Babcock Wilcox Enterprises Inc
For the period ended Dec 31, 2023. Filed Mar 15, 2024.
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FY2023 · Filed Mar 15, 2024
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Notes to Consolidated Financial Statements
DECEMBER 31, 2023
NOTE 1 –BASIS OF PRESENTATION
The Consolidated Financial Statements of Babcock & Wilcox Enterprises, Inc. have been prepared in accordance with GAAP. We have eliminated all intercompany transactions and accounts. Unless otherwise noted, discussion of our business and results of operations in this Annual Report on Form 10-K refers to our continuing operations.
Liquidity and Going Concern
The accompanying Consolidated Financial Statements have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
We have recurring operating losses primarily due to losses recognized on B&W Solar loss contracts described in Note 4 to the Consolidated Financial Statements as well as increased selling, general and administrative expenses and higher debt service costs. Our net cash used in operating activities was $42.3 million and $30.6 million for the years ended December 31, 2023 and December 31, 2022. Our assessment of our ability to fund future operations is inherently subjective, judgment-based and susceptible to change based on future events. Currently, with existing cash on hand and available liquidity, we are projecting insufficient liquidity to fund operations through one year following the date that this Annual Report is issued. These conditions and events raise substantial doubt about our ability to continue as a going concern.
In response to the conditions, we are currently evaluating different strategies to obtain the required funding for future operations. We have taken or plan to take all or some combination of the following actions, and continue to evaluate other actions:
initiated the sale process of one of our non-strategic businesses;
filed for a waiver of required minimum contributions to the U.S. Plan, that if granted, would reduce cash funding requirements in 2024 and would increase contributions annually over the subsequent five-year period. We cannot provide any assurances that such waiver will be granted;
initiated the sale process of several non-core real estate assets;
plan to sell common shares pursuant to our At-The-Market Offering; and,
considering alternative measures to manage cash flow, such as suspension of the dividend on our Preferred Stock.
Based on our ability to raise funds through the actions noted above and our Cash and cash equivalents as of December 31, 2023, we have concluded that it is probable that such proceeds would provide sufficient liquidity to fund operations for the next twelve months following the date of this Annual Report. As a result, it is probable that our plans alleviate the substantial doubt about our ability to continue as a going concern.
Operations
Our operations are assessed based onthree reportable market-facing segments as part of our strategic, market-focused organizational and re-branding initiative to accelerate growth and provide stakeholders improved visibility into its renewable and environmental growth platforms. Our reportable segments are as follows:
Babcock & Wilcox Renewable: Technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, biomass-to-energy and black liquor systems for the pulp and paper industry. Our technologies support a circular economy, diverting waste from landfills to use for power generation and replacing fossil fuels, while recovering metals and reducing emissions.
Babcock & Wilcox Environmental: A full suite of emissions control and environmental technology solutions for utility, waste-to-energy, biomass-to-energy, carbon black, and industrial steam generation applications around the world. Our broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control, and mercury control.
Babcock & Wilcox Thermal: Steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. We have an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
For financial information about our segments see Note 5 to the Consolidated Financial Statements.
NOTE 2 –SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
We use estimates and assumptions to prepare the Consolidated Financial Statements in conformity with GAAP. Our long-term contracts, warranty obligations, valuation of goodwill, intangible assets, other long-lived assets, business combinations, tax assets, pension and postretirement plans, contingencies and litigation require the use of various management estimates and assumptions. These estimates and assumptions affect the amounts we report in the Consolidated Financial Statements and accompanying notes. Our actual results could differ from these estimates. Management reviews our estimates on an on-going basis. Changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
Cash and cash equivalents and restricted cash
Cash equivalents are highly liquid investments, with maturities of three months or less at the time of purchase. We record cash and cash equivalents as current or long-term restricted when we are unable to freely use such cash and cash equivalents for general operating purposes.
Trade accounts receivable and allowance for credit loss
Trade accounts receivable are recorded at the point control transfers to customers and represent the amount of consideration we expect to receive in exchange for goods and services transferred and do not bear interest. We establish provisions for expected lifetime losses on accounts receivable at the time the receivable is recorded based on historical experience, customer credit quality and forecasted economic conditions. We regularly review our accounts receivable balances and the allowance for credit loss and establish or adjust the allowance as necessary using the specific identification method. Allowance for credit loss was $11.0 million and $12.7 million at December 31, 2023 and 2022, respectively. Bad debt amounts charged to selling, general and administrative expenses were $2.0 million, $0.2 million and $0.3 million for the years ended December 31, 2023, 2022, and 2021, respectively.
Contract balances
Contracts in progress, a current asset in the Consolidated Balance Sheets, includes revenues and related costs, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts. Advance billings, a current liability in the Consolidated Balance Sheets, includes amounts 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. Unbilled revenues do not contain an allowance for credit losses as the expectation to invoice customers and the collect all amounts due 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 Consolidated Statements of Operations and an accrual for the estimated loss on the uncompleted contract is recorded 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 as a reduction of the estimated selling price in the period the change in estimate occurs. These amounts are included in Other accrued liabilities in the Consolidated Balance Sheets.
Inventories
Inventories are carried at the lower of cost or net realizable value on the first-in, first-out basis ("FIFO") or weighted-average cost basis. The FIFO basis at December 31, 2023 applied to approximately 54% of inventory and is used across all segments. The weighted-average cost basis at December 31, 2023 applied to approximately 46% of inventory and is used in the B&W Thermal Segment. The obsolete inventory reserve was $8.5 million and $7.2 million as of December 31, 2023 and 2022, respectively. The components of inventories can be found in Note 7 to the Consolidated Financial Statements.
Property, plant and equipment
Property, plant and equipment are recorded at depreciated cost, less any impairment provisions. Property, plant and equipment are depreciated using the straight-line method over estimated economic useful lives ofeight to 33 years for buildings andthree to 28 years for machinery and equipment. Depreciation expense was $10.3 million, $10.5 million and $9.6 million for the years ended December 31, 2023, 2022 and 2021, respectively. The costs of maintenance, repairs and renewals that do not materially prolong the useful life of an asset are expensed as incurred.
Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is 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 recorded is calculated by the excess of the asset carrying amount 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 result in future asset impairments and negatively affect our financial position and results of operations.
Goodwill
Goodwill is generally recorded as a result of a business combination and represents the excess of purchase price over the fair value of the tangible and identifiable net assets acquired. We perform impairment testing of goodwill annually on October 1 or if we determine that impairment indicators are present. In assessing goodwill for impairment, we follow ASC 350, Intangibles – Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill, or we choose not to perform the qualitative assessment, then we compare the fair value of that reporting unit with its carrying amount, including goodwill, in a quantitative assessment. If the carrying amount of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss measured as the excess of the reporting unit’s carrying amount, including goodwill, over its fair value. The estimated fair value of the reporting unit is derived based on valuation techniques we believe market participants would use for each of the reporting units.
Intangible assets
Intangible assets are recognized at fair value when acquired, generally as a result of a business combination. Intangible assets with definite lives are amortized to operating expense using the straight-line method over their estimated useful lives and tested for impairment when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Intangible assets with indefinite lives are not amortized and are subject to impairment testing at least annually or in interim periods when impairment indicators are present. We may elect to perform a qualitative assessment when testing indefinite lived intangible assets for impairment to determine whether events or circumstances affecting significant inputs related to the most recent quantitative evaluation have occurred, indicating that it is more likely than not that the indefinite lived intangible asset is impaired. Otherwise, we test indefinite-lived intangible assets for impairment by determining the fair value of the indefinite-lived intangible asset and comparing the fair value to its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment is recognized for the amount of the difference.
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in Right-of-use (“ROU”) assets, Operating lease liabilities and Non-current operating lease liabilities in the Consolidated Balance Sheets. Finance leases are included in Net property, plant and equipment and finance leases, 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. Since substantially all of our leases do not provide an implicit rate, the incremental borrowing rate based on the information available at lease commencement date is used to determine 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 exclude lease incentives. Our lease terms may include options to extend or terminate the lease, which are recognized when it is reasonably certain that the option will be exercised. 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 in the Consolidated Balance Sheets.
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.
Income taxes
Income tax expense for federal, foreign, state and local income taxes are calculated on taxable income based on the income tax law in effect at the latest balance sheet date and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the 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 the 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 in the Consolidated Statements of Operations.
Assets and liabilities held for sale and discontinued operations
We classify assets and liabilities as held for sale ("disposal group") when Management, with approval from the Board of Directors, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. We also consider whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. We test for impairment when we classify a disposal group as held for sale in the following order. First, we evaluate for impairment all assets other than goodwill. Next, we evaluate goodwill, and finally the disposal group in its entirety. An impairment charge is recognized when the carrying value of the disposal group exceeds the estimated fair value, less costs to sell. We also cease depreciation and amortization for assets classified as held for sale. When a decision to sell represents a strategic shift impacting our operations and financial results, the disposal group and related operations are reported as discontinued operations. For further discussion see Note 4 to the Consolidated Financial Statements.
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 and use actuarial valuations to calculate the cost and benefit obligations of pension and postretirement benefits. The actuarial valuations use significant assumptions in the determination of benefit cost and obligations, including assumptions regarding discount rates, expected returns on plan assets, mortality and health care cost trends.
We determine the 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 or losses into earnings as a component of net periodic benefit cost (MTM pension adjustment). Recognized net actuarial gains and losses consist primarily of 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 the benefit obligation, determined on a plan-by-plan basis. See Note 14 to the Consolidated Financial Statements for a detailed description of our pension plans and postretirement benefits.
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. 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 to the Consolidated Financial Statements.
Revenue recognition
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services, accounted for 23%,21% and 20% of our revenue for the years ended December 31, 2023, 2022, and 2021, 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 77%,79% and 80% of our revenue for the years ended December 31, 2023, 2022, and 2021, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services. Typically, revenue is recognized over time using the cost-to-cost input method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of contractual bonuses and penalties, contract modifications and liquidated damages. 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 its expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect the overall cash position. Refer to Note 5 to the Consolidated Financial Statements for details of disaggregation of revenue by segment.
As of December 31, 2023, we have estimated the costs to complete of all in-process contracts in order to estimate revenues using a cost-to-cost input method. However, it is possible that current estimates could change in the future 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 unplanned cost increases. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, transportation, 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 position, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial position, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal period.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
We recognize accrued claims in contract revenues for additional work or changes in the scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim, the amount can be reasonably estimated 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 the relevant history with the counterparty that supports 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 no amount is recorded at contract inception as a liability has not been incurred at that point.
Warranty expense
We record an estimated expense in Cost of operations in the 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 recognized when the contract becomes a loss contract. In addition, we record specific adjustments when we expect the actual warranty costs to significantly differ from the initial estimates. Such changes could have a material effect on our consolidated financial position, results of operations and cash flows.
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. Disclosures are provided 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 currently are involved in significant litigation, as discussed in Note 21 to the Consolidated Financial Statements. These matters are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties; the attribution of damages, if any, among multiple defendants; plaintiffs in most cases involving personal injury claims do not specify the amount of damages claimed; the discovery process may take multiple years to complete; during the litigation process, it is common to have multiple complex unresolved procedural and substantive issues; the potential availability of insurance and indemnity coverages; the wide-ranging outcomes reached in similar cases, including the variety of damages awarded; the likelihood of settlements for de minimis amounts prior to trial; the likelihood of success at trial; and the likelihood of success on appeal.
Consequently, it is possible future earnings could be affected by changes in our assessment of the probability that a loss has been incurred in a material pending litigation against us and/or changes in estimates related to such matters.
Loss recoveries
Loss recoveries are recognized and disclosed only when receipt of the recovery is probable and can be reasonably estimated. These matters are typically resolved over long periods of time and are often difficult to assess and estimate due to, among other reasons, the possibility of multiple actions by third parties, multiple complex unresolved procedural and substantive issues; the wide-ranging outcomes reached in similar cases, including the variety of losses incurred. Consequently, it is possible future earnings could be affected by changes in our assessment of the probability that a loss recovery has been recognized and/or changes in estimates related to such matters.
Research and development
Research and development activities are related to improving our products through innovations to reduce cost and increase competitiveness and/or improve performance to better meet customers' expectations. Research and development expenses totaled $8.4 million, $3.8 million, and $1.6 million in the years ended December 31, 2023, 2022 and 2021, respectively.
Contingent consideration
The fair value of earn-out arrangements are included as part of the purchase price of the acquired companies on their respective acquisition dates. For each transaction, we estimate the fair value of contingent earn-out payments as part of the initial purchase price and record the estimated fair value of contingent consideration as a liability in Other non-current liabilities in the Consolidated Balance Sheets.
We review and reassess the estimated fair value of contingent consideration on a quarterly basis, and the updated fair value could differ materially from the initial estimates. Changes in the estimated fair value of our contingent earn-out liabilities related to the time component of the present value calculation are reported in Interest expense in the Consolidated Statements of Operations. Adjustments to the estimated fair value related to changes in all other unobservable inputs are reported in Other - net in the Consolidated Statements of Operations.
Self-insurance
We have 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 operating 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 in the Consolidated Balance Sheets are reserves for self-insurance totaling $8.0 million and $8.3 million as of December 31, 2023 and 2022, respectively.
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. 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 classified along with other income tax cash flows as an operating activity. 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 19 to the Consolidated Financial Statements for further discussion of stock-based compensation.
Foreign currency translation
We translate assets and liabilities of our foreign operations into U.S. dollars at current exchange rates, and translate items in the Consolidated Statements of Operations at average exchange rates for the periods presented. We record adjustments resulting from the translation of foreign currency amounts as a component of Accumulated Other Comprehensive Loss. We report foreign currency transaction gains (losses) in income. We have included transaction losses of $2.5 million,$0.6 million and $4.3 million in the years ended December 31, 2023, 2022 and 2021, respectively, in Foreign exchange in the 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.
Recently adopted accounting standards
We adopted the following accounting standards during the year ended December 31, 2023:
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendment in this update provides an exception to fair value measurement for contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination. As a result, contract assets and contract liabilities will be recognized and measured by the acquirer in accordance with ASC 606, Revenue from Contracts with Customers. The amendment also improves consistency in revenue recognition in the post-acquisition period for acquired contracts as compared to contracts entered into after the business combination. The impact of adopting this standard on the Consolidated Financial Statements was immaterial.
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 credit loss on our trade receivables and contracts in progress. The impact of adopting this standard on the Consolidated Financial Statements was immaterial.
New accounting standards to be adopted
We consider the applicability and impact of all issued ASUs. Recently issued ASUs that are not considered were assessed and determined to be not applicable in the current reporting period. New accounting standards not yet adopted that could affect the Consolidated Financial Statements in the future are summarized as follows:
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative. The new guidance is intended to align U.S. GAAP and SEC requirements while facilitating the application of U.S. GAAP for all entities. The effective date of ASU 2023-06 depends on (1) whether an entity is already subject to the SEC's current disclosure requirements and (2) whether and, if so, when the SEC removed related requirements from its regulations. For entities that are already subject to the SEC's current disclosure requirements, the effective date for each amendment will be the date on which the SEC's removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. If the SEC has not removed the related requirements from its regulations by June 30, 2027, the amendments made by ASU 2023-06 will be removed from the Codification and will not become effective for any entity. We are currently evaluating the impact of this standard on the Consolidated Financial Statements.
