NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2017
NOTE 1
– BASIS OF PRESENTATION
These interim financial statements of Babcock & Wilcox Enterprises, Inc. ("B&W," "we," "us," "our" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2016 (“Annual Report”). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.
NOTE 2
– EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of our common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands, except per share amounts)
|
2017
|
2016
|
|
2017
|
2016
|
Net income (loss) attributable to shareholders
|
$
|
(114,302
|
)
|
$
|
8,894
|
|
|
$
|
(272,346
|
)
|
$
|
(44,089
|
)
|
|
|
|
|
|
|
Weighted average shares used to calculate basic earnings per share
|
46,149
|
|
49,621
|
|
|
47,905
|
|
50,613
|
|
Dilutive effect of stock options, restricted stock and performance shares
|
—
|
|
236
|
|
|
—
|
|
—
|
|
Weighted average shares used to calculate diluted earnings per share
|
46,149
|
|
49,857
|
|
|
47,905
|
|
50,613
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
$
|
(2.48
|
)
|
$
|
0.18
|
|
|
$
|
(5.69
|
)
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
$
|
(2.48
|
)
|
$
|
0.18
|
|
|
$
|
(5.69
|
)
|
$
|
(0.87
|
)
|
Because we incurred a net loss in the quarter and nine months ended
September 30, 2017
and the nine months ended
September 30, 2016
, basic and diluted shares are the same.
If we had net income in the nine months ended September 30,
2017
and
2016
, diluted shares would include an additional
0.4 million
and
0.5 million
shares, respectively. If we had net income in the quarter ended
September 30, 2017
, diluted shares would include an additional
0.5 million
shares.
We excluded
2.0 million
and
0.6 million
shares related to stock options from the diluted share calculation for the nine months ended
September 30, 2017
and
2016
, respectively, because their effect would have been anti-dilutive. For the quarter ended
September 30, 2017
, we excluded
2.3 million
shares related to stock options because their effect would have been anti-dilutive.
NOTE 3
– SEGMENT REPORTING
Our operations are assessed based on
three
reportable segments, which are summarized as follows:
|
|
•
|
Power segment
:
focused on the supply of and aftermarket services for steam-generating, environmental and auxiliary equipment for power generation and other industrial applications.
|
|
|
•
|
Renewable segment
:
focused on the supply of steam-generating systems, environmental and auxiliary equipment for the waste-to-energy and biomass power generation industries.
|
|
|
•
|
Industrial segment
:
focused on custom-engineered cooling, environmental and other industrial equipment along with related aftermarket services.
|
An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended
September 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Revenues:
|
|
|
|
|
|
Power segment
|
$
|
202,222
|
|
$
|
211,749
|
|
|
$
|
612,274
|
|
$
|
762,293
|
|
Renewable segment
|
108,557
|
|
124,344
|
|
|
262,168
|
|
293,593
|
|
Industrial segment
|
99,288
|
|
76,809
|
|
|
281,734
|
|
147,275
|
|
Eliminations
|
(1,364
|
)
|
(1,947
|
)
|
|
(6,540
|
)
|
(4,882
|
)
|
|
408,703
|
|
410,955
|
|
|
1,149,636
|
|
1,198,279
|
|
Gross profit:
|
|
|
|
|
|
Power segment
|
40,629
|
|
48,896
|
|
|
132,653
|
|
170,903
|
|
Renewable segment
|
181
|
|
18,592
|
|
|
(100,119
|
)
|
14,468
|
|
Industrial segment
|
9,461
|
|
14,601
|
|
|
34,240
|
|
33,506
|
|
Intangible amortization expense included in cost of operations
|
(2,984
|
)
|
(7,752
|
)
|
|
(11,455
|
)
|
(8,833
|
)
|
Mark to market loss included in cost of operations
|
—
|
|
(580
|
)
|
|
(954
|
)
|
(30,079
|
)
|
|
47,287
|
|
73,757
|
|
|
54,365
|
|
179,965
|
|
Selling, general and administrative ("SG&A") expenses
|
(59,225
|
)
|
(59,615
|
)
|
|
(192,742
|
)
|
(179,225
|
)
|
Goodwill impairment charges
|
(86,903
|
)
|
—
|
|
|
(86,903
|
)
|
—
|
|
Restructuring activities and spin-off transaction costs
|
(3,775
|
)
|
(2,395
|
)
|
|
(8,910
|
)
|
(38,021
|
)
|
Research and development costs
|
(2,291
|
)
|
(2,361
|
)
|
|
(7,454
|
)
|
(8,273
|
)
|
Intangible amortization expense included in SG&A
|
(1,016
|
)
|
(1,018
|
)
|
|
(2,999
|
)
|
(3,071
|
)
|
Mark to market loss included in SG&A
|
—
|
|
(64
|
)
|
|
(106
|
)
|
(465
|
)
|
Equity in income of investees
|
1,234
|
|
2,827
|
|
|
4,813
|
|
4,887
|
|
Impairment of equity method investment
|
—
|
|
—
|
|
|
(18,193
|
)
|
—
|
|
Gains (losses) on asset disposals, net
|
(59
|
)
|
2
|
|
|
(63
|
)
|
17
|
|
Operating income (loss)
|
$
|
(104,748
|
)
|
$
|
11,133
|
|
|
$
|
(258,192
|
)
|
$
|
(44,186
|
)
|
During the first half of 2017, we announced our plan to reclassify the Industrial Steam product line currently included in our Power segment to the Industrial segment beginning with the quarter ended September 30, 2017. We have indefinitely postponed that reorganization. As of September 30, 2017, the Industrial Steam product line remains in the Power segment for all periods presented.
NOTE 4
– UNIVERSAL ACQUISITION
On January 11, 2017, we acquired Universal Acoustic & Emission Technologies, Inc. ("Universal") for approximately
$52.5 million
in cash, funded primarily by borrowings under our United States revolving credit facility, net of
$4.4 million
cash acquired in the business combination. Transaction costs included in the purchase price were approximately
$0.2 million
. We accounted for the Universal acquisition using the acquisition method, whereby all of the assets acquired and liabilities assumed were recognized at their fair value on the acquisition date, with any excess of the purchase price over the estimated fair value recorded as goodwill. In order to purchase Universal on January 11, 2017, we borrowed approximately
$55.0 million
under the United States revolving credit facility in 2017.
Universal provides custom-engineered acoustic, emission and filtration solutions to the natural gas power generation, mid-stream natural gas pipeline, locomotive and general industrial end-markets. Universal's product offering includes gas turbine inlet and exhaust systems, silencers, filters and enclosures. 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
$16.0 million
and
$49.8 million
of revenue to our operating results during the
three and nine
months ended
September 30, 2017
, respectively. Universal contributed
$3.2 million
and
$10.0 million
of gross profit (excluding intangible asset amortization expense of
$0.5 million
and
$2.6 million
) to our operating results in the
three and nine
months ended
September 30, 2017
, respectively. We expect Universal to contribute over
$70.0 million
of revenue and be accretive to the Industrial segment's gross profit during 2017.
The allocation of the purchase price based on the estimated fair value of assets acquired and liabilities assumed is set forth below. We are in the process of finalizing the purchase price allocation associated with the valuation of certain intangible assets and deferred tax balances; as a result, the provisional measurements of intangible assets, goodwill and deferred income tax balances are subject to change. Purchase price adjustments are expected to be finalized by December 31, 2017.
|
|
|
|
|
(in thousands)
|
Estimated acquisition
date fair value
|
Cash
|
$
|
4,379
|
|
Accounts receivable
|
11,270
|
|
Contracts in progress
|
3,167
|
|
Inventories
|
4,585
|
|
Other assets
|
579
|
|
Property, plant and equipment
|
16,692
|
|
Goodwill
|
14,413
|
|
Identifiable intangible assets
|
19,500
|
|
Deferred income tax assets
|
935
|
|
Current liabilities
|
(10,833
|
)
|
Other noncurrent liabilities
|
(1,423
|
)
|
Deferred income tax liabilities
|
(6,338
|
)
|
Net acquisition cost
|
$
|
56,926
|
|
The intangible assets included above consist of the following:
|
|
|
|
|
|
|
|
Estimated
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 an increase in our intangible asset amortization expense during the
three and nine
months ended
September 30, 2017
of
$0.5 million
and
$2.6 million
, respectively, which is included in cost of operations in our condensed consolidated statement of operations. Amortization of intangible assets is not allocated to segment results.
Approximately
$0.1 million
and
$1.5 million
of acquisition and integration related costs of Universal was recorded as a component of our operating expenses in the condensed consolidated statement of operations in the three and nine months ended
September 30, 2017
, respectively.
