BABCOCK & WILCOX ENTERPRISES, INC.
10-Ks and 10-Qs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
x
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended
December 31, 2019
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission File No. 001-36876
BABCOCK & WILCOX ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
|
DELAWARE
|
|
47-2783641
|
|
(State or other Jurisdiction of Incorporation or Organization)
|
|
(I.R.S. Employer Identification No.)
|
|
1200 EAST MARKET STREET, SUITE 650
|
|
|
|
AKRON, OHIO
|
|
44305
|
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrant's Telephone Number, Including Area Code:
(330) 753-4511
Securities registered pursuant to Section 12(b) of the Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common Stock, $0.01 par value
|
BW
|
New York Stock Exchange
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
¨
No
x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes
x
No
¨
1
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
Non-accelerated filer
|
|
x
|
|
Smaller reporting company
|
|
x
|
|
Emerging growth company
|
¨
|
|||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extension transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
¨
No
x
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on the last business
day of the registrant's most recently completed second fiscal quarter (based on the closing sales price on the New York Stock
Exchange on June 28, 2019) was approximately
$45.2 million
.
The number of shares of the registrant's common stock outstanding at
March 24, 2020
was
46,407,120
.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for the 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS
|
|
PAGE
|
|
2
PART I
ITEM 1. Business
In this annual report on Form 10-K, unless the context otherwise indicates, "B&W," "we," "us," "our" or the "Company" mean Babcock & Wilcox Enterprises, Inc. and its consolidated subsidiaries.
We are a leading technology-based provider of advanced steam production from fossil and renewable sources for power generation and other industrial and municipal applications, as well as related environmental equipment and aftermarket parts and services. We specialize in technology and engineering for power generation and various other industries, including the procurement, erection and specialty manufacturing of related equipment, and services, including:
|
•
|
high-pressure equipment for energy conversion, such as boilers fueled by coal, oil, bitumen, natural gas, and renewables including municipal solid waste and biomass fuels;
|
|
•
|
environmental control systems for both power generation and industrial applications to incinerate, filter, capture, recover and/or purify air, liquid and vapor-phase effluents from a variety of power generation and specialty manufacturing processes;
|
|
•
|
aftermarket support for the global installed base of operating plants with a wide variety of products and technical services including replacement parts, retrofit and upgrade capabilities, field engineering, construction, inspection, operations and maintenance, condition assessment and other technical support;
|
|
•
|
custom-engineered ash handling equipment, systems and replacement parts;
|
|
•
|
custom-engineered, comprehensive dry and wet cooling solutions for steam applications
; and
|
|
•
|
engineered-to-order services, products and systems for energy conversion worldwide and related auxiliary equipment, such as burners, pulverizers, sootblowers and ash and material handling systems.
|
Our overall activity depends significantly on the capital expenditures and operations and maintenance expenditures of global electric power generating companies, other steam-using industries and industrial facilities with environmental compliance needs. Several factors influence these expenditures, including:
|
•
|
prices for electricity, along with the cost of production and distribution including the cost of fuel within the United States or internationally;
|
|
•
|
demand for electricity and other end products of steam-generating facilities;
|
|
•
|
requirements for environmental improvements;
|
|
•
|
expectation of future requirements to further limit or reduce greenhouse gas and other emissions in the United States and internationally;
|
|
•
|
environmental policies which include waste-to-energy or biomass as options to meet legislative requirements and clean energy portfolio standards;
|
|
•
|
level of capacity utilization at operating power plants and other industrial uses of steam production;
|
|
•
|
requirements for maintenance and upkeep at operating power plants to combat the accumulated effects of usage;
|
|
•
|
overall strength of the industrial industry; and
|
|
•
|
ability of electric power generating companies and other steam users to raise capital.
|
Customer demand is heavily affected by the variations in our customers' business cycles and by the overall economies and energy, environmental and noise abatement needs of the countries in which they operate.
Going Concern Considerations
Substantial doubt regarding our ability to continue as a going concern was initially raised in connection with the issuance of our 2018 Consolidated Financial Statements as we faced liquidity challenges from significant decreases in revenues and backlog as well as continued net operating losses, including losses recognized on our six European Vølund EPC loss contracts described in Note 5 to the Consolidated Financial Statements included in Part II, Item 8 of this annual report. These liquidity challenges caused us to be out of compliance with certain financial covenants contained in, and resulted in events of default under, the agreements governing certain of our debt at each of December 31, 2018 and March 31, 2019. As a result, we were forced to execute numerous amendments and waivers to waive these defaults and maintain compliance with these agreements.
3
During 2019 and the first quarter of 2020, management successfully implemented or is in the process of implementing plans to address our liquidity needs, improve our operational results and obtain additional financing primarily through the actions described in "Management's Discussion and Analysis - Liquidity and Capital Resources - Liquidity and Going Concern Considerations" included in Part II, Item 7 of this annual report, and Note 1, Note 14 and Note 15 to the Consolidated Financial Statements included in Part II, Item 8 of this annual report.
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally, with over 100 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. 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. Our headquarters and the headquarters of our Babcock & Wilcox segment in Akron, Ohio, the headquarters of our Vølund & Other Renewable segment in Denmark and the headquarters of our SPIG segment in Italy (among other locations where we and our customers, vendors and suppliers operate) are currently subject to lock-down or shelter-in-place orders under local ordinances, with employees continuing to work remotely if possible. While some of our employees can work remotely, many of our customers and projects require our employees to travel to customer and project worksites. Certain of our customers and significant projects are located in areas where travel restrictions have been imposed, and we have and continue working to evacuate employees from jurisdictions that are closing their borders. Customers have closed or reduced on-site activities, and timelines for completion on certain of our projects have also been extended into next year. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus have also caused significant volatility and, at times, illiquidity in global equity and credit markets. As a result of our current inability to reasonably estimate the full scope of these and future impacts of this outbreak on our ongoing operations, we continue to face uncertainty regarding our liquidity and ability to refinance our Amended Credit Agreement by May 11, 2020, which raises a substantial doubt about our ability to continue as a going concern.
Management believes it is taking all prudent actions to address the substantial doubt about our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face.
For additional information, see
Note 1
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
Business Segments
Our operations are assessed based on three reportable segments, Babcock & Wilcox, Vølund & Other Renewable and SPIG.
Babcock & Wilcox Segment
Our Babcock & Wilcox segment focuses on the supply of, and aftermarket services for, steam-generating, environmental, and auxiliary equipment for power generation, oil and gas, and other industrial applications, which includes a comprehensive mix of OEM and aftermarket products and services to support peak efficiency and availability of steam generating and associated environmental and auxiliary equipment, serving utility, oil and gas, and industrial customers globally.
Steam generating product and service offerings include engineering, procurement, specialty manufacturing, construction and commissioning of new and retrofit utility boilers and industrial boilers fired with coal and natural gas. Our boiler products include advanced supercritical boilers, subcritical boilers, fluidized bed boilers, chemical recovery boilers, industrial power boilers, package boilers, heat recovery steam generators and waste heat boilers.
Our environmental systems offerings include air pollution control products and related equipment for the treatment of nitrogen oxides, sulfur dioxide, fine particulate, mercury, acid gases and other hazardous air emissions. These include wet and dry flue gas desulfurization systems, catalytic and non-catalytic nitrogen oxides reduction systems, low nitrogen oxides burners and overfire air systems, fabric filter baghouses, wet and dry electrostatic precipitators, mercury control systems and dry sorbent injection for acid gas mitigation.
Our aftermarket products and services include replacement parts, field technical services, retrofit and upgrades, fuel switching and repowering contracts, construction and maintenance services, start-up and commissioning, training programs and plant operations and maintenance for our full complement of boiler, environmental and auxiliary equipment. Our
4
auxiliary equipment includes boiler cleaning equipment and material handling equipment. We provide aftermarket parts and services both for our own installed base as well as for competitors' equipment.
The segment also receives license fees and royalty payments through licensing agreements of our proprietary technologies.
While opportunities to increase revenues in the segment are limited, we are striving to grow margins by:
|
•
|
maintaining our strong service presence in support of our installed fleet of steam generation equipment and expanding support of others' OEM equipment;
|
|
•
|
selectively bidding for contracts in emerging international markets requiring state-of-the-art technology for fossil power generation and environmental systems;
|
|
•
|
growing sales of industrial steam generation products in the petrochemical and pulp & paper markets, such as heat recovery, environmental control systems, natural gas and oil-fired package boilers; and
|
|
•
|
reducing costs through a focus on operational efficiencies.
|
Vølund & Other Renewable Segment
Our Vølund & Other Renewable segment provides steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries, and plant operations and maintenance services for our full complement of systems and equipment. We deliver these products and services to a large base of customers in Europe and Asia through our extensive network of technical support personnel and global sourcing capabilities. Our customers consist of traditional, renewable and carbon neutral power utility companies that require steam generation and environmental control technologies to enable beneficial use of municipal waste and biomass. This segment's activity is dependent on the demand for electricity and reduced landfill use, and ultimately the capacity utilization and associated operations and maintenance expenditures of waste-to-energy power generating companies and other industries that use steam to generate energy.
In 2017, we redefined our approach to bidding on and executing renewable energy contracts. Under this model, we are focusing on engineering and supplying our core waste-to-energy and renewable energy technologies - steam generation, combustion grate, environmental equipment, material handling and cooling condensers - while partnering with other firms to execute the balance of plant and civil construction scope on contracts we pursue. We also elected to limit bidding on additional renewable energy contracts that involved our European resources as we worked through our then-existing contracts. We believe this market approach is better aligned with our core competencies and risk-profile as a supplier of engineered equipment and technologies and aftermarket services.
Globally, efforts to reduce the environmental impact of burning fossil fuels may create opportunities for us as existing generating capacity is replaced with cleaner technologies. We expect backlog growth in the future, primarily from renewable waste-to-energy contracts, as we continue to see numerous opportunities around the globe, although the rate of this growth is dependent on many external factors.
On 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. See further discussions in
Note 27
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
SPIG Segment
Our SPIG segment provides custom-engineered cooling systems, services and aftermarket products. SPIG’s product offerings include air-cooled (dry) cooling systems, mechanical draft wet cooling towers and natural draft wet cooling hyperbolic towers. SPIG also provides end-to-end aftermarket services, including spare parts, upgrades and revamping of existing installations and remote monitoring. SPIG's comprehensive dry and wet cooling solutions and aftermarket products and services are primarily provided to the power generation industry, including natural gas-fired and renewable energy power plants, and downstream oil and gas, petrochemical and other industrial end markets in Europe, the Middle East and the Americas. SPIG's activity is dependent primarily on global energy demand from utilities and other industrial plants, regulatory requirements, water scarcity and energy efficiency needs.
Beginning in 2017, we changed our strategy to improve profitability by focusing on more selective bidding in core geographies and products. We see opportunities for growth in revenues from core products and geographies in the SPIG segment relating to a variety of factors. Our new equipment customers make purchases as part of major capacity expansions,
5
to replace existing equipment, or in response to regulatory initiatives. Additionally, our significant installed base provides a consistent and recurring aftermarket stream of parts, retrofits and services. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2019; however, included in these few remaining contracts are two 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 twelve months of 2019 with the erection completed as of December 31, 2019. 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 twelve months of 2019 and is expected to be substantially complete in the second quarter of 2020.
Contracts
We execute our contracts through a variety of methods, including fixed-price, cost-plus, target price cost incentive, cost-reimbursable or some combination of these methods. Contracts are usually awarded through a competitive bid process. Factors that customers may consider include price, technical capabilities of equipment and personnel, plant or equipment availability, efficiency, safety record and reputation.
Fixed-price contracts are for a fixed selling price to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to us because they require us to predetermine both the quantities of work to be performed and the costs associated with executing the work.
We have contracts that extend beyond one year. Most of our long-term contracts have provisions for progress payments. We attempt to cover anticipated increases in labor, material and service costs of our long-term contracts either through an estimate of such changes, which is reflected in the original price, or through risk-sharing mechanisms, such as escalation or price adjustments for items such as labor and commodity prices. In the event of a contract deferral or cancellation without cause, we generally would be entitled to recover costs incurred, settlement expenses and profit on work completed prior to deferral or termination. Significant or numerous cancellations could adversely affect our business, financial condition, results of operations and cash flows.
From time to time, we partner with other companies to meet the needs of our customers, which can result in project-related joint venture entities or other contractual arrangements. While we carefully select our partners in these arrangements, they can subject us to risks that we may not be able to fully control and may include joint and several liability. An example of this includes BWL Energy Ltd., which was formed to complete the construction of a waste wood fired boiler contract in the United Kingdom (the fifth European Vølund loss contract described in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
). This joint venture combined our expertise in waste-to-energy power plant design, engineering, procurement and construction with our partner's civil construction capability to provide a full turnkey product to our customer. However, our partner in BWL Energy Ltd. filed for administration (similar to bankruptcy in the U.S.) in late February 2018, and we were required to assume our partner's scope of work.
We generally recognize our contract revenues and related costs over time using the cost-to-cost input method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Accordingly, we review contractual sales price and cost estimates regularly as the work progresses and reflect adjustments in profit proportionate to the percentage-of-completion in the period when we revise those estimates. To the extent that these adjustments result in a reduction or an elimination of previously reported profits with respect to a contract, we would recognize a charge against current earnings, which could be material.
See further description of risks related to our contracting in
Risks Relating to Our Industry and Our Business
in Part I, Item 1A of this annual report.
Our arrangements with customers frequently require us to provide letters of credit, bid and performance bonds or guarantees to secure bids or performance under contracts, which may involve providing cash collateral or other contract security that we may not be able to provide.
Other sales, such as parts and certain aftermarket service activities, are not in the form of long-term contracts, and we recognize revenues as goods are delivered and work is performed. See further discussion in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
6
Foreign Operations
Our operations in Denmark provide comprehensive services to companies in the waste-to-energy and biomass energy sector of the power generation market, primarily in Europe.
Our operations in Italy provide custom-engineered comprehensive wet and dry cooling solutions and aftermarket parts and services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets in Europe, the Middle East and the Americas. Our operations in Scotland and China primarily provide
boiler cleaning technologies and systems (such as sootblowers), primarily to Europe and China, respectively.
Our Canadian operations serve the Canadian industrial power, oil production and electric utility markets. We have manufacturing facilities in Mexico to serve global markets. We also own a manufacturing facility in China that produces tube bundles for our cooling solutions.
Historically, our joint ventures in China and India served the power generation needs of their local domestic and other utility markets, and both joint ventures participated as manufacturing partners on certain of our foreign contracts. In 2018, we sold our joint venture interests of Babcock & Wilcox Beijing Company, Ltd. ("BWBC") and Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES") located in China and India, respectively.
The functional currency of our foreign operating entities is not the United States dollar, and as a result, we are subject to exchange rate fluctuations that impact our financial position, results of operations and cash flows.
For additional information on the geographic distribution of our revenues, see
Note 4
to our
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
Customers
We provide our products and services to a diverse customer base that includes utilities and other power producers located around the world. We have no customers that individually accounted for more than 10% of our consolidated revenues for the year ended December 31, 2019.
We have one customer, Southern Company, which accounted for $138.1 million or 13.0% of our consolidated revenue for the year ended December 31, 2018. Refer to
Note 4
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
for additional information.
Competition
With over 150 years of experience, we have supplied highly engineered energy and environmental equipment in more than 90 countries. We have a competitive advantage in our experience and technical capability to reliably convert a wide range of fuels to steam. Our strong, installed base around the globe also yields competitive advantages, although our markets are highly competitive and price sensitive. We compete with a number of domestic and foreign companies specializing in power generation, environmental, and cooling systems and services. Each segment's primary competitors are summarized as follows:
|
Babcock & Wilcox segment
|
Vølund & Other Renewable segment
|
SPIG segment
|
|
GE
|
CNIM Group
|
Hamon
|
|
MH Power Systems
|
Hitachi Zosen
|
Enexio
|
|
Babcock Power
|
Martin
|
Seagull
|
|
Clyde Bergemann
|
Keppel Seghers
|
Paharpur
|
|
Doosan
|
Valmet
|
Evapco
|
|
Enerfab
|
Andritz
|
SPG Dry
|
Across each of our segments, we also compete with a variety of engineering and construction companies related to installation of steam generating systems and environmental control equipment; specialized industrial equipment; and other suppliers of replacement parts, repair and alteration services and other services required to retrofit and maintain existing steam generating systems. The primary bases of competition are price, technical capabilities, quality, timeliness of performance, breadth of products and services and willingness to accept contract risks.
7
Raw Materials and Suppliers
Our operations use raw materials such as carbon and alloy steels in various forms and components and accessories for assembly, which are available from numerous sources. We generally purchase these raw materials and components as needed for individual contracts. We do not depend on a single source of supply for any significant raw materials. Although shortages of some raw materials have existed from time to time, no serious shortage exists at the present time.
Employees
At December 31, 2019, we had approximately 2,400 employees worldwide. Of our hourly employees, approximately 550 are union-affiliated, covered by four union agreements related to active facilities in Mexico, the United States, the United Kingdom, and Canada. We successfully renegotiated one union agreement in 2019, are in the beginning stages of renegotiation of another union agreement and preparing to renegotiate a third agreement that expires in 2020. We consider our relationships with our employees and unions to be in good standing.
Patents and Licenses
We currently hold a large number of United States and foreign patents and have patent applications pending. We have acquired patents and technology licenses and granted technology licenses to others when we have considered it advantageous for us to do so. Although in the aggregate our patents and licenses are important to us, we do not regard any single patent or license or group of related patents or licenses as critical or essential to our business as a whole. In general, we depend on our technological capabilities and the application of know-how, rather than patents and licenses, in the conduct of our various businesses.
Research and Development Activities
Our research and development activities are related to improving our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our and our customers' expectations.
Research and development costs are expensed as incurred.
Permits and Licenses
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. The kinds of permits, licenses and certificates required in our operations depend upon a number of factors. We are not aware of any material noncompliance and believe our operations and certifications are currently in compliance with all relevant permits, licenses and certifications.
Environmental
We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows in any given year.
Information about our Executive Officers
For a listing of our executive officers, see Part III, Item 10 of this annual report, which information is incorporated herein by reference.
8
***** Cautionary Statement Concerning Forward-Looking Information *****
This annual 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 address matters that involve risks and uncertainties and include statements that reflect our current views with respect to our financial performance and future events with respect to our business and industry in general. 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. Differences between actual results and any future performance suggested in our forward-looking statements could result from a variety of factors, including the following: our ability to continue as a going concern; the risks of pandemics or other public health emergencies, including the continued spread and impact of, and the governmental and third party response to, the recent coronavirus outbreak; the impact of social distancing, shelter-in-place, border closings, travel restrictions, remote work requirements and similar governmental and private measures taken to combat the spread of the coronavirus; 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 refinance the credit agreement governing our revolving credit facility and term loans in accordance with its terms on or prior to May 11, 2020; 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 satisfy, or if required, obtain waivers of the requirements under the credit agreement governing our revolving credit facility and term loans; our ability to refinance our obligations under such credit agreement in a timely manner, if at all; our ability to obtain waivers of required pension contributions beginning with contributions for fiscal year 2019; the highly competitive nature of our businesses, and our ability to successfully compete with our current and future competitors; general economic and business conditions, including changes in interest rates and currency exchange rates; fluctuations and volatility in global financial markets, such as the recent substantial decline in oil prices; technological and regulatory developments in the energy industry and our ability to evolve with these trends; cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings; our ability to perform contracts on time and on budget, in accordance with the schedules and terms established by the applicable contracts with customers; failure by third-party subcontractors, partners or suppliers to perform their obligations on time and as specified; our ability to successfully resolve claims by vendors for goods and services provided and claims by customers for items under warranty; our ability to realize anticipated savings and operational benefits from our restructuring plans, and other cost-savings initiatives; our ability to successfully address productivity and schedule issues in our Vølund & Other Renewable segment, including the ability to complete our European EPC 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 SPIG and Vølund & Other Renewable segments; changes in our effective tax rate and tax positions, including the limitation on our ability to use our net operating loss carryforwards and other tax assets as a result of our recent ownership change under Section 382 of the Internal Revenue Code; 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; the loss of key personnel and the continued availability of qualified personnel; the timing and ability to obtain project related insurance recoveries against certain of our subcontractors and other counterparties; 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; and our ability to successfully consummate strategic alternatives for non-core assets, if we decide to pursue them. These factors also include the cautionary statements included in this report and the risk factors set forth under Part I, Item 1A of this annual report.
9
These factors are not necessarily all the factors that could affect us. We assume no obligation to revise or update any forward-looking statement included in this annual report for any reason, except as required by law.
Available Information
Our website address is
www.babcock.com
. We make available through the Investor section of this website under "Financial Information," free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (the "SEC"). In addition, the SEC maintains a website at
www.sec.gov
that contains reports, proxy and annual reports, and other information regarding issuers that file electronically with the SEC. We have also posted on our website our: Corporate Governance Principles; Code of Business Conduct; Code of Ethics for our Chief Executive Officer and Senior Financial Officers; Related Party Transactions Policy; Management, Board Members and Independent Director Contact Information; Amended and Restated By-laws; charters for the Audit & Finance, Governance, and Compensation
Committees of our Board; and Modern Slavery Transparency Statement. We are not including the information contained in our website as part of or incorporating it by reference into this annual report.
Item 1A. Risk Factors
You should carefully consider each of the following risks and all of the other information contained in this annual report. If any of these risks develop into actual or expected events, our business, financial condition, results of operations or cash flows could be materially and adversely affected, and, as a result, the trading price of our common stock could decline.
Risks Relating to Our Industry and Our Business
Our business, financial condition and results of operations, and those of our customers, suppliers and vendors, are being adversely affected by the recent global COVID-19 outbreak and may be adversely affected by other similar outbreaks.
If a pandemic or outbreak of an infectious disease occurs, our business, financial condition and results of operations may be adversely affected. For example, in December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. While initially the outbreak was largely concentrated in the Hubei Province of China, it has now spread globally, with over 100 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. In March 2020, the World Health Organization declared the COVID-19 outbreak to be a pandemic. To try to contain the spread of this virus, governments around the world have implemented and continue to implement numerous preventative measures, such as travel bans, border closings, quarantines, shelter in place orders, and shutdowns, while individuals and companies have implemented store closures, social distancing and remote-working initiatives. These measures have impacted and may further impact our workforce and operations, the operations of our customers, and those of our respective vendors and suppliers.
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally, with over 100 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. 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. Our headquarters and the headquarters of our Babcock & Wilcox segment in Akron, Ohio, the headquarters of our Vølund & Other Renewable segment in Denmark and the headquarters of our SPIG segment in Italy (among other locations where we and our customers, vendors and suppliers operate) are currently subject to lock-down or shelter-in-place orders under local ordinances, with employees continuing to work remotely if possible. While some of our employees can work remotely, many of our customers and projects require our employees to travel to customer and project worksites. Certain of our customers and significant projects are located in areas where travel restrictions have been imposed, and we have and continue working to evacuate employees from jurisdictions that are closing their borders. Customers have closed or reduced on-site activities, and timelines for completion on certain of our projects have also been extended into next year. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus have also caused significant volatility and, at times, illiquidity in global equity and credit markets. As a result of our current inability to reasonably estimate the full scope of these and future impacts of this outbreak on our ongoing operations, we continue to face uncertainty regarding our liquidity and ability to refinance our Amended Credit Agreement by May 11, 2020, which raises a substantial doubt about our ability to continue as a going concern.
10
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. These effects could include, among others, delays in the construction of new projects or the delay of maintenance on existing products provided to our customers, as well as disruptions or restrictions on our employees’ ability to travel to necessary worksites, including as a result of the temporary closure of our facilities or the facilities of our customers, suppliers, vendors or projects. Further, our suppliers and vendors may be adversely impacted, which may impair their ability to satisfy their contractual obligations to us and our customers. 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, could cause continued interest rate volatility and movements that could make obtaining financing or refinancing our debt obligations more challenging or more expensive, could continue to limit the ability of our personnel to travel to service the needs of our customers as well as limiting the ability of our suppliers and vendors to travel to service our business, and could result in any threatened areas to be subject to quarantine and shelter-in-place orders among other restrictions. 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.
We must refinance our Amended Credit Agreement on or prior to May 11, 2020 in order to continue operation as a going concern.
On January 31, 2020, we entered into Amendment No. 20 to our Amended Credit Agreement. Pursuant to Amendment No. 20, we and our lenders under our Amended Credit Agreement agreed on a term sheet pursuant to which (1) we will undertake a refinancing transaction to raise at least $200 million of new debt or equity financing with proceeds to repay borrowings and reduce lender commitments under our U.S. Revolving Credit Facility on or prior to May 11, 2020 and (2) we and the lenders under our Amended Credit Agreement will amend and restate our Amended Credit Agreement on the terms specified in Amendment No. 20. In connection with our entry into Amendment No. 20, we also entered into a letter agreement with B. Riley Financial, Inc. (together with each of its affiliates, including B. Riley FBR, Inc. and BRC Partners Opportunity Fund, LP, "B. Riley"), pursuant to which B. Riley agreed to fund any shortfall in the $200 million refinancing transaction to the extent such amounts have not been raised from third parties. Amendment No. 20 adds a new event of default with respect to any amendment, supplement, waiver or modification without the written consent of the administrative agent under the Amended Credit Agreement of, or certain breaches and defaults and failures to perform by B. Riley under, this backstop letter agreement. The obligations of our lenders to amend and restate our Amended Credit Agreement on the terms agreed as part of Amendment No. 20 are subject to various conditions, including the completion of the refinancing on the terms contemplated by Amendment No. 20, a limitation on the aggregate amount of our indebtedness following completion of the refinancing and the accuracy of our representations and warranties made under the Amended Credit Agreement as it will be amended and restated. These representations and warranties will be substantially consistent with those under the Amended Credit Agreement, including a representation regarding the absence, other than as a result of our European Vølund EPC loss contracts that are the subject of settlement agreements and our entry into and performance of those settlement agreements, of certain material adverse changes with respect to our consolidated operations, business, assets, properties, liabilities or condition (financial or otherwise). While we have entered into an agreement with B. Riley to backstop this refinancing, our ability to raise new capital on or prior to May 11, 2020 from third parties as part of the refinancing, if at all, is subject to a variety of risks, including the risks discussed throughout this annual report and risks impacting the global economic, financial and credit markets generally, such as the recent global outbreak of a novel coronavirus, COVID-19.
As a result of the disruption to the U.S. and world-wide economic, financial and credit markets caused by the recent outbreak of COVID-19, and the related measures implemented by governments, individuals and private companies to contain the further spread of the virus, we continue to face liquidity challenges and may be unable to refinance our Amended Credit Agreement on the terms required by Amendment No. 20 on or prior to May 11, 2020 or at all. If we are unable to complete the contemplated refinancing on or prior to May 11, 2020 on the terms specified by Amendment No. 20 for any reason, or if B. Riley were to breach, default or fail to perform its obligation under its backstop agreement commitment letter with us, we
11
will experience an event of default under our Amended Credit Agreement and be forced to seek a waiver thereunder. Even if we obtain additional financing on or prior to May 11, 2020, there can be no assurance that our plan to improve our financial position will be successful or that we will be able to obtain additional capital in the future on commercially reasonable terms or at all. If any of these events were to occur, it may materially and adversely affect our reputation, liquidity, business, financial condition or results of operations and may result in our inability to continue operating as a going concern and it may be necessary for us to reorganize our company in its entirety, including through bankruptcy proceedings.
Our Amended Credit Agreement, which governs our U.S. Revolving Credit Facility and our Last Out Term Loans, restricts our operations.
The terms of our Amended Credit Agreement impose various restrictions and covenants on us that could have adverse consequences, including by limiting our:
|
•
|
flexibility in planning for, or reacting to, changes in our business or economic, regulatory and industry conditions;
|
|
•
|
ability to invest in joint ventures or acquire other companies;
|
|
•
|
ability to sell assets;
|
|
•
|
ability to pay dividends to our shareholders;
|
|
•
|
ability to repurchase shares of our common stock;
|
|
•
|
ability to borrow additional funds; and
|
|
•
|
ability to issue additional letters of credit.
|
In addition, our Amended Credit Agreement requires us to satisfy and maintain specified financial ratios. The covenants of our Amended Credit Agreement also limit the amount of additional contract charges that we are able to incur on specific European Vølund contracts. In the past, we have been forced to request amendments to these covenants of our Amended Credit Agreement, among others, and no assurance can be provided that we will be able to perform under the covenants of our Amended Credit Agreement in the future.
Our ability to comply with the covenants, restrictions and specified financial ratios contained in our Amended Credit Agreement may be affected by events beyond our control, including prevailing macroeconomic, financial and industry conditions, as well as the other risks discussed in this annual report. If market or other macroeconomic conditions deteriorate, or if we experience any of the other risks discussed in this annual report, our ability to comply with these covenants may be impaired. A breach of any of the covenants in our Amended Credit Agreement could result in an event of default under our Amended Credit Agreement, which would result in our inability to access our U.S. Revolving Credit Facility for additional borrowings and letters of credit while any default exists. Upon the occurrence of such an event of default, all amounts outstanding under our U.S. Revolving Credit Facility and our Last Out Term Loans could also be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. If indebtedness under our Amended Credit Agreement is accelerated, there can be no assurance that we will have sufficient assets to repay the indebtedness. The operating and financial restrictions and covenants in our Amended Credit Agreement and any future financing agreements may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Maintaining adequate bonding and letter of credit capacity is necessary for us to successfully complete, bid on and win various contracts.
In line with industry practice, we are often required to post standby letters of credit and surety bonds to support contractual obligations to customers as well as other obligations. These letters of credit and bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. If a letter of credit or bond is required for a particular contract and we are unable to obtain it due to insufficient liquidity or other reasons, we will not be able to pursue that contract, or we could default on contracts that are underway or that have been awarded. We utilize bonding facilities, but, as is typically the case, the issuance of bonds under each of those facilities is at the surety's sole discretion. Moreover, due to events that affect the insurance and bonding and credit markets generally, bonding and letters of credit may be more difficult to obtain in the future or may only be available at significant additional cost. There can be no assurance that letters of credit or bonds from sources outside of our contractually committed U.S. Revolving Credit Facility will continue to be available to us on reasonable terms, and the use of our U.S. Revolving Credit Facility to obtain letters of credit or bonds may reduce the borrowing capacity under our U.S. Revolving Credit Facility. In addition, the inclusion of a "going concern" explanatory paragraph in the auditor's report covering our audited Consolidated Financial Statements contained in this annual report may
12
prevent us from obtaining bonding and letters of credit from sources outside of our contractually committed Amended Credit Agreement on reasonable terms, or at all. Our inability to obtain or maintain adequate letters of credit and bonding and, as a result, to bid on new work could have a material adverse effect on our business, financial condition and results of operations. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of
December 31, 2019
and December 31, 2018 was
$88.5 million
and
$175.9 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 from sources outside our U.S. Revolving Credit Facility was
$31.8 million
as of
December 31, 2019
. Of the letters of credit issued under the U.S. Revolving Credit Facility as of
December 31, 2019
,
$35.2 million
are subject to foreign currency revaluation. Amendment No. 20 to our Amended Credit Agreement also provides incremental Tranche A-5 last out term loans that are expected to be extended prior to maturity of the term loan facility in in the event certain customer letters of credit are drawn.
We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of
December 31, 2019
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$221.3 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit facility backstopping surety bonds from sources outside our U.S. Revolving Credit Facility was
$22.7 million
as of
December 31, 2019
.
Our customers, suppliers, vendors, employees and other third parties with whom we do business may react negatively to the substantial doubt about our ability to continue as a going concern.
Our customers, suppliers, vendors, employees and other third parties with whom we do business may react negatively to the substantial doubt about our ability to continue as a going concern. The inclusion of a "going concern" explanatory paragraph in the auditor's report covering our audited Consolidated Financial Statements contained in this annual report may only heighten these concerns about our financial viability and may discourage existing or new customers, suppliers, vendors and other third parties from entering into business relationships with us on terms that we find acceptable or at all, including by demanding the posting of additional standby letters of credit or surety bonds before engaging in business with us. We may also have difficulty in retaining and attracting employees as a result of these concerns. As a result, our management team may need to address these concerns with these various constituencies, which may divert their attention from other important business activities. These adverse reactions by each of these groups of constituencies may further impair our financial condition in a re-enforcing cycle. All of these risks could materially and adversely affect our ability to continue operating as a going concern and we could be required to reorganize our company in its entirety, including through bankruptcy proceedings.
Our evaluation of strategic alternatives for certain businesses and non-core assets may not be successful.
We continue to evaluate strategic alternatives for our business lines and assets to improve the company's capital structure. There can be no assurance that these on-going strategic evaluations will result in the identification or consummation of any transaction. We may incur substantial expenses associated with identifying and evaluating potential strategic alternatives. The process of exploring strategic alternatives may be time consuming and disruptive to our business operations, and if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We cannot assure that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will prove to be beneficial to shareholders and that the process of identifying, evaluating and consummating any potential transaction or other strategic alternative will not adversely impact our business, financial condition or results of operations. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third parties in our business, the availability of financing to potential buyers on reasonable terms, and the consent of our lenders.
In addition, while this strategic evaluation continues, we are exposed to risks and uncertainties, including potential difficulties in retaining and attracting key employees, distraction of our management from other important business activities, and potential difficulties in establishing and maintaining relationships with customers, suppliers, lenders, sureties and other third parties, all of which could harm our business.
Our total assets include goodwill and other indefinite-lived intangible assets. If we determine these have become impaired, our business, financial condition and results of operations could be materially adversely affected.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain trademarks and tradenames. At December 31, 2019, goodwill and other indefinite-
13
lived intangible assets totaled
$72.5 million
. We review goodwill and other intangible assets at least annually for impairment and any excess in carrying value over the estimated fair value is charged to the statement of comprehensive income. Future impairment may result from, among other things, deterioration in the performance of an acquired business or product line, adverse market conditions and changes in the competitive landscape, adverse changes in applicable laws or regulations, including changes that restrict the activities of an acquired business or product line, and a variety of other circumstances. If the value of our business were 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. A reduction in net income resulting from the write-down or impairment of indefinite-lived intangible assets could also have a material adverse effect on our business, financial condition and results of operations.
We are subject to risks associated with contractual pricing in our industry, including the risk that, if our actual costs exceed the costs we estimate on our fixed-price contracts, our profitability will decline, and we may suffer losses.
We are engaged in a highly competitive industry, and we have priced a number of our contracts on a fixed-price basis. Our actual costs could exceed our projections. We attempt to cover the increased costs of anticipated changes in labor, material and service costs of long-term contracts, either through estimates of cost increases, which are reflected in the original contract price, or through price escalation clauses. Despite these attempts, the cost and gross profit we realize on a fixed-price contract could vary materially from the estimated amounts because of supplier, contractor and subcontractor performance, changes in job conditions, variations in labor and equipment productivity and increases in the cost of labor and raw materials, particularly steel, over the term of the contract. These variations and the risks generally inherent in our industry may result in actual revenues or costs being different from those we originally estimated and may result in reduced profitability or losses on contracts. Some of these risks include:
|
•
|
difficulties encountered on our large-scale contracts related to the procurement of materials or due to schedule disruptions, equipment performance failures, engineering and design complexity, unforeseen site conditions, rejection clauses in customer contracts or other factors that may result in additional costs to us, reductions in revenue, claims or disputes;
|
|
•
|
our inability to obtain compensation for additional work we perform or expenses we incur as a result of our customers or subcontractors providing deficient design or engineering information or equipment or materials;
|
|
•
|
requirements to pay liquidated damages upon our failure to meet schedule or performance requirements of our contracts; and
|
|
•
|
difficulties in engaging third-party subcontractors, equipment manufacturers or materials suppliers or failures by third-party subcontractors, equipment manufacturers or materials suppliers to perform could result in contract delays and cause us to incur additional costs.
|
We have recently experienced these risks with several large loss contracts in our Volund & Other Renewable and SPIG segments, which resulted in significant losses for our operations, impaired our liquidity position and had previously resulted in substantial doubt regarding whether we would be able to continue to operate as a going concern. If we were to experience these risks again in the future, our business, results of operations, financial condition and liquidity may be materially and adversely affected.
Our contractual performance may be affected by third parties' and subcontractors' failure to meet schedule, quality and other requirements on our contracts, which could increase our costs, scope, technical difficulty or in extreme cases, our ability to meet contractual requirements.
We conduct significant portions of our business by engaging in long-term contracts related to highly complex, customized equipment or facilities for electrical generation, industrial processes, and/or environmental compliance. The complexity of these contracts generally necessitates the participation of others, including third-party suppliers, subcontractors, equipment or part manufacturers, partner companies, other companies with whom we do not have contractual relationships, customers, financing organizations, regulators and others. Our reliance on these parties subjects us to the risk of customer dissatisfaction with the quality or performance of the products or services we sell due to supplier or subcontractor failure. Third-party supplier and subcontractor business interruptions could include but are not limited to, work stoppages, union negotiations, other labor disputes and payment disputes. Current or future economic conditions could also impact the ability of suppliers and subcontractors to access credit and, thus, impair their ability to provide us quality products, materials, or services in a timely manner, or at all.
14
While we endeavor to limit our liability to matters within our control, not all scenarios can be foreseen, and we may become subject to the risk of others’ performance that may or may not be within our control or influence. Delays, changes or failures of others, including third-party suppliers and subcontractors, could subject us to additional costs, delays, technical specification changes, contractual penalties or other matters for which we may be unable to obtain compensation, or compensation may not be sufficient. In extreme cases, the direct or indirect effects of such matters may cause us to be unable to fulfill our contractual requirements.
For example, we have had contracts to construct several renewable energy plants in the United Kingdom. These contracts have suffered delays, additional costs and contractual penalties. The complexity of these contracts required us to subcontract matters, such as structural engineering, to other companies that have the appropriate technical expertise. In September 2017, a structural steel issue was discovered at one of these plants, which management believes is the result of an engineering error by a subcontractor. The failure resulted in work being stopped at the plant with the failure and at two other plants under construction where failure had not occurred, but had used a similar design by the same subcontractor. In each case, additional engineering analysis and remediation was required, resulting in additional costs, schedule delays and contractual penalties, all of which were significantly greater at the plant where failure occurred. Through December 31, 2019, approximately
$36 million
of additional costs had been recorded related to the effects of this engineering error across the three plants. In each case, the engineering assessment, remediation and safety plans required approval of the subcontractor, customer, our contract partner and the respective analysis of independent technical experts from each. Any insurance coverage may be insufficient, or the timing of any insurance proceeds may not meet our liquidity requirements. In the case of the fifth European Vølund loss contract, where structural failure occurred, the process to agree on the appropriate structural remediation and plan to implement the remediation was lengthy and resulted in a more significant delay.
If our co-venturers fail to perform their contractual obligations on a contract or if we fail to coordinate effectively with our co-venturers, we could be exposed to legal liability, loss of reputation, reduced profit, or liquidity challenges.
We often perform contracts jointly with third parties or execute contracts with partners through joint ventures or other contractual arrangements. For example, we enter into contracting consortia and other contractual arrangements to bid for and perform jointly on large contracts. We may not be able to control the actions of our partners in these arrangements, and influence over the actions of our partners and the contractual outcomes may be limited. Success on these joint contracts depends in part on whether our co-venturers fulfill their contractual obligations satisfactorily. If any one or more of these third parties fail to perform their contractual obligations satisfactorily, we may be required to make additional investments and provide added services in order to compensate for that failure. If we are unable to adequately address any performance issues when and if required, customers may exercise their rights to terminate a joint contract, exposing us to legal liability, damage to our reputation, reduced profit or liquidity challenges.
For example, our joint venture partner for a renewable energy plant in the United Kingdom entered into administration (similar to filing for bankruptcy in the U.S.) in late February 2018. Accordingly, we were required to take over the civil scope of the renewable energy plant project, which resulted in significant delays and materially increased our costs on the project. The same joint venture partner is party to another previously awarded bid, but where notice to proceed has not been provided.
Our collaborative arrangements also involve risks that participating parties may disagree on business decisions and strategies. These disagreements could result in delays, additional costs and risks of litigation. In these arrangements, we sometimes have joint and several liabilities with our partners, and we cannot be certain that our partners will be able to satisfy any potential liability that could arise. Our inability to successfully maintain existing collaborative relationships or enter into new collaborative arrangements could have a material adverse effect on our results of operations.
We are exposed to credit risk and may incur losses as a result of such exposure.
We conduct our business by obtaining orders that generate cash flows in the form of advances, contract progress payments and final balances in accordance with the underlying contractual terms. We are thus exposed to potential losses resulting from contractual counterparties' failure to meet their obligations. As a result, the failure by customers to meet their payment obligations, or a mere delay in making those payments, could reduce our liquidity and increase the need to resort to other sources of financing, with possible adverse effects on our business, financial condition, results of operations and cash flows. In some cases, we have joint and several liability with consortium partners in our projects, such as the renewable energy plants in the United Kingdom, and we may be subject to additional losses if our partners are unable to meet their contractual obligations. For example, in the case of the fifth European Vølund loss contract, our civil construction partner for this project
15
entered into administration in February 2018 (similar to filing for bankruptcy in the U.S.), and we were required to assume their scope of work.
In addition, the deterioration of macroeconomic conditions or negative trends in the global credit markets could have a negative impact on relationships with customers and our ability to collect on trade receivables, with possible adverse effects on our business, financial condition, results of operations and cash flows.
Our backlog is subject to unexpected adjustments and cancellations and may not be a reliable indicator of future revenues or earnings.
There can be no assurance that the revenues projected in our backlog will be realized or, if realized, will result in profits. Because of contract cancellations or changes in scope and schedule, we cannot predict with certainty when or if backlog will be performed. In addition, even where a contract proceeds as scheduled, it is possible that contracted parties may default and fail to pay amounts owed to us or poor contract performance could increase the cost associated with a contract. Delays, suspensions, cancellations, payment defaults, scope changes and poor contract execution could materially reduce or eliminate the revenues and profits that we actually realize from contracts in backlog.
Reductions in our backlog due to cancellation or modification by a customer or for other reasons may adversely affect, potentially to a material extent, the revenues and earnings we actually receive from contracts included in our backlog. Many of the contracts in our backlog provide for cancellation fees in the event customers cancel contracts. These cancellation fees usually provide for reimbursement of our out-of-pocket costs, revenues for work performed prior to cancellation and a varying percentage of the profits we would have realized had the contract been completed. However, we typically have no contractual right upon cancellation to the total revenues reflected in our backlog. Contracts may remain in our backlog for extended periods of time. If we experience significant contract terminations, suspensions or scope adjustments to contracts reflected in our backlog, our financial condition, results of operations and cash flows may be adversely impacted.
We derive substantial revenues from electric power generating companies and other steam-using industries, including coal-fired power plants in particular. Demand for our products and services depending on spending in these historically cyclical industries. Additionally, recent legislative and regulatory developments relating to clean air legislation are affecting industry plans for spending on coal-fired power plants within the United States and elsewhere.
The demand for power generation products and services depends primarily on the spending of electric power generating companies and other steam-using industries and expenditures by original equipment manufacturers. These expenditures are influenced by such factors as:
|
•
|
prices for electricity, along with the cost of production and distribution;
|
|
•
|
prices for natural resources such as coal and natural gas;
|
|
•
|
demand for electricity and other end products of steam-generating facilities;
|
|
•
|
availability of other sources of electricity or other end products;
|
|
•
|
requirements of environmental legislation and regulations, including potential requirements applicable to carbon dioxide emissions;
|
|
•
|
investments in renewable energy sources and technology;
|
|
•
|
impact of potential regional, state, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future;
|
|
•
|
level of capacity utilization and associated operations and maintenance expenditures of power generating companies and other steam-using facilities;
|
|
•
|
requirements for maintenance and upkeep at operating power plants and other steam-using facilities to combat the accumulated effects of wear and tear;
|
|
•
|
ability of electric generating companies and other steam users to raise capital; and
|
|
•
|
relative prices of fuels used in boilers, compared to prices for fuels used in gas turbines and other alternative forms of generation.
|
We estimate that
45%
and
48%
of our consolidated revenues in 2019 and 2018, respectively, was related to coal-fired power plants. The availability of natural gas in great supply has caused, in part, low prices for natural gas in the United States, which has led to more demand for natural gas relative to energy derived from coal. A material decline in spending by electric power generating companies and other steam-using industries on coal-fired power plants over a sustained period of time could materially and adversely affect the demand for our power generation products and services and, therefore, our financial condition, results of operations and cash flows. Coal-fired power plants have been scrutinized by environmental groups and
16
government regulators over the emissions of potentially harmful pollutants. This scrutiny and other economic incentives including tax advantages, have promoted the growth of nuclear, wind and solar power, among others, and a decline in cost of renewable power plant components and power storage. The recent economic environment and uncertainty concerning new environmental legislation or replacement rules or regulations in the United States and elsewhere has caused many of our major customers, principally electric utilities, to delay making substantial expenditures for new plants, and delay upgrades to existing power plants.
Demand for our products and services is vulnerable to macroeconomic downturns and industry conditions.
Demand for our products and services has been, and we expect that demand will continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including macroeconomic and industry conditions. These factors include, but are not limited to, the cyclical nature of the industries we serve, inflation, geopolitical issues, the availability and cost of credit, volatile oil and natural gas prices, low business and consumer confidence, high unemployment and energy conservation measures.
Unfavorable macroeconomic conditions may lead customers to delay, curtail or cancel proposed or existing contracts, which may decrease the overall demand for our products and services and adversely affect our results of operations.
In addition, our customers may find it more difficult to raise capital in the future due to limitations on the availability of credit, increases in interest rates and other factors affecting the federal, municipal and corporate credit markets. Also, our customers may demand more favorable pricing terms and find it increasingly difficult to timely pay invoices for our products and services, which would impact our future cash flows and liquidity. Inflation or significant changes in interest rates could reduce the demand for our products and services. Any inability to timely collect our invoices may lead to an increase in our borrowing requirements, our accounts receivable and potentially to increased write-offs of uncollectible invoices. If the economy weakens, or customer spending declines, then our backlog, revenues, net income and overall financial condition could deteriorate.
Our reported financial results may be adversely affected by new accounting pronouncements or changes in existing accounting standards and practices, which could result in volatility in our results of operations.
We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation or changes by the FASB and the SEC. New accounting pronouncements and varying interpretations of accounting standards and practices have occurred in the past and are expected to occur in the future. New accounting pronouncements or a change in the interpretation of existing accounting standards or practices may have a significant effect on our reported financial results and may even affect our reporting of transactions completed before the change is announced or effective.
Any difficulties in adopting or implementing any new accounting standard could result in our failure to meet our financial reporting obligations, which could result in regulatory discipline and harm investors’ confidence in us. Finally, if we were to change our critical accounting estimates, our operating results could be significantly affected.
We could be subject to changes in tax rates or tax law, adoption of new regulations, changing interpretations of existing law or exposure to additional tax liabilities in excess of accrued amounts that could adversely affect our financial position.
