NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2023
NOTE 1 – BASIS OF PRESENTATION
These interim Condensed Consolidated Financial Statements of Babcock & Wilcox Enterprises, Inc. (“B&W,” “management,” “we,” “us,” “our” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and Securities and Exchange Commission (“SEC”) instructions for interim financial information, and should be read in conjunction with the Company's Annual Report. The Company has included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. The Company has eliminated all intercompany transactions and accounts. The Company has presented the notes to its Condensed Consolidated Financial Statements on the basis of continuing operations, unless otherwise stated.
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from these estimates. In the opinion of management, these consolidated financial statements contain all estimates and adjustments, consisting of normal recurring accruals, required to fairly present the financial position, results of operations, and cash flows for the interim periods. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full-year ending December 31, 2023.
Non-controlling interests are presented in the Company’s consolidated financial statements as if parent company investors (controlling interests) and other minority investors (non-controlling interests) in partially-owned subsidiaries have similar economic interests in a single entity. As a result, investments in non-controlling interests are reported as equity in the Company’s consolidated financial statements. Additionally, the Company’s consolidated financial statements include 100% of a controlled subsidiary’s earnings, rather than only its share. Transactions between the parent company and non-controlling interests are reported in equity as transactions between stockholders, provided that these transactions do not create a change in control.
Market Update
The COVID-19 pandemic has continued to create challenges for the Company in countries that have significant outbreak mitigation strategies, namely, countries in our Asia-Pacific region, which led to temporary project postponements and has continued to impact results in this region. Additionally, the Company has experienced negative impacts to its global supply chains as a result of COVID-19, the war in Ukraine, Russia-related supply chain shortages and other factors, including disruptions to the manufacturing, supply, distribution, transportation and delivery of its products. The Company has also observed significant delays and disruptions of its service providers and negative impacts to pricing of certain of its products. These delays and disruptions have had, and could continue to have, an adverse impact on the Company’s ability to meet customers’ demands. The Company is continuing to actively monitor the impact of these market conditions on current and future periods and actively manage costs and our liquidity position to provide additional flexibility while still supplying its customers and their specific needs. The duration and scope of these conditions cannot be predicted, and therefore, any anticipated negative financial impact to the Company’s operating results cannot be reasonably estimated.
NOTE 2 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss) earnings per share of the Company's common stock, net of non-controlling interest and dividends on preferred stock:
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| Three Months Ended March 31, | | |
(in thousands, except per share amounts) | 2023 | | 2022 | | | | | | |
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Net loss attributable to stockholders of common stock | $ | (16,211) | | | $ | (11,979) | | | | | | | |
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Weighted average shares used to calculate diluted earnings (loss) per share | 88,733 | | | 87,992 | | | | | | | |
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Basic (loss) earnings per share | $ | (0.18) | | | $ | (0.14) | | | | | | | |
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Diluted (loss) earnings per share | $ | (0.18) | | | $ | (0.14) | | | | | | | |
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Because the Company incurred a net loss in the three-month periods ended March 31, 2023 and March 31, 2022, basic and diluted shares are the same.
If the Company had net income in the three months ended March 31, 2023 and March 31, 2022, diluted shares would include an additional 0.4 million and 0.9 million shares, respectively.
The Company excluded 2.2 million and 0.4 million shares related to stock options from the diluted share calculation for the three-month periods ended March 31, 2023 and 2022, respectively, because their effect would have been anti-dilutive.
NOTE 3 – SEGMENT REPORTING
The Company's operations are assessed based on three reportable market-facing segments as part of its strategic, market-focused organizational and re-branding initiative to accelerate growth and provide stakeholders with improved visibility into its renewable and environmental growth platforms. The Company's three reportable segments are as follows:
•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 replacement of fossil fuels, while recovering metals and reducing emissions. To date, we have installed over 500 waste-to-energy and biomass-to-energy units at more than 300 facilities in approximately 30 countries which serve a wide variety of utility, waste management, municipality and investment firm customers. Additionally, we have installed more than 100MW of clean solar production.
•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. The Company's ClimateBright family of products including SolveBright, OxyBright, BrightLoop and BrightGen, places us at the forefront of carbon dioxide capturing technologies and development with many of the aforementioned products ready for commercial demonstration.
•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.
An analysis of the Company's operations by segment is as follows:
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | | | |
Revenues: | | | | | | | | | |
B&W Renewable segment | | | | | | | | | |
B&W Renewable | $ | 49,132 | | | $ | 19,711 | | | | | | | |
B&W Renewable Services | 16,310 | | | 8,288 | | | | | | | |
Vølund | 18,681 | | | 16,336 | | | | | | | |
B&W Solar | 15,989 | | | 23,626 | | | | | | | |
| 100,112 | | | 67,961 | | | | | | | |
B&W Environmental segment | | | | | | | | | |
B&W Environmental | 20,361 | | | 18,185 | | | | | | | |
SPIG | 16,605 | | | 12,060 | | | | | | | |
GMAB | 2,474 | | | 4,703 | | | | | | | |
| 39,440 | | | 34,948 | | | | | | | |
B&W Thermal segment | | | | | | | | | |
B&W Thermal | 119,236 | | | 102,239 | | | | | | | |
| 119,236 | | | 102,239 | | | | | | | |
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Eliminations | (1,541) | | | (1,099) | | | | | | | |
Total Revenues | $ | 257,247 | | | $ | 204,049 | | | | | | | |
At a segment level, the adjusted EBITDA presented below is consistent with the manner in which the Company's 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, costs related to financial consulting, research and development costs 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.
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | | | |
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B&W Renewable segment - Adjusted EBITDA | $ | 4,940 | | | $ | 1,955 | | | | | | | |
B&W Environmental segment - Adjusted EBITDA | 1,906 | | | 1,439 | | | | | | | |
B&W Thermal segment - Adjusted EBITDA | 13,733 | | | 14,154 | | | | | | | |
Corporate | (5,080) | | | (4,373) | | | | | | | |
R&D expenses | (1,307) | | | (655) | | | | | | | |
Interest Expense | (14,429) | | | (12,324) | | | | | | | |
Depreciation & Amortization | (5,365) | | | (6,202) | | | | | | | |
Benefit Plans, net | (109) | | | 7,452 | | | | | | | |
Gain on sales, net | (937) | | | 20 | | | | | | | |
Settlement and related legal costs | 3,009 | | | (2,528) | | | | | | | |
Advisory fees for settlement costs and liquidity planning | (546) | | | (1,032) | | | | | | | |
Stock Compensation | (3,227) | | | (1,319) | | | | | | | |
Restructuring expense and business services transition | (960) | | | (2,688) | | | | | | | |
Acquisition pursuit and related costs | (134) | | | (843) | | | | | | | |
Product Development | (1,370) | | | (852) | | | | | | | |
Foreign exchange | (461) | | | 3,085 | | | | | | | |
Financial advisory services | — | | | — | | | | | | | |
Contract Disposal | (1,387) | | | (875) | | | | | | | |
Inventory step-up price adjustment | — | | | (1,745) | | | | | | | |
Other Net | (261) | | | (123) | | | | | | | |
Loss before income tax expense | (11,985) | | | (7,454) | | | | | | | |
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The Company does not separately identify or report its assets by segment as its CODM does not consider assets by segment to be a critical measure by which performance is measured.
