NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2018
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, 2017 ("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.
Going concern considerations
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty other than the reclassification of our Second Lien Term Loan Facility, as described below, to current liabilities.
We face liquidity challenges from additional losses recognized in the fourth quarter of 2017 and the first quarter of 2018 on our European renewable energy contracts described in
Note 4
to the condensed consolidated financial statements, which caused us to be out of compliance with certain financial covenants in the agreements governing certain of our debt at December 31, 2017 and at March 31, 2018. To avoid default, we obtained amendments to our U.S. revolving credit facility, dated May 11, 2015 (as amended, the "U.S. Revolving Credit Facility"), on March 1, 2018 and April 10, 2018 that temporarily waived the financial covenant defaults that existed at December 31, 2017 and March 31, 2018, respectively. We also completed a Rights Offering, as described in Note 17 on April 30, 2018, which raised gross proceeds of $248.5 million, a substantial portion of which was used to fully repay and terminate our second lien term loan facility, dated August 9, 2017 (the "Second Lien Term Loan Facility"), and the remainder of which will be used for working capital purposes, as described in Note 16 and Note 17.
Our plan to further improve our liquidity position and to remedy the going concern uncertainty includes, but is not limited to:
|
|
•
|
progressing an active program to sell at least
$100.0 million
of assets by March 31, 2019 as required under the terms of Amendment 5 to the U.S. Revolving Credit Facility, as described in
Note 15
, the proceeds of which would primarily be used to repay outstanding borrowings under the U.S. Revolving Credit Facility;
|
|
|
•
|
exploring options to reduce costs in our business;
|
|
|
•
|
selling certain other assets or exiting certain markets if we believe the opportunity would improve our liquidity;
|
|
|
•
|
working to mitigate, where possible, the adverse impact of our net losses over the past two years on our core operations, customers, vendors and banking relationships (e.g., providers of bank guarantees, letters of credit and surety bonds); and
|
|
|
•
|
dedicating contract management resources to the performance, efficiency and timely completion of our existing and forecasted portfolio of contracts;
|
While we believe that the actions summarized above are more likely than not to address the substantial doubt about our ability to continue as a going concern, we cannot assert that it is probable that our plans will fully mitigate the conditions identified. Our plan is designed to provide us with adequate liquidity to meet our obligations for at least the twelve month period following May 8, 2018; however, our remediation plan depends on conditions and matters that may be outside of our control. Accordingly, we cannot be certain of our ability to sell sufficient assets on terms acceptable to us, which raises substantial doubt about our ability to continue as a going concern. Additionally, our ability to meet the amended covenants associated with our U. S. Revolving Credit Facility is dependent on our future financial operating results. If we cannot continue as a going concern, material adjustments to the carrying values and classifications of our assets and liabilities and the reported amounts of income and expense could be required.
NOTE 2
– EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of our common stock, net of noncontrolling interest:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands, except per share amounts)
|
2018
|
2017
|
Net loss attributable to shareholders
|
$
|
(120,433
|
)
|
$
|
(7,045
|
)
|
|
|
|
Weighted average shares used to calculate basic earnings per share
|
44,187
|
|
48,740
|
|
Dilutive effect of stock options, restricted stock and performance shares
|
—
|
|
—
|
|
Weighted average shares used to calculate diluted earnings per share
|
44,187
|
|
48,740
|
|
|
|
|
Basic loss per share:
|
$
|
(2.73
|
)
|
$
|
(0.14
|
)
|
|
|
|
Diluted loss per share:
|
$
|
(2.73
|
)
|
$
|
(0.14
|
)
|
Because we incurred a net loss in the three months ended
March 31, 2018
and
2017
, basic and diluted shares are the same.
If we had net income in the three months ended
March 31, 2018
and
2017
, diluted shares would include an additional
0.9 million
and
0.4 million
shares, respectively.
We excluded
2.0 million
and
1.9 million
shares related to stock options from the diluted share calculation for the three months ended
March 31, 2018
and
2017
, respectively, 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:
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|
•
|
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.
|
The segment information presented in the table below reflects the product line revenues that are reviewed by each segment's manager. These gross product line revenues exclude eliminations of revenues generated from sales to other segments or to other product lines within the segment. The primary component of the Power segment elimination is revenue associated with construction services. An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
2017
|
Revenues:
|
|
|
Power segment
|
|
|
Retrofits & continuous emissions monitoring systems
|
$
|
61,983
|
|
$
|
61,374
|
|
New build utility and environmental
|
12,847
|
|
52,691
|
|
Aftermarket parts and field engineering services
|
73,073
|
|
75,133
|
|
Industrial steam generation
|
14,906
|
|
22,873
|
|
Eliminations
|
(3,683
|
)
|
(15,775
|
)
|
|
159,126
|
|
196,296
|
|
Renewable segment
|
|
|
Renewable new build and services
|
44,711
|
|
88,872
|
|
Operations and maintenance
|
15,247
|
|
16,664
|
|
|
59,958
|
|
105,536
|
|
Industrial segment
|
|
|
Aftermarket parts and services
|
19,766
|
|
26,592
|
|
Environmental solutions
|
40,254
|
|
26,732
|
|
Cooling systems
|
29,021
|
|
36,359
|
|
Engineered products
|
5,884
|
|
2,534
|
|
|
94,925
|
|
92,217
|
|
|
|
|
Eliminations
|
(2,652
|
)
|
(2,945
|
)
|
|
$
|
311,357
|
|
$
|
391,104
|
|
Beginning in 2018, we changed our primary measure of segment profitability from gross profit to adjusted earnings before interest, tax, depreciation and amortization ("EBITDA"). The presentation of the components of our gross profit and adjusted EBITDA in the tables below are consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, mark-to-market ("MTM") pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under Amendments 3 and 5 to our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment. Adjusted EBITDA for each segment is presented below with a reconciliation to net income. Adjusted EBITDA is not a recognized term under GAAP and should not be considered in isolation or as an alternative to net earnings (loss), operating profit (loss) or as an alternative to cash flows from operating activities as a measure of our liquidity. Adjusted EBITDA as presented below differs from the calculation used to compute our leverage ratio and interest coverage ratio as defined by our U.S. Revolving Credit Facility. Because all companies do not use identical calculations, the amounts presented for Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
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|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
2017
|
Gross profit (loss)
(1)
:
|
|
|
Power segment
|
$
|
30,909
|
|
$
|
37,710
|
|
Renewable segment
|
(50,449
|
)
|
10,594
|
|
Industrial segment
|
11,269
|
|
15,315
|
|
Intangible amortization expense included in cost of operations
|
(2,385
|
)
|
(5,018
|
)
|
|
(10,656
|
)
|
58,601
|
|
Selling, general and administrative ("SG&A") expenses
|
(70,818
|
)
|
(65,922
|
)
|
Restructuring activities and spin-off transaction costs
|
(6,862
|
)
|
(3,032
|
)
|
Research and development costs
|
(1,508
|
)
|
(2,262
|
)
|
Intangible amortization expense included in SG&A
|
(1,108
|
)
|
(994
|
)
|
Equity in income of investees
|
(11,757
|
)
|
618
|
|
Operating income (loss)
|
$
|
(102,709
|
)
|
$
|
(12,991
|
)
|
(1)
Gross profit excludes intangible amortization but includes depreciation.