We are subject to income taxes in the United States and numerous foreign jurisdictions. A change in tax laws, treaties or regulations, or in their interpretation, in any country in which we operate could result in a higher tax rate on our earnings, which could have a material impact on our earnings and cash flows from operations. Tax reform legislation enacted in December of 2017 has made substantial changes to United States tax law, including a reduction in the corporate tax rate, a limitation on deductibility of interest expense, a limitation on the use of net operating losses to offset future taxable income, the allowance of immediate expensing of capital expenditures and the transition of U.S. international taxation from a worldwide tax system to a more generally territorial system, and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections and will be subject to interpretations and implementing regulations by the Treasury and Internal Revenue Service, any of which could mitigate or increase certain adverse effects of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation. Generally, future changes in applicable U.S. or foreign tax laws and regulations, or their interpretation and application could have an adverse effect on our business, financial conditions and results of operations.
17
Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain, and we are regularly subject to audit by tax authorities. Although we believe that our tax estimates and tax positions are reasonable, they could be materially affected by many factors including the final outcome of tax audits and related litigation, the introduction of new tax accounting standards, legislation, regulations and related interpretations, our global mix of earnings, the ability to realize deferred tax assets and changes in uncertain tax positions. A significant increase in our tax rate could have a material adverse effect on our profitability and liquidity.
Our ability to use net operating losses ("NOLs") and certain tax credits to reduce future tax payments could be further limited if we experience an additional "ownership change".
Some or all of the Company's deferred tax assets, consisting primarily of NOLs and interest carryforwards that are not currently deductible for tax purposes, could expire unused if we are unable to generate sufficient taxable income in the future to take advantage of them or if we enter into transactions that limit our right to use them, which includes transactions that result in an "ownership change" under Section 382 of the Code.
Sections 382 and 383 of the Code limits for U.S. federal income tax purposes, the annual use of NOL carryforwards (including previously disallowed interest carryforwards) and tax credit carryforwards, respectively, following an ownership change. Under Section 382 of the Code, a company has undergone an ownership change if shareholders owning at least 5% of the company have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, the Company determined that a Section 382 ownership change occurred on July 23, 2019 as a result of the Equitization Transactions described in Note 19. As a result of this change in ownership, the Company estimated that the future utilization of our federal NOLs (and certain credits and previously disallowed interest deductions) will become limited to approximately $1.2 million annually ($0.3 million tax effected). The Company is currently in the process of refining and finalizing these calculations. The Company maintains a full valuation allowance on its net deferred tax assets including the deferred tax assets associated with the federal NOLs, credits and disallowed interest carryforwards.
Although the treatment of net operating loss carryforwards arising in tax years beginning on or before December 31, 2017 has generally not changed under the tax reform legislation enacted in 2017, net operating loss carryforwards arising in tax years beginning after December 31, 2017 may be used to offset only 80% of taxable income. In addition, net operating losses arising in tax years ending after December 31, 2017 may be carried forward indefinitely, as opposed to the 20-year carryforward under prior law.
The Internal Revenue Service ("IRS") could challenge the amount, timing and/or use of our NOL carryforwards.
The amount of our NOL carryforwards has not been audited or otherwise validated by the IRS. Among other things, the IRS could challenge whether a current or prior ownership change occurred, as well as the amount, the timing and/or our use of our NOLs. Any such challenge, if successful, could significantly limit our ability to utilize a portion or all of our NOL carryforwards. In light of the inherent uncertainty involved in calculating whether an ownership change has occurred (both because of the complexity of applying Section 382 of the Code and because of limitations on a publicly-traded company's knowledge as to the ownership of, and transactions in, its securities), the calculation of the amount of our utilizable NOL carryforwards could be changed as a result of a successful challenge by the IRS or as a result of new information about the ownership of, and transactions in, our securities.
A disruption in, or failure of our information technology systems, including those related to cybersecurity, could adversely affect our business operations and financial performance.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic sensitive and confidential information, to manage and support a variety of business processes and activities and to comply with regulatory, legal and tax requirements. While we maintain some of our critical information technology systems, we are also dependent on third parties to provide important information technology services relating to, among other things, human resources, electronic communications and certain finance functions.
We face various threats to our information technology networks and systems, including cyber threats, threats to the physical security of our facilities and infrastructure from natural or man-made incidents or disasters, and threats from terrorist acts, as well as the potential for business disruptions associated with these threats. We have been, and will likely continue to be,
18
subject to cyber-based attacks and other attempts to threaten our information technology systems and the software we sell. A cyber-based attack could include attempts to gain unauthorized access to our proprietary information and attacks from malicious third parties using sophisticated, targeted methods to circumvent firewalls, encryption and other security defenses, including hacking, fraud, phishing scams or other forms of deception. Although we utilize a combination of tailored and industry standard security measures and technology to monitor and mitigate these threats, we cannot guarantee that these measures and technology will be sufficient to prevent current and future threats to our information technology networks and systems from materializing. Furthermore, we may have little or no oversight with respect to security measures employed by third-party service providers, which may ultimately prove to be ineffective at countering threats.
If these systems are damaged, intruded upon, attacked, shutdown or cease to function properly, whether by planned upgrades, force majeure, telecommunication failures, hardware or software beak-ins or viruses, or other cybersecurity incidents and our business continuity plans do not resolve the issues in a timely manner, the services we provide to customers, the value of our investment in research and development efforts and other intellectual property, our product sales, our ability to comply with regulations related to information contained on our information technology networks and systems, our financial condition, results of operations and stock price may be materially and adversely affected, and we could experience delays in reporting our financial results. In addition, there is a risk of business interruption, litigation with third parties, reputational damage from leakage of confidential information or the software we sell being compromised, and increased cybersecurity protection and remediation costs due to the increasing sophistication and proliferation of threats. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means.
To address risks to our information technology systems, we continue to invest in our systems and training of company personnel. As required, we replace and/or upgrade financial, human resources and other information technology systems. These activities subject us to inherent costs and risks associated with replacing and updating these systems, including potential disruption of our internal control structure, substantial capital expenditures, demands on management time and other risks of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our systems implementations and upgrades may not result in productivity improvements at the levels anticipated, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations. Such disruption and any other information technology system disruptions, and our ability to mitigate those disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our financial condition, results of operations and stock price.
Privacy and information security laws are complex, and if we fail to comply with applicable laws, regulations and standards, or if we fail to properly maintain the integrity of our data, protect our proprietary rights to our systems or defend against cybersecurity attacks, we may be subject to government or private actions due to privacy and security breaches, any of which could have a material adverse effect on our business, financial condition and results of operations or materially harm our reputation.
We are subject to a variety of laws and regulations in the United States and other countries that involve matters central to our business, including user privacy, security, rights of publicity, data protection, content, intellectual property, distribution, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation, and online-payment services. These laws can be particularly restrictive in countries outside the United States. Both in the United States and abroad, these laws and regulations constantly evolve and remain subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate. Because we store, process, and use data, some of which contains personal information, we are subject to complex and evolving federal, state, and foreign laws and regulations regarding privacy, data protection, content, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes to our business practices, increased cost of operations, and declines in user growth, retention, or engagement, any of which could seriously harm our business.
Several proposals have been adopted or are currently pending before federal, state, and foreign legislative and regulatory bodies that could significantly affect our business. The General Data Protection Regulation, or GDPR, in the European Union, which went into effect on May 25, 2018, placed new data protection obligations and restrictions on organizations and may require us to further change our policies and procedures. If we are not compliant with GDPR requirements, we may be subject to significant fines and our business may be seriously harmed. In addition, the California Consumer Privacy Act goes into effect in January 2020, with a lookback to January 2019, and places additional requirements on the handling of personal data.
19
We rely on intellectual property law and confidentiality agreements to protect our intellectual property. We also rely on intellectual property we license from third parties. Our failure to protect our intellectual property rights, or our inability to obtain or renew licenses to use intellectual property of third parties, could adversely affect our business.
Our success depends, in part, on our ability to protect our proprietary information and other intellectual property. Our intellectual property could be stolen, challenged, invalidated, circumvented or rendered unenforceable. In addition, effective intellectual property protection may be limited or unavailable in some foreign countries where we operate.
Our failure to protect our intellectual property rights may result in the loss of valuable technologies or adversely affect our competitive business position. We rely significantly on proprietary technology, information, processes and know-how that are not subject to patent or copyright protection. We seek to protect this information through trade secret or confidentiality agreements with our employees, consultants, subcontractors or other parties, as well as through other security measures. These agreements and security measures may be inadequate to deter or prevent misappropriation of our confidential information. In the event of an infringement of our intellectual property rights, a breach of a confidentiality agreement or divulgence of proprietary information, we may not have adequate legal remedies to protect our intellectual property. Litigation to determine the scope of intellectual property rights, even if ultimately successful, could be costly and could divert management's attention away from other aspects of our business. In addition, our trade secrets may otherwise become known or be independently developed by competitors.
In some instances, we have augmented our technology base by licensing the proprietary intellectual property of third parties. In the future, we may not be able to obtain necessary licenses on commercially reasonable terms, which could have a material adverse effect on our operations.
Our business strategy includes development and commercialization of new technologies to support our growth, which requires significant investment and involves various risks and uncertainties. These new technologies may not achieve desired commercial or financial results.
Our future growth will depend, in part, on our ability to continue to innovate by developing and commercializing new product and service offerings. Investments in new technologies involve varying degrees of uncertainties and risk. Commercial success depends on many factors, including the levels of innovation, the development costs and the availability of capital resources to fund those costs, the levels of competition from others developing similar or other competing technologies, our ability to obtain or maintain government permits or certifications, our ability to license or purchase new technologies from third parties, the effectiveness of production, distribution and marketing efforts, and the costs to customers to deploy and provide support for the new technologies. We may not achieve significant revenues from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and, even if they are profitable, our operating margins from new products and services may not be as high as the margins we have experienced historically. In addition, new technologies may not be patentable and, as a result, we may face increased competition.
Our operations are subject to operating risks, which could expose us to potentially significant professional liability, product liability, warranty and other claims. Our insurance coverage may be inadequate to cover all of our significant risks, our insurers may deny coverage of material losses we incur, or we may be unable to obtain additional insurance coverage in the future, any of which could adversely affect our profitability and overall financial condition.
We engineer, construct and perform services in, and provide products for, large industrial facilities where accidents or system failures can have significant consequences. Risks inherent in our operations include:
|
•
|
accidents resulting in injury or the loss of life or property;
|
|
•
|
environmental or toxic tort claims, including delayed manifestation claims for personal injury or loss of life;
|
|
•
|
pollution or other environmental mishaps;
|
|
•
|
adverse weather conditions;
|
|
•
|
mechanical failures;
|
|
•
|
property losses;
|
|
•
|
business interruption due to political action or other reasons; and
|
|
•
|
labor stoppages.
|
20
Any accident or failure at a site where we have provided products or services could result in significant professional liability, product liability, warranty and other claims against us, regardless of whether our products or services caused the incident. We have been, and in the future, we may be, named as defendants in lawsuits asserting large claims as a result of litigation arising from events such as those listed above.
We endeavor to identify and obtain in established markets insurance agreements to cover significant risks and liabilities. Insurance against some of the risks inherent in our operations is either unavailable or available only at rates or on terms that we consider uneconomical. Also, catastrophic events customarily result in decreased coverage limits, more limited coverage, additional exclusions in coverage, increased premium costs and increased deductibles and self-insured retentions. Risks that we have frequently found difficult to cost-effectively insure against include, but are not limited to, business interruption, property losses from wind, flood and earthquake events, war and confiscation or seizure of property in some areas of the world, pollution liability, liabilities related to occupational health exposures (including asbestos), the failure, misuse or unavailability of our information systems, the failure of security measures designed to protect our information systems from cybersecurity threats, and liability related to risk of loss of our work in progress and customer-owned materials in our care, custody and control. Depending on competitive conditions and other factors, we endeavor to obtain contractual protection against uninsured risks from our customers. When obtained, such contractual indemnification protection may not be as broad as we desire or may not be supported by adequate insurance maintained by the customer. Such insurance or contractual indemnity protection may not be sufficient or effective under all circumstances or against all hazards to which we may be subject. A successful claim for which we are not insured or for which we are underinsured could have a material adverse effect on us. Additionally, disputes with insurance carriers over coverage may affect the timing of cash flows and, if litigation with the carrier becomes necessary, an outcome unfavorable to us may have a material adverse effect on our results of operations.
Our wholly owned captive insurance subsidiary provides workers' compensation, employer's liability, commercial general liability, professional liability and automotive liability insurance to support our operations. We may also have business reasons in the future to have our insurance subsidiary accept other risks which we cannot or do not wish to transfer to outside insurance companies. These risks may be considerable in any given year or cumulatively. Our insurance subsidiary has not provided significant amounts of insurance to unrelated parties. Claims as a result of our operations could adversely impact the ability of our insurance subsidiary to respond to all claims presented.
Additionally, upon the February 22, 2006 effectiveness of the settlement relating to the Chapter 11 proceedings involving several of our subsidiaries, most of our subsidiaries contributed substantial insurance rights to the asbestos personal injury trust, including rights to (1) certain pre-1979 primary and excess insurance coverages and (2) certain of our 1979-1986 excess insurance coverage. These insurance rights provided coverage for, among other things, asbestos and other personal injury claims, subject to the terms and conditions of the policies. The contribution of these insurance rights was made in exchange for the agreement on the part of the representatives of the asbestos claimants, including the representative of future claimants, to the entry of a permanent injunction, pursuant to Section 524(g) of the United States Bankruptcy Code, to channel to the asbestos trust all asbestos-related claims against our subsidiaries and former subsidiaries arising out of, resulting from or attributable to their operations, and the implementation of related releases and indemnification provisions protecting those subsidiaries and their affiliates from future liability for such claims. Although we are not aware of any significant, unresolved claims against our subsidiaries and former subsidiaries that are not subject to the channeling injunction and that relate to the periods during which such excess insurance coverage related, with the contribution of these insurance rights to the asbestos personal injury trust, it is possible that we could have underinsured or uninsured exposure for non-derivative asbestos claims or other personal injury or other claims that would have been insured under these coverages had the insurance rights not been contributed to the asbestos personal injury trust.
We are subject to government regulations that may adversely affect our future operations.
Many aspects of our operations and properties are affected by political developments and are subject to both domestic and foreign governmental regulations, including those relating to:
|
•
|
constructing and manufacturing power generation products;
|
|
•
|
currency conversions and repatriation;
|
|
•
|
clean air and other environmental protection legislation;
|
|
•
|
taxation of foreign earnings;
|
|
•
|
tariffs, duties, or trade sanctions and other trade barriers imposed by foreign countries that restrict or prohibit business transactions in certain markets;
|
21
|
•
|
changes in applicable laws or policies;
|
|
•
|
transactions in or with foreign countries or officials; and
|
|
•
|
use of local employees and suppliers.
|
In addition, a substantial portion of the demand for our products and services is from electric power generating companies and other steam-using customers. The demand for power generation products and services can be influenced by governmental legislation setting requirements for utilities related to operations, emissions and environmental impacts. The legislative process is unpredictable and includes a platform that continuously seeks to increase the restrictions on power producers. Potential legislation limiting emissions from power plants, including carbon dioxide, could affect our markets and the demand for our products and services related to power generation.
We cannot determine the extent to which our future operations and earnings may be affected by new legislation, new regulations or changes in existing regulations.
Our business and our customers' businesses are required to obtain, and to comply with, national, state and local government permits and approvals.
Our business and our customers' businesses are required to obtain, and to comply with, national, state and local government permits and approvals. Any of these permits or approvals may be subject to denial, revocation or modification under various circumstances. Failure to obtain or comply with the conditions of permits or approvals may adversely affect our operations by temporarily suspending our activities or curtailing our work and may subject us to penalties and other sanctions. Although existing licenses are routinely renewed by various regulators, renewal could be denied or jeopardized by various factors, including:
|
•
|
failure to comply with environmental and safety laws and regulations or permit conditions;
|
|
•
|
local community, political or other opposition;
|
|
•
|
executive action; and
|
|
•
|
legislative action.
|
In addition, if new environmental legislation or regulations are enacted or implemented, or existing laws or regulations are amended or are interpreted or enforced differently, we or our customers may be required to obtain additional operating permits or approvals. Our inability or our customers' inability to obtain, and to comply with, the permits and approvals required for our business could have a material adverse effect on us.
Our operations are subject to various environmental laws and legislation that may become more stringent in the future.
Our operations and properties are subject to a wide variety of increasingly complex and stringent foreign, federal, state and local environmental laws and regulations, including those governing discharges into the air and water, the handling and disposal of solid and hazardous wastes, the remediation of soil and groundwater contaminated by hazardous substances and the health and safety of employees. Sanctions for noncompliance may include revocation of permits, corrective action orders, administrative or civil penalties and criminal prosecution. Some environmental laws provide for strict, joint and several liability for remediation of spills and other releases of hazardous substances, as well as damage to natural resources. In addition, companies may be subject to claims alleging personal injury or property damage as a result of alleged exposure to hazardous substances. Such laws and regulations may also expose us to liability for the conduct of or conditions caused by others or for our acts that were in compliance with all applicable laws at the time such acts were performed.
We cannot predict all of the environmental requirements or circumstances that will exist in the future but anticipate that environmental control and protection standards will become increasingly stringent and costly. Based on our experience to date, we do not currently anticipate any material adverse effect on our business or financial condition as a result of future compliance with existing environmental laws and regulations. However, future events, such as changes in existing laws and regulations or their interpretation, more vigorous enforcement policies of regulatory agencies or stricter or different interpretations of existing laws and regulations, may require additional expenditures by us, which may be material. Accordingly, we can provide no assurance that we will not incur significant environmental compliance costs in the future.
22
Our operations involve the handling, transportation and disposal of hazardous materials, and environmental laws and regulations and civil liability for contamination of the environment or related personal injuries may result in increases in our operating costs and capital expenditures and decreases in our earnings and cash flows.
Our operations involve the handling, transportation and disposal of hazardous materials. Failure to properly handle these materials could pose a health risk to humans or wildlife and could cause personal injury and property damage (including environmental contamination). If an accident were to occur, its severity could be significantly affected by the volume of the materials and the speed of corrective action taken by emergency response personnel, as well as other factors beyond our control, such as weather and wind conditions. Actions taken in response to an accident could result in significant costs.
Governmental requirements relating to the protection of the environment, including solid waste management, air quality, water quality and cleanup of contaminated sites, have in the past had a substantial impact on our operations. These requirements are complex and subject to frequent change. In some cases, they can impose liability for the entire cost of cleanup on any responsible party without regard to negligence or fault and impose liability on us for the conduct of others or conditions others have caused, or for our acts that complied with all applicable requirements when we performed them. Our compliance with amended, new or more stringent requirements, stricter interpretations of existing requirements or the future discovery of contamination may require us to make material expenditures or subject us to liabilities that we currently do not anticipate. Such expenditures and liabilities may adversely affect our business, financial condition, results of operations and cash flows. In addition, some of our operations and the operations of predecessor owners of some of our properties have exposed us to civil claims by third parties for liability resulting from alleged contamination of the environment or personal injuries caused by releases of hazardous substances into the environment.
In our contracts, we seek to protect ourselves from liability associated with accidents, but there can be no assurance that such contractual limitations on liability will be effective in all cases or that our or our customers' insurance will cover all the liabilities we have assumed under those contracts. The costs of defending against a claim arising out of a contamination incident or precautionary evacuation, and any damages awarded as a result of such a claim, could adversely affect our results of operations and financial condition.
We maintain insurance coverage as part of our overall risk management strategy and due to requirements to maintain specific coverage in our financing agreements and in many of our contracts. These policies do not protect us against all liabilities associated with accidents or for unrelated claims. In addition, comparable insurance may not continue to be available to us in the future at acceptable prices, or at all.
We could be adversely affected by violations of the United States Foreign Corrupt Practices Act, the UK Anti-Bribery Act or other anti-bribery laws.
The United States Foreign Corrupt Practices Act (the "FCPA") generally prohibits companies and their intermediaries from making improper payments to non-United States government officials. Our training program, audit process and policies mandate compliance with the FCPA, the UK Anti-Bribery Act (the "UK Act") and other anti-bribery laws. We operate in some parts of the world that have experienced governmental corruption to some degree, and, in some circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. If we are found to be liable for violations of the FCPA, the UK Act or other anti-bribery laws (either due to our own acts or our inadvertence, or due to the acts or inadvertence of others, including agents, promoters or employees of our joint ventures), we could suffer from civil and criminal penalties or other sanctions.
We may not be able to compete successfully against current and future competitors.
Some of our competitors or potential competitors have greater financial or other resources than we have and in some cases are government supported. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics than those of our products and services. Furthermore, we operate in industries where capital investment is critical. We may not be able to obtain as much purchasing and borrowing leverage and access to capital for investment as other companies, which may impair our ability to compete against competitors or potential competitors.
23
The loss of the services of one or more of our key personnel, or our failure to attract, recruit, motivate, and retain qualified personnel in the future, could disrupt our business and harm our results of operations.
We depend on the skills, working relationships, and continued services of key personnel, including our management team and others throughout our organization. We are also dependent on our ability to attract and retain qualified personnel, for whom we compete with other companies both inside and outside our industry. Our business, financial condition or results of operations may be adversely impacted by the unexpected loss of any of our management team or other key personnel, or more generally if we fail to attract, recruit, motivate and retain qualified personnel.
Negotiations with labor unions and possible work stoppages and other labor problems could divert management's attention and disrupt operations. In addition, new collective bargaining agreements or amendments to existing agreements could increase our labor costs and operating expenses.
A significant number of our employees are members of labor unions. If we are unable to negotiate acceptable new contracts with our unions from time to time, we could experience strikes or other work stoppages by the affected employees. If any such strikes, protests or other work stoppages were to occur, we could experience a significant disruption of operations. In addition, negotiations with unions could divert management's attention. New union contracts could result in increased operating costs, as a result of higher wages or benefit expenses, for both union and nonunion employees. If nonunion employees were to unionize, we could experience higher ongoing labor costs.
Pension and medical expenses associated with our retirement benefit plans may fluctuate significantly depending on a number of factors, and we may be required to contribute cash to meet underfunded pension obligations.
A substantial portion of our current and retired employee population is covered by pension and postretirement benefit plans, the costs and funding requirements of which 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 mark to market 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.
As of
December 31, 2019
, our defined benefit pension and postretirement benefit plans were underfunded by approximately
$257.0 million
. In addition, certain of these postretirement benefit plans were collectively bargained, and our ability to curtail or change the benefits provided may be impacted by contractual provisions set forth in the relevant union agreements and other plan documents. We also participate in various multi-employer pension plans in the United States and Canada under union and industry agreements that generally provide defined benefits to employees covered by collective bargaining agreements. Absent an applicable exemption, a contributor to a United States multi-employer plan is liable, upon termination or withdrawal from a plan, for its proportionate share of the plan's underfunded vested liability. Funding requirements for benefit obligations of these multi-employer pension plans are subject to certain regulatory requirements, and we may be required to make cash contributions which may be material to one or more of these plans to satisfy certain underfunded benefit obligations. See
Note 13
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
for additional information regarding our pension and postretirement benefit plan obligations.
Our international operations are subject to political, economic and other uncertainties not generally encountered in our domestic operations.
We derive a substantial portion of our revenues from international operations, and we intend to continue to expand our international presence and customer base as part of our growth strategy. Our revenues from sales to customers located outside of the United States represented approximately
46%
and
39%
of total revenues for the years ended
December 31, 2019
and 2018, respectively. Operating in international markets requires significant resources and management attention and subjects us to political, economic and regulatory risks that are not generally encountered in our United States operations. These include:
|
•
|
risks of war, terrorism and civil unrest;
|
|
•
|
expropriation, confiscation or nationalization of our assets;
|
24
|
•
|
renegotiation or nullification of our existing contracts;
|
|
•
|
changing political conditions and changing laws and policies affecting trade and investment;
|
|
•
|
overlap of different tax structures;
|
|
•
|
risk of changes in foreign currency exchange rates; and
|
|
•
|
tariffs, price controls and trade agreements and disputes.
|
Various foreign jurisdictions have laws limiting the right and ability of foreign subsidiaries and joint ventures to pay dividends and remit earnings to affiliated companies. Our international operations sometimes face the additional risks of fluctuating currency values, hard currency shortages and controls of foreign currency exchange. If we continue to expand our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. These and other factors may have a material impact on our international operations or our business as a whole.
International uncertainties and fluctuations in the value of foreign currencies could harm our profitability.
We have international operations primarily in Europe and Canada. For the
year ended
December 31, 2019
, international operations accounted for approximately
46%
of our total revenues. Our significant international subsidiaries may have sales and cost of sales in different currencies as well as other transactions that are denominated in currencies other than their functional currency. We do not currently engage in currency hedging activities to limit the risks of currency fluctuations. Consequently, fluctuations in foreign currencies could have a negative impact on the profitability of our global operations, which would harm our financial results and cash flows.
Natural disasters or other events beyond our control, such as war, armed conflicts or terrorist attacks could adversely affect our business.
Matters outside of our control could adversely affect demand for or supply of our products or disrupt our facilities, systems or projects, which could interrupt operational processes and performance on our contracts and adversely impact our ability to manufacture our products and provide services and support to our customers. Insurance for such matters may be unavailable or insufficient. Such matters could include natural disasters, such as earthquakes, tsunamis, hurricanes, floods, tornadoes, war, armed conflicts, or terrorist attacks, among others. We operate facilities in areas of the world that are exposed to such risks, which could be general in nature or targeted at us or our markets.
Interest rates on certain of our outstanding indebtedness are tied to LIBOR and may be subject to change.
LIBOR and certain other “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. In particular, on July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. It is unclear whether, at that time, LIBOR will cease to exist or if new methods of calculating LIBOR will be established. As of December 31, 2019, approximately
$170 million
of our outstanding indebtedness had interest rate payments determined based directly or indirectly on LIBOR, including our outstanding indebtedness under our Amended Credit Agreement. If there is uncertainty as to whether LIBOR will continue to be quoted, if LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, the interest rates on this indebtedness may increase substantially from those we have previously experienced. Further, our Amended Credit Agreement contains provisions establishing alternative methods for calculating the interest rate on our indebtedness if LIBOR is no longer available. Any such alternative calculation methods could increase the interest expense we have historically realized on our indebtedness or realize on future indebtedness under our Amended Credit Agreement.
Risks Relating to Ownership of Our Common Stock
The market price and trading volume of our common stock may be volatile.
The market price of our common stock could fluctuate significantly in future periods due to a number of factors, many of which are beyond our control, including:
|
•
|
fluctuations in our quarterly or annual earnings or those of other companies in our industry;
|
25
|
•
|
failures of our operating results to meet the estimates of securities analysts or the expectations of our shareholders or changes by securities analysts in their estimates of our future earnings;
|
|
•
|
announcements by us or our customers, suppliers or competitors;
|
|
•
|
the depth and liquidity of the market for our common stock;
|
|
•
|
changes in laws or regulations that adversely affect our industry or us;
|
|
•
|
changes in accounting standards, policies, guidance, interpretations or principles;
|
|
•
|
general economic, industry and stock market conditions;
|
|
•
|
future sales of our common stock by our shareholders;
|
|
•
|
the concentration of ownership of our common stock;
|
|
•
|
future issuances of our common stock by us;
|
|
•
|
our ability to pay dividends in the future; and
|
|
•
|
the other risk factors set forth under Part I, Item 1A of this annual report and other parts of this annual report.
|
Substantial sales, or the perception of sales, of our common stock by us or certain of our existing shareholders could cause our stock price to decline and future issuances may dilute our common shareholders' ownership in the Company.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. As of December 31, 2019, we had an aggregate of approximately
46.4 million
shares of common stock outstanding, approximately 22.6 million shares of which were held by B. Riley and Vintage Capital Management, LLC ("Vintage"), not including approximately 1.7 million shares of our common stock issuable upon exercise of the warrants held by B. Riley. We entered into a registration rights agreement with B. Riley and Vintage on April 30, 2019, pursuant to which B. Riley and Vintage have customary demand and piggyback registration rights for all shares of our common stock they beneficially own. We filed a resale shelf registration statement on behalf of the shareholders party to the registration rights agreement permitting the resale of approximately 25.6 million shares of our common stock that were issued to B. Riley, Vintage and the other shareholders party thereto. We are also required to register for resale any additional shares of our common stock that B. Riley and Vintage may acquire in the future, including as part of any refinancing of our Amended Credit Agreement.
Any sales of substantial amounts of our common stock, or the perception that these sales might occur, could lower the market price of our common stock and impede our ability to raise capital through the issuance of equity securities. Any sales, or perception of sales, by our existing shareholders could also impact the perception of shareholder support for us. which could in turn negatively affect our customer and supplier relationships. Further, if we were to issue additional equity securities (or securities convertible into or exchangeable or exercisable for equity securities) to raise additional capital, our shareholders' ownership interests in the Company will be diluted and the value of our common stock may be reduced.
B. Riley and Vintage each have significant influence over us.
B. Riley and Vintage together control approximately 51.8% of the voting power represented by our common stock. Each of B. Riley and Vintage have the right to nominate three members of our board of directors pursuant to the investor rights agreement we entered into with them on April 30, 2019, The investor rights agreement also provides pre-emptive rights to B. Riley with respect to certain future issuances of our equity securities. The services of our Chief Executive Officer are provided to us by B. Riley pursuant to a consulting agreement, and B. Riley currently holds all of our outstanding Last Out Term Loans issued under our Amended Credit Agreement and has agreed to backstop the refinancing of our Amended Credit Agreement as previously disclosed. If either B. Riley or Vintage participate as investors in the refinancing of our Amended Credit Agreement, including through B. Riley’s backstop obligations, their respective ownership of our common stock, debt or other securities may further increase. As a result these arrangements, each of B. Riley and Vintage have significant influence over our management and policies and over all matters requiring shareholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. Further, if B. Riley and Vintage were to act together on any matter presented for shareholder approval, they would have the ability to control the outcome of that matter. Each of B. Riley and Vintage can take actions that have the effect of delaying or preventing a change of control of us or discouraging others from making tender offers for our shares, which could prevent shareholders from receiving a premium for their shares. These actions may be taken even if other shareholders oppose them. In addition, the concentration of voting power with B. Riley and Vintage may have an adverse effect on the price of our
26
common stock, and the interests of either B. Riley or Vintage may not be consistent with the interests of our other shareholders.
We are a "smaller reporting company" and, as a result of the scaled disclosure requirements applicable to us, our common stock may be less attractive to investors.
We are currently a "smaller reporting company" as defined under Regulation S-K. As a smaller reporting company, we are subject to scaled disclosure requirements in our periodic reports and proxy statements, including around executive compensation arrangements. We intend to take advantage of certain of the scaled disclosure requirements available for smaller reporting companies, and we may continue to take advantage of these or additional scaled disclosure requirements until we no longer qualify as a smaller reporting company. As a result, the information we provide to investors may be different than that provided by other public companies. We cannot predict whether investors will find our common stock less attractive as a result of our taking advantage of these scaled disclosure requirements. If investors find our common stock less attractive as a result of our choices, there may be a less active trading market for our common stock and our stock price may decline or may be more volatile.
We do not currently pay regular dividends on our common stock, so holders of our common stock may not receive funds without selling their shares of our common stock.
We have no current intent to pay a regular dividend, and dividend payments are restricted by our lending agreements. Our board of directors will determine the payment of future dividends on our common stock, if any, and the amount of any dividends in light of applicable law, contractual restrictions limiting our ability to pay dividends, our earnings and cash flows, our capital requirements, our financial condition, and other factors our board of directors deems relevant. Accordingly, our shareholders may have to sell some or all of their shares of our common stock in order to generate cash flow from their investment.
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of the Company, even if that change may be considered beneficial by some shareholders.
The existence of some provisions of our certificate of incorporation and bylaws and Delaware law could discourage, delay or prevent a change in control of the Company that a shareholder may consider favorable.
In addition, we are subject to Section 203 of the Delaware General Corporation Law, which may have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging takeover attempts that might result in a premium over the market price for shares of our common stock.
We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal and are not intended to make the Company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our board of directors determines is not in the best interests of the Company and our shareholders.
We may issue preferred stock that could dilute the voting power or reduce the value of our common stock.
Our certificate of incorporation authorizes us to issue, without the approval of our shareholders, one or more classes or series of preferred stock having such designation, powers, preferences and relative, participating, optional and other special rights, including preferences over our common stock respecting dividends and distributions, as our board of directors generally may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, we could grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.
27
Risks Relating to our 2015 Spin-Off from our Former Parent
We are subject to continuing contingent liabilities of BWXT following the spin-off.
We completed a spin-off from The Babcock & Wilcox Company (now known as BWX Technologies, Inc., or “BWXT”), on June 30, 2015 to become a separate publicly traded company, and BWXT did not retain any ownership interest in the Company. As a result of the spin-off, there are several significant areas where the liabilities of BWXT may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of BWXT consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the completion of the spin-off is jointly and severally liable for the federal income tax liability of the entire consolidated tax reporting group for that taxable period. We entered into a tax sharing agreement with BWXT in connection with the spin-off that allocates the responsibility for prior period taxes of BWXT consolidated tax reporting group between us and BWXT and its subsidiaries. However, if BWXT were unable to pay, we could be required to pay the entire amount of such taxes. Other provisions of law establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities. The other contingent liabilities include personal injury claims or environmental liabilities related to BWXT's historical nuclear operations. For example, BWXT has agreed to indemnify us for personal injury claims and environmental liabilities associated with radioactive materials related to the operation, remediation, and/or decommissioning of two former nuclear fuel processing facilities located in the Borough of Apollo and Parks Township, Pennsylvania. To the extent insurance providers and third-party indemnitors do not cover those liabilities, and BWXT was unable to pay, we could be required to pay for them.
The spin-off could result in substantial tax liability.
The spin-off was conditioned on BWXT's receipt of an opinion of counsel, in form and substance satisfactory to BWXT, substantially to the effect that, for United States federal income tax purposes, the spin-off qualifies under Section 355 of the Code, and certain transactions related to the spin-off qualify under Sections 355 and/or 368 of the Code. The opinion relied on, among other things, various assumptions and representations as to factual matters made by BWXT and us which, if inaccurate or incomplete in any material respect, would jeopardize the conclusions reached by such counsel in its opinion. The opinion is not binding on the IRS or the courts, and there can be no assurance that the IRS or the courts will not challenge the conclusions stated in the opinion or that any such challenge would not prevail.
We are not aware of any facts or circumstances that would cause the assumptions or representations that were relied on in the opinion to be inaccurate or incomplete in any material respect. If, notwithstanding receipt of the opinion, the spin-off was determined not to qualify under Section 355 of the Code, each United States holder of BWXT common stock who received shares of our common stock in the spin-off would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares of our common stock received. In addition, if certain related preparatory transactions were to fail to qualify for tax-free treatment, they would be treated as taxable asset sales and/or distributions.
Under the terms of the tax sharing agreement we entered into in connection with the spin-off, we are generally responsible for all taxes attributable to us or any of our subsidiaries, whether accruing before, on or after the date of the spin-off. We and BWXT generally share responsibility for all taxes imposed on us or BWXT and its subsidiaries in the event the spin-off and/or certain related preparatory transactions were to fail to qualify for tax-free treatment. However, if the spin-off and/or certain related preparatory transactions were to fail to qualify for tax-free treatment because of actions or failures to act by us or BWXT, we or BWXT, respectively would be responsible for all such taxes. Our liabilities under the tax sharing agreement could have a material adverse effect on us. At this time, we cannot precisely quantify the amount of liabilities we may have under the tax sharing agreement and there can be no assurances as to their final amounts.
Under some circumstances, we could be liable for any resulting adverse tax consequences from engaging in certain significant strategic or capital raising transactions.
Even if the spin-off otherwise qualifies as a tax-free distribution under Section 355 of the Code, the spin-off and certain related transactions may result in significant United States federal income tax liabilities to us under Section 355(e) and other applicable provisions of the Code if 50% or more of BWXT's stock or our stock (in each case, by vote or value) is treated as having been acquired, directly or indirectly, by one or more persons as part of a plan (or series of related transactions) that includes the spin-off. The process for determining whether an acquisition triggering those provisions has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case.
28
Under the terms of the tax sharing agreement we entered into in connection with the spin-off, BWXT generally is liable for any such tax liabilities. However, we are required to indemnify BWXT against any such tax liabilities that result from actions taken or failures to act by us. As a result of these rules and contractual provisions, we may be unable to engage in certain strategic or capital raising transactions that our shareholders might consider favorable, or to structure potential transactions in the manner most favorable to us, without certain adverse tax consequences.
Potential indemnification liabilities to BWXT pursuant to the master separation agreement could materially adversely affect the Company.
The master separation agreement with BWXT provides for, among other things, the principal corporate transactions required to effect the spin-off, certain conditions to the spin-off and provisions governing the relationship between us and BWXT with respect to and resulting from the spin-off. Among other things, the master separation agreement provides for indemnification obligations designed to make us financially responsible for substantially all liabilities that may exist relating to our business activities, whether incurred prior to or after the spin-off, as well as those obligations of BWXT assumed by us pursuant to the master separation agreement. If we are required to indemnify BWXT under the circumstances set forth in the master separation agreement, we may be subject to substantial liabilities.
In connection with our separation from BWXT, BWXT has agreed to indemnify us for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure us against the full amount of such liabilities, or that BWXT's ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the master separation agreement, BWXT has agreed to indemnify us for certain liabilities. However, third parties could seek to hold us responsible for any of the liabilities that BWXT agreed to retain, and there can be no assurance that the indemnity from BWXT will be sufficient to protect us against the full amount of such liabilities, or that BWXT will be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from BWXT any amounts for which we are held liable, we may be temporarily required to bear these losses.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The following table provides the segment, location and general use of each of our principal properties that we own or lease at December 31, 2019.
|
Business Segment and Location
|
Principal Use
|
Owned/Leased
(Lease Expiration)
|
|
Babcock & Wilcox segment and Corporate
|
||
|
Akron, Ohio
|
Administrative office
|
Leased (2034)
|
|
Barberton, Ohio
|
Administrative office / research and development
|
Owned
(1)
|
|
Lancaster, Ohio
|
Manufacturing facility
|
Owned
(1)
|
|
Copley, Ohio
|
Warehouse / service center
|
Owned
(1)
|
|
Dumbarton, Scotland
|
Manufacturing facility
|
Owned
|
|
Guadalupe, NL, Mexico
|
Manufacturing facility
|
Leased (2024)
|
|
Cambridge, Ontario, Canada
|
Administrative office / warehouse
|
Leased (2024)
|
|
Jingshan, Hubei, China
|
Manufacturing facility
|
Owned
|
|
Vølund & Other Renewable segment
|
||
|
Copenhagen, Denmark
|
Administrative office
|
Leased (2021)
|
|
Esbjerg, Denmark
|
Manufacturing facility / administrative office
|
Owned
|
|
SPIG segment
|
||
|
Paruzzaro Italy
|
Administrative offices
|
Leased (2024)
|
|
Ding Xiang, Xin Zhou, Shan Xi, China
|
Manufacturing facility
|
Leased (2020)
|
(1)
These properties are encumbered by liens under existing credit facilities.
29
In September 2018, we relocated our corporate headquarters to Barberton, Ohio from Charlotte, North Carolina. In December 2019, we consolidated all of our Barberton and most of our Copley, Ohio operations into new, leased office space in Akron, Ohio for our Corporate and Babcock & Wilcox segment functions. The new location in Akron is expected to reduce operating costs, inclusive of rent, and to provide a space that better meets our needs.
In connection with our new lease agreement, we have agreed to sell our Barberton facility following the move to the facility in Akron, Ohio. We believe that our other major properties are adequate for our present needs and, as supplemented by planned improvements and construction, expect them to remain adequate for the foreseeable future.
Item 3. Legal Proceedings
For information regarding ongoing investigations and litigation, see
Note 23
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
, which we incorporate by reference into this Item.
Additionally, the Company has received subpoenas from the staff of the SEC in connection with an investigation into the accounting charges and related matters involving its Vølund & Other Renewable segment in 2015, 2016, 2017, 2018 and 2019. We are cooperating with the staff of the SEC related to the subpoenas and investigation. We cannot predict the length, scope or results of the investigation, or the impact, if any, of the investigation on our results of operations.
PART II
Item 5. Market for Registrant's Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the New York Stock Exchange under the symbol BW.
As of January 31, 2020, there were approximately 1,000 record holders of our common stock.
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 repurchase shares to satisfy employee statutory income tax withholding obligations. The following table identifies the number of common shares and average purchase price paid by the Company, for each month during the quarter ended
December 31, 2019
. The Company does not have a general share repurchase program at this time.
|
(share data in thousands)
|
||||||||||
|
Period
|
Total number of shares purchased
(1)
|
Average price paid per share
|
Total number of shares purchased as part of publicly announced plans or programs
|
Approximate dollar value of shares that may yet be purchased under the plans or programs
|
||||||
|
October 2019
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
November 2019
|
18
|
|
$
|
4.10
|
|
—
|
|
$
|
—
|
|
|
December 2019
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
Total
|
18
|
|
$
|
4.10
|
|
—
|
|
$
|
—
|
|
(1)
Repurchased shares are recorded in treasury stock in our Consolidated Balance Sheets included in Part II, Item 8 of this annual report.
Reverse Stock Split
On July 11, 2019, the Company's board of directors approved a reverse stock split of one-for-ten on the Company's issued and outstanding common stock which became effective on July 24, 2019. The one-for-ten reverse stock split automatically converted every ten shares of the Company's outstanding and treasury common stock prior to the effectiveness of the reverse stock split into one share of common stock. No fractional shares were issued in the reverse stock split. Instead, stockholders who would otherwise have held fractional shares received cash payments (without interest) in respect of such fractional shares. The reverse stock split did not impact any stockholder's percentage ownership of the Company, subject to the treatment of fractional shares. The reverse stock split was undertaken to allow the Company to regain compliance with the NYSE's continued listing standards relating to minimum price per share.
Item 6. Selected Financial Data
30
We are currently a smaller reporting company as defined by Item 10(f)(1) of Regulation S-K and are not required to provide the information required by this item.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW OF RESULTS
We recorded operating losses of
$29.4 million
and
$426.6 million
in 2019 and 2018, respectively and we showed improved results in each of our reporting segments. Prior to 2019, the most significant driver of our operating losses were the charges for the six European Vølund EPC loss contracts. The scope of these EPC (Engineer, Procure and Construct) contracts extended beyond our core technology, products and services. In 2019 and 2018, we recorded
$6.9 million
and
$233.0 million
, in net losses, respectively, inclusive of warranty expense, from changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. Aside from these loss projects, we have one remaining extended scope contract in our Vølund & Other Renewable business which turned into a small loss 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 December 31, 2019, five of the six European Vølund EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the
March 29, 2019
settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying a combined
£70 million
(
$91.5 million
)
on April 5, 2019 in exchange for limiting and further defining our obligations under the second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately
$144 million
), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by May 31, 2019, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminated all historical claims and remaining liquidated damages. In accordance with the settlement, we have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed.
We estimated the portion of this settlement related to waiver of the rejection right on the fifth loss contract was
$81.1 million
, which was recorded in the fourth quarter of 2018 as a reduction in the selling price.
We are still pursuing insurance recoveries and claims against subcontractors.
For the second loss contract, the settlement limited the remaining performance obligations and settled historic claims for nonconformance and delays, and we turned over the plant in May 2019, and subsequently began the operations and maintenance contract to operate this plant.
See further discussion of the loss projects in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
The SPIG segment contributed to our operating results with
$(2.4) million
and
$(53.3) million
of adjusted EBITDA in 2019 and 2018, respectively. The improvement continues to reflect the effects of a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG's adjusted EBITDA loss in 2018 was primarily driven by increases in estimated costs to complete new build cooling systems contracts sold under a previous strategy and lower volumes of aftermarket cooling system services. SPIG's 2018 results also include bad debt expense of $9.3 million and legal expenses related to legacy litigation. SPIG's new build cooling systems contracts that were sold under the previous strategy were mostly complete as of December 31, 2018; however, included in these few remaining contracts are two 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 twelve months of 2019. Final completion of the first loss contract is expected to be in first 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 twelve months of 2019. Final completion of the second loss contract is expected to be in the third quarter of 2020. SPIG's two significant loss contracts, as disclosed in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
, generated revenues of
$18.8 million
and
$59.8 million
in 2019 and 2018, respectively.
Our Babcock & Wilcox segment generated adjusted EBITDA of
$66.6 million
and
$59.5 million
in 2019 and 2018, respectively. This improvement is primarily attributable to lower costs on construction projects in 2019, cost savings from restructuring initiatives that we began to implement in 2018 and lower warranty expenses in 2019.
31
We have manufacturing facilities in Mexico, China, Unites 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-savings measures to continue to translate to bottom-line results, with top-line growth driven by opportunities for our core technologies and support services across the Babcock & Wilcox, Vølund and Other Renewable, and SPIG segments globally. While we anticipate quarterly variability and cyclicality typical of our industry, we expect to continue to show improvement in 2020 as compared to 2019.
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 affected by:
|
•
|
$3.6 million
of loss on sale of business was recognized in 2019 for a non-core materials handling business in Germany, Loibl GmbH, as described in
Note 27
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
|
|
•
|
$11.7 million
and
$16.8 million
of restructuring and spin-off costs were recognized in 2019 and 2018. The actions in 2019 primarily related to severance. In 2018, restructuring costs related primarily to executive severance and the remaining severance costs of prior restructuring initiatives.
|
|
•
|
$9.1 million
and
$18.6 million
of financial advisory service fees were recorded in 2019 and 2018, respectively, which are required under our U.S. Revolving Credit Facility. Financial advisory service fees are included in
advisory fees and settlement costs
in the Consolidated Statement of Operations included in Item 8 of this annual report.
|
|
•
|
$6.6 million
of settlement cost was recognized in 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 Consolidated Statement of Operations included in Item 8 of this annual report. 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.
|
|
•
|
$11.8 million
of legal and other advisory fees were recognized in 2019 related to the contract settlements and for liquidity planning and is included in
advisory fees and settlement costs
in the Consolidated Statement of Operations included in Item 8 of this annual report. The contract settlement is further described above and in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
|
|
•
|
$4.9 million
of accelerated depreciation expense in 2019 for fixed assets affected by our September 2018 announcement to consolidate office space and relocate our global headquarters to Akron, Ohio in December 2019.
|
|
•
|
$8.8 million
and
$(67.5) million
of actuarially determined mark to market ("MTM") gains (losses) on our pension and other post retirement benefits in 2019 and 2018, respectively. MTM losses are further described in
Note 13
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
|
|
•
|
$40.0 million
of goodwill and other intangible impairments related to our SPIG reporting unit in 2018.
|
|
•
|
$18.4 million
of other-than-temporary impairment was recognized in the first quarter of 2018 for our interest in Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES"), an equity method investment in India based on an agreement to sell our ownership interest.
|
|
•
|
$6.5 million
of gain on sale was recognized in the first quarter 2018 for our equity method investment in China and is included in
equity in income and impairment of investees
in the Consolidated Statement of Operations included in Item 8 of this annual report.
|
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally, with over 100 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. 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. Our headquarters and the headquarters of our Babcock &
32
Wilcox segment in Akron, Ohio, the headquarters of our Vølund & Other Renewable segment in Denmark and the headquarters of our SPIG segment in Italy (among other locations where we and our customers, vendors and suppliers operate) are currently subject to lock-down or shelter-in-place orders under local ordinances, with employees continuing to work remotely if possible. While some of our employees can work remotely, many of our customers and projects require our employees to travel to customer and project worksites. Certain of our customers and significant projects are located in areas where travel restrictions have been imposed, and we have and continue working to evacuate employees from jurisdictions that are closing their borders. Customers have closed or reduced on-site activities, and timelines for completion on certain of our projects have also been extended into next year. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus have also caused significant volatility and, at times, illiquidity in global equity and credit markets. As a result of our current inability to reasonably estimate the full scope of these and future impacts of this outbreak on our ongoing operations, we continue to face uncertainty regarding our liquidity and ability to refinance our Amended Credit Agreement by May 11, 2020, which raises a substantial doubt about our ability to continue as a going concern.
