Item 1. Business
ITEM 1. Business
In this Annual Report on Form 10-K, or this “Annual Report”, unless the context otherwise indicates, “B&W,” “we,” “us,” “our” or the “Company” mean Babcock & Wilcox Enterprises, Inc. and its consolidated subsidiaries.
B&W is a growing, globally-focused renewable, environmental and thermal technologies provider with over 150 years of experience providing diversified energy and emissions control solutions to a broad range of industrial, electrical utility,
5
municipal and other customers. B&W’s innovative products and services are organized into three market-facing segments. Our reportable segments are:
• Babcock & Wilcox Renewable: Cost-effective technologies for efficient and environmentally sustainable power and heat generation, including waste-to-energy, solar construction and installation, biomass energy and black liquor systems for the pulp and paper industry. B&W’s leading technologies support a circular economy, diverting waste from landfills to use for power generation and replacing fossil fuels, while recovering metals and reducing emissions.
• Babcock & Wilcox Environmental: A full suite of best-in-class emissions control and environmental technology solutions for utility, waste to energy, biomass, carbon black, and industrial steam generation applications around the world. B&W’s broad experience includes systems for cooling, ash handling, particulate control, nitrogen oxides and sulfur dioxides removal, chemical looping for carbon control, and mercury control.
• Babcock & Wilcox Thermal: Steam generation equipment, aftermarket parts, construction, maintenance and field services for plants in the power generation, oil and gas, and industrial sectors. B&W has an extensive global base of installed equipment for utilities and general industrial applications including refining, petrochemical, food processing, metals and others.
On September 30, 2021, we acquired a 60% controlling ownership stake in Illinois-based solar energy contractor Fosler Construction Company Inc. (“Fosler Construction”) for approximately $27.2 million in cash plus contingent consideration of up to $10 million, valued at $8.8 million. Fosler Construction provides commercial, industrial and utility-scale solar services and owns two community solar projects in Illinois being developed under the Illinois Solar for All program. Fosler Construction was founded in 1998 and employs approximately 120 people. It has a strong track record of successfully completing solar projects profitably with union labor and has aligned its model with a growing number of renewable project incentives in the U.S. We believe Fosler Construction is positioned to capitalize on the high-growth solar market in the U.S. and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. Fosler Construction is reported as part of our B&W Renewable segment, and operates under the name Fosler Solar, a Babcock & Wilcox company.
On November 30, 2021, we acquired 100% ownership of VODA A/S (“VODA”) through our wholly-owned subsidiary, B&W PGG Luxembourg Finance SARL for approximately $32.9 million. VODA is a Denmark-based multi-brand aftermarket parts and services provider, focusing on energy-producing incineration plants including waste-to-energy, biomass-to-energy or other fuels, providing service, engineering services, spare parts as well as general outage support and management. VODA has extensive experience in incineration technology, boiler and pressure parts, SRO, automation, and performance optimization. VODA employs approximately 65 people mainly in Denmark and Sweden. We believe VODA will solidify our platform for our renewable service business in Europe and that the acquisition aligns with B&W’s aggressive growth and expansion of our clean and renewable energy businesses. VODA is reported as part of our B&W Renewable segment. We plan to form B&W Renewable Services to integrate VODA and our waste-to-energy and biomass aftermarket services businesses.
On February 1, 2022, we acquired 100% ownership of Fossil Power Systems, Inc. for approximately $59.1 million, excluding working capital adjustments. Fossil Power Systems, Inc., 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. Fossil Power Systems, Inc. will initially be reported as part of our B&W Thermal segment.
On February 28, 2022, we acquired 100% ownership of Optimus Industries, LLC for approximately $19 million, excluding working capital adjustments. Optimus 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 sulfuric acid plants and is based in Tulsa, Oklahoma and Chanute, Kansas. Optimus Industries, LLC will be reported as part of our B&W Thermal segment.
6
Our business depends significantly on the capital, operations and maintenance expenditures of global electric power generating companies, including renewable and thermal powered heat generation industries and industrial facilities with environmental compliance policy requirements. Several factors may influence these expenditures, including:
• climate change initiatives promoting environmental policies including renewable energy options utilizing waste-to-energy or biomass to meet legislative requirements and clean energy portfolio standards in the United States, European, Middle East and Asian markets;
• regulations requiring environmental improvements in various global markets;
• expectations regarding future governmental requirements to further limit or reduce greenhouse gas and other emissions in the United States, Europe and other international climate change sensitive countries;
• prices for electricity, along with the cost of production and distribution including the cost of fuels within the United States, Europe, Middle East and Asian countries;
• demand for electricity and other end products of steam-generating facilities;
• level of capacity utilization at operating power plants and other industrial uses of steam production;
• maintenance and upkeep requirements at operating power plants, including to combat the accumulated effects of usage;
• overall strength of the industrial industry; and
• ability of electric power generating companies and other steam users to raise capital.
