W Renewable segment increased $25.5 million to $32.1 million in the third quarter of 2020 compared to $6.6 million in the third quarter of 2019. The improvement is primarily due to the non-recurring loss recovery of $26.0 million recognized in the third quarter under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts described, as in Note 4, partially offset by lower volume, as discussed above.
Nine Months Ended September 30, 2020 and 2019
Revenues in the B&W Renewable segment decreased 25%, or $40.3 million, to $118.6 million in the nine months ended September 30, 2020 compared to $158.9 million in the nine months ended September 30, 2019. The reduction in revenue is due to the advanced completion of activities on the European B&W Renewable EPC loss contracts in the prior year as well as new anticipated activities being deferred due to COVID-19 being partially offset by a higher level of activities on two operations and maintenance contracts in the U.K. which followed the turnover of the EPC loss contracts to the customers. Additionally, 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 nine months ended September 30, 2019.
Adjusted EBITDA in the B&W Renewable segment increased 626%, or $26.2 million, to $22.0 million in the nine months ended September 30, 2020 compared to $(4.2) million in the nine months ended September 30, 2019, which is primarily due to the non-recurring loss recovery of $26.0 million recognized in the nine months ending September 30, 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4. Additionally, the divestiture
Adjusted gross profit in the B&W Renewable segment increased $29.1decreased $14.7 million, to $48.4$17.4 million in the nine months ended September 30, 2020third quarter of 2021 compared to $19.3$32.1 million in the nine months ended September 30, 2019.corresponding period of 2020. The improvementdecrease is primarily due to the non-recurring loss recovery of $26.0 million recognized in the nine months ending September 30,third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 44.
Nine Months Ended September 30, 2021 and 2020
Revenues in additionthe B&W Renewable segment decreased 11%, or $13.4 million to $105.2 million in the impactsnine months ended September 30, 2021 compared to $118.6 million in the corresponding period of Loibl2020. The reduction in revenue is primarily due to lower volume in the first nine months of 2021 coupled with the completion of prior year large service and licensing projects that have not been replaced.
Adjusted EBITDA in the B&W Renewable segment decreased $7.0 million, to $15.0 million in the nine months ended September 30, 2021 compared to $22.0 million in the corresponding period of 2020. The decrease is primarily due to lower costs related tovolume and the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
Adjusted gross profit in the Adjusted EBITDA section above.B&W Renewable segment decreased $14.3 million, to $34.1 million in the third quarter of 2021 compared to $48.4 million in the corresponding period of 2020. The decrease is primarily due to lower volume and the non-recurring loss recovery of $26.0 million recognized in third quarter of 2020 under an October 10, 2020 settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts, as described in Note 4.
B&W Environmental Segment Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Revenues | $ | 38,249 | | | $ | 25,262 | | | $ | 12,987 | | | $ | 97,767 | | | $ | 76,354 | | | $ | 21,413 | |
Adjusted EBITDA | $ | 3,471 | | | $ | 2,177 | | | $ | 1,294 | | | $ | 7,270 | | | $ | 1,408 | | | $ | 5,862 | |
Adjusted gross profit | $ | 7,870 | | | $ | 6,874 | | | $ | 996 | | | $ | 20,483 | | | $ | 16,628 | | | $ | 3,855 | |
Adjusted gross profit % | 20.6 | % | | 27.2 | % | | | | 21.0 | % | | 21.8 | % | | |
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(In thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Revenues | $ | 25,262 |
| $ | 45,036 |
| $ | (19,774 | ) | $ | 76,354 |
| $ | 234,485 |
| $ | (158,131 | ) |
Adjusted EBITDA | $ | 1,078 |
| $ | 1,771 |
| $ | (693 | ) | $ | (137 | ) | $ | 2,453 |
| $ | (2,590 | ) |
Adjusted gross profit | $ | 5,929 |
| $ | 9,030 |
| $ | (3,101 | ) | $ | 15,465 |
| $ | 33,613 |
| $ | (18,148 | ) |
Adjusted gross profit % | 23.5 | % | 20.1 | % | | 20.3 | % | 14.3 | % | |
Three Months Ended September 30, 20202021 and 20192020
Revenues in the B&W Environmental segment decreased 44%increased 51%, or $19.8$13.0 million to $25.3$38.2 million in the third quarter of 20202021 compared to $45.0$25.3 million in the third quartercorresponding period of 2019.2020. The decreaseincrease is primarily duedriven by increased volume in our ASH project business as well as higher overall project activity in the current quarter as compared to the completion of large construction projects in the prior year in additionquarter which was impacted due to the postponement of new projects by customers as a result of COVID-19. B&W Environmental's two significant legacy loss contracts, as disclosed in Note 4 to the Condensed Consolidated Financial Statements, generated revenues of $0.4 million and $1.3 million in the third quarter of 2020 and 2019, respectively.
Adjusted EBITDA in the B&W Environmental segment was $1.1$3.5 million in the third quarter of 20202021 compared to $1.8$2.2 million in the third quartercorresponding period of 2019.2020. The decreaseincrease is driven primarily by the lowerhigher volume, as described above being partially offset by the results of cost savings and restructuring initiatives.an increase in shared resources.
Adjusted gross profit in the B&W Environmental segment decreased $3.1increased $1.0 million to $5.9$7.9 million in the third quarter of 20202021 compared to $9.0$6.9 million in the third quartercorresponding period of 2019.2020. The declineincrease is primarily attributable to the decreaseincrease in volume, beingas described above partially offset by favorable product mix and the results of cost savings and restructuring initiatives.an increase in shared resources.
Nine Months Ended September 30, 20202021 and 20192020
Revenues in the B&W Environmental segment decreased 67%increased 28%, or $158.1$21.4 million to $76.4$97.8 million in the nine months ended September 30, 20202021 compared to $234.5$76.4 million in the corresponding prior year period of 2020. The increase is primarily driven by increased volume in our ASH project business as well as projects which were previously postponed due to COVID-19 in the prior periods being released in the current period.
Adjusted EBITDA in the B&W Environmental segment was $7.3 million in the nine months ended September 30, 2019. The decrease is primarily due2021 compared to the completion of large construction projects in addition to the postponement of new projects by several customers as a result of COVID-19. B&W Environmental's two significant legacy loss contracts, as disclosed in Note 4 to the Condensed Consolidated Financial Statements, generated revenues of $3.6 million and $20.6$1.4 million in the nine months ended September 30, 2020corresponding prior year period of 2020. The increase is driven primarily by the higher volume, as described above, and 2019, respectively.
Adjusted EBITDAa $1.3 million charge recognized in the prior period related to completion of two B&W Environmental segment decreased $2.6Loss Contracts as compared to a $0.4 million to $(0.1) millionimprovement recognized in the nine months ended September 30, 2020 compared to $2.5 millioncurrent period on those same projects, as described in the nine months ended September 30, 2019. The decline is primarily attributable to the impacts of lower volume, the effects of which were partially offset by a lower percentage of overhead being absorbed by the segment that were not previously absorbed by other segments.Note 4.
