NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2017
NOTE 1
– BASIS OF PRESENTATION
These interim financial statements of Babcock & Wilcox Enterprises, Inc. ("B&W," "we," "us," "our" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.
NOTE 2
– EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of our common stock:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except per share amounts)
|
2017
|
2016
|
Net income (loss) attributable to shareholders
|
$
|
(7,045
|
)
|
$
|
10,507
|
|
|
|
|
Weighted average shares used to calculate basic earnings per share
|
48,740
|
|
51,627
|
|
Dilutive effect of stock options, restricted stock and performance shares
(1)
|
—
|
|
594
|
|
Weighted average shares used to calculate diluted earnings per share
|
48,740
|
|
52,221
|
|
|
|
|
Basic earnings (loss) per share:
|
$
|
(0.14
|
)
|
$
|
0.20
|
|
|
|
|
Diluted earnings (loss) per share:
|
$
|
(0.14
|
)
|
$
|
0.20
|
|
(1)
Because we incurred a net loss in the first quarter of
2017
, basic and diluted shares are the same. If we had net income in the first three months of
2017
, diluted shares would include an additional
0.4 million
shares, and would exclude
1.9 million
shares related to stock options because their effect would have been anti-dilutive. At
March 31, 2016
, we excluded from the diluted share calculation
0.1 million
shares related to stock options, as their effect would have been anti-dilutive.
NOTE 3
– SEGMENT REPORTING
Our operations are assessed based on
three
reportable segments, which are summarized as follows:
|
|
•
|
Power segment
:
focused on the supply of and aftermarket services for steam-generating, environmental and auxiliary equipment for power generation and other industrial applications.
|
|
|
•
|
Renewable segment
:
focused on the supply of steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries.
|
|
|
•
|
Industrial segment
:
focused on custom-engineered cooling, environmental and other industrial equipment along with related aftermarket services.
|
An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
Revenues:
|
|
|
Power segment
|
$
|
196,296
|
|
$
|
288,703
|
|
Renewable segment
|
105,536
|
|
83,773
|
|
Industrial segment
|
92,217
|
|
32,466
|
|
Eliminations
|
(2,945
|
)
|
(826
|
)
|
|
391,104
|
|
404,116
|
|
Gross profit:
|
|
|
Power segment
|
42,963
|
|
59,532
|
|
Renewable segment
|
10,594
|
|
13,379
|
|
Industrial segment
|
15,315
|
|
7,756
|
|
Intangible asset amortization expense included in cost of operations
|
(5,018
|
)
|
(511
|
)
|
Mark to market loss included in cost of operations
|
(954
|
)
|
—
|
|
|
62,900
|
|
80,156
|
|
Selling, general and administrative expenses
|
(65,922
|
)
|
(57,687
|
)
|
Restructuring activities and spin-off transaction costs
|
(3,032
|
)
|
(4,010
|
)
|
Research and development costs
|
(2,262
|
)
|
(2,842
|
)
|
Intangible asset amortization expense included in SG&A
|
(994
|
)
|
(1,027
|
)
|
Mark to market (loss) gain included in SG&A
|
(106
|
)
|
—
|
|
Equity in income of investees
|
618
|
|
2,676
|
|
Operating income (loss)
|
$
|
(8,798
|
)
|
$
|
17,266
|
|
NOTE 4
– UNIVERSAL ACQUISITION
On January 11, 2017, we acquired Universal Acoustic & Emission Technologies, Inc. ("Universal") for approximately
$52.5 million
in cash, funded primarily by borrowings under our United States revolving credit facility, net of
$4.4 million
cash acquired in the business combination. Transaction costs included in the purchase price were approximately
$0.2 million
. We accounted for the Universal acquisition using the acquisition method, whereby all of the assets acquired and liabilities assumed were recognized at their fair value on the acquisition date, with any excess of the purchase price over the estimated fair value recorded as goodwill.
Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal's product offering includes gas turbine inlet and exhaust systems, silencers, filters and enclosures. Universal employs approximately
460
people, mainly in the United States and Mexico. The acquisition of Universal is consistent with B&W's goal to grow and diversify its technology-based offerings with new products and services in the industrial markets that are complementary to our core businesses. During
2017
, we will integrate Universal with our Industrial segment. Universal contributed
$21.2 million
of revenue and
$4.9 million
of gross profit (excluding intangible asset amortization expense of
$1.5 million
) to our operating results in the three months ended
March 31, 2017
. We expect Universal to contribute over
$80.0 million
of revenue and be accretive to the Industrial segment's earnings during 2017.
The allocation of the purchase price based on the estimated fair value of assets acquired and liabilities assumed is detailed below. We are in the process of finalizing the purchase price allocation associated with the valuation of certain intangible assets and deferred tax balances; as a result, the provisional measurements of intangible assets, goodwill and deferred income tax balances are subject to change. Purchase price adjustments are expected to be finalized by December 31, 2017.
