NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30,
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 June 30,
|
|
Six months ended June 30,
|
(in thousands, except per share amounts)
|
2017
|
2016
|
|
2017
|
2016
|
Net loss attributable to shareholders
|
$
|
(150,999
|
)
|
$
|
(63,490
|
)
|
|
$
|
(158,044
|
)
|
$
|
(52,983
|
)
|
|
|
|
|
|
|
Weighted average shares used to calculate basic earnings per share
|
48,854
|
|
50,603
|
|
|
48,797
|
|
51,115
|
|
Dilutive effect of stock options, restricted stock and performance shares
(1)
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Weighted average shares used to calculate diluted earnings per share
|
48,854
|
|
50,603
|
|
|
48,797
|
|
51,115
|
|
|
|
|
|
|
|
Basic loss per share:
|
$
|
(3.09
|
)
|
$
|
(1.25
|
)
|
|
$
|
(3.24
|
)
|
$
|
(1.04
|
)
|
|
|
|
|
|
|
Diluted loss per share:
|
$
|
(3.09
|
)
|
$
|
(1.25
|
)
|
|
$
|
(3.24
|
)
|
$
|
(1.04
|
)
|
(1)
Because we incurred a net loss in the quarters and six months ended June 30,
2017
and 2016, basic and diluted shares are the same. If we had net income in the first six months of
2017
and 2016, diluted shares would include an additional
0.4 million
and
0.7 million
shares, respectively. We excluded
1.9 million
shares related to stock options from the diluted share calculation at June 30, 2017 because 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 June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Revenues:
|
|
|
|
|
|
Power segment
|
$
|
213,756
|
|
$
|
261,841
|
|
|
$
|
410,052
|
|
$
|
550,544
|
|
Renewable segment
|
48,074
|
|
85,476
|
|
|
153,610
|
|
169,249
|
|
Industrial segment
|
90,229
|
|
38,005
|
|
|
182,446
|
|
70,471
|
|
Eliminations
|
(2,230
|
)
|
(2,114
|
)
|
|
(5,175
|
)
|
(2,940
|
)
|
|
349,829
|
|
383,208
|
|
|
740,933
|
|
787,324
|
|
Gross profit:
|
|
|
|
|
|
Power segment
|
49,061
|
|
62,475
|
|
|
92,024
|
|
122,007
|
|
Renewable segment
|
(110,894
|
)
|
(17,503
|
)
|
|
(100,300
|
)
|
(4,124
|
)
|
Industrial segment
|
9,464
|
|
11,148
|
|
|
24,779
|
|
18,904
|
|
Intangible amortization expense included in cost of operations
|
(3,453
|
)
|
(569
|
)
|
|
(8,471
|
)
|
(1,080
|
)
|
Mark to market loss included in cost of operations
|
—
|
|
(29,499
|
)
|
|
(954
|
)
|
(29,499
|
)
|
|
(55,822
|
)
|
26,052
|
|
|
7,078
|
|
106,208
|
|
Selling, general and administrative ("SG&A") expenses
|
(67,596
|
)
|
(61,902
|
)
|
|
(133,518
|
)
|
(119,610
|
)
|
Restructuring activities and spin-off transaction costs
|
(2,103
|
)
|
(31,616
|
)
|
|
(5,135
|
)
|
(35,626
|
)
|
Research and development costs
|
(2,901
|
)
|
(3,070
|
)
|
|
(5,163
|
)
|
(5,912
|
)
|
Intangible amortization expense included in SG&A
|
(988
|
)
|
(1,026
|
)
|
|
(1,982
|
)
|
(2,053
|
)
|
Mark to market loss included in SG&A
|
—
|
|
(401
|
)
|
|
(106
|
)
|
(401
|
)
|
Equity in income of investees
|
2,961
|
|
(616
|
)
|
|
3,579
|
|
2,060
|
|
Impairment of equity method investment
|
(18,193
|
)
|
—
|
|
|
(18,193
|
)
|
—
|
|
Gains (losses) on asset disposals, net
|
(4
|
)
|
(6
|
)
|
|
(4
|
)
|
15
|
|
Operating loss
|
$
|
(144,646
|
)
|
$
|
(72,585
|
)
|
|
$
|
(153,444
|
)
|
$
|
(55,319
|
)
|
Beginning with the quarter ended September 30, 2017, the Industrial Steam product line currently included in our Power segment will be reclassified to the Industrial segment to align with management changes that became effective on July 1, 2017.
On June 30, 2017, we assessed our intangible assets for impairment, including goodwill, and we will perform our annual goodwill impairment test after the change in reportable segments is completed. See
Note 13
for the results of our interim goodwill impairment test.
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. In order to purchase Universal on January 11, 2017, we borrowed approximately
$55.0 million
under the United States revolving credit facility in 2017.
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 our goal to grow and diversify our 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
$12.6 million
and
$33.8 million
of revenue to our operating results during the
three and six
months ended
June 30, 2017
, respectively. Universal contributed
$1.9 million
and
$6.8 million
of gross profit (excluding intangible asset amortization expense of
$0.6 million
and
$2.1 million
) to our operating results in the
three and six
months ended
June 30, 2017
, respectively. We expect Universal to contribute over
$80.0 million
of revenue and be accretive to the Industrial segment's gross profit during 2017.
The allocation of the purchase price based on the estimated fair value of assets acquired and liabilities assumed is set forth 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 and six
months ended
June 30, 2017
of
$0.6 million
and
$2.1 million
, respectively, 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
$0.4 million
and
$1.4 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 in the three and six months ended
June 30, 2017
.