Adjusted gross profit in the B&W Environmental segment decreased $18.1increased $3.9 million to $15.5$20.5 million in the nine months ended September 30, 20202021 compared to $33.6$16.6 million in the nine months ended September 30, 2019.corresponding prior year period of 2020. The decreaseincrease is primarily attributable to the decreaseincrease in volume and a $1.3 million charge recognized in the prior period related to completion of two B&W Environmental Loss Contracts as compared to a $0.4 million improvement recognized in the current period on those same projects, as described above.in Note 4.
B&W Thermal Segment Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Revenues | $ | 83,819 | | | $ | 70,025 | | | $ | 13,794 | | | $ | 328,416 | | | $ | 223,920 | | | $ | 104,496 | |
Adjusted EBITDA | $ | 9,205 | | | $ | 7,287 | | | $ | 1,918 | | | $ | 32,066 | | | $ | 22,879 | | | $ | 9,187 | |
Adjusted gross profit | $ | 21,307 | | | $ | 20,623 | | | $ | 684 | | | $ | 75,948 | | | $ | 63,788 | | | $ | 12,160 | |
Adjusted gross profit % | 25.4 | % | | 29.5 | % | | | | 23.1 | % | | 28.5 | % | | |
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(In thousands) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Revenues | $ | 70,025 |
| $ | 108,157 |
| $ | (38,132 | ) | $ | 223,920 |
| $ | 315,587 |
| $ | (91,667 | ) |
Adjusted EBITDA | $ | 7,255 |
| $ | 12,871 |
| $ | (5,616 | ) | $ | 22,676 |
| $ | 34,994 |
| $ | (12,318 | ) |
Adjusted gross profit | $ | 20,623 |
| $ | 25,614 |
| $ | (4,991 | ) | $ | 63,788 |
| $ | 65,530 |
| $ | (1,742 | ) |
Adjusted gross profit % | 29.5 | % | 23.7 | % | | 28.5 | % | 20.8 | % | |
Three Months Ended September 30,31, 2021 and 2020 and 2019
Revenues in the B&W Thermal segment decreased 35%increased 20%, or $38.1$13.8 million, to $70.0$83.8 million in the third quarter of 2020 from $108.22021 compared to $70.0 million generated in the third quartercorresponding period of 2019.2020. The revenue decreaseincrease is attributable to a higher level of activity in our project business than in the adverse impacts of COVID-19 resulting in customer delays and lower parts, construction, package boilers and international service orders.comparable prior year quarter which was negatively impacted by COVID-19.
Adjusted EBITDA in the B&W Thermal segment decreased $5.6increased $1.9 million to $7.3$9.2 million in the third quarter of 20202021 compared to $12.9$7.3 million in the third quartercorresponding period of 2019, which2020. The increase is mainly attributabledue to the decrease inhigher volume as described above beingoffset partially offset by the results of costs savingsproduct mix and restructuring initiatives.an increase in shared resources due to higher volume.
Adjusted gross profit in the B&W Thermal segment decreased $5.0increased $0.7 million, to $20.6$21.3 million in the third quarter of 2020,2021, compared to $25.6$20.6 million in the third quartercorresponding period of 2019,2020, which is consistent withmainly attributable to the decreaseincrease in revenue as described above offset partially by favorable product mix and the results of costs savings and restructuring initiatives.an increase in shared resources due to higher volume.
Nine Months Ended September 30,31, 2021 and 2020 and 2019
Revenues in the B&W Thermal segment decreased 29%increased 47%, or $91.7$104.5 million, to $223.9$328.4 million in the nine months ended September 30, 2020 from $315.62021 compared to $223.9 million generated in the corresponding prior year period of 2020. The revenue increase is attributable to a higher level of activity on parts, construction, package boilers and international service orders which were all negatively impacted in the comparable prior year period due to COVID-19.
Adjusted EBITDA in the B&W Thermal segment increased $9.2 million to $32.1 million in the nine months ended September 30, 2019. The revenue decrease is attributable2021 compared to customers' concern regarding the duration and magnitude of COVID-19 resulting in lower parts, construction, package boilers and international service orders.
Adjusted EBITDA in the B&W Thermal segment decreased $12.3 million to $22.7$22.9 million in the nine months ended September 30,corresponding prior year period of 2020, compared to $35.0 million in the nine months ended September 30, 2019, which is mainly attributable to lowerthe increase in volume as described above and a higher percentage of overhead being absorbedoffset partially by the segment that was previously absorbed by other segments, the effects of which were partially offset by favorable product mix, an increase in expenses due to growth in Asia and a full period of cost savingsMiddle East, and restructuring initiatives benefiting the current year.an increase in shared resources due to higher volume.
Adjusted gross profit in the B&W Thermal segment decreased $1.7increased $12.2 million, to $63.8$75.9 million in the nine months ended September 30, 2020,2021, compared to $65.5$63.8 million in the nine months ended September 30, 2019,corresponding prior year period of 2020, which is mainly attributable to lower volumeconsistent with the increase in revenue as described above andoffset partially offset by favorable product mix, and the effectsan increase in shared resources due to higher 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, becauseBecause we operate globally, our backlog is also affected by changes in foreign currencies each period. We do not include orders of our unconsolidated joint ventures in backlog.
Bookings represent changes to the backlog. Bookings include additions from booking new business, subtractions from customer cancellations or modifications, changes in estimates of liquidated damages that affect selling price and revaluation of backlog denominated in foreign currency. We believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods, and that shorter-term changes in bookings may not necessarily indicate a material trend.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In approximate millions) | 2021 | | 2020 | | 2021 | | 2020 |
B&W Renewable(1) | $ | 103 | | | $ | 26 | | | $ | 184 | | | $ | 91 | |
B&W Environmental | 22 | | | 41 | | | 90 | | | 98 | |
B&W Thermal | 48 | | | 114 | | | 236 | | | 294 | |
Other/eliminations | — | | | (4) | | | — | | | (5) | |
Bookings | $ | 173 | | | $ | 177 | | | $ | 510 | | | $ | 478 | |
|
| | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(In approximate millions) | 2020 | 2019 | 2020 | 2019 |
B&W Renewable(1) | $ | 26 |
| $ | 27 |
| $ | 91 |
| $ | (27 | ) |
B&W Environmental | 41 |
| 16 |
| 98 |
| 139 |
|
B&W Thermal | 114 |
| 48 |
| 294 |
| 270 |
|
Other/eliminations | (4 | ) | (5 | ) | (5 | ) | (13 | ) |
Bookings | $ | 177 |
| $ | 86 |
| $ | 478 |
| $ | 369 |
|
(1) B&W Renewable bookings includes the revaluation of backlog denominated in currency other than U.S. dollars. The foreign exchange impact on B&W Renewable bookings in the third quarter of 2021 and 2020 and 2019 was $(6.4)$3.6 million and $(6.9)$(6.4) million, respectively. The foreign exchange impact on B&W Renewable bookings in the nine months ended September 30, 2021 and 2020 was $8.1 million and 2019 was $(7.0) million, and $(7.4) million, respectively.