|
|
|
|
|
(in thousands)
|
Estimated Acquisition
Date Fair Value
|
Cash
|
$
|
4,379
|
|
Accounts receivable
|
11,270
|
|
Contracts in progress
|
3,167
|
|
Inventories
|
4,585
|
|
Other assets
|
579
|
|
Property, plant and equipment
|
16,692
|
|
Goodwill
|
14,413
|
|
Identifiable intangible assets
|
19,500
|
|
Deferred income tax assets
|
935
|
|
Current liabilities
|
(10,833
|
)
|
Other noncurrent liabilities
|
(1,423
|
)
|
Deferred income tax liabilities
|
(6,338
|
)
|
Net acquisition cost
|
$
|
56,926
|
|
The intangible assets included above consist of the following (dollar amount in thousands):
|
|
|
|
|
|
|
(in thousands)
|
Estimated
Fair Value
|
|
Weighted Average
Estimated Useful Life
(in Years)
|
Customer relationships
|
$
|
10,800
|
|
|
15
|
Backlog
|
1,700
|
|
|
1
|
Trade names / trademarks
|
3,000
|
|
|
20
|
Technology
|
4,000
|
|
|
7
|
Total amortizable intangible assets
|
$
|
19,500
|
|
|
|
The acquisition of Universal resulted in an increase in our intangible asset amortization expense during the three months ended
March 31, 2017
of
$1.5 million
, which is included in cost of operations in our condensed consolidated statement of operations. Amortization of intangible assets is not allocated to segment results.
Approximately
$1.0 million
of acquisition and integration related costs of Universal was recorded as a component of our operating expenses in the condensed consolidated statement of operations for the three months ended
March 31, 2017
.
The following unaudited pro forma financial information below represents our results of operations for the three months ended
March 31, 2016
and twelve months ended
December 31, 2016
had the Universal acquisition occurred on January 1, 2016. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2016. This information should not be taken as representative of our future consolidated results of operations.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Twelve Months Ended December 31,
|
(in thousands)
|
2016
|
2016
|
Revenues
|
$
|
424,373
|
|
$
|
1,660,986
|
|
Net income (loss) attributable to B&W
|
10,602
|
|
(113,940
|
)
|
Basic earnings per common share
|
0.21
|
|
(2.27
|
)
|
Diluted earnings per common share
|
0.20
|
|
(2.27
|
)
|
The unaudited pro forma results included in the table above reflect the following pre-tax adjustments to our historical results:
|
|
•
|
A net increase in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of
$1.4 million
and
$2.8 million
in the three months ended
March 31, 2016
and the twelve months ended
December 31, 2016
, respectively.
|
|
|
•
|
Elimination of the historical interest expense recognized by Universal of
$0.1 million
and
$0.4 million
in the three months ended
March 31, 2016
and the twelve months ended
December 31, 2016
, respectively.
|
|
|
•
|
Elimination of
$0.5 million
in transaction related costs recognized in the twelve months ended
December 31, 2016
.
|
NOTE 5
– CONTRACTS AND REVENUE RECOGNITION
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 project, we recognize a charge against current earnings. If a contract is estimated to result in a loss, that 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 at 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 that the estimates are made 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.
In the three months ended
March 31, 2017
and
2016
, we recognized changes in estimates related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
Increases in estimates for percentage-of-completion contracts
|
$
|
15,092
|
|
$
|
12,400
|
|
Decreases in estimates for percentage-of-completion contracts
|
(8,963
|
)
|
(4,300
|
)
|
Net changes in estimates for percentage-of-completion contracts
|
$
|
6,129
|
|
$
|
8,100
|
|
As disclosed in our
December 31, 2016
consolidated financial statements, we had four renewable energy projects in Europe that were loss contracts at
December 31, 2016
. During the three months ended
March 31, 2017
, we recorded a total of
$3.0 million
in net gains resulting from changes in the estimated revenues and costs to complete these four European renewable energy loss contracts, offset by a
$2.5 million
charge related to an increase in estimated costs to complete a separate European renewable energy contract that remains profitable. The status of these four loss contracts is as follows:
As we disclosed in our 2016 second and third quarter and annual financial statements, we incurred significant charges due to changes in the estimated cost to complete a contract related to one European renewable energy contract, which caused the project to become a loss contract. As of
March 31, 2017
, this project is approximately
93%
complete and construction activities are complete as of the date of this report. We expect the unit to be operational during the second quarter of 2017 and turnover activities linked to the customer's operation of the facility will be completed during the second half of 2017. We reduced the
$6.4 million
reserve for estimated losses on this contract recorded in our consolidated balance sheet at
December 31, 2016
by
$2.6 million
in the three months ended
March 31, 2017
as a result of progress on the project, but the change had no net impact on our statement of operations during the 2017 first quarter. The estimated liquidated damages due to schedule delays of
$3.4 million
for this project as of
March 31, 2017
are unchanged since
December 31, 2016
.
The second project became a loss contract in the fourth quarter of 2016. As of
March 31, 2017
, this contract was approximately
78%
complete, and we expect this second project to be completed in the fourth quarter of 2017. During the three months ended
March 31, 2017
, we recognized a
$3.8 million
gain on the project due to improvements in construction cost estimates. As of
March 31, 2017
, the reserve for estimated contract losses recorded in our consolidated
balance sheet was
$2.5 million
, and estimated liquidated damages due to schedule delays for this project were
$8.1 million
.
The third project became a loss contract in the fourth quarter of 2016. As of
March 31, 2017
, this contract was approximately
86%
complete. We expect the unit to be operational during the second quarter of 2017 and turnover activities linked to the customer's operation of the facility will be completed during the second half of 2017. During the three months ended
March 31, 2017
, we recognized additional contract losses of
$2.8 million
as a result of changes in the estimated costs at completion. As of
March 31, 2017
, the reserve for estimated contract losses recorded in our consolidated balance sheet was
$3.4 million
, and estimated liquidated damages due to schedule delays for this project were
$6.9 million
.