Management believes it is taking all prudent actions to address the substantial doubt about our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face.
RESULTS OF OPERATIONS
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, MTM pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment.
|
Year ended December 31,
|
|||||||||
|
(In thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Revenues:
|
|||||||||
|
Babcock & Wilcox segment
|
$
|
688,340
|
|
$
|
754,576
|
|
$
|
(66,236
|
)
|
|
Vølund & Other Renewable segment
|
121,861
|
|
181,182
|
|
(59,321
|
)
|
|||
|
SPIG segment
|
80,729
|
|
153,625
|
|
(72,896
|
)
|
|||
|
Eliminations
|
(31,819
|
)
|
(26,995
|
)
|
(4,824
|
)
|
|||
|
$
|
859,111
|
|
$
|
1,062,388
|
|
$
|
(203,277
|
)
|
|
33
|
|
Year ended December 31,
|
||||||||
|
(in thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Adjusted EBITDA
(1)
|
|||||||||
|
Babcock & Wilcox segment
(2)
|
$
|
66,644
|
|
$
|
59,546
|
|
$
|
7,098
|
|
|
Vølund & Other Renewable segment
|
(10,477
|
)
|
(275,906
|
)
|
265,429
|
|
|||
|
SPIG segment
|
(2,417
|
)
|
(53,283
|
)
|
50,866
|
|
|||
|
Corporate
(3)
|
(17,580
|
)
|
(24,230
|
)
|
6,650
|
|
|||
|
Research and development costs
|
(2,861
|
)
|
(3,780
|
)
|
919
|
|
|||
|
|
$
|
33,309
|
|
$
|
(297,653
|
)
|
$
|
330,962
|
|
(1)
Adjusted EBITDA, for the
year ended
December 31, 2018
, excludes stock compensation that was previously included in segment results and totals
$1.3 million
in the Babcock & Wilcox segment,
$0.4 million
in the Vølund & Other Renewable segment,
$0.1 million
in the SPIG segment, and
$2.6 million
in Corporate. Beginning in the third quarter of 2019, stock compensation is no longer considered in Adjusted EBITDA for purposes of managing the business, and prior periods have been adjusted to be presented on a comparable basis.
|
(2)
|
The Babcock & Wilcox segment adjusted EBITDA, for the
year ended
December 31, 2018
, excludes
$25.4 million
of net benefit from pension and other postretirement benefit plans, excluding MTM adjustments, that were previously included in the segment results. Beginning in 2019,
net pension benefits
are no longer allocated to the segments, and prior periods have been adjusted to be presented on a comparable basis.
|
|
(3)
|
Allocations are excluded from discontinued operations. Accordingly, allocations previously absorbed by the MEGTEC and Universal businesses in the SPIG segment have been included with other unallocated costs in Corporate, and total
$11.4 million
in the
year ended
December 31, 2018
.
|
Revenues decreased by
$203.3 million
to
$859.1 million
in 2019 as compared to
$1.1 billion
in 2018. Revenue in the Babcock & Wilcox segment decreased by
$66.2 million
primarily due to a global decline in large construction new build projects and a lower volume of parts projects. Revenue in the Vølund & Other Renewable segment decreased by
$59.3 million
partially due to the divestitures of
Palm Beach Resource Recovery Corporation ("PBRRC")
, a subsidiary that held two operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, and Loibl, a materials handling business in Germany. PBRRC and Loibl contributed
$44.5 million
and
$29.9 million
of revenue, respectively in the year ended December 31, 2018. Revenue was also lower in the Volund & Other Renewable segment due to the lower level of activity and changes in estimates, including the effect of the settlements, on the EPC loss contracts as described above and in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
. These declines in the Volund & Other Renewable segment revenue were partially offset by the startup of two operations and maintenance contracts in the U.K. SPIG segment revenue declined
$72.9 million
due to lower volume of new build cooling systems following a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products.
Operating losses improved
$397.2 million
to
$(29.4) million
in 2019 from
$(426.6) million
in 2018, primarily due to costs savings and restructuring initiatives in the Babcock & Wilcox segment, a lower level of losses on the six European Vølund EPC loss contracts as described in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
and a change in strategy in the SPIG segment to improve profitability by focusing on more selective bidding in core geographies and products. Restructuring expenses, advisory fees, intangible asset amortization expense, gains (losses) on dispositions of equity method investees, and impairments are discussed in further detail in the sections below.
Non-GAAP Financial Measures
The following discussion of our business segment results of operations includes a discussion of adjusted gross profit, a non-GAAP financial measure. Adjusted gross profit differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (
"
GAAP
"
). Intangible amortization expense is not allocated to the segments’ adjusted gross profit. A reconciliation of operating 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.
34
|
|
Year ended December 31,
|
||||||||
|
(in thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Adjusted gross profit (loss)
(1)
|
|
|
|||||||
|
Operating loss
|
$
|
(29,382
|
)
|
$
|
(426,600
|
)
|
$
|
397,218
|
|
|
Inventory reserve in Cost of Operations for strategic change in China
|
—
|
|
1,405
|
|
(1,405
|
)
|
|||
|
Selling, general and administrative ("SG&A") expenses
|
150,556
|
|
198,200
|
|
(47,644
|
)
|
|||
|
Advisory fees and settlement costs
|
27,943
|
|
18,625
|
|
9,318
|
|
|||
|
Trade receivable reserve in SG&A for Chinese operations
|
—
|
|
5,845
|
|
(5,845
|
)
|
|||
|
Intangible amortization expense
|
4,274
|
|
6,716
|
|
(2,442
|
)
|
|||
|
Goodwill impairment
|
—
|
|
40,046
|
|
(40,046
|
)
|
|||
|
Restructuring activities and spin-off transaction costs
|
11,707
|
|
16,758
|
|
(5,051
|
)
|
|||
|
Research and development costs
|
2,861
|
|
3,780
|
|
(919
|
)
|
|||
|
(Gain) loss on asset disposals, net
|
(3,940
|
)
|
1,438
|
|
(5,378
|
)
|
|||
|
Equity in income and impairment of investees
|
—
|
|
11,603
|
|
(11,603
|
)
|
|||
|
$
|
164,019
|
|
$
|
(122,184
|
)
|
$
|
286,203
|
|
|
(1)
Intangible amortization is not allocated to the segments' adjusted gross profit, but depreciation is allocated to the segments' adjusted gross profit.
Adjusted gross profit by segment is as follows:
|
Year ended December 31,
|
|||||||||
|
(in thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Adjusted gross profit (loss)
|
|||||||||
|
Babcock & Wilcox segment
|
$
|
148,898
|
|
$
|
141,054
|
|
$
|
7,844
|
|
|
Vølund & Other Renewable segment
|
9,043
|
|
(238,125
|
)
|
247,168
|
|
|||
|
SPIG segment
|
6,078
|
|
(25,113
|
)
|
31,191
|
|
|||
|
$
|
164,019
|
|
$
|
(122,184
|
)
|
$
|
286,203
|
|
|
Babcock & Wilcox Segment Results
|
Year ended December 31,
|
|||||||||
|
(In thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Revenues
|
$
|
688,340
|
|
$
|
754,576
|
|
$
|
(66,236
|
)
|
|
Adjusted EBITDA
|
$
|
66,644
|
|
$
|
59,546
|
|
$
|
7,098
|
|
|
Adjusted gross profit
|
$
|
148,898
|
|
$
|
141,054
|
|
$
|
7,844
|
|
|
Adjusted gross profit %
|
21.6
|
%
|
18.7
|
%
|
|||||
Revenues in the Babcock & Wilcox segment decreased
9%
, or
$66.2 million
, to
$688.3 million
in 2019 compared to
$754.6 million
in 2018. The revenue decrease is attributable to a global decline in large new build and upgrade projects and a lower volume of parts.
Adjusted EBITDA in the Babcock & Wilcox segment increased
12%
, or
$7.1 million
, to
$66.6 million
in 2019 compared to
$59.5 million
in 2018, which is mainly attributable to the results of costs savings and restructuring initiatives partly offset by the decrease in revenue volume as described above. Additionally, warranty expense in the second quarter of 2018 included
$4.3 million
of specific provisions on certain contracts in the Babcock &Wilcox segment for specific technical matters and customer requirements.
Adjusted gross profit in the Babcock & Wilcox segment increased
$7.8 million
to
$148.9 million
in 2019 compared to
$141.1 million
in 2018, which is mainly attributable to the results of costs savings and restructuring initiatives partly offset by the
35
decrease in revenue above. Additionally, warranty expense in the second quarter of 2018 included
$4.3 million
of specific provisions on certain contracts in the Babcock &Wilcox segment for specific technical matters and customer requirements.
Vølund & Other Renewable Segment Results
|
Year ended December 31,
|
|||||||||
|
(in thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Revenues
|
$
|
121,861
|
|
$
|
181,182
|
|
$
|
(59,321
|
)
|
|
Adjusted EBITDA
|
$
|
(10,477
|
)
|
$
|
(275,906
|
)
|
$
|
265,429
|
|
|
Adjusted gross profit (loss)
|
$
|
9,043
|
|
$
|
(238,125
|
)
|
$
|
247,168
|
|
|
Adjusted gross profit (loss) %
|
7.4
|
%
|
(131.4
|
)%
|
|||||
Revenues in the Vølund & Other Renewable segment decreased
33%
, or
$59.3 million
to
$121.9 million
in 2019 compared to
$181.2 million
in 2018. The reduction in revenue partially relates to the divestitures of PBRRC, a subsidiary that held two operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, and Loibl, a materials handling business in Germany, that had previously generated annual revenues of approximately $60 million and $30 million, respectively. PBRRC and Loibl contributed
$44.5 million
and
$29.9 million
of revenue, respectively in the year ended December 31, 2018. Revenue was also lower due to the lower level of activity and changes in estimates, including the effect of the settlements, on the EPC loss contracts as described in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
. These declines in the Volund & Other Renewable segment revenue were partially offset by the startup of two operations and maintenance contracts in the U.K. that followed turnover of the EPC loss contracts to the customers. Our revenue in 2019 was also affected by a previous change in strategy for the Vølund & Other Renewable business and a previous decision to limit bidding on Vølund renewable energy contracts while we focused on progressing the EPC loss contracts, both of which are described above.
Adjusted EBITDA in the Vølund & Other Renewable segment improved
$265.4 million
to
$(10.5) million
in 2019 compared to
$(275.9) million
in 2018. The improvement was primarily due to changes in the estimated revenues and costs to complete the six European Vølund EPC loss contracts. In 2019 and 2018, we recorded
$6.9 million
and
$233.0 million
in net losses including warranty, respectively. Beyond the effect of the loss contracts, Adjusted EBITDA for 2019 included lower levels of direct overhead support, warranty expense and lower SG&A, reflecting the benefits of restructuring offset partially by the absence of adjusted gross profit from PBRRC and Loibl as described above.
Adjusted gross profit (loss) in the Vølund & Other Renewable segment increased
$247.2 million
to
$9.0 million
in 2019 compared to
$(238.1) million
in 2018. The improvement was primarily driven by lower costs to complete the six European Vølund EPC loss contracts as described in the Adjusted EBITDA section above. Beyond the effect of the loss contracts, adjusted gross profit for 2019 included lower levels of direct overhead support and warranty expense, offset by the absence of adjusted gross profit from PBRRC and Loibl as described above.
SPIG Segment Results
|
Year ended December 31,
|
|||||||||
|
(In thousands)
|
2019
|
2018
|
$ Change
|
||||||
|
Revenues
|
$
|
80,729
|
|
$
|
153,625
|
|
$
|
(72,896
|
)
|
|
Adjusted EBITDA
|
$
|
(2,417
|
)
|
$
|
(53,283
|
)
|
$
|
50,866
|
|
|
Adjusted gross profit (loss)
|
$
|
6,078
|
|
$
|
(25,113
|
)
|
$
|
31,191
|
|
|
Adjusted gross profit (loss) %
|
7.5
|
%
|
(16.3
|
)%
|
|||||
Revenues in the SPIG segment decreased
47%
, or
$72.9 million
, to
$80.7 million
in 2019 from
$153.6 million
in 2018. The decrease is primarily due to lower volume of new build cooling systems following a 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products. SPIG's two significant loss contracts, as disclosed in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
, generated revenues of
$18.8 million
and
$59.8 million
in 2019 and 2018, respectively.
36
Adjusted EBITDA in the SPIG segment improved
$50.9 million
to
$(2.4) million
of adjusted EBITDA income in 2019 compared to
$(53.3) million
in 2018, driven by the 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products in addition to the benefit of restructuring, SG&A cost savings and operating cost reductions.
Adjusted gross profit (loss) in the SPIG segment increased
$31.2 million
, to
$6.1 million
in 2019, compared to
$(25.1) million
in 2018. This improvement was driven by the 2017 change in strategy to improve profitability by focusing on more selective bidding in core geographies and products in addition to the benefit of restructuring, SG&A cost savings and operating cost reductions.
Bookings and Backlog
Bookings and backlog are our measure of remaining performance obligations under our sales contracts. It is possible that our methodology for determining bookings and backlog may not be comparable to methods used by other companies.
We generally include expected revenue from contracts in our backlog when we receive written confirmation from our customers authorizing the performance of work and committing the customers to payment for work performed. Backlog may not be indicative of future operating results, and contracts in our backlog may be canceled, modified or otherwise altered by customers. Backlog can vary significantly from period to period, particularly when large new build projects or operations and maintenance contracts are booked because they may be fulfilled over multiple years. Additionally, because we operate globally, our backlog is also affected by changes in foreign currencies each period. We do not include orders of our unconsolidated joint ventures in backlog.
Bookings represent changes to the backlog. Bookings include additions from booking new business, subtractions from customer cancellations or modifications, changes in estimates of liquidated damages that affect selling price and revaluation of backlog denominated in foreign currency. We believe comparing bookings on a quarterly basis or for periods less than one year is less meaningful than for longer periods, and that shorter-term changes in bookings may not necessarily indicate a material trend.
|
Year ended December 31,
|
||||||
|
(In approximate millions)
|
2019
|
2018
|
||||
|
Babcock & Wilcox
|
$
|
524
|
|
$
|
688
|
|
|
Vølund & Other Renewable
(1)(2)
|
(19
|
)
|
(501
|
)
|
||
|
SPIG
|
32
|
|
65
|
|
||
|
Other/eliminations
|
(21
|
)
|
(2
|
)
|
||
|
Bookings
|
$
|
516
|
|
$
|
250
|
|
(1)
Vølund & Other Renewable bookings includes the revaluation of backlog denominated in currency other than U.S. dollars. The foreign exchange impact on Vølund & Other Renewable bookings in the years ended December 31, 2019 and 2018 was $(3.3) million and $(21.5) million, respectively.
(2)
In 2019, Vølund & Other Renewable includes debookings of $19 million related to the sale of Loibl and $72 million related to a 15-year operations and maintenance contract previously expected to follow completion of the fifth European Vølund EPC loss contract, which was canceled following the settlement agreement described in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
. In 2018, Vølund & Other Renewable bookings includes a reduction of approximately $467 million from the sale of PBRRC and $81 million from the settlement of the fifth loss project.
37
Our backlog decline, as expected, is primarily driven by the timing of large new build projects in addition to the Company's focus on core technologies and profitability across all segments, as well as resolution of the European EPC loss contracts. As of December 31, 2018, Vølund and Other Renewable’s backlog included $53.0 million for European EPC contracts and SPIG’s backlog included $45.1 million for products which the Company identified in late 2018 as non-strategic and non-core products, and to focus on bidding on projects in core technologies and geographies. Our backlog as of December 31, 2019 and 2018 was as follows:
|
As of December 31,
|
||||||
|
(In approximate millions)
|
2019
|
2018
|
||||
|
Babcock & Wilcox
|
$
|
220
|
|
$
|
386
|
|
|
Vølund & Other Renewable
(1)
|
188
|
|
327
|
|
||
|
SPIG
|
39
|
|
87
|
|
||
|
Other/eliminations
|
(6
|
)
|
(18
|
)
|
||
|
Backlog
|
$
|
441
|
|
$
|
782
|
|
|
(1)
|
Vølund & Other Renewable backlog at December 31, 2019, includes $171.8 million related to long-term operation and maintenance contracts for renewable energy plants, with remaining durations extending until 2034. Generally, such contracts have a duration of 10-20 years and include options to extend.
|
Of the backlog at
December 31, 2019
, we expect to recognize revenues as follows:
|
(In approximate millions)
|
2020
|
2021
|
Thereafter
|
Total
|
||||||||
|
Babcock & Wilcox
|
$
|
185
|
|
$
|
19
|
|
$
|
16
|
|
$
|
220
|
|
|
Vølund & Other Renewable
|
29
|
|
24
|
|
135
|
|
188
|
|
||||
|
SPIG
|
29
|
|
6
|
|
4
|
|
39
|
|
||||
|
Other/eliminations
|
(6
|
)
|
—
|
|
—
|
|
(6
|
)
|
||||
|
Expected revenue from backlog
|
$
|
237
|
|
$
|
49
|
|
$
|
155
|
|
$
|
441
|
|
Corporate
Corporate costs include SG&A expenses that are not allocated to the reportable segments. These costs include certain executive, compliance, strategic, reporting and legal expenses associated with governance of the total organization and being an SEC registrant. Corporate costs decreased
$6.7 million
to
$17.6 million
in the year ended December 31, 2019 as compared to
$24.2 million
in the year ended December 31, 2018, primarily due to the benefits of restructuring and discretionary spend reductions, partly offset by an incentive compensation award.
Allocations are excluded from discontinued operations, and accordingly,
$11.4 million
of indirect costs that were previously absorbed by the MEGTEC and Universal businesses were included as other unallocated costs in Corporate in 2018.
Advisory Fees and Settlement Costs
Advisory fees and settlement costs increased by
$9.3 million
to
$27.9 million
in the
year ended
December 31, 2019 as compared to
$18.6 million
in the
year ended
December 31, 2018, primarily due to settlement costs to exit the fifth Vølund contract as described in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
, an increase in legal fees related to liquidity planning and pursuit of insurance recoveries. These increases were partly offset by a decrease in financial advisory fees.
Research and Development
Our research and development activities are related to improving our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our and our customers' expectations.
Research and development costs unrelated to specific contracts are expensed as incurred. Research and development expenses totaled
$2.9 million
and
$3.8 million
for the years ended
December 31, 2019
and
2018
, respectively. The reductions resulted primarily from restructuring and cost-control initiatives.
38
Restructuring
In 2018, we began to implement a series of cost restructuring actions, primarily in our U.S., European, Canadian and Asian operations, and corporate functions. These actions were intended to appropriately size our operations and support functions in response to the continuing decline in certain global markets for new build coal-fired power generation, the announcement of the MEGTEC and Universal sale, the level of activity in our Vølund & Other Renewable business and our liquidity needs. Restructuring actions across our business units and corporate functions, including executive severances, resulted in
$11.7 million
and
$16.8 million
of expense in the years ended
December 31, 2019
and
2018
, respectively. Severance expense is recognized over the remaining service periods of affected employees, and as of
December 31, 2019
, we do
no
t expect additional severance expense to be recognized based on actions taken through that date.
Goodwill Impairment
Goodwill and other intangible assets are required to be tested for impairment annually or earlier if there are impairment indicators. No impairment indicators were identified during 2019. Interim impairment testing as of June 30, 2018 was performed at SPIG due to lower bookings in the second quarter of 2018 than previously forecasted, which resulted in a reduction in the forecast for the reporting unit. As a result of the impairment test in 2018, we recognized a
$37.5 million
impairment of goodwill in the SPIG reporting unit, after which it did not have any remaining goodwill. Interim impairment testing was also performed as of June 30, 2018, September 30, 2018 and December 31, 2018 for the Babcock & Wilcox segment, resulting in no additional goodwill impairment. Since June 30, 2018, all remaining goodwill is related to the Babcock & Wilcox segment as described in
Note 8
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
Equity in Income (Loss) of Investees
At December 31, 2019, we do not have any remaining investments in equity method investees. During the first quarter of 2018, we sold our interest in Babcock & Wilcox Beijing Company, Ltd. ("BWBC") to our joint venture partner in China for approximately $21.1 million, resulting in a gain of approximately $6.5 million, which was classified in
equity in income and impairment of investees
in the Consolidated Statement of Operations included in Part II, Item 8 of this annual report. Proceeds from this sale, net of $1.3 million of withholding tax, were $19.8 million. Our former equity method investment in BWBC had a manufacturing facility that designed, manufactured, produced and sold various power plant and industrial boilers, primarily in China.
In July 2018, we completed the sale of our investment in TBWES together with the settlement of related contractual claims and received $15.0 million in cash, of which $7.7 million related to our investment in TBWES and $7.3 million of proceeds were used to pay outstanding claims. In July 2018, the AOCI related to cumulative currency translation loss from our investment in TBWES of $2.6 million was also recognized as a loss and is included in
foreign exchange
in our Consolidated Statement of Operations included in Item 8. TBWES had a manufacturing facility that produced boiler parts and equipment intended primarily for new build coal boiler contracts in India. During the first quarter of 2018, based on a preliminary agreement to sell our investment in TBWES, we recognized an additional $18.4 million other-than-temporary-impairment. The impairment charge was based on the difference in the carrying value of our investment in TBWES and the preliminary sale price. These other-than-temporary-impairment losses were classified in
equity in income and impairment of investees
in the Consolidated Statements of Operations included in Part II, Item 8 of this annual report.
Depreciation and Intangible Asset Amortization
Depreciation expense was
$19.3 million
and
$21.8 million
in the years ended
December 31, 2019
and
2018
, respectively.
We recorded intangible asset amortization expense of
$4.3 million
and
$6.7 million
in the years ended
December 31, 2019
and
2018
, respectively.
In September 2018, we relocated our corporate headquarters to Barberton, Ohio from Charlotte, North Carolina. In December 2019, we consolidated all of our Barberton and most of our Copley, Ohio operations into new, leased office space in Akron, Ohio for our Corporate and Babcock & Wilcox segment functions. The new location in Akron is expected to reduce operating costs, inclusive of rent, and to provide a space that better meets our needs.
We did not incur significant relocation costs; however, since the decision to relocate in the third quarter of 2018, we recognized
$8.1 million
of accelerated depreciation, of which
$4.9 million
was incurred during the year ended December 31, 2019.
39
Pension and Other Postretirement Benefit Plans
We recognize benefits from our defined benefit and other postretirement benefit plans based on actuarial calculations primarily because our expected return on assets is greater than our service costs. Service cost is low because our plan benefits are frozen except for a small number of hourly participants. Pension benefits, excluding MTM adjustments of
$8.8 million
and
$(67.5) million
, were
$14.0 million
and
$25.4 million
in the years ended
December 31, 2019
and
2018
, respectively.
Refer to
Note 13
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
Our pension costs also include MTM adjustments from time to time, as described further in
Note 13
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
. Interim MTM charges are a result of curtailments or settlements. Any MTM charge or gain should not be considered to be representative of future MTM adjustments as such events are not currently predicted and are in each case subject to market conditions and actuarial assumptions as of the date of the even giving rise to the MTM adjustment.
Lump sum payments from our Canadian Plans resulted in plan settlements of a
$0.1 million
loss and a
$0.1 million
gain during 2019 and 2018, respectively. The settlements themselves were not material, but they triggered interim MTM remeasurements of the Canadian Plan's assets and liabilities, resulting in a
$0.6 million
loss during 2019 and a
$0.4 million
gain during 2018.
While we retained the pension liability related to employees of PBRRC after the September 2018 sale of this business, the status change of these participants in the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the "Commercial Operations Plan") resulted in a
$3.5 million
curtailment loss in the third quarter of 2018, which also triggered an interim MTM of the Commercial Operations Plan assets and liabilities that led to a gain of $
7.7 million
in the third quarter of 2018.
Other than service cost of
$0.8 million
and
$0.7 million
in the
years ended
December 31, 2019
and
2018
, respectively, which are related to the small number of hourly participants still accruing benefits within the Babcock & Wilcox segment, pension benefit and MTM adjustments are excluded from the results of our segments. Refer to
Note 13
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
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.
Foreign exchange was a loss of
$16.6 million
and
$28.5 million
for the years ended
December 31, 2019
and 2018, respectively. Foreign exchange gains and losses are primarily related to unhedged intercompany loans denominated in European currencies to fund foreign operations. Foreign exchange losses in 2019 were driven primarily by a strengthening U.S. dollar compared to the underlying European currencies. Additionally, in July 2018, the AOCI related to cumulative currency translation loss from our investment in TBWES of $2.6 million was also recognized as a loss and is included in foreign exchange with other income (expense) in our Consolidated Statement of Operations included in Part II, Item 8 of this annual report.
Income Taxes
|
Year ended December 31,
|
|||||||||
|
(In thousands, except for percentages)
|
2019
|
2018
|
$ Change
|
||||||
|
Loss before income taxes
|
$
|
(124,447
|
)
|
$
|
(555,801
|
)
|
$
|
431,354
|
|
|
Income tax expense
|
$
|
5,286
|
|
$
|
102,224
|
|
$
|
(96,938
|
)
|
|
Effective tax rate
|
(4.2
|
)%
|
(18.4
|
)%
|
|||||
40
We operate in numerous countries that have statutory tax rates different than the U.S. federal statutory tax 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 19% and approximately 30%. We have also maintained full valuation allowances against our net deferred tax assets. Changes in valuation allowances may partly or entirely offset any income tax expense or benefit in a given jurisdiction, depending on the deferred tax balance in that jurisdiction. As a result, we expect our effective income tax rate to vary, potentially significantly, from period to period.
Our income tax expense in 2019 reflects a full valuation allowance against our net deferred tax assets. Deferred tax assets are evaluated each period for realizability and valuation allowances are recorded when the likelihood to realize those deferred tax assets is not more likely than not. Valuation allowances may be reversed 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 in 2019 and 2018 is not reflective of the U.S. statutory rate primarily due to a full valuation allowance against net deferred tax assets. In jurisdictions where we have available net operating loss carryforwards ("NOLs"), such as the U.S., Denmark and Italy, the existence of tax expense primarily reflects withholding taxes or state and local income taxes in state taxing regimes which impose a taxable income limitation. Our income tax expense (benefit) also reflects changes in the jurisdictional mix of income and losses.
In 2018, we recorded a $99.6 million non-cash charge relating to the establishment of a valuation allowance against our remaining net deferred tax assets, and a $1.6 million tax benefit relating to the tax benefits that were sustained because the taxing authority's period of assessment had passed.
Liquidity and Capital Resources
Liquidity and Going Concern Considerations
Our primary liquidity requirements include debt service and working capital needs. We fund our liquidity requirements, primarily through cash generated from operations and external sources of financing, including our Amended Credit Agreement that governs a revolving credit facility ("U.S. Revolving Credit Facility") and our last out term loan facility ("Last Out Term Loans"), each of which are described below in further detail along with other sources of liquidity.
Substantial doubt regarding our ability to continue as a going concern was initially raised in connection with the issuance of our 2018 Consolidated Financial Statements as we faced liquidity challenges from significant decreases in revenues and backlog as well as continued net operating losses, including losses recognized on our six European Vølund EPC loss contracts described in
Note 5
to the Consolidated Financial Statements included in Part II, Item 8 of this annual report.
These liquidity challenges caused us to be out of compliance with certain financial covenants contained in, and resulted in events of default under, the agreements governing certain of our debt at each of December 31, 2018 and March 31, 2019. As a result, we were forced to execute numerous amendments and waivers to waive these defaults and maintain compliance with these agreements.
Our liquidity is provided under a credit agreement dated May 11, 2015, as amended, with a syndicate of lenders ("Amended Credit Agreement") that governs a revolving credit facility and our last out term loan facility. Our Amended Credit Agreement and the related amendments and waivers are described in more detail in
Note 14
,
Note 15
and
Note 19
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
In response to conditions that raised substantial doubt and in order to address our liquidity needs, during the year ended December 31, 2019, we took the following actions, among others, and successfully implemented the following, as described in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this annual report:
|
•
|
reduced uncertainty and provided better visibility into our future liquidity requirements by turning over five of the six European Vølund EPC loss contracts to the customers by the end of second quarter of 2019, partly facilitated by a settlement related to the second and fifth loss contracts as described in
Note 5
, which was funded with proceeds from Tranche A-3 of the Last Out Term Loans
;
|
|
•
|
entered into an additional settlement as described in
Note 5
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, under the terms of this settlement, our obligations to act, and our risk from acting, as the prime EPC should the project move forward was eliminated
;
|
41
|
•
|
received
$10.0 million
in net proceeds from Tranche A-2 of the Last Out Term Loans described in
Note 15
from an affiliate of B. Riley Financial, Inc. (together with each of its affiliates, including B. Riley FBR, Inc. and BRC Partners Opportunity Fund, LP, "B. Riley"), a related party, on March 20, 2019;
|
|
•
|
received
$150.0 million
in face value from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in
Note 15
,
from B. Riley, a related party, on April 5, 2019
;
|
|
•
|
completed the sale of a non-core materials handling business in Germany, Loibl GmbH, effective May 31, 2019 for
€10.0 million
(approximately
$11.4 million
), subject to adjustment, resulting in net proceeds of
$7.4 million
;
|
|
•
|
completed the equitization transactions described in
Note 18
and
Note 19
on July 23, 2019, which included an exchange of all of the outstanding balance of Tranche A-1 of the Last Out Term Loans for equity and a rights offering to raise
$50.0 million
that was used to fully repay Tranche A-2 of the Last Out Term Loans and to reduce a portion of the outstanding principal under Tranche A-3 of the Last Out Term Loans; and
|
|
•
|
entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in
Note 14
and
Note 15
, the most recent of which were Amendments No. 16, No. 17, No. 18, No. 19, and No. 20 dated April 5, 2019, August 7, 2019, December 31, 2019, January 17, 2020, and January 31, 2020, respectively;
and
|
|
•
|
on January 31, 2020, received
$30.0 million
of additional gross borrowings from B. Riley under a new Tranche A-4 of Last Out Term Loans, as described in
Note 15
.
|
As of December 31, 2019, and March 30, 2020, we were in compliance with the terms of the agreements governing our debt and no events of default were continuing. However, the Company’s history of operating losses and negative cash flows from operations represent conditions and events that continue to raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 2019 Consolidated Financial Statements are issued.
In response to the Company’s conditions and events discussed above, the Company has implemented or is in the process of implementing the following plans as described in the Notes to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
:
|
•
|
on January 31, 2020, the Company, B. Riley, a related party, and the lenders executed Amendment No. 20 to the Amended Credit Agreement pursuant to which the Company would undertake a Refinancing transaction and the Company and the lenders would amend and restate the Amended Credit Agreement, each as described in
Note 14
;
|
|
•
|
on January 31, 2020, as required by Amendment No. 20, the Company simultaneously entered into a Backstop Commitment Letter agreement with B. Riley, pursuant to which B. Riley agreed to fund any shortfall in the
$200.0 million
of new debt or equity financing required as part of the terms of the Refinancing transaction stipulated in Amendment No. 20 to the extent such amounts have not been raised by the Company from third parties and to convert, or cause its affiliates to convert, Term Loans into equity to the extent necessary to comply with the Amended Credit Agreement indebtedness limit of
$275.0 million
if the Company is unable to secure third parties to fund a sufficient amount of financing through the issuance of equity as described in
Note 14
;
|
|
•
|
on January 31, 2020, received an incremental Tranche A-5 of Last Term Out Loan commitment to be used in the event certain customer letters of credit are drawn, as described in
Note 15
;
|
|
•
|
on March 12, 2020, filed for waiver of required minimum contributions to the U.S. Pension Plan as described in
Note 13
, that if granted, would reduce cash funding requirements in 2020 by approximately
$25.0 million
and would increase contributions over the following five years.
|
Other potential sources and uses of cash during the next twelve months subsequent to December 31, 2019 include the following as described in the Notes to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
:
|
•
|
the sale of a small business within the Babcock & Wilcox segment as described in
Note 27
;
|
|
•
|
the release of funds deposited in escrow to resolve any submitted claims or adjustments related to the sale of the MEGTEC and Universal businesses as described in
Note 28
; and
|
|
•
|
filed for waiver on March 12, 2020 of required 2019 plan year's minimum contributions to the U.S. Pension Plan as described in
Note 13
, that if not granted, would increase our cash funding requirements in 2020 by approximately
$25.0 million
for total pension and other postretirement benefit funding of approximately
$46.0 million
. The waiver request for the 2018 plan year was approved by the IRS in August 2019. The Company cannot make any assurances that such waiver will be granted.
|
42
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally, with over 100 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. 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. Our headquarters and the headquarters of our Babcock & Wilcox segment in Akron, Ohio, the headquarters of our Vølund & Other Renewable segment in Denmark and the headquarters of our SPIG segment in Italy (among other locations where we and our customers, vendors and suppliers operate) are currently subject to lock-down or shelter-in-place orders under local ordinances, with employees continuing to work remotely if possible. While some of our employees can work remotely, many of our customers and projects require our employees to travel to customer and project worksites. Certain of our customers and significant projects are located in areas where travel restrictions have been imposed, and we have and continue working to evacuate employees from jurisdictions that are closing their borders. Customers have closed or reduced on-site activities, and timelines for completion on certain of our projects have also been extended into next year. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus have also caused significant volatility and, at times, illiquidity in global equity and credit markets. As a result of our current inability to reasonably estimate the full scope of these and future impacts of this outbreak on our ongoing operations, we continue to face uncertainty regarding our liquidity and ability to refinance our Amended Credit Agreement by May 11, 2020, which raises a substantial doubt about our ability to continue as a going concern.
Management believes it is taking all prudent actions to address the substantial doubt about our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face.
In addition to the discussions described above, we continue to evaluate further dispositions, opportunities for additional cost savings and opportunities for insurance recoveries and other claims where appropriate and available. If the value of our business were 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.
Cash and Cash Flows
At
December 31, 2019
, our unrestricted cash and cash equivalents totaled
$43.8 million
and we had total debt of
$283.0 million
. Our foreign business locations held
$38.9 million
of our total unrestricted cash and cash equivalents at
December 31, 2019
. 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. In general, our foreign cash balances are not available to fund our U.S. operations unless the funds are repatriated or used to repay intercompany loans made from the U.S. to foreign entities, which could expose us to taxes we presently have not made a provision for in our results of operations. We presently have no plans to repatriate these funds to the U.S. At
December 31, 2019
, we had approximately
$26.0 million
available for borrowings under the U.S. Revolving Credit Facility.
Cash used in operations was
$176.3 million
in the
year ended
December 31, 2019
, which was primarily due to funding settlements related to European Vølund EPC contracts as described in
Note 5
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
, progress against accrued losses on the six European Vølund EPC loss contracts and working capital build within the Babcock & Wilcox segment related to the timing and mix of work. In the
year ended
December 31, 2018
, cash used in operations was
$281.9 million
and primarily related to funding progress on the six European Vølund EPC loss contracts in the Vølund & Other Renewable segment, corporate overhead (inclusive of interest, pension and other postretirement benefits, financial advisory services, restructuring and spin costs, and research and development) and working capital build within the Babcock & Wilcox segment related to the timing and mix of work. Operating cash flows in the
year ended
December 31, 2018
are primarily represented in the operating loss of continuing operations before non-cash impairments of goodwill, deferred tax valuation allowance, MTM loss from benefit plans, and equity method investments.
Cash flows from investing activities provided net cash of
$8.8 million
in the
year ended
December 31, 2019
, primarily from proceeds received from the sale of Loibl for
$7.4 million
. In the
year ended
December 31, 2018
, net cash provided by investing activities was
$179.2 million
, primarily from asset sales, including the sales MEGTEC and Universal for $112.0 million in cash, net of $22.5 million in cash sold with the businesses, the sale of PBRRC for
$38.8 million
, the sale of two equity method investments, BWBC and TBWES, for
$28.8 million
, and the sale of a small emissions monitoring business for $5.1 million, which were offset by
$5.5 million
of capital expenditures.
43
Cash flows from financing activities provided net cash of
$167.0 million
in the
year ended
December 31, 2019
, primarily related to
$109.6 million
net borrowings from the Last Out Term Loans,
$34.1 million
of net borrowings from the U.S. Revolving Credit Facility, and
$40.4 million
proceeds from the Rights Offering, partly offset by
$16.6 million
of financing fees. Net cash provided by financing activities in the
year ended
December 31, 2018
was
$82.6 million
primarily related to
$50.6 million
of net borrowings from the U.S. Revolving Credit Facility and the
$30.0 million
borrowings from the Last Out Term Loan for working capital purposes. Gross proceeds received from the rights offering were
$248.4 million
, of which
$214.9 million
were used to repay the Second Lien Term Loan, including
$2.3 million
of accrued interest, with the remainder used to fund operations. Cost associated with the financing activity in the
year ended
December 31, 2018
totaled
$25.6 million
.
U.S. Revolving Credit Facility
On May 11, 2015, we entered into a credit agreement (as amended, the "Amended Credit Agreement") with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc. or "BWXT") which governs the U.S. Revolving Credit Facility and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments to the Amended Credit Agreement, including several to avoid default under the financial and other covenants specified in the Amended Credit Agreement. As of
December 31, 2019
, the U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to
$334.6 million
(reduced to
$330.3 million
in March 2020 as a result of the settlement of escrow funds related to the sale of PBRRC), as amended and adjusted for completed asset sales. The proceeds from loans under the U.S. Revolving Credit Facility are available for working capital needs, capital expenditures, permitted acquisitions and other general corporate purposes, and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the amendment described below. As of
December 31, 2019
, we were in compliance with the terms of the Amended Credit Agreement.
On April 5, 2019, we entered into Amendment No. 16 to the Amended Credit Agreement. Amendment No. 16 provided (i)
$150.0 million
in additional commitments from an affiliate of B. Riley Financial, Inc. (together with each of its affiliates, including B. Riley FBR, Inc. and BRC Partners Opportunity Fund, LP, "B. Riley"), under Tranche A-3 of the Last Out Term Loans and (ii) an incremental uncommitted facility of up to
$15.0 million
, to be provided by B. Riley or an assignee. Amendment No. 16 also, among other items, (1) modified the definition of EBITDA in the Amended Credit Agreement to, among other things, include addbacks related to losses in connection with the Vølund projects, fees and expenses related to the Amendment and prior waivers to the Credit Agreement and fees associated with Vølund project related settlement agreements, (2) reduced to
$30.0 million
the minimum liquidity we are required to maintain at the time of any credit extension request and at the last business day of any calendar month, (3) allowed for the issuance of up to
$20.0 million
of new letters of credit with respect to any future Vølund project, (4) changed the consolidated interest coverage and senior leverage coverage covenant ratios, (5) decreased the relief period borrowing sublimit, (6) changed or removed certain contract completion milestones that we had been required to meet in connection with one renewable energy project, (7) permitted letters of credit to expire one year after the maturity of the revolving credit facility, (8) created a new event of default for failure to terminate the U.S. Revolving Credit Facility on or prior to March 15, 2020, which effectively accelerated the maturity date of the U.S. Revolving Credit Facility from June 30, 2020, (9) established a deferred ticking fee of
1.0%
if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental
1.0%
per month after December 15, 2019 and (10) provided for a contingent consent fee of
4.0%
if certain actions are not undertaken to refinance the facility by December 15, 2019.
On August 7, 2019, we entered into Amendment No. 17 to the Amended Credit Agreement, which clarified the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts and reset the loss basket for certain Vølund contracts to
$15.0 million
to align with the clarification commencing with the quarter ended March 31, 2019.
On December 31, 2019 and January 17, 2020 we entered into Amendments No. 18 and No.19 to the Amended Credit Agreement, respectively, which together extended the then current
$205 million
sub-limit on borrowings under the U.S. Revolving Credit Facility and the deadline for completing certain required corporate actions in connection with a refinancing of the Amended Credit Agreement to January 31, 2020.
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement, which provided two additional tranches of Last Out Term Loan and made the other changes specified below.
44
The Amended Credit Agreement and our cash management agreements with our lenders and their affiliates continue to be (1) guaranteed by substantially all of our wholly owned domestic subsidiaries and certain of our foreign subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The U.S. Revolving Credit Facility requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements, with the exception to the prepayment of certain Last Out Term Loans pursuant to the Equitization Transactions described in
Note 19
; such Last Out Term Loan prepayments were limited by an aggregate principal amount of
$86 million
plus interest. The U.S. Revolving Credit Facility requires certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions. Such prepayments may require us to reduce the commitments under the U.S. Revolving Credit Facility by a corresponding amount of such prepayments.
As of
December 31, 2019
, revolving loans outstanding under the U.S. Revolving Credit Facility bore interest at our option at either (1) the LIBOR rate plus
6.0%
per annum during 2019 and
7.0%
per annum during 2020, or (2) the Base Rate plus
5.0%
per annum during 2019, and
6.0%
per annum during 2020. The Base Rate is the highest of the Federal Funds rate plus
0.5%
, the one-month LIBOR rate plus
1.0%
, or the administrative agent's prime rate. The components of our interest expense are detailed in
Note 20
. A commitment fee of
1.0%
per annum is charged on the unused portions of the U.S. Revolving Credit Facility. Additionally, an annual facility fee of
$1.5 million
was paid on the first business day of 2019, and a pro-rated amount of
$0.8 million
was paid on January 3, 2020. A deferred fee reduction from
2.5%
to
1.5%
became effective on October 10, 2018, due to achieving certain asset sales. A letter of credit fee of
2.5%
per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of
1.5%
per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Letter of credit fees are payable on the tenth business day after the last business day of each fiscal quarter.
In connection with Amendment No. 16, we recorded a contingent consent fee of
$13.9 million
(
4.0%
of total availability) as part of deferred financing fees in
other current assets
in the Consolidated Balance Sheets because it has been earned but may be waived, and was amortized to interest expense as of December 31, 2019. The full amount of the contingent consent fee was accrued as of December 31, 2019. See further discussion in
Note 20
. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of
1.0%
of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental
1.0%
per month after December 15, 2019. As of December 31, 2019, we accrued deferred ticking fee expense of
$5.1 million
as the actions required were not completed by December 15, 2019.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. These include a maximum permitted senior debt leverage ratio and a minimum consolidated interest coverage ratio, each as defined in the Amended Credit Agreement. Compliance with these ratios was waived with respect to the quarter ended December 31, 2018 and new ratios were established in Amendment No. 16 commencing with the quarter ended March 31, 2019.
Effective beginning April 5, 2019 with Amendment No. 16, the remaining maximum permitted senior debt leverage ratios, as defined in the Amended Credit Agreement, are as follows:
•
3.50
:1.00 for the quarter ending March 31, 2020
•
3.25
:1.00 for the quarter ending June 30, 2020
Effective beginning April 5, 2019 with Amendment No. 16, the remaining minimum consolidated interest coverage ratios, as defined in the Amended Credit Agreement, are as follows:
•
1.50
:1.00 for the quarter ending March 31, 2020
•
1.75
:1.00 for the quarter ending June 30, 2020
The Amended Credit Agreement contains various conditions that we must satisfy in order to be able to borrow funds under the U.S. Revolving Credit Facility, including the accuracy of specified representations and warranties, such as the absence, other than as a result of our European Vølund EPC loss contracts that are the subject of settlement agreements and our entry into and performance of those settlement agreements, of certain material adverse changes with respect to our consolidated operations, business, assets, properties, liabilities or conditions (financial or otherwise). The Amended Credit Agreement also contains a number of customary affirmative and negative covenants, including restrictions on our ability and the ability of our
45
subsidiaries to (i) declare or pay any dividends or other distributions on account of our common stock and (ii) make payments of principal and interest on subordinated indebtedness. A breach of any of the covenants in our Amended Credit Agreement could result in an event of default under our Amended Credit Agreement, which would result in our inability to access our U.S. Revolving Credit Facility for additional borrowings and letters of credit while any default exists. Upon the occurrence of such an event of default, all amounts outstanding under our U.S. Revolving Credit Facility and our Last Out Term Loans could also be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. These restrictions are subject to very limited exceptions, including the ability of our subsidiaries to declare and pay dividends to us or to any other guarantor of our indebtedness under the Amended Credit Agreement and certain other payments between us and certain of our subsidiaries. Because we are currently operating under a relief period under the Amended Credit Agreement, we do not have the ability to declare or pay dividends or other distributions or make payments of principal and interest on subordinated indebtedness to third parties. As part of Amendment No. 20 to the Amended Credit Agreement discussed below, we and our lenders agreed that the Further Amended and Restated Credit Agreement (as defined below) executed in connection with the refinancing of the Amended Credit Agreement would permit us to declare and pay cash dividends at the end of each fiscal quarter of up to
$6.0 million
. Our ability to declare and pay cash dividends under the Further Amended and Restated Credit Agreement will be reduced by the amount of interest expense in any fiscal quarter payable with respect to outstanding Last Out Term Loans under the Further Amended and Restated Credit Agreement. We do not have any third party subordinated indebtedness currently outstanding.
At
December 31, 2019
, borrowings under the U.S. Revolving Credit Facility consisted of
$179.0 million
at a weighted average interest rate of
8.03%
. Usage under the U.S. Revolving Credit Facility consisted of
$179.0 million
of borrowings,
$27.1 million
of financial letters of credit and
$97.6 million
of performance letters of credit. At
December 31, 2019
, we had approximately
$30.9 million
available to meet letter of credit requirements based on our overall facility size, of which
$26.0 million
was available for additional borrowings under our sublimit. As of December 31, 2019, the U.S. Revolving Credit Facility balance is presented as a current liability in our Consolidated Balance Sheet as we are currently dependent upon the waivers granted in our most recent limited waiver to maintain our current compliance with the covenants in the Amended Credit Agreement.