The following unaudited pro forma financial information below represents our results of operations for the three and six months ended
June 30, 2016
and 12 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
|
Six months ended
|
Twelve months ended
|
(in thousands)
|
June 30, 2016
|
June 30, 2016
|
December 31, 2016
|
Revenues
|
$
|
404,120
|
|
$
|
828,493
|
|
$
|
1,660,986
|
|
Net income (loss) attributable to B&W
|
(62,963
|
)
|
(52,361
|
)
|
(113,940
|
)
|
Basic earnings per common share
|
(1.24
|
)
|
(1.02
|
)
|
(2.27
|
)
|
Diluted earnings per common share
|
(1.24
|
)
|
(1.02
|
)
|
(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
$0.5 million
,
$1.9 million
and
$2.8 million
in the three and six months ended
June 30, 2016
and the 12 months ended
December 31, 2016
, respectively.
|
|
|
•
|
Elimination of the historical interest expense recognized by Universal of
$0.1 million
,
$0.2 million
and
$0.4 million
in the three and six months ended
June 30, 2016
and the 12 months ended
December 31, 2016
, respectively.
|
|
|
•
|
Elimination of
$0.5 million
in transaction related costs recognized in the 12 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 and six
months ended
June 30, 2017
and
2016
, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Increases in estimates for percentage-of-completion contracts
|
$
|
4,982
|
|
|
$
|
12,019
|
|
|
$
|
14,182
|
|
|
$
|
26,193
|
|
Decreases in estimates for percentage-of-completion contracts
|
(121,217
|
)
|
|
(38,839
|
)
|
|
(124,588
|
)
|
|
(44,812
|
)
|
Net changes in estimates for percentage-of-completion contracts
|
$
|
(116,235
|
)
|
|
$
|
(26,820
|
)
|
|
$
|
(110,406
|
)
|
|
$
|
(18,619
|
)
|
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
June 30, 2017
, two additional renewable energy projects in Europe became loss contracts. During the
three and six
months ended
June 30, 2017
, we recorded a total of
$115.2 million
and
$112.2 million
, respectively, in net losses resulting from changes in the estimated revenues and costs to complete these six European renewable energy loss contracts. These changes in estimates include an increase in our estimate of liquidated damages associated with these six projects of
$16.7 million
during the three months ended
June 30, 2017
, to a total of
$49.6 million
. The charges recorded in the second quarter of 2017 are due to revisions in the estimated revenues and costs at completion during the period, primarily as a result of scheduling delays and shortcomings in our subcontractors' estimated
productivity. Also included in the charges recorded in the second quarter of 2017 were corrections to estimated contract costs at completion of
$4.9 million
and
$6.2 million
relating to the three months ended December 31, 2016 and March 31, 2017, respectively. Management has determined these amounts are immaterial to the consolidated financial statements in both previous periods. As of
June 30, 2017
, the status of these six loss contracts was 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
June 30, 2017
, this project is approximately
94%
complete and construction activities are complete as of the date of this report. The unit became 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
June 30, 2017
, we recognized additional contract losses of
$10.5 million
on the project as a result of differences in actual and estimated costs during the second quarter of 2017 and schedule delays. Our estimate at completion as of June 30, 2017 includes
$6.5 million
of total expected liquidated damages. As of
June 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$3.9 million
. In the second quarter of 2016, we recognized a
$31.7 million
charge, and as of
June 30, 2016
, this project and had
$6.4 million
of accrued losses and was
73%
complete.
The second project became a loss contract in the fourth quarter of 2016. As of
June 30, 2017
, this contract was approximately
69%
complete, and we expect this project to be completed in early 2018. During the
three and six
months ended
June 30, 2017
, we recognized additional contract losses of
$41.2 million
and
$37.4 million
, respectively, on this project as a result of changes in construction cost estimates and schedule delays. Our estimate at completion as of June 30, 2017 includes
$14.3 million
of total expected liquidation damages. As of
June 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$16.6 million
.
The third project became a loss contract in the fourth quarter of 2016. As of
June 30, 2017
, this contract was approximately
95%
complete and construction activities are complete as of the date of this report. The unit became 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 and six
months ended
June 30, 2017
, we recognized additional contract losses of
$2.7 million
and
$5.5 million
, respectively, as a result of changes in the estimated costs at completion. Our estimate at completion as of June 30, 2017 includes
$7.3 million
of total expected liquidated damages for schedule delays. As of
June 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$1.5 million
.
The fourth project became a loss contract in the fourth quarter of 2016. As of
June 30, 2017
, this contract was approximately
66%
complete, and we expect this project to be completed in early 2018. During the
three and six
months ended
June 30, 2017
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$23.8 million
and
$21.9 million
, respectively. Our estimate at completion as of June 30, 2017 includes
$6.4 million
of total expected liquidated damages due to schedule delays. The changes in the status of this project were primarily attributable to changes in the estimated costs at completion, offset by a
$4.8 million
reduction in estimated liquidated damages we recognized during the three months ended March 31, 2017. As of
June 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$8.8 million
.
The fifth project became a loss contract in the second quarter of 2017. As of
June 30, 2017
, this contract was approximately
57%
complete, and we expect this project to be completed in the first half of 2018. During the three months ended
June 30, 2017
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$23.3 million
in the three months ended
June 30, 2017
. Our estimate at completion as of June 30, 2017 includes
$12.0 million
of total expected liquidated damages due to schedule delays. The change in the status of this project was primarily attributable to changes in the estimated costs at completion and schedule delays. As of
June 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$9.4 million
.
The sixth project became a loss contract in the second quarter of 2017. As of
June 30, 2017
, this contract was approximately
59%
complete, and we expect this project to be completed in the first half of 2018. During the three months ended
June 30, 2017
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$18.5 million
in the three months ended
June 30, 2017
. Our estimate at completion as of June 30, 2017 includes
$3.2 million
of total expected liquidated damages due to schedule delays. The change in the status of this project was primarily attributable to changes in the estimated costs at completion and schedule delays. As of
June 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$4.0 million
.