The fourth project became a loss contract in the fourth quarter of 2016. As of
March 31, 2017
, this contract was approximately
68%
complete, and we expect this fourth project to be completed in the first half of 2018. During the three months ended
March 31, 2017
, we revised our estimated revenue and costs at completion for this fourth loss contract, which resulted in a gain of
$1.9 million
during the quarter. The improvements in the status of this project were primarily attributable to changes in the estimated costs at completion and a
$4.6 million
reduction in estimated liquidated damages. As of
March 31, 2017
, the reserve for estimated contract losses recorded in our consolidated balance sheet was
$0.7 million
, and estimated liquidated damages due to schedule delays for this project were
$4.0 million
.
We continue to expect the other renewable energy projects that incurred charges in the fourth quarter of 2016 for changes in estimated costs to complete to remain profitable contracts at completion. Changes in estimated costs at completion on one of these projects during the three months ended
March 31, 2017
resulted in a
$2.5 million
charge. Accrued liquidated damages associated with these other renewable energy projects due to schedule delays total
$9.1 million
at
March 31, 2017
.
During the third quarter of 2016, we determined it was probable that we would receive a
$15.0 million
insurance recovery for a portion of the losses on the first European renewable energy project discussed above. There was no change in the accrued probable insurance recovery in the three months ended
March 31, 2017
. The insurance recovery represents the full amount available under the insurance policy, and is recorded in accounts receivable - other in our condensed consolidated balance sheet at
March 31, 2017
.
NOTE 6
– RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
Restructuring liabilities
Restructuring liabilities are included in other accrued liabilities on our condensed consolidated balance sheets. Activity related to the restructuring liabilities is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
2,254
|
|
$
|
740
|
|
Restructuring expense
|
1,970
|
|
2,147
|
|
Payments
|
(3,527
|
)
|
(2,727
|
)
|
Balance at March 31
|
$
|
697
|
|
$
|
160
|
|
Accrued restructuring liabilities at
March 31, 2017
and
2016
relate to employee termination benefits. In the three month period ending
March 31, 2017
, we recognized
$0.6 million
in non-cash restructuring expense related to losses on the disposals of assets.
Spin-off transaction costs
In the quarters ended
March 31, 2017
and
2016
, we incurred
$0.4 million
and
$1.9 million
, respectively, of costs directly related to the spin-off from our former parent, The Babcock & Wilcox Company (now known as BWX Technologies, Inc.). The costs were primarily attributable to employee retention awards.
NOTE 7
– PROVISION FOR INCOME TAXES
Our effective tax rate for the three months ended
March 31, 2017
was approximately
36.7%
as compared to
38.5%
for the three months ended
March 31, 2016
. Our effective tax rate for the three months ended
March 31, 2017
was higher than our statutory rate primarily due to nondeductible expenses and foreign losses, which are subject to a valuation allowance, offset by the jurisdictional mix of our income and losses and favorable discrete items of approximately
$0.8 million
. The discrete items primarily consist of the income tax effects of vested and exercised share-based compensation awards, offset by non-deducible transaction costs. Our effective tax rate for the three months ended
March 31, 2016
was higher than our statutory rate primarily due to adjustments to deferred taxes for certain non-deductible spin-off costs, offset by the jurisdictional mix of our income and losses.
During the three months ended
March 31, 2017
, we prospectively adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting
. Adopting the new accounting standard resulted in a net
$1.3 million
income tax benefit in the three months ended
March 31, 2017
associated with the income tax effects of vested and exercised share-based compensation awards.
NOTE 8
– COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are 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 quarters ended March 31,
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss)
|
|
Net unrealized gain (loss) on investments (net of tax)
|
|
Net unrealized gain (loss) on derivative instruments
|
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
|
Total
|
Balance at December 31, 2015
|
$
|
(19,493
|
)
|
|
$
|
(44
|
)
|
|
$
|
1,786
|
|
|
$
|
(1,102
|
)
|