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
2017
|
Adjusted EBITDA
|
|
|
|
|
Power segment
(1)
|
$
|
11,240
|
|
$
|
17,388
|
|
Renewable segment
|
(61,681
|
)
|
927
|
|
Industrial segment
|
(3,446
|
)
|
532
|
|
Corporate
|
(9,056
|
)
|
(7,778
|
)
|
Research and development costs
|
(1,508
|
)
|
(2,262
|
)
|
Foreign exchange & other income (expense)
|
2,819
|
|
(373
|
)
|
|
(61,632
|
)
|
8,434
|
|
|
|
|
|
|
Gain on sale of equity method investment (BWBC)
|
6,509
|
|
—
|
|
Other than temporary impairment of equity method investment in TBWES
|
(18,362
|
)
|
—
|
|
MTM loss from benefit plans
|
—
|
|
(1,062
|
)
|
Financial advisory services included in SG&A
|
(3,476
|
)
|
—
|
|
Acquisition and integration costs included in SG&A
|
—
|
|
(1,929
|
)
|
Restructuring activities and spin-off transaction costs
|
(6,862
|
)
|
(3,032
|
)
|
Depreciation & amortization
|
(9,070
|
)
|
(11,582
|
)
|
Interest expense, net
|
(13,362
|
)
|
(1,637
|
)
|
Loss before income tax expense
|
(106,255
|
)
|
(10,808
|
)
|
Income tax expense (benefit)
|
14,080
|
|
(3,967
|
)
|
Net loss
|
(120,335
|
)
|
(6,841
|
)
|
Net income attributable to noncontrolling interest
|
(98
|
)
|
(204
|
)
|
Net loss attributable to stockholders
|
$
|
(120,433
|
)
|
$
|
(7,045
|
)
|
(1)
Power segment adjusted EBITDA includes
$6.8 million
and
$5.0 million
of net benefit from pension and other postretirement benefit plans excluding MTM adjustments in the three months ended March 31, 2018 and 2017, respectively.
NOTE 4
– REVENUE RECOGNITION AND CONTRACTS
Adoption of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606")
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a
$0.5 million
net increase to opening retained earnings as of January 1, 2018 from the cumulative effect of adopting Topic 606 that primarily related to transitioning the timing of certain sales commissions expense. The effect on revenue from adopting Topic 606 was not material for the three months ended March 31, 2018.
Revenue recognition
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services primarily in the Power and Industrial segments, accounted for
28%
and
29%
of our revenue for the three months ended March 31, 2018 and 2017, respectively. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon delivery and acceptance by the customer. Standard commercial payment terms generally apply to these sales.
Revenue from products and services transferred to customers over time accounted for
72%
and
71%
of our revenue for the three months ended March 31, 2018 and 2017, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services from all three of our segments. Typically, revenue is recognized over time using the percentage-of-completion method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the percentage-of-completion method contain a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position and have in 2018 in our Renewable segment. Refer to
Note 3
for our disaggregation of revenue by product line.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim.
We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception has not been recorded for sales commission as a liability has not been incurred at that point.
Contract balances
Contracts in progress, a current asset in our condensed consolidated balance sheets, includes revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts. Advance billings, a current liability in our consolidated balance sheets, includes advance billings on contracts invoices that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit
losses as we expect to invoice customers and collect all amounts for unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected contract loss is recognized in full in the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in other current liabilities in the balance sheet. In addition, when we determine that an uncompleted contract will not be completed on-time and the contract has liquidated damages provisions, we recognize the estimated liquidated damages we will incur and record them as a reduction of the estimated selling price in the period the change in estimate occurs. Losses accrued in advance of the percentage-of-completion of a contract are included in other accrued liabilities, a current liability, in our consolidated balance sheets.
The following represent the components of our contracts in progress and advance billings on contracts included in our consolidated balance sheets:
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|
|
|
|
|
|
|
|
March 31,
|
December 31,
|
(in thousands)
|
2018
|
2017
|
Contract assets - included in contracts in progress:
|
|
|
Costs incurred less costs of revenue recognized
|
$
|
80,663
|
|
$
|
80,645
|
|
Revenues recognized less billings to customers
|
81,016
|
|
80,575
|
|
Contracts in progress
|
$
|
161,679
|
|
$
|
161,220
|
|
Contract liabilities - included in advance billings on contracts:
|
|
|
Billings to customers less revenues recognized
|
$
|
162,115
|
|
$
|
177,953
|
|
Costs of revenue recognized less cost incurred
|
1,198
|
|
3,117
|
|
Advance billings on contracts
|
$
|
163,313
|
|
$
|
181,070
|
|
|
|
|
Accrued contract losses
|
$
|
47,557
|
|
$
|
40,634
|
|
The impact of adopting Topic 606 on components of our contracts in progress and advance billings on contracts was not material at March 31, 2018.
Backlog
On March 31, 2018 we had
$1,763 million
of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately
44%
,
15%
and
42%
of our remaining performance obligations as revenue in the remainder of 2018, 2019 and thereafter, respectively.
Changes in contract estimates
As of March 31, 2018, we have estimated the costs to complete all of our in-process contracts in order to estimate revenues in accordance with the percentage-of-completion method of accounting. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, transportation, fluctuations in foreign exchange rates or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.
In the three months ended
March 31, 2018
and
2017
, 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 March 31,
|
(in thousands)
|
2018
|
2017
|
Increases in gross profits for changes in estimates for over time contracts
|
$
|
5,337
|
|
$
|
15,092
|
|
Decreases in gross profits for changes in estimates for over time contracts
|
(54,865
|
)
|
(8,963
|
)
|
Net changes in gross profits for changes in estimates for over time contracts
|
$
|
(49,528
|
)
|
$
|
6,129
|
|
Renewable loss contracts
We had four renewable energy contracts in Europe that were loss contracts at December 31, 2016. During the three months ended June 30, 2017, two additional renewable energy contracts in Europe became loss contracts. In the three months ended
March 31, 2018
and March 31, 2017, we recorded
$52.6 million
in net losses and
$0.5 million
in net gains, respectively, resulting from changes in the estimated revenues and costs to complete certain European renewable energy contracts. These changes in estimates in the three months ended
March 31, 2018
and 2017 included an increase in our estimate of anticipated liquidated damages that reduced revenue associated with these six contracts by
$13.3 million
and a decrease of
$2.9 million
, respectively. The total anticipated liquidated damages associated with these six contracts was
$90.3 million
and
$77.1 million
at
March 31, 2018
and
December 31, 2017
, respectively.
The charges recorded in the three months ended
March 31, 2018
were due to revisions in the estimated revenues and costs at completion during the period across the six loss contracts described below. As of
March 31, 2018
, the status of these six loss contracts was as follows:
The first contract became a loss contract in the second quarter of 2016. As of
March 31, 2018
, this contract is approximately
97%
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 are expected to be completed in mid-2018. During the quarter ended
March 31, 2018
, we recognized additional contract losses of
$7.1 million
on the contract as a result of differences in actual and estimated costs and schedule delays. Our estimate at completion as of
March 31, 2018
includes
$10.0 million
of total expected liquidated damages. As of
March 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$2.7 million
. In the quarter ended
March 31, 2017
, we did not recognize any additional charges from changes in our estimate at completion, and as of
March 31, 2017
, this contract had
$3.8 million
of accrued losses and was
93%
complete.