We continue to expect the other renewable energy projects that are not loss contracts to remain profitable at completion.
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 at
June 30, 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
June 30, 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 June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Balance at beginning of period
(1)
|
$
|
697
|
|
$
|
160
|
|
|
$
|
2,254
|
|
$
|
740
|
|
Restructuring expense
|
1,887
|
|
15,877
|
|
|
3,857
|
|
18,024
|
|
Payments
|
(1,617
|
)
|
(4,053
|
)
|
|
(5,144
|
)
|
(6,780
|
)
|
Balance at June 30
|
$
|
967
|
|
$
|
11,984
|
|
|
$
|
967
|
|
$
|
11,984
|
|
(1)
For the three month periods ended June 30, 2017 and 2016, the balance at the beginning of the period is as of March 31, 2017 and 2016, respectively. For the six month periods ended June 30, 2017 and 2016, the balance at the beginning of the period is as of December 31, 2016 and 2015, respectively.
Accrued restructuring liabilities at
June 30, 2017
and
2016
relate primarily to employee termination benefits.
Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring liability. In the
three and six
months ended
June 30, 2017
, we recognized
$(0.2) million
and
$0.4 million
, respectively, in non-cash restructuring expense related to losses (gains) on the disposals of long-lived assets. In the
three and six
months ended
June 30, 2016
, we recognized non-cash charges of
$14.6 million
related to impairments of long-lived assets.
Spin-off transaction costs
Spin-off costs were primarily attributable to employee retention awards directly related to the spin-off from our former parent, The Babcock & Wilcox Company (now known as BWX Technologies, Inc.). In the
three and six
months ended
June 30, 2017
, we recognized spin-off costs of
$0.5 million
and
$0.9 million
, respectively. In the
three and six
months ended June 30, 2016, we recognized spin-off costs of
$1.1 million
and
$3.0 million
, respectively. In the three months ended
June 30, 2017
, we disbursed
$1.9 million
of the accrued retention awards.
NOTE 7
– PROVISION FOR INCOME TAXES
We had tax expense in the three months ended
June 30, 2017
which resulted in a
1.3%
effective tax rate as compared to a tax benefit in the three months ended
June 30, 2016
which resulted in a
12.5%
effective tax rate. Our effective tax rate for the three months ended
June 30, 2017
was lower than our statutory rate primarily due to foreign losses in our Renewable segment that are subject to a valuation allowance, nondeductible expenses and unfavorable discrete items of
$3.2 million
. The discrete items include withholding tax on a forecasted distribution outside the US, partly offset by favorable adjustments to prior year foreign tax returns and the effect of vested and exercised share-based compensation awards. The tax benefit associated with the
$18.2 million
impairment of our equity method investment in India was offset by a valuation allowance.
Our effective tax rate for the three months ended
June 30, 2016
was lower than our statutory rate primarily due to a
$13.1 million
increase in valuation allowances against deferred tax assets related to our equity investment in a foreign joint venture and state net operating losses, and to changes in the jurisdictional mix of our forecasted full year income and losses, which were significantly affected by the 2016 second quarter mark to market adjustments, and the charge from a renewable energy contact in Europe.
Our effective rate for the six months ended
June 30, 2017
was approximately
1.3%
as compared to
4.4%
for the six months ended
June 30, 2016
. Our effective tax rate for the six months ended
June 30, 2017
was lower than our statutory rate primarily due to the reasons noted above and nondeductible transaction costs, which were offset by the effect of vested and exercised share-based compensation awards, both of which were discrete items in the first quarter of 2017.
Our effective tax rate for the six months ended
June 30, 2016
was lower than our statutory rate primarily due to a
$13.1 million
increase in valuation allowances associated with deferred tax assets related to our equity investment in a foreign joint venture and state net operating losses, and to the jurisdictional mix of our forecasted full year income and losses, as described above.
During the six months ended
June 30, 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
$0.2 million
and
$1.5 million
income tax benefit in the three and six months ended
June 30, 2017
, respectively, 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 first two quarters in
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, 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
|
)
|
Other comprehensive income (loss) before reclassifications
|
6,757
|
|
(19
|
)
|
(2,204
|
)
|
(97
|
)
|
4,437
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
(1
|
)
|
(658
|
)
|
(800
|
)
|
(1,459
|
)
|
Net current-period other comprehensive income (loss)
|
6,757
|
|
(20
|
)
|
(2,862
|
)
|
(897
|
)
|
2,978
|
|
Balance at June 30, 2017
|
$
|
(31,813
|
)
|
$
|
(23
|
)
|
$
|
(1,316
|
)
|
$
|
4,917
|
|
$
|
(28,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
)
|
Other comprehensive income (loss) before reclassifications
|
(11,566
|
)
|
(7
|
)
|
778
|
|
37
|
|
(10,758
|
)
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
—
|
|
(651
|
)
|
58
|
|
(593
|
)
|
Net current-period other comprehensive income (loss)
|
(11,566
|
)
|
(7
|
)
|
127
|
|
95
|
|
(11,351
|
)
|
Balance at June 30, 2016
|
$
|
(29,319
|
)
|
$
|
(32
|
)
|
$
|
3,486
|
|
$
|
(1,007
|
)
|
$
|
(26,872
|
)
|
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 June 30,
|
|
Six months ended June 30,
|
2017
|
2016
|
|
2017
|
2016
|
Derivative financial instruments
|
Revenues
|
$
|