|
$
|
(18,853
|
)
|
Other comprehensive income (loss) before reclassifications
|
1,740
|
|
|
18
|
|
|
2,576
|
|
|
(61
|
)
|
|
4,273
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
|
1
|
|
|
(1,003
|
)
|
|
61
|
|
|
(941
|
)
|
Net current-period other comprehensive income
|
1,740
|
|
|
19
|
|
|
1,573
|
|
|
—
|
|
|
3,332
|
|
Balance at March 31, 2016
|
$
|
(17,753
|
)
|
|
$
|
(25
|
)
|
|
$
|
3,359
|
|
|
$
|
(1,102
|
)
|
|
$
|
(15,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss)
|
|
Net unrealized gain (loss) on investments (net of tax)
|
|
Net unrealized gain (loss) on derivative instruments
|
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
|
Total
|
Balance at December 31, 2016
|
$
|
(43,987
|
)
|
|
$
|
(37
|
)
|
|
$
|
802
|
|
|
$
|
6,740
|
|
|
$
|
(36,482
|
)
|
Other comprehensive income (loss) before reclassifications
|
5,417
|
|
|
61
|
|
|
4,587
|
|
|
(44
|
)
|
|
10,021
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
|
(27
|
)
|
|
(3,843
|
)
|
|
(882
|
)
|
|
(4,752
|
)
|
Net current-period other comprehensive income (loss)
|
5,417
|
|
|
34
|
|
|
744
|
|
|
(926
|
)
|
|
5,269
|
|
Balance at March 31, 2017
|
$
|
(38,570
|
)
|
|
$
|
(3
|
)
|
|
$
|
1,546
|
|
|
$
|
5,814
|
|
|
$
|
(31,213
|
)
|
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,
|
2017
|
2016
|
Derivative financial instruments
|
Revenues
|
$
|
5,288
|
|
$
|
1,323
|
|
|
Cost of operations
|
3
|
|
(23
|
)
|
|
Other-net
|
(393
|
)
|
4
|
|
|
Total before tax
|
4,898
|
|
1,304
|
|
|
Provision for income taxes
|
1,055
|
|
301
|
|
|
Net income (loss)
|
$
|
3,843
|
|
$
|
1,003
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Cost of operations
|
$
|
873
|
|
$
|
404
|
|
|
Provision for income taxes
|
(9
|
)
|
465
|
|
|
Net income (loss)
|
$
|
882
|
|
$
|
(61
|
)
|
|
|
|
|
Realized gain on investments
|
Other-net
|
$
|
43
|
|
$
|
(1
|
)
|
|
Provision for income taxes
|
16
|
|
—
|
|
|
Net income (loss)
|
$
|
27
|
|
$
|
(1
|
)
|
NOTE 9
– CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2017
|
December 31, 2016
|
Held by foreign entities
|
$
|
35,462
|
|
$
|
94,415
|
|
Held by United States entities
|
10,808
|
|
1,472
|
|
Cash and cash equivalents
|
$
|
46,270
|
|
$
|
95,887
|
|
|
|
|
Reinsurance reserve requirements
|
$
|
19,243
|
|
$
|
21,189
|
|
Restricted foreign accounts
|
5,717
|
|
6,581
|
|
Restricted cash and cash equivalents
|
$
|
24,960
|
|
$
|
27,770
|
|
NOTE 10
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2017
|
December 31, 2016
|
Raw materials and supplies
|
$
|
66,981
|
|
$
|
61,630
|
|
Work in progress
|
6,579
|
|
6,803
|
|
Finished goods
|
15,770
|
|
17,374
|
|
Total inventories
|
$
|
89,330
|
|
$
|
85,807
|
|
NOTE 11
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2017
|
December 31, 2016
|
Definite-lived intangible assets
|
|
|
Customer relationships
|
$
|
58,896
|
|
$
|
47,892
|
|
Unpatented technology
|
18,765
|
|
18,461
|
|
Patented technology
|
6,522
|
|
2,499
|
|
Tradename
|
21,997
|
|
18,774
|
|
Backlog
|
29,933
|
|
28,170
|
|
All other
|
7,461
|
|
7,429
|
|
Gross value of definite-lived intangible assets
|
143,574
|
|
123,225
|
|
Customer relationships amortization
|
(18,987
|
)
|
(17,519
|
)
|
Unpatented technology amortization
|
(3,380
|
)
|
(2,864
|
)
|
Patented technology amortization
|
(1,701
|
)
|
(1,532
|
)
|
Tradename amortization
|
(4,135
|
)
|
(3,826
|
)
|
Acquired backlog amortization
|
(25,019
|
)
|
(21,776
|
)
|
All other amortization
|
(6,281
|
)
|
(5,974
|
)
|
Accumulated amortization
|
(59,503
|
)
|
(53,491
|
)
|
Net definite-lived intangible assets
|
$
|
84,071
|
|
$
|
69,734
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
Total indefinite-lived intangible assets
|
$
|
1,305
|
|
$
|
1,305
|
|
The following summarizes the changes in the carrying amount of intangible assets:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
71,039
|
|
$
|
37,844
|
|
Business acquisitions and adjustments
|
19,500
|
|
275
|
|
Amortization expense
|
(6,012
|
)
|
(1,538
|
)
|
Currency translation adjustments and other
|
849
|
|
153
|
|
Balance at end of the period
|
$
|
85,376
|
|
$
|
36,734
|
|
The acquisition of Universal resulted in an increase in our intangible asset amortization expense during the three months ended
March 31, 2017
of
$1.5 million
, which is included in cost of operations in our condensed consolidated statement of operations. The amortization of Universal's intangible assets is highest during the first quarter of 2017 and declines each subsequent quarter during the year primarily due to the amortization of the backlog intangible asset. Amortization of intangible assets is not allocated to segment results.
