The following discussion provides an analysis of the results of our continuing operations, an overview of our liquidity and capital resources and other items related to our business. It contains forward-looking statements about our future revenue, operating results, and expectations. See "Cautionary Note Regarding Forward-Looking Statements" and "Part I-Item 1A. Risk Factors" for a discussion of the risks, assumptions and uncertainties affecting these statements. This discussion and analysis should be read in conjunction with Part I of this Form 10-K as well as our consolidated financial statements and notes thereto included in this Form 10-K. Overview Unless otherwise specified, the financial information and discussion in this Form 10-K are as ofDecember 31, 2022 and are based on our continuing operations; they exclude any results of our discontinued operations. Please refer to "Note 5-Changes in Business" to the consolidated financial statements included in this Form 10-K for additional information on our discontinued operations. In 2018, we implemented major cost reduction initiatives to reduce our overhead costs, including restructuring and consolidating our corporate functions, and began working on a comprehensive strategic plan to grow and improve our business, which was finalized in early 2019. Our strategy has been focused on a comprehensive plan to grow and improve our operations, strengthen our core competencies, aggressively manage working capital, and reduce costs in order to improve liquidity and reduce debt. In 2020, we refinanced our new credit facilities which included senior secured term loan facilities in an aggregate amount of up to$50.0 million (collectively, the "Term Loan") and a senior secured asset-based revolving line of credit of up to$30.0 million (the "Revolving Credit Facility"). The Term Loan and Revolving Credit Facility mature onDecember 16, 2025 . In connection with the refinancing, the Company repaid the outstanding balance of the prior facilities and all interest in full. For additional information, please refer to "Note 11-Debt" to the consolidated financial statements included in this Form 10-K. During 2021, we changed our corporate management structure to reinforce our customer focus and strengthen operations, and among other changes, added a Chief Operating Officer, an Executive Vice President of Business Development, and a Vice President of Safety and our Corporate Controller was appointed Chief Financial Officer. Additionally, in 2022, the Company promoted its Senior Vice President of Energy and Industrial to Executive Vice President of Business Development. We are enhancing our management methods to provide additional process capabilities and focus on customer relations and sales. In early 2022, we lost a major contract with a customer inCanada , and as a result, we exited the Canadian market. This customer contributed 12% of our revenue in 2021. In addition, in early 2022, we lost a major multi-year contract with a customer within the nuclear decommissioning market contributing to a loss of approximately$374.6 million in backlog in the years 2022 through 2029. We continue to target other growth opportunities within our end markets with greater customer focus and strengthened operational effectiveness. Please refer to Item 1. Business under "Backlog" included in this Form 10-K for additional information. In the third quarter of 2022, management assessed the Company's financial condition, resulting in the Company developing a liquidity plan to alleviate the substantial doubt about the Company's ability to continue as a going concern during 2023. As a result of the Company being unable to comply with its debt covenants, the Company amended its Term Loan and Revolving Credit Facility and entered into the Wynnefield Notes during the third and fourth quarter of 2022 and the first quarter of 2023. 31
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In addition, we have engaged an investment banking firm to explore a range of strategic alternatives for the Company to maximize shareholder value, which could include a potential sale. We have not set a timetable for the conclusion of this review, nor made decisions for further actions or possible strategic alternatives. There can be no assurance that the exploration of strategic alternatives will result in the identification or consummation of any transaction, or that any strategic alternative identified, evaluated and consummated will provide the anticipated benefits or otherwise preserve or enhance stockholder value. If the Company's liquidity improvement plan and theJanuary 9, 2023 andFebruary 24, 2023 amendments to the Term Loan and the Revolving Credit Facility do not have the intended effect of addressing the Company's liquidity problems through its review of strategic alternatives, including if the Company is unable to obtain future advances under the discretionary delayed draw term loans, the Company will continue to consider all strategic alternatives, including restructuring or refinancing its debt, seeking additional debt or equity capital, reducing or delaying the Company's business activities and strategic initiatives, or selling assets, other strategic transactions and/or other measures, including obtaining relief under theU.S. Bankruptcy Code. The Company's continuation as a going concern is dependent upon its ability to successfully implement its liquidity improvement plan and obtain necessary debt or equity financing to address the Company's liquidity challenges and continue operations until the Company returns to generating positive cash flow or is otherwise able to execute on a transaction pursuant to its review of strategic alternatives, including a potential sale of the Company. We remain dedicated to pursuing the best course of action to provide the highest returns for our shareholders. For additional information, please refer to "Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and "Note 2-Liquidity", "Note 11-Debt" and "Note 18-Subsequent Events" to the consolidated financial statements included in this Form 10-K.