The second contract became a loss contract in the fourth quarter of 2016. As of
March 31, 2018
, this contract was approximately
87%
complete. Commissioning activities began in the first quarter of 2018 and we expect construction will be completed on this contract and that it will startup in mid-2018. During the quarter ended
March 31, 2018
, we recognized contract losses of
$4.1 million
on this contract as a result of changes in construction cost estimates, subcontractor productivity being lower than previous estimates, and additional expected punch list and commissioning cost. Our estimate at completion as of
March 31, 2018
includes
$20.7 million
of total expected liquidated damages due to schedule delays. Our estimate at completion as of
March 31, 2018
also includes contractual bonus opportunities for guaranteed higher power output (discussed further below). As of
March 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$9.4 million
. In the quarter ended
March 31, 2017
, we recognized gains of
$3.8 million
from changes in our estimate at completion, and as of
March 31, 2017
, this contract had
$2.5 million
of accrued losses and was
78%
complete.
The third contract became a loss contract in the fourth quarter of 2016. As of
March 31, 2018
, this contract was approximately
98%
complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017, and partial takeover was achieved in March 2018. Remaining activities relate to punch list and finalization and are planned to be completed during the customer's next planned outage later in 2018. During the quarter ended
March 31, 2018
, we recognized additional contract losses of
$1.9 million
as a result of changes in the estimated costs at completion. Our estimate at completion as of
March 31, 2018
includes
$7.4 million
of total expected liquidated damages due to schedule delays. As of
March 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$0.8 million
. In the quarter ended
March 31, 2017
, we recognized charges of
$2.8 million
from changes in our estimate at completion, and as of
March 31, 2017
, this contract had
$3.4 million
of accrued losses and was
86%
complete.
The fourth contract became a loss contract in the fourth quarter of 2016. As of
March 31, 2018
, this contract was approximately
87%
complete. Commissioning activities began in the first quarter of 2018 and we expect construction will be completed on this contract and that it will startup in mid-2018. During the quarter ended
March 31, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in
$12.1 million
of additional contract losses due to subcontractor productivity being lower than previous estimates, additional expected punch list and commissioning cost, estimated claim settlements and estimated liquidated damages. Our estimate at completion as of
March 31, 2018
includes
$16.2 million
of total expected liquidated damages due to schedule delays. Our estimate at completion as of
March 31, 2018
also includes contractual bonus opportunities for guaranteed higher power output (discussed further below). As of
March 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$5.7 million
. In the quarter ended
March 31, 2017
, we recognized gains of
$1.9 million
from changes in our estimate at completion, and as of
March 31, 2017
, this contract had
$0.7 million
of accrued losses and was
68%
complete.
The fifth contract became a loss contract in the second quarter of 2017. As of
March 31, 2018
, this contract was approximately
61%
complete, and we expect construction will be completed on this contract in late 2018 with turnover activities in early 2019. During the quarter ended
March 31, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in
$18.2 million
of additional contract losses. First quarter 2018 changes in estimate on this fifth contract relate primarily to taking over of the civil scope from our joint venture partner, which entered administration (similar to filing for bankruptcy in the U.S.) in late February 2018 and receiving regulatory release later than expected to begin repairs to the failed steel beam, which further increased costs to complete remaining work streams in a compressed time frame. Our estimate at completion as of
March 31, 2018
includes
$21.9 million
of total expected liquidated damages due to schedule delays. As of
March 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$23.5 million
. Although not a loss contract in the quarter ended
March 31, 2017
, we recognized charges of
$2.5 million
from changes in our estimate at completion, and as of
March 31, 2017
, this contract was
48%
complete. This fifth project also includes a rejection clause that gives the customer the option to reject the deliverable, recover all monies paid to us and our partner (up to approximately
$153 million
), and require us to restore the property to its original state if a certain contractual milestone is not met by September 30, 2018. Meeting the contract milestone by September 30, 2018 will require, among other things, the coordination of and cooperation from various subcontractors. Any material productivity or timing issues relating to those subcontractors may jeopardize our ability to meet the contract milestone. We are working with the customer and expect to satisfy their requirements related to this contractual milestone. Our project plans include accelerating construction work and taking other remedial actions, if necessary, to avoid the exercise of the rejection clause.
The sixth contract became a loss contract in the second quarter of 2017. As of
March 31, 2018
, this contract was approximately
83%
complete, and we expect construction will be completed on this contract and that it will startup in the second half of 2018. During the quarter ended
March 31, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$9.3 million
due to additional schedule delays, inclusive of liquidated damages, and estimated claim settlements. Our estimate at completion as of December 31, 2017 includes
$14.2 million
of total expected liquidated damages due to schedule delays. The change in the status of this contract in 2018 was primarily attributable to changes in the estimated costs at completion and schedule delays. As of
March 31, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$3.5 million
. As of
March 31, 2017
, this contract was
55%
complete.
In September 2017, we identified the failure of a structural steel beam on the fifth contract, which stopped work in the boiler building and other areas pending corrective actions to stabilize the structure that are expected to be complete in the first half of 2018. Provisional regulatory approval to begin structural repairs to the failed beam was obtained at the end of March 2018 (later than previously estimated) and full approval to proceed with repairs was obtained in April 2018. The engineering, design and manufacturing of the steel structure were the responsibility of our subcontractors. A similar design was also used on the second and fourth contracts, and although no structural failure occurred on these two other contracts, work was also stopped in certain restricted areas while we added reinforcement to the structures, which also resulted in delays that lasted until late January 2018. The total costs related to the structural steel issues on these three contracts, including contract delays, are estimated to be approximately
$48 million
, which is included in the
March 31, 2018
estimated losses at completion for these three contracts.
Also during the third quarter of 2017, we adjusted the design of three renewable facilities to increase the guaranteed power output, which will allow us to achieve contractual bonus opportunities for the higher output. In the fourth quarter of 2017, we obtained agreement from certain customers to increase the value of these bonus opportunities and to provide partial relief on liquidated damages. The bonus opportunities and liquidated damages relief increased the estimated selling price of the three
contracts by approximately
$19 million
in total, and this positive change in estimated cost to complete was fully recognized in 2017 because each were loss contracts.
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 contract discussed above. There was no change in the accrued probable insurance recovery at
March 31, 2018
. 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, 2018
and
2017
.
NOTE 5
– 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)
|
2018
|
2017
|
Balance at beginning of period
|
$
|
2,320
|
|
$
|
2,254
|
|
Restructuring expense
|
5,888
|
|
1,970
|
|
Payments
|
(2,294
|
)
|
(3,527
|
)
|
Balance at March 31
|
$
|
5,914
|
|
$
|
697
|
|
Accrued restructuring liabilities at
March 31, 2018
and
2017
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 months ended
March 31, 2018
and 2017, we recognized
$0.6 million
and
$0.6 million
, respectively, in non-cash restructuring expense related to losses (gains) on the disposals 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 months ended
March 31, 2018
and 2017, we recognized spin-off costs of
$0.4 million
and
$0.4 million
, respectively.