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires a public entity to disclose significant segment expenses and other segment items in interim and annual periods and expands the ASC 280 disclosure requirements for interim periods. The ASU also explicitly requires public entities with a single reportable segment to provide all segment disclosures under ASC 280, including the new disclosures under the ASU. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of this standard on the Consolidated Financial Statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which requires disclosure of specific categories in the effective tax rate reconciliation and additional information for reconciling items that meet a quantitative threshold. The standard is intended to benefit investors by providing more detailed income tax disclosures to assess how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. Adoption of the standard will only impact the income tax disclosures and is not expected to be material to the Consolidated Financial Statements.
NOTE 3–EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per share of our common stock, net of non-controlling interest and dividends on preferred stock:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands, except per share amounts) | 2023 | 2022 | 2021 |
| (Loss) income from continuing operations | $(78,633) | $(19,988) | $29,313 |
| Net (income) loss attributable to non-controlling interest | (237) | 3,723 | (644) |
| Less: Dividend on Series A preferred stock | 14,858 | 14,860 | 9,127 |
| (Loss) income from continuing operations attributable to stockholders of common stock | (93,728) | (31,125) | 19,542 |
| (Loss) income from discontinued operations, net of tax | (118,338) | (6,596) | 2,225 |
| Net (loss) income attributable to stockholders of common stock | (212,066) | (37,721) | 21,767 |
| Weighted average shares used to calculate basic (loss) income per share | 89,011 | 88,256 | 82,391 |
| Dilutive effect of stock options, restricted stock and performance units | — | — | 1,189 |
| Weighted average shares used to calculate diluted (loss) income per share | 89,011 | 88,256 | 83,580 |
| Basic (loss) earnings per share | |||
| Continuing operations | $(1.05) | $(0.35) | $0.23 |
| Discontinued operations | (1.33) | (0.08) | 0.03 |
| Basic (loss) earnings per share | $(2.38) | $(0.43) | $0.26 |
| Diluted (loss) earnings per share | |||
| Continuing operations | $(1.05) | $(0.35) | $0.23 |
| Discontinued operations | (1.33) | (0.08) | 0.03 |
| Diluted (loss) earnings per share | $(2.38) | $(0.43) | $0.26 |
Basic and diluted shares are the same in the years ended December 31, 2023 and 2022 because we incurred a loss in each of those years.
If we had net income in the years ended December 31, 2023 and 2022, diluted shares would include an additional 0.3 million and 0.7 million shares, respectively.
We excluded 2.3 million,2.1 million and 0.3 million shares related to stock options from the diluted share calculation for the years ended December 31, 2023, 2022 and 2021 respectively, because their effect would have been anti-dilutive.
NOTE 4 –ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS
During the third quarter of 2023, we committed to a plan to sell our B&W Solar business resulting in a significant change that would impact our operations. As of September 30, 2023, we met all of the criteria for the assets and liabilities of this business, formerly part of our B&W Renewable segment, to be accounted for as held for sale. In addition, we also determined that the operations of the B&W Solar business qualified as a discontinued operation, primarily based upon its significance to our current and historic operating losses. The decision to sell the B&W Solar business, along with the significant increase in estimated costs to complete the B&W Solar loss contracts, resulted in a triggering event that required us to immediately perform certain valuations. Certain trade accounts receivable and contract assets were determined to be uncollectible, resulting in charges of$17.6 million. For goodwill, we performed a quantitative assessment using the income approach (discounted cash flows). The income approach uses the disposal group's estimated future cash flows, discounted at the weighted-average cost of capital of a hypothetical third-party buyer to account for uncertainties within the projections. The income approach also uses assumptions based on the disposal group's estimated revenue growth, operating margin, and working capital turnover. As a result of this impairment test, we recognized an impairment of $56.6 million, or the entire balance of goodwill associated with B&W Solar. We then compared the remaining carrying amount of the disposal group with its fair value and determined that the carrying amount approximated the fair value and no further impairment of the disposal group was required. These charges have been included in Loss from discontinued operations, net of tax in the Consolidated Statements of Operations.
The following table summarizes the operating results of the disposal group included in discontinued operations on the Consolidated Statements of Operations:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Revenues | $34,725 | $41,897 | $12,490 |
| Cost of operations | 80,794 | 43,211 | 8,010 |
| Selling general and administrative expenses(1) | 15,168 | (2,029) | 3,133 |
| Loss (gain) on asset disposals, net | 143 | (59) | (52) |
| Goodwill impairment | 56,556 | 7,224 | — |
| Total costs and expenses | 152,661 | 48,347 | 11,091 |
| Operating (loss) income | (117,936) | (6,450) | 1,399 |
| Other (expense) income | (402) | (146) | 630 |
| (Loss) income from discontinued operations before tax | (118,338) | (6,596) | 2,029 |
| Benefit from income taxes | — | — | (196) |
| (Loss) income from discontinued operations, net of tax | $(118,338) | $(6,596) | $2,225 |
| (1) General and administrative expenses in 2022 includes a $9.6 million gain related to the change in fair value of contingent consideration. | |||
Results from Discontinued Operations
(Loss) income from discontinued operations, net of tax, totaled $(118.3) million, $(6.6) million and $2.2 million during the years ended December 31, 2023, 2022 and 2021, respectively. The losses in 2023 and 2022 were driven by goodwill impairment of $56.6 million and $7.2 million, respectively. Also included in the losses were $44.1 million and $13.2 million in losses from changes in estimated costs to complete twenty-eight andthirteen loss contracts during the years ended December 31, 2023 and 2022, respectively. There were no contracts in a loss position as of December 31, 2021. As of December 31, 2023 and 2022, other current liabilities included $7.1 million and $2.9 million in accrued contract losses on B&W Solar loss contracts, respectively.
The following table provides the major classes of assets and liabilities of the disposal group included in assets held for sale and liabilities held for sale in the Consolidated Balance Sheets:
| (in thousands) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Cash | $31 | $490 |
| Contracts in progress | 4,538 | 16,759 |
| Accounts receivable - trade | 3,272 | 4,111 |
| Other assets, net | 62 | 2 |
| Total current assets | 7,903 | 21,362 |
| Net property, plant and equipment and finance leases | 2,683 | 1,476 |
| Intangible assets, net | 7,833 | 8,729 |
| Goodwill | — | 56,556 |
| Right-of-use assets | 76 | 1,077 |
| Other non-current assets, net | — | 175 |
| Total non-current assets | 10,592 | 68,013 |
| Total assets of disposal group | $18,495 | $89,375 |
| Loans payable, current | $502 | $— |
| Operating lease liabilities, current | 23 | 97 |
| Accounts payable | 26,298 | 7,938 |
| Accrued employee benefits | 231 | 24 |
| Advance billings on contracts | 5,961 | 2,484 |
| Accrued warranty expense | 1,078 | — |
| Other current liabilities | 8,101 | 14,208 |
| Total current liabilities | 42,194 | 24,751 |
| Loans payable, net of current portion | 1,308 | 464 |
| Non-current operating lease liabilities | — | 995 |
| Other non-current liabilities | 112 | 4,192 |
| Total non-current liabilities | 1,420 | 5,651 |
| Total liabilities of disposal group | $43,614 | $30,402 |
| Reported as: | ||
| Current assets of discontinued operations | $18,495 | $21,362 |
| Non-current assets of discontinued operations | — | 68,013 |
| Total assets of discontinued operations | $18,495 | $89,375 |
| Current liabilities of discontinued operations | $43,614 | $24,751 |
| Non-current liabilities of discontinued operations | — | 5,651 |
| Total liabilities of discontinued operations | $43,614 | $30,402 |
The significant components included in our Consolidated Statements of Cash Flows for the discontinued operations are as follows:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Depreciation and amortization of long-lived assets | $952 | $2,448 | $1,739 |
| Goodwill impairment | 56,556 | 7,224 | — |
| Change in fair value of contingent consideration | — | (9,567) | |
| Changes in operating assets and liabilities: | |||
| Contracts in progress | 12,673 | 1,064 | (3,887) |
| Accounts payable | 18,360 | 1,549 | 4,291 |
| Purchase of property, plant and equipment | (1,857) | (1,929) | (1,547) |
Contracts
During 2022, we determined that our B&W Solar reporting unit had projects located in the United States that existed at the time B&W Solar was acquired on September 30, 2021 that generated losses due to the status of certain construction activities existing at acquisition date, not adequately disclosed in the sales agreement and not recognized in the financial records of the seller. As a result, we recorded an increase in goodwill of $14.4 million, primarily resulting from the recognition of $14.1 million of accrued liabilities and $0.4 million of warranty accruals in conjunction with the finalization of purchase accounting as measurement period adjustments, which was finalized in 2022. We have submitted insurance claims to recover a portion of these losses. During the years ended December 31, 2023 and 2022, additional B&W Solar projects became loss contracts, and as such, we recorded $16.1 million and $13.2 million, respectively, in net losses related to the additional B&W Solar loss contracts.
The following represents the components of B&W Solar contracts in progress and advance billings on contracts included in discontinued operations:
Changes in Contract Estimates
During each of the years ended December 31, 2023 and 2022 B&W Solar recognized changes in estimated gross profit related to long-term contracts accounted for on the over time basis, which are summarized below. There were no changes in contract estimates in 2021, see below for a summary of changes:
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| Increases in gross profit for changes in estimates | $163 | $— |
| Decreases in gross profit for changes in estimates | (44,315) | (13,154) |
| Net changes in gross profit for changes in estimates | $(44,152) | $(13,154) |
Backlog
During the year ended December 31, 2023, B&W Solar had total bookings of $99.3 million. On December 31, 2023, B&W Solar had $99.0 million of remaining performance obligations, which we also refer to as total backlog. We expect to recognize substantially all ofour remaining performance obligations as revenue prior to December 31, 2024.
NOTE 5 –SEGMENT REPORTING
Our operations are assessed based onthree reportable segments as described in Note 1. An analysis of our operations by segment is as follows:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Revenues: | |||
| B&W Renewable segment | |||
| B&W Renewable | $165,108 | 136,376 | $83,639 |
| B&W Renewable Services | 100,198 | 78,960 | 25,852 |
| Vølund | 53,299 | 73,337 | 34,819 |
| 318,605 | 288,673 | 144,310 | |
| B&W Environmental segment | |||
| B&W Environmental | 97,799 | 77,863 | 58,262 |
| SPIG | 91,132 | 61,017 | 55,615 |
| GMAB | 13,996 | 15,513 | 19,949 |
| 202,927 | 154,393 | 133,826 | |
| B&W Thermal segment | |||
| B&W Thermal | 499,216 | 415,104 | 433,329 |
| 499,216 | 415,104 | 433,329 | |
| Eliminations | (21,394) | (10,252) | (592) |
| Total Revenues | $999,354 | $847,918 | $710,873 |
At a segment level, the adjusted EBITDA presented below is consistent with the manner in which our chief operating decision maker ("CODM") reviews the results of operations and makes strategic decisions about the business and is calculated as earnings before interest, tax, depreciation and amortization adjusted for items such as gains or losses arising from the sale of non-income producing assets, net pension benefits, restructuring activities, impairments, gains and losses on debt extinguishment, legal and settlement costs, costs related to financial consulting, research and development costs, costs and operating income from contracts being terminated, and other costs that may not be directly controllable by segment management and are not allocated to the segment. The following table is provided to reconcile our segment performance metrics to loss before income tax expense.
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Adjusted EBITDA | |||
| B&W Renewable segment (1) | $22,586 | $21,227 | $19,826 |
| B&W Environmental segment | 15,277 | 9,787 | 11,773 |
| B&W Thermal segment | 66,653 | 56,291 | 49,143 |
(1) Adjusted EBITDA in our Renewable segment for the year ended December 31, 2022 includes a $6.2 million non-recurring gain on sale related to development rights of a future renewable energy project.
We do not separately identify or report assets by segment as the CODM does not consider assets by segment to be a critical measure by which performance is measured.
A reconciliation of Adjusted EBITDA by segment to (Loss) income from continuing operations before income tax expense (benefit) is as follows:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| B&W Renewable segment - Adjusted EBITDA | $22,586 | $21,227 | $19,826 |
| B&W Environmental segment - Adjusted EBITDA | 15,277 | 9,787 | 11,773 |
| B&W Thermal segment - Adjusted EBITDA | 66,653 | 56,291 | 49,143 |
| Corporate | (21,374) | (16,477) | (12,467) |
| Research and development | (4,011) | (3,319) | (1,093) |
| Interest expense | (48,703) | (44,220) | (38,992) |
| Depreciation & amortization | (19,990) | (21,628) | (16,291) |
| Benefit plans, net | (37,505) | 37,528 | 48,142 |
| Gain on sales, net | (57) | 2,539 | 13,932 |
| Settlement and related legal recoveries (costs) | 1,474 | (10,734) | (4,894) |
| Advisory fees for settlement costs and liquidity planning | (1,107) | (1,509) | (5,480) |
| Stock compensation | (7,121) | (8,654) | (10,476) |
| Restructuring expense and business services transition | (5,663) | (8,474) | (10,726) |
| Acquisition pursuit and related costs | (827) | (5,504) | (4,841) |
| Product development | (9,023) | (4,100) | (4,713) |
| Foreign exchange | (2,507) | (582) | (4,294) |
| Gain on debt extinguishment | — | — | 6,530 |
| Financial advisory services | — | (1,424) | (2,709) |
| Contract disposal | (8,550) | (2,976) | — |
| Inventory step-up price adjustment | — | — | (483) |
| Letter of credit fees | (7,702) | (5,204) | (1,578) |
| Other-net | (2,002) | (1,496) | (3,024) |
| (Loss) income from continuing operations before income tax expense (benefit) | $(70,152) | $(8,929) | $27,285 |
We estimate that 45%,38% and 47% of our consolidated revenues in 2023, 2022, and 2021, respectively, were related to coal-fired power plants. The availability of natural gas in great supply has caused, in part, low prices for natural gas in the United States, which has led to more demand for natural gas relative to energy derived from coal. A material decline in spending by electric power generating companies and other steam-using industries on coal-fired power plants over a sustained period of time could materially and adversely affect the demand for our power generation products and services and, therefore, our financial condition, results of operations and cash flows. Coal-fired power plants have been scrutinized by environmental groups and government regulators over the emissions of potentially harmful pollutants. This scrutiny and other economic incentives including tax advantages, have promoted the growth of wind, solar and nuclear 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 to delay upgrades to existing power plants.