Industry Trends and Outlook
Electric Power Generation - We are primarily focused on nuclear and fossil power generation. We are involved in new build power generation facilities, maintenance of existing facilities and the decommissioning of retired facilities. Net electricity generation in theU.S. increased approximately 3.3% in 2022 compared to 2021 according to the EIA. The EIA projects electricity generation will decrease by 2.0% in 2023, then rise by 2.0% in 2024. Nuclear New Builds - In nuclear power generation, we are heavily involved in the construction of the only new nuclear reactors being built in theU.S. , Plant Vogtle Units 3 and 4. In 2017, we formed a limited liability company withBechtel Power Corporation , a global leader in EPC and project management,Richmond County Constructors, LLC ("RCC"). RCC operates as construction subcontractor toBechtel Power Corporation , which has been selected as the prime construction contractor for the Plant Vogtle Units 3 and 4. RCC provides construction craft labor for the project. Williams is a 25% member in RCC. We also have won additional scope of work outside RCC and are currently bidding on other opportunities for direct scope of work. Plant Vogtle Units 3 and 4 are expected to become operative in 2023. In the future, we believe the nuclear generation market will provide innovative developments and high growth opportunities. According to Fitch research, the future of nuclear power capacity additions within theU.S. will come from the development of plants using small modular reactor ("SMR") technologies. SMR technology has several benefits in comparison to traditional nuclear power facilities given their smaller size, including that they require a reduced footprint and lower capital investments and offer several safety benefits. While theDOE has already awarded significant funding for research and development towards the development of SMR technologies and pilot projects, there is the potential for additional funding over the coming years given that nuclear is expected to play a key role in the current administration's efforts toward reaching carbon pollution-free power according to Fitch research. Nuclear Decommissioning - Given the average age of nuclear facilities in theU.S. of 40 years old, nuclear decommissioning represents one of the fastest growing fields within the nuclear industry. According to theU.S. NRC, as ofAugust 15, 2022 , there were 25 shut down commercial nuclear power reactors at 20 sites in various stages of decommissioning. We are currently working with a major contractor in the decommissioning field and believe there may be an opportunity for us to expand our capabilities and more broadly serve the decommissioning of nuclear power facilities. We are actively pursuing projects in the decommissioning market and see this as an opportunity for future growth. Water and Wastewater Treatment Landscape - Technological advances in order to keep up with population growth and industrial capacity, are transforming the water and wastewater treatment industry. Nationally, the EPA estimates that the cost of replacing all 10 million lead service lines (LSLs) in theU.S. could range from$16 billion to as much as$80 billion . We are expanding our services to target capital projects and maintenance on booster pump stations, well buildouts, treatment expansions, and lift stations within the water and wastewater treatment industry. A significant portion of theNovember 2021 Infrastructure Investment and Jobs Act has been allocated to improve water infrastructure ($55 billion ). We are no longer pursuing water projects due to decreased gross profit related to ourFlorida water contracts. 32
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Other Fossil Fuel Power Generation - The reduction of coal-fired electricity
production has reduced demand for routine maintenance, plant upgrades,
modification, and new construction at
TheU.S. EIA reported that natural gas-fired generation surpassed coal-fired generation and was the most common electricity fuel starting in 2016. As a result, we have seen the demand for routine maintenance, plant upgrades, modification, and new construction in the gas-fired generation market increase. We have maintained a presence in that market, primarily in capital projects for efficiency improvements. However, because most of those plants are newer than their nuclear and coal counterparts, they require fewer upgrades, which means they also require less maintenance than either coal or nuclear plants. Natural Gas Distribution Market - TheU.S. accounts for a natural gas pipeline network of 305,000 miles of transmission pipelines and 2.2 million miles of distribution pipes within utility service areas. Natural gas usage remained broadly flat in 2021 with gas delivered to consumers rising only 0.1%. In the long-term it is expected that natural gas will likely serve as a transition fuel with the expected growth in demand, driven mostly by the power sector, projected to average at 1.6% year-over-year from 2022 to 2030. Nationwide, about 40% of natural gas is used for energy production and the remainder is mostly used for commercial uses (heating and cooking) and industrial uses. InNew York and the northeasternU.S. , we are involved in projects forecasted to invest in a range of$500 million to$1.5 billion in infrastructure improvements related to natural gas distribution. The Company estimates that the market opportunity is worth$6.0 billion per year. Storm Hardening and Transmission and Distribution - Following extensive damage from storms, such as Hurricane Irma in 2017 and Hurricane Michael in 2018, theFlorida legislature passed Senate Bill 796 in 2019. Bill 796 requires investor-owned utilities to file 10-year storm protection plans in order to strengthen its grid as a prevention measure from future hurricane damage. In 2021, utilities operating inFlorida included projects with a value of approximately$20 billion within their 10-year storm-hardening plans inFlorida with execution that began in 2020. Due to our underperformance in the transmission and distribution business inFlorida andConnecticut , the Company is no longer pursuing any new projects in transmission and distribution. We have exited theFlorida transmission and distribution market within the first quarter of 2023 and we are in the process of exiting theConnecticut transmission and distribution market. 33 Table of Contents Results of Operations