Amendment No. 20 to the Amended Credit Agreement - Subsequent Event
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement, which requires us to refinance our Amended Credit Agreement on or prior to May 11, 2020. Amendment No. 20 provides (i)
$30.0 million
of additional commitments from B. Riley, a related party, under a new Tranche A-4 of Last Out Term Loans and (ii) an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturity of the Last Out Term Loans under the Amended Credit Agreement in the event certain customer letters of credit are drawn. The proceeds from the Tranche A-4 Last Out Term Loans may be used under the terms of Amendment No. 20 to support the Company's growth, for working capital and general corporate purposes, and to reimburse certain expenses of B. Riley as specified by Amendment No. 20. The terms of the Tranche A-4 and Tranche A-5 Last Out Term Loans are the same as the terms for the Tranche A-3 under the Amended Credit Agreement.
Amendment No. 20 also, among other things, (i) modifies the definition of EBITDA in the Amended Credit Agreement to, among other things, include add-backs for up to
$5.0 million
of business restructuring expenses during the period from January 1, 2020 to January 1, 2022 and for all restructuring-related professional fees and expenses, (ii) sets the current sub-limit on borrowings under our U.S. Revolving Credit Facility at
$205.0 million
, (iii) adds a new event of default in the event of any amendment, supplement, waiver or modification without the written consent of the administrative agent under the Amended Credit Agreement of, or certain breaches and defaults and failures to perform by B. Riley under, the Backstop Commitment Letter (as defined and described below) and (iv) removes the covenant with regard to corporate action milestones.
After giving effect to Amendment No. 20, at January 31, 2020, our U.S. Revolving Credit Facility was limited to
$334.6 million
(reduced to
$330.3 million
in March 2020 as a result of the settlement of escrow funds related to the sale of PBRRC) of borrowings or letters of credit, of which approximately
$50.6 million
was available for borrowing under the
$205.0 million
sublimit currently applicable to borrowings under our U.S. Revolving Credit Facility.
Agreement to Further Amend and Restate the Amended Credit Agreement by May 2020
Pursuant to Amendment No. 20, the Company and the lenders also agreed upon a term sheet pursuant to which the Company would undertake the Refinancing and the Company and the lenders would amend and restate the Credit Agreement on the
46
terms, among others, specified below (as amended and restated, the “Further Amended and Restated Credit Agreement”). Pursuant to this term sheet, the Refinancing will consist of, among other things, the following:
|
•
|
At least
$200.0 million
of new debt or equity financing upon the effectiveness of the Further Amended and Restated Credit Agreement,
|
|
•
|
All debt relating to the Refinancing (including the continuation of any existing term loans under the Amended Credit Agreement) may not exceed
$275.0 million
in aggregate principal amount,
|
|
•
|
All debt relating to the Refinancing must be issued on the same terms as the term loans under the Amended Credit Agreement, provided that (i) the maturity date of such debt shall be six months after January 1, 2022, (ii) the interest on such debt may not exceed
12%
per annum and (iii) the aggregate cash interest expense of such debt may not exceed
$6.0 million
in any fiscal quarter, and
|
|
•
|
Certain disqualifying stock instruments may not be issued.
|
The proceeds of the Refinancing must be used to repay in full the Company’s then-existing revolving credit loans and to refinance certain existing term loans. Following the Refinancing, the Further Amended and Restated Credit Agreement will establish a new revolving credit facility that will be limited to
$195.0 million
, with
$30.0 million
available for revolving credit loans for working capital purposes and
$165.0 million
available solely for existing and new letters of credit (with financial letters of credit being capped at
$35.0 million
), that will mature on January 1, 2022. The terms of the Further Amended and Restated Credit Agreement will permit letters of credit to remain outstanding with termination dates that extend up to six months beyond the January 1, 2022 maturity date, so long as each such letter of credit is cash collateralized in accordance with the terms of the Further Amended and Restated Credit Agreement. Upon consummation of the Refinancing, the Company must pay an aggregate
$7.0 million
of amendment fees and outstanding deferred fees under the Amended Credit Agreement, with
$8.9 million
of fees being waived and an aggregate
$9.5 million
of fees being deferred.
Following the Refinancing, all revolving credit loans under the Further Amended and Restated Credit Agreement will bear interest at a rate of LIBOR plus
5.00%
or the base rate (as defined in the Amended Credit Agreement) plus
4.00%
, all letters of credit will bear interest at a rate of
4.00%
, and cash collateralized letters of credit will bear interest at a rate of
1.50%
. Collateral, representations and warranties and events of default under the Further Amended and Restated Credit Agreement will remain consistent with the collateral, representations and warranties and events of default under the Amended Credit Agreement. Affirmative and negative covenants under the Further Amended and Restated Credit Agreement will be substantially consistent with the affirmative and negative covenants under the Amended Credit Agreement, except that, among other changes, (i) covenants requiring a consultant and chief implementation officer will be deleted, (ii) a third party letter of credit basket of up to
$50.0 million
will be added, (iii) a cash dividend of up to
$6.0 million
per fiscal quarter will be permitted in certain circumstances, (iv) certain covenants for charges related to the Vølund loss projects will be removed, (v) the minimum required liquidity will be increased from
$30.0 million
to
$40.0 million
, and (vi) certain interest coverage and leverage covenant levels will be reset based on Company projections. As part of the Refinancing, the size of the Company’s board of directors may also be reduced to 5 members, with B. Riley retaining the ability to appoint two members.
The obligations of our lenders to enter into the Further Amended and Restated Credit Agreement on the terms agreed as part of Amendment No. 20 are subject to various conditions, including the completion of the Refinancing on the terms contemplated by Amendment No. 20, a limitation on the aggregate amount of our indebtedness following completion of the Refinancing and the accuracy of our representations and warranties made under the Further Amended and Restated Credit Agreement. These representations and warranties in particular will be substantially consistent with those under the Amended Credit Agreement, including a representation regarding the absence, other than as a result of our European Vølund EPC loss contracts that are the subject of settlement agreements and our entry into and performance of those settlement agreements, of certain material adverse changes with respect to our consolidated operations, business, assets, properties, liabilities or condition (financial or otherwise).
Backstop Commitment Letter
On January 31, 2020, the Company also entered into a letter agreement with B. Riley (the "Backstop Commitment Letter"), a related party, pursuant to which B. Riley agreed to (i) fund any shortfall in the
$200.0 million
of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties, and (ii) convert, or cause its applicable affiliates to convert, term loans into equity to the extent necessary to comply with the indebtedness limit of
$275.0 million
if the Company is unable to secure third parties to fund a sufficient amount of financing through the issuance of equity. If B. Riley is called upon to fund such a shortfall, the terms of such debt or equity financing will comply with the terms of the Refinancing described above.
47
Foreign Revolving Credit Facilities
Outside of the United States, we had revolving credit facilities in Turkey that were used to provide working capital to local operations. At December 31, 2018, we had aggregate borrowings under these facilities of
$0.6 million
whose weighted average interest rate was
40.0%
. In 2018, our banking counterparties in Turkey began requiring the conversion of these revolving credit facilities to be denominated in Turkish liras instead of euros, resulting in correspondingly higher market interest rates. As of January 4, 2019, the foreign revolving credit facilities were paid in full and closed.
Last Out Term Loans
Last Out Term Loans are incurred under our Amended 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 the Amended Credit Agreement. In connection with Amendment No. 16, the maturity date for all Last Out Term Loans was extended to December 31, 2020 and further extends to July 1, 2022 upon the effectiveness the Refinancing.
Until July 22, 2019, after giving effect to Amendment No. 16, all outstanding Last Out Term Loans bore interest at a fixed rate per annum of
15.5%
per annum. of which
7.5%
was payable in cash and
8%
was payable in kind. As of
December 31, 2019
, and after giving effect to the completion of the 2019 Rights Offering (as defined below) on July 23, 2019, the interest rate on the Tranche A-3 Last Out Term Loans under the Amended Credit Agreement became a fixed rate per annum of
12%
payable in cash. The total effective interest rate of Tranche A-3 was
20.71%
on
December 31, 2019
. The total effective interest rate of Tranche A-1 was
25.38%
on December 31, 2018. Interest expense associated with the Last Out Term Loans is detailed in
Note 20
.
As of December 31, 2019, the Tranche A-3 net carrying value of
$104.0 million
is presented as a current liability in our Consolidated Balance Sheet as we are currently dependent upon the waivers granted in our most recent limited waiver to maintain our current compliance with the covenants in the Amended Credit Agreement.
As of December 31, 2018, the Tranche A-1 net carrying value of
$30.6 million
is presented as a current liability in our Consolidated Balance Sheets as a result of the limited waivers that extend through April 5, 2019.
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 three draws in September and October 2018. In November 2018, Tranche A-1 was assigned to Vintage Capital Management, LLC ("Vintage"), also a related party. The original face principal amount of Tranche A-1 was
$30.0 million
, which excludes a
$2.0 million
up-front fee that was added to the principal balance on the first funding date, transaction expenses, paid-in-kind interest and original issue discounts of
10%
for each draw under Tranche A-1.
On April 5, 2019, Amendment No. 16 and the Letter Agreement (defined in
Note 19
) modified Tranche A-1 by adding a substantive conversion option that required the conversion of the Tranche A-1 to common stock at
$0.30
per share in connection with the Equitization Transactions described in
Note 19
, which was conditioned upon, among other things, the closing of the 2019 Rights Offering and shareholder approval. Under U.S. GAAP, a debt modification with the same borrower that results in substantially different terms is accounted for as an extinguishment of the existing debt and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair value of the new debt as compared to the carrying value of the extinguished debt. The carrying value of Tranche A-1 was
$33.3 million
on April 5, 2019 before the modification. The initial fair value of the new debt was estimated to be its initial principal value of
$37.3 million
. We recognized a loss on debt extinguishment of
$4.0 million
in the quarter ended June 30, 2019, primarily representing the unamortized value of the original issuance discount and fees on the extinguished debt. The interest rates of Tranche A-1 are described above. As described in
Note 19
, Tranche A-1 was exchanged for shares on July 23, 2019, after which no remaining amounts were outstanding.
Tranche A-2
On March 19, 2019, we entered into Amendment No. 15 to our Amended Credit Agreement, which allowed us to borrow
$10.0 million
of net proceeds from B. Riley, a related party, under a Tranche A-2 of Last Out Term Loans, which were fully
48
borrowed on March 20, 2019. Tranche A-2 did not include an original issue discount. Interest rates of Tranche A-2 are described above. As described in
Note 19
, Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions.
Tranche A-3
Under Amendment No. 16 to our Amended Credit Agreement, we borrowed
$150.0 million
face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The
$141.4 million
net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European Vølund loss projects as described in
Note 5
, with the remainder used for working capital and general corporate purposes. Tranche A-3 included an original issue discount of
3.2%
of the gross cash proceeds. An additional discount was recorded upon shareholder approval of the warrants and Equitization Transactions. These additional discounts totaled
$8.1 million
, which included
$6.1 million
for the estimated fair value of warrants issued to B. Riley, a related party, as described in
Note 16
and
Note 19
and
$2.0 million
for the intrinsic value of the beneficial conversion feature that allowed conversion of a portion of the Tranche A-3 to equity under the Backstop Commitment described in
Note 19
. Both the warrants and the Backstop Commitment were contemplated in connection of the original extension of Tranche A-3 as part of the Letter Agreement.
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 described in
Note 19
, 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. The Tranche A-3 matures on December 31, 2020 and extends to July 1, 2022 upon the effectiveness of the Refinancing.
Tranches A-4 & A-5 - Subsequent Events
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement. Amendment No. 20 provides (i)
$30.0 million
of additional commitments from B. Riley, a related party, under a new Tranche A-4 of Last Out Term Loans and (ii) an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturity of the Last Out Term Loans under the Amended Credit Agreement in the event certain customer letters of credit are drawn. The proceeds from Tranche A-4 may be used under the terms of Amendment No. 20 to support the Company's growth, 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 and Tranche A-5 are the same as the terms for the Tranche A-3 under the Amended Credit Agreement.
As of January 31, 2020, we borrowed
$30.0 million
face value of the Tranche A-4 and received net proceeds of
$26.3 million
after paying total fees of
$3.7 million
. Net proceeds were used to support the Company's growth. The Tranche A-4 matures on December 31, 2020 and extends to July 1, 2022 upon the effectiveness of the Refinancing.
As of March 30, 2020, no borrowings occurred under Tranche A-5
.
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 as described in
Note 18
, 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 2019 Rights Offering were used to fully repay Tranche A-2 of the Last Out Term Loans, including accrued paid-in-kind interest.
|
49
|
•
|
$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 payable in cash and continues to bear the other terms described in
Note 15
. 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.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of
December 31, 2019
and December 31, 2018 was
$88.5 million
and
$175.9 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
$31.8 million
as of
December 31, 2019
. Of the letters of credit issued under the U.S. Revolving Credit Facility,
$35.2 million
are subject to foreign currency revaluation.
We have posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. These bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of
December 31, 2019
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$221.3 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping surety bonds was
$22.7 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.
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. Direct costs of the 2019 Rights Offering totaled
$0.8 million
for the
year ended
December 31, 2019
.
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 as described in
Note 19
, 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 26
. The 2019 Rights Offering was pursuant to the April 5, 2019 Letter Agreement and the Equitization
50
Transactions described in
Note 19
and were approved by stockholders at the Company's annual stockholder meeting on June 14, 2019.
2018 Rights Offering
On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase
1.4
common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of
$3.00
per common share (the "2018 Rights Offering"). On April 10, 2018, we extended the expiration date and amended certain other terms regarding the 2018 Rights Offering. As amended, each right entitled holders to purchase
2.8
common shares at a price of
$2.00
per share. The 2018 Rights Offering expired at 5:00 p.m., New York City time, on April 30, 2018. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2018 Rights Offering did not include an oversubscription privilege.
The 2018 Rights Offering resulted in the issuance of
12.4 million
common shares on April 30, 2018. Gross proceeds from the 2018 Rights Offering were
$248.4 million
. Of the proceeds received,
$214.9 million
was used to fully repay the Second Lien Credit Agreement, including
$2.3 million
of accrued interest, and the remainder was used for working capital purposes. Direct costs of the 2018 Rights Offering totaled
$3.3 million
.
Warrants
On July 23, 2019,
1,666,667
warrants were issued to certain entities affiliated with B. Riley in connection with the Equitization Transactions described in
Note 19
. Each warrant can be converted to one share of our common stock at an exercise price of
$0.01
per share. As of
December 31, 2019
, all
1,666,667
warrants remain unexercised.
The warrants were contemplated in the April 5, 2019 Letter Agreement (defined in
Note 19
) and on June 14, 2019, the issuance of the warrants was approved by stockholders in the Company's annual stockholder meeting, which established the grant date for accounting purposes. The grant date fair value of the warrants was estimated to be
$6.1 million
using the Black-Scholes option pricing model. The warrants may not be put back to the Company for cash, and they qualify for equity classification. The grant date value of the warrants was included as part of the original-issue discount based on the relative fair value method for Tranche A-3 of the Last Out Term Loans described in
Note 15
because the value was part of the consideration required by the Tranche A-3 lender in order to extend the Tranche A-3 loans.
Second Lien Term Loan Extinguished in 2018
On August 9, 2017, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of AIP, governing the Second Lien Term Loan Facility. The Second Lien Term Loan Facility consisted of a second lien term loan in the principal amount of $175.9 million, all of which was borrowed on August 9, 2017, and a delayed draw term loan facility in the principal amount of up to $20.0 million, which was drawn in a single draw on December 13, 2017.
On May 4, 2018, we fully repaid the Second Lien Term Loan Facility using $212.6 million of the proceeds from the 2018 Rights Offering, plus accrued interest of
$2.3 million
. A loss on extinguishment of this debt of approximately $49.2 million was recognized in the second quarter of 2018 as a result of the remaining $32.5 million unamortized debt discount on the date of the repayment, $16.2 million of make-whole interest, and $0.5 million of fees associated with the extinguishment. See
Note 20
for the Second Lien Term Loan Facility's interest expense.
Off-Balance Sheet Arrangements
There were no significant off-balance sheet arrangements at
December 31, 2019
.
EFFECTS OF INFLATION AND CHANGING PRICES
Our
Consolidated Financial Statements included in Part II, Item 8 of this annual report
are prepared in accordance with generally accepted accounting principles in the United States, using historical United States dollar accounting ("historical
51
cost"). Statements based on historical cost, however, do not adequately reflect the cumulative effect of increasing costs and changes in the purchasing power of the United States dollar, especially during times of significant and continued inflation.
In order to minimize the negative impact of inflation on our operations, we attempt to cover the increased cost of anticipated changes in labor, material and service costs, either through an estimate of those changes, which we reflect in the original price, or through price escalation clauses in our contracts. However, there can be no assurance we will be able to cover all changes in cost using this strategy.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The
Consolidated Financial Statements included in Part II, Item 8 of this annual report
are prepared in accordance with accounting principles generally accepted in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are affected by management's application of accounting policies. We believe the following are our most critical accounting policies that we apply in the preparation of our consolidated financial statements. These policies require our most difficult, subjective and complex judgments, often as a result of the need to make estimates of matters that are inherently uncertain.
Contracts and revenue recognition
A significant portion of our revenue is recognized over time using the cost-to-cost input method, which involves significant estimates. This method of revenue recognition uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead, warranty and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications.
We review contract price and cost estimates each reporting period as the work progresses and reflect adjustments proportionate to the costs incurred to date relative to total estimated costs at completion in income in the period when those estimates are revised. These changes in estimates can be material. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected contract loss is recognized in full through the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in
other accrued liabilities
in the Consolidated Balance Sheets. In addition, when we determine that an uncompleted contract will not be completed on-time and the contract has liquidated damages provisions, we recognize the estimated liquidated damages we will incur and record them as a reduction of the estimated selling price in the period the change in estimate occurs. Losses accrued in advance of the completion of a contract are included in
other accrued liabilities
in our Consolidated Balance Sheets.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
We recognize claims receivable in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for enforcing the claim, the cause of any additional costs incurred and whether those costs are identifiable or otherwise determinable, the nature and reasonableness of those costs, the objective evidence available to support the amount of the claim, and our relevant history with the counter-party that supports our expectations about their willingness and ability to pay for the additional cost along with a reasonable margin. In our Consolidated Balance Sheets, claims receivable at December 31, 2019 and December 31, 2018 were not significant.
Our revenue recognition policies, assumptions, changes in estimates and significant loss contracts are described in greater detail in
Note 2
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
Warranty
We accrue estimated expense included in
cost of operations
on our Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts. In addition, we record
52
specific provisions or reductions when we expect the actual warranty costs to significantly differ from the accrued estimates. Factors that impact our estimate of warranty costs include prior history of warranty claims and our estimates of future costs of materials and labor. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. See
Note 11
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
for further discussion.
Pension and other postretirement benefit plans
We use actuarial and other assumptions in calculating the cost and benefit obligations of our pension and postretirement benefits. These assumptions include discount rates, expected returns on plan assets, mortality and retirement rates. These assumptions represent our best estimates based on historical experience and other factors.
Actual experience that differs from these assumptions or future changes in assumptions will affect our recognized benefit obligations and related costs. We recognize net actuarial gains and losses into earnings in the fourth quarter of each year, or as interim remeasurements are required, as a component of net periodic benefit cost. Net actuarial gains and losses occur when actual experience differs from any of the various assumptions used to value our pension and postretirement benefit plans or when assumptions, which are revisited annually through our update of our actuarial valuations, change due to current market conditions or underlying demographic changes. The primary factors contributing to net actuarial gains and losses are changes in the discount rate used to value the obligations as of the measurement date each year, the difference between the actual and expected return on plan assets. The effect of changes in the discount rate and expected rate of return on plan assets in combination with the actual return on plan assets can result in significant changes in our estimated pension and postretirement benefit cost and our consolidated financial condition.
The following sensitivity analysis shows the impact of a 25 basis point change in the assumed discount rate and return on assets on our pension plan obligations and expense for the year ended December 31, 2019:
|
(In millions)
|
0.25% increase
|
0.25% decrease
|
||||
|
Discount rate
:
|
||||||
|
Effect on ongoing net periodic benefit cost
(1)
|
$
|
(29.6
|
)
|
$
|
31.0
|
|
|
Effect on projected benefit obligation
|
(32.2
|
)
|
33.4
|
|
||
|
Return on assets:
|
||||||
|
Effect on ongoing net periodic benefit cost
|
(2.1
|
)
|
2.1
|
|
||
(1)
Excludes effect of annual MTM adjustment.
A 25 basis point change in the assumed discount rate and return on assets would have no meaningful impact on our other postretirement benefit plan obligations and expense for the year ended December 31, 2019 individually or in the aggregate, excluding the impact of any annual MTM adjustments we record annually.
Loss contingencies
We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such probable loss is not reasonably estimable. We are currently involved in some significant litigation. See
Note 23
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
for a discussion of this litigation. As disclosed, we have accrued estimates of the probable losses associated with these matters; however, these matters are typically resolved over long periods of time and are often difficult to estimate due to the possibility of multiple actions by third parties. Therefore, it is possible that future earnings could be affected by changes in our estimates related to these matters.
Goodwill impairment
As of
December 31, 2019
, we had
$38.3 million
and
$8.9 million
of goodwill remaining in our Babcock & Wilcox and Construction reporting units, respectively, both of which are within the Babcock & Wilcox segment. Impairments in 2018 fully impaired goodwill in our SPIG reporting unit.
53
Each year as of October 1, or as circumstances indicate, we evaluate goodwill at each reporting unit to assess recoverability, and impairments, if any, are recognized in earnings. We perform a qualitative analysis when we believe that there is substantially in excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant facts and circumstances that could affect fair value. Deterioration in macroeconomic, industry and market conditions, cost factors, overall financial performance, share price decline or entity and reporting unit specific events could cause us to believe a qualitative test is no longer appropriate.
When we determine that it is appropriate to test goodwill for impairment utilizing a quantitative test, we compare the fair value of a reporting unit to its carrying amount, including goodwill. We utilize both the income and market valuation approaches to provide inputs into the estimate of the fair value of our reporting units, which would be considered by market participants. Under the income valuation approach, we employ a discounted cash flow model to estimate the fair value of each reporting unit. This model requires the use of significant estimates and assumptions regarding future revenues, costs, margins, capital expenditures, changes in working capital, terminal year growth rate and cost of capital. Our cash flow models are based on our forecasted results for the applicable reporting units. Actual results could differ materially from our projections. Some assumptions, such as future revenues, costs and changes in working capital are company driven and could be affected by a loss of one or more significant contracts or customers; failure to control costs on certain contracts; or a decline in demand based on changing economic, industry or regulatory conditions. Changes in external market conditions may affect certain other assumptions, such as the cost of capital. Market conditions can be volatile and are outside of our control.
Under the market valuation approach, we employ both the guideline publicly traded company method and the similar transactions method. The guideline publicly traded company method indicates the fair value of the equity of each reporting unit by comparing it to publicly traded companies in similar lines of business. The similar transactions method considers recent prices paid for business in our industry or related industries. After identifying and selecting guideline companies and similar transactions, we analyze their business and financial profiles for relative similarity. Factors such as size, growth, risk and profitability are analyzed and compared to each of our reporting units. Assumptions include the selection of our peer companies and use of market multiples, which could deteriorate or increase based on the profitability of our competitors and performance of their stock, which is often dependent on the performance of the stock market and general economy as a whole.
Beginning April 1, 2018, we adopted ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
Goodwill impairment tests after April 1, 2018 recognize impairment for the amount that the carrying value of a reporting unit exceeds its fair value up to the remaining amount of goodwill. Impairment testing was performed as of October 1, 2019 (annual impairment test) and no impairment was indicated. Because the Babcock & Wilcox reporting unit had a negative carrying value, reasonable changes in the assumptions would not indicate impairment. Reasonable changes in assumptions for our Construction reporting unit also would not indicate impairment because of the 70% headroom indicated by the test at October 1, 2019. These results were consistent with the testing performed during 2018.
The SPIG reporting unit did not perform goodwill impairment testing during 2019 since goodwill was fully impaired during the second quarter 2018, resulting in a $37.5 million impairment of goodwill in the SPIG reporting unit as of June 30, 2018.
Further description of our impairment tests is included in
Note 8
to the
Consolidated Financial Statements included in Part II, Item 8 of this annual report
.
Long-lived asset impairment
We carry our property, plant and equipment at depreciated cost, reduced by provisions to recognize economic impairment when we determine impairment has occurred. Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business and result in future asset impairments.
54
We evaluate our long-lived assets whenever circumstances indicate impairment could exist. SPIG's financial results and goodwill impairments triggered evaluations of long-lived assets, including the identifiable intangible assets, in the SPIG asset group as of August 31, 2019, December 31, 2018, September 30, 2018 and June 30, 2018. The SPIG reporting unit was determined to be the asset group with the lowest level of identifiable cash flows for purposes of our impairment evaluation, other than described below. In periods when goodwill remained on that reporting unit, we tested the SPIG asset group for impairment in accordance with ASC 360-10 before testing goodwill for impairment at the SPIG reporting unit in accordance with ASC 350-20. The first step of the ASC 360 impairment test is to compare the carrying value of the asset group to the sum of the undiscounted cash flows attributable to the asset group and the residual values of the assets at the end of the life of the primary assets. In our tests as of August 31, 2019, December 31, 2018 and June 30, 2018, the sum of the undiscounted cash flows and the residual value of the primary assets exceeded the carrying value of the SPIG asset group and no impairment was indicated. In each of these tests, reasonable changes in the assumptions used to develop the future cash flow would not have indicated impairment. In the fourth quarter of 2018, a strategic decision was made to exit certain geographies of the SPIG segment, and as a result, $2.5 million of the customer relationship and other intangible assets related to these geographies were impaired. SPIG did not have significant property, plant and equipment in these geographies.
Income taxes
Income tax expense for federal, foreign, state, and local income taxes is calculated on pre-tax income based on the income tax law in effect at the latest balance sheet date and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess deferred taxes and the adequacy of the valuation allowance on a quarterly basis. In determining the need for a valuation allowance, the historical and projected financial performance of the entity recording the net deferred tax asset is considered, along with all other relevant positive and negative evidence. As of
December 31, 2019
, we have a valuation allowance on our net deferred tax assets in substantially all jurisdictions, as we do not believe it is more likely than not that the deferred tax assets will be realized.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our consolidated financial statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of provision for income taxes on our Consolidated Statements of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposures to market risks have not changed materially from those disclosed here under "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report. Our exposure to market risk from changes in interest rates relates primarily to our cash equivalents and our investment portfolio, which primarily consists of investments in U.S. government obligations and highly liquid money market instruments denominated in U.S. dollars. We are averse to principal loss and seek to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. Our investments are classified as available-for-sale.
Our U. S. Revolving Credit Facility is variable-rate debt, so its fair value would not be significantly affected by changes in prevailing market rates. On
December 31, 2019
, its principal balance was
$179.0 million
, and the weighted average interest rate was
8.03%
. Our Last Out Term Loans are also variable-rate debt and it has a paid-in-kind interest feature which is additive to the principal balance. The variable interest rate plus the paid-in-kind interest feature are primarily determined by liquidity risk, and that market interest rates risk is not believed to be a significant indication of fair value of the Last Out Term Loans. On
December 31, 2019
, the principal balance of Tranche A-3 of the Last Out Term Loans was
$113.3 million
inclusive of original issue discount costs, transaction expenses, and paid-in-kind interest, and the weighted average interest rate was
20.71%
. If the balances of the U.S. Revolving Credit Facility and the Last Out Term Loans at
December 31, 2019
were to remain constant, a 100 basis points change in market interest rates would impact our cash flow by an estimated $2.9 million per year.
We have operations in many foreign locations, and, as a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange ("FX") rates or weak economic conditions in those foreign markets. Foreign
55
currency transaction gains and losses on intercompany loans that are not designated as permanent loans are recorded in earnings. Our primary foreign currency exposures are Danish krone, Great British pound, Euro, Canadian dollar, and Chinese yuan. If the balances of these intercompany loans at
December 31, 2019
were to remain constant, a 100 basis points change in FX rates would impact our earnings by an estimated $6.7 million per year. Historically, we have hedged those risks with FX forward contracts. We do not enter into speculative derivative positions. During the third quarter of 2017, our hedge counterparties removed the lines of credit supporting new FX forward contracts. Subsequently, we have not entered into any new FX forward contracts and the last of our derivative contracts were sold during the first quarter of 2019. The unrealized FX gain balance was transferred to
advanced billings on contracts
on our Consolidated Balance Sheets included in Part II, Item 8 of this annual report during the third quarter of 2019 and is expected to be recognized over time as the related projects are completed. As of December 31, 2019, we do not hold any derivative assets or liabilities.
56
ITEM 8. Consolidated Financial Statements and Supplemental Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Babcock & Wilcox Enterprises, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Babcock & Wilcox Enterprises, Inc. (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, stockholders' (deficit) equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has uncertainty regarding its ability to refinance its Credit Agreement by May 11, 2020, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1
.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/S/ DELOITTE & TOUCHE LLP
Cleveland, Ohio
March 30, 2020
We have served as the Company’s auditor since 2014.
57
BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Year ended December 31,
|
||||||
|
(in thousands, except per share amounts)
|
2019
|
2018
|
||||
|
Revenues
|
$
|
859,111
|
|
$
|
1,062,388
|
|
|
Costs and expenses:
|
||||||
|
Cost of operations
|
698,853
|
|
1,192,032
|
|
||
|
Selling, general and administrative expenses
|
151,069
|
|
204,706
|
|
||
|
Goodwill and other intangible asset impairment
|
—
|
|
40,046
|
|
||
|
Advisory fees and settlement costs
|
27,943
|
|
18,625
|
|
||
|
Restructuring activities and spin-off transaction costs
|
11,707
|
|
16,758
|
|
||
|
Research and development costs
|
2,861
|
|
3,780
|
|
||
|
(Gain) loss on asset disposals, net
|
(3,940
|
)
|
1,438
|
|
||
|
Total costs and expenses
|
888,493
|
|
1,477,385
|
|
||
|
Equity in income and impairment of investees
|
—
|
|
(11,603
|
)
|
||
|
Operating loss
|
(29,382
|
)
|
(426,600
|
)
|
||
|
Other (expense) income:
|
|
|
||||
|
Interest expense
|
(94,901
|
)
|
(49,613
|
)
|
||
|
Interest income
|
923
|
|
244
|
|
||
|
Loss on debt extinguishment
|
(3,969
|
)
|
(49,241
|
)
|
||
|
Gain (loss) on sale of business
|
(3,601
|
)
|
39,815
|
|
||
|
Benefit plans, net
|
22,800
|
|
(42,123
|
)
|
||
|
Foreign exchange
|
(16,602
|
)
|
(28,542
|
)
|
||
|
Other – net
|
285
|
|
259
|
|
||
|
Total other expense
|
(95,065
|
)
|
(129,201
|
)
|
||
|
Loss before income tax expense
|
(124,447
|
)
|
(555,801
|
)
|
||
|
Income tax expense
|
5,286
|
|
102,224
|
|
||
|
Loss from continuing operations
|
(129,733
|
)
|
(658,025
|
)
|
||
|
Income (loss) from discontinued operations, net of tax
|
694
|
|
(66,832
|
)
|
||
|
Net loss
|
(129,039
|
)
|
(724,857
|
)
|
||
|
Net loss (income) attributable to non-controlling interest
|
7,065
|
|
(435
|
)
|
||
|
Net loss attributable to stockholders
|
$
|
(121,974
|
)
|
$
|
(725,292
|
)
|
|
Basic and diluted loss per share - continuing operations
|
$
|
(3.89
|
)
|
$
|
(47.62
|
)
|
|
Basic and diluted earnings (loss) per share - discontinued operations
|
0.02
|
|
(4.83
|
)
|
||
|
Basic and diluted loss per share
|
$
|
(3.87
|
)
|
$
|
(52.45
|
)
|
|
|
|
|
|
|
||
|
Shares used in the computation of (loss) earnings per share:
|
|
|
|
|
||
|
Basic and diluted
(1)
|
31,514
|
|
13,829
|
|
||
(1)
Basic and diluted shares reflect the bonus element for the 2019 Rights Offering on July 23, 2019 as described in
Note 3
and the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
See accompanying notes to Consolidated Financial Statements.
58
BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Net loss
|
$
|
(129,039
|
)
|
$
|
(724,857
|
)
|
|
Other comprehensive income (loss):
|
|
|
||||
|
Currency translation adjustments (CTA)
|
13,401
|
|
16,452
|
|
||
|
|
|
|
||||
|
Reclassification of CTA to net loss
|
3,176
|
|
551
|
|
||
|
|
|
|
||||
|
Derivative financial instruments:
|
|
|
||||
|
Unrealized (gains) losses on derivative financial instruments
|
(1,367
|
)
|
1,074
|
|
||
|
Income tax benefit
|
—
|
|
184
|
|
||
|
Unrealized (gains) losses on derivative financial instruments, net of taxes
|
(1,367
|
)
|
890
|
|
||
|
Derivative financial instrument losses (gains) reclassified into net loss
|
202
|
|
(1,623
|
)
|
||
|
Income tax expense
|
—
|
|
(358
|
)
|
||
|
Reclassification adjustment for losses (gains) included in net loss, net of taxes
|
202
|
|
(1,265
|
)
|
||
|
|
|
|
||||
|
Derivative financial instruments reclassified to advanced billings on contracts
|
(197
|
)
|
—
|
|
||
|
Benefit obligations:
|
|
|
||||
|
Unrealized losses on benefit obligations, net of taxes
|
—
|
|
(22
|
)
|
||
|
|
|
|
|
|
||
|
Amortization of benefit plan benefits
|
(1,857
|
)
|
(3,941
|
)
|
||
|
Income tax benefit
|
—
|
|
1,630
|
|
||
|
Amortization of benefit plan benefits, net of taxes
|
(1,857
|
)
|
(5,571
|
)
|
||
|
|
|
|
||||
|
Other
|
—
|
|
(38
|
)
|
||
|
|
|
|
||||
|
Other comprehensive income
|
13,358
|
|
10,997
|
|
||
|
Total comprehensive loss
|
(115,681
|
)
|
(713,860
|
)
|
||
|
Comprehensive loss (income) attributable to non-controlling interest
|
7,140
|
|
(229
|
)
|
||
|
Comprehensive loss attributable to stockholders
|
$
|
(108,541
|
)
|
$
|
(714,089
|
)
|
See accompanying notes to Consolidated Financial Statements.
59
BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
|
(in thousands, except per share amount)
|
December 31, 2019
|
December 31, 2018
|
||||
|
Cash and cash equivalents
|
$
|
43,772
|
|
$
|
43,214
|
|
|
Restricted cash and cash equivalents
|
13,169
|
|
17,065
|
|
||
|
Accounts receivable – trade, net
|
142,201
|
|
197,203
|
|
||
|
Accounts receivable – other
|
23,263
|
|
44,662
|
|
||
|
Contracts in progress
|
91,579
|
|
144,727
|
|
||
|
Inventories
|
63,103
|
|
61,323
|
|
||
|
Other current assets
|
27,044
|
|
41,425
|
|
||
|
Current assets held for sale
|
8,089
|
|
—
|
|
||
|
Total current assets
|
412,220
|
|
549,619
|
|
||
|
Net property, plant and equipment, and finance lease
|
97,053
|
|
90,892
|
|
||
|
Goodwill
|
47,160
|
|
47,108
|
|
||
|
Intangible assets
|
25,300
|
|
30,793
|
|
||
|
Right-of-use assets
|
12,498
|
|
—
|
|
||
|
Other assets
|
24,966
|
|
27,085
|
|
||
|
Non-current assets held for sale
|
7,322
|
|
—
|
|
||
|
Total assets
|
$
|
626,519
|
|
$
|
745,497
|
|
|
|
|
|
|
|
||
|
Revolving credit facilities
|
$
|
179,000
|
|
$
|
145,506
|
|
|
Last out term loans
|
103,953
|
|
30,649
|
|
||
|
Accounts payable
|
109,913
|
|
199,882
|
|
||
|
Accrued employee benefits
|
18,256
|
|
19,319
|
|
||
|
Advance billings on contracts
|
75,287
|
|
149,367
|
|
||
|
Accrued warranty expense
|
33,376
|
|
45,117
|
|
||
|
Operating lease liabilities
|
4,323
|
|
—
|
|
||
|
Other accrued liabilities
|
68,848
|
|
122,149
|
|
||
|
Current liabilities held for sale
|
9,538
|
|
—
|
|
||
|
Total current liabilities
|
602,494
|
|
711,989
|
|
||
|
Pension and other accumulated postretirement benefit liabilities
|
259,272
|
|
281,647
|
|
||
|
Non-current finance lease liabilities
|
30,454
|
|
—
|
|
||
|
Non-current operating lease liabilities
|
8,388
|
|
—
|
|
||
|
Other non-current liabilities
|
20,850
|
|
29,158
|
|
||
|
Total liabilities
|
921,458
|
|
1,022,794
|
|
||
|
Commitments and contingencies
|
|
|
||||
|
Stockholders' deficit:
|
|
|
||||
|
Common stock, par value $0.01 per share, authorized shares of 500,000 and 200,000 at December 31, 2019 and 2018, respectively; issued and outstanding shares of 46,374 and 16,879 at December 31, 2019 and 2018, respectively
(1)
|
4,699
|
|
1,748
|
|
||
|
Capital in excess of par value
|
1,142,614
|
|
1,047,062
|
|
||
|
Treasury stock at cost, 616 and 587 shares at December 31, 2019 and 2018, respectively
(1)
|
(105,707
|
)
|
(105,590
|
)
|
||
|
Accumulated deficit
|
(1,339,888
|
)
|
(1,217,914
|
)
|
||
|
Accumulated other comprehensive income (loss)
|
1,926
|
|
(11,432
|
)
|
||
|
Stockholders' deficit attributable to shareholders
|
(296,356
|
)
|
(286,126
|
)
|
||
|
Non-controlling interest
|
1,417
|
|
8,829
|
|
||
|
Total stockholders' deficit
|
(294,939
|
)
|
(277,297
|
)
|
||
|
Total liabilities and stockholders' deficit
|
$
|
626,519
|
|
$
|
745,497
|
|
(1)
Issued and outstanding common shares and treasury stock shares reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
See accompanying notes to Consolidated Financial Statements.
60
BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
|
Common Stock
|
Capital In
Excess of Par Value |
Treasury Stock
|
Accumulated Deficit
|
Accumulated
Other Comprehensive (Loss) Income |
Non-controlling
Interest |
Total
Stockholders’ Deficit |
|||||||||||||||||
|
|
Shares
(1)
|
Par Value
|
|||||||||||||||||||||
|
|
|
(in thousands, except share and per share amounts)
|
|||||||||||||||||||||
|
Balance at January 1, 2018
|
4,407
|
|
$
|
499
|
|
$
|
800,968
|
|
$
|
(104,785
|
)
|
$
|
(492,150
|
)
|
$
|
(22,429
|
)
|
$
|
8,600
|
|
$
|
190,703
|
|
|
Net loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(725,292
|
)
|
—
|
|
435
|
|
(724,857
|
)
|
|||||||
|
Revenue recognition standard adoption
|
—
|
|
—
|
|
—
|
|
—
|
|
(472
|
)
|
—
|
|
—
|
|
(472
|
)
|
|||||||
|
Currency translation adjustments
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
17,003
|
|
(206
|
)
|
16,797
|
|
|||||||
|
Derivative financial instruments
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(375
|
)
|
—
|
|
(375
|
)
|
|||||||
|
Defined benefit obligations
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,593
|
)
|
—
|
|
(5,593
|
)
|
|||||||
|
Available-for-sale investments
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(38
|
)
|
—
|
|
(38
|
)
|
|||||||
|
Rights offering, net
|
12,426
|
|
1,243
|
|
243,846
|
|
—
|
|
—
|
|
—
|
|
—
|
|
245,089
|
|
|||||||
|
Stock-based compensation charges
|
46
|
|
6
|
|
2,248
|
|
(805
|
)
|
—
|
|
—
|
|
—
|
|
1,449
|
|
|||||||
|
Balance at December 31, 2018
|
16,879
|
|
$
|
1,748
|
|
$
|
1,047,062
|
|
$
|
(105,590
|
)
|
$
|
(1,217,914
|
)
|
$
|
(11,432
|
)
|
$
|
8,829
|
|
$
|
(277,297
|
)
|
|
Net loss
|
—
|
|
—
|
|
—
|
|
—
|
|
(121,974
|
)
|
—
|
|
(7,065
|
)
|
(129,039
|
)
|
|||||||
|
Currency translation adjustments
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
16,577
|
|
(75
|
)
|
16,502
|
|
|||||||
|
Derivative financial instruments
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,362
|
)
|
—
|
|
(1,362
|
)
|
|||||||
|
Defined benefit obligations
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,857
|
)
|
—
|
|
(1,857
|
)
|
|||||||
|
Stock-based compensation charges
|
108
|
|
12
|
|
3,072
|
|
(117
|
)
|
—
|
|
—
|
|
—
|
|
2,967
|
|
|||||||
|
Rights offering, net
|
13,922
|
|
1,392
|
|
39,544
|
|
—
|
|
—
|
|
—
|
|
—
|
|
40,936
|
|
|||||||
|
Last Out Term Loan principal value exchanged for common stock
|
15,465
|
|
1,547
|
|
44,848
|
|
—
|
|
—
|
|
—
|
|
—
|
|
46,395
|
|
|||||||
|
Issuance of beneficial conversion option of Last Out Term Loan Tranche A-3
|
—
|
|
—
|
|
2,022
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2,022
|
|
|||||||
|
Warrants
|
—
|
|
—
|
|
6,066
|
|
—
|
|
—
|
|
—
|
|
—
|
|
6,066
|
|
|||||||
|
Dividends to non-controlling interest
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(272
|
)
|
(272
|
)
|
|||||||
|
Balance at December 31, 2019
|
46,374
|
|
$
|
4,699
|
|
$
|
1,142,614
|
|
$
|
(105,707
|
)
|
$
|
(1,339,888
|
)
|
$
|
1,926
|
|
$
|
1,417
|
|
$
|
(294,939
|
)
|
(1)
Issued and outstanding common shares and treasury stock shares reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
See accompanying notes to Consolidated Financial Statements.
61
BABCOCK & WILCOX ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Cash flows from operating activities:
|
||||||
|
Net loss
|
$
|
(129,039
|
)
|
$
|
(724,857
|
)
|
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
||||||
|
Depreciation and amortization of long-lived assets
|
23,605
|
|
32,003
|
|
||
|
Amortization of deferred financing costs, debt discount and payment-in-kind interest
|
61,181
|
|
25,727
|
|
||
|
Non-cash operating lease expense
|
5,356
|
|
—
|
|
||
|
Loss (gain) on sale of business
|
3,601
|
|
(33,919
|
)
|
||
|
Loss on debt extinguishment
|
3,969
|
|
49,241
|
|
||
|
Goodwill impairment of discontinued operations
|
—
|
|
72,309
|
|
||
|
Goodwill and other intangible asset impairment
|
—
|
|
40,046
|
|
||
|
Income from equity method investees
|
—
|
|
(6,758
|
)
|
||
|
Other-than-temporary impairment of equity method investment in TBWES
|
—
|
|
18,362
|
|
||
|
(Gains) losses on asset disposals and impairments
|
(3,940
|
)
|
1,313
|
|
||
|
(Benefit from) provision for deferred income taxes, including valuation allowances
|
(855
|
)
|
98,060
|
|
||
|
Mark to market (gains) losses and prior service cost amortization for pension and postretirement plans
|
(10,661
|
)
|
63,511
|
|
||
|
Stock-based compensation, net of associated income taxes
|
3,084
|
|
2,254
|
|
||
|
Changes in assets and liabilities:
|
||||||
|
Accounts receivable
|
63,914
|
|
80,376
|
|
||
|
Dividends from equity method investees
|
—
|
|
890
|
|
||
|
Accrued insurance receivable
|
—
|
|
12,300
|
|
||
|
Contracts in progress
|
48,492
|
|
(6,301
|
)
|
||
|
Advance billings on contracts
|
(71,268
|
)
|
(22,343
|
)
|
||
|
Inventories
|
(4,141
|
)
|
10,337
|
|
||
|
Income taxes
|
1,273
|
|
(5,342
|
)
|
||
|
Accounts payable
|
(80,459
|
)
|
(4,360
|
)
|
||
|
Accrued and other current liabilities
|
(23,101
|
)
|
38,734
|
|
||
|
Accrued contract loss
|
(50,654
|
)
|
21,531
|
|
||
|
Pension liabilities, accrued postretirement benefits and employee benefits
|
(16,346
|
)
|
(38,976
|
)
|
||
|
Other, net
|
(328
|
)
|
(6,023
|
)
|
||
|
Net cash used in operating activities
|
(176,317
|
)
|
(281,885
|
)
|
||
|
Cash flows from investing activities:
|
||||||
|
Purchase of property, plant and equipment
|
(3,804
|
)
|
(5,473
|
)
|
||
|
Proceeds from sale of business
|
7,445
|
|
155,016
|
|
||
|
Proceeds from sale of equity method investments in joint venture
|
—
|
|
28,764
|
|
||
|
Purchases of available-for-sale securities
|
(8,914
|
)
|
(34,836
|
)
|
||
|
Sales and maturities of available-for-sale securities
|
11,547
|
|
35,220
|
|
||
|
Other, net
|
2,505
|
|
534
|
|
||
|
Net cash from investing activities
|
8,779
|
|
179,225
|
|
||
62
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Cash flows from financing activities:
|
||||||
|
Borrowings under our U.S. revolving credit facility
|
291,600
|
|
565,200
|
|
||
|
Repayments of our U.S. revolving credit facility
|
(257,500
|
)
|
(514,600
|
)
|
||
|
Repayments of our second lien term loan facility
|
—
|
|
(212,590
|
)
|
||
|
Borrowings under Last Out Term Loan Tranche A-1
|
—
|
|
30,000
|
|
||
|
Borrowings under Last Out Term Loan Tranche A-2
|
10,000
|
|
—
|
|
||
|
Repayments under Last Out Term Loan Tranche A-2
|
(10,309
|
)
|
—
|
|
||
|
Borrowings under Last Out Term Loan Tranche A-3
|
141,350
|
|
—
|
|
||
|
Repayments under Last Out Term Loan Tranche A-3
|
(31,457
|
)
|
—
|
|
||
|
Repayments under our foreign revolving credit facilities
|
(605
|
)
|
(7,322
|
)
|
||
|
Shares of our common stock returned to treasury stock
|
(117
|
)
|
(805
|
)
|
||
|
Proceeds from rights offering
|
40,376
|
|
247,132
|
|
||
|
Costs related to rights offering
|
(832
|
)
|
(3,286
|
)
|
||
|
Debt issuance costs
|
(16,619
|
)
|
(22,360
|
)
|
||
|
Issuance of common stock
|
1,392
|
|
1,243
|
|
||
|
Other, net
|
(261
|
)
|
—
|
|
||
|
Net cash from financing activities
|
167,018
|
|
82,612
|
|
||
|
Effects of exchange rate changes on cash
|
(2,818
|
)
|
(2,320
|
)
|
||
|
Net decrease in cash, cash equivalents and restricted cash
|
(3,338
|
)
|
(22,368
|
)
|
||
|
Less net increase in cash and cash equivalents of discontinued operations
|
—
|
|
(12,950
|
)
|
||
|
Net decrease in cash, cash equivalents and restricted cash of continuing operations
|
(3,338
|
)
|
(9,418
|
)
|
||
|
Cash, cash equivalents and restricted cash of continuing operations, beginning of period
|
60,279
|
|
69,697
|
|
||
|
Cash, cash equivalents and restricted cash of continuing operations, end of period
|
$
|
56,941
|
|
$
|
60,279
|
|
See accompanying notes to Consolidated Financial Statements.