NOTE 4 – REVENUE RECOGNITION AND CONTRACTS
Revenue Recognition
The Company generates the vast majority of its revenues from the supply of, and aftermarket services for, steam-generating, environmental and auxiliary equipment. The Company also earns revenue from the supply of custom-engineered cooling systems for steam applications along with related aftermarket services.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services, accounted for 25% and 19% of the Company's revenue for the three months ended March 31, 2023 and 2022, respectively. Revenue from products and services transferred to customers over time, which primarily relates to customized, engineered solutions and construction services, accounted for 75% and 81% of the Company's revenue for the three months ended March 31, 2023 and 2022, respectively.
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.
Contract assets as of March 31, 2023 include approximately $6.1 million for change orders and/or claims in transaction prices for certain contracts that were in the process of being resolved in the ordinary course of business, including through negotiation, arbitration and other proceedings. The Company believes that these amounts are collectible and recoverable under the applicable contracts.
Transaction prices for the Company’s contracts may include variable consideration, which comprises items such as change orders, claims and incentives. Management estimates variable consideration for a performance obligation utilizing estimation methods that it believes best predict the amount of consideration to which the Company will be entitled. Variable consideration is included in the estimated transaction price if it is probable that when the uncertainty associated with the variable consideration is resolved, there will not be a significant reversal of the cumulative amount of revenue that has been recognized. Management’s estimates of variable consideration and the determination of whether to include estimated amounts in transaction prices are based largely on legal advice, past practices with the customer, specific discussions, correspondence or preliminary negotiations with the customer and all other relevant information that is reasonably available at the time of the estimate. The effect of variable consideration on the transaction price of a performance obligation is recognized as an adjustment to revenue, typically on a cumulative catch-up basis, as such variable consideration, which typically pertains to changed conditions and scope, is generally for services encompassed under the existing contract. To the extent unapproved change orders, claims and other variable consideration reflected in transaction prices are not resolved in the Company’s favor, or to the extent incentives reflected in transaction prices are not earned, there could be reductions in, or reversals of, previously recognized revenue.
As of March 31, 2023, the Company included approximately $7.0 million of change orders and/or claims in transaction prices for certain contracts that were in the process of being resolved in the ordinary course of business, including through negotiation, arbitration and other proceedings. For the comparable period of March 31, 2022, the Company did not report material unapproved change orders. These transaction price adjustments, when earned, are included within contract assets or accounts receivable, net of allowance, as appropriate. As of March 31, 2023, these change orders and/or claims primarily related to certain projects in the Company’s B&W Renewable segment and include amounts related to the B&W Solar business. The Company actively engages with its customers to complete the final approval process and generally expects these processes to be completed within one year. Amounts ultimately realized upon final agreement by customers could be higher or lower than such estimated amounts.
Refer to Note 3 for the Company's disaggregation of revenue by product line.
Contract Balances
The following represents the components of the Company's Contracts in progress and Advance billings on contracts included in its Condensed Consolidated Balance Sheets:
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(in thousands) | March 31, 2023 | | December 31, 2022 | | $ Change | | % Change |
Contract assets - included in contracts in progress: | | | | | | | |
Costs incurred less costs of revenue recognized | $ | 74,112 | | | $ | 79,421 | | | $ | (5,309) | | | (7) | % |
Revenues recognized less billings to customers | 89,804 | | | 55,518 | | | 34,286 | | | 62 | % |
Contracts in progress | $ | 163,916 | | | $ | 134,939 | | | $ | 28,977 | | | 21 | % |
Contract liabilities - included in advance billings on contracts: | | | | | | | |
Billings to customers less revenues recognized | $ | 94,808 | | | $ | 113,643 | | | $ | (18,835) | | | (17) | % |
Costs of revenue recognized less cost incurred | 42,417 | | | 19,786 | | | 22,631 | | | 114 | % |
Advance billings on contracts | $ | 137,225 | | | $ | 133,429 | | | $ | 3,796 | | | 3 | % |
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Net contract balance | $ | 26,691 | | | $ | 1,510 | | | $ | 25,181 | | | 1,668 | % |
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Accrued contract losses | $ | 3,315 | | | $ | 3,032 | | | $ | 283 | | | 9 | % |
Backlog
On March 31, 2023 the Company had $662.9 million of remaining performance obligations, which the Company also refers to as total backlog. The Company expects to recognize approximately 77.7%, 18.1% and 4.2% of its remaining performance obligations as revenue in 2023, 2024 and thereafter, respectively.
Changes in Contract Estimates
During each of the three-month periods ended March 31, 2023 and 2022, the Company recognized changes in estimated gross profit related to long-term contracts accounted for on the over time basis, which are summarized as follows:
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | | | |
Increases in gross profit for changes in estimates for over time contracts | $ | 6,225 | | | $ | 3,341 | | | | | | | |
Decreases in gross profit for changes in estimates for over time contracts | (5,753) | | | (2,862) | | | | | | | |
Net changes in gross profit for changes in estimates for over time contracts | $ | 472 | | | $ | 479 | | | | | | | |
B&W Renewable Projects
During 2022, the Company determined that its B&W Solar reporting unit had nine projects located in the United States that existed at the time B&W Solar (formerly Fosler) was acquired on September 30, 2021 which generated losses that arose 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, the Company 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 as of September 30, 2022. The Company has submitted insurance claims to recover a portion of these losses as of March 31, 2023. During 2022, four additional B&W Solar projects became loss contracts, as such, the Company recorded $13.2 million in net losses from changes in the estimated costs to complete the thirteen B&W Solar loss contracts. During the three months ended March 31, 2023, one additional B&W Solar project became a loss contract. The related loss incurred during the quarter was immaterial to the Company's consolidated financial statements.
NOTE 5 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value. The components of inventories are as follows:
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(in thousands) | March 31, 2023 | | December 31, 2022 |
Raw materials and supplies | $ | 91,668 | | | $ | 87,554 | |
Work in progress | 3,917 | | | 2,518 | |
Finished goods | 14,154 | | | 12,565 | |
Total inventories | $ | 109,739 | | | $ | 102,637 | |
NOTE 6 – PROPERTY, PLANT & EQUIPMENT, & FINANCE LEASES
Property, plant and equipment less accumulated depreciation is as follows:
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(in thousands) | March 31, 2023 | | December 31, 2022 |
Land | $ | 2,498 | | | $ | 2,481 | |
Buildings | 34,062 | | | 35,326 | |
Machinery and equipment | 154,919 | | | 153,939 | |
Property under construction | 13,133 | | | 11,410 | |
| 204,612 | | | 203,156 | |
Less accumulated depreciation | 144,036 | | | 141,145 | |
Net property, plant and equipment | 60,576 | | | 62,011 | |
Finance leases | 30,549 | | | 30,549 | |
Less finance lease accumulated amortization | 6,713 | | | 6,197 | |
Net property, plant and equipment, and finance lease | $ | 84,412 | | | $ | 86,363 | |
NOTE 7 - GOODWILL
The following summarizes the changes in the net carrying amount of goodwill as of March 31, 2023:
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(in thousands) | B&W Renewable | | B&W Environmental | | B&W Thermal | | Total | |
Goodwill | $ | 139,248 | | | $ | 79,825 | | | $ | 69,587 | | | $ | 288,660 | | |
Accumulated impairment losses | $ | (57,189) | | | (74,478) | | | — | | | (131,667) | | |
Balance at December 31, 2022 | $ | 82,059 | | | $ | 5,347 | | | $ | 69,587 | | | $ | 156,993 | | |
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Currency translation adjustments | 77 | | | 32 | | | 157 | | | 266 | | |
Balance at March 31, 2023 | $ | 82,136 | | | $ | 5,379 | | | $ | 69,744 | | | $ | 157,259 | | |
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.