714
|
|
$
|
1,261
|
|
|
$
|
6,002
|
|
$
|
2,584
|
|
|
Cost of operations
|
(49
|
)
|
10
|
|
|
(46
|
)
|
33
|
|
|
Other-net
|
885
|
|
(578
|
)
|
|
492
|
|
(620
|
)
|
|
Total before tax
|
1,550
|
|
693
|
|
|
6,448
|
|
1,997
|
|
|
Provision for income taxes
|
892
|
|
42
|
|
|
1,947
|
|
343
|
|
|
Net income
|
$
|
658
|
|
$
|
651
|
|
|
$
|
4,501
|
|
$
|
1,654
|
|
|
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Cost of operations
|
$
|
789
|
|
$
|
(95
|
)
|
|
$
|
1,662
|
|
$
|
309
|
|
|
Provision for income taxes
|
(11
|
)
|
(37
|
)
|
|
(20
|
)
|
428
|
|
|
Net income (loss)
|
$
|
800
|
|
$
|
(58
|
)
|
|
$
|
1,682
|
|
$
|
(119
|
)
|
|
|
|
|
|
|
|
Realized gain on investments
|
Other-net
|
$
|
1
|
|
$
|
—
|
|
|
$
|
44
|
|
$
|
(1
|
)
|
|
Provision for income taxes
|
—
|
|
—
|
|
|
16
|
|
—
|
|
|
Net income (loss)
|
$
|
1
|
|
$
|
—
|
|
|
$
|
28
|
|
$
|
(1
|
)
|
NOTE 9
– CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Held by foreign entities
|
$
|
64,354
|
|
$
|
94,415
|
|
Held by United States entities
|
3,513
|
|
1,472
|
|
Cash and cash equivalents
|
$
|
67,867
|
|
$
|
95,887
|
|
|
|
|
Reinsurance reserve requirements
|
$
|
18,405
|
|
$
|
21,189
|
|
Restricted foreign accounts
|
4,428
|
|
6,581
|
|
Restricted cash and cash equivalents
|
$
|
22,833
|
|
$
|
27,770
|
|
Our United States revolving credit facility described in
Note 17
allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.
NOTE 10
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Raw materials and supplies
|
$
|
66,776
|
|
$
|
61,630
|
|
Work in progress
|
6,764
|
|
6,803
|
|
Finished goods
|
16,047
|
|
17,374
|
|
Total inventories
|
$
|
89,587
|
|
$
|
85,807
|
|
NOTE 11
– EQUITY METHOD INVESTMENTS
Joint ventures in which we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. We assess our investments in unconsolidated affiliates for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other than temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated affiliate at fair value.
Our primary equity method investees include joint ventures in China and India, each of which manufactures boiler parts and equipment. At
June 30, 2017
and
December 31, 2016
, our total investment in these joint ventures was
$84.6 million
and
$98.7 million
, respectively. During the second quarter of 2017, both we and our joint venture partner decided to make a strategic change in the Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES") joint venture due to the decline in forecasted market opportunities in India, which reduced the expected recoverable value of our investment in the joint venture. As a result of this strategic change, we recognized a
$18.2 million
other-than-temporary-impairment of our investment in TBWES during the three months ended
June 30, 2017
. The impairment charge was based on the difference in the carrying value of our investment in TBWES and our share of the estimated fair value of TBWES's net assets.
NOTE 12
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Definite-lived intangible assets
|
|
|
Customer relationships
|
$
|
59,392
|
|
$
|
47,892
|
|
Unpatented technology
|
19,489
|
|
18,461
|
|
Patented technology
|
6,576
|
|
2,499
|
|
Tradename
|
22,492
|
|
18,774
|
|
Backlog
|
30,041
|
|
28,170
|
|
All other
|
7,521
|
|
7,429
|
|
Gross value of definite-lived intangible assets
|
145,511
|
|
123,225
|
|
Customer relationships amortization
|
(20,432
|
)
|
(17,519
|
)
|
Unpatented technology amortization
|
(3,898
|
)
|
(2,864
|
)
|
Patented technology amortization
|
(1,871
|
)
|
(1,532
|
)
|
Tradename amortization
|
(4,447
|
)
|
(3,826
|
)
|
Acquired backlog amortization
|
(26,677
|
)
|
(21,776
|
)
|
All other amortization
|
(6,619
|
)
|
(5,974
|
)
|
Accumulated amortization
|
(63,944
|
)
|
(53,491
|
)
|
Net definite-lived intangible assets
|
$
|
81,567
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
71,039
|
|
$
|
37,844
|
|
Business acquisitions
|
19,500
|
|
—
|
|
Amortization expense
|
(10,453
|
)
|
(3,133
|
)
|
Currency translation adjustments and other
|
2,786
|
|
319
|
|
Balance at end of the period
|
$
|
82,872
|
|
$
|
35,030
|
|
The acquisition of Universal resulted in an increase in our intangible asset amortization expense during the
three and six
months ended
June 30, 2017
of
$0.6 million
and
$2.1 million
, respectively, which is included in cost of operations in our condensed consolidated statement of operations. The amortization of Universal's intangible assets was highest during the first quarter of 2017 and is expected to decline 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 September 30, 2017
|
$
|
3,739
|
|
Three months ending December 31, 2017
|
$
|
3,598
|
|
Twelve months ending December 31, 2018
|
$
|
12,415
|
|
Twelve months ending December 31, 2019
|
$
|
10,218
|
|
Twelve months ending December 31, 2020
|
$
|
8,949
|
|
Twelve months ending December 31, 2021
|
$
|
8,630
|
|
Twelve months ending December 31, 2022
|
$
|
7,081
|
|
Thereafter
|
$
|
26,937
|
|
NOTE 13
– GOODWILL
The following summarizes the changes in the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Power
|
|
Renewable
|
|
Industrial
|
|
Total
|
Balance at December 31, 2016
|
|
$
|
46,220
|
|
|
$
|
48,435
|
|
|
$
|
172,740
|
|
|
$
|
267,395
|
|
Increase resulting from Universal acquisition
|
|
—
|
|
|
—
|
|
|
14,413
|
|
|
14,413
|
|
Currency translation adjustments
|
|
783
|
|
|
1,016
|
|
|
4,450
|
|
|
6,249
|
|
Balance at June 30, 2017
|
|
$
|
47,003
|
|
|
$
|
49,451
|
|
|
$
|
191,603
|
|
|
$
|
288,057
|
|
Our annual goodwill impairment assessment is performed on October 1 of each year (the "annual assessment" date). The Renewable segment's second quarter results and management changes in our Industrial segment caused us to also evaluate whether goodwill was impaired at June 30, 2017 (the "interim assessment" date).