The following unaudited pro forma financial information below represents our results of operations for the three and nine months ended
September 30, 2016
and 12 months ended
December 31, 2016
had the Universal acquisition occurred on January 1, 2016. The unaudited pro forma financial information below is not intended to represent or be indicative of our actual consolidated results had we completed the acquisition at January 1, 2016. This information should not be taken as representative of our future consolidated results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
Nine months ended
|
Twelve months ended
|
(in thousands)
|
September 30, 2016
|
September 30, 2016
|
December 31, 2016
|
Revenues
|
$
|
431,412
|
|
$
|
1,259,905
|
|
$
|
1,660,986
|
|
Net income (loss) attributable to B&W
|
8,903
|
|
(43,458
|
)
|
(113,940
|
)
|
Basic earnings per common share
|
0.18
|
|
(0.86
|
)
|
(2.27
|
)
|
Diluted earnings per common share
|
0.18
|
|
(0.86
|
)
|
(2.27
|
)
|
The unaudited pro forma results included in the table above reflect the following pre-tax adjustments to our historical results:
|
|
•
|
A net increase in amortization expense related to timing of amortization of the fair value of identifiable intangible assets acquired of
$0.5 million
,
$2.4 million
and
$2.8 million
in the three and nine months ended
September 30, 2016
and the 12 months ended
December 31, 2016
, respectively.
|
|
|
•
|
Elimination of the historical interest expense recognized by Universal of
$0.1 million
,
$0.3 million
and
$0.4 million
in the three and nine months ended
September 30, 2016
and the 12 months ended
December 31, 2016
, respectively.
|
|
|
•
|
Elimination of
$2.1 million
in transaction related costs recognized in the 12 months ended
December 31, 2016
.
|
NOTE 5
– CONTRACTS AND REVENUE RECOGNITION
We generally recognize revenues and related costs from long-term contracts on a percentage-of-completion basis. Accordingly, we review contract price and cost estimates regularly as work progresses and reflect adjustments in profit proportionate to the percentage of completion in the periods in which we revise estimates to complete the contract. To the extent that these adjustments result in a reduction of previously reported profits from a project, we recognize a charge against current earnings. If a contract is estimated to result in a loss, that loss is recognized in the current period as a charge to earnings and the full loss is accrued on our balance sheet, which results in no expected gross profit from the loss contract in the future unless there are revisions to our estimated revenues or costs at completion in periods following the accrual of the contract loss. Changes in the estimated results of our percentage-of-completion contracts are necessarily based on information available at the time that the estimates are made and are based on judgments that are inherently uncertain as they are predictive in nature. As with all estimates to complete used to measure contract revenue and costs, actual results can and do differ from our estimates made over time.
In the
three and nine
months ended
September 30, 2017
and
2016
, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Increases in estimates for percentage-of-completion contracts
|
$
|
3,040
|
|
$
|
7,996
|
|
|
$
|
15,777
|
|
$
|
33,056
|
|
Decreases in estimates for percentage-of-completion contracts
|
(12,312
|
)
|
(22,126
|
)
|
|
(135,445
|
)
|
(65,805
|
)
|
Net changes in estimates for percentage-of-completion contracts
|
$
|
(9,272
|
)
|
$
|
(14,130
|
)
|
|
$
|
(119,668
|
)
|
$
|
(32,749
|
)
|
As disclosed in our
December 31, 2016
consolidated financial statements, we had four renewable energy projects in Europe that were loss contracts at
December 31, 2016
. During the three months ended June 30, 2017, two additional renewable energy projects in Europe became loss contracts. During the three and nine months ended
September 30, 2017
, we recorded a total of
$11.6 million
and
$123.8 million
, respectively, in net losses resulting from changes in the estimated revenues and costs to complete these six European renewable energy loss contracts. These changes in estimates include an increase in our estimate of liquidated damages associated with these six projects of
$13.2 million
and
$22.6 million
in the three and nine months ended
September 30, 2017
, respectively, to a total of
$62.8 million
at
September 30, 2017
. The charges recorded in the nine months
ended September 30, 2017 were due to revisions in the estimated revenues and costs at completion during the period, primarily as a result of structural steel design issues including the anticipated schedule impact, scheduling delays and shortcomings in our subcontractors' estimated productivity. Also included in the charges recorded in the nine months ended September 30, 2017 were corrections that reduced (increased) estimated contract losses at completion by
$1.0 million
,
$(6.0) million
and
$1.1 million
relating to the three months ended December 31, 2016, March 31, 2017 and June 30, 2017, respectively. Management has determined these amounts are immaterial to the consolidated financial statements in these previous periods. As of
September 30, 2017
, the status of these six loss contracts was as follows:
The first project became a loss contract in the second quarter of 2016. As of
September 30, 2017
, this project 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 during the first quarter of 2018. During the three and nine months ended
September 30, 2017
, we recognized additional contract losses of
$4.6 million
and
$15.1 million
, respectively, on the project as a result of differences in actual and estimated costs and schedule delays. Our estimate at completion as of September 30, 2017 includes
$9.4 million
of total expected liquidated damages. As of
September 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$2.3 million
. In the three and nine months ended
September 30, 2016
, we recognized charges of
$14.0 million
and
$45.7 million
, respectively, and as of
September 30, 2016
, this project had
$7.8 million
of accrued losses and was
79%
complete.
The second project became a loss contract in the fourth quarter of 2016. As of
September 30, 2017
, this contract was approximately
75%
complete, and we expect this project to be completed in early 2018. During the
three and nine
months ended
September 30, 2017
, we recognized contract gains of
$2.0 million
and contract losses of
$35.4 million
, respectively, on this project as a result of changes in construction cost estimates and schedule delays. Our estimate at completion as of September 30, 2017 includes
$15.5 million
of total expected liquidated damages. As of
September 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$13.6 million
.
The third project became a loss contract in the fourth quarter of 2016. As of
September 30, 2017
, this contract was approximately
95%
complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017, and turnover activities linked to the customer's operation of the facility are expected to be completed during the fourth quarter of 2017. During the
three and nine
months ended
September 30, 2017
, we recognized additional contract losses of
$1.6 million
and
$7.1 million
, respectively, as a result of changes in the estimated costs at completion. Our estimate at completion as of September 30, 2017 includes
$6.7 million
of total expected liquidated damages for schedule delays. As of
September 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$1.7 million
.
The fourth project became a loss contract in the fourth quarter of 2016. As of
September 30, 2017
, this contract was approximately
77%
complete, and we expect this project to be completed in early 2018. During the
three and nine
months ended
September 30, 2017
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in contract gains of
$4.5 million
and contract losses of
$17.4 million
, respectively. Our estimate at completion as of September 30, 2017 includes
$8.9 million
of total expected liquidated damages due to schedule delays. The changes in the status of this project were primarily attributable to changes in the estimated costs at completion, offset by a
$4.8 million
reduction in estimated liquidated damages we recognized during the three months ended March 31, 2017. As of
September 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$5.2 million
.
The fifth project became a loss contract in the second quarter of 2017. As of
September 30, 2017
, this contract was approximately
60%
complete, and we expect this project to be completed in the second half of 2018. During the three and nine months ended
September 30, 2017
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$12.0 million
and
$35.3 million
, respectively. Our estimate at completion as of
September 30, 2017
includes
$17.9 million
of total expected liquidated damages due to schedule delays. The change in the status of this project was primarily attributable to changes in the estimated costs at completion and schedule delays. As of
September 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$14.3 million
.
The sixth project became a loss contract in the second quarter of 2017. As of
September 30, 2017
, this contract was approximately
68%
complete, and we expect this project to be completed in the first half of 2018. During the nine months ended
September 30, 2017
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$18.5 million
. We had
no
significant change in estimate on this loss contract during the
three months ended
September 30, 2017
. Our estimate at completion as of September 30, 2017 includes
$4.3 million
of total expected liquidated damages due to schedule delays. The change in the status of this project was primarily attributable to changes in the estimated costs at completion and schedule delays. As of
September 30, 2017
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our consolidated balance sheet was
$3.3 million
.
In September 2017, we identified the failure of a structural steel beam on the fifth project, which temporarily stopped work in the boiler building pending corrective actions to stabilize the structure that are expected to be complete in the fourth quarter of 2017. 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 projects, and although no structural failure occurred on these two other projects, work was also stopped for a short period of time, and reinforcement of the structure is underway. The costs related to these structural steel issues are estimated to be approximately
$20 million
, which include the impact of project delays, and is included in the September 30, 2017 estimated losses at completion for these three projects as disclosed in the preceding paragraphs.
Also in the three months ended September 30, 2017, we adjusted the design of three of these renewable facilities to increase the guaranteed power output, which will allow us to achieve contractual bonus opportunities for the higher output. The bonus opportunities increased the estimated selling price of the three contracts by approximately
$15 million
in total, and this positive change in estimated cost to complete was fully recognized in the third quarter of 2017 because each of these three were loss projects.
During the three and nine months ended September 30, 2017, we recognized a net loss of
$2.3 million
on our other renewable energy projects that are not loss contracts, and we expect them to remain profitable at completion.
During the third quarter of 2016, we determined it was probable that we would receive a
$15.0 million
insurance recovery for a portion of the losses on the first European renewable energy project discussed above. There was no change in the accrued probable insurance recovery at
September 30, 2017
. The insurance recovery represents the full amount available under the insurance policy, and is recorded in accounts receivable - other in our condensed consolidated balance sheet at
September 30, 2017
.