Our backlog as of September 30, 20202021 and 20192020 was as follows:
| | | | | | | | | | | |
| As of September 30, |
(In approximate millions) | 2021 | | 2020 |
B&W Renewable(1) | $ | 313 | | | $ | 196 | |
B&W Environmental | 101 | | | 107 | |
B&W Thermal | 130 | | | 208 | |
Other/eliminations | (4) | | | (2) | |
Backlog | $ | 540 | | | $ | 509 | |
|
| | | | | | |
| As of September 30, |
(In approximate millions) | 2020 | 2019 |
B&W Renewable(1) | $ | 196 |
| $ | 207 |
|
B&W Environmental | 107 |
| 112 |
|
B&W Thermal | 208 |
| 161 |
|
Other/eliminations | (2 | ) | (7 | ) |
Backlog | $ | 509 |
| $ | 473 |
|
(1) B&W Renewable backlog at September 30, 2021, includes $152.8 million related to long-term operation and maintenance contracts for renewable energy plants, with remaining durations extending until 2034. Generally, such contracts have a duration of 10-20 years and include options to extend. | |
(1)
| B&W Renewable backlog at September 30, 2020, includes $159.0 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 September 30, 2020,2021, we expect to recognize revenues as follows:
| | | | | | | | | | | | | | |
(In approximate millions) | 2021 | 2022 | Thereafter | Total |
B&W Renewable | $ | 60 | | $ | 76 | | $ | 177 | | $ | 313 | |
B&W Environmental | 32 | | 42 | | 27 | | 101 | |
B&W Thermal | 69 | | 58 | | 3 | | 130 | |
Other/eliminations | (4) | | — | | — | | (4) | |
Expected revenue from backlog | $ | 157 | | $ | 176 | | $ | 207 | | $ | 540 | |
|
| | | | | | | | | | | | |
(In approximate millions) | 2020 | 2021 | Thereafter | Total |
B&W Renewable | $ | 15 |
| $ | 19 |
| $ | 162 |
| $ | 196 |
|
B&W Environmental | 25 |
| 43 |
| 39 |
| 107 |
|
B&W Thermal | 55 |
| 114 |
| 39 |
| 208 |
|
Other/eliminations | (2 | ) | — |
| — |
| (2 | ) |
Expected revenue from backlog | $ | 93 |
| $ | 176 |
| $ | 240 |
| $ | 509 |
|
Corporate
Corporate costs in adjusted EBITDA include SG&A expenses that are not allocated to the reportable segments. These costs include, among others, certain executive, compliance, strategic, reporting and legal expenses associated with governance of the total organization and being an SEC registrant. Corporate costs increased $1.9$1.0 million to $5.9 million compared to $4.9 million incurred for the three months ended September 30, 2021 and 2020, respectively. The increase is primarily due to higher incentive compensation costs recognized for the third quarter ended September 30, 2021.
Corporate costs decreased $1.3 million to $11.5 million compared to $12.9 million incurred for the nine months ended September 30, 2021 and 2020, respectively. The decrease is primarily due to lower audit fees, personnel, director fees and insurance costs, offset by higher incentive compensation costs recognized in the first nine months of 2021.
Advisory Fees and Settlement Costs
Advisory fees and settlement costs decreased by $2.0 million to $1.8 million in the third quarter of 2020 as2021 compared to $3.1$3.8 million in the third quartercorresponding period of 2019, primarily due to the accrual of management bonuses partially offset by the benefits of restructuring2020 and discretionary spend reductions. Corporateadvisory fees and settlement costs decreased $4.1$0.4 million to $12.9$9.7 million in the nine months ended September 30, 20202021 as compared to $17.0$10.1 million in the nine months ended September 30, 2019,corresponding period of 2020. The change is primarily due to the benefitsdecreased use of restructuring and discretionary spend reductions.
Advisory Fees and Settlement Costs
Advisory fees and settlement costs decreased by $0.6 million to $3.8 millionexternal consultants in the third quarter of 2020 as compared to $4.5 million in the third quarter of 2019, primarily due to a decrease in financial advisory fees.2021.
Advisory fees and settlement costs decreased by $12.8 million to $10.1 million in the nine months ended September 30, 2020 as compared to $22.9 million in the nine months ended September 30, 2019, primarily due to settlement costs to exit the fifth B&W Renewable EPC contract in the first quarter of 2019 as described in Note 4 to the Condensed Consolidated Financial Statements and a decrease in financial advisory fees.
Research and Development
Our research and development activities are related tofocused on improving our products through innovations to reduce the cost of our products toand make them more competitive, and through innovationsas well as 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(benefit) expenses totaled $(0.2) million and $1.4 million and $0.8 million forin the third quarter of 2021 and 2020, respectively, and 2019, respectively. Researchtotaled $1.0 million and development expenses totaled $3.9 million and $2.3 million forin the nine months ended September 30, 20202021 and 2019,2020, respectively. The increase$(0.2) million benefit in the third quarter of 2021 resulted from the recognition of a foreign research and development refundable credit of $0.8 million from the 2020 tax year. Excluding the effects of the refundable credit, the decreases for the three and nine months ending September 30, 2021 resulted primarily from timing of specific research and development efforts.
Restructuring
Restructuring actions across our business units and corporate functions including executive severances, resulted in $2.4$4.6 million and $2.6$2.4 million of expense in the third quarter of 2021 and 2020, respectively, and 2019, respectively. Restructuring actions across our business units and corporate functions, including executive severances, resulted in $6.7totaled $8.0 million and $9.6$6.7 million of expense in the nine months ended September 30, 2021 and 2020, respectively. The charges primarily consist of severance and 2019, respectively. Severance expense is recognized over the remainingbusiness service periods of affected employees, and as of September 30, 2020, we do not expect additional severance expensetransition costs related to be recognized based on actions taken, through that date.
Goodwill Impairment
Goodwill is tested for impairment annually and when impairment indicators exist. Duringincluding as part of the third quarter of 2020, the Company completed anCompany’s strategic, market-focused organizational and re-branding initiative eliminating the legacy business unit structure and launching the B&W Renewable, B&W Environmental, and B&W Thermal brands, which we considered to be a triggering event and as a result, the Company reevaluated its operating segments and reporting units. Segment results for all periods have been restated for comparative purposes.
Effective September 30, 2020, the previous Babcock & Wilcox and Babcock & Wilcox Construction Company reporting units became the B&W Company Thermal and B&W Construction Company reporting units, respectively, within the Babcock & Wilcox Thermal operating segment. The Company also identified the B&W Company Renewable and B&W Company Environmental reporting units related to the transfer of businesses from the former Babcock & Wilcox reporting unit to the Babcock & Wilcox Renewable and Babcock & Wilcox Environmental operating segments. Consequently, the Company re-allocated goodwill between the affected reporting units based on their relative fair values and compared the carrying value to the fair value of each impacted reporting unit.