63
BABCOCK & WILCOX ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31,
2019
NOTE 1
– BASIS OF PRESENTATION
The 2019 and 2018 Consolidated Financial Statements of Babcock & Wilcox Enterprises, Inc. (“B&W,” “management,” “we,” “us,” “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission ("SEC"). We have eliminated all intercompany transactions and accounts. We present the notes to our Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.
Going Concern Considerations
The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Substantial doubt regarding our ability to continue as a going concern was initially raised in connection with the issuance of our 2018 Consolidated Financial Statements as we faced liquidity challenges from significant decreases in revenues and backlog as well as continued net operating losses, including losses recognized on our six European Vølund EPC loss contracts described in
Note 5
.
These liquidity challenges caused us to be out of compliance with certain financial covenants contained in, and resulted in events of default under, the agreements governing certain of our debt at each of December 31, 2018 and March 31, 2019. As a result, we were forced to execute numerous amendments and waivers to waive these defaults and maintain compliance with these agreements.
Our liquidity is provided under a credit agreement dated May 11, 2015, as amended, with a syndicate of lenders ("Amended Credit Agreement") that governs a revolving credit facility ("U.S. Revolving Credit Facility") and our last out term loan facility ("Last Out Term Loans"). Our Amended Credit Agreement and the related amendments and waivers are described in more detail in
Note 14
,
Note 15
and
Note 19
.
In response to conditions that raised substantial doubt and in order to address our liquidity needs, during the year ended December 31, 2019, we took the following actions, among others, and successfully implemented the following:
|
•
|
reduced uncertainty and provided better visibility into our future liquidity requirements by turning over five of the six European Vølund EPC loss contracts to the customers by the end of second quarter of 2019, partly facilitated by a settlement related to the second and fifth loss contracts as described in
Note 5
, which was funded with proceeds from Tranche A-3 of the Last Out Term Loans
;
|
|
•
|
entered into an additional settlement as described in
Note 5
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, under the terms of this settlement, our obligations to act, and our risk from acting, as the prime EPC should the project move forward was eliminated
;
|
|
•
|
received
$10.0 million
in net proceeds from Tranche A-2 of the Last Out Term Loans described in
Note 15
from an affiliate of B. Riley Financial, Inc. (together with each of its affiliates, including B. Riley FBR, Inc. and BRC Partners Opportunity Fund, LP, "B. Riley"), a related party, on March 20, 2019;
|
|
•
|
received
$150.0 million
in face value from Tranche A-3 of the Last Out Term Loans before original issuance discount and fees, as described in
Note 15
,
from B. Riley, a related party, on April 5, 2019
;
|
|
•
|
completed the sale of a non-core materials handling business in Germany, Loibl GmbH, effective May 31, 2019 for
€10.0 million
(approximately
$11.4 million
), subject to adjustment, resulting in net proceeds of
$7.4 million
;
|
|
•
|
completed the equitization transactions described in
Note 18
and
Note 19
on July 23, 2019, which included an exchange of all of the outstanding balance of Tranche A-1 of the Last Out Term Loans for equity and a rights offering to raise
$50.0 million
that was used to fully repay Tranche A-2 of the Last Out Term Loans and to reduce a portion of the outstanding principal under Tranche A-3 of the Last Out Term Loans;
|
|
•
|
entered into several amendments and waivers to avoid default and improve our liquidity under the terms of our Amended Credit Agreement as described in
Note 14
and
Note 15
, the most recent of which were Amendments No. 16, No. 17, No. 18, No. 19, and No. 20 dated April 5, 2019, August 7, 2019, December 31, 2019, January 17, 2020, and January 31, 2020, respectively;
and
|
64
|
•
|
on January 31, 2020, received
$30.0 million
of additional gross borrowings from B. Riley under a new Tranche A-4 of Last Out Term Loans, as described in
Note 15
.
|
As of December 31, 2019, and March 30, 2020, we were in compliance with the terms of the agreements governing our debt and no events of default were continuing. However, the Company’s history of operating losses and negative cash flows from operations represent conditions and events that continue to raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 2019 Consolidated Financial Statements are issued.
In response to the Company’s conditions and events discussed above, the Company has implemented or is in the process of implementing the following plans:
|
•
|
on January 31, 2020, the Company, B. Riley, a related party, and the lenders executed Amendment No. 20 to the Amended Credit Agreement pursuant to which the Company would undertake a Refinancing transaction and the Company and the lenders would amend and restate the Amended Credit Agreement, each as described in
Note 14
;
|
|
•
|
on January 31, 2020, as required by Amendment No. 20, the Company simultaneously entered into a Backstop Commitment Letter agreement with B. Riley, pursuant to which B. Riley agreed to fund any shortfall in the
$200.0 million
of new debt or equity financing required as part of the terms of the Refinancing transaction stipulated in Amendment No. 20 to the extent such amounts have not been raised by the Company from third parties and to convert, or cause its affiliates to convert, Term Loans into equity to the extent necessary to comply with the Amended Credit Agreement indebtedness limit of
$275.0 million
if the Company is unable to secure third parties to fund a sufficient amount of financing through the issuance of equity as described in
Note 14
;
|
|
•
|
on January 31, 2020, received an incremental Tranche A-5 of Last Term Out Loan commitment to be used in the event certain customer letters of credit are drawn, as described in
Note 15
;
|
|
•
|
on March 12, 2020, filed for waiver of required minimum contributions to the U.S. Pension Plan as described in
Note 13
, that if granted, would reduce cash funding requirements in 2020 by approximately
$25.0 million
and would increase contributions over the following five years. The Company cannot make any assurances that such waiver will be granted.
|
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and has subsequently spread globally, with over 100 countries around the world confirming infections, including the United States and countries throughout Europe and Southeast Asia. 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. Our headquarters and the headquarters of our Babcock & Wilcox segment in Akron, Ohio, the headquarters of our Vølund & Other Renewable segment in Denmark and the headquarters of our SPIG segment in Italy (among other locations where we and our customers, vendors and suppliers operate) are currently subject to lock-down or shelter-in-place orders under local ordinances, with employees continuing to work remotely if possible. While some of our employees can work remotely, many of our customers and projects require our employees to travel to customer and project worksites. Certain of our customers and significant projects are located in areas where travel restrictions have been imposed, and we have and continue working to evacuate employees from jurisdictions that are closing their borders. Customers have closed or reduced on-site activities, and timelines for completion on certain of our projects have also been extended into next year. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus have also caused significant volatility and, at times, illiquidity in global equity and credit markets. As a result of our current inability to reasonably estimate the full scope of these and future impacts of this outbreak on our ongoing operations, we continue to face uncertainty regarding our liquidity and ability to refinance our Amended Credit Agreement by May 11, 2020, which raises a substantial doubt about our ability to continue as a going concern.
Management believes it is taking all prudent actions to address the substantial doubt about our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.
Reverse Stock Split
On July 11, 2019, the Company's board of directors approved a reverse stock split of one-for-ten on the Company's issued and outstanding common stock which became effective on July 24, 2019. The one-for-ten reverse stock split automatically
65
converted every ten shares of the Company's outstanding and treasury common stock prior to the effectiveness of the reverse stock split into one share of common stock. No fractional shares were issued in the reverse stock split. Instead, stockholders who would otherwise have held fractional shares received cash payments (without interest) in respect of such fractional shares. The reverse stock split did not impact any stockholder's percentage ownership of the Company, subject to the treatment of fractional shares. The reverse stock split was undertaken to allow the Company to regain compliance with the continued listing standards of the New York Stock Exchange ("NYSE") relating to minimum price per share.
All share and per share data contained in these Consolidated Financial Statements reflects the retroactive application of the aforementioned reverse stock split.
NOTE 2
– SIGNIFICANT ACCOUNTING POLICIES
Reportable segments
We operate in
three
reportable segments. Our reportable segments are as follows:
|
•
|
Babcock & Wilcox segment
:
focused on the supply of and aftermarket services for steam-generating, environmental and auxiliary equipment for power generation and other industrial applications.
|
|
•
|
Vølund & Other Renewable segment
:
focused on the supply of steam-generating systems, environmental and auxiliary equipment and operations and maintenance services for the waste-to-energy and biomass power generation industries.
|
|
•
|
SPIG segment
:
focused on the supply of custom-engineered cooling systems for steam applications along with related aftermarket services.
|
For financial information about our segments see
Note 4
to our Consolidated Financial Statements.
Use of estimates
We use estimates and assumptions to prepare our Consolidated Financial Statements in conformity with GAAP. Some of our more significant estimates include our estimate of costs to complete long-term construction contracts, estimates associated with assessing whether goodwill and other long-lived assets are impaired, estimates of costs to be incurred to satisfy contractual warranty requirements, estimates of the value of acquired intangible and tangible assets, estimates associated with the realizability of deferred tax assets, and estimates we make in selecting assumptions related to the valuations of our pension and postretirement plans, including the selection of our discount rates, mortality and expected rates of return on our pension plan assets. These estimates and assumptions affect the amounts we report in our Consolidated Financial Statements and accompanying notes. Our actual results could differ from these estimates. Variances could result in a material effect on our financial condition and results of operations in future periods.
Earnings per share
We have computed earnings per common share on the basis of the weighted average number of common shares, and, where dilutive, common share equivalents, outstanding during the indicated periods. The weighted average shares used to calculate basic and diluted earnings per share reflect the bonus element for the 2019 Rights Offering on July 23, 2019 and the one-for-ten reverse stock split on July 24, 2019. We have a number of forms of stock-based compensation, including incentive and non-qualified stock options, restricted stock, restricted stock units, performance shares, and performance units, subject to satisfaction of specific performance goals. We include the shares applicable to these plans in dilutive earnings per share when related performance criteria have been met. The computation of basic and diluted earnings per share is included in
Note 3
.
Investments
Our investments primarily relate to our wholly owned insurance subsidiary. Our investments, which are primarily highly liquid money market instruments, are classified as available-for-sale and are carried at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive income (loss). We classify investments
66
available for current operations in the Consolidated Balance Sheets as current assets, while we classify investments held for long-term purposes as non-current assets. We adjust the amortized cost of debt securities for amortization of premiums and accretion of discounts to maturity. That amortization is included in interest income. We include realized gains and losses on our investments in
other - net
in our Consolidated Statements of Operations. The cost of securities sold is based on the specific identification method. We include interest on securities in interest income.
Foreign currency translation
We translate assets and liabilities of our foreign operations into U.S. dollars at current exchange rates, and we translate items in our statement of operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency financial statements as a component of accumulated other comprehensive income (loss). We report foreign currency transaction gains and losses in income. We have included transaction losses of
$(16.6) million
and
$(28.5) million
in the years ended
December 31, 2019
and
2018
, respectively, in
foreign exchange
in our Consolidated Statements of Operations. These foreign exchange net gains and losses are primarily related to transaction gains or losses from unhedged intercompany loans when the loan is denominated in a currency different than the participating entity's functional currency.
Revenue recognition
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services primarily in the Babcock & Wilcox segment, accounted for
21%
and
19%
of our revenue for the years ended
December 31, 2019
and
2018
, respectively. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon shipment or delivery and acceptance by the customer. Standard commercial payment terms generally apply to these sales.
Revenue from products and services transferred to customers over time accounted for
79%
and
81%
of our revenue for the years ended
December 31, 2019
and
2018
, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services from all
three
of our segments. Typically, revenue is recognized over time using the cost-to-cost input method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the cost-to-cost input method contains a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position and have in our Vølund & Other Renewable segment. Refer to
Note 4
for our disaggregation of revenue by product line.
As of
December 31, 2019
, we have estimated the costs to complete all of our in-process contracts in order to estimate revenues using a cost-to-cost input method. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, transportation, fluctuations in foreign exchange rates or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
67
We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for enforcing the claim, the cause of any additional costs incurred and whether those costs are identifiable or otherwise determinable, the nature and reasonableness of those costs, the objective evidence available to support the amount of the claim, and our relevant history with the counter-party that supports our expectations about their willingness and ability to pay for the additional cost along with a reasonable margin.
We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception has not been recorded for sales commission as a liability has not been incurred at that point.
Contract Balances
Contracts in progress, a current asset in our Consolidated Balance Sheets, includes revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts. Advance billings, a current liability in our Consolidated Balance Sheets, includes advance billings on contracts invoices that exceed accumulated contract costs and revenues and costs recognized under the cost-to-cost input method. Those balances are classified as current based on the life cycle of the associated contracts. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and the collection of all amounts for unbilled revenues is deemed probable. We review contract price and cost estimates each reporting period as the work progresses and reflect adjustments proportionate to the costs incurred to date relative to total estimated costs at completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected contract loss is recognized in full through the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in
other accrued liabilities
in the Consolidated Balance Sheets. In addition, when we determine that an uncompleted contract will not be completed on-time and the contract has liquidated damages provisions, we recognize the estimated liquidated damages at the most likely amount we will incur and record them as a reduction of the estimated selling price in the period the change in estimate occurs. Losses accrued in advance of the completion of a contract are included in
other accrued liabilities
in our Consolidated Balance Sheets.
Warranty expense
We accrue estimated expense included in
cost of operations
on our Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows.
Research and development
Our research and development activities are related to improving our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our and our customers' expectations.
Research and development activities totaled
$2.9 million
and
$3.8 million
in the years ended
December 31, 2019
and
2018
, respectively.
68
Advertising expense
Advertising expense is charged when incurred and is included in
selling, general and administrative expenses
on our Consolidated Statements of Operations. Advertising expenses in the years ended
December 31, 2019
and
2018
were not significant.
Pension plans and postretirement benefits
We sponsor various defined benefit pension and postretirement plans covering certain employees of our U.S., Canadian and U.K. subsidiaries. We use actuarial valuations to calculate the cost and benefit obligations of our pension and postretirement benefits. The actuarial valuations use significant assumptions in the determination of our benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends.
We determine our discount rate based on a review of published financial data and discussions with our actuary regarding rates of return on high-quality, fixed-income investments currently available and expected to be available during the period to maturity of our pension and postretirement plan obligations. We use an alternative spot rate method for discounting the benefit obligation rather than a single equivalent discount rate because it more accurately applies each year's spot rates to the projected cash flows.
The components of benefit cost related to service cost, interest cost, expected return on plan assets and prior service cost amortization are recorded on a quarterly basis based on actuarial assumptions. In the fourth quarter of each year, or as interim remeasurements are required, we recognize net actuarial gains and losses into earnings as a component of net periodic benefit cost (mark to market ("MTM") pension adjustment). Recognized net actuarial gains and losses consist primarily of our reported actuarial gains and losses and the difference between the actual return on plan assets and the expected return on plan assets.
We recognize the funded status of each plan as either an asset or a liability in the Consolidated Balance Sheets. The funded status is the difference between the fair value of plan assets and the present value of its benefit obligation, determined on a plan-by-plan basis. See
Note 13
for a detailed description of our plan assets.
Income taxes
Income tax expense for federal, foreign, state and local income taxes are calculated on pre-tax income based on the income tax law in effect at the latest balance sheet date and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We assess deferred taxes and the adequacy of the valuation allowance on a quarterly basis. In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our Consolidated Financial Statements. We record interest and penalties (net of any applicable tax benefit) related to income taxes as a component of
income tax expense
on our Consolidated Statements of Operations.
Cash and cash equivalents and restricted cash
Our cash equivalents are highly liquid investments, with maturities of three months or less when we purchase them. We record cash and cash equivalents as restricted when we are unable to freely use such cash and cash equivalents for our general operating purposes.
Trade accounts receivable and allowance for doubtful accounts
Our trade accounts receivable balance is stated at the amount owed by our customers, net of allowances for estimated uncollectible balances. We maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management's evaluation of the ability of
69
customers to make payments, with emphasis on historical remittance experience, known customer financial difficulties, the age of receivable balances and any other known factors specific to a receivable. Accounts receivable are charged to the allowance when it is determined they are no longer collectible. Our allowance for doubtful accounts was
$25.1 million
and
$21.4 million
at
December 31, 2019
and
2018
, respectively. In the fourth quarter of 2018, we increased the allowance for doubtful accounts by
$5.9 million
for the Chinese operations of the Babcock & Wilcox segment. Additionally, in the fourth quarter of 2018, SPIG increased its allowance for doubtful accounts by
$9.3 million
related to projects in the Middle East. Amounts charged to selling, general and administrative expenses were
$0.2 million
and
$15.5 million
for the years ended
December 31, 2019
and
2018
, respectively.
Inventories
We carry our inventories at the lower of cost or market. We determine cost principally on the first-in, first-out basis, except for certain materials inventories of our Babcock & Wilcox segment, where we use the last-in, first-out ("LIFO") method. We determined the cost of approximately
20%
and
22%
of our total inventories using the LIFO method at
December 31, 2019
and
2018
, respectively, and our total LIFO reserve at
December 31, 2019
and
2018
was approximately
$7.2 million
and
$7.6 million
, respectively. Our obsolete inventory reserve was
$6.9 million
and
$7.9 million
at
December 31, 2019
and
2018
, respectively. In the fourth quarter of 2018, we increased our inventory reserve by
$1.4 million
for the Chinese operations of the Babcock & Wilcox segment as a result of a strategic change in that business unit. The components of inventories can be found in
Note 6
.
Property, plant and equipment
We carry our property, plant and equipment at depreciated cost, less any impairment provisions. We depreciate our property, plant and equipment using the straight-line method over estimated economic useful lives of
eight
to
33 years
for buildings and
three
to
28 years
for machinery and equipment. Our depreciation expense was
$19.3 million
and
$21.8 million
for the years ended
December 31, 2019
and
2018
, respectively. We expense the costs of maintenance, repairs and renewals that do not materially prolong the useful life of an asset as we incur them.
Property, plant and equipment amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined using a discounted cash flow analysis. Our estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. Any changes in such factors may negatively affect our business and result in future asset impairments.
Investments in unconsolidated joint ventures
We use the equity method of accounting for investments in joint ventures in which we are able to exert significant influence, but not control. Joint ventures in which our investment ownership is less than 20% and where we are unable to exert significant influence are carried at cost. We assess our investments in unconsolidated joint ventures for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other-than-temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated joint venture at fair value.
Investments in consolidated joint ventures
SPIG maintains a
60%
ownership interest in a joint venture entity, which is consolidated into the SPIG segment results. Net loss (income) attributable to the non-controlling interest for the year ended December 31, 2019 includes an immaterial reclassification of
$6.9 million
related to the September 30, 2017 and June 30, 2018 allocation of SPIG goodwill impairment losses which were previously recorded to accumulated deficit of the SPIG segment. Management determined that for the periods ended September 30, 2017 and June 30, 2018,
$3.5 million
and
$3.4 million
, respectively, of the goodwill impairment loss attributable to the non-controlling interest was deducted from accumulated deficit instead of the equity in the non-
70
controlling interest. The correction of this error is immaterial to the 2019 annual financial statements as well as the previously issued 2017 and 2018 annual and quarterly financial statements.
Goodwill
Goodwill represents the excess of the cost of our acquired businesses over the fair value of the net assets acquired. We perform testing of goodwill for impairment annually or when impairment indicators are present. We may elect to perform a qualitative test when we believe that there is substantially in excess fair value over carrying value based on our most recent quantitative assessment, adjusted for relevant events and circumstances that could affect fair value during the current year. If we conclude based on this assessment that it is more likely than not that the reporting unit is not impaired, we do not perform a quantitative impairment test. In all other circumstances, we perform a quantitative impairment test to identify potential goodwill impairment and measure the amount of any goodwill impairment. Beginning April 1, 2018, we adopted ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
Goodwill impairment tests after April 1, 2018 recognize impairment for the amount that the carrying value of a reporting unit exceeds its fair value up to the remaining amount of goodwill. Prior to April 1, 2018, we used a two-step impairment test. The first step of the test compared the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeded its fair value, the second step of the goodwill impairment test was performed to measure the amount of the impairment loss, if any. The second step compared the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill.
Intangible assets
Intangible assets are recognized at fair value when acquired. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and quantitatively tested for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to impairment testing at least annually or in interim periods when impairment indicators are present. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite lived intangible assets for impairment by quantitatively determining the fair value of the indefinite lived intangible asset and comparing the fair value of the intangible asset to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, we recognize impairment for the amount of the difference.
Derivative financial instruments
Derivative assets and liabilities usually consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. As of
December 31, 2019
, we do not hold any derivative assets or liabilities; the last of our derivative contracts were sold during the first quarter of 2019.
Self-insurance
We have a wholly owned insurance subsidiary that provides employer's liability, general and automotive liability and workers' compensation insurance and, from time to time, builder's risk insurance (within certain limits) to our companies. We may also, in the future, have this insurance subsidiary accept other risks that we cannot or do not wish to transfer to outside insurance companies. Included in
other non-current liabilities
on our Consolidated Balance Sheets are reserves for self-insurance totaling
$15.7 million
and
$21.6 million
at the years ended
December 31, 2019
and
2018
, respectively.
Loss contingencies
We estimate liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. We provide disclosure when there is a reasonable possibility that the ultimate loss will exceed the recorded provision or if such probable loss is not reasonably estimable. We are currently involved in some significant litigation, as discussed in
Note 23
. Our losses are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties; the attribution of damages, if any, among multiple defendants; plaintiffs, in most cases involving personal injury claims, do not specify the amount of
71
damages claimed; the discovery process may take multiple years to complete; during the litigation process, it is common to have multiple complex unresolved procedural and substantive issues; the potential availability of insurance and indemnity coverages; the wide-ranging outcomes reached in similar cases, including the variety of damages awarded; the likelihood of settlements for de minimis amounts prior to trial; the likelihood of success at trial; and the likelihood of success on appeal. Consequently, it is possible future earnings could be affected by changes in our assessments of the probability that a loss has been incurred in a material pending litigation against us and/or changes in our estimates related to such matters.
Stock-based compensation
The fair value of equity-classified awards, such as restricted stock, performance shares and stock options, is determined on the date of grant and is not remeasured. The fair value of liability-classified awards, such as cash-settled stock appreciation rights, restricted stock units and performance units, is determined on the date of grant and is remeasured at the end of each reporting period through the date of settlement. Fair values for restricted stock, restricted stock units, performance shares and performance units are determined using the closing price of our common stock on the date of grant. Fair values for stock options are determined using a Black-Scholes option-pricing model ("Black-Scholes"). For performance shares or units that contain a Relative Total Shareholder Return vesting criteria and for stock appreciation rights, we utilize a Monte Carlo simulation to determine the fair value, which determines the probability of satisfying the market condition included in the award. The determination of the fair value of a share-based payment award using an option-pricing model or a Monte Carlo simulation requires the input of significant assumptions, such as the expected life of the award and stock price volatility.
We recognize expense for all stock-based awards granted on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. For liability-classified awards, changes in fair value are recognized through cumulative catch-ups each period. Excess tax benefits on stock-based compensation are to be presented as a financing cash flow, rather than as a reduction of taxes paid. These excess tax benefits result from tax deductions in excess of the cumulative compensation expense recognized for options exercised and other equity-classified awards. See
Note 21
for further discussion of stock-based compensation.
Recently adopted accounting standards
Effective January 1, 2019, we adopted ASU 2016-02,
Leases (Topic 842)
and used the effective date as our date of initial application and continued applying the guidance under the lease standard in effect at that time to the comparative periods presented in the Consolidated Financial Statements. We recorded an immaterial cumulative-effect adjustment to the opening balance of retained earnings on the date of adoption. We also elected the "package of practical expedients", which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. However, we did not elect to adopt the hindsight practical expedient and therefore maintained the lease terms we previously determined under ASC 840.
We have implemented new leasing software and established new processes and internal controls designed to comply with the new lease accounting and disclosure requirements set by the new standard. The impact of the standard upon adoption increased our assets and liabilities within our Consolidated Balance Sheets by approximately
$16 million
but did not materially impact our results of operations or cash flows.
Effective January 1, 2019, we adopted ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The new guidance provides companies with the option to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. Existing guidance requiring the effect of a change in tax law or rates to be recorded in continuing operations is not affected. This standard is effective for all public business entities for fiscal years beginning after December 15, 2018, and any interim periods within those fiscal years. We did not elect to reclassify the income tax effects of the Tax Act from accumulated other comprehensive income to retained earnings.
72
NOTE 3
– EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings (loss) per share of our common stock, net of non-controlling interest:
|
Year ended December 31,
|
||||||
|
(in thousands, except per share amounts)
|
2019
|
2018
|
||||
|
Loss from continuing operations
|
$
|
(122,668
|
)
|
$
|
(658,460
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
694
|
|
(66,832
|
)
|
||
|
Net loss attributable to stockholders
|
$
|
(121,974
|
)
|
$
|
(725,292
|
)
|
|
Weighted average shares used to calculate basic and diluted earnings per share
(1)
|
31,514
|
|
13,829
|
|
||
|
Basic and diluted loss per share - continuing operations
|
$
|
(3.89
|
)
|
$
|
(47.62
|
)
|
|
Basic and diluted earnings (loss) per share - discontinued operations
|
0.02
|
|
(4.83
|
)
|
||
|
Basic and diluted loss per share
|
$
|
(3.87
|
)
|
$
|
(52.45
|
)
|
(1)
Weighted average shares used to calculate basic and diluted earnings (loss) per share reflect the bonus element for the 2019 Rights Offering on July 23, 2019 as described below and the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
In July 2019, the Company completed the 2019 Rights Offering, as described in
Note 18
, to existing common stockholders. Because the rights issuance was offered to all existing stockholders at an exercise price that was less than the fair value of the stock, the weighted average shares outstanding and basic and diluted earnings (loss) per share were adjusted retroactively to reflect the bonus element of the rights offering for all periods presented by a factor of
1.0875
. Weighted average shares, prior to giving effect to the 2019 Rights Offering, in 2019 and 2018 were
11,635 thousand
and
12,716 thousand
, respectively.
Because we incurred a net loss in the years ended
December 31, 2019
and
2018
, basic and diluted shares are the same.
If we had net income in years ended
December 31, 2019
and
2018
, diluted shares would include an additional
150.0 thousand
and
78.3 thousand
shares, respectively.
We excluded
311.6 thousand
and
294.8 thousand
shares related to stock options from the diluted share calculation for the years ended
December 31, 2019
and
2018
, respectively, because their effect would have been anti-dilutive.
73
NOTE 4
– SEGMENT REPORTING
Our operations are assessed based on
three
reportable segments as described in
Note 2
. Revenues exclude eliminations of revenues generated from sales to other segments or to other product lines within the segment. The primary component of the Babcock & Wilcox segment elimination is revenue associated with construction services. The primary component of total eliminations is associated with Babcock & Wilcox segment construction services provided to the SPIG segment. An analysis of our operations by segment is as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Revenues:
|
||||||
|
Babcock & Wilcox segment
|
||||||
|
Retrofits
|
$
|
251,201
|
|
$
|
223,516
|
|
|
New build utility and environmental
|
140,601
|
|
155,695
|
|
||
|
Aftermarket parts and field engineering services
|
153,729
|
|
271,028
|
|
||
|
Industrial steam generation
|
186,417
|
|
129,648
|
|
||
|
Eliminations
|
(43,608
|
)
|
(25,311
|
)
|
||
|
688,340
|
|
754,576
|
|
|||
|
Vølund & Other Renewable segment
|
||||||
|
Renewable new build and services
|
113,474
|
|
137,565
|
|
||
|
Operations and maintenance services
|
9,119
|
|
44,507
|
|
||
|
Eliminations
|
(732
|
)
|
(890
|
)
|
||
|
121,861
|
|
181,182
|
|
|||
|
SPIG segment
|
||||||
|
New build cooling systems
|
54,839
|
|
112,758
|
|
||
|
Aftermarket cooling system services
|
27,757
|
|
40,867
|
|
||
|
Eliminations
|
(1,867
|
)
|
—
|
|
||
|
80,729
|
|
153,625
|
|
|||
|
Eliminations
|
(31,819
|
)
|
(26,995
|
)
|
||
|
$
|
859,111
|
|
$
|
1,062,388
|
|
|
74
The presentation of the components of our adjusted EBITDA in the table below is consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, MTM pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment.
Adjusted EBITDA for each segment is presented below with a reconciliation to loss before income tax.
|
|
Year ended December 31,
|
|||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Adjusted EBITDA
(1)
|
|
|
|
|
||
|
Babcock & Wilcox segment
(2)
|
$
|
66,644
|
|
$
|
59,546
|
|
|
Vølund & Other Renewable segment
|
(10,477
|
)
|
(275,906
|
)
|
||
|
SPIG segment
|
(2,417
|
)
|
(53,283
|
)
|
||
|
Corporate
(3)
|
(17,580
|
)
|
(24,230
|
)
|
||
|
Research and development costs
|
(2,861
|
)
|
(3,780
|
)
|
||
|
|
33,309
|
|
(297,653
|
)
|
||
|
|
|
|
|
|
||
|
Restructuring activities and spin-off transaction costs
|
(11,707
|
)
|
(16,758
|
)
|
||
|
Financial advisory services
|
(9,069
|
)
|
(18,625
|
)
|
||
|
Settlement cost to exit Vølund contract
(4)
|
(6,575
|
)
|
—
|
|
||
|
Reserve for strategic change in China
|
—
|
|
(7,250
|
)
|
||
|
Advisory fees for settlement costs and liquidity planning
|
(11,824
|
)
|
—
|
|
||
|
Litigation settlement
|
(475
|
)
|
—
|
|
||
|
Stock compensation
|
(3,376
|
)
|
(4,381
|
)
|
||
|
Goodwill and other intangible asset impairment
|
—
|
|
(40,046
|
)
|
||
|
Impairment of equity method investment in TBWES
|
—
|
|
(18,362
|
)
|
||
|
Gain on sale of equity method investment in BWBC
|
—
|
|
6,509
|
|
||
|
Depreciation & amortization
|
(23,605
|
)
|
(28,521
|
)
|
||
|
Gain (loss) on asset disposals, net
|
3,940
|
|
(1,513
|
)
|
||
|
Operating loss
|
(29,382
|
)
|
(426,600
|
)
|
||
|
Interest expense, net
|
(93,978
|
)
|
(49,369
|
)
|
||
|
Loss on debt extinguishment
|
(3,969
|
)
|
(49,241
|
)
|
||
|
(Loss) gain on sale of business
|
(3,601
|
)
|
39,815
|
|
||
|
Net pension benefit before MTM
|
13,996
|
|
25,351
|
|
||
|
MTM gain (loss) from benefit plans
|
8,804
|
|
(67,474
|
)
|
||
|
Foreign exchange
|
(16,602
|
)
|
(28,542
|
)
|
||
|
Other – net
|
285
|
|
259
|
|
||
|
Loss before income tax expense
|
$
|
(124,447
|
)
|
$
|
(555,801
|
)
|
(1)
Adjusted EBITDA, for the year ended December 31, 2018, excludes stock compensation that was previously included in segment results and totals
$1.3 million
in the Babcock & Wilcox segment,
$0.4 million
in the Vølund & Other Renewable segment,
$0.1 million
in the SPIG segment, and
$2.6 million
in Corporate. Beginning in the third quarter of 2019, stock compensation is no longer considered in Adjusted EBITDA for purposes of managing the business, and prior periods have been adjusted to be presented on a comparable basis.
|
(2)
|
The Babcock & Wilcox segment adjusted EBITDA, for the year ended December 31, 2018, excludes
$25.4 million
of net benefit from pension and other postretirement benefit plans, excluding MTM adjustments, that were previously included in the segment results. Beginning in 2019,
net pension benefits
are no longer allocated to the segments, and prior periods have been adjusted to be presented on a comparable basis.
|
|
(3)
|
Allocations are excluded from discontinued operations. Accordingly, allocations previously absorbed by the MEGTEC and Universal businesses in the SPIG segment have been included with other unallocated costs in Corporate, and total
$11.4 million
in the year ended
December 31, 2018
.
|
|
(4)
|
In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The settlement eliminates our obligations to act, and our risk related to acting, as the prime EPC should the project have moved forward.
|
We do not separately identify or report our assets by segment as our chief operating decision maker does not consider assets by segment to be a critical measure by which performance is measured.
75
We provide our products and services to a diverse customer base that includes utilities and other power producers located around the world. We have no customers that individually account for more than
10%
of our consolidated revenues for the year ended
December 31, 2019
. We had one customer, Southern Company, which accounted for
$138.1 million
or
13.0%
of our consolidated revenue for the year ended
December 31, 2018
.
We estimate that
45%
and
48%
of our consolidated revenues in 2019 and 2018, respectively, was related to coal-fired power plants. The availability of natural gas in great supply has caused, in part, low prices for natural gas in the United States, which has led to more demand for natural gas relative to energy derived from coal. A material decline in spending by electric power generating companies and other steam-using industries on coal-fired power plants over a sustained period of time could materially and adversely affect the demand for our power generation products and services and, therefore, our financial condition, results of operations and cash flows. Coal-fired power plants have been scrutinized by environmental groups and government regulators over the emissions of potentially harmful pollutants. This scrutiny and other economic incentives including tax advantages, have promoted the growth of nuclear, wind and solar power, among others, and a decline in cost of renewable power plant components and power storage. The recent economic environment and uncertainty concerning new environmental legislation or replacement rules or regulations in the United States and elsewhere has caused many of our major customers, principally electric utilities, to delay making substantial expenditures for new plants, and delay upgrades to existing power plants.
Information about our consolidated operations in different geographic areas
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
REVENUES
(1)
|
||||||
|
United States
|
$
|
460,484
|
|
$
|
652,879
|
|
|
Canada
|
113,660
|
|
90,459
|
|
||
|
United Kingdom
|
54,347
|
|
64,465
|
|
||
|
Denmark
|
27,311
|
|
12,426
|
|
||
|
Sweden
|
18,789
|
|
34,578
|
|
||
|
China
|
18,430
|
|
23,432
|
|
||
|
Indonesia
|
16,739
|
|
3,108
|
|
||
|
South Korea
|
14,443
|
|
5,678
|
|
||
|
Finland
|
14,118
|
|
10,161
|
|
||
|
Belgium
|
9,145
|
|
8,226
|
|
||
|
Philippines
|
6,702
|
|
—
|
|
||
|
Taiwan - Republic of China
|
6,154
|
|
11,690
|
|
||
|
India
|
6,095
|
|
5,642
|
|
||
|
Italy
|
6,013
|
|
14,164
|
|
||
|
Germany
|
5,897
|
|
14,690
|
|
||
|
Saudi Arabia
|
5,243
|
|
8,035
|
|
||
|
South Africa
|
5,033
|
|
3,586
|
|
||
|
Brazil
|
4,800
|
|
9,042
|
|
||
|
Vietnam
|
3,801
|
|
5,764
|
|
||
|
Bahrain
|
2,628
|
|
5,286
|
|
||
|
Chile
|
2,533
|
|
5,597
|
|
||
|
Nigeria
|
1,019
|
|
12,211
|
|
||
|
Aggregate of all other countries, each with less than $5 million in revenues
|
55,727
|
|
61,269
|
|
||
|
$
|
859,111
|
|
$
|
1,062,388
|
|
|
(1)
We allocate geographic revenues based on the location of the customer's operations.
76
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
NET PROPERTY, PLANT AND EQUIPMENT, AND FINANCE LEASE
|
||||||
|
United States
|
$
|
61,111
|
|
$
|
43,070
|
|
|
Mexico
|
19,241
|
|
20,458
|
|
||
|
Denmark
|
6,801
|
|
7,372
|
|
||
|
United Kingdom
|
5,469
|
|
5,671
|
|
||
|
China
|
76
|
|
8,720
|
|
||
|
Aggregate of all other countries
|
4,355
|
|
5,601
|
|
||
|
$
|
97,053
|
|
$
|
90,892
|
|
|
NOTE 5
– REVENUE RECOGNITION AND CONTRACTS
Revenue Recognition
We generate the vast majority of our revenues from the supply of, and aftermarket services for, steam-generating, environmental and auxiliary equipment. We also earn revenue from the supply of custom-engineered cooling systems for steam applications along with related aftermarket services. Our revenue recognition accounting policy is described in more detail in
Note 2
.
Contract Balances
The following represents the components of our
contracts in progress
and
advance billings on contracts
included in our Consolidated Balance Sheets:
|
(in thousands)
|
December 31, 2019
|
December 31, 2018
|
$ Change
|
% Change
|
|||||||
|
Contract assets - included in contracts in progress:
|
|||||||||||
|
Costs incurred less costs of revenue recognized
|
$
|
29,877
|
|
$
|
49,910
|
|
$
|
(20,033
|
)
|
(40
|
)%
|
|
Revenues recognized less billings to customers
|
61,702
|
|
94,817
|
|
(33,115
|
)
|
(35
|
)%
|
|||
|
Contracts in progress
|
$
|
91,579
|
|
$
|
144,727
|
|
$
|
(53,148
|
)
|
(37
|
)%
|
|
Contract liabilities - included in advance billings on contracts:
|
|||||||||||
|
Billings to customers less revenues recognized
|
$
|
76,468
|
|
$
|
140,933
|
|
$
|
(64,465
|
)
|
(46
|
)%
|
|
Costs of revenue recognized less cost incurred
|
(1,181
|
)
|
8,434
|
|
(9,615
|
)
|
(114
|
)%
|
|||
|
Advance billings on contracts
|
$
|
75,287
|
|
$
|
149,367
|
|
$
|
(74,080
|
)
|
(50
|
)%
|
|
Net contract balance
|
$
|
16,292
|
|
$
|
(4,640
|
)
|
$
|
20,932
|
|
451
|
%
|
|
Accrued contract losses
|
$
|
6,139
|
|
$
|
61,651
|
|
$
|
(55,512
|
)
|
(90
|
)%
|
The following amounts represent retainage on contracts:
|
(in thousands)
|
December 31, 2019
|
December 31, 2018
|
$ Change
|
% Change
|
|||||||
|
Retainage expected to be collected within one year
|
$
|
474
|
|
$
|
12,293
|
|
$
|
(11,819
|
)
|
(96
|
)%
|
|
Retainage expected to be collected after one year
|
5,739
|
|
3,437
|
|
2,302
|
|
67
|
%
|
|||
|
Total retainage
|
$
|
6,213
|
|
$
|
15,730
|
|
$
|
(9,517
|
)
|
(61
|
)%
|
We have included retainage expected to be collected in 2019 in
accounts receivable – trade, net
in our Consolidated Balance Sheets. Retainage expected to be collected after one year are included in
other assets
in our Consolidated Balance Sheets. Of
77
the long-term retainage at
December 31, 2019
, we anticipate collecting
$4.9 million
and
$0.8 million
in 2021 and 2022, respectively.
Backlog
On
December 31, 2019
we had
$441.0 million
of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately
53.7%
,
11.1%
and
35.1%
of our remaining performance obligations as revenue in the remainder of 2020, 2021 and thereafter, respectively.
Changes in Contract Estimates
In the years ended
December 31, 2019
and
2018
, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Increases in gross profits for changes in estimates for over time contracts
|
$
|
34,622
|
|
$
|
18,183
|
|
|
Decreases in gross profits for changes in estimates for over time contracts
|
(50,050
|
)
|
(262,389
|
)
|
||
|
Net changes in gross profits for changes in estimates for over time contracts
|
$
|
(15,428
|
)
|
$
|
(244,206
|
)
|
Vølund EPC Loss Contracts
We had
six
Vølund EPC contracts for renewable energy facilities in Europe that were loss contracts at December 31, 2017.
The scope of these EPC (Engineer, Procure and Construct) contracts extended beyond our core technology, products and services.
In addition to these loss contracts, we have one remaining extended scope contract in our Vølund & Other Renewables segment which turned into a loss contract in the fourth quarter of 2019.
In the years ended
December 31, 2019
and 2018, we recorded
$6.9 million
and
$233.0 million
in net losses, respectively, inclusive of warranty expense as described in
Note 11
, resulting from changes in the estimated revenues and costs to complete the
six
European Vølund EPC loss contracts. These changes in estimates in the year ended
December 31, 2019
includes a decrease in our estimate of anticipated liquidated damages that reduced revenue associated with these six contracts by
$1.8 million
. These changes in estimates in the
year ended
December 31, 2018
included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these
six
contracts by
$11.5 million
. Total anticipated liquidated damages associated with these six contracts were
$86.8 million
and
$88.6 million
at
December 31, 2019
and
December 31, 2018
, respectively.
As of December 31, 2019, five of the six European Vølund EPC loss contracts had been turned over to the customer, with only punch list or agreed remediation items and performance testing remaining, some of which are expected to be performed during the customers' scheduled maintenance outages. Turnover is not applicable to the fifth loss contract under the terms of the
March 29, 2019
settlement agreement with the customers of the second and fifth loss contracts, who are related parties to each other. Under that settlement agreement, we limited our remaining risk related to these contracts by paying a combined
£70 million
(
$91.5 million
)
on April 5, 2019 in exchange for limiting and further defining our obligations under the second and fifth loss contracts, including waiver of the rejection and termination rights on the fifth loss contract that could have resulted in repayment of all monies paid to us and our former civil construction partner (up to approximately
$144 million
), and requirement to restore the property to its original state if the customer exercised this contractual rejection right. On the fifth loss contract, we agreed to continue to support construction services to complete certain key systems of the plant by May 31, 2019, for which penalty for failure to complete these systems is limited to the unspent portion of our quoted cost of the activities through that date. The settlement eliminated all historical claims and remaining liquidated damages. In accordance with the settlement, we have no further obligation related to the fifth loss contract other than customary warranty of core products if the plant is used as a biomass plant as designed.
We estimated the portion of this settlement related to waiver of the rejection right on the fifth loss contract was
$81.1 million
, which was recorded in the fourth quarter of 2018 as a reduction in the selling price.
We are still pursuing insurance recoveries and claims against subcontractors.
For the second loss contract, the settlement limited the remaining performance obligations and settled historic claims for nonconformance and delays, and we turned over the plant in May 2019, and subsequently began the operations and maintenance contract to operate this plant.
78
As of
December 31, 2019
, the status of these
six
Vølund EPC loss contracts was as follows:
The first contract, a waste-to-energy plant in Denmark, became a loss contract in the second quarter of 2016. As of
December 31, 2019
, this contract was approximately
99%
complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017. A settlement was reached with the customer to achieve takeover on January 31, 2019, after which only punch list items and other agreed to remediation items remain, most of which are expected to be performed during the customer's scheduled maintenance outages. As of January 31, 2019, the contract is in the warranty phase. During the year ended
December 31, 2019
, we recognized additional contract losses of
$2.3 million
on this contract as a result of identifying additional remediation costs. Our estimate at completion as of
December 31, 2019
includes
$8.9 million
of total expected liquidated damages. As of
December 31, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Consolidated Balance Sheets was
$1.1 million
. In the year ended
December 31, 2018
, we recognized additional contract losses of
$31.8 million
as a result of differences in actual and estimated costs, schedule delays and issues encountered during trial operations. As of
December 31, 2018
, this contract had
$4.9 million
of accrued losses and was
95%
complete.
The second contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
December 31, 2019
, this contract was approximately
100%
complete. Trial operations began in April 2019 and takeover by the customer occurred effective May 2019. This project is subject to the
March 29, 2019
settlement agreement described above. During the year ended
December 31, 2019
, we recognized additional contract losses of
$2.3 million
on this contract as a result of repairs required during startup commissioning activities, additional punch list and other commissioning costs, and changes in construction cost estimates. Our estimate at completion as of
December 31, 2019
includes
$18.7 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
December 31, 2019
and 2018 also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of
December 31, 2019
, we have
no
reserve for estimated contract losses. In the year ended
December 31, 2018
, we recognized contract losses of
$21.7 million
on this contract as a result of repairs required during startup commissioning activities, additional expected punch list and other commissioning costs, and changes in construction cost estimates. Losses in the year ended
December 31, 2018
also related to increases in expected warranty costs and subcontractor productivity being lower than previous estimates. As of
December 31, 2018
, this contract had
$3.9 million
of accrued losses and was
95%
complete.
The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of
December 31, 2019
, this contract was approximately
100%
complete. Warranty began in March 2018, when we agreed to a partial takeover with the customer, and we agreed to a full takeover by the customer at the end of October 2018, when we also agreed to a scheduled timeline for remaining punch list activities to be completed around the customer's future planned outages. During the year ended
December 31, 2019
, we recognized additional contract losses of
$0.1 million
on the contract. Our estimate at completion as of
December 31, 2019
includes
$6.6 million
of total expected liquidated damages due to schedule delays. As of
December 31, 2019
, we have
no
reserve for estimated contract losses. In the year ended
December 31, 2018
, we recognized additional contract losses of
$6.9 million
as a result of changes in the estimated costs at completion. As of
December 31, 2018
, this contract had
$0.5 million
of accrued losses and was
99%
complete.
The fourth contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
December 31, 2019
, this contract was approximately
100%
complete. Trial operations began in November 2018 and takeover by the customer occurred in February 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. During the year ended
December 31, 2019
, we recognized additional contract charges of
$5.2 million
on this contract due to changes in estimated bonus revenue and cost to complete remaining punch list, remediation of certain performance guarantees and other close out items. Our estimate at completion as of
December 31, 2019
includes
$20.4 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
December 31, 2019
also include contractual bonus opportunities for guaranteed higher power output and other performance metrics. As of
December 31, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Consolidated Balance Sheets was
$0.2 million
. In the year ended
December 31, 2018
, we recognized additional contract losses of
$31.3 million
on this contract as a result of challenges in startup commissioning activities, additional expected punch list and other commissioning costs, additional subcontractor costs and estimated liquidated damages. Losses in the year ended
December 31, 2018
also include increases in expected warranty costs and subcontractor productivity being lower than previous estimates. As of
December 31, 2018
, this contract had
$2.1 million
of accrued losses and was
96%
complete.
The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
December 31, 2019
, this contract was approximately
98%
complete. This project is subject to the
March 29, 2019
79
settlement agreement described above.
We estimated the portion of this settlement related to waiver of the rejection right on the fifth loss contract was
$81.1 million
, which was recorded in the fourth quarter of 2018 as a reduction in the selling price.