NOTE 6
– RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
Restructuring liabilities
Restructuring liabilities are included in other accrued liabilities on our condensed consolidated balance sheets. Activity related to the restructuring liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Balance at beginning of period
(1)
|
$
|
967
|
|
$
|
11,984
|
|
|
$
|
2,254
|
|
$
|
740
|
|
Restructuring expense
|
3,428
|
|
1,792
|
|
|
7,285
|
|
19,816
|
|
Payments
|
(2,399
|
)
|
(10,422
|
)
|
|
(7,543
|
)
|
(17,202
|
)
|
Balance at September 30
|
$
|
1,996
|
|
$
|
3,354
|
|
|
$
|
1,996
|
|
$
|
3,354
|
|
(1)
For the three month periods ended September 30, 2017 and 2016, the balance at the beginning of the period is as of June 30, 2017 and 2016, respectively. For the nine month periods ended September 30, 2017 and 2016, the balance at the beginning of the period is as of December 31, 2016 and 2015, respectively.
Accrued restructuring liabilities at
September 30, 2017
and
2016
relate primarily to employee termination benefits.
Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring liability. In the
three and nine
months ended
September 30, 2017
, we recognized
$0.2 million
and
$0.6 million
, respectively, in non-cash restructuring expense related to losses (gains) on the disposals of long-lived assets. In the
three and nine
months ended
September 30, 2016
, we recognized non-cash charges of
$0.2 million
and
$14.8 million
, respectively, related to impairments of long-lived assets.
Spin-off transaction costs
Spin-off costs were primarily attributable to employee retention awards directly related to the spin-off from our former parent, The Babcock & Wilcox Company (now known as BWX Technologies, Inc.). In the
three and nine
months ended
September 30, 2017
, we recognized spin-off costs of
$0.2 million
and
$1.0 million
, respectively. In the
three and nine
months ended September 30, 2016, we recognized spin-off costs of
$0.4 million
and
$3.4 million
, respectively. In the nine months ended
September 30, 2017
, we disbursed
$1.9 million
of the accrued retention awards.
NOTE 7
– PROVISION FOR INCOME TAXES
We had an income tax benefit of
$5.6 million
in the three months ended
September 30, 2017
, which resulted in a
4.7%
effective tax rate as compared to
$1.6 million
of income tax expense in the three months ended
September 30, 2016
, which resulted in a
15.2%
effective tax rate. Our effective tax rate for the three months ended
September 30, 2017
was lower than our statutory rate primarily due to nondeductible goodwill impairment charges, foreign losses in our Renewable segment that are subject to a valuation allowance and nondeductible expenses, offset by favorable discrete items of
$0.4 million
. The discrete items include favorable adjustments to prior year U.S. tax returns and the effect of vested and exercised share-based compensation awards. Our effective tax rate for the three months ended
September 30, 2016
was lower than our statutory rate primarily due to changes in the jurisdictional mix of our forecasted full year income and losses and favorable impacts from adjustments related to prior years' tax returns in the United States and foreign jurisdictions.
We had an income tax benefit of
$7.6 million
in the nine months ended
September 30, 2017
, which resulted in a
2.7%
effective tax rate as compared to an income tax benefit of
$0.8 million
in the nine months ended September 30, 2016, which resulted in a
1.8%
effective tax rate for the nine months ended
September 30, 2016
. Our effective tax rate for the nine months ended
September 30, 2017
was lower than our statutory rate primarily due to the reasons noted above, as well as the second quarter tax benefit associated with the impairment of our equity method investment in India, which was offset by a valuation allowance, second quarter discrete items including withholding tax on a forecasted distribution outside the United States, partly offset by first quarter favorable discrete adjustments to prior year foreign tax returns and nondeductible transaction costs. Our effective tax rate for the nine months ended
September 30, 2016
was lower than our statutory rate primarily due to a
$13.1 million
increase in valuation allowances associated with deferred tax assets related to our equity investment in a foreign joint venture and state net operating losses, and to the jurisdictional mix of our forecasted full year income and losses, as described above.
During the nine months ended
September 30, 2017
, we prospectively adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting
. Adopting the new accounting standard resulted in a net
$0.2 million
and
$1.7 million
income tax benefit in the three and nine months ended
September 30, 2017
, respectively, associated with the income tax effects of vested and exercised share-based compensation awards.
NOTE 8
– COMPREHENSIVE INCOME
Gains and losses deferred in accumulated other comprehensive income (loss) ("AOCI") are reclassified and recognized in the condensed consolidated statements of operations once they are realized. The changes in the components of AOCI, net of tax, for the first three quarters in
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss) (net of tax)
|
Net unrealized gain (loss) on investments (net of tax)
|
Net unrealized gain (loss) on derivative instruments (net of tax)
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
Balance at December 31, 2016
|
$
|
(43,987
|
)
|
$
|
(37
|
)
|
$
|
802
|
|
$
|
6,740
|
|
$
|
(36,482
|
)
|
Other comprehensive income (loss) before reclassifications
|
5,417
|
|
61
|
|
4,587
|
|
(44
|
)
|
10,021
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
(27
|
)
|
(3,843
|
)
|
(882
|
)
|
(4,752
|
)
|
Net current-period other comprehensive income (loss)
|
5,417
|
|
34
|
|
744
|
|
(926
|
)
|
5,269
|
|
Balance at March 31, 2017
|
$
|
(38,570
|
)
|
$
|
(3
|
)
|
$
|
1,546
|
|
$
|
5,814
|
|
$
|
(31,213
|
)
|
Other comprehensive income (loss) before reclassifications
|
6,757
|
|
(19
|
)
|
(2,204
|
)
|
(97
|
)
|
4,437
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
(1
|
)
|
(658
|
)
|
(800
|
)
|
(1,459
|
)
|
Net current-period other comprehensive income (loss)
|
6,757
|
|
(20
|
)
|
(2,862
|
)
|
(897
|
)
|
2,978
|
|
Balance at June 30, 2017
|
(31,813
|
)
|
(23
|
)
|
(1,316
|
)
|
4,917
|
|
(28,235
|
)
|
Other comprehensive income (loss) before reclassifications
|
2,591
|
|
69
|
|
268
|
|
(66
|
)
|
2,862
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
(4
|
)
|
3,567
|
|
(630
|
)
|
2,933
|
|
Net current-period other comprehensive income (loss)
|
2,591
|
|
65
|
|
3,835
|
|
(696
|
)
|
5,795
|
|
Balance at September 30, 2017
|
$
|
(29,222
|
)
|
$
|
42
|
|
$
|
2,519
|
|
$
|
4,221
|
|
$
|
(22,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss) (net of tax)
|
Net unrealized gain (loss) on investments (net of tax)
|
Net unrealized gain (loss) on derivative instruments (net of tax)
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
Balance at December 31, 2015
|
$
|
(19,493
|
)
|
$
|
(44
|
)
|
$
|
1,786
|
|
$
|
(1,102
|
)
|
$
|
(18,853
|
)
|
Other comprehensive income (loss) before reclassifications
|
1,740
|
|
18
|
|
2,576
|
|
(61
|
)
|
4,273
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
1
|
|
(1,003
|
)
|
61
|
|
(941
|
)
|
Net current-period other comprehensive income
|
1,740
|
|
19
|
|
1,573
|
|
—
|
|
3,332
|
|
Balance at March 31, 2016
|
$
|
(17,753
|
)
|
$
|
(25
|
)
|
$
|
3,359
|
|
$
|
(1,102
|
)
|
$
|
(15,521
|
)
|
Other comprehensive income (loss) before reclassifications
|
(11,566
|
)
|
(7
|
)
|
778
|
|
37
|
|
(10,758
|
)
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
—
|
|
(651
|
)
|
58
|
|
(593
|
)
|
Net current-period other comprehensive income (loss)
|
(11,566
|
)
|
(7
|
)
|
127
|
|
95
|
|
(11,351
|
)
|
Balance at June 30, 2016
|
(29,319
|
)
|
(32
|
)
|
3,486
|
|
(1,007
|
)
|
(26,872
|
)
|
Other comprehensive income (loss) before reclassifications
|
2,811
|
|
18
|
|
1,132
|
|
(25
|
)
|
3,936
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
—
|
|
(1,247
|
)
|
8
|
|
(1,239
|
)
|
Net current-period other comprehensive income (loss)
|
2,811
|
|
18
|
|
(115
|
)
|
(17
|
)
|
2,697
|
|
Balance at September 30, 2016
|
$
|
(26,508
|
)
|
$
|
(14
|
)
|
$
|
3,371
|
|
$
|
(1,024
|
)
|
$
|
(24,175
|
)
|
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 September 30,
|
|
Nine months ended September 30,
|
2017
|
2016
|
|
2017
|
2016
|
Derivative financial instruments
|
Revenues
|
$
|
2,092
|
|
$
|
1,940
|
|
|
$
|
8,094
|
|
$
|
4,524
|
|
|
Cost of operations
|
159
|
|
24
|
|
|
113
|
|
57
|
|
|
Other-net
|
(7,930
|
)
|
(445
|
)
|
|
(7,438
|
)
|
(1,065
|
)
|
|
Total before tax
|
(5,679
|
)
|
1,519
|
|
|
769
|
|
3,516
|
|
|
Provision for income taxes
|
(2,112
|
)
|
272
|
|
|
(165
|
)
|
615
|
|
|
Net income
|
$
|
(3,567
|
)
|
$
|
1,247
|
|
|
$
|
934
|
|
$
|
2,901
|
|
|
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Cost of operations
|
$
|
619
|
|
$
|
(15
|
)
|
|
$
|
2,281
|
|
$
|
294
|
|
|
Provision for income taxes
|
(11
|
)
|
(7
|
)
|
|
(31
|
)
|
421
|
|
|
Net income (loss)
|
$
|
630
|
|
$
|
(8
|
)
|
|
$
|
2,312
|
|
$
|
(127
|
)
|
|
|
|
|
|
|
|
Realized gain on investments
|
Other-net
|
$
|
6
|
|
$
|
—
|
|
|
$
|
50
|
|
$
|
(1
|
)
|
|
Provision for income taxes
|
2
|
|
—
|
|
|
18
|
|
—
|
|
|
Net income (loss)
|
$
|
4
|
|
$
|
—
|
|
|
$
|
32
|
|
$
|
(1
|
)
|
NOTE 9
– CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2017
|
December 31, 2016
|
Held by foreign entities
|
$
|
44,778
|
|
$
|
94,415
|
|
Held by United States entities
|
3,359
|
|
1,472
|
|
Cash and cash equivalents
|
$
|
48,137
|
|
$
|
95,887
|
|
|
|
|
Reinsurance reserve requirements
|
$
|
21,456
|
|
$
|
21,189
|
|
Restricted foreign accounts
|
5,192
|
|
6,581
|
|
Restricted cash and cash equivalents
|
$
|
26,648
|
|
$
|
27,770
|
|
Our United States revolving credit facility described in
Note 17
allows for nearly immediate borrowing of available capacity to fund cash requirements in the normal course of business, meaning that the minimum United States cash on hand is maintained to minimize borrowing costs.