There were no indicators of goodwill impairment identified during our quarterly triggering event assessment for the quarter ended March 31, 2023.
NOTE 8 – INTANGIBLE ASSETS
The Company's intangible assets are as follows:
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(in thousands) | March 31, 2023 | | December 31, 2022 |
Definite-lived intangible assets(1) | | | |
Customer relationships | $ | 68,191 | | | $ | 68,164 | |
Unpatented technology | 18,260 | | | 18,208 | |
Patented technology | 3,622 | | | 3,635 | |
Tradename | 13,516 | | | 13,441 | |
Acquired backlog | 3,100 | | | 3,100 | |
All other | 9,998 | | | 9,653 | |
Gross value of definite-lived intangible assets | 116,687 | | | 116,201 | |
Customer relationships amortization | (27,465) | | | (26,198) | |
Unpatented technology amortization | (10,463) | | | (10,013) | |
Patented technology amortization | (2,927) | | | (2,891) | |
Tradename amortization | (6,341) | | | (6,154) | |
Acquired backlog | (3,100) | | | (3,100) | |
All other amortization | (9,091) | | | (9,082) | |
Accumulated amortization | (59,387) | | | (57,438) | |
Net definite-lived intangible assets | $ | 57,300 | | | $ | 58,763 | |
Indefinite-lived intangible assets | | | |
Trademarks and trade names | $ | 1,530 | | | $ | 1,530 | |
Total intangible assets, net | $ | 58,830 | | | $ | 60,293 | |
(1) The Company finalized the purchase price allocation for the B & W Solar and B & W Renewable Service A/S acquisition on September 30, 2022 and November 30, 2022, respectively. The purchase price allocations for FPS and Optimus were finalized on of February 1, 2023 and February 28, 2023, respectively. These allocations resulted in several measurement period adjustments during the year ended December 31, 2022.
The following summarizes the changes in the carrying amount of intangible assets, net:
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | |
Balance at beginning of period | $ | 60,293 | | | $ | 43,795 | | | |
Business acquisitions and adjustments(1) (2) | — | | | 25,092 | | | |
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Amortization expense | (1,949) | | | (2,978) | | | |
Currency translation adjustments | 486 | | | (457) | | | |
Balance at end of the period | $ | 58,830 | | | $ | 65,452 | | | |
(1) During the quarter ended March 31, 2022 the Company was still in the process of completing the purchase price allocation associated with the Fosler Construction, VODA, Fossil Power and Optimus Industries acquisitions and as a result, the provisional measurements of goodwill associated with these acquisitions were subject to change.
(2) The purchase price allocations for FPS and Optimus were finalized on of February 1, 2023 and February 28, 2023, respectively. These allocations resulted in several measurement period adjustments during the year ended December 31, 2022.
Amortization of intangible assets is included in Cost of operations and SG&A in the Company's Consolidated Statement of Operations but is not allocated to segment results.
Estimated future intangible asset amortization expense as of March 31, 2023 is as follows (in thousands):
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| Amortization Expense |
Year ending December 31, 2023 | 6,020 | |
Year ending December 31, 2024 | 7,955 | |
Year ending December 31, 2025 | 7,158 | |
Year ending December 31, 2026 | 6,010 | |
Year ending December 31, 2027 | 5,352 | |
Year ending December 31, 2028 | 5,352 | |
Thereafter | 19,453 | |
NOTE 9 – ACCRUED WARRANTY EXPENSE
The Company may offer assurance type warranties on products and services that it sells. Changes in the carrying amount of accrued warranty expense are as follows:
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| Three Months Ended March 31, |
(in thousands) | 2023 | | 2022 |
Balance at beginning of period | $ | 9,568 | | | $ | 12,925 | |
Additions | 1,901 | | | 1,300 | |
Expirations and other changes | (1,358) | | | (1,467) | |
Payments | (253) | | | (193) | |
Translation and other | 43 | | | (692) | |
Balance at end of period | $ | 9,901 | | | $ | 11,873 | |
The Company accrues estimated expense included in Cost of operations on its Condensed Consolidated Statements of Operations to satisfy contractual warranty requirements when it recognizes the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In addition, the Company records specific provisions or reductions where it expects the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on the Company's consolidated financial condition, results of operations and cash flows.
NOTE 10 – RESTRUCTURING ACTIVITIES
The Company incurred restructuring charges (benefits) in each of the three months ended March 31, 2023 and 2022. The charges (benefits) primarily consist of legal fees and costs related to actions taken as part of the Company’s ongoing strategic, market-focused organizational and re-branding initiative.
The following tables summarizes the restructuring activity incurred by segment:
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| Three Months Ended March 31, | | Three Months Ended March 31, |
| 2023 | | 2022 |
(in thousands) | Total | Severance and related costs (benefit) | Other (1) | | Total | Severance and related costs (benefit) | Other(1) |
B&W Renewable segment | $ | (89) | | $ | (89) | | $ | — | | | $ | (193) | | $ | (229) | | $ | 36 | |
B&W Environmental segment | 20 | | 1 | | 19 | | | 69 | | 10 | | 59 | |
B&W Thermal segment | 3 | | 3 | | — | | | 198 | | 50 | | 148 | |
Corporate | 450 | | — | | 450 | | | 20 | | — | | 20 | |
| $ | 384 | | $ | (85) | | $ | 469 | | | $ | 94 | | $ | (169) | | $ | 263 | |
Cumulative costs to date | $ | 46,127 | | 36,813 | | 9,314 | | | | | |
(1) Other amounts consist primarily of relocation and other costs that are not considered as severance.
Restructuring liabilities are included in Other accrued liabilities on the Company's Condensed Consolidated Balance Sheets. Activity related to the restructuring liabilities is as follows:
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
Balance at beginning of period | $ | 1,615 | | | $ | 6,561 | | | | | |
Restructuring (benefit) expense | 384 | | | 94 | | | | | |
Payments | 37 | | | (749) | | | | | |
Balance at end of period | $ | 2,036 | | | $ | 5,906 | | | | | |
The payments shown above for the three months ended March 31, 2023 and 2022 relate primarily to severance costs. Accrued restructuring liabilities at March 31, 2023 and 2022 relate primarily to employee termination benefits.
