Babcock & Wilcox(US:BW)2022-03-07 16:00PART I Business Babcock & Wilcox Enterprises, Inc. (B&W) is a global provider of renewable, environmental, and thermal technologies, strategically expanding through acquisitions in clean energy and influenced by capital expenditures and regulations Company Segments | Segment | Description | | :--- | :--- | | B&W Renewable | Technologies for waste-to-energy, solar, biomass, and black liquor systems | | B&W Environmental | Emissions control and environmental technology solutions like cooling, ash handling, and particulate control | | B&W Thermal | Steam generation equipment, aftermarket parts, and services for power generation, oil & gas, and industrial sectors | - The company completed four strategic acquisitions to bolster its renewable and thermal segments: Fosler Construction (Sept 2021): 60% stake in a solar energy contractor to capitalize on the high-growth U.S. solar market26 VODA A/S (Nov 2021): 100% ownership of a Danish aftermarket parts and services provider to strengthen its renewable service business in Europe27 Fossil Power Systems, Inc. (Feb 2022): 100% ownership of a manufacturer of hydrogen, natural gas, and renewable combustion equipment28 Optimus Industries, LLC (Feb 2022): 100% ownership of a designer of waste heat recovery products29 - The COVID-19 pandemic has adversely impacted business by disrupting global supply chains, delaying projects into 2022 and beyond, and imposing travel restrictions that affect the company's ability to service customers at worksites333435 2021 Capital Activities | Activity | Date | Net Proceeds / Amount (in millions) | | :--- | :--- | :--- | | Equity Offerings | | | | Common Stock Offering | Feb 2021 | ~$163.0 | | Preferred Stock Offering | May 2021 | ~$106.4 | | Debt Offerings | | | | 8.125% Senior Notes | Feb 2021 | ~$120.0 | | 6.50% Senior Notes | Dec 2021 | ~$145.0 | - At December 31, 2021, the company employed approximately 1,800 people worldwide, with about 400 hourly employees affiliated with unions, and considers its employee and union relations to be in good standing66 Risk Factors The company faces diverse operational, industry, financial, international, and ownership risks, including COVID-19 impacts, fixed-price contract losses, coal-fired plant dependence, liquidity needs, geopolitical events, and significant shareholder influence - Operational Risks: The business continues to be adversely affected by the COVID-19 pandemic, which has caused project delays and supply chain disruptions8384 The company is also subject to losses if actual costs exceed estimates on fixed-price contracts, a risk that has materialized in the past88 - Industry Risks: A substantial portion of revenue (47% in 2021) is related to coal-fired power plants, making the company vulnerable to a decline in spending on coal-based energy121123 Demand is also subject to macroeconomic downturns and supply chain issues125 - Liquidity and Capital Risks: The business requires significant bonding and letter of credit capacity to bid on and execute contracts132 Goodwill and intangible assets ($160.3 million at year-end) are subject to impairment risk137 Debt agreements contain restrictive covenants that could limit operational flexibility146 - International & Regulatory Risks: The company's business may be affected by sanctions and export controls related to Russia's invasion of Ukraine178 It is also subject to the U.S. Foreign Corrupt Practices Act (FCPA) and other anti-bribery laws, as well as political and economic uncertainties in foreign markets185187 - Ownership Risks: B. Riley Financial, Inc. holds significant influence, controlling approximately 30.3% of the voting power and having the right to nominate three directors as of December 31, 2021198200 Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None244 Properties The company's principal properties include owned and leased manufacturing facilities, administrative offices, and service centers across its three segments globally Principal Properties by Segment (as of Dec 31, 2021) | Segment | Location | Use | Ownership | | :--- | :--- | :--- | :--- | | B&W Renewable | Esbjerg, Denmark | Manufacturing/Admin | Owned | | | Copenhagen, Denmark | Admin Office | Leased (2023) | | B&W Environmental | Paruzzaro, Italy | Admin Offices | Leased (2024) | | | Ding Xiang, China | Manufacturing | Leased (2023) | | B&W Thermal | Akron, Ohio | Admin Offices | Leased (2034) | | | Lancaster, Ohio | Manufacturing | Leased (2041) | | | Dumbarton, Scotland | Manufacturing | Owned | | | Guadalupe, Mexico | Manufacturing | Leased (2024) | Legal Proceedings Information regarding ongoing investigations and litigation is incorporated by reference from Note 22 to the Consolidated Financial Statements - For details on legal proceedings, refer to Note 22 of the Consolidated Financial Statements246 Mine Safety Disclosures This item is not applicable to the company - Not Applicable248 PART II Market for Registrant's Common Equity, Related Stockholder Matter and Issuer Purchase of Equity Securities The company's common