Information about our consolidated operations in different geographic areas:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| REVENUES (1) | |||
| United States | $505,078 | $456,534 | $419,050 |
| Canada | 90,612 | 83,727 | 48,206 |
| United Kingdom | 82,745 | 30,223 | 26,722 |
| Denmark | 58,191 | 50,857 | 30,310 |
| Sweden | 36,088 | 35,303 | 22,391 |
| Saudi Arabia | 23,103 | 21,428 | 12,529 |
| China | 20,358 | 25,890 | 10,028 |
| Brazil | 16,959 | 15,049 | 3,946 |
| Indonesia | 16,011 | 11,724 | 1,853 |
| South Korea | 15,059 | 6,032 | 3,961 |
| Greece | 13,018 | 71 | 253 |
| Taiwan | 12,478 | 12,433 | 5,776 |
| Belgium | 10,837 | 2,624 | 3,045 |
| France | 9,696 | 12,555 | 4,539 |
| Israel | 1,290 | 3,082 | 14,110 |
| Hong Kong | 9 | 896 | 11,056 |
| Aggregate of all other countries, each with less than $10 million in revenues | 87,822 | 79,490 | 93,098 |
| $999,354 | $847,918 | $710,873 | |
(1) We allocate geographic revenues based on the location of the customer's operations.
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| NET PROPERTY, PLANT AND EQUIPMENT AND FINANCE LEASES | ||
| United States | $47,870 | $52,932 |
| Mexico | 14,953 | 16,925 |
| Denmark | 6,821 | 6,672 |
| United Kingdom | 4,940 | 4,729 |
| Italy | 1,431 | 1,545 |
| Aggregate of all other countries | 2,354 | 2,084 |
| $78,369 | $84,887 | |
NOTE 6 –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 Contracts in progress and Advance billings on contracts included in the Consolidated Balance Sheets:
| (in thousands) | December 31, 2023 | December 31, 2022 | $ Change | % Change |
|---|---|---|---|---|
| Contract assets - included in contracts in progress: | ||||
| Costs incurred less costs of revenue recognized | $37,556 | $62,662 | $(25,106) | (40)% |
| Revenues recognized less billings to customers | 52,498 | 55,518 | (3,020) | (5)% |
| Contracts in progress | $90,054 | $118,180 | $(28,126) | (24)% |
| Contract liabilities - included in advance billings on contracts: | ||||
| Billings to customers less revenues recognized | $76,032 | $111,159 | $(35,127) | (32)% |
| Costs of revenue recognized less cost incurred | 5,066 | 19,786 | (14,720) | (74)% |
| Advance billings on contracts | $81,098 | $130,945 | $(49,847) | (38)% |
| Net contract balance | $8,956 | $(12,765) | $21,721 | 170% |
| Accrued contract losses | $522 | $180 | $342 | 190% |
The following amounts represent retainage on contracts:
| (in thousands) | December 31, 2023 | December 31, 2022 | $ Change | % Change |
|---|---|---|---|---|
| Retainage expected to be collected within one year | $2,584 | $3,076 | $(492) | (16)% |
| Retainage expected to be collected after one year | 1,466 | 786 | 680 | 87% |
| Total retainage | $4,050 | $3,862 | $188 | 5% |
Retainage expected to be collected in 2024 is included in Accounts receivable – trade, net in the Consolidated Balance Sheets. Retainage expected to be collected after one year is included in Other assets in the Consolidated Balance Sheets. All long-term retainage at December 31, 2023 is expected to be collected by the end of 2025.
Backlog
At December 31, 2023 we had $644.5 million of remaining performance obligations, including $114.0 million of performance obligations associated with O&M contracts being exited, which are also referred to as total backlog. We expect to recognize approximately 69%,14% and 17% of its remaining performance obligations as revenue in 2024, 2025 and thereafter, respectively.
Changes in Contract Estimates
In the years ended December 31, 2023, 2022 and 2021 we recognized changes in estimated gross profit related to long-term contracts accounted for on the over time basis, which are summarized as follows:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Increases in gross profit for changes in estimates | $11,356 | $15,067 | $16,042 |
| Decreases in gross profit for changes in estimates | (10,407) | (8,586) | (6,531) |
| Net changes in gross profit for changes in estimates | $949 | $6,481 | $9,511 |
Loss Contracts from Continuing Operations
During the year ended December 31, 2023, we recorded $3.9 million in net losses from changes in estimated costs to complete eight B&W Thermal contracts in loss positions.
NOTE 7 –INVENTORIES, NET
The components of Inventories, net included in the Consolidated Balance Sheets are as follows:
| (in thousands) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Raw materials and supplies | $90,116 | $87,554 |
| Work in progress | 6,604 | 2,517 |
| Finished goods | 17,170 | 12,565 |
| Total inventories, net | $113,890 | $102,636 |
NOTE 8–PROPERTY, PLANT & EQUIPMENT AND FINANCE LEASES
The following table indicates the carrying value of each of the major classes of depreciable assets in the Consolidated Balance Sheets:
| (in thousands) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Land | $2,608 | $2,481 |
| Buildings | 34,832 | 35,326 |
| Machinery and equipment | 152,700 | 151,607 |
| Property under construction | 13,780 | 11,410 |
| 203,920 | 200,824 | |
| Less accumulated depreciation | 147,929 | 140,289 |
| Net property, plant and equipment | 55,991 | 60,535 |
| Finance lease | 30,656 | 30,549 |
| Less finance lease accumulated amortization | 8,278 | 6,197 |
| Net property, plant and equipment and finance leases | $78,369 | $84,887 |
NOTE 9 -GOODWILL
The following summarizes the changes in the net carrying amount of goodwill in the Consolidated Balance Sheets:
| (in thousands) | B&W Renewable | B&W Environmental | B&W Thermal | Total |
|---|---|---|---|---|
| Goodwill | $75,468 | $79,825 | $69,587 | $224,880 |
| Accumulated impairment losses | (49,965) | (74,478) | — | (124,443) |
| Balance at December 31, 2022 | $25,503 | $5,347 | $69,587 | $100,437 |
| Currency translation adjustments | 302 | 290 | 927 | 1,519 |
| Balance at December 31, 2023 | $25,805 | $5,637 | $70,514 | $101,956 |
Goodwill represents the excess of the consideration transferred over the fair value of net assets, including identifiable intangible assets, at the acquisition date. Goodwill is assessed for impairment annually on October 1 or more frequently if events or changes in circumstances indicate a potential impairment exists (a "triggering event").
The annual quantitative assessment was performed using a combination of the income approach (discounted cash flows), the market approach and the guideline transaction method. The income approach uses the reporting unit’s estimated future cash flows, discounted at the weighted-average cost of capital of a hypothetical third-party buyer to account for uncertainties within the projections. The income approach uses assumptions based on the reporting unit’s estimated revenue growth, operating margin, and working capital turnover. The market approach estimates fair value by applying cash flow multiples to the reporting unit’s operating performance. The multiples are derived from comparable publicly traded companies with similar characteristics to the reporting unit. The guideline transaction method estimates fair value by applying recent observed transaction multiples from transactions involving companies with similar characteristics to the reporting unit’s business. The fair market value calculated in the quantitative assessment exceeded the carrying amount of the reporting units by a range of 9% to 142% at October 1, 2023. One of our reporting units, Babcock & Wilcox Construction Company, which is a component of the B&W Thermal segment, has a negative carrying amount at December 31, 2023. There is goodwill of $8.9 million allocated to Babcock & Wilcox Construction Company at December 31, 2023.
During the fourth quarter of 2023, we identified factors that indicated a triggering event had occurred, mainly due to the decrease in the common stock price during the quarter. We performed a qualitative assessment in accordance with ASC 350 and, in conjunction with the results of the annual assessment, concluded that no impairment of goodwill exists for any reporting unit at December 31, 2023.
NOTE 10 –INTANGIBLE ASSETS
Intangible assets are as follows:
| (in thousands) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Definite-lived intangible assets | ||
| Customer relationships | $59,543 | $58,764 |
| Unpatented technology | 18,416 | 18,208 |
| Patented technology | 3,677 | 3,635 |
| Trade names | 13,595 | 13,441 |
| All other | 9,763 | 9,653 |
| Gross value of definite-lived intangible assets | $104,994 | $103,701 |
| Customer relationships amortization | (29,820) | (25,349) |
| Unpatented technology amortization | (11,764) | (10,013) |
| Patented technology amortization | (3,030) | (2,891) |
| Trade names amortization | (6,892) | (6,154) |
| All other amortization | (9,391) | (9,260) |
| Accumulated amortization | $(60,897) | $(53,667) |
| Net definite-lived intangible assets | $44,097 | $50,034 |
| Indefinite-lived intangible assets | ||
| Trademarks | 1,530 | 1,530 |
| Total intangible assets, net | $45,627 | $51,564 |
The following summarizes the changes in the carrying amount of intangible assets:
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| Balance at beginning of period | $51,564 | $33,215 |
| Business acquisitions and adjustments | — | 27,412 |
| Amortization expense | (7,230) | (7,348) |
| Currency translation adjustments | 1,293 | (1,715) |
| Balance at end of the period | $45,627 | $51,564 |
Amortization of intangible assets is included in Cost of operations and SG&A in the Consolidated Statement of Operations but is not allocated to segment results.
Definite-lived intangible assets are assessed for impairment on an interim basis when impairment indicators exist. During the fourth quarter of 2023, we identified factors that indicated a triggering event had occurred, mainly due to the decrease in the common stock price during the quarter. We performed a quantitative assessment in accordance with ASC 360 and concluded that no impairment of intangible assets exists at December 31, 2023.
Estimated future intangible asset amortization expense, during the year ended December 31, 2023 is as follows (in thousands):
| Amortization Expense | |
|---|---|
| Twelve months ending December 31, 2024 | $7,558 |
| Twelve months ending December 31, 2025 | 6,685 |
| Twelve months ending December 31, 2026 | 5,530 |
| Twelve months ending December 31, 2027 | 4,916 |
| Twelve months ending December 31, 2028 | 4,633 |
| Thereafter | 14,775 |
NOTE 11 –LEASES
During the year ended December 31, 2022, we sold certain real property and then entered into leaseback agreements with the buyers for each sale transaction. We accounted for these sale-leasebacks as financing transactions with the purchasers of the assets in accordance with ASC 842 as the lease agreements were all deemed to be finance leases. We concluded the lease agreements met the qualifications to be classified as finance leases due to the significance of the present value of the lease payments, using the appropriate individual discount rate to reflect our incremental borrowing rates, compared to the fair value of the leased property as of the lease commencement dates.
Finance lease classification indicates that control of the related property has not transferred to the buyer/lessor, and as such, these transactions were deemed to be failed sale-leasebacks and were accounted for as financing arrangements. As a result of this determination, the proceeds from the buyer/lessor are viewed to have been received in the form of hypothetical loans with its leased property considered to be collateral. The hypothetical loans are payable as principal and interest in the form of “lease payments” to the buyer/lessors. As such, the property will remain in the Consolidated Balance Sheets as Net property, plant, equipment and finance leases until the leases end. We will depreciate the assets over the shorter of their respective economic lives or lease term. No gains or losses were recognized related to the transactions under U.S. GAAP for the year ended December 31, 2022 for the following transactions:
In December 2022, we sold certain real property assets at our Chanute, Kansas location for $8.4 million in proceeds and then simultaneously entered into a leaseback agreement with the buyer of the property. The lease has a 20 year term, withtwo renewal options often years each. Under the terms of the lease agreement, our initial basic rent is approximately $0.7 million per year with annual increases of 2.25% throughout the life of the agreement. We concluded the lease agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using a discount rate that reflects our incremental borrowing rate, compared to the fair value of the leased property as of the lease commencement date. At December 31, 2023, the carrying value of the financing liability was $8.5 million, which is net of debt issuance costs of $0.6 million and is recorded in Long-term loans payable in the Consolidated Balance Sheets. The monthly lease payments are split between a reduction of principal and interest expense using the effective interest rate method.
In November 2022, we sold certain real property assets at our Monterey, Mexico location for $1.4 million in proceeds and then simultaneously entered into a leaseback agreement with the buyer of the property. The lease has afour year term with payments of approximately $0.4 million per year. We concluded the lease agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using a discount rate that reflects our incremental borrowing rate, compared to the fair value of the leased property as of the lease commencement date. At December 31, 2023, the carrying value of the financing liability was $1.0 million in Loans payable in the Consolidated Balance Sheets. The monthly lease payments are split between a reduction of principal and interest expense using the effective interest rate method.
In October 2022, We sold a corporate aircraft for $3.4 million in proceeds and then simultaneously entered into a leaseback agreement with the buyer of the property. The lease has atwo year term with payments of approximately $62 thousand per month through July 2024 with a final payment of $2.3 million in August 2024 at the expiration of the lease. We concluded the lease agreement met the qualifications to be classified as a finance lease due to the significance of the present value of the lease payments, using a discount rate that reflects our incremental borrowing rate, compared to the fair value of the leased property as of the lease commencement date. At December 31, 2023, the carrying value of the financing liability was $2.6 million, which is recorded in Loans payable in the Consolidated Balance Sheets. The monthly lease payments are split between a reduction of principal and interest expense using the effective interest rate method.
