NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
2018
NOTE 1
– BASIS OF PRESENTATION
These interim financial statements of Babcock & Wilcox Enterprises, Inc. ("B&W," "we," "us," "our" or "the Company") have been prepared in accordance with accounting principles generally accepted in the United States and Securities and Exchange Commission instructions for interim financial information, and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2017 ("Annual Report"). Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed in our Annual Report. We have included all adjustments, in the opinion of management, consisting only of normal, recurring adjustments, necessary for a fair presentation of the interim financial statements. We have eliminated all intercompany transactions and accounts. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.
Going Concern Considerations
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty.
We face liquidity challenges from additional losses recognized in the fourth quarter of 2017 and the nine months ended September 30, 2018 on our European renewable energy contracts described in
Note 6
to the condensed consolidated financial statements, which caused us to be out of compliance with certain financial covenants in the agreements governing certain of our debt at December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018. To avoid default, we obtained amendments and waivers to our U.S. revolving credit facility (as amended, the "U.S. Revolving Credit Facility") that temporarily waived, prevented or resolved these financial covenant defaults, as described in
Note 17
.
In an effort to address our liquidity needs and the going concern uncertainty from the accrued losses on the European loss contracts in the Renewable segment, we have:
|
|
|
|
•
|
raised gross proceeds of
$248.4 million
on April 30, 2018 through the rights offering as described in
Note 20
(the "Rights Offering");
|
|
|
|
|
•
|
repaid on May 4, 2018 the Second Lien Term Loan Facility described in
Note 19
that had been in default beginning March 1, 2018;
|
|
|
|
|
•
|
completed the sale of our MEGTEC and Universal businesses on October 5, 2018, for
$130 million
, subject to adjustment, resulting in receipt of
$115.0 million
in cash, net of
$19.5 million
in cash sold with the businesses, and
$7.7 million
that was deposited in escrow pending final settlement of working capital and other customary matters;
|
|
|
|
|
•
|
completed the sale of Palm Beach Resource Recovery Corporation ("PBRRC"), a subsidiary that held
two
operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, on September 17, 2018 for
$45 million
subject to adjustment, resulting in receipt of
$38.8 million
in cash and
$4.9 million
, which was deposited in escrow pending final settlement of working capital and other customary matters;
|
|
|
|
|
•
|
sold our equity method investments in Babcock & Wilcox Beijing Company, Ltd. ("BWBC"), a joint venture in China, and Thermax Babcock & Wilcox Energy Solutions Private Limited ("TBWES"), a joint venture in India, and settled related contractual claims, resulting in proceeds of
$21.1 million
in the second quarter of 2018 and
$15.0 million
in the third quarter of 2018, respectively;
|
|
|
|
|
•
|
sold another non-core business for
$5.1 million
in the first quarter of 2018;
|
|
|
|
|
•
|
initiated restructuring actions and other additional cost reductions in the second quarter of 2018 that are designed to save approximately
$38 million
annually;
|
|
|
|
|
•
|
received
$20 million
in net proceeds from the Last Out Term Loan, described in
Note 18
, from B. Riley FBR, Inc., a related party, during the third quarter of 2018 and another
$10 million
in net proceeds from the Last Out Term Loan from the same lender in October 2018; and
|
|
|
|
|
•
|
entered into several waivers and amendments to avoid default under our U.S. Revolving Credit Facility as described in Note 17 to the condensed consolidated financial statements, the most recent of which is dated October 31, 2018. As part of this latest amendment, our lenders agreed to: (1) extend the deadline to obtain written concessions from customers in an amount of at least $25.0 million to February 15, 2019; (2) change the interest coverage and senior leverage financial covenant ratios; (3) amend the definition of EBITDA to allow certain add-back adjustments
|
inclusive of the third quarter of 2018; (4) extend certain Renewable loss contract milestones; and (5) adjust certain minimum liquidity requirements.
Management believes it is taking all prudent actions to address the substantial doubt about our ability to continue as a going concern, but we cannot assert that it is probable that our plans will fully mitigate the liquidity challenges we face. In prior reporting periods, our plans to mitigate the liquidity challenges created by losses in the Renewable segment have primarily focused on the non-core asset sales and financing activities described above, and such items are now complete. As of September 30, 2018, our plans primarily depend upon realization of the projected cost savings from our previously announced restructuring actions and achievement of our forecasted cash generation from our core operations. Additionally, we continue to evaluate further dispositions and additional opportunities for cost savings. We also continue to pursue insurance recoveries and additional relief from customers and will pursue other claims where appropriate and available. Based on our forecasts, our plans are designed to provide us with what we believe will be adequate liquidity to meet our obligations for at least the twelve-month period following November 8, 2018. However, our remediation plans depend on conditions and matters that may be outside of our control, including agreement to concessions from customers on the Renewable loss contracts as required under the amended terms of our U.S. Revolving Credit Facility and our ability to obtain and maintain sufficient capacity to support contract security requirements for current and future business. Our U.S. Revolving Credit Facility also limits the amount of additional contract charges we may incur on specific European renewable energy contracts and requires us to deliver those contracts by specified dates; those covenant requirements are within our forecasts but have in the past required amendment to avoid default. While we do not believe it is probable that we will fail to comply with our covenants in the twelve-month period following November 8, 2018, our ability to operate within the other amended covenants and borrowing limits associated with our U.S. Revolving Credit Facility are dependent on our future financial operating results. If we cannot continue as a going concern, material adjustments to the carrying values and classifications of our assets and liabilities and the reported amounts of income and expense would be required.
NOTE 2
– EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share of our common stock, net of noncontrolling interest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(in thousands, except per share amounts)
|
2018
|
2017
|
|
2018
|
2017
|
|
Loss from continuing operations
|
$
|
(104,241
|
)
|
$
|
(114,834
|
)
|
|
$
|
(431,014
|
)
|
$
|
(269,268
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
(1,447
|
)
|
532
|
|
|
(60,875
|
)
|
(3,078
|
)
|
|
Net loss attributable to shareholders
|
$
|
(105,688
|
)
|
$
|
(114,302
|
)
|
|
$
|
(491,889
|
)
|
$
|
(272,346
|
)
|
|
|
|
|
|
|
|
|
Weighted average shares used to calculate basic and diluted earnings per share
|
168,677
|
|
46,149
|
|
|
113,147
|
|
47,905
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share - continuing operations
|
$
|
(0.62
|
)
|
$
|
(2.49
|
)
|
|
$
|
(3.81
|
)
|
$
|
(5.62
|
)
|
|
Basic and diluted earnings (loss) per share - discontinued operations
|
(0.01
|
)
|
0.01
|
|
|
(0.54
|
)
|
(0.07
|
)
|
|
Basic and diluted loss per share
|
$
|
(0.63
|
)
|
$
|
(2.48
|
)
|
|
$
|
(4.35
|
)
|
$
|
(5.69
|
)
|
Because we incurred a net loss in the three and nine months ended
September 30, 2018
and
2017
, basic and diluted shares are the same. If we had net income in the three months ended
September 30, 2018
and
2017
, diluted shares would include an additional
0.4 million
and
0.5 million
shares, respectively. If we had net income in the nine months ended September 30, 2018 and 2017, diluted shares would include an additional
0.8 million
and
0.4 million
shares, respectively.
We excluded
3.8 million
and
2.3 million
shares related to stock options from the diluted share calculation for the three months ended
September 30, 2018
and
2017
, respectively, because their effect would have been anti-dilutive. We excluded
2.8 million
and
2.0 million
shares related to stock options from the diluted share calculation for the nine months ended
September 30, 2018
and
2017
, respectively, because their effect would have been anti-dilutive.
NOTE 3
– DISCONTINUED OPERATIONS
On October 5, 2018, we sold all of the capital stock of our MEGTEC and Universal businesses to Dürr Inc., a wholly owned subsidiary of Dürr AG, pursuant to a stock purchase agreement executed on June 5, 2018 for
$130.0 million
, subject to adjustment. We received
$115.0 million
in cash, net of
$19.5 million
in cash sold with the businesses, and
$7.7 million
, which was deposited in escrow pending final settlement of working capital and other customary matters. The escrow matters are expected to be resolved within 18 months from the closing date. We primarily used proceeds from the transaction to reduce outstanding balances under our U.S. Revolving Credit Facility and for working capital purposes.
Beginning with June 30, 2018, the MEGTEC and Universal businesses, which were previously included in our Industrial segment, are classified as held for sale and as discontinued operations because the disposal represents a strategic shift that will have a major effect on our operations. Accordingly, we recorded a
$72.3 million
non-cash impairment charge in June 2018 to reduce the carrying value of the MEGTEC and Universal businesses to the fair value, less an amount of estimated sale costs; the non-cash impairment charge is included in
Loss from discontinued operations, net of tax
, and is presented below as a goodwill impairment.
The following table presents selected financial information regarding the discontinued operations included in the Condensed Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Revenue
|
$
|
50,969
|
|
$
|
51,833
|
|
|
$
|
167,408
|
|
$
|
138,463
|
|
|
Cost of operations
|
40,597
|
|
40,504
|
|
|
130,785
|
|
109,601
|
|
|
Selling, general and administrative
|
9,220
|
|
9,885
|
|
|
26,244
|
|
31,329
|
|
|
Goodwill impairment
|
—
|
|
—
|
|
|
72,309
|
|
—
|
|
|
Restructuring charge
|
—
|
|
111
|
|
|
—
|
|
262
|
|
|
Research and development
|
424
|
|
398
|
|
|
1,180
|
|
1,331
|
|
|
Loss (gain) on asset disposals
|
(2,234
|
)
|
—
|
|
|
(2,234
|
)
|
2
|
|
|
Operating income (loss)
|
2,962
|
|
935
|
|
|
(60,877
|
)
|
(4,062
|
)
|
|
Net income (loss)
|
(1,447
|
)
|
532
|
|
|
(60,875
|
)
|
(3,078
|
)
|
The following table presents the major classes of assets that have been presented as assets and liabilities held for sale in our Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
|
Cash and cash equivalents
|
$
|
17,646
|
|
$
|
12,950
|
|
|
Accounts receivable – trade, net
|
36,428
|
|
39,196
|
|
|
Accounts receivable – other
|
1,873
|
|
157
|
|
|
Contracts in progress
|
20,403
|
|
25,409
|
|
|
Inventories
|
8,959
|
|
9,245
|
|
|
Other current assets
|
4,858
|
|
1,515
|
|
|
Current assets of discontinued operations
|
90,167
|
|
88,472
|
|
|
Net property, plant and equipment
|
26,365
|
|
27,224
|
|
|
Goodwill
|
46,411
|
|
118,720
|
|
|
Deferred income taxes
|
1,882
|
|
359
|
|
|
Intangible assets
|
32,364
|
|
34,715
|
|
|
Other assets
|
2,274
|
|
18
|
|
|
Noncurrent assets of discontinued operations
|
109,296
|
|
181,036
|
|
|
Total assets of discontinued operations
|
$
|
199,463
|
|
$
|
269,508
|
|
|
|
|
|
|
Accounts payable
|
$
|
13,673
|
|
$
|
19,838
|
|
|
Accrued employee benefits
|
4,324
|
|
3,095
|
|
|
Advance billings on contracts
|
10,199
|
|
9,073
|
|
|
Accrued warranty expense
|
4,928
|
|
5,506
|
|
|
Other accrued liabilities
|
23,403
|
|
9,987
|
|
|
Current liabilities of discontinued operations
|
56,527
|
|
47,499
|
|
|
Pension and other accumulated postretirement benefit liabilities
|
6,294
|
|
6,388
|
|
|
Other noncurrent liabilities
|
1,833
|
|
6,612
|
|
|
Noncurrent liabilities of discontinued operations
|
8,127
|
|
13,000
|
|
|
Total liabilities of discontinued operations
|
$
|
64,654
|
|
$
|
60,499
|
|
The significant components included in our Condensed Consolidated Statements of Cash Flows for the discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
Depreciation and amortization
|
$
|
3,482
|
|
$
|
7,633
|
|
|
Goodwill impairment
|
72,309
|
|
—
|
|
|
Loss (gain) on asset disposals
|
(2,234
|
)
|
2
|
|
|
Benefit from deferred income taxes
|
(974
|
)
|
(282
|
)
|
|
Purchase of property, plant equipment
|
(77
|
)
|
(888
|
)
|
|
Acquisition of Universal, net of cash acquired
|
—
|
|
(52,547
|
)
|
NOTE 4
– DIVESTITURES
Sale of
Palm Beach Resource Recovery Corporation ("PBRRC")
On September 17, 2018, we sold all of the issued and outstanding capital stock of PBRRC, a subsidiary that held
two
operations and maintenance contracts for waste-to-energy facilities in West Palm Beach, Florida, to Covanta Pasco, Inc., a wholly owned subsidiary of Covanta Holding Company for
$45 million
, subject to adjustment. We received
$38.8 million
in cash and
$4.9 million
that was deposited in escrow pending final settlement of working capital and other customary matters. The escrow is available to resolve any submitted claims or adjustments up to
18
months from the closing date, and was primarily recorded in non-current other assets as of September 30, 2018. We recognized a
$39.7 million
pre-tax gain on sale of this business in the three months ended September 30, 2018, net of
$0.8 million
of transaction costs. PBRRC was formerly part of the Renewable segment and represented most of the operations and maintenance revenue in the three and nine months ended September 30, 2018 and 2017.
We continue to evaluate further dispositions and additional opportunities for cost savings, as well as other alternatives to increase our financial flexibility as we progress towards completion on our Renewable loss projects, as described in
Note 6
.