NOTE 11 – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of net periodic cost (benefit) included in net (loss) income are as follows:
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| Pension Benefits | | Other Benefits |
| Three Months Ended March 31, | | | | Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | | | | | 2023 | | 2022 | | | | | | |
Interest cost | $ | 11,489 | | | $ | 6,664 | | | | | | | | | $ | 92 | | | $ | 49 | | | | | | | |
Expected return on plan assets | (11,697) | | | (14,366) | | | | | | | | | — | | | — | | | | | | | |
Amortization of prior service cost | 52 | | | 28 | | | | | | | | | 173 | | | 173 | | | | | | | |
Benefit plans, net (1) | (156) | | | (7,674) | | | | | | | | | 265 | | | 222 | | | | | | | |
Service cost included in COS (2) | 144 | | | 201 | | | | | | | | | 4 | | | 5 | | | | | | | |
Net periodic benefit cost (benefit) | $ | (12) | | | $ | (7,473) | | | | | | | | | $ | 269 | | | $ | 227 | | | | | | | |
(1) Benefit plans, net, which is presented separately in the Company's Condensed Consolidated Statements of Operations, is not allocated to the segments.
(2) Service cost related to a small group of active participants is presented within Cost of operations in the Company's Condensed Consolidated Statements of Operations and is recorded at the B&W Thermal segment level.
There were no mark-to-market ("MTM") adjustments for the Company's pension and other postretirement benefit plans during the three months ended March 31, 2023 and 2022.
The Company made contributions to its pension and other postretirement benefit plans totaling $0.3 million during the three months ended March 31, 2023 as compared to $0.4 million during the three months ended March 31, 2022.
NOTE 12 – DEBT
Senior Notes
8.125% Senior Notes
During 2021, the Company completed sales of $151.2 million aggregate principal amount of its 8.125% senior notes due 2026 (“8.125% Senior Notes”) for net proceeds of approximately $146.6 million. In addition to the completed sales, the Company issued $35.0 million of 8.125% Senior Notes to B. Riley Financial, Inc., a related party, in exchange for a deemed prepayment of its then existing Last Out Term Loan Tranche A-3. The 8.125% Senior Notes bear interest at the rate of 8.125% per annum which 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.
On March 31, 2021, the Company entered into a sales agreement with B. Riley Securities, Inc., a related party, in which it 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.
6.50% Senior Notes
During 2021, the Company completed sales of $151.4 million aggregate principal amount of its 6.50% senior notes due in 2026 (the “6.50% Senior Notes”) for net proceeds of approximately $145.8 million. 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. The 6.50% Senior Notes mature on December 31, 2026.
The components of the Company's senior notes at March 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 | (3,883) | | | (5,027) | | | (8,910) | |
Unamortized premium | 421 | | | — | | | 421 | |
Net debt balance | $ | 189,573 | | | $ | 146,413 | | | $ | 335,986 | |
Revolving Debt
On June 30, 2021, the Company entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with PNC Bank, National Association, as administrative agent (“PNC”) and a letter of credit agreement (the “Letter of Credit Agreement”) with PNC, pursuant to which PNC agreed to issue up to $110.0 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 the Company's subsidiaries as guarantors, pursuant to which it is 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”). The obligations of the Company under each of the Debt Facilities are guaranteed by certain existing and future domestic and foreign subsidiaries of the Company. B. Riley Financial, Inc. (“B. Riley”), a related party, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as described below. The Company expects to use the proceeds and letter of credit availability under the Debt Facilities for working capital purposes and general corporate purposes. The Revolving Credit Agreement matures on June 30, 2025. As of March 31, 2023, no borrowings have occurred under the Revolving Credit Agreement and under the Letter of Credit Agreement, usage consisted of $13.7 million of financial letters of credit and $93.2 million of performance letters of credit.
Each of the Debt Facilities has a maturity date of June 30, 2025. 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 Secured Overnight Financing Rate ("SOFR") rate plus 3.0%. The interest rates applicable to the Reimbursement Agreement float at a rate per annum equal to either (i) a base rate plus 6.50% or (ii) 1 or 3 month reserve-adjusted SOFR plus 7.50%. Under the Letter of Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) administrative fees of 0.75% and (ii) fronting fees of 0.25%. Under the Revolving Credit Agreement, the Company is required to pay letter of credit fees on outstanding letters of credit equal to (i) letter of credit commitment fees of 3.0% and (ii) letter of credit fronting fees of 0.25%. Under each of the Revolving Credit Agreement and the Letter of Credit Agreement, the Company is required to pay a facility fee equal to 0.375% per annum of the unused portion of the Revolving Credit Agreement or the Letter of Credit Agreement, respectively. The Company is permitted to prepay all or any portion of the loans under the Revolving Credit Agreement prior to maturity without premium or penalty. Prepayments under the Reimbursement Agreement shall be subject to a prepayment fee of 2.25% in the 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.
The Company has mandatory prepayment obligations under the Reimbursement Agreement upon the receipt of proceeds from certain dispositions or casualty or condemnation events. The Revolving Credit Agreement and Letter of Credit Agreement require mandatory prepayments to the extent of an over-advance.
The obligations under the Debt Facilities are secured by substantially all assets of the Company and each of the guarantors, in each case subject to inter-creditor arrangements. As noted above, the obligations under the Letter of Credit Facility are also secured by the cash collateral provided by MSD and any other cash collateral provider thereunder.
The Debt Documents contain certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. The Debt Documents require the Company to comply with certain financial maintenance covenants, including a quarterly fixed charge coverage test of not less than 1.00 to 1.00, a quarterly senior net leverage ratio test of not greater than 2.50 to 1.00, a non-guarantor cash repatriation covenant not to exceed $35 million at any one time, a minimum liquidity covenant of at least $30.0 million at all times, 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 the then outstanding amounts under the Debt Documents may become due and payable immediately. The Company entered into an amendment to the Revolving Credit Agreement on May 9, 2023 which allowed the Company to exclude certain acquisition related expenses from the calculation of EBITDA under the Revolving Credit Agreement, including for purposes of determining the Company's compliance with certain financial covenants thereunder. Accordingly, as of March 31, 2023 in light of the amendment to the Revolving Credit Agreement, the Company remained in compliance with all financial covenants.
In connection with the Company’s entry into the Debt Documents on June 30, 2021, 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 the Company’s 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 the Company’s obligations under the Reimbursement Agreement. Under a fee letter with B. Riley, the Company agreed to pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty. The Company entered into a reimbursement agreement with B. Riley governing the Company’s obligation to reimburse B. Riley to the extent the B. Riley Guaranty is called upon by the agent or lenders under the Reimbursement Agreement.
On November 7, 2022 the Company executed an amendment to its Debt Documents with MSD which modified certain financial maintenance covenants for future periods beginning with fiscal quarters ending on December 31, 2022. The Fixed Charge Coverage Ratio was amended to 0.55:1.0 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. 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, the Company also executed an amendment to its Debt Documents 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 addition, the interest rates applicable to the Reimbursement Agreement float at a rate per annum are equal to either (i) a base rate plus 9.0% or (ii) 1 or 3-month reserve-adjusted SOFR plus 10.0%. In December 2022, the Company also deposited $10.0 million with PNC for Letter of Credit collateral to enable MSD to reduce their collateral requirement by $10.0 million.
On March 14, 2023, the Company, with certain subsidiaries of the Company 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.