The following summary and discussion of our results of operations is based on our continuing operations and excludes any results of our discontinued operations. You should refer to this information, as well as the financial data provided in our consolidated financial statements and related notes included in this Form 10-K, when reading our discussion and analysis of results of operations below. Year Ended December 31, (in thousands) 2022 2021 Revenue$ 238,119 $ 304,946 Cost of revenue 231,071 273,520 Gross profit 7,048 31,426
Selling and marketing expenses 1,365
950
General and administrative expenses 25,640
23,409
Depreciation and amortization expense 230
190 Total operating expenses 27,235 24,549 Operating income (loss) (20,187) 6,877 Interest expense, net 5,509 5,001 Other income, net (11,474) (1,619) Income (loss) from continuing operations before income tax expense (14,222)
3,495
Income tax expense (benefit) (49)
793
Income (loss) from continuing operations$ (14,173) $
2,702
Revenue for the year endedDecember 31, 2022 decreased$66.8 million , or 21.9%, compared with 2021. The decrease in revenue was primarily driven by our lost nuclear decommissioning projects, resulting in a$41.0 million reduction, exiting the Canadian nuclear market, contributing to a$30.7 million reduction, and a$19.7 million reduction related to ourUnited States nuclear market compared with 2021. These declines were partially offset by an$11.0 million year-over-year increase in our water business, distribution businesses and a$7.2 million increase in our chemical business and a$6.2 million increase in our transmission and distribution businesses. Gross profit for the year endedDecember 31, 2022 decreased$24.4 million , or 77.6%, compared with 2021. The decrease in gross profit was primarily driven by start-up costs relating to our transmission and distribution markets and cost overruns on uncompleted fixed price projects in the water markets we serve inFlorida . We anticipate that these projects will continue to generate revenues with no associated profits until completion, with the final project scheduled for completion in the fourth quarter of 2023. Excluding the impact relating to start-up costs in the transmission and distribution markets and the lump sum projects in the water market for which losses were incurred, the Company would have realized a gross margin of 11.3% rather than 3.0%. 34
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The following table reconciles our adjusted gross margin to our actual gross margin by deducting the transmission and distribution projects that are incurring start-up costs and lump sum projects in the water markets that are generating a loss. We believe this information is meaningful as it isolates the impact that our start-up costs and the non-profitable lump sum projects have on our gross margin. Because adjusted gross margin is not calculated in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies and should not be considered in isolation or as substitute for, or superior to, financial measures prepared in accordance with GAAP. (in thousands) Year Ended December 31, 2022 Revenue $ 238,119 Cost of revenue 231,071 Gross profit 7,048 Gross profit margin 3.0% Minus: revenue from transmission and distribution start-up business (6,957) Minus: revenue from Florida lump sum water projects (18,541) Minus: total revenue deducted (25,498) Minus: cost of revenue from transmission and distribution start-up business (12,374) Minus: cost of revenue from the Florida lump sum water projects (30,108) Minus: total cost of revenue deducted
(42,482) Adjusted revenue 212,621 Adjusted cost of revenue 188,589 Adjusted gross profit $ 24,032 Adjusted gross profit margin 11.3%
Changes in estimated gross margins related to revenue recognized under the percentage of completion method are made in the period in which circumstances requiring the revisions become known. During the year endedDecember 31, 2022 , we recognized increases in the estimated costs at completion and related gross profit margins related to several projects inJacksonville, Florida . The Company increased its prior estimates related to the costs of executing the contracts to completion, which led to a decrease in the recognized revenues to date under the percentage of completion revenue recognition methodology. As a result of these changes, net income for the year endedDecember 31, 2022 decreased by$7.8 million and basic and diluted earnings per share for the year endedDecember 31, 2022 decreased by$0.30 per share. Operating income for the year endedDecember 31, 2022 decreased$27.1 million , or 393.5%, compared with 2021, due primarily to the decrease in gross profit of$24.4 million and an increase of$2.7 million in total operating expenses (see below).