NOTE 5
– 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 and operations and maintenance services for the waste-to-energy and biomass power generation industries.
|
|
|
|
|
•
|
Industrial segment
:
focused on the supply of custom-engineered cooling systems for steam applications along with related aftermarket services.
|
The segment information presented in the table below reflects the product line revenues that are reviewed by each segment's manager. These gross product line revenues exclude eliminations of revenues generated from sales to other segments or to other product lines within the segment. The primary component of the Power segment elimination is revenue associated with construction services. An analysis of our operations by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
Power segment
|
|
|
|
|
|
|
Retrofits
|
$
|
52,366
|
|
$
|
78,684
|
|
|
$
|
183,693
|
|
$
|
222,128
|
|
|
New build utility and environmental
|
38,039
|
|
25,764
|
|
|
93,080
|
|
123,314
|
|
|
Aftermarket parts and field engineering services
|
67,678
|
|
64,456
|
|
|
204,050
|
|
202,037
|
|
|
Industrial steam generation
|
41,143
|
|
38,624
|
|
|
84,513
|
|
103,437
|
|
|
Eliminations
|
(8,176
|
)
|
(5,306
|
)
|
|
(17,408
|
)
|
(38,642
|
)
|
|
|
191,050
|
|
202,222
|
|
|
547,928
|
|
612,274
|
|
|
Renewable segment
|
|
|
|
|
|
|
Renewable new build and services
|
62,834
|
|
93,154
|
|
|
147,622
|
|
214,156
|
|
|
Operations and maintenance services
|
14,278
|
|
15,403
|
|
|
44,450
|
|
48,011
|
|
|
Eliminations
|
(628
|
)
|
—
|
|
|
(628
|
)
|
—
|
|
|
|
76,484
|
|
108,557
|
|
|
191,444
|
|
262,167
|
|
|
Industrial segment
|
|
|
|
|
|
|
New build cooling systems
|
26,852
|
|
34,354
|
|
|
89,596
|
|
101,260
|
|
|
Aftermarket cooling system services
|
7,997
|
|
13,100
|
|
|
28,012
|
|
42,011
|
|
|
|
34,849
|
|
47,454
|
|
|
117,608
|
|
143,271
|
|
|
|
|
|
|
|
|
|
Eliminations
|
(7,420
|
)
|
(1,363
|
)
|
|
(17,504
|
)
|
(6,539
|
)
|
|
|
$
|
294,963
|
|
$
|
356,870
|
|
|
$
|
839,476
|
|
$
|
1,011,173
|
|
Beginning in 2018, we changed our primary measure of segment profitability from gross profit to adjusted earnings before interest, tax, depreciation and amortization ("EBITDA"). The presentation of the components of our gross profit and adjusted
EBITDA in the tables below are consistent with the way our chief operating decision maker reviews the results of our operations and makes strategic decisions about our business. Items such as gains or losses on asset sales, mark-to-market ("MTM") pension adjustments, restructuring and spin costs, impairments, losses on debt extinguishment, costs related to financial consulting required under our U.S. Revolving Credit Facility and other costs that may not be directly controllable by segment management are not allocated to the segment. Adjusted EBITDA for each segment is presented below with a reconciliation to net income. Adjusted EBITDA is not a recognized term under GAAP and should not be considered in isolation or as an alternative to net earnings (loss), operating profit (loss) or as an alternative to cash flows from operating activities as a measure of our liquidity. Adjusted EBITDA as presented below differs from the calculation used to compute our leverage ratio and interest coverage ratio as defined by our U.S. Revolving Credit Facility. Because all companies do not use identical calculations, the amounts presented for Adjusted EBITDA may not be comparable to other similarly titled measures of other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Gross profit (loss)
(1)
:
|
|
|
|
|
|
|
Power segment
|
$
|
34,313
|
|
$
|
35,390
|
|
|
$
|
95,189
|
|
$
|
116,952
|
|
|
Renewable segment
|
(17,120
|
)
|
181
|
|
|
(136,898
|
)
|
(100,119
|
)
|
|
Industrial segment
|
(5,524
|
)
|
(2,556
|
)
|
|
(8,196
|
)
|
2,330
|
|
|
Intangible amortization expense included in cost of operations
|
(1,207
|
)
|
(2,262
|
)
|
|
(4,868
|
)
|
(8,389
|
)
|
|
|
10,462
|
|
30,753
|
|
|
(54,773
|
)
|
10,774
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative ("SG&A") expenses
|
(44,887
|
)
|
(49,871
|
)
|
|
(151,007
|
)
|
(163,723
|
)
|
|
Financial advisory services included in SG&A
|
(7,244
|
)
|
(358
|
)
|
|
(15,475
|
)
|
(358
|
)
|
|
Intangible amortization expense included in SG&A
|
(135
|
)
|
(127
|
)
|
|
(530
|
)
|
(331
|
)
|
|
Goodwill impairment
|
—
|
|
(86,903
|
)
|
|
(37,540
|
)
|
(86,903
|
)
|
|
Restructuring activities and spin-off transaction costs
|
(2,863
|
)
|
(3,664
|
)
|
|
(13,551
|
)
|
(8,648
|
)
|
|
Research and development costs
|
(452
|
)
|
(1,893
|
)
|
|
(2,881
|
)
|
(6,123
|
)
|
|
Loss on asset disposals, net
|
(28
|
)
|
(59
|
)
|
|
(1,412
|
)
|
(61
|
)
|
|
Equity in income and impairment of investees
|
—
|
|
1,234
|
|
|
(11,757
|
)
|
(13,380
|
)
|
|
Operating loss
|
$
|
(45,147
|
)
|
$
|
(110,888
|
)
|
|
$
|
(288,926
|
)
|
$
|
(268,753
|
)
|
(1)
Gross profit of the segments excludes intangible amortization but includes depreciation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Adjusted EBITDA
|
|
|
|
|
|
|
|
|
|
|
Power segment
(1)
|
$
|
21,911
|
|
$
|
21,624
|
|
|
$
|
49,524
|
|
$
|
66,434
|
|
|
Renewable segment
|
(25,831
|
)
|
(10,648
|
)
|
|
(166,188
|
)
|
(133,023
|
)
|
|
Industrial segment
|
(11,212
|
)
|
(7,609
|
)
|
|
(24,744
|
)
|
(12,994
|
)
|
|
Corporate
(2)
|
(5,793
|
)
|
(8,775
|
)
|
|
(23,601
|
)
|
(28,168
|
)
|
|
Research and development costs
|
(452
|
)
|
(1,893
|
)
|
|
(2,881
|
)
|
(6,123
|
)
|
|
Foreign exchange
|
(4,939
|
)
|
(6,902
|
)
|
|
(22,680
|
)
|
(4,563
|
)
|
|
Other – net
|
(45
|
)
|
(241
|
)
|
|
221
|
|
(163
|
)
|
|
|
(26,361
|
)
|
(14,444
|
)
|
|
(190,349
|
)
|
(118,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of business
|
39,731
|
|
—
|
|
|
39,731
|
|
—
|
|
|
Gain on sale of equity method investment (BWBC)
|
—
|
|
—
|
|
|
6,509
|
|
—
|
|
|
Impairment of equity method investment in TBWES
|
—
|
|
—
|
|
|
(18,362
|
)
|
(18,193
|
)
|
|
Loss on debt extinguishment
|
—
|
|
—
|
|
|
(49,241
|
)
|
—
|
|
|
Loss on asset disposal
|
—
|
|
(61
|
)
|
|
(1,513
|
)
|
(61
|
)
|
|
MTM gain (loss) from benefit plans
|
4,196
|
|
—
|
|
|
4,740
|
|
(1,062
|
)
|
|
Financial advisory services
|
(7,244
|
)
|
(358
|
)
|
|
(15,475
|
)
|
(358
|
)
|
|
Acquisition and integration costs included in SG&A
|
—
|
|
(141
|
)
|
|
—
|
|
(1,573
|
)
|
|
Goodwill impairment
|
—
|
|
(86,903
|
)
|
|
(37,540
|
)
|
(86,903
|
)
|
|
Restructuring activities and spin-off transaction costs
|
(2,863
|
)
|
(3,664
|
)
|
|
(13,551
|
)
|
(8,648
|
)
|
|
Depreciation & amortization
|
(7,103
|
)
|
(7,228
|
)
|
|
(21,005
|
)
|
(23,387
|
)
|
|
Interest expense, net
|
(10,247
|
)
|
(7,131
|
)
|
|
(35,316
|
)
|
(14,880
|
)
|
|
Loss before income tax expense
|
(9,891
|
)
|
(119,930
|
)
|
|
(331,372
|
)
|
(273,665
|
)
|
|
Income tax expense (benefit)
|
94,256
|
|
(5,309
|
)
|
|
99,285
|
|
(4,963
|
)
|
|
Loss from continuing operations
|
(104,147
|
)
|
(114,621
|
)
|
|
(430,657
|
)
|
(268,702
|
)
|
|
Income (loss) from discontinued operations, net of tax
|
(1,447
|
)
|
532
|
|
|
(60,875
|
)
|
(3,078
|
)
|
|
Net loss
|
(105,594
|
)
|
(114,089
|
)
|
|
(491,532
|
)
|
(271,780
|
)
|
|
Net income attributable to noncontrolling interest
|
(94
|
)
|
(213
|
)
|
|
(357
|
)
|
(566
|
)
|
|
Net loss attributable to stockholders
|
$
|
(105,688
|
)
|
$
|
(114,302
|
)
|
|
$
|
(491,889
|
)
|
$
|
(272,346
|
)
|
(1)
Power segment adjusted EBITDA includes
$6.4 million
and
$5.0 million
of net benefit from pension and other postretirement benefit plans excluding MTM adjustments in the three months ended
September 30, 2018
and 2017, respectively. Power segment adjusted EBITDA includes
$19.5 million
and
$15.1 million
of net benefit from pension and other postretirement benefit plans excluding MTM adjustments in the nine months ended
September 30, 2018
and 2017, respectively.
(2)
Allocations are excluded from discontinued operations. Accordingly, allocations previously absorbed by the MEGTEC and Universal businesses in the Industrial segment have been included with other unallocated costs in Corporate, and total
$2.9 million
and
$2.2 million
in the three months ended
September 30, 2018
and 2017, respectively and
$8.6 million
and
$6.6 million
in the nine months ended
September 30, 2018
and 2017, respectively.
NOTE 6
– REVENUE RECOGNITION AND CONTRACTS
Adoption of Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606")
On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning on or after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a
$0.5 million
net increase to opening retained earnings as of January 1, 2018 from the cumulative effect of adopting Topic 606 that primarily related to transitioning the timing of certain sales commissions expense. The effect on revenue from adopting Topic 606 was not material for the nine months ended September 30, 2018.
Revenue Recognition
A performance obligation is a contractual promise to transfer a distinct good or service to the customer. A contract's transaction price is allocated to each distinct performance obligation and is recognized as revenue when (point in time) or as (over time) the performance obligation is satisfied.
Revenue from goods and services transferred to customers at a point in time, which includes certain aftermarket parts and services primarily in the Power and Industrial segments, accounted for
22%
and
17%
of our revenue for the three months ended September 30, 2018 and 2017, respectively, and
18%
and
16%
of our revenue for the nine months ended September 30, 2018 and 2017, respectively. Revenue on these contracts is recognized when the customer obtains control of the asset, which is generally upon shipment or delivery and acceptance by the customer. Standard commercial payment terms generally apply to these sales.
Revenue from products and services transferred to customers over time accounted for
78%
and
83%
of our revenue for the three months ended September 30, 2018 and 2017, respectively, and
82%
and
84%
of our revenue for the nine months ended September 30, 2018 and 2017, respectively. Revenue recognized over time primarily relates to customized, engineered solutions and construction services from all three of our segments. Typically, revenue is recognized over time using the percentage-of-completion method that uses costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, SG&A expenses. Variable consideration in these contracts includes estimates of liquidated damages, contractual bonuses and penalties, and contract modifications. Substantially all of our revenue recognized over time under the percentage-of-completion method contains a single performance obligation as the interdependent nature of the goods and services provided prevents them from being separately identifiable within the contract. Generally, we try to structure contract milestones to mirror our expected cash outflows over the course of the contract; however, the timing of milestone receipts can greatly affect our overall cash position and have in 2018 in our Renewable segment. Refer to
Note 5
for our disaggregation of revenue by product line.
Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct and, therefore, are accounted for as part of the existing contract, with cumulative adjustment to revenue.
We recognize accrued claims in contract revenues for extra work or changes in scope of work to the extent of costs incurred when we believe we have an enforceable right to the modification or claim and the amount can be estimated reliably, and its realization is probable. In evaluating these criteria, we consider the contractual/legal basis for the claim, the cause of any additional costs incurred, the reasonableness of those costs and the objective evidence available to support the claim.
We generally recognize sales commissions in equal proportion as revenue is recognized. Our sales agreements are structured such that commissions are only payable upon receipt of payment, thus a capitalized asset at contract inception has not been recorded for sales commission as a liability has not been incurred at that point.
Contract Balances
Contracts in progress, a current asset in our condensed consolidated balance sheets, includes revenues and related costs so recorded, plus accumulated contract costs that exceed amounts invoiced to customers under the terms of the contracts. Advance billings, a current liability in our condensed consolidated balance sheets, includes advance billings on contracts invoices that exceed accumulated contract costs and revenues and costs recognized under the percentage-of-completion method. Most long-term contracts contain provisions for progress payments. Our unbilled receivables do not contain an allowance for credit losses as we expect to invoice customers and collect all amounts for unbilled revenues. We review contract price and cost estimates periodically as the work progresses and reflect adjustments proportionate to the percentage-of-completion in income in the period when those estimates are revised. For all contracts, if a current estimate of total contract cost indicates a loss on a contract, the projected contract loss is recognized in full in the statement of operations and an accrual for the estimated loss on the uncompleted contract is included in other current liabilities in the condensed consolidated balance sheets. In addition, when we determine that an uncompleted contract will not be completed on-time and the contract has liquidated damages provisions, we recognize the estimated liquidated damages we will incur and record them as a reduction of the estimated selling price in the period the change in estimate occurs. Losses accrued in advance of the percentage-of-completion of a contract are included in other accrued liabilities, a current liability, in our condensed consolidated balance sheets.