Under the settlement, our remaining performance obligations were limited to construction support services to complete certain key systems of the plant by May 31, 2019. The settlement also eliminated all historical claims and remaining liquidated damages. Remaining items at
December 31, 2019
are primarily related to punch list and other finalization items for the key systems under the terms of the settlement and subcontract close outs. During the year ended
December 31, 2019
, our estimated loss on the contract improved by
$5.6 million
inclusive of warranty. Our estimate at completion as of
December 31, 2019
, includes
$13.4 million
of total expected liquidated damages due to schedule delays. As of
December 31, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Consolidated Balance Sheets was
$2.4 million
. During the twelve months ended December 31, 2018, we revised our estimated revenue and costs at completion for this loss contract which resulted in
$119.5 million
of additional contract losses, including waiver of rejection rights, estimated costs of taking over the civil scope in the first quarter of 2018 from our joint venture partner, who entered administration (similar to filing for bankruptcy in the U.S.) in late February 2018 and receipt of regulatory release later than expected in previous estimates to begin repairs to failed steel beam that failed in September 2017, which are described in more detail below. Losses in the twelve months ended December 31, 2018 also reflect an extended schedule from greater challenges in restarting work on a site that had been idle pending repairs on the failed steel beam, including the extent of items that had been damaged from weather exposure, and increases in expected warranty costs. As of
December 31, 2018
, this contract had
$36.8 million
of accrued losses and was
76%
complete.
The sixth contract, a waste-to-energy plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
December 31, 2019
, this contract was approximately
99%
complete. Trial operations began in December 2018 and customer takeover occurred on January 25, 2019, after which only final performance testing, for which performance metrics have been previously demonstrated, and punch list and other agreed upon items remain, some of which are expected to be performed during the customer's scheduled maintenance outages. The contract is in the warranty phase. During the year ended
December 31, 2019
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract charges of
$2.5 million
related to matters encountered in completing punch list items and sub-contractor close-outs. Our estimate at completion as of
December 31, 2019
includes
$18.7 million
of total expected liquidated damages due to schedule delays. As of
December 31, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Consolidated Balance Sheets was
$0.3 million
. In the year ended
December 31, 2018
, we revised our revenue and costs at completion for this contract, which resulted in additional contract losses of
$22.0 million
due to challenges in startup commissioning activities. As of
December 31, 2018
, this contract had
$1.4 million
of accrued losses and was
95%
complete.
In the fourth quarter of 2019, one of our other Vølund renewable energy contracts turned into a loss contract (estimate loss of
$0.2 million
) due to the extension of time and other start-up costs associated with the completion of the trial operations run and turnover to the client. This contract was turned over to the client in October 2019. During the years ended
December 31, 2019
and 2018, we recognized additional charges of
$3.4 million
and
$2.3 million
, respectively, on this contract.
In September 2017, we identified the failure of a structural steel beam on the fifth contract, which stopped work in the boiler building and other areas pending corrective actions to stabilize the structure. Provisional regulatory approval to begin structural repairs to the failed beam was obtained on March 29, 2018 (later than previously estimated), and full approval to proceed with repairs was obtained in April 2018. Full access to the site was obtained on June 6, 2018 after completion of the repairs to the structure. The engineering, design and manufacturing of the steel structure were the responsibility of our subcontractors. A similar design was also used on the second and fourth contracts, and although no structural failure occurred on these two other contracts, work was also stopped in certain restricted areas while we added reinforcement to the structures, which also resulted in delays that lasted until late January 2018. The total costs related to the structural steel issues on these three contracts, including contract delays, are estimated to be approximately
$36 million
, which is included in the
December 31, 2019
estimated losses at completion for these three contracts. We are continuing to aggressively pursue recovery of this cost under various applicable insurance policies and from responsible subcontractors. In June 2019, we agreed in principle to a settlement agreement under one insurance policy related to recover GBP
2.8 million
(
$3.5 million
) of certain losses on the fifth project; which our insurer paid us in September 2019.
During the third quarter of 2016, we claimed a DKK
100.0 million
(
$15.5 million
) insurance recovery for a portion of the losses on the first Vølund contract discussed above. In May 2018, our insurer disputed coverage on our insurance claim. We continued to aggressively pursue full recovery under the policy, and we filed for arbitration in July 2018. On June 28, 2019, we agreed to a full settlement, under which our insurer paid DKK
37 million
(
$5.6 million
) to us in July 2019. At December 31, 2018, we had a net receivable of DKK
20 million
(
$3.2 million
) in
accounts receivable - other
in our Consolidated Balance Sheets.
80
The Company is continuing to pursue other potential insurance recoveries and claims where appropriate and available.
Other Vølund Contract Settlement
In March 2019, we entered into a settlement in connection with an additional European waste-to-energy EPC contract, for which notice to proceed was not given and the contract was not started. The
£
5.0 million
(approximately
$6.6 million
) payment on April 5, 2019 for the
settlement eliminates our obligations to act, and our risk related to acting, as the prime EPC should the project have moved forward.
SPIG's Loss Contracts
At
December 31, 2019
, SPIG had
two
significant loss contracts, each of which are contracts for a dry cooling system for a gas-fired power plant in the United States. In the years ended
December 31, 2019
and 2018, we recorded
$5.6 million
and
$17.6 million
in net losses, respectively, resulting from changes in estimated revenue and cost to complete these two loss contracts.
At
December 31, 2019
, the design and procurement are substantially complete, and construction is nearing completion on the first loss contract. Overall, the contract is approximately
99%
complete and
final completion is expected to be in first quarter of 2020
. During the year ended
December 31, 2019
, we recognized additional contract charges of
$2.3 million
on this contract due to issues related to the fan screens and construction estimate to complete. As of
December 31, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Consolidated Balance Sheets was
$0.1 million
related to this contract. In the year ended
December 31, 2018
, we revised our revenue and costs at completion for this contract, which resulted in additional contract losses of
$14.8 million
. As of
December 31, 2018
, this contract had accrued losses of
$4.6 million
and was
69%
complete. Construction is being performed by the Babcock & Wilcox segment, but the contract loss is included in the SPIG segment.
At
December 31, 2019
, the design and procurement are nearing completion on the second loss contract. Overall, the contract is approximately
87%
complete and
final completion is expected to be in the third quarter of 2020
. During the year ended
December 31, 2019
, we recognized additional contract charges of
$3.3 million
on this contract due to issues with the seismic design and fan screens. As of
December 31, 2019
, the reserve for estimated contract losses recorded in
other accrued liabilities
in our Consolidated Balance Sheets was
$0.9 million
related to this contract. In the year ended
December 31, 2018
, we revised our revenue and costs at completion for this contract, which resulted in additional contract losses of
$2.8 million
. As of
December 31, 2018
, this contract had accrued losses of
$0.1 million
and was
97%
complete.
NOTE 6
– INVENTORIES
The components of inventories are as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Raw materials and supplies
|
$
|
42,685
|
|
$
|
44,833
|
|
|
Work in progress
|
7,502
|
|
5,348
|
|
||
|
Finished goods
|
12,916
|
|
11,142
|
|
||
|
Total inventories
|
$
|
63,103
|
|
$
|
61,323
|
|
81
NOTE 7
– PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASE
Property, plant and equipment, and finance lease less accumulated depreciation is as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Land
|
$
|
2,998
|
|
$
|
3,575
|
|
|
Buildings
|
84,005
|
|
106,238
|
|
||
|
Machinery and equipment
|
154,016
|
|
181,825
|
|
||
|
Property under construction
|
6,204
|
|
2,290
|
|
||
|
247,223
|
|
293,928
|
|
|||
|
Less accumulated depreciation
|
180,562
|
|
203,036
|
|
||
|
Net property, plant and equipment
|
66,661
|
|
90,892
|
|
||
|
Finance lease
|
30,405
|
|
—
|
|
||
|
Less finance lease accumulated amortization
|
13
|
|
—
|
|
||
|
Net property, plant and equipment, and finance lease
|
$
|
97,053
|
|
$
|
90,892
|
|
In September 2018, we relocated our corporate headquarters to Barberton, Ohio from Charlotte, North Carolina. In December 2019, we consolidated all of our Barberton and most of our Copley, Ohio operations into new, leased office space in Akron, Ohio for our Corporate and Babcock & Wilcox segment functions. The new location in Akron is expected to reduce operating costs, inclusive of rent, and to provide a space that better meets our needs.
We did not incur significant relocation costs; however, since the decision to relocate in the third quarter of 2018, we recognized
$8.1 million
of accelerated depreciation, of which
$4.9 million
was incurred during the year ended December 31, 2019.
NOTE 8
- GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of
December 31, 2019
:
|
(in thousands)
|
Babcock & Wilcox Segment
|
||
|
Balance at December 31, 2018
|
$
|
47,108
|
|
|
Currency translation adjustments
|
52
|
|
|
|
Balance at December 31, 2019
|
$
|
47,160
|
|
Goodwill is tested for impairment annually and when impairment indicators exist. All of our remaining goodwill is related to the Babcock & Wilcox reporting unit and the Babcock & Wilcox Construction Company reporting unit, which are both included in the Babcock & Wilcox segment. Because the Babcock & Wilcox reporting unit had a negative carrying value, reasonable changes in the assumptions would not indicate impairment.
No
impairment was recorded during 2019. In 2018, we recognized
$37.5 million
impairment of all the remaining goodwill in the SPIG reporting unit resulting from a reduction in their bookings than previously forecasted.
82
NOTE 9
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Definite-lived intangible assets
|
||||||
|
Customer relationships
|
$
|
24,440
|
|
$
|
24,764
|
|
|
Unpatented technology
|
14,917
|
|
15,098
|
|
||
|
Patented technology
|
2,598
|
|
2,616
|
|
||
|
Tradename
|
12,372
|
|
12,566
|
|
||
|
All other
|
9,225
|
|
9,728
|
|
||
|
Gross value of definite-lived intangible assets
|
63,552
|
|
64,772
|
|
||
|
Customer relationships amortization
|
(18,616
|
)
|
(17,219
|
)
|
||
|
Unpatented technology amortization
|
(5,245
|
)
|
(3,760
|
)
|
||
|
Patented technology amortization
|
(2,476
|
)
|
(2,348
|
)
|
||
|
Tradename amortization
|
(4,257
|
)
|
(3,672
|
)
|
||
|
All other amortization
|
(8,963
|
)
|
(8,285
|
)
|
||
|
Accumulated amortization
|
(39,557
|
)
|
(35,284
|
)
|
||
|
Net definite-lived intangible assets
|
$
|
23,995
|
|
$
|
29,488
|
|
|
Indefinite-lived intangible assets
|
||||||
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
|
Total intangible assets, net
|
$
|
25,300
|
|
$
|
30,793
|
|
The following summarizes the changes in the carrying amount of intangible assets:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
30,793
|
|
$
|
42,065
|
|
|
Amortization expense
|
(4,274
|
)
|
(6,715
|
)
|
||
|
Impairment expense
|
—
|
|
(2,521
|
)
|
||
|
Currency translation adjustments and other
|
(1,219
|
)
|
(2,036
|
)
|
||
|
Balance at end of the period
|
$
|
25,300
|
|
$
|
30,793
|
|
Amortization of intangible assets is included in
cost of operations
and
SG&A
in our Consolidated Statement of Operations but is not allocated to segment results.
Estimated future intangible asset amortization expense is as follows (in thousands):
|
Amortization Expense
|
|||
|
Year ending December 31, 2020
|
$
|
3,414
|
|
|
Year ending December 31, 2021
|
3,180
|
|
|
|
Year ending December 31, 2022
|
3,140
|
|
|
|
Year ending December 31, 2023
|
3,138
|
|
|
|
Year ending December 31, 2024
|
2,973
|
|
|
|
Thereafter
|
8,150
|
|
|
Long-lived assets, including intangible assets are reviewed for impairment annually, or whenever circumstances indicate that the carrying amount might not be recoverable. Interim impairment testing was performed for the SPIG and Vølund & Other Renewable reporting units due to continued net operating losses and significant decreases in revenues experienced during 2019.
83
In the fourth quarter of 2018, a strategic decision was made to exit certain geographies of the SPIG segment, and as a result,
$2.5 million
of the customer relationship and other intangible assets related to these geographies were impaired during the fourth quarter of 2018. As of December 31, 2019 and December 31, 2018, the SPIG reporting unit had
$21.6 million
and
$25.0 million
of identifiable intangible assets, net of accumulated amortization, respectively.
As of December 31, 2019 and December 31, 2018, the Vølund & Other Renewable reporting unit had
$1.1 million
and
$2.0 million
of identifiable intangible assets, net of accumulated amortization, respectively.
In our interim tests as of September 30, 2019, the sum of the undiscounted cash flows and the residual value of the primary assets exceeded the carrying value of both the SPIG and Vølund & Other Renewable reporting units and no impairment was indicated.
We believe the estimates and assumptions utilized in our interim impairment testing are reasonable. However, actual results could differ substantially from those used in our valuations. To the extent such factors result in a failure to achieve the level of undiscounted forecasted cash flows used to estimate fair value for the purpose determining whether or not an impairment calculation should be performed for the intangible assets, or if we committed to a strategy to sell one or more of the reporting units in the near future as we continue to reevaluate our ongoing operations, we may be required to record non-cash impairment charges in the future which could have an adverse impact on our business, financial condition and results of operations.
NOTE 10
– LEASES
Accounting for Leases
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. We adopted this new standard on January 1, 2019 and used the effective date as our date of initial application while continuing to present the comparative periods in accordance with the guidance under the lease standard in effect during those prior periods in the Consolidated Financial Statements. See
Note 2
for additional information about the impact of adopting ASC 842 in the Consolidated Financial Statements.
We determine if an arrangement is a lease at inception. Operating leases are included in
right-of-use
("ROU")
assets
,
operating
lease liabilities
and
non-current operating lease liabilities
in the Consolidated Balance Sheets. Finance leases are included in
net property, plant and equipment, and finance lease, other
accrued liabilities
and
other non-current finance liabilities
in the Consolidated Balance Sheets. Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As substantially all of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. The ROU assets also include any prepaid lease payments made and initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease, which we recognize when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
For leases beginning in 2019 and later, we account for lease components (e.g., fixed payments including rent) together with the non-lease components (e.g., common-area maintenance costs) as a single lease component for all classes of underlying assets.
In December 2019, we consolidated all of our Barberton and most of our Copley, Ohio operations into new leased office space in Akron, Ohio as described in
Note 7
. The lease is classified as a finance lease and has an initial term of
fifteen years
, with an option to extend up to
two
additional
ten
-year terms and no option of early termination. As we are not reasonably certain to exercise the option to extend the lease beyond the initial base term, only payments related to the initial term were included in the initial ROU asset. Base rent will increase
two
percent annually, making the total future minimum payments during the initial term of the lease approximately
$54.0 million
. Based upon an initial term of
fifteen years
, an incremental borrowing rate of
8%
was used to determine the ROU asset, as no implicit rate was identified in the lease agreement. We recorded a
$30.4 million
ROU asset in
net property, plant and equipment, and finance lease
and corresponding liabilities in
other
accrued liabilities
and
other non-current finance liabilities in the
Consolidated Balance Sheets
.
We have operating and finance leases for real estate, vehicles, and certain equipment. Our leases have remaining lease terms of up to
15 years
, some of which may include options to extend the leases for up to
10 years
, and some of which may include options to terminate the leases within
1 year
.
84
The components of lease expense included on our Consolidated Statements of Operations were as follows:
|
Year ended December 31,
|
||||
|
(in thousands)
|
Classification
|
2019
|
||
|
Operating lease expense:
|
||||
|
Operating lease expense
|
Selling, general and administrative expenses
|
$
|
6,624
|
|
|
Short-term lease expense
|
Selling, general and administrative expenses
|
6,575
|
|
|
|
Variable lease expense
(1)
|
Selling, general and administrative expenses
|
2,349
|
|
|
|
Total operating lease expense
|
$
|
15,548
|
|
|
|
|
|
|
||
|
Finance lease expense:
|
||||
|
Amortization of right-of-use assets
|
Selling, general and administrative expenses
|
$
|
13
|
|
|
Interest on lease liabilities
|
Interest expense
|
14
|
|
|
|
Total finance lease expense
|
$
|
27
|
|
|
|
|
|
|
||
|
Sublease income
(2)
|
Other – net
|
$
|
(67
|
)
|
|
Net lease cost
|
$
|
15,508
|
|
|
(1)
Variable lease expense primarily consists of common area maintenance expenses paid directly to lessors of real estate leases.
(2)
Sublease income excludes rental income from owned properties, which is not material.
Other information related to leases is as follows:
|
Year ended December 31,
|
|||
|
(in thousands)
|
2019
|
||
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|||
|
Operating cash flows from operating leases
|
$
|
6,578
|
|
|
Operating cash flows from finance leases
|
14
|
|
|
|
Financing cash flows from finance leases
|
(12
|
)
|
|
|
Right-of-use assets obtained in exchange for lease liabilities:
|
|
|
|
|
Operating leases
|
$
|
3,014
|
|
|
Finance leases
|
$
|
30,404
|
|
|
Weighted-average remaining lease term:
|
|||
|
Operating leases (in years)
|
3.4
|
|
|
|
Finance leases (in years)
|
15.0
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
Operating leases
|
9.27
|
%
|
|
|
Finance leases
|
8.00
|
%
|
|
85
Amounts relating to leases were presented on our Consolidated Balance Sheets as of December 31, 2019 in the following line items:
|
(in thousands)
|
||||
|
Assets:
|
Classification
|
December 31, 2019
|
||
|
Operating lease assets
|
Right-of-use assets
|
$
|
12,498
|
|
|
Finance lease assets
|
Net property, plant and equipment, and finance lease
|
30,392
|
|
|
|
Total non-current lease assets
|
$
|
42,890
|
|
|
|
Liabilities:
|
||||
|
Current
|
||||
|
Operating lease liabilities
|
Operating lease liabilities
|
$
|
4,323
|
|
|
Finance lease liabilities
|
Other accrued liabilities
|
(38
|
)
|
|
|
Non-current
|
|
|
||
|
Operating lease liabilities
|
Non-current operating lease liabilities
|
8,388
|
|
|
|
Finance lease liabilities
|
Non-current finance lease liabilities
|
$
|
30,454
|
|
|
Total lease liabilities
|
43,127
|
|
||
Future minimum lease payments required under non-cancellable leases as of December 31, 2019 were as follows:
|
(in thousands)
|
Operating Leases
|
Finance Leases
|
Total
|
||||||
|
Year ending December 31, 2020
|
$
|
5,222
|
|
$
|
2,404
|
|
$
|
7,626
|
|
|
Year ending December 31, 2021
|
3,809
|
|
3,243
|
|
7,052
|
|
|||
|
Year ending December 31, 2022
|
2,591
|
|
3,307
|
|
5,898
|
|
|||
|
Year ending December 31, 2023
|
1,782
|
|
3,373
|
|
5,155
|
|
|||
|
Year ending December 31, 2024
|
1,040
|
|
3,438
|
|
4,478
|
|
|||
|
Thereafter
|
56
|
|
38,285
|
|
38,341
|
|
|||
|
Total
|
$
|
14,500
|
|
$
|
54,050
|
|
$
|
68,550
|
|
|
Less imputed interest
|
(1,789
|
)
|
(23,634
|
)
|
(25,423
|
)
|
|||
|
Lease liability
|
$
|
12,711
|
|
$
|
30,416
|
|
$
|
43,127
|
|
NOTE 11
– ACCRUED WARRANTY EXPENSE
We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
45,117
|
|
$
|
33,514
|
|
|
Additions
|
9,557
|
|
33,095
|
|
||
|
Expirations and other changes
|
(7,622
|
)
|
(5,963
|
)
|
||
|
Payments
|
(12,446
|
)
|
(14,151
|
)
|
||
|
Translation and other
|
(1,230
|
)
|
(1,378
|
)
|
||
|
Balance at end of period
|
$
|
33,376
|
|
$
|
45,117
|
|
We accrue estimated expense included in
cost of operations
on our Consolidated Statements of Operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In addition, we
86
record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. Warranty expense in the year ended December 31, 2019 includes
$3.9 million
of warranty reversal related to developments stemming from the March 29, 2019 settlement agreement for the Vølund EPC loss contracts described in
Note 5
. Warranty expense for the year ended December 31, 2018, includes a
$14.2 million
increase in expected warranty costs for the
six
European renewable energy loss contracts based on experience from the startup and commissioning activities in the second quarter of 2018 and
$4.3 million
of specific provisions on certain contracts in the Babcock & Wilcox segment for specific technical matters and customer requirements. During the year ended December 31, 2018, the Babcock & Wilcox segment reduced its accrued warranty expense by
$4.5 million
to reflect the expiration of warranties and updated its estimated warranty accrual rate to reflect its warranty claims experience and contractual warranty obligations.
NOTE 12
– RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
The following tables summarize the restructuring activity and spin-off costs incurred by segment:
|
Year ended December 31,
|
Year ended December 31,
|
||||||||||||||||||
|
2019
|
2018
|
||||||||||||||||||
|
(in thousands)
|
Total
|
Severance and related costs
|
Other
(1)
|
Total
|
Severance and related costs
|
Other
(1)
|
|||||||||||||
|
Babcock & Wilcox segment
|
$
|
5,109
|
|
$
|
4,691
|
|
$
|
418
|
|
$
|
7,793
|
|
$
|
7,616
|
|
$
|
177
|
|
|
|
Vølund & Other Renewable segment
|
1,533
|
|
1,533
|
|
—
|
|
469
|
|
469
|
|
—
|
|
|||||||
|
SPIG segment
|
631
|
|
631
|
|
—
|
|
2,506
|
|
2,506
|
|
—
|
|
|||||||
|
Corporate
|
4,434
|
|
3,566
|
|
868
|
|
5,990
|
|
5,461
|
|
529
|
|
|||||||
|
$
|
11,707
|
|
$
|
10,421
|
|
$
|
1,286
|
|
$
|
16,758
|
|
$
|
16,052
|
|
$
|
706
|
|
||
(1)
Other amounts consist primarily of exit, spin-off, relocation and other costs.
In 2018, we began to implement a series of cost restructuring actions, primarily in our U.S., European, Canadian and Asian operations, and corporate functions. These actions were intended to appropriately size our operations and support functions in response to the continuing decline in certain global markets for new build coal-fired power generation, the announcement of the MEGTEC and Universal sale, the level of activity in our Vølund & Other Renewable business and our liquidity needs. Severance expense is recognized over the remaining service periods of affected employees, and as of
December 31, 2019
, we do
no
t expect additional severance expense to be recognized based on actions taken through that date. Severance payments are expected to extend through the end of 2020.
Restructuring liabilities are included in
other accrued liabilities
on our Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
7,359
|
|
$
|
2,244
|
|
|
Restructuring expense
|
11,707
|
|
16,415
|
|
||
|
Payments
|
(13,707
|
)
|
(11,300
|
)
|
||
|
Balance at end of period
|
$
|
5,359
|
|
$
|
7,359
|
|
Accrued restructuring liabilities at
December 31, 2019
and
2018
relate primarily to employee termination benefits.
87
NOTE 13
– PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
We have historically provided defined benefit retirement benefits to domestic employees under the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the "U.S. Plan"), a noncontributory plan. As of 2006, the U.S. Plan was closed to new salaried plan entrants. Effective December 31, 2015, benefit accruals for those salaried employees covered by, and continuing to accrue service and salary adjusted benefits under the U.S. Plan ceased. As of December 31, 2019, and 2018, only approximately
100
hourly union employees continue to accrue benefits under the U.S. Plan.
Effective January 1, 2012, a defined contribution component was adopted applicable to Babcock & Wilcox Canada, Ltd. (the "Canadian Plans"). Any employee with less than two years of continuous service as of December 31, 2011 was required to enroll in the defined contribution component of the Canadian Plans as of January 1, 2012 or upon the completion of 6 months of continuous service, whichever is later. These and future employees will not be eligible to enroll in the defined benefit component of the Canadian Plans. In 2014, benefit accruals under certain hourly Canadian pension plans were ceased with an effective date of January 1, 2015. As part of the spin-off transaction, we split the Canadian defined benefit plans from BWXT, which was completed in 2017. We did not present these plans as multi-employer plans because our portion was separately identifiable, and we were able to assess the assets, liabilities and periodic expense in the same manner as if it were a separate plan in each period.
We also sponsor the Diamond Power Specialty Limited Retirement Benefits Plan (the "U.K. Plan") through our subsidiary. Benefit accruals under this plan ceased effective November 30, 2015. We have accounted for the GMP equalization following the U.K. High Court ruling during the fourth quarter of 2018 by recording prior service cost in accumulated other comprehensive income that will be amortized through net periodic pension cost over
15 years
, ending December 31, 2033.
We do not provide retirement benefits to certain non-resident alien employees of foreign subsidiaries. Retirement benefits for salaried employees who accrue benefits in a defined benefit plan are based on final average compensation and years of service, while benefits for hourly paid employees are based on a flat benefit rate and years of service. Our funding policy is to fund the plans as recommended by the respective plan actuaries and in accordance with the Employee Retirement Income Security Act of 1974, as amended, or other applicable law. Funding provisions under the Pension Protection Act accelerate funding requirements to ensure full funding of benefits accrued.
We make available other benefits which include postretirement health care and life insurance benefits to certain salaried and union retirees based on their union contracts, and on a limited basis, to future retirees.
88
Obligations and funded status
|
Pension Benefits
Year Ended December 31,
|
Other Benefits
Year Ended December 31,
|
|||||||||||
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
||||||||
|
Change in benefit obligation:
|
||||||||||||
|
Benefit obligation at beginning of period
|
$
|
1,140,127
|
|
$
|
1,248,529
|
|
$
|
14,019
|
|
$
|
11,029
|
|
|
Service cost
|
778
|
|
729
|
|
15
|
|
16
|
|
||||
|
Interest cost
|
43,312
|
|
40,411
|
|
424
|
|
427
|
|
||||
|
Plan participants’ contributions
|
—
|
|
—
|
|
180
|
|
210
|
|
||||
|
Curtailments
|
—
|
|
3,517
|
|
—
|
|
—
|
|
||||
|
Settlements
|
115
|
|
57
|
|
—
|
|
—
|
|
||||
|
Amendments
|
—
|
|
743
|
|
—
|
|
5,248
|
|
||||
|
Actuarial loss (gain)
|
114,125
|
|
(66,326
|
)
|
(1,200
|
)
|
(1,296
|
)
|
||||
|
Gain due to transfer
|
—
|
|
(1,142
|
)
|
—
|
|
—
|
|
||||
|
Foreign currency exchange rate changes
|
2,007
|
|
(4,689
|
)
|
66
|
|
(142
|
)
|
||||
|
Benefits paid
|
(81,496
|
)
|
(81,702
|
)
|
(1,370
|
)
|
(1,473
|
)
|
||||
|
Benefit obligation at end of period
|
$
|
1,218,968
|
|
$
|
1,140,127
|
|
$
|
12,134
|
|
$
|
14,019
|
|
|
Change in plan assets:
|
||||||||||||
|
Fair value of plan assets at beginning of period
|
$
|
871,925
|
|
$
|
1,007,002
|
|
$
|
—
|
|
$
|
—
|
|
|
Actual return on plan assets
|
177,560
|
|
(67,691
|
)
|
—
|
|
—
|
|
||||
|
Employer contribution
|
4,049
|
|
20,059
|
|
1,191
|
|
1,263
|
|
||||
|
Plan participants' contributions
|
—
|
|
—
|
|
180
|
|
210
|
|
||||
|
Transfers
|
—
|
|
(1,121
|
)
|
—
|
|
—
|
|
||||
|
Foreign currency exchange rate changes
|
2,079
|
|
(4,622
|
)
|
—
|
|
—
|
|
||||
|
Benefits paid
|
(81,496
|
)
|
(81,702
|
)
|
(1,371
|
)
|
(1,473
|
)
|
||||
|
Fair value of plan assets at the end of period
|
974,117
|
|
871,925
|
|
—
|
|
—
|
|
||||
|
Funded status
|
$
|
(244,851
|
)
|
$
|
(268,202
|
)
|
$
|
(12,134
|
)
|
$
|
(14,019
|
)
|
|
Amounts recognized in the balance sheet consist of:
|
||||||||||||
|
Accrued employee benefits
|
$
|
(1,153
|
)
|
$
|
(1,165
|
)
|
$
|
(1,683
|
)
|
$
|
(1,985
|
)
|
|
Accumulated postretirement benefit obligation
|
—
|
|
—
|
|
(10,451
|
)
|
(12,034
|
)
|
||||
|
Pension liability
|
(248,821
|
)
|
(269,613
|
)
|
—
|
|
—
|
|
||||
|
Prepaid pension
|
5,123
|
|
2,576
|
|
—
|
|
—
|
|
||||
|
Accrued benefit liability, net
|
$
|
(244,851
|
)
|
$
|
(268,202
|
)
|
$
|
(12,134
|
)
|
$
|
(14,019
|
)
|
|
Amount recognized in accumulated comprehensive income (before taxes):
|
||||||||||||
|
Prior service cost (credit)
|
$
|
643
|
|
$
|
943
|
|
$
|
1,962
|
|
$
|
(195
|
)
|
|
Supplemental information:
|
||||||||||||
|
Plans with accumulated benefit obligation in excess of plan assets
|
||||||||||||
|
Projected benefit obligation
|
$
|
1,159,083
|
|
$
|
1,083,965
|
|
$
|
—
|
|
$
|
—
|
|
|
Accumulated benefit obligation
|
$
|
1,159,083
|
|
$
|
1,083,965
|
|
$
|
12,134
|
|
$
|
14,019
|
|
|
Fair value of plan assets
|
$
|
909,110
|
|
$
|
813,187
|
|
$
|
—
|
|
$
|
—
|
|
|
Plans with plan assets in excess of accumulated benefit obligation
|
||||||||||||
|
Projected benefit obligation
|
$
|
59,885
|
|
$
|
56,162
|
|
$
|
—
|
|
$
|
—
|
|
|
Accumulated benefit obligation
|
$
|
59,885
|
|
$
|
56,162
|
|
$
|
—
|
|
$
|
—
|
|
|
Fair value of plan assets
|
$
|
65,007
|
|
$
|
58,738
|
|
$
|
—
|
|
$
|
—
|
|
89
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
|
Pension Benefits
|
Other Benefits
|
||||||||||||
|
Year ended December 31,
|
Year ended December 31,
|
||||||||||||
|
(in thousands)
|
2019
|
2018
|
2019
|
2018
|
|||||||||
|
Interest cost
|
$
|
43,312
|
|
$
|
40,411
|
|
$
|
424
|
|
$
|
427
|
|
|
|
Expected return on plan assets
|
(55,717
|
)
|
(63,964
|
)
|
—
|
|
—
|
|
|||||
|
Amortization of prior service cost
|
142
|
|
124
|
|
(2,157
|
)
|
(2,349
|
)
|
|||||
|
Recognized net actuarial (gain) loss
|
(7,603
|
)
|
68,771
|
|
(1,201
|
)
|
(1,297
|
)
|
|||||
|
Benefit plans, net
(1)
|
(19,866
|
)
|
45,342
|
|
(2,934
|
)
|
(3,219
|
)
|
|||||
|
Service cost included in COS
(2)
|
778
|
|
729
|
|
15
|
|
16
|
|
|||||
|
Net periodic benefit cost (benefit)
|
$
|
(19,088
|
)
|
$
|
46,071
|
|
$
|
(2,919
|
)
|
$
|
(3,203
|
)
|
|
|
(1)
|
Benefit plans, net
, which is presented separately in the Consolidated Statements of Operations, is not allocated to the segments.
|
|
(2)
|
Service cost related to a small group of active participants is presented within
cost of operations
in the Consolidated Statement of Operations and is allocated to the Babcock & Wilcox segment.
|
Recognized net actuarial (gain) loss consists primarily of our reported actuarial (gain) loss, curtailments, settlements, and the difference between the actual return on plan assets and the expected return on plan assets. Total net MTM adjustments for our pension and other postretirement benefit plans were (gains) losses of
$(8.8) million
and
$67.5 million
in the years ended
December 31, 2019
and
2018
, respectively. We have excluded the recognized net actuarial (gain) loss from our reportable segments and such amount has been reflected in
Note 4
as the
MTM gain (loss) from benefit plans
in the reconciliation of
Adjusted EBITDA for each segment to
consolidated loss before income tax. The recognized net actuarial (gain) loss was recorded in
benefit plans, net
in our Consolidated Statements of Operations
Settlements are triggered in a plan when the distributions exceed the sum of the service cost and interest cost of the respective plan. Lump sum payments from our Canadian Plans resulted in plan settlements of a
$0.1 million
loss and a
$0.1 million
gain during 2019 and 2018, respectively. The settlements themselves were not material, but they triggered interim MTM remeasurements of the Canadian Plan's assets and liabilities, resulting in a
$0.6 million
loss during 2019 and a
$0.4 million
gain during 2018. Both the settlements and the MTM remeasurements are reflected in the
Recognized net actuarial (gain) loss
in the table above and are included in our Consolidated Statements of Operations in the
benefit plans, net
line item.
While we retained the pension liability related to employees of Palm Beach Resource Recovery Corporation ("PBRRC") after the September 2018 sale of this business, the status change of these participants in the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the "Commercial Operations Plan") resulted in a $
3.5 million
curtailment loss in the third quarter of 2018, which also triggered an interim MTM of the Commercial Operations Plan assets and liabilities that led to a gain of $
7.7 million
in the third quarter of 2018. Both the curtailment and the MTM are reflected in the
Recognized net actuarial loss (gain)
in the table above and are included in our Consolidated Statements of Operations in the
benefit plans, net
line item.
90
Assumptions
|
|
Pension Benefits
|
Other Benefits
|
|||
|
Year ended December 31,
|
Year ended December 31,
|
||||
|
|
2019
|
2018
|
2019
|
2018
|
|
|
Weighted average assumptions used to determine net periodic benefit obligations:
|
|||||
|
Comparative single equivalent discount rate
|
3.25%
|
4.26%
|
2.99%
|
4.02%
|
|
|
Rate of compensation increase
|
0.07%
|
0.07%
|
—
|
—
|
|
|
Weighted average assumptions used to determine net periodic benefit cost:
|
|||||
|
Comparative single equivalent discount rate
|
4.28%
|
3.65%
|
2.99%
|
4.02%
|
|
|
Expected return on plan assets
|
6.66%
|
6.66%
|
—
|
—
|
|
|
Rate of compensation increase
|
0.07%
|
0.07%
|
—
|
—
|
|
The expected rate of return on plan assets is based on the long-term expected returns for the investment mix of assets currently in the portfolio. In setting this rate, we use a building-block approach. Historic real return trends for the various asset classes in the plan's portfolio are combined with anticipated future market conditions to estimate the real rate of return for each asset class. These rates are then adjusted for anticipated future inflation to determine estimated nominal rates of return for each asset class. The expected rate of return on plan assets is determined to be the weighted average of the nominal returns based on the weightings of the asset classes within the total asset portfolio. We use an expected return on plan assets assumption of
6.89%
for the majority of our pension plan assets (approximately
93%
of our total pension assets at December 31, 2019).
Investment goals
The overall investment strategy of the pension trusts is to achieve long-term growth of principal, while avoiding excessive risk and to minimize the probability of loss of principal over the long term. The specific investment goals that have been set for the pension trusts in the aggregate are (1) to ensure that plan liabilities are met when due and (2) to achieve an investment return on trust assets consistent with a reasonable level of risk.
Allocations to each asset class for both domestic and foreign plans are reviewed periodically and rebalanced, if appropriate, to assure the continued relevance of the goals, objectives and strategies. The pension trusts for both our domestic and foreign plans employ a professional investment advisor and a number of professional investment managers whose individual benchmarks are, in the aggregate, consistent with the plans' overall investment objectives. The goals of each investment manager are (1) to meet (in the case of passive accounts) or exceed (for actively managed accounts) the benchmark selected and agreed upon by the manager and the trust and (2) to display an overall level of risk in its portfolio that is consistent with the risk associated with the agreed upon benchmark.
The investment performance of total portfolios, as well as asset class components, is periodically measured against commonly accepted benchmarks, including the individual investment manager benchmarks. In evaluating investment manager performance, consideration is also given to personnel, strategy, research capabilities, organizational and business matters, adherence to discipline and other qualitative factors that may impact the ability to achieve desired investment results.
Domestic plans:
We sponsor the U.S. Plan, which is a domestic defined benefit plan. The assets of this plan are held by the Trustee in The Babcock & Wilcox Company Master Trust (the "Master Trust"). For the years ended December 31, 2019 and 2018, the investment return on domestic plan assets of the Master Trust (net of deductions for management fees) was approximately
23%
and
(7)%
, respectively.
91
The following is a summary of the asset allocations for the Master Trust by asset category:
|
Year ended December 31,
|
||||
|
2019
|
2018
|
|||
|
Asset Category:
|
||||
|
Fixed Income (excluding United States Government Securities)
|
—
|
%
|
33
|
%
|
|
Commingled and Mutual Funds
|
68
|
%
|
41
|
%
|
|
United States Government Securities
|
30
|
%
|
25
|
%
|
|
Other
|
2
|
%
|
1
|
%
|
The target asset allocation for the Master Trust was
65%
and
45%
of commingled and mutual funds and
35%
and
55%
of fixed income as of December 31, 2019 and 2018, respectively. We routinely reassess the target asset allocation with a goal of better aligning the timing of expected cash flows from those assets to the anticipated timing of benefit payments.
Foreign plans:
We sponsor various plans through certain of our foreign subsidiaries. These plans are the Canadian Plans and the U.K. Plan. The combined weighted average asset allocations of these plans by asset category were as follows:
|
Year ended December 31,
|
||||
|
2019
|
2018
|
|||
|
Asset Category:
|
||||
|
Commingled and Mutual Funds
|
30
|
%
|
41
|
%
|
|
Fixed Income
|
68
|
%
|
58
|
%
|
|
Other
|
2
|
%
|
1
|
%
|
The target allocation for 2019 for the foreign plans, by asset class, is as follows:
|
Canadian
Plans
|
U.K. Plan
|
|||
|
Asset Class:
|
||||
|
United States Equity
|
28
|
%
|
7
|
%
|
|
Global Equity
|
22
|
%
|
7
|
%
|
|
Fixed Income
|
50
|
%
|
86
|
%
|
Fair value of plan assets
See
Note 25
for a detailed description of fair value measurements and the hierarchy established for valuation inputs. The following is a summary of total investments for our plans measured at fair value:
|
(in thousands)
|
Year ended December 31, 2019
|
Level 1
|
Level 2
|
||||||
|
Commingled and mutual funds
(1)
|
$
|
641,672
|
|
$
|
—
|
|
$
|
531,823
|
|
|
United States government securities
|
271,272
|
|
—
|
|
271,272
|
|
|||
|
Fixed income
|
39,625
|
|
—
|
|
39,625
|
|
|||
|
Cash and accrued items
|
21,548
|
|
729
|
|
20,819
|
|
|||
|
Total pension and other postretirement benefit assets
|
$
|
974,117
|
|
$
|
729
|
|
$
|
863,539
|
|
|
(1)
|
In accordance with Subtopic 820-10,
Fair Value Measurement and Disclosures
, certain investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The investments that are measured at fair value using the net asset value per share are included in the year ended December 31, 2019 commingled and mutual fund balance as the fair value amount presented in this table is intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at the end of period, which is presented in the first table above titled "obligations and funded status".
|
92
|
(in thousands)
|
Year ended December 31, 2018
|
Level 1
|
Level 2
|
||||||
|
Commingled and mutual funds
|
$
|
359,126
|
|
$
|
—
|
|
$
|
359,126
|
|
|
United States government securities
|
198,017
|
|
198,017
|
|
—
|
|
|||
|
Fixed income
|
304,961
|
|
—
|
|
304,961
|
|
|||
|
Cash and accrued items
|
9,821
|
|
9,816
|
|
5
|
|
|||
|
Total pension and other postretirement benefit assets
|
$
|
871,925
|
|
$
|
207,833
|
|
$
|
664,092
|
|
Expected cash flows
|
Domestic Plans
|
Foreign Plans
|
||||||||||||
|
(in thousands)
|
Pension
Benefits
|
Other
Benefits
|
Pension
Benefits
|
Other
Benefits
|
|||||||||
|
Expected employer contributions to trusts of defined benefit plans:
|
|||||||||||||
|
2020
|
$
|
17,845
|
|
$
|
1,289
|
|
$
|
1,832
|
|
$
|
179
|
|
|
|
Expected benefit payments
(1)
:
|
|||||||||||||
|
2020
|
$
|
75,035
|
|
$
|
1,288
|
|
$
|
2,635
|
|
$
|
179
|
|
|
|
2021
|
74,717
|
|
1,199
|
|
2,650
|
|
169
|
|
|||||
|
2022
|
74,329
|
|
1,112
|
|
2,688
|
|
147
|
|
|||||
|
2023
|
73,825
|
|
1,026
|
|
2,697
|
|
139
|
|
|||||
|
2024
|
73,057
|
|
944
|
|
2,772
|
|
128
|
|
|||||
|
2025-2029
|
347,071
|
|
3,599
|
|
15,112
|
|
492
|
|
|||||
|
(1)
|
Pension benefit payments are made from their respective plan's trust.
|
We made contributions to our pension and other postretirement benefit plans totaling
$5.2 million
and
$21.3 million
during the years ended December 31, 2019 and 2018, respectively. Expected employer contributions to trusts of defined benefit plans above assume that relief is granted under 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. The Company is required to resume quarterly contributions on April 15, 2020 equal to the required quarterly contributions to the Plan while the waiver is in effect with respect to the Plan. We filed a waiver request with the IRS on March 12, 2020 related to the 2019 Plan year. If the temporary hardship waiver is not fully granted, required minimum employer pension contributions could increase by approximately
$25.0 million
, for total pension and other postretirement benefit funding of approximately
$46.0 million
or greater in 2020, plus interest and, if assessed, penalties. The Company cannot make any assurances that such waiver will be granted.
Defined contribution plans
We provide benefits under The B&W Thrift Plan (the "Thrift Plan"). The Thrift Plan generally provides for matching employer contributions of
50%
of the first
8%
of the participants compensation. These matching employer contributions are typically made in cash. Amounts charged to expense for employer contributions under the Thrift Plan totaled approximately
$3.1 million
and
$9.5 million
in the years ended December 31, 2019 and 2018, respectively.
Also, our salaried Canadian employees are provided with a defined contribution plan. The amount charged to expense for employer contributions was approximately
$0.3 million
and
$0.3 million
in the years ended December 31, 2019 and 2018, respectively.
93
Multi-employer plans
One of our subsidiaries in the Babcock & Wilcox segment contributes to various multi-employer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. The following table summarizes our contributions to multi-employer plans for the years covered by this report:
|
Pension Fund
|
EIN/PIN
|
Pension Protection
Act Zone Status
|
FIP/RP Status
Pending/
Implemented
|
Contributions
|
Surcharge Imposed
|
Expiration Date
of Collective
Bargaining
Agreement
|
|||||||||||||||
|
2019
|
2018
|
||||||||||||||||||||
|
2019
|
2018
|
(in millions)
|
|||||||||||||||||||
|
Boilermaker-Blacksmith National Pension Trust
|
48-6168020/ 001
|
Red
|
Yellow
|
Yes
|
$
|
7.5
|
|
$
|
9.5
|
|
No
|
Described
Below |
|||||||||
|
All Other
|
4.9
|
|
4.9
|
|
|||||||||||||||||
|
$
|
12.4
|
|
$
|
14.4
|
|
||||||||||||||||
Our collective bargaining agreements with the Boilermaker-Blacksmith National Pension Trust (the "Boilermaker Plan") is under a National Maintenance Agreement platform which is evergreen in terms of expiration. However, the agreement allows for termination by either party with a 90-day written notice. Our contributions to the Boilermaker Plan constitute less than 5% of total contributions to the Boilermaker Plan. All other contributions expense for all periods included in this report represents multiple amounts to various plans that, individually, are deemed to be insignificant.
NOTE 14
– REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
United States
|
$
|
179,000
|
|
$
|
144,900
|
|
|
Foreign
|
—
|
|
606
|
|
||
|
Total revolving debt
|
$
|
179,000
|
|
$
|
145,506
|
|
U.S. Revolving Credit Facility
On May 11, 2015, we entered into the Amended Credit Agreement with a syndicate of lenders in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc. or "BWXT") which governs the U.S. Revolving Credit Facility and the Last Out Term Loans. Since June 2016, we have entered into a number of waivers and amendments to the Amended Credit Agreement, including several to avoid default under the financial and other covenants specified in the Amended Credit Agreement. As of
December 31, 2019
, the U.S. Revolving Credit Facility provides for a senior secured revolving credit facility in an aggregate amount of up to
$334.6 million
(reduced to
$330.3 million
in March 2020 as a result of the settlement of escrow funds related to the sale of PBRRC), as amended and adjusted for completed asset sales. The proceeds from loans under the U.S. Revolving Credit Facility are available for working capital needs, capital expenditures, permitted acquisitions and other general corporate purposes, and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the amendment described below.
On April 5, 2019, we entered into Amendment No. 16 to the Amended Credit Agreement. Amendment No. 16 provided (i)
$150.0 million
in additional commitments from B. Riley, under Tranche A-3 of the Last Out Term Loans and (ii) an incremental uncommitted facility of up to
$15.0 million
, to be provided by B. Riley or an assignee. Amendment No. 16 also, among other items, (1) modified the definition of EBITDA in the Amended Credit Agreement to, among other things, include addbacks related to losses in connection with the Vølund projects, fees and expenses related to the Amendment and prior waivers to the Credit Agreement and fees associated with Vølund project related settlement agreements, (2) reduced to
$30.0 million
the minimum liquidity we are required to maintain at the time of any credit extension request and at the last business day of any calendar month, (3) allowed for the issuance of up to
$20.0 million
of new letters of credit with respect to any future Vølund project, (4) changed the consolidated interest coverage and senior leverage coverage covenant ratios,
94
(5) decreased the relief period borrowing sublimit, (6) changed or removed certain contract completion milestones that we had been required to meet in connection with one renewable energy project, (7) permitted letters of credit to expire one year after the maturity of the revolving credit facility, (8) created a new event of default for failure to terminate the U.S. Revolving Credit Facility on or prior to March 15, 2020, which effectively accelerated the maturity date of the U.S. Revolving Credit Facility from June 30, 2020, (9) established a deferred ticking fee of
1.0%
if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental
1.0%
per month after December 15, 2019 and (10) provided for a contingent consent fee of
4.0%
if certain actions are not undertaken to refinance the facility by December 15, 2019.
On August 7, 2019, we entered into Amendment No. 17 to the Amended Credit Agreement, which clarified the definition cumulatively through Amendment No. 16 of the amounts that can be used in calculating the loss basket for certain Vølund contracts and reset the loss basket for certain Vølund contracts to
$15.0 million
to align with the clarification commencing with the quarter ended March 31, 2019.
On December 31, 2019 and January 17, 2020 we entered into Amendments No. 18 and No.19 to the Amended Credit Agreement, respectively, which together extended the then current
$205 million
sub-limit on borrowings under the U.S. Revolving Credit Facility and the deadline for completing certain required corporate actions in connection with a refinancing of the Amended Credit Agreement to January 31, 2020.
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement, which provided two additional tranches of Last Out Term Loan and made the other changes specified below.