In conjunction with the changes mentioned above, the Company performed a goodwill impairment test of the impacted reporting units on a before and after basis and based on the assessment, as of September 30, 2020, concluded that the fair value of the impacted reporting units exceeded their carrying values. Accordingly, no impairment was indicated during the third quarter of 2020.
In the first quarter of 2020, our share price declined significantly, which we considered to be a triggering event for an interim goodwill assessment. We primarily attributed the significant decline in our share price to the current macroeconomic conditions and impacts COVID-19 will have on our operations. Based on the interim assessment, as of March 31, 2020, no impairment was indicated during the first quarter of 2020.
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 B&W
Renewable and B&W Environmental asset groups. With respect to these asset groups no impairment was indicated during the first quarter of 2020.
Depreciation and Amortization
Depreciation expense was $2.7$2.3 million and $4.3$2.7 million in the third quarter of 2021 and 2020, respectively and 2019, respectively.
Depreciationdepreciation expense was $8.2$7.4 million and $15.8$8.2 million in the nine months ended September 30, 2021 and 2020, and 2019, respectively. Depreciation
Amortization expense in the third quarter and nine months ended September 30, 2019 includes $0.7was $2.1 million and $4.7 million, respectively, of accelerated depreciation of our prior corporate facility.
We recorded amortization expense of $1.4 million and $1.0 million in the third quarter of 2021 and 2020, respectively and 2019, respectively. We recorded amortization expense of $4.1was $5.5 million and $3.3$4.1 million in the nine months ended September 30, 20202021 and 2019,2020, respectively.
Pension and Other Postretirement Benefit Plans
We recognize benefits from our defined benefit and other postretirement benefit plans based on actuarial calculations primarily because our expected return on assets is greater than our service costs.cost. Service cost is low because our plan benefits are frozen except for a small number of hourly participants. Pension benefits before MTM were $7.3$7.6 million and $3.6$7.3 million in the third quarter of 20202021 and 2019,2020, respectively. Pension benefits before MTM were $22.3$22.6 million and $10.4$22.3 million in the nine months ended September 30, 2021 and 2020, and 2019, respectively.There were no MTM adjustments for our pension and other postretirement benefit plans during the three and nine months ended September 30, 2020 or the third quarter of 2019. The pension benefits for thenine months ended September 30, 2019 exclude MTM adjustment losses of $1.3 million. 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.time. Interim MTM charges are primarily a result of changes in the discount rate, curtailments orand 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. Total MTM adjustments for our pension benefit plans were gains of $2.3 million for the three and nine months ended September 30, 2021. There were no MTM adjustments for our other postretirement benefit plans during the three and nine months ended September 30, 2021. There were no MTM adjustments for our pension and other postretirement benefit plans during the three and nine months ended September 30, 2020.
Other than service cost of $0.2 million and $0.4$0.2 million in the third quarter of 2021 and 2020, respectively, and 2019, respectively, $0.7 millionand $0.6 million and$0.7 million in the nine months ended September 30, 2021 and 2020,and2019, respectively, which are related to the small number of hourly participants still accruing benefits within the Babcock &Wilcox& 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.Refer to Note 12 to the Condensed Consolidated Financial Statements for further information regarding our pension and other postretirement plans.
Foreign Exchange
We translate assets and liabilities of our foreign operations into United States dollars at current exchange rates, and we translate items in our statement of operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive income (loss). We report foreign currency transaction gains and losses in income.Condensed Consolidated Statements of Operations.
Foreign exchange was a gaingain/(loss) of $25.0$(1.7) million and a loss of $26.7$25.0 million for the three months ended September 30,third quarter of 2021 and 2020, respectively, and 2019, respectively. Foreign exchange was a gaingain/(loss) of $22.7$(1.1) million and a loss of $27.4$22.7 million for the nine months ended September 30, 20202021 and 2019,2020, respectively. Foreign exchange gains and losses are primarily related to unhedged intercompany loans denominated in European currencies to fund foreign operations.
Income Taxes
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(In thousands, except for percentages) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
Income (loss) before income taxes | $ | 13,949 | | | $ | 34,053 | | | $ | (20,104) | | | $ | 8,029 | | | $ | (17,580) | | | $ | 25,609 | |
Income tax expense (benefit) | $ | 301 | | | $ | (502) | | | $ | 803 | | | $ | 6,683 | | | $ | (467) | | | $ | 7,150 | |
Effective tax rate | 2.2 | % | | (1.5) | % | | | | 83.2 | % | | 2.7 | % | | |
|
| | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(In thousands, except for percentages) | 2020 | 2019 | $ Change | 2020 | 2019 | $ Change |
Income (loss) before income taxes | $ | 34,053 |
| $ | (55,947 | ) | $ | 90,000 |
| $ | (17,580 | ) | $ | (131,631 | ) | $ | 114,051 |
|
Income tax (benefit) expense | $ | (502 | ) | $ | 1,043 |
| $ | (1,545 | ) | $ | (467 | ) | $ | 3,560 |
| $ | (4,027 | ) |
Effective tax rate | (1.5 | )% | (1.9 | )% | | 2.7 | % | (2.7 | )% | |
Our income tax expense in the third quarter of 20202021 reflects a full valuation allowance against our net deferred tax assets, except in Mexico, Canada, the United Kingdom, Brazil, Finland, Germany, Thailand, the Philippines, Indonesia, and Sweden. Deferred tax assets are evaluated each period to determine whether realization is more likely than not. Valuation allowances are established when management determines it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. Valuation allowances may be removed in the future if sufficient positive evidence exists to outweigh the negative evidence under the framework of ASC 740, Income Taxes.
Our effective tax rate for the third quarter of 20202021 is not reflective of the United States statutory rate primarily due to a valuation allowance against certain net deferred tax assets.assets and favorable discrete items,including return to provision adjustments. In certain jurisdictions (namely, the United States, Denmark and Italy) where the companyCompany 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 companyCompany excludes the loss in that jurisdiction from the overall computation of the estimated annual effective tax rate.
Our effective tax rate for For the third quarter of 2019 was not reflective ofperiod ended September 30, 2021, the United States statutory ratewas not considered a loss jurisdiction and was included in the 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 duerelated to a valuation allowance against certain netintraperiod tax allocation, recognizing deferred tax assets.liabilities for changes in ownership of foreign equity method investments or foreign subsidiaries, and exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The Company adopted ASU No. 2019-12 on January 1, 2021, on a prospective basis. The adoption did not have a material impact on our interim consolidated financial statements, estimated income for the full fiscal year 2021, or to the trend of earnings.
Liquidity and Capital Resources
Liquidity
Our primary liquidity requirements include debt service, funding dividends on preferred stock and working capital needs. We fund our liquidity requirements primarily through cash generated from operations, and external sources of financing, including our A&Rrecent Revolving Credit Agreement, (as defined below) that governs the U.S. Revolving Credit FacilitySenior Notes, and the last out term loans (the "Last Out Term Loans"),equity offerings, including our Preferred Stock, each of which are described below and in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report in further detail along with other sources of liquidity.