NOTE 6
– PROVISION FOR INCOME TAXES
In the three months ended March 31, 2018, income tax expense was
$14.1 million
, resulting in an effective tax rate of
(13.3)%
. In the three months ended March 31, 2017, income tax benefit was
$4.0 million
, with an effective tax rate of
36.7%
. Our effective tax rate for the three months ended March 31, 2018 was lower than our statutory rate primarily due to foreign losses in our Renewable segment and disallowed interest expense pursuant to the United States Tax Cuts and Jobs Act (the "Tax Act") that are subject to valuation allowances as well as other nondeductible expenses and unfavorable discrete items of
$0.9 million
. The discrete items include a valuation allowance on the net deferred tax assets of one of our foreign subsidiaries and the income tax effects of vested and exercised share-based compensation awards. The tax benefit associated with the
$18.4 million
impairment of our equity method investment in India was offset by a valuation allowance. The effective tax rate for the three months ended March 31, 2018 also reflects the reduced federal corporate income tax rate enacted as part of the Tax Act and the impact of a change in our mix of domestic and foreign earnings. We continue to analyze the different aspects of the Tax Act which could potentially affect the provisional estimates that were recorded at December 31, 2017.
As a result of the Rights Offering which was completed on April 30, 2018, we are evaluating if we experienced an ownership change as defined under Internal Revenue Code ("IRC") Section 382. Under IRC Section 382, a company has undergone an ownership change if shareholders owning at least 5% of the company have increased their holdings by more than 50% during the prior three year period. As of May 8, 2018, full information related to shareholder transactions is not available publicly or to us. If we experienced an ownership change, the future utilization of our federal net operating loss and credit carryforwards could be limited to approximately
$2.5 million
, annually. Additionally, we could record income tax expense of approximately
$14 million
in the second quarter of 2018 for a partial valuation allowance on the deferred tax assets related to our federal net operating loss and credit carryforwards.
NOTE 7
– 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 three months ended March 31, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss)
|
Net unrealized gain (loss) on investments (net of tax)
1
|
Net unrealized gain (loss) on derivative instruments
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
Balance at December 31, 2017
|
$
|
(27,837
|
)
|
$
|
38
|
|
$
|
1,737
|
|
$
|
3,633
|
|
$
|
(22,429
|
)
|
Impact of ASU 2016-1 on changes in the components of AOCI, net of tax
1
|
—
|
|
(38
|
)
|
—
|
|
—
|
|
(38
|
)
|
Other comprehensive income (loss) before reclassifications
|
3,223
|
|
—
|
|
1,224
|
|
(55
|
)
|
4,392
|
|
Amounts reclassified from AOCI to net income (loss)
|
(2,044
|
)
|
—
|
|
(1,272
|
)
|
(384
|
)
|
(3,700
|
)
|
Net current-period other comprehensive income (loss)
|
1,179
|
|
—
|
|
(48
|
)
|
(439
|
)
|
692
|
|
Balance at March 31, 2018
|
$
|
(26,658
|
)
|
$
|
—
|
|
$
|
1,689
|
|
$
|
3,194
|
|
$
|
(21,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
)
|
1
ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
requires investments to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. The standard is effective as of January 1, 2018 and requires application by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
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,
|
2018
|
2017
|
Release of currency translation gain with the sale of equity method investment
|
Equity in income and impairment of investees
|
$
|
2,044
|
|
$
|
—
|
|
|
Provision for income taxes
|
—
|
|
—
|
|
|
Net income (loss)
|
$
|
2,044
|
|
$
|
—
|
|
|
|
|
|
Derivative financial instruments
|
Revenues
|
$
|
1,616
|
|
$
|
5,288
|
|
|
Cost of operations
|
12
|
|
3
|
|
|
Other-net
|
—
|
|
(393
|
)
|
|
Total before tax
|
1,628
|
|
4,898
|
|
|
Provision for income taxes
|
356
|
|
1,055
|
|
|
Net income (loss)
|
$
|
1,272
|
|
$
|
3,843
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Benefit plans, net
|
$
|
384
|
|
$
|
873
|
|
|
Provision for income taxes
|
—
|
|
(9
|
)
|
|
Net income (loss)
|
$
|
384
|
|
$
|
882
|
|
|
|
|
|
Realized gain on investments
|
Other-net
|
$
|
—
|
|
$
|
43
|
|
|
Provision for income taxes
|
—
|
|
16
|
|
|
Net income (loss)
|
$
|
—
|
|
$
|
27
|
|
NOTE 8
– CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2018
|
December 31, 2017
|
Held by foreign entities
|
$
|
34,253
|
|
$
|
54,274
|
|
Held by United States entities
|
3,129
|
|
2,393
|
|
Cash and cash equivalents
|
$
|
37,382
|
|
$
|
56,667
|
|
|
|
|
Reinsurance reserve requirements
|
$
|
22,445
|
|
$
|
21,061
|
|
Sale proceeds held in escrow
|
20,266
|
|
—
|
|
Restricted foreign accounts
|
6,975
|
|
4,919
|
|
Restricted cash and cash equivalents
|
$
|
49,686
|
|
$
|
25,980
|
|
Our U.S. Revolving Credit Facility described in
Note 15
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 9
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2018
|
December 31, 2017
|
Raw materials and supplies
|
$
|
56,052
|
|
$
|
60,708
|
|
Work in progress
|
6,454
|
|
7,867
|
|
Finished goods
|
15,022
|
|
13,587
|
|
Total inventories
|
$
|
77,528
|
|
$
|
82,162
|
|
NOTE 10
– 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 equity method investment in Babcock & Wilcox Beijing Company, Ltd. ("BWBC") has a manufacturing facility that designs, manufactures, produces and sells various power plant and industrial boilers primarily in China. During the first quarter of 2018, we sold our interest in BWBC to our joint venture partner in China for approximately
$21.0 million
, resulting in a gain of approximately
$6.5 million
. As of March 31, 2018,
$19.8 million
, which are the proceeds from this sale net of withholding tax, are held in escrow and classified as Restricted cash and cash equivalents on the balance sheet. The proceeds were released to us from the escrow account in May 2018.
After the sale of BWBC, our primary remaining equity method investment is in Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES"), a joint venture in India. TBWES has a manufacturing facility that produces boiler parts and equipment intended primarily for new build coal boiler contracts in India. During the second quarter of 2017, both we and our joint venture partner decided to make a strategic change in the Indian joint venture due to the decline in forecasted market opportunities in India, at which time we recorded in an
$18.2 million
other-than-temporary-impairment to the expected recoverable value of our investment in the joint venture. During the first quarter of 2018, based on a preliminary agreement to sell our investment in TBWES, we recognized an additional
$18.4 million
other-than-temporary-impairment. The impairment charge was based on the difference in the carrying value of our investment in TBWES and the preliminary sale price. Additionally, AOCI includes
$2.6 million
at March 31, 2018 related to cumulative currency translation loss from our investment in TBWES. Our remaining carrying value of TBWES was
$7.7 million
at March 31, 2018 and
$26.0 million
at December 31, 2017.