The following represent the components of our contracts in progress and advance billings on contracts included in our condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
December 31,
|
|
(in thousands)
|
2018
|
2017
|
|
Contract assets - included in contracts in progress:
|
|
|
|
Costs incurred less costs of revenue recognized
|
$
|
51,083
|
|
$
|
69,576
|
|
|
Revenues recognized less billings to customers
|
90,490
|
|
66,235
|
|
|
Contracts in progress
|
$
|
141,573
|
|
$
|
135,811
|
|
|
Contract liabilities - included in advance billings on contracts:
|
|
|
|
Billings to customers less revenues recognized
|
$
|
124,973
|
|
$
|
168,880
|
|
|
Costs of revenue recognized less cost incurred
|
2,872
|
|
3,117
|
|
|
Advance billings on contracts
|
$
|
127,845
|
|
$
|
171,997
|
|
|
|
|
|
|
Accrued contract losses
|
$
|
40,362
|
|
$
|
40,634
|
|
The impact of adopting Topic 606 on components of our contracts in progress and advance billings on contracts was not material at September 30, 2018.
Backlog
On September 30, 2018 we had
$921 million
of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately
28%
,
33%
and
39%
of our remaining performance obligations as revenue in the remainder of 2018, 2019 and thereafter, respectively. Backlog reduced by approximately
$467 million
in September 2018 as a result of the sale of PBRRC described in
Note 4
.
Changes in Contract Estimates
As of September 30, 2018, we have estimated the costs to complete in-process contracts in order to estimate revenues in accordance with the percentage-of-completion method of accounting. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, transportation, fluctuations in foreign exchange rates or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated financial condition, results of operations and cash flows. Variations from estimated contract performance could result in material adjustments to operating results for any fiscal quarter or year.
In the three and nine months ended
September 30, 2018
and
2017
, we recognized changes in estimated gross profit related to long-term contracts accounted for on the percentage-of-completion basis, which are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Increases in gross profits for changes in estimates for over time contracts
|
$
|
2,326
|
|
$
|
3,040
|
|
|
$
|
16,182
|
|
$
|
15,777
|
|
|
Decreases in gross profits for changes in estimates for over time contracts
|
(26,583
|
)
|
(12,312
|
)
|
|
(136,992
|
)
|
(135,445
|
)
|
|
Net changes in gross profits for changes in estimates for over time contracts
|
$
|
(24,257
|
)
|
$
|
(9,272
|
)
|
|
$
|
(120,810
|
)
|
$
|
(119,668
|
)
|
Renewable Loss Contracts
We had
four
renewable energy contracts in Europe that were loss contracts at December 31, 2016. During the three months ended June 30, 2017,
two
additional renewable energy contracts in Europe became loss contracts. In the three months ended
September 30, 2018
and September 30, 2017, we recorded
$19.1 million
and
$11.6 million
in net losses, respectively, from changes in the estimated revenues and costs to complete these six European renewable energy loss contracts. These changes in estimates in the three months ended
September 30, 2018
and 2017 included increases in our estimates of anticipated liquidated damages that (increased) reduced revenue associated with these
six
contracts by
$(0.2) million
and
$13.2 million
, respectively. The total anticipated liquidated damages associated with these
six
contracts were
$93.2 million
and
$62.8 million
at
September 30, 2018
and
September 30, 2017
, respectively. During the nine months ended September 30, 2017 there 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 both previous periods.
In the nine months ended
September 30, 2018
and September 30, 2017, we recorded
$129.1 million
and
$123.8 million
in net losses, respectively, inclusive of warranty expense as described in
Note 15
, resulting from changes in the estimated revenues and costs to complete the six European renewable energy loss contracts. These changes in estimates in the nine months ended
September 30, 2018
and 2017 included increases in our estimates of anticipated liquidated damages that reduced revenue associated with these
six
contracts by
$16.1 million
and
$27.0 million
, respectively.
The charges recorded in the three and nine months ended
September 30, 2018
and
September 30, 2017
were due to revisions in the estimated revenues and costs at completion during the period across the
six
loss contracts described below. Also, as described in
Note 17
, the
October 31, 2018 amendment to the U.S. Revolving Credit Facility requires $25.0 million of concessions from customers on these Renewable loss contracts to be secured by February 15, 2019. As of September 30, 2018, a portion of these concessions have been agreed, but have not been included in the contract estimates because of uncertainties in achieving related performance obligations.
As of
September 30, 2018
, the status of these
six
loss contracts was as follows:
The first contract, a waste-to-energy plant in Denmark, became a loss contract in the second quarter of 2016. As of
September 30, 2018
, this contract is approximately
97%
complete and construction activities are complete as of the date of this report. The unit became operational during the second quarter of 2017 and is only pending completion of contractual trial operations and takeover activities and requirements, to which the customer has not yet agreed. Our estimates at September 30, 2018 assume complete takeover by the customer in the fourth quarter of 2018. During the
three and nine
months ended
September 30, 2018
, we recognized additional contract losses of
$3.9 million
and
$19.3 million
, respectively, on the contract as a result of differences in actual and estimated costs, schedule delays and issues encountered during preparation for formal trial operations. Losses in the nine months ended September 30, 2018 also related to increases in expected warranty costs. Our estimate at completion as of
September 30, 2018
includes
$9.4 million
of total expected liquidated damages. As of
September 30, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$3.0 million
. In the
three and nine
months ended
September 30, 2017
, we recognized additional contract losses of
$4.6 million
and
$15.1 million
, respectively, as a result of differences in actual and estimated costs and schedule delays. As of
September 30, 2017
, this contract had
$2.3 million
of accrued losses and was
97%
complete.
The second contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
September 30, 2018
, this contract was approximately
93%
complete. Startup of the unit occurred in April 2018, and synchronization to the electrical grid while firing on biomass fuel occurred in September 2018. Trial operations and takeover by the customer is expected in the fourth quarter of 2018. During the
three and nine
months ended
September 30, 2018
, we recognized additional contract losses of
$3.4 million
and
$16.8 million
, respectively, on this contract as a result of repairs required during startup commissioning activities, additional expected punch list and other commissioning costs, and changes in construction cost estimates. Losses in the nine months ended September 30, 2018 also related to increases in expected warranty costs and subcontractor productivity being lower than previous estimates. Our estimate at completion as of
September 30, 2018
includes
$19.5 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
September 30, 2018
and September 30, 2017 also include contractual bonus opportunities for guaranteed higher power output (discussed further below). As of
September 30, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$5.6 million
. In the
three and nine
months ended
September 30, 2017
, we recognized contract gains of
$2.0 million
and losses of
$35.4 million
, respectively, from changes in the expected selling price, construction cost estimates and schedule delays, and as of
September 30, 2017
, this contract had
$13.6 million
of accrued losses and was
75%
complete.
The third contract, a biomass plant in Denmark, became a loss contract in the fourth quarter of 2016. As of
September 30, 2018
, this contract was 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 partial takeover was achieved in March 2018, when the contract moved into the warranty phase. We agreed with the customer to a full takeover at the end of October 2018 and scheduled a time line for remaining punch list activities to be completed around the customer's future planned outages. During the
three and nine
months ended
September 30, 2018
, we recognized additional contract losses of
$3.0 million
and
$6.5 million
, respectively, as a result of changes in the estimated costs at completion. Our estimate at completion as of
September 30, 2018
includes
$7.0 million
of total expected liquidated damages due to schedule delays. As of
September 30, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$1.1 million
. In the
three and nine
months ended
September 30, 2017
, we recognized charges of
$1.6 million
and
$7.1 million
, respectively, from changes in our estimate at completion, and as of
September 30, 2017
, this contract had
$1.7 million
of accrued losses and was
95%
complete.
The fourth contract, a biomass plant in the United Kingdom, became a loss contract in the fourth quarter of 2016. As of
September 30, 2018
, this contract was approximately
95%
complete. Commissioning activities began in the first quarter of 2018, and construction was substantially complete at June 30, 2018. Startup of the unit occurred in May 2018, and synchronization to the electrical grid while firing on biomass fuel occurred in July 2018. Trial operations began in November 2018 and takeover by the customer is expected in the fourth quarter of 2018. During the
three and nine
months ended
September 30, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in
$4.1 million
and
$28.9 million
, respectively, of additional contract losses due to challenges in startup commissioning activities, additional expected punch list and other commissioning costs, additional subcontractor costs and estimated liquidated damages. Losses in the nine months ended September 30, 2018 also include increases in expected warranty costs and subcontractor productivity being lower than previous estimates. Our estimate at completion as of
September 30, 2018
includes
$20.0 million
of total expected liquidated damages due to schedule delays. Our estimates at completion as of
September 30, 2018
and September 30, 2017 also include contractual bonus opportunities for guaranteed higher power output (discussed further below). As of
September 30, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$3.1 million
. In the
three and nine
months ended
September 30, 2017
, we recognized a contract gain of
$4.5 million
and contract losses of
$17.4 million
, respectively, from changes in the expected selling price, changes in construction cost estimates and schedule delays, and as of
September 30, 2017
, this contract had
$5.2 million
of accrued losses and was
77%
complete.
The fifth contract, a biomass plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
September 30, 2018
, this contract was approximately
70%
complete, and we expect construction will be substantially completed on this contract in early 2019 with takeover by the customer in the third quarter of 2019. During the three months ended
September 30, 2018
, we made progress consistent with previous estimates and did not recognize any additional changes in estimated revenue or costs at completion for this contract. In September 2018, we connected to the electrical grid and generated first power from site, which enabled the customer to file the accreditation application with the regulatory agency. During the nine months ended September 30, 2018, we revised our estimated revenue and costs at completion for this loss contract which resulted in
$39.7 million
of additional contract losses, including estimated costs of taking over the civil scope in the first quarter of 2018 from our joint venture partner, who entered administration (similar to filing for bankruptcy in the U.S.) in late February 2018 and receipt of regulatory release later than expected in previous estimates (March 29, 2018) to begin repairs to the failed steel beam, which further increased costs to complete remaining work streams. Full access to the site was obtained on June 6, 2018, after the steel beam repairs were completed. The impact of the failed steel beam is discussed in more detail below. Losses in the nine months ended September 30, 2018 also reflect an extended schedule from greater challenges in restarting work on a site that had been idle pending repairs on the failed steel beam, including the extent of items that had been damaged from weather exposure, and increases in expected warranty costs. Our estimate at completion as of
September 30, 2018
, includes
$20.2 million
of total expected liquidated damages due to schedule delays. As of
September 30, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$22.8 million
. In the
three and nine
months ended
September 30, 2017
, we recognized charges of
$12.0 million
and
$35.3 million
, respectively from changes in our estimate at completion, and as of
September 30, 2017
, this contract had
$14.3 million
of accrued losses and was
60%
complete. This fifth project also includes a rejection clause that gives the customer the option to reject the deliverable, recover all monies paid to us and our former civil construction partner (up to approximately
$144 million
), and require us to restore the property to its original state if certain criteria are not satisfied, including not achieving a contractual milestone related to accreditation criteria by September 30, 2018. We did not meet the express contractual criteria to satisfy this contractual milestone related to accreditation; however, the approach used was the one that the customer and external counsel considered to be the most appropriate option for accreditation in the circumstances. Our September 30, 2018 estimate at completion does not assume the customer's exercise of the rejection right because management believes
the customer will not exercise its rejection right and the customer has not indicated its intention to exercise this right; however, we cannot control whether the customer will agree to modify the contract or exercise its right to reject the contract, and no assurances can be given in this regard. We are currently negotiating with the customer a formal agreement of the terms under which all rejection rights will be suspended, but without such agreement, the customer retains the current right to reject the contract.
The sixth contract, a waste-to-energy plant in the United Kingdom, became a loss contract in the second quarter of 2017. As of
September 30, 2018
, this contract was approximately
92%
complete. Commissioning activities began in the first quarter of 2018, construction was substantially completed in July 2018, startup of the unit occurred in July 2018 and trial operations and customer takeover are expected in the fourth quarter of 2018. During the
three and nine
months ended
September 30, 2018
, we revised our estimated revenue and costs at completion for this loss contract, which resulted in additional contract losses of
$4.7 million
and
$17.9 million
due to challenges in startup commissioning activities. Losses in the nine months ended September 30, 2018 also included the effects of schedule delays, inclusive of liquidated damages, estimated claim settlements, and increases in expected warranty costs. Our estimate at completion as of
September 30, 2018
includes
$17.2 million
of total expected liquidated damages due to schedule delays. As of
September 30, 2018
, the reserve for estimated contract losses recorded in "other accrued liabilities" in our condensed consolidated balance sheet was
$1.9 million
. In the
nine
months ended
September 30, 2017
, we recognized additional contract losses of
$18.5 million
from changes in our estimate at completion, and as of
September 30, 2017
, this contract had
$3.3 million
of accrued losses and was
68%
complete.