As of December 31, 2019 and March 30, 2020,We recently executed the datefollowing actions:
•in June 2021, we issued 2,916,880 shares of our 2019Preferred Stock and paid $0.4 million in cash to B. Riley, a related party, in exchange for a deemed prepayment of $73.3 million of our then existing Tranche A-3 term loan and paid $0.9 million in cash for accrued interest due to B. Riley, as described in Note 14 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report. As a result of such deemed prepayment, the total amount outstanding under our Last Out Term Loans was reduced to zero;
•on June 30, 2021 and September 30, 2021, we werepaid dividends on our outstanding Preferred Stock totaling $1.7 million and $3.7 million, respectively, as described in compliance withNote 16 to 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 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 2019Condensed Consolidated Financial Statements were issued,included in Part I, Item 1 of this Quarterly Report;
•on June 30, 2021, we entered into the Revolving Credit Agreement with PNC, as administrative agent and swing loan lender which provides for an up to $50.0 million asset-based revolving credit facility, including a $15 million letter of credit sublimit and a $5 million swingline sublimit. In addition, we were not ableentered into the Letter of Credit Agreement with PNC, pursuant to assert that it was probable that our plans when fully implemented would alleviatewhich PNC has agreed to issue up to $110 million in letters of credit secured in part by cash collateral provided by an affiliate of MSD. Lastly, we entered into the eventsReimbursement Agreement with MSD, as administrative agent, and conditions.
Since January 1, 2020the cash collateral providers from time to time party thereto, pursuant to which we shall reimburse MSD and throughany other cash collateral provider to the issuanceextent the up to $110 million of our 2019cash collateral provided by MSD and any other cash collateral provider to secure the Letter of Credit Agreement is drawn to satisfy draws on letters of credit, as described in Note 15 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report;
•in August 2021, we completed the sale of certain real property assets at our Lancaster, Ohio location for $18.9 million. We received $15.8 million of net proceeds after adjustments and expenses and recognized a gain on Marchsale of $13.9 million. In conjunction with the sale, we executed a leaseback agreement commencing August 13, 2021 and expiring on August 31, 2041;
•as of September 30, 2020,2021, we took the following actions, among others, and have successfully implemented, or are in the processissued an additional $25.6 million aggregate principal amount of implementing the following:
entered into several amendments and waivers to avoid default and improve our liquiditySenior Notes for $26.0 million net proceeds under the terms of our creditMarch 31, 2021 sales agreement as described in Note 13 and Note 14,to the most recentCondensed Consolidated Financial Statements included in Part I, Item 1 of which were Amendments No. 19, No. 20 and No. 21 dated January 17, 2020, January 31, 2020 and March 27, 2020, respectively;this Quarterly Report;
on January 31, 2020, received $30.0•as of September 30, 2021, we issued additional shares of our Preferred Stock for $5.9 million of additional gross borrowings from B. Riley Financial, Inc. (together with its affiliates, "B. Riley")net proceeds 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,sales agreement as described in Note 14;
on March 12, 2020, filed for waiver of required minimum contributions16 to the U.S. Pension Plan as describedCondensed Consolidated Financial Statements included in Note 12Part I, Item 1 of this Quarterly Report; and subsequently
•on October 1, 2020 receivedSeptember 30, 2021, we acquired a letter from the Internal Revenue Service (the "IRS"60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) that the 2019 waiver request had been approved subject to certain conditions; and
on March 17, 2020, we fully settled the remaining escrow associated with the sale of Palm Beach Resource Recovery Corporation and received $4.5for approximately $27.2 million in cash.cash plus a contingent consideration arrangement, preliminarily valued at $6.2 million, with a maximum value up to $10.0 million if a certain revenue target is achieved in 2022.
See Note 13, Note 14, Note 15, Note 16, Note 17 and Note 24 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for additional information on our external sources of financing and equity offerings.
In addition to the actions taken above, subsequent to March 30, 2020 we have taken the following actions:
on May 14, 2020, the Company entered into an agreement amending and restating our credit agreement with Bank of America, N.A., as administrative agent (the “Administrative Agent”) and lender, and the other lenders party thereto. These amendments to the credit agreement, as amended and restated (the "A&R Credit Agreement"), among other amendments, extends the maturity date on the U.S. Revolving Credit Facility to June 30, 2022 and the maturity date on the Last Out Term Loans to December 30, 2022. 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. B. Riley 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 U.S. Revolving Credit Facility (other than with respect to letters of credit and contingent obligations thereunder), including the obligation to repay outstanding revolving credit loans and pay earned interest and fees;
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;
on October 10, 2020, we entered into a settlement agreement with an insurer in connection with five of the six European B&W Renewable EPC loss contracts. In connection with the insured losses recognized in prior years, we recognized this non-recurring loss recovery of $26.0 million as a reduction of our Cost of operations in our Condensed Consolidated Statements of Operations for the quarter ending September 30, 2020 because we determined the loss recovery was probable as of such date. On October 23, 2020, we received the gross proceeds of $26.0 million for the loss recovery recognized during the third quarter ending September 30, 2020, as described in Note 4; and
on October 30, 2020, we entered into Amendment No. 1 to our Amended and Restated Credit Agreement (the “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 (i) interest coverage ratios beginning with a ratio of 0.50:1.00 for the quarter ending December 31, 2020 and up to 1.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter and (ii) senior leverage ratios beginning with 7.75:1.00 for the quarter ending December 31, 2020 and down to 2.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter.
Beginning in April 2020 and continuing as of November 10, 2021, as part of the Company’s response to the impact of the COVID-19 pandemic on its business, the Company has takencontinues to take a number of the following cash conservation and cost reduction measures which include:
temporary unpaid furloughs of 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, however, the Company is implementing a new 401(k) company match for the remainder of 2020;U.S. employees starting January 1, 2022;
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;
temporary rent payment deferrals related to leased facilities located in the U.S., Canada, Italy and Denmark;
•utilizing options for government loans and programs in the U.S. and abroad that are appropriate and available; and
•deferring 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, the2021. In January 2021, we made Pension Plan contribution paymentscontributions of $5.5$23.1 million, each for the 2020 Plan year that would have been made on April 15, 2020, July 15, 2020 and October 15, 2020, respectively. In addition, we elected to defer the contribution payments of $1.1 million for the 2018 Plan year and $23.7 million for the 2019 Plan year that were both due on September 15, 2020. Per the 2019 Plan year waiver received on October 1, 2020, the $23.7 million deferred for the 2019 Plan year will now be funded over the next five years.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 September 30, 2020,2021, our unrestricted cash and cash equivalents totaled $38.9$107.1 million and we had total debt of $355.2$193.1 million. Our foreign business locations held $36.8$39.2 million of our total unrestricted cash and cash equivalents at September 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.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. AtU.S.. In addition, we had $6.9 million of restricted cash at September 30, 2020, we had approximately $23.1 million available2021 related to collateral for borrowings under the U.S. Revolving Credit Facility.certain letters of credit.