NOTE 10
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2017
|
December 31, 2016
|
Raw materials and supplies
|
$
|
66,995
|
|
$
|
61,630
|
|
Work in progress
|
9,518
|
|
6,803
|
|
Finished goods
|
14,586
|
|
17,374
|
|
Total inventories
|
$
|
91,099
|
|
$
|
85,807
|
|
NOTE 11
– EQUITY METHOD INVESTMENTS
Joint ventures in which we have significant ownership and influence, but not control, are accounted for in our consolidated financial statements using the equity method of accounting. We assess our investments in unconsolidated affiliates for other-than-temporary-impairment when significant changes occur in the investee's business or our investment philosophy. Such changes might include a series of operating losses incurred by the investee that are deemed other than temporary, the inability of the investee to sustain an earnings capacity that would justify the carrying amount of the investment or a change in the strategic reasons that were important when we originally entered into the joint venture. If an other-than-temporary-impairment were to occur, we would measure our investment in the unconsolidated affiliate at fair value.
Our primary equity method investees include joint ventures in China and India, each of which manufactures boiler parts and equipment. At
September 30, 2017
and
December 31, 2016
, our total investment in these joint ventures was
$87.4 million
and
$98.7 million
, respectively.
During the third quarter of 2017, both we and our joint venture partner began the process of scaling back the operations at Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES"), our joint venture in India, due to the decline in forecasted market opportunities in India. Currently, the manufacturing facility in India has been reduced to essential personnel only while engineering services are expected to continue in our engineering office through the end of 2017. These actions are in line with our change in strategy for the joint venture announced in the second quarter of 2017, which reduced the expected recoverable value of our investment in TBWES. We recognized an
$18.2 million
other-than-temporary-impairment of our investment in TBWES during the nine months ended
September 30, 2017
. The impairment charge was based on the difference in the carrying value of our investment in TBWES and our share of the estimated fair value of TBWES's net assets.
NOTE 12
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2017
|
December 31, 2016
|
Definite-lived intangible assets
|
|
|
Customer relationships
|
$
|
59,683
|
|
$
|
47,892
|
|
Unpatented technology
|
19,941
|
|
18,461
|
|
Patented technology
|
6,560
|
|
2,499
|
|
Tradename
|
22,818
|
|
18,774
|
|
Backlog
|
30,088
|
|
28,170
|
|
All other
|
7,550
|
|
7,429
|
|
Gross value of definite-lived intangible assets
|
146,640
|
|
123,225
|
|
Customer relationships amortization
|
(21,931
|
)
|
(17,519
|
)
|
Unpatented technology amortization
|
(4,443
|
)
|
(2,864
|
)
|
Patented technology amortization
|
(2,043
|
)
|
(1,532
|
)
|
Tradename amortization
|
(4,749
|
)
|
(3,826
|
)
|
Acquired backlog amortization
|
(27,814
|
)
|
(21,776
|
)
|
All other amortization
|
(6,965
|
)
|
(5,974
|
)
|
Accumulated amortization
|
(67,945
|
)
|
(53,491
|
)
|
Net definite-lived intangible assets
|
$
|
78,695
|
|
$
|
69,734
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
Total indefinite-lived intangible assets
|
$
|
1,305
|
|
$
|
1,305
|
|
The following summarizes the changes in the carrying amount of intangible assets:
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
71,039
|
|
$
|
37,844
|
|
Business acquisitions
|
19,500
|
|
55,438
|
|
Amortization expense
|
(14,455
|
)
|
(11,904
|
)
|
Currency translation adjustments and other
|
3,916
|
|
647
|
|
Balance at end of the period
|
$
|
80,000
|
|
$
|
82,025
|
|
The January 11, 2017 acquisition of Universal resulted in an increase in our intangible asset amortization expense during the
three and nine
months ended
September 30, 2017
of
$0.5 million
and
$2.6 million
, respectively.
The July 1, 2016 acquisition of SPIG, S.p.A. resulted in an increase in our intangible asset amortization expense during the
three and nine
months ended
September 30, 2017
of
$1.9 million
and
$7.3 million
, respectively, and
$7.1 million
of intangible asset amortization expense during the three months ended September 30, 2016.
Amortization of intangible assets is included in cost of operations in our condensed consolidated statement of operations, but it is not allocated to segment results.
Estimated future intangible asset amortization expense, including the increase in amortization expense resulting from the January 11, 2017 acquisition of Universal, is as follows (in thousands):
|
|
|
|
|
Period ending
|
Amortization expense
|
Three months ending December 31, 2017
|
$
|
3,582
|
|
Twelve months ending December 31, 2018
|
$
|
12,444
|
|
Twelve months ending December 31, 2019
|
$
|
10,342
|
|
Twelve months ending December 31, 2020
|
$
|
9,042
|
|
Twelve months ending December 31, 2021
|
$
|
8,782
|
|
Twelve months ending December 31, 2022
|
$
|
7,205
|
|
Thereafter
|
$
|
27,298
|
|
NOTE 13
– GOODWILL
The following summarizes the changes in the carrying amount of goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Power
|
Renewable
|
Industrial
|
Total
|
Balance at December 31, 2016
|
$
|
46,220
|
|
$
|
48,435
|
|
$
|
172,740
|
|
$
|
267,395
|
|
Increase resulting from Universal acquisition
|
—
|
|
—
|
|
14,413
|
|
14,413
|
|
Third quarter 2017 impairment charges
*
|
—
|
|
(49,965
|
)
|
(36,938
|
)
|
(86,903
|
)
|
Currency translation adjustments
|
1,180
|
|
1,530
|
|
6,490
|
|
9,200
|
|
Balance at September 30, 2017
|
$
|
47,400
|
|
$
|
—
|
|
$
|
156,705
|
|
$
|
204,105
|
|
*
Prior to September 30, 2017, we had not recorded any goodwill impairment charges.
Our annual goodwill impairment assessment is performed on October 1 of each year (the "annual assessment" date); however, events during 2017 have required two interim assessments of all six of our reporting units. In the second quarter of 2017, significant charges in our Renewable segment was considered to be a triggering event for the interim assessment as of June 30, 2017, which did not indicate impairment. In the third quarter of 2017, our market capitalization significantly decreased to below our equity value, which was considered to be a trigger for a second interim assessment. Additionally, the forecast was reduced for our SPIG reporting unit based on a change in the market strategy implemented by the new segment management to focus on core geographies and products.
Assessing goodwill for impairment involves a two step test. Step 1 of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the test is performed to measure the amount of the impairment loss, if any. Step 2 of the test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill, and impairment is measured as the excess of the carrying value over the implied value of goodwill. Estimating the fair value of a reporting unit requires significant judgment. The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on a
50%
weighting of an income approach using a discounted cash flow analysis based on forward-looking projections of future operating results, a
30%
to
40%
weighting of a market approach using multiples of revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") of guideline companies and a
20%
to
10%
weighting of a market approach using multiples of revenue and EBITDA from recent, similar business combinations.