On May 9, 2023 the Company further amended the Amended Revolving Credit Agreement. See Note 23 for further details.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain of the Company's subsidiaries, primarily outside of the United States, have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees outside of the Company's Letter of Credit Agreement as of March 31, 2023 was $53.0 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 $32.4 million as of March 31, 2023. Of the outstanding letters of credit issued under the Letter of Credit Agreement, $68.4 million are subject to foreign currency revaluation.
The Company has also posted surety bonds to support contractual obligations to customers relating to certain contracts. The Company utilizes 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 the Company fail to perform its obligations under its applicable contracts. The Company, and certain of its 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 its contracting activity. As of March 31, 2023, bonds issued and outstanding under these arrangements in support of its contracts totaled approximately $341.7 million. The aggregate value of the letters of credit backstopping surety bonds was $14.2 million.
The Company's ability to obtain and maintain sufficient capacity under its current Debt Facilities is essential to allow it to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, the Company's ability to support contract security requirements in the future will be diminished.
Other Indebtedness - Loans Payable
As of March 31, 2023, the Company had Loans payable of $15.7 million, net of debt issuance costs of $0.6 million, of which $4.3 million is classified as current and $11.4 million as long term loans payable on the Company's Consolidated Balance Sheet. Included in these amounts, the company had approximately $13.1 million, net of debt issuance costs of $0.6 million, related to sale-leaseback financing transactions.
NOTE 13 – PREFERRED STOCK
In May 2021, the Company completed a public offering of its 7.75% Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock") pursuant to an underwriting agreement (the “Underwriting Agreement”) between the Company and B. Riley Securities, Inc. At the closing, the Company issued to the public 4,444,700 shares of its Preferred Stock, at an offering price of $25.00 per share for net proceeds of approximately $106.4 million after deducting underwriting discounts, commissions but before expenses. The Preferred Stock has a par value of $0.01 per share and is perpetual and has no maturity date. The Preferred Stock has a cumulative cash dividend, when and as if declared by the Company's Board of Directors, at a rate of 7.75% per year on the liquidation preference amount of $25.00 per share and payable quarterly in arrears.
The Preferred Stock ranks, as to dividend rights and rights as to the distribution of assets upon the Company's liquidation, dissolution or winding-up: (1) senior to all classes or series of the Company's 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 the Company's capital stock expressly designated as ranking on parity with the Preferred Stock; (3) junior to any future class or series of the Company's capital stock expressly designated as ranking senior to the Preferred Stock; and (4) junior to all of the Company's existing and future indebtedness.
The Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. The Company will pay cumulative cash dividends on the Preferred Stock when, and if, declared by its Board of Directors, only out of funds legally available for payment of dividends. Dividends on the Preferred Stock will accrue on the stated amount of $25.00 per share of the Preferred Stock at a rate per annum equal to 7.75% (equivalent to $1.9375 per year), payable quarterly in arrears. Dividends on the Preferred Stock declared by the Company's Board of Directors will be payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year.
During the three months ending March 31, 2023, the Company's Board of Directors approved dividends totaling $3.7 million for holders of the Preferred Stock. There were no cumulative undeclared dividends of the Preferred Stock at March 31, 2023.
NOTE 14 – COMMON STOCK
On May 19, 2022, the stockholders of the Company, upon the recommendation of the Company’s 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 the Company’s common stock authorized for award grants under the 2021 Plan from 1,250,000 shares to 5,250,000 shares. The 2021 Plan replaced the Company’s 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 Company 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.
NOTE 15 –INTEREST EXPENSE AND SUPPLEMENTAL CASH FLOW INFORMATION
Interest expense in the Company's Condensed Consolidated Financial Statements consisted of the following components:
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | | | |
Components associated with borrowings from: | | | | | | | | | |
Senior notes | $ | 6,328 | | | $ | 6,216 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Components associated with amortization or accretion of: | | | | | | | | | |
Revolving Credit Agreement | 984 | | | 1,060 | | | | | | | |
Senior notes | 619 | | | 643 | | | | | | | |
| | | | | | | | | |
| 1,603 | | | 1,703 | | | | | | | |
| | | | | | | | | |
Components associated with interest from: | | | | | | | | | |
Lease liabilities | 724 | | | 708 | | | | | | | |
Other interest expense | 4,007 | | | 2,640 | | | | | | | |
| 4,731 | | | 3,348 | | | | | | | |
| | | | | | | | | |
Total interest expense | $ | 12,662 | | | $ | 11,267 | | | | | | | |
The following table provides a reconciliation of Cash, cash equivalents and Short-term and Long-term restricted cash reporting within the Company's Condensed Consolidated Balance Sheets and in the Condensed Consolidated Statements of Cash Flows:
| | | | | | | | | | | |
(in thousands) | March 31, 2023 | | December 31, 2022 |
Held by foreign entities | $ | 39,095 | | | $ | 46,640 | |
Held by U.S. entities | 23,665 | | | 30,088 | |
Cash and cash equivalents | 62,760 | | | 76,728 | |
| | | |
Reinsurance reserve requirements | 506 | | | 447 | |
Project indemnity collateral (1) | — | | | 5,723 | |
Bank guarantee collateral | 2,107 | | | 2,072 | |
Letters of credit collateral (2) | 11,196 | | | 11,193 | |
Hold-back for acquisition purchase price (3) | 3,102 | | | 5,900 | |
Escrow for long-term project (4) | 11,397 | | | 11,397 | |
Current and Long-term restricted cash and cash equivalents | 28,308 | | | 36,732 | |
Total cash, cash equivalents and restricted cash shown in the Condensed Consolidated Statements of Cash Flows | $ | 91,068 | | | $ | 113,460 | |
(1) The Company released $5.7 million in project indemnity restricted cash collateral for a letter of credit agreement during the first quarter of 2023.
(2) The Company paid an additional $10.0 million in December, 2022 for letter of credit collateral which is reflected in Long-term restricted cash on the Company's Consolidated Balance Sheets. The remainder of the letters of credit are reflected within Restricted cash and cash equivalents.
(3) The purchase price for Fossil Power Systems ("FPS") was $59.2 million, and included an initial hold-back of $5.9 million which was included in Current restricted cash and cash equivalents and Other accrued liabilities on the Company's Condensed Consolidated Balance Sheets. As of March 31, 2023, the initial payment was made in the amount of $2.8 million and the remainder 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.
(4) On December 15, 2021, the Company entered into an agreement to place $11.4 million in an escrow account as security to ensure project performance. On April 30, 2023, $2.5 million of the total amount held in escrow will be reclassified from Long-Term restricted cash to Current restricted cash in anticipation of the initial payment on April 20, 2024. The remaining amount of $8.9 million will be reclassified from Long-term restricted cash to Current restricted cash on September 30, 2024, with a scheduled final settlement on September 30, 2025.