stock trades on the NYSE, with its performance lagging benchmarks, and it issued preferred stock to B. Riley in 2021 to prepay term loans - The company's common stock is traded on the NYSE under the symbol BW251 - A performance graph comparing cumulative total shareholder return over five years shows B&W's stock performance lagging behind the S&P 500, Russell 2000, and a custom peer group255 - On June 1, 2021, the company issued 2,916,880 shares of its Preferred Stock to B. Riley in a private exchange to prepay $73.3 million of existing term loans257 Management's Discussion and Analysis of Financial Condition and Results of Operation This section analyzes the company's financial performance from 2019-2021, highlighting 2021 revenue growth to $723.4 million, a return to profitability with $31.5 million net income, increased Adjusted EBITDA, and strengthened liquidity through strategic financing activities Overview B&W's business is structured into Renewable, Environmental, and Thermal segments, with recent strategic acquisitions expanding its clean energy focus, driven by global power generation and industrial sector capital expenditures - The company's business is organized into three market-facing segments: Babcock & Wilcox Renewable, Babcock & Wilcox Environmental, and Babcock & Wilcox Thermal260 - Recent strategic acquisitions include Fosler Construction (solar), VODA (renewable services), Fossil Power Systems (combustion equipment), and Optimus Industries (waste heat recovery) to expand its clean energy and thermal businesses261262263265 - Key business drivers include climate change initiatives, environmental regulations, electricity prices, and the overall strength of the industrial sector266 Results of Operations - Years Ended December 31, 2021, 2020, and 2019 In 2021, consolidated revenues increased 27.7% to $723.4 million, driven by strong recovery in Thermal and Environmental segments, leading to a net income of $31.5 million and increased backlog Consolidated Financial Performance (in millions) | Metric | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $723.4 | $566.3 | $859.1 | | Operating Income (Loss) | $20.8 | $(1.7) | $(29.4) | | Net Income (Loss) | $31.5 | $(10.3) | $(129.0) | | Adjusted EBITDA | $70.6 | $45.7 | $46.0 | Segment Revenue Performance (in millions) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | B&W Renewable | $156.8 | $156.2 | +0.4% | | B&W Environmental | $133.8 | $108.0 | +23.9% | | B&W Thermal | $433.3 | $305.0 | +42.1% | - The B&W Renewable segment's adjusted EBITDA decreased to $23.2 million in 2021 from $25.0 million in 2020, primarily because 2020 results included a one-time $26.0 million insurance settlement recovery related to legacy EPC loss contracts299301 - Backlog increased to $639 million at the end of 2021, up from $535 million at the end of 2020, with bookings of $779 million for the year289 Liquidity and Capital Resources The company significantly improved its liquidity and capital structure in 2021 through strategic equity and debt offerings, ending the year with $224.9 million in cash and new debt facilities - The company executed several major financing actions in 2021, including offerings of common stock, preferred stock, 8.125% Senior Notes, and 6.50% Senior Notes, which significantly bolstered its cash position334 Key Balance Sheet and Cash Flow Items (Year-End 2021) | Item | Amount (in millions) | | :--- | :--- | | Unrestricted Cash & Equivalents | $224.9 | | Total Debt | $340.3 | | Gross Preferred Stock | $191.7 | | Cash Used in Operations | $(111.2) | | Cash Used in Investing | $(33.5) | | Cash from Financing | $302.8 | - On June 30, 2021, the company replaced its prior A&R Credit Agreement with new debt facilities, including a $50 million asset-based revolving credit facility and a $110 million letter of credit facility334343 - As of December 31, 2021, the company had outstanding letters of credit, bank guarantees, and surety bonds totaling approximately $374.9 million to support its contractual obligations347349 Critical Accounting Policies and Estimates This section details critical accounting policies requiring significant management judgment, including revenue recognition on long-term contracts, business combinations, loss contingencies, and income taxes - Revenue Recognition: A significant portion of revenue is recognized over time using the cost-to-cost input method, which relies on estimates of total costs at completion355 Changes in these estimates can materially impact reported profits356 - Business Combinations: Acquired assets and liabilities are measured at their estimated fair values, with any excess purchase price recorded as goodwill, a process involving significant valuation estimates361 - Loss Contingencies: Liabilities for probable and reasonably estimable losses are accrued, requiring judgment, especially for complex litigation, and future earnings could be affected by changes in estimates363 - Income Taxes: The company records a valuation allowance against deferred tax assets that are not more likely than not to