NOTE 11
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2018
|
December 31, 2017
|
Definite-lived intangible assets
|
|
|
Customer relationships
|
$
|
59,701
|
|
$
|
59,794
|
|
Unpatented technology
|
20,564
|
|
20,160
|
|
Patented technology
|
6,533
|
|
6,542
|
|
Tradename
|
23,038
|
|
22,951
|
|
Backlog
|
30,184
|
|
30,160
|
|
All other
|
7,598
|
|
7,611
|
|
Gross value of definite-lived intangible assets
|
147,618
|
|
147,218
|
|
Customer relationships amortization
|
(24,942
|
)
|
(23,434
|
)
|
Unpatented technology amortization
|
(5,728
|
)
|
(5,013
|
)
|
Patented technology amortization
|
(2,249
|
)
|
(2,213
|
)
|
Tradename amortization
|
(5,443
|
)
|
(5,097
|
)
|
Acquired backlog amortization
|
(29,327
|
)
|
(28,695
|
)
|
All other amortization
|
(7,546
|
)
|
(7,291
|
)
|
Accumulated amortization
|
(75,235
|
)
|
(71,743
|
)
|
Net definite-lived intangible assets
|
$
|
72,383
|
|
$
|
75,475
|
|
|
|
|
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)
|
2018
|
2017
|
Balance at beginning of period
|
$
|
76,780
|
|
$
|
71,039
|
|
Acquisition of Universal (see Note 21)
|
—
|
|
19,500
|
|
Amortization expense
|
(3,492
|
)
|
(6,012
|
)
|
Currency translation adjustments and other
|
400
|
|
849
|
|
Balance at end of the period
|
$
|
73,688
|
|
$
|
85,376
|
|
Amortization of intangible assets is included in cost of operations and SG&A in our condensed consolidated statement of operations as shown in
Note 3
, but it is not allocated to segment results.
Estimated future intangible asset amortization expense is as follows (in thousands):
|
|
|
|
|
Year ending
|
Amortization expense
|
Three months ending June 30, 2018
|
$
|
3,372
|
|
Three months ending September 30, 2018
|
$
|
2,767
|
|
Three months ending December 31, 2018
|
$
|
2,768
|
|
Twelve months ending December 31, 2019
|
$
|
10,255
|
|
Twelve months ending December 31, 2020
|
$
|
9,106
|
|
Twelve months ending December 31, 2021
|
$
|
8,903
|
|
Twelve months ending December 31, 2022
|
$
|
7,334
|
|
Twelve months ending December 31, 2023
|
$
|
5,856
|
|
Thereafter
|
$
|
22,022
|
|
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, 2018
|
December 31, 2017
|
Land
|
$
|
8,977
|
|
$
|
8,859
|
|
Buildings
|
123,293
|
|
122,369
|
|
Machinery and equipment
|
218,008
|
|
217,791
|
|
Property under construction
|
7,827
|
|
6,486
|
|
|
358,105
|
|
355,505
|
|
Less accumulated depreciation
|
218,512
|
|
213,574
|
|
Net property, plant and equipment
|
$
|
139,593
|
|
$
|
141,931
|
|
NOTE 13
– WARRANTY EXPENSE
We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
2017
|
Balance at beginning of period
|
$
|
39,020
|
|
$
|
40,468
|
|
Additions
|
5,004
|
|
4,253
|
|
Expirations and other changes
|
(1,356
|
)
|
(509
|
)
|
Increases attributable to business combinations
|
—
|
|
1,060
|
|
Payments
|
(3,200
|
)
|
(2,774
|
)
|
Translation and other
|
576
|
|
346
|
|
Balance at end of period
|
$
|
40,044
|
|
$
|
42,844
|
|
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)
|
2018
|
2017
|
|
2018
|
2017
|
Service cost
|
$
|
189
|
|
$
|
274
|
|
|
$
|
4
|
|
$
|
4
|
|
Interest cost
|
9,757
|
|
10,257
|
|
|
97
|
|
221
|
|
Expected return on plan assets
|
(16,230
|
)
|
(14,856
|
)
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
25
|
|
25
|
|
|
(646
|
)
|
(900
|
)
|
Recognized net actuarial loss (gain)
|
—
|
|
1,062
|
|
|
—
|
|
—
|
|
Net periodic benefit cost (benefit)
|
$
|
(6,259
|
)
|
$
|
(3,238
|
)
|
|
$
|
(545
|
)
|
$
|
(675
|
)
|
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 "
Recognized net actuarial loss (gain)" in the table above. The recognized net actuarial (gain) loss was recorded in our condensed consolidated statements of operations in the "Pension benefit (cost)" line item.
We made contributions to our pension and other postretirement benefit plans totaling
$3.4 million
and
$1.4 million
during the three months ended March 31, 2018 and 2017, 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, 2018
|
December 31, 2017
|
United States
|
$
|
177,044
|
|
$
|
94,300
|
|
Foreign
|
4,345
|
|
9,173
|
|
Total revolving debt
|
$
|
181,389
|
|
$
|
103,473
|
|
U.S. 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 which governs the U.S. Revolving Credit Facility. 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, subject to the limits specified in the amendment described below.
On February 24, 2017, August 9, 2017, March 1, 2018 and April 10, 2018, 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 16
), (2) modify the definition of adjusted 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
$30.1 million
of charges for certain Renewable segment contracts for periods including the quarter ended September 30, 2017, up to
$38.7 million
of charges for certain Renewable segment contracts for periods including the quarter ended December 31, 2017, up to
$51.1 million
of charges for certain Renewable segment contracts for the quarter ended March 31, 2018 and include in the fiscal quarter ended March 31, 2018 up to
$20.0 million
of anticipated receipts that will be recorded after March 31, 2018 on account of contractual bonuses and liquidated damages relief, exclude 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 up to
$11.0 million
of fees and expenses incurred in connection with the March 1, 2018 and April 10, 2018 amendments; (3) require the Company to pledge the equity interests of certain of its wholly-owned foreign subsidiaries, and to cause certain of the Company's wholly-owned foreign subsidiaries to guarantee and provide collateral for the obligations under the Amended Credit Agreement; (4) replace the maximum leverage ratio with a maximum senior debt leverage ratio, (5) decrease the minimum consolidated interest coverage ratio, (6) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to
$220.0 million
in the aggregate until, among other things, the Second Lien Term Loan Facility is fully prepaid, (7) reduce commitments under the U.S. Revolving Credit Facility from
$600.0 million
to
$450.0 million
; (8) require us to maintain liquidity (as defined in the Amended Credit Agreement) of at least
$65.0 million
as of the last business day of any calendar month, (9) require us to repay outstanding borrowings under the U.S. Revolving Credit Facility (without any reduction in commitments) with certain excess cash, (10) remove the Company's ability to reinvest net cash proceeds from asset sales that trigger prepayment requirements; (11) increase the pricing for borrowings and commitment fees under the Amended Credit Agreement, (12) limit our ability to incur debt and liens during the covenant relief period, (13) limit our ability to make acquisitions and investments in third parties during the covenant relief period, (14) prohibit us from paying dividends and undertaking stock repurchases during the covenant relief period (other than our share repurchase from an affiliate of American Industrial Partners ("AIP") (discussed further in
Note 16
)), (15) prohibit us from exercising the accordion described below during the covenant relief period, (16) limit our ability to issue financial and commercial letters of credit and the applications for which they may be used under the Amended Credit Agreement, and limit the amount of such incremental letters of credit to
$20.0 million
until, among other things, the Second Lien Term Loan Facility is fully prepaid, (17) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales, (18) beginning with the quarter ended June 30, 2018, limit to no more than
$15.0 million
any cumulative net income losses attributable to eight specified Vølund contracts, (19) increase reporting obligations and require us to hire a third-party consultant and a chief implementation officer, (20) require us to pay a deferred facility fee as more fully set forth in the March 1, 2018 Amendment, (21) meet certain contract completion milestones in connection with six European Renewable loss contracts and (22) require us to sell at least
$100 million
of assets before March 31, 2019. 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 ended December 31, 2019.