Customer demand is heavily affected by the variations in our customers’ business cycles and by the overall economies and energy, environmental and noise abatement needs of the countries in which they operate.
COVID-19
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China and subsequently spread globally. This global pandemic has disrupted business operations, including global supply chains, trade, commerce, financial and credit markets, and daily life throughout the world. Our business has been, and continues to be, adversely impacted by the measures taken and restrictions imposed in the countries in which we operate and by local governments and others to control the spread of this virus. These measures and restrictions have varied widely and have been subject to significant changes from time to time depending on changes in the severity of the virus in these countries and localities. These restrictions, including curtailment of travel and other activity, negatively impact our ability to conduct business.
Disruption to our global supply chains from COVID-19 has included impacts to the manufacturing, supply, distribution, transportation and delivery of our products. We could also see significant disruptions of the operations of our logistics, service providers, delays in shipments and negative impacts to pricing of certain of our products. Disruptions and delays in our supply chains as a result of the COVID-19 pandemic could adversely our ability to meet our customers’ demands. Additionally, the prioritization of shipments of certain products as a result of the pandemic could cause delays in the shipment or delivery of our products. Such disruptions could result in reduced sales.
The volatility and variability of the virus has limited our ability to forecast the impact of the virus on our customers and our business. The ongoing impact of COVID-19, including new strains such as the delta and omicron variants, has resulted in the reimposition of certain restrictions and may lead to other restrictions being implemented in response to efforts to reduce the spread of the virus. These varying and changing events have caused many of the projects we had anticipated would begin in 2021 to be delayed into 2022 and potentially beyond. Many customers and projects require B&W's employees to travel to customer and project worksites. Certain customers and significant projects are located in areas where travel restrictions have been imposed, certain customers have closed or reduced on-site activities, and timelines for completion of certain projects have, as noted above, been extended into 2022 and beyond. Additionally, out of concern for our employees, even where restrictions permit employees to return to our offices and worksites, we incurred additional costs to protect our employees and advised those who are uncomfortable returning to worksites due to the pandemic that they are not required to do so for an indefinite period of time. The resulting uncertainty concerning, among other things, the spread and economic impact of the virus has also caused significant volatility and, at times, illiquidity in global equity and credit markets. The full extent of the impact of COVID-19 and its variants on our operational and financial performance will depend on future developments, including the ultimate duration and spread of the pandemic and related actions taken by the U.S. government, state and local government officials, and international governments to prevent outbreaks, as well as the availability, effectiveness and acceptance of COVID-19 vaccinations in the U.S. and abroad, all of which are uncertain, out of our control, and cannot be predicted.
Equity Capital Activities
7
On February 12, 2021, we completed a public offering of 29,487,180 shares of our common stock for net proceeds of $163.0 million, inclusive of 3,846,154 shares issued to B. Riley Securities, Inc., a related party.
On May 7, 2021, we completed a public offering of 4,000,000 shares of our 7.75% Series A Cumulative Perpetual Preferred Stock (the “Preferred Stock”) at an offering price of $25.00 per share for net proceeds of approximately $95.7 million after deducting underwriting discounts and commissions but before expenses.
On May 26, 2021, we completed the additional sale of 444,700 shares of our Preferred Stock, related to offering described above, at an offering price of $25.00 per share for net proceeds of approximately $10.7 million after deducting underwriting fees and commissions.
On June 1, 2021, the Company and B. Riley, a related party, entered into an agreement 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.
On July 7, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in connection with the offer and sale of our Preferred Stock with an aggregate offering price of up to $76 million to or through B. Riley Securities, Inc. The Preferred Stock has the same terms (other than date of issuance and first dividend), has the same CUSIP number and is fungible with the Preferred Stock issued on May 7, 2021. As of December 31, 2021, we sold $7.7 million aggregate amount of Preferred Stock for $7.7 million net proceeds after commission and fees related to the July 7, 2021 sales agreement.