Cash used in operations was $67.3$107.8 million in the nine months ended September 30, 2020,2021, which is primarily represented in the $47.1 million change in pension, postretirement and employee benefit liabilities and a $70.9 million net decrease in operating cash outflows associated with changes in working capital. In the nine months ended September 30, 2020, cash used in operations was $67.3 million primarily represented in the net loss of continuing operations, the increase in accounts receivable - other from recognizing the non-recurring loss recovery insurance settlement of $26.0 million described in Note 4, the change in pension, postretirement and employee benefit liabilities and the impact of fluctuating foreign currency exchange rates. There also was also a $2.8 million net decreaseincrease in operating cash outflows associated with changes in working capital.
Cash flows from investing activities used net cash of $5.9 million in the nine months ended September 30, 2021, primarily due to the acquisition of Fosler Construction of $27.2 million and $4.2 million of capital expenditures, offset by proceeds from the sale of business and assets of $23.8 million. In the nine months ended September 30, 2019,2020, cash used in operations was $201.1 million primarily due to funding settlements related to European B&W Renewable EPC contracts, progress against accrued losses on the six European B&W Renewable EPC loss contracts and working capital build within the B&W Thermal segment related to the timing of and mix of work.
Cash flows from investing activities provided net cash of $2.0 million, in the nine months ended September 30, 2020, primarily related to $8.0 million from the settlement of remaining escrows associated with the sale of Palm Beach Resource Recovery Corporation and MEGTEC and Universal businesses, offset by the net change in available-for-sale securities and $2.3 million of capital expenditures. In
Cash flows from financing activities provided net cash of $159.2 million in the nine months ended September 30, 2019, cash flows from investing activities provided2021, primarily related to the issuance of common stock, Senior Notes and Preferred Stock offset by $75.4 million Last Out Term Loans repayments, a $164.3 million net cashreduction on the prior U.S. Revolving Credit Facility and $16.7 million of $7.1 million, primarily from proceeds received from the sale of Loibl for $7.4 million.
financing fees. Cash flows from financing activities provided net cash of $52.4 million in the nine months ended September 30, 2020, primarily related to $60.0 million face value borrowings from the Tranche A-4 and Tranche A-6 of the Last Out Term Loans and a $2.9 million change on the U.S. Revolving Credit Facility primarily offset by $10.3 million of financing fees. Cash flows from financing activities provided net cash of $181.0 million in the nine months ended September 30, 2019, primarily related to $109.6 million net borrowings from the Last Out Term Loans, $46.8$2.9 million of net borrowings from the prior U.S. Revolving Credit Facility and $40.4 million proceeds from the Rights Offering, partly offset by $15.5$10.3 million of financing fees.
U.S. Revolving Credit FacilityDebt Facilities
On May 11, 2015,As described above and in the Notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, on June 30, 2021, we entered into the 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 governsDebt Facilities, including the U.S. Revolving Credit FacilityAgreement. The obligations of the Company under each of the Debt Facilities are guaranteed by certain existing and future domestic and foreign subsidiaries of the Last Out Term Loans. Since June 2016, we have entered intoCompany. B. Riley, a numberrelated party, has provided a guaranty of waivers and amendmentspayment with regard to the amended credit agreement, including several to avoid defaultCompany’s obligations under the financialReimbursement Agreement, as described below. The Company expects to use the proceeds and other covenants specified in the amendedletter of credit agreement. As of September 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 loansavailability under the U.S. Revolving Credit Facility are availableDebt Facilities for working capital needs, capital expenditures, permitted acquisitionspurposes and other general corporate purposes, and the full amount is available
including to support the issuance ofbackstop certain letters of credit subject to the limits specified in the agreement.
As of September 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 September 30, 2020, borrowings under the U.S. Revolving Credit Facility consisted of $181.9 million at a weighted average interest rate of 7.63%. Usage under the U.S. Revolving Credit Facility consisted of $181.9 million of borrowings, $23.0 million of financial letters of credit and $89.6 million of performance letters of credit. At September 30, 2020, we had
approximately $32.4 million available to meet letter of credit requirements based on our overall facility size, of which $23.1 million was available for additional borrowingsissued under our sublimit.
On October 23, 2020, we received $26.0 million of gross proceeds under the settlement agreement representing the non-recurring loss recovery as described in Note 4. As required by the Company’s U.S. Revolving Credit Facility, 50% of the net proceeds (gross proceeds less costs) or approximately $8.0 million of the settlement received by the Company was applied as a permanent reduction of the U.S. Revolving Credit Facility in October 2020.
Under theprevious A&R Credit Agreement, the interest rate for the U.S. 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% upon the commitments under such facility being reduced to less than $200.0 million. The interest paymentswere terminated, all loans were repaid and all outstanding and undrawn letters of credit were collateralized on the unpaid principal amount of revolving credit loans incurred during the period from May 14, 2020 through and including August 31, 2020 of $3.8 million are deferred and will be paid in six equal installments on the last business day of each calendar month beginning on January 29, 2021 and through June 30, 2021. The maturity date under the U.S. Revolving Credit Facility will be extended to June 30, 2022 pursuant to the terms of the A&R Credit Agreement.
Last Out Term Loans
Effective with the new debt facilities the Company entered into on June 30, 2021, as described in Note 15 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report, the Company has no remaining Last Out Term Loans and no further borrowings thereunder are 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. available.
The Company recognized a loss on debt extinguishment of $6.2 million in the quarter ended June 30, 2020, primarily representing the unamortized value of the original issuance discount and fees on the Tranche A-3 Last Out Term Loan. In connection with
See Note 14 to the effectivenessCondensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for additional information on our Last Out Term Loans.
A&R Credit Agreement
As described above, the A&R Credit Agreement the maturity date for the Last Out Term Loans was extended to December 30, 2022.
On September 30, 2020commitments were terminated, all loans were repaid and June 30, 2020, the Company issued 2,334,002all outstanding and 1,192,371 unregistered shares of common stock to B. Riley in settlement of the quarterly interest payable in connection with the Equitization Agreement discussed in Note 13.
The total effective interest rate of Tranche A-3, Tranche A-4 and Tranche A-6 was 12.0% on September 30, 2020. The interest rate on the Last Out Term Loans under the A&R Credit Agreement is a fixed rate per annum of 12.0%. Interest expense associated with the Last Out Term Loans is detailed in Note 15.
Tranche A-1
We borrowed $30.0 million of net proceeds under Tranche A-1 of the Last Out Term Loans from B. Riley, a related party, in September and October of 2018. In November 2018, Tranche A-1 was assigned to Vintage, also a related party. As part of the Equitization Transactions in July 2019, the outstanding principal of Tranche A-1 of the Last Out Term Loans including accrued paid-in-kind interest remaining as of March 31, 2019 was exchanged for shares of common stock.
Tranche A-2
We borrowed $10.0 million of net proceeds under Tranche A-2 of Last Out Term Loans from B. Riley, a related party in March 2019. Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions in July 2019.
Tranche A-3
Under Amendment No. 16 to our credit agreement, we borrowed $150.0 million face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The $141.4 million net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European B&W Renewable EPC 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 principal of Tranche A-3 of the Last Out Term Loans was $39.7 million.