We primarily attributed the significant decline in our market capitalization in the third quarter of 2017 to the announcement of significant charges in the Renewable reporting unit. Accordingly, we increased the discount rate applied to future projected cash flows from
15.0%
at June 30, 2017 to
23.5%
at September 30, 2017. As a result of the increase in the discount rate and an increase in the carrying value of the reporting unit, impairment was indicated at September 30, 2017, which measured
$50.0 million
(
$48.9 million
net of tax), the full carrying value. Other long-lived assets in the reporting unit were not impaired.
For our SPIG reporting unit, which is included in our Industrial segment, the Step 1 also indicated impairment. At June 30, 2017 and October 1, 2016, the fair value exceeded the carrying value by less than
1%
and
5%
, respectively. At September 30, 2017, the independently obtained fair value estimates decreased under both the income and market valuation approaches due
to a short-term decrease in profitability attributable to specific current contracts and changes in SPIG's market strategy introduced by segment management during the third quarter. The discount rate applied to future projected cash flows was
14.0%
and
12.5%
at each of the September 30, 2017 and June 30, 2017 interim tests, respectively. Step 2 of the impairment test at September 30, 2017 measured
$36.9 million
of impairment (with no income tax impact). The SPIG reporting unit has
$38.0 million
of goodwill remaining after the impairment charge. Other long-lived assets in the reporting unit were not impaired.
For the remaining four reporting units where impairment was not indicated at September 30, 2017, the goodwill balances at September 30, 2017 and the Step 1 goodwill impairment test headroom (the estimated fair value less the carrying value) are as follows:
|
|
|
|
|
|
|
|
Power Segment
|
|
Industrial Segment
|
(in millions)
|
Power
|
Construction
|
|
MEGTEC
|
Universal
|
Reporting unit headroom
|
60%
|
98%
|
|
12%
|
18%
|
Goodwill balance
|
$38.5
|
$8.9
|
|
$104.3
|
$14.4
|
Step 1 of the impairment test for our MEGTEC reporting unit, which is included in our Industrial segment, did not indicate impairment, and the fair value exceeded the carrying value by
12%
at September 30, 2017 compared to
3.0%
at June 30, 2017 and
22%
at October 1, 2016. Under both the income and market valuation approaches, the fair value estimates at the interim assessment data and the second interim assessment date decreased compared to the annual assessment date due to lower projected net sales and EBITDA. Similar to many industrial businesses, the reduction in MEGTEC reporting unit revenues has been the result of a decline in new equipment demand, primarily in the Americas; however, bookings trends have recently improved and backlog at September 30, 2017 is 67% higher than at the same date a year ago. The MEGTEC reporting unit recorded a
15%
increase in revenues and a
16%
increase in gross profit during the third quarter of 2017. The estimate of fair value of the MEGTEC reporting unit is sensitive to changes in assumptions, particularly assumed discount rates and projections of future operating results under the income approach. The discount rate applied to future projected cash flows was
12.5%
and
11.0%
at each of the September 30, 2017 and June 30, 2017 interim tests, respectively. Absent any other changes, an increase in the discount rate could result in future impairment of goodwill. Decreases in future projected operating results could also result in future impairment of goodwill.
NOTE 14
– PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment is stated at cost. The composition of our property, plant and equipment less accumulated depreciation is set forth below:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2017
|
December 31, 2016
|
Land
|
$
|
8,802
|
|
$
|
6,348
|
|
Buildings
|
121,952
|
|
114,322
|
|
Machinery and equipment
|
206,437
|
|
189,489
|
|
Property under construction
|
14,218
|
|
22,378
|
|
|
351,409
|
|
332,537
|
|
Less accumulated depreciation
|
208,302
|
|
198,900
|
|
Net property, plant and equipment
|
$
|
143,107
|
|
$
|
133,637
|
|
NOTE 15
– WARRANTY EXPENSE
Changes in the carrying amount of our accrued warranty expense are as follows:
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
Balance at beginning of period
|
$
|
40,467
|
|
$
|
39,847
|
|
Additions
|
17,818
|
|
18,300
|
|
Expirations and other changes
|
(9,053
|
)
|
(2,945
|
)
|
Increases attributable to business combinations
|
1,060
|
|
901
|
|
Payments
|
(11,126
|
)
|
(10,922
|
)
|
Translation and other
|
2,064
|
|
(217
|
)
|
Balance at end of period
|
$
|
41,230
|
|
$
|
44,964
|
|
During the nine months ended
September 30, 2017
and 2016, our Power segment reduced its accrued warranty expense by
$4.7 million
and
$2.2 million
, respectively, to reflect the expiration of warranties, and updated its estimated warranty accrual rate to reflect its warranty claims experience and current contractual warranty obligations, which reduced the accrued warranty expense by
$4.1 million
in the nine months ended September 30, 2017. Additions to the warranty accrual include specific provisions on industrial steam projects totaling
$7.1 million
and
$2.1 million
during the nine months ended September 30, 2017 and 2016, respectively.
NOTE 16
– PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Components of net periodic benefit cost (benefit) included in net income (loss) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Other benefits
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
|
2017
|
2016
|
Service cost
|
$
|
227
|
|
$
|
548
|
|
|
$
|
756
|
|
$
|
1,137
|
|
|
$
|
3
|
|
$
|
6
|
|
|
$
|
11
|
|
$
|
18
|
|
Interest cost
|
10,369
|
|
10,086
|
|
|
30,905
|
|
30,890
|
|
|
(106
|
)
|
206
|
|
|
255
|
|
629
|
|
Expected return on plan assets
|
(14,936
|
)
|
(15,925
|
)
|
|
(44,646
|
)
|
(46,107
|
)
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
29
|
|
81
|
|
|
80
|
|
335
|
|
|
(561
|
)
|
—
|
|
|
(2,277
|
)
|
—
|
|
Recognized net actuarial loss
|
—
|
|
645
|
|
|
1,062
|
|
30,545
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Net periodic benefit cost (benefit)
|
$
|
(4,311
|
)
|
$
|
(4,565
|
)
|
|
$
|
(11,843
|
)
|
$
|
16,800
|
|
|
$
|
(664
|
)
|
$
|
212
|
|
|
$
|
(2,011
|
)
|
$
|
647
|
|
During the first quarter of 2017, lump sum payments from our Canadian pension plan resulted in a plan settlement of
$0.4 million
, which also resulted in interim mark to market accounting for the pension plan. The mark to market adjustment in the first quarter of 2017 was
$0.7 million
. The effect of these charges and mark to market adjustments are reflected in the
$1.1 million
"
Recognized net actuarial loss" for the nine months ended September 30, 2017 in the table above. There were no significant plan settlements or interim mark to market adjustments during the second or third quarters of 2017.
During the second and third quarters of 2016, we recorded adjustments to our benefit plan liabilities resulting from certain curtailment and settlement events. In September 2016, lump sum payments from our Canadian pension plan resulted in a
$0.1 million
pension plan settlement charge. In May 2016, the closure of our West Point, Mississippi manufacturing facility resulted in a
$1.8 million
curtailment charge in our United States pension plan. In April 2016, lump sum payments from our Canadian pension plan resulted in a
$1.1 million
plan settlement charge.
These events resulted in interim mark to market accounting for the respective benefit plans in 2016. Mark to market charges in the three months ended September 30, 2016 were
$0.5 million
in our Canadian pension plan. Mark to market charges for our United States and Canadian pension plans were
$27.5 million
in the nine months ended September 30, 2016. The pension mark to market charges were impacted by higher than expected returns on pension plan assets. The weighted-average discount rate used to remeasure the benefit plan liabilities at September 30, 2016 was
3.88%
. The effect of these charges and mark to market adjustments are reflected in the 2016 "Recognized net actuarial loss" in the table above.
We have excluded the recognized net actuarial loss from our reportable segments and such amount has been reflected in
Note 3
as the mark to market adjustment in the reconciliation of reportable segment income (loss) to consolidated operating losses. The recognized net actuarial loss during the
three and nine
months ended
September 30, 2017
and 2016 was recorded in our condensed consolidated statements of operations in the following line items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Cost of operations
|
$
|
—
|
|
$
|
580
|
|
|
$
|
954
|
|
$
|
30,079
|
|
Selling, general and administrative expenses
|
—
|
|
64
|
|
|
106
|
|
465
|
|
Other
|
—
|
|
—
|
|
|
2
|
|
—
|
|
Total
|
$
|
—
|
|
$
|
644
|
|
|
$
|
1,062
|
|
$
|
30,544
|
|
We made contributions to our pension and other postretirement benefit plans totaling
$9.8 million
and
$16.2 million
during the
three and nine
months ended
September 30, 2017
, respectively, as compared to
$1.8 million
and
$4.4 million
during the
three and nine
months ended
September 30, 2016
, respectively.
See
Note 23
for the future expected effect of FASB ASU 2017-07 on the presentation of benefit and expense related to our pension and post retirement plans.