Our interim assessment for each of our six reporting units indicated that it was not more likely than not that any of our reporting unit's goodwill was impaired. The following summarizes our reporting units' goodwill balances at June 30, 2017 and the headroom from our interim Step 1 goodwill impairment test, which is the estimated fair value less the carrying value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Power
|
|
Construction
|
|
Renewable
|
|
MEGTEC
|
|
SPIG
|
|
Universal
|
Reporting unit headroom
|
|
102%
|
|
214%
|
|
68%
|
|
3%
|
|
<1%
|
|
11%
|
Goodwill balance
|
|
$38.1
|
|
$8.9
|
|
$49.5
|
|
$104.3
|
|
$72.9
|
|
$14.4
|
Estimating the fair value of a reporting unit requires significant judgment. The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a
50%
weighting of an income approach using a discounted cash flow analysis based on forward-looking projections of future operating results, a
30%
to
40%
weighting of a market approach using multiples of revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) of guideline companies and a
10%
to
20%
weighting of a market approach using multiples of revenue and EBITDA from recent, similar business combinations.
As a result of the incurred and accrued contract losses in the Renewable reporting unit, it has a negative carrying value at both the annual and interim assessment dates. The Step 1 goodwill impairment test indicated there was no impairment of the Renewable reporting unit's goodwill, and its fair value exceeded its carrying value by
68%
at June 30, 2017. The reporting unit's estimated fair value is most sensitive to changes in the future forecasted results of operations and the discount rate. The rate we used to discount future projected cash flows at the interim assessment date in 2017 was
15%
. Reasonable changes in assumptions did not indicate impairment.
For our MEGTEC reporting unit, which is included in our Industrial segment, the Step 1 goodwill impairment test indicated there was no impairment, and the fair value exceeded the carrying value by
3%
at June 30, 2017 compared to
22%
at October 1, 2016. Under both the income and market valuation approaches, the fair value estimates decreased due to lower projected net sales and EBITDA. Similar to many industrial businesses, the reduction in MEGTEC reporting unit revenues has been the
result of a decline in new equipment demand, primarily in the Americas. However, management believes the industrials market is starting to show signs of stabilizing as evidenced by the
42%
increase in revenues and
31%
increase in gross profit during the second quarter of 2017. The estimate of fair value of the MEGTEC reporting unit is sensitive to changes in assumptions, particularly assumed discount rates and projections of future operating results under the income approach. At June 30, 2017, the discount rate used in the income approach was
11%
. Absent any other changes, an increase in the discount rate could result in future impairment of goodwill. Decreases in future projected operating results could also result in future impairment of goodwill.
For our SPIG reporting unit, which is included in our Industrial segment, the Step 1 goodwill impairment test indicated there was no impairment, and the fair value exceeded the carrying value by less than
1%
at June 30, 2017 compared to
5%
at October 1, 2016. The small amount of headroom is expected based on the fact that the business was acquired on July 1, 2016. Under both the income and market valuation approaches, the independently obtained fair value estimates decreased due to a short-term decrease in profitability attributable to specific contracts. New management coupled with changes in SPIG's contracting process results in the reporting unit's forecasted profitability increasing in future periods. Since October 1, 2016, the reporting unit also has an increased pipeline of opportunities to sell its products and services. The estimate of fair value of the SPIG reporting unit is sensitive to changes in assumptions, particularly assumed discount rates and projections of future operating results under the income approach. At June 30, 2017, the discount rate used in the income approach was
12.5%
. Absent any other changes, an increase in the discount rate could result in future impairment of goodwill. Decreases in future projected operating results could also result in future impairment of goodwill.
NOTE 14
– 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)
|
June 30, 2017
|
December 31, 2016
|
Land
|
$
|
8,716
|
|
$
|
6,348
|
|
Buildings
|
120,574
|
|
114,322
|
|
Machinery and equipment
|
203,228
|
|
189,489
|
|
Property under construction
|
13,447
|
|
22,378
|
|
|
345,965
|
|
332,537
|
|
Less accumulated depreciation
|
201,556
|
|
198,900
|
|
Net property, plant and equipment
|
$
|
144,409
|
|
$
|
133,637
|
|
NOTE 15
– WARRANTY EXPENSE
Changes in the carrying amount of our accrued warranty expense are as follows:
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
40,467
|
|
$
|
39,847
|
|
Additions
|
13,050
|
|
9,788
|
|
Expirations and other changes
|
(3,243
|
)
|
(1,219
|
)
|
Increases attributable to business combinations
|
1,060
|
|
—
|
|
Payments
|
(7,437
|
)
|
(5,707
|
)
|
Translation and other
|
1,307
|
|
36
|
|
Balance at end of period
|
$
|
45,204
|
|
$
|
42,745
|
|
NOTE 16
– 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 June 30,
|
|
Six months ended June 30,
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
Service cost
|
$
|
256
|
|
$
|
205
|
|
|
$
|
530
|
|
$
|
589
|
|
|
$
|
4
|
|
$
|
6
|
|
|
$
|
8
|
|
$
|
12
|
|
Interest cost
|
10,279
|
|
10,228
|
|
|
20,536
|
|
20,804
|
|
|
140
|
|
212
|
|
|
361
|
|
423
|
|
Expected return on plan assets
|
(14,854
|
)
|
(15,255
|
)
|
|
(29,710
|
)
|
(30,182
|
)
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
26
|
|
111
|
|
|
51
|
|
253
|
|
|
(816
|
)
|
—
|
|
|
(1,716
|
)
|
—
|
|
Recognized net actuarial loss
|
—
|
|
29,900
|
|
|
1,062
|
|
29,900
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Net periodic benefit cost (benefit)
|
$
|
(4,293
|
)
|
$
|
25,189
|
|
|
$
|
(7,531
|
)
|
$
|
21,364
|
|
|
$
|
(672
|
)
|
$
|
218
|
|
|
$
|
(1,347
|
)
|
$
|
435
|
|
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 first quarter of 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. There were no plan settlements or interim mark to market adjustments during the second quarter of 2017.