The following cash activity is presented as a supplement to the Company's Condensed Consolidated Statements of Cash Flows and is included in Net cash used in operating activities:
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2023 | | 2022 | | |
Income tax payments, net | $ | 1,551 | | | $ | 471 | | | |
| | | | | |
Interest payments - 8.125% Senior Notes due 2026 | $ | 3,921 | | | $ | 3,783 | | | |
Interest payments - 6.50% Senior Notes due 2026 | 2,461 | | | 2,926 | | | |
| | | | | |
| | | | | |
Total cash paid for interest | $ | 6,382 | | | $ | 6,709 | | | |
NOTE 16 – PROVISION FOR INCOME TAXES
In the three months ended March 31, 2023, income tax expense was $0.5 million, resulting in an effective tax rate of (4.1)%. In the three months ended March 31, 2022, income tax expense was $1.2 million, resulting in an effective tax rate of (16.5)%.
The Company's effective tax rate for the three months ended March 31, 2023 is not reflective of the U.S. statutory rate due to valuation allowances against certain net deferred tax assets and discrete items. The Company has unfavorable discrete items of $0.2 million for the three months ended March 31, 2023, which primarily represent withholding taxes. The Company had unfavorable discrete items of $0.4 million for the three months ended March 31, 2022, which primarily represented withholding taxes.
The Company is subject to federal income tax in the United States and numerous countries that have statutory tax rates different than the United States federal statutory rate of 21%. The most significant of these foreign operations are located in Canada, Denmark, Germany, Italy, Mexico, Sweden, and the United Kingdom, with effective tax rates ranging between approximately 19% and 30%. The Company provides for income taxes based on the tax laws and rates in the jurisdictions where it conducts operations. These jurisdictions may have regimes of taxation that vary in both nominal rates and the basis on which these rates are applied. The Company's consolidated effective income tax rate can vary from period to period due to these foreign income tax rate variations, changes in the jurisdictional mix of its income, and valuation allowances.
NOTE 17 – CONTINGENCIES
Litigation Relating to Boiler Installation and Supply Contract
On December 27, 2019, a complaint was filed against Babcock & Wilcox by P.H. Glatfelter Company (“Glatfelter”) in the United States District Court for the Middle District of Pennsylvania, Case No. 1:19-cv-02215-JPW, alleging claims of breach of contract, fraud, negligent misrepresentation, promissory estoppel and unjust enrichment (the “Glatfelter Litigation”). The complaint alleges damages in excess of $58.9 million. On March 16, 2020 the Company filed a motion to dismiss, and on December 14, 2020 the court issued its order dismissing the fraud and negligent misrepresentation claims and finding that, in the event that parties’ contract is found to be valid, Plaintiffs’ claims for damages will be subject to the contractual cap on liability (defined as the $11.7 million purchase price subject to certain adjustments). On January 11, 2021, the Company filed its answer and a counterclaim for breach of contract, seeking damages in excess of $2.9 million. The Company intends to continue to vigorously litigate the action. However, given the stage of the litigation, it is too early to determine if the outcome of the Glatfelter Litigation will have a material adverse impact on The Company's consolidated financial condition, 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 the Company’s directors (current and former), executives and significant stockholders (collectively, “Defendants”) and the Company (as a nominal defendant). The action was filed in the Delaware Court of Chancery and is captioned Parker v. Avril, et al., C.A. No. 2020-0280-PAF (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 the Company 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 the Company. Of the total settlement amount, the Company 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 shareholders of the Company, 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 the Company 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 the Company. The proposed settlement, which remains subject to court approval, would resolve 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. The settlement of this matter remains subject to court approval and the amount to be paid by the Company is fully accrued and reflected in Other accrued liabilities on the Company's Condensed Consolidated Balance Sheets at March 31, 2023. The Company has also accrued a probable loss recovery related to settlement proceeds of $3.4 million in Other Accounts Receivable on the Company's Condensed Consolidated Balance Sheets and in Advisory fees and settlement costs in the Company's Condensed Consolidated Statements of Operations at March 31, 2023. The Court has scheduled a hearing on July 10, 2023 to consider final approval of the settlement.
Russian Invasion of Ukraine
The Company does not currently have contracts directly with Russian entities or businesses and it currently does not conduct business in Russia directly. It is believed that the Company’s only involvement with Russia or Russian entities, involves sales of its products with a trade receivable in the amount of approximately $3.1 million by a wholly-owned Italian subsidiary of the Company to non-Russian counterparties who may resell the Company's products to Russian entities or perform services in Russia using its products. The Company has 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 the Company's subsidiary’s rights and responsibilities under the contracts and could result in potential losses to the Company.
Other
Due to the nature of B&W's business, the Company is, from time to time, involved in routine litigation or subject to disputes or claims related to its business activities, including, among other things: performance or warranty-related matters under the Company's customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on prior experience, the Company does not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
NOTE 18 – COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are generally reclassified and recognized in the Condensed Consolidated Statements of Operations once they are realized. The changes in the components of AOCI, net of tax, for the first, second and third quarters of 2023 and 2022 were as follows:
| | | | | | | | | | | | |
(in thousands) | Currency translation loss | | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2022 | $ | (70,333) | | | $ | (2,453) | | $ | (72,786) | |
Other comprehensive income before reclassifications | 4,592 | | | 223 | | 4,815 | |
Net other comprehensive (loss) income | 4,592 | | | 223 | | 4,815 | |
Balance at March 31, 2023 | $ | (65,741) | | | $ | (2,230) | | $ | (67,971) | |
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(in thousands) | Currency translation loss | | Net unrecognized loss related to benefit plans (net of tax) | Total |
Balance at December 31, 2021 | $ | (55,499) | | | $ | (3,323) | | $ | (58,822) | |
Other comprehensive loss before reclassifications | (4,285) | | | — | | (4,285) | |
Reclassified from AOCI to net (loss) income | — | | | 593 | | 593 | |
Net other comprehensive (loss) income | (4,285) | | | 593 | | (3,692) | |
Balance at March 31, 2022 | $ | (59,784) | | | $ | (2,730) | | $ | (62,514) | |
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The amounts reclassified out of AOCI by component and the affected Condensed Consolidated Statements of Operations line items are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
AOCI component | Line items in the Condensed Consolidated Statements of Operations affected by reclassifications from AOCI | Three Months Ended March 31, | | |
2023 | | 2022 | | | | | | |
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Pension and post retirement adjustments, net of tax | Benefit plans, net | 223 | | | 593 | | | | | | | |
| Net Income (Loss) | $ | 223 | | | $ | 593 | | | | | | | |
NOTE 19 – FAIR VALUE MEASUREMENTS
The following tables summarize the Company's financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic, Fair Value Measurements and Disclosures).
| | | | | | | | | | | | |
(in thousands) | | | | |
Available-for-sale securities | March 31, 2023 | Level 1 | Level 2 | |
Corporate notes and bonds | $ | 4,203 | | $ | 4,203 | | $ | — | | |
Mutual funds | 633 | | — | | 633 | | |
United States Government and agency securities | 4,108 | | 4,108 | | — | | |
Total fair value of available-for-sale securities | $ | 8,944 | | $ | 8,311 | | $ | 633 | | |
| | | | | | | | | | | | |
(in thousands) | | | | |
Available-for-sale securities | 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 | | |
Available-For-Sale Securities
The Company's investments in available-for-sale securities are presented in Other assets on its Condensed Consolidated Balance Sheets with contractual maturities ranging from 0-5 years.