Tranche A-4
On January 31, 2020, we entered into Amendment No. 20 to our 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.
As of January 31, 2020, we borrowed $30.0 million face value of the Tranche A-4 and received net proceeds of $26.3 million after incurring total fees of $3.7 million related to Amendment No, 20 described above.
Tranche A-5
Amendment No. 20 also 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 A&R Credit Agreement in the event certain customerundrawn letters of credit are drawn.were collateralized on June 30, 2021. The termsCompany recognized a gain on debt extinguishment of Tranche A-5 are the same as the terms for the Tranche A-3 under the A&R Credit Agreement. As of November 13, 2020, no borrowings occurred under Tranche A-5.
Tranche A-6
The A&R Credit Agreement provided us with up to $70.0$6.5 million of additional funding in the formquarter ended June 30, 2021, primarily representing the write-off of Tranche A-6 Last Out Term Loans from B. Riley, a related party, as described in Note 13. An aggregate $30.0accrued revolver fees of $11.3 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 offerings of our Common Stockoffset by the Company. The remaining $5.0 million will be available upon request by the Company.
On May 14, 2020, we borrowed $30.0 million face valueunamortized deferred financing fees of the Tranche A-6 and received gross proceeds of $30.0$4.8 million related to the entry into theprior A&R Credit Agreement.
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 described in Note 13. The $50.0 million will be available upon request by the Company, subject to certain limitations. As of November 13, 2020, no borrowings occurred under Tranche A-7.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of our subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of September 30, 2020 and December 31, 20192021 was $80.6 million and $88.5 million, respectively.$53.1 million. The aggregate value of the outstanding letters of credit provided byunder the U.S. RevolvingLetter of Credit FacilityAgreement backstopping letters of credit or bank guarantees was $31.6$21.7 million as of September 30, 2020.2021. Of the outstanding letters of credit issued under the U.S. RevolvingLetter of Credit Facility, $37.5Agreement, $29.8 million are subject to foreign currency revaluation.
We have also posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. These bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of September 30, 2020,2021, bonds issued and outstanding under these arrangements in support of contracts totaled approximately $277.6$157.6 million. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds was $34.7$13.1 million.
Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facilitynew Debt Facilities is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
A&R Credit AgreementOther Indebtedness - Loans Payable
OnDuring the nine months ended September 30, 2021, our Denmark subsidiary received three unsecured interest free loans totaling $3.4 million under a local government loan program related to COVID-19. The loans of $0.8 million, $1.7 million and $0.9 million are payable in April 2022, May 11, 2015, we entered into the amended credit agreement with a syndicate of lenders2022 and May 2023, respectively. The loan payable 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
specifiedMay 2023 is included in the amended credit agreement.
On May 14, 2020, we entered into the A&R Credit Agreement which refinances and extends the maturity of our existing U.S.
Revolving Credit Facility and Last Out Term Loans.
Under the A&R Credit Agreement, B. Riley has committed to provide the Company with up to $70.0 million of additional Last Out Term Loans on the same terms as the long term loans extended under the amended credit agreement. An aggregate $30.0 millionpayables in our Condensed Consolidated Balance Sheets.
As of this new commitment was funded upon execution of the A&R Credit Agreement. Of the remaining commitments, at least $35.0 million will be funded in installments, subject to reduction for the gross proceeds from certain equity offerings conducted by the Company, and $5.0 million will be funded upon request by the Company. The proceeds from the $30.0 million of new term loans will be used to pay transaction fees and expenses and repay outstanding borrowings under the U.S.
Revolving Credit Facility. Proceeds from the remaining $40.0 million of Last Out Term Loans will be used to repay outstanding borrowings under the U.S. Revolving Credit Facility, with any remaining amounts used for working capital, capital expenditures, permitted acquisitions and general corporate purposes.
The A&R Credit Agreement also provides that, (i) the U.S. Revolving Credit Facility continues to be available for issuances of existing and new letters of credit, subject to the L/C Sublimit (as defined below), (ii) the $205.0 million sublimit on borrowings under the U.S. Revolving Credit Facility is maintained, and (iii) interest payments on the unpaid principal amount of revolving credit loans incurred during the period from May 14, 2020 through and including August 31, 2020 of $3.8 million are deferred and will be paid in six equal installments on the last business day of each calendar month beginning on January 29, 2021 and through June 30, 2021. No swing line borrowings are permitted under the A&R Credit Agreement.
The A&R Credit Agreement also amends the following terms, among others, as compared with the prior credit agreement:
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(i) | the maturity date of the U.S. Revolving Credit Facility has been 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 U.S. Revolving Credit Facility); |
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(ii) | the interest rate for loans under the U.S. Revolving Credit Facility has been 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 U.S. Revolving Credit Facility are reduced to less than $200.0 million. The fee for letters of credit will be set at 4.0%; |
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(iii) | the interest rate for all Last Out Term Loans has been set at 12.0%; |
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(iv) | the commitments under the U.S. Revolving Credit Facility automatically and permanently decrease in the following amounts on the following dates, which match the funding dates and amounts for the committed term loans: (x) $10.0 million on November 30, 2020; and (y) $5.0 million on each of March 31, 2021, June 30, 2021, September 30, 2021, December 31, 2021 and March 31, 2022, respectively; |
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(v) | the amount of revolving loans and letters of credit available in currencies other than U.S. dollars have been capped at $125.0 million through April 30, 2021 and will step down to $110.0 million on May 1, 2021; and |
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(vi) | the amount of financial letters of credit have been 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 prior credit agreement, except that, among other changes: (i) the indebtedness covenant has been modified to permit the incurrence of any governmental assistance in the form of indebtedness in connection with COVID-19 relief in an aggregate principal amount not to exceed $10.0 million; (ii) a third-party letter of credit basket of up to $50.0 million has been added; (iii) certain liens and restricted payments are modified to permit liens and repayments of indebtedness incurred in connection with governmental assistance in connection with COVID-19 relief; and (iv) covenants related to the European B&W Renewable EPC loss projects have been removed. The minimum required liquidity condition of $30.0 million remains constant but has been modified to exclude cash of non-loan parties in an amount in excess of $25.0 million. Certain financial covenant testing has been suspended through September 30, 2020, with the2021, for our recent acquisition of a 60% controlling ownership stake in Fosler Construction Company and the Administrative Agent having agreed to negotiate such covenant levels and related definitions prior to October 31, 2020. See A&R Credit Agreement subsequent event described below for a discussion of the results of the negotiation.
Events of default under the A&R Credit Agreement are substantially consistent with the prior 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 negotiate 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 incurred certain customary amendment and commitment fees, a portion of which will be deferred pursuant to the terms of the A&R Credit Agreement along with certain previously deferred fees incurred under the amended credit agreement.
A&R Credit Agreement - subsequent event
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 of interest coverage ratios and senior leverage ratios,Inc. (“Fosler Construction”) as described in Note 13.