For further information, see Note 17 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Debt Capital Activities
8.125% Senior Notes
On February 12, 2021, we completed a public offering of $125.0 million aggregate principal amount of our 8.125% senior notes due 2026 (the “8.125% Senior Notes”). At the completion of the offering, we received net proceeds of approximately $120.0 million after deducting underwriting discounts, commissions, and before expenses.
In addition to the public offering, we issued $35.0 million of 8.125% Senior Notes to B. Riley Financial, Inc., a related party, in exchange for a deemed prepayment of our existing Last Out Term Loan Tranche A-3 in a concurrent private offering.
On March 31, 2021, we entered into a sales agreement with B. Riley Securities, Inc., a related party, in which we may sell to or through B. Riley Securities, Inc., from time to time, additional 8.125% Senior Notes up to an aggregate principal amount of $150.0 million of 8.125% Senior Notes. 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 be fungible with, the 8.125% Senior Notes issued February 12, 2021, as described above.
As of December 31, 2021, the Company has sold $26.2 million aggregate principal amount of 8.125% Senior Notes under the sales agreement disclosed above for $26.6 million of net proceeds after commissions and fees.
The 8.125% Senior Notes are senior unsecured obligations of the Company and rank equally in right of payment with all of the Company’s other existing and future senior unsecured and unsubordinated indebtedness. The 8.125% Senior Notes bear interest at the rate of 8.125% per annum. Interest on the 8.125% Senior Notes is payable quarterly in arrears on January 31, April 30, July 31 and October 31 of each year, commencing on April 30, 2021. The 8.125% Senior Notes mature on February 28, 2026.
6.50% Senior Notes .
On December 13, 2021, we completed an underwritten public offering of $140 million aggregate principal amount of 6.50% senior notes due 2026 (the “6.50% Senior Notes”). On December 28, 2021, we received a notice that the Underwriters had elected to exercise their overallotment option for an additional $11.4 million in aggregate principal amount of the 6.50% Senior Notes. The Company closed the overallotment option on December 30, 2021. As of the closing of the overallotment option, a total of $151.4 million in aggregate principal amount of the 6.50% Senior Notes have been sold. The net proceeds
8
from the offering, including the 6.50% Senior Notes purchased pursuant to the overallotment option, after deducting the Underwriters’ discount and the estimated offering expenses payable by the Company, were approximately $145.0 million.
The public offering of our 6.50% Senior Notes was conducted pursuant to an underwriting agreement dated December 8, 2021, 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 of the Company and rank equally in right of payment with all of the Company’s other existing and future senior unsecured and unsubordinated indebtedness. The 6.50% Senior Notes are effectively subordinated in right of payment to all of the Company’s existing and future secured indebtedness and structurally subordinated to all existing and future indebtedness of the Company’s subsidiaries, including trade payables. The 6.50% Senior Notes bear interest at the rate of 6.50% per annum. Interest on the 6.50% Senior Notes is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing on March 31, 2022. The 6.50% Senior Notes will mature on December 31, 2026.
For further information, see Note 14 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Contracts
We execute our contracts through a variety of methods, including fixed-price, cost-plus, target price cost incentive, cost-reimbursable or some combination of these methods. Contracts are usually awarded through a competitive bid process. Factors that customers may consider include price, technical capabilities of equipment and personnel, plant or equipment availability, efficiency, safety record and reputation.
Fixed-price contracts are for a fixed selling price to cover all costs and any profit element for a defined scope of work. Fixed-price contracts entail more risk to us because they require us to predetermine both the quantities of work to be performed and the costs associated with executing the work.
We have contracts that extend beyond one year. Most of our long-term contracts have provisions for progress payments. We attempt to cover anticipated increases in labor, material and service costs of our long-term contracts either through an estimate of such changes, which is reflected in the original price, or through risk-sharing mechanisms, such as escalation or price adjustments for items such as labor and commodity prices. In the event of a contract deferral or cancellation without cause, we generally would be entitled to recover costs incurred, settlement expenses and profit on work completed prior to deferral or termination. Significant or numerous cancellations could adversely affect our business, financial condition, results of operations and cash flows.
From time to time, we partner with other companies to meet the needs of our customers, which can result in project-related joint venture entities or other contractual arrangements. While we carefully select our partners in these arrangements, they can subject us to risks that we may not be able to fully control and may include joint and several liability.