General and Administrative Expenses
Year Ended December 31, ($ in thousands) 2022 2021
Employee-related expenses
3,045 Professional fees 5,866 2,799 Other expenses 6,369 5,047 Total$ 25,640 $ 23,409 Total general and administrative expenses for the year endedDecember 31, 2022 increased$2.2 million , or 9.5%, compared with 2021. The$3.1 million increase in professional fees was primarily driven by legal expenses. Other expenses increased by$1.3 million primarily related to software and subscription costs. These increases were partially offset by decreases of$1.3 million in stock-based compensation involving forfeitures and adjustments related to performance objectives and a$0.9 million reduction primarily contributed to employee-related costs for salaries. 35 Table of Contents Other (Income) Expense, Net
Year Ended December 31, ($ in thousands) 2022 2021 Interest expense, net$ 5,509 $ 5,001 Other income, net (11,474) (1,619) Total$ (5,965) $ 3,382 Total other income, net, for the year endedDecember 31, 2022 increased$9.3 million , or 276.4%, compared with 2021. The increase was primarily driven by an$8.1 million settlement of an arbitration proceeding related to the restatement of the Company's financial statements in 2017 for the 2012 to 2014 period, coupled with a$2.7 million settlement related to a former executive and his employer. These awards were partially offset by a$0.5 million increase in interest expense related to interest rate increases and additional borrowings, a$0.6 million reduction in joint venture earnings due to lower volume as construction activities forPlant Vogtle move closer to completion and$0.4 million related to a decreased settlement distribution related to a former
segment. Income Tax Expense Year Ended December 31, ($ in thousands) 2022 2021 Income tax expense (benefit) $ (49)$ 793
We recorded income tax benefit from continuing operations of less than$0.1 million and income tax expense from continuing operations of$0.8 million in 2022 and 2021, respectively. Our effective tax rates from continuing operations were 0.4% and 22.8% of income tax for the years endedDecember 31, 2022 and 2021, respectively. The income tax benefit in 2022 was mainly comprised of a$0.1 million Canadian tax benefit, partially offset by the indefinite lived deferred tax assets related to post 2017 NOLs and Section 163(j) interest addback carryover that are allowed to be applied against the deferred tax liabilities related to the indefinite lived intangible assets.
Discontinued Operations
Please refer to "Note 5-Changes in Business" to the consolidated financial statements included in this Form 10-K for information regarding discontinued operations.
Liquidity and Capital Resources
During 2022, our principal sources of liquidity were borrowings under the Revolving Credit Facility and effective management of our working capital. Our principal uses of cash were to pay for customer contract-related material, labor and subcontract labor, operating expenses, principal payments on the Term Loan and interest expense on the Term Loan and the Revolving Credit Facility. In 2023, we required additional funding to continue to conduct our business, and, among other things, we amended the Term Loan to increase the amount borrowed and issued the Wynnefield Notes. Such actions were intended to alleviate the Company's liquidity constraints to an extent sufficient to permit the Company to continue to operate while it engages in its process to explore strategic alternatives for the Company, including a potential sale. For additional information regarding our liquidity outlook, including our ability to continue as a going concern and ongoing liquidity constraints, see below under "Liquidity Outlook." See discussion in "Note 11-Debt" to the consolidated financial statements included in this Form 10-K for additional information regarding
our outstanding debt. 36 Table of Contents Net Cash Flows
Our net consolidated cash flows, including cash flows related to discontinued operations, consisted of the following:
Year EndedDecember 31 , (in thousands) 2022
2021
Cash flows provided by (used in): Operating activities$ (8,685) $ (4,497) Investing activities (834) (538) Financing activities 7,653 (1,280)
Effect of exchange rate changes on cash (121)
81
Net change in cash, cash equivalents and restricted cash
Cash and Cash Equivalents As ofDecember 31, 2022 , our operating unrestricted cash and cash equivalents decreased$2.0 million to$0.5 million . As ofDecember 31, 2022 ,$0.3 million of our operating cash balance was held inU.S. bank accounts and$0.2 million in Canadian bank accounts. Total liquidity (the sum of unrestricted cash and availability under the Revolving Credit Facility) was$3.8 million as ofDecember 31, 2022 . Total liquidity was$3.5 million onMarch 5, 2023 after we received$0.8 million from the Wynnefield Notes,$1.5 million from the Term Loan Amendment in the form of a delayed draw and a$1.0 million advance pursuant to the then-existing terms of the Term Loan Agreement.
Cash Flows Used in Operating Activities
Cash flows from operating activities are primarily from earnings sources and are affected by changes in operating assets and liabilities, which consist primarily of working capital balances related to our projects. For the year endedDecember 31, 2022 , cash used in operating activities increased by$4.2 million compared to the same period in 2021. Major components of cash flows used by operating activities for the year endedDecember 31, 2022 were as follows: Year EndedDecember 31 , (in thousands)
2022
Cash flows provided by (used in): Net income (loss) $
(13,678)
Net income from discontinued operations
(495)
Deferred income tax provision (benefit)
(174)
Depreciation and amortization on plant, property and equipment
230
Amortization of deferred financing costs
831 Amortization of debt discount 200 Bad debt expense 19 Stock-based compensation 1,708 Paid-in-kind interest (1) 176
Cash effect of changes in operating assets and liabilities
2,979
Net cash used in operating activities, continuing operations
(8,204)
Net cash used in operating activities, discontinued operations
(481)
Net cash used in operating activities $
(8,685)
(1) Paid-in-kind interest is added to the Term Loan principal
and
will be paid at maturity.
Cash effect of changes in operating assets and liabilities for 2022 included the following (includes foreign currency translation conversion from Canadian dollar toUnited States dollar):
Accounts receivable, excluding credit losses recognized during the period,
? decreased
operating activities. The variance is primarily attributable to the timing of
billing and collections. 37 Table of Contents
Contract liabilities, which consisted of billings on uncompleted contracts in
excess of costs and estimated earnings, increased
cash flows from operating activities. Contract assets, which consisted of costs
? and estimated earnings in excess of billings on uncompleted contracts,
increased
These balances can experience significant fluctuations based on business volume
and the timing of when job costs are incurred and the timing of customer billings and payments.