In September 2017, we identified the failure of a structural steel beam on the fifth contract, which stopped work in the boiler building and other areas pending corrective actions to stabilize the structure. Provisional regulatory approval to begin structural repairs to the failed beam was obtained on March 29, 2018 (later than previously estimated), and full approval to proceed with repairs was obtained in April 2018. Full access to the site was obtained on June 6, 2018 after completion of the repairs to the structure. The engineering, design and manufacturing of the steel structure were the responsibility of our subcontractors. A similar design was also used on the second and fourth contracts, and although no structural failure occurred on these two other contracts, work was also stopped in certain restricted areas while we added reinforcement to the structures, which also resulted in delays that lasted until late January 2018. The total costs related to the structural steel issues on these three contracts, including contract delays, are estimated to be approximately
$43 million
, which is included in the
September 30, 2018
, estimated losses at completion for these three contracts.
Also during the third quarter of 2017, we implemented a design change in three of the renewable facilities to increase the guaranteed power output, which will allow us to achieve contractual bonus opportunities for the higher output. In the fourth quarter of 2017, we obtained agreement from certain customers to increase the value of these bonus opportunities and to provide partial relief on liquidated damages. The bonus opportunities and liquidated damages relief increased the estimated selling price of the three contracts by approximately
$19 million
in total, and this positive change in estimated cost to complete was fully recognized in 2017 because each was a loss contract.
During the third quarter of 2016, we determined it was probable that we would receive a
$15.5 million
(DKK
100.0 million
) insurance recovery for a portion of the losses on the first European renewable energy contract discussed above. In May 2018, our insurer disputed coverage on our insurance claim.
We believe that the dispute from the insurer is without merit and continue to believe we are entitled to the full value of the claim. We intend to aggressively pursue full recovery under the policy, and we filed for arbitration in July 2018. However, an allowance for the entire receivable was recorded in the second quarter of 2018 based upon the dispute by the insurer, which is considered contradictory evidence in the accounting probability assessment of this loss recovery, even if it is believed to be without merit.
The insurance recovery of
$15.5 million
is recorded in accounts receivable - other in our condensed consolidated balance sheet at
December 31, 2017
. The
$15.5 million
insurance recovery was fully offset by an allowance in the three months ended June 30, 2018, and remains fully reserved at September 30, 2018.
NOTE 7
– RESTRUCTURING ACTIVITIES AND SPIN-OFF TRANSACTION COSTS
Restructuring Liabilities
In June 2018, we began to implement a series of cost restructuring actions, primarily in our U.S. and Canadian operations, corporate functions, and Industrial segment. These actions were intended to appropriately size our operations and support functions in response to the continuing decline in global markets for new build coal-fired power generation, the announcement of the MEGTEC and Universal sale and our liquidity needs. Severance cost associated with these actions is expected to total approximately
$7.1 million
, of which
$2.6 million
and
$6.0 million
was recorded in the
three and nine
months ended
September 30, 2018
, respectively, and the remainder will be recorded in the balance of 2018 over the
remaining service periods. Severance payments are expected to extend through mid-2019. Executive severance was
$(0.6) million
in the three months ended
September 30, 2018
, representing a reduction in expected severance cost upon finalizing a severance contract, and totaled
$4.5 million
in the
nine months ended
September 30, 2018
related to the elimination of the SVP and Chief Business Development Officer role and the transition of the CEO to Leslie C. Kass. Severance payments are expected to extend through mid-2019.
The remainder of the restructuring costs in the
nine months ended
September 30, 2018
, primarily relate to actions from the second half of 2017 that were intended to improve our global cost structure and increase our financial flexibility. These restructuring actions included 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 included reduction of approximately
30%
of B&W Vølund's workforce to align with a new execution model focused on B&W Vølund's core boiler, grate and environmental equipment technologies, with the balance-of-plant and civil construction scope being executed by a partner.
In the
three and nine
months ended
September 30, 2017
, restructuring costs relate primarily to a series of activities that took place prior to 2017 that were intended to help us maintain margins, make our costs more volume-variable and allow our business to be more flexible. These actions were primarily in the Power segment in advance of lower projected demand for power generation from coal in the United States. We made our manufacturing costs more volume-variable through the closure of manufacturing facilities and development of manufacturing arrangements with third parties. Also, we made our cost of engineering and supply chain more variable by creating a matrix organization capable of delivering products across multiple segments and developing more volume-variable outsourcing arrangements with our joint venture partners and other third parties to meet fluctuating demand. Until the second quarter of 2018, these restructuring actions achieved the goal of maintaining gross margins in the Power segment. Quantification of cost savings, however, is significantly dependent upon volume assumptions that have changed since the restructuring actions were initiated.
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)
|
2018
|
2017
|
|
2018
|
2017
|
|
Balance at beginning of period
|
$
|
7,882
|
|
$
|
838
|
|
|
$
|
2,320
|
|
$
|
1,809
|
|
|
Restructuring expense
|
2,849
|
|
3,166
|
|
|
13,013
|
|
7,023
|
|
|
Payments
|
(3,113
|
)
|
(2,188
|
)
|
|
(7,715
|
)
|
(7,016
|
)
|
|
Balance at September 30
|
$
|
7,618
|
|
$
|
1,816
|
|
|
$
|
7,618
|
|
$
|
1,816
|
|
Accrued restructuring liabilities at
September 30, 2018
and
2017
relate primarily to employee termination benefits. Excluded from restructuring expense in the table above are non-cash restructuring charges that did not impact the accrued restructuring liability. In the three months ended
September 30, 2017
, we recognized
$0.3 million
in restructuring related to gains on disposals of long-lived assets. In the nine months ended
September 30, 2018
and 2017, we recognized
$0.2 million
and
$0.6 million
, respectively, in non-cash restructuring expense related to losses on the disposals of long-lived assets.
Spin-Off Transaction Costs
Spin-off costs were primarily attributable to employee retention awards directly related to the spin-off from our former parent, The Babcock & Wilcox Company (now known as BWX Technologies, Inc.). In the three months ended September 30, 2017, spin costs were
$0.2 million
. In the nine months ended
September 30, 2018
and 2017, we recognized spin-off costs of
$0.3 million
and
$1.0 million
, respectively. In each of the nine months ended
September 30, 2018
and
September 30, 2017
, we disbursed
$1.9 million
of the accrued retention awards.
NOTE 8
– PROVISION FOR INCOME TAXES
In the three months ended September 30, 2018, we recognized income tax expense of
$94.3 million
, which includes
$99.6 million
of non-cash income tax charges to increase the valuation allowance against our remaining net deferred tax assets. Deferred tax assets are evaluated each period to determine whether it is more likely than not that those deferred tax assets will be realized in the future. This evaluation is performed under the framework of ASC 740,
Income Taxes
, and considers all
positive and negative evidence. In our analysis at September 30, 2018, our weighing of positive and negative evidence included an assessment of historical income by jurisdiction adjusted for recent dispositions and other nonrecurring items, as well as an evaluation of other qualitative factors such as the amendments to covenants in our U.S Revolving Credit Facility as described in
Note 17
and our current and prior plans to mitigate our liquidity challenges as described in
Note 1
. The changes in circumstances in the third quarter of 2018 also included, among other items, the September 2018 sale of PBRRC, which had been generating income in the U.S. These current period changes in circumstances were reflected in the weight assigned to each piece of evidence considered under the framework and resulted in the judgment that a full valuation allowance against our remaining net deferred tax assets should be recorded at September 30, 2018.
Valuation allowances do not limit our ability to use deferred tax assets in the future. Valuation allowances may be reversed in the future if sufficient positive evidence exists to outweigh the negative evidence under the framework
.
Our effective tax rate for the
three months ended September 30, 2018
is not reflective of the U.S. statutory rate primarily due to the increase in the valuation allowance against net deferred tax assets. In jurisdictions where we have available net operating loss carryforwards (NOLs), such as the U.S., Denmark and Italy, the existence of a full valuation allowance against deferred tax assets results in income tax benefit or expense relating primarily to discrete items. In other profitable jurisdictions, however, we may record income tax expense, even though we have established a full valuation allowance against our net deferred tax assets.
Discrete items in the three months ended September 30, 2018 include
$99.6 million
of expense from increasing the valuation allowance against remaining deferred tax assets and a
$1.6 million
benefit related to the release of a tax reserve when the statute of limitations expired. The remainder of the income tax in the three months ended September 30, 2018 relates to changes in the jurisdictional mix of income and losses.
In the three months ended September 30, 2017, the income tax benefit was
$5.3 million
, which resulted in an effective tax rate of
4.4%
that 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.
In the nine months ended September 30, 2018, income tax expense was
$99.3 million
, which is not reflective of the U.S. statutory rate due to the increase in the valuation allowance against net deferred tax assets as described above. Unfavorable discrete items were an expense of
$1.4 million
in the first half of the year and include a valuation allowance on the net deferred tax assets of one of our foreign subsidiaries and the income tax effects of vested and exercised share-based compensation awards.
In the nine months ended September 30, 2017, income tax benefit was
$5.0 million
, which resulted in an effective tax rate of
1.8%
that was lower than our statutory rate primarily due to the reasons noted above and nondeductible transaction costs, which were offset by the effect of vested and exercised share-based compensation awards, both of which were discrete items in the first quarter of 2017.
We continue to analyze the different aspects of the Tax Act, which could potentially affect the provisional estimates that were recorded at December 31, 2017.
As a result of accumulations of the Company's common stock among several large shareholders and the impact of the Rights Offering that was completed on April 30, 2018, we continue to monitor for the possibility of an ownership change as defined under Internal Revenue Code ("IRC") Section 382. Under IRC Section 382, a company has undergone an ownership change if shareholders owning at least 5% of the company have increased their collective holdings by more than 50% during the prior three-year period. Based on information that is publicly available, the Company does not currently believe it has experienced an ownership change. Small changes in ownership by shareholders owning at least 5% of the Company could result in an ownership change; however, if we had experienced an ownership change as of September 30, 2018, the future utilization of our federal net operating loss and credit carryforwards would be limited to approximately
$4 million
annually, but quantification is dependent upon the value of the company multiplied by the long-term interest rate at the time of the ownership change.
NOTE 9
– 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 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss)
|
Net unrealized gain (loss) on investments (net of tax)
1
|
Net unrealized gain (loss) on derivative instruments
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
|
Balance at December 31, 2017
|
$
|
(27,837
|
)
|
$
|
38
|
|
$
|
1,737
|
|
$
|
3,633
|
|
$
|
(22,429
|
)
|
|
Impact of ASU 2016-1 on changes in the components of AOCI, net of tax
(1)
|
—
|
|
(38
|
)
|
—
|
|
—
|
|
(38
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
3,223
|
|
—
|
|
1,224
|
|
(55
|
)
|
4,392
|
|
|
Amounts reclassified from AOCI to net income (loss)
|
(2,044
|
)
|
—
|
|
(1,272
|
)
|
(384
|
)
|
(3,700
|
)
|
|
Net current-period other comprehensive income (loss)
|
1,179
|
|
(38
|
)
|
(48
|
)
|
(439
|
)
|
654
|
|
|
Balance at March 31, 2018
|
$
|
(26,658
|
)
|
$
|
—
|
|
$
|
1,689
|
|
$
|
3,194
|
|
$
|
(21,775
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
8,517
|
|
—
|
|
(513
|
)
|
112
|
|
8,116
|
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
—
|
|
381
|
|
(427
|
)
|
(46
|
)
|
|
Amounts reclassified from AOCI to pension, other accumulated postretirement benefit liabilities and deferred income taxes
(2)
|
—
|
|
—
|
|
—
|
|
(2,831
|
)
|
(2,831
|
)
|
|
Net current-period other comprehensive income (loss)
|
8,517
|
|
—
|
|
(132
|
)
|
(3,146
|
)
|
5,239
|
|
|
Balance at June 30, 2018
|
$
|
(18,141
|
)
|
$
|
—
|
|
$
|
1,557
|
|
$
|
48
|
|
$
|
(16,536
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
296
|
|
—
|
|
150
|
|
(11
|
)
|
435
|
|
|
Amounts reclassified from AOCI to net income (loss)
|
2,595
|
|
—
|
|
(392
|
)
|
(122
|
)
|
2,081
|
|
|
Net current-period other comprehensive income (loss)
|
2,891
|
|
—
|
|
(242
|
)
|
(133
|
)
|
2,516
|
|
|
Balance at September 30, 2018
|
$
|
(15,250
|
)
|
$
|
—
|
|
$
|
1,315
|
|
$
|
(85
|
)
|
$
|
(14,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Currency translation gain (loss)
|
Net unrealized gain (loss) on investments (net of tax)
|
Net unrealized gain (loss) on derivative instruments
|
Net unrecognized gain (loss) related to benefit plans (net of tax)
|
Total
|
|
Balance at December 31, 2016
|
$
|
(43,987
|
)
|
$
|
(37
|
)
|
$
|
802
|
|
$
|
6,740
|
|
$
|
(36,482
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
5,417
|
|
61
|
|
4,587
|
|
(44
|
)
|
10,021
|
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
(27
|
)
|
(3,843
|
)
|
(882
|
)
|
(4,752
|
)
|
|
Net current-period other comprehensive income (loss)
|
5,417
|
|
34
|
|
744
|
|
(926
|
)
|
5,269
|
|
|
Balance at March 31, 2017
|
$
|
(38,570
|
)
|
$
|
(3
|
)
|
$
|
1,546
|
|
$
|
5,814
|
|
$
|
(31,213
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
6,757
|
|
(19
|
)
|
(2,204
|
)
|
(97
|
)
|
4,437
|
|
|
Amounts reclassified from AOCI to net income (loss)
|
—
|
|
(1
|
)
|
(658
|
)
|
(800
|
)
|
(1,459
|
)
|
|
Net current-period other comprehensive income (loss)
|
6,757
|
|
(20
|
)
|
(2,862
|
)
|
(897
|
)
|
2,978
|
|
|
Balance at June 30, 2017
|
$
|
(31,813
|
)
|
$
|
(23
|
)
|
$
|
(1,316
|
)
|
$
|
4,917
|
|
$
|
(28,235
|
)
|
|
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
|
)
|
(1)
ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities,
requires investments to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. The standard is effective as of January 1, 2018 and requires application by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption.