Effective October 30, 2020, the24, Fosler Construction has two loans totaling $7.6 million. Both loans have a variable interest rate with a minimum interest coverage ratios under our A&R Credit Agreementrate of 6% and are as follows:
0.50:1.00payable January 1, 2022. In addition, Fosler Construction also has loans primarily for the quarter ending December 31, 2020
0.50:1.00 for the quarter ending March 31, 2021
0.80:1.00 for the quarter ending June 30, 2021
1.00:1.00 for the quarter endingvehicles and equipment totaling $0.9 million at September 30, 20212021. The vehicle and equipment loans are included in long term loans payables in our Condensed Consolidated Balance Sheets.
1.10:1.00 for the quarter ending December 31, 2021
1.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
Effective October 30, 2020, the maximum permitted senior leverage ratios under our A &R Credit Agreement are as follows:
7.75:1.00 for the quarter ending December 31, 2020
7.75:1.00 for the quarter ending March 31, 2021
4.25:1.00 for the quarter ending June 30, 2021
3.75:1.00 for the quarter ending September 30, 2021
3.00:1.00 for the quarter ending December 31, 2021
2.25:1.00 for the quarter ending March 31, 2022 and the last day of each fiscal quarter ending thereafter
B. Riley Limited Guaranty
In connection with the Company’s entry into the A&R Credit Agreement, B. Riley entered into the B. Riley Guaranty for the benefit of the Administrative Agent and the lenders under the U.S. Revolving Credit Facility. The B. Riley Guaranty provides for the guarantee of all of the Company’s obligations with respect to the U.S. Revolving Credit Facility (other than with respect to letters of credit and contingent obligations), including the obligation to repay outstanding revolving credit loans and pay earned interest and fees. The B. Riley Guaranty is enforceable in certain circumstances, including, among others: (i) B. Riley’s failure to timely fund in full any of its additional Last Out Term Loans committed under the A&R Credit Agreement; (ii) certain events of default relating to bankruptcy or insolvency occurring with respect to B. Riley; (iii) the acceleration of the Company’s borrowings under the U.S. Revolving Credit Facility; (iv) the Company’s failure to pay any
amount due to the Administrative Agent or any lender under the revolving credit facility; or (v) any assertion that the B. Riley Guaranty or any portion thereof is not valid, binding or enforceable.
Fee and Interest Equitization Agreement
In connection with the B. Riley Guaranty, the Company entered into a Fee and Interest Equitization Agreement (the “Equitization Agreement”) with B. Riley and, solely for certain limited purposes under the Equitization Agreement, B. Riley FBR, Inc.
The Equitization Agreement provides that, in lieu of receiving (a) $13.4 million of interest payments with respect to Last Out Term Loans under the A&R Credit Agreement between May 14, 2020 and December 31, 2020 (the “Equitized Interest Payments”) and (b) the B. Riley Guaranty Fee (the “Equitized Fee Payment” and, together with the Equitized Interest Payments, the “Equitized Fees and Interest Payments”), B. Riley will receive unregistered shares of the Company’s Common Stock, calculated as explained below.
Under the Equitization Agreement, B. Riley will receive a number of unregistered 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 for 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.
On September 30, 2020 and June 30, 2020, the Company issued 2,334,002 and 1,192,371 unregistered shares of Common Stock, respectively, to B. Riley and certain of its affiliates in settlement of the quarterly interest payable in connection with the Equitization Agreement discussed above.
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 September 30, 2020.2021.
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 nine months ended September 30, 2020.2021.
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 on Form 10-K for the year ended December 31, 2019 except for those described below.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.
On September 30, 2021, we acquired a 60% controlling ownership in Fosler Construction, as described in Note 24 of the unaudited condensed consolidated financial statements in Part I of this report. As the acquisition occurred during the last 12 months, the scope of our assessment of the effectiveness of disclosure controls and procedures does not include internal control over financial reporting related to the Fosler Construction acquisition. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our internal control over financial reporting scope in the year of acquisition.
Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 20202021 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 threenine months ended September 30, 20202021 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 1720 to the unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report,Quarterly Report, which we incorporate by reference into this Item.
Item 1A. Risk Factors
We are subject to various risks and uncertainties in the course of our business. The discussion of such risks and uncertainties may be found under "Risk Factors"“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 and
in our Quarterly Report on Form 10-Q for the quarter ended SeptemberMarch 31, 2021 and June 30, 2020.2021 and other filings with the SEC since the date of the Form 10-K. There have been no material changes to such risk factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In accordance with the provisions of the employee benefit plans, the Company acquired the following shares in connection with the vesting of employee restricted stock that require us to withhold shares to satisfy employee statutory income tax withholding obligations. The following table identifies the number of common shares and average price per share for each month during the quarter ended September 30, 2020.2021. The Company does not have a general share repurchase program at this time. | | | | | | | | | | | | | | |
(data in whole amounts) | | | | |
Period | Total number of shares acquired (1) | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs |
July 2021 | — | | $ | — | | — | | $ | — | |
August 2021 | 198,609 | | $ | 7.82 | | — | | $ | — | |
September 2021 | — | | $ | — | | — | | $ | — | |
Total | 198,609 | | $ | 7.82 | | — | | $ | — | |
|
| | | | | | | | | | |
(data in whole amounts) | | | | |
Period | Total number of shares acquired (1) | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs |
July 2020 | — |
| $ | — |
| — |
| $ | — |
|
August 2020 | 96,718 |
| $ | 2.77 |
| — |
| $ | — |
|
September 2020 | 108 |
| $ | 4.30 |
| — |
| $ | — |
|
Total | 96,826 |
| $ | — |
| — |
| $ | — |
|
(1) Acquired shares are recorded in treasury stock in our Condensed Consolidated Balance Sheets.
Item 6. Exhibits
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| | Form of 2021 Long-Term Cash Incentive Award Grant Agreement
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| | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of October 30, 2020, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto (incorporated by reference to Exhibit 10.1 of the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed November 5, 2020 (File No. 001-36876)). |
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| | Second Amendment to Executive Services Agreement between Babcock & Wilcox Enterprises, Inc. and BRPI Executive Consulting, LLC dated November 9, 2020 (incorporated by reference to Exhibit 10.1 of the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed November 10, 2020 (File No. 001-36876)).
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| | Third Amendment to Executive Employment Agreement between Babcock & Wilcox Enterprises, Inc. and Henry Bartoli dated November 5, 2020 (incorporated by reference to Exhibit 10.2 of the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed November 10, 2020 (File No. 001-36876)). |
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| | Consultant Agreement by and between The Babcock & Wilcox Company Inc. and Henry 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 November 10, 2020 (File No. 001-36876)).
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| | Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer. |
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| | Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer. |
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| | Section 1350 certification of Chief Executive Officer. |
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| | Section 1350 certification of Chief Financial Officer. |
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101.INS101.SCH | | XBRL Instance Document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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104 | | Cover Page Interactive Data File (embedded within the inline XBRL document) |
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.
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| | BABCOCK & WILCOX ENTERPRISES, INC. |
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November 10, 2021 | By: | BABCOCK & WILCOX ENTERPRISES, INC. |
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November 13, 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)
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