Other current assets decreased
? increased cash flows from operating activities. The variance was primarily due
to the reversal of receivables related to the remittance of Canadian harmonized
sales tax ("HST").
Accrued and other liabilities and accounts payable decreased
during fiscal year 2022, which decreased cash flows from operating activities.
? The payable was an offset from the HST receivables, and a deferred payroll tax
liability associated with the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act").
Other long-term assets increased
? decreased cash flows from operating activities. The variance was primarily due
to increases in right-of-use lease assets, joint venture earnings and debt
issuance costs.
Cash Used in Investing Activities
For the years ended
Cash Provided by (Used in) Financing Activities
For the year endedDecember 31, 2022 , net cash provided by financing activities was$7.7 million primarily due to our borrowings under the Revolving Credit Facility exceeding our repayments from customer cash receipts by$16.7 million , which was partially offset by$8.8 million of cash used to pay down our Term Loan and$0.2 million cash used to pay statutory taxes related to our stock-based awards. At any point in time, the outstanding balance under the Revolving Credit Facility is a function of the timing of collections of our customer receivables and the timing of our cash expenditure needs for the following week for payment of trade payable obligations, payroll, and related tax obligations. For additional information about our outstanding debt, including the Term Loan and the Revolving Credit Facility, please refer to "Note 11-Debt" to the consolidated financial statements included in this Form 10-K. For the year endedDecember 31, 2021 , net cash used in financing activities was$1.3 million primarily due to$1.1 million of cash used to pay down our Term Loan and$0.6 million cash used in connection with our stock-based awards for payments of statutory taxes, which was partially offset by cash provided by our borrowings under the Revolving Credit Facility exceeding our repayments from customer cash receipts by$0.3 million . OnJanuary 9, 2023 , the Company entered into a third amendment to the Term Loan which, among other things, capped the amount of quarterly interest payable in cash at 10% per annum, with the remainder being payable-in-kind, for each quarterly interest payment commencingJanuary 1, 2023 through and includingJanuary 1, 2024 , and deferred principal payments from theJanuary 1, 2023 quarterly payment date until and including theJanuary 1, 2024 quarterly payment date. The paid-in-kind interest will increase the principal amount of the Term Loan every month. In addition, the Company issued the Wynnefield Notes, which are two unsecured promissory notes in an aggregate amount equaling$0.8 million . OnFebruary 21, 2023 , the Company received a$1.0 million advance pursuant to the existing terms of the Term Loan. Additionally, onFebruary 24, 2023 , the Company entered into a fourth amendment to the Term Loan, which among other things, provided for delayed draw term loans in an aggregate principal amount of$1.5 million , which were funded at the time the amendment was signed, and for discretionary delayed draw term loans in an aggregate principal amount of$3.5 million , which will be funded at the lenders' discretion. If the Company is unable to obtain funding under the discretionary delayed draw term loans, its liquidity will be materially negatively impacted.
For additional information about our outstanding debt, please refer to "Note 11-Debt" and "Note 18-Subsequent Events" to the consolidated financial statements included in this Form 10-K.
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Effect of Exchange Rate Changes on Cash
For the years ended
Dividends
We do not currently anticipate declaring dividends in the future. As ofDecember 31, 2022 , the terms of the Term Loan and Revolving Credit Facility restricted our ability to pay dividends. In addition, the timing and amounts of any dividends would be subject to determination and approval by our Board of Directors.