Senior Notes
See Note 12 above for a discussion of the Company's senior notes. The fair value of the senior notes is based on readily available quoted market prices as of March 31, 2023.
| | | | | | | | | |
(in thousands) | March 31, 2023 | |
Senior Notes | Carrying Value | Estimated Fair Value | |
8.125% Senior Notes due 2026 ('BWSN') | $ | 193,035 | | $ | 190,178 | | |
6.50% Senior Notes due 2026 ('BWNB') | $ | 151,440 | | $ | 131,268 | | |
Other Financial Instruments
The Company used the following methods and assumptions in estimating its fair value disclosures for its other financial instruments:
•Cash and cash equivalents and restricted cash and cash equivalents. The carrying amounts that the Company has reported in the accompanying Condensed Consolidated Balance Sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
•Revolving Debt. The Company bases the fair values of debt instruments on quoted market prices. Where quoted prices are not available, the Company bases the fair values on Level 2 inputs such as the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of the Company's Revolving Debt approximated their carrying value at March 31, 2023.
•Warrants. The fair value of the warrants was established using the Black-Scholes option pricing model value approach.
NOTE 20 – RELATED PARTY TRANSACTIONS
The Company believes 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 approximately 30.8% of the Company's outstanding common stock as of March 31, 2023.
On July 20, 2022, BRF Investments, LLC, an affiliate of B. Riley, a related party exercised 1,541,666.7 warrants to purchase 1,541,666 shares of the Company's common stock at a price per share of $0.01 pursuant to the terms of the warrant agreement between the Company and B. Riley dated July 23, 2019.
On July 28, 2022, the Company participated in the sale process of Hamon Holdings Corporation ("Hamon") for which B. Riley Securities, Inc., a related party to the Company, has been engaged as Hamon’s investment banker and to serve as advisor to Hamon through a Chapter 11 363 Asset Sale of Hamon’s entire United States business or potential carve-out of any of its four main subsidiaries. The Company was the successful bidder for the assets of one of those subsidiaries, Hamon Research-Cottrell, Inc. a major provider of air pollution control technology, for approximately $2.9 million.
The Company entered into an agreement with BRPI Executive Consulting, LLC, an affiliate of B. Riley, on November 19, 2018 and amended the agreement on November 9, 2020 to retain the services of Mr. Kenny Young, to serve as its Chief Executive Officer until December 31, 2023, unless terminated by either party with thirty days written notice. Under this agreement, payments are $0.75 million per annum, paid monthly. Subject to the achievement of certain performance objectives as determined by the Compensation Committee of the Board, a bonus or bonuses may also be earned and payable to BRPI Executive Consulting, LLC. Total fees associated with B. Riley related to the services of Mr. Kenny Young were $0.2 million and $0.2 million for the three months ended March 31, 2023 and March 31, 2022, respectively.
As described in Note 17, 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. Of the total $9.5 million settlement amount, the Company 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 customary settlement costs and expenses, will be paid to shareholders of the Company, excluding any Defendant in the Stockholder Litigation. The settlement of this matter remains subject to court approval and the amount to be paid by the Company is fully accrued at March 31, 2023.
The public offering of the Company's 8.125% Senior Notes in February 2021, as described in Note 12, was conducted pursuant to an underwriting agreement dated February 10, 2021, between the Company and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date on February 12, 2021, the Company paid B. Riley Securities, Inc. $5.2 million for underwriting fees and other transaction cost related to the 8.125% Senior Notes offering.
The public offering of the Company's common stock, as described in Note 14, was conducted pursuant to an underwriting agreement dated February 9, 2021, between the Company and B. Riley Securities, Inc., as representative of the several underwriters. Also on February 12, 2021, the Company paid B. Riley Securities, Inc. $9.5 million for underwriting fees and other transaction costs related to the offering.
On February 12, 2021, the Company and B. Riley entered into the Exchange Agreement pursuant to which the Company 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 its existing Tranche A term loan with B. Riley Financial in the Exchange, as described in Note 12.
On March 31, 2021, the Company entered into a sales agreement with B. Riley Securities, Inc., a related party, in which the Company may sell, from time to time, up to an aggregated principal amount of $150.0 million of 8.125% Senior Notes due 2026 to or through B. Riley Securities, Inc., as described in Note 12. As of March 31, 2023, the Company paid B. Riley Securities, Inc. $0.6 million for underwriting fees and other transaction costs related to the offering of which $0.1 million has been paid for the three months ended March 31, 2023.
The public offering of the Company's 7.75% Series A Cumulative Perpetual Preferred Stock, as described in Note 13, was conducted pursuant to an underwriting agreement dated May 4, 2021, between the Company and B. Riley Securities, Inc., as representative of several underwriters. At the closing date on May 2021, the Company paid B. Riley Securities, Inc. $4.3 million for underwriting fees and other transaction cost related to the Preferred Stock offering.
On May 26, 2021, the Company completed the additional sale of 444,700 shares of its Preferred Stock, related to the grant to the underwriters, as described in Note 13, and paid B. Riley Securities, Inc. $0.4 million for underwriting fees in conjunction with the transaction.
On June 1, 2021, the Company issued 2,916,880 shares of its 7.75% Series A Cumulative Perpetual Preferred Stock and paid $0.4 million in cash due to B. Riley, a related party, in exchange for a deemed prepayment of $73.3 million of the Company's then existing Last Out Term Loans and paid $0.9 million in cash for accrued interest, as described in Note 13.
On June 30, 2021, the Company entered into new Debt Facilities, as described in Note 12. In connection with the its entry into the Debt Facilities, B. Riley Financial, Inc., an affiliate of B. Riley, has provided a guaranty of payment with regard to the Company’s obligations under the Reimbursement Agreement, as describe in Note 12. Under a fee letter with B. Riley, the Company shall pay B. Riley $0.9 million per annum in connection with the B. Riley Guaranty.
On July 7, 2021, the Company entered into a sales agreement with B. Riley Securities, Inc., a related party, in which the Company may sell, from time to time, up to an aggregated principal amount of $76.0 million of Preferred Stock to or through B. Riley Securities, Inc., as described in Note 13. As of March 31, 2023, the Company paid B. Riley Securities, Inc. $0.2 million for underwriting fees and other transaction costs related to the offering.
The public offering of the Company's 6.50% Senior Notes in December 2021, as described in Note 12, was conducted pursuant to an underwriting agreement dated December 8, 2021, between the Company and B. Riley Securities, Inc., an affiliate of B. Riley, as representative of several underwriters. At the closing date on December 13, 2021, the Company paid B. Riley Securities, Inc. $5.5 million for underwriting fees and other transaction cost related to the 6.50% Senior Notes offering.
On December 17, 2021, B. Riley Financial, Inc. entered into a General Agreement of Indemnity (the "Indemnity Agreement"), between the Company and AXA-XL and or 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 the Company's proposed performance on a specified project. In consideration of B. Riley's execution of the Indemnity Agreement, the Company 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.
On December 28, 2021, the Company received a notice that the underwriters of the 6.50% Senior Notes had elected to exercise their overallotment option for an additional $11.4 million in aggregate principal amount of the Senior Notes. At the closing date on December 30, 2021, the Company paid B. Riley Securities, Inc. $0.5 million for underwriting fees and other transaction cost related to the 6.50% Senior Notes overallotment.