NOTE 17
– REVOLVING DEBT
The components of our revolving debt are comprised of separate revolving credit facilities in the following locations:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2017
|
December 31, 2016
|
United States
|
$
|
58,900
|
|
$
|
9,800
|
|
Foreign
|
12,398
|
|
14,241
|
|
Total revolving debt
|
$
|
71,298
|
|
$
|
24,041
|
|
United States revolving credit facility
On May 11, 2015, we entered into a credit agreement with a syndicate of lenders ("Credit Agreement") in connection with our spin-off from The Babcock & Wilcox Company. The Credit Agreement, which is scheduled to mature on June 30, 2020, provides for a senior secured revolving credit facility, initially in an aggregate amount of up to
$600.0 million
. The proceeds from loans under the Credit Agreement are available for working capital needs and other general corporate purposes, and the full amount is available to support the issuance of letters of credit.
On February 24, 2017 and August 9, 2017, we entered into amendments to the Credit Agreement (the “Amendments” and the Credit Agreement, as amended to date, the “Amended Credit Agreement”) to, among other things: (1) permit us to incur the debt under the second lien term loan facility (discussed further in
Note 18
), (2) modify the definition of EBITDA in the Amended Credit Agreement to exclude: up to
$98.1 million
of charges for certain Renewable segment contracts for periods including the quarter ended December 31, 2016, up to
$115.2 million
of charges for certain Renewable segment contracts for periods including the quarter ended June 30, 2017, up to
$4.0 million
of aggregate restructuring expenses incurred during the period from July 1, 2017 through September 30, 2018 measured on a consecutive four-quarter basis, realized and unrealized foreign exchange losses resulting from the impact of foreign currency changes on the valuation of assets and liabilities, and fees and expenses incurred in connection with the August 9, 2017 amendment, (3) replace the maximum leverage ratio with a maximum senior debt leverage ratio, (4) decrease the minimum consolidated interest coverage ratio, (5) limit our ability to borrow under the Amended Credit Agreement during the covenant relief period to
$250.0 million
in the aggregate, (6) reduce commitments under the revolving credit facility from
$600.0 million
to
$500.0 million
, (7) require us to maintain liquidity (as defined in the Amended Credit Agreement) of at least
$75.0 million
as of the last business day of any calendar month, (8) require us to repay outstanding borrowings under the revolving credit facility (without any reduction in commitments) with certain excess cash, (9) increase the pricing for borrowings and commitment fees under the Amended Credit Agreement, (10) limit our ability to incur debt and liens during the covenant relief period, (11) limit our ability to make acquisitions and investments in third parties during the covenant relief period, (12) prohibit us from paying dividends and undertaking stock
repurchases during the covenant relief period (other than our share repurchase from an affiliate of AIP (discussed further in
Note 18
)), (13) prohibit us from exercising the accordion described below during the covenant relief period, (14) limit our financial and commercial letters of credit outstanding under the Amended Credit Agreement to
$30.0 million
during the covenant relief period, (15) require us to reduce commitments under the Amended Credit Agreement with the proceeds of certain debt issuances and asset sales, (16) beginning with the quarter ended September 30, 2017, limit to no more than
$25.0 million
any cumulative net income losses attributable to certain Vølund projects, and (17) increase reporting obligations and require us to hire a third-party consultant. The covenant relief period will end, at our election, when the conditions set forth in the Amended Credit Agreement are satisfied, but in no event earlier than the date on which we provide the compliance certificate for our fiscal quarter ending December 31, 2018.
Other than during the covenant relief period, the Amended Credit Agreement contains an accordion feature that allows us, subject to the satisfaction of certain conditions, including the receipt of increased commitments from existing lenders or new commitments from new lenders, to increase the amount of the commitments under the revolving credit facility in an aggregate amount not to exceed the sum of (1)
$200.0 million
plus (2) an unlimited amount, so long as for any commitment increase under this subclause (2) our senior leverage ratio (assuming the full amount of any commitment increase under this subclause (2) is drawn) is equal to or less than
2.00
:1.0 after giving pro forma effect thereto. During the covenant relief period, our ability to exercise the accordion feature will be prohibited.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates are (1) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances. During the covenant relief period, such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such prepayments. Following the covenant relief period, such prepayments will not require us to reduce the commitments under the Amended Credit Agreement.
After giving effect to Amendments, loans outstanding under the Amended Credit Agreement bear interest at our option at either (1) the LIBOR rate plus
5.0%
per annum or (2) the base rate (the highest of the Federal Funds rate plus
0.5%
, the one month LIBOR rate plus
1.0%
, or the administrative agent's prime rate) plus
4.0%
per annum. Interest expense associated with our United States revolving credit facility loans for the three and nine months ended September 30, 2017 was
$3.3 million
and
$7.0 million
, respectively. Included in interest expense was
$1.3 million
and
$2.1 million
of non-cash amortization of direct financing costs for the three and nine months ended September 30, 2017, respectively. A commitment fee of
1.0%
per annum is charged on the unused portions of the revolving credit facility. A letter of credit fee of
2.50%
per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of
1.50%
per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding. Additionally, an annual facility fee of
$1.5 million
is payable on the first business day of 2018 and 2019, and a pro rated amount is payable on the first business day of 2020.
The Amended Credit Agreement includes financial covenants that are tested on a quarterly basis, based on the rolling four-quarter period that ends on the last day of each fiscal quarter. The maximum permitted senior debt leverage ratio as defined in the Amended Credit Agreement is:
|
|
•
|
6.00
:1.0 for the quarter ended September 30, 2017,
|
|
|
•
|
8.50
:1.0 for each of the quarters ending December 31, 2017 and March 31, 2018,
|
|
|
•
|
6.25
:1.0 for the quarter ending June 30, 2018,
|
|
|
•
|
4.00
:1.0 for the quarter ending September 30, 2018,
|
|
|
•
|
3.75
:1.0 for the quarter ending December 31, 2018,
|
|
|
•
|
3.25
:1.0 for each of the quarters ending March 31, 2019 and June 30, 2019, and
|
|
|
•
|
3.00
:1.0 for each of the quarters ending September 30, 2019 and each quarter thereafter.
|
The minimum consolidated interest coverage ratio as defined in the Credit Agreement is:
|
|
•
|
1.50
:1.0 for the quarter ended September 30, 2017,
|
|
|
•
|
1.00
:1.0 for each of the quarters ending December 31, 2017 and March 31, 2018,
|
|
|
•
|
1.25
:1.0 for the quarter ending June 30, 2018,
|
|
|
•
|
1.50
:1.0 for each of the quarters ending September 30, 2018 and December 31, 2018,
|
|
|
•
|
1.75
:1.0 for each of the quarters ending March 31, 2019 and June 30, 2019, and
|
|
|
•
|
2.00
:1.0 for each of the quarters ending September 30, 2019 and each quarter thereafter.
|
Beginning with September 30, 2017, consolidated capital expenditures in each fiscal year are limited to
$27.5 million
.
At
September 30, 2017
, usage under the Amended Credit Agreement consisted of
$58.9 million
in borrowings at an effective interest rate of
6.88%
,
$7.7 million
of financial letters of credit and
$87.2 million
of performance letters of credit. At
September 30, 2017
, we had
$94.7 million
available for borrowings or to meet letter of credit requirements primarily based on trailing 12 month EBITDA, and our leverage (as defined in the Amended Credit Agreement) ratio was
3.00
and our interest coverage ratio was
2.59
. In addition, through September 30, 2017, we have used
$11.6 million
of the
$25.0 million
of permitted net income losses attributable to our Vølund projects. At
September 30, 2017
, we were in compliance with all of the covenants set forth in the Amended Credit Agreement.
Foreign revolving credit facilities
Outside of the United States, we have revolving credit facilities in Turkey, China and India that are used to provide working capital to our operations in each country. These three foreign revolving credit facilities allow us to borrow up to
$14.8 million
in aggregate and each have a one year term. At
September 30, 2017
, we had
$12.4 million
in borrowings outstanding under these foreign revolving credit facilities at an effective weighted-average interest rate of
5.17%
.
Other credit arrangements
Certain subsidiaries have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in associated with contracting activity. The aggregate value of all such letters of credit and bank guarantees not secured by the United States revolving credit facility as of
September 30, 2017
and December 31, 2016 was
$279.1 million
and
$255.2 million
, respectively.
We have posted surety bonds to support contractual obligations to customers relating to certain projects. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. Although there can be no assurance that we will maintain our surety bonding capacity, we believe our current capacity is adequate to support our existing project requirements for the next 12 months. In addition, these bonds generally indemnify customers should we fail to perform our obligations under the applicable contracts. We, and certain of our subsidiaries, have jointly executed general agreements of indemnity in favor of surety underwriters relating to surety bonds those underwriters issue in support of some of our contracting activity. As of
September 30, 2017
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$472.3 million
.
NOTE 18
– SECOND LIEN TERM LOAN FACILITY
On
August 9, 2017
, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of American Industrial Partners ("AIP"), governing a second lien term loan facility. The second lien term loan facility consists of a second lien term loan in the principal amount of
$175.9 million
, all of which was borrowed on
August 9, 2017
, and a delayed draw term loan facility in the principal amount of up to
$20.0 million
, which may be drawn in a single draw prior to June 30, 2020, subject to certain conditions. Through
September 30, 2017
, we have not utilized the delayed draw term loan facility.
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. 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 any borrowings we may make under 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 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 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
18.64%
.