Liquidity Outlook
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We anticipate we will continue to experience periodic constraints on our liquidity as a result of the cash flow requirements of specific projects through the fourth quarter 2023, and we are taking steps expected to strengthen operating results in order to improve our liquidity. Such constraints on our liquidity negatively affected our ability to remain in compliance with our debt covenants, and, accordingly, we entered into two separate amendments to each of the Revolving Credit Facility and Term Loan in the third and fourth quarters of 2022, and an additional two separate amendments to such agreements during the first quarter of 2023. The first two amendments, among other things, revised certain terms contained in the Term Loan and the Revolving Credit Facility, respectively, and deferred principal payments on the Term Loan due onJanuary 1, 2023 toJanuary 9, 2023 . The third and fourth amendments entered into during the first quarter of 2023, among other things, revised certain terms contained in the Term Loan and the Revolving Credit Facility and provided for delayed draw term loans under the Term Loan in an aggregate principal amount of$1.5 million , which were funded at the time the amendment was signed, and discretionary delayed draw term loans in an aggregate principal amount of$3.5 million , which will be funded at the lenders' discretion. We also issued the Wynnefield Notes, in an aggregate principal amount of$400,000 and$350,000 , respectively, during the first quarter of 2023. For additional information, please refer to "Note 2-Liquidity", "Note 11-Debt" and "Note 18-Subsequent Events" to the consolidated financial statements included in this Form 10-K. As future advances of delayed draw term loans are discretionary on the part of our Term Loan lenders, it is possible that the Term Loan lenders may require enhanced rights or additional fees or interest before funding future advances. In certain circumstances, we may require the consent of PNC before we can agree to such terms. Such a consent from PNC, and any proposed amendments to our intercreditor agreement that might be associated with such a consent, may involve the payment of further fees and expenses by the Company to PNC and any amendments to our intercreditor agreement may require negotiations between our Term Loan lenders, PNC and the Company. A failure to procure any necessary consents or a failure to successfully negotiate such amendments to our intercreditor agreement could result in future delayed draw term loans not being available to the Company, which could have a material adverse effect on our liquidity position and result in certain of the negative outcomes described in this "Part II-Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" in our Form 10-K and "Note 2-Liquidity", "Note 11-Debt" and "Note 18-Subsequent Events" to our consolidated financial statements included in this Form 10-K. The Company anticipates that enhanced rights or additional fees or interest in relation to the funding of future advances of delayed draw term loans will be forthcoming and that consent fees and related amendments to the Company's intercreditor agreement may be requested or required by our lenders and may be agreed to by the Company in order to secure necessary funding. During the third and fourth quarter of 2022, the Company settled two legal claims that impacted liquidity. The first involved a cash collection in the third quarter of 2022 of an approximately$8.1 million settlement related to an arbitration proceeding against a third party in connection with the restatement of our financial statements in 2017 for the 2012 to 2014 period, which was used to partially prepay our Term Loan. The second, settled in the fourth quarter of 2022, involved litigation against a former executive and his employer that resulted in the former executive and his employer agreeing to a cash settlement of$2.7 million . The Company recognized the settlement as other income during the third quarter of 2022 and collected the$2.7 million cash settlement onOctober 13, 2022 . The$2.7 million settlement was used to pay a portion of the Revolving Credit Facility in the fourth quarter of 2022. For additional information about the arbitration and legal settlements, please refer to "Note 11-Debt" to the condensed consolidated financial statements included in this Form 10-K. Our continuation as a going concern is dependent upon the Company's ability to successfully implement its liquidity plan and obtain necessary debt or equity financing to continue operations until we return to generating positive cash flow. While continuing to operate its business in recent months, the Company is implementing various elements of its previously disclosed liquidity improvement plan, which include taking steps to address profitability of non-performing
businesses, 39 Table of Contents aggressively reducing operating expenses, shortening the collection cycle time on the Company's accounts receivable, and lengthening the payment cycle time on its accounts payable. The Company has continued to experience material intra-week liquidity pressure as it has attempted to manage the short-term negative cash flows that result from, among other things, having to fund significant weekly craft labor payrolls on large outage projects before those payrolls can be billed to the Company's customers and collected. Although the Company has utilized the Revolving Credit Agreement to address such time period negative cash flows, contract terms restricting customer invoicing frequency, delays in customer payments, and underlying surety bonds have negatively impacted the Company's borrowing base and the availability of funds. Although these factors, among others, raise substantial doubt about our ability to continue as a going concern, we believe that we have sufficient resources to satisfy our working capital requirements through the next 12 months and our long-term liquidity needs and foreseeable material cash requirements, as we strategically use our$30.0 million borrowing availability under our Revolving Credit Facility and the additional borrowings under the Term Loan and the Wynnefield Notes obtained in the first quarter of 2023, and implement our liquidity plan. A variety of factors can affect the Company's short- and long-term liquidity, the impact of which could be material, including, but not limited to: the funding of certain of the Company's previously disclosed loss-contracts; cash required for funding ongoing operations and projects; matters relating to the Company's contracts, including contracts billed based on milestones that may require the Company to incur significant expenditures prior to collections from its customers and others that allow for significant upfront billing at the beginning of a project, which temporarily increases liquidity in the near term; the outcome of potential contract disputes, which may be significant; payment collection issues, including those caused by economic slowdowns or other factors which can lead to credit deterioration of the Company's customers; required payments of interest under the Term Loan Agreement and the Revolving Credit Agreement and on the Company's operating and finance leases; pension obligations requiring annual contributions to multiemployer pension plans; insurance coverage for contracts that require the Company to indemnify third parties; and issuances of letters of credit. The Company believes that theFebruary 24, 2023 amendments