(2)
Includes the reclassification of the unamortized balance of the curtailment gain, net of tax as described in
Note 16
.
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,
|
|
2018
|
2017
|
|
2018
|
2017
|
|
Release of currency translation gain with the sale of equity method investment
|
Equity in income and impairment of investees
|
$
|
(2,595
|
)
|
$
|
—
|
|
|
$
|
(551
|
)
|
$
|
—
|
|
|
|
Provision for income taxes
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
|
Net loss
|
$
|
(2,595
|
)
|
$
|
—
|
|
|
$
|
(551
|
)
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
Revenues
|
$
|
508
|
|
$
|
2,092
|
|
|
$
|
1,646
|
|
$
|
8,094
|
|
|
|
Cost of operations
|
(6
|
)
|
159
|
|
|
(5
|
)
|
113
|
|
|
|
Other-net
|
—
|
|
(7,930
|
)
|
|
—
|
|
(7,438
|
)
|
|
|
Total before tax
|
502
|
|
(5,679
|
)
|
|
1,641
|
|
769
|
|
|
|
Provision for income taxes
|
110
|
|
(2,112
|
)
|
|
358
|
|
(165
|
)
|
|
|
Net income (loss)
|
$
|
392
|
|
$
|
(3,567
|
)
|
|
$
|
1,283
|
|
$
|
934
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost on benefit obligations
|
Benefit plans, net
|
$
|
168
|
|
$
|
619
|
|
|
$
|
979
|
|
$
|
2,281
|
|
|
|
Provision for income taxes
|
46
|
|
(11
|
)
|
|
46
|
|
(31
|
)
|
|
|
Net income
|
$
|
122
|
|
$
|
630
|
|
|
$
|
933
|
|
$
|
2,312
|
|
|
|
|
|
|
|
|
|
|
Realized gain on investments
|
Other-net
|
$
|
—
|
|
$
|
6
|
|
|
$
|
—
|
|
$
|
50
|
|
|
|
Provision for income taxes
|
—
|
|
2
|
|
|
—
|
|
18
|
|
|
|
Net income
|
$
|
—
|
|
$
|
4
|
|
|
$
|
—
|
|
$
|
32
|
|
NOTE 10
– INVENTORIES
The components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
|
Raw materials and supplies
|
$
|
47,047
|
|
$
|
54,291
|
|
|
Work in progress
|
6,276
|
|
6,918
|
|
|
Finished goods
|
11,332
|
|
11,708
|
|
|
Total inventories
|
$
|
64,655
|
|
$
|
72,917
|
|
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. As noted below, other-than-temporary-impairments occurred for our equity method investment in TBWES to reduce the carrying value to estimated fair value at the impairment dates.
As of September 30, 2018, our investments in equity method investees are not significant. During the first quarter of 2018, we sold our interest in BWBC to our joint venture partner in China for approximately
$21.1 million
, resulting in a gain of approximately
$6.5 million
. Proceeds from this sale, net of
$1.3 million
of withholding tax, were
$19.8 million
. Our former equity method investment in BWBC had a manufacturing facility that designs, manufactures, produces and sells various power plant and industrial boilers primarily in China.
In July 2018, we completed the sale of our investment in TBWES together with the settlement of related contractual claims and received
$15.0 million
in cash, of which
$7.7 million
related to our investment in TBWES and
$7.3 million
of proceeds were used to pay outstanding claims. In July 2018, the AOCI related to cumulative currency translation loss from our investment in TBWES of
$2.6 million
was also recognized as a loss and is included in foreign exchange with other income (expense) in our condensed consolidated statement of operations. TBWES had a manufacturing facility that produces boiler parts and equipment intended primarily for new build coal boiler contracts in India. During the second quarter of 2017, both we and our joint venture partner decided to make a strategic change in the Indian joint venture due to the decline in forecasted market opportunities in India, at which time we recorded in an
$18.2 million
other-than-temporary-impairment to the expected recoverable value of our investment in the joint venture. During the first quarter of 2018, based on a preliminary agreement to sell our investment in TBWES, we recognized an additional
$18.4 million
other-than-temporary-impairment. The impairment charge was based on the difference in the carrying value of our investment in TBWES and the preliminary sale price.
NOTE 12
- GOODWILL
The following summarizes the changes in the carrying amount of goodwill as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Power
|
|
Renewable
|
|
Industrial
(1)
|
|
Total
|
|
Balance at December 31, 2017
(2)
|
$
|
47,370
|
|
|
$
|
—
|
|
|
$
|
38,308
|
|
|
$
|
85,678
|
|
|
Currency translation adjustments
|
(157
|
)
|
|
—
|
|
|
(768
|
)
|
|
(925
|
)
|
|
2018 impairment charges
|
—
|
|
|
—
|
|
|
(37,540
|
)
|
|
(37,540
|
)
|
|
Balance at September 30, 2018
(2)
|
$
|
47,213
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47,213
|
|
(1)
Goodwill for MEGTEC and Universal are shown as part of noncurrent assets of discontinued operations. See
Note 3
for further description of discontinued operations.
(2)
Accumulated goodwill impairments were
$50.0 million
for the Renewable segment as of December 31, 2017 and
$74.4 million
and
$36.9
for the Industrial segment as of September 30, 2018 and December 31, 2017, respectively.
The following summarizes the changes in the carrying amount of goodwill as of September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Power
|
|
Renewable
|
|
Industrial
(1)
|
|
Total
|
|
Balance at December 31, 2016
|
$
|
46,220
|
|
|
$
|
48,435
|
|
|
$
|
68,432
|
|
|
$
|
163,087
|
|
|
Currency translation adjustments
|
1,180
|
|
|
1,530
|
|
|
6,491
|
|
|
9,201
|
|
|
2017 impairment charges
|
—
|
|
|
(49,965
|
)
|
|
(36,938
|
)
|
|
(86,903
|
)
|
|
Balance at September 30, 2017
(2)
|
$
|
47,400
|
|
|
$
|
—
|
|
|
$
|
37,985
|
|
|
$
|
85,385
|
|
(1)
Goodwill for MEGTEC and Universal are shown as part of noncurrent assets of discontinued operations. See
Note 3
for further description of discontinued operations.
(2)
Prior to September 30, 2017, we had not recorded any goodwill impairment charges
In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
(ASU 2017-04)
.
The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. We early adopted ASU 2017-04 on April 1, 2018, effective the first day of our 2018 second quarter.
Goodwill is tested for impairment annually and when impairment indicators exist. Interim impairment testing as of June 30, 2018 was performed for the SPIG reporting unit due to lower bookings in the second quarter of 2018 than previously forecasted, which resulted in a reduction in the forecast for the reporting unit. In this test, we compared the fair value of the reporting unit to its carrying value to measure goodwill impairment loss as required by ASU 2017-04. Fair value was determined using the combination of a discounted cash flow method (income approach) and the guideline public company method (market comparable approach), weighted equally in determining the fair value. The market comparable approach estimates fair value using market multiples of various financial measures compared to a set of comparable public companies.
Key Level 3 unobservable inputs in our valuation included cash flows and long-term growth rates reflective of management's forecasted outlook, and discount rates inclusive of risk adjustments consistent with current market conditions. A discount rate of
14.5%
was used, which is based on the weighted average cost of capital using guideline public company data, factoring in current market data and company specific risk factors. As a result of the impairment test, we recognized a
$37.5 million
impairment of goodwill in the SPIG reporting unit at June 30, 2018. After the impairment, the SPIG reporting unit did not have any remaining goodwill.
In the third quarter of 2017, we recorded
$50.0 million
of impairment charges in the Renewable segment due to significant charges incurred that attributed to a significant decline in our market capitalization in the third quarter of 2017. Also in the third quarter of 2017, our SPIG reporting unit, which is included in our Industrial segment, recorded a
$36.9 million
impairment charge due to a short-term decrease in profitability attributable to specific, then-current contracts and changes in SPIG's market strategy introduced during the third quarter of 2017.
NOTE 13
– INTANGIBLE ASSETS
Our intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
|
Definite-lived intangible assets
(1)
|
|
|
|
Customer relationships
|
$
|
25,000
|
|
$
|
25,494
|
|
|
Unpatented technology
|
15,166
|
|
12,910
|
|
|
Patented technology
|
2,632
|
|
6,542
|
|
|
Tradename
|
12,636
|
|
13,951
|
|
|
Backlog
|
17,760
|
|
18,060
|
|
|
All other
|
9,809
|
|
7,611
|
|
|
Gross value of definite-lived intangible assets
|
83,003
|
|
84,568
|
|
|
Customer relationships amortization
|
(14,167
|
)
|
(12,455
|
)
|
|
Unpatented technology amortization
|
(3,395
|
)
|
(2,184
|
)
|
|
Patented technology amortization
|
(2,315
|
)
|
(2,213
|
)
|
|
Tradename amortization
|
(3,524
|
)
|
(3,042
|
)
|
|
Acquired backlog amortization
|
(17,760
|
)
|
(16,622
|
)
|
|
All other amortization
|
(8,045
|
)
|
(7,292
|
)
|
|
Accumulated amortization
|
(49,206
|
)
|
(43,808
|
)
|
|
Net definite-lived intangible assets
|
$
|
33,797
|
|
$
|
40,760
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
Trademarks and trade names
|
$
|
1,305
|
|
$
|
1,305
|
|
|
Total indefinite-lived intangible assets
|
$
|
1,305
|
|
$
|
1,305
|
|
(1)
Intangible assets for MEGTEC and Universal are shown as part of noncurrent assets of discontinued operations. See
Note 3
for further description of discontinued operations.
The following summarizes the changes in the carrying amount of intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
Balance at beginning of period
|
$
|
42,065
|
|
$
|
48,622
|
|
|
Amortization expense
|
(5,398
|
)
|
(8,724
|
)
|
|
Currency translation adjustments and other
|
(1,565
|
)
|
3,877
|
|
|
Balance at end of the period
|
$
|
35,102
|
|
$
|
43,775
|
|
Amortization of intangible assets is included in cost of operations and SG&A in our condensed consolidated statement of operations, but it is not allocated to segment results.
As of September 30, 2018 and December 31, 2017, the SPIG reporting unit had
$28.5 million
and
$32.7 million
of identifiable intangible assets, net of accumulated amortization, respectively. Long-lived assets, including intangible assets, are reviewed for impairment annually, or whenever circumstances indicate that the carrying amount might not be recoverable. The circumstances leading to the goodwill impairments as of June 30, 2018 and September 30, 2017 also triggered evaluations for the SPIG reporting unit. In our tests as of June 30, 2018 and September 30, 2017, the sum of the undiscounted cash flows and the residual value of the primary assets exceeded the carrying value of the SPIG asset group and no impairment was indicated.
Estimated future intangible asset amortization expense is as follows (in thousands):
|
|
|
|
|
|
|
|
Year ending
|
Amortization expense
|
|
Three months ending December 31, 2018
|
$
|
1,311
|
|
|
Twelve months ending December 31, 2019
|
4,724
|
|
|
Twelve months ending December 31, 2020
|
3,976
|
|
|
Twelve months ending December 31, 2021
|
3,763
|
|
|
Twelve months ending December 31, 2022
|
3,671
|
|
|
Twelve months ending December 31, 2023
|
3,662
|
|
|
Thereafter
|
12,690
|
|
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, 2018
|
December 31, 2017
|
|
Land
|
$
|
3,597
|
|
$
|
3,631
|
|
|
Buildings
|
106,635
|
|
107,944
|
|
|
Machinery and equipment
|
182,653
|
|
205,331
|
|
|
Property under construction
|
2,278
|
|
5,979
|
|
|
|
295,163
|
|
322,885
|
|
|
Less accumulated depreciation
|
198,237
|
|
208,178
|
|
|
Net property, plant and equipment
|
$
|
96,926
|
|
$
|
114,707
|
|
In September 2018, we relocated our corporate headquarters to Barberton, Ohio from Charlotte, North Carolina. At the same time, we announced that we would consolidate most of our Barberton and Copley, Ohio operations into new, leased office space in Akron, Ohio in the third quarter of 2019. The new location in Akron is expected to reduce operating costs, net of rent, and to provide a space that better meets our needs. We do not expect to incur significant relocation costs; however, we expect
$7.0 million
of accelerated depreciation to be recognized through mid-2019, of which
$1.2 million
was recognized in the three months ended September 30, 2018.
NOTE 15
– WARRANTY EXPENSE
We may offer assurance type warranties on products and services we sell. Changes in the carrying amount of our accrued warranty expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
Balance at beginning of period
|
$
|
33,514
|
|
$
|
36,520
|
|
|
Additions
|
30,621
|
|
17,782
|
|
|
Expirations and other changes
|
(1,865
|
)
|
(9,053
|
)
|
|
Payments
|
(9,418
|
)
|
(10,534
|
)
|
|
Translation and other
|
(688
|
)
|
1,900
|
|
|
Balance at end of period
|
$
|
52,164
|
|
$
|
36,615
|
|
We accrue estimated expense included in cost of operations to satisfy contractual warranty requirements when we recognize the associated revenues on the related contracts, or in the case of a loss contract, the full amount of the estimated warranty costs is accrued when the contract becomes a loss contract. In addition, we record specific provisions or reductions where we expect the actual warranty costs to significantly differ from the accrued estimates. Such changes could have a material effect on our consolidated financial condition, results of operations and cash flows. Warranty expense in the nine months ended September 30, 2018 includes a
$15.1 million
increase in expected warranty costs for the six European renewable energy loss contracts based on experience from the startup and commissioning activities in the second quarter of 2018 and
$5.3 million
of specific provisions on certain contracts in the Power segment for specific technical matters and customer requirements.