Estimated future intangible asset amortization expense, including the increase in amortization expense resulting from the January 11, 2017 acquisition of Universal, is as follows (in thousands):
|
|
|
|
|
Period ending
|
Amortization expense
|
Three months ending June 30, 2017
|
$
|
4,458
|
|
Three months ending September 30, 2017
|
$
|
3,874
|
|
Three months ending December 31, 2017
|
$
|
3,539
|
|
Twelve months ending December 31, 2018
|
$
|
11,888
|
|
Twelve months ending December 31, 2019
|
$
|
10,035
|
|
Twelve months ending December 31, 2020
|
$
|
8,787
|
|
Twelve months ending December 31, 2021
|
$
|
8,470
|
|
Twelve months ending December 31, 2022
|
$
|
6,932
|
|
Thereafter
|
$
|
26,088
|
|
NOTE 12
– PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment is stated at cost. The composition of our property, plant and equipment less accumulated depreciation is set forth below:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2017
|
December 31, 2016
|
Land
|
$
|
8,633
|
|
$
|
6,348
|
|
Buildings
|
120,346
|
|
114,322
|
|
Machinery and equipment
|
197,363
|
|
189,489
|
|
Property under construction
|
15,641
|
|
22,378
|
|
|
341,983
|
|
332,537
|
|
Less accumulated depreciation
|
194,967
|
|
198,900
|
|
Net property, plant and equipment
|
$
|
147,016
|
|
$
|
133,637
|
|
NOTE 13
– WARRANTY EXPENSE
Changes in the carrying amount of our accrued warranty expense are as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
40,468
|
|
$
|
39,847
|
|
Additions
|
4,253
|
|
5,696
|
|
Expirations and other changes
|
(509
|
)
|
(440
|
)
|
Increases attributable to business combinations
|
1,060
|
|
—
|
|
Payments
|
(2,774
|
)
|
(3,182
|
)
|
Translation and other
|
346
|
|
311
|
|
Balance at end of period
|
$
|
42,844
|
|
$
|
42,232
|
|
NOTE 14
– PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Three Months Ended March 31,
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Service cost
|
$
|
274
|
|
$
|
384
|
|
|
$
|
4
|
|
$
|
6
|
|
Interest cost
|
10,257
|
|
10,576
|
|
|
221
|
|
211
|
|
Expected return on plan assets
|
(14,856
|
)
|
(14,927
|
)
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
25
|
|
141
|
|
|
(900
|
)
|
—
|
|
Recognized net actuarial loss
|
1,062
|
|
—
|
|
|
—
|
|
—
|
|
Net periodic benefit cost (benefit)
|
$
|
(3,238
|
)
|
$
|
(3,826
|
)
|
|
$
|
(675
|
)
|
$
|
217
|
|
During the first quarter of 2017, lump sum payments from our Canadian pension plan resulted in a plan settlement of
$0.4 million
, which also resulted in interim mark to market accounting for the pension plan. The mark to market adjustment in the three months ended
March 31, 2017
was
$0.7 million
. The effect of these charges and mark to market adjustments are reflected in the
$1.1 million
"
Recognized net actuarial loss" in the table above.
See
Note 20
for the future expected effect of FASB ASU 2017-07 on the presentation of benefit and expense related to our pension and post retirement plans.
We have excluded the recognized net actuarial loss from our reportable segments and such amount has been reflected in
Note 3
as the mark to market adjustment in the reconciliation of reportable segment income (loss) to consolidated operating income (loss). The recognized net actuarial loss during the three months ended
March 31, 2017
was recorded in our condensed consolidated statements of operations in the following line items:
|
|
|
|
|
(in thousands)
|
|
Cost of operations
|
$
|
954
|
|
Selling, general and administrative expenses
|
106
|
|
Other
|
2
|
|
Total
|
$
|
1,062
|
|
We made contributions to our pension and other postretirement benefit plans totaling
$1.4 million
and
$1.3 million
during the quarters ended
March 31, 2017
and
2016
, respectively.
NOTE 15
– REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2017
|
December 31, 2016
|
United States
|
$
|
90,000
|
|
$
|
9,800
|
|
Foreign
|
12,647
|
|
14,241
|
|
Total revolving debt
|
$
|
102,647
|
|
$
|
24,041
|
|
United States credit facility
In connection with the spin-off, we entered into a credit agreement on May 11, 2015 (the "Credit Agreement"). The Credit Agreement provides for a senior secured revolving credit facility in an aggregate amount of up to $600 million, which is scheduled to mature on June 30, 2020. The proceeds of loans under the Credit Agreement are available for working capital needs, issuance of letters of credit and other general corporate purposes.
On
February 24, 2017
, we entered into Amendment No. 2 to Credit Agreement (the “Amendment” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (i) provide financial covenant relief by amending the definition of EBITDA (as defined in the Amended Credit Agreement) to exclude up to $98.1 million of losses for certain Renewable segment contracts for the year ended December 31, 2016; (ii) increase the maximum permitted leverage ratio to 3.50 to 1.00 during the covenant relief period; (iii) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to $300.0 million in the aggregate; (iv) increase the pricing for borrowings, letters of credit and commitment fees under the Amended Credit Agreement during the covenant relief period; (v) limit our ability to incur debt and liens during the covenant relief period; (vi) limit our ability to make acquisitions and investments in third parties during the covenant relief period; (vii) prohibit us from making dividends and stock redemptions during the covenant relief period; (viii) prohibit us from exercising the accordion described below during the covenant relief period; (ix) limit our financial letters of credit outstanding under the Amended Credit Agreement to $30.0 million during the covenant relief period; and (x) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales. The covenant relief period will end, at our election, when the conditions set forth in the Amendment are satisfied, but in no event earlier than the date on which we provide the compliance certificate for the fiscal quarter ending December 31, 2017.
Other than during the covenant relief period described above, the Amended Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (i) $200 million plus (ii) an unlimited amount, so long as for any commitment increase under this subclause (ii) our senior secured leverage ratio (assuming the full amount of any commitment increase under this subclause (ii) is drawn) is equal to or less than 2.0 to 1.0 after giving pro forma effect thereto. During the covenant relief period described above, our ability to exercise the accordion feature will be prohibited.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (i) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (ii) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances. During the covenant relief period described above, such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such prepayments. Following the covenant relief period described above, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
Loans outstanding under the Amended Credit Agreement bear interest at our option at either (i) the LIBOR rate plus (a) during the covenant relief period described above, a margin of 2.50% per year, and (b) following the covenant relief period described above, a margin ranging from 1.375% to 1.875% per year, or (ii) the base rate (the highest of the Federal Funds rate plus 0.5%, the one month LIBOR rate plus 1.0%, or the administrative agent's prime rate) plus (a) during the covenant relief period described above, a margin of 1.50% per year, and (b) following the covenant relief period described above, a margin ranging from 0.375% to 0.875% per year. A commitment fee is charged on the unused portions of the revolving credit facility, and that fee (A) during the covenant relief period described above, is 0.50% per year, and (B) following the covenant relief period described above, varies between 0.25% and 0.35% per year. Additionally, (I) during the covenant relief period, a letter of credit fee of 2.50% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of 1.50% per year is charged with respect to the amount of each performance letter of credit outstanding, and (II) following the covenant relief period described above, a letter of credit fee of between 1.375% and 1.875% per year is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of between 0.825% and 1.125% per year is charged with respect to the amount of each performance letter of credit outstanding. Following the covenant relief period described above, the applicable margin for loans, the commitment fee and the letter of credit fees set forth above vary quarterly based on our leverage ratio.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted leverage ratio (i) is 3.50 to 1.00 during the covenant relief period described above and (ii) is 3.00 to 1.00 following the covenant relief period described above (which ratio may be increased to 3.25 to 1.00 for up to four consecutive fiscal quarters after a material acquisition). The
minimum consolidated interest coverage ratio is 4.00 to 1.00 both during and following the covenant relief period described above. At March 31, 2017, our leverage ratio was
2.40
and our interest coverage ratio was
6.41
.