We generally recognize our contract revenues and related costs over time using the cost-to-cost input method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Accordingly, we review contractual sales price and cost estimates regularly as the work progresses and reflect adjustments in profit proportionate to the percentage-of-completion in the period when we revise those estimates. To the extent that these adjustments result in a reduction or an elimination of previously reported profits with respect to a contract, we would recognize a charge against current earnings, which could be material.
See further description of risks related to our contracting in Risks Related to Our Operations in Part I, Item 1A of this Annual Report.
Our arrangements with customers frequently require us to provide letters of credit, bid and performance bonds or guarantees to secure bids or performance under contracts, which may involve providing cash collateral or other contract security that we may not be able to provide.
9
Other sales, such as parts and certain aftermarket service activities, are not in the form of long-term contracts, and we recognize revenues as goods are delivered and work is performed. See further discussion in Note 5 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Foreign Operations
Our operations in Denmark, including through our recent acquisition of VODA, provide comprehensive services to companies in the waste-to-energy and biomass to energy sector of the power generation market, currently primarily in Europe. Our operations in Italy provide custom-engineered comprehensive wet and dry cooling solutions and aftermarket parts and services to the power generation industry including natural gas-fired and renewable energy power plants, as well as downstream oil and gas, petrochemical and other industrial end markets in Europe, the Middle East and the Americas. Our operations in Scotland primarily provide boiler cleaning technologies and systems primarily to Europe. Our Canadian operations serve the Canadian industrial power, oil production and electric utility markets. We have manufacturing facilities in Mexico to serve global markets.
The functional currency of our foreign operating entities is not the United States dollar, and as a result, we are subject to exchange rate fluctuations that impact our financial position, results of operations and cash flows. We do not currently engage in currency hedging activities to limit the risks of currency fluctuations.
For additional information on the geographic distribution of our revenues, see Note 4 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.
Competition
With over 150 years of experience, we have a competitive advantage in our experience and technical capability to reliably convert a wide range of fuels to steam. We have supplied highly-engineered energy and environmental equipment in more than 90 countries. Our strong, installed base around the globe also yields competitive advantages, although our markets are highly competitive and price sensitive. We compete with a number of domestic and foreign companies specializing in power generation, environmental control equipment, and cooling systems and services. Each segment’s primary competitors are summarized as follows:
B&W Renewable segment B&W Environmental segment B&W Thermal segment
CNIM Group Hamon GE (1)
Hitachi Zosen Enexio MH Power Systems (1)
Martin Seagull Babcock Power (1)
Keppel Seghers Paharpur Doosan (1)
Valmet Evapco Clyde Bergemann
Andritz SPG Dry Enerfab
Steinmuller Radscan AB TEI Construction
LAB APComPower
Azco, Inc.
(1) GE, MH Power Systems, Babcock Power & Doosan are also considered primary competitors of the B&W Environmental Segment.
Across each of our segments, we also compete with a variety of engineering and construction companies related to installation of steam generating systems and environmental control equipment; specialized industrial equipment; and other suppliers of replacement parts, repair and alteration services and other services required to retrofit and maintain existing steam generating systems. The primary bases of competition are price, technical capabilities, quality, timeliness of performance, breadth of products and services and willingness to accept contract risks.
Raw Materials and Suppliers
Our operations use raw materials such as carbon and alloy steels in various forms and components and accessories for assembly, which are available from numerous sources. We generally purchase these raw materials and components as needed for individual contracts. We do not depend on a single source of supply for any significant raw materials. Although shortages of some raw materials have existed from time to time, no serious shortage exists at the present time.
10
Human Capital Resources
Human Capital Management
At December 31, 2021, we had approximately 1,800 employees worldwide, of which approximately 1,750 were full-time. Approximately 400 of our hourly employees are union-affiliated, covered by four union agreements related to active facilities in Mexico, the United States, the United Kingdom, and Canada. We successfully renegotiated two union contracts in 2021 and have one that will expire in early 2023. We consider our relationships with our employees and unions to be in good standing.
Workforce Engagement
We believe an engaged global workforce is critical to our success as we work to profitably grow our business as a leading supplier of clean and sustainable energy solutions.