The remaining future cash payments related to the aggregate financing liabilities for each year ending December 31 are as follows:
| 2024 | $3,800 |
| 2025 | 1,137 |
| 2026 | 1,122 |
| 2027 | 782 |
| 2028 | 800 |
| Thereafter | 13,331 |
| Total minimum liability requirements | $20,972 |
| Imputed interest | (8,151) |
| Total | $12,821 |
The components of lease expense included in the Consolidated Statements of Operations are as follows:
| Year ended December 31, | ||||
|---|---|---|---|---|
| (in thousands) | Classification | 2023 | 2022 | 2021 |
| Operating lease expense: | ||||
| Operating lease expense | Selling, general and administrative expenses | $6,726 | 7,103 | $4,936 |
| Operating lease expense | Cost of operations | — | — | 1,077 |
| Short-term lease expense | Selling, general and administrative expenses | 2,350 | 3,496 | 3,513 |
| Variable lease expense (1) | Selling, general and administrative expenses | 354 | 150 | 422 |
| Total operating lease expense | $9,430 | $10,749 | $9,948 | |
| Finance lease expense: | ||||
| Amortization of right-of-use assets | Cost of operations | $2,082 | $3,527 | $3,510 |
| Interest on lease liabilities | Interest expense | 2,235 | 2,372 | 2,502 |
| Total finance lease expense | $4,317 | $5,899 | $6,012 | |
| Sublease income (2) | Other – net | $— | $(72) | $(86) |
| Net lease cost | $13,747 | $16,576 | $15,874 | |
(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) | 2023 | 2022 | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | |||
| Operating cash flows - operating leases | $6,467 | $6,725 | $5,580 |
| Operating cash flows - finance leases | 2,235 | 2,371 | 2,502 |
| Financing cash flows - finance leases | 1,195 | 2,435 | 2,366 |
| (in thousands) | December 31, 2023 | December 31, 2022 |
|---|---|---|
| Right-of-use assets obtained in exchange for lease liabilities: | ||
| Operating leases | $3,166 | 3,140 |
| Finance leases | $103 | $— |
| Weighted-average remaining lease term: | ||
| Operating leases (in years) | 12.2 | 13.2 |
| Finance leases (in years) | 11.0 | 12.0 |
| Weighted-average discount rate: | ||
| Operating leases | 8.3% | 8.3% |
| Finance leases | 8.0% | 8.0% |
Amounts relating to leases are presented in the Consolidated Balance Sheets in the following line items:
| (in thousands) | |||
|---|---|---|---|
| Assets: | Classification | December 31, 2023 | December 31, 2022 |
| Operating lease assets | Right-of-use assets | $28,192 | $28,362 |
| Finance lease assets | Net property, plant and equipment and finance leases | 22,378 | 24,352 |
| Total non-current lease assets | $50,570 | $52,714 | |
| Liabilities: | |||
| Current | |||
| Operating lease liabilities | Operating lease liabilities | $3,932 | $3,498 |
| Finance lease liabilities | Financing lease liabilities | 1,367 | 1,180 |
| Non-current | |||
| Operating lease liabilities | Non-current operating lease liabilities | 25,350 | 25,588 |
| Finance lease liabilities | Non-current finance lease liabilities | 26,206 | 27,482 |
| Total lease liabilities | $56,855 | $57,748 | |
Future minimum lease payments required under non-cancellable leases as of December 31, 2023 are as follows:
| (in thousands) | Operating Leases | Finance Leases | Total |
|---|---|---|---|
| 2024 | $6,085 | $3,501 | $9,586 |
| 2025 | 4,781 | 3,527 | 8,308 |
| 2026 | 4,021 | 3,597 | 7,618 |
| 2027 | 3,342 | 3,660 | 7,002 |
| 2028 | 2,748 | 3,715 | 6,463 |
| Thereafter | 27,101 | 23,866 | 50,967 |
| Total | $48,078 | $41,866 | $89,944 |
| Less imputed interest | (18,796) | (14,293) | (33,089) |
| Lease liability | $29,282 | $27,573 | $56,855 |
NOTE 12–ACCRUED WARRANTY EXPENSE
We may offer assurance type warranties on products and services sold to customers. Changes in the carrying amount of our accrued warranty expense are as follows:
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| Balance at beginning of period | $9,568 | $12,925 |
| Additions | 6,257 | 7,294 |
| Expirations and other changes | (5,943) | 150 |
| Payments | (2,349) | (10,634) |
| Translation and other | 101 | (167) |
| Balance at end of period | $7,634 | $9,568 |
We record estimated expense in Cost of operations in the 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 recorded when the contract becomes a loss contract. In addition, we record specific adjustments when we expect the actual warranty costs to significantly differ from the initial estimates. Such changes could have a material effect on our consolidated financial position, results of operations and cash flows.
NOTE 13 –RESTRUCTURING ACTIVITIES
We incurred restructuring charges in 2023, 2022 and 2021. The charges primarily consist of severance and related costs associated with non-recurring actions taken to transform our operations with impacts on employees and facilities used in our businesses. During 2021, these charges also include actions taken to address the impact of COVID-19 on our business.
The following tables summarizes the restructuring activity incurred by segment:
| Year ended December 31, | |||
|---|---|---|---|
| 2023 | |||
| (in thousands) | Total | Severance and related costs | Other |
| B&W Renewable segment | $2,153 | $1,831 | $322 |
| B&W Environmental segment | 449 | 180 | 269 |
| B&W Thermal segment | 1,614 | 781 | 833 |
| Corporate | 6 | — | 6 |
| $4,222 | $2,792 | $1,430 | |
| Year ended December 31, | |||
|---|---|---|---|
| 2022 | |||
| (in thousands) | Total | Severance and related costs | Other |
| B&W Renewable segment | $900 | $719 | $181 |
| B&W Environmental segment | 228 | 28 | 200 |
| B&W Thermal segment | 589 | 128 | 461 |
| Corporate | (1,157) | (1,228) | 71 |
| $560 | $(353) | $913 | |
| Year ended December 31, | |||
|---|---|---|---|
| 2021 | |||
| (in thousands) | Total | Severance and related costs | Other |
| B&W Renewable segment | $1,876 | $1,732 | $144 |
| B&W Environmental segment | 430 | 360 | 70 |
| B&W Thermal segment | 2,207 | 1,734 | 473 |
| Corporate | 356 | 213 | 143 |
| $4,869 | $4,039 | $830 | |
Restructuring liabilities primarily related to severance payments are included in Other accrued liabilities in the Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| Balance at beginning of period | $1,615 | $6,561 |
| Restructuring expense | 4,222 | 560 |
| Payments | (3,332) | (5,506) |
| Balance at end of period | $2,505 | $1,615 |
NOTE 14 –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, 2023, and 2022,68 and 72 hourly employees continue to accrue benefits under the U.S. Plan for the respective years.
Effective January 1, 2012, a defined contribution component was adopted applicable to Babcock & Wilcox Canada, Ltd. (the "Canadian Plans"). Any employee with less thantwo 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 was later. These and future employees are not eligible to enroll in the defined benefit component of the Canadian Plans. Effective January 1, 2015, benefit accruals under certain hourly Canadian pension plans were ceased. 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 a subsidiary. Effective November 30, 2015, benefit accruals under this plan ceased. We have accounted for the Guaranteed Minimum Pension 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 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 including postretirement health care and life insurance benefits to certain salaried and union retirees based on their contracts, and on a limited basis, to future retirees.
Obligations and funded status
| Pension BenefitsYear Ended December 31, | Other Benefits Year Ended December 31, | |||
|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2023 | 2022 |
| Change in benefit obligation: | ||||
| Benefit obligation at beginning of period | $893,315 | $1,199,845 | $7,676 | $10,372 |
| Service cost | 522 | 699 | 17 | 20 |
| Interest cost | 45,143 | 26,676 | 360 | 182 |
| Plan participants’ contributions | — | — | 114 | 125 |
| Actuarial loss (gain) | 24,789 | (249,945) | (802) | (1,353) |
| Foreign currency exchange rate changes | 1,500 | (4,413) | 26 | (82) |
| Benefits paid | (76,452) | (79,547) | (1,048) | (1,588) |
| Benefit obligation at end of period | $888,817 | $893,315 | $6,343 | $7,676 |
| Change in plan assets: | ||||
| Fair value of plan assets at beginning of period | $770,923 | $1,037,235 | $— | $— |
| Actual return on plan assets | 32,830 | (184,570) | — | — |
| Employer contribution | 1,416 | 3,713 | 934 | 1,463 |
| Plan participants' contributions | — | — | 114 | 125 |
| Foreign currency exchange rate changes | 1,883 | (5,908) | — | — |
| Benefits paid | (76,452) | (79,547) | (1,048) | (1,588) |
| Fair value of plan assets at the end of period | 730,600 | 770,923 | — | — |
| Funded status | $(158,217) | $(122,392) | $(6,343) | $(7,676) |
| Amounts recognized in the balance sheet consist of: | ||||
| Accrued employee benefits | $(1,103) | $(1,118) | $(930) | $(1,162) |
| Accumulated postretirement benefit obligation | — | — | (5,413) | (6,514) |
| Pension liability | (167,498) | (129,662) | — | — |
| Prepaid pension | 10,384 | 8,388 | — | — |
| Accrued benefit liability, net | $(158,217) | $(122,392) | $(6,343) | $(7,676) |
| Amount recognized in accumulated comprehensive income (before taxes): | ||||
| Prior service cost | $787 | $966 | $974 | $1,665 |
| Supplemental information: | ||||
| Plans with accumulated benefit obligation in excess of plan assets | ||||
| Projected benefit obligation | 851,302 | 856,546 | — | — |
| Accumulated benefit obligation | 851,302 | 856,546 | — | 7,676 |
| Fair value of plan assets | 682,699 | 725,767 | — | — |
| Plans with plan assets in excess of accumulated benefit obligation | ||||
| Projected benefit obligation | 37,515 | 36,770 | — | — |
| Accumulated benefit obligation | 37,515 | 36,770 | — | — |
| Fair value of plan assets | 47,901 | 45,158 | — | — |
Components of net periodic benefit cost (benefit) included in net (loss) income are as follows:
| Pension Benefits · Other Benefits | ||||||
|---|---|---|---|---|---|---|
| Year ended December 31, | Year ended December 31, | |||||
| (in thousands) | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 |
| Interest cost | $45,143 | $26,676 | $22,559 | $360 | $182 | $145 |
| Expected return on plan assets | (46,877) | (57,547) | (56,154) | — | — | — |
| Amortization of prior service cost | 190 | 189 | 97 | 691 | 691 | 691 |
| Recognized net actuarial loss (gain) | 38,801 | (6,365) | (15,327) | (803) | (1,354) | (153) |
| Benefit plans, net (1) | 37,257 | (37,047) | (48,825) | 248 | (481) | 683 |
| Service cost included in COS (2) | 522 | 699 | 781 | 17 | 20 | 22 |
| Net periodic benefit cost (benefit) | $37,779 | $(36,348) | $(48,044) | $265 | $(461) | $705 |
(1)Benefit plans, net, which is presented separately in our Consolidated Statements of Operations, is not allocated to the segments.
(2)Service cost related to a small group of active participants is presented within Cost of operations in the Consolidated Statement of Operations and is allocated to the B&W Thermal segment.
Recognized net actuarial loss (gain) consists primarily of reported actuarial loss/gain and the difference between the actual return on plan assets and the expected return on plan assets. Total net MTM adjustments for our pension and other postretirement benefit plans were losses (gains) of $38.0 million, $(7.7) million and $(15.5) million in the years ended, December 31, 2023, 2022 and 2021, respectively. The recognized net actuarial loss (gain) was recorded in Benefit plans, net in the Consolidated Statements of Operations.
Assumptions
| Pension Benefits · Other Benefits | ||||||
|---|---|---|---|---|---|---|
| Year ended December 31, | Year ended December 31, | |||||
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | |
| Weighted average assumptions used to determine net periodic benefit obligations: | ||||||
| Comparative single equivalent discount rate | 5.02% | 5.35% | 2.81% | 4.94% | 5.28% | 2.50% |
| Rate of compensation increase | 0.07% | 0.06% | 0.07% | — | — | — |
| Weighted average assumptions used to determine net periodic benefit cost: | ||||||
| Comparative single equivalent discount rate | 5.39% | 2.88% | 2.52% | 4.94% | 5.28% | 2.50% |
| Expected return on plan assets | 6.37% | 5.90% | 5.76% | — | — | — |
| Rate of compensation increase | 0.07% | 0.06% | 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 6.5% for the majority of our pension plan assets (approximately 93% of our total pension assets at December 31, 2023).
Sensitivity
The following sensitivity analysis reflects 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, 2023:
| (In millions) | 0.25% increase | 0.25% decrease |
|---|---|---|
| Discount rate: | ||
| Effect on ongoing net periodic benefit cost (1) | $(18.6) | $19.3 |
| Effect on projected benefit obligation | (20.1) | 20.9 |
| Return on assets: | ||
| Effect on ongoing net periodic benefit cost | (1.8) | 1.8 |
(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, 2023 individually or in the aggregate, excluding the impact of any annual MTM adjustments we record annually.
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 we 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 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, 2023 and 2022, the investment return on domestic plan assets of the Master Trust (net of deductions for management fees) was approximately 4.1% and (17.5)%, respectively.
The following is a summary of the asset allocations for the Master Trust by asset category:
| Year ended December 31, | ||
|---|---|---|
| 2023 | 2022 | |
| Asset category: | ||
| United States government securities | 16% | 12% |
| Corporate stocks | 2% | 6% |
| Private credit | 39% | —% |
| Venture capital | —% | 42% |
| Hedge funds | 32% | 27% |
| Cash and cash equivalents | 11% | 13% |
The target asset allocation for the Master Trust as of December 31, 2023 and 2022 was 50% of alternative, liquid credit and direct lending funds,20% of fixed income securities, and 30% of equity and other investments. We routinely reassess the target asset allocation with a goal of better aligning the expected cash flows from those assets to the anticipated benefit payments.
Foreign plans: We sponsor the Canadian Plans and the U.K. Plan through certain of our foreign subsidiaries. The combined weighted average asset allocations of these plans by asset category were as follows:
| Year ended December 31, | ||
|---|---|---|
| 2023 | 2022 | |
| Asset category: | ||
| Commingled and mutual funds | 23% | 24% |
| Fixed income | 76% | 72% |
| Other | 1% | 4% |
The target allocation for 2023 for the foreign plans, by asset class, is as follows:
| CanadianPlans | U.K. Plan | |
|---|---|---|
| Asset class: | ||
| United States equity | 25% | 3% |
| Global equity | 25% | 4% |
| Fixed income and other | 50% | 93% |
Fair value of plan assets
See Note 22 for a detailed description of fair value measurements and the hierarchy established for valuation inputs. In accordance with ASC 820, Fair Value Measurement, certain investments that are measured at fair value using the net asset value ("NAV") per share practical expedient have not been classified in the fair value hierarchy. The investments that are measured at fair value using NAV per share included in the tables below are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at the end of each period, which is presented in the first table above titled “Obligations and funded status”. The following is a summary of total investments of our plans measured at fair value:
| (in thousands) | Year ended December 31, 2023 | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|
| Commingled and mutual funds | $11,168 | $— | $11,168 | $— |
| United States government securities | 106,232 | 106,232 | — | — |
| Fixed income | 65,821 | 10,689 | 36,305 | 18,827 |
| Equity | 13,472 | 13,090 | — | 382 |
| Private credit | 235,198 | — | — | 235,198 |
| Private equity | 4,176 | — | — | 4,176 |
| Hedge fund | 85,363 | — | — | 85,363 |
| Cash and accrued items | 43,634 | 43,634 | — | — |
| Investments measured at fair value | $565,064 | $173,645 | $47,473 | $343,946 |
| Investments measured at net asset value | 165,689 | |||
| Pending trades | (153) | |||
| Total pension and other postretirement benefit assets | $730,600 | |||
| (in thousands) | Year ended December 31, 2022 | Level 1 | Level 2 | Level 3 |
|---|---|---|---|---|
| Commingled and mutual funds | $12,020 | $— | $12,020 | $— |
| United States government securities | 83,948 | 83,948 | — | — |
| Fixed income | 53,258 | 13,191 | 32,548 | 7,519 |
| Equity | 41,313 | 41,137 | — | 176 |
| Venture capital | 250,344 | — | — | 250,344 |
| Hedge fund | 83,439 | — | — | 83,439 |
| Cash and accrued items | 76,257 | 76,257 | — | — |
| Investments measured at fair value | $600,579 | $214,533 | $44,568 | $341,478 |
| Investments measured at net asset value | 171,441 | |||
| Pending trades | (1,097) | |||
| Total pension and other postretirement benefit assets | $770,923 | |||
Expected cash flows
| Domestic Plans · Foreign Plans | ||||
|---|---|---|---|---|
| (in thousands) | PensionBenefits | OtherBenefits | PensionBenefits | OtherBenefits |
| Expected employer contributions to trusts of defined benefit plans: | ||||
| 2024 | $26,367 | $803 | $297 | $143 |
| Expected benefit payments (1): | ||||
| 2024 | 73,563 | 803 | 2,526 | 143 |
| 2025 | 72,588 | 735 | 2,631 | 129 |
| 2026 | 71,450 | 670 | 2,696 | 122 |
| 2027 | 70,061 | 608 | 2,701 | 108 |
| 2028 | 68,558 | 550 | 2,793 | 92 |
| 2029-2033 | 315,543 | 1,984 | 14,200 | 358 |
(1)Pension benefit payments are made from their respective plan's trust.