to the Term Loan and the Revolving Credit Facility will, if the discretionary delayed draw term loans under the Term Loan are advanced, provide much needed support to the Company's ongoing operations and may permit the Company to operate while it continues to engage in its process to explore strategic alternatives to maximize value for the Company and its shareholders or other stakeholders, but additional liquidity support may be necessary. The Company has not disclosed a timetable for the conclusion of its review of strategic alternatives, nor has it made any decisions related to any further actions or possible strategic alternatives at this time. The Company does not intend to comment on the details of its review of strategic alternatives until it determines that further disclosure is appropriate or necessary. If the Company is unable to address any potential liquidity shortfalls that may arise in the future, it will need to seek additional funding from third party sources, which may not be available on reasonable terms, if at all, and the Company's inability to obtain this capital or execute an alternative solution to its liquidity needs could have a material adverse effect on the Company's shareholders and creditors. Importantly, any such additional funding could only be obtained in compliance with the restrictions contained in the agreements governing the Company's existing indebtedness. If the Company is unable to comply with its covenants under its indebtedness, or otherwise is unable to meet its obligations under such indebtedness, or the lenders under the Term Loan do not exercise their discretion to fund the delayed draw term loans, the Company's liquidity would be further adversely affected. In addition, such occurrences could result in an event of default under such indebtedness and the potential acceleration of outstanding indebtedness thereunder and the potential foreclosure on the collateral securing such debt and would likely cause a cross-default under the Company's other outstanding indebtedness or obligations. If the Company's liquidity improvement plan and the first quarter 2023 amendments to the Term Loan and the Revolving Credit Facility do not have the intended effect of addressing the Company's liquidity problems through its review of strategic alternatives, including if the Company is unable to obtain future advances under the discretionary delayed draw term loans, the Company will continue to consider all strategic alternatives, including restructuring or refinancing its debt, seeking additional debt or equity capital, reducing or delaying the Company's business activities and strategic initiatives, or selling assets, other strategic transactions and/or other measures, including obtaining relief under theU.S. Bankruptcy Code. The Company's continuation as a going concern is dependent upon its ability to successfully implement its liquidity improvement plan and obtain necessary debt or equity financing to address the Company's liquidity challenges and continue operations until the Company returns to generating positive cash flow or is otherwise able to execute on a transaction pursuant to its review of strategic alternatives, including a potential sale of the Company. 40
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Off-Balance Sheet Transactions
Our liquidity is currently not dependent on the use of off-balance sheet transactions but, in line with industry practice, we are often required to provide payment and performance surety bonds to customers and may be required to provide letters of credit. If performance assurances are extended to customers, generally our maximum potential exposure is limited in the contract with our customers. We frequently obtain similar performance assurances from third-party vendors and subcontractors for work performed in the ordinary course of contract execution. However, the total costs of a project could exceed our original cost estimates, and we could experience reduced gross profit or possibly a loss for a given project. In some cases, if we fail to meet certain performance standards, we may be subject to contractual liquidated damages. As ofDecember 31, 2022 , we had a contingent liability for issued and outstanding standby letters of credit, generally issued to secure performance on customer contracts. As ofDecember 31, 2022 , we had$0.5 million of letters of credit under the Revolving Credit Facility sublimit and$0.4 million of outstanding cash collateralized standby letters of credit pursuant to a prior revolving credit facility withWells Fargo Bank, National Association , and there were no amounts drawn upon these letters of credit. In addition, as ofDecember 31, 2022 , we had outstanding payment and performance surety bonds on projects of$59.2 million . Our subsidiaries also provide financial guarantees for certain contractual obligations in the ordinary course of business.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions. An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe that the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of our consolidated financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements included in this Form 10-K. Revenue Recognition. We provide construction, maintenance, and support services to customers in energy, power, and industrial end markets. Our services, which are provided through long-term maintenance or discrete project agreements, are designed to improve or sustain our customers' operating efficiencies and extend the useful lives of their process equipment. The contracts are awarded on a competitively bid and negotiated basis with the majority structured as cost-plus arrangements and the remainder as lump-sum. 41
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Our contracts generally include a single performance obligation for which revenue is recognized over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. For cost-plus contracts, we recognize revenue when services are performed and contractually billable based upon the hours incurred and agreed-upon hourly rates. Revenue on fixed-price contracts is recognized and invoiced over time using the cost-to-cost percentage-of-completion method. To the extent a contract is deemed to have multiple performance obligations, we allocate the transaction price of the contract to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We do not adjust the price of the contract for the effects of a significant financing component. Change orders are generally not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. We believe these methods of revenue recognition most accurately reflect the economics of the transactions with our customers. Our contracts may include several types of variable consideration, including change orders, rate true-up provisions, retainage, claims, incentives, penalties, and liquidated damages. We estimate the amount of revenue to be recognized on variable consideration using estimation methods that best predict the amount of consideration to which we expect to be entitled. We include variable consideration in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on an assessment of our anticipated performance and all information (historical, current, and forecasted) that is reasonably available. We update our estimate of the transaction price each reporting period and the effect of variable consideration on the transaction price is recognized as an adjustment to revenue on a cumulative catch-up basis. In circumstances where we cannot reasonably determine the outcome