NOTE 21 – ACQUISITIONS AND DIVESTITURES
Acquisitions
Fossil Power Systems
On February 1, 2022, the Company acquired 100% ownership of Fossil Power Systems, Inc. (“FPS”) for approximately $59.2 million. The consideration paid for FPS 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 Company's Condensed 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 quarter ended March 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 Company's B&W Thermal segment.
The Company finalized the fair values during the quarter primarily using the discounted cash flow method for the assets acquired and liabilities assumed.
Optimus Industries
On February 28, 2022, the Company acquired 100% ownership of Optimus Industries, LLC ("Optimus Industries") for approximately $19.2 million. Optimus Industries 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 Tulsa, Oklahoma and Chanute, Kansas. Optimus Industries is reported as part of the Company's B&W Thermal segment.
The Company finalized the fair values during the quarter primarily using the discounted cash flow method for the assets acquired and liabilities assumed.
Hamon Holdings Corporation Industries
On July 28, 2022, the Company acquired certain assets of Hamon Holdings Corporation ("Hamon Holdings") through a competitive sale process, in connection with B. Riley Securities, Inc., a related party to the Company, had been 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 its four main subsidiaries. B&W was the successful bidder for certain assets of one of those subsidiaries, Hamon Research-Cottrell, Inc., ("Hamon") a major provider of air pollution control technology, for approximately $2.9 million.
Purchase Price Allocations
The purchase price allocation to assets acquired and liabilities assumed in the acquisitions of Fossil Power Systems and Optimus Industries are detailed in following tables.
| | | | | | | | | | | |
| Fossil Power Systems |
(in thousands) | Estimated Acquisition Date Fair Value | Measurement Period Adjustments | Final Allocation(2) |
Cash | $ | 1,869 | | $ | — | | $ | 1,869 | |
Accounts receivable | 2,624 | | — | | 2,624 | |
Contracts in progress | 370 | | — | | 370 | |
Other current assets | 3,228 | | — | | 3,228 | |
Property, plant and equipment, net | 178 | | — | | 178 | |
Goodwill(1) | 35,392 | | 270 | | 35,662 | |
Other assets | 25,092 | | — | | 25,092 | |
Right of use assets | 1,115 | | — | | 1,115 | |
Current liabilities | (1,792) | | (18) | | (1,810) | |
Advance billings on contracts | (645) | | — | | (645) | |
Non-current lease liabilities | (989) | | — | | (989) | |
Non-current liabilities | (7,384) | | (106) | | (7,490) | |
Net acquisition cost | $ | 59,058 | | $ | 146 | | $ | 59,204 | |
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the FPS acquisition, goodwill represents
FPS's ability to significantly expand services among new customers by leveraging cross-selling opportunities and recognizing general cost synergies.
(2) The Company's purchase price allocation was final as of March 31, 2023.
| | | | | | | | | | | |
| Optimus Industries |
(in thousands) | Estimated Acquisition Date Fair Value | Measurement Period Adjustments | Final Allocation(2) |
Cash | $ | 5,338 | | $ | — | | $ | 5,338 | |
Accounts receivable | 5,165 | | — | | 5,165 | |
Contracts in progress | 2,598 | | — | | 2,598 | |
Other current assets | 2,115 | | — | | 2,115 | |
Property, plant and equipment, net | 2,441 | | 5,178 | | 7,619 | |
Goodwill(1) | 11,081 | | (7,274) | | 3,807 | |
Other assets | 12 | | 2,319 | | 2,331 | |
Right of use assets | 94 | | 11 | | 105 | |
Current liabilities | (4,240) | | — | | (4,240) | |
Advance billings on contracts | (3,779) | | — | | (3,779) | |
Non-current lease liabilities | (2) | | — | | (2) | |
Non-current liabilities | (1,858) | | — | | (1,858) | |
Net acquisition cost | $ | 18,965 | | $ | 234 | | $ | 19,199 | |
(1) Goodwill is calculated as the excess of the purchase price over the net assets acquired. With respect to the Optimus Industries acquisition, goodwill represents Optimus Industries ability to significantly expand future customer relationships which are not in place today and recognize general cost synergies.
(2) The Company's purchase price allocation was final as of March 31, 2023.
Intangible assets are included in other assets above and consists of the following:
| | | | | | | | | | | | | | | | | |
| Fossil Power Systems | | Optimus Industries |
| Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life | | Estimated Acquisition Date Fair Value | Weighted Average Estimated Useful Life |
Customer Relationships | $ | 20,451 | | 9 years | | 2,100 | | 10 years |
Tradename | 787 | | 14 years | | 220 | | 3 years |
Patented Technology | 578 | | 12 years | | — | | — | |
Unpatented Technology | 3,276 | | 12 years | | — | | — | |
Total intangible assets(1) | $ | 25,092 | | | | $ | 2,320 | | |
(1) Intangible assets were valued using the income approach, which includes significant assumptions around future revenue growth, profitability, discount rates and customer attrition. Such assumptions are classified as level 3 inputs within the fair value hierarchy.
Divestitures
On June 30, 2022 the Company sold development rights related to a future solar project for $8.0 million. In conjunction with the sale, the Company recognized a $6.2 million gain on sale. The Company recorded $4.7 million in outstanding receivables related to the transaction within Accounts receivable – other in the Company's Condensed Consolidated Balance Sheets at March 31, 2023.
NOTE 22 – NEW ACCOUNTING PRONOUNCEMENTS AND STANDARDS
The Company adopted the following accounting standard during the first three months of 2023:
In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326: Financial Instruments - Credit Losses. This update is an amendment to the new credit losses standard, ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that was issued in June 2016 and clarifies that operating lease receivables are not within the scope of Topic 326. The new credit losses standard changes the accounting for credit losses for certain instruments. The new measurement approach is based on expected losses, commonly referred to as the current expected credit loss ("CECL") model, and applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investment in leases, and reinsurance and trade receivables, as well as certain off-balance sheet credit exposures, such as loan commitments. The standard also changes the impairment model for available-for-sale debt securities. The provisions of this standard will primarily impact the allowance for doubtful accounts on the Company's trade receivables, contracts in progress, and potentially its impairment model for available-for-sale debt securities (to the extent we have any upon adoption). For public, smaller reporting companies, this standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The impact of adopting this standard on the Company's Consolidated Financial Statements was immaterial.
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 amendment in this update is effective for public business entities in January 2023; all other entities have an additional year to adopt. Early adoption is permitted; however, if the new guidance is adopted in an interim period, it is required to be applied retrospectively to all business combinations within the year of adoption. This amendment is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The impact of adopting this standard on the Company's Consolidated Financial Statements was immaterial.
There were no new accounting standards not yet adopted that during the quarter ended March 31, 2023.
NOTE 23 – SUBSEQUENT EVENTS
On May 9, 2023 the Company entered into Amendment No. 3 to the Revolving Credit Agreement which allowed the Company to exclude certain expenses from the calculation of EBITDA under the Revolving Credit Agreement, including for purposes of determining the Company’s compliance with certain financial covenants thereunder.