be realized364 As of December 31, 2021, a valuation allowance exists in substantially all jurisdictions366 Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate fluctuations and foreign currency exchange rate exposures, particularly to the Danish krone, British pound, Euro, Canadian dollar, Mexican peso, and Chinese yuan - The company is exposed to foreign currency exchange risk, primarily from the Danish krone, British pound, Euro, Canadian dollar, Mexican peso, and Chinese yuan369 - A hypothetical 100 basis point change in FX rates would impact annual earnings by an estimated $0.8 million, based on intercompany loan balances at December 31, 2021369 Consolidated Financial Statements and Supplemental Data This section presents the audited consolidated financial statements for 2019-2021, along with the independent auditor's unqualified report on financial statements and internal controls Consolidated Statement of Operations Highlights (in thousands) | Line Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Revenues | $723,363 | $566,317 | $859,111 | | Operating Income (Loss) | $20,821 | $(1,737) | $(29,382) | | Net Income (Loss) | $31,538 | $(10,297) | $(129,039) | | Diluted EPS | $0.26 | $(0.21) | $(3.87) | Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $224,874 | $57,338 | | Total Assets | $913,265 | $599,077 | | Total Liabilities | $854,643 | $930,054 | | Total Stockholders' Equity (Deficit) | $58,622 | $(330,977) | Consolidated Statement of Cash Flows Highlights (in thousands) | Line Item | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(111,196) | $(40,806) | $(176,317) | | Net Cash (Used in) from Investing Activities | $(33,541) | $2,219 | $8,779 | | Net Cash from Financing Activities | $302,812 | $44,098 | $167,018 | Controls and Procedures Management, including the CEO and CFO, evaluated and concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with the independent auditor issuing an unqualified opinion - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2021670 - Management concluded that internal control over financial reporting was effective as of December 31, 2021674 This assessment excluded the recently acquired businesses, Fosler Construction and VODA675 - There were no material changes in internal control over financial reporting during the fourth quarter of 2021677 Other Information On March 2, 2022, the Board of Directors amended the company's bylaws to eliminate the age limitation for board members - The company's bylaws were amended on March 2, 2022, to remove any age limitation for directors688 PART III Directors, Executive Officers, and Corporate Governance This section provides information on executive officers as of March 1, 2022, with other governance details incorporated by reference from the 2022 Annual Meeting Proxy Statement Executive Officers (as of March 1, 2022) | Name | Age | Position | | :--- | :--- | :--- | | Kenneth Young | 58 | Chairman and Chief Executive Officer | | Louis Salamone | 75 | Executive Vice President, Chief Financial Officer and Chief Accounting Officer | | Jimmy B. Morgan | 53 | Executive Vice President and Chief Operating Officer | | John J. Dziewisz | 56 | Executive Vice President, General Counsel and Corporate Secretary | - Information regarding directors, the audit committee, and compliance with Section 16(a) is incorporated by reference from the company's definitive proxy statement690 Executive Compensation Information concerning the compensation of directors and executive officers is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Details on executive compensation are incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders697 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides equity compensation plan information as of December 31, 2021, with further security ownership details incorporated by reference from the 2022 Annual Meeting Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2021) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price ($) | Securities Remaining for Future Issuance | | :--- | :--- | :--- | :--- | | Approved by security holders | 2,093,000 | $19.11 | 326,000 | Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Details on related transactions and director independence are incorporated by reference from the Proxy Statement for the 2022 Annual Meeting of Stockholders699 Principal Accountant Fees and Services Information regarding fees billed by the principal accountant, Deloitte & Touche LLP, is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information on fees paid to the principal accountant, Deloitte & Touche LLP, will be presented in the Proxy Statement for the 2022 Annual Meeting of Stockholders700 PART IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Form 10-K report, including an index of all exhibits - This section contains the index of all exhibits filed with the Form 10-K, including the Master Separation Agreement, Bylaws, Indentures for senior notes, and various credit agreements705706 Form 10-K Summary The company indicates that there is no Form 10-K summary - None725