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 U.S. 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 and certain of our foreign 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. 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.
The March 1, 2018 and April 10, 2018 Amendments temporarily waived certain defaults and events of default under our U.S. Revolving Credit Facility that were breached on December 31, 2017 and March 31, 2018 or that may occur in the future, with certain amendments effective immediately and other amendments effective upon the completion of the Rights Offering and the repayment of the outstanding balance of our Second Lien Term Loan Facility. The temporary waiver would have ended if the Rights Offering and repayment had not been completed by May 22, 2018. The temporary waiver will also end if other conditions specified in the Amendment occur. Upon any such termination of the waiver, the Company's ability to borrow funds and issue letters of credit under the Amended Credit Agreement will terminate.
After giving effect to the Amendments, loans outstanding under the Amended Credit Agreement bear interest at our option at either LIBOR rate plus
7.0%
per annum or the Base Rate plus
6.0%
per annum until we complete the Rights Offering and
prepay the Second Lien Term Loan facility and thereafter at our option at either (1) the LIBOR rate plus
5.0%
per annum during 2018,
6.0%
per annum during 2019 and
7.0%
per annum during 2020, or (2) the Base Rate plus
4.0%
per annum during 2018,
5.0%
per annum during 2019, and
6.0%
per annum during 2020. The Base Rate is 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. Interest expense associated with our U.S. Revolving Credit Facility loans for the three months ended March 31, 2018 was
$5.5 million
. Included in interest expense was
$2.6 million
of non-cash amortization of direct financing costs for the three months ended March 31, 2018. A commitment fee of
1.0%
per annum is charged on the unused portions of the U.S. Revolving Credit Facility. A letter of credit fee of
2.5%
per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of
1.5%
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. A deferred fee of
2.5%
is charged, but may be reduced by up to
1.5%
if the Company achieves certain asset sales.
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. After completion of the Rights Offering and the repayment of the outstanding balance of our Second Lien Term Loan Facility, the maximum permitted senior debt leverage ratio as defined in the Amended Credit Agreement is:
|
|
•
|
7.00
:1.0 for the quarter ending March 31, 2018,
|
|
|
•
|
6.75
:1.0 for the quarters ending June 30, 2018 and September 30, 2018,
|
|
|
•
|
4.75
:1.0 for the quarter ending December 31, 2018,
|
|
|
•
|
3.00
:1.0 for the quarter ending March 31, 2019,
|
|
|
•
|
2.75
:1.0 for the quarters ending June 30, 2019 and September 30, 2019 and
|
|
|
•
|
2.50
:1.0 for the quarter ending December 31, 2019 and each quarter thereafter.
|
After completion of the Rights Offering and the repayment of the outstanding balance of our Second Lien Term Loan Facility, the minimum consolidated interest coverage ratio as defined in the Amended Credit Agreement is:
|
|
•
|
1.15
:1.0 for the quarter ending March 31, 2018,
|
|
|
•
|
1.00
:1.0 for the quarter ending June 30, 2018,
|
|
|
•
|
1.00
:1.0 for the quarter ending September 30, 2018,
|
|
|
•
|
1.25
:1.0 for the quarter ending December 31, 2018,
|
|
|
•
|
1.50
:1.0 for the quarter ending March 31, 2019 and
|
|
|
•
|
2.00
:1.0 for the quarters ending June 30, 2019 and each quarter thereafter.
|
Consolidated capital expenditures in each fiscal year are limited to
$27.5 million
.
At
March 31, 2018
, borrowings under the Amended Credit Agreement and foreign facilities consisted of
$181.4 million
at an effective interest rate of
8.71%
. Usage under the Amended Credit Agreement consisted of
$177.0 million
of borrowings,
$7.7 million
of financial letters of credit and
$144.6 million
of performance letters of credit. After giving effect to the Amendments, at
March 31, 2018
, we had approximately
$45.3 million
available for borrowings or to meet letter of credit requirements primarily based on trailing 12 month adjusted EBITDA (as defined in the Amended Credit Agreement), and our leverage and interest coverage ratios (as defined in the Amended Credit Agreement) were
4.24
and
1.77
, respectively. We expect to amend the U.S. Revolving Credit Facility upon the completion of at least $100 million of asset sales, required on or before March 31, 2019, to update terms and financial covenants to be reflective of the remaining operations.
Foreign revolving credit facilities
Outside of the United States, we have revolving credit facilities in Turkey that were used to provide working capital to our operations in that country. These foreign revolving credit facilities allow us to borrow up to
$4.3 million
in aggregate and each have a one year term. At March 31, 2018, we had
$4.3 million
in borrowings outstanding under these foreign revolving credit facilities at an effective weighted-average interest rate of
3.43%
.
Letters of credit, bank guarantees and surety bonds
Certain subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of
March 31, 2018
and December 31, 2017 was
$219.4 million
and
$269.1 million
, respectively. The aggregate value of all such
letters of credit and bank guarantees that are partially secured by the U.S. Revolving Credit Facility as of
March 31, 2018
was
$75.1 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility in support of letters of credit outside of the United States was
$41.3 million
as of
March 31, 2018
.
We have posted surety bonds to support contractual obligations to customers relating to certain contracts. 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 contract 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
March 31, 2018
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$439.9 million
.
NOTE 16
– SECOND LIEN TERM LOAN FACILITY
Extinguishment of the second lien term loan facility
Using
$214.9 million
of the proceeds from the Rights Offering described in
Note 17
, we fully repaid the Second Lien Term Loan Facility (described below) on May 4, 2018. A loss on extinguishment of this debt of approximately
$49.2 million
is expected to be recognized in the second quarter of 2018 as a result of the remaining
$32.5 million
unamortized debt discount on the date of the repayment,
$16.2 million
of make whole interest, and
$0.5 million
of fees associated with the extinguishment.
Terms of the 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 AIP, governing the 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 was borrowed on
August 9, 2017
, and a delayed draw term loan facility in the principal amount of up to
$20.0 million
, which was drawn in a single draw on December 13, 2017.
Borrowings under the second lien term loan, other than the delayed draw term loan, have a coupon interest rate of
10%
per annum, and borrowings under the delayed draw term loan have a coupon interest rate of
12%
per annum, in each case payable quarterly. As of March 7, 2018, the interest rate increased to
12%
and
14%
per annum, respectively, due to the covenant default. Undrawn amounts under the delayed draw term loan accrue a commitment fee at a rate of
0.50%
, which was paid at closing. The second lien term loan and the delayed draw term loan have a scheduled maturity of December 30, 2020.