In addition, the Amended Credit Agreement contains various restrictive covenants, including with respect to debt, liens, investments, mergers, acquisitions, dividends, equity repurchases and asset sales. At
March 31, 2017
, usage under the Amended Credit Agreement consisted of
$90.0 million
in borrowings at an effective interest rate of
3.4%
,
$7.5 million
of financial letters of credit and
$91.1 million
of performance letters of credit. At
March 31, 2017
, we had
$55.1 million
available borrowing capacity based on trailing-twelve month EBITDA, as defined in our Amended Credit Agreement.
The Amended Credit Agreement generally includes customary events of default for a secured credit facility. If an event of default relating to bankruptcy or other insolvency events with respect to us occurs under the Amended Credit Agreement, all obligations will immediately become due and payable. If any other event of default exists, the lenders will be permitted to accelerate the maturity of the obligations outstanding. If any event of default occurs, the lenders are permitted to terminate their commitments thereunder and exercise other rights and remedies, including the commencement of foreclosure or other actions against the collateral. Additionally, if we are unable to make any of the representations and warranties in the Amended Credit Agreement, we will be unable to borrow funds or have letters of credit issued. At
March 31, 2017
, we were in compliance with all of the covenants set forth in the Amended Credit Agreement.
Debt issuance costs
Debt issuance costs associated with our United States credit facility are included in other assets in our condensed consolidated balance sheets. We expect to amortize the deferred charges through June 30, 2020 as a component of interest expense.
Foreign revolving credit facilities
Outside of the United States, we have unsecured revolving credit facilities in Turkey, China and India that are used to provide working capital to our operations in each country. The revolving credit facilities in Turkey and India are a result of the July 1, 2016 acquisition of SPIG. These three foreign revolving credit facilities allow us to borrow up to
$16.1 million
in aggregate and each have a one year term. At
March 31, 2017
, we had
$12.6 million
in borrowings outstanding under these foreign revolving credit facilities at an effective weighted-average interest rate of
5.1%
. If an event of default relating to bankruptcy or insolvency events was to occur, all obligations will become due and payable.
Letters of credit, bank guarantees and surety bonds
Certain subsidiaries have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees associated with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States credit facility as of
March 31, 2017
and
December 31, 2016
was
$296.7 million
and
$255.2 million
, respectively.
We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is more than adequate to support our existing project requirements for the next twelve months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of
March 31, 2017
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$520.3 million
.
Universal acquisition
In order to purchase Universal on January 11, 2017, we borrowed approximately
$55.0 million
under the United States credit facility in 2017.
NOTE 16
– CONTINGENCIES
ARPA litigation
On February 28, 2014, the Arkansas River Power Authority ("ARPA") filed suit against Babcock & Wilcox Power Generation Group, Inc. (now known as The Babcock & Wilcox Company and referred to herein as “BW PGG”) in the United States District Court for the District of Colorado (Case No. 14-cv-00638-CMA-NYW) alleging breach of contract, negligence, fraud and other claims arising out of BW PGG's delivery of a circulating fluidized bed boiler and related equipment used in the Lamar Repowering Project pursuant to a 2005 contract.
A jury trial took place in mid-November 2016. Some of ARPA’s claims were dismissed by the judge during the trial. The jury’s verdict on the remaining claims was issued on November 21, 2016. The jury found in favor of B&W with respect to ARPA’s claims of fraudulent concealment and negligent misrepresentation and on one of ARPA’s claims of breach of contract. The jury found in favor of ARPA on the three remaining claims for breach of contract and awarded damages totaling
$4.2 million
, which exceeded the previous
$2.3 million
accrual we established in 2012 by
$1.9 million
. We increased our accrual by
$1.9 million
in the fourth quarter of 2016.
ARPA has requested that pre-judgment interest of $4.1 million plus post-judgment interest at a rate of 0.77% compounded annually be added to the judgment, together with certain litigation costs. This request is pending before the court, and we believe that a substantial amount of interest and costs claimed by ARPA are without factual or legal support. Accordingly, we believe an award of some interest is possible, but that it is not probable that the amount claimed by ARPA will be awarded; therefore, we have not accrued any portion of interest in our condensed consolidated financial statements. B&W has requested the court to modify the verdict and we will continue to evaluate options for appeal upon final ruling on the parties’ motions to modify the award of damages. At
March 31, 2017
and
December 31, 2016
,
$4.2 million
was included in other accrued liabilities in our consolidated balance sheet, and we have posted a bond pending resolution of post-trial matters.