The carrying value of the second lien term loan facility at
September 30, 2017
was as follows (in thousands):
|
|
|
|
Face value
|
Unamortized debt discount
and direct financing costs
|
Net carrying value
|
$175,884
|
$37,500
|
$138,384
|
Interest expense associated with our second lien credit agreement is comprised of the following:
|
|
|
|
|
|
(in thousands)
|
Actual for the period
August 9, 2017 through
September 30, 2017
|
|
Forecasted for the period
October 1, 2017 through
December 31, 2017
|
Forecasted for the period
January 1, 2018 through
December 31, 2018
|
Coupon interest (10%)
|
$2,554
|
|
$4,433
|
$17,588
|
Amortization of financing costs and discount
|
$1,095
|
|
$2,119
|
$9,678
|
Total interest expense
|
$3,649
|
|
$6,552
|
$27,266
|
Borrowings under the Second Lien Credit Agreement are (1) guaranteed by substantially all of our wholly owned domestic subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by second-priority liens on certain assets owned by us and the guarantors. The Second Lien Credit Agreement requires interest payments on loans on a quarterly basis until maturity. Voluntary prepayments made during the first year after closing are subject to a make-whole premium, voluntary prepayments made during the second year after closing are subject to a
3.0%
premium and voluntary prepayments made during the third year after closing are subject to a
2.0%
premium. The Second Lien Credit Agreement requires us to make certain prepayments on any outstanding loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions and a right to reinvest such proceeds in certain circumstances, and subject to certain restrictions contained in an intercreditor agreement among the lenders under the Amended Credit Agreement and the Second Lien Credit Agreement.
The Second Lien Credit Agreement contains representations and warranties, affirmative and restrictive covenants, financial covenants and events of default substantially similar to those contained in the Amended Credit Agreement, subject to appropriate cushions. The Second Lien Credit Agreement is generally less restrictive than the Amended Credit Agreement.
NOTE 19
– CONTINGENCIES
ARPA litigation
On February 28, 2014, the Arkansas River Power Authority ("ARPA") filed suit against Babcock & Wilcox Power Generation Group, Inc. (now known as The Babcock & Wilcox Company and referred to herein as “BW PGG”) in the United States District Court for the District of Colorado (Case No. 14-cv-00638-CMA-NYW) alleging breach of contract, negligence, fraud and other claims arising out of BW PGG's delivery of a circulating fluidized bed boiler and related equipment used in the Lamar Repowering Project pursuant to a 2005 contract.
A jury trial took place in mid-November 2016. Some of ARPA’s claims were dismissed by the judge during the trial. The jury’s verdict on the remaining claims was rendered on November 21, 2016. The jury found in favor of B&W with respect to ARPA’s claims of fraudulent concealment and negligent misrepresentation and on one of ARPA’s claims of breach of contract. The jury found in favor of ARPA on the three remaining claims for breach of contract and awarded damages totaling
$4.2 million
, which exceeded the previous
$2.3 million
accrual we established in 2012 by
$1.9 million
. We increased our accrual by
$1.9 million
in the fourth quarter of 2016. At
September 30, 2017
and
December 31, 2016
,
$4.2 million
was included in other accrued liabilities in our consolidated balance sheet, and we have posted a bond pending resolution of post-trial matters.
ARPA also requested that pre-judgment interest of
$4.1 million
plus post-judgment interest at a rate of
0.77%
compounded annually be added to the judgment, together with certain litigation costs. The court granted ARPA
$3.7 million
of pre-
judgment interest on July 21, 2017, 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.
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.
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 disclosed on February 28, 2017 and August 9, 2017 that it would incur losses on these projects. The plaintiff seeks an unspecified amount of damages.
We believe the allegations in the Stockholder Litigation are without merit, and that the outcome of the Stockholder Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows, 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 20
– DERIVATIVE FINANCIAL INSTRUMENTS
Our foreign currency exchange ("FX") forward contracts that qualify for hedge accounting are designated as cash flow hedges. The hedged risk is the risk of changes in functional-currency-equivalent cash flows attributable to changes in FX spot rates of forecasted transactions related to long-term contracts. We exclude from our assessment of effectiveness the portion of the fair value of the FX forward contracts attributable to the difference between FX spot rates and FX forward rates. At
September 30, 2017
and
2016
, we had deferred approximately
$2.5 million
and
$3.4 million
, respectively, of net gains on these derivative financial instruments in accumulated other comprehensive income ("AOCI").
At
September 30, 2017
, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled
$121.2 million
at
September 30, 2017
with maturities extending to November 2019. These instruments consist primarily of contracts to purchase or sell euros and British pounds sterling. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions party to our United States revolving credit facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our United States revolving credit facility. 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)
|
September 30, 2017
|
December 31, 2016
|
Derivatives designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
1,694
|
|
$
|
3,805
|
|
Other assets
|
750
|
|
665
|
|
Accounts payable
|
542
|
|
1,012
|
|
Other liabilities
|
183
|
|
213
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
Foreign exchange contracts:
|
|
|
Location of FX forward contracts not designated as hedges:
|
|
|
Accounts receivable-other
|
$
|
1,238
|
|
$
|
105
|
|
Accounts payable
|
2,594
|
|
403
|
|
Other liabilities
|
8
|
|
7
|
|
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
(in thousands)
|
2017
|
2016
|
|
2017
|
2016
|
Derivatives designated as hedges:
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income
|
$
|
398
|
|
$
|
1,419
|
|
|
$
|
2,642
|
|
5,476
|
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location:
|
|
|
|
|
|
Revenues
|
2,092
|
|
1,940
|
|
|
8,094
|
|
4,524
|
|
Cost of operations
|
159
|
|
24
|
|
|
113
|
|
57
|
|
Other-net
|
(7,930
|
)
|
(445
|
)
|
|
(7,438
|
)
|
(1,065
|
)
|
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location:
|
|
|
|
|
|
Other-net
|
(7,005
|
)
|
1,607
|
|
|
(10,524
|
)
|
3.408
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
Forward contracts
|
|
|
|
|
|
Loss recognized in income by location:
|
|
|
|
|
|
Other-net
|
$
|
(1,364
|
)
|
$
|
(154
|
)
|
|
$
|
(1,709
|
)
|
$
|
(567
|
)
|
NOTE 21
– FAIR VALUE MEASUREMENTS
The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the FASB Topic
Fair Value Measurements and Disclosures
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Available-for-sale securities
|
September 30, 2017
|
|
Level 1
|
Level 2
|
Level 3
|
Commercial paper
|
$
|
5,394
|
|
|
$
|
—
|
|
$
|
5,394
|
|
$
|
—
|
|
Mutual funds
|
1,286
|
|
|
—
|
|
1,286
|
|
—
|
|
U.S. Government and agency securities
|
7,243
|
|
|
7,243
|
|
—
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
13,923
|
|
|
$
|
7,243
|
|
$
|
6,680
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Available-for-sale securities
|
December 31, 2016
|
|
Level 1
|
Level 2
|
Level 3
|
Commercial paper
|
$
|
6,734
|
|
|
$
|
—
|
|
$
|
6,734
|
|
$
|
—
|
|
Certificates of deposit
|
2,251
|
|
|
—
|
|
2,251
|
|
—
|
|
Mutual funds
|
1,152
|
|
|
—
|
|
1,152
|
|
—
|
|
Corporate bonds
|
750
|
|
|
750
|
|
—
|
|
—
|
|
U.S. Government and agency securities
|
7,104
|
|
|
7,104
|
|
—
|
|
—
|
|
Total fair value of available-for-sale securities
|
$
|
17,991
|
|
|
$
|
7,854
|
|
$
|
10,137
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
September 30, 2017
|
|
December 31, 2016
|
Forward contracts to purchase/sell foreign currencies
|
$
|
355
|
|
|
$
|
2,940
|
|
Available-for-sale securities
We estimate the fair value of available-for-sale securities based on quoted market prices. Our investments in available-for-sale securities are presented in "other assets" on our condensed consolidated balance sheets.
Derivatives
Derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments.
Other financial instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
|
|
•
|
Cash and cash equivalents and restricted cash and cash equivalents
. The carrying amounts that we have reported in the accompanying condensed consolidated balance sheets for cash and cash equivalents and restricted cash and cash equivalents approximate their fair values due to their highly liquid nature.
|
|
|
•
|
Revolving debt
. We base the fair values of debt instruments on quoted market prices. Where quoted prices are not available, we base the fair values on the present value of future cash flows discounted at estimated borrowing rates for similar debt instruments or on estimated prices based on current yields for debt issues of similar quality and terms. The fair value of our debt instruments approximated their carrying value at
September 30, 2017
and
December 31, 2016
.
|
Non-recurring fair value measurements
The purchase price allocation associated with the January 11, 2017 acquisition of Universal required significant fair value measurements using unobservable inputs. The fair value of the acquired intangible assets was determined using the income approach (see
Note 4
).