In May 2016, the closure of our West Point, Mississippi manufacturing facility resulted in a
$1.8 million
curtailment charge in our United States pension plan and lump sum payments from our Canadian pension plan in April 2016 resulted in a
$1.1 million
plan settlement. Each of these events also resulted in interim mark to market accounting for the pension plans. Mark to market adjustments in the three months ended June 30, 2016 were
$24.1 million
and
$2.9 million
for our United States and Canadian pension plans, respectively, based on a weighted-average discount rate of
3.89%
and higher than expected returns on pension plan assets. The effect of these charges and mark to market adjustments are reflected in the
$29.9 million
"Recognized net actuarial loss" in the table above.
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 losses. The recognized net actuarial loss during the
three and six
months ended
June 30, 2017
and 2016 was recorded in our condensed consolidated statements of operations in the following line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Cost of operations
|
$
|
—
|
|
|
$
|
29,499
|
|
|
$
|
954
|
|
|
$
|
29,499
|
|
Selling, general and administrative expenses
|
—
|
|
|
401
|
|
|
106
|
|
|
401
|
|
Other
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
29,900
|
|
|
$
|
1,062
|
|
|
$
|
29,900
|
|
We made contributions to our pension and other postretirement benefit plans totaling
$5.0 million
and
$6.4 million
during the
three and six
months ended
June 30, 2017
, respectively, as compared to
$1.3 million
and
$2.6 million
during the
three and six
months ended
June 30, 2016
, respectively.
See
Note 23
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.
NOTE 17
– REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
|
|
|
|
|
|
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
United States
|
$
|
118,130
|
|
$
|
9,800
|
|
Foreign
|
13,268
|
|
14,241
|
|
Total revolving debt
|
$
|
131,398
|
|
$
|
24,041
|
|
United States revolving credit facility
On May 11, 2015, we entered into a credit agreement with a syndicate of lenders ("Credit Agreement") in connection with our spin-off from The Babcock & Wilcox Company. The Credit Agreement, which is scheduled to mature on June 30, 2020, provides for a senior secured revolving credit facility, initially in an aggregate amount of up to
$600.0 million
. The proceeds from loans under the Credit Agreement are available for working capital needs and other general corporate purposes, and the full amount is available to support the issuance of letters of credit.
On February 24, 2017 and August 9, 2017, we entered into amendments to the Credit Agreement (the “Amendments” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (1) permit us to incur the debt under the second lien term loan facility (discussed further in
Note 18
), (2) modify the definition of EBITDA in the Amended Credit Agreement to exclude: up to
$98.1 million
of charges for certain Renewable segment contracts for periods including the quarter ended December 31, 2016, up to
$115.2 million
of charges for certain Renewable segment contracts for periods including the quarter ended June 30, 2017, up to
$4.0 million
of aggregate restructuring expenses incurred during the period from July 1, 2017 through September 30, 2018 measured on a consecutive four-quarter basis, realized and unrealized foreign exchange losses resulting from the impact of foreign currency changes on the valuation of assets and liabilities, and fees and expenses incurred in connection with the August 9, 2017 amendment, (3) replace the maximum leverage ratio with a maximum senior debt leverage ratio, (4) decrease the minimum consolidated interest coverage ratio, (5) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to
$250.0 million
in the aggregate, (6) reduce commitments under the revolving credit facility from
$600.0 million
to
$500.0 million
, (7) require us to maintain liquidity (as defined in the Amended Credit Agreement) of at least
$75.0 million
as of the last business day of any calendar month, (8) require us to repay outstanding borrowings under the revolving credit facility (without any reduction in commitments) with certain excess cash, (9) increase the pricing for borrowings and commitment fees under the Amended Credit Agreement, (10) limit our ability to incur debt and liens during the covenant relief period, (11) limit our ability to make acquisitions and investments in third parties during the covenant relief period, (12) prohibit us from paying dividends and undertaking stock repurchases during the covenant relief period (other than our share repurchase from an affiliate of AIP (discussed further in
Note 18
)), (13) prohibit us from exercising the accordion described below during the covenant relief period, (14) limit our financial and commercial letters of credit outstanding under the Amended Credit Agreement to
$30.0 million
during the covenant relief period, (15) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales, (16) beginning with the quarter ending September 30, 2017, limit to no more than
$25.0 million
any net income losses attributable to certain Vølund projects, and (17) increase reporting obligations and require us to hire a third-party consultant. The covenant relief period will end, at our election, when the conditions set forth in the Amended Credit Agreement are satisfied, but in no event earlier than the date on which we provide the compliance certificate for our fiscal quarter ending December 31, 2018.