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)
|
2018
|
2017
|
2018
|
2017
|
|
2018
|
2017
|
2018
|
2017
|
|
Interest cost
|
$
|
9,739
|
|
$
|
10,342
|
|
$
|
29,237
|
|
$
|
30,832
|
|
|
$
|
97
|
|
$
|
(106
|
)
|
$
|
289
|
|
$
|
255
|
|
|
Expected return on plan assets
|
(16,235
|
)
|
(14,936
|
)
|
(48,680
|
)
|
(44,646
|
)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Amortization of prior service cost
|
25
|
|
29
|
|
75
|
|
80
|
|
|
(186
|
)
|
(561
|
)
|
(1,020
|
)
|
(2,277
|
)
|
|
Recognized net actuarial loss (gain)
|
(4,196
|
)
|
—
|
|
(4,740
|
)
|
1,062
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Benefit plans, net
|
(10,667
|
)
|
(4,565
|
)
|
(24,108
|
)
|
(12,672
|
)
|
|
(89
|
)
|
(667
|
)
|
(731
|
)
|
(2,022
|
)
|
|
Service cost included in COS
|
186
|
|
200
|
|
562
|
|
681
|
|
|
4
|
|
3
|
|
12
|
|
11
|
|
|
Net periodic benefit cost (benefit)
|
$
|
(10,481
|
)
|
$
|
(4,365
|
)
|
$
|
(23,546
|
)
|
$
|
(11,991
|
)
|
|
$
|
(85
|
)
|
$
|
(664
|
)
|
$
|
(719
|
)
|
$
|
(2,011
|
)
|
We made contributions to our pension and other postretirement benefit plans totaling
$9.1 million
and
$17.6 million
during the three and nine months ended September 30, 2018, respectively, as compared to
$9.8 million
and
$16.2 million
during the three and nine months ended September 30, 2017, respectively.
While we retained the pension liability related to employees of PBRRC after the September 2018 sale of this business, the status change of these participants in the Retirement Plan for Employees of Babcock & Wilcox Commercial Operations (the "Commercial Operations Plan") resulted in a
$3.5 million
curtailment loss in the three months ended September 30, 2018, which also triggered an interim MTM of the Commercial Operations Plan assets and liabilities that was a gain of
$7.7 million
in the three months ended September 30, 2018. Both the curtailment and the MTM are reflected in the "Recognized net actuarial loss (gain)
" in the table above and are included in our condensed consolidated statements of operations in the "Benefit plans, net" line item
.
During the three months ended June 30, 2018, lump sum payments from our Canadian pension plan resulted in a plan settlement gain of
$0.1 million
, which also triggered an interim MTM of the Canadian pension plan assets and liability that was a gain of
$0.4 million
in the three months ended June 30, 2018. Both the settlement and the MTM are reflected in the "Recognized net actuarial loss (gain)
" in the table above and are included in our condensed consolidated statements of operations in the "Benefit plans, net" line item.
During the three months ended March 31, 2017, lump sum payments from our Canadian pension plan resulted in a plan settlement loss of
$0.4 million
, which also resulted in interim MTM of the Canadian pension plan that was a loss of
$0.7 million
in the three months ended March 31, 2017. The effect of these charges and mark to market adjustments are reflected in the "
Recognized net actuarial loss (gain)" in the table above.
Both the settlement and the MTM are reflected in the "Recognized net actuarial loss (gain)
" in the table above and are included in our condensed consolidated statements of operations in the "Benefit plans, net" line item.
We terminated the Babcock & Wilcox Retiree Medical Plan (the "Retiree OPEB plan") effective December 31, 2016. The Retiree OPEB plan was originally established to provide secondary medical insurance coverage for retirees that had reached the age of
65
, up to a lifetime maximum cost. In exchange for terminating the Retiree OPEB plan, the participants had the option to enroll in a third-party health care exchange, to which B&W agreed to contribute up to
$750
a year for each of the next
three
years (beginning in 2017) to a health reimbursement account ("HRA"), provided the plan participant had not yet
reached their lifetime maximum under the terminated Retiree OPEB plan. Based on the number of participants who enrolled in the new benefit plan, we recognized a curtailment gain of
$10.8 million
on December 31, 2016 for the actuarially determined difference in the liability for these participants in the Retiree OPEB plan and the new plan. The curtailment gain was deferred in accumulated other comprehensive income and was being recognized as income through 2020. Participants in the Retiree OPEB plan filed a class action lawsuit against B&W in 2017 asserting that the change in health care coverage breached B&W's obligations under collective bargaining agreements. In April 2018, the court approved a settlement whereby B&W will contribute
$1,000
a year for 2018 and 2019, and
$1,100
a year thereafter for the life of a participant to an HRA. As a result of the settlement, the revised Retiree OPEB plan was actuarially remeasured as of April 1, 2018. The unamortized balance of the curtailment gain of
$5.2 million
and the related deferred tax of
$1.3 million
was reversed from AOCI and we recorded
$5.2 million
in other accumulated postretirement benefit liabilities for the actuarial value of the Retiree OPEB plan.
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, 2018
|
December 31, 2017
|
|
United States
|
$
|
190,600
|
|
$
|
94,300
|
|
|
Foreign
|
3,415
|
|
9,173
|
|
|
Total revolving debt
|
$
|
194,015
|
|
$
|
103,473
|
|
U.S. Revolving Credit Facility
On May 11, 2015, we entered into a credit agreement with a syndicate of lenders ("Credit Agreement") in connection with our spin-off from The Babcock & Wilcox Company (now BWX Technologies, Inc.) which governs the U.S. Revolving Credit Facility. The Credit Agreement, which is scheduled to mature on June 30, 2020, provides for a senior secured revolving credit facility, initially in an aggregate amount of up to
$600.0 million
. The proceeds from loans under the Credit Agreement are available for working capital needs and other general corporate purposes, and the full amount is available to support the issuance of letters of credit, subject to the limits specified in the amendment described below.
Since June 2016, we have entered into a number of amendments to the Credit Agreement (the "Amendments" and the Credit Agreement, as amended to date, the "Amended Credit Agreement"). The most recent Amendments, which we entered into on August 9, 2018, September 14, 2018, September 28, 2018, October 4, 2018 and October 31, 2018, respectively among other things, provided for the following modifications: (1) modifies the definition of adjusted EBITDA in the Amended Credit Agreement to exclude up to an additional
$72.8 million
of charges for certain Renewable segment contracts for periods including the quarter ended June 30, 2018 and allow further add backs to EBITDA for restructuring and other similar expenses; (2) modifies the financial covenants as described below; (3) modifies the amount of liquidity (as defined in the Amended Credit Agreement) to be at least
$45.0 million
as of the last business day of any calendar month and on any day that a borrowing is made, which then drops to
$40.0 million
once certain B&W Volund projects are turned over to customers; (4) lowers the amount of certain excess cash, from
$60.0 million
to
$45.0 million
, that we are permitted to hold before mandatory repayment of the U.S. Revolving Credit Facility is required; (5) modifies the Company's ability to reinvest net cash proceeds from asset sales that trigger prepayment requirements to allow for the ability to retain up to
$25.0 million
of asset sale proceeds after receipt of the initial Last Out Loan funding described below; (6) permits an aggregate
$25.0 million
of cumulative net income losses attributable to eight specified B&W Vølund contracts for the fiscal quarters ending September 30, 2018 and December 31, 2018; (7) modifies certain contract completion milestones that we are required to meet in connection with
six
European Renewable loss contracts; (8) modifies the date by which we are required to sell at least
$100 million
of assets from March 31, 2019 to October 31, 2018; (9) requires us to achieve certain concessions from our renewable contract customers by February 15, 2019 that will generate at least
$25.0 million
of incremental benefits to us, (10) adds additional events of default related to the termination or rejection of certain contracts related to our Renewables segment; (11) permits and requires us to raise an additional net
$30.0 million
of last-out loans under the Amended Credit Agreement in connection with the Last Out Loans described below; 12) consents to the sale of PBRRC; (13) eliminates a requirement to adjust on a pro forma basis our EBITDA after the sales of MEGTEC, Universal and PBRRC; (14) changes the interest coverage and senior leverage financial covenant ratios as of October 31, 2018; and (15) amends the definition of EBITDA to allow certain add-back adjustments to exclude up to an additional
$21 million
of certain charges for periods including the quarter ended September 30, 2018.
The Amended Credit Agreement and our obligations under certain hedging agreements and cash management agreements with our lenders and their affiliates continue to be (1) guaranteed by substantially all of our wholly owned domestic subsidiaries and certain of our foreign subsidiaries, but excluding our captive insurance subsidiary, and (2) secured by first-priority liens on certain assets owned by us and the guarantors. The Amended Credit Agreement requires interest payments on revolving loans on a periodic basis until maturity. We may prepay all loans at any time without premium or penalty (other than customary LIBOR breakage costs), subject to notice requirements. The Amended Credit Agreement requires us to make certain prepayments on any outstanding revolving loans after receipt of cash proceeds from certain asset sales or other events, subject to certain exceptions. Such prepayments may require us to reduce the commitments under the Amended Credit Agreement by a corresponding amount of such prepayments.
After giving effect to the Amendments, revolving loans outstanding under the Amended Credit Agreement bear interest at our option at either (1) the LIBOR rate plus
5.0%
per annum during 2018,
6.0%
per annum during 2019 and
7.0%
per annum during 2020, or (2) the Base Rate plus
4.0%
per annum during 2018,
5.0%
per annum during 2019, and
6.0%
per annum during 2020. The Base Rate is the highest of the Federal Funds rate plus
0.5%
, the one month LIBOR rate plus
1.0%
, or the administrative agent's prime rate. The components of our interest expense are detailed in
Note 24
. A commitment fee of
1.0%
per annum is charged on the unused portions of the U.S. Revolving Credit Facility. Additionally, an annual facility fee of
$1.5 million
is payable on the first business day of 2018 and 2019, and a pro rated amount is payable on the first business day of 2020. A deferred fee of
2.5%
is charged as of September 30, 2018 and will decrease to
1.5%
effective October 10, 2018 due to achieving certain asset sales. A letter of credit fee of
2.5%
per annum is charged with respect to the amount of each financial letter of credit outstanding, and a letter of credit fee of
1.5%
per annum is charged with respect to the amount of each performance and commercial letter of credit outstanding.
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. Effective with the latest Amendment dated October 31, 2018, the maximum permitted senior debt leverage ratio as defined in the Amended Credit Agreement is:
•
9.75
:1.0 for the quarters ending September 30, 2018,
|
|
|
|
•
|
9.00
:1.0 for the quarter ending December 31, 2018,
|
|
|
|
|
•
|
4.00
:1.0 for the quarter ending March 31, 2019,
|
|
|
|
|
•
|
3.50
:1.0 for the quarter ending June 30, 2019,
|
|
|
|
|
•
|
3.00
:1.0 for the quarter ending September 30, 2019, and
|
|
|
|
|
•
|
3.00
:1.0 for or the quarters ending December 31, 2019 and each quarter thereafter.
|
Effective with the latest Amendment dated October 31, 2018, the minimum consolidated interest coverage ratio as defined in the Amended Credit Agreement is:
|
|
|
|
•
|
1.00
:1.0 for the quarter ending September 30, 2018,
|
|
|
|
|
•
|
1.00
:1.0 for the quarter ending December 31, 2018,
|
|
|
|
|
•
|
2.25
:1.0 for the quarter ending March 31, 2019,
|
|
|
|
|
•
|
3.00
:1.0 for the quarter ending June 30, 2019,
|
|
|
|
|
•
|
3.25
:1.0 for the quarter ending September 30, 2019, and
|
|
|
|
|
•
|
3.25
:1.0 for or the quarters ending December 31, 2019 and each quarter thereafter.
|
Consolidated capital expenditures in each fiscal year are limited to
$27.5 million
.
At
September 30, 2018
, borrowings under the Amended Credit Agreement consisted of
$190.6 million
at an weighted average interest rate of
8.81%
. Usage under the Amended Credit Agreement consisted of
$190.6 million
of borrowings,
$28.6 million
of financial letters of credit and
$150.2 million
of performance letters of credit. After giving effect to the Amendments, at
September 30, 2018
, we had approximately
$59.4 million
available for borrowings or to meet letter of credit requirements primarily based on our borrowing sublimit, our trailing 12 month adjusted EBITDA (as defined in the Amended Credit Agreement), and our leverage and interest coverage ratios (as defined in the Amended Credit Agreement) which were
7.95
and
1.56
, respectively. As a result of the sale of our interest in TBWES, as discussed in
Note 11
, and the sale of our MEGTEC and Universal businesses, as discussed in
Note 3
, the U.S. Revolving Credit Facility was reduced from
$450.0 million
to
$347.0 million
effective October 11, 2018. Also, effective October 12, 2018, we had approximately
$78.1 million
available for borrowings or to meet letter of credit requirements.
Foreign Revolving Credit Facilities
Outside of the United States, we have revolving credit facilities in Turkey and, until the first quarter of 2018, in India that are used to provide working capital to local operations. At September 30, 2018 and December 31, 2017, we had aggregate borrowings under these facilities of
$3.4 million
and
$9.2 million
respectively. Our weighted average interest rate on these facilities was
29.01%
and
6.07%
at September 30, 2018 and December 31, 2017, respectively. Our banking counterparties in Turkey have required and are requiring the conversion of these revolving credit facilities to Turkish lira denomination from euro denomination, resulting in correspondingly higher market interest rates for these facilities. As of September 30, 2018, these facilities allow us to borrow up to
$3.4 million
in aggregate and each have less than a year remaining to maturity.