Stockholder litigation
On March 3, 2017 and March 13, 2017, the Company and certain of its officers were named as defendants in two separate but largely identical complaints alleging violations of the federal securities laws. The complaints received to date purport to be brought on behalf of a class of investors who purchased the Company’s common stock between July 1, 2015 and February 28, 2017 and were filed in the United States District Court for the Western District of North Carolina (collectively, the “Stockholder Litigation”). We anticipate that these cases and any similar cases filed in the future will be consolidated into a single action.
The plaintiffs in the Stockholder Litigation allege fraud, misrepresentation and a course of conduct around the facts surrounding certain projects underway in the Company's Renewable segment, which, according to the plaintiffs, had the effect of artificially inflating the price of the Company’s common stock. The plaintiffs further allege that stockholders were harmed when the Company disclosed on February 28, 2017 that it would incur losses on these projects. Plaintiffs seek an unspecified amount of damages.
The Company believes the allegations in the Stockholder Litigation are without merit, and that the outcome of the Stockholder Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 17
– DERIVATIVE FINANCIAL INSTRUMENTS
Our foreign currency exchange ("FX") forward contracts that qualify for hedge accounting are designated as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At
March 31, 2017
and
2016
, we had deferred approximately
$1.6 million
and
$3.4 million
, respectively, of net gains on these derivative financial instruments in AOCI.
At
March 31, 2017
, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled
$190.6 million
at March 31, 2017 with maturities extending to November 2019. These instruments consist primarily of contracts to purchase or sell euros and British pounds sterling. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions party to our credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our United States credit facility.
The following tables summarize our derivative financial instruments:
|
|
|
|
|
|
|
|
|
Asset and Liability Derivatives
|
(in thousands)
|
March 31, 2017
|
December 31, 2016
|
Derivatives designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
2,225
|
|
$
|
3,805
|
|
Other assets
|
650
|
|
665
|
|
Accounts payable
|
647
|
|
1,012
|
|
Other liabilities
|
—
|
|
213
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts not designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
3
|
|
$
|
105
|
|
Accounts payable
|
312
|
|
403
|
|
Other liabilities
|
—
|
|
7
|
|
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2017
|
2016
|
Derivatives designated as hedges:
|
|
|
Cash flow hedges
|
|
|
Foreign exchange contracts
|
|
|
Amount of gain (loss) recognized in other comprehensive income
|
$
|
5,901
|
|
$
|
3,210
|
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location:
|
|
|
Revenues
|
5,288
|
|
1,323
|
|
Cost of operations
|
3
|
|
(23
|
)
|
Other-net
|
(393
|
)
|
4
|
|
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location:
|
|
|
Other-net
|
241
|
|
582
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Forward contracts
|
|
|
Gain (loss) recognized in income by location:
|
|
|
Other-net
|
$
|
(310
|
)
|
$
|
(110
|
)
|
NOTE 18
– FAIR VALUE MEASUREMENTS
The following tables summarize our 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, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Commercial paper
|
$
|
5,692
|
|
|
$
|
—
|
|
|
$
|
5,692
|
|
|
$
|
—
|
|
Certificates of deposit
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
Mutual funds
|
1,205
|
|
|
—
|
|
|
1,205
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
U.S. Government and agency securities
|
8,245
|
|
|
8,245
|
|
|
—
|
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
16,142
|
|
|
$
|
8,245
|
|
|
$
|
7,897
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Available-for-sale securities
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Commercial paper
|
$
|
6,734
|
|
|
$
|
—
|
|
|
$
|
6,734
|
|
|
$
|
—
|
|
Certificates of deposit
|
2,251
|
|
|
—
|
|
|
2,251
|
|
|
—
|
|
Mutual funds
|
1,152
|
|
|
—
|
|
|
1,152
|
|
|
—
|
|
Corporate bonds
|
750
|
|
|
750
|
|
|
—
|
|
|
—
|
|
U.S. Government and agency securities
|
7,104
|
|
|
7,104
|
|
|
—
|
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
17,991
|
|
|
$
|
7,854
|
|
|
$
|
10,137
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
March 31, 2017
|
|
December 31, 2016
|
Forward contracts to purchase/sell foreign currencies
|
$1,919
|
|
$2,940
|
Available-for-sale securities
We estimate the fair value of available-for-sale securities based on quoted market prices. Our investments in available-for-sale securities are presented in "other assets" on our condensed consolidated balance sheets.
Derivatives
Derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments.
Other financial instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
|
|
•
|
Cash and cash equivalents and restricted cash and cash equivalents
. The carrying amounts that we have 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
. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on 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 our debt instruments approximated their carrying value at
March 31, 2017
and
December 31, 2016
.
|
Non-recurring fair value measurements
The purchase price allocation associated with the January 11, 2017 acquisition of Universal required significant fair value measurements using unobservable inputs ("Level 3" inputs as defined in the fair value hierarchy established by FASB Topic
Fair Value Measurements and Disclosures
). The fair value of the acquired intangible assets was determined using the income approach (see
Note 4
).
The measurement of the net actuarial loss associated with our Canadian pension plan was determined using unobservable inputs (see
Note 14
). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.