The Amended Credit Agreement and our cash management agreements with our lenders and their affiliates continue to be (1) guaranteed by substantially all of our wholly owned domestic subsidiaries and certain of our foreign subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The U.S. Revolving Credit Facility requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements, with the exception to the prepayment of certain Last Out Term Loans pursuant to the Equitization Transactions described in
Note 19
; such Last Out Term Loan prepayments were limited by an aggregate principal amount of
$86 million
plus interest. The U.S. Revolving Credit Facility requires certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions. Such prepayments may require us to reduce the commitments under the U.S. Revolving Credit Facility by a corresponding amount of such prepayments.
As of
December 31, 2019
, revolving loans outstanding under the U.S. Revolving Credit Facility bore interest at our option at either (1) the LIBOR rate plus
6.0%
per annum during 2019 and
7.0%
per annum during 2020, or (2) the Base Rate plus
5.0%
per annum during 2019, and
6.0%
per annum during 2020. The Base Rate is the highest of the Federal Funds rate plus
0.5%
, the one-month LIBOR rate plus
1.0%
, or the administrative agent's prime rate. The components of our interest expense are detailed in
Note 20
. A commitment fee of
1.0%
per annum is charged on the unused portions of the U.S. Revolving Credit Facility. Additionally, an annual facility fee of
$1.5 million
was paid on the first business day of 2019, and a pro-rated amount of
$0.8 million
was paid on January 3, 2020. A deferred fee reduction from
2.5%
to
1.5%
became effective on October 10, 2018, due to achieving certain asset sales. A letter of credit fee of
2.5%
per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of
1.5%
per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Letter of credit fees are payable on the tenth business day after the last business day of each fiscal quarter.
In connection with Amendment No. 16, we recorded a contingent consent fee of
$13.9 million
(
4.0%
of total availability) as part of deferred financing fees in
other current assets
in the Consolidated Balance Sheets because it has been earned but may be waived, and was fully amortized to interest expense as of December 31, 2019. The full amount of the contingent consent fee was accrued as of December 31, 2019. See further discussion in
Note 20
. Amendment No. 16 to the U.S. Revolving Credit Facility also established a deferred ticking fee of
1.0%
of total availability that is payable if certain actions are not undertaken to refinance the facility by December 15, 2019, in addition to an incremental
1.0%
per month after December 15, 2019. As of December 31, 2019, we accrued deferred ticking fee expense of
$5.1 million
as the actions required were not completed by December 15, 2019.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. These include a maximum permitted senior debt leverage ratio and a minimum consolidated interest coverage ratio, each as defined in the Amended Credit Agreement. Compliance with
95
these ratios was waived with respect to the quarter ended December 31, 2018 and new ratios were established in Amendment No. 16 commencing with the quarter ended March 31, 2019.
Effective beginning April 5, 2019 with Amendment No. 16, the remaining maximum permitted senior debt leverage ratios, as defined in the Amended Credit Agreement, are as follows:
•
3.50
:1.00 for the quarter ending March 31, 2020
•
3.25
:1.00 for the quarter ending June 30, 2020
Effective beginning April 5, 2019 with Amendment No. 16, the remaining minimum consolidated interest coverage ratios, as defined in the Amended Credit Agreement, are as follows:
•
1.50
:1.00 for the quarter ending March 31, 2020
•
1.75
:1.00 for the quarter ending June 30, 2020
The Amended Credit Agreement contains various conditions that we must satisfy in order to be able to borrow funds under the U.S. Revolving Credit Facility, including the accuracy of specified representations and warranties, such as the absence, other than as a result of our European Vølund EPC loss contracts that are the subject of settlement agreements and our entry into and performance of those settlement agreements, of certain material adverse changes with respect to our consolidated operations, business, assets, properties, liabilities or condition (financial or otherwise). The Amended Credit Agreement also contains a number of customary affirmative and negative covenants, including restrictions on our ability and the ability of our subsidiaries to (i) declare or pay any dividends or other distributions on account of our common stock and (ii) make payments of principal and interest on subordinated indebtedness. These restrictions are subject to very limited exceptions, including the ability of our subsidiaries to declare and pay dividends to us or to any other guarantor of our indebtedness under the Amended Credit Agreement and certain other payments between us and certain of our subsidiaries. A breach of any of the covenants in our Amended Credit Agreement could result in an event of default under our Amended Credit Agreement, which would result in our inability to access our U.S. Revolving Credit Facility for additional borrowings and letters of credit while any default exists. Upon the occurrence of such an event of default, all amounts outstanding under our U.S. Revolving Credit Facility and our Last Out Term Loans could also be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated.Because we are currently operating under a relief period under the Amended Credit Agreement, we do not have the ability to declare or pay dividends or other distributions or make payments of principal and interest on subordinated indebtedness to third parties. As part of Amendment No. 20 to the Amended Credit Agreement discussed below, we and our lenders agreed that the Further Amended and Restated Credit Agreement executed in connection with the refinancing of the Amended Credit Agreement would permit us to declare and pay cash dividends at the end of each fiscal quarter of up to
$6.0 million
. Our ability to declare and pay cash dividends under the Further Amended and Restated Credit Agreement will be reduced by the amount of interest expense in any fiscal quarter payable with respect to outstanding Last Out Term Loans under the Further Amended and Restated Credit Agreement. We do not have any third party subordinated indebtedness currently outstanding.
At
December 31, 2019
, borrowings under the U.S. Revolving Credit Facility consisted of
$179.0 million
at a weighted average interest rate of
8.03%
. Usage under the U.S. Revolving Credit Facility consisted of
$179.0 million
of borrowings,
$27.1 million
of financial letters of credit and
$97.6 million
of performance letters of credit. At
December 31, 2019
, we had approximately
$30.9 million
available to meet letter of credit requirements based on our overall facility size, of which
$26.0 million
was available for additional borrowings under our sublimit. As of December 31, 2019, the U.S. Revolving Credit Facility balance is presented as a current liability in our Consolidated Balance Sheet as we are currently dependent upon the waivers granted in our most recent limited waiver to maintain our current compliance with the covenants in the Amended Credit Agreement.
Amendment No. 20 to the Amended Credit Agreement - Subsequent Event
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement, which requires us to refinance our Amended Credit Agreement on or prior to May 11, 2020. Amendment No. 20 provides (i)
$30.0 million
of additional commitments from B. Riley, a related party, under a new Tranche A-4 of Last Out Term Loans and (ii) an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturity of the Last Out Term Loans under the Amended Credit Agreement in the event certain customer letters of credit are drawn. The proceeds from the Tranche A-4 Last Out Term Loans may be used under the terms of Amendment No. 20 to support the Company's growth, for working capital and general corporate purposes, and to reimburse certain expenses of B. Riley as specified by Amendment No. 20. The terms of the
96
Tranche A-4 and Tranche A-5 Last Out Term Loans are the same as the terms for the Tranche A-3 under the Amended Credit Agreement.
Amendment No. 20 also, among other things, (i) modifies the definition of EBITDA in the Amended Credit Agreement to, among other things, include add-backs for up to
$5.0 million
of business restructuring expenses during the period from January 1, 2020 to January 1, 2022 and for all restructuring-related professional fees and expenses, (ii) sets the current sub-limit on borrowings under our U.S. Revolving Credit Facility at
$205.0 million
, (iii) adds a new event of default in the event of any amendment, supplement, waiver or modification without the written consent of the administrative agent under the Amended Credit Agreement of, or certain breaches and defaults and failures to perform by B. Riley under, the Backstop Commitment Letter (as defined and described below) and (iv) removes the covenant with regard to corporate action milestones.
After giving effect to Amendment No. 20, at January 31, 2020, our U.S. Revolving Credit Facility was limited to
$334.6 million
(reduced to
$330.3 million
in March 2020 as a result of the settlement of escrow funds related to the sale of PBRRC) of borrowings or letters of credit, of which approximately
$50.6 million
was available for borrowing under the
$205.0 million
sublimit currently applicable to borrowings under our U.S. Revolving Credit Facility.
Agreement to Further Amend and Restate the Amended Credit Agreement by May 2020
Pursuant to Amendment No. 20, the Company and the lenders also agreed upon a term sheet pursuant to which the Company would undertake a Refinancing transaction on or prior to May 11, 2020 and the Company and the lenders would amend and restate the Credit Agreement on the terms, among others, specified below (as amended and restated, the “Further Amended and Restated Credit Agreement”). Pursuant to this term sheet, the Refinancing will consist of, among other things, the following:
|
•
|
At least
$200.0 million
of new debt or equity financing upon the effectiveness of the Further Amended and Restated Credit Agreement,
|
|
•
|
All debt relating to the Refinancing (including the continuation of any existing term loans under the Amended Credit Agreement) may not exceed
$275.0 million
in aggregate principal amount,
|
|
•
|
All debt relating to the Refinancing must be issued on the same terms as the term loans under the Amended Credit Agreement, provided that (i) the maturity date of such debt shall be six months after January 1, 2022, (ii) the interest on such debt may not exceed
12%
per annum and (iii) the aggregate cash interest expense of such debt may not exceed
$6.0 million
in any fiscal quarter, and
|
|
•
|
Certain disqualifying stock instruments may not be issued.
|
The proceeds of the Refinancing must be used to repay in full the Company’s then-existing revolving credit loans and to refinance certain existing term loans. Following the Refinancing, the Further Amended and Restated Credit Agreement will establish a new revolving credit facility that will be limited to
$195.0 million
, with
$30.0 million
available for revolving credit loans for working capital purposes and
$165.0 million
available solely for existing and new letters of credit (with financial letters of credit being capped at
$35.0 million
), that will mature on January 1, 2022. The terms of the Further Amended and Restated Credit Agreement will permit letters of credit to remain outstanding with termination dates that extend up to six months beyond the January 1, 2022 maturity date, so long as each such letter of credit is cash collateralized in accordance with the terms of the Further Amended and Restated Credit Agreement. Upon consummation of the Refinancing, the Company must pay an aggregate
$7 million
of amendment fees and outstanding deferred fees under the Amended Credit Agreement, with
$8.9 million
of fees being waived and an aggregate
$9.5 million
of fees being deferred.
Following the Refinancing, all revolving credit loans under the Further Amended and Restated Credit Agreement will bear interest at a rate of LIBOR plus
5.00%
or the base rate (as defined in the Amended Credit Agreement) plus
4.00%
, all letters of credit will bear interest at a rate of
4.00%
, and cash collateralized letters of credit will bear interest at a rate of
1.50%
. Collateral, representations and warranties and events of default under the Further Amended and Restated Credit Agreement will remain consistent with the collateral, representations and warranties and events of default under the Amended Credit Agreement. Affirmative and negative covenants under the Further Amended and Restated Credit Agreement will be substantially consistent with the affirmative and negative covenants under the Amended Credit Agreement, except that, among other changes, (i) covenants requiring a consultant and chief implementation officer will be deleted, (ii) a third party letter of credit basket of up to
$50.0 million
will be added, (iii) a cash dividend of up to
$6.0 million
per fiscal quarter will be permitted in certain circumstances, (iv) certain covenants for charges related to the Vølund loss projects will be removed, (v) the minimum required liquidity will be increased from
$30.0 million
to
$40.0 million
, and (vi) certain interest coverage and
97
leverage covenant levels will be reset based on Company projections. As part of the Refinancing, the size of the Company’s board of directors may also be reduced to 5 members, with B. Riley retaining the ability to appoint two members.
The obligations of our lenders to enter into the Further Amended and Restated Credit Agreement on the terms agreed as part of Amendment No. 20 are subject to various conditions, including the completion of the Refinancing on the terms contemplated by Amendment No. 20, a limitation on the aggregate amount of our indebtedness following completion of the Refinancing and the accuracy of our representations and warranties made under the Further Amended and Restated Credit Agreement. These representations and warranties in particular will be substantially consistent with those under the Amended Credit Agreement, including a representation regarding the absence, other than as a result of our European Vølund EPC loss contracts that are the subject of settlement agreements and our entry into and performance of those settlement agreements, of certain material adverse changes with respect to our consolidated operations, business, assets, properties, liabilities or condition (financial or otherwise).
Backstop Commitment Letter
On January 31, 2020, the Company also entered into a letter agreement with B. Riley (the "Backstop Commitment Letter"), a related party, pursuant to which B. Riley agreed to (i) fund any shortfall in the
$200.0 million
of new debt or equity financing required as part of the terms of the Refinancing to the extent such amounts have not been raised from third parties, and (ii) convert, or cause its applicable affiliates to convert, term loans into equity to the extent necessary to comply with the indebtedness limit of
$275.0 million
if the Company is unable to secure third parties to fund a sufficient amount of financing through the issuance of equity. If B. Riley is called upon to fund such a shortfall, the terms of such debt or equity financing will comply with the terms of the Refinancing described above.
Foreign Revolving Credit Facilities
Outside of the United States, we had revolving credit facilities in Turkey that were used to provide working capital to local operations. At December 31, 2018, we had aggregate borrowings under these facilities of
$0.6 million
whose weighted average interest rate was
40.0%
. In 2018, our banking counterparties in Turkey began requiring the conversion of these revolving credit facilities to be denominated in Turkish liras instead of euros, resulting in correspondingly higher market interest rates. As of January 4, 2019, the foreign revolving credit facilities were paid in full and closed.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of
December 31, 2019
and December 31, 2018 was
$88.5 million
and
$175.9 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
$31.8 million
as of
December 31, 2019
. Of the letters of credit issued under the U.S. Revolving Credit Facility,
$35.2 million
are subject to foreign currency revaluation.
We have posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. These bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of
December 31, 2019
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$221.3 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility backstopping surety bonds was
$22.7 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.
98
NOTE 15
– LAST OUT TERM LOANS
The components of the Last Out Term Loans by Tranche are as follows:
|
Year ended December 31,
|
||||||
|
2019
|
2018
|
|||||
|
(in thousands)
|
A-3
|
A-1
|
||||
|
Proceeds
(1)
|
$
|
101,660
|
|
$
|
30,000
|
|
|
Discount and fees
|
8,650
|
|
5,111
|
|
||
|
Paid-in-kind interest
|
3,020
|
|
132
|
|
||
|
Principal
|
113,330
|
|
35,243
|
|
||
|
Unamortized discount and fees
|
(9,377
|
)
|
(4,594
|
)
|
||
|
Net debt balance
|
$
|
103,953
|
|
$
|
30,649
|
|
(1)
Tranche A-3 proceeds represent the net proceeds after the
$39.7 million
principal prepayment of the tranche as of July 23, 2019, the date of the Equitization Transactions as discussed below.
Last Out Term Loans are incurred under our Amended 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 the Amended Credit Agreement. In connection with Amendment No. 16, the maturity date for all Last Out Term Loans was extended to December 31, 2020 and further extends to July 1, 2022 upon the effectiveness the Refinancing.
Until July 22, 2019, after giving effect to Amendment No. 16, all outstanding Last Out Term Loans bore interest at a fixed rate per annum of
15.5%
per annum. of which
7.5%
was payable in cash and
8%
was payable in kind. As of
December 31, 2019
, and after giving effect to the completion of the 2019 Rights Offering (as defined below) on July 23, 2019, the interest rate on the Tranche A-3 Last Out Term Loans under the Amended Credit Agreement became a fixed rate per annum of
12%
payable in cash. The total effective interest rate of Tranche A-3 was
20.71%
on
December 31, 2019
. The total effective interest rate of Tranche A-1 was
25.38%
on December 31, 2018. Interest expense associated with the Last Out Term Loans is detailed in
Note 20
.
As of December 31, 2019 and 2018, the Last Out Term Loans are presented as a current liability in our Consolidated Balance Sheets as a result of limited waivers granted to maintain compliance with the covenants in the Amended Credit Agreement.
Tranche A-1
We borrowed
$30.0 million
of net proceeds under Tranche A-1 of the Last Out Term Loans from
B. Riley
, a related party, in three draws in September and October 2018. In November 2018, Tranche A-1 was assigned to Vintage Capital Management, LLC ("Vintage"), also a related party. The original face principal amount of Tranche A-1 was
$30.0 million
, which excludes a
$2.0 million
up-front fee that was added to the principal balance on the first funding date, transaction expenses, paid-in-kind interest and original issue discounts of
10%
for each draw under Tranche A-1.
On April 5, 2019, Amendment No. 16 and the Letter Agreement (defined in
Note 19
) modified Tranche A-1 by adding a substantive conversion option that required the conversion of the Tranche A-1 to common stock at
$0.30
per share in connection with the Equitization Transactions described in
Note 19
, which was conditioned upon, among other things, the closing of the 2019 Rights Offering and shareholder approval. Under U.S. GAAP, a debt modification with the same borrower that results in substantially different terms is accounted for as an extinguishment of the existing debt and a reborrowing of new debt. An extinguishment gain or loss is then recognized based on the fair value of the new debt as compared to the carrying value of the extinguished debt. The carrying value of Tranche A-1 was
$33.3 million
on April 5, 2019 before the modification. The initial fair value of the new debt was estimated to be its initial principal value of
$37.3 million
. We recognized a loss on debt extinguishment of
$4.0 million
in the quarter ended June 30, 2019, primarily representing the unamortized value of the original issuance discount and fees on the extinguished debt. The interest rates of Tranche A-1 are described above. As described in
Note 19
, Tranche A-1 was exchanged for shares on July 23, 2019, after which no remaining amounts were outstanding.
99
Tranche A-2
On March 19, 2019, we entered into Amendment No. 15 to our Amended Credit Agreement, which allowed us to borrow
$10.0 million
of net proceeds from B. Riley, a related party, under a Tranche A-2 of Last Out Term Loans, which were fully borrowed on March 20, 2019. Tranche A-2 did not include an original issue discount. Interest rates of Tranche A-2 are described above. As described in
Note 19
, Tranche A-2 was fully repaid on July 23, 2019 with proceeds from the 2019 Rights Offering as part of the Equitization Transactions.
Tranche A-3
Under Amendment No. 16 to our Amended Credit Agreement, we borrowed
$150.0 million
face value from B. Riley, a related party, under a Tranche A-3 of Last Out Term Loans. The
$141.4 million
net proceeds from Tranche A-3 were primarily used to pay the amounts due under the settlement agreements covering certain European Vølund loss projects as described in
Note 5
, with the remainder used for working capital and general corporate purposes. Tranche A-3 included an original issue discount of
3.2%
of the gross cash proceeds. An additional discount was recorded upon shareholder approval of the warrants and Equitization Transactions. These additional discounts totaled
$8.1 million
, which included
$6.1 million
for the estimated fair value of warrants issued to B. Riley, a related party, as described in
Note 16
and
Note 19
and
$2.0 million
for the intrinsic value of the beneficial conversion feature that allowed conversion of a portion of the Tranche A-3 to equity under the Backstop Commitment described in
Note 19
. Both the warrants and the Backstop Commitment were contemplated in connection of the original extension of Tranche A-3 as part of the Letter Agreement.
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 described in
Note 19
, 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. The Tranche A-3 matures on December 31, 2020 and extends to July 1, 2022 upon the effectiveness of the Refinancing.
Tranches A-4 & A-5 - Subsequent Events
On January 31, 2020, we entered into Amendment No. 20 to the Amended Credit Agreement. Amendment No. 20 provides (i)
$30.0 million
of additional commitments from B. Riley, a related party, under a new Tranche A-4 of Last Out Term Loans and (ii) an incremental Tranche A-5 of Last Out Term Loans to be extended prior to maturity of the Last Out Term Loans under the Amended Credit Agreement in the event certain customer letters of credit are drawn. The proceeds from Tranche A-4 may be used under the terms of Amendment No. 20 to support the Company's growth, 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 and Tranche A-5 are the same as the terms for the Tranche A-3 under the Amended Credit Agreement.
As of January 31, 2020, we borrowed
$30.0 million
face value of the Tranche A-4 and received net proceeds of
$26.3 million
after paying total fees of
$3.7 million
. Net proceeds were used to support the Company's growth. The Tranche A-4 matures on December 31, 2020 and extends to July 1, 2022 upon the effectiveness of the Refinancing.
As of March 30, 2020, no borrowings occurred under Tranche A-5
.
NOTE 16
– WARRANTS
On July 23, 2019,
1,666,667
warrants were issued to certain entities affiliated with B. Riley in connection with the Equitization Transactions described in
Note 19
. Each warrant can be converted to one share of our common stock at an exercise price of
$0.01
per share. As of
December 31, 2019
, all
1,666,667
warrants remain unexercised.
The warrants were contemplated in the April 5, 2019 Letter Agreement (defined in
Note 19
) and on June 14, 2019, the issuance of the warrants was approved by stockholders in the Company's annual stockholder meeting, which established the grant date for accounting purposes. The grant date fair value of the warrants was estimated to be
$6.1 million
using the Black-Scholes option pricing model. The warrants may not be put back to the Company for cash, and they qualify for equity classification. The grant date value of the warrants was included as part of the original-issue discount based on the relative fair value method for Tranche A-3 of the Last Out Term Loans described in
Note 15
because the value was part of the consideration required by the Tranche A-3 lender in order to extend the Tranche A-3 loans.
100
The Black-Scholes option pricing model key assumptions are as follows:
|
Stock price
(1)
|
$
|
0.385
|
|
|
Exercise price
|
$
|
0.010
|
|
|
Time to expiration
|
3 years
|
|
|
|
Annualized volatility
|
121.00
|
%
|
|
|
Annual rate of quarterly dividends
|
—
|
%
|
|
|
Discount rate - bond equivalent rate
|
2.30
|
%
|
|
|
Expiration of option
|
April 5, 2022
|
|
|
|
Warrant value
|
$
|
0.380
|
|
(1)
The stock price is the April 5, 2019 closing price, the date the Black-Scholes option pricing model was performed. The stock price used in the model was not adjusted for the one-for-ten reverse stock split.
NOTE 17
– COMMON SHARES
On June 14, 2019, after approval of the stockholders at the Company's annual meeting of stockholders, the Company amended its Restated Certificate of Incorporation to increase the authorized number of shares of the Company's common stock from
200,000,000
shares to
500,000,000
shares to allow for the Equitization Transactions described in
Note 19
. The reverse stock split on July 24, 2019, described in
Note 1
did not affect the number of authorized shares.
NOTE 18
– RIGHTS OFFERINGS
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 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. Direct costs of the 2019 Rights Offering totaled
$0.8 million
for the
year ended
December 31, 2019
.
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 as described in
Note 19
, 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 26
. The 2019 Rights Offering was pursuant to the April 5, 2019 Letter Agreement and the Equitization Transactions described in
Note 19
and were approved by stockholders at the Company's annual stockholder meeting on June 14, 2019.
2018 Rights Offering
On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase
1.4
common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of
$3.00
per common share. On April 10, 2018, we extended the expiration date and amended certain other terms regarding the 2018 Rights Offering. As amended, each right entitled holders to purchase
2.8
common shares at a price of
$2.00
per share. The 2018 Rights Offering expired at 5:00 p.m., New York City time, on April 30, 2018. The Company did not issue fractional rights or pay cash in lieu of fractional rights. The 2018 Rights Offering did not include an oversubscription privilege.
The 2018 Rights Offering resulted in the issuance of
12.4 million
common shares on April 30, 2018. Gross proceeds from the 2018 Rights Offering were
$248.4 million
. Of the proceeds received,
$214.9 million
was used to fully repay the Second Lien Credit Agreement, including
$2.3 million
of accrued interest, and the remainder was used for working capital purposes. Direct costs of the 2018 Rights Offering totaled
$3.3 million
.
101
NOTE 19
– 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 as described in
Note 18
, 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 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 payable in cash and continues to bear the other terms described in
Note 15
. 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.
NOTE 20
–INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
In addition to non-cash items described in the Consolidated Statements of Cash Flows, we also recognized certain non-cash changes in our Consolidated Balance Sheets related to capital expenditures and interest expense as described below:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Accrued capital expenditures in accounts payable
|
$
|
1,287
|
|
$
|
139
|
|
|
Accreted interest expense on our Second Lien Term Loan Facility
|
$
|
—
|
|
$
|
3,202
|
|
102
The following cash activity is presented as a supplement to Consolidated Statements of Cash Flows and is included in
Net cash used in operations
:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Income tax payments (refunds), net
|
$
|
3,873
|
|
$
|
3,690
|
|
|
Interest payments on our U.S. Revolving Credit Facility
|
$
|
14,715
|
|
$
|
10,784
|
|
|
Interest payments on our Last Out Term Loans
|
12,220
|
|
—
|
|
||
|
Interest payments on our Second Lien Term Loan Facility
|
—
|
|
7,627
|
|
||
|
Total cash paid for interest
|
$
|
26,935
|
|
$
|
18,411
|
|
Interest expense
in our Consolidated Statements of Operations consisted of the following components:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Components associated with borrowings from:
|
||||||
|
U.S. Revolving Credit Facility
|
$
|
15,639
|
|
$
|
12,284
|
|
|
Last Out Term Loans - cash interest
|
11,207
|
|
513
|
|
||
|
Last Out Term Loans - paid-in-kind interest
|
5,964
|
|
1,079
|
|
||
|
Second Lien Term Loan Facility
|
—
|
|
7,460
|
|
||
|
Foreign Revolving Credit Facilities
|
—
|
|
716
|
|
||
|
32,810
|
|
22,052
|
|
|||
|
Components associated with amortization or accretion of:
|
||||||
|
U.S. Revolving Credit Facility - deferred financing fees and commitment fees
|
31,567
|
|
22,943
|
|
||
|
U.S. Revolving Credit Facility - contingent consent fee for Amendment 16
(1)
|
13,879
|
|
—
|
|
||
|
U.S. Revolving Credit Facility - deferred ticking fee for Amendment 16
(1)
|
5,064
|
|
—
|
|
||
|
Last Out Term Loans - discount and financing fees
|
10,580
|
|
552
|
|
||
|
Second Lien Term Loan Facility - discount and financing fees
|
—
|
|
3,202
|
|
||
|
61,090
|
|
26,697
|
|
|||
|
Other interest expense
|
1,001
|
|
864
|
|
||
|
Total interest expense
|
$
|
94,901
|
|
$
|
49,613
|
|
|
(1)
|
As described in
Note 14
, Amendment No. 16 to the U.S. Revolving Credit Facility established a contingent consent fee of
$13.9 million
(
4.0%
of total availability) and a deferred ticking fee of
1.0%
of the total availability of the U.S. Revolving Credit Facility, both which were fully earned on December 15, 2019. In addition, an incremental monthly fee of
1.0%
of total availability of the U.S. Revolving Credit Facility shall be earned on the 15th day of each succeeding month and is payable on the earlier of March 15, 2020 or the last day of the Availability Period with respect to the U.S. Revolving Credit Facility.
|
103
The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the Consolidated Balance Sheets that sum to the total of the same amounts in the Consolidated Statements of Cash Flows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Held by foreign entities
|
$
|
38,921
|
|
$
|
35,522
|
|
|
Held by U.S. entities
|
4,851
|
|
7,692
|
|
||
|
Cash and cash equivalents of continuing operations
|
43,772
|
|
43,214
|
|
||
|
Reinsurance reserve requirements
|
9,318
|
|
11,768
|
|
||
|
Restricted foreign accounts
|
3,851
|
|
5,297
|
|
||
|
Restricted cash and cash equivalents
|
13,169
|
|
17,065
|
|
||
|
Total cash, cash equivalents and restricted cash of continuing operations shown in the Consolidated Statements of Cash Flows
|
$
|
56,941
|
|
$
|
60,279
|
|
Our U.S. Revolving Credit Facility described in
Note 14
allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.
NOTE 21
– STOCK-BASED COMPENSATION
On June 14, 2019, at the Company's annual meeting of stockholders, upon the recommendation of the Company's Board of Directors, the stockholders approved the Babcock & Wilcox Enterprises, Inc. Amended and Restated 2015 Long-Term Incentive Plan (amended and restated as of June 14, 2019) (the "Fourth Amended and Restated 2015 LTIP"), which became effective upon such stockholder approval. The Fourth Amended and Restated 2015 LTIP, among other immaterial changes, increased the number of shares available for awards by
1,700,000
shares to a total of
2,927,173
shares of the Company's common stock, subject to adjustment as provided under the plan document. The increase in the maximum number of shares available for awards allowed us to establish the previously announced equity pool of
1,666,666
shares of its common stock for issuance for long-term incentive planning purposes in connection with the Equitization Transactions.
Stock options
There were no stock options awarded in 2019. The fair value of the option grant awarded in 2018 was estimated at the date of grant using Black-Scholes, with the following weighted-average assumptions:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
Risk-free interest rate
|
2.69
|
%
|
|
Expected volatility
|
64
|
%
|
|
Expected life of the option in years
|
3.95
|
|
|
Expected dividend yield
|
—
|
%
|
The risk-free interest rate is based on the implied yield on a United States Treasury
zero
-coupon issue with a remaining term equal to the expected life of the option. The expected volatility is based on implied volatility from publicly traded options on our common stock, historical volatility of the price of our common stock and other factors. The expected life of the option is based on observed historical patterns. The expected dividend yield is based on the projected annual dividend payment per share divided by the stock price at the date of grant. This amount is
zero
in 2018 because we did not expect to pay dividends on the dates the 2018 stock options were awarded.
104
The following table summarizes activity for our stock options for the
year ended
December 31, 2019
:
|
(share data in thousands)
|
Number of shares
|
Weighted-average
exercise price
|
Weighted-average
remaining
contractual term
(in years)
|
Aggregate
intrinsic value
(in thousands)
|
|||||
|
Outstanding at beginning of period
(1)
|
439
|
|
$
|
105.43
|
|
||||
|
Granted
|
—
|
|
—
|
|
|||||
|
Exercised
|
—
|
|
—
|
|
|||||
|
Cancelled/expired/forfeited
|
(43
|
)
|
96.80
|
|
|||||
|
Outstanding at end of period
|
396
|
|
$
|
106.56
|
|
5.03
|
$
|
—
|
|
|
Exercisable at end of period
|
396
|
|
$
|
106.56
|
|
5.03
|
$
|
—
|
|
(1)
Outstanding number of shares at beginning of period and weighted average exercise price reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
The aggregate intrinsic value included in the table above represents the total pretax intrinsic value that would have been received by the option holders had all option holders exercised their options on December 31, 2019. The intrinsic value is calculated as the total number of option shares multiplied by the difference between the closing price of our common stock on the last trading day of the period and the exercise price of the options. This amount changes based on the price of our common stock.
Restricted stock units
Non-vested restricted stock units activity for the
year ended
December 31, 2019
was as follows:
|
(share data in thousands)
|
Number of shares
|
Weighted-average grant date fair value
|
|||
|
Non-vested at beginning of period
(1)
|
93
|
|
$
|
53.30
|
|
|
Granted
|
2,225
|
|
3.72
|
|
|
|
Vested
|
(217
|
)
|
11.41
|
|
|
|
Cancelled/forfeited
|
(72
|
)
|
9.19
|
|
|
|
Non-vested at end of period
|
2,029
|
|
$
|
4.97
|
|
(1)
Outstanding number of shares at beginning of period reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
As of
December 31, 2019
, total compensation expense not yet recognized related to non-vested restricted stock units was
$6.6 million
and the weighted-average period in which the expense is expected to be recognized is
1.3
years.
Performance-based restricted stock units
Performance-based restricted stock units activity for the
year ended
December 31, 2019
was as follows:
|
(share data in thousands)
|
Number of shares
|
Weighted-average grant date fair value
|
|||
|
Non-vested at beginning of period
(1)
|
92
|
|
$
|
97.42
|
|
|
Granted
|
—
|
|
—
|
|
|
|
Vested
|
—
|
|
—
|
|
|
|
Cancelled/forfeited
|
(45
|
)
|
125.94
|
|
|
|
Non-vested at end of period
|
47
|
|
$
|
70.06
|
|
(1)
Outstanding number of shares at beginning of period reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
105
Performance-based, cash settled units
Cash-settled performance units activity for the
year ended
December 31, 2019
was as follows:
|
(share data in thousands)
|
Number of shares
|
Weighted-average grant date fair value
|
|||
|
Non-vested at beginning of period
(1)
|
74
|
|
$
|
47.34
|
|
|
Granted
|
—
|
|
—
|
|
|
|
Vested
|
(31
|
)
|
3.46
|
|
|
|
Cancelled/forfeited
|
(19
|
)
|
3.46
|
|
|
|
Non-vested at end of period
|
24
|
|
$
|
18.78
|
|
(1)
Outstanding number of shares at beginning of period reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
Stock Appreciation Rights
In December 2018, we granted stock appreciation rights to certain employees ("Employee SARs") and to a non-employee related party, BRPI Executive Consulting, LLC ("Non-employee SARs"). The Employee SARs and Non-employee SARs both expire
ten
years after the grant date and primarily vest
100%
upon completion after the required years of service. Upon vesting, the Employee SARs and Non-employee SARs may be exercised within
ten
business days following the end of any calendar quarter during which the volume weighted average share price is greater than the share price goal. Upon exercise of the SARs, holders receive a cash-settled payment equal to the number of SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the SARs base price. Employee SARs are issued under the Fourth Amended and Restated 2015 LTIP, and Non-employee SARs are issued under a Non-employee SARs agreement. The liability method is used to recognize the accrued compensation expense with cumulatively adjusted revaluations to the then current fair value at each reporting date through final settlement.
We used the following assumptions to determine the fair value of the SARs granted to employees and non-employee as of December 31, 2019 and 2018:
|
Year ended December 31,
|
||||
|
|
2019
|
2018
|
||
|
Risk-free interest rate
|
1.89
|
%
|
2.80
|
%
|
|
Expected volatility
|
46
|
%
|
46
|
%
|
|
Expected life in years
|
8.71
|
|
9.50
|
|
|
Suboptimal exercise factor
|
2.0x
|
|
2.0x
|
|
In making these assumptions, we based estimated volatility on the historical returns of the Company's stock price and selected guideline companies. We based risk-free rates on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we convert to a continuously compounded rate. We relied upon a suboptimal exercise factor, representing the ratio of the base price to the stock price at the time of exercise, to account for potential early exercise prior to the expiration of the contractual term. With consideration to the executive level of the SARs holders, a suboptimal exercise multiple of
2.0x
was selected. Subject to vesting conditions, should the stock price achieve a value of
2.0x
above the base price, we assume the holders will exercise prior to the expiration of the contractual term of the SARs. The expected term for the SARs is an output of our valuation model in estimating the time period that the SARs are expected to remain unexercised. Our valuation model assumes the holders will exercise their SARs prior to the expiration of the contractual term of the SARs.
106
The following table presents the changes in our outstanding employee SARs and non-employee SARs for the year ending December 31, 2019 and the associated weighted-average values:
|
(share data in thousands)
|
Number of employee SARs
|
Number of non-employee SARs
|
Total number of SARs
|
Weighted-average value
(1)
|
Weighted-average exercise price
(1)
|
|||||||
|
Non-vested at beginning of period
|
253
|
|
844
|
|
1,097
|
|
$
|
1.82
|
|
$
|
23.37
|
|
|
Granted
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
||
|
Vested
|
(85
|
)
|
—
|
|
(85
|
)
|
0.52
|
|
22.50
|
|
||
|
Non-vested at end of period
|
168
|
|
844
|
|
1,012
|
|
$
|
0.51
|
|
$
|
23.44
|
|
(1)
Number of SARs, weighted-average value and weighted-average exercise price at beginning of period reflect the one-for-ten reverse stock split on July 24, 2019 as described in
Note 1
.
As of December 31, 2019, the total intrinsic value of the vested and non-vested SARs was
$3.4 million
.
NOTE 22
– PROVISION FOR INCOME TAXES
We are subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the U.S. 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
19%
and approximately
30%
. We provide for income taxes based on the tax laws and rates in the jurisdictions in which we conduct our operations. These jurisdictions have tax regimes that vary with respect to both nominal rates and the basis on which those rates are applied. Our consolidated effective income tax rate can vary significantly from period to period due to these variations, changes in the jurisdictional mix of our income, and valuation allowances recognized in jurisdictions that have a net deferred tax asset balance.
We recognize the benefit of a tax position when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. A recognized tax benefit is measured as the largest amount of benefit, on a cumulative probability basis, which is more likely-than-not-to to be realized upon ultimate settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Below is a tabular rollforward of the beginning and ending aggregate unrecognized tax benefits:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
1,500
|
|
$
|
1,204
|
|
|
Increases based on tax positions taken in the current year
|
29
|
|
588
|
|
||
|
Increases based on tax positions taken in prior years
|
27
|
|
51
|
|
||
|
Decreases based on tax positions taken in prior years
|
(223
|
)
|
—
|
|
||
|
Decreases due to settlements with tax authorities
|
—
|
|
(140
|
)
|
||
|
Decreases due to lapse of applicable statute of limitation
|
(104
|
)
|
(203
|
)
|
||
|
Balance at end of period
|
$
|
1,229
|
|
$
|
1,500
|
|
The unrecognized tax benefits of
$0.6 million
would, if recognized, affect the effective tax rate. The remaining balance of unrecognized tax benefits relates to deferred tax assets that, if recognized, would require a full valuation allowance based on present circumstances. We recognize interest and penalties related to unrecognized tax benefits in our provision for income taxes; however, such amounts are not significant to any period presented.
Tax years 2015 through 2019 remain open to assessment by the United States Internal Revenue Service and various state and international tax authorities. With few exceptions, we do not have any returns under examination for years prior to 2014. The United States Internal Revenue Service has completed examinations of the federal tax returns of our former parent, BWXT, through 2014, and all matters arising from such examinations have been resolved.
107
Deferred income taxes reflect the net tax effects of temporary differences between the financial and tax bases of assets and
liabilities. Significant components of deferred tax assets and liabilities are as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Deferred tax assets:
|
||||||
|
Pension liability
|
$
|
64,046
|
|
$
|
66,652
|
|
|
Accrued warranty
|
3,121
|
|
2,943
|
|
||
|
Accrued vacation pay
|
99
|
|
98
|
|
||
|
Accrued liabilities for self-insurance (including postretirement health care benefits)
|
4,815
|
|
4,653
|
|
||
|
Accrued liabilities for executive and employee compensation
|
5,844
|
|
4,473
|
|
||
|
Long-term contracts
|
4,879
|
|
27,623
|
|
||
|
Accrued legal fees
|
503
|
|
1,058
|
|
||
|
Inventory reserve
|
1,791
|
|
1,595
|
|
||
|
Property, plant and equipment
|
614
|
|
1,200
|
|
||
|
Net operating loss carryforward
|
386,949
|
|
314,274
|
|
||
|
State net operating loss carryforward
|
21,190
|
|
21,017
|
|
||
|
Capital loss carryforward
|
—
|
|
3,744
|
|
||
|
Interest disallowance carryforward
|
37,221
|
|
21,550
|
|
||
|
Foreign tax credit carryforward
|
2,535
|
|
2,535
|
|
||
|
Other tax credits
|
3,243
|
|
6,642
|
|
||
|
Other
|
9,216
|
|
10,755
|
|
||
|
Investments in joint ventures and affiliated companies
|
589
|
|
—
|
|
||
|
Total deferred tax assets
|
546,655
|
|
490,812
|
|
||
|
Valuation allowance for deferred tax assets
|
(539,791
|
)
|
(483,967
|
)
|
||
|
Total deferred tax assets, net
|
6,864
|
|
6,845
|
|
||
|
Deferred tax liabilities:
|
|
|
|
|
||
|
Investments in joint ventures and affiliated companies
|
—
|
|
30
|
|
||
|
Intangibles
|
8,785
|
|
9,595
|
|
||
|
Total deferred tax liabilities
|
8,785
|
|
9,625
|
|
||
|
Net deferred tax liabilities
|
$
|
(1,921
|
)
|
$
|
(2,780
|
)
|
At December 31, 2019, we have a valuation allowance of
$539.8 million
for deferred tax assets, which we do not expect will be realized at a more likely-than-not level, through carrybacks, future reversals of existing taxable temporary differences, estimates of future taxable income, and tax-planning strategies. Deferred tax assets are evaluated each period to determine whether it is more likely than not that those deferred tax assets will be realized in the future. This evaluation is performed under the framework of ASC 740, Income Taxes, and considers all positive and negative evidence. In our analysis at December 31, 2019, our weighting of positive and negative evidence included an assessment of historical income by jurisdiction adjusted for recent dispositions and other nonrecurring items, as well as an evaluation of other qualitative factors such as the length and magnitude of pretax losses.
We continue to have a full valuation allowance against substantially all of our net deferred tax assets as of December 31, 2019. We will continue to weigh and assess the positive and negative evidence that exists as of each balance sheet date and the valuation allowances may be reversed in the future if sufficient positive evidence exists to outweigh the negative evidence. Any reversal of our valuation allowance could be material to the income or loss for the period in which our assessment changes.
108
Subsequent to the issuance of the Company’s 2018 Consolidated Financial Statements, the Company identified certain historical net operating loss carryforwards generated at wholly-owned foreign holding companies which had not been properly recognized for financial reporting purposes. While this did not impact the Consolidated Balance Sheets and related Consolidated Statements of Operations, Consolidated Statement of Comprehensive Loss, Consolidated Statement of Stockholders’ Deficit and Consolidated Cash Flows as of and for the year ended December 31, 2018, the associated deferred tax assets and corresponding valuation allowance were not included in the note to the 2018 Consolidated Financial Statements,
Provision for Income Taxes
. As a result, the previously reported amounts have been restated to reflect the correct amounts, resulting in
$170.9 million
increases to tax-effected net operating loss carryforwards, deferred tax assets and valuation allowance as of December 31, 2018. The Company’s management evaluated the materiality of the misstatements from quantitative and qualitative perspectives and concluded the misstatements are not material to the prior period.
The following is an analysis of our valuation allowance for deferred tax assets:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
(483,967
|
)
|
$
|
(108,105
|
)
|
|
Charges to costs and expenses
|
(56,254
|
)
|
(375,408
|
)
|
||
|
Charges to other accounts
|
430
|
|
(454
|
)
|
||
|
Balance at end of period
|
$
|
(539,791
|
)
|
$
|
(483,967
|
)
|
Loss before the provision for incomes taxes is as follows:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
United States
|
$
|
(64,610
|
)
|
$
|
(166,269
|
)
|
|
Other than the United States
|
(59,837
|
)
|
(389,532
|
)
|
||
|
Loss before provision for income taxes
|
$
|
(124,447
|
)
|
$
|
(555,801
|
)
|
The provision for income taxes consisted of:
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Current:
|
||||||
|
United States - federal
|
$
|
534
|
|
$
|
1,817
|
|
|
United States - state and local
|
454
|
|
(276
|
)
|
||
|
Other than the United States
|
3,705
|
|
3,339
|
|
||
|
Total current
|
4,693
|
|
4,880
|
|
||
|
Deferred:
|
||||||
|
United States - federal
|
(257
|
)
|
84,203
|
|
||
|
United States - state and local
|
—
|
|
10,020
|
|
||
|
Other than the United States
|
850
|
|
3,121
|
|
||
|
Total deferred provision
|
593
|
|
97,344
|
|
||
|
Provision for income taxes
|
$
|
5,286
|
|
$
|
102,224
|
|
109
The following is a reconciliation of the United States statutory federal tax rate to the consolidated effective tax rate:
|
Year ended December 31,
|
||||
|
(in thousands)
|
2019
|
2018
|
||
|
United States federal statutory rate
|
21.0
|
%
|
21.0
|
%
|
|
State and local income taxes
|
(2.6
|
)
|
0.5
|
|
|
Foreign rate differential
|
(1.6
|
)
|
(0.3
|
)
|
|
Deferred taxes - change in tax rate
|
(7.9
|
)
|
0.4
|
|
|
Non-deductible (non-taxable) items
|
(7.7
|
)
|
(0.6
|
)
|
|
Tax credits
|
(0.1
|
)
|
(0.7
|
)
|
|
Valuation allowances
|
(45.2
|
)
|
(67.5
|
)
|
|
Goodwill impairment
|
—
|
|
(1.4
|
)
|
|
Luxembourg impairment of investments
|
52.9
|
|
32.3
|
|
|
Accrual adjustments
|
(0.1
|
)
|
—
|
|
|
Disallowed interest deductions
|
(4.5
|
)
|
—
|
|
|
Return to provision and prior year true-up
|
(7.9
|
)
|
—
|
|
|
Other
|
(0.5
|
)
|
(2.1
|
)
|
|
Effective tax rate
|
(4.2
|
)%
|
(18.4
|
)%
|
We have tax effected foreign net operating loss carryforwards ("NOLs") of
$364.1 million
available to offset future taxable income in certain foreign jurisdictions. Of these foreign NOLs,
$216 million
do not expire and will be available indefinitely. The remaining foreign NOLs begin to expire in
2020
.
At December 31, 2019, we have a tax effected U.S. federal net operating loss of
$22.8 million
. Of this United States federal net operating loss,
$18.9 million
will begin to expire in
2031
and the balance has an unlimited life. At December 31, 2019, we have foreign tax credit carryovers of
$2.5 million
. At December 31, 2019, we have tax effected state net operating loss benefits of
$21.2 million
available to offset future taxable income in various states. Our state net operating loss carryforwards begin to expire in the year
2020
.
All deferred tax assets, to the extent not supported by reversing taxable temporary differences, have also been fully offset by valuation allowances as of December 31, 2019.
Undistributed earnings of certain of the Company’s foreign subsidiaries amounted to approximately
$304 million
at December 31, 2019. Those earnings are considered to be indefinitely reinvested; accordingly, no provision for U.S. federal income taxes has been provided thereon. Upon repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the various foreign countries. The Company expects to be able to take a 100% dividend received deduction to offset any U.S. federal income tax liability on the undistributed earnings. Withholding taxes of approximately
$3 million
would be payable upon remittance of all previously unremitted earnings at December 31, 2019.
Sections 382 and 383 of the Internal Revenue Code ("Code") limits for U.S. federal income tax purposes, the annual use of NOL carryforwards (including previously disallowed interest carryforwards) and tax credit carryforwards, respectively, following an ownership change. Under Code Section 382, a company has undergone an ownership change if shareholders owning at least 5% of the company have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, the Company determined that a Section 382 ownership change occurred on July 23, 2019 as a result of the Equitization Transactions described in
Note 19
. As a result of this change in ownership, the Company estimated that the future utilization of our federal NOLs (and certain credits and previously disallowed interest deductions) will become limited to approximately
$1.2 million
annually (
$0.3 million
tax effected). The Company is currently in the process of refining and finalizing these calculations. The Company maintains a full valuation allowance on its U.S. net deferred tax assets, including the deferred tax assets associated with the federal NOLs, credits and disallowed interest carryforwards.
110
New United States Tax Act
The United States Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017 and introduced significant changes to the United States income tax law. Beginning in 2018, the Tax Act reduced the United States statutory corporate income tax rate from
35%
to
21%
and created a modified territorial system that will generally allow United States companies a full dividend received deduction for any future dividends from non-U.S. subsidiaries. In addition to the tax rate reduction and changes to the territorial nature of the U.S. tax system, the Tax Act introduced a new limitation on interest deductions, a Foreign Derived Intangible Income (“FDII”) and new minimum tax on foreign sourced income, Global Low Taxed Intangible Income (“GILTI”). The Company will account for GILTI as a period cost in the year the tax is incurred. In 2019, we did not report any FDII benefit or GILTI taxes but did incur an interest limitation of approximately
$60.5 million
. This disallowed interest expense will be available for carryforward and is not subject to expiration but can only be used in a future year when the net interest expense for that period (including carryforward amounts) exceeds the relevant annual limitation.