We made contributions to our pension and other postretirement benefit plans totaling $2.4 million and $5.2 million during the years ended December 31, 2023 and 2022, respectively.
Defined contribution plans
We provide benefits under The B&W Thrift Plan (the "Thrift Plan"), after minimum service requirements are met. The Thrift Plan generally provides for matching employer contributions. Employer matching contributions are typically made in cash. Amounts charged to expense for employer contributions under the Thrift Plan total approximately $4.0 million and $3.1 million in the years ended December 31, 2023 and 2022, respectively. There were no employer contributions for the year ended December 31, 2021. Beginning in April 2020 and continuing through December 31, 2021, as part of the Company's response to the impact of the COVID-19 pandemic on its business, the Company suspended its 401(k) company match for U.S. employees. The Company resumed its employer contributions beginning in 2022 inclusive of a one-time profit sharing contribution for the 2021 plan year equal to 0.75% of the eligible employees' base pay.
Also, our salaried Canadian employees are eligible to participate in a defined contribution plan, after minimum service requirements are met. The amount charged to expense for employer contributions was approximately $0.3 million in each of the years ended December 31, 2023, 2022 and 2021.
Multi-employer plans
One of our subsidiaries in the B&W Thermal segment contributes to various multi-employer plans. The plans generally provide defined benefits to substantially all unionized workers in this subsidiary. The following table summarizes our contributions to multi-employer plans for the years ended December 31, 2023, 2022 and 2021:
| (in millions) · Pension ProtectionAct Zone Status · FIP/RP StatusPending/Implemented · Contributions · Surcharge Imposed · Expiration DateOf CollectiveBargainingAgreement | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Pension Fund · EIN/PIN · 2023 · 2022 · 2021 · 2023 · 2022 · 2021 | ||||||||||
| Boilermaker-Blacksmith National Pension Trust | 48-6168020/ 001 | Red | Yellow | Yellow | Yes | $13.4 | $8.0 | $16.6 | No | DescribedBelow |
| All other | 1.2 | 1.0 | 2.2 | |||||||
| $14.6 | $9.0 | $18.8 | ||||||||
Our collective bargaining agreements with the Boilermaker-Blacksmith National Pension Trust ("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 included above represents multiple amounts to various plans that, individually, are deemed to be insignificant.
NOTE 15-DEBT AND CREDIT FACILITIES
8.125% Senior Notes
During 2021, we completed sales of $151.2 million aggregate principal amount of our 8.125% Senior Notes for net proceeds of $146.6 million. In addition to the completed sales, we issued $35.0 million of the 8.125% Senior Notes to B. Riley Financial, Inc., a related party, in exchange for a deemed prepayment of our then-existing Last Out Term Loan Tranche A-3. The 8.125% Senior Notes bear interest at the rate of 8.125% per annum, payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year. The 8.125% Senior Notes mature on February 28, 2026.
In March 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell to or through B. Riley Securities, Inc., from time to time, additional 8.125% Senior Notes up to an aggregate principal amount of $150.0 million. The 8.125% Senior Notes have the same terms as (other than date of issuance), form a single series of debt securities with and have the same CUSIP number and are fungible with the initial 8.125% Senior Notes issuance in 2021. During the year ended December 31, 2022, we sold $6.8 million aggregate principal of the 8.125% Senior Notes under this sales agreement for $6.7 million of net proceeds.
The 8.125% Senior Notes are senior unsecured obligations and rank equally in right of payment with all of our other existing and future senior unsecured and unsubordinated indebtedness.
6.50% Senior Notes
During 2021, we completed sales of $151.4 million aggregate principal amount of our 6.50% Senior Notes for net proceeds of $145.8 million. The 6.50% Senior Notes bear interest at the rate of 6.50% per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. The 6.50% Senior Notes mature on December 31, 2026. The public offering of our 6.50% Senior Notes was conducted pursuant to an underwriting agreement between us and B. Riley Securities, Inc., an affiliate of B. Riley, a related party, as representative of several underwriters.
The 6.50% Senior Notes are senior unsecured obligations and rank equally in right of payment with all of our other existing and future unsecured and unsubordinated indebtedness. The 6.50% Senior Notes are effectively subordinated in right of payment to all of our existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of our subsidiaries, including trade payables.
The components of our senior notes at December 31, 2023 are as follows:
| Senior Notes | |||||
|---|---|---|---|---|---|
| (in thousands) | 8.125% | 6.50% | Total | ||
| Senior notes due 2026 | $193,035 | $151,440 | $344,475 | ||
| Unamortized deferred financing costs | (2,899) | (4,019) | (6,918) | ||
| Unamortized premium | 312 | — | 312 | ||
| Net debt balance | $190,448 | $147,421 | $337,869 | ||
Revolving Debt
In June 2021, we entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association ("PNC"), as administrative agent and a letter of credit agreement (the “Letter of Credit Agreement”) with PNC, pursuant to which PNC agreed to issue up to $110.0 million in letters of credit that is secured in part by cash collateral provided by an affiliate of MSD Partners, MSD PCOF Partners XLV, LLC (“MSD”), as well as a reimbursement, guaranty and security agreement with MSD, as administrative agent, and the cash collateral providers from time to time party thereto, along with certain of our subsidiaries as guarantors, pursuant to which we are obligated to reimburse MSD and any other cash collateral provider to the extent the cash collateral provided by MSD and any other cash collateral provider to secure the
Letter of Credit Agreement is drawn to satisfy draws on letters of credit (the “Reimbursement Agreement” and collectively with the Revolving Credit Agreement and Letter of Credit Agreement, the “Debt Documents” and the facilities thereunder, the “Debt Facilities”). Our obligations under each of the Debt Facilities were guaranteed by certain of our existing and future domestic and foreign subsidiaries. B. Riley, a related party, has provided a guaranty of payment with regard to our obligations under the Reimbursement Agreement. We used the proceeds and letter of credit availability under the Debt Facilities for working capital purposes and general corporate purposes. The Debt Facilities mature on June 30, 2025. At December 31, 2023, we had $27.0 million outstanding in revolving debt. For the year ended December 31, 2023, we had average daily borrowings of $14.2 million and a maximum daily amount outstanding of $34.9 million under the Revolving Credit Agreement. Under the Letter of Credit Agreement, usage consisted of $15.9 million financial letters of credit and $70.0 million of performance letters of credit at December 31, 2023.
At inception of the Debt Facilities, the interest rates applicable under the Revolving Credit Agreement float at a rate per annum equal to either (i) a base rate plus 2.0% or (ii) 1- or 3-month reserve-adjusted LIBOR plus 3.0%. The interest rates applicable to the Reimbursement Agreement float at a rate per annum equal to either (i) a base rate plus 6.50% or (ii) 1- or 3-month reserve-adjusted LIBOR plus 7.50%. The Letter of Credit Agreement requires fees on outstanding letters of credit equal to (i) administrative fees of 0.75% and (ii) fronting fees of 0.25%. The Revolving Credit Agreement requires fees on outstanding letters of credit equal to (i) letter of credit commitment fees of 3.0% and (ii) letter of credit fronting fees of 0.25%. Under each of the Letter of Credit Agreement and Revolving Credit Agreement, we are required to pay a facility fee equal to 0.375% per annum of the unused portion of the Letter of Credit Agreement or the Revolving Credit Agreement, respectively. Certain of these terms have been amended as described in the following paragraphs.
We are permitted to prepay all or any portion of the loans under the Revolving Credit Agreement prior to maturity without premium or penalty. Prepayments under the Reimbursement Agreement are subject to a prepayment fee of 2.25% in the first year after closing,2.0% in the second year after closing and 1.25% in the third year after closing with no prepayment fee payable thereafter. We have mandatory prepayment obligations under the Reimbursement Agreement upon the receipt of proceeds from certain dispositions or casualty or condemnation events. The Revolving Credit Agreement and Letter of Credit Agreement require mandatory prepayments to the extent of an over-advance.
The obligations under the Debt Facilities are secured by substantially all assets of the Company and each of the guarantors, in each case subject to inter-creditor arrangements. As noted above, the obligations under the Letter of Credit Facility are also secured by the cash collateral provided by MSD and any other cash collateral provider thereunder.
The Debt Documents contain certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. At inception, the Debt Documents require us to comply with certain financial maintenance covenants, including a quarterly fixed charge coverage test of not less than 1.00 to 1.00, a quarterly senior net leverage ratio test of not greater than 2.50 to 1.00, a non-guarantor cash repatriation covenant not to exceed $35.0 million at any one time, a minimum liquidity covenant of at least $30.0 million at all times, a current ratio of not less than 1.25 to 1.00, and an annual cap on maintenance capital expenditures of $7.5 million. The Debt Documents also contain customary events of default (subject, in certain instances, to specified grace periods) including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under the respective facility, the failure to comply with certain covenants and agreements specified in the applicable debt agreement, defaults in respect of certain other indebtedness and certain events of insolvency. If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all then-outstanding amounts under the Debt Facilities may become due and payable immediately. Certain of these covenants and terms have been amended as described in the following paragraphs.
In June 2021, in connection with our entry into the Debt Facilities, B. Riley, a related party, entered into a guaranty agreement in favor of MSD, in its capacity as administrative agent under the Reimbursement Agreement, for the ratable benefit of MSD, the cash collateral providers and each co-agent or sub-agent appointed by MSD from time to time (the “B. Riley Guaranty”). The B. Riley Guaranty provides for the guarantee of all of our obligations under the Reimbursement Agreement. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and the acceleration of our obligations under the Reimbursement Agreement. Under a fee letter with B. Riley, we agreed to pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty. We entered into a reimbursement agreement with B. Riley governing our obligation to reimburse B. Riley to the extent the B. Riley Guaranty is called upon by the agent or lenders under the Reimbursement Agreement.
In November 2022 we executed an amendment to our Reimbursement Agreement with MSD which modified certain financial maintenance covenants for future periods beginning with the fiscal quarter ending on December 31, 2022. The Fixed Charge Coverage Ratio was amended to 0.55 to 1.0 for the fiscal quarter ending December 31, 2022,0.65 to 1.00 for the fiscal quarter ending March 31, 2023,0.80 to 1.00 for the fiscal quarter ending June 30, 2023,1.15 to 1.00 for the fiscal quarter ending September 30, 2023 and 1.25 to 1.00 for the fiscal quarter ending December 31, 2023 and thereafter. The Senior Net Leverage Ratio was amended to 2.00 to 1.00 for the fiscal quarter ending December 31, 2022,1.75 to 1.00 for the fiscal quarter ending March 31, 2023,1.60 to 1.00 for the fiscal quarter ending June 30, 2023, and 1.50 to 1.00 for the fiscal quarter ending September 30, 2023 and thereafter. In addition, the interest rates applicable to the Reimbursement Agreement float at a rate per annum are equal to either (i) the base rate plus 9.0% or (ii) 1 or 3-month reserve-adjusted SOFR plus 10.0%. The amendment also establishes minimum cash flow covenants, as defined, for the fiscal quarter ending December 31, 2022 of $20.0 million and $25.0 million for the fiscal year 2023 and each fiscal year thereafter. In addition, we executed an amendment to our Revolving Credit Agreement with PNC which modified the calculation of the Fixed Charge Coverage Ratio for the fiscal quarters ending December 31, 2022, March 31, 2023 and June 30, 2023. The calculation of the Fixed Charge Coverage ratio for the fiscal quarter ending September 30, 2023 and thereafter will revert to the original calculation as stated in the original Debt Documents. In December 2022, we also deposited $10.0 million with PNC for Letter of Credit collateral to enable MSD to reduce their collateral requirement by $10.0 million.
In March 2023, we, with certain of our subsidiaries as guarantors, certain lenders from time to time party to the Revolving Credit Agreement, and PNC, as administrative agent and swing loan lender to the Revolving Credit, Guaranty and Security Agreement, dated as of June 30, 2021, as amended (the “Amended Revolving Credit Agreement”), entered into the Second Amendment, Waiver and Consent to the Amended Revolving Credit Agreement (the “Second Amended Revolving Credit Agreement”). The Second Amended Revolving Credit Agreement amends the terms of the Amended Revolving Credit Agreement to (i) waive the senior net leverage ratio test for purposes of enacting a Permitted Restricted Payment on Preferred Shares (each as defined in the Second Amended Revolving Credit Agreement) to be made on March 31, 2023; and (ii) replace the use of LIBOR with Term SOFR throughout.
In May 2023, we entered into Amendment No. 3 to the Revolving Credit Agreement which allowed us to exclude certain expenses from the calculation of EBITDA under the Revolving Credit Agreement, including for purposes of determining compliance with certain financial covenants thereunder.
In June 2023, we entered into Amendment No. 4 to the Revolving Credit Agreement, which increased the limit of aggregate amount of all unrestricted cash and cash equivalents permitted to draw on the Amended Revolving Credit Agreement from $30.0 million to $40.0 million.
In November 2023, we entered into Amendment No. 3 to the Reimbursement Agreement (the “Third Amended Reimbursement Agreement”), which modified certain financial maintenance covenants for future periods beginning with the fiscal quarter ended on September 30, 2023. The Fixed Charge Coverage Ratio was amended to 1.05 to 1.0 for the fiscal quarters ending September 30, 2023 and December 31, 2023,1.15 to 1.0 for the fiscal quarters ending March 31, 2024 and June 30, 2024,1.05 to 1.0 for the fiscal quarter ending September 30, 2024,1.1 to 1.0 for the fiscal quarter ending December 31, 2024, and 1.25 to 1.0 for the fiscal quarter ending March 31, 2025 and thereafter. The Senior Net Leverage Ratio condition to payment of dividends on preferred equity was amended to 1.46 to 1.0 for the fiscal quarter ending September 30, 2023,1.3 to 1.0 for the fiscal quarter ending December 31, 2023 and 1.25 to 1.0 for all fiscal quarters thereafter. The Third Amended Reimbursement Agreement also imposes a leverage condition to the payment of dividends on preferred equity, which requires the Company to provide a quality of earnings report and pay a $1.0 million fee to MSD prior to paying a dividend for the fiscal quarter ending December 31, 2023. The Third Amended Reimbursement Agreement also amends the minimum cash flow covenants set forth in the Reimbursement Agreement to $10.0 million for the fiscal quarter ending December 31, 2023 and $25.0 million for the fiscal year 2024 and each fiscal year thereafter. The interest rates applicable to the Third Amended Reimbursement Agreement float at a rate per annum equal to SOFR plus 10% through December 31, 2023, SOFR plus 11% from January 1, 2024 through June 30, 2024 and will increase by 50 basis points as of the first day of each fiscal quarter thereafter. The size of the Cash Collateral Facility under the Third Amended Reimbursement Agreement stepped down to $100.0 million following the receipt of a PNC consent (as defined in the Third Amended Reimbursement Agreement), and will step down further to $90.0 million upon reduction in outstanding letters of credit to $90.0 million or less.