In connection with our entry into the Second Lien Term Loan Facility, we used
$50.9 million
of the proceeds to repurchase and retire approximately
4.8 million
shares of our common stock (approximately
10%
of our shares outstanding) held by an affiliate of AIP, which was one of the conditions precedent for the Second Lien Term Loan Facility. Based on observable and unobservable market data, we determined the fair value of the shares we repurchased from the related party on
August 9, 2017
was
$16.7 million
. We utilized a discounted cash flow model and estimates of our weighted average cost of capital on the transaction date to derive the estimated fair value of the share repurchase. The
$34.2 million
difference between the share repurchase price and the fair value of the repurchased shares was recorded as a discount on the Second Lien Term Loan Facility borrowing. Non-cash amortization of the debt discount and direct financing costs will be accreted to the carrying value of the loan through interest expense over the term of the Second Lien Term Loan Facility utilizing the effective interest method and an effective interest rate of
20.08%
.
The carrying value of the Second Lien Term Loan Facility at
March 31, 2018
was as follows (in thousands):
|
|
|
|
Face value
|
Unamortized debt discount
and direct financing costs
|
Net carrying value
|
$195,884
|
$33,368
|
$162,516
|
Interest expense associated with our Second Lien Credit Agreement is comprised of the following:
|
|
|
|
|
(in thousands)
|
Coupon
Interest
|
Accretion of debt discount and amortization of financing costs
|
Total
Interest
Expense
|
For the three months ended March 31, 2018
|
$5,269
|
$2,369
|
$7,638
|
Borrowings under the Second Lien Credit Agreement are (1) guaranteed by substantially all of our wholly owned domestic subsidiaries and certain of our foreign 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 quarterly basis until maturity. Voluntary prepayments made during the first year after closing are subject to a 5% make-whole premium, voluntary prepayments made during the second year after closing are subject to 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 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 certain cushions. At March 31, 2018 and December 31, 2017, we were in default of several financial covenants associated with the Second Lien Credit Agreement, which resulted in our classification of all of the net carrying value as a current liability in our condensed consolidated balance sheet. Under the terms of the intercreditor agreement among the lenders under the Amended Credit Agreement and the Second Lien Credit Agreement, the lenders under the Second Lien Credit Agreement cannot enforce remedies against the collateral until after they provide notice of enforcement and after the expiration of a 180-day standstill period. The lenders under the Second Lien Credit Agreement did not provide such notice.
The March 1, 2018 and April 10, 2018 Amended Credit Agreement amendments temporarily waived all events of default, including cross-default provisions, which resulted in the outstanding balance being classified as noncurrent in our condensed consolidated balance sheet at
March 31, 2018
.
NOTE 17
– RIGHTS OFFERING
On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase
1.4
common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of
$3.00
per common share (the "Rights Offering"). On April 10, 2018, we extended the expiration date and amended certain other terms regarding the Rights Offering. As amended, each right entitled holders to purchase
2.8
common shares at a price of
$2.00
per share. The Rights Offering expired at 5:00 p.m., New York City time, on April 30, 2018. The Company did not issue fractional rights, or pay cash in lieu of fractional rights. The Rights Offering did not include an oversubscription privilege.
The Rights Offering concluded on April 30, 2018, resulting in the issuance of
124.3 million
common shares on April 30, 2018. Gross proceeds from the Rights Offering were
$248.5 million
. Of the proceeds received,
$214.9 million
were used to fully repay the Second Lien Credit Agreement and the remainder will be used for working capital purposes. Direct costs of the Rights Offering totaled approximately
$3.8 million
.
NOTE 18
– 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
. Accordingly, we increased our accrual by
$1.9 million
in the fourth quarter of 2016.
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, which we recorded in our June 30, 2017 condensed consolidated financial statements in other accrued liabilities and interest expense. B&W commenced an appeal of the judgment on August 18, 2017, and ARPA filed a notice of cross appeal on August 31, 2017.
In December 2017, we reached an agreement in principle to settle all matters related to the ARPA litigation for
$7.0 million
. The agreement requires us to make payments of
$2.5 million
,
$2.5 million
and
$2.0 million
on July 1, 2018, 2019 and 2020, respectively. The present value of the payable amounts of
$2.5 million
and
$3.9 million
were included in other current accrued liabilities and other noncurrent accrued liabilities, respectively, in our condensed consolidated balance sheets at March 31, 2018.
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 were brought on behalf of a putative 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. During the third quarter of 2017, the plaintiff further amended its complaint. As amended, the complaint now purports to cover investors who purchased shares between June 17, 2015 and August 9, 2017. We filed a motion to dismiss in late 2017; the court denied the motion in early 2018.
The plaintiff in the Stockholder Litigation alleges fraud, misrepresentation and a course of conduct relating to the facts surrounding certain projects underway in the Company's Renewable segment, which, according to the plaintiff, had the effect of artificially inflating the price of the Company's common stock. The plaintiff further alleges that stockholders were harmed when the Company later disclosed that it would incur losses on these projects. The plaintiff seeks an unspecified amount of damages.
On February 16, 2018 and February 22, 2018, the Company and certain of its officers and directors were named as defendants in three separate but substantially similar derivative lawsuits filed in the United States District Court for the District of Delaware (the “Derivative Litigation”). The allegations and claims against defendants are largely the same. Plaintiffs assert a variety of claims against defendants including alleged violations of the federal securities laws, gross mismanagement, waste, breach of fiduciary duties and unjust enrichment. Plaintiffs, who all purport to be current shareholders of the Company's common stock, are suing on behalf of the Company to recover costs and unspecified damages, and force implementation of corporate governance changes.
We believe the allegations in the Stockholder Litigation and the Derivative Litigation are without merit, and that the respective outcomes of the Stockholder Litigation and the Derivative Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
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 19
– 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, 2018
and
2017
, we had deferred approximately
$1.7 million
and
$1.6 million
, respectively, of net gains on these derivative financial instruments in accumulated other comprehensive income ("AOCI").
At
March 31, 2018
, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled
$36.7 million
at
March 31, 2018
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 U.S. Revolving Credit Facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our U.S. Revolving Credit Facility. During the third quarter of 2017, our hedge counterparties removed the lines of credit supporting new FX forward contracts. Subsequently, we have not entered into any new FX forward contracts.