NOTE 19
– SUPPLEMENTAL CASH FLOW INFORMATION
During the
three
-months ended
March 31, 2017
and
2016
, we recognized the following non-cash activity in our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
2016
|
Accrued capital expenditures in accounts payable
|
$
|
552
|
|
$
|
4,500
|
|
NOTE 20
– NEW ACCOUNTING STANDARDS
New accounting standards that could affect our consolidated financial statements in the future are summarized as follows:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. The new accounting standard provides a comprehensive model to use in accounting for revenue from contracts with customers and will replace most existing revenue recognition guidance when it becomes effective. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses and determining if an entity is the principal or agent in a revenue arrangement. The new accounting standard also requires more detailed disclosures to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. The new accounting standard is effective for interim and annual reporting periods beginning after December 15, 2017, and permits retrospectively applying the guidance to each prior reporting period presented (full retrospective method) or prospectively applying the guidance and providing additional disclosures comparing results to previous guidance, with the cumulative effect of initially applying the guidance recognized in beginning retained earnings at the date of initial application (modified retrospective method). We have developed a cross-functional team of B&W professionals from across each of our reportable segments and an implementation plan to adopt the new accounting standard. Currently, we are analyzing our primary revenue streams and are in the process of performing a detailed review of key contracts representative of our products and services in order to assess potential changes in our processes, systems, internal controls and the timing and method of revenue recognition and related disclosures. We currently expect to adopt the new accounting standard on January 1, 2018 under the modified retrospective method. The FASB has issued, and may issue in the future, interpretative guidance, which may cause our evaluation to change. Our evaluation of the new accounting standard is ongoing, and we will not be able to make a determination about the impact of the new accounting standard until the time of adoption based upon existing, uncompleted contracts at that time.
In January 2016, the FASB issued ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. The new accounting standard is effective for us beginning in 2018, but early adoption is permitted. The new accounting standard requires investments such as available-for-sale securities to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. With adoption of this standard, lessees will have to recognize almost all leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are similar to those applied in current lease accounting, but without explicit bright lines. The new accounting standard is effective for us beginning in 2019. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Of the eight classification-related changes this new standard will require in the statement of cash flows, only two of the classification requirements are relevant to our historical cash flow statement presentation (presentation of debt prepayments and presentation of distributions from equity method investees). However, the new classification requirements would not have changed our historical statement of cash flows. The new standard is effective for us beginning in 2018. We do not plan to early adopt the new accounting standard because the impact is not expected to be material to our consolidated statement of cash flows when adopted.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
The new guidance clarifies the definition of a business in an effort to make the guidance more consistent. The guidance provides a test for determining when a set is not a business, specifically, when substantially all of the fair value of the gross assets acquired or disposed of are concentrated in a single identifiable asset or group of assets, and if inputs and substantive processes that significantly contribute to the ability to create outputs is not present. The new accounting standard is effective for us beginning in 2018. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
The new guidance removes the requirement to compare implied fair value of goodwill with the carrying amount, therefore impairment charges would be recognized immediately by the amount which carrying value exceeds fair value. The new accounting standard is effective beginning in 2020. We are currently assessing the impact that adopting this new accounting standard will have on our financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Benefit Cost and Net Periodic Postretirement Benefit Cost
. The new guidance classifies service cost as the only component of net periodic benefit cost presented in cost of operations, whereas the other components will be presented in other income. This will affect not only how we present net periodic benefit cost, but also how we present gross profit and operating income upon adoption. The new accounting standard is effective for us beginning in 2018. We have assessed the impact of adopting the new standard on our consolidated statement of operations and determined the required
reclassifications will primarily impact our Power segment's gross profit. The changes in the classification of the historical components of net periodic benefit costs are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Pension & other postretirement benefit costs (benefits)
|
(in thousands)
|
December 31,
2016
|
December 31,
2015
|
Current
classification
|
Future
classification
|
Service cost
|
$
|
1,703
|
|
$
|
13,701
|
|
Cost of operations
|
Cost of operations
|
Interest cost
|
41,772
|
|
50,644
|
|
Cost of operations
|
Other income (expense)
|
Expected return on plan assets
|
(61,939
|
)
|
(68,709
|
)
|
Cost of operations
|
Other income (expense)
|
Amortization of prior service cost
|
250
|
|
307
|
|
Cost of operations
|
Other income (expense)
|
Recognized net actuarial losses -
mark to market adjustments
|
24,110
|
|
40,210
|
|
Cost of operations or SG&A expenses
|
Other income (expense)
|
Net periodic benefit cost (benefit)
|
$
|
5,896
|
|
$
|
36,153
|
|
|
|
New accounting standards that were adopted during the three months ended
March 31, 2017
are summarized as follows:
In the three months ended
March 31, 2017
, the Company adopted ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting
. This new accounting standard has affected how we account for share-based payments, with the most significant impact being the impact of income taxes associated with share-based compensation. Subsequent to adoption, the income tax effects related to share-based payments will be recorded as a component of income tax expense (or benefit) as they occur, rather than being classified as a component of additional paid-in capital. In addition, the effect of excess tax benefits will now be presented in the cash flow statement as an operating activity. We prospectively adopted the new accounting standard. See
Note 7
for the effect on the statement of operations for the three months ended
March 31, 2017
.
In the three months ended
March 31, 2017
, the Company adopted ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This standard requires that first-in, first-out inventory be measured at the lower of cost or net realizable value. Under GAAP prior to the adoption of the standard, inventory was measured at the lower of cost or market, where market was defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value minus a normal profit margin. Although this standard raises the threshold on when charges against inventory can occur, we do not expect a significant impact because we have not had significant inventory charges in the past. We prospectively adopted the new accounting standard and it had no impact on our condensed consolidated financial statements for the three months ended
March 31, 2017
.