Letters of Credit, Bank Guarantees and Surety Bonds
Certain subsidiaries primarily outside of the United States have credit arrangements with various commercial banks and other financial institutions for the issuance of letters of credit and bank guarantees in association with contracting activity. The aggregate value of all such letters of credit and bank guarantees opened outside of the U.S. Revolving Credit Facility as of
September 30, 2018
and December 31, 2017 was
$178.6 million
and
$269.1 million
, respectively. The aggregate value of all such letters of credit and bank guarantees that are partially secured by the U.S. Revolving Credit Facility as of
September 30, 2018
was
$67.5 million
. The aggregate value of the letters of credit provided by the U.S. Revolving Credit Facility in support of letters of credit outside of the United States was
$39.0 million
as of
September 30, 2018
.
We have posted surety bonds to support contractual obligations to customers relating to certain contracts. We utilize bonding facilities to support such obligations, but the issuance of bonds under those facilities is typically at the surety's discretion. 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, 2018
, bonds issued and outstanding under these arrangements in support of contracts totaled approximately
$311.0 million
.
Our ability to obtain and maintain sufficient capacity under our U.S. Revolving Credit Facility is essential to allow us to support the issuance of letters of credit, bank guarantees and surety bonds. Without sufficient capacity, our ability to support contract security requirements in the future will be diminished.
NOTE 18
– LAST OUT TERM LOAN
The Last Out Term loan components are as follows:
|
|
|
|
|
|
|
|
(in thousands)
|
September 30, 2018
|
|
Proceeds
|
$
|
20,000
|
|
|
Discount and fees
|
4,111
|
|
|
Paid-in-kind interest
|
16
|
|
|
Principal
|
24,127
|
|
|
Unamortized discount and fees
|
(4,098
|
)
|
|
Debt balance
|
$
|
20,029
|
|
As referenced above, our Amended Credit Agreement requires us to draw
$30.0 million
of net proceeds under a last out term loan. B. Riley FBR, Inc., a related party, committed to provide an aggregate principal amount of last-out term loans (the “Last Out Term Loan”) that, when fully borrowed, will result in us receiving
$30.0 million
of aggregate net proceeds. The face principal amount of Last Out Term Loan is
$35.1 million
, which includes a
$2.0 million
up-front fee that was added to the principal balance on the first funding date, transaction expenses, and original issue discounts of
10.00%
for each draw under the Last Out Term Loan. The Last Out Term Loan is incurred under our Amended Credit Agreement and will share on a pari passu basis with the guaranties and collateral provided thereunder to the existing lenders under the U.S. Revolving Credit Facility; provided, that the Last Out Term Loan is subordinated in right of payment to the prior payment in full of all amounts owed to the lenders under the U.S. Revolving Credit Facility. The Last Out Term Loan matures and is payable in full on July 1, 2020, the day after the maturity date of the U.S. Revolving Credit Facility. The first
$10.0 million
of net Last Out Term Loan proceeds were received on September 17, 2018, the consummation date of the sale PBRRC as described in
Note 4
.
Subsequently, we received additional net proceeds of
$10.0 million
,
$5.0 million
and
$5.0 million
on September 24, 2018, October 1, 2018 and October 15, 2018, respectively. The Last Out Term Loan may be prepaid, subject to the subordination provisions, but not re-borrowed.
The Last Out Term Loan bears interest at a rate per annum equal to (i) if eurocurrency rate loan, the then-applicable U.S. LIBOR rate plus
14.00%
, with
5.50%
of such interest rate to be paid in cash and the remaining
8.50%
payable in kind by adding such accrued interest to the principal amount of the Last Out Loans and (ii) if base rate loan, the then applicable U.S. prime rate plus
13.00%
, with
4.50%
of such interest rate to be paid in cash and the remaining
8.50%
payable in kind by adding such accrued interest to the principal amount of the Last Out Loan. Subject to the subordination provisions, the Last Out Loan shall be subject to all of the other same representations and warranties, covenants and events of default under the Amended Credit Agreement. The total effective interest rate of the Last Out Term Loan was
27.54%
on September 30, 2018 and
26.11%
on October 15, 2018, the date of the final draw; the effective rate of the Last Out Term Loan may fluctuate over the life of the loan due to changes in LIBOR, the prime rates or any repayments. Interest expense associated with the Last Out Term Loan is detailed in
Note 24
.
NOTE 19
– SECOND LIEN TERM LOAN FACILITY
Extinguishment of the Second Lien Term Loan Facility
Using
$212.6 million
of the proceeds from the Rights Offering, we fully repaid the Second Lien Term Loan Facility (described below) on May 4, 2018, plus accrued interest of
$2.3 million
. A loss on extinguishment of this debt of approximately
$49.2 million
was recognized in the second quarter of 2018 as a result of the remaining
$32.5 million
unamortized debt discount on the date of the repayment,
$16.2 million
of make-whole interest, and
$0.5 million
of fees associated with the extinguishment.
Terms of the Second Lien Term Loan Facility
On
August 9, 2017
, we entered into a second lien credit agreement (the "Second Lien Credit Agreement") with an affiliate of AIP, governing the Second Lien Term Loan Facility. The Second Lien Term Loan Facility consisted of a second lien term loan in the principal amount of
$175.9 million
, all of which was borrowed on
August 9, 2017
, and a delayed draw term loan facility in the principal amount of up to
$20.0 million
, which was drawn in a single draw on December 13, 2017.
Borrowings under the second lien term loan, other than the delayed draw term loan, had a coupon interest rate of
10%
per annum, and borrowings under the delayed draw term loan had a coupon interest rate of
12%
per annum, in each case payable quarterly. As of March 7, 2018, the interest rates increased to
12%
and
14%
per annum, respectively, due to the covenant default. Undrawn amounts under the delayed draw term loan accrued a commitment fee at a rate of
0.50%
, which was paid at closing. The second lien term loan and the delayed draw term loan had a scheduled maturity of December 30, 2020. Interest expense associated with our Second Lien Credit Agreement is detailed in
Note 24
.
In connection with our entry into the Second Lien Term Loan Facility, we used
$50.9 million
of the proceeds to repurchase and retire approximately
4.8 million
shares of our common stock (approximately
10%
of our shares outstanding) held by an affiliate of AIP, which was one of the conditions precedent for the Second Lien Term Loan Facility. Based on observable and unobservable market data, we determined the fair value of the shares we repurchased from the related party on
August 9, 2017
was
$16.7 million
. We utilized a discounted cash flow model and estimates of our weighted average cost of capital on the transaction date to derive the estimated fair value of the share repurchase. The
$34.2 million
difference between the share repurchase price and the fair value of the repurchased shares was recorded as a discount on the Second Lien Term Loan Facility borrowing. Non-cash amortization of the debt discount and direct financing costs were being accreted to the carrying value of the loan through interest expense utilizing the effective interest method and an effective interest rate of
20.08%
.
The Second Lien Credit Agreement contained representations and warranties, affirmative and restrictive covenants, financial covenants and events of default substantially similar to those contained in the Amended Credit Agreement, subject to certain cushions. At March 31, 2018 and December 31, 2017, we were in default of several financial covenants associated with the Second Lien Credit Agreement, which resulted in our classification of all of the net carrying value as a current liability in our condensed consolidated balance sheet. Under the terms of the intercreditor agreement among the lenders under the Amended Credit Agreement and the Second Lien Credit Agreement, the lenders under the Second Lien Credit Agreement cannot enforce remedies against the collateral until after they provide notice of enforcement and after the expiration of a 180-day standstill period. The lenders under the Second Lien Credit Agreement did not provide such notice. The March 1, 2018 and
April 10, 2018 Amended Credit Agreement amendments temporarily waived all events of default, including cross-default provisions.
NOTE 20
– RIGHTS OFFERING
On March 19, 2018, we distributed to holders of our common stock one nontransferable subscription right to purchase
1.4
common shares for each common share held as of 5:00 p.m., New York City time, on March 15, 2018 at a price of
$3.00
per common share. On April 10, 2018, we extended the expiration date and amended certain other terms regarding the Rights Offering. As amended, each right entitled holders to purchase
2.8
common shares at a price of
$2.00
per share. The Rights Offering expired at 5:00 p.m., New York City time, on April 30, 2018. The Company did not issue fractional rights, or pay cash in lieu of fractional rights. The Rights Offering did not include an oversubscription privilege.
The Rights Offering concluded on April 30, 2018, resulting in the issuance of
124.3 million
common shares on April 30, 2018. Gross proceeds from the Rights Offering were
$248.4
. Of the proceeds received,
$214.9 million
was used to fully repay the Second Lien Credit Agreement, including
$2.3 million
of accrued interest, and the remainder was used for working capital purposes. Direct costs of the Rights Offering totaled
$3.3 million
.
NOTE 21
– CONTINGENCIES
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. Through subsequent amendments, the putative class period was expanded to include investors who purchased shares between June 17, 2015 and August 9, 2017. We filed a motion to dismiss in late 2017; the court denied the motion in early 2018.
The plaintiff in the Stockholder Litigation alleges fraud, misrepresentation and a course of conduct relating to the facts surrounding certain projects underway in the Company's Renewable segment, which, according to the plaintiff, had the effect of artificially inflating the price of the Company's common stock. The plaintiff further alleges that stockholders were harmed when the Company later disclosed that it would incur losses on these projects. The plaintiff seeks an unspecified amount of damages.
On February 16, 2018, and February 22, 2018, the Company and certain of its present and former officers and directors were named as defendants in three separate but substantially similar derivative lawsuits filed in the United States District Court for the District of Delaware (the "Derivative Litigation"). On April 23, 2018, the United States District Court for the District of Delaware entered an order consolidating the related derivative actions and designating co-lead and co-liaison counsel. On June 1, 2018, plaintiffs filed a consolidated derivative complaint. Plaintiffs assert a variety of claims against defendants including alleged violations of the federal securities laws, waste, breach of fiduciary duties and unjust enrichment. Plaintiffs, who all purport to be current shareholders of the Company's common stock, are suing on behalf of the Company to recover costs and an unspecified amount of damages, and force implementation of corporate governance changes.
On June 28, 2018, the Derivative Litigation was transferred to the United States District Court for the Western District of North Carolina, where the Stockholder Litigation is pending. The parties filed a motion asking the Court to stay the Derivative Litigation, which was granted by the Court on August 13, 2018. Mediation is scheduled for December 14, 2018, in which the parties will discuss possible settlement of the Stockholder Litigation.
We believe the allegations in the Stockholder Litigation and the Derivative Litigation are without merit, and that the respective outcomes of the Stockholder Litigation and the Derivative Litigation will not have a material adverse impact on our consolidated financial condition, results of operations or cash flows, net of any insurance coverage.
Other
Due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things: performance or warranty-related matters under our customer and supplier contracts and other business arrangements; and workers' compensation, premises liability and other claims. Based on our prior experience, we do not expect that any of these other litigation proceedings, disputes and claims will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 22
– 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, 2018
and
2017
, we had deferred approximately
$1.3 million
and
$2.5 million
, respectively, of net gains (losses) on these derivative financial instruments in AOCI.
At
September 30, 2018
, our derivative financial instruments consisted solely of FX forward contracts. The notional value of our FX forward contracts totaled
$18.9 million
at
September 30, 2018
with maturities extending to November 2019. These instruments consist primarily of contracts to purchase or sell Danish krone, Swedish króna, euros and British pounds sterling. We are exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We attempt to mitigate this risk by using major financial institutions with high credit ratings. The counterparties to all of our FX forward contracts are financial institutions party to our U.S. Revolving Credit Facility. Our hedge counterparties have the benefit of the same collateral arrangements and covenants as described under our U.S. Revolving Credit Facility. During the third quarter of 2017, our hedge counterparties removed the lines of credit supporting new FX forward contracts. Subsequently, we have not entered into any new FX forward contracts.