In March 2024, we entered into Amendment No. 4 to the Reimbursement Agreement (the "Fourth Amended Reimbursement Agreement"), which modified certain financial maintenance covenants for future periods beginning with the fiscal quarter ended on December 31, 2023. The Fixed Charge Coverage Ratio was amended to 0.93 to 1.0 for the fiscal quarter ending December 31, 2023,0.82 to 1.0 for the fiscal quarter ending March 31, 2024,0.90 to 1.0 for the fiscal quarter ending June 30, 2024,0.95 to 1.0 for the fiscal quarter ending September 30, 2024,1.1 to 1.0 for the fiscal quarter ending December 31, 2024, and 1.25 to 1.0 for the fiscal quarter ending March 31, 2025 and thereafter. The Senior Net Leverage Ratio condition to payment of any Permitted Restricted Payments, as defined in the Fourth Amended Reimbursement Agreement, was amended to 1.45 to 1.0 for the four quarter fiscal measurement period ending as of December 31, 2023 and 1.25 to 1.0 thereafter. The Fourth Amended Reimbursement Agreement also amends the minimum cash flow covenants set forth in the Reimbursement Agreement to no less than $10.0 million as of December 31, 2023 (for the preceding fiscal quarter), no less than $15.0 million as of December 31, 2024 (for the preceding fiscal year), and no less than $25.0 million as of December 31 of each fiscal year thereafter. The Applicable Margin with respect to Delayed Draw Term Loans and Cash Collateral Commitment Fees will increase by an additional 0.50% on each of April 30, 2024, July 1, 2024, October 1, 2024, January 1, 2025 and April 1, 2025 in each case if the Obligations are in excess of $15 million on the applicable date.
As discussed in Note 25, in January 2024, we entered into a new Credit Agreement with Axos Bank. This agreement substantially replaces the existing Reimbursement Agreement, Revolving Credit Agreement and Letter of Credit Agreement. B. Riley, a related party, has provided a guaranty of payment with regard to our obligations under the Credit Agreement. For further discussion on the new agreement, see Note 25.
Other Letters of credit, bank guarantees and surety bonds
Certain of our subsidiaries, that are primarily outside of the United States, have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees outside of the Letter of Credit Agreement as of December 31, 2023, was $39.4 million. The aggregate value of the outstanding letters of credit provided under the Letter of Credit Agreement backstopping letters of credit or bank guarantees was $21.7 million as of December 31, 2023. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $54.0 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 our applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds the underwriters issue in support of some of our contracting activity. As of December 31, 2023, bonds issued and outstanding under these arrangements in support of our contracts totaled $141.7 million. The aggregate value of the letters of credit backstopping surety bonds was $16.8 million.
Our ability to obtain and maintain sufficient capacity under our current debt facilities is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
Other Indebtedness - Loans Payable
As of December 31, 2023, we had Loans payable of $41.6 million, net of debt issuance costs of $0.5 million, of which $6.2 million is classified as current and $35.4 million as long-term loans payable in the Consolidated Balance Sheets. Included in these amounts, we had approximately $12.3 million, net of debt issuance costs of $0.5 million, related to sale-leaseback financing transactions.
At December 31, 2022, our Denmark subsidiary has an unsecured interest-free loan of $0.8 million under a local government loan program related to COVID-19 that was repaid in 2023.
NOTE 16 –CAPITAL STOCK
Common Stock
In May 2022, our stockholders, upon the recommendation of our Board of Directors, approved an amendment to the Babcock & Wilcox Enterprises, Inc 2021 Long-Term Incentive Plan. The Plan Amendment became effective upon such stockholder approval. The Plan Amendment increased the total number of shares of our common stock authorized for award grants under the 2021 Plan from 1,250,000 shares to 5,250,000 shares. The 2021 Plan replaced our Amended and Restated 2015 Long-Term Incentive Plan. In addition to the 5,250,000 shares available for award grant purposes under the 2021 Plan as described above, any shares of our common stock underlying any outstanding award granted under the 2015 Plan that, following May 20, 2021, expires, or is terminated, surrendered, or forfeited for any reason without issuance of such shares shall also be available for the grant of new awards under the 2021 Plan.
In February 2021, we completed a public offering of our common stock pursuant to the Underwriting Agreement dated February 9, 2021, between us and B. Riley Securities, Inc., as representative of the underwriters. At the closing, we issued to the public 29,487,180 shares of our common stock for gross proceeds of $172.5 million. We received net proceeds of $163.0 million after deducting underwriting discounts and commissions, but before expenses.
Preferred Stock
In May 2021, we completed a public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement between us and B. Riley Securities, Inc. At the closing, we issued to the public 4,444,700 shares of our Preferred Stock, at an offering price of $25.00 per share for net proceeds of $106.4 million after deducting underwriting discounts and commissions, but before expenses. The Preferred Stock has a par value of $0.01 per share, is perpetual and not subject to mandatory redemption or any sinking fund. The Preferred Stock has a cumulative cash dividend, when and if declared by our Board of Directors, at a rate of 7.75% (equivalent to $1.9375) per year on the liquidation preference amount of $25.00 per share and is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year.
In June 2021, we entered into an exchange agreement with B. Riley, pursuant to which we (i) issued B. Riley 2,916,880 shares of our Preferred Stock, representing an exchange price of $25.00 per share and paid $0.4 million in cash, and (ii) paid $0.9 million in cash to B. Riley for accrued interest due, in exchange for a deemed prepayment of $73.3 million of our then existing term loans with B. Riley under our prior A&R Credit Agreement.
In July 2021, we entered into a sales agreement with B. Riley Securities, Inc., for the sale of additional shares of Preferred Stock, from time to time, up to an aggregate amount of $76.0 million of Preferred Stock. The Preferred Stock has the same terms and CUSIP number and is fungible with the Preferred Stock issued during May 2021. During 2021, we sold $0.3 million shares, or $7.7 million aggregate principal amount of Preferred Stock for $7.7 million net proceeds under this sales agreement.
The Preferred Stock ranks, as to dividend rights and rights as to the distribution of assets upon our liquidation, dissolution or winding-up: (1) senior to all classes or series of our common stock and to all other capital stock issued by it expressly designated as ranking junior to the Preferred Stock; (2) on parity with any future class or series of our capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of our capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all of our existing and future indebtedness.
During thetwelve months ending December 31, 2023, our Board of Directors approved dividends tota ling $14.9 million toholders of the Preferred Stock. There wereno cumulative undeclared dividends of the Preferred Stock at December 31, 2023, and all declared dividends have been paid as of January 2, 2024.
NOTE 17–ACCUMULATED OTHER COMPREHENSIVE LOSS
Gains and losses deferred in 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 December 31, 2023, 2022, and 2021 were as follows:
| (in thousands) | Currency translation loss | Net unrecognized loss related to benefit plans (net of tax) | Total |
|---|---|---|---|
| Balance at December 31, 2020 | $(47,575) | $(4,815) | $(52,390) |
| Other comprehensive income before reclassifications | (3,412) | 676 | (2,736) |
| Amounts reclassified from AOCI to net income | (4,512) | 816 | (3,696) |
| Net other comprehensive income | (7,924) | 1,492 | (6,432) |
| Balance at December 31, 2021 | $(55,499) | $(3,323) | $(58,822) |
| Other comprehensive loss before reclassifications | (14,834) | — | (14,834) |
| Amounts reclassified from AOCI to net income | — | 870 | 870 |
| Net other comprehensive income (loss) | (14,834) | 870 | (13,964) |
| Balance at December 31, 2022 | $(70,333) | $(2,453) | $(72,786) |
| Other comprehensive income before reclassifications | 5,555 | — | 5,555 |
| Amounts reclassified from AOCI to net income | — | 870 | 870 |
| Net other comprehensive income | 5,555 | 870 | 6,425 |
| Balance at December 31, 2023 | $(64,778) | $(1,583) | $(66,361) |
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, | ||||
|---|---|---|---|---|
| 2023 · 2022 · 2021 | ||||
| Release of currency translation adjustment with the sale of business | Loss on sale of business | $— | $— | $4,512 |
| Pension and post retirement adjustments, net of tax | Benefit plans, net | (870) | (870) | (816) |
| Net (loss) income | $(870) | $(870) | $3,696 | |
NOTE 18 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense in the Consolidated Financial Statements consisted of the following components:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Components associated with borrowings from: | |||
| Senior notes | $25,601 | $24,962 | $13,273 |
| Last Out Term Loans | — | — | 4,349 |
| U.S. Revolving Credit Facility | 1,494 | — | 1,416 |
| 27,095 | 24,962 | 19,038 | |
| Components associated with amortization or accretion of: | |||
| Deferred fees on Revolving Credit Agreement | 4,643 | 4,400 | 2,735 |
| Deferred fees on Senior notes | 2,525 | 2,612 | 2,510 |
| U.S. Revolving Credit Facility - deferred financing fees and commitment fees | — | — | 5,995 |
| 7,168 | 7,012 | 11,240 | |
| Components associated with interest from: | |||
| Lease liabilities | 2,235 | 2,372 | 2,502 |
| Letter of Credit fees and interest | 10,955 | 8,424 | — |
| Other interest expense | 2,442 | 2,091 | 6,743 |
| 15,632 | 12,887 | 9,245 | |
| Total interest expense | $49,895 | $44,861 | $39,523 |
The following table provides a reconciliation of cash and cash equivalents and current and long-term restricted cash reported within the Consolidated Balance Sheets and in the Consolidated Statements of Cash Flows:
| December 31, | |||||
|---|---|---|---|---|---|
| (in thousands) · 2023 · 2022 · 2021 | |||||
| Held by foreign entities | $44,388 | $46,640 | $42,070 | ||
| Held by U.S. entities | 20,947 | 30,088 | 182,804 | ||
| Cash and cash equivalents | 65,335 | 76,728 | 224,874 | ||
| Reinsurance reserve requirements | 380 | 447 | 443 | ||
| Restricted foreign accounts | — | — | |||
| Project indemnity collateral (1) | — | 5,723 | — | ||
| Bank guarantee collateral | 1,823 | 2,072 | 997 | ||
| Letters of credit collateral (2) | 584 | 11,193 | 401 | ||
| Hold-back for acquisition purchase price (3) | 2,950 | 5,900 | — | ||
| Escrow for long-term project (4) | 297 | 11,397 | — | ||
| Restricted cash and cash equivalents | 6,034 | 36,732 | 1,841 | ||
| Total Cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows(5) | $71,369 | $113,460 | $226,715 | ||
(1) We released $5.7 million in project indemnity restricted cash collateral for a letter of credit agreement in 2023.
(2) We paid an additional $10.0 million in December, 2022 for letter of credit collateral which is reflected in Long-term restricted cash in the Consolidated Balance Sheets. This amount was released in 2023 in association with our refinancing with PNC.
(3) The purchase price for FPS was $59.2 million, including a hold-back of $5.9 million which is included in Current restricted cash and cash equivalents and Other accrued liabilities in the Consolidated Balance Sheets. The hold-back is being held in escrow for potential payment of up to the maximum amount twenty-four months from the February 1, 2022 date of acquisition if the conditions are met. We paid $2.9 million of this holdback during 2023, and the remaining amount in February 2024.
(4) In January 2022, we funded $11.4 million in an escrow account as security to ensure project performance. This cash was released in 2023.
(5) Includes cash held at discontinued operations of $0.03 million, $0.49 million and $0.00 million at December 31, 2023, 2022 and 2021, respectively.
The following cash activity is presented as a supplement to the Consolidated Statements of Cash Flows and is included in Net cash used in activities:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Income tax payments, net | $6,731 | $7,950 | $4,991 |
| Cash paid for interest(1) | $23,067 | $25,673 | $20,234 |
| (1) Excludes amounts paid for Letter of Credit fees | |||
NOTE 19 –STOCK-BASED COMPENSATION
Stock options
There wereno stock options awarded in 2023. The following table summarizes activity for outstanding stock options for the year ended December 31, 2023:
| (share data in thousands) | Number of shares | Weighted-averageexercise price | Weighted-averageremainingcontractual term (in years) | Aggregateintrinsic value(in thousands) |
|---|---|---|---|---|
| Outstanding at beginning of period | 287 | $102.96 | ||
| Granted | — | — | ||
| Exercised | — | — | ||
| Cancelled/expired/forfeited | (4) | 73.88 | ||
| Outstanding at end of period | 283 | $103.34 | 2.37 | $— |
| Exercisable at end of period | 283 | $103.34 | 2.37 | $— |
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, 2023. 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. If zero is shown, the closing price of our common stock at December 31, 2023 is lower than the exercise price for all options.
Restricted stock units
Non-vested restricted stock units activity for the year ended December 31, 2023 is as follows:
| (share data in thousands) | Number of shares | Weighted-average grant date fair value |
|---|---|---|
| Non-vested at beginning of period | 1,894 | $7.15 |
| Granted | 553 | 5.22 |
| Vested | (1,029) | 6.25 |
| Cancelled/forfeited | (86) | 7.13 |
| Non-vested at end of period | 1,332 | $7.64 |
As of December 31, 2023, total compensation expense not yet recognized related to non-vested restricted stock units was $6.9 million and the weighted-average period in which the expense is expected to be recognized is 1.7 years.
Restricted stock units with market conditions
In July 2022, we granted market-based RSUs to certain members of management. The number of market-based RSUs granted was 0.96 million. The RSUs will vest if our closing stock price on the NYSE is equal to or higher than the Stock Price Goal of $12.00 per share during the performance period, which expires on the 5th anniversary of the Grant Date. The $6.70 grant date fair value per market-based RSU was determined using a Monte Carlo simulation approach. Compensation expense for awards with market conditions is recognized over the derived service period using cost of equity as the drift rate in the simulation for estimating the dividend service period and is not reversed if the market condition is not met.
We used the following assumptions to determine the fair value of the restricted stock units with market conditions as of the grant date:
| Risk free interest rate | 2.7% |
|---|---|
| Volatility | 59.0% |
| Cost of equity | 17.4% |
| Performance period | 5 years |
| Derived service period | 0.78 years |
Restricted stock units with market conditions activity for the year ended December 31, 2023 was as follows:
| (share data in thousands) | Number of shares | Weighted-average grant date fair value |
|---|---|---|
| Non-vested at beginning of period | 860 | $6.70 |
| Granted | — | — |
| Exercised | — | — |
| Cancelled/forfeited | (100) | 6.70 |
| Non-vested at end of period | 760 | $6.70 |
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 expireten years after the grant date and primarily vest 100% upon completion after the required years of service. Upon vesting, the Employee SARs and Non-employee SARs may be exercised within 10 business days following the end of any calendar quarter during which the volume weighted average share price is greater than the share price goal. Upon exercise of the SARs, holders receive a cash-settled payment equal to the number of SARs that are being exercised multiplied by the difference between the stock price on the date of exercise minus the SARs base price. Employee SARs were issued under the Fourth Amended and Restated 2015 LTIP, and Non-employee SARs were issued under a Non-employee SARs agreement. The liability method was 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 2023 and 2022:
| December 31, | ||
|---|---|---|
| 2023 | 2022 | |
| Risk-free interest rate | 3.80% | 4.00% |
| Expected volatility | 57% | 59% |
| Expected life in years | 4.75 | 5.65 |
| Suboptimal exercise factor | 2.0x | 2.0x |
In making these assumptions, we based estimated volatility on the historical returns of our 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 2.0 x was selected. Subject to vesting conditions, should the stock price achieve a value of 2.0 x 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 the valuation model in estimating the time period that the SARs are expected to remain unexercised. The valuation model assumes the holders will exercise their SARs prior to the expiration of the contractual term of the SARs.