B&W is known for having a dedicated, long-tenured workforce and for having some of the best, most experienced employees in the industries we serve. Our ability to attract and retain this exceptional talent requires a commitment to open communication about the company’s business, strategy and results with our employees and a globally diverse, inclusive and supportive workplace that provides opportunities for growth and career development. It also requires programs that enhance employees’ overall work experience. We have implemented the Responsible and Flexible Workplace Program (“ReFlex”) in the U.S. that provides employees with flexibility in where they work and various work-from-home policies across many of our global operations. While COVID-19 has continued to impact life throughout the world, our employees have remained diligent, customer focused and resilient, and progressive employment programs like ReFlex have provided us with an important competitive advantage. They allow us to keep our facilities running, deliver on our projects and ensure our customers’ needs are met, while also safeguarding the safety and health of our employees. Through ReFlex, our employees have needed flexibility and autonomy in how they work, particularly during these unprecedented times.
Compensation and Benefits
We also believe it is important to provide competitive compensation and benefits programs for our employees. In addition to salaries, we offer the following benefits, among others, which vary by employee level and by the country where the employees are located:
• bonuses,
• stock awards,
• retirement programs (including pension and savings plans),
• health savings and flexible spending accounts,
• paid time off,
• paid parental leave,
• disability programs,
• and employee assistance programs.
Core Values
At B&W, our values of safety, ethics, quality, integrity, respect and agility are at the foundation of our business, and we are focused on efficiently ingraining new employees into that culture, whether they join through the normal recruiting and hiring process, or as we have grown our company through strategic acquisitions. We also believe in the importance of being a good corporate citizen, providing and supporting opportunities for our employees to make a positive impact in the communities where they live and work.
Our Board is actively engaged with our workforce practices and policies, and regularly receives updates and provides input on key culture topics, including employee engagement, employee development and succession planning.
Patents and Patent Licenses
We currently hold a large number of United States and foreign patents and have patent applications pending. We have acquired patents and technology licenses and granted technology licenses to others when we have considered it advantageous
11
for us to do so. Although in the aggregate our patents and licenses are important to us, we do not regard any single patent or license or group of related patents or licenses as critical or essential to our business as a whole. In general, we depend on our technological capabilities and the application thereof, rather than patents and licenses, in the conduct of our various businesses.
Research and Development Activities
Our research and development activities improve our products through innovations to reduce the cost of our products to make them more competitive and through innovations to reduce performance risk of our products to better meet our customer expectations. Research and development costs are expensed as incurred.
Permits and Licenses
We are required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates with respect to our operations. The kinds of permits, licenses and certificates required in our operations depend upon a number of factors. We are not aware of any material noncompliance and believe our operations and certifications are currently in compliance with all relevant permits, licenses and certifications.
Environmental
We have been identified as a potentially responsible party at various cleanup sites under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”). CERCLA and other environmental laws can impose liability for the entire cost of cleanup on any of the potentially responsible parties, regardless of fault or the lawfulness of the original conduct. Generally, however, where there are multiple responsible parties, a final allocation of costs is made based on the amount and type of wastes disposed of by each party and the number of financially viable parties, although this may not be the case with respect to any particular site. We have not been determined to be a major contributor of wastes to any of these sites. On the basis of our relative contribution of waste to each site, we expect our share of the ultimate liability for the various sites will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows in any given year.
Government Regulations
We are subject to a variety of laws and regulations in the United States and other countries that involve matters central to our business, including those relating to:
• the construction and manufacture of renewable, environmental and thermal products;
• clean air and other environmental protection legislation;
• taxation of domestic and foreign earnings;
• tariffs, duties, or trade sanctions and other trade barriers imposed by foreign countries that restrict or prohibit business transactions in certain markets;
• user privacy, security, data protection, content, and online-payment services;
• intellectual property;
• transactions in or with foreign countries or officials; and
• use of local employees and suppliers.
For further discussion, see Part I, Item 1A, “Risk Factors” of this Annual Report on Form 10-K.
Available Information
Our website address is www.babcock.com . We make available through the Investor section of this website under “Financial Information,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement, statements of beneficial ownership of securities on Forms 3, 4 and 5 and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (the “SEC”). In addition, the SEC maintains a website at www.sec.gov that contains reports, proxy and annual reports, and other information regarding issuers that file electronically with the SEC. We have also posted on our website our: Corporate Governance Principles; Code of Business Conduct; Code of Ethics for our Chief Executive Officer and Senior Financial Officers; Related Party Transactions Policy; Management, Board Members and Independent Director Contact Information; Amended and Restated By-laws; charters for the Audit & Finance, Governance, and
12
Compensation Committees of our Board; and our Modern Slavery Transparency Statement. We are not including the information contained in our website as part of or incorporating it by reference into this Annual Report.