Other than during the covenant relief period, 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 (1)
$200.0 million
plus (2) an unlimited amount, so long as for any commitment increase under this subclause (2) our senior leverage ratio (assuming the full amount of any commitment increase under this subclause (2) is drawn) is equal to or less than
2.00
:1.0 after giving pro forma effect thereto. During the covenant relief period, 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 (1) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (2) 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, 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, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
After giving effect to Amendments, loans outstanding under the Amended Credit Agreement bear interest at our option at either (1) the LIBOR rate plus
5.0%
per annum or (2) 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
4.0%
per annum. A commitment fee of
1.0%
per annum is charged on the unused portions of the revolving credit facility. A letter of credit fee of
2.50%
per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of
1.50%
per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Additionally, an annual facility fee of
$1.5 million
is payable on the first business day of 2018 and 2019, and a pro rated amount is payable on the first business day of 2020.
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 senior debt leverage ratio as defined in the Amended Credit Agreement is:
|
|
•
|
6.00
:1.0 for the quarter ending September 30, 2017,
|
|
|
•
|
8.50
:1.0 for each of the quarters ending December 31, 2017 and March 31, 2018,
|
|
|
•
|
6.25
:1.0 for the quarter ending June 30, 2018,
|
|
|
•
|
4.00
:1.0 for the quarter ending September 30, 2018,
|
|
|
•
|
3.75
:1.0 for the quarter ending December 31, 2018,
|
|
|
•
|
3.25
:1.0 for each of the quarters ending March 31, 2019 and June 30, 2019, and
|
|
|
•
|
3.00
:1.0 for each of the quarters ending September 30, 2019 and each quarter thereafter.
|
The minimum consolidated interest coverage ratio as defined in the Credit Agreement is:
|
|
•
|
1.50
:1.0 for the quarter ending September 30, 2017,
|
|
|
•
|
1.00
:1.0 for each of the quarters ending December 31, 2017 and March 31, 2018,
|
|
|
•
|
1.25
:1.0 for the quarter ending June 30, 2018,
|
|
|
•
|
1.50
:1.0 for each of the quarters ending September 30, 2018 and December 31, 2018,
|
|
|
•
|
1.75
:1.0 for each of the quarters ending March 31, 2019 and June 30, 2019, and
|
|
|
•
|
2.00
:1.0 for each of the quarters ending September 30, 2019 and each quarter thereafter.
|
Beginning with September 30, 2017, consolidated capital expenditures in each fiscal year are limited to
$27.5 million
.
At
June 30, 2017
, usage under the Amended Credit Agreement consisted of
$118.1 million
in borrowings at an effective interest rate of
3.81%
,
$7.7 million
of financial letters of credit and
$93.7 million
of performance letters of credit. After giving effect to the August 9, 2017 amendment, at
June 30, 2017
, we had
$92.1 million
available for borrowings or to meet letter of credit requirements primarily based on trailing 12 month EBITDA, and our leverage (as defined in the Amended Credit Agreement) ratio was
2.16
and our interest coverage ratio was
5.41
. At
June 30, 2017
, we were in compliance with all of the covenants set forth in the Amended Credit Agreement.
Foreign revolving credit facilities
Outside of the United States, we have revolving credit facilities in Turkey, China and India that are used to provide working capital to our operations in each country. These three foreign revolving credit facilities allow us to borrow up to
$14.5 million
in aggregate and each have a one year term. At
June 30, 2017
, we had
$13.3 million
in borrowings outstanding under these foreign revolving credit facilities at an effective weighted-average interest rate of
5.1%
.
Other credit arrangements
Certain subsidiaries have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in associated with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States revolving credit facility as of
June 30, 2017
and December 31, 2016 was
$273.3 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 adequate to support our existing project requirements for the next 12 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
June 30, 2017
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$465.3 million
.
NOTE 18
– SECOND LIEN TERM LOAN FACILITY
On
August 9, 2017
, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of American Industrial Partners ("AIP"), governing a second lien term loan facility. The second lien term loan facility consists of a second lien term loan in the principal amount of
$175.9 million
, all of which we borrowed on August 9, 2017, and a delayed draw term loan facility in the principal amount of up to
$20.0 million
, which may be drawn in a single draw prior to June 30, 2020, subject to certain conditions. Borrowings under the second lien term loan, other than the delayed draw term loan, bear interest at
10%
per annum, and borrowings under the delayed draw term loan bear interest at
12%
per annum, in each case payable quarterly. Undrawn amounts under the delayed draw term loan accrue a commitment fee at a rate of
0.50%
per annum. The second lien term loan has a scheduled maturity of December 30, 2020. Any delayed draw borrowings would also have a scheduled maturity of December 30, 2020. In connection with our entry into the second lien term loan facility, we used a portion of the proceeds from the second lien term loan to repurchase approximately
4.8 million
shares of our common stock (approximately
10%
of our shares outstanding) held by an affiliate of AIP for approximately
$50.9 million
, which was one of the conditions precedent for the second lien term loan facility.
Borrowings under the Second Lien Credit Agreement are (1) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by second-priority liens on certain assets owned by us and the guarantors. The Second Lien Credit Agreement requires interest payments on loans on a periodic basis until maturity. Voluntary prepayments made during the first year after closing are subject to a make-whole premium, voluntary prepayments made during the second year after closing are subject to a a
3.0%
premium and voluntary prepayments made during the third year after closing are subject to a
2.0%
premium. The Second Lien Credit Agreement requires us to make certain prepayments on any outstanding 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, and subject to certain restrictions contained in an intercreditor agreement among the lenders under the Amended Credit Agreement and the Second Lien Credit Agreement.