As of December 31, 2023, the SARs are fully vested and their total intrinsic value is $1.6 million.
NOTE 20 –INCOME TAXES
(Loss) income from continuing operations before income tax expense (benefit) is comprised of the following:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| United States | $(80,264) | $29 | $28,626 |
| Other than the United States | 10,112 | (8,958) | (1,341) |
| (Loss) income from continuing operations before income tax expense (benefit) | $(70,152) | $(8,929) | $27,285 |
Significant components of the provision for income taxes from continuing operations are as follows:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Current: | |||
| Federal | 645 | $736 | $1,760 |
| State | 222 | 166 | (141) |
| Foreign | 8,750 | 5,566 | 4,649 |
| Total current provision | 9,617 | 6,468 | 6,268 |
| Deferred: | |||
| Federal | 279 | 164 | 94 |
| State (1) (2) | (390) | 5,629 | (8,772) |
| Foreign | (1,025) | (1,202) | 382 |
| Total deferred provision | (1,136) | 4,591 | (8,296) |
| Provision for income taxes | $8,481 | $11,059 | $(2,028) |
(1)The 2021 amount reflects an $8.7 million deferred tax benefit primarily attributable to a reduction in the valuation allowance on net operating losses and temporary deductible benefits in certain states that are now expected to be recovered.
(2)The 2022 amount is primarily attributable to deferred tax expense associated with nontaxable mark-to-market pension gains in certain states where temporary deductible benefits are expected to be recovered, changes in enacted statutory income tax rates, and changes in apportionment relating to project mix.
The provision for income taxes attributable to continuing operations differs from the amount computed by applying the statutory federal income tax rate to income (loss) before the provision (benefit) for income taxes.
The sources and tax effects of the differences are as follows:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Income tax benefit at federal statutory rate | $(14,732) | $(1,875) | $5,730 |
| State and local income taxes | (555) | 985 | 983 |
| Foreign rate differential | 677 | 313 | 132 |
| Deferred taxes - change in tax rate | 1,244 | 1,217 | (564) |
| Non-deductible (non-taxable) items | 822 | 330 | (122) |
| Tax credits | 1,834 | 1,876 | 252 |
| Valuation allowances | 14,500 | 14,131 | (13,136) |
| Effect of DPMH sale | — | — | (1,090) |
| Unrecognized tax benefits | — | 10 | 150 |
| Withholding taxes | 1,195 | 1,382 | 3,882 |
| Change in indefinite reinvestment assertion | 278 | 163 | (15) |
| Disallowed interest deductions | — | — | 1,010 |
| Return to provision and prior year true-up | 3,800 | (7,544) | 960 |
| Other | (582) | 71 | (200) |
| Income tax expense (benefit) | $8,481 | $11,059 | $(2,028) |
Deferred income taxes reflect the tax effects of differences between the financial and tax bases of assets and liabilities.
Significant components of deferred tax assets and liabilities are as follows:
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| Deferred tax assets: | ||
| Pension liability | $36,087 | $28,644 |
| Accruals | 9,101 | 8,596 |
| Long-term contracts | 6,664 | 1,246 |
| Net operating loss carryforward | 419,052 | 405,640 |
| State net operating loss carry forward | 20,476 | 20,668 |
| Interest limitation carryforward | 55,337 | 49,871 |
| Foreign tax credit carryforward | 2,996 | 3,608 |
| Other tax credits | 2,294 | 3,477 |
| Lease liability | 14,488 | 14,596 |
| Capitalized R&D | 638 | 845 |
| Property, plant and equipment | 1,296 | — |
| Other | 5,326 | 7,401 |
| Total deferred tax assets | $573,755 | $544,592 |
| Valuation allowance for deferred tax assets | (551,931) | (521,137) |
| Total deferred tax assets, net | $21,824 | $23,455 |
| Deferred tax liabilities: | ||
| Property, plant and equipment | $— | $268 |
| Right of use assets | 13,112 | 13,421 |
| Unremitted earnings | 1,511 | 1,232 |
| Intangibles | 18,087 | 18,588 |
| Total deferred tax liabilities | 32,710 | 33,509 |
| Net deferred tax liabilities | $(10,886) | $(10,054) |
At December 31, 2023 we have foreign NOL carryforward deferred tax assets ("DTAs") of approximately $357.4 million available to offset future taxable income in certain foreign jurisdictions. Of these foreign NOL carryforwards, $155.6 million do not expire. The remaining foreign NOLs will expire between 2024 and 2040.
At December 31, 2023, we have U.S. federal NOL carryforward DTAs of approximately $61.7 million. Of this amount, $20.0 million will expire in 2036 and 2037. The remaining amount of U.S. NOL carryforward does not expire. A portion of the net operating loss carryforward is limited under IRC Section 382. Approximately $38.2 million of our U.S. federal NOL carryforward is not subject to the IRC Section 382 limitation.
At December 31, 2023, we have state NOL carryforward DTAs of $20.5 million available to offset future taxable income in various jurisdictions. Of this amount, $20.0 million will expire between 2024 and 2042.
At December 31, 2023, we have foreign tax credit carryforwards of $3.0 million. These carryforwards will expire between 2024 and 2026.
At December 31, 2023, we have valuation allowances of $551.9 million for deferred tax assets, which we expect will not be realized through carry-backs, reversals of existing taxable temporary differences, estimates of future taxable income or tax-planning strategies. Deferred tax assets are evaluated for realizability under ASC 740, considering all positive and negative evidence. At December 31, 2023, our weighting of positive and negative evidence included an assessment of historical income by jurisdiction adjusted for nonrecurring items, as well as an evaluation of other qualitative factors such as the length and magnitude of pretax losses. The valuation allowances may be reversed in the future if sufficient positive evidence exists.
Any reversal of our valuation allowance could be material to the income or loss for the period in which our assessment changes.
The net change during the year in the total valuation allowance is as follows:
| Year ended December 31, | ||
|---|---|---|
| (in thousands) | 2023 | 2022 |
| Balance at beginning of period | $(521,137) | $(512,803) |
| Charges to costs and expenses(1) | (28,197) | (14,131) |
| Charges to other accounts | (2,597) | 5,797 |
| Balance at end of period | $(551,931) | $(521,137) |
| (1) Includes $14.5 million from loss on continuing operations and $13.7 million from loss on discontinued operations. | ||
Sections 382 and 383 of the IRC 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 IRC Section 382, an ownership change occurs if shareholders owning at least 5% of our common stock have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, we determined that a Section 382 ownership change occurred in July 2019. As a result of this change in ownership, we 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) We maintain a full valuation allowance on the majority of its U.S. deferred tax assets, including the deferred tax assets associated with the federal NOLs, credits and disallowed interest carryforwards.
Undistributed earnings of certain foreign subsidiaries amounted to approximately $184.8 million. We no longer intend to assert indefinite reinvestment with respect to withholding taxes of $1.5 million that could be assessed on the repatriation of $13.3 million in undistributed earnings. We continue to assert indefinite reinvestment in the remaining $171.5 million of existing earnings that are not expected to be distributed in the future. Upon repatriation of those earnings, in the form of dividends or otherwise, we would be subject to withholding taxes payable to various foreign countries. We expect to take the 100% dividends received deduction to offset any US federal taxable income on the undistributed earnings. Withholding taxes of approximately $2.7 million would be payable upon remittance of these previously unremitted earnings.
We recognize the benefit of a tax position when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. A recognized tax benefit is measured as the largest amount of benefit, on a cumulative probability basis, which is more likely-than-not to be realized upon settlement. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Below is a tabular roll-forward of the beginning and ending aggregate unrecognized tax benefits on a continuing operations basis:
| Year ended December 31, | |||
|---|---|---|---|
| (in thousands) | 2023 | 2022 | 2021 |
| Balance at beginning of period | $36,196 | $36,419 | $39,013 |
| Increases based on tax positions taken in prior years | — | 1,829 | 242 |
| Decreases based on tax positions taken in prior years | (9) | — | (29) |
| CTA/Translation | 1,142 | (2,052) | (2,807) |
| Balance at end of period | $37,329 | $36,196 | $36,419 |
Unrecognized tax benefits of $3.0 million would, if recognized, impact the effective tax rate. The remaining balance of unrecognized tax benefits relates to deferred tax assets that, if recognized, would require a full valuation allowance. It is not expected that the amount of unrecognized tax benefits will change significantly during the next 12 months. We recognize interest and penalties related to unrecognized tax benefits in our provision for income taxes; however, such amounts are not significant to any period presented.
Tax years 2016 through 2022 remain open to assessment by the United States Internal Revenue Service and various state and international tax authorities. We do not have any returns under examination for years prior to 2014.
NOTE 21 –CONTINGENCIES
Litigation Relating to Boiler Installation and Supply Contract
On December 27, 2019, a complaint was filed against us by P.H. Glatfelter Company (“Glatfelter”) in the United States District Court for the Middle District of Pennsylvania, Case No. 1:19-cv-02215-JPW, alleging claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment (the “Glatfelter Litigation”). The complaint alleges damages in excess of $58.9 million. On March 16, 2020 we filed a motion to dismiss, and on December 14, 2020 the court issued its order dismissing the fraud and negligent misrepresentation claims. On January 11, 2021, we filed an answer and a counterclaim for breach of contract, seeking damages in excess of $2.9 million. On November 30, 2022, we and Glatfelter each filed cross-motions for summary judgment. On June 21, 2023, the court granted our motion in part, dismissing Glatfelter’s promissory estoppel and unjust enrichment claims, dismissing Babcock & Wilcox Enterprises, Inc. entirely (Glatfelter's remaining claim is asserted against The Babcock & Wilcox Company), and finding that Plaintiffs’ claims for damages will be subject to the contractual cap on liability (defined as the $11.7 million purchase price, subject to certain adjustments), and denied Glatfelter’s motion for summary judgment. The case is set for trial in March 2024. We intend to continue to vigorously litigate the action. However, given the uncertainty inherent in 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 position, results of operations or cash flows.
Stockholder Derivative and Class Action Litigation
On April 14, 2020, a putative B&W stockholder (“Plaintiff”) filed a derivative and class action complaint against certain of our directors (current and former), executives and significant stockholders (collectively, “Defendants”) and B&W (as a nominal defendant). The action was filed in the Delaware Court of Chancery and is captioned Parker v. Avril, et al., C.A. No. 2020-0280-PAF (the “Stockholder Litigation”). Plaintiff alleges that Defendants, among other things, did not properly discharge their fiduciary duties in connection with the 2019 rights offering and related transactions.
On June 10, 2022, after pursuing private mediation, the parties to the Stockholder Litigation reached a settlement agreement in principle to resolve the Stockholder Litigation. That settlement agreement includes (i) certain corporate governance changes that B&W is willing to implement in the future, (ii) a total payment of $9.5 million, and (iii) other customary terms and conditions. All attorney’s fees, administration costs, and expenses associated with the settlement of this matter will be deducted from the total payment amount, other than the cost of notice, which will be borne by B&W. Of the total settlement amount, B&W will pay $4.75 million on behalf of B. Riley Financial, Inc. and Vintage Capital Management, LLC, pursuant to existing contractual indemnification obligations to settle Plaintiff’s direct claims asserted against these entities. This $4.75 million, after the deduction of attorney’s fees and the customary settlement costs and expenses described above, will be paid to our shareholders, excluding any Defendant in the Stockholder Litigation. The remaining $4.75 million of the total settlement amount, after the deduction of attorney’s fees and the customary settlement costs and expenses described above, will be paid to B&W from insurance proceeds and the contribution of certain other parties to the Stockholder Litigation to settle the derivative claims asserted by Plaintiff on behalf of B&W.
On July 14, 2023, the Court issued an order approving the settlement as fair and reasonable and in the best interests of the Plaintiff, the certified class, B&W, and our stockholders and entered the order and final judgment dismissing the case with prejudice. The settlement resolved all claims that have been, could have been, could now be, or in the future could, can, or might be asserted in the Stockholder Litigation.
Russian Invasion of Ukraine
We do not currently have contracts directly with Russian entities or businesses and currently do not conduct business in Russia directly. We believe that our only involvement with Russia, or Russian entities, involves sales of products by a wholly-owned Italian subsidiary to non-Russian counterparties who may resell our products to Russian entities or perform services in Russia using our products. We have implemented a restricted party screening process completed by a third party to monitor compliance with trade restrictions. The economic sanctions and export-control measures and the ongoing invasion of Ukraine could impact our subsidiary’s rights and responsibilities under the contracts and could result in potential losses.
Other
Due to the nature of our business, from time to time, we are 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 prior experience, except as disclosed above, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
NOTE 22–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 ASC 820, Fair Value Measurements).
Available-For-Sale Debt Securities
| (in thousands) | |||
|---|---|---|---|
| December 31, 2023 | Level 1 | Level 2 | |
| Corporate notes and bonds | $3,144 | $3,144 | $— |
| Mutual funds | 3 | — | 3 |
| United States government and agency securities | 3,906 | 3,906 | — |
| Total fair value of available-for-sale securities | $7,053 | $7,050 | $3 |
| (in thousands) | |||
|---|---|---|---|
| December 31, 2022 | Level 1 | Level 2 | |
| Corporate notes and bonds | $4,154 | $4,154 | $— |
| Mutual funds | 612 | — | 612 |
| United States government and agency securities | 4,023 | 4,023 | — |
| Total fair value of available-for-sale securities | $8,789 | $8,177 | $612 |
Our investments in available-for-sale debt securities are presented in Other assets in the Consolidated Balance Sheets with contractual maturities ranging from 0-5 years.
Senior Notes
See Note 14 above for a discussion of our senior notes. The fair value of the senior notes is based on readily available quoted market prices as of December 31, 2023.
| (in thousands) | December 31, 2023 | |
|---|---|---|
| Senior Notes | Carrying Value | Estimated Fair Value |
| 8.125% Senior Notes due 2026 ('"BWSN") | $193,035 | $151,031 |
| 6.50% Senior Notes due 2026 ("BWNB") | $151,440 | $98,497 |
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 have been 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. We base the fair value of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair value 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 the Revolving Debt approximated its carrying amount at December 31, 2023.
NOTE 23 –RELATED PARTY TRANSACTIONS
We believe transactions with related parties were conducted on terms equivalent to those prevailing in an arm's length transaction.
Transactions with B. Riley
Based on its Schedule 13D filings with the SEC, B. Riley beneficially owns approxim ately 30.7%of the Company's outstanding common stock as of December 31, 2023. B. Riley currently has the right to nominate one member of our Board of Directors pursuant to the investor rights agreement we entered into with B. Riley in April 2019. The investor rights agreement also provides pre-emptive rights to B. Riley with respect to certain future issuances of our equity securities.
