Babcock & Wilcox A/S

The end-market demand for our products is strong. The markets in Europe, North and South America and Asia are showing increasing interest in renewable power generation projects from waste and biomass fuel sources, which are well aligned with our products and services.
We are confident in our leading technology, which is in high demand in all markets. In 2021, we continued to focus on our core technologies and on transitioning into a fully integrated and efficient global projects and engineering execution model leveraging our knowledge and expertise with the rest of the global B&W operations. At the same time, we continued to focus on growing our service and maintenance business in Europe. Our sales and growth efforts were to some extent slowed by the COVID-19 pandemic; however, while we cannot fully predict how the pandemic will continue to affect the timing of new project bookings, we continue to see strong demand for our renewable technologies. As a result, we expect sales to increase as we continue to pursue our growth strategy.
Our parent company, B&W, has provided considerable support through the past years as we worked to complete six projects that negatively impacted our financial results. As of December 31, 2021, only punch list or agreed remediation items remain, some of which are expected to be performed during the customers' scheduled maintenance outages in 2022.
We have handed over well-performing plants to our customers, and these plants function as showcases for future customers and offer longer-term opportunities for our service and O&M business.
A more detailed project status summary is contained in our parent company's 10-K to be found at lnvestors.babcock.com.
The shareholders’ support letter provided in 2017, in which B&W committed to fund our company with the cash required to meet our obligations and allow the business to continue as a going concern, has been extended through at minimum December 2023 (see note 2).
Profit/loss for the year in relation to expected developments
Our full-year 2021 net revenues were DKK 388 million, which is a decrease of DKK 49 million compared to the prior year due to a reduction in large project activities. Operating profit was reduced from a profit of DKK 37 million to a loss of DKK 42 millions. We have remained focused on serving our customers, making important decisions to better position our businesses for the future, and driving improved financial performance. The year-end results reflected a loss of DKK 48 million.
We generally recognize revenues and related costs from long-term contracts on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as work progresses and reflect adjustments in profit proportionate to the percentage of completion in the periods in which we revise estimates to complete the contract. To the extent that these adjustments result in a reduction of previously reported profits from a contract, we recognize a charge against current earnings. If a contract is estimated to result in a loss, such loss is recognized in the current period as a charge to earnings and the full loss is accrued on our balance sheet, which results in no expected gross profit from the loss contract in the future unless there are revisions to our estimated revenues or costs of completion in periods following the accrual of the contract loss. Changes in the estimated results of our percentage-of-completion contracts are necessarily based on information available at the time of the estimates and are based on judgments that are inherently uncertain, as they are predictive in nature. As with all estimates to complete used to measure contract revenue and costs, actual results can and do differ from our estimates made over time.
Insurance recoveries and sub-contractor claims
We have collected on claims in 2021 and we continue to pursue insurance recoveries and sub-contractor claims related to the previous loss-making projects.
Restructuring and growth activities
In May 2020, we aligned under The Babcock & Wilcox Company (B&W) in a global company structure for all B&W operations. Under this structure, sales, engineering, project management, procurement, manufacturing, and other project-related support is provided through a globally matrixed structure. The structure helps us better address workload ebbs and flows, while also allowing employees across the global B&W operations to expand their skills and gain greater experience in supporting all of B&W’s product line areas, thus increasing overall manpower flexibility.
Throughout 2021, we continued to identify and implement multiple actions to proactively improve our cost structure. Key actions included workforce reductions to align with the new global structure and our activity levels, other selling, general and administrative cost reductions as well as other process improvements. These actions have continued into 2021 and were focused on productivity and efficiency gains to enhance profitability and cash flow going forward.
Conclusion
The 2-year main warranty phases for the European EPC loss contracts have expired in 2021, and we thus now have these loss contracts behind us.
Based on the new structure for bidding and executing new-build projects, and the continued cost-savings, management expects improved results going forward.