The Second Lien Credit Agreement contains representations and warranties, affirmative and restrictive covenants, financial covenants and events of default substantially similar to those contained in the Amended Credit Agreement, subject to appropriate cushions. The Second Lien Credit Agreement is generally less restrictive than the Amended Credit Agreement.
NOTE 19
– 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 rendered 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. At
June 30, 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.
ARPA also 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. The court granted ARPA $3.7 million of pre-judgment interest on July 21, 2017. We recorded the
$3.7 million
pre-judgment interest payable in our June 30, 2017 condensed consolidated financial statements in other accrued liabilities and interest expense. B&W intends to evaluate its options for appeal.
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"). During the second quarter of 2017, the Stockholder Litigation was consolidated into a single action and a lead plaintiff was selected by the Court. As amended, the complaint now purports to cover investors who purchased shares between June 17, 2015 and February 28, 2017.
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 20
– 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
June 30, 2017
and
2016
, we had deferred approximately
$(1.3) million
and
$3.5 million
, respectively, of net gains (losses) on these derivative financial instruments in accumulated other comprehensive income ("AOCI").
At
June 30, 2017
, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled
$223.3 million
at
June 30, 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 United States revolving credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our United States revolving credit facility.
The following tables summarize our derivative financial instruments:
|
|
|
|
|
|
|
|
|
Asset and Liability Derivative
|
(in thousands)
|
June 30, 2017
|
December 31, 2016
|
Derivatives designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
2,992
|
|
$
|
3,805
|
|
Other assets
|
69
|
|
665
|
|
Accounts payable
|
5,214
|
|
1,012
|
|
Other liabilities
|
60
|
|
213
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts not designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
28
|
|
$
|
105
|
|
Other assets
|
7
|
|
—
|
|
Accounts payable
|
71
|
|
403
|
|
Other liabilities
|
—
|
|
7
|
|
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Derivatives designated as hedges:
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income
|
$
|
(3,657
|
)
|
$
|
847
|
|
|
$
|
2,244
|
|
4,057
|
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location:
|
|
|
|
|
|
Revenues
|
714
|
|
1,261
|
|
|
6,002
|
|
2,584
|
|
Cost of operations
|
(49
|
)
|
10
|
|
|
(46
|
)
|
33
|
|
Other-net
|
885
|
|
(578
|
)
|
|
492
|
|
(620
|
)
|
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location:
|
|
|
|
|
|
Other-net
|
(113
|
)
|
1,219
|
|
|
(3,519
|
)
|
1.801
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
Forward contracts
|
|
|
|
|
|
Loss recognized in income by location:
|
|
|
|
|
|
Other-net
|
$
|
(36
|
)
|
$
|
(303
|
)
|
|
$
|
(345
|
)
|
$
|
(413
|
)
|
NOTE 21
– 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
|
June 30, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Commercial paper
|
$
|
7,968
|
|
|
$
|
—
|
|
|
$
|
7,968
|
|
|
$
|
—
|
|
Certificates of deposit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Mutual funds
|
1,228
|
|
|
—
|
|
|
1,228
|
|
|
—
|
|
Corporate bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
U.S. Government and agency securities
|
7,343
|
|
|
7,343
|
|
|
—
|
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
16,539
|
|
|
$
|
7,343
|
|
|
$
|
9,196
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
June 30, 2017
|
|
December 31, 2016
|
Forward contracts to purchase/sell foreign currencies
|
$
|
(2,248
|
)
|
|
$
|
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
June 30, 2017
and
December 31, 2016
.
|
Non-recurring fair value measurements
The other-than-temporary impairment of our equity method investment in TBWES 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
). We determined the impairment charge by first determining an estimate of the price that could be received to sell the assets and transfer the liabilities held by TBWES in an orderly transaction between
market participants at June 30, 2017. The fair value of TBWES's net assets was determined through a combination of the cost approach, a market approach and an income approach.
The purchase price allocation associated with the January 11, 2017 acquisition of Universal required significant fair value measurements using unobservable inputs. 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 16
). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.
NOTE 22
– SUPPLEMENTAL CASH FLOW INFORMATION
During the
six
-months ended
June 30, 2017
and
2016
, we recognized the following non-cash activity in our condensed consolidated financial statements:
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|
|
|
|
|
|
|
(in thousands)
|
2017
|
2016
|
Accrued capital expenditures in accounts payable
|
$
|
703
|
|
$
|
3,920
|
|
NOTE 23
– 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; determining if an entity is the principal or agent in a revenue arrangement; and technical corrections and improvements on topics including: contract costs, loss provisions on construction and production contracts and disclosures for remaining and prior-period performance obligations. 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. To date, we have analyzed our primary revenue streams and performed a detailed review of a sample 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. Based on our preliminary assessment, we do not expect the timing of revenue recognition to change significantly upon adoption of the new accounting standard; however, we are still assessing the impact to process, systems, internal controls and disclosures. We plan 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 will include the existing, uncompleted contracts at that time the new accounting standard is adopted, and as a result, we will not be able to make a final determination about the impact of adopting the new accounting standard until the first quarter of 2018.
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 group of assets and business activities 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:
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|
|
|
|
|
|
|
|
|
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 six months ended
June 30, 2017
are summarized as follows:
In the six months ended
June 30, 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 and six months ended
June 30, 2017
.
In the six months ended
June 30, 2017
, the Company adopted ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This new accounting 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 this new accounting 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 new accounting 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 or six months ended
June 30, 2017
.
NOTE 24
– SUBSEQUENT EVENT
On August 7, 2017, our Board of Directors approved a Key Executive Retention Program (the “KERP”) as a means to maintain continuity of management as the Company works through its operational challenges. Key members of our management team (other than our CEO) participate in the KERP, and participants received awards payable in both cash and shares of the Company’s common stock. The KERP had no impact on our consolidated financial statements as of June 30, 2017.