As described in Note 25, in January 2024 in connection with the our entry into the Axos Credit Agreement, we entered into a guaranty agreement and a fee and reimbursement agreement with B. Riley.
We entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, in November 2018 and amended the agreement in November 2020 and December 2023 to retain the services of Mr. Kenneth Young, to serve as our Chief Executive Officer until December 31, 2028, 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 our Board of Directors, a bonus or bonuses may also be earned and payable to BRPI Executive Consulting, LLC.
As described in Note 21, in June 2022, after pursuing private mediation, the parties to the Stockholder Litigation reached a settlement agreement that was approved by the court in July 2023 which included a $9.5 million settlement amount, under which we paid $4.75 million on behalf of B. Riley and Vintage Capital Management, LLC pursuant to existing contractual indemnification obligations to settle Plaintiff’s direct claims asserted against these entities. This $4.75 million, after the deduction of attorney’s fees and customary settlement costs and expenses, will be paid to our shareholders, excluding any Defendant in the Stockholder Litigation.
In July 2022, BRF Investments, LLC, an affiliate of B. Riley, exercised 1,541,667 warrants to purchase 1,541,666 shares of our common stock at a price per share of $0.01 pursuant to the terms of the warrant agreement between us and B. Riley dated July 23, 2019.
In July 2022, we participated in the sale process of Hamon Holdings in which B. Riley Securities, Inc, an affiliate of B. Riley, was engaged as Hamon Holdings’ investment banker and to serve as advisor to Hamon Holdings through a Chapter 11 363 Asset Sale of Hamon Holdings’ entire United States business or potential carve-out of any of itsfour main subsidiaries. We were a successful bidder for the assets ofone of those subsidiaries, Hamon, a major provider of air pollution control technology, for approximately $2.9 million.
In December 2021, B. Riley entered into a General Agreement of Indemnity (the "Indemnity Agreement"), between us and AXA-XL its affiliated associated and subsidiary companies (collectively the “Surety”). Pursuant to the terms of the Indemnity Agreement, B. Riley will indemnify the Surety for losses the Surety may incur as a result of providing a payment and performance bond in an aggregate amount not to exceed €30.0 million in connection with our proposed performance on a specified project. In consideration of B. Riley's execution of the Indemnity Agreement we paid B. Riley a fee of $1.7 million following the issuance of the bond by the Surety, which represents approximately 5.0% of the bonded obligations, to be amortized over the term of the agreement.
In December 2021, the public offering of our 6.50% Senior Notes, as described in Note 15, was conducted pursuant to an underwriting agreement between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. The underwriters also elected to exercise their overallotment option for an additional $11.4 million in aggregate principal amount of the 6.50% Senior Notes. We paid B. Riley Securities, Inc. a total of $6.0 million for underwriting fees and other transaction cost related to the 6.50% Senior Notes offering and overallotment option.
In June 2021, we entered into new Debt Facilities, as described in Note 15. In connection with the entry into the Debt Facilities, B. Riley provided a guaranty of payment with regard to our obligations under the Reimbursement Agreement, as described in Note 15. Under a fee letter with B. Riley, we are obligated to pay B. Riley$0.9 million per annum in connection with the B. Riley Guaranty.
In May 2021, the public offering of our 7.75% Series A Cumulative Perpetual Preferred Stock ("Preferred Stock"), as described in Note 16, was conducted pursuant to an underwriting agreement between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date in May 2021, we paid B. Riley Securities, Inc. $4.3 million for underwriting fees and other transaction costs related to the Preferred Stock offering.
In May 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to the grant to the underwriters, as described in Note 16, and paid B. Riley Securities, Inc., an affiliate of B. Riley, $0.4 million for underwriting fees in conjunction with the transaction.
In June 2021, we issued 2,916,880 shares of our 7.75% Series A Cumulative Perpetual Preferred Stock and paid $0.4 million in cash due to B. Riley, in exchange for a deemed prepayment of $73.3 million of our then-existing Last Out Term Loans and paid $0.9 million in cash for accrued interest, as described in Note 16.
In July 2021, we entered into a sales agreement with B. Riley Securities, Inc., an affiliate of B. Riley, pursuant to which we may sell, from time to time, up to an aggregate principal amount of $76.0 million of our Preferred Stock to or through B. Riley Securities, Inc., as described in Note 14. We have paid B. Riley Securities, Inc. $0.2 million for underwriting fees and other transaction costs related to the offering.
In February 2021, the public offering of our 8.125% Senior Notes, as described in Note 15, was conducted pursuant to an Underwriting agreement between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date, we paid B. Riley Securities, Inc. $5.2 million for underwriting fees and other transaction costs related to the 8.125% Senior Notes offering.
In February 2021, we entered into an Exchange Agreement with B. Riley pursuant to which we agreed to issue to B. Riley $35.0 million aggregate principal amount of 8.125% Senior Notes in exchange for a deemed prepayment of $35.0 million of our existing Tranche A term loan with B. Riley, as described in Note 15.
In March 2021, we entered into a sales agreement with B. Riley Securities, Inc., an affiliate of B. Riley, pursuant to which we may sell, from time to time, up to an aggregated principal amountof $150.0 million of 8.125% Senior Notes due 2026 to or through B. Riley Securities, Inc., as described in Note 15. We have paid B. Riley Securities, Inc. a total of $0.5 million for underwriting fees and other transaction costs related to the sales agreement.
In February 2021, the public offering of our common stock, as described in Note 16, was conducted pursuant to an underwriting agreement between us and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of the several underwriters. We paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction costs related to the offering.
In November 2020, we entered into an agreement with B. Riley Principal merger Corp. II, an affiliate of B. Riley, to purchase 200,000 shares of Class A common stock of Eos Energy Storage LLC for an aggregate purchase price of $2.0 million. The shares were sold in January 2021 for net proceeds of $4.5 million.
NOTE 24 –ACQUISITIONS AND DIVESTITURES
Acquisitions
Fossil Power Systems
In February 2022, we acquired 100% ownership of FPS for approximately $59.2 million. The consideration paid included a hold-back of $5.9 million, payable twenty-four months from the date of the acquisition if certain conditions of the purchase agreement are met and is recorded on the Consolidated Balance Sheets in Restricted cash and cash equivalents and Other accrued liabilities. Of the $5.9 million hold-back, $2.8 million was paid during the year ended December 31, 2023.
FPS is a leading designer and manufacturer of hydrogen, natural gas and renewable pulp and paper combustion equipment including ignitors, plant controls and safety systems based in Dartmouth, Nova Scotia, Canada and is reported as part of the B&W Thermal segment.
We finalized the purchase price allocation during the first quarter of 2023 using the discounted cash flow method for the assets acquired and liabilities assumed. The impact of the finalization was immaterial.
B&W Chanute
In February 2022, we acquired 100% ownership of B&W Chanute for approximately $19.2 million. B&W Chanute, designs and manufactures waste heat recovery products for use in power generation, petrochemical, and process industries, including package boilers, watertube and firetube waste heat boilers, economizers, superheaters, waste heat recovery equipment and units for sulfuric acid plants and is based in Chanute, Kansas and Tulsa, Oklahoma. B&W Chanute is reported as part of the B&W Thermal segment.
We finalized the purchase price allocation during the first quarter of 2023 using the discounted cash flow method for the assets acquired and liabilities assumed. The impact of the finalization was immaterial.
Hamon
In July 2022, we acquired certain assets of Hamon Holdings through a competitive sale process, in which B. Riley Securities, Inc. was Hamon Holding's investment banker and advisor through a Chapter 11 363 Asset Sale. We were the successful bidder for certain assets ofone of those subsidiaries, Hamon, a major provider of air pollution control technology, for approximately $2.9 million.
Divestitures
In June 2022, we sold development rights related to a future renewable energy project for $8.0 million. In conjunction with the sale, we recognized a $6.2 million gain on sale. We have $5.1 million in outstanding receivables related to the transaction recorded within Accounts receivable – other in the Consolidated Balance Sheets at December 31, 2023.
Certain real property assets for the Lancaster, Ohio location were sold in August 2021 for $18.9 million. We received $15.8 million of net proceeds after adjustments and expenses and recognized a gain on sale of $13.9 million. In conjunction with the sale, we executed a leaseback agreement commencing which expires on August 31, 2041.
Certain real property assets at the Copley, Ohio location were sold in March 2021 for $4.0 million. We received $3.3 million of net proceeds after adjustments and recognized a gain on sale of $1.9 million. In conjunction with the sale, we executed a leaseback agreement commencing which expires on March 31, 2033.
In March 2021, we sold all of the issued and outstanding capital stock of Diamond Power Machine (Hubei) Co., Inc, for $2.8 million. We received $2.0 million in gross proceeds before expenses and recorded an $0.8 million favorable contract asset that was amortized through December 31, 2023.
NOTE 25 -SUBSEQUENT EVENT
We entered into a credit agreement on January 18, 2024, with certain of our subsidiaries as guarantors, the lenders party thereto from time to time and Axos Bank ("Axos"), as administrative agent, swingline lender and letter of credit issuer (the "Credit Agreement").
The Credit Agreement provides for an up to $150.0 million asset-based revolving credit facility (with availability subject to a borrowing base calculation) ("Credit Facility"), including a $100.0 million letter of credit sublimit. Our obligations under the Credit Agreement are guaranteed by certain of our domestic and foreign subsidiaries. B. Riley has provided a guaranty of payment with regard to our obligations under the Credit Agreement, as further described below. We expect to use the proceeds and letter of credit availability under the Credit Agreement to (i) pay off our current revolving credit facility with PNC, (ii) provide for working capital needs, (iii) provide cash collateral to secure letters of credit to be issued under the Credit Agreement, and (iv) provide for general corporate purposes.
The Credit Agreement has a maturity date of (i) January 18, 2027, or (ii) if our 8.125% Senior Notes and 6.50% Senior Notes are not refinanced by August 30, 2025 or the maturity date has not otherwise been extended to a date at least 6 months beyond the Credit Facility maturity, August 30, 2025. The interest rates applicable under the Credit Agreement are: (i) with respect to SOFR Loans, (a) SOFR plus 5.25% if the outstanding principal amount of loans is equal to or less than $100.0 million or (b) SOFR plus 4.00% if the outstanding principal amount of loans is equal to or greater than $100.0 million; (ii) with respect to Base Rate Loans, the greater of (a) the Federal Funds Rate plus 2.00% plus the Applicable Margin, (b) the prime rate as designated by Axos plus the Applicable Margin, and (c) Daily Simple SOFR plus 1.00% plus the Applicable Margin; and (iii) with respect to the default rate under the Credit Agreement, the then-existing interest rate plus 2.00%.
In connection with the Credit Agreement, we are required to pay (i) an origination fee equal to $1.5 million, (ii) a commitment fee equal to 0.50% per annum multiplied by the positive difference by which the Aggregate Revolving Commitments exceed the Total Revolving Outstandings, subject to adjustment, (iii) a facility fee equal to the Applicable Margin for SOFR Loans multiplied by the positive difference by which the actual daily amount of L/C Obligations the Administrative Agent is then holding Specified Cash Collateral exceeds the actual daily Outstanding Amount of Revolving Loans, and (iv) a collateral monitoring fee of $1,000 per month. We are permitted to prepay all or any portion of the loans under the Credit Agreement prior to maturity subject to the payment of an early termination fee. The Credit Agreement requires mandatory prepayments under certain circumstances, including in the event of an over-advance.
The obligations under the Credit Agreement are secured by substantially all assets of B&W and each of the guarantors, in each case subject to intercreditor arrangements. The Credit Agreement contains certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. The Credit Agreement requires us to comply with certain financial maintenance covenants, including a quarterly fixed charge coverage test, a quarterly total net leverage ratio test, a cash repatriation covenant, a minimum liquidity covenant, an annual cap on maintenance capital expenditures and a limit on unrestricted cash. The Credit Agreement also contains customary events of default (subject, in certain instances, to specified grace periods) including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under the Credit Agreement, the failure to comply with certain covenants and agreements specified in the Credit Agreement, defaults in respect of certain other indebtedness, and certain events of insolvency. If any event of default occurs, Axos may declare the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Credit Agreement may become due and payable immediately.
In connection with the our entry into the Credit Agreement, we entered into with B. Riley (i) a guaranty agreement in favor of (a) Axos, in its capacity as administrative agent under the Credit Agreement, for the ratable benefit of the Secured Parties and (b) such Secured Parties (the “B. Riley Guaranty”) and (ii) a fee and reimbursement agreement, made by B. Riley and accepted and agreed to by the Company (the “B. Riley Fee Agreement”). The B. Riley Guaranty provides for the guarantee of all of our obligations under the Credit Agreement. The B. Riley Guaranty is enforceable in certain circumstances, including, among others, certain events of default and the acceleration of our obligations under the Credit Agreement. The B. Riley Fee Agreement provides, among other things, for an annual fee to be paid to B. Riley by us in an annual amount equal to 2.00% of Aggregate Revolving Commitments under the Credit Agreement (or approximately $3 million) as consideration for B. Riley’s agreements and commitments under the B. Riley Guaranty. The B. Riley Fee Agreement also requires us to reimburse B. Riley to the extent the B. Riley Guaranty is called upon by the agent or lenders under the Credit Agreement and requires us to execute a junior secured promissory note with respect to the same within 60 days after the execution of the B. Riley Fee Agreement (or such other date as B. Riley may agree to).
On March 15 2024, we entered into Amendment No. 4 to the Reimbursement Agreement (the "Fourth Amended Reimbursement Agreement"), which modified certain financial maintenance covenants for future periods beginning with the fiscal quarter ended on December 31, 2023. The Fixed Charge Coverage Ratio was amended to 0.93 to 1.0 for the fiscal quarter ending December 31, 2023,0.82 to 1.0 for the fiscal quarter ending March 31, 2024,0.90 to 1.0 for the fiscal quarter ending June 30, 2024,0.95 to 1.0 for the fiscal quarter ending September 30, 2024,1.1 to 1.0 for the fiscal quarter ending December 31, 2024, and 1.25 to 1.0 for the fiscal quarter ending March 31, 2025 and thereafter. The Senior Net Leverage Ratio condition to payment of any Permitted Restricted Payments, as defined in the Fourth Amended Reimbursement Agreement, was amended to 1.45 to 1.0 for the four quarter fiscal measurement period ending as of December 31, 2023 and 1.25 to 1.0 thereafter. The Fourth Amended Reimbursement Agreement also amends the minimum cash flow covenants set forth in the Reimbursement Agreement to no less than $10.0 million as of December 31, 2023 (for the preceding fiscal quarter), no less than $15.0 million as of December 31, 2024 (for the preceding fiscal year), and no less than $25.0 million as of December 31 of each fiscal year thereafter. The Applicable Margin with respect to Delayed Draw Term Loans and Cash Collateral Commitment Fees will increase by an additional 0.50% on each of April 30, 2024, July 1, 2024, October 1, 2024, January 1, 2025 and April 1, 2025 in each case if the Obligations are in excess of $15 million on the applicable date.
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