The other-than-temporary impairment of our equity method investment in TBWES (see
Note 11
) required significant fair value measurements using unobservable inputs ("Level 3" inputs as defined in the fair value hierarchy established by FASB Topic
Fair Value Measurements and Disclosures
). We determined the impairment charge by first determining an estimate of the price that could be received to sell the assets and transfer the liabilities held by TBWES in an orderly transaction between market participants at June 30, 2017. The fair value of TBWES's net assets was determined through a combination of the cost approach, a market approach and an income approach.
Our interim goodwill impairment test and third quarter impairment charge required significant fair value measurements using unobservable inputs (see
Note 13
). The fair value of each reporting unit determined under Step 1 of the goodwill impairment test was based on an income approach using a discounted cash flow analysis, a market approach using multiples of revenue and EBITDA of guideline companies, and a market approach using multiples of revenue and EBITDA from recent, similar business combinations. The fair value of the assets and liabilities for the Renewable and SPIG reporting units determined under Step 2 of the goodwill impairment test were based on either an income or market approach.
The measurement of the net actuarial loss associated with our Canadian pension plan was determined using unobservable inputs (see
Note 16
). These inputs included the estimated discount rate, expected return on plan assets and other actuarial inputs associated with the plan participants.
The determination of the estimated fair value of the related party share repurchase required significant fair value measurements using unobservable inputs (see
Note 18
). 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.
NOTE 22
– SUPPLEMENTAL CASH FLOW INFORMATION
During the
nine
months ended
September 30, 2017
and
2016
, we recognized the following non-cash activity in our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
2016
|
Accrued capital expenditures in accounts payable
|
$
|
1,118
|
|
$
|
2,543
|
|
During the
nine
months ended
September 30, 2017
and
2016
, we recognized the following cash activity in our condensed consolidated financial statements:
|
|
|
|
|
|
|
|
(in thousands)
|
2017
|
2016
|
Income tax payments (refunds), net
|
$
|
(11,190
|
)
|
$
|
11,289
|
|
Interest payments on our United States revolving credit facility
|
$
|
2,876
|
|
$
|
40
|
|
Interest payments on our second lien term loan facility
|
$
|
2,492
|
|
$
|
—
|
|
NOTE 23
– NEW ACCOUNTING STANDARDS
New accounting standards that could affect our consolidated financial statements in the future are summarized as follows:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. The new accounting standard provides a comprehensive model to use in accounting for revenue from contracts with customers and will replace most existing revenue recognition guidance when it becomes effective. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses; determining if an entity is the principal or agent in a revenue arrangement; and technical corrections and improvements on topics including: contract costs, loss provisions on construction and production contracts and disclosures for remaining and prior-period performance obligations. The new accounting standard also requires more detailed disclosures to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with
customers. The new accounting standard is effective for interim and annual reporting periods beginning after December 15, 2017, and permits retrospectively applying the guidance to each prior reporting period presented (full retrospective method) or prospectively applying the guidance and providing additional disclosures comparing results to previous guidance, with the cumulative effect of initially applying the guidance recognized in beginning retained earnings at the date of initial application (modified retrospective method). We have developed a cross-functional team of B&W professionals from across each of our reportable segments and an implementation plan to adopt the new accounting standard. To date, we have analyzed our primary revenue streams and performed a detailed review of a sample of key contracts representative of our products and services in order to assess potential changes in our processes, systems, internal controls and the timing and method of revenue recognition and related disclosures. Based on our preliminary assessment, we do not expect the timing of revenue recognition to change significantly upon adoption of the new accounting standard; however, we are still assessing the impact to process, systems, internal controls and disclosures. We plan to adopt the new accounting standard on January 1, 2018 under the modified retrospective method. The FASB has issued, and may issue in the future, interpretative guidance, which may cause our evaluation to change. Our evaluation will include the existing, uncompleted contracts at that time the new accounting standard is adopted, and as a result, we will not be able to make a final determination about the impact of adopting the new accounting standard until the first quarter of 2018.
In January 2016, the FASB issued ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. The new accounting standard is effective for us beginning in 2018, but early adoption is permitted. The new accounting standard requires investments such as available-for-sale securities to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. With adoption of this standard, lessees will have to recognize almost all leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are similar to those applied in current lease accounting, but without explicit bright lines. The new accounting standard is effective for us beginning in 2019. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Of the eight classification-related changes this new standard will require in the statement of cash flows, only two of the classification requirements are relevant to our historical cash flow statement presentation (presentation of debt prepayments and presentation of distributions from equity method investees). However, the new classification requirements would not have changed our historical statement of cash flows. The new standard is effective for us beginning in 2018. We do not plan to early adopt the new accounting standard because the impact is not expected to be material to our consolidated statement of cash flows when adopted.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business.
The new guidance clarifies the definition of a business in an effort to make the guidance more consistent. The guidance provides a test for determining when a group of assets and business activities is not a business, specifically, when substantially all of the fair value of the gross assets acquired or disposed of are concentrated in a single identifiable asset or group of assets, and if inputs and substantive processes that significantly contribute to the ability to create outputs is not present. The new accounting standard is effective for us beginning in 2018. We do not expect the new accounting standard to have a significant impact on our financial results when adopted.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
The new guidance removes the requirement to compare implied fair value of goodwill with the carrying amount, therefore impairment charges would be recognized immediately by the amount which carrying value exceeds fair value. The new accounting standard is effective beginning in 2020. We are currently assessing the impact that adopting this new accounting standard will have on our financial statements.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Benefit Cost and Net Periodic Postretirement Benefit Cost
. The new guidance classifies service cost as the only component of net periodic benefit cost presented in cost of operations, whereas the other components will be presented in other income. This will affect not only how we present net periodic benefit cost, but also how we present segment gross profit and operating income upon adoption. The new accounting standard is effective for us beginning in 2018. We have
assessed the impact of adopting the new standard on our consolidated statement of operations and determined the required reclassifications will primarily impact our Power segment's gross profit. The changes in the classification of the historical components of net periodic benefit costs are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Pension & other postretirement benefit costs (benefits)
|
(in thousands)
|
December 31,
2016
|
December 31,
2015
|
Current
classification
|
Future
classification
|
Service cost
|
$
|
1,703
|
|
$
|
13,701
|
|
Cost of operations
|
Cost of operations
|
Interest cost
|
41,772
|
|
50,644
|
|
Cost of operations
|
Other income (expense)
|
Expected return on plan assets
|
(61,939
|
)
|
(68,709
|
)
|
Cost of operations
|
Other income (expense)
|
Amortization of prior service cost
|
250
|
|
307
|
|
Cost of operations
|
Other income (expense)
|
Recognized net actuarial losses -
mark to market adjustments
|
24,110
|
|
40,210
|
|
Cost of operations or SG&A expenses
|
Other income (expense)
|
Net periodic benefit cost (benefit)
|
$
|
5,896
|
|
$
|
36,153
|
|
|
|
New accounting standards that were adopted during the nine months ended
September 30, 2017
are summarized as follows:
In the nine months ended
September 30, 2017
, the Company adopted ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-based Payment Accounting
. This new accounting standard has affected how we account for share-based payments, with the most significant impact being the impact of income taxes associated with share-based compensation. Subsequent to adoption, the income tax effects related to share-based payments will be recorded as a component of income tax expense (or benefit) as they occur, rather than being classified as a component of additional paid-in capital. In addition, the effect of excess tax benefits will now be presented in the cash flow statement as an operating activity. We prospectively adopted the new accounting standard. See
Note 7
for the effect on the statement of operations for the three and nine months ended
September 30, 2017
.
In the nine months ended
September 30, 2017
, the Company adopted ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. This new accounting standard requires that first-in, first-out inventory be measured at the lower of cost or net realizable value. Under GAAP prior to the adoption of this new accounting standard, inventory was measured at the lower of cost or market, where market was defined as replacement cost, with a ceiling of net realizable value and a floor of net realizable value minus a normal profit margin. Although this new accounting standard raises the threshold on when charges against inventory can occur, we do not expect a significant impact because we have not had significant inventory charges in the past. We prospectively adopted the new accounting standard and it had no impact on our condensed consolidated financial statements for the three or nine months ended
September 30, 2017
.
NOTE 24
– SUBSEQUENT EVENT
In the third quarter of 2017 and through the date of this report, we have announced plans to implement restructuring actions to improve our global cost structure and increase our financial flexibility. The restructuring actions include a workforce reduction at both the business segment and corporate levels totaling approximately
9%
of our global workforce, SG&A expense reductions and new cost control measures, and office closures and consolidations in non-core geographies. These actions include reduction of approximately
30%
of B&W Vølund's workforce, which will right-size its workforce to operate under a new execution model focused on B&W's core boiler, grate and environmental equipment technologies, with the balance of plant and civil construction scope being executed by a partner. We believe the new B&W Vølund business model provides the Company with a lower risk profile and aligns with B&W's strategy of being an industrial and power equipment technology and solutions provider. Other actions are focused on productivity and efficiency gains to enhance profitability and cash flows, and to mitigate the impact of lower demand in the global coal-fired power market. Total estimated costs associated with these restructuring actions are anticipated to be approximately
$20 million
, most of which will be recognized in the fourth quarter of 2017, and the estimated annual savings are expected to be approximately
$45 million
in 2018.