NOTE 23
– CONTINGENCIES
Stockholder Class Action Litigation
On March 3, 2017 and March 13, 2017, the Company and certain of its former officers were named as defendants in
two
separate but largely identical complaints alleging violations of the federal securities laws. The
two
complaints were brought on behalf of a class of investors who purchased the Company's common stock between July 1, 2015 and February 28, 2017 and were filed in the United States District Court for the Western District of North Carolina (collectively, the "Stockholder Litigation"). During the second quarter of 2017, the Stockholder Litigation was consolidated into a single action and a lead plaintiff was selected by the Court. Through subsequent amendments, the putative class period was expanded to include investors who purchased shares between June 17, 2015 and August 9, 2017. The plaintiff in the Stockholder Litigation alleged fraud, misrepresentation and a course of conduct relating to certain projects undertaken by the Vølund & Other Renewable segment, which, according to the plaintiff, had the effect of artificially inflating the price of the Company's common stock. The plaintiff further alleged that stockholders were harmed when the Company later disclosed that it would incur losses on these projects. The plaintiff sought an unspecified amount of damages.
Following denial of defendants’ motion to dismiss the Stockholder Litigation and a period of additional discovery, the parties reached an agreement in principle to settle the Stockholder Litigation at mediation on April 16, 2019. The agreement required defendants to pay or cause to be paid
$19.5 million
into a settlement fund. Following the Court’s preliminary approval of the settlement, the
$19.5 million
payment was made by certain of our insurance carriers. The Court held a hearing to consider final approval of the settlement on December 16, 2019 and entered its final order approving the settlement on December 20, 2019.
The Stockholder Litigation is fully resolved as of January 31, 2020.
Derivative Litigation
On February 16, 2018 and February 22, 2018, the Company and certain of its present and former officers and directors were named as defendants in
three
separate but substantially similar derivative lawsuits filed in the United States District Court for the District of Delaware (the "Federal Court Derivative Litigation"). On April 23, 2018, the United States District Court for the District of Delaware entered an order consolidating the related derivative actions and designating co-lead and co-liaison counsel. On June 1, 2018, plaintiffs filed a consolidated derivative complaint. Plaintiffs asserted a variety of claims against the defendants including alleged violations of the federal securities laws, waste, breach of fiduciary duties and unjust enrichment. Plaintiffs, who purport to be current stockholders of the Company's common stock, sued on behalf of the Company to recover costs and an unspecified amount of damages, and to force the implementation of certain corporate governance changes. On June 28, 2018, the Federal Court Derivative Litigation was transferred to the United States District Court for the Western District of North Carolina, where the Stockholder Litigation was pending.
On November 14, 2018, the Company and certain of its present and former officers and directors were named as defendants in an additional shareholder derivative lawsuit filed in the North Carolina Superior Court (the "State Court Derivative Litigation"). The complaint in that action covered the same period and contained allegations substantially similar to those asserted in the Federal Court Derivative Litigation.
111
At a mediation held on April 17, 2019, the parties to the Federal Court and State Court Derivative Litigations reached an agreement in principle to resolve these cases based on certain corporate governance changes that the Company has already implemented or was willing to implement in the future and payment by certain of the Company's insurance carriers of
$1 million
in attorneys' fees and expenses to plaintiffs' counsel. There was no other monetary payment associated with this settlement. Following the Court’s preliminary approval of the settlement, the
$1 million
payment was made by one of our insurance carriers. The Court entered a final order approving the settlement on December 20, 2019.
The Federal Court Derivative Litigation and State Court Derivative Litigation are fully resolved as of January 31, 2020.
Litigation Relating to the Equitization Transactions
On May 28, 2019, a putative class action complaint was filed against the Board in the Court of Chancery of the State of Delaware. The complaint is captioned Price v. Avril, et al., C.A. No. 2019-0393-JRS (Del. Ch.) (the “Delaware Court of Chancery Litigation”). The complaint asserted, among other things, that the Board breached their fiduciary duties by failing to disclose all material information necessary for a fully-informed vote on certain of the proposals presented for consideration at the annual meeting of the Company's stockholders. The plaintiff also filed a motion to preliminarily enjoin the stockholder vote on the proposals unless and until all material information regarding the proposals was disclosed to the Company’s stockholders. The plaintiff withdrew her motion to preliminarily enjoin the stockholder vote on the proposals following the Company’s issuance of a supplemental proxy statement on June 6, 2019. The Court granted the plaintiff's request to voluntarily dismiss this action with prejudice on July 31, 2019 and retained jurisdiction solely for the purpose of adjudicating an anticipated application for attorneys' fees and expenses incurred by plaintiff's counsel. Thereafter, following a period of negotiations, the Company, and not its insurance carriers, paid
$0.4
million in October 2019 in attorneys’ fees and expenses to plaintiff’s counsel in connection with the mooted disclosure claims asserted in the action without admitting any fault or wrongdoing. On October 16, 2019, the Court entered an order closing the case. In entering the order, the Court was not asked to review, and did not pass judgment on, the payment of the attorneys’ fees and expenses or their reasonableness.
In addition, on June 3, 2019, a second putative class action complaint was filed against the Company, the Board and Mr. Young in the United States District Court for the District of Delaware. The complaint is captioned Kent v. Babcock & Wilcox Enterprises, Inc., et. al., No. 1:19-cv-01032-MN (D. Del.) (the “District of Delaware Litigation”). The complaint asserted, among other things, claims under Sections 14(a) and 20(a) of the Exchange Act for allegedly disseminating a materially incomplete and misleading proxy statement in connection with the Equitization Transactions, which was filed with the SEC on May 13, 2019. The complaint sought an order rescinding the Equitization Transactions or, in the alternative, awarding monetary damages as well as other relief. On September 19, 2019, the Kent action was voluntarily dismissed as to the named plaintiff only. On October 7, 2019, the Company agreed to pay Kent’s counsel attorneys' fees and costs of
$0.1 million
in connection with the mooted disclosure claims asserted in the action without admitting any fault or wrongdoing. The Company, and not its insurance carriers, subsequently made the
$0.1 million
payment to Kent’s counsel.
The Delaware Court of Chancery Litigation and District of Delaware Litigation are fully resolved as of January 31, 2020.
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’s claims as well as potential counter claims against Glatfelter and intend to vigorously defend against the action. However, given the preliminary stage of the litigation, it is too early to determine if the outcome of the Glatfelter Litigation will have a material adverse impact on our consolidated financial condition, results of operations or cash flows.
112
SEC Investigation
The U.S. SEC is conducting a formal investigation of the Company, focusing on the accounting charges and related matters involving the Company's Vølund and Other 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 subpoena 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 and directors and has requested additional testimony from 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.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 24
– COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are generally reclassified and recognized in the Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the
year ended
December 31, 2019
and
2018
were as follows:
|
(in thousands)
|
Currency translation (loss) gain
|
Net unrealized gain (loss) on investments (net of tax)
|
Net unrealized gain (loss) on derivative instruments
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
||||||||||
|
Balance at December 31, 2017
|
$
|
(27,837
|
)
|
$
|
38
|
|
$
|
1,737
|
|
$
|
3,633
|
|
$
|
(22,429
|
)
|
|
ASU 2016-1 cumulative adjustment
(1)
|
—
|
|
(38
|
)
|
—
|
|
—
|
|
(38
|
)
|
|||||
|
Other comprehensive income (loss) before reclassifications
|
16,452
|
|
—
|
|
890
|
|
(22
|
)
|
17,320
|
|
|||||
|
Reclassified from AOCI to net income (loss)
|
551
|
|
—
|
|
(1,265
|
)
|
(2,740
|
)
|
(3,454
|
)
|
|||||
|
Amounts reclassified from AOCI to pension, other accumulated postretirement benefit liabilities and deferred income taxes
(2)
|
—
|
|
—
|
|
—
|
|
(2,831
|
)
|
(2,831
|
)
|
|||||
|
Net other comprehensive income (loss)
|
17,003
|
|
(38
|
)
|
(375
|
)
|
(5,593
|
)
|
10,997
|
|
|||||
|
Balance at December 31, 2018
|
$
|
(10,834
|
)
|
$
|
—
|
|
$
|
1,362
|
|
$
|
(1,960
|
)
|
$
|
(11,432
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
13,401
|
|
—
|
|
(1,367
|
)
|
—
|
|
12,034
|
|
|||||
|
Reclassified from AOCI to net income (loss)
|
3,176
|
|
—
|
|
202
|
|
(1,857
|
)
|
1,521
|
|
|||||
|
Amounts reclassified from AOCI to advanced billings on contracts
(3)
|
—
|
|
—
|
|
(197
|
)
|
—
|
|
(197
|
)
|
|||||
|
Net other comprehensive income (loss)
|
16,577
|
|
—
|
|
(1,362
|
)
|
(1,857
|
)
|
13,358
|
|
|||||
|
Balance at December 31, 2019
|
$
|
5,743
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(3,817
|
)
|
$
|
1,926
|
|
(1)
ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,
requires investments to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income (loss). The standard was effective as of January 1, 2018 and requires application by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
(2)
Includes the reclassification of the unamortized balance of the curtailment gain, net of tax as described in
Note 13
.
(3)
The unrealized FX gain balance was transferred to
advanced billings on contracts
on our Consolidated Balance Sheets during the third quarter of 2019 and is expected to be recognized over time as the related projects are completed.
113
The amounts reclassified out of AOCI by component and the affected Consolidated Statements of Operations line items are as follows (in thousands):
|
AOCI component
|
Line items in the Consolidated Statements of Operations affected by reclassifications from AOCI
|
Year ended December 31,
|
|||||
|
2019
|
2018
|
||||||
|
Release of currency translation gain with the sale of equity method investment and the sale of business
|
Equity in income and impairment of investees
|
$
|
—
|
|
$
|
(551
|
)
|
|
Loss on sale of business
|
(3,176
|
)
|
—
|
|
|||
|
Net loss
|
$
|
(3,176
|
)
|
$
|
(551
|
)
|
|
|
Derivative financial instruments
|
Revenues
|
|
|
$
|
1,638
|
|
|
|
Cost of operations
|
—
|
|
(15
|
)
|
|||
|
Other – net
|
(202
|
)
|
—
|
|
|||
|
Total before tax
|
(202
|
)
|
1,623
|
|
|||
|
Provision for income taxes
|
—
|
|
358
|
|
|||
|
Net (loss) income
|
$
|
(202
|
)
|
$
|
1,265
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Benefit plans, net
|
$
|
1,857
|
|
$
|
3,002
|
|
|
Provision for income taxes
|
—
|
|
262
|
|
|||
|
Net income
|
$
|
1,857
|
|
$
|
2,740
|
|
|
NOTE 25
– FAIR VALUE MEASUREMENTS
The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic,
Fair Value Measurements and Disclosures
).
|
(in thousands)
|
|||||||||
|
Available-for-sale securities
|
December 31, 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
|
|
|
(in thousands)
|
|||||||||
|
Available-for-sale securities
|
December 31, 2018
|
Level 1
|
Level 2
|
||||||
|
Corporate notes and bonds
|
$
|
13,028
|
|
$
|
13,028
|
|
$
|
—
|
|
|
Mutual funds
|
1,283
|
|
—
|
|
1,283
|
|
|||
|
United States Government and agency securities
|
1,437
|
|
1,437
|
|
—
|
|
|||
|
Total fair value of available-for-sale securities
|
$
|
15,748
|
|
$
|
14,465
|
|
$
|
1,283
|
|
|
(in thousands)
|
||||||
|
Derivatives
|
December 31, 2019
|
December 31, 2018
|
||||
|
Forward contracts to purchase/sell foreign currencies
|
$
|
—
|
|
$
|
546
|
|
114
Available-For-Sale Securities
Our investments in available-for-sale securities are presented in
other assets
on our Consolidated Balance Sheets with contractual maturities ranging from
0
-
6 years
.
Derivatives
Derivative assets and liabilities usually consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments. As of December 31, 2019, we do not hold any derivative assets or liabilities; the last of our derivative contracts were sold during the first quarter of 2019.
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
|
•
|
Cash and cash equivalents and restricted cash and cash equivalents
. The carrying amounts that we have reported in the accompanying Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
|
|
•
|
Revolving debt and Last Out Term Loans
. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on Level 2 inputs such as the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our debt instruments approximated their carrying value at
December 31, 2019
and
December 31, 2018
.
|
|
•
|
Warrants.
The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
|
Non-Recurring Fair Value Measurements
The measurement of the net actuarial gain or loss associated with our pension and other postretirement plans was determined using unobservable inputs (see
Note 13
). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.
Our annual goodwill impairment test required significant fair value measurements using unobservable inputs (see
Note 8
). The fair values of the reporting units were based on an income approach using a discounted cash flow analysis, a market approach using multiples of revenue and EBITDA of guideline companies, and a market approach using multiples of revenue and EBITDA from recent, similar business combinations.
Property, plant and equipment and definite-lived intangible asset amounts are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. An impairment loss would be recognized when the carrying amount of an asset exceeds the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition. The amount of the impairment loss to be recorded is calculated by the excess of the asset carrying value over its fair value. Fair value is generally determined based on an income approach using a discounted cash flow analysis or based on the price that the Company expects to receive upon the sale of these assets. Both of those approaches utilize unobservable inputs (see
Note 12
and
Note 7
).
NOTE 26
– RELATED PARTY TRANSACTIONS
The Letter Agreement described in
Note 19
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 size of our board of directors is currently expected to remain at
seven
directors, unless reduced in connection with the Refinancing described in
Note 14
. 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. The Company also entered into
115
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.
Transactions with B. Riley
B. Riley became the beneficial owner of greater than
five
percent of our common stock in May 2018, upon completion of the 2018 Rights Offering described in
Note 18
. Based on its Schedule 13D filings, B. Riley beneficially owns
17.9%
of our outstanding common stock, inclusive of the warrants further described in
Note 16
, as of
December 31, 2019
.
B. Riley is party to the Last Out Term Loans as described in
Note 15
and
Note 19
and was a party to the Equitization Transactions described in
Note 19
, which included providing the Backstop Commitment to the 2019 Rights Offering described in
Note 18
and
Note 19
and receiving warrants as described in
Note 16
and
Note 19
. B. Riley is also party to the Backstop Commitment Letter where it has agreed to fund any shortfall in the Refinancing as described in
Note 14
.
We entered an agreement with BPRI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 for the services of Mr. Kenny Young, to serve as our Chief Executive Officer until November 30, 2020, unless terminated by either party with thirty days written notice. 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 BPRI 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 December 2018, we granted a total of
840 thousand
stock appreciation rights, the Non-employee SARs, to BRPI Executive Consulting, LLC. The Non-employee SARs expire
ten
years after the grant date and vest
100%
upon completion after the required years of service. Upon vesting, the Non-employee SARs may be exercised within
ten
business days following the end of any calendar quarter during which the volume weighted average share price is greater than the per share price goal of
$22.50
for
510 thousand
of the Non-employee SARS and
$25.00
for the remaining
330 thousand
of Non-employee SARS. Upon exercise of the Non-employee SARs, the holder receives a cash-settled payment equal to the number of Non-employee SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the Non-employee SARs base price of
$20.00
per stock appreciation right. Non-employee SARs are issued under a Non-employee SARs agreement.
Total fees associated with B. Riley related to the Last Out Term Loans and services of Mr. Kenny Young, both as described above, were
$12.4 million
and
$5.1 million
for the years ended
December 31, 2019
and
2018
, respectively.
Transactions with Vintage Capital Management, LLC
Based on its Schedule 13D filings, Vintage beneficially owns
33.9%
of our outstanding common stock as of
December 31, 2019
.
Vintage was a party to Tranche A-1 of the Last Out Term Loans as described in
Note 15
and
Note 19
and was a party to the Equitization Transactions described in
Note 19
, which included participation in the 2019 Rights Offering described in
Note 18
and
Note 19
and conversion of Tranche A-1 of the Last Out Term Loans in the Debt Exchange as described in
Note 15
and
Note 19
. Prior to the Debt Exchange,
$6.0 million
of Tranche A-1 had been transferred or sold to affiliates of B. Riley and the remainder was held by Vintage.
On April 10, 2018, the Company and Vintage entered into an equity commitment agreement (the "Equity Commitment Agreement"), which amended and restated in its entirety the prior letter agreement, dated as of March 1, 2018, between the Company and Vintage, pursuant to which Vintage agreed to backstop the 2018 Rights Offering for the purpose of providing at least
$245 million
of new capital.
On July 23, 2019, concurrent with the completion of the 2019 Rights Offering, described in
Note 18
and
Note 19
, the Tranche A-1 principal and paid-in-kind interest totaling
$38.2 million
was exchanged for
12.7 million
of our common shares of which
10.7
million of common shares were issued to Vintage, a related party, and the remainder were issued to B.Riley, also a related party, described above.
116
NOTE 27
– ASSETS HELD FOR SALE AND DIVESTITURES
Assets Held for Sale
In December 2019, we determined that a small business within the Babcock & Wilcox 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 December 31, 2019, the carrying value of the assets held for sale approximated the estimated fair value less costs to sell, therefore an impairment charge was not recorded. The divestiture of the business held for sale could result in a gain or loss on sale to the extent the ultimate selling price differs from the current carrying value of the net assets recorded. The sale is expected to close in the first half of 2020.
The following table summarizes the carrying value of the assets and liabilities held for sale at December 31, 2019:
|
(in thousands)
|
December 31, 2019
|
||
|
Accounts receivable – trade, net
|
$
|
5,472
|
|
|
Accounts receivable – other
|
147
|
|
|
|
Contracts in progress
|
586
|
|
|
|
Inventories
|
1,555
|
|
|
|
Other current assets
|
329
|
|
|
|
Current assets held for sale
|
8,089
|
|
|
|
Net property, plant and equipment
|
6,534
|
|
|
|
Intangible assets
|
725
|
|
|
|
Right-of-use-asset
|
63
|
|
|
|
Non-current assets held for sale
|
7,322
|
|
|
|
Total assets held for sale
|
$
|
15,411
|
|
|
Accounts payable
|
$
|
7,898
|
|
|
Accrued employee benefits
|
430
|
|
|
|
Advance billings on contracts
|
227
|
|
|
|
Accrued warranty expense
|
515
|
|
|
|
Operating lease liabilities
|
6
|
|
|
|
Other accrued liabilities
|
462
|
|
|
|
Current liabilities held for sale
|
9,538
|
|
|
|
Non-current liabilities held for sale
|
—
|
|
|
|
Total liabilities held for sale
|
$
|
9,538
|
|
Divestitures
Effective May 31, 2019, we sold all of the issued and outstanding capital stock of Loibl, a material handling business in Germany, to Lynx Holding GmbH for
€10.0 million
(approximately
$11.4 million
), subject to adjustment. We received
$7.4 million
in cash and recognized a
$3.6 million
pre-tax loss on sale of this business in
2019
, net of
$0.7 million
in transaction costs. Proceeds from the transaction were primarily used to reduce outstanding balances under our U.S. Revolving Credit Facility. Through the sale, we were also able to release performance letters of credit totaling
$8.5 million
, which improved our borrowing capacity. Prior to the divestiture, Loibl was part of the Vølund & Other Renewable segment and had revenues of approximately
$30 million
for the year ended December 31, 2018.
117
On September 17, 2018, we sold all of the issued and outstanding capital stock of PBRRC, a subsidiary that held two operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, to Covanta Pasco, Inc., a wholly owned subsidiary of Covanta Holding Company for
$45 million
, subject to adjustment. We received
$38.8 million
in cash and
$4.9 million
that was deposited in escrow pending final settlement of working capital and other customary matters. We received
$0.2 million
that was released from escrow for the year ended December 31, 2019. We recognized a
$39.8 million
pre-tax gain on sale of this business in 2018, net of
$0.8 million
of transaction costs. PBRRC was formerly part of the Vølund & Other Renewable segment and represented most of the operations and maintenance revenue for the year ended December 31, 2018.
Divestitures - Subsequent Events
On March 17, 2020, we fully settled the remaining escrow associated with the sale of PBRRC and received
$4.5 million
in cash.
NOTE 28
– DISCONTINUED OPERATIONS
On October 5, 2018, we sold all of the capital stock of our MEGTEC and Universal businesses to Dürr Inc., a wholly owned subsidiary of Dürr AG ("Dürr"), pursuant to a stock purchase agreement executed on June 5, 2018 for
$130.0 million
, subject to adjustment. We received
$112.0 million
in cash, net of
$22.5 million
in cash sold with the businesses, and
$7.7 million
, which was deposited in escrow pending final settlement of working capital and other customary matters. We primarily used proceeds from the transaction to reduce outstanding balances under our U.S. Revolving Credit Facility and for working capital purposes. During the quarter ended June 30, 2019, we received
$1.5 million
that was released from escrow. For the year ended
December 31, 2019
,
$0.7 million
of pretax income from discontinued operations was recognized primarily for the release of an accrued liability. On July 1, 2019,
$2.7 million
was released from escrow to Dürr. The remaining escrow matters are expected to be resolved within 18 months from the closing date.
Beginning June 30, 2018, the MEGTEC and Universal businesses are classified as discontinued operations because the disposal represents a strategic shift that had a major effect on our operations; they were previously included in our Industrial segment, which has been renamed the SPIG segment because SPIG is the remaining business of the former Industrial segment. We recorded a
$72.3 million
non-cash impairment charge in June 2018 to reduce the carrying value of the MEGTEC and Universal businesses to the fair value, less an amount of estimated sale costs; the non-cash impairment charge is included in (
loss) income from discontinued operations, net of tax
in our Consolidated Statements of Operations and is presented below as goodwill impairment.
The following table presents selected financial information regarding the discontinued operations of our former MEGTEC and Universal businesses included in the Consolidated Statements of Operations:
|
(in thousands)
|
Year ended December 31, 2018
|
||
|
Revenue
|
$
|
170,908
|
|
|
Cost of operations
|
134,057
|
|
|
|
Selling, general and administrative
|
26,596
|
|
|
|
Goodwill impairment
|
72,309
|
|
|
|
Research and development
|
1,224
|
|
|
|
Gain on asset disposals
|
(1,991
|
)
|
|
|
Operating loss
|
(61,287
|
)
|
|
|
Loss on sale of business
|
(5,521
|
)
|
|
|
Income tax benefit
|
(233
|
)
|
|
|
Net loss
|
(66,832
|
)
|
|
118
The significant components of discontinued operations of our former MEGTEC and Universal businesses included in our Consolidated Statements of Cash Flows are as follows:
|
(in thousands)
|
Year ended December 31, 2018
|
||
|
Depreciation and amortization
|
$
|
3,482
|
|
|
Goodwill impairment
|
72,309
|
|
|
|
Gain on asset disposals
|
(1,991
|
)
|
|
|
Loss on sales of business
|
5,521
|
|
|
|
Benefit from deferred income taxes
|
(944
|
)
|
|
|
Purchase of property, plant and equipment
|
(77
|
)
|
|
NOTE 29
– NEW ACCOUNTING STANDARDS
New accounting standards not yet adopted that could affect our Consolidated Financial Statements in the future are summarized as follows:
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 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 financial statements.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. The new guidance requires companies acting as the customer in a cloud hosting service arrangement to follow the requirements of ASC 350-40 for capitalizing implementation costs for internal-use software and requires the amortization of these costs over the life of the related service contract. This standard is effective for all public business entities for fiscal years beginning after December 15, 2019, and any interim periods within those fiscal years. Early adoption is permitted in any interim period. We expect the impact of this standard on our financial statements will be immaterial.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
119
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, which, by their nature, can provide only reasonable assurance regarding the control objectives. It should be noted that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
Based on the evaluation referred to above, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of December 31, 2019 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.
120
Management's Report on Internal Control Over Financial Reporting
B&W's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes, among other things, policies and procedures for conducting business, information systems for processing transactions and an internal audit department. Mechanisms are in place to monitor the effectiveness of our internal control over financial reporting and actions are taken to remediate identified internal control deficiencies. Our procedures for financial reporting include the involvement of senior management, our Audit and Finance Committee and our staff of financial and legal professionals. Our financial reporting process and associated internal controls were designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of financial reporting and the preparation of our Consolidated Financial Statements for external reporting in accordance with accounting principles generally accepted in the United States of America.
Management, with the participation of our principal executive and financial officers, assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. Management based its assessment on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance as to its effectiveness and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. Based on our assessment, management has concluded that B&W's internal control over financial reporting was effective at the reasonable assurance level described above as of December 31, 2019.
121
Changes in Internal Control Over Financial Reporting
On August 8, 2019, our former Vice President, Controller and Chief Accounting Officer, Daniel W. Hoehn, resigned from the Company, at which time Louis Salamone, the Company’s Chief Financial Officer, assumed the additional role of the Company’s Chief Accounting Officer.
Beginning January 1, 2019, we implemented ASU 2016-02,
Leases (Topic 842).
Although adoption of the lease standard had an immaterial impact on our results of operations, it materially impacted our Consolidated Balance Sheets. Therefore, we implemented changes to our processes related to our accounting for leases and the related control activities. These changes included implementing new lease software and training.
There were no other changes in our internal control over financial reporting during the three months ended
December 31, 2019
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Amendment to Credit Agreement
On March 27, 2020, we entered into Amendment No. 21 to the Credit Agreement, dated May 11, 2015 with Bank of America, N.A., as administrative agent and lender, and the other lenders party thereto. Amendment No. 21 modifies the delivery requirements with respect to the Consolidated Financial Statements included in this annual report to allow for the inclusion of disclosure about the substantial doubt regarding our ability to continuing operation as a going concern as part of the notes to the Consolidated Financial Statements and in the associated opinion of our independent registered public accounting firm. Certain of our lenders, as well as certain of their respective affiliates, have performed and may in the future perform for us and our subsidiaries, various commercial banking, investment banking, lending, underwriting, trust services, financial advisory and other financial services, for which they have received and may in the future receive customary fees and expenses. Certain term loan lenders under the Amended Credit Agreement are also significant shareholders of our company and are party to various agreements with us pursuant to which they have various rights with regard to their shareholdings and our governance, as we have previously disclosed in our public reports.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item with respect to directors is incorporated by reference to the material appearing under the heading "Election of Directors" in the Proxy Statement for our 2020 Annual Meeting of Stockholders. The information required by this item with respect to compliance with section 16(a) of the Securities and Exchange Act of 1934, as amended, is incorporated by reference to the material appearing under the heading "Section 16(a) Beneficial Ownership Compliance" in the Proxy Statement for our 2020 Annual Meeting of Stockholders. The information required by this item with respect to the Audit Committee and Audit and Finance Committee financial experts is incorporated by reference to the material appearing in the "Director Independence" and "Audit and Finance Committee" sections under the heading "Corporate Governance –Board of Directors and Its Committees" in the Proxy Statement for our 2020 Annual Meeting of Stockholders.
We have adopted a Code of Business Conduct for our employees and directors, including, specifically, our chief executive officer, our chief financial officer, our chief accounting officer, and our other executive officers. Our code satisfies the requirements for a "code of ethics" within the meaning of SEC rules. A copy of the code is posted on our web site,
www.babcock.com
under "Investor Relations – Corporate Governance – Highlights." We intend to disclose promptly on our website any amendments to, or waivers of, the code covering our chief executive officer, chief financial officer and chief accounting officer.
EXECUTIVE OFFICERS
Our executive officers and their ages as of March 1, 2020, are as follows:
122
|
Name
|
Age
|
Position
|
|
Kenneth Young
|
56
|
Chief Executive Officer
|
|
Louis Salamone
|
73
|
Executive Vice President, Chief Financial Officer and Chief Accounting Officer
|
|
Robert M. Caruso
|
57
|
Chief Implementation Officer
|
|
Henry E. Bartoli
|
73
|
Chief Strategy Officer
|
|
John J. Dziewisz
|
54
|
Senior Vice President and Corporate Secretary
|
|
Jimmy B. Morgan
|
51
|
Senior Vice President, Babcock & Wilcox
|
Kenneth Young has served as our Chief Executive Officer since November 2018. Mr. Young also serves as the President of B. Riley Financial, Inc. ("B. Riley"), a provider of collaborative financial services and solutions, since July 2018, and as Chief Executive Officer of B. Riley’s subsidiary, B. Riley Principal Investments, since October 2016. From August 2008 to March 2016, Mr. Young served as the President and Chief Executive Officer of Lightbridge Communications Corporation (f/k/a LCC International, Inc.), a provider of integrated end-to-end solutions for wireless voice and data communications networks. Mr. Young has served as a member of the boards of directors of Globalstar, Inc. since 2015, Orion Energy Systems, Inc. since 2017, Liberty Tax, Inc. since 2018 and bebe stores, inc. since 2018. Mr. Young previously served as a member of the boards of directors of B. Riley from 2015 to 2016 and Standard Diversified Opportunities Inc. from 2015 to 2017.
Louis Salamone has served as our Executive Vice President, Chief Financial Officer and Chief Accounting Officer since August 2019. Before that, Mr. Salamone served as our Chief Financial Officer since February 2019. Prior to that, Mr. Salamone served as the Company's Executive Vice President of Finance since November 2018. Mr. Salamone also serves as an advisor to MDx Diagnostics, LLC, a provider of medical devices, since December 2017. From April 2013 until December 2017, Mr. Salamone served as Chief Financial Officer of CityMD, an urgent care provider. Prior to joining CityMD, Mr. Salamone was Vice President and Chief Financial Officer of OpenPeak Inc., a provider of mobile cybersecurity solutions, from April 2009 until March 2013, and Executive Vice President and Chief Financial Officer of LCC, from June 2006 until April 2009.
Robert M. Caruso has served as our Chief Implementation Officer since April 2018. He works closely with the Company’s executive leadership team to review financial and operational strategies, and revenue and profitability enhancement opportunities. Mr. Caruso also serves as a Managing Director of Alvarez & Marsal's North American Commercial Restructuring practice ("NACR") since September 2006. He is a member of the NACR Executive Committee and co-leads
the NACR Midwest Region.
Henry E. Bartoli has served as our Chief Strategy Officer since November 2018, in addition to serving as a member of our Board of Directors since January 2018. Prior to joining the Company, Mr. Bartoli served as President and Chief Executive Officer of Hitachi Power Systems America LTD from 2004 until his retirement in 2014. From 2002 to 2004, he was Executive Vice President of The Shaw Group, after serving in a number of senior leadership roles at Foster Wheeler Ltd. from 1992 to 2002, including Group Executive and Corporate Senior Vice President, Energy Equipment Group, and Group Executive and Corporate Vice President and Group Executive, Foster Wheeler Power Systems Group. Previously, from 1971 to 1992, he served in a number of positions of increasing importance at Burns and Roe Enterprises, Inc.
John J. Dziewisz has served as our Senior Vice President and Corporate Secretary since February 1, 2020. He also serves as the Company’s Chief Compliance Officer and the General Counsel of The Babcock & Wilcox Company. Previously, Mr. Dziewisz served as our Vice President, Assistant General Counsel & Chief Compliance Officer from January 2019 to February 2020. From June 2013 until January 2019, Mr. Dziewisz served as Assistant General Counsel, Operations & Intellectual Property. From June 2005 until June 2013, Mr. Dziewisz served as Managing Attorney with the Company. Mr. Dziewisz joined the Company in 1997.
Jimmy B. Morgan has served as our Senior Vice President, Babcock & Wilcox since January 2019. Previously, Mr. Morgan served as Senior Vice President, Renewable, including our Babcock & Wilcox Vølund subsidiary, and Babcock & Wilcox's operations and maintenance services businesses, from December 2016 to January 2019. From August 2016 to December 2016, he served as Senior Vice President, Operations. He was Vice President, Operations from May 2016 to August 2016 and was Vice President and General Manager of Babcock & Wilcox Construction Co., Inc. from February 2016 to May 2016. Before joining Babcock & Wilcox, he was President for Allied Technical Resources, Inc., a technical staffing company, from September 2013 to January 2016. Previous positions included serving as Chief Operating Officer with BHI Energy, Vice President of Installation and Modification Services with Westinghouse Electric Company, and as Managing Director for AREVA T&D. He began his career with Duke Energy.
123
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the material appearing under the headings "Compensation of Directors" and "Compensation of Executive Officers" in the Proxy Statement for our 2020 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides information on our equity compensation plans as of December 31, 2019:
|
(share data in thousands)
|
|
|
Equity Compensation Plan Information
|
|
|
Plan Category
|
Equity compensation plans approved by security holders
|
|
Number of securities to be issued upon exercise of outstanding options and rights
|
2,472
|
|
Weighted-average exercise price of outstanding options and rights
|
$22.49
|
|
Number of securities remaining available for future issuance
|
97
|
The other information required by this item is incorporated by reference to the material appearing under the headings "Security Ownership of Directors and Executive Officers" and "Security Ownership of Certain Beneficial Owners" in the Proxy Statement for our 2020 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated by reference to the material appearing under the headings "Corporate Governance – Director Independence" and "Certain Relationships and Related Transactions" in the Proxy Statement for our 2020 Annual Meeting of Stockholders.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the material appearing under the heading "Ratification of Appointment of Independent Registered Public Accounting Firm for Year Ending December 31, 2020" in the Proxy Statement for our 2020 Annual Meeting of Stockholders.
PART IV
Item 15. Exhibits
|
Master Separation Agreement, dated as of June 8, 2015, between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 2.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Certificate of Amendment of the Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on June 17, 2019 (File No. 001-36876)).
|
||
|
Certificate of Amendment of the Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on July 24, 2019 (File No. 001-36876)).
|
||
124
|
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-36876)).
|
||
|
Form of Warrant (incorporated by reference to Exhibit 4.1 of the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on July 24, 2019 (File No. 001-36876)).
|
||
|
Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.
|
||
|
Tax Sharing Agreement, dated as of June 8, 2015, by and between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Employee Matters Agreement, dated as of June 8, 2015, by and between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Transition Services Agreement, dated as of June 8, 2015, between The Babcock & Wilcox Company, as service provider, and Babcock & Wilcox Enterprises, Inc., as service receiver (incorporated by reference to Exhibit 10.3 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Transition Services Agreement, dated as of June 8, 2015, between Babcock & Wilcox Enterprises, Inc., as service provider, and The Babcock & Wilcox Company, as service receiver (incorporated by reference to Exhibit 10.4 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Assumption and Loss Allocation Agreement, dated as of June 19, 2015, by and among ACE American Insurance Company and the Ace Affiliates (as defined therein), Babcock & Wilcox Enterprises, Inc. and The Babcock & Wilcox Company (incorporated by reference to Exhibit 10.5 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Reinsurance Novation and Assumption Agreement, dated as of June 19, 2015, by and among ACE American Insurance Company and the Ace Affiliates (as defined therein), Creole Insurance Company and Dampkraft Insurance Company (incorporated by reference to Exhibit 10.6 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Novation and Assumption Agreement, dated as of June 19, 2015, by and among The Babcock & Wilcox Company, Babcock & Wilcox Enterprises, Inc., Dampkraft Insurance Company and Creole Insurance Company (incorporated by reference to Exhibit 10.7 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
Babcock & Wilcox Enterprises, Inc. Amended and Restated 2015 Long-Term Incentive Plan (Amended and Restated as of June 14, 2019) (incorporated by reference to Appendix G to the Babcock & Wilcox Enterprises, Inc. Definitive Proxy Statement filed with the Securities and Exchange Commission on May 13, 2019).
|
||
|
Babcock & Wilcox Enterprises, Inc. Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.9 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
||
|
|
Babcock & Wilcox Enterprises, Inc. Management Incentive Compensation Plan (incorporated by reference to Exhibit 10.10 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
|
Supplemental Executive Retirement Plan of Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.11 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
125
|
|
Babcock & Wilcox Enterprises, Inc. Defined Contribution Restoration Plan (incorporated by reference to Exhibit 10.12 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
|
Intellectual Property Agreement, dated as of June 26, 2015, between Babcock & Wilcox Power Generation Group, Inc. and BWXT Foreign Holdings, LLC (incorporated by reference to Exhibit 10.13 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
|
Intellectual Property Agreement, dated as of June 27, 2015, between Babcock & Wilcox Technology, Inc. and Babcock & Wilcox Investment Company (incorporated by reference to Exhibit 10.14 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
|
Intellectual Property Agreement, dated as of May 29, 2015, between Babcock & Wilcox Canada Ltd. and B&W PGG Canada Corp. (incorporated by reference to Exhibit 10.15 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
|
Intellectual Property Agreement, dated as of May 29, 2015, between Babcock & Wilcox mPower, Inc. and Babcock & Wilcox Power Generation Group, Inc. (incorporated by reference to Exhibit 10.16 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
|
Intellectual Property Agreement, dated as of June 26, 2015, between The Babcock & Wilcox Company and Babcock & Wilcox Enterprises, Inc. (incorporated by reference to Exhibit 10.17 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
Form of Change-in-Control Agreement, by and between Babcock & Wilcox Enterprises, Inc. and certain officers for officers elected prior to August 4, 2016 (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 001-36876)).
|
||
|
|
Form of Restricted Stock Grant Agreement (Spin-off Award) (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 001-36876)).
|
|
|
|
Form of Restricted Stock Units Grant Agreement (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 001-36876)).
|
|
|
|
Form of Stock Option Grant Agreement (incorporated by reference to Exhibit 10.3 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (File No. 001-36876)).
|
|
|
|
Form of Performance Restricted Stock Unit Agreement (incorporated by reference to Exhibit 10.23 to the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-36876)).
|
|
|
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.24 to the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 001-36876)).
|
||
126
|
|
Form of Change-in-Control Agreement, by and between Babcock & Wilcox Enterprises, Inc. and certain officers for officers elected on or after August 4, 2016 (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 001-36876)).
|
|
|
|
Form of Performance Unit Award Grant Agreement (Cash Settled) (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 001-36876)).
|
|
|
Form of Special Restricted Stock Unit Award Grant Agreement (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 001-36876)).
|
||
|
|
Babcock & Wilcox Enterprises, Inc., Severance Plan, as revised effective June 1, 2018 (incorporated by reference to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (File No. 001-36876)).
|
|
|
|
Consulting Agreement dated November 19, 2018 between Babcock & Wilcox Enterprises, Inc., and BRPI Executive Consulting (incorporated by reference to Exhibit 10.49 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-36876)).
|
|
|
|
Executive Employment Agreement dated November 19, 2018 between Babcock & Wilcox Enterprises, Inc. and Louis Salamone (incorporated by reference to Exhibit 10.50 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-36876)).
|
|
|
Executive Employment Agreement dated November 19, 2018 between Babcock & Wilcox Enterprises, Inc. and Henry Bartoli, as amended.
|
||
|
Form of Stock Appreciation Right Award Grant Agreement (incorporated by reference to Exhibit 10.52 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-36876)).
|
||
|
|
Credit Agreement, dated as of May 11, 2015, 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 10.18 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 (File No. 001-36876)).
|
|
|
Amendment No. 1 dated June 10, 2016 to Credit Agreement, dated May 11, 2015, 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 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (File No. 001-36876)).
|
||
|
Amendment No. 2 dated February 24, 2017 to Credit Agreement, dated May 11, 2015, 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 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 (File No. 001-36876)).
|
||
127
|
Amendment No. 3 dated August 9, 2017, to Credit Agreement dated May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the Borrower, Bank of America, N.A., as administrative Agent and Lender, and the other Lenders party thereto (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (File No. 001-36876)).
|
||
|
Amendment No. 4 dated September 30, 2017, to Credit Agreement dated May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the Borrower, Bank of America, N.A., as administrative Agent and Lender, and the other Lenders party thereto (incorporated by reference to Exhibit 10.3 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (File No. 001-36876)).
|
||
|
Amendment No. 5 dated March 1, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed March 5, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 6 dated April 10, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed April 11, 2018 (File No. 001-36876)).
|
||
|
Consent and Amendment No. 7 dated May 31, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 8 dated August 9, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed August 13, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 9 dated September 14, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 10 dated September 28, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 11 dated October 4, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 12 dated October 31, 2018, to Credit Agreement, dated as of May 11, 2015, 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 the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 13 dated December 31, 2018, to Credit Agreement, dated as of May 11, 2015, 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 10.47 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-36876)).
|
||
128
|
Amendment No. 14 dated January 15, 2019 to Credit Agreement, dated as of May 11, 2015, 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 10.48 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 15 and Limited Waiver dated March 19, 2019 to Credit Agreement, dated as of May 11, 2015, 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 10.53 of the Babcock & Wilcox Enterprises, Inc. Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 001-36876)).
|
||
|
Amendment No. 16, dated April 5, 2019, to Credit Agreement, dated as of May 11, 2015, 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 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on April 5, 2019 (File No. 001-36876)).
|
||
|
Amendment No. 17, dated August 7, 2019, to Credit Agreement, dated as of May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto.
|
||
|
Amendment No. 18, dated December 31, 2019, to Credit Agreement, dated as of May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto.
|
||
|
Amendment No. 19, dated January 17, 2020, to Credit Agreement, dated as of May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto.
|
||
|
Amendment No. 20, dated January 31, 2020, to Credit Agreement, dated as of May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto.
|
||
|
Investor Rights Agreement, dated as of April 30, 2019, by and among Babcock & Wilcox Enterprises, Inc., B. Riley FBR, Inc. and Vintage Capital Management, LLC (incorporated by reference to Exhibit 10.4 of the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (File No. 001-36876)).
|
||
|
Registration Rights Agreement, dated as of April 30, 2019, by and among Babcock & Wilcox Enterprises, Inc., and certain investors party thereto (incorporated by reference to Exhibit 10.5 of the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2019 (File No. 001-36876)).
|
||
|
Form of 2019 Restricted Stock Units Director Grant Agreement (incorporated by reference to Exhibit 10.1 to the Babcock & Wilcox Enterprises, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 (File No. 001-36876)).
|
||
|
First Amendment to the Babcock & Wilcox Enterprises, Inc. Defined Contribution Restoration Plan.
|
||
|
Backstop Commitment Letter, dated January 31, 2020, between Babcock & Wilcox Enterprises, Inc. and B. Riley Financial, Inc. (incorporated by reference to Exhibit 10.2 to the Babcock & Wilcox Enterprises, Inc. Current Report on Form 8-K filed on February 3, 2020 (File No. 001-36876)).
|
||
129
|
Amendment No. 21, dated March 27, 2020, to Credit Agreement, dated as of May 11, 2015, among Babcock & Wilcox Enterprises, Inc., as the borrower, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto.
|
||
|
Significant Subsidiaries of the Registrant.
|
||
|
Consent of Deloitte & Touche LLP.
|
||
|
Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.
|
||
|
Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.
|
||
|
Section 1350 certification of Chief Executive Officer.
|
||
|
Section 1350 certification of Chief Financial Officer.
|
||
|
101.INS
|
XBRL Instance Document.
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document.
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document.
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document.
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document.
|
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
|
* Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
† Management contract or compensatory plan or arrangement.
‡ The Company has omitted certain information contained in this exhibit pursuant to Rule 601(b)(10) of Regulation S-K. The omitted information is not material and, if publicly disclosed, would likely cause competitive harm to the Company.
130
SCHEDULE II
BABCOCK & WILCOX ENTERPRISES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
21,392
|
|
$
|
11,591
|
|
|
Charges to costs and expenses
|
1,689
|
|
8,208
|
|
||
|
Deductions
|
(371
|
)
|
(585
|
)
|
||
|
Currency translation adjustments and other
|
2,361
|
|
$
|
2,178
|
|
|
|
Balance at end of period
|
$
|
25,071
|
|
$
|
21,392
|
|
Deferred Tax Assets Valuation Allowance
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
483,967
|
|
$
|
108,105
|
|
|
Charges to costs and expenses
|
56,254
|
|
375,408
|
|
||
|
Charges to other accounts
|
(430
|
)
|
454
|
|
||
|
Balance at end of period
|
$
|
539,791
|
|
$
|
483,967
|
|
Inventory Reserves
|
Year ended December 31,
|
||||||
|
(in thousands)
|
2019
|
2018
|
||||
|
Balance at beginning of period
|
$
|
15,529
|
|
$
|
13,328
|
|
|
Charges to costs and expenses
|
72
|
|
1,809
|
|
||
|
Deductions
|
(141
|
)
|
(1,010
|
)
|
||
|
Held for sale
|
(1,384
|
)
|
—
|
|
||
|
Currency translation adjustments and other
|
89
|
|
1,402
|
|
||
|
Balance at end of period
|
$
|
14,165
|
|
$
|
15,529
|
|
131
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
BABCOCK & WILCOX ENTERPRISES, INC.
|
||
|
March 30, 2020
|
By:
|
/s/ Kenneth M. Young
|
|
Kenneth M. Young
|
||
|
Chief Executive Officer
|
||
132
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
Signature
|
Title
|
|
|
/s/ Kenneth M. Young
|
Chief Executive Officer
(Principal Executive Officer)
|
|
|
Kenneth M. Young
|
||
|
/s/ Louis Salamone
|
Executive Vice President, Chief Financial Officer and Chief Accounting Officer (Principal Financial and Accounting Officer and Duly Authorized Representative)
|
|
|
Louis Salamone
|
||
|
/s/ Matthew E. Avril
|
Director
|
|
|
Matthew E. Avril
|
||
|
/s/ Henry E. Bartoli
|
Director
|
|
|
Henry E. Bartoli
|
||
|
/s/ Cynthia S. Dubin
|
Director
|
|
|
Cynthia S. Dubin
|
||
|
/s/ Alan Howe
|
Director
|
|
|
Alan Howe
|
||
|
/s/ Brian R. Kahn
|
Director
|
|
|
Brian R. Kahn
|
||
|
/s/ Bryant Riley
|
Director
|
|
|
Bryant Riley
|
||
|
/s/ Kenneth Siegel
|
Director
|
|
|
Kenneth Siegel
|
||
March 30, 2020
133
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsPart IIItem 5. Market For Registrant's Common Equity Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Consolidated Financial Statements and Supplemental DataNote 1 Basis Of PresentationNote 2 Significant Accounting PoliciesNote 3 Earnings (loss) Per ShareNote 4 Segment ReportingNote 5 Revenue Recognition and ContractsNote 6 InventoriesNote 7 Property, Plant & Equipment, & Finance LeaseNote 8 - GoodwillNote 9 Intangible AssetsNote 10 LeasesNote 11 Accrued Warranty ExpenseNote 12 Restructuring Activities and Spin-off Transaction CostsNote 13 Pension Plans and Other Postretirement BenefitsNote 14 Revolving DebtNote 15 Last Out Term LoansNote 16 WarrantsNote 17 Common SharesNote 18 Rights OfferingsNote 19 Equitization TransactionsNote 20 Interest Expense and Supplemental Cash Flow InformationNote 21 Stock-based CompensationNote 22 Provision For Income TaxesNote 23 ContingenciesNote 24 Comprehensive IncomeNote 25 Fair Value MeasurementsNote 26 Related Party TransactionsNote 27 Assets Held For Sale and DivestituresNote 28 Discontinued OperationsNote 29 New Accounting StandardsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. ExhibitsItem 16. Form 10-k Summary