The following tables summarize our derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Asset and Liability Derivative
|
|
(in thousands)
|
September 30, 2018
|
December 31, 2017
|
|
Derivatives designated as hedges:
|
|
|
|
Foreign exchange contracts:
|
|
|
|
Location of FX forward contracts designated as hedges:
|
|
|
|
Accounts receivable-other
|
$
|
438
|
|
$
|
1,088
|
|
|
Other assets
|
463
|
|
312
|
|
|
Accounts payable
|
—
|
|
105
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
Foreign exchange contracts:
|
|
|
|
Location of FX forward contracts not designated as hedges:
|
|
|
|
Accounts receivable-other
|
$
|
5
|
|
$
|
7
|
|
|
Accounts payable
|
2
|
|
1,722
|
|
|
Other liabilities
|
—
|
|
12
|
|
The effects of derivatives on our financial statements are outlined below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
Nine months ended September 30,
|
|
(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
Amount of gain (loss) recognized in other comprehensive income
|
$
|
103
|
|
$
|
398
|
|
|
$
|
1,102
|
|
$
|
2,642
|
|
|
Effective portion of gain (loss) reclassified from AOCI into earnings by location:
|
|
|
|
|
|
|
Revenues
|
508
|
|
2,092
|
|
|
1,646
|
|
8,094
|
|
|
Cost of operations
|
(6
|
)
|
159
|
|
|
(5
|
)
|
113
|
|
|
Other-net
|
—
|
|
(7,930
|
)
|
|
—
|
|
(7,438
|
)
|
|
Portion of gain (loss) recognized in income that is excluded from effectiveness testing by location:
|
|
|
|
|
|
|
Other-net
|
(498
|
)
|
(7,005
|
)
|
|
(633
|
)
|
(10,524
|
)
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
Forward contracts
|
|
|
|
|
|
|
Loss recognized in income by location:
|
|
|
|
|
|
|
Other-net
|
$
|
(28
|
)
|
$
|
(1,364
|
)
|
|
$
|
(24
|
)
|
$
|
(1,709
|
)
|
NOTE 23
– FAIR VALUE MEASUREMENTS
The following tables summarize our financial assets and liabilities carried at fair value, all of which were valued from readily available prices or using inputs based upon quoted prices for similar instruments in active markets (known as "Level 1" and "Level 2" inputs, respectively, in the fair value hierarchy established by the Financial Accounting Standards Board ("FASB") Topic,
Fair Value Measurements and Disclosures
).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Available-for-sale securities
|
September 30, 2018
|
Level 1
|
Level 2
|
Level 3
|
|
Commercial paper
|
$
|
3,384
|
|
$
|
—
|
|
$
|
3,384
|
|
$
|
—
|
|
|
Certificates of deposit
|
1,151
|
|
—
|
|
1,151
|
|
—
|
|
|
Mutual funds
|
1,330
|
|
—
|
|
1,330
|
|
—
|
|
|
Corporate notes and bonds
|
1,597
|
|
1,597
|
|
—
|
|
—
|
|
|
United States Government and agency securities
|
7,954
|
|
7,954
|
|
—
|
|
—
|
|
|
Total fair value of available-for-sale securities
|
$
|
15,416
|
|
$
|
9,551
|
|
$
|
5,865
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Available-for-sale securities
|
December 31, 2017
|
Level 1
|
Level 2
|
Level 3
|
|
Commercial paper
|
$
|
1,895
|
|
$
|
—
|
|
$
|
1,895
|
|
$
|
—
|
|
|
Certificates of deposit
|
2,398
|
|
—
|
|
2,398
|
|
—
|
|
|
Mutual funds
|
1,331
|
|
—
|
|
1,331
|
|
—
|
|
|
Corporate notes and bonds
|
4,447
|
|
4,447
|
|
—
|
|
—
|
|
|
United States Government and agency securities
|
5,738
|
|
5,738
|
|
—
|
|
—
|
|
|
Total fair value of available-for-sale securities
|
$
|
15,809
|
|
$
|
10,185
|
|
$
|
5,624
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
September 30, 2018
|
December 31, 2017
|
|
Forward contracts to purchase/sell foreign currencies
|
$
|
905
|
|
$
|
(432
|
)
|
Available-For-Sale Securities
We estimate the fair value of available-for-sale securities based on quoted market prices. Our investments in available-for-sale securities are presented in "other assets" on our condensed consolidated balance sheets.
Derivatives
Derivative assets and liabilities currently consist of FX forward contracts. Where applicable, the value of these derivative assets and liabilities is computed by discounting the projected future cash flow amounts to present value using market-based observable inputs, including FX forward and spot rates, interest rates and counterparty performance risk adjustments.
Other Financial Instruments
We used the following methods and assumptions in estimating our fair value disclosures for our other financial instruments:
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•
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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.
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|
|
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•
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Revolving debt and last out term loan
. 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, 2018
and
December 31, 2017
.
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Non-Recurring Fair Value Measurements
The measurement of the net actuarial gain or loss associated with our pension and other postretirement plans 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.
Our interim goodwill impairment tests and second quarter 2018 impairment charges required significant fair value measurements using unobservable inputs (see
Note 12
). The fair value of the reporting unit 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.
Our second quarter 2018 impairment charges to assets held for sale of discontinued operations required significant fair value measurements using unobservable inputs (see
Note 3
). The fair value of the net assets held for sale was based on the expected net proceeds for the sale of MEGTEC and Universal.
NOTE 24
– SUPPLEMENTAL INFORMATION
During the
nine
months ended
September 30, 2018
and
2017
, we recognized the following non-cash activity in our condensed consolidated financial statements:
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|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
2017
|
|
Accrued capital expenditures in accounts payable
|
$
|
23
|
|
$
|
1,118
|
|
|
Accreted interest expense on our second lien term loan facility
|
$
|
3,202
|
|
$
|
1,095
|
|
During the
nine
months ended
September 30, 2018
and
2017
, we recognized the following cash activity in our condensed consolidated financial statements:
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|
|
|
|
|
|
|
|
|
(in thousands)
|
2018
|
2017
|
|
Income tax payments (refunds), net
|
$
|
3,440
|
|
$
|
(11,190
|
)
|
|
Interest payments on our U.S. revolving credit facility
|
$
|
9,200
|
|
$
|
2,876
|
|
|
Interest payments on our second lien term loan facility
|
$
|
7,627
|
|
$
|
2,492
|
|
During the three and
nine
months ended
September 30, 2018
and
2017
, interest expense in our condensed consolidated financial statements consisted of the following components:
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|
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|
Three months ended September 30,
|
|
Nine months ended September 30,
|
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(in thousands)
|
2018
|
2017
|
|
2018
|
2017
|
|
Components associated with borrowings from:
|
|
|
|
|
|
|
U.S. Revolving Credit Facility
|
$
|
3,879
|
|
$
|
1,018
|
|
|
$
|
9,658
|
|
$
|
3,146
|
|
|
Second Lien Term Loan Facility
|
—
|
|
2,554
|
|
|
7,460
|
|
2,554
|
|
|
Last Out Term Loan - interest paid
|
38
|
|
—
|
|
|
38
|
|
—
|
|
|
Last Out Term Loan - interest paid-in-kind
|
83
|
|
—
|
|
|
83
|
|
—
|
|
|
Foreign revolving credit facilities
|
157
|
|
234
|
|
|
436
|
|
708
|
|
|
|
4,157
|
|
3,806
|
|
|
17,675
|
|
6,408
|
|
|
Components associated with amortization or accretion of:
|
|
|
|
|
|
|
U.S. Revolving Credit Facility deferred financing fees and commitment fees
|
6,104
|
|
2,304
|
|
|
14,419
|
|
3,892
|
|
|
Second Lien Term Loan Facility discount and financing fees
|
—
|
|
1,095
|
|
|
3,202
|
|
1,095
|
|
|
Last Out Term Loan discount and financing fees
|
49
|
|
—
|
|
|
49
|
|
—
|
|
|
|
6,153
|
|
3,399
|
|
|
17,670
|
|
4,987
|
|
|
|
|
|
|
|
|
|
Other interest expense
|
109
|
|
50
|
|
|
403
|
|
3,846
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
$
|
10,419
|
|
$
|
7,255
|
|
|
$
|
35,748
|
|
$
|
15,241
|
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reporting within the consolidated balance sheets that sum to the total of the same amounts in the consolidated statements of cash flows:
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(in thousands)
|
September 30, 2018
|
December 31, 2017
|
September 30, 2017
|
December 31, 2016
|
|
Held by foreign entities
|
$
|
25,838
|
|
$
|
42,490
|
|
$
|
35,123
|
|
$
|
89,042
|
|
|
Held by United States entities
(1)
|
6,645
|
|
1,227
|
|
2,290
|
|
(1,616
|
)
|
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Cash and cash equivalents of continuing operations
|
32,483
|
|
43,717
|
|
37,413
|
|
87,426
|
|
|
|
|
|
|
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Reinsurance reserve requirements
|
13,390
|
|
21,061
|
|
21,456
|
|
21,189
|
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|
Restricted foreign accounts
|
6,299
|
|
4,919
|
|
5,192
|
|
6,581
|
|
|
Restricted cash and cash equivalents
|
19,689
|
|
25,980
|
|
26,648
|
|
27,770
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and restricted cash of continuing operations shown in the consolidated statements of cash flows
|
$
|
52,172
|
|
$
|
69,697
|
|
$
|
64,061
|
|
$
|
115,196
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents of discontinued operations
(2)
|
$
|
17,646
|
|
$
|
12,950
|
|
$
|
10,724
|
|
$
|
8,461
|
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(1)
Cash and cash equivalents held by United States entities is negative at December 31, 2016 due to outstanding checks at continuing operations, for which we had the right to offset against cash held by U.S. entities of discontinued operations at that date.
(2)
Cash and cash equivalents of discontinued operations is included in current assets of discontinued operations in the consolidated balance sheet. See
Note 3
for further information.
Our U.S. 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 25
– NEW ACCOUNTING STANDARDS
New accounting standards that could affect our consolidated financial statements in the future are summarized as follows:
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. With adoption of this standard, lessees will have to recognize long-term leases as a right-of-use asset and a lease liability on their balance sheet. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are similar to those applied in current lease accounting, but without explicit bright lines. In March 2018, the FASB approved an alternative transition method to the modified retrospective approach, which eliminates the requirement to restate prior period financial statements and requires the cumulative effect of the retrospective allocation to be recorded as an adjustment to the opening balance of retained earnings at the date of adoption. The new accounting standard is effective for us beginning in 2019 and we plan to elect the cumulative-effect adjustment transition method. We do not expect the new accounting standard to have a significant impact on our financial results when adopted, but it will result in new balances in the consolidated balance sheets and new disclosures in the Notes.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. The new guidance provides companies with the election to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income to retained earnings. Existing guidance requiring the effect of a change in tax law or rates to be recorded in continuing operations is not affected. This standard is effective for all public business entities for fiscal years beginning after December 15, 2018, and any interim periods within those fiscal years. Early adoption is permitted in any interim period. We expect the impact of this standard on our financial statements would be immaterial, but we do not plan on early adopting this standard and have not determined whether we will exercise the election upon adoption.
In August 2018, the FASB issued ASU 2018-15,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
. The new guidance requires companies acting as the customer in a cloud hosting service arrangement to follow the
requirements of ASC 350-40 for capitalizing implementation costs for internal-use software and requires the amortization of these costs over the life of the related service contract. This standard is effective for all public business entities for fiscal years beginning after December 15, 2019, and any interim periods within those fiscal years. Early adoption is permitted in any interim period. We are currently evaluating the impact of this standard on our financial statements and whether we will elect to adopt this standard early.
In August 2018, the FASB issued ASU 2018-14,
Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans
. The new guidance provides modifications to the disclosure requirements for employers that sponsor defined benefit pension and other postretirement plans. Included in these modifications is the removal of five disclosure requirements for public entities. This standard is effective for all public business entities for fiscal years beginning after December 15, 2020, but early adoption is permitted. We do not anticipate this standard having a significant impact on our financial statements.
New accounting standards that were adopted during the nine months ended
September 30, 2018
are summarized as follows:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. The new accounting standard provides a comprehensive model to use in accounting for revenue from contracts with customers and replaces most existing revenue recognition guidance. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations for licenses, for determining if an entity is the principal or agent in a revenue arrangement, and for technical corrections and improvements on topics including contract costs, loss provisions on construction and production contracts and disclosures for remaining and prior-period performance obligations. The new accounting standard also requires more detailed disclosures to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new accounting standard is effective for interim and annual reporting periods beginning after December 15, 2017, and permits retrospectively applying the guidance to each prior reporting period presented (full retrospective method) or prospectively applying the guidance and providing additional disclosures comparing results to previous guidance, with the cumulative effect of initially applying the guidance recognized in beginning retained earnings at the date of initial application (modified retrospective method). We adopted the new accounting standard as of January 1, 2018 under the modified retrospective method. See
Note 6
for additional accounting policy and transition disclosures.
In January 2016, the FASB issued ASU 2016-1,
Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
. The new accounting standard is effective for us beginning in 2018, but early adoption is permitted. The new accounting standard requires investments such as available-for-sale securities to be measured at fair value through earnings each reporting period as opposed to changes in fair value being reported in other comprehensive income. We adopted the new accounting standard prospectively as of January 1, 2018, which resulted in an immaterial impact on our financial results.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Of the eight classification-related changes this new standard will require in the statement of cash flows, only two of the classification requirements are relevant to our historical cash flow statement presentation (presentation of debt prepayments and presentation of distributions from equity method investees). However, the new classification requirements did not change our historical statement of cash flows. We adopted the new accounting standard as of January 1, 2018, which resulted in an immaterial impact on our financial results.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
. The new guidance requires the changes in the total of cash, cash equivalents and restricted cash to be shown together in the statement of cash flows and no longer presenting transfers between cash and cash equivalents and restricted cash in the statement of cash flows. Historically, we have presented the transfer of cash to restricted cash and cash equivalents in the investing section of the statement of cash flows. With the adoption of ASU 2016-18, changes in restricted cash are also included in statement of cash flows based on the nature of the change together with unrestricted cash flows. We retrospectively adopted the new accounting standard as of January 1, 2018. The only meaningful effect on our financial statements is related to the restricted cash received from the sale of BWBC as described in
Note 11
, which is reflected as investing cash flow. The detail of cash, cash equivalents, and restricted cash is included in
Note 24
.
In March 2017, the FASB issued ASU 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Benefit Cost and Net Periodic Postretirement Benefit Cost
. The new guidance classifies service cost as the
only component of net periodic benefit cost presented in cost of operations, whereas the other components will be presented in other income. Upon adoption, this affected not only how we present net periodic benefit cost, but also Power segment gross profit. We adopted the new accounting standard retrospectively as of January 1, 2018. The changes in the classification of the historical components of net periodic benefit costs from operating expense to other expense for the three and nine months ended September 30, 2017 amounted to
$5.2 million
and
$14.7 million
, respectively, and are reflected in our condensed consolidated statements of operations.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. We early adopted ASU 2017-04 on April 1, 2018, effective the first day of our 2018 second quarter.
See
Note 12
for further discussion of the goodwill impairment we recognized in the second quarter of 2018.