The following tables summarize our derivative financial instruments:
|
|
|
|
|
|
|
|
|
Asset and Liability Derivative
|
(in thousands)
|
March 31, 2018
|
December 31, 2017
|
Derivatives designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
1,288
|
|
$
|
1,088
|
|
Other assets
|
1,343
|
|
312
|
|
Accounts payable
|
14
|
|
105
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts not designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
—
|
|
$
|
7
|
|
Accounts payable
|
2
|
|
1,722
|
|
Other liabilities
|
23
|
|
12
|
|
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in thousands)
|
2018
|
2017
|
Derivatives designated as hedges:
|
|
|
Cash flow hedges
|
|
|
Foreign exchange contracts
|
|
|
Amount of gain (loss) recognized in other comprehensive income
|
$
|
1,601
|
|
$
|
5,901
|
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location:
|
|
|
Revenues
|
1,616
|
|
5,288
|
|
Cost of operations
|
12
|
|
3
|
|
Other-net
|
—
|
|
(393
|
)
|
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location:
|
|
|
Other-net
|
(86
|
)
|
241
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Forward contracts
|
|
|
Loss recognized in income by location:
|
|
|
Other-net
|
$
|
(25
|
)
|
$
|
(310
|
)
|
NOTE 20
– 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 Financial Accounting Standards Board ("FASB") Topic
Fair Value Measurements and Disclosures
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Available-for-sale securities
|
March 31, 2018
|
Level 1
|
Level 2
|
Level 3
|
Commercial paper
|
$
|
2,538
|
|
$
|
—
|
|
$
|
2,538
|
|
$
|
—
|
|
Certificates of deposit
|
2,995
|
|
—
|
|
2,995
|
|
—
|
|
Mutual funds
|
1,330
|
|
—
|
|
1,330
|
|
—
|
|
Corporate notes and bonds
|
1,591
|
|
1,591
|
|
—
|
|
—
|
|
United States Government and agency securities
|
7,516
|
|
7,516
|
|
—
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
15,970
|
|
$
|
9,107
|
|
$
|
6,863
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Available-for-sale securities
|
December 31, 2017
|
Level 1
|
Level 2
|
Level 3
|
Commercial paper
|
$
|
1,895
|
|
$
|
—
|
|
$
|
1,895
|
|
$
|
—
|
|
Certificates of deposit
|
2,398
|
|
—
|
|
2,398
|
|
—
|
|
Mutual funds
|
1,331
|
|
—
|
|
1,331
|
|
—
|
|
Corporate notes and bonds
|
4,447
|
|
4,447
|
|
—
|
|
—
|
|
United States Government and agency securities
|
5,738
|
|
5,738
|
|
—
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
15,809
|
|
$
|
10,185
|
|
$
|
5,624
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
March 31, 2018
|
December 31, 2017
|
Forward contracts to purchase/sell foreign currencies
|
$
|
2,591
|
|
$
|
(432
|
)
|
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, 2018
and
December 31, 2017
.
|
Non-recurring fair value measurements
The purchase price allocation associated with the January 11, 2017 acquisition of Universal Acoustic & Emission Technologies, Inc. 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 measurement of the net actuarial gain or loss associated with our pension and other postretirement plans 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 21
– 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 U.S. 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 U.S. 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. At the acquisition date, Universal employed approximately
460
people, mainly in the United States and Mexico. During 2017, we integrated Universal with our Industrial segment. Universal contributed
$21.2 million
of revenue and
$4.9 million
(excluding intangible asset amortization expense of
$1.5 million
) of gross profit to our operating results in the
three
months ended
March 31, 2017
.
The allocation of the purchase price based on the fair value of assets acquired and liabilities assumed is set forth below.
|
|
|
|
|
(in thousands)
|
Acquisition
date fair values
|
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:
|
|
|
|
|
|
|
Fair value (in thousands)
|
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 amortization expense during the three months ended March 31, 2018 and 2017 of
$0.4 million
and
$1.5 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
$1.0 million
of acquisition and integration related costs of Universal was recorded as a component of our SG&A expenses in the condensed consolidated statement of operations in the three months ended
March 31, 2017
.
NOTE 22
– SUPPLEMENTAL INFORMATION
During the
three
months ended
March 31, 2018
and
2017
, we recognized the following non-cash activity in our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
2017
|
Accrued capital expenditures in accounts payable
|
$
|
300
|
|
$
|
552
|
|
Accreted interest expense on our second lien term loan facility
|
$
|
2,369
|
|
$
|
—
|
|
During the
three
months ended
March 31, 2018
and
2017
, we recognized the following cash activity in our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
2017
|
Income tax payments
|
$
|
1,822
|
|
$
|
399
|
|
Interest payments on our U.S. revolving credit facility
|
$
|
1,687
|
|
$
|
528
|
|
Interest payments on our second lien term loan facility
|
$
|
5,303
|
|
$
|
—
|
|
During the years ended March 31, 2018 and 2017, interest expense in our condensed consolidated financial statements consisted of the following components:
|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
2017
|
Components associated with borrowings from:
|
|
|
U.S. Revolving Credit Facility
|
$
|
2,345
|
|
$
|
700
|
|
Second Lien Term Loan Facility
|
5,269
|
|
—
|
|
Foreign revolving credit facilities
|
134
|
|
241
|
|
|
7,748
|
|
941
|
|
Components associated with amortization or accretion of:
|
|
|
U.S. Revolving Credit Facility deferred financing fees and commitment fees
|
3,201
|
|
716
|
|
Second Lien Term Loan Facility deferred financing fees and discount
|
2,369
|
|
—
|
|
|
5,570
|
|
716
|
|
|
|
|
Other interest expense
|
198
|
|
93
|
|
|
|
|
Total interest expense
|
$
|
13,516
|
|
$
|
1,750
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the consolidated balance sheets that sum to the total of the same amounts in the consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
March 31, 2018
|
December 31, 2017
|
March 31, 2017
|
December 31, 2016
|
Cash and cash equivalents
|
$
|
37,382
|
|
$
|
56,667
|
|
$
|
46,270
|
|
$
|
95,887
|
|
Restricted cash and cash equivalents
|
49,686
|
|
25,980
|
|
24,960
|
|
27,770
|
|
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows
|
$
|
87,068
|
|
$
|
82,647
|
|
$
|
71,230
|
|
$
|
123,657
|
|
NOTE 23
– NEW ACCOUNTING STANDARDS
New accounting standards that could affect our consolidated financial statements in the future are summarized as follows:
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. With adoption of this standard, lessees will have to recognize long-term 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, but will result in new balances in the consolidated balance sheets and new disclosures in the Notes.
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 February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The new guidance provides companies with the election to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. Existing guidance requiring the effect of a change in tax law or rates to be recorded in continuing operations is not affected. This standard is effective for all public business entities for fiscal years beginning after December 15, 2018, and any interim periods within those fiscal years. Early adoption is permitted in any
interim period. We expect the impact of this standard on our financial statements would be immaterial, but we do not plan on early adopting this standard and have not determined whether we will exercise the election upon adoption.
New accounting standards that were adopted during the three months ended
March 31, 2018
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 replaces most existing revenue recognition guidance. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations for licenses, for determining if an entity is the principal or agent in a revenue arrangement, and for 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 adopted the new accounting standard as of January 1, 2018 under the modified retrospective method. See
Note 4
for additional accounting policy and transition disclosures.
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 adopted the new accounting standard prospectively as of January 1, 2018, which resulted in an immaterial impact on our financial results.
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 did not change our historical statement of cash flows. We adopted the new accounting standard as of January 1, 2018, which resulted in an immaterial impact on our financial results.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The new guidance requires the changes in the total of cash, cash equivalents and restricted cash to be shown together in the statement of cash flows and no longer presenting transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Historically, we have presented the transfer of cash to restricted cash and cash equivalents in the investing section of the statement of cash flows. With the adoption of ASU 2016-18, changes in restricted cash are also included in statement of cash flows based on the nature of the change together with unrestricted cash flows. We retrospectively adopted the new accounting standard as of January 1, 2018. The only meaningful effect on our financial statements is related to the restricted cash received from the sale of BWBC as described in
Note 10
, which is reflected as investing cash flow. The detail of cash, cash equivalents, and restricted cash is included in
Note 22
.
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. Upon adoption, this affected not only how we present net periodic benefit cost, but also Power segment gross profit. We adopted the new accounting standard retrospectively as of January 1, 2018. The changes in the classification of the historical components of net periodic benefit costs from operating expense to other expense for the first quarter 2017 amounted to
$4.2 million
and are reflected in our condensed consolidated statements of operations.