of a contract, we recognize revenue over time as the work is performed, but only to the extent of recoverable costs incurred (i.e., zero margin). A loss provision is recorded for the amount of any estimated unrecoverable costs in excess of total estimated revenue on a contract as soon as we become aware. We generally provide a limited warranty for a term of two years or less following completion of services performed under our contracts. Historically, warranty claims have not resulted in material costs incurred. During the fourth quarter of 2022, we recognized increases in estimated costs at completion and related gross profit margins related to several projects inJacksonville, Florida . The Company increased its prior estimates related to the costs of executing the contracts to completion, which led to a decrease in the recognized revenues to date under the percentage of completion revenue recognition methodology. As a result of these changes, net income for the year endedDecember 31, 2022 decreased by$7.8 million and basic and diluted earnings per share for the year endedDecember 31, 2022 decreased by$0.30 per share. Long-Lived Assets. Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If circumstances require a long-lived asset held for use to be tested for possible impairment, we first compare the undiscounted cash flows expected to be generated by the asset to the carrying value of the asset. If the carrying value of the asset exceeds expected future cash flows, the excess of the carrying value over the estimated fair value is charged to impairment expense in the consolidated statements of operations. Assets held for sale are reported at the lower of their carrying value, less estimated costs to sell. Fair value is determined through various valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. We group long-lived assets by legal entity for purposes of recognition and measurement of an impairment loss, as this is the lowest level for which cash flows are independent.Goodwill and Other Intangible Assets.Goodwill and indefinite-lived intangible assets are tested for impairment annually as ofOctober 1 and whenever events or circumstances indicate that the carrying value may not be recoverable. Our indefinite-lived intangible asset consists of the Williams trade name. Our testing of goodwill for potential impairment involves the comparison of each reporting unit's carrying value to its estimated fair value, which is determined using a combination of income, market and cost approaches. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate future cash flows and include an estimate of long-term future growth rates based on our most recent views of the long-term outlook for our reporting unit. Under the market approach, the fair value is determined by utilizing comparative market multiples in the valuation estimates. The cost approach is based on the assumption that a prudent investor would pay no more for a security or asset than the amount at which it could be replaced or reproduced and is performed by estimating the replacement cost. The fair value of our Williams reporting unit exceeded book value onDecember 31, 2022 . 42 Table of Contents
Similarly, the testing of our trade names for potential impairment involves the comparison of the carrying value for each trade name to its estimated fair value, which is determined using the relief from royalty method.
Impairment write-downs are charged to results of operations in the period in which the impairment is determined. We recorded no impairment write-downs in 2022. Income Taxes. We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those differences are expected to be recovered or settled. We recognize income as a result of changes in tax rates on deferred tax assets and liabilities in the period that includes the enactment date. Under Accounting Standards Codification ("ASC") 740-Income Taxes, theFinancial Accounting Standards Board (the "FASB") requires companies to assess whether valuation allowances should be established against their deferred tax assets based on the consideration of all available positive and negative evidence and utilizing a "more likely than not" standard. In making such assessments, significant weight is given to evidence that can be objectively verified. A company's current or previous operating history is given more weight than its future outlook, although we do consider future taxable income projections, ongoing tax planning strategies and the limitation on the use of carryforward losses in determining valuation allowance needs. We establish valuation allowances for our deferred tax assets if, based on the available evidence, it is more likely than not that some portion of or all the deferred tax assets will not be realized. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We recognize the tax benefit from uncertain tax positions only if it is more likely than not to be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We believe that our benefits and accruals recognized are appropriate for all open audit years based on our assessment of many factors, including past experience and interpretation of tax law. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. To the extent that the final tax outcome of these matters is determined to be different than the amounts recorded, those differences will impact income tax expense in the period in which the determination is made.
Inflation Reduction Act of 2022
OnAugust 16, 2022 , the Inflation Reduction Act of 2022 was signed into law, making significant changes to the Internal Revenue Code. Such changes include, but are not limited to, a 15% corporate minimum income tax and a 1% excise tax on corporate stock repurchases in tax years beginning afterDecember 31, 2022 . While these tax law changes have no immediate effect and are not expected to have a material adverse effect on the Company's results of operations going forward, the Company will continue to evaluate the Inflation Reduction Act's impact as further information becomes available. Insurance. The Company maintains insurance coverage for most insurable aspects of its business and operations. The Company's insurance programs, including, but not limited to, health, general liability, and workers' compensation, have varying coverage limits depending upon the type of insurance. We retain exposure to potential losses based on deductibles, coverage limits and retentions. For the year endedDecember 31, 2022 and 2021, insurance expense, including insurance premiums related to the excess claim coverage and claims incurred for continuing operations, was$6.4 million and$5.2 million , respectively. The Company's consolidated balance sheets include amounts representing its probable estimated liability related to insurance-related claims that are known and have been asserted against the Company, and for insurance-related claims that are believed to have been incurred but had not yet been reported as ofDecember 31, 2022 and 2021. As of bothDecember 31, 2022 and 2021, the Company provided$0.9 million in letters of credit and provided cash collateral of$1.5 million , as security for possible workers' compensation claims. 43
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Recently Adopted Accounting Pronouncements
The Company did not implement any new accounting pronouncements during the year endedDecember 31, 2022 . However, the Company is currently evaluating the impact of future disclosures